3M COMPANY
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is designed to provide a reader of 3M's financial statements
with a narrative from the perspective of management. 3M's MD&A is presented in
the following sections:
•Overview
•Results of Operations
•Performance by Business Segment
•Financial Condition and Liquidity
•Cautionary Note Concerning Factors That May Affect Future Results
Forward-looking statements in Part I, Item 2 may involve risks and uncertainties
that could cause results to differ materially from those projected (refer to the
section entitled "Cautionary Note Concerning Factors That May Affect Future
Results" in Part I, Item 2 and the risk factors provided in Part II, Item 1A for
discussion of these risks and uncertainties).
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OVERVIEW
3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. Effective in the first quarter of 2022, 3M made the following changes: •Changes in measure of segment operating performance used by 3M's chief operating decision maker-impacting 3M's disclosed measure of segment profit/loss (business segment operating income). See additional information in Note 16. 3M's disclosed disaggregated revenue was also updated as a result of the changes in segment reporting. See additional information in Note 2. •Changes to non-GAAP measures - certain amounts adjusted for special items. Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section below for additional information.
Information provided herein reflects the impact of these changes for all periods presented.
3M manages its operations in four operating business segments: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer. From a geographic perspective, any references to EMEA refer toEurope ,Middle East andAfrica on a combined basis. As described in the Overview-Consideration of COVID-19 section of Part II, Item 7 of the Company's 2021 Annual Report on Form 10-K, 3M continues to be impacted by the global pandemic and related effects associated with the coronavirus (COVID-19). In addition, risk factors with respect to COVID-19, can be found in Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q. Given the diversity of 3M's businesses, some of the factors described in that Overview-Consideration of COVID-19 section have increased the demand for 3M products, while others have decreased demand or made it more difficult for 3M to serve customers. Due to the speed with which the COVID-19 situation continues to develop and evolve and the uncertainty of its duration and the timing of recovery, 3M is not able at this time to predict the extent to which the COVID-19 pandemic may have a material effect on its consolidated results of operations or financial condition. 3M is experiencing interruption to a portion of the manufacturing at its site in Zwijndrecht,Belgium as more fully discussed in Note 14. 3M is also impacted by theRussia -Ukraine conflict. Relevant risk factors can be found in Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q. As discussed in Note 14, 3M continues to explore and deploy options to mitigate the impact of a prolonged suspension or interruption of the Zwijndrecht facility's operations. With respect to theRussia -Ukraine conflict, the business and operational environment inRussia is impacted by, among other things, Russian laws and regulations as well as sanctions imposed by theU.S. and other governments. In light of the conflict, inMarch 2022 , 3M suspended operations of its subsidiaries inRussia , the net sales of which was less than one percent of 3M's consolidated net sales for 2021. If the environment were to deteriorate, such as a lack of currency exchangeability coupled with an acute degradation in the ability to make key operational decisions, a need to deconsolidate these subsidiaries' operations could arise. In addition, 3M has other operations that source certain raw materials from suppliers inRussia and have experienced related supply disruption due to the conflict. Further supply disruption could lead to downstream customer impacts. Though 3M monitors relevant factors as well as options to mitigate potential impacts, it is not able to predict the extent to which these circumstances may have a material effect on 3M's consolidated results of operations or financial condition. 49
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Operating income margin and earnings per share attributable to 3M common shareholders - diluted:
The following table provides the increases (decreases) in operating income margins and diluted earnings per share for the three months endedMarch 31, 2022 and 2021. Three months ended March 31, 2022 Percent of Earnings per net sales diluted share Same period last year 22.5 % $ 2.77 Net costs for significant litigation 1.6
0.18
Same period last year, excluding special items 24.1 % $
2.95
Increase/(decrease) due to: Total organic growth/productivity and other (0.4) - Raw material impact (2.4) (0.30) Foreign exchange impacts 0.1 (0.04) Other expense (income), net N/A 0.01 Income tax rate N/A (0.02) Shares of common stock outstanding N/A
0.05
Current period, excluding special items 21.4 % $
2.65
Net costs for significant litigation (2.8) (0.39) Current period 18.6 % $ 2.26 The Company refers to various "adjusted" amounts or measures on an "adjusted basis". These exclude special items. These non-GAAP measures are further described and reconciled to the most directly comparable GAAP financial measures in the Certain amounts adjusted for special items - (non-GAAP measures) section below.
