The Global Demographic Tailwind

[DewDiligence]

3M Results Were Stellar, As Usual

[MMM is one of the world’s greatest companies and hence expectations tend to be sky-high; thus, even quarterly numbers are good as these failed to impress investors unduly. No matter—MMM is a strong beneficiary of The Global Demographic Tailwind (65% of sales are ex-US) and it ought to be a core holding in any portfolio, IMO.

The 4Q09 sales breakdown by business segment was: industrial/transportation 31%, healthcare 19%, consumer/office (e.g. Scotch tape, Post-It notes) 14%, security services 13%, display graphics (e.g. films for LCD screens) 13%, electronics/communications 10%. 4Q09 sales in constant currencies grew 6.4% year-over-year; this figure includes 4.4% from organic volume growth, 1.1% from pricing, and 0.9% from acquisitions. Management raised 2010 EPS guidance slightly to 4.90-5.10 (vs prior guidance of 4.85-5.00); the 2010 P/E of 16x is not dirt cheap but neither it is expensive.]

http://finance.yahoo.com/news/3M-Company-Tops-zacks-1591607194.html?x=0&.v=1

›By Zacks Equity Research
January 29, 2010, 9:54 am EST

3M Company (NYSE: MMM) reported earnings from continuing operations of $1.30 for the fourth quarter of 2009, beating the Zacks Consensus Estimate. Revenues for the quarter were $6.1 billion.

Revenues increased over 11% year on year and the growth was very broad based. Every geographic region expanded the sales with notable performances in Asia Pacific at 22% and Latin America and Canada each at 19%. The company experienced double-digit sales increases in nearly all business segments led by displaying graphics at 19% and safety security and protection at 13.5%. Organic volumes [i.e. volume excluding acquisitions and divestitures] grew 4.4% in the fourth quarter driven by strong demand for optical films and respiratory protection products [the latter were aided by the swine flu outbreak].

Organic volumes rose nearly 19% in Asia Pacific as Korea, China and Taiwan posted the most dramatic increases driven by a combination of improved local demand along with the pick up in global electronics. Selling prices rose 1.1%, so the company effectively held on to price increases enacted a year ago.

Gross profit improved 18% year-on-year and gross margins show an improvement by almost three whole points to 47.9%. Factory utilization accounted for half of the improvement with fourth quarter improvement. SG&A costs increased 7%, driven by a higher advertising and merchandising investment along with higher compensation costs related to improved year-on-year company performance. As a percent of sales SG&A declined by 60 basis points. R&D spending was down just slightly versus the fourth quarter last year, impacted by company-wide cost reduction efforts.

Operating income rose 38% to $1.3 billion. And operating margins were 21.9%. The fourth quarter tax rate was 26.8%, down 80 basis points versus Q4 last year; due to a lower international tax rate and a completion of certain tax audits.

Finally in the midst of the weak economic climate, the company invested $1.3 billion in R&D, up slightly as percent of sales. 3M Company continues to support its key larger programs but overall spending was impacted by company-wide cost initiatives such as in direct spending reduction and obligation policy change.

Free cash flow conversion was 82% in the quarter, impacted by discretionary pension contributions of more than $400 million in the fourth quarter. Its global pension plans at year end were 90% funded with the U.S. qualified plan at 96% and international plans at 83%.

Inventories declined by $374 million and inventory turns improved from 3.8 to 4.6 for the year. Capital expenditures for the year came in at $903 million. The company expects 2010 capital expenditure to be approximately $1 billion. The strong capital discipline resulted in net debt of $1.1 billion, down $3 billion from one year ago. Cash and marketable securities increased by $2 billion and debt got actually reduced by $1 billion.

The company is working on an improved planning frame for 2010 with an EPS of $4.90 to $5.10 which is an increase over 2009.‹