3M's (NYSE: MMM) earnings are a microcosm of the market as a whole. Yes, profits may be finally drifting higher, but that has more to do with cost-cutting measures and changes in goodwill accounting than any significant pickup in business.

The company that made Post-it notes and Scotch tape famous earned $1.38 per share in the third quarter, a 25% increase from a year ago. The goodwill change accounted for $0.03 of that total. Revenue rose only 4.6%, however, to $4.1 billion -- and all of that increase came from overseas, as U.S. sales were flat.

While still expecting to earn $5.22 to $5.27 per share for the full year, CEO James McNerney, Jr. doesn't exactly see blue skies ahead. "There are no clear signs," he says, "of improving global economic conditions."

Still, there's something to be said for improving efficiency and tightening up operations. The company's 4.6% sales increase was accompanied by a 9% and 13% decrease in accounts receivable and inventory, respectively -- a sign that it's managing its working capital smartly.

On top of that, Standard & Poor's today said 3M has generated more than $1 billion so far this year in "discretionary cash flow," which excludes capital expenditures and dividends. The total for all of 2001 was $1.1 billion, meaning that despite the tough times, the company is improving where it really counts: free cash flow.