A discussion related to the components of year-on-year changes in operating income margin and earnings per diluted share follows:
Total organic growth/productivity and other: •For the first quarter of 2022, the following components impacted operating margins and earnings per diluted share year-on-year: •Declines in disposable respirator demand year-on-year negatively impacted operating margins by 0.1 percent and earnings per share by$0.03 . •Remaining organic growth/productivity and other impacts resulted in a net year-on-year benefit$0.03 to earnings per share and penalty of 0.3 percent to operating margins. The increase in organic sales did not fully offset operating margin effects of non-raw material/logistics cost headwinds as a percent of sales. Impacts included the following: ?Strong pricing, spending discipline and benefits from restructuring actions taken in 2021 ?Manufacturing headwinds from global supply chain challenges, including geopolitical impacts due to theRussia /Ukraine conflict ?Increased investments in growth, productivity and sustainability Raw material impact: •3M continued to experience inflationary pressures with year-on-year increases in raw material and logistics costs. Foreign exchange impacts •Foreign currency impacts (net of hedging) decreased operating income by approximately$42 million (or a decrease of pre-tax earnings by approximately$26 million ) year-on-year for the first three months of 2022 primarily the result of the strength of theU.S. dollar. These estimates include: (a) the effects of year-on-year changes in exchange rates on translating current period functional currency profits intoU.S. dollars and on current period non-functional currency denominated purchases or transfers of goods between 3M operations, and (b) year-on-year changes in transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks. 50
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Other expense (income), net: •Lower income related to non-service cost components of pension and postretirement expense increased expense year-on-year for the first three months of 2022. •Interest expense (net of interest income) decreased for the first quarter of 2022 compared to the same period year-on-year. Income tax rate: •Certain items above reflect specific income tax rates associated therewith. Overall, the effective tax rate for the first quarter of 2022 was 18.8 percent, an increase from 16.4 percent in the prior year. The primary factor that increased the Company's effective tax rate included adjustments to reserves for uncertain tax positions. •On an adjusted basis (as discussed below), the effective tax rate for the first quarter of 2022 was 17.6%, an increase of 0.7 percentage points compared to the same period year-on-year. Shares of common stock outstanding: •Lower shares outstanding increased earnings per share year-on-year for the first three months of 2022.
Certain amounts adjusted for special items - (non-GAAP measures):
In addition to reporting financial results in accordance withU.S. GAAP, 3M also provides non-GAAP measures that adjust for the impacts of special items. For the periods presented, special items include the items described below. Operating income, segment operating income, income before taxes, net income, earnings per share, and the effective tax rate are all measures for which 3M provides the reported GAAP measure and a measure adjusted for special items. The adjusted measures are not in accordance with, nor are they a substitute for, GAAP measures. While the Company includes certain items in its measure of segment operating performance, it also considers these non-GAAP measures in evaluating and managing its operations. The Company believes that discussion of results adjusted for special items is useful to investors in understanding underlying business performance, while also providing additional transparency to the special items. Special items impacting operating income are reflected in Corporate and Unallocated, except as described below with respect to net costs for significant litigation. The determination of these items may not be comparable to similarly titled measures used by other companies. In the first quarter of 2022, the Company changed the extent of matters and charges/benefits it includes within special items with respect to net costs for significant litigation. Previously, 3M included net costs, when significant, associated with changes in accrued liabilities related to respirator mask/asbestos litigation and PFAS-related other environmental matters, along with the associated tax impacts. These non-GAAP measure changes involved including net costs for litigation related to 3M's Combat Arms Earplugs, expanding net costs to include external legal fees and insurance recoveries associated with the applicable matters in addition to changes in accrued liabilities, and to include all such net costs for the applicable matters, not just when considered significant. Information provided herein reflects the impact of these changes for all periods presented.
Special items for the periods presented include:
Net costs for significant litigation:
•These relate to 3M's respirator mask/asbestos, PFAS-related other
environmental, and Combat Arms Earplugs matters (as discussed in Note 14). Net
costs include the impacts of any changes in accrued liabilities, external legal
fees, and insurance recoveries, along with associated tax impacts. Net costs
related to respirator mask/asbestos and Combat Arms Earplugs matters are
reflected as special items in the Safety and Industrial business segment while
those associated with PFAS-related other environmental matters are primarily
reflected as corporate special items in Corporate and Unallocated.
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Operating Income
Net Income Earnings per
(Dollars in millions, except per Safety and Safety and Total Company Income Before Provision for Effective Tax Attrib-utable to Earnings per diluted share
share amounts) Industrial Industrial Margin Total Company Margin Taxes Income Taxes Rate 3M Diluted Share percent change
Three months ended March 31, 2021
GAAP $ 752 24.3% $ 1,994 22.5 % $ 1,945 $ 319 16.4 % $ 1,624 $ 2.77
Adjustments for special items:
Net costs for significant
litigation 65 135 135 32 103 0.18
Three months ended March 31, 2021
adjusted amounts (non-GAAP
measures) $ 817 26.4% $ 2,129 24.1 % $ 2,080 $ 351 16.9 % $ 1,727 $ 2.95
Three months ended March 31, 2022
GAAP $ 636 20.8% $ 1,641 18.6 % $ 1,603 $ 302 18.8 % $ 1,299 $ 2.26 (18) %
Adjustments for special items:
Net costs for significant
litigation 63 250 250 25 225 0.39
Three months ended March 31, 2022
adjusted amounts (non-GAAP
measures) $ 699 22.9% $ 1,891 21.4 % $ 1,853 $ 327 17.6 % $ 1,524 $ 2.65 (10) %
Sales and operating income by business segment:
The following tables contain sales and operating income results by business segment for the three months endedMarch 31, 2022 and 2021. Refer to the section entitled "Performance by Business Segment" later in MD&A for additional discussion concerning 2022 versus 2021 results, including Corporate and Unallocated. Refer to Note 16 for additional information on business segments. Three months ended March 31, 2022 2021 % change Net Oper. Net Oper. Net Oper. (Dollars in millions) Sales Income Sales Income Sales Income Business Segments Safety and Industrial $ 3,051 $ 636$ 3,099 $ 752 (1.6) % (15.5) % Transportation and Electronics 2,340 496 2,396 556 (2.3) (10.6) Health Care 2,124 448 2,069 464 2.7 (3.5) Consumer 1,313 224 1,289 269 1.8 (16.6) Corporate and Unallocated 1 (163) (2) (47)Total Company $ 8,829 $ 1,641$ 8,851 $ 1,994 (0.3) % (17.7) % Three months ended March 31, 2022 Worldwide Sales Change Total sales By Business Segment Organic sales Acquisitions Divestitures Translation change Safety and Industrial 0.5 % - % - % (2.1) % (1.6) % Transportation and Electronics (0.3) - - (2.0) (2.3) Health Care 4.7 - - (2.0) 2.7 Consumer 3.4 - - (1.6) 1.8Total Company 1.7 - - (2.0) (0.3) 52
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Sales by geographic area:
Percent change information compares the three months endedMarch 31, 2022 with the same period last year, unless otherwise indicated. Additional discussion of business segment results is provided in the Performance by Business Segment section.
