3M Earnings: Currency Headwinds Temper Revenue And Outlook

3M (NYSE:MMM) announced its first quarter results on April 23. The company reported a 3.2% decline in revenues, reaching $7.6 billion, as a result of foreign currency headwinds, which more than offset increased volume and pricing benefits. ^[1] However, on an organic local currency basis, which excludes the impact of currency fluctuations and acquisitions, revenue grew 3.3%. All five segments – Industrial, Healthcare, Safety and Graphics, Electronics and Energy and Consumer – reported positive growth on an organic local currency basis. Though 3M’s operating margin improved 90 basis points, to 22.8%, its net profits declined 0.7%, to reach $1.7 billion.

Despite the decline in net profits, 3M still managed to post growth of 3.4% year-on-year in its earnings per share, to reach $1.85, thanks to its $886 million share repurchases. However, 3M’s stock declined 3% during pre-market trading, as the market was expecting earnings of $1.92 per share. 3M’s lowered revenue and earnings guidance for the year also left investors disappointed.

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Outlook Lowered On FX Headwinds

After its fourth quarter revenue suffered from currency fluctuations, 3M had taken steps in order to counter the impact of the foreign exchange translations. The company entered into currency hedging contracts with a tenor of 24 months, as opposed to its general practice of 12 month contracts, in order to safeguard against unexpected changes in foreign exchange rates. The company also planned to raise product prices to offset the impact of weak currencies, a strategy that 3M has used in the past as well and is one of the driving factors behind its pricing. The company also looked localize production; for example, in order to cater to its customers in Europe, it would utilize its production capacity in Europe and avoid having to import from regions with stronger currencies compared to the euro.

Despite 3M’s preparations, its reported revenue and profits tanked due to the strong U.S. dollar.  Foreign currency headwinds reduced its pre-tax earnings by $0.10 per share. Given the present currency headwinds and the expectations of further strengthening in the U.S. dollar, 3M lowered its revenue guidance. It now expects to see a 6-7% decline in revenues, compared to its earlier estimates of a reduction of 4-5%. ^[1]

In the fourth quarter, looking at the strength of the U.S. dollar, 3M provided guidance of foreign currency headwinds of $0.20 per share. However, the company has now revised its guidance to an impact of $0.35-0.40 per share. This will result in estimated earnings per share of $7.80-8.10, compared to 3M’s previous guidance of $8.00-8.30. 3M also expects its full year tax rate to be higher, within the range of 28.5-29.5%.

Electronics and Energy, Safety and Graphics, Health Care Drive Growth

Currency fluctuations aside, 3M posted strong growth across its segments, with Electronics and Energy, Safety and Graphics, and Health Care segments growing the strongest.

Sales of 3M’s Electronics and Energy segment increased primarily due to display materials. ^[2] 3M’s display materials include films that help enhance viewing pleasure on devices with displays and adhesives that help bonding display parts, lenses, LCDs, and touch screens. The sales of these products are highly dependent on consumer electronics sales. In 2014, the U.S. Consumer Electronics industry generated $217 billion. ^[3] Growing demand for smartphones, tablets, and LCD, UHD and OLED TVs will continue to drive growth in the U.S. Consumer Electronics industry, sales for which are expected to cross $223 billion in 2015. This should help bolster 3M’s Electronics and Energy segment through the year.

Safety and Graphics’ sales were primarily driven by personal safety products such as respirators, personal protective equipment, head and face protection, body protection, hearing protection and protective eye-wear. Most of the segment’s first quarter sales came from the Asia Pacific region, as rising health concerns regarding the deteriorating air conditions in China bolstered sales of respirators. ^[2] We expect similar trends to drive growth in the coming quarters.

In the first quarter, 3M’ Health Care segment grew 3% in organic local currency sales driven by growth in health information systems and food safety. In order to strengthen its position in the healthcare IT market 3M acquired Treo Solution, ^[4] a healthcare data analytics and business intelligence provider, in April 2014. Sales from Treo Solutions added 0.7% growth to 3M’s Health Care segment in the quarter. Going forward we expect to see growth in the segment driven by its recent acquisition of Ivera Medical Corp, a manufacturer of health care products that disinfect and protect devices used for access into a patient’s bloodstream. ^[5]

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1. 3M’s Q1 2015 Earnings Press Release, April 23, 2015, www.3m.com [↩] [↩]
2. 3M’s Q1 2015 Earnings Presentation, April 23, 2015, www.3m.com [↩] [↩]
3. Industry Sales Data, www.ce.org [↩]
4. 3M Completes Acquisition of Treo Solutions, April 1 2014, www.3m.com [↩]
5. 3M Completes Acquisition of Ivera Medical Corp, Mar 13, 2015, www.3m.com [↩]