Maplewood-based 3M crushes profit forecasts but warns of inflation

3M posted a strong second quarter Tuesday with profits and sales well above expectations, but the company warned investors about rising costs in its supply chain.

Also, 3M noted that its COVID-fueled respirator production has peaked and sales are now falling.

The Maplewood-based manufacturer of everything from sandpaper to computer coolant earned $1.52 billion, or $2.59 a share, in April through June. That's up 15% from a year ago.

Stock analysts on average were forecasting per-share earnings of $2.26 and sales of $8.55 billion. 3M's second quarter sales tallied $8.9 billion, up from $7.18 billion.

"3M delivered strong performance in the second quarter, once again posting organic growth across all business groups and geographic areas, along with increased earnings and robust cash flow," said Mike Roman, 3M's chief executive.

It was the company's third consecutive solid quarter as it continues to recover from the economic pain inflicted in 2020 by the coronavirus pandemic.

3M is projecting full year 2021 earnings of $9.70 to $10.10 per share, up from $9.20 to $9.70. The company now expects annual sales to increase 7% to 10% over 2020, compared to its previous estimate of 5 % to 8 %.

3M's stock closed Tuesday at $200.47, down 0.6%.

As the world economy continues to bounce back, manufacturers like 3M are grappling with rising prices for raw materials and transportation as well as a global dearth of semiconductors.

"Inflation has been an ongoing challenge as we go through the year," Roman told analysts and investors. "We continue to work to mitigate price increases and chip shortages."

3M is raising prices, but costs are increasing faster. 3M said it expects supply chain price inflation of 65 cents to 80 cents per share in 2021, up from its earlier projection of 30 to 50 cents per share.

"We are raising prices everywhere and it is taking a little bit of time, but it is broad based," 3M's Chief Financial Officer Monish Patolawala told analysts.

Computer chip supply constraints are also expected to continue to hamper the company, particularly its automotive and electronics business.

But 3M's transportation and electronics division continued a comeback in the second quarter, posting a 24.6% increase in organic local currency sales and a 52 % hike in operating income.

Its largest unit, safety and industrial, recorded a 17.6 % increase in sales and a 15 % gain in operating profits. Its two other businesses — health care and consumer — also had double-digit gains, with operating profit growth outpacing sales growth.

But for much of the past 16 months, the profit story at 3M has been shaped by the way it ramped up respirator, or face mask, production in response to the spread of COVID-19. 3M's N95 respirator is known as the gold standard in protection against pathogens and other particulate matter.

The company's second quarter disposable respirator sales were up 3% over the same time last year, but they fell 11% sequentially over the first quarter. "We are now seeing a deceleration in health care demand" for respirators, Roman said.

For the second half of 2021, 3M said it expects a decline in the range of $100 million to $300 million in pandemic-related respirator sales.

As sales tail off to health care customers, Roman said the company is selling more respirators to its industrial customers, which in normal times is 3M's largest mask market. And there are still places around the world where mask demand is increasing, Roman said.

Overall, while Roman said he sees continued global economic recovery, he said COVID-19 is still a wild card, particularly with the spread of the Delta variant.

3M pointed out Tuesday that it expects its legal expenses to rise in the third quarter due to scheduled trials involving its Combat Arms earplugs and a class of chemicals it once made known as PFAS.

3M face suits by over 200,000 active and retired military members who claim their earplugs failed them. 3M prevailed in one of the first three bellwether earplug trials earlier this year, but lost the other two. More bellwethers are set for the fall.

Meanwhile, a bellwether trial over PFAS contamination is slated for October in Michigan. 3M faces over 300 PFAS-related suits across the country, litigation which analysts say has been weighing on the value of its stock.

3M also said in a regulatory filing Tuesday that during the second quarter, it added another $57 million to a reserve covering PFAS and other environmental liabilities — after setting aside $55 million in the first quarter.