Adjusted earnings of $2.50 a share beat forecasts by 12 cents, and the company raised its full-year range to $9.10 to $9.15. About 4 cents of the quarter reflects a decision to treat amortization as a special item. A warrant tied to an expanded Amazon data-center deal landed the night before.
3M's third quarter looks different depending on which line you read.
The industrial company reported adjusted earnings of $2.50 a share on Tuesday, up 12% from $2.23 a year earlier and above the consensus estimate of $2.38. On a reported basis, earnings were $2.63 a share, including 60 cents from a gain on its remaining stake in Solventum, the health-care business it spun off.
Shares were up 5.8% at $171.39 at about 2 p.m. Eastern.
Two measures of growth
Sales were about $6.58 billion, up 1.0%, slightly below forecasts of $6.61 billion. Organic growth on a reported basis, which excludes currency and acquisitions, was 0.2%.
3M's preferred measure looks very different. It excludes the products made with PFAS chemicals that it is exiting. On that basis, adjusted sales rose 4.2% and adjusted organic growth was 3.3%.
The gap is the cost of the exit. The PFAS business is shrinking by design, and 3M asks investors to judge the company on what remains. That is a reasonable framing for a business being wound down, but it means the company's total sales are barely growing.
The accounting change
The earnings beat also needs a footnote. 3M now treats amortization of acquired intangible assets as a special item, excluded from adjusted earnings, for all periods. The change adds about 4 cents to third-quarter adjusted earnings. If analysts' forecasts were set on the old basis, the like-for-like beat is closer to 8 cents than 12.
The full-year forecast reflects the same change. 3M now expects adjusted earnings of $9.10 to $9.15 a share, adjusted organic growth above 3.5% and adjusted free cash flow of about $4.8 billion. Part of the increase in the earnings range reflects the new amortization treatment and an acquisition, so not all of it is an operating improvement.
The operating improvement that is there is real. The adjusted operating margin widened 1.1 percentage points to 26.2%, and adjusted free cash flow was $1.2 billion. "We delivered another quarter of strong results, including solid sales growth, continued margin expansion, double-digit EPS growth, and robust free cash flow," Chief Executive William Brown said.
The Amazon warrant
A separate disclosure on Monday evening may have mattered as much. 3M said it has expanded its relationship with Amazon to supply products for data centers, and granted Amazon a warrant to acquire up to 3.2 million 3M shares. The warrant links a potential equity stake for Amazon to the commercial relationship between the two companies.
That gives 3M a direct line into the data-center build-out, one of the few areas of industrial demand growing quickly. It also means some of Tuesday's gain may reflect the Amazon news rather than the quarter.
Market implications
One reading is that 3M's turnaround is on track. Margins are widening, cash flow is strong, the ongoing business is growing above 3% organically and a major data-center customer now holds a warrant tied to the relationship.
A second reading is that the headline numbers flatter the picture. Reported growth is flat, part of the beat and the guidance raise comes from an accounting change, and the reported earnings include a one-time investment gain.
What to watch
Adjusted organic growth in the fourth quarter; the pace of the PFAS exit; terms and vesting of the Amazon warrant in future filings; free cash flow against the $4.8 billion target; and sell-side estimate changes on the new amortization basis. A fourth quarter with reported organic growth above 1% would show the ongoing business outgrowing the exit.