3M profits flatten, but beat Wall Street estimates

Rising inflation and supply chain woes are buffeting 3M and manufacturers around the world.

Still, the Maplewood-based giant managed to post better than expected third quarter profits Tuesday.

"In the face of continued global challenges, the 3M team executed well and delivered broad-based organic growth, along with strong margins and cash flow," 3M CEO Mike Roman said in a statement. "Overall, end-market demand remained strong, and we navigated supply chain disruptions."

3M made $1.43 billion, or $2.45 cents a share, even with the same period last year. Stock analysts on average were expecting per-share profits of $2.20.

Sales were $8.9 billion, up 7.1% over a year ago and above analysts' average forecast of $8.67 billion. The company's organic sales, which strip out foreign currency swings, increased 6.3 percent.

But with worrisome macroeconomic trends expected to continue, 3M on Tuesday clipped the upper end of its expected profit range. The company now forecasts full-year earnings per share to be $9.70 to $9.90; earlier the company predicted $9.70 to $10.10.

"Ultimately, the duration of these supply chain challenges is difficult to predict," Roman told stock analysts in a conference call. Nor does 3M foresee a quick end to commodity inflation.

"I would say we don't see the raw material or the inflation environment slowing down in any way," Monish Patolawala, 3M's chief financial officer, told analysts.

Still, 3M's sales outlook continues to be healthy as consumer demand remains strong. 3M is now pegging its sales growth for the year at 9% to 10%, compared with prior guidance of 7% to 10%.

All four of 3M's divisions posted sales growth over 2020's third quarter, but operating profits fell in three of them. The bottom line: 3M has not been able to raise its own prices fast enough to offset higher raw materials and logistics costs.

An unprecedented supply chain disruption, including clogged ports and shipping container shortages, has affected companies across the United States. Ocean freight costs have more than doubled over the past year, Roman told stock analysts.

To deal with the congestion, Roman said 3M has taken to moving its products in different ways. It has expanded railcar use; increased charter flights by 40%; and switched to less clogged ports.

3M and many other companies are also facing tight employment markets — which tend to bid up labor prices. Prices of some goods that 3M buys have risen due to higher labor costs further down the supply chain, Patolawala said.

3M expects legal costs to rise during the fourth quarter, too. The company is facing an avalanche of litigation over chemicals known as PFAS as well as its Combat Arms military earplugs.

During the third quarter, 3M committed $145 million over three years to remediate PFAS-related environmental issues in Zwijndrecht, Belgium, where the company has a factory that made the chemicals, according to a filing Tuesday with U.S. securities regulators.

The commitment came after the Flanders regional government hit 3M with a "notice of default," alleging violations of environmental laws and seeking PFAS-related information.

PFAS chemicals, used in products ranging from fabric protectors to firefighting foam, do not break down in the environment and have polluted groundwater in Washington County and elsewhere.

3M is also fighting claims that its Combat Arms earplugs are defective in one of the largest ever U.S. mass torts. Four bellwether trials have already been held this year — three of which went against 3M — and several more are slated for the fourth quarter.

In 3M's largest division — industrial — sales clocked in at $3.2 billion, up 7.2%. But operating income of $620 million marked a 20% year-on-year decline.

Within the industrial division, sales of 3M's N95 respirators — which had boomed in 2020 due to COVID-19 — continued falling in the third quarter. Disposable respirator sales were down 7% year over year and 15% from the second quarter.

In transportation and electronics, sales were up 5.8% to $2.5 billion, though operating earnings fell 9% to $465 million. That division continues to be hampered by the global semiconductor shortage, Roman noted.

Operating profits in 3M's consumer division dipped 3% to $332 million, while sales grew 8.1% to $1.5 billion.

The company's health care division posted sales of $2.2 million, up 4.1 %. Health's care's operating income tallied $529 million a 7 % increase over a year ago.

Sales grew in all major regions of the globe, but the highest growth rate — 7.9% — was in the Americas.

3M's stock closed Tuesday at $182.16, up 32 cents.