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3M pushes through Q2 ‘knothole’ with record revenue and earnings

3M squeezed through a “knothole” in its second quarter with nary a scratch, posting record quarterly revenue and earnings this morning, 3M Chairman and CEO George Buckley told investors.

But Wall Street showed its disappointment as MMM tumbled more than 4 percent in early trading, because the company said 2011 earnings will likely fall below analysts’ estimates because of weakening sales of optical film used on LCD TVs.

The company reported sales of $7.7 billion, up 14.1 percent year-on-year. Earnings rose 3.9 percent to $1.60 per share, and operating margins were 21.6 percent.

 The company generated $1.2 billion in free cash flow during the quarter, equal to 100 percent of net income. 3M increased its earnings-per-share guidance for the year by 5 cents at the lower end of the range, to $6.10 to $6.25 a share, but that still was below an average of $6.31 reported by Bloomberg news.

The effects from the devastating Japanese earthquake cost 3M an estimated $160 million in revenue and 7 cents earnings per share in the quarter. In addition, the company faced soft consumer spending, a “down cycle” in optical films driven by soft demand for LCD TVs and cost increases on raw materials for many of its products.

These headwinds were offset by solid growth in emerging markets, price increases across all businesses, and solid growth across the diverse portfolio of 3M businesses outside of optical films.

Buckley said the company’s business hit a trough in Japan in the quarter, but he expects a pickup through the end of the year as the Japanese automobile industry recovers and reconstruction from earthquake damage accelerates.

He also rattled off impressive growth numbers across several businesses: renewable energy products up 61 percent; abrasives up 50 percent; safety and security products up more than 20 percent across Asia and Latin America with 51 percent growth in China and 29percent growth in India.

Acquisitions added 4 percent to sales growth in the quarter. 3M has been aggressive in acquiring more than two-dozen businesses in recent years, and has budgeted $2 billion to $3 billion for acquisitions this year. “We have a pretty full hopper” of acquisitions Buckley said, but cautioned that prices are currently too high, so the company is holding back on the acquisition front.

Buckley expressed concern about the slow pace of economic recovery, cautious consumer spending and the risk of inflation.

“Volatile commodity markets have opened a new chapter” in pushing raw material costs onto customers through higher prices, he said. 3M intends to continue to raise prices into next year, he added.

Buckley also said he is confident that China will be able to “soft land” its economy, slowing growth to bring down inflation, without causing a recession. China “is stuffed full of the best educated minds,” he said.  “I would not bet against them.”

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