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Minnesota’s Fortune 500 companies: shaken but optimistic

Northwest posted a disappointing $317 million net loss in the third quarter.
REUTERS/John Gress
Northwest posted a disappointing $317 million net loss in the third quarter.

As the nation’s economy continues to falter, Minnesota’s Fortune 500 companies — there are 19 in the state — face a host of struggles.  But despite disappointing third-quarter reports, representatives for several of the state’s top companies say they are trying to say positive during a time of deep fears.

Still, one of Minnesota’s Fortune 500 companies that appears to be suffering the most — Eagan-based Northwest Airlines  — will have a smaller role in Minnesota’s economy.

Oct. 29 marked the day of demise for Northwest, as its months-in-the-process merger with Atlanta-based Delta Air Lines received approval from the U.S. justice and transportation departments.

Ed Bastian, Delta CFO and newly appointed CEO of Northwest, said in a press conference at the Minneapolis-St. Paul International Airport the next day that some Minnesota jobs would be lost or moved to Atlanta, but the Minneapolis airport would remain as a main hub. “We’d be fools, quite honestly, to let anything happen to that,” Bastian said.

Initially, Bastian also said the Eagan offices would be retained, and many executives would be based there. On Nov. 13, however, Delta’s general counsel, Richard B. Hirst, told the Minnesota House Local Government and Metropolitan Affairs Committee that Delta would now be relocating all those offices to Atlanta, likely meaning more Minnesota job cuts.

Hirst said Delta made the decision in light of the economic situation, but that the company would comply with an early pay-off of Northwest’s remaining $245 million in outstanding debt from general obligation bonds issued by the Metropolitan Airport Commission in 1992.

Over time, analysts say, the merger will be more cost-effective for both companies and shouldn’t affect air travel competition, but it could take years for business plans for employees and other procedures to be finalized — likely not until 2010.

In Northwest’s third-quarter report, released a week before Bastian’s airport press conference, company officials said they had hoped the merger would place the companies in greater “financial stability” — but Northwest posted a disappointing $317 million net loss in the third quarter.

Much of Northwest’s troubles were attributed to a $410 million fuel hedge-fund charge. Since Northwest was hit by rapidly rising jet fuel costs, they took a cue from other companies like Southwest Airlines and invested oodles of moola into a fuel hedge fund. Airlines often use hedge funds to insulate themselves against jet-fuel price increases.

But fuel prices drastically declined, forcing Northwest to pay the higher rates than what fuel was going for on the open market — a problem that has affected other airlines like United and Southwest. In the third quarter, Northwest paid $3.79 per gallon for jet fuel compared to $2.11 in the third quarter of 2007, a nearly 80 percent increase.

Without the hedge-fund foibles, Northwest would have posted a net income of $93 million.

3M in relatively good shape
Other third-quarter earnings reports were released for Minnesota’s large companies in the last month — including U.S. Bancorp and UnitedHealth Group —  but only one, 3M, posted positive results.

Although much of 3M’s business relies on foreign business and a few recent acquisitions abroad — their business in Latin America increased by 26 percent — the company made famous by Scotch tape and Post-it notes beat analyst estimates, increasing profits by 3.2 percent over last year’s third quarter.

Despite the promising numbers, CEO George Buckley said Oct. 21 that 3M’s sales would have been even higher had the financial crisis not hit at the end of the quarter.

“The global financial crisis, which happened right towards the end of the quarter, caused a number of last minute canceled orders from distributors and retailers in their own understandable ‘just-in-case’ attempts to preserve cash,” Buckley said.

Buckley called 3M a short-cycle company, meaning even “temporary blips” in the economy have a rapid effect on the company’s portfolio, just like long-term trends would.

“We live right on the edge of that razor blade,” he said.

Since 2006, 3M has been revamping its core business model by investing in capital and research, as well as overseas acquisitions. Buckley said in those three years, the company’s “underlying strength” has improved and will help the company withstand economic struggles.

“Despite having done well in the face of some pretty tough challenges, we are far from feeling complacent about what lies ahead,” Buckley said. “So the $64,000 question is this: What can we sensibly say about the future and what are we doing to prepare for it?”

