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3M Reports Third-Quarter 2018 Results

October 23, 2018 7:30 AM

Third-Quarter Highlights:

ST. PAUL, Minn.--(BUSINESS WIRE)-- 3M (NYSE: MMM) today reported third-quarter 2018 results.

“In the third quarter, 3M delivered a double-digit increase in cash flow and earnings-per-share, along with strong margins despite slower growth,” said Mike Roman, 3M chief executive officer. “We also continued to deploy capital to invest in our future and return cash to our shareholders.

“Through nine months of the year, our global team posted organic growth of more than 3 percent, and we are positioned to deliver a solid 2018,” Roman continued. “Going forward, we remain focused on innovating for our customers and driving growth, while continuing to transform our enterprise.”

Third-quarter sales were $8.2 billion with organic local-currency sales up 1.3 percent while acquisitions, net of divestitures, increased sales by 0.2 percent. Foreign currency translation decreased sales by 1.7 percent year-on-year.

Total sales grew 7.0 percent in Safety and Graphics; Industrial was flat; sales declined 2.8 percent in Health Care, 3.4 percent in Consumer and 4.8 percent in Electronics and Energy. Organic local-currency sales increased 2.3 percent in Electronics and Energy, 2.2 percent in Industrial, and 2.2 percent in Safety and Graphics; organic local-currency sales declined 1.1 percent in Health Care and 2.0 percent in Consumer.

On a geographic basis, total sales grew 1.6 percent in Asia Pacific and 1.3 percent in the U.S.; total sales declined 3.9 percent in EMEA (Europe, Middle East and Africa) and 5.5 percent in Latin America/Canada. Organic local-currency sales increased 3.2 percent in Asia Pacific, 2.1 percent in Latin America/Canada, and 0.5 percent in the U.S.; organic local-currency sales declined 0.9 percent in EMEA.

Third-quarter GAAP earnings were $2.58 per share, an increase of 10.7 percent year-over-year. Operating income was $2.0 billion with operating margins of 24.7 percent.

The company’s operating cash flow was $2.1 billion, contributing to conversion of 114 percent of net income to free cash flow, as referenced in the “Supplemental Financial Information Non-GAAP Measures” section.

3M paid $794 million in cash dividends to shareholders and repurchased $1.1 billion of its own shares during the quarter.

The company updated its 2018 GAAP earnings expectations to be in the range of $8.78 to $8.93 per share versus $9.08 to $9.38 previously. Excluding the full-year impacts from the communication markets business divestiture gain and related actions, a first-quarter legal settlement, and the Tax Cuts and Jobs Act-related expense, 3M now expects its adjusted 2018 earnings to be in the range of $9.90 to $10.00 per share versus prior expectation of $10.20 to $10.45. The update to the ranges reflects an estimated full-year earnings headwind of $0.05 per share from foreign currency versus a prior expectation of a benefit of $0.10 per share.

3M also updated its full-year organic local-currency sales growth guidance to approximately 3 percent from 3 to 4 percent and free cash flow conversion to 90 to 95 percent from 90 to 100 percent, as referenced in the “Supplemental Financial Information Non-GAAP Measures” section.

Third-Quarter Business Group Discussion

Industrial

Safety and Graphics

Health Care

Electronics and Energy

Consumer

3M will conduct an investor teleconference at 9:00 a.m. EDT (8:00 a.m. CDT) today. Investors can access this conference via the following:

Forward-Looking Statements

This news release contains forward-looking information about 3M's financial results and estimates and business prospects that involve substantial risks and uncertainties. You can identify these statements by the use of words such as "anticipate," "estimate," "expect," "aim," "project," "intend," "plan," "believe," "will," "should," "could," "target," "forecast" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or business plans or prospects. Among the factors that could cause actual results to differ materially are the following: (1) worldwide economic, political, and capital markets conditions and other factors beyond the Company's control, including natural and other disasters or climate change affecting the operations of the Company or its customers and suppliers; (2) the Company's credit ratings and its cost of capital; (3) competitive conditions and customer preferences; (4) foreign currency exchange rates and fluctuations in those rates; (5) the timing and market acceptance of new product offerings; (6) the availability and cost of purchased components, compounds, raw materials and energy (including oil and natural gas and their derivatives) due to shortages, increased demand or supply interruptions (including those caused by natural and other disasters and other events); (7) the impact of acquisitions, strategic alliances, divestitures, and other unusual events resulting from portfolio management actions and other evolving business strategies, and possible organizational restructuring; (8) generating fewer productivity improvements than estimated; (9) unanticipated problems or delays with the phased implementation of a global enterprise resource planning (ERP) system, or security breaches and other disruptions to the Company's information technology infrastructure; (10) financial market risks that may affect the Company’s funding obligations under defined benefit pension and postretirement plans; and (11) legal proceedings, including significant developments that could occur in the legal and regulatory proceedings described in the Company's Annual Report on Form 10-K for the year ended Dec. 31, 2017, and any subsequent quarterly reports on Form 10-Q (the “Reports”). Changes in such assumptions or factors could produce significantly different results. A further description of these factors is located in the Reports under "Cautionary Note Concerning Factors That May Affect Future Results" and "Risk Factors" in Part I, Items 1 and 1A (Annual Report) and in Part I, Item 2 and Part II, Item 1A (Quarterly Reports). The information contained in this news release is as of the date indicated. The Company assumes no obligation to update any forward-looking statements contained in this news release as a result of new information or future events or developments.

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3M Company and Subsidiaries

CONSOLIDATED STATEMENT OF INCOME

(Millions, except per-share amounts)
(Unaudited)
� � � � � � � �
Three months ended Nine months ended
September 30, September 30,
2018 2017 2018 2017
�
Net sales $ 8,152 $ 8,172 $ 24,820 � $ 23,667 �
�
Operating expenses
Cost of sales 4,159 4,059 12,622 11,961
Selling, general and administrative expenses 1,547 1,637 5,920 4,871
Research, development and related expenses 430 468 1,384 1,422
Gain on sale of businesses � — � — � (530 ) � (490 )
�
Total operating expenses � 6,136 � 6,164 � 19,396 � � 17,764 �
�
Operating income � 2,016 � 2,008 � 5,424 � � 5,903 �
�
Other expense (income), net � 51 � 11 � 144 � � 27 �
�
Income before income taxes 1,965 1,997 5,280 5,876
�
Provision for income taxes � 419 � 564 � 1,266 � � 1,532 �
�
Net income including noncontrolling interest $ 1,546 $ 1,433 $ 4,014 � $ 4,344 �
�
Less: Net income attributable to noncontrolling interest � 3 � 4 � 12 � � 9 �
�
Net income attributable to 3M $ 1,543 $ 1,429 $ 4,002 � $ 4,335 �
�
Weighted average 3M common shares outstanding – basic 585.6 597.6 591.1 597.9
Earnings per share attributable to 3M common shareholders – basic $ 2.64 $ 2.39 $ 6.77 � $ 7.25 �
�
Weighted average 3M common shares outstanding – diluted 598.4 612.7 605.1 612.5
Earnings per share attributable to 3M common shareholders – diluted $ 2.58 $ 2.33 $ 6.61 � $ 7.08 �
�
Cash dividends paid per 3M common share $ 1.36 $ 1.175 $ 4.08 � $ 3.525 �
�
As discussed in note (c), results of operations for the first quarter of 2018 were impacted by an $897 million pre-tax charge related to settlement of a previously disclosed lawsuit with the State of Minnesota and a $217 million measurement period adjustment relative to the accounting for the 2017 enactment of the Tax Cuts and Jobs Act. Results of operations for the second quarter of 2018 reflected the net $389 million pre-tax impact of the Communication Markets divestiture gain, net of restructuring actions. In addition, as discussed in 3M’s Form 8-K dated May 8, 2018, (which updated 3M’s 2017 Annual Report on Form 10-K) the Company adopted Accounting Standards Update (ASU) No. 2017-07 relative to the presentation of pension and postretirement benefit costs in the first quarter of 2018 with retroactive impact to prior periods.
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3M Company and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEET

(Dollars in millions)
(Unaudited)
� � � �
September 30, December 31,
2018 2017
ASSETS
Current assets
Cash and cash equivalents $ 3,185 $ 3,053
Marketable securities – current 338 1,076
Accounts receivable – net 5,329 4,911
Inventories 4,437 4,034
Prepaids 745 937
Other current assets � 385 � 266
Total current assets � 14,419 � 14,277
Property, plant and equipment – net 8,630 8,866
Goodwill and intangible assets – net 12,849 13,449
Other assets � 1,377 � 1,395
Total assets $ 37,275 $ 37,987
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LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and
current portion of long-term debt $ 1,307 $ 1,853
Accounts payable 2,029 1,945
Accrued payroll 783 870
Accrued income taxes 186 310
Other current liabilities � 3,031 � 2,709
Total current liabilities � 7,336 � 7,687
Long-term debt 13,539 12,096
Other liabilities � 6,089 � 6,582
Total liabilities $ 26,964 $ 26,365
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Total equity $ 10,311 $ 11,622
Shares outstanding
September 30, 2018: 582,287,135 shares
December 31, 2017: 594,884,237 shares � �
Total liabilities and equity $ 37,275 $ 37,987
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3M Company and Subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in millions)
(Unaudited)
� � � �
Nine months ended
September 30,
2018 2017
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,181 � $ 4,380 �
�
Cash flows from investing activities:
Purchases of property, plant and equipment (1,046 ) (914 )
Acquisitions, net of cash acquired 13 (12 )
Purchases and proceeds from sale or maturities of marketable securities and investments – net 714 (310 )
Proceeds from sale of businesses, net of cash sold 806 862
Other investing activities � 151 � � 20 �
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES � 638 � � (354 )
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Cash flows from financing activities:
Change in debt 1,093 (590 )
Purchases of treasury stock (3,601 ) (1,564 )
Proceeds from issuances of treasury stock pursuant to stock option and benefit plans 401 582
Dividends paid to shareholders (2,406 ) (2,104 )
Other financing activities � (36 ) � (23 )
�
NET CASH USED IN FINANCING ACTIVITIES � (4,549 ) � (3,699 )
�
Effect of exchange rate changes on cash and cash equivalents � (138 ) � 106 �
�
Net increase (decrease) in cash and cash equivalents 132 433
Cash and cash equivalents at beginning of year � 3,053 � � 2,398 �
�
Cash and cash equivalents at end of period $ 3,185 � $ 2,831 �
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3M Company and Subsidiaries

SUPPLEMENTAL FINANCIAL INFORMATION

NON-GAAP MEASURES

(Dollars in millions, except full-year 2018 forecast)
(Unaudited)
� � � � � �
Three months ended Nine months ended
September 30, September 30,
Major GAAP Cash Flow Categories 2018 2017 2018 2017
�
Net cash provided by operating activities $ 2,139 $ 1,750 $ 4,181

$

4,380
Net cash provided by (used in) investing activities (269 ) (781 ) 638 (354 )
Net cash used in financing activities (1,453 ) (843 ) (4,549 ) (3,699 )
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Free Cash Flow (non-GAAP measure)

Full-Year 2018
Forecast
(Billions)