Three months ended
Europe,
Asia Middle East Other
Americas Pacific & Africa Unallocated Worldwide
Net sales (millions) $ 4,438 $ 2,770 $ 1,621 $ - $ 8,829
% of worldwide sales 50.3 % 31.4 % 18.3 % 100.0 %
Components of net sales change:
Organic sales 2.5 2.7 (1.9) 1.7
Divestitures - - - -
Translation - (2.7) (5.7) (2.0)
Total sales change 2.5 % - % (7.6) % (0.3) %
Additional information beyond what is included in the preceding table is as follows:
•In theAmericas geographic area,U.S. total sales were flat which included increased organic sales of 1 percent. Total sales inMexico increased 10 percent which included increased organic sales of 10 percent. InCanada , total sales increased 22 percent which included increased organic sales of 22 percent. InBrazil , total sales increased 19 percent which included increased organic sales of 14 percent.
•In the
Managing currency risks:
The strongerU.S. dollar had a negative impact on sales in the first three months of 2022 compared to the same periods last year. Net of the Company's hedging strategy, foreign currency negatively impacted earnings in the first three months of 2022 compared to the same period last year. 3M utilizes a number of tools to manage currency risk related to earnings including natural hedges such as pricing, productivity, hard currency, hard currency-indexed billings, and localizing source of supply. 3M also uses financial hedges to mitigate currency risk. In the case of more liquid currencies, 3M hedges a portion of its aggregate exposure, using a 12, 24 or 36 month horizon, depending on the currency in question. For less liquid currencies, financial hedging is frequently more expensive with more limitations on tenor. Thus, this risk is largely managed via local operational actions using natural hedging tools as discussed above. In either case, 3M's hedging approach is designed to mitigate a portion of foreign currency risk and reduce volatility, ultimately allowing time for 3M's businesses to respond to changes in the marketplace.
Financial condition:
Refer to the section entitled "Financial Condition and Liquidity" later in MD&A for a discussion of items impacting cash flows.
InNovember 2018 , 3M's Board of Directors replaced the Company'sFebruary 2016 repurchase program with a new repurchase program. This new program authorizes the repurchase of up to$10 billion of 3M's outstanding common stock, with no pre-established end date. In the first three months of 2022, the Company purchased$773 million of its own stock, compared to$231 million of stock purchases in the first three months of 2021. As ofMarch 31, 2022 , approximately$4.8 billion remained available under the authorization. InFebruary 2022 , 3M's Board of Directors declared a first-quarter 2022 dividend of$1.49 per share, an increase of 1 percent. This marked the 64th consecutive year of dividend increases for 3M. 3M expects to contribute approximately$200 million of cash to its global defined benefit pension and postretirement plans in 2022. The Company does not have a required minimum cash pension contribution obligation for itsU.S. plans in 2022. 53
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Table of Contents RESULTS OF OPERATIONSNet Sales :
Refer to the preceding "Overview" section and the "Performance by Business Segment" section later in MD&A for additional discussion of sales change.
Operating Expenses:
Three months ended
March 31,
(Percent of net sales) 2022 2021 Change
Cost of sales 54.7 % 51.1 % 3.6 %
Selling, general and administrative expenses (SG&A) 21.3 20.5 0.8
Research, development and related expenses (R&D) 5.4 5.9 (0.5)
Operating income margin 18.6 % 22.5 % (3.9) %
3M expects global defined benefit pension and postretirement service cost
expense in 2022 to decrease by approximately $68 million pre-tax when compared
to 2021, which impacts cost of sales; selling, general and administrative
expenses (SG&A); and research, development and related expenses (R&D). The
year-on-year decrease in defined benefit pension and postretirement service cost
expense for the first quarter of 2022 was approximately $16 million .
For total year 2021, the Company recognized consolidated defined benefit pre-tax
pension and postretirement service cost expense of $503 million and a benefit of
$297 million related to all non-service pension and postretirement net benefit
costs (after settlements, curtailments, special termination benefits and other)
for a total consolidated defined benefit pre-tax pension and postretirement
expense of $206 million .
For total year 2022, defined benefit pension and postretirement service cost
expense is anticipated to total approximately $435 million while non-service
pension and postretirement net benefit cost is anticipated to be a benefit of
approximately $250 million , for a total consolidated defined benefit pre-tax
pension and postretirement expense of approximately $185 million , a decrease in
expense of approximately $20 million compared to 2021.
The Company is continuing the ongoing deployment of an enterprise resource planning (ERP) system on a worldwide basis, with these investments impacting cost of sales, SG&A, and R&D.
