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).
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 Current Report on Form 8-K datedApril 26, 2022 (which updated 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. 53 -------------------------------------------------------------------------------- Table of Contents During the first six month of 2022, 3M's costs for significant litigation (see Certain amounts adjusted for special items - (non-GAAP measures section below) included, among things, pre-tax charges associated with steps toward resolving Combat Arms Earplugs litigation and associated with additional commitments to address PFAS-related maters at its Zwijndrecht,Belgium site (approximately$1.2 billion and$355 million , respectively, in the second quarter of 2022). These matters are further discussed in Note 14. 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 received approval inJune 2022 to begin the process toward restarting manufacturing operations at the Zwijndrecht facility. The process for restarting previously-idled operations at the facility is progressing according to plan. Belgian government authorities continue to maintain oversight of these operations and compliance with applicable requirements. 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. Additionally, the Company continues to evaluate options, some of which could lead to termination of activities of these subsidiaries and substantially their liquidation. 3M monitors factors such as its ability to access various exchange mechanisms; the impact of government regulations on the Company's ability to manage its Russian subsidiaries' capital structure, purchasing, product pricing, and labor relations; and the current political and economic situation. Based upon a review of factors as ofJune 30, 2022 , the Company continues to consolidate its Russian subsidiaries. As ofJune 30, 2022 , the balance of accumulated other comprehensive loss associated with these subsidiaries was approximately$40 million and the amount of intercompany receivables due from these subsidiaries and their total net assets was approximately$90 million . 3M also 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.
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 and six months endedJune 30, 2022 and 2021. Three months ended Six months ended June 30, 2022 June 30, 2022 Percent of Earnings per Percent of Earnings per net sales diluted share net sales diluted
share
Same period last year 22.0 % $ 2.59 22.3 % $
5.36
Net costs for significant litigation 1.4 0.16 1.4 0.34 Same period last year, excluding special items 23.4 % $ 2.75 23.7 % $
5.70
Increase/(decrease) due to: Total organic growth/productivity and other 0.8 0.12 0.2 0.12 Raw material impact (3.1) (0.36) (2.7) (0.66) Foreign exchange impacts (0.1) (0.13) - (0.17) Other expense (income), net N/A (0.02) N/A (0.01) Income tax rate N/A 0.05 N/A 0.03 Shares of common stock outstanding N/A 0.07 N/A 0.12 Current period, excluding special items 21.0 % $ 2.48 21.2 % $
5.13
Net costs for significant litigation (19.7) (2.34) (11.2) (2.73)
Current period 1.3 % $ 0.14 10.0 % $ 2.40
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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 second 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 0.4 percent and earnings per share by$0.09 . •Remaining organic growth/productivity and other impacts resulted in a net year-on-year benefit$0.21 to earnings per share and 1.2 percent to operating margins which was impacted by 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 as well as the COVID related shutdown inChina ?Second quarter of 2021 pre-tax benefit of$91 million pre-tax ($0.12 per share after tax) from the impact of the favorable decision of theBrazilian Supreme Court regarding the calculation of past social taxes ?Increased investments in growth, productivity and sustainability •For the first six months 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 0.3 percent and earnings per share by$0.12 . •Remaining organic growth/productivity and other impacts resulted in a net year-on-year benefit$0.24 to earnings per share and 0.5 percent to operating margins which was impacted by 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 as well as the COVID related shutdown inChina ?Second quarter of 2021 benefit of$91 million pre-tax ($0.12 per share after tax) from the impact of the favorable decision of theBrazilian Supreme Court regarding the calculation of past social taxes ?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$84 million (or a decrease of pre-tax earnings by approximately$95 million ) year-on-year for the second quarter of 2022 and decreased operating income by approximately$111 million (or a decrease of pre-tax earnings by approximately$121 million ) year-on-year for the first six 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. 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 and six months of 2022. •Interest expense (net of interest income) increased for the three months endedJune 30, 2022 compared to the same period year-on-year and decreased for the six months endedJune 30, 2022 compared to the same period year-on-year. 55
