Despite a challenging macroeconomic environment, 3M Company (MMM - Free Report) reported relatively healthy third-quarter 2016 results with GAAP earnings of $1,329 million or $2.15 per share compared with $1,296 million or $2.05 per share in the year-earlier quarter. The year-over-year improvement in earnings per share, despite slightly lower sales, was largely due to a decline in operating expenses. The reported earnings exceeded the Zacks Consensus Estimate by a penny.

Net sales during the quarter were $7,709 million, marginally down from $7,712 million in the year-ago quarter and in line with the Zacks Consensus Estimate. Foreign currency translation impact increased sales by 0.5%, while organic local-currency sales declined 0.8% and inorganic growth added 0.3%.

On a geographic basis, organic sales increased 1.2% in Latin America/Canada, offset by a 2.2% decline in Asia Pacific, 1% decline in EMEA (Europe, Middle East and Africa) and 0.4% in the U.S. Operating income in the reported quarter was $1,904 million versus $1,876 million in the year-ago-quarter, resulting in respective operating margins of 24.7% and 24.3%.

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Segment Results

Industrial segment sales increased 1% year over year to $2,582 million as sales growth in automotive OEM and automotive aftermarket was partially offset by decline across the rest of the portfolio. Operating income increased 2% year over year to $591 million, while operating margin improved 0.3% to 22.9%.

Health Care segment sales increased 1.1% to $1,361 million in the reported quarter, driven by growth in food safety, drug delivery systems, and critical and chronic care. Organic local-currency sales increased 1.5% year over year while adverse foreign currency translation partially reduced segment sales by 0.4%. Operating income decreased 0.6% year over year to $429 million, while operating margin was also down 0.6% to 31.5%.

Consumer segment revenues were $1,209 million, up 4% year over year, driven by home improvement and home care businesses. Operating income was $317 million, up 8.3% year over year. Operating margin was 26.2% for the reported quarter compared to 25.2% in the year-ago quarter.

Safety and Graphics segment sales increased 2.2% year over year to $1,448 million, owing to sales growth in roofing granules and commercial solutions. The segment recorded organic local-currency sales growth of 2%. Operating income increased 12.3% to $364 million, while operating margin improved 2.2% to 25.1%.

Electronics and Energy segment revenues were $1,293 million, down 7.5% year over year due to decline in electronics material solutions and display materials and systems. Organic local-currency sales declined 8.1%, dragged down by weakness in electrical markets and renewable energy markets. Operating income was down 9.1% year over year to $312 million, while operating margin was down 0.4% to 24.2%.

Balance Sheet and Cash Flow  

Cash and cash equivalents as of Sep 30, 2016 were $2,308 million, compared with $1,605 million as of Sep 30, 2015. Long-term debt stood at $11,079 million at quarter end, compared with $8,937 million in the year-ago period. Cash flow from operating activities for the first nine months of the year was $4,453 million compared with $4,082 million in the year-earlier period. Free cash flow generated during the quarter was $1,561 million, up from $1,310 million in the prior-year period.  

During the reported quarter, 3M paid $670 million in cash dividends and repurchased $774 million worth of shares. 3M converted 117% of net income to free cash flow during the quarter.

Outlook Narrowed

3M narrowed its earlier guidance for 2016. The company anticipates 2016 GAAP earnings in the range of $8.15 to $8.20 per share compared to earlier projections of $8.15 to $8.30. Organic local-currency sales is expected to be flat compared to 0%-1% growth expected earlier, while free cash flow conversion rate is anticipated to be 95%-105%.

3M CO Price, Consensus and EPS Surprise

3M CO Price, Consensus and EPS Surprise | 3M CO Quote

With continued restructuring activities for a focused portfolio, 3M expects to report relatively healthy results in 2016 and beyond. 3M currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Danaher Corp. (DHR - Free Report) , Leucadia National Corporation (LUK - Free Report) and Macquarie Infrastructure Corporation (MIC - Free Report) , each carrying a Zacks Rank #2 (Buy).
Danaher has a long-term earnings growth expectation of 11.7% and is currently trading at a forward P/E of 22.4x.

Leucadia has a long-term earnings growth expectation of 18.0% and is currently trading at a forward P/E of 94.2x.

Macquarie is currently trading at a forward P/E of 70.1x.