Cost of Sales:
Cost of sales, measured as a percent of sales, increased in the first three months of 2022 when compared to the same periods last year. Increases primarily due to negative manufacturing productivity impacts from ongoing global supply chain, raw material and logistics challenges, including estimate of idled portions ofBelgium manufacturing facility, increased net costs for significant litigation, increased compensation and benefit costs, and increased investments in growth, productivity and sustainability.
Selling, General and Administrative Expenses:
SG&A, measured as a percent of sales, increased in the first three months of 2022 when compared to the same period last year. SG&A was impacted by increased compensation and benefit costs, and continued investment on key growth initiatives. Cost increases were partially offset by restructuring benefits and ongoing general 3M cost management.
Research, Development and Related Expenses:
R&D, measured as a percent of sales, decreased in the first three months of 2022
when compared to the same period last year. 3M continued to invest in its key
initiatives, including R&D aimed at disruptive innovation programs with the
potential to create entirely new markets and disrupt existing markets.
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Other Expense (Income), Net:
See Note 6 for a detailed breakout of this line item.
Interest expense (net of interest income) decreased in the first three months of 2022 compared to the same period year-on-year due to an early debt extinguishment pre-tax charge in the first quarter of 2021.
The non-service pension and postretirement net benefit decreased approximately$12 million in the first three months of 2022 compared to the same period year-on-year. Provision for Income Taxes: Three months ended March 31, (Percent of pre-tax income) 2022 2021 Effective tax rate 18.8 % 16.4 %
The primary factor that increased the Company's effective tax rate included adjustments to uncertain tax positions.
3M currently estimates its effective tax rate for 2022 to be approximately 18.5 to 19.5 percent. The tax rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits, changes in tax laws, and employee share-based payment accounting; as well as recurring factors, such as the geographic mix of income before taxes.
Refer to Note 8 for further discussion of income taxes.
Income from Unconsolidated Subsidiaries, Net of Taxes:
Three months ended
March 31,
(Millions) 2022 2021Income (loss) from unconsolidated subsidiaries, net of taxes
$ 2 $ 1
Income (loss) from unconsolidated subsidiaries, net of taxes, is attributable to
the Company's accounting under the equity method for ownership interests in
certain entities such as Kindeva following 3M's divestiture of the drug delivery
business in 2020.
Net Income (Loss) Attributable to Noncontrolling Interest:
Three months ended
March 31,
(Millions) 2022 2021Net income (loss) attributable to noncontrolling interest $
4 $ 3
Net income (loss) attributable to noncontrolling interest represents the
elimination of the income or loss attributable to non-3M ownership interests in
3M consolidated entities. The primary noncontrolling interest relates to
Significant Accounting Policies:
Information regarding new accounting standards is included in Note 1 to the Consolidated Financial Statements.
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PERFORMANCE BY BUSINESS SEGMENT
Disclosures relating to 3M's business segments are provided in Note 16. Effective in the first quarter of 2022, the measure of segment operating performance used by 3M's chief operating decision maker (CODM) changed and, as a result, 3M's disclosed measure of segment profit/loss (business segment operating income) was updated for all comparative periods presented. The change to business segment operating income aligns with the update to how the CODM assesses performance and allocates resources for the Company's business segments (see Note 16 for additional details). Information provided herein reflects the impact of these changes for all periods presented. 3M manages its operations in four business segments. The reportable segments are Safety and Industrial; Transportation and Electronics; Health Care; and Consumer. Corporate and Unallocated: In addition to these four business segments, 3M assigns certain costs to "Corporate and Unallocated," which is presented separately in the preceding business segments table and in Note 16. Corporate and Unallocated operating income includes "corporate special items" and "other corporate expense-net". Corporate special items include net costs for significant litigation associated with PFAS-related other environmental matters (see Note 14), gain/loss on sale of businesses (see Note 3), and divestiture-related restructuring costs. Other corporate expense-net includes items such as net costs related to limited unallocated corporate staff and centrally managed material resource centers of expertise costs, corporate philanthropic activity, and other net costs that 3M may choose not to allocate directly to its business segments. Other corporate expense-net also includes costs and income from contract manufacturing, transition services and other arrangements with the acquirer of the former Drug Delivery business following its 2020 divestiture. Items classified as revenue from this activity are included in Corporate and Unallocated net sales. Because Corporate and Unallocated includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis.
Corporate and Unallocated operating expenses increased in the first three months of 2022, when compared to the same period last year.
Corporate Special Items
Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section for additional details on the impact of net costs for significant litigation, gain/loss on sale of businesses, and divestiture-related restructuring actions.
Other Corporate Expense - Net
Other corporate operating expenses, net, in the first three months of 2022, was relatively flat when compared to the same period last year.
Operating Business Segments:
Information related to 3M's business segments is presented in the tables that follow with additional context in the corresponding narrative below the tables.
Refer to 3M's 2021 Annual Report on Form 10-K, Item 1, Business, for discussion of 3M products that are included in each business segment.
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Safety and Industrial Business:
Three months ended
March 31,
2022 2021
Sales (millions) $ 3,051 $ 3,099
Sales change analysis:
Organic sales 0.5 %
Translation (2.1)
Total sales change (1.6) %
Business segment operating income (millions) $ 636 $ 752
Percent change (15.5) %
Percent of sales 20.8 % 24.3 %
Adjusted business segment operating income (millions)
(non-GAAP measure) $ 699 $ 817
Percent change (14.4) %
Percent of sales 22.9 % 26.4 %
The preceding table also displays business segment operating income information
adjusted for special items. For Safety and Industrial these adjustments include
net costs for respirator mask/asbestos and Combat Arms Earplugs litigation
matters. Refer to the Certain amounts adjusted for special items - (non-GAAP
measures) section for additional details.