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Income tax rate: •Certain items above reflect specific income tax rates associated therewith. Overall, the effective tax rate for the second quarter of 2022 was (38.3) percent, a decrease from 21.5 percent in the prior year. The effective tax rate for the first six months of 2022 was 16.8 percent, as compared to 18.9 percent in the prior year. The primary factor that decreased the Company's effective tax rate for both periods was the tax impact associated with the second quarter 2022 charge related to steps toward resolving Combat Arms Earplugs litigation (discussed in Note 14). •On an adjusted basis (as discussed below), the effective tax rate for the second quarter and first six months of 2022 was 19.8 percent and 18.7 percent, respectively, a decrease of 1.8 percentage points and a decrease of 0.5 percent, respectively, 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 and six 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 (loss), 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 (Loss)
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 June 30, 2021
GAAP $ 662 21.8% $ 1,971 22.0 % $ 1,938 $ 415 21.5 % $ 1,524 $ 2.59
Adjustments for special items:
Net costs for significant
litigation 52 127 127 30 97 0.16
Three months ended June 30, 2021
adjusted amounts (non-GAAP
measures) $ 714 23.6% $ 2,098 23.4 % $ 2,065 $ 445 21.6 % $ 1,621 $ 2.75
Three months ended June 30, 2022
GAAP $ (707) (24.2)% $ 110 1.3 % $ 60 $ (23) (38.3) % $ 78 $ 0.14 (95) %
Adjustments for special items:
Net costs for significant
litigation 1,337 1,716 1,716 374 1,342 2.34
Three months ended June 30, 2022
adjusted amounts (non-GAAP
measures) $ 630 21.5% $ 1,826 21.0 % $ 1,776 $ 351 19.8 % $ 1,420 $ 2.48 (10) %
Operating Income (Loss)
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
Six months ended June 30, 2021
GAAP $ 1,414 23.1% $ 3,965 22.3 % $ 3,883 $ 734 18.9 % $ 3,148 $ 5.36
Adjustments for special items:
Net costs for significant
litigation 117 262 262 62 200 0.34
Six months ended June 30, 2021
adjusted amounts (non-GAAP
measures) $ 1,531 25.0% $ 4,227 23.7 % $ 4,145 $ 796 19.2 % $ 3,348 $ 5.70
Six months ended June 30, 2022
GAAP $ (71) (1.2)% $ 1,751 10.0 % $ 1,663 $ 279 16.8 % $ 1,377 $ 2.40 (55) %
Adjustments for special items:
Net costs for significant
litigation 1,400 1,966 1,966 399 1,567 2.73
Six months ended June 30, 2022
adjusted amounts (non-GAAP
measures) $ 1,329 22.2% $ 3,717 21.2 % $ 3,629 $ 678 18.7 % $ 2,944 $ 5.13 (10) %
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Sales and operating income (loss) by business segment:
The following tables contain sales and operating income (loss) results by business segment for the three and six months endedJune 30, 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 June 30, 2022 2021 % change Oper. Net Income Net Oper. Net Oper. (Dollars in millions) Sales (Loss) Sales Income Sales Income (Loss) Business Segments Safety and Industrial$ 2,924 $ (707) $ 3,029 $ 662 (3.4) % (206.9) % Transportation and Electronics 2,268 476 2,355 513 (3.7) (7.5) Health Care 2,179 494 2,165 548 0.6 (9.9) Consumer 1,330 247 1,400 290 (5.0) (14.9) Corporate and Unallocated 1 (400) 1 (42)Total Company $ 8,702 $ 110 $ 8,950 $ 1,971 (2.8) % (94.4) % Six months ended June 30, 2022 2021 % change Oper. Net Income Net Oper. Net Oper. (Dollars in millions) Sales (Loss) Sales Income Sales Income (Loss) Business Segments Safety and Industrial$ 5,975 $ (71) $ 6,128 $ 1,414 (2.5) % (105.0) % Transportation and Electronics 4,608 972 4,751 1,069 (3.0) % (9.1) % Health Care 4,303 942 4,234 1,012 1.6 % (7.0) % Consumer 2,643 471 2,689 559 (1.7) % (15.7) % Corporate and Unallocated 2 (563) (1) (89)Total Company $ 17,531 $ 1,751 $ 17,801 $ 3,965 (1.5) % (55.8) % Three months ended June 30, 2022 Worldwide Sales Change Total sales By Business Segment Organic sales Acquisitions Divestitures Translation change Safety and Industrial 0.7 % - % - % (4.1) % (3.4) % Transportation and Electronics 0.5 - - (4.2) (3.7) Health Care 4.4 - - (3.8) 0.6 Consumer (2.5) - - (2.5) (5.0)Total Company 1.0 - - (3.8) (2.8) Six months ended June 30, 2022 Worldwide Sales Change Total sales By Business Segment Organic sales Acquisitions Divestitures Translation change Safety and Industrial 0.6 % - % - % (3.1) % (2.5) % Transportation and Electronics 0.1 - - (3.1) (3.0) Health Care 4.5 - - (2.9) 1.6 Consumer 0.3 - - (2.0) (1.7)Total Company 1.4 - - (2.9) (1.5) 58