Buckley said 3M has cut 1,000 positions across the United States, Europe and Asia, stopped all hiring in this country, Canada, Japan and Western Europe, and embargoed U.S. acquisitions “until we see how the end markets play out.”

As for next quarter, he wouldn’t give specific sales projections as the company has in the past, only saying that they’d be “colored by the strength of the Christmas season.”

“But I don’t think Christmas will get canceled this year, even if it turns out a little more muted than normal,” Buckley said.

Banking industry questions still loom
While Buckley remains optimistic in the coming months, the banking market is clearly still hurting — U.S. Bancorp’s third-quarter earnings were down 47 percent, according to an Oct. 21 release. (PDF)

Much of that loss was attributed to unpaid loans, mostly from the mortgage crisis — $498 million in net charge-offs this quarter, compared with $199 million in 2007’s third quarter. According to the news release, executives expect those numbers to worsen in the fourth quarter.

U.S. Bancorp is parent company of U.S. Bank. U.S. Bank’s Twin Cities Market President Elliot Jaffee said simply that the company is experiencing “some cyclical stress,” but is continuing to grow.

“I don’t want to forecast too much, but it will take a little time for us to turn around,” Jaffee said in an interview with MinnPost. “At least the next few quarters might be like this, but I’m speaking about the general economy here, not U.S. Bank.”

One of the only positives on the company’s balance sheet: deposits went up 12 percent, or $14.4 billion, allegedly because the public was pulling savings from other institutions associated with the financial mess.

“Even in this environment of cyclical weakness, we expect to do well,” Jaffee said.

Jaffee said U.S. Bank has fared better than other banks because the company stayed conservative with businesses and investments that had been successful in the past. He said in the past, investors would ask why U.S. Bank wasn’t being more aggressive with their loans and investments — Jaffee said they’re now seeing the benefit of playing it safe on that end of the business model.

“Sticking to the knitting is really working for us,” he said. “We’re in the fortunate position of sticking with our plans.”

Down but optimistic
Another company that professes a conservative investment profile is doing better than its counterparts, despite losses in the third quarter.

UnitedHealth Group is surely surviving, but its profits still slid 28 percent, according to its Oct. 16 quarterly report. (PDF)

The Minnetonka-based HMO had a small stake in Lehman Brothers, Washington Mutual and AIG, and lost $45 million in those investments as of late, but that’s only part of the problem.

Although overall revenues were up 8 percent, according to its third-quarter report, UnitedHealth also settled two class-action lawsuits with a total payout of $600 million.

UnitedHealth CEO Stephen Helmsley said Oct. 16 that the economic climate limits any forecasts he could make for 2009, but he said he expects 2009’s first-quarter enrollment numbers to be “down significantly comparable to first quarter 2008 and possibly greater.”

Employment levels could also be in jeopardy, he said, adding that “reductions in administrative staff and overhead areas” could be one place where the company might aim to save money.

Still, Helmsley remained optimistic about UnitedHealth’s position in the market.

“Our financial position is strong and we are committed to keeping it that way,” he said.

Also joining the cut-back trend is Richfield-based Best Buy, which announced Nov. 12 that the electronics giant saw a 7.6 percent store-to-store sales drop in October.

“Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we’ve ever seen,” CEO Brad Anderson said.

But that concern had been foreshadowed. On Oct. 16, President and COO Brian Dunn sent a video message to Best Buy employees in an attempt to calm their fears about the “really uncertain times.”

“We’re going to have to be smart and we’re going to have to watch every dollar,” Dunn said. “Straight up, these are the toughest times I’ve seen in 24 years.”

Target Corp., which announced a 3 percent decline in store-to-store revenues in September (well before the financial crisis), and a nearly 5 percent drop in October, completed the downward trend with the Nov. 17 release of its third-quarter report. Earnings were down 24 percent.

The big-name retailer has also been making cuts — not in employment (yet) but in store growth.

Spokeswoman Hadley Barrows said in an interview with MinnPost that Target is planning to scale back new store openings in 2009. The original plan was to open 70 new locations next year, she said; that number has now been dropped to 20 or 25.

Courtney Sinner is a journalism and English literature honors student at the University of Minnesota. She has written for the Pioneer Press, Detroit Lakes Newspapers and the Minnesota Daily.

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