First quarter 2022 results:
Sales in Safety and Industrial were down 1.6 percent in
On an organic sales basis: •Sales increased in closure and masking systems, industrial adhesives and tapes, abrasives, electrical markets, roofing granules, and automotive aftermarket and decreased in personal safety. •Growth from continued improving general industrial manufacturing activity and other end-market demand was partially offset by the disposable respirator sales decline within personal safety, which negatively impacted year-on-year first quarter organic growth by 1.5 percent. Business segment operating income margins decreased year-on-year due to increased raw materials and logistics costs, special item costs for significant litigation and manufacturing productivity headwinds, partially offset by selling price actions, strong spending discipline and benefits from restructuring actions. Adjusting for special item costs for significant litigation (non-GAAP measure), business segment operating income margins decreased year-on-year as displayed above.
Transportation and Electronics Business:
Three months ended
March 31,
2022 2021
Sales (millions) $ 2,340 $ 2,396
Sales change analysis:
Organic sales (0.3) %
Translation (2.0)
Total sales change (2.3) %
Business segment operating income (millions) $ 496 $ 556
Percent change (10.6) %
Percent of sales 21.2 % 23.2 %
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First quarter 2022 results:
Sales in Transportation and Electronics were down 2.3 percent in
On an organic sales basis:
•Sales increased in commercial solutions and decreased in electronics,
automotive and aerospace and transportation safety, while advanced materials was
flat.
•Sales declines were primarily due to the ongoing impacts of the semiconductor
supply chain constraints on the automotive and consumer electronics end-markets.
Business segment operating income margins decreased year-on-year due to
increased raw materials and logistics costs, manufacturing productivity
headwinds and investments in auto electrification, partially offset by selling
price actions, strong spending discipline and benefits from restructuring
actions.
Health Care Business:
Three months ended
March 31,
2022 2021
Sales (millions) $ 2,124 $ 2,069
Sales change analysis:
Organic sales 4.7 %
Translation (2.0)
Total sales change 2.7 %
Business segment operating income (millions) $ 448 $ 464
Percent change (3.5) %
Percent of sales 21.1 % 22.5 %
First quarter 2022 results:
Sales in Health Care were up 2.7 percent in
On an organic sales basis: •Sales increased in food safety, separation and purification, medical solutions, health information systems, and in oral care. •Sales increased in medical solutions and oral care, but continue to be impacted by COVID-related trends on elective procedure volumes. •Sales increased in separation and purification with sustained demand for biopharma filtration solutions for COVID-related vaccines and therapeutics. •Sales increased in health information systems due to strong growth in revenue cycle management and clinician solutions.
Business segment operating income margins decreased year-on-year due to increased raw materials and logistics costs along with manufacturing productivity headwinds and investments, partially offset by sales growth (including selling price actions), strong spending discipline and benefits from restructuring actions.
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Consumer Business:
Three months ended
March 31,
2022 2021
Sales (millions) $ 1,313 $ 1,289
Sales change analysis:
Organic sales 3.4 %
Translation (1.6)
Total sales change 1.8 %
Business segment operating income (millions) $ 224 $ 269
Percent change (16.6) %
Percent of sales 17.1 % 20.8 %
First quarter 2022 results:
Sales in Consumer totaled were up 1.8 percent in
On an organic sales basis: •Sales increased in consumer health and safety, home care, stationery and office and home improvement. •Sales increases continue to be benefited by strength and demand in market-lead categories such as FiltreteTM air quality solutions and CommandTM adhesives. Business segment operating income margins decreased year-on-year as a result of increased raw materials, logistics and outsourced hardgoods manufacturing costs along with manufacturing productivity headwinds, partially offset by sales growth (including selling price actions), strong spending discipline and benefits from restructuring actions.
