3M Earnings Review: Macroeconomic Challenges And Foreign Currency Headwinds Prevail

Industrial conglomerate 3M (NYSE:MMM) reported its fourth quarter and full year 2015 results on Tuesday, with Q4 GAAP earnings of $1.66 per share, a decline of 8.3% over the corresponding quarter of the previous year. ^[1] Such a significant drop in earnings can be attributed to macroeconomic challenges and volatile foreign currency headwinds, which caused a 5.8 percentage point decline in sales. While net sales fell 5.4% year-on-year, they surpassed the estimated figures. The corporate restructuring announced by the company in October resulted in a pre-tax charge of $114 million, or $0.14 per share, but will deliver savings of $130 million in 2016. ^[2] In the last four trailing quarters, 3M has managed to beat earnings thrice.

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Weak Demand In Electronics And Energy Segment And Industrial Goods Drives Revenue Lower

A sales decline was seen in all segments in U.S. Dollars, while in organic terms, the Health Care and Consumer divisions reported growth of 4.5% and 2.7%, respectively. A sales decline of 6.3% was reported in the Industrial segment, with foreign currency translations negatively impacting the sales by a massive 6.2 percentage points. Sales growth in 3M purification and automotive OEM was offset by declines in industrial adhesives and tapes, abrasives, and advanced materials. 3M’s many products in the Industrials segment exposes it to numerous markets where demand has been deteriorating recently. Electronics related sales were down a massive 8%, as the electronics materials solutions and display materials and systems declined. The consumer electronics segment is impacted by weakness in the consumer electronics end market and excess channel inventory. Nicholas C. Gangestad, CFO and Senior Vice President, expects this softness to continue in the next quarter. With a fall in renewable energy, telecom, and electrical market, energy-related sales dropped 6%.

Corporate Restructuring To Tide Over The Challenging External Environment

3M has been undertaking substantial portfolio restructuring, with efforts being made to divest assets that no longer fit with its corporate strategy and investing in ones which are more in tune with it. During the quarter, 3M sold its Library Systems business across the globe. Since 2012, the company has cut its businesses from 40 to 26, and invested substantially in R&D to develop innovative products. Moreover, a new global ERP system is being introduced to standardize its business processes. Such efforts should result in significant annual operational savings and reduce the working capital. Despite such initiatives, 3M has been adversely affected by weak macroeconomic conditions and unfavorable movement in foreign currency exchange rates.

The company managed to increase its margins 60 basis points to a healthy 22.1%, excluding restructuring, with four of the five businesses posting margins over 21%. Lower raw material costs and higher selling prices were the primary drivers for this, contributing 2% to margin expansion, with global sourcing teams capitalizing on lower commodity prices. Foreign currency, net of hedge gains, eroded margins by 30 basis points. Given the low growth environment, 3M’s ability to increase the margins has been quite impressive. The foreign currency headwinds warrant a need for financial hedging. 3M hedges close to 50% of its economic exposure on a rolling 12-month basis and also has additional hedges as far as 36 months in some of the liquid currencies. For 2015, this resulted in a benefit of $182 million.

3M continues to invest heavily in R&D, acquisitions, and CapEx. Of the $7 billion investment in these, $1.18 billion was in R&D, helping the company to invent and manufacture cutting-edge, relevant, and unique products. Such investments should aid in curtailing the negative effects of the weak global environment.

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1. 3M Reports Fourth-Quarter and Full-Year 2015 Results [↩]
2. 3M Q4, 2015- Earnings Call Transcript [↩]