3M officials say slower global economy will continue to challenge company

3M CEO Mike Roman said the slower global economy will continue to be a challenge for at least the rest of this year.

The company reported Thursday that second-quarter profits plunged 39% amid declining sales in Europe and China, especially in the electronics, auto aftermarket and industrial sectors. Only one of 3M's four key businesses — health care — reported a bump in sales during the April-to-June period.

Even so, 3M's stock price fell less than 1% on Thursday, as investors were not caught off guard. They already had diminished expectations for the second quarter as 3M had lowered its forecast following its disappointing first quarter report back in April.

At the time, 3M executives slashed the 2019 financial forecast, cut 2,000 jobs and announced a restructuring designed to save $100 million this year and at least $225 million per subsequent years. As a result, analysts said investors were prepared for another tough quarter and so were pleased Thursday when 3M reiterated its adjusted earnings guidance for full year 2019.

In contrast, Graco and Protolabs had expected better second-quarter results than what they reported on late Wednesday and Thursday. Displeased investors shoved Graco's stock down more than 5% and Protolabs' down nearly 10%.

Graco CEO Pat McHale said the company saw "softer business levels across a lot of our end markets, especially Asia-Pacific." He also sees a hesitance by companies, especially in China, to make capital improvements. Uncertainties caused by the trade war between China and the U.S. extend beyond the two countries, he said.

At 3M, Roman said the global economy, especially the Asia-Pacific region, will continue to be "sequentially down" during much of the third quarter.

3M worked at cutting inventory and returning to disciplined spending to beat the second-quarter expectations.

It reaffirmed the full-year outlook for adjusted earnings of $9.25 to $9.75 a share.

Company officials told Wall Street analysts they have reduced factory production and inventories in select areas to better manage demand and costs. 3M, however, will still spend about $1.6 billion to $1.7 billion this year on various capital expenditure projects.

The company said it earned $1.13 billion, or $1.92 a share, in the quarter. Excluding one-time items, such as restructuring charges and a charge for exiting the Venezuelan market, 3M earned $2.20 a share. Analysts were expecting an adjusted profit of $2.05 a share.

Declining sales

Sales fell 2.6% to $8.2 billion.

The company's safety and industrial business reported a 5% decline in sales during the period. Consumer product sales fell 0.5% while its transportation and electronics business had a 2.9% sales drop. Health care product sales rose 5.8%.

For the quarter, "our execution was strong in the face of continued slow-growth conditions in key end markets, as we effectively managed costs and improved cash flow," Roman said during Thursday's conference call. "Moving ahead we remain focused on continuing to drive operational improvements, investing for the future and delivering for our customers and shareholders."

Investors in April pummeled 3M's stock. It dropped 13% to $159 in a single day and has yet to fully recover.

The price has been trading near $179 a share, far from its $219 peak in April. On Thursday, 3M's stock slid $1.19 to close at $178.13 a share.

CFRA Equity Research Analyst Jim Corridore maintained his 3M stock estimate for 2019 but lowered his earnings forecast. He said in an e-mail that 3M is taking "appropriate steps" to weather economic slowdowns but faces headwinds.

"Revenues were weak in most global geographies," he said. But "MMM is moving to combat weak global conditions by cutting manufacturing output and restructuring. These actions impacted [pretax earnings] margins."

Moody's Senior Vice President David Berge noted that "3M still has some work to do to regain its footing in 2019.

"Like many firms, the company has been hit hard by soft auto and industrial end markets along with regional weakness in China and Europe. [It's led] to a dip in revenue and margins."

3M's concerns of late have stretched widely.

Last month, it suspended all operations in Venezuela and took a $162 million charge to unravel itself from the "unstable" environment there.

Separately, the 117-year old industrial behemoth expects to soon complete the largest acquisition in 3M history: the $6.7 billion purchase of wound-care product maker Acelity Inc. Roman and CFO Nick Gangestad said that deal is still expected to close by year end.

Legal issues

During Thursday's call, Roman acknowledged that 3M is embroiled in a host of lawsuits and proposed regulatory changes surrounding industrial chemicals called "PFAS," which is short for per- or polyfluoroalkyl substances.

3M has been sued by states and municipalities across the country at the same time Congress and regulators are proposing tougher PFAS limits and may reclassify the chemicals as hazardous.

Roman told analysts that the PFAS issue is "top of mind" to 3M.

3M used a type of PFAS chemicals known as "PFOA" and "PFOS" decades ago to make nonstick coatings and other products. It stopped production in the early 2000s, after the chemicals were found to have leaked from underground storage tanks into water sources in Twin Cities east metro.

The chemicals and others within the PFAS class have since been found to be ubiquitous in the environment. PFAS chemicals don't break down quickly and there are concerns they may be linked with health hazards such as cancer, low birth weights, effects on the immune system and other problems.

The PFAS issue has already cost 3M hundreds of millions of dollars and could cost hundreds of millions more depending on legal and regulatory outcomes.

Last year 3M — which Roman said stopped using the chemicals nearly two decades ago — agreed to pay $850 million to the state of Minnesota to settle a PFAS pollution cleanup lawsuit.

This year, 3M settled with the city of Lake Elmo but was subsequently sued (along with five other manufacturers and distributors) by the state of New Hampshire over PFAS water contamination concerns.

On Thursday, Roman said "the scientific evidence does not show that PFAS cause harm to people at past or current exposure levels." He added 3M "will defend with vigor our company's reputation in the court of law and the court of public opinion."

Some analysts downgraded 3M's stock prospects in recent weeks after Congress launched various bills, including a National Defense Authorization Act amendment that seeks to limit PFAS use and to reclassify the chemicals as "hazardous."

Goldman Sachs equity research analyst Joe Ritchie said Thursday "it's hard to access how all this will shake out."

Dee DePass • 612-673-7725