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Sales by geographic area:
Percent change information compares the three and six months ended
Three months ended
Europe,
Asia Middle East Other
Americas Pacific & Africa Unallocated Worldwide
Net sales (millions) $ 4,751 $ 2,447 $ 1,504 $ - $ 8,702
% of worldwide sales 54.6 % 28.1 % 17.3 % 100.0 %
Components of net sales change:
Organic sales 3.9 (1.8) (2.0) 1.0
Divestitures - - - -
Translation (0.2) (6.0) (10.2) (3.8)
Total sales change 3.7 % (7.8) % (12.2) % (2.8) %
Six months ended June 30, 2022
Europe,
Asia Middle East Other
Americas Pacific & Africa Unallocated Worldwide
Net sales (millions) $ 9,189 $ 5,217 $ 3,125 $ - $ 17,531
% of worldwide sales 52.4 % 29.8 % 17.8 % 100.0 %
Components of net sales change:
Organic sales 3.2 0.5 (2.0) 1.4
Divestitures - - - -
Translation (0.1) (4.3) (7.9) (2.9)
Total sales change 3.1 % (3.8) % (9.9) % (1.5) %
Additional information beyond what is included in the preceding tables are as follows:
•For the second quarter of 2022, in theAmericas geographic area,U.S. total sales increased 2 percent which included increased organic sales of 2 percent. Total sales inMexico increased 13 percent which included increased organic sales of 13 percent. InCanada , total sales increased 13 percent which included increased organic sales of 17 percent. InBrazil , total sales increased 17 percent which included increased organic sales of 9 percent. In theAsia Pacific geographic area,China total sales decreased 11 percent which included decreased organic sales of 8 percent. InJapan , total sales decreased 11 percent which included increased organic sales of 1 percent. •For the first six months of 2022, in theAmericas geographic area,U.S. total sales increased 1 percent which included increased organic sales of 1 percent. Total sales inMexico increased 11 percent which included increased organic sales of 12 percent. InCanada , total sales increased 17 percent which included increased organic sales of 19 percent. InBrazil , total sales increased 18 percent which included increased organic sales of 11 percent. In theAsia Pacific geographic area,China total sales decreased 6 percent which included decreased organic sales of 5 percent. InJapan , total sales decreased 8 percent which included increased organic sales of 2 percent. 59
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Managing currency risks:
The strongerU.S. dollar had a negative impact on sales in the first three and six 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 and six 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 six months of 2022, the Company purchased$773 million of its own stock, compared to$734 million of stock purchases in the first six months of 2021. As ofJune 30, 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. InMay 2022 , 3M's Board of Directors declared a second-quarter dividend of$1.49 per share. 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. 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 Six months ended
June 30, June 30,
(Percent of net sales) 2022 2021 Change 2022 2021 Change
Cost of sales 58.5 % 52.7 % 5.8 % 56.6 % 51.9 % 4.7 %
Selling, general and administrative
expenses (SG&A) 34.7 19.6 15.1 27.9 20.0 7.9
Research, development and related expenses (R&D) 5.5 5.7 (0.2) 5.5 5.8 (0.3) Operating income margin 1.3 % 22.0 % (20.7) % 10.0 % 22.3 % (12.3) % 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 second quarter and first six months of 2022 was approximately$18 million and$34 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 . 60
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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 and six months of 2022 when compared to the same periods last year. Increases were primarily due to 2022 special item costs for significant litigation from additional commitments to address PFAS-related maters at 3M's Zwijndrecht,Belgium site (discussed in Note 14), higher raw materials and logistics costs, manufacturing productivity headwinds which were further magnified by the combined impact of COVID-related lockdowns inChina and the shutdown of certain operations inBelgium , compensation and benefit costs, and investments in growth, productivity and sustainability.
