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 2023, 3M made the following changes: •Changes in measure of segment operating performance and segment composition used by 3M's chief operating decision maker-impacting 3M's disclosed measure of segment profit/loss (business segment operating income)-and realignment of 3M's Consumer business segment from four divisions to three divisions. See additional information in Note 15. 3M's disclosed disaggregated revenue was also updated as a result of these changes. 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. References are made to organic sales change (which include both organic volume impacts and selling price impacts), which is defined as the change in net sales, absent the separate impacts on sales from foreign currency translation and acquisitions, net of divestitures. Acquisition and divestiture sales change impacts, if any, are measured separately for the first twelve months post-transaction. 3M believes this information is useful to investors and management in understanding ongoing operations and in analysis of ongoing operating trends. 3M has been and may continue to be impacted by the global pandemic and related effects associated with the coronavirus (COVID-19). The Overview section of Part II, Item 7 of the Company's 2022 Annual Report on Form 10-K provides a description of how COVID-19 has impacted or may impact 3M. In addition within this Form 10-Q for the quarterly period endedMarch 31, 2023 , risk factors with respect to COVID-19 can be found in Item 1A "Risk Factors" and certain COVID-19 impacts are referenced in various discussions within this Form 10-Q, including in this Item 2. 50
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3M is also impacted by certain special items such as costs for significant litigation and the sales and income associated with manufactured PFAS products that 3M plans to exit by the end of 2025. See Certain amounts adjusted for special items - (non-GAAP measures) section below for additional discussion of these and other special items, including references therein to where further information is provided. Additional information regarding certain items impacting pre-2023 periods that may also be relevant in 2023 can be found in the Overview section of Part II, Item 7 as well as in further sections of 3M's 2022 Annual Report on Form 10-K.
Earnings per share attributable to 3M common shareholders - diluted:
The following table provides the increases (decreases) in diluted earnings per
share.
Three months ended
Earnings per diluted share March 31, 2023
Same period last year $ 2.26
Net costs for significant litigation 0.39
Manufactured PFAS products (0.02)
Total special items 0.37
Same period last year, excluding special items $ 2.63
Increase/(decrease) due to:
Total organic growth/productivity and other (0.38)
Restructuring (0.05)
Raw material impact (0.15)
Foreign exchange impacts (0.10)
Divestitures (0.03)
Other expense (income), net (0.02)
Income tax rate -
Shares of common stock outstanding 0.07
Current period, excluding special items 1.97
Net costs for significant litigation (0.07)
Divestiture costs (0.15)
Manufactured PFAS products 0.01
Total special items (0.21)
Current period $ 1.76
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 earnings per diluted share follows:
Total organic growth/productivity and other: •For the first quarter of 2023, the following components impacted earnings per diluted share year-on-year: •Declines in disposable respirator demand year-on-year and the 2022 exit of operations inRussia negatively impacted earnings per share by$0.21 . •Remaining organic growth/productivity and other impacts resulted in a net year-on-year decline of$0.17 per share which was impacted by the following: ?Lower sales volumes (particularly electronics/consumer retail); manufacturing/supply chain headwinds;China (COVID-related); andEurope geopolitical impacts ?Benefits from higher selling prices; aggressive spending discipline; ongoing productivity actions ?Investments in growth, productivity, and sustainability 51
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Restructuring:
•3M recorded restructuring pre-tax charges of$52 million in the first quarter of 2023 compared to$18 million in the same period last year (refer to Note 5 for additional discussion). Raw material impact: •3M continued to experience headwinds year-on-year from the carryover impact of higher raw material, logistics and energy cost inflation. Foreign exchange impacts •Foreign currency impacts (net of hedging) decreased operating income and pre-tax earnings by approximately$76 million year-on-year for the first quarter of 2023, primarily resulting from 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.
Divestitures:
•Divestiture impact includes lost income from divested businesses and remaining
stranded costs (net of transition arrangement income). In the third quarter of
2022, 3M completed both the split-off of the Food Safety business (discussed in
Note 3) and the deconsolidation of the Aearo Entities (discussed in Note 14).