FINANCIAL CONDITION AND LIQUIDITY
The strength and stability of 3M's business model and strong free cash flow capability, together with proven capital markets access, provides financial flexibility and enables the Company to invest through business cycles. Investing in 3M's business to drive organic growth and deliver strong returns on invested capital remains the first priority for capital deployment. This includes research and development, capital expenditures, and commercialization capability. The Company also continues to actively manage its portfolio through acquisitions and divestitures to maximize value for shareholders. 3M expects to continue returning cash to shareholders through dividends and share repurchases. To fund cash needs inthe United States , the Company relies on ongoing cash flow fromU.S. operations, access to capital markets and repatriation of the earnings of its foreign affiliates that are not considered to be permanently reinvested. For those international earnings still considered to be reinvested indefinitely, the Company currently has no plans or intentions to repatriate these funds forU.S. operations. See Note 10 to the Consolidated Financial Statements in 3M's 2021 Annual Report on Form 10-K for further information on earnings considered to be reinvested indefinitely. 3M maintains a strong liquidity profile. The Company's primary short-term liquidity needs are met through cash on hand andU.S. commercial paper issuances. 3M believes it will have continuous access to the commercial paper market. 3M's commercial paper program permits the Company to have a maximum of$5 billion outstanding with a maximum maturity of 397 days from date of issuance. The Company had no commercial paper outstanding atMarch 31, 2022 andDecember 31, 2021 . Total debt: The strength of 3M's credit profile and significant ongoing cash flows provide 3M proven access to capital markets. Additionally, the Company's debt maturity profile is staggered to help ensure refinancing needs in any given year are reasonable in proportion to the total portfolio. 3M currently has an A1 credit rating with a stable outlook from Moody's Investors Service and an A+ credit rating with negative outlook from Standard and Poor's. 59
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The Company's total debt was lower at
InJuly 2017 , theUnited Kingdom's Financial Conduct Authority announced that it would no longer require banks to submit rates for the London InterBank Offered Rate ("LIBOR") after 2021. InNovember 2020 , theICE Benchmark Administration (IBA), LIBOR's administrator, proposed extending the publication of USD LIBOR throughJune 2023 . Subsequently, in March of 2021, IBA ceased publication of certain LIBOR rates afterDecember 31, 2021 . USD LIBOR rates that did not cease onDecember 31, 2021 will continue to be published throughJune 30, 2023 . The Company has reviewed its debt securities, bank facilities, and derivative instruments and continues to evaluate commercial contracts that may utilize LIBOR as the reference rate. 3M will continue its assessment and monitor regulatory developments during the transition period. EffectiveFebruary 10, 2020 , the Company updated its "well-known seasoned issuer" (WKSI) shelf registration statement, which registers an indeterminate amount of debt or equity securities for future issuance and sale. This replaced 3M's previous shelf registration datedFebruary 24, 2017 . InMay 2016 , in connection with the WKSI shelf, 3M entered into an amended and restated distribution agreement relating to the future issuance and sale (from time to time) of the Company's medium-term notes program (Series F), up to the aggregate principal amount of$18 billion , which was an increase from the previous aggregate principal amount up to$9 billion of the same Series. As ofMarch 31, 2022 , the total amount of debt issued as part of the medium-term notes program (Series F), inclusive of debt issued inFebruary 2019 and prior years is approximately$17.6 billion (utilizing the foreign exchange rates applicable at the time of issuance for the euro denominated debt). Information with respect to long-term debt issuances and maturities for the periods presented is included in Note 10 of this Form 10-Q and Note 12 to the Consolidated Financial Statements in 3M's 2021 Annual Report on Form 10-K. 3M has an amended and restated$3.0 billion five-year revolving credit facility expiring inNovember 2024 . The revolving credit agreement includes a provision under which 3M may request an increase of up to$1.0 billion (at lender's discretion), bringing the total facility up to$4.0 billion . In addition, 3M entered into a$1.25 billion 364-day credit facility, which was renewed inNovember 2021 with an expiration date ofNovember 2022 . The 364-day credit agreement includes a provision under which 3M may convert any advances outstanding on the maturity date into term loans having a maturity date one year later. These credit facilities were undrawn atMarch 31, 2022 . Under both the$3.0 billion and$1.25 billion credit agreements, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at not less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the four consecutive quarters then ended to total interest expense on all funded debt for the same period. AtMarch 31, 2022 , this ratio was approximately 20 to 1. Debt covenants do not restrict the payment of dividends. As disclosed in Note 12 to the Consolidated Financial Statements in 3M's 2021 Annual Report on Form 10-K, 3M has a$1 billion debt financing commitment related to the intended Food Safety Division spin-off or split transaction. Amounts outstanding under this facility have a term of 364 days following the borrowing date and are required to be repaid when certain conditions are met. This commitment was undrawn atMarch 31, 2022 .
The Company also had
Cash, cash equivalents and marketable securities:
AtMarch 31, 2022 , 3M had$3.4 billion of cash, cash equivalents and marketable securities, of which approximately$3.0 billion was held by the Company's foreign subsidiaries and approximately$0.4 billion was held inthe United States . These balances are invested in bank instruments and other high-quality fixed income securities. AtDecember 31, 2021 , 3M had$4.8 billion of cash, cash equivalents and marketable securities, of which approximately$3.1 billion was held by the Company's foreign subsidiaries and$1.7 billion was held bythe United States . The decrease fromDecember 31, 2021 primarily resulted from cash flow from operations offset by ongoing dividend payments, purchases of treasury stock, capital expenditures, and the Q1 2022 Eurobond maturity. 60
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Net Debt (non-GAAP measure):
Net debt is not defined underU.S. GAAP and may not be computed the same as similarly titled measures used by other companies. The Company defines net debt as total debt less the total of cash, cash equivalents and current and long-term marketable securities. 3M believes net debt is meaningful to investors as 3M considers net debt and its components to be important indicators of liquidity and financial position. The following table provides net debt as ofMarch 31, 2022 andDecember 31, 2021 . March 31, December 31, (Millions) 2022 2021 Change Total debt $ 16,678 $ 17,363$ (685) Less: Cash, cash equivalents and marketable securities 3,386 4,792 (1,406) Net debt (non-GAAP measure) $ 13,292 $ 12,571 $ 721
Refer to the preceding "Total Debt" and "Cash,
Balance Sheet:
3M's strong balance sheet and liquidity provide the Company with significant flexibility to fund its numerous opportunities going forward. The Company will continue to invest in its operations to drive growth, including continual review of acquisition opportunities.
The Company uses working capital measures that place emphasis and focus on certain working capital assets, such as accounts receivable and inventory activity.
