3M Company (MMM Quick QuoteMMM - Free Report) has reported better-than-expected bottom-line results for the third quarter of 2020, with earnings surpassing the Zacks Consensus Estimate by 7.04%. However, sales lagged estimates by 1.7%.

Its adjusted earnings in the reported quarter were $2.43 per share, surpassing the Zacks Consensus Estimate of $2.27. However, the bottom line decreased 5.8% from the year-ago quarter figure of $2.58.

The results suffered from a year-over-year rise in cost of sales and operating expenses, and higher taxes (8 cents per share). These adversities more than offset the positive impacts of growth in net sales.

Sales Details

In the quarter under review, 3M’s net sales were $8,350 million, reflecting growth of 4.5% from the year-ago quarter. However, the company’s net sales lagged the Zacks Consensus Estimate of $8,495 million.

Results benefitted from a 0.9% year-over-year increase in organic sales, a 4.8% contribution from acquisitions and a 0.6% gain from movements in foreign currencies. However, divestitures had a negative impact of 1.8%.

Business was healthy in home improvement, semiconductor, personal safety, general cleaning solutions, biopharma filtration and data center. These headwinds were partially offset by weakness in automotive OEM (original equipment manufacturer), general industrial, healthcare, office supplies, oral care, traffic safety, hospitality, healthcare IT and consumer electronics.

On a geographical basis, sales in the Americas increased 7.7% year over year, while that in the Asia Pacific declined 0.6%. Business in the Europe, Middle East and Africa region improved, with sales increasing 4.4% year over year.

The company reports top-line results under four business segments — including Safety & Industrial, Transportation & Electronics, Health Care, and Consumer. The segmental information is briefly discussed below.

Revenues from the Safety and Industrial segment totaled $3,024 million, increasing 6.9% year over year. The improved performance resulted from a 6.9% increase in organic sales and a 0.4% contribution from movements in foreign currencies, partially offset by 0.4% adverse impacts of divestitures.

Revenues from the Transportation & Electronics segment totaled $2,314 million, reflecting a year-over-year decline of 7.4%. Results were adversely impacted by a 7.1% fall in organic sales and a 1.2% negative influence of divestitures, partially offset by a 0.9% contribution from movements in foreign currencies.

Revenues from the Health Care segment were $2,160 million, up 25.5% year over year. The results benefitted from a positive impact of 23.4% from acquisitions, an 8.1% increase in organic sales and a 1.1% gain from movements in foreign currencies. However, divestitures had a negative impact of 7.1%.

Revenues from the Consumer segment increased 5.6% year over year to $1,417 million. Organic sales improved 5.5% and movements in foreign currencies had a positive impact of 0.1%.

Margin Profile

In the quarter under review, 3M’s cost of sales increased 2.7% year over year to $4,303 million. It represented 51.5% of net sales compared with 52.4% in the year-ago quarter. Selling, general and administrative expenses grew 15.3% year over year to $1,677 million. It represented 20.1% of net sales versus 18.2% in the year-ago quarter. Research, development and related expenses expanded 4.1% year over year to $461 million. It represented 5.5% of the quarter’s net sales.

Adjusted operating income in the quarter under review inched up 0.2% year over year to $1,909 million. Operating margin decreased 90 bps year over year to 22.9%. Tax rate in the quarter was 21.4% versus 19% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the third quarter, 3M had cash and cash equivalents of $4,121 million, down 2.3% from $4,219 million at the end of the last reported quarter. Long-term debt balance decreased 4.4% sequentially to $18,429 million.

In the reported quarter, it generated net cash of $2,480 million, reflecting year-over-year growth of 22.7%. Capital used for purchasing property, plant and equipment increased 5.4% year over year to $368 million. Adjusted free cash flow in the quarter was $2,161    million, up 13.1% from $1,911 million generated in the year-ago quarter. Adjusted free cash flow conversion was at 153%.

During the first nine months of 2020, the company used $2,540 million for paying out dividends to shareholders and repurchased $366 million treasury shares. Notably, it paid out dividends of $2,488 million and repurchased shares worth $1,243 million in the first nine months of 2019.

Outlook

3M remains focused on investing in innovation and growth opportunities as well as working on cost-saving actions. Also, healthy generation of cash flow, efforts to strengthen capital structure and sound capital allocation remain its priorities.

For 2020, the company refrained from providing financial projections due to the prevailing uncertainties associated with the pandemic.

Notably, it did mention that it expects a year-over-year change in sales of flat to low-single digits in October. Business days in the month are one less than the year-ago month.

In the fourth quarter of 2020, the company expects respirators to boost sales by 300 bps year over year. Also, the divestiture of the drug delivery business is expected to hurt sales by $100 million (or 130 bps). Operating margin (adjusted) in the quarter is expected to be 21%.