3M Beats Q2 Earnings, Revenues Hurt By Strong Dollar
3M Company (MMM - Analyst Report) reported record earnings of $2.02 per share for second-quarter 2015, beating the Zacks Consensus Estimate of $1.99 and reflecting an increase of 5.8% year over year. Shares were trending downward in pre-market trading, as investors were likely disappointed by the weak revenue numbers.
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Net income came in at $1.3 billion, 2.6% higher compared with the previous year. The earnings improvement was driven by successful cost streamlining initiatives.
Net sales during the quarter were $7,686 million, down 5.5% year over year and lagging the Zacks Consensus Estimate of $7,896 million. The year-over-year decrease in sales was driven by a significant negative foreign currency translation impact, which shaved off 7.3% year over year. However, the company achieved organic local-currency sales growth of 1.8%.
Operating income stood at $1,840 million in the reported quarter versus $1,856 million in the year-ago-quarter. Operating margin came in at 23.9% in the reported quarter, up 1.1% year over year.
Segment Results
Industrial segment sales decreased 6.4% year over year to $2.6 billion in the reported quarter, driven by unfavorable foreign currency impact. Organic local-currency sales increased 1.4% year over year due to strong sales in aerospace and commercial transportation, 3M purification and automotive market.
Health Care segment sales decreased 3.7% to $1.4 billion in the reported quarter, subdued by a strong dollar. Organic local-currency sales increased 3.4% year over year with growth in health information systems, food safety, infection prevention, oral care and chronic care.
Consumer segment revenues were $1.1 billion in the reported quarter, down 2.5% year over year, as organic growth of 3.4% was crushed by adverse foreign currency impact. The segment saw strength across the portfolio, especially in DIY, stationery and office supplies, and home care.
Safety and Graphics segment sales decreased 4.1% year over year to $1.4 billion, negatively impacted by foreign currency translation. The segment showed strong organic local-currency sales growth of 4.9%, benefited by growth in commercial solutions, roofing granules and personal safety.
Electronics and Energy segment revenues were $1.3 billion in the reported quarter, down 7.9% year over year. Organic local-currency sales declined 3%, dragged down by weakness in display materials and systems as well as electrical markets, telecom and renewable energy markets.
Balance Sheet and Cash Flow
Cash and cash equivalents as of Jun 30, 2015 were $2,983 million, compared with $2,125 million as of Jun 30, 2014. Long-term debt stood at $8,431 million at quarter end, compared with $5,323 million as of Jun 30, 2015. Free cash flow generated during the quarter was $968 million, down from $1,299 million in the prior-year period.
During the quarter, 3M paid $646 million in cash dividends to shareholders and repurchased $1.7 billion of its shares. In second-quarter 2015, 3M converted 74% of net income to free cash flow.
During the quarter, 3M announced the acquisition of Capital Safety, a global provider of fall protection equipment, for $2.5 billion. Capital Safety will build on 3M’s strong foothold in technology, manufacturing and global capabilities, and boost the company’s personal safety platform.
Additionally, in late February, 3M announced its intention to acquire Polypore’s Separations Media business for $1.0 billion, which is likely to enhance its existing filtration platform and unlock new growth opportunities for the company.
Outlook
Factoring in a feeble global economic growth environment and the sustained negative impact of a strong dollar, 3M revised its 2015 guidance slightly downward. The company now expects earnings to be in the range of $7.80 to $8.00 per share from the prior range of $7.80 to $8.10 per share. Foreign currency translation is expected to reduce 2015 sales by 6% to 7%.
3M reduced its expectation for organic local-currency sales growth to the range of 2.5% to 4%, down from the previous guidance of 3% to 6%. The company affirmed its expectation of free cash flow conversion in the range of 90% to 100%.
3M currently has a Zacks Rank #3 (Hold). Other stocks that look promising and are worth a look now include ITT Corporation (ITT - Analyst Report), Carlisle Companies Incorporated (CSL - Snapshot Report) and Koninklijke KPN N.V. (KKPNF -Snapshot Report). While ITT holds a Zacks Rank #1 (Strong Buy), Carlisle Companies and Koninklijke carry a Zacks Rank #2 (Buy).
Disclosure: None.