Selling, General and Administrative Expenses:
SG&A, measured as a percent of sales, increased in the first three and six months of 2022 when compared to the same period last year. SG&A was impacted by increased special item costs for significant litigation primarily related to steps toward resolving Combat Arms Earplugs litigation (discussed in Note 14) resulting in a 2022 second quarter pre-tax charge of approximately$1.2 billion , 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 and six months of 2022 when compared to the same period last year. 3M continues to invest in a range of R&D activities from application development, product and manufacturing support, product development and technology development aimed at disruptive innovations.
Other Expense (Income), Net:
See Note 6 for a detailed breakout of this line item.
Interest expense (net of interest income) increased in the second quarter of 2022 primarily driven by foreign exchange; net interest decreased in the first six 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 and generation of incremental interest income.
The non-service pension and postretirement net benefit decreased approximately
Provision for Income Taxes:
Three months ended Six months ended
June 30, June 30,
(Percent of pre-tax income) 2022 2021 2022 2021
Effective tax rate (38.3) % 21.5 % 16.8 % 18.9 %
The primary factor that decreased the Company's effective tax rate for the
second quarter of 2022 and first six months of 2022 versus the same period in
the prior year was the tax impact associated with the second quarter 2022 charge
related to steps toward resolving Combat Arms Earplugs litigation (discussed in
Note 14).
3M currently estimates its effective tax rate for 2022 to be approximately 17.5
to 18.5 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.
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Income from Unconsolidated Subsidiaries, Net of Taxes:
Three months ended Six months ended
June 30, June 30,
(Millions) 2022 2021 2022 2021Income (loss) from unconsolidated subsidiaries, net of taxes
$ (1) $ 2 $ 1 $ 3 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 Six months ended
June 30, June 30,
(Millions) 2022 2021 2022 2021
Net income (loss) attributable to noncontrolling
interest $ 4
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.
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.
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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 and six months of 2022, when compared to the same period last year. The subsections below provide additional information.
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. Corporate special item net costs increased in the first three and six months of 2022 year over year primarily due to additional commitments in 2022 to address PFAS-related maters at 3M's Zwijndrecht,Belgium site (discussed in Note 14),
Other Corporate Expense - Net
Other corporate operating expenses, net, increased in the first three and six months of 2022, when compared to the same period last year primarily due to a$91 million pre-tax benefit from the impact of the favorable decision of theBrazilian Supreme Court included in the second quarter of 2021 regarding the calculation of past social taxes.
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 Current Report on Form 8-K datedApril 26, 2022 (which updated 3M's 2021 Annual Report on Form 10-K), Item 1, Business, for discussion of 3M products that are included in each business segment. 63
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Safety and Industrial Business:
Three months ended Six months ended
June 30, June 30,
2022 2021 2022 2021
Sales (millions) $ 2,924 $ 3,029 $ 5,975 $ 6,128
Sales change analysis:
Organic sales 0.7 % 0.6 %
Translation (4.1) (3.1)
Total sales change (3.4) % (2.5) %
Business segment operating income (loss)
(millions) $ (707) $ 662 $ (71) $ 1,414
Percent change (206.9) % (105.0) %
Percent of sales (24.2) % 21.8 % (1.2) % 23.1 %
Adjusted business segment operating income
(millions) (non-GAAP measure) $ 630 $ 714 $ 1,329 $ 1,531
Percent change (11.8) % (13.2) %
Percent of sales 21.5 % 23.6 % 22.2 % 25.0 %
The preceding table also displays business segment operating income (loss) 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.
Second quarter 2022 results:
Sales in Safety and Industrial were down 3.4 percent in
On an organic sales basis: •Sales increased in abrasives, electrical markets, closure and masking systems, roofing granules, automotive aftermarket, and industrial adhesives and tapes 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 second quarter organic growth by 5.7 percent. COVID-related lockdowns inChina also negatively impacted growth. Business segment operating income margins decreased year-on-year due to special item costs for significant litigation primarily related to steps toward resolving Combat Arms Earplugs litigation (discussed in Note 14) resulting in a 2022 second quarter pre-tax charge of approximately$1.2 billion . Margins were also impacted by manufacturing productivity headwinds further magnified by the COVID-related lockdowns inChina , partially offset by 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.
