Sales dip, but 3M sticks to profit gain

Article by: DEE DEPASS , Star Tribune
Updated: July 26, 2012 - 9:04 PM

A strong U.S. dollar hurt revenue, yet the company's stock rose 2 percent on Thursday.

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3M Co., the Maplewood-based maker of Post-it Notes and Scotch tape, said profit rose 0.6 percent to $1.17 billion.

Photo: Paul Sakuma, Associated Press

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A tough economy caused 3M Co.'s revenue to dip in the second quarter, but the company squeezed costs just enough to eke out a slight earnings gain, officials said Thursday.

Maplewood-based 3M, which makes Scotch tape, optical films, sponges, solar components and many other products, saw second-quarter sales fall 1.9 percent to $7.5 million. Still, earnings rose 0.6 percent to $1.17 billion, or $1.66 a share.

Analysts consensus estimates had expected earnings of $1.65 a share and revenues of $7.79 billion.

3M officials said Thursday the combination of challenging economic conditions and the strong U.S. dollar hurt sales.

New CEO Inge Thulin told analysts in a conference call Thursday that 3M pulled through the quarter thanks to "outstanding factory efficiency and cost discipline throughout the organization."

Analysts noted that cost cuts, factory efficiency gains, modest price increases and select sales growth pushed 3M's profit margins to 22.9 percent for the quarter. Profit margins in 3M's Industrial and Transportation and Healthcare businesses hit 23.4 and 32.2 percent, respectively.

"This is some very nice margin improvement," said UBS Financial Services analyst Jason Feldman.

FBR Capital Markets senior research analyst Ajay Kejriwal agreed and said he liked the 2 percent pricing gains 3M achieved. He added that 3M got hurt by foreign currency exchanges during the quarter. However, if currencies were not translated into U.S. dollars, then global sales actually grew 1.9 percent. "It's a good company," he said.

Wall Street apparently agreed. 3M's stock rose $1.89 to close at $90.59 a share Thursday. 3M reiterated its 2012 earnings forecast of $6.35 to $6.50 a share and said sales should grow 2 to 5 percent. Still, the unfavorable impact of foreign currency exchange rates could cut sales by 3 percent in 2012. Annual profit margins of 21.5 to 22.5 percent are expected, officials said.

For the quarter, 3M's largest business, Industrial and Transportation, saw sales drop 0.6 percent to $2.6 billion, but earnings shot up 13 percent to $614 million. Officials noted 20 percent-plus sales gains for 3M's new aerospace unit and its mining, oil, and gas solutions business.

Health care sales rose 1.1 percent to $1.3 billion thanks to strong product sales in food safety, health information and skin/wound care. 3M's consumer and office unit grew.

Revenues fell for 3M's Safety, Security and Protection Services; Display and Graphics (D&G); and the Electro and Communications business due in part to weak consumer demand and volume declines for LCD TV films in Asia. Demand for optical films used in smartphones and computer tablets remained strong.

3M's international front generated 66 percent of all 2011 sales.

For the quarter, slowing economies in Western Europe and a depressed electronics market in Asia and Europe challenged 3M. Growth was strong across Latin America, Canada, and the United States.

Thulin called sub-Saharan Africa "our newest frontier."

3M has formed a new subsidiary in Nigeria and reactivated operations in Kenya. "We believe sub-Saharan Africa holds long-term opportunities for 3M of more than half a billion dollars," Thulin said.

3M's new global outreach went one step farther, creating a stand-alone subsidiary in Saudi Arabia that should be fully operational in September. 3M already does "sizable" business in Saudi Arabia. "With a wholly owned subsidiary we can make a step change in our growth there," Thulin said adding that the new venture could grow to $500 million long term.

Dee DePass • 612-673-7725