Are Investors In For A Surprise From 3M This Earnings Season?

3M (NYSE:MMM) is set to announce its first quarter earnings on April 25, 2017, wherein marginal increases to revenue and EPS are expected. The main driver for a rise in sales is expected to be organic growth, as well as strong demand in automotive and OEM sectors. Furthermore, weakness in the US dollar in the first quarter could help spur growth for the company. Better operating efficiency, and consequently a lower SG&A expenditure, could help pave the way for an increase in the earnings per share. As per analysts’ estimates, the SG&A expenses are expected to fall massively, from $1.94 billion in the corresponding quarter of the prior year, to $1.5 billion in the current period. The main highlight of the first quarter has been the definitive agreement 3M entered into to acquire Scott Safety, which has been delved into further below.

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Acquisition Of Scott Safety

3M has been very active on the M&A front in recent years, having made significant acquisitions such as Capital Safety, Polypore’s Separations Media business, and Ivera. The company has also made an effort to slim down. Some of the big-ticket sales include that of its Static Control and Library Systems businesses, and Faab Fabricauto. The company was involved in another such acquisition, that of Scott Safety from Johnson Controls, for $2 billion. The deal, which is likely to close in the second half of the financial year, is the second largest in 3M’s history, and will make the company the largest player in the personal protection market in the US. Since 2012 to early 2016, 3M has pruned its businesses from 40 to 26, thereby improving customer relevance, productivity, and speed, through a leaner operating structure. This has helped to attain operating efficiency, and thus, improved margins.

3M has worked hard to expand its worker safety products, and personal safety is considered a core growth business. In its largest deal to date, 3M bought Capital Safety for $2.5 billion about two years back, which helped it attain an immense presence in the fall protection and worker-harness arena. Meanwhile, the Scott Safety acquisition will aid in expanding its firefighter breathing equipment. Both these acquisitions complement the company’s personal safety portfolio, which provides respiratory, hearing, and fall protection solutions, that help improve the safety and health of workers.

According to Frost and Sullivan, 3M has “some gaps in its safety portfolio.” This deal should help to plug some of those gaps, as it provides 3M with safety products that cater to firefighters and the oil and mining industries, where breathing and gas detection are crucial. Furthermore, it also catapults the company to the number one position in the PPE (personal protection equipment) industry. The Scott Safety business had annual revenues of approximately $570 million in 2016, taking the combined revenue of the Capital Safety and Scott Safety acquisitions to over $1 billion for 3M. According to 3M CEO Inge Thulin, the Scott Safety acquisition is expected to contribute about 10 cents per share to 3M’s earnings, after the initial acquisition costs are accounted for.

Over-Reliance On Share Repurchases?

In the fourth quarter of FY 2016, the company spent a massive $1.6 billion on buybacks and dividends. For the full year, the company returned $6.4 billion to shareholders, including cash dividends of $2.7 billion and gross share repurchases of $3.7 billion. The company intends to continue this strategy in 2017, with expected share buybacks to be in the range of $2.5 billion to $4.5 billion. This implies that the company is spending more on share repurchases and dividends than it makes in net income. The company’s debt figures have been on the rise, increasing almost a whopping $2 billion year-on-year, as on December 31, 2016. Such a strategy may not be sustainable in the long term.

Have more questions on 3M? Have a look at these links below:

• Industrials Segment Drives Growth For 3M In Its Fourth Quarter
• As A Part Of Its Growth Strategy, 3M Divests From Some Of Its Businesses
• R&D: One Of The Driving Factors Behind 3M’s Growth
• 3M Teams Up With Alphabet’s Verily For Population Health Management Tools
• What Trends Will Ensure Growth For 3M From Developing Markets In The Future

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