First six months 2022 results:
Sales in Safety and Industrial were down 2.5 percent in
On an organic sales basis: •Sales increased in closure and masking systems, abrasives, electrical markets, industrial adhesives and tapes, 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 organic growth by 3.6 percent. Business segment operating income margins decreased year-on-year due to special item costs for significant litigation primarily related to steps toward resolving Combat Arms Earplugs litigation (discussed in Note 14) resulting in a 2022 second quarter pre-tax charge of approximately$1.2 billion . Margins were also impacted by increased raw materials and logistics costs, manufacturing productivity headwinds further magnified by the COVID related lockdowns inChina , partially offset by selling price actions, 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. 64
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Transportation and Electronics Business:
Three months ended Six months ended
June 30, June 30,
2022 2021 2022 2021
Sales (millions) $ 2,268 $ 2,355 $ 4,608 $ 4,751
Sales change analysis:
Organic sales 0.5 % 0.1 %
Translation (4.2) (3.1)
Total sales change (3.7) % (3.0) %
Business segment operating income (millions) $ 476 $ 513 $ 972 $ 1,069
Percent change (7.5) % (9.1) %
Percent of sales 21.0 % 21.8 % 21.1 % 22.5 %
Second quarter 2022 results:
Sales in Transportation and Electronics were down 3.7 percent in
On an organic sales basis: •Sales increased in advanced materials, commercial solutions, and automotive and aerospace, and decreased in electronics and transportation safety. •Growth was held back by the COVID-related lockdowns inChina along with 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 manufacturing productivity headwinds from the combined impact of COVID-related lockdowns inChina and the continued shutdown during Q2 of certain operations inBelgium , partially offset by strong spending discipline and benefits from restructuring actions.
First six months 2022 results:
Sales in Transportation and Electronics were down 3.0 percent in
On an organic sales basis: •Sales increased in commercial solutions and advanced materials, and decreased in automotive and aerospace, electronics and transportation safety. •Growth was held back by the ongoing impacts of the semiconductor supply chain constraints on the automotive and consumer electronics end-markets along with the COVID-related lockdowns inChina . Business segment operating income margins decreased year-on-year due to increased raw materials and logistics costs, manufacturing productivity headwinds which were further magnified by the combined impact of COVID-related lockdowns inChina and the shutdown of certain operations inBelgium and investments in auto electrification, partially offset by selling price actions, strong spending discipline and benefits from restructuring actions. 65
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Health Care Business:
Three months ended Six months ended
June 30, June 30,
2022 2021 2022 2021
Sales (millions) $ 2,179 $ 2,165 $ 4,303 $ 4,234
Sales change analysis:
Organic sales 4.4 % 4.5 %
Translation (3.8) (2.9)
Total sales change 0.6 % 1.6 %
Business segment operating income (millions) $ 494 $ 548 $ 942 $ 1,012
Percent change (9.9) % (7.0) %
Percent of sales 22.7 % 25.3 % 21.9 % 23.9 %
Second quarter 2022 results:
Sales in Health Care were up 0.6 percent in
On an organic sales basis: •Sales increased in separation and purification, health information systems, medical solutions, and oral care, and were flat in food safety. •Sales increased in medical solutions and oral care, but continue to be impacted by COVID-related trends on elective procedure volumes. •Sales increased in health information systems due to strong growth in revenue cycle management. •Sales increased in separation and purification with sustained demand for biopharma filtration solutions for COVID-related vaccines.
Business segment operating income margins decreased year-on-year due to manufacturing productivity headwinds, investments in the business and transaction-related costs associated with the announced divestiture of the food safety business (see Note 3), partially offset by benefits from leverage on sales growth, strong spending discipline and benefits from restructuring actions.
