3M Company (MMM Quick QuoteMMM - Free Report) has reported better-than-expected fourth-quarter 2020 results, wherein earnings and sales surpassed the consensus estimate by 8.7% and 1.1%, respectively.

Its adjusted earnings were $2.38 per share, surpassing the Zacks Consensus Estimate of $2.19. Moreover, the bottom line increased 22.1% from the year-ago quarter figure of $1.95. The results benefited from growth in net sales and a fall in total operating expenses on a year-over-year basis.

In 2020, the company’s adjusted earnings came in at $9.25, up 18.4% year over year.

Sales Details

In the quarter under review, 3M’s net sales were $8,583 million, reflecting growth of 5.8% from the year-ago quarter. The company’s net sales beat the Zacks Consensus Estimate of $8,488 million.

In 2020, the company’s net sales were $32,184 million, up 0.1% on a year-over-year basis.

Quarterly results benefited from a 5.5% year-over-year increase in organic sales, a 0.5% contribution from acquisitions and a 1.4% gain from movements in foreign currencies. However, divestitures had a negative impact of 1.6%.

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

Region wise, sales in the Americas increased 7.9% year over year, while that in the Asia Pacific jumped 1.7%. Business in the Europe, Middle East and Africa region improved, with sales increasing 5.6% year over year.

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

Revenues from Safety and Industrial totaled $3,140 million, increasing 12.7% year over year. The improved performance resulted from an 11.4% increase in organic sales and a 1.3% contribution from movements in foreign currencies.

Revenues from Transportation & Electronics totaled $2,338 million, reflecting a year-over-year increase of 2.3%. Results gained from a 1.4% rise in organic sales and a 2.2% contribution from movements in foreign currencies, partially offset by a 1.3% negative influence of divestitures.

Revenues from Health Care were $2,257 million, up 5.4% year over year. The results benefited from a positive impact of 2.1% from acquisitions, a 6.6% increase in organic sales and a 1.6% gain from movements in foreign currencies. However, divestitures had a negative impact of 4.9%.

Revenues from Consumer increased 10.6% year over year to $1,425 million. Organic sales improved 9.9% and movements in foreign currencies had a positive impact of 0.7%.

Margin Profile

In the fourth quarter, 3M’s cost of sales increased 1.5% year over year to $4,388 million. It represented 51.1% of net sales compared with 53.3% in the year-ago quarter. Selling, general and administrative expenses fell 2.6% to $1,890 million. It represented 22% of net sales versus 23.9% in the year-ago quarter. Research, development and related expenses fell 12.5% year over year to $456 million. It represented 5.3% of the quarter’s net sales.

Adjusted operating income in the quarter increased 39.5% year over year to $1,849 million. Operating margin jumped 250 basis points to 21.5%. Tax rate in the quarter was 18.5% versus 20.3% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting 2020, 3M had cash and cash equivalents of $4,634 million, up 12.4% from $4,121 million at the end of the last reported quarter. Long-term debt balance decreased 2.4% sequentially to $17,989 million.

In the reported quarter, it generated net cash of $2,515 million, reflecting year-over-year growth of 7.6%. Capital used for purchasing property, plant and equipment decreased 21.6% to $422 million. Adjusted free cash flow was $2,104 million, up 16.1% from $1,813 million generated in the year-ago quarter. Adjusted free cash flow conversion was 151%.

In 2020, the company used $3,388 million for paying out dividends to shareholders and repurchased $368 million treasury shares. Notably, it paid out dividends of $3,316 million and repurchased shares worth $1,407 million in 2019.

Outlook

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

For 2021, 3M currently anticipates adjusted earnings per share of $9.20-$9.70. Sales are predicted to increase 5-8% year over year, with organic sales growth in the range of 3-6%. Free cash flow conversion is projected to be 95-105% for the year.

Zacks Rank & Stocks to Consider

The company currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks are AGCO Corporation (AGCO Quick QuoteAGCO - Free Report) , AptarGroup, Inc. (ATR Quick QuoteATR - Free Report) and Axon Enterprise, Inc. . While AGCO currently sports a Zacks Rank #1 (Strong Buy), AptarGroup and Axon Enterprise carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AGCO delivered a positive earnings surprise of 434.48%, on average, in the trailing four quarters.

AptarGroup delivered a positive earnings surprise of 10.91%, on average, in the trailing four quarters.

Axon Enterprise delivered a positive earnings surprise of 30.28%, on average, in the trailing four quarters.

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