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 quarter of
2023.
•Interest expense (net of interest income) decreased for the first quarter of
2023 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 2023 was 17.7 percent,
a decrease from 18.8 percent in the prior year. The primary factor that
decreased the Company's effective tax rate for first quarter 2023 was deferred
tax impacts of 2023 activity.
•On an adjusted basis (as discussed below), the effective tax rate for the first
quarter of 2023 was 17.7 percent, an increase of 0.2 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 quarter of 2023.
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Certain amounts adjusted for special items - (non-GAAP measures):
In addition to reporting financial results in accordance withU.S. GAAP, 3M also provides certain non-GAAP measures. These measures are not in accordance with, nor are they a substitute for GAAP measures, and may not be comparable to similarly titled measures used by other companies. Certain measures adjust for the impacts of special items. Special items for the periods presented include the items described below. Because 3M provides certain information with respect to business segments, it is noteworthy that special items impacting operating income (loss) are reflected in Corporate and Unallocated, except as described below with respect to net costs for significant litigation and manufactured PFAS products items. In 2023, 3M changed certain of its non-GAAP measures by adjusting for the results of manufactured PFAS products in arriving at results, adjusted for special items. In the fourth quarter of 2022, 3M recorded a charge for PFAS manufacturing exit costs and included it as an adjustment in arriving at results, adjusted for special items. The 2023 non-GAAP measure change involved expanding the extent of adjustment to include the sales and estimates of income (including exit costs) and associated activity regarding manufactured PFAS products that 3M plans to exit by the end of 2025. The information herein reflects the impacts of these changes for all periods presented. This document contains measures for which 3M provides the reported GAAP measure and a non-GAAP measure adjusted for special items.These measures and reasons 3M believes they are useful to investors (and, as applicable, used by 3M) include: GAAP amounts for which a measure adjusted for special items is also provided: Reasons 3M believes the measure is useful •Net sales (and sales change) •Operating income, segment operating Considered, in addition to segment operating income and operating income margin performance, in evaluating and managing operations; •Income before taxes useful in understanding underlying business •Provision for income taxes and performance, provides additional transparency to effective tax rate special items •Net income •Earnings per share
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 the associated tax impacts. Prior to initiating voluntary chapter 11 bankruptcy proceedings inJuly 2022 , net costs related to Combat Arms Earplugs andAearo -respirator mask/asbestos matters along with non-Aearo respirator mask/asbestos matters were reflected as special items in the Safety and Industrial business segment. During the bankruptcy period, net costs related to Combat Arms Earplugs andAearo -respirator mask/asbestos matters are reflected as corporate special items in Corporate and Unallocated.
Divestiture costs:
•These include costs related to separating and divesting substantially an entire business segment of 3M following public announcement of its intended divestiture.
Manufactured PFAS products:
•These amounts relate to sales and estimates of income regarding manufactured
PFAS products that 3M plans to exit by the end of 2025 included within the
Transportation and Electronics business segment. Estimated income does not
contemplate impacts on non-operating items such as net interest income/expense
and the non-service cost components portion of defined benefit plan net periodic
benefit costs.
