3M balances ups, downs to beat Q1 predictions

Despite soggy U.S. sales and sizable declines in consumer and optical films, 3M Co. reported fair first-quarter results Thursday that beat analysts' expectations by 3 cents a share. Excluding last year's pharmaceutical sale, 3M operating income rose 3.6 percent to $1.5 billion. Including the sale and other special items, net income fell 28 percent to $988 million or $1.38 a share. On average analysts had expected $1.35.

However, the bellwether stock surprised Wall Street with news that profits for its once-high-flying LCD optical-films business took a dive during the quarter as optical profits fell 50 percent. 3M's stock fell sharply at Thursday's opening but recovered somewhat to close at $79.13, down $1.50 or 1.9 percent.

CEO George Buckley said the once-unique LCD film technology that brightens flat-panel TVs, computers and cell phones is becoming a commodity item as Asian competitors wrestle for market share with cheaper prices and lower-end technologies. It wasn't that long along ago that LCD film sales and margins drove 3M's growth. Not anymore.

3M's display and graphics division, which includes optical films, saw sales drop 5.9 percent to $871 million. Optical sales fell 16 percent and profits plunged 50 percent, results that J.P. Morgan Chase analyst Steven Tusa noted were "really bad" and surprising given recent meetings executives conducted for analysts.

Those talks "made people feel comfortable that you had your hands or a fence around this situation. ... [Now] what's being missed here?" Tusa asked executives during a conference call Thursday.

Last year, 3M slashed its film prices, laid off some workers and entered the low end of the market in an effort to better compete. It wasn't enough. Buckley chalked first-quarter film results to the fact that flat-panel TV makers are "scrambling for market share. And there is a reorganizing of the power based in the marketplace. ... Those dynamics are extraordinarily difficult to forecast accurately. They just are." Global strength

Morgan Stanley analyst Scott Davis said "I don't think there was a huge surprise ... that the rate of change in display and graphic was negative. But it was certainly a surprise that health care and electro and communications came in as strong as they did."

While 3M's consumer and office division operating income fell 7 percent because of the slowdown in U.S. consumer spending, neither it nor LCD films were enough to spoil the quarter.

Global revenues rose 8.9 percent to $6.5 billion, due mainly to international sales. Operating income rose 3.6 percent to $1.5 billion, excluding one-time items such as the $422 million (57 cent per share) gain from the 2007 sale of 3M's massive pharmaceutical division. 3M posted strong earnings and sales growth in its industrial, safety/security and electro/ communications divisions. Thanks to strong dental and medical supply sales and currency gains, 3M's health care division increased sales 12 percent to $1.1 billion while operating income rose 19.6 percent to $321 million, excluding last year's special items. Buckley reiterated his forecast for 2008, saying earnings should increase at least 10 percent above the $4.98 per share posted in 2007.

3M also expects operating margins of 22.5 to 23.5 percent and a tax rate of 31.5 to 32.5 percent for all of 2008. Capital expenditures will decline by $100 million for the year to a range of $1.3 billion to $1.4 billion, Buckley said.

Dee DePass • 612-673-7725