Working capital (non-GAAP measure):
March 31, December 31,
(Millions) 2022 2021 Change
Current assets $ 14,452 $ 15,403 $ (951)
Less: Current liabilities 9,152 9,035 117
Working capital (non-GAAP measure) $ 5,300 $
6,368
Various assets and liabilities, including cash and short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. Working capital is not defined underU.S. generally accepted accounting principles and may not be computed the same as similarly titled measures used by other companies. The Company defines working capital as current assets minus current liabilities. 3M believes working capital is meaningful to investors as a measure of operational efficiency and short-term financial health. Working capital decreased$1.1 billion compared withDecember 31, 2021 . Balance changes in current assets decreased working capital by$1.0 billion , driven largely by decreases in cash and cash equivalents . Balance changes in current liabilities decreased working capital by$0.1 billion , primarily due to increases in current-portion of long-term debt and accounts payable. Accounts receivable increased$155 million and inventory increased$305 million , respectively, fromDecember 31, 2021 , primarily as a result of increased sequential sales and related operating activity from that of late 2021 partially offset by foreign currency translation impacts. Current portion of long-term debt increased as upcoming debt maturities now considered current were partially offset by the realized Eurobond maturity in the first quarter of 2022, while accounts payable also increased as a result of increased sequential operating activity from that of late 2021 partially offset by foreign currency translation impacts. Cash Flows: Cash flows from operating, investing and financing activities are provided in the tables that follow. Individual amounts in the Consolidated Statement of Cash Flows exclude the effects of acquisitions, divestitures and exchange rate impacts on cash and cash equivalents, which are presented separately in the cash flows. Thus, the amounts presented in the following operating, investing and financing activities tables reflect changes in balances from period to period adjusted for these effects. 61
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Cash Flows from Operating Activities:
Three months ended
March 31,
(Millions) 2022 2021
Net income including noncontrolling interest $ 1,303 $ 1,627
Depreciation and amortization 459 460
Company pension and postretirement contributions (42)
(47)
Company pension and postretirement expense 43
47
Stock-based compensation expense 135
131
Income taxes (deferred and accrued income taxes) 130 58 Accounts receivable (189) (205) Inventories (319) (304) Accounts payable 261 155 Other - net (770) (234)
Net cash provided by (used in) operating activities
Cash flows from operating activities can fluctuate significantly from period to period, as working capital movements, tax timing differences and other items can significantly impact cash flows. In the first three months of 2022, cash flows provided by operating activities decreased$677 million compared to the same period last year, with this decrease primarily due to increased variable compensation and benefits costs and increased net costs for significant litigation. The combination of accounts receivable, inventories and accounts payable decreased operating cash flow by$247 million in the first three months of 2022, compared to an operating cash flow decrease of$354 million in the first three months of 2021. Additional discussion on working capital changes is provided earlier in the "Financial Condition and Liquidity" section.
Cash Flows from Investing Activities:
Three months ended
March 31,
(Millions) 2022 2021
Purchases of property, plant and equipment (PP&E) $ (424) $ (310)
Proceeds from sale of PP&E and other assets 56 32
Purchases and proceeds from maturities and sale of marketable securities and investments, net
92 (110)
Proceeds from sale of businesses, net of cash sold 13 -
Other - net - 19
Net cash provided by (used in) investing activities $ (263) $ (369)
Investments in property, plant and equipment enable growth across many diverse
markets, helping to meet product demand and increasing manufacturing efficiency.
The Company expects 2022 capital spending to be approximately $1.7 billion to
$2.0 billion as 3M continues to invest in growth, productivity and
sustainability.
3M records capital-related government grants earned as reductions to the cost of property, plant and equipment; and associated unpaid liabilities and grant proceeds receivable are considered non-cash changes in such balances for purposes of preparation of statement of cash flows.
3M invests in renewal and maintenance programs, which pertain to cost reduction, cycle time, maintaining and renewing current capacity, eliminating pollution, and compliance. Costs related to maintenance, ordinary repairs, and certain other items are expensed. 3M also invests in growth, which adds to capacity, driven by new products, both through expansion of current facilities and new facilities. Finally, 3M also invests in other initiatives, such as information technology (IT), laboratory facilities, and a continued focus on investments in sustainability.
Refer to Note 3 for information on acquisitions and divestitures. The Company is actively considering additional acquisitions, investments and strategic alliances, and from time to time may also divest certain businesses.
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Purchases of marketable securities and investments and proceeds from maturities and sale of marketable securities and investments are primarily attributable to certificates of deposit/time deposits, commercial paper, and other securities, which are classified as available-for-sale. Refer to Note 9 for more details about 3M's diversified marketable securities portfolio. Purchases of investments include additional survivor benefit insurance, plus investments in equity securities.
