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3M earnings miss expectations; 2011 guidance cut

Tags: 3M Co
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3M Co's (MMM-N) quarterly earnings fell well short of expectations due to weakness in the electronics market, the debt crisis in Europe and inventory-reduction moves by its customers, sending the company's shares down in early trading.

3M lowered its full-year earnings forecast, citing expectations for slower economic growth and lower demand.

"The business environment remains challenging, as the economic softening that we experienced late in the second quarter continued into the third," Chief Executive George Buckley told a press release.

In a conference call, Buckley said the debt crisis in Europe had impacted exchange rates, disproportionately hitting 3M due to its exposure to international markets.

Despite weakness in key pockets of its business, 3M enjoyed continued growth for industrial, security, transportation and healthcare products during the quarter. Growth in do-it-yourself products also helped the company.

3M suffered from disappointing organic growth, Nomura Equity Research analyst Shannon O'Callaghan said in a note to investors: "3M's story is all about accelerating organic growth, but organic growth of 2.8 percent continued to decelerate and was the lowest in our sector."

O'Callaghan said segment operating margins were below expectations, and he expressed concern over higher pension headwinds and the implication of zero volume growth in the fourth quarter.

'ECONOMIC SOFTENING'

3M's relatively wide earnings miss and cautionary outlook are out of step with some of its conglomerate peers in the U.S. industrial sector. On Monday, Caterpillar Inc solidly beat expectations with a 44 percent earnings increase, sending its shares and the overall market significantly higher.

The report from 3M represents the view of a company more exposed to buyers of smaller-ticket items. The company makes products such as Post-It Notes, tape and sandpaper, in addition to health care and security products. It is also a supplier to other industries, such as automakers and television makers.

St. Paul, Minnesota-based 3M reported third-quarter net income attributable to common shareholders of $1.09 billion US, or $1.52 per share, down from $1.1 billion, or $1.53 per share, a year earlier.

Analysts on average had expected $1.61 per share.

The company's quarterly sales also fell short of expectations, rising 10 percent to $7.5 billion, compared with expectations of $7.8 billion. 3M said many of its customers are lowering inventories in anticipation of slowing demand.

While the company continues to experience good growth rates, Buckley said the LCD TV part of its portfolio "remained weak," and other parts of the electronics business are also slowing. In addition, "policy uncertainty and austerity are affecting growth in Western Europe," he said.

3M forecast full-year 2011 earnings of $5.85 to $5.95 per share. It previously forecast $6.10 to $6.25.

The company sees organic sales volume growth of 3 percent to 4 percent, down from a previous forecast of 6 percent to 7.5 percent.

3M said slower growth will persist through year-end, pushing the company to respond with "aggressive cost management." It remains bullish on emerging markets and said it would maintain its planned levels of research and development spending.

DIVISION PERFORMANCE MIXED

Sales in the company's closely watched display and graphics business fell 12.2 percent in the quarter, due largely to weakness in the LCD television market. The company had already signaled a slowdown in LCD TVs when it reported second-quarter earnings in July.

During the quarter, 3M saw double-digit sales growth in its industrial and transportation, health care, and safety and security divisions, and more modest growth in consumer and office business.

The industrial and transportation business, 3M's biggest in terms of revenue, saw hefty growth in Europe and Asia Pacific. Sales of items such as adhesives, abrasives and renewable energy, in addition to acquisitions, led to an 18.8 percent sales increase to $2.6 billion, or about a third of overall revenue.

The healthcare business benefited from an uptick in demand for infection prevention and health information systems. Sales in each region of the world showed considerable strength, with Asia Pacific volume rising 20 percent.

Personal safety products, roofing granules and corrosion protection products helped drive gains in the safety, security and protection services division.

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