3M (MMM) Q4 Earnings Fall Short Of Estimates, Decline Y/Y

3M Company (NYSE:MMM) has reported weaker-than-expected results for the fourth quarter of 2019, with earnings and sales lagging estimates by 7.1 and 0.2%, respectively. This came in after two consecutive quarters of better-than-expected results.

Its adjusted earnings in the reported quarter were $1.95 per share. The figure lagged the Zacks Consensus Estimate of $2.10. Also, its bottom line declined 15.6% from the year-ago quarter figure of $2.31 due to organic sales decline, the Acelity buyout and organizational realignment charges.

For 2019, the company’s adjusted earnings were $9.10 per share, decreasing 13% year over year. However, the bottom line surpassed the Zacks Consensus Estimate of $9.04.

Weak Organic Sales, Divestitures and Forex Woes Hurt Revenues

In the quarter under review, 3M’s net sales were $8,111 million, reflecting growth of 2.1% from the year-ago quarter. Results were adversely impacted by a 2.6% decrease in organic sales (results in automotive and electronics businesses were soft in the quarter), 0.5% negative impact of divestitures and 0.4% adverse impact of foreign currency translation, partially offset by 5.6% gain from acquisitions.

However, the company’s net sales lagged the Zacks Consensus Estimate of $8,126 million.

On a geographical basis, sales in the United States grew 7.4% year over year, while that in the Asia Pacific declined 1.7%. Europe, Middle East and Africa’s sales declined 2% and that of Latin America/Canada improved 1.2%.

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 $2,811 million, declining 4.8% year over year. The decline resulted from a 0.6% adverse impact of forex woes, 2.8% fall in organic sales and 1.4% negative impact of divestitures.

Revenues from the Transportation & Electronics segment totaled $2,290 million, declining 6.2% year over year. Results were adversely impacted by a 5.9% fall in organic sales and a 0.3% decline from forex woes.

Revenues from the Health Care segment were $2,141 million, rising 25.4% year over year. Acquisitions had positive impacts of 26%, while organic sales declined 0.2% and forex woes had adverse impacts of 0.4%.

Revenues from the Consumer segment were flat year over year at $1,268 million. Forex woes had an adverse impact of 0.2%, offset by 0.2% increase in organic sales.

In 2019, the company’s net sales were $32,136 million, reflecting a 1.9% decline from the previous year. However, the top line met with the Zacks Consensus Estimate of $32.13 billion.

Operating Margin Down Y/Y

In the quarter under review, 3M’s cost of sales rose 6.5% year over year to $4,325 million. It represented 53.3% of net sales compared with 51.1% in the year-ago quarter. Selling, general and administrative expenses increased 15.3% year over year to $1,940 million. It represented 23.9% of net sales versus 21.2% in the year-ago quarter. Research, development and related expenses grew 19.2% to $521 million. It represented 6.4% of the quarter’s net sales versus 5.5% in the year-ago quarter.

Adjusted operating income in the quarter under review declined 13.7% year over year to $1,539 million. Operating margin decreased 340 bps year over year to 19% due mainly to adverse impacts of the Acelity buyout, global organizational restructuring actions, lower organic volumes and others. Tax rate in the quarter was 20.3% versus 20.5% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the fourth quarter, 3M had cash and cash equivalents of $2,353 million, down 70% from $7,731 million at the end of the last reported quarter. Long-term debt balance was roughly flat sequentially at $17,518 million.

In the reported quarter, the company generated net cash of $2,338 million, reflecting year-over-year growth of 3.5%. Capital used for purchasing property, plant and equipment grew 1.3% year over year to $538 million. Free cash flow in the quarter was $1,800 million versus $1,727 generated in the year-ago quarter. Free cash flow conversion was at 186%.

During 2019, the company used $3,316 million for paying out dividends to shareholders, while repurchased $1,407 million shares.

Outlook

3M intends on transforming its businesses through streamlined operational structure and new operating model (global). For these changes, the company has undertaken restructuring actions (that are likely to lower workforce by 1,500). Pre-tax savings from the restructuring measures are anticipated to be $110-$120 million, with $40-50 million expected in 2020.

For 2020, the company anticipates earnings of $9.30-$9.75 per share. Tax rate is likely to be 20-21%.

Sales are predicted to increase 3-5% year over year. Organic sales will likely be between flat and 2% rise. Acquisitions, net of impact from divested assets, will likely have 3% positive impact. Forex woes will have neutral impact.

Net cash generated from operating activities is anticipated to be $6.9-$7.6 billion, while capital expenditure will likely total $1.6-$1.8 billion. Free cash flow is predicted to be $5.1-$6 billion, while free cash flow conversion will likely be 95-105%.

Further, shares worth $1 billion will likely be repurchased during 2020. Return on invested capital will likely be 18-21%.

3M Company Price, Consensus and EPS Surprise