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Three months ended March 31, 2022
(Dollars in millions, except per Operating Operating Income Provision for Effective tax Net Income
share amounts) Net Sales Income Income Margin Before Taxes Income Taxes rate Attributable to 3M Earnings per Diluted Share
Safety and Industrial
GAAP amounts $ 627 20.6 %
Adjustments for special items:
Net costs for significant 63
litigation
Total special items 63
Adjusted amounts (non-GAAP $ 690 22.6 %
measures)
Transportation and Electronics
GAAP amounts $ 2,340 $ 464 19.8 %
Adjustments for special items:
Manufactured PFAS products (320) (16)
Total special items (320) (16)
Adjusted amounts (non-GAAP $ 2,020 $ 448 22.2 %
measures)
Total Company
GAAP amounts $ 8,829 $ 1,641 18.6 % $ 1,603 $ 302 18.8 % $ 1,299 $ 2.26
Adjustments for special items:
Net costs for significant - 250 250 25 225 0.39
litigation
Manufactured PFAS products (320) (16) (16) (4) (12) (0.02)
Total special items (320) 234 234 21 213 0.37
Adjusted amounts (non-GAAP $ 8,509 $ 1,875 22.0 %$ 1,837 $ 323 17.5 % $ 1,512 $ 2.63 measures) Three months ended March 31, 2023 Earnings per diluted share (Dollars in millions, except per Operating Operating Income Provision for Effective tax Net Income Earnings per percent share amounts)Net Sales Sales Change Income Income Margin Before Taxes Income Taxes rate Attributable to 3M Diluted Share change Safety and Industrial GAAP amounts $ 601 21.6 % Adjustments for special items: Net costs for significant (39) litigation Total special items (39) Adjusted amounts (non-GAAP $ 562 20.2 % measures) Transportation and Electronics GAAP amounts$ 2,050 (12.4) %$ 294 14.4 % Adjustments for special items: Manufactured PFAS products (345) (10) Total special items (345) (10) Adjusted amounts (non-GAAP$ 1,705 (15.6) %$ 284 16.7 % measures)Total Company GAAP amounts$ 8,031 (9.0) %$ 1,241 15.4 %$ 1,189 $ 210 17.7 % $ 976$ 1.76 (22) % Adjustments for special items: Net costs for significant - 43 43 7 36 0.07 litigation Manufactured PFAS products (345) (10) (10) (3) (7) (0.01) Divestiture costs - 102 102 20 82 0.15 Total special items (345) 135 135 24 111 0.21 Adjusted amounts (non-GAAP$ 7,686 (9.7) %$ 1,376 17.9 %$ 1,324 $ 234 17.7 % $ 1,087$ 1.97 (25) % measures) Three months ended March 31, 2023 Organic Total sales Sales Change sales Acquisitions Divestitures Translation changeTotal Company (4.9) % - % (1.3) % (2.8) % (9.0) % Remove manufactured PFAS products special (0.7) - - -
(0.7)
item impact Adjusted total Company (non-GAAP measures) (5.6) % - % (1.3) % (2.8) %
(9.7) %
Transportation and Electronics (8.0) % - % (1.0) % (3.4) % (12.4) % Remove manufactured PFAS products special (3.3) - (0.1) 0.2
(3.2)
item impact
Adjusted Transportation and Electronics (11.3) % - % (1.1) % (3.2) % (15.6) %
(non-GAAP measures)
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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 months endedMarch 31, 2023 and 2022. Refer to the section entitled Performance by Business Segment later in MD&A for additional discussion concerning 2023 versus 2022 results, including Corporate and Unallocated. Refer to Note 15 for additional information on business segments. Three months ended March 31, 2023 2022 % change Net Oper. Net Oper. Net Oper. (Dollars in millions) Sales Income (Loss) Sales Income (Loss) Sales Income (Loss) Business Segments Safety and Industrial$ 2,779 $ 601 $ 3,051 $ 627 (8.9) % (4.2) % Transportation and Electronics 2,050 294 2,340 464 (12.4) (36.6) Health Care 2,010 360 2,128 445 (5.6) (19.2) Consumer 1,192 179 1,309 219 (9.0) (18.5) Corporate and Unallocated - (193) 1 (114)Total Company $ 8,031 $ 1,241 $ 8,829 $ 1,641 (9.0) % (24.4) % Three months ended March 31, 2023 Worldwide Sales Change Total sales By Business Segment Organic sales Acquisitions Divestitures Translation change Safety and Industrial (6.0) % - % - % (2.9) % (8.9) % Transportation and Electronics (8.0) - (1.0) (3.4) (12.4) Health Care 1.4 - (4.3) (2.7) (5.6) Consumer (6.8) - (0.3) (1.9) (9.0)Total Company (4.9) - (1.3) (2.8) (9.0)
Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section for additional details on the impact of special items on sales (and sales change) and operating income (loss) by business segment.
