News Column

3M Cuts Guidance, Citing Economic Realities

October 24, 2012

John Welbes

The 3M Co.'s stock slid 4.1 percent Tuesday after the Maplewood-based manufacturer lowered its profit projections for 2012. Citing "challenging" conditions in the broader economy, 3M CEO Inge Thulin noted that the company is facing sluggish growth in Western Europe and Japan and a slowdown in China.

"Regardless of economic conditions, we will remain focused on things within our control," Thulin said, referencing the company's technology and manufacturing prowess around the globe.

3M, a maker of industrial products, electronic components, office products and thousands of other consumer and industrial goods, reported that sales totaled $7.5 billion, down slightly from the same period last year. Earnings of $1.65 per share, though, met Wall Street's expectations.

With more than two-thirds of its revenue coming from outside the United States, 3M is seen as a bellwether of global economic conditions.

"We're stable as we go into (the fourth quarter)," Thulin said in a conference call with analysts Tuesday, Oct. 23, responding to a question about economic conditions. "We don't see any uptick but believe it's stable."

The sales levels that didn't meet expectations were tied, in part, to an expected recovery in consumer electronic product sales that didn't fully materialize in the third quarter, 3M executives told analysts.

A broader slowdown in China's economy also played into flat sales in the Asia-Pacific region.

"The year has clearly not played

out the way most anticipated" in China, Thulin said. "But short-term challenges will not divert us from the opportunity. We'll continue to invest for the long term."

After the cut in the company's earnings outlook, the stock slid downward to close at $88.73 -- a drop of $3.80 per share. The 3M earnings report -- along with that of rival industrial DuPont -- was largely blamed for a 1.8 percent drop in the Dow Jones industrial average.

Though 3M's sales total was down 0.4 percent compared with last year's third quarter, effects from foreign currency exchange rates played a key role in the decline. Still, all of the company's businesses saw growth when increased pricing power and greater sales volumes were factored in, said Adam Fleck, an analyst with Morningstar who follows 3M.

"That's usually a decent sign that things are getting better," he said, "but it's at a very low rate."

3M's ability to raise prices mitigated the decline in total sales, he said, in large part because of the type of goods that 3M sells. "They're making small, disposable, low-cost types of things," such as components for aircraft, cars, or televisions, Fleck said. "They're a small piece of the overall product."

"They can raise their price slightly, and it looks big on a percentage term," but customers are willing to pay it to get a quality part on time from a trusted manufacturer.

Three weeks ago, 3M announced a deal to acquire Ceradyne Inc., a maker of high-tech, high-temperature industrial ceramics, for $860 million. While the deal hasn't been completed, Thulin said that what's distinct about the Ceradyne acquisition is that the technology can be used across 3M's product lines. Thulin declined to go into specifics, but said that "we can leverage this big time as we move ahead."

Analysts also asked about the launch of Microsoft's Windows 8, set for later this month, which will interface with a new Microsoft touch-screen tablet computer. 3M makes optical film that's used in the manufacture of many computer and handheld device screens to brighten the display.

Windows 8 "is an opportunity for broad-based 3M electronics, not just optical film," Thulin said. As handheld devices continue to flourish, 3M has more products and services it will be able to provide. "We can't talk about that, but this is a good thing for us," Thulin said.

The company also has done about $80 million worth of restructuring so far this year, which included a voluntary retirement program early in 2012 and some consolidation of operations in Europe in the second quarter.

That type of restructuring is normal in such economic times, David Meline, 3M's chief financial officer, told analysts.

"We look for opportunities to improve efficiency."


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Source: (c)2012 the Pioneer Press (St. Paul, Minn.) Distributed by MCT Information Services


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