3M Company (MMM Quick QuoteMMM - Free Report) reported better-than-expected results for the fourth quarter of 2018, pulling off a positive earnings surprise of 1.76%.

The company’s adjusted earnings in the reported quarter were $2.31 per share, surpassing the Zacks Consensus Estimate of $2.27. On a year-over-year basis, bottom-line results increased 10%, driven by decrease in costs and operating expenses, other expenses and tax expenses.

For 2018, 3M’s adjusted earnings per share were $10.46, surpassing the Zacks Consensus Estimate of $9.94 and marking roughly 14.4% increase over the year-ago tally of $9.17.

Divestitures and Forex Woes Hurt Revenues

In the quarter under review, 3M’s net sales were $7,945 million, reflecting a decline of 0.6% from the year-ago quarter. Results were adversely impacted by 1.3% negative impact from divestitures and 2.3% adverse impact from foreign currency translation, partially offset by 3% growth in organic sales.

Also, the top line surpassed the Zacks Consensus Estimate of $7.94 billion.

On a geographical basis, sales in the United States increased 3.3% year over year while that generated in the Asia Pacific decreased 0.8%. Europe, Middle East and Africa’s sales declined 6.4% and that from Latin America/Canada slipped 2.8%.

The company reports net sales under five segments — Industrial, Safety and Graphics, Health Care, Electronics and Energy, and Consumer. The segmental information is briefly discussed below:

Revenues from the Industrial segment were $2,952 million, decreasing 0.3% year over year. Results were adversely influenced by 2.7% negative impact from foreign currency translations and 0.1% adverse impact from divestitures, partially offset by 2.5% growth in organic sales.

Revenues from the Safety and Graphics segment totaled $1,569 million, increasing 0.3% year over year. The improvement came on the back of 3.3% gain from organic sales growth, partially offset by 2.8% adverse impact of forex woes and 0.2% negative impact of divestitures.

Revenues from the Health Care segment were $1,520 million, reflecting growth of 2.4% year over year. While organic sales grew 4.8%, unfavorable currency translation impacted sales adversely by 2.4%.

Revenues from the Electronics and Energy segment totaled $1,342 million, decreasing 4.5% year over year. Results were adversely impacted by 7.1% negative impact from divestitures and 1.5% from forex woes, partially offset by 4.1% organic growth.

Revenues from the Consumer segment inched up 0.1% year over year to $1,211 million. The improvement came on the back of 1.9% gain from organic sales growth, offset by 1.8% adverse impact of forex woes.

For 2018, the company’s sales were $32,765 million, reflecting growth of 3.5% from the year-ago tally. However, the top line fell short of the Zacks Consensus Estimate of $32.79 billion.

Margin Flat Y/Y, Costs Decrease

In the quarter under review, 3M’s cost of sales decreased 0.8% year over year to $4,060 million. It represented 51.1% of net sales compared with 51.2% in the year-ago quarter. Selling, general and administrative expenses decreased 4.2% year over year to $1,682 million. It represented 21.2% of net sales versus 22% in the year-ago quarter. Research, development and related expenses were $437 million. It represented 5.5% of net sales versus 5.6% in the year-ago quarter.

Adjusted operating income in the quarter under review slipped 0.3% year over year to $1,783 million. Operating margin was flat year over year at 22.4%. Other expenses in the quarter declined 46.2% and tax provisions decreased 67.7%. Adjusted tax rate in the quarter was 20.5% versus 23% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the fourth quarter, 3M’s cash and cash equivalents were $2,853 million, down 10.4% from $3,185 million at the end of the last reported quarter. Long-term debt balance decreased 0.9% sequentially to $13,411 million.

In the reported quarter, the company generated net cash of $2,258 million, increasing 21.4% year over year. Capital used for purchasing property, plant and equipment increased 15.7% year over year to $531 million. Free cash flow generated was $1,727 million, increasing 23.3% year over year.

During the year, the company used $3,193 million for paying dividends to shareholders while repurchased $4,870 million shares.

Outlook

For 2019, 3M revised down adjusted earnings guidance from $10.60-$11.05 to $10.45-$10.90 per share. The revision includes adverse impact of 10 cents related to the acquisition of M??? Modal’s technology business. Tax rate is likely to be 20-22%.

Organic sales growth guidance has been revised from 2-4% to 1-4%. Acquisitions, net of impact from divested assets, will have a neutral impact while forex woes will hurt sales by 1%. Capital expenditure will total $1.7-$1.9 billion. Further, shares worth $2-$4 billion will likely be repurchased during 2019. Return on invested capital will likely be 22-25% and free cash flow conversion will be 95-105%.

3M Company Price, Consensus and EPS Surprise