�
Net cash provided by operating activities $ 2,139 $ 1,750 $ 4,181 $ 4,380 $6.4 to $6.8
Purchases of property, plant and equipment � (377 ) � (325 ) � (1,046 ) � (914 ) ($1.6)
Free cash flow (a) � 1,762 � � 1,425 � � 3,135 � � 3,466 � $4.8 to $5.2
�
Net income attributable to 3M $ 1,543 $ 1,429 $ 4,002 $ 4,335 $5.3 to $5.5
Free cash flow conversion (a) 114 % 100 % 78 % 80 % 90% to 95%
�
(a) � Free cash flow and free cash flow conversion are not defined under U.S. generally accepted accounting principles (GAAP). Therefore, they should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The Company defines free cash flow conversion as free cash flow divided by net income attributable to 3M. The Company believes free cash flow and free cash flow conversion are meaningful to investors as they function as useful measures of performance and the Company uses these measures as an indication of the strength of the company and its ability to generate cash.
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� � � � � � � � � � � � � � � � � � � � � �
September 30, December 31,
Net Debt (non-GAAP measure) 2018 2017
�
Total debt $ 14,846 $ 13,949
Less: Cash, cash equivalents and marketable securities � 3,550 � 4,156
�
Net debt (b) $ 11,296 $ 9,793
�
(b) � Net debt is not defined under U.S. GAAP and may not be computed the same as similarly titled measures used by other companies. The Company defines net debt as total debt less the total of cash, cash equivalents and current and long-term marketable securities. 3M believes net debt is meaningful to investors as 3M considers net debt and its components to be an important indicator of liquidity and a guiding measure of capital structure strategy.
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3M Company and Subsidiaries

SUPPLEMENTAL FINANCIAL INFORMATION

NON-GAAP MEASURES – (CONTINUED)

(Dollars in billions, except per share amounts)
(Unaudited)
� � � � � � � � � �
Estimated Full-Year 2018
Adjusted income, earnings per share, & effective tax rate (non-GAAP measures)

GAAP
Measure

Adjustment
for
Measurement
Period
Accounting of
TCJA

Adjustment
for MN
NRD
Resolution

Adjustment for
Communication
Markets
Division
Divestiture, Net
of Related
Restructuring
Actions

Adjusted Non-
GAAP Measure
(c)

�
Income before taxes $ 7.0 to 7.1 $ — $ 0.9 $ (0.4 )

$

7.5 to 7.6

Provision for income taxes $ 1.6 to 1.7 $ (0.2 ) $ 0.2 $ (0.1 )

$

1.5 to 1.6

Effective tax rate 23 to 25

�%

20 to 21

�%

�
Net income attributable to 3M $ 5.3 to 5.5 $ 0.2 $ 0.7 $ (0.3 )

$

5.9 to 6.1

Earnings per diluted share $ 8.78 to 8.93 $ 0.36 $ 1.16 $ (0.40 - 0.45 )

$

9.90 to 10.00

�
(c) � In February 2018, 3M reached an agreement with the State of Minnesota that resolved the previously disclosed Natural Resource Damages (NRD) lawsuit filed by the State against the Company related to certain PFCs present in the environment. Under the terms of the settlement, 3M agreed to provide an $850 million grant to the State for a special “3M Water Quality and Sustainability Fund.” This Fund will enable projects that support water sustainability in the Twin Cities East Metro region, such as continued delivery of water to residents and enhancing groundwater recharge to support sustainable growth. The projects will also result in habitat and recreation improvements, such as fishing piers, trails, and open space preservation. 3M recorded a pre-tax charge of $897 million, inclusive of legal fees and other related obligations, in the first quarter of 2018 associated with the resolution of this matter. Also during the first quarter of 2018, 3M recorded a tax expense of $217 million related to a measurement period adjustment to the provisional amounts recorded in December 2017, from the enactment of the Tax Cuts and Jobs Act (TCJA). 3M’s provisional accounting continues to be subject to adjustment during the measurement period of up to one year following the December 2017 enactment of TCJA. In the second quarter of 2018, 3M completed the sale of substantially all of its Communication Markets Division and reflected a pre-tax gain of $494 million as a result of this divestiture. During the second quarter of 2018, management approved and committed to undertake certain restructuring actions related to addressing corporate functional costs following the Communication Markets Division divestiture. These actions resulted in a second quarter 2018 pre-tax charge of $105 million.
�
In addition to providing full-year estimated 2018 financial results in accordance with U.S. GAAP, the Company also provides non-GAAP measures that adjust for the impacts of the NRD resolution, measurement period adjustment to the impact of enactment of the TCJA, and the impact of the Communication Markets Division divestiture gain, net of restructuring actions. These items represent significant charges/benefits that impacted the Company’s financial results. Income before taxes, provision for income taxes, net income, earnings per share, and the effective tax rate are all measures for which 3M provides the estimated GAAP measure and an adjusted measure. The adjusted measures are not in accordance with, nor are they a substitute for, GAAP measures. The Company considers these non-GAAP measures in evaluating and managing the Company’s operations. The Company believes that discussion of results adjusted for this item is meaningful to investors as it provides a useful analysis of ongoing underlying operating trends. The determination of these items may not be comparable to similarly titled measures used by other companies.
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3M Company and Subsidiaries