Sales by geographic area:
Percent change information compares the three months endedMarch 31, 2023 with the same prior year period, 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) $ 4,399 $ 2,180 $ 1,452 $ - $ 8,031
% of worldwide sales 54.8 % 27.1 % 18.1 % 100.0 %
Components of net sales change:
Organic sales 1.2 (14.9) (4.5) (4.9)
Divestitures (1.6) (1.0) (1.0) (1.3)
Translation (0.5) (5.4) (4.9) (2.8)
Total sales change (0.9) % (21.3) % (10.4) % (9.0) %
Additional information beyond what is included in the preceding tables are as follows:
•For the first quarter of 2023, in theAmericas geographic area,U.S. total sales were flat which included increased organic sales of 1 percent. Total sales inMexico increased 6 percent which included increased organic sales of 10 percent. InCanada , total sales decreased 14 percent which included decreased organic sales of 7 percent. InBrazil , total sales increased 5 percent which included increased organic sales of 8 percent. In theAsia Pacific geographic area,China total sales decreased 23 percent which included decreased organic sales of 18 percent. InJapan , total sales decreased 21 percent which included decreased organic sales of 10 percent. 55
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Managing currency risks:
The strongerU.S. dollar had a negative impact on sales in the first three months of 2023 compared to the same period last year. Net of the Company's hedging strategy, foreign currency negatively impacted earnings in the first three months of 2023 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 2023, the Company purchased$29 million of its own stock, compared to$773 million of stock purchases in the first three months of 2022. As ofMarch 31, 2023 , approximately$4.2 billion remained available under the authorization. InFebruary 2023 , 3M's Board of Directors declared a first-quarter 2023 dividend of$1.50 per share, an increase of 1 percent. This marked the 65th consecutive year of dividend increases for 3M. 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) 2023 2022 Change
Cost of sales 57.4 % 54.7 % 2.7 %
Selling, general and administrative expenses (SG&A) 21.3 21.3 -
Research, development and related expenses (R&D) 5.9 5.4 0.5
Operating income margin 15.4 % 18.6 % (3.2) %
Stock compensation expense was $135 million and $135 million for the three
months ended March 31, 2023 and 2022, respectively, which impacts cost of sales;
selling, general and administrative expenses (SG&A); and research, development
and related expenses (R&D). The Company's annual stock option and restricted
stock unit grant is made in February. Accounting rules require recognition of
expense under a non-substantive vesting period approach, requiring compensation
expense recognition when an employee is eligible to retire. This
retiree-eligible population represents 35 percent of the annual grant
stock-based compensation expense; therefore, higher stock-based compensation
expense is recognized in the first quarter each year.
3M expects global defined benefit pension and postretirement service cost
expense in 2023 to decrease by approximately $160 million pre-tax when compared
to 2022, which impacts cost of sales, SG&A, and R&D. The year-on-year decrease
in defined benefit pension and postretirement service cost expense for the first
three months of 2023 was approximately $42 million .
For total year 2022, the Company recognized consolidated defined benefit pre-tax
pension and postretirement service cost expense of $426 million and a benefit of
$248 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 $178 million .
For total year 2023, defined benefit pension and postretirement service cost
expense is anticipated to total approximately $270 million while non-service
pension and postretirement net benefit cost is anticipated to be a benefit of
approximately $125 million , for a total consolidated defined benefit pre-tax
pension and postretirement expense of approximately $145 million , a decrease in
expense of approximately $30 million compared to 2022.
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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 2023 when compared to the same period last year. Increases were primarily due to higher raw materials and energy costs; manufacturing productivity headwinds; investments in growth, productivity and sustainability; and restructuring. These increases were partially offset year-on-year due to lower net costs for significant litigation to address certain PFAS-related other environmental matters, strong pricing and aggressive spending discipline.
