3M Company (MMM Quick QuoteMMM - Free Report) reported mixed results for second-quarter 2018, with in-line earnings and revenues surpassing estimates by 0.9%.

The company’s adjusted earnings in the reported quarter were $2.59 per share, in-line with the Zacks Consensus Estimate. The bottom-line result excluded 48 cents per share gain related to the divestiture of assets.

Also, earnings increased 15.1% from the year-ago tally of $2.25 (which excluded 33 cents per share of one-time gains).

Organic Sales, Buyout and Forex Gains Drive Revenues, Divestitures Drag

In the quarter under review, 3M Company’s net sales were $8,390 million, reflecting growth of 7.4% from the year-ago quarter. The improvement was driven by 4.5% favorable impact from volume growth, 1.1% gain from pricing, 2.1% gain from acquired assets and 1% positive impact from foreign currency translation. However, this was partially offset by 1.3% negative impact from divestitures.

Also, the top line exceeded the Zacks Consensus Estimate of $8,317 million.

On a geographical basis, sales in the United States increased 7.1% year over year, while that generated in the Asia-Pacific grew 7.9%. Europe, Middle East and Africa’s sales improved 9.5% and that from Latin America/Canada increased 3.1%.

The company reports its net sales under five segments — Industrial, Safety and Graphics, Health Care, Electronics and Energy, and Consumer. The segmental information is briefly discussed below:

Revenues from the Industrial segment were $3,148 million, increasing 6.8% year over year. Results were driven by 5.7% growth in organic sales and 1.2% positive impact from foreign currency translations, partially offset by 0.1% negative impact from divestitures.

Revenues from the Safety and Graphics segment totaled $1,815 million, increasing 15.8% year over year. The improvement came on the back of 8.5% gain from organic sales growth, 10.5% positive impact from acquired assets and 1% from forex tailwinds. This was partially offset by 4.2% negative impact from divestitures.

Revenues from the Health Care segment were $1,520 million, reflecting growth of 4.9% year over year. While organic sales grew 3.8%, acquisitions and favorable currency translation contributed 0.1% and 1% to sales growth, respectively.

Revenues from the Electronics and Energy segment totaled $1,337 million, increasing 3.6% year over year. The improvement came on the back of 5.2% gain from organic sales growth and 1.1% gain from currency translations, partially offset by 2.7% negative impact from divestitures.

Revenues from the Consumer segment grew 4.6% year over year to $1,223 million. The improvement came on the back of 4.3% gain from organic sales growth and 0.3% gain from currency translations.

Margin Profile Improve Y/Y

In the quarter under review, 3M Company’s cost of sales increased 5.1% year over year to $4,227 million. It represented 50.4% of net sales compared with 51.5% in the year-ago quarter. Selling, general and administrative expenses increased 11.1% year over year to $1,800 million. It represented 21.5% of net sales versus 20.7% in the year-ago quarter. Research, development and related expenses were $468 million. It represented 5.6% of net sales versus 6.1% in the year-ago quarter.

Operating income in the quarter under review increased 11.5% year over year to $2,401 million. Operating margin grew 100 basis points to 28.6%.

Balance Sheet and Cash Flow

Exiting the second quarter, 3M Company’s cash and cash equivalents were $2,801 million, down 19.8% from $3,491 million at the end of the last reported quarter. Long-term debt balance decreased 7.5% sequentially to $11,294 million.

In the reported quarter, the company generated net cash of $1,899 million, increasing 15.7% from the year-ago tally of $1,642 million. Capital used for purchasing property, plant and equipment increased 20.9% year over year to $365 million. Free cash flow generated was $1,534 million, increasing 14.5% year over year.

During the second quarter, the company used $802 million for paying dividends to shareholders while repurchased $1.6 billion shares.

Outlook

In the quarters ahead, 3M Company anticipates strengthening its product portfolio as well as invest for boosting its innovation capabilities.

The company has revised down its adjusted earnings guidance for 2018 from $10.20-$10.55 to $10.20-$10.45 per share. The revision shows the impact of income from the divestiture of communication markets’ businesses.

Organic sales growth guidance has been maintained at 3-4% while free cash flow conversion has been pegged at 90-100%. Effective tax rate is anticipated to be 20-22%.

Net cash generated from operating activities are predicted to be $6.7-$7.2 billion, capital expenditure to be $1.5-$1.8 billion and free cash flow to be $4.9-$5.7 billion.

3M Company Price, Consensus and EPS Surprise