With its Q3 earnings last October, 3M (NYSE: MMM) announced a restructuring plan expected to reduce 2016 costs by $130 million. With its Q4 results it revealed a $114 million charge for this, which reduced full-year earnings per share by 1.8%.
What's the plan?
Companies take restructuring charges to cover the costs of managing their business portfolios. If they expect to sell a unit for less than the value at which it's carried on their books, they reserve against that accounting loss. If they expect to close a plant, they reserve against severance packages, writedowns of equipment, and, if necessary, environmental cleanup. Restructuring charges are estimates, and sometimes companies are pleasantly surprised: The operation they're selling attracts a better price than expected, more employees take early retirement than anticipated, etc. Overestimates flow back to earnings. Deliberate overestimates are a way to flatter future earnings at the expense of current income: Companies that are having a bad year may figure that they have nothing to lose by making it seem a little worse to magnify their recovery.
3M describes its plan as a reduction of "structural overhead, largely in the U.S." and a pruning of its operations in slower-growing markets, primarily in the EMEA and Latin America regions. Translation: Layoffs of 1,500 American middle managers (1.7% of employees) and sales or closures of nonperformers. Both measures should benefit margins, although 3M won't achieve the $130 million figure in 2016 unless it acts unusually quickly: Savings won't reach that level on an annual basis until the restructuring is complete. So while the latter part of 2016 should see some benefit, it is unlikely to offset the cost.
What are we to make of it?
For a company as big as 3M, with thousands of products, disparate customers, manufacturing in 70 countries and selling in 200, you'd expect restructuring to be pretty much a full-time job. Perhaps a $114 million charge (0.4% of 2015 revenue) is more than in recent years, but it's unlikely to be much more. Such an announcement might make the task of notifying the 1,500 managers who will lose their jobs easier, since they'll know it's part of a public, companywide process. But it's hard to believe that it's a mere accident that 3M chose to make such a charge public in 2015, since it has been pruning portfolio positions and reallocating staff, for which it incurred similar costs all along.
3M enjoys a special place in many investors' thinking, as an industrial company with a long history of comparatively stable growth (thanks to its consumer and healthcare exposure), 57 years of unbroken dividend increases., and an ability to extract profits from some extremely unlikely markets. Yet over the last few years, things have not gone especially well: It has received less of a boost from economic recovery than it has in the past, and it has taken to the somewhat desperate measure of borrowing money to repurchase stock. It took on $3.5 billion in debt and drew down cash to spend $5.2 billion on share repurchases in 2015.
The announcement of a restructuring charge seems very much in the same spirit: It allows 3M to end a difficult year with a measure that suggests improvements to come. The fact that 3M has been taking such measures for years without feeling the need to announce them suggests that this one is novel, possibly even one-of-a-kind. That's simply not true: 3M has closed operations and reduced its workforce on other occasions. Investors shouldn't attach much value to the announcement.
