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3M (MMM) Beats Q3 Earnings Estimates, Lowers '19 Projections

Zacks Equity Research

3M Company MMM reported better-than-expected results for the third quarter of 2019, with earnings surpassing estimates by 4.5%. This is the second consecutive quarter of better-than-expected results.

Its adjusted earnings in the reported quarter were $2.58 per share. The figure surpassed the Zacks Consensus Estimate of $2.47. However, its bottom line was in line with the year-ago quarter figure.

Weak Organic Sales, Divestitures and Forex Woes Hurt Revenues

In the quarter under review, 3M’s net sales were $7,991 million, reflecting a decline of 2% from the year-ago quarter. Results were adversely impacted by a 1.3% decrease in organic sales (results in automotive and electronics businesses as well as China end-markets were soft in the quarter), 0.3% negative impact of divestitures and 1.3% adverse impact of foreign currency translation, partially offset by 0.9% gain from acquisitions.

Also, the company’s net sales lagged the Zacks Consensus Estimate of $8,098 million by 1.3%.

On a geographical basis, sales in the United States grew 0.8% year over year while that in the Asia Pacific declined 5%. Europe, Middle East and Africa’s sales declined 4.1% and that of Latin America/Canada improved 0.6%.

Effective from the second quarter of 2019, the company realigned its business segments from five to four — including Safety & Industrial; Transportation & Electronics; Health Care; and Consumer. The segmental information is briefly discussed below.

Revenues from the Safety and Industrial segment totaled $2,849 million, declining 5.7% year over year. The decline resulted from 1.6% adverse impact of forex woes, 3.3% fall in organic sales and 0.8% negative impact of divestitures.

Revenues from the Transportation & Electronics segment totaled $2,503 million, declining 4.4% year over year. Results were adversely impacted by a 3.4% fall in organic sales and a 1% decline from forex woes.

Revenues from the Health Care segment were $1,721 million, rising 4.7% year over year. While organic sales grew 2%, unfavorable currency translation adversely impacted sales by 1.7%. Acquisitions had a positive 4.4% impact.

Revenues from the Consumer segment grew 1.7% year over year to $1,324 million. Forex woes had an adverse impact of 0.9% while organic sales positively impacted revenues by 2.6%.

Operating Margin Up Y/Y

In the quarter under review, 3M’s cost of sales rose 0.7% year over year to $4,188 million. It represented 52.4% of net sales compared with 51% in the year-ago quarter. Selling, general and administrative expenses declined 5.9% year over year to $1,455 million. It represented 18.2% of net sales versus 19% in the year-ago quarter. Research, development and related expenses rose 3% to $443 million. It represented 5.5% of the quarter’s net sales versus 5.3% in the year-ago quarter.

Operating income in the quarter under review declined 0.2% year over year to $2,011 million. Operating margin grew 50 bps year over year to 25.2%.

Balance Sheet and Cash Flow

Exiting the third quarter, 3M had cash and cash equivalents of $7,731 million, significantly above $2,849 million at the end of the last reported quarter. Long-term debt balance rose 17.2% sequentially to $17,479 million.

In the reported quarter, the company generated net cash of $2,022 million, reflecting a year-over-year decline of 5.5%. Capital used for purchasing property, plant and equipment declined 7.4% year over year to $349 million. Free cash flow in the quarter was $1,673 million versus $1,762 generated in the year-ago quarter. Free cash flow conversion was at 106%.

During the first nine months of 2019, the company used $2,488 million for paying out dividends to shareholders while repurchased $1,243 million shares.

Outlook

3M remains committed toward making investments in research and development as well as growth programs. Driving shareholder value is a priority too.

For the fourth quarter, the company predicts organic sales decline of 1-3% year over year while anticipates acquisitions (net of divestiture impact) to positively impact sales by 5%. Forex will pose a 1% headwind. Earnings in the quarter will be $2.05-$2.15, including 15 cents per share of adverse impact of the Acelity buyout.

For 2019, the company lowered its adjusted earnings projection to $8.99-$9.09 from the previously mentioned $9.25-$9.75 per share. Tax rate is likely to be 20-21% versus the earlier stated 20-22%.

Organic sales are predicted to decline 1-1.5% versus previously mentioned 1% decline to 2% growth. Acquisitions, net of impact from divested assets, will have 1% positive impact (versus a neutral impact mentioned earlier) while forex woes will likely hurt sales by 2% (versus the earlier 1% impact).

Net cash generated from operating activities is anticipated to be $6.7-$6.9 billion (revised from previously mentioned $6.3-$7 billion) while capital expenditure will likely total $1.6-$1.7 billion (maintained). Free cash flow is predicted to be $5-$5.3 billion (versus the prior $4.6-$5.4 billion) while free cash flow conversion is at 105-110% versus the earlier mentioned 95-105%.

Further, shares worth $1-$1.5 billion will likely be repurchased during 2019. Return on invested capital will likely be 18.5-19.5% versus the previously stated 20-22%.

3M Company Price, Consensus and EPS Surprise