Subpoena, cuts shock 3M shares
The 3M Co. dropped the most in nine months after revealing that it had received a grand jury subpoena in an environmental investigation and saying it would cut 1,500 jobs as markets slump, including car parts and electronics.
The pared workforce is part of a restructuring — affecting “all business groups, functions and geographies” — starting this month that will recast reporting lines and consolidate manufacturing oversight, 3M said in a statement Tuesday as it reported earnings. The company anticipates pre
tax savings of as much as $120 million a year from the changes.
The cuts, on top of 2,000 layoffs announced in April, capped a rough year for the maker of everything from Post-it notes to touch-screen displays. The company trimmed its forecasts several times last year because of trade disputes, head winds in China and flagging demand in the automotive and electronics markets. Chief Executive Officer Mike Roman said 3M is positioning itself to capitalize on an eventual rebound.
The latest round equates to about 1.5% of 3M’s global workforce.
The shares fell 5.72% in New York trading. The company’s stocks fell 7.4% in 2019, the third-worst performance in the Dow Jones Industrial Average.
“Organic growth company-wide in the fourth quarter was minus 2.6%, in line with our guidance,” Roman said in a conference call with analysts. “We continued to face softness in certain end markets, namely China, automotive, and electronics, which impacted overall growth.”
The company received a federal grand jury subpoena last month regarding discharges at an Alabama facility that may not have complied with relevant permits, Roman said in a call with analysts. 3M is cooperating with the investigation, which began after a previously reported company disclosure to authorities, he said.
The St. Paul, Minn.-based company took a pretax fourthquarter write-down of $214 million for litigation related to polyfluoroalkyl chemicals, commonly called PFAS. They are used in firefighting foam, nonstick pots and pans, water-repellent clothing and many other household and personal items. They are nicknamed “forever chemicals” because they persist in the environment.
The company, along with chemicals- and materials-making peers such as Chemours Co., faces potentially substantial liability from lawsuits over the harmful effects of the chemicals.
As part of the newly announced restructuring, non-U.S. employees will now report to their business groups rather than the international operations organization, which is being eliminated. Julie Bushman, who oversees international operations, will step down April 1, 3M said.
The company earned $969 million, or $1.66 per share, in the fourth quarter. Its adjusted profit was $1.95 per share, far from the pershare earnings of $2.10 that industry analysts had expected, according to a survey by Zacks Investment Research expected. Sales climbed 2.1% to $8.1 billion.
The quarter was “noisy,” with “unexpectedly large” charges, Deane Dray, an analyst at RBC Capital Markets, said in a note to clients.
The transportation and electronics unit continued to weigh on results, with revenue dropping 6.2%. The strain was countered somewhat by the health care division, a recent bright spot, which boosted sales 25% in the quarter.
Roman acknowledged that 3M “continued to manage challenges in certain key end markets,” but said in the statement that the results were still in line with the company’s expectations.
The company also makes virus masks and, in response to the spreading coronavirus in China that has now killed dozens of people, 3M is rapidly increasing production.
The U.S. government chartered a plane to fly out diplomats from the U.S. Consulate in Wuhan, where the outbreak started, and other Americans. China has cut off access to Wuhan and 16 other cities to prevent people from leaving and spreading the virus further.
“We’re seeing increased demand for our respiratory protection products and we’re ramping up our production worldwide in China, around the world, to meet that demand,” Roman said. “At the same time, we’re seeing what everybody else is seeing, that there’s — businesses are shutting down, extending their shutdown beyond Lunar New Year so we’re really watching day to day what that’s going to mean for our outlook for China.”
The company gave the first peek at its expectations for 2020, saying adjusted profit will be $9.30 to $9.75 a share this year. The midpoint of the range trailed the $9.60 average of analyst estimates. Organic sales, excluding the impact of currency conversions, will rise no more than 2% this year.
Earlier this month, the Institute for Supply Management reported that U.S. manufacturing activity fell to the lowest level in more than a decade. A survey by the association of purchasing managers found that companies are uncertain about trade and are seeing weak demand from abroad.
The manufacturing sector last year was rocked by slower global growth and the escalation of trade tensions between the United States and China. President Donald Trump signed an initial agreement with China this month that may ease some of the drag caused by tariffs and threats of additional import taxes. However, the spread of a new virus in China threatens to hammer the nation’s economy, and possibly others.