Selling, General and Administrative Expenses:
SG&A, measured as a percent of sales, was consistent in the first three months of 2023 when compared to the same period last year. SG&A was impacted restructuring charges and continued investment in key growth initiatives. These impacts were offset by lower net costs for significant litigation to address Combat Arms Earplugs and 3M's respirator mask/asbestos litigation matters, restructuring benefits and ongoing general 3M cost management.
Research, Development and Related Expenses:
R&D, measured as a percent of sales, increased in the first three months of 2023 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) decreased in the first quarter of 2023 primarily due to prior period debt maturities and interest income generated on invested cash. The non-service pension and postretirement net benefit decreased approximately$36 million in the first quarter of 2023 compared to the same period year-on-year. Provision for Income Taxes: Three months ended March 31, (Percent of pre-tax income) 2023 2022 Effective tax rate 17.7 % 18.8 %
The primary factor that decreased the Company's effective tax rate for first quarter 2023 was deferred tax impacts of 2023 activity.
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) 2023 2022
Income (loss) from unconsolidated subsidiaries, net of $ 2 $ 2
taxes
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. In the fourth quarter of 2022, 3M sold its remaining ownership
interest in Kindeva.
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Net Income (Loss) Attributable to Noncontrolling Interest:
Three months ended
March 31,
(Millions) 2023 2022
Net income (loss) attributable to noncontrolling $ 5 $ 4
interest
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
Item 1, Business Segments, provides an overview of 3M's business segments. In addition, disclosures relating to 3M's business segments are provided in Note 15. Effective in the first quarter of 2023, the measure of segment operating performance and segment composition 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 15 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 15. 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 Combat Arms Earplugs andAearo -respirator mask/asbestos matters during the chapter 11 bankruptcy period (which began inJuly 2022 ) and with PFAS-related other environmental matters (see Note 14). Corporate special items also include divestiture costs, gain/loss on business divestitures (see Note 3), divestiture-related restructuring costs (see Note 5), andRussia exit costs (see Note 13). Divestiture costs include costs related to separating and divesting substantially an entire business segment of 3M following public announcement of its intended divestiture. 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, gains/losses from sales of property, plant and equipment and other assets, 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 transition supply, manufacturing and service arrangements with Neogen Corporation following the 2022 split-off of 3M's Food Safety business. 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 2023, 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 special items and to Note 15 for additional information on the components of corporate special items. Corporate special item net costs remained flat year over year.
Other Corporate Expense - Net
Other corporate operating expenses, net, increased in the first three months of
2023, when compared to the same period last year. The year-on-year increase was
primarily due to higher pre-tax restructuring charges and lower gains on sale of
property, plant and equipment.
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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 2022 Annual Report on Form 10-K, Item 1, Business, for discussion of 3M products that are included in each business segment.
Safety and Industrial Business:
Three months ended
March 31,
2023 2022
Sales (millions) $ 2,779 $ 3,051
Sales change analysis:
Organic sales (6.0) %
Translation (2.9)
Total sales change (8.9) %
Business segment operating income (loss) (millions) $ 601 $ 627
Percent change (4.2) %
Percent of sales 21.6 % 20.6 %
Adjusted business segment operating income (millions) $ 562 $ 690
(non-GAAP measure)
Percent change (18.7) %
Percent of sales 20.2 % 22.6 %
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 (Aearo -related and
non-Aearo related) and Combat Arms Earplugs litigation matters. During the Aearo
chapter 11 bankruptcy period (which began in July 2022 - see Note 14), net costs
related to Combat Arms Earplugs and Aearo -respirator mask/asbestos matters are
reflected as corporate special items in Corporate and Unallocated while those
associated with non-Aearo respirator mask/asbestos matters continue to be
reflected as special items in the Safety and Industrial business segment. Refer
to the Certain amounts adjusted for special items - (non-GAAP measures) section
for additional details.
