3M Gets Costs Down Faster Than Revenue

Updated from 11:19 a.m. EDT

Like many companies this quarter, diversified manufacturer

3M

(MMM) - Get Report

beat earnings estimates, but only because its costs were slashed faster than its revenue shrank.

Excluding non-recurring items, 3M earned $487 million, or $1.23 a share, in the first quarter, up 4.28% from $467 million, or $1.16 a share, in the year-ago period and above analysts' consensus estimates of $1.19. But sales fell 6.6% to $3.89 billion and came in below forecasts for $3.95 billion.

"We delivered positive earnings per share growth in the first quarter, despite continued challenging global economic conditions," said James McNerney, chief executive officer of 3M, in a statement.

But looking ahead, McNerney was hardly able to predict a strong recovery in the business in 2002. "Although, we're hopeful that the global economy will improve, our spending plans assume a continuation of the challenging economic backdrop for the remainder of the year," he said.

3M said it should earn between $4.80 a share and $5.10 a share in 2002, excluding non-recurring items. That's in line with the consensus estimate of $4.89 a share. The manufacturer predicts that second-quarter earnings will come in above the first quarter's $1.23 a share. Analysts are forecasting $1.21.

3M's guidance suggests the economic rebound is going to be gradual than some may have come to think. "There is not a lot of strength evident yet," said Stephen O'Neil, an analyst at Hilliard, Lyons.

Durable goods orders for big-ticket items, such as motor vehicles and appliances, fell slightly in February after rising in December and January, the Census Bureau reported earlier in April.

3M's sales volumes fell 4.5% from a year ago, including a positive 0.5% impact from acquisitions.

The manufacturer's sales of industrial equipment fell 8.3% to $793 million in the first quarter, while sales of electronics and communications products decreased by 24% over the same period.

On a positive note, 3M's sales of transportation, graphics, and safety products -- its largest business segment -- rose 5.3% to $894 million, while sales of healthcare equipment were up 6.9% to $871 million.

At the same time, 3M's operating expenses fell 7.3% to $3.18 billion in the first quarter.

"3M is working overtime to implement its management and productivity initiatives," said Nicholas Heymann, an analyst at Prudential Securities. "That implementation is resulting in lower costs."

Some analysts said McNerney may be setting expectations low to be sure he will top them.

"CEO pessimism is often high at the early stages of a recovery, when companies are getting over the damage of the recession," said Christopher Low, an economist at First Tennessee Capital Markets. "Companies lost a ton of credibility because they had to guide expectations lower. Now, as a group, they have been a lot more conservative in their estimates."

Lately, 3M was off 49 cents, or 0.39%, at $124.40, but just below its 52-week high of $128.10.