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Why Did 3M Downgrade Its Fiscal 2016 Earnings Guidance?

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Free cash flow generation in 2Q16

3M’s free cash flow in the second quarter of 2016 was along expected lines and relatively flat compared to last year. The company reported free cash flow of $968 million in the quarter, a decline of 0.6% over 2Q15.

Its free cash flow position was supported by a 12.7% decline in capital expenditures, which offset a 4% fall in operating cash inflow. 3M converted 75% of the company’s quarterly net profits into free cash flow compared to 74% in the corresponding quarter last year.

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3M’s fiscal 2016 guidance

In its 2Q16 earnings, 3M (MMM) reduced its fiscal 2016 guidance that it outlined on its 1Q16 earnings call in April 2016. It did this in light of continuing anemic global demand, which continues to affect companies with an industrial (XLI) focus.

In April, the company forecast that earnings per share for fiscal 2016 would increase 7%–11%, to $8.10–$8.45. 3M now expects earnings per share to increase 8%–10%, to $8.15–$8.30.

Company estimates have reduced organic sales growth assumptions from 1%–3% to 0%–1%. Acquisitions last year are expected to add an additional 1% to overall sales. Lower sales growth is primarily due to weak industrial (IYJ) markets, which have affected several companies such as Dover (DOV) and United Technologies (UTX). The free cash flow conversion is expected to be 95%–105% of net income for the whole year.

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