First quarter 2023 results:
Sales in Safety and Industrial were down 8.9 percent in
On an organic sales basis:
•Sales increased in automotive aftermarket, electrical markets, and abrasives and decreased in personal safety, industrial adhesives and tapes, closure and masking systems and in roofing granules. •Growth was held back by the disposable respirator sales decline within personal safety along with the exit ofRussia (which, together, negatively impacted year-on-year first quarter organic growth by 9.9 percentage points); declines within industrial adhesives and tapes due to consumer electronics softness, closure and masking systems was down as consumers pulled back on discretionary spending impacting e-commerce shipments. Business segment operating income margins increased year-on-year from pricing, aggressive spending discipline, and productivity actions which more than offset the decline driven by lower sales volume, manufacturing and supply chain headwinds, carryover raw material/logistics/energy cost inflation, investments in the business and China COVID-related challenges. Adjusting for special items (non-GAAP measure), business segment operating income margins decreased year-on-year as displayed above. 59
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Transportation and Electronics Business:
Three months ended
March 31,
2023 2022
Sales (millions) $ 2,050 $ 2,340
Sales change analysis:
Organic sales (8.0) %
Divestitures (1.0)
Translation (3.4)
Total sales change (12.4) %
Business segment operating income (millions) $ 294 $ 464
Percent change (36.6) %
Percent of sales 14.4 % 19.8 %
Adjusted sales (millions) (non-GAAP measure) $ 1,705 $ 2,020
Sales change analysis:
Organic sales (11.3) %
Divestitures (1.1) %
Translation (3.2) %
Total sales change (15.6) %
Adjusted business segment operating income (millions) $ 284 $ 448
(non-GAAP measure)
Percent change (36.4) %
Percent of sales 16.7 % 22.2 %
The preceding table also displays business segment sales (and sales change) and
operating income (loss) information adjusted for special items. For
Transportation and Electronics these adjustments include the sales and estimates
of income regarding PFAS manufactured products that 3M plans to exit by the end
of 2025. Refer to the Certain amounts adjusted for special items - (non-GAAP
measures) section for additional details.
First quarter 2023 results:
Sales in Transportation and Electronics were down 12.4 percent inU.S. dollars. Adjusting for special item PFAS manufactured products (non-GAAP measure), sales were down 15.6 percent inU.S. dollars.
On an organic sales basis:
•Sales increased in automotive and aerospace, and advanced materials and decreased in electronics, transportation safety and commercial solutions. •Growth continued to be held back by significant consumer electronics end-market weakness along with tiers and original equipment manufacturers (OEMs) aggressively reducing inventories particularly for smartphones, tablets and TVs.
Divestitures:
•Divestiture impact relates to lost Transportation and Electronics sales
year-on-year from deconsolidation of the Aearo Entities in
Business segment operating income margins decreased year-on-year from lower sales volumes, manufacturing and supply chain headwinds, carryover raw material/logistics/energy cost inflation, investments in the business andChina COVID-related challenges partially offset by benefits from pricing, aggressive spending discipline, and productivity actions. Adjusting for special item PFAS manufactured products (non-GAAP measure), business segment operating income margins decreased year-on-year as displayed above. 60
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Health Care Business:
Three months ended
March 31,
2023 2022
Sales (millions) $ 2,010 $ 2,128
Sales change analysis:
Organic sales 1.4 %
Divestitures (4.3)
Translation (2.7)
Total sales change (5.6) %
Business segment operating income (millions) $ 360 $ 445
Percent change (19.2) %
Percent of sales 17.9 % 20.9 %
First quarter 2023 results:
Sales in Health Care were down 5.6 percent in
On an organic sales basis:
•Sales increased in medical solutions, and oral care; were flat in health
information systems, and decreased in separation and purification.
•Growth was held back by declines in separation and purification due to the
normalization of post-COVID-related biopharma demand along with overall
headwinds from the exit of
Divestitures:
•Divestiture impact relates to the lost sales year-on-year from the Food Safety Division split-off transaction in the third quarter of 2022.
