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3M (MMM) Meets Q2 Earnings Estimates, Trims 2016 View

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Despite a challenging macroeconomic environment, 3M Company (MMM - Free Report) reported relatively modest second-quarter 2016 results with GAAP earnings of $1,291 million or $2.08 per share compared with $1,300 million or $2.02 per share in the year-earlier quarter. The year-over-year improvement in earnings per share, despite lower net income, was largely due to a decline in outstanding shares. The reported earnings matched the Zacks Consensus Estimate.

Net sales during the quarter were $7,662 million, down 0.3% year over year and missed the Zacks Consensus Estimate of $7,725 million. The year-over-year decrease in sales was driven by a significant negative foreign currency translation impact, which reduced sales by 1.5%. Organic local-currency sales declined 0.2%, while inorganic growth added 1.4% to sales.

On a geographic basis, organic sales increased 4.8% in Latin America/Canada, 3.0% in EMEA (Europe, Middle East and Africa) and 0.4% in the U.S., offset by a 5.4% decline in Asia Pacific. Operating income in the reported quarter was $1,866 million versus $1,840 million in the year-ago-quarter, resulting in respective operating margins of 24.4% and 23.9%.

3M Company (MMM - Free Report) Street EPS & Surprise Percent - Last 5 Quarters | FindTheCompany

Segment Results

Industrial segment sales remained flat year over year at $2,631 million as sales growth in automotive OEM, automotive aftermarket, and abrasives businesses was offset by decline across the rest of the portfolio. Operating income increased 1.2% year over year to $615 million, while operating margin improved 0.3% to 23.4%.

Health Care segment sales increased 3.0% to $1,404 million in the reported quarter, driven by growth across all businesses. Organic local-currency sales increased 4.9% year over year while adverse foreign currency translation partially reduced segment sales by 1.9%. Operating income improved 4.3% year over year to $460 million, while operating margin was up 0.4% to 32.7%.

Consumer segment revenues were $1,130 million, up 1.7% year over year, driven by home improvement and consumer healthcare businesses. Operating income was $281 million, up 8.8% year over year. Operating margin was 24.9% for the reported quarter compared to 23.3% in the year-ago quarter.

Safety and Graphics segment sales increased 4.7% year over year to $1,499 million, owing to sales growth in roofing granules and commercial solutions. The segment recorded organic local-currency sales growth of 2.3%. However, foreign currency translation reduced sales by 2.2%. Operating income increased 12.8% to $411 million, while operating margin improved 2% to 27.4%.

Electronics and Energy segment revenues were $1,181 million, down 10% year over year due to decline in electronics material solutions and display materials and systems. Organic local-currency sales declined 9.1%, dragged down by weakness in electrical markets and renewable energy markets. Operating income was down 18.1% year over year to $229 million, while operating margin was down 2% to 19.3%.

3M CO Price, Consensus and EPS Surprise

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

Balance Sheet and Cash Flow    

Cash and cash equivalents as of Jun 30, 2016 were $1,688 million, compared with $2,983 million as of Jun 30, 2015. Long-term debt stood at $9,299 million at quarter end, compared with $8,398 million in the year-ago period. Cash flow from operating activities for the first half of the year was $2,545 million compared with $2,418 million in the year-earlier period. Free cash flow generated during the quarter was $962 million, marginally down from $968 million in the prior-year period.  

During the reported quarter, 3M paid $672 million in cash dividends and repurchased $828 million worth of shares. 3M converted 75% of net income to free cash flow during the quarter.

Outlook Trimmed

3M narrowed its earlier guidance for 2016. For 2016, the company anticipates GAAP earnings in the range of $8.15 to $8.30 per share compared to earlier projections of $8.10 to $8.45. Organic local-currency sales growth is expected to be 0%-1%, 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 2016 and beyond. 3M currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Honeywell International Inc. (HON - Free Report) , Leucadia National Corporation and Swire Pacific Limited (SWRAY - Free Report) , each carrying a Zacks Rank #2 (Buy).

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