SALES CHANGE ANALYSIS (d)

(Unaudited)
� � � � � � � � � �
Three months ended September 30, 2018
Europe,
Middle Latin
Sales Change Analysis United Asia- East and America/ World-
By Geographic Area States Pacific Africa Canada Wide
�
Volume – organic (0.9 )% 3.0 % (2.5 )% (0.1 )% 0.1 %
Price 1.4 � 0.2 � 1.6 � 2.2 � 1.2 �
Organic local-currency sales 0.5 3.2 (0.9 ) 2.1 1.3
Acquisitions 2.3 0.5 2.9 0.8 1.7
Divestitures (1.5 ) (0.6 ) (2.9 ) (1.5 ) (1.5 )
Translation — � (1.5 ) (3.0 ) (6.9 ) (1.7 )
Total sales change 1.3 % 1.6 % (3.9 )% (5.5 )% (0.2 )%
�
�
Three months ended September 30, 2018
Worldwide Sales Change Organic local- Total sales
By Business Segment currency sales Acquisitions Divestitures Translation change
�
Industrial 2.2 % — % (0.1 )% (2.1 )% — %
Safety and Graphics 2.2 8.9 (1.9 ) (2.2 ) 7.0
Health Care (1.1 ) — — (1.7 ) (2.8 )
Electronics and Energy 2.3 — (6.1 ) (1.0 ) (4.8 )
Consumer (2.0 ) — � — � (1.4 ) (3.4 )
Total Company 1.3 % 1.7 % (1.5 )% (1.7 )% (0.2 )%
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�
Nine months ended September 30, 2018
Europe,
Middle Latin
Sales Change Analysis United Asia- East and America/ World-
By Geographic Area States Pacific Africa Canada Wide
�
Volume – organic 1.6 % 4.4 % 0.2 % 2.1 % 2.3 %
Price 1.1 � 0.2 � 1.6 � 1.7 � 1.0 �
Organic local-currency sales 2.7 4.6 1.8 3.8 3.3
Acquisitions 2.6 0.6 3.0 0.9 1.9
Divestitures (1.4 ) (0.6 )