Business segment operating income margins decreased year-on-year due to manufacturing and supply chain headwinds, carryover raw material/logistics/energy costs inflation and investments in the business, partially offset by benefits from pricing, aggressive spending discipline, and productivity actions.
As discussed in Note 3, in the third quarter of 2022, 3M announced its intention
to spin off the Health Care business as a separate public company. 3M expects to
initially retain a 19.9% ownership position in the Health Care business.
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Consumer Business:
Three months ended
March 31,
2023 2022
Sales (millions) $ 1,192 $ 1,309
Sales change analysis:
Organic sales (6.8) %
Divestitures (0.3)
Translation (1.9)
Total sales change (9.0) %
Business segment operating income (millions) $ 179 $ 219
Percent change (18.5) %
Percent of sales 15.0 % 16.8 %
First quarter 2023 results:
Sales in Consumer were down 9.0 percent in
On an organic sales basis:
•Sales increased in stationery and office, and decreased in home improvement and home health and auto care. •Growth was negatively impacted as consumers have shifted their spending patterns to more non-discretionary items and retailers have aggressively reduced their inventory levels.
Business segment operating income margins decreased year-on-year from lower sales volumes; manufacturing and supply chain headwinds and carryover raw material/logistics/energy cost inflation, partially offset by benefits from pricing, aggressive spending discipline, and productivity 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 in 3M's 2022 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$1.1 billion in commercial paper outstanding atMarch 31, 2023 , compared to no commercial paper outstanding as ofDecember 31, 2022 . 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 ofMarch 2023 , 3M has a credit rating of A1, negative outlook fromMoody's Investors Service , and a credit rating of A, CreditWatch negative fromS&P Global Ratings . The Company's total debt atMarch 31, 2023 was consistent when compared toDecember 31, 2022 as maturities of$1.15 billion of fixed-rate notes were offset by issuances of commercial paper of$1.1 billion . 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, derivative instruments, and commercial contracts that may utilize LIBOR as the reference rate. Contracts will be modified to apply a new reference rate where applicable. EffectiveFebruary 8, 2023 , 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 10, 2020 . InMay 2016 , 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, 2023 , 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 in 3M's 2022 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 2022 with an expiration date ofNovember 2023 . 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, 2023 . 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, 2023 , this ratio was approximately 17 to 1. Debt covenants do not restrict the payment of dividends. 63
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The Company also had
Cash, cash equivalents and marketable securities:
AtMarch 31, 2023 , 3M had$4.0 billion of cash, cash equivalents and marketable securities, of which approximately$2.7 billion was held by the Company's foreign subsidiaries and approximately$1.3 billion was held inthe United States . These balances are invested in bank instruments and other high-quality fixed income securities. AtDecember 31, 2022 , 3M had$3.9 billion of cash, cash equivalents and marketable securities, of which approximately$2.7 billion was held by the Company's foreign subsidiaries and$1.2 billion was held bythe United States . The increase fromDecember 31, 2022 primarily resulted from cash flow from operations.
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, 2023 andDecember 31, 2022 . (Millions) March 31, 2023 December 31, 2022 Change Total debt $ 15,960 $ 15,939 $ 21 Less: Cash, cash equivalents and marketable 3,992 3,916 76 securities Net debt (non-GAAP measure) $ 11,968 $ 12,023 $ (55)
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):
(Millions) March 31, 2023 December 31, 2022 Change Current assets $ 14,963 $ 14,688 $ 275 Less: Current liabilities 10,556 9,523 1,033 Working capital (non-GAAP measure) $ 4,407 $ 5,165$ (758) 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$0.8 billion compared withDecember 31, 2022 . Balance changes in current assets increased working capital by$0.3 billion , driven largely by increases in cash and cash equivalents and accounts receivable. Balance changes in current liabilities decreased working capital by$1.0 billion , primarily due to increases in short-term borrowings driven by issuances of commercial paper partially offset by decreases in accrued payroll. 64
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