3M (NYSE:MMM) announced its second quarter 2014 results on July 24, posting 4.8% year-on-year growth in sales, to reach $8.1 billion.  All five of 3M’s business segments – Industrial, Safety and Graphics, Health Care, Electronics & Energy, and Consumer – posted positive organic local currency sales growth in the quarter, in line with the company’s guidance. Organic local currency sales do not include the impact of acquisitions or currency fluctuations. Improvement in operating margin and stock repurchase helped drive 11.7% growth in earnings per share.
Of all its segments, 3M’s Electronics & Energy segment showed the highest growth in organic local currency sales. The consolidation activities undertaken to streamline the division led to significant improvement in the division’s margins, which contributed to the 0.8% increase in operating margins of the company.
During its second quarter meet, 3M reaffirmed its full year earnings per share guidance range of $7.30 to $7.55.  The company reduced its guidance for capital expenditure from $1.7-$1.8 billion to $1.5-$1.6 billion citing better understanding due to portfolio management efforts. 3M reiterated its intention to invest $5 billion to $10 billion in acquisitions through 2017.
Growth in sales of display materials drives Electronics & Energy Segment
In the second quarter, sales of 3M’s Electronics & Energy segment grew 6.4% year-on year driven by 11% growth in display materials and systems.  3M’s display materials include films that help enhance viewing pleasure on devices with displays and adhesives that help bonding display parts, lens, LCDs, and touch screens. These products are purchased by electronic original equipment manufacturers and display manufacturers.
The sales of display materials and systems are highly dependent on sales of consumer electronics. In 2013, the U.S. Consumer Electronics industry generated $207 billion.  Growing demand for smartphones, tablets, and LCD, UHD and OLED TVs will continue to drive growth in the U.S. Consumer Electronics industry, the sales for which are expected to cross $211 billion in 2014.
Continued growth in sales of consumer electronics will help drive sales for 3M’s display materials in the coming quarters. 3M expects its Electronics & Energy segment to grow 3-7% in 2014. 
Pricing and consolidation activities helped improve operating margins
In the second quarter, 3M’s operating margins improved 0.8% year-on-year to reach 22.8%.  Most of the margin growth came from the 1.2% increase in prices. 3M has been able to command higher prices due to its heavy research & development investments which enable it to regularly bring out new and innovative products. These new products are priced at premium rates and drive up overall pricing for the company. Products developed in the last five years account for a third of 3M’s sales. 
3M’s Electronics & Energy segment contributed the most towards improvement in margins. The segment’s margins increased 2.9%, from 17.7% to 20.6%,  driven by consolidation activities undertaken in the past two years. The realignment and restructuring of the division helped reduce infrastructure requirements and enabled better use of assets.
For the year 2014, 3M is expecting an operating margin of 22-23%.  Therefore, we expect to see 3M’s operating margin remain relatively stagnant quarter-on-quarter.Notes:
- 3M’s Q2 Earnings Press Release, July 24 2014, www.3m.com [↩] [↩]
- 3M Company’s (MMM) CEO Inge Thulin Q2 2014 Results – Earnings Call Transcript, July 24 2014, www.seekingalpha.com [↩] [↩]
- 3M’s Q2 Earnings Presentation, July 24 2014, www.3m.com [↩] [↩]
- Industry Sales Data, www.ce.org [↩]
- 3M’s CEO Hosts 2014 Outlook Meeting Conference (Transcript), Dec 18 2013, www.seekingalpha.com [↩]
- 3M’s Morgan Stanley Industrials & Autos Conference Presentation, September 18 2013, www.3m.com [↩]