Despite a challenging macroeconomic environment, 3M Company (MMM - Free Report) reported relatively healthy fourth-quarter 2016 results with GAAP earnings of $1,155 million or $1.88 per share compared with $1,038 million or $1.66 per share in the year-earlier quarter. The year-over-year improvement in earnings was largely due to higher sales and lower operating expenses. The reported earnings exceeded the Zacks Consensus Estimate by a penny.  

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For full year 2016, 3M reported GAAP earnings of $5,050 million or $8.16 per share compared with $4,833 million or $7.58 per share in 2015. The year-over-year increase in GAAP earnings despite lower sales was primarily due to lower operating expenses.   

Net sales during the quarter were $7,329 million, up from $7,298 million in the year-ago quarter but missing the Zacks Consensus Estimate of $7,368 million. Foreign currency translation impact and divestures decreased sales by 0.8% and 0.4%, respectively, while organic local-currency sales improved 1.6%. For full year 2016, 3M recorded net sales of $30,109 million compared with $30,274 million in 2015.     

On a geographic basis, organic sales increased 4.1% in the reported quarter in Latin America/Canada, 2.4% in Asia Pacific and 1.2% in the U.S., partially offset by a 2.4% decline in EMEA (Europe, Middle East, and Africa). From a segment perspective, organic local-currency sales increased 4.6% in Industrial, 2.2% in Safety and Graphics, and 1.3% in Health Care, somewhat offset by a decrease of 0.6% in Electronics and Energy, and 0.7% in Consumer. Operating income in the reported quarter improved to $1,665 million from $1,500 million in the year-ago-quarter, resulting in respective operating margins of 22.7% and 20.5%.

3M Company Price, Consensus and EPS Surprise

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

Segment Results

Industrial segment sales increased 3% year over year to $2,524 million as sales growth in automotive OEM, advanced materials, separation and purification and automotive aftermarket was partially offset by decline in aerospace. Operating income increased 16.8% year over year to $553 million, while operating margin was 21.9% compared with 19.3% in fourth-quarter 2015.

Health Care segment sales declined 0.1% to $1,379 million in the reported quarter, driven by lower oral care and health information systems sales. Adverse foreign currency translation reduced segment sales by 1.4% year over year. Operating income decreased 7.3% year over year to $410 million, while operating margin was 29.8% compared with 32.1% in the prior-year period.

Consumer segment revenues were $1,094 million, down 0.7% year over year, driven by decline in stationery and office businesses. Operating income was $228 million, down 10.5% year over year. Operating margin was 20.9% for the reported quarter compared with 23.1% in the year-ago period.

Safety and Graphics segment sales increased 0.6% year over year to $1,301 million, owing to sales growth in roofing granules and commercial solutions. Operating income decreased 4.1% to $270 million, while operating margin was 20.8% compared with 21.8% in fourth-quarter 2015.

Electronics and Energy segment revenues were $1,208 million, down 1% year over year due to decline in electronics material solutions and display materials and systems. Organic local-currency sales declined 0.6%, dragged down by weakness in electrical markets and renewable energy markets. Operating income was up 61.3% year over year to $326 million, while operating margin was 26.9% compared with 16.6% in the year-ago quarter.

Balance Sheet and Cash Flow  

Cash and cash equivalents at year end 2016 were $2,398 million, compared with $1,798 million in the prior-year period. Long-term debt stood at $10,678 million at year end, compared with $8,753 million in the year-ago period. Cash flow from operating activities for 2016 was $6,662 million compared with $6,420 million in 2015. Free cash flow generated during 2016 was $5,242 million, up from $4,959 million in the prior-year period.  

During the reported quarter, 3M paid $664 million in cash dividends and repurchased $924 million worth of shares. 3M converted 104% of net income to free cash flow during 2016, while return on invested capital was 23%.

Outlook Reaffirmed

3M reiterated its earlier guidance for 2017. The company anticipates 2017 GAAP earnings in the range of $8.45 to $8.80 per share, representing year-over-year growth of 4–8%. Organic local-currency sales are expected to be up 1–3%, while free cash flow conversion rate is anticipated to be 95–105%.

With continued restructuring activities for a focused portfolio, 3M expects to report relatively healthy results in 2017. 3M currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Hitachi, Ltd. (HTHIY  - Free Report) , Barloworld Limited (BRRAY - Free Report) and Swire Pacific Ltd. (SWRAY  - Free Report) , each carrying a Zacks Rank #2 (Buy). 

Hitachi has a long-term earnings growth expectation of 13% and is currently trading at a forward P/E of 14.2x.

Barloworld has a long-term earnings growth expectation of 12.8% and is currently trading at a forward P/E of 11.5x.  

Swire Pacific is currently trading at a forward P/E of 16.2x.