3M (MMM +0.04%) reported its first-quarter earnings this morning, and the results fell below Wall Street expectations. During Q1, 3M's revenue declined by 3.2% year over year to $7.6 billion, which translated to earning $1.85 per share, a 3.4% annual increase. The Street was anticipating $7.84 billion in revenue and $1.93 per share for the quarter.
In local currency terms, 3M's revenues would've increased by 3.3%, but the continued strength of the U.S. dollar affected revenues by 6.5% during the quarter. Despite the strong dollar giving the illusion of weakness, 3M's underlying business is growing and operating efficiently. That's because on an organic and local currency basis, 3M experienced growth across all of its segments and geographies, and the company's operating margins improved by about 1% to 22.8%.
The following table shows how each of 3M's segments performed in local currency terms and dollar terms:
|
Segment |
Local Currency Performance (annual change) |
Total Currency Impact |
Performance in Dollar Terms (annual change) |
|---|---|---|---|
|
Industrial |
2.7% |
(7%) |
(4.3%) |
|
Safety and graphics |
4.1% |
(7.7%) |
(3.6%) |
|
Healthcare |
3% |
(7%) |
(3.3%) |
|
Electronics and energy |
5.8% |
(4.1%) |
0.8% |
|
Consumer |
2.1% |
(5%) |
(2.9%) |
Source: 3M.
The strength of the dollar forced management to update its guidance for the 2015 year, and now the company expects it will reduce earnings by $0.35 to $0.40 per share, a 75% to 100% increase compared to its prior expectation of $0.20 per share.
Consequently, 3M believes it'll earn between $7.80 and $8.10 per share in 2015, down from its previous range of $8.00 to $8.30 per share. On the revenue front, management expects that its 2015 sales will be reduced by 6% to 7%, versus its prior expectation of being affected between 4% and 5% by currency headwinds. From a local currency perspective, 3M maintained that it expects organic annual revenue growth of between 3% and 6%.
All told, 3M's updated forecast compares unfavorably to Wall Street's 2015 expectations, which before this revision called for 0.6% revenue growth and earnings of $8.14 per share.
The bigger picture
During the quarter, 3M paid out $652 million in dividends, and repurchased $886 million of its stock, reducing its shares outstanding by about 3.8% year over year and its cash balance by 8.3%. It also generated nearly $1.1 billion in cash flow from profit-making activities and ended the quarter with about $1.8 billion of cash on its balance sheet.
Of the $1.1 billion it generated in cash flow, $789 million was converted into free cash flow, giving the business plenty of excess capital to fund the needs of its business while continuing to return capital to shareholders.
Shares of 3M may be down today on currency concerns, but the underlying business appears to be just fine.