Cash Flows from Financing Activities:
Three months ended
March 31,
(Millions) 2022 2021
Change in short-term debt - net $ (5) $ 6
Repayment of debt (maturities greater than 90 days) (579) (450)
Proceeds from debt (maturities greater than 90 days) - -
Total cash change in debt (584) (444)
Purchases of treasury stock (773) (231)Proceeds from issuances of treasury stock pursuant to stock option and benefit plans
164 293
Dividends paid to shareholders (852) (858)
Other - net (9) (11)
Net cash provided by (used in) financing activities $
(2,054)
Total debt was approximately$16.7 billion atMarch 31, 2022 and$17.4 billion atDecember 31, 2021 . Decreases in debt were largely due to theFebruary 2022 repayment of500 million euros aggregate principal amount of fixed-rate medium-term notes. The Company had no commercial paper outstanding atMarch 31, 2022 andDecember 31, 2021 . Net commercial paper issuances in addition to repayments and borrowings by international subsidiaries are largely reflected in "Change in short-term debt - net" in the preceding table. 3M's primary short-term liquidity needs are met through cash on hand andU.S. commercial paper issuances. 2021 issuances, maturities, and extinguishments of short-and long-term debt are described in Note 10 to the Consolidated Financial Statements in 3M's 2021 Annual Report on Form 10-K. Repurchases of common stock are made to support the Company's stock-based employee compensation plans and for other corporate purposes. In the first three months of 2022, the Company purchased$773 million of its own stock. For more information, refer to the table titled "Issuer Purchases ofEquity Securities " in Part II, Item 2. The Company does not utilize derivative instruments linked to the Company's stock.
3M has paid dividends since 1916. In
Other cash flows from financing activities may include various other items, such as cash paid associated with certain derivative instruments, distributions to or sales of noncontrolling interests, changes in overdraft balances, and principal payments for finance leases.
Free Cash Flow (non-GAAP measure):
Free cash flow and free cash flow conversion are not defined underU.S. generally accepted accounting principles (GAAP). Therefore, they should not be considered a substitute for income or cash flow data prepared in accordance withU.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The Company defines free cash flow conversion as free cash flow divided by net income attributable to 3M. The Company believes free cash flow and free cash flow conversion are meaningful to investors as they are useful measures of performance and the Company uses these measures as an indication of the strength of the company and its ability to generate cash. Free cash flow and free cash flow conversion vary across quarters throughout the year. Below find a recap of free cash flow and free cash flow conversion. 63
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Refer to the preceding "Cash Flows from Operating Activities" and "Cash Flows
from Investing Activities" sections for discussion of items that impacted the
operating cash flow and purchases of PP&E components of the calculation of free
cash flow. Refer to the preceding "Results of Operations" section for discussion
of items that impacted the net income attributable to 3M component of the
calculation of free cash flow conversion.
Three months ended
March 31,
(Millions) 2022 2021
Major GAAP Cash Flow Categories
Net cash provided by (used in) operating activities $ 1,011 $ 1,688
Net cash provided by (used in) investing activities (263) (369)
Net cash provided by (used in) financing activities (2,054) (1,251)
Free Cash Flow (non-GAAP measure) Net cash provided by (used in) operating activities $ 1,011$ 1,688 Purchases of property, plant and equipment (424) (310) Free cash flow 587 1,378 Net income attributable to 3M $ 1,299$ 1,624 Free cash flow conversion 45 % 85 %
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company may also make forward-looking statements in other reports filed with theSecurities and Exchange Commission , in materials delivered to shareholders and in press releases. In addition, the Company's representatives may from time to time make oral forward-looking statements. Forward-looking statements relate to future events and typically address the Company's expected future business and financial performance. Words such as "plan," "expect," "aim," "believe," "project," "target," "anticipate," "intend," "estimate," "will," "should," "could," "forecast" and other words and terms of similar meaning, typically identify such forward-looking statements. In particular, these include, among others, statements relating to: •worldwide economic, political, regulatory, international trade, capital markets and other external conditions, such as interest rates, financial conditions of our suppliers and customers, trade restrictions such as tariffs in addition to retaliatory counter measures, inflation, military conflicts, and natural and other disasters or climate change affecting the operations of the Company or our suppliers and customers, •risks related to public health crises such as the global pandemic associated with the coronavirus (COVID-19), •liabilities related to certain fluorochemicals and the outcome of contingencies, •the Company's strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of financial performance, and market position, •competitive conditions and customer preferences, •foreign currency exchange rates and fluctuations in those rates, •new business opportunities, product development, and future performance or results of current or anticipated products, •fluctuations in the costs and availability of purchased components, compounds, raw materials and energy, •Information technology systems including ERP system roll-out and implementations, •Security breaches and other disruptions to information technology infrastructure, •the scope, nature or impact of acquisition, strategic alliance and divestiture activities, •operational execution, including inability to generate productivity improvements as estimated, •future levels of indebtedness, common stock repurchases and capital spending, •future availability of and access to credit markets, •pension and postretirement obligation assumptions and future contributions, •asset impairments, •tax liabilities and effects of changes in tax rates, laws or regulations, and •legal and regulatory proceedings, legal compliance risks (including third-party risks) with regards to environmental, product liability and other laws and regulations inthe United States and other countries in which we operate. 64
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The Company assumes no obligation to update or revise any forward-looking statements.
Forward-looking statements are based on certain assumptions and expectations of future events and trends that are subject to risks and uncertainties. Actual future results and trends may differ materially from historical results or those reflected in any such forward-looking statements depending on a variety of factors. Important information as to these factors can be found in this document, including, among others, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings of "Overview," "Financial Condition and Liquidity" and annually in "Critical Accounting Estimates." Discussion of these factors is incorporated by reference from Part II, Item 1A, "Risk Factors," of this document, and should be considered an integral part of Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations." For additional information concerning factors that may cause actual results to vary materially from those stated in the forward-looking statements, see our reports on Form 10-K, 10-Q and 8-K filed with theSEC from time to time.
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