As discussed in Note 3, in
First six months 2022 results:
Sales in Health Care were up 1.6 percent in
On an organic sales basis:
•Sales increased in separation and purification, medical solutions, health
information systems, food safety and 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, investments in the business and transaction-related
costs associated with the announced divestiture of the food safety business (see
Note 3), 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 Six months ended
June 30, June 30,
2022 2021 2022 2021
Sales (millions) $ 1,330 $ 1,400 $ 2,643 $ 2,689
Sales change analysis:
Organic sales (2.5) % 0.3 %
Translation (2.5) (2.0)
Total sales change (5.0) % (1.7) %
Business segment operating income (millions) $ 247 $ 290 $ 471 $ 559
Percent change (14.9) % (15.7) %
Percent of sales 18.5 % 20.7 % 17.8 % 20.8 %
Second quarter 2022 results:
Sales in Consumer totaled were down 5.0 percent in
On an organic sales basis: •Sales increased in stationery and office and home care, and decreased in consumer health and safety and home improvement. •Sales decreases primarily due to soft consumer market conditions and continued product availability issues.
Business segment operating income margins decreased year-on-year as a result of ongoing supply chain constraints, along with manufacturing productivity headwinds, partially offset by strong spending discipline and benefits from restructuring actions.
First six months 2022 results:
Sales in Consumer totaled were down 1.7 percent in
On an organic sales basis:
•Sales increased in stationery and office, consumer health and safety, and home
care and decreased in 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.
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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, provide financial flexibility to deploy capital in accordance with the Company's stated priorities and meet needs associated with contractual commitments and other obligations. 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 Current Report on Form 8-K datedApril 26, 2022 (which updated 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$350 million and no commercial paper outstanding atJune 30, 2022 andDecember 31, 2021 , respectively.
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. As ofJuly 2022 , 3M has a credit rating of A1, stable outlook from Moody's Investors Service and a credit rating of A+, CreditWatch negative fromS&P Global Ratings . The Company's total debt was lower atJune 30, 2022 when compared toDecember 31, 2021 . Decreases in debt were largely due to the repayments of500 million euros and$600 million aggregate principal amounts of fixed-rate medium-term notes inFebruary 2022 andJune 2022 , respectively, offset by increases in commercial paper outstanding. For discussion of repayments of and proceeds from debt refer to the following "Cash Flows from Financing Activities" section. 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 ofJune 30, 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 Current Report on Form 8-K datedApril 26, 2022 (which updated 3M's 2021 Annual Report on Form 10-K). 68
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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 atJune 30, 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. AtJune 30, 2022 , this ratio was approximately 15 to 1. Debt covenants do not restrict the payment of dividends. As disclosed in Note 10, 3M has financing facilities that provide commitments of$650 million of term loans and$350 million of bridge financing along with$150 million of revolving credit related to the intended Food Safety Division split-off transaction. Amounts outstanding under the term loan commitment are payable over five years following the closing date while those under the bridge financing facility have a term of 364 days following the borrowing date and are required to be repaid when certain conditions are met. These commitments were undrawn atJune 30, 2022 .
The Company also had
Cash, cash equivalents and marketable securities:
AtJune 30, 2022 , 3M had$3.0 billion of cash, cash equivalents and marketable securities, of which approximately$2.7 billion was held by the Company's foreign subsidiaries and approximately$0.3 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 and proceeds from commercial paper offset by ongoing dividend payments, purchases of treasury stock, capital expenditures, and the fixed-rate medium-term note maturities in the first six months of 2022.
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 ofJune 30, 2022 andDecember 31, 2021 . June 30, December 31, (Millions) 2022 2021 Change Total debt $ 16,276 $ 17,363$ (1,087) Less: Cash, cash equivalents and marketable securities 3,011 4,792 (1,781) Net debt (non-GAAP measure) $ 13,265 $ 12,571$ 694
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.
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Working capital (non-GAAP measure):
June 30, December 31,
(Millions) 2022 2021 Change
Current assets $ 14,514 $ 15,403 $ (889)
Less: Current liabilities 9,896 9,035 861
Working capital (non-GAAP measure) $ 4,618 $
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$1.8 billion compared withDecember 31, 2021 . Balance changes in current assets decreased working capital by$0.9 billion , driven largely by decreases in cash and cash equivalents . Balance changes in current liabilities decreased working capital by$0.9 billion , primarily due to increases in short-term borrowings and current-portion of long-term debt and accounts payable. Accounts receivable increased$254 million and inventory increased$660 million , respectively, fromDecember 31, 2021 , primarily as a result of increased sequential sales and related operating activity 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 bond maturities in the first six months of 2022, while accounts payable also increased as a result of increased sequential operating activity partially offset by foreign currency translation impacts.
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