3M hits a rough patch in second quarter

3M Co. CEO George Buckley on Tuesday sought to minimize the company's difficulties in the second quarter by comparing them to a knothole, an uncomfortable but short-lived tight spot with daylight on the other side.

Wall Street wasn't buying the message and sent the Maplewood-based giant's shares down 5.4 percent to $89.93. It was the largest one-day percentage drop in 3M's stock price since last October and made it the biggest percentage loser on the Dow Jones industrial average, which fell 0.73 percent.

Despite taking hits from the disaster in Japan, lower sales of LCD films and a slowdown in economic growth, 3M posted higher sales and earnings for the quarter ended June 30. It had double-digit sales growth in four of its six business segments.

"The market has gotten used to industrial companies beating analysts' estimates and raising guidance," said Jeff Windau, an analyst at Edward Jones in St. Louis.

3M did neither. Its earnings for the quarter ended June 30 rose 3.9 percent to $1.2 billion, or $1.60 a share, in line with analysts' projections. The company narrowed the range of its forecast for the year, boosting only the bottom end by 5 cents a share. It now expects earnings to be $6.10 to $6.25 a share. That compares with $5.75 a share last year.

Windau and Mariann Montagne, an analyst and portfolio manager at Marks Group Wealth Management in Minnetonka, said they thought the market was overreacting.

Montagne noted that 3M's earnings forecast includes a non-operating expense: an increase in pension and postretirement benefit expenses of 22 cents a share. Excluding those expenses, 2011 earnings are expected to be in the range of $6.32 to $6.47 per share, an increase of 12 to 15 percent year-over-year. 3M maintained its forecast for full-year organic sales growth in the range of 6 to 7.5 percent.

3M's sales increased 14.1 percent to $7.7 billion in the quarter and were higher in five of the company's six business segments. But Montagne said investors seemed to focus on the display and graphics segment, whose sales declined 7 percent due to lower sales of LCD films. 3M has been cutting inventories of the films for about a year; the inventory glut is the result of manufacturers shifting away from LCD televisions in favor of LED back-lit models.

Nicholas Heymann, an analyst at William Blair in New York, thinks investors thought 3M was further along in getting past its LCD film problems. "They thought the genie had been put back into the bottle," he said.

3M previously had said organic sales in display and graphics would rise 3 to 7 percent this year. On Tuesday it said the segment's organic sales -- which don't include price increases, acquisitions or currency effects -- would be flat compared with last year. In a conference call, Buckley emphasized the difficulties are confined to LCD films for televisions. Films for other devices like smartphones and tablet computers are selling well and also carry higher profit margins, contributing to a 22.8 percent profit margin for unit.

The company estimated that the combined direct and indirect effect from the disaster in Japan reduced second-quarter sales growth by 2.4 percentage points and earnings by 7 cents a share.

Buckley said the second quarter took the brunt of the impact from the crisis in Japan. The company maintained its previous guidance on the effect of business disruptions for the full year, saying it expects they will reduce 3M's full-year sales growth by 1 percentage point and earnings by 11 to 12 cents a share.