Electronics and Energy Segment Dampens 3M’s Sales

Currency headwinds force 3M to lower outlook for FY16

M1Technology conglomerate 3M Company (NYSE: MMM) announced its Q2 FY16 financial results on July 26th, 2016. The Maplewood, Minnesota-based company operates through five segments: Industrial, Safety and Graphics, Health Care, Electronics and Energy, and Consumer. 3M sells its products directly to users and through wholesalers, retailers, jobbers, distributors and dealers globally. The Company operates over 90 manufacturing facilities in approximately 30 states in the U.S and over 130 manufacturing and converting facilities in 40 countries outside the U.S.

3M reported revenue of $30.27 billion in FY15. Read more about 3M’s financial results below.

Q2 FY16 financial highlights

During Q2 FY16, the Company’s net sales declined 0.3% to $7,662 million as compared to the year-ago quarter, hurt by a significant negative foreign currency translation impact, which reduced sales by 1.5%. Organic local-currency sales declined 0.2%, while inorganic growth added 1.4% to sales during the quarter under review.

Source: 3M
Source: 3M

During Q2 FY16, 3M’s organic local-currency sales grew by 4.9% in Health Care, 2.7% in Consumer, and 2.3% in Safety and Graphics segments. On the other hand, organic local-currency sales declined 1.4% in the Industrial and 9.1% in the Electronics and Energy segments. On a geographic basis, organic sales increased 4.8% in Latin America/Canada, 3.0% in Europe, Middle East and Africa (EMEA), and 0.4% in the U.S., offset by a 5.4% decline in Asia Pacific.

3M’s operating income in Q2 FY16 increased marginally to $1,866 million versus $1,840 million in the year-ago-quarter, while operating margins increased by 50 bps to 24.4%.

Source: 3M
Source: 3M

Despite a challenging macroeconomic environment, 3M reported modest GAAP earnings of $1,291 million, or $2.08 per share, during Q2 FY16, compared to $1,300 million, or $2.02 per share, in the year-ago quarter. The Y-o-Y improvement in EPS, despite lower net income, was largely due to a decline in outstanding shares.

Source: 3M
Source: 3M

Segmental highlights

Industrial: This segment’s sales declined 0.1% to $2.6 billion in U.S. dollars during Q2 FY16. Organic local-currency sales declined 1.4%, while acquisitions, net of divestitures, increased sales by 2.6% during the reporting quarter. Foreign currency translation hurt sales by 1.3% during Q2 FY16. On an organic local-currency basis, Industrial sales were driven by automotive OEM, automotive aftermarket, and abrasives. Sales increased in Latin America/Canada and EMEA, and declined in Asia Pacific and the U.S. Operating income rose 1.2% Y-o-Y to $615 million, while operating margin stood at 23.4% during the reporting quarter.

Safety and Graphics: This segment’s sales grew 4.7% to $1.5 billion in U.S. dollars during Q2 FY16. Organic local-currency sales increased 2.3%, while acquisitions, net of divestitures, drove sales by 4.6%. Foreign currency translation hurt sales by 2.2% during the reporting quarter. On an organic local-currency basis, sales growth was driven by roofing granules and commercial solutions. Sales grew in Latin America/Canada, the U.S. and EMEA, and declined in Asia Pacific. Operating income jumped 12.8% Y-o-Y to $411 million, while operating margin stood at 27.4% during the reporting quarter.

Source: 3M
Source: 3M

Healthcare: This segment’s sales grew 3% to $1.4 billion in U.S. dollars during Q2 FY16. Organic local-currency sales increased 4.9%, while foreign currency translation hurt sales by 1.9% during the reporting quarter. On an organic local-currency basis, sales grew across the entire portfolio. Sales grew in all geographic areas led by Latin America/Canada and Asia Pacific. Operating income rose 4.3% Y-o-Y to $460 million, while operating margin stood at 32.7% during the reporting quarter.

Electronics and Energy: This segment’s sales plunged 10% to $1.2 billion in U.S. dollars during Q2 FY16. Organic local-currency sales fell 9.1%, while foreign currency translation reduced sales by 0.9%. On an organic local-currency basis, electronics-related sales fell 14% owing to declines in both electronics materials solutions, and display materials and systems. Energy-related sales declined 2% as sales growth in telecom was offset by declines in electrical markets and renewable energy. Sales rose in EMEA, remained flat in Latin America/Canada and the U.S., and declined in Asia Pacific. Operating income nosedived 18.1% Y-o-Y to $229 million, while operating margin stood at 19.3% during the reporting quarter.

Consumer: This segment’s sales grew 1.7% to $1.1 billion in U.S. dollars during Q2 FY16. Organic local-currency sales rose 2.7%, while foreign currency translation hurt sales by 1% during the reporting quarter. On an organic local-currency basis, sales growth was led by home improvement and consumer health care. Sales grew in Asia Pacific, the U.S. and Latin America/Canada, and declined in EMEA. Operating income grew 8.8% Y-o-Y to $281 million, while operating margin stood at 24.9% during the reporting quarter.

Other highlights

The company’s operating cash flow was $1.3 billion, contributing to conversion of 75% of net income to free cash flow. Cash and cash equivalents as of June 30th, 2016, were $1,688 million compared to $2,983 million as of June 30th, 2015. Long-term debt stood at $9,299 million at quarter’s end compared to $8,398 million in the year-ago period.

Cash flow from operating activities for H1 FY16 was $2,545 million compared to $2,418 million in the year-ago period. Free cash flow generated during the reporting quarter was $962 million, a marginal decline from $968 million in the prior-year period.  3M converted 75% of net income to free cash flow during the quarter under review.

3M’s business transformation strategy is proceeding at a steady pace, with the Company expecting global service centers and streamlined practices to save $500-$700 million in annual operating costs by 2020.

Stock repurchases

During Q2 FY16, 3M paid $672 million in cash dividends to shareholders and repurchased $828 million of its common stock during the reporting quarter.

Updated guidance for full year FY16

Chief Executive Officer, Inge Thulin, revamped operations to reduce U.S. expenses and strengthen 3M’s business in Europe and Latin America in 2015. 3M, which generates about two-thirds of its revenue overseas, cut its FY15 forecast more than once last year. Similarly, amidst a sluggish global economy and currency headwinds, 3M has again narrowed down its full year FY16 earnings to be in the range of $8.15 to $8.30 per share, versus a prior expectation of $8.10 to $8.45. Pressured by a strong dollar, the Company also updated its organic local-currency sales growth guidance to be in the range of 0% to 1%, versus a previous range of 1%-3%. 3M forecasts foreign currency translation to hurt FY16 sales by 1%-2%, versus a previous expected reduction of 1%-3%.

Stock Performance

M63M’s stock finished the day at $178.38, gaining 0.01%, at the close on Wednesday, August 3rd, 2016, having vacillated between an intraday high of $179.13 and a low of $177.97 during the session. The stock’s trading volume was at 1,419,035 for the day. The Company’s market cap was at $107.58 billion as of Wednesday’s close.

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