(2.4

) (1.4 ) (1.4 )
Translation — � 1.8 � 4.0 � (2.8 ) 1.1 �
Total sales change 3.9 % 6.4 % 6.4 % 0.5 % 4.9 %
�
�
Nine months ended September 30, 2018
Worldwide Sales Change Organic local- Total sales
By Business Segment currency sales Acquisitions Divestitures Translation change
�
Industrial 3.4 % — % (0.1 )% 1.3 % 4.6 %
Safety and Graphics 5.8 9.8 (4.2 ) 1.2 12.6
Health Care 1.7 0.1 — 1.2 3.0
Electronics and Energy 3.0 — (3.2 ) 1.0 0.8
Consumer 1.3 � — � — � 0.5 � 1.8 �
Total Company 3.3 % 1.9 % (1.4 )% 1.1 % 4.9 %
�
(d) � Total sales change is calculated based on reported sales results. The components of sales change include organic local-currency sales, acquisitions, divestitures, and translation. Organic local-currency sales includes both organic volume impacts (which excludes acquisition and divestiture impacts), plus selling price changes. Acquisition and divestiture impacts are measured separately for the first 12 months post-transaction.
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3M Company and Subsidiaries
BUSINESS SEGMENTS
(Dollars in millions)
(Unaudited)

As part of 3M’s continuing effort to improve the alignment of its businesses around markets and customers, the Company made the following changes, effective in the first quarter of 2018, and other revisions impacting business segment reporting:

Consolidation of customer account activity within international countries – expanding dual credit reporting

Centralization of manufacturing and supply technology platforms

In addition, 3M adopted ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, effective Jan. 1, 2018, on a retrospective basis. As a result, operating income for 3M’s business segments has been revised to reflect non-service cost components of pension and postretirement net periodic benefit costs within other expense (income) net.

The financial information presented herein reflects the impact of the preceding changes for all periods presented. Refer to 3M’s Current Report on Form 8-K furnished on March 15, 2018, for additional supplemental unaudited historical business segment net sales and operating income information. In addition, these business segment changes were reflected in 3M’s Current Report on Form 8-K dated May 8, 2018, (which updated 3M’s 2017 Annual Report on Form 10-K) and 3M’s Quarterly Report on Form 10-Q for the periods ended March 31, 2018, and June 30, 2018.

� � � � � � � �
BUSINESS SEGMENT INFORMATION Three months ended Nine months ended
NET SALES September 30, September 30,
(Millions) 2018 2017 2018 2017
�
Industrial $ 3,023 $ 3,023 $ 9,315 $ 8,905
Safety and Graphics 1,660 1,551 5,258 4,670
Health Care 1,445 1,485 4,501 4,369
Electronics and Energy 1,443 1,515 4,130 4,096
Consumer 1,235 1,279 3,585 3,521
Corporate and Unallocated 35 3 47 6
Elimination of Dual Credit � (689 ) � (684 ) � (2,016 ) � (1,900 )
�
Total Company $ 8,152 � $ 8,172 � $ 24,820 � $ 23,667 �
�
�
BUSINESS SEGMENT INFORMATION Three months ended Nine months ended
OPERATING INCOME September 30, September 30,
(Millions) 2018 2017 2018 2017
�
Industrial $ 667 $ 672 $ 2,110 $ 1,910
Safety and Graphics 412 411 1,375 1,661
Health Care 446 467 1,341 1,304
Electronics and Energy 457 430 1,659 1,011
Consumer 291 311 770 732
Corporate and Unallocated (e) (77 ) (112 ) (1,329 ) (256 )
Elimination of Dual Credit � (180 ) � (171 ) � (502 ) � (459 )
�
Total Company $ 2,016 � $ 2,008 � $ 5,424 � $ 5,903 �
�
(e) � Corporate and Unallocated operating income was impacted of certain restructuring actions related to addressing corporate functional costs following the Communication Markets Division divestiture recorded in the second quarter of 2018. These actions, in addition to the legal settlement recorded in the first quarter of 2018, impacted operating income for the first nine months of 2018, as further discussed in note (c).
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About 3M
At 3M, we apply science in collaborative ways to improve lives daily. With $32 billion in sales, our 91,000 employees connect with customers all around the world. Learn more about 3M’s creative solutions to the world’s problems at www.3M.com or on Twitter @3M or @3MNews.

3M

Investor Contact:

Bruce Jermeland, 651-733-1807

or

Tony Riter, 651-733-1141

or

Media Contact:

Lori Anderson, 651-733-0831

Source: 3M

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