3M Earnings Review: Currency Overshadows Another Quarter Of Solid Operational Performance

3M (NYSE:MMM) reported its Q3 results on October 22, and yet again, the company’s strong operational performance was overshadowed by the negative impact of currency translations. ^[1] The American multinational conglomerate generated approximately 63% of its top line from markets outside the U.S., and with the dollar continually strengthening against foreign currencies, the 1.2% organic growth in Q3 was wiped out by a larger 7.4 percentage point currency headwind.

We have a price estimate of $152 for 3M, which is slightly above the current market price.

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After its fourth quarter revenue suffered from currency fluctuations, 3M took steps to counter the impact of foreign exchange translations. The company entered into currency hedging contracts with a tenor of 24 months, as opposed to its general practice of 12 months, in order to safeguard against unexpected changes in foreign exchange rates. However, with crucial emerging market currencies remaining weak into the second half of the year, there is bound to be a material impact on the top line. And now 3M expects foreign currency translations to reduce sales by approximately 7% for the full-year, compared with the prior range of 6% to 7%.

Macroeconomic volatility in some of the crucial overseas markets has hurt 3M this year, considering that approximately 30% of the net sales come from Asia-Pacific. Organic local currency growth in Asia Pacific was 0.4% in Q3, brought down by the 2% decline in China/Hong Kong. Although Asia-Pacific has traditionally been a ground of hope and investment for foreign companies, the uncertain macroeconomic environment, especially in China, which is coming to terms with normalization, could make it difficult to extract meaningful growth from this region in the near term.

A tepid economic global environment has now forced 3M to revise downward its full-year guidance. Organic local-currency sales growth is expected to be in the range of 1.5-2%, versus previous guidance of 2.5-4%.

What the maker of a plethora of products ranging from Post-It Notes to high-tech phone parts has been able to do well is to protect its profitability. In fact, the combination of lower raw material costs and higher selling prices resulted in a full one percentage point improvement in operating margins to 23.7% through the first nine months of the year. The company also looked to 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. 3M has looked to improve efficiency, cut unnecessary overhead expenses, and become a leaner business. In fact, since 2012, the company has consolidated businesses within each of its business groups, and moved from six business groups to five, and from 40 businesses to 26. ^[2]

And now 3M announced its restructuring plan, which includes slashing 1,500 jobs worldwide. The company will take a charge of approximately $100 million on a pre-tax basis in the fourth quarter related to this plan, with savings of approximately $130 million next year. The structural overhaul could help 3M protect profitability, which is negatively impacted by the continually stronger U.S. dollar. Notable year-on-year declines in the euro, yen, and Brazilian real, which devalued versus the U.S. dollar by 15%, 14%, and 37%, respectively in the quarter, hurt 3M’s results.

While 3M has revised downward its full-year guidance on sales and EPS (expected to be in the range of $7.73 to $7.78 per share, versus the prior range of $7.73 to $7.93 per share), its operational performance remains strong. With pending structural changes, the company’s margins could further improve, reflecting a solid core business.

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1. 3M earnings release [↩]
2. 3M earnings transcript Q2 [↩]