3M profit tumbles as sales slump

3M Company's strategy of relying on foreign sales has buoyed profit for years. No more.

International sales fell 14 percent in the fourth quarter and overall profit dropped 37 percent, as the recession's grip on 3M and most other industrial companies tightened across the globe.

"We saw all the classic signs one would expect at times like these: canceled orders, inventory corrections in the channel, factory shutdowns, layoffs and overall weak business conditions," 3M CEO George Buckley told Wall Street analysts Thursday during a conference call.

"While weak business conditions, poor consumer confidence and a fear factor made it worse, we believe the principal cause of the severe downturn was the shortage of credit to lubricate the wheels of global commerce."

Buckley said that he expects conditions to worsen during the first quarter this year before starting to level off in the second and third quarters, which prompted the company to cut its 2009 earnings forecast and predict deeper cost cutting in the months ahead. Buckley said he's not expecting signs of real growth until the fourth quarter.

That's disappointing news for Wall Street and Main Street alike. In the fourth quarter, Minnesota's largest manufacturer slashed 2,400 jobs worldwide and furloughed 1,000 more factory workers. It also terminated most contract workers. That's on top of 1,000 job cuts in the third quarter.

Buckley told analysts Thursday that "more [cuts] are likely" in 2009 as he tries to trim $235 million in salary and benefits this year.

It's a stunning reversal of fortune for 3M, which until recently had been a Wall Street darling with robust growth coming out of China, India, Brazil, Poland, Russia and other developing countries.

International results were so good that 3M enacted a plan several years ago to accelerate foreign investments. International sales jumped from 53 percent of total sales in 2001 to 65 percent last year and were on pace to hit 70 percent next year.

But in October, November and December, international sales fell 14 percent compared with a 6 percent decline in the United States. As a result, Buckley and CFO Patrick Campbell said that capital expenditures worldwide will be cut by $500 million, or about 30 percent.

The changes are necessary, officials said, because 3M -- which makes Scotch Tape, Post-it notes and everything else from dental crowns to bandages, kitchen sponges and automotive adhesives and electrical cables -- has felt the global recession punch five of its six worldwide businesses.

Economists say that 3M is no different from Dow Chemical, DuPont, Pentair, H.B. Fuller and other multinational giants that have learned that this global recession respects no boundary or reputation. Those firms -- as well as Boeing, Caterpillar, Andersen Corp., Hutchinson Technology, AT&T, Polaris, Home Depot and Best Buy -- have shed tens of thousands of workers in recent weeks.

Though dismal, 3M's results beat the company's recently reduced expectations. That's why 3M's stock rose $1.13 on Thursday, to close at $56.55, analysts said.

Wall Street analysts and investors are not ready to write off 3M.

"There's blood all over the place in the economy right now," said Edward Jones research analyst Dan Ortwerth, noting that the company beat expectations. Analysts expected 3M to earn 93 cents a share for the quarter; it earned 97 cents a share, excluding severance and other one-time items.

"What that tells me is that in a bad, bad storm where everyone is suffering, including the good ships, this one looks like it is going to make it through. It's proving that it's seaworthy, as advertised," Ortwerth said.

Health care unit grows

Analyst Scott Davis with Morgan Stanley noted that 3M's once highly profitable optical-films business continues to worsen, despite earlier forecasts that declines for the troubled unit had bottomed out. Optical systems sales plummeted 48 percent during the quarter, prompting a sales decline for 3M's larger display and graphics business.

Buckley said that optical films, which brighten LCD screens on cell phones, laptop computers and flat-panel TVs, should see growth again as manufacturers and consumers discover the energy-saving benefits. He said the company has no plan to exit the business despite slow demand and pricing pressures in Asia.

China, a linchpin of 3M's former growth, slowed considerably in 2008, Buckley said. But he said 3M will continue to invest in plants and product development there because consumer demand from China's massive population should strengthen in the future.

Continued investment in China and India remain smart strategies, because their huge populations -- both in excess of 1.1 billion people -- will form a massive consumer class in 10 years, Jim Paulsen, chief investment strategist at Wells Capital Management, said recently.

While it will protect the balance sheet, it won't immediately improve profit. Sales volumes will decline 5 to 9 percent in 2009 and earnings are now expected to reach just $4.30 to $4.70 a share this year, down from 3M's earlier forecast of $4.50 to $4.95 a share.