Facing tariffs and a big sale, Solventum sees profits slide

As tariffs loom, 3M-spinoff Solventum’s operating margins are continuing to shrink while its investors look toward the company’s announced purification business sale for balance sheet relief.

Solventum, Minnesota’s newest large company with more than 22,000 employees around the world, has a plant in China, another in Canada and two Mexico -- all countries that could be hit by new or enhanced tariffs starting Tuesday.

Chief financial officer Wayde McMillan called tariffs “the topic of the day.”

“Like others, we’re obviously concerned and we’re monitoring this very closely,” McMillan added.

Solventum, which makes health, material and data science products, was spun out of 3M on April 1, and is moving its headquarters from Maplewood to Eagan in the coming years. The company took on more than $8 billion in debt partly to pay 3M for transferring the health care business into the new company. It just announced the multibillion dollar sale of its purification business to in part pay down this debt.

Overall, Solventum reported adjusted net profits of $422 million on about $2.1 billion in sales for the quarter that ended Dec. 31. Adjusted profits fell more than $100 million compared to the performance of the same four divisions when they were a part of 3M a year prior. Operating income margin on an adjusted basis fell more than 5 percentage points, to 20.4%.

While operating margins tightened, CEO Bryan Hanson pointed to consistent sales volume growth as a promising sign for the young company.

The company recorded its third consecutive quarter of growth in sales volume after seven quarters of consecutive declines for 3M Healthcare prior to the spinoff, Hanson said.

“Now stopping that decline and reversing it, especially amid a complex separation, global restructuring, a talent and cultural transformation, and a significant divestiture process — any of which posed real risk to business continuity — represents a major achievement for this team," Hanson said to analysts Thursday.

Earlier this week, Solventum said it is selling its purification business to Thermo Fisher Scientific for $4.1 billion in cash. Massachusetts-based Thermo Fisher said the business segment operates globally with approximately 2,500 workers. Solventum’s stock price rose above $80 per share for the first time following the announcement.

For the fourth quarter, the business segment selling purification products used in commercial spaces and homes posted an unadjusted operating margin of 6.9%, down from 12.2% a year prior despite net sales growing by $5 million.

McMillan said he expects margins to improve after the deal closes.

“It enables us to accelerate our timeline to deleverage the balance sheet and positions us to begin executing our strategy to augment sales growth with tuck-in acquisitions,” McMillan said.

Activist investor Nelson Peltz’s Trian Fund Management, Solventum’s largest active shareholder, commended the company’s announced purification sale on Wednesday after previously saying in January the separation from 3M wasn’t living up to its potential. Trian is further pushing the company to separate more of its businesses, the Wall Street Journal reported Thursday, citing people familiar with the matter.

Solventum posted $1.41 in adjusted earnings per share Thursday, above Wall Street’s expectations.

The company projected organic sales growth of 1 to 2% for the next fiscal year and adjusted EPS of $5.45 to $5.65. Hanson said he will provide long-term plans at an investor day next month.

“While we know this turnaround will take time and focused investment,” Hanson said, “we are encouraged by the early, meaningful progress and remain well positioned to execute our value creation plan.”