A slowing global economy is putting a drag on Minnesota corporate profits, which are down significantly for the first time since the Great Recession ended in 2009.
Nearly a third of the 84 companies on the Star Tribune's list of publicly traded firms saw profits fall last year. Following national trends, manufacturers on the Star Tribune 100 — including 3M, Ecolab and Pentair — have been particularly stung, though a strong U.S. dollar relative to other currencies has eaten into profits at all kinds of Minnesota companies with a global reach.
The profitability of Minnesota's companies is important for the state's economy, and Minnesota sports a relatively high number of corporate headquarters.
"We care about these companies being profitable because they employ our neighbors," said Paul Vaaler, a strategic management professor in the University of Minnesota's law school and its Carlson School of Management. "There are so many positive externalities to local communities where profitable companies are located."
The 84 companies analyzed by the Star Tribune posted combined profits of $32 billion, down from $36 billion the year before. Revenue at those companies grew, however, by 7.5 percent to $514 billion.
Of the companies surveyed, 32 saw profits increase and 25 swung from red ink to black or vice versa. The state's five most profitable companies in absolute terms — respectively U.S. Bancorp, UnitedHealth Group, 3M, Target and Medtronic — accounted for 69 percent of the state's public corporation earnings. (Medtronic moved its headquarters to Ireland early last year, but its leadership remains in Fridley.)
The profit drop in 2015 comes after earnings for Minnesota's publicly traded companies rose 3 percent in 2014 and fell 1.5 percent in 2013.
'Lethargic' response
Generally, when profits are rising, executives like to pat themselves on the back for a job well done, but when earnings are sinking, the story changes, Vaaler said.
"When things are going well, it's all about what they did," he said. "When it's not, it's all about things they can't control."
But executives can mitigate matters beyond their control — and retain profits — through cost-cutting, innovation or even relocating production, he said. In Vaaler's view, Minnesota's Fortune 500 companies are more "lethargic" in taking such actions than their brethren nationwide.
After-tax profits of U.S. corporations as tallied by the U.S. Commerce Department were up 3.3 percent in 2015 over 2014; that's a measurement roughly akin to the way companies report profits. Still, publicly traded U.S. corporations generally have been in a profit recession since the last half of 2015.
The companies that make up the Standard & Poor's 500 index saw year-over-year profits drop a bit less than 1 percent in the third quarter, according to data from Thomson Reuters. In the fourth quarter, the S&P 500's profits fell 2.9 percent and are estimated to have declined 5.4 percent in the first quarter. It's the worst string of quarterly profits for the S&P 500 since 2009, and it doesn't seem to be over.
Thomson Reuters forecasts the S&P 500 to begin posting year-over-year profit increases in 2016's third quarter.
The manufacturer Pentair experienced one of the larger profit declines in 2015. The company, which is based in England but is basically run from Golden Valley, lost $65 million last year after earning $607 million in 2015. Much of the damage came from a $555 million asset write-down in its valves and controls business.
Hurt by oil slump
Pentair makes pumps, valves and water and industrial filtration systems and counts the oil and gas industry as a major customer.
Bloomington-based Donaldson, a maker of filtration systems for large trucks and factories, also relies on the energy business, as well as the hard-hit mining and agricultural equipment industries. Donaldson's profits of $179 million last year were $67 million less than in 2014.
Wayzata-based Northern Oil and Gas, which invests in North Dakota's Bakken oil fields, suffered most from the energy industry's collapse.
The company lost $975 million in 2015, making it the second least profitable publicly traded company in Minnesota. With average oil prices falling 48 percent, Northern Oil's revenue plummeted from $595 million in 2014 to $275 million last year. The company took a $1.2 billion impairment charge due to the declining value of its oil and gas properties.
The crash in oil prices does have a significant upside: It has reduced energy bills for all sorts of companies. "Oil going down is a good thing," Vaaler said. "Everybody's input costs are going down. It's like a tax cut."
Impact of strong dollar
The strong dollar, a result of a relatively strong U.S. economy, is a trickier issue. A strong dollar hurts U.S. exports, essentially making them more expensive overseas. Plus, companies with operations in other countries often use local currencies, yet they must translate their profits into dollars, which are effectively more expensive when the dollar is strong.
The profit tally for Minnesota companies in 2015 also was hit by higher tax expenses at Richfield-based Best Buy, and acquisition-related charges at Medtronic — two of the state's largest companies.
The $438 million decline in Best Buy's 2015 earnings was largely due to a tax bill more than triple that of 2014. The $690 million decline in Medtronic's calendar-year profits reflects several one-time costs stemming from its acquisition of Covidien, the tax-driven deal that led to its headquarters being relocated to Ireland.
A pool of red ink
Finally, ugly years at three companies — Stratasys, Imation and Christopher & Banks — led to a large pool of red ink.
Stratasys, a 3-D printing firm dually based in Eden Prairie and Israel, lost $1.4 billion in 2015, the largest loss of all publicly traded Minnesota companies. Stratasys has been hard hit by a rush of competitors into the once novel 3-D printing market, and it badly botched the rollout of its emerging consumer line of 3-D printers. Costly product malfunctions caused the company to take huge charges, close stores and lay off staff.
Oakdale-based Imation was the third least profitable company, losing $194 million. The long-suffering data storage firm unraveled in 2015, its managers opting to sell or shut down many operations. Plymouth-based Christopher & Banks, a women's apparel retailer, lost $49 million in 2015 compared to a $47 million profit in 2014 — a big swing. The company suffered an operating loss on the heels of several merchandising missteps and a general slowdown in the apparel sector.
Still, Minnesota's biggest corporate losses were far outweighed by its biggest earners. Minnesota's two most profitable companies in 2015 — U.S. Bancorp and UnitedHealth — respectively posted earnings of $5.9 billion and $5.8 billion.
Staff writer Dee DePass contributed to this report.
