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 2021, 3M made the following changes. Information provided herein reflects the impact of these changes for all periods presented.
? Change in accounting principle for net periodic pension and postretirement plan
cost. See detailed discussion in Note 1.
Change 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.
Change in alignment of certain products within 3M's Consumer business
? segment-creating the
information in Note 16. 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. Consideration of COVID-19:
As described in the Overview-Consideration of COVID-19 section of Part II, Item 7 of the Company's 2020 Annual Report on Form 10-K, 3M is 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. Overall, 3M experienced broad-based growth across all business segments in the first quarter of 2021, benefiting from continued improvements in certain end markets. 3M's total sales increased 9.6% year-on-year in the first quarter of 2021 with organic local-currency sales growth of 8.0%. 3M experienced the strongest sales growth in personal safety, as well as in other areas such as home improvement, oral care, electronics, and separation and purification sciences. COVID-related respirator sales are estimated to have impacted year-on-year organic local-currency sales growth by approximately 2.4 percent for the first quarter of 2021. In the first quarter of 2020, as effects of COVID-19 emerged, weak demand in a number of end markets began to negatively impact oral care, automotive OEM and aftermarket, general industrial, commercial solutions and stationery and office, while demand was increasing in areas such as personal safety, home improvement, general cleaning, food safety and biopharma filtration. 3M's operating income margins increased 1.9 percentage points year-on-year in the first quarter of 2021. Factoring out the impact on operating income of special items as described in the Certain amounts adjusted for special items - (non-GAAP measures) section below, operating income margins increased 1.7 points to 22.5 percent for the first quarter of 2021 when compared to 2020. Various COVID-19 implications contributed in part to these results. Overall, the impact of the COVID-19 pandemic on 3M's consolidated results of operations was primarily driven by factors related to changes in demand for products and disruption in global supply chains as described or referenced above. While it is not feasible to identify or quantify all the other direct and indirect implications on 3M's results of operations, below are factors that 3M believes have also affected its result for first quarter of 2021 when compared to 2020: 52 Table of Contents
Factors contributing to charges:
Increased raw materials and logistics costs during first-quarter 2021 from
? ongoing COVID-19 related manufacturing supply chain challenges further
magnified in
During first-quarter 2020 implemented targeted plant and/or line shutdowns due
? to weak customer demand or government mandates as a result of the COVID-19
pandemic.
Charge of
as discussed in the "Assets and Liabilities that are Measured at Fair Value on
? a Nonrecurring Basis" section of Note 13 that use the measurement alternative
described therein in addition to an immaterial pre-tax charge related to impairment of certain indefinite lived tradenames.
Factors providing benefits or other impacts:
? Ongoing cost management in discretionary spending in areas such as travel,
professional services, and advertising/merchandising.
? Continued productivity efforts, including year-on-year savings from
restructuring actions taken in 2020.
Refer to the Financial Condition and Liquidity section below for more information on the Company's liquidity position.
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.
Operating income margin and Earnings per share attributable to 3M common shareholders - diluted:
The following table provides a summary of the increases (decreases) in operating income margins and diluted earnings per share for the three months endedMarch 31, 2021 . Three months ended March 31, 2021 Percent of Earnings per net sales diluted share Same period last year 20.6 % $ 2.25 Significant litigation-related charges/benefits 0.2
(0.06)
Gain/loss on sale of businesses -
-
Same period last year, excluding special items 20.8 % $ 2.19 Increase/(decrease) due to: Organic growth/productivity and other 1.5
0.34
Selling price and raw material impact (0.2) (0.01) Acquisitions/divestitures - (0.03) Foreign exchange impacts 0.4 0.13 Other expense (income), net N/A 0.03 Income tax rate N/A 0.14 Shares of common stock outstanding N/A
(0.02)
Current period, excluding special items 22.5 % $
2.77 None - - Current period 22.5 % $ 2.77
Operating income margins increased 1.9 percentage points in the first three months of 2021 when compared to the same period last year. For the first quarter of 2021, net income attributable to 3M was$1.62 billion , or$2.77 per diluted share, versus$1.31 billion , or$2.25 per diluted share, in the same period last year, an increase of 23.1 percent on a per diluted share basis.
The Company refers to various 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.
On an adjusted basis, operating margins increased 1.7 percentage points to 22.5 percent in the first three months of 2021 when compared to the same period last year. Net income attributable to 3M on an adjusted basis was$1.62 billion ,
or$2.77 per diluted 53 Table of Contents
share, versus
Additional discussion related to the components of the year-on-year change in operating income margins and earnings per diluted share follows:
Organic growth/productivity and other:
Higher organic volume growth, ongoing cost management, and improved
productivity increased operating income margins and earnings per diluted share
? year-on-year. In addition, the first quarter of 2021 compared to 2020 benefited
from restructuring in 2020, net of additional actions in 2021, and
COVID-impacts recognized on certain assets in the first quarter of 2020.
? On a combined basis, higher defined benefit pension and postretirement service
cost increased expense year-on-year.
Selling price and raw material impact:
Higher raw material and logistics costs from strong end-market demand and
? COVID-impacted manufacturing and supply chain disruptions that were further
magnified by
partially offset by higher selling prices. Acquisitions/divestitures:
? Divestiture impacts are comprised of the lost income from the divestiture of
the Company's drug delivery business (sale completed inMay 2020 ). Foreign exchange impacts:
Foreign currency impacts (net of hedging) increased operating income by
? approximately
year-on-year. Other expense (income), net:
? Higher income related to non-service cost components of pension and
postretirement expense, decreased expense year-on-year.
Interest expense (net of interest income) increased year-on-year due to an
? early debt extinguishment charge related to make-whole call offers on
million of debt inMarch 2021 . Income tax rate:
Certain items above reflect specific income tax rates associated therewith.
? Overall, the effective tax rate for the first quarter of 2021 was 16.4 percent,
a decrease of 1.1 percentage points year-on-year.
On an adjusted basis, the effective tax rate decreased 4.3 percentage points
? year-on-year primarily from nonrepeating favorable adjustments in 2021 related
to impacts ofU.S. international tax provisions.
Shares of common stock outstanding:
? Higher shares outstanding decreased earnings per share year-on-year.
Certain amounts adjusted for special items - (non-GAAP measures):
In addition to reporting financial results in accordance withU.S. GAAP, the Company 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 (measure of segment operating performance), 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. The Company considers these non-GAAP measures in evaluating and managing the Company's operations. The Company believes that discussion of results adjusted for these items is meaningful to investors as it provides a useful analysis of ongoing underlying operating trends. The determination of these items may not be comparable to similarly titled measures used by other companies. Special items include:
Gain/loss from sale of businesses:
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Table of Contents
In the first quarter of 2020, 3M recorded a pre-tax gain of
? million loss after tax) related to the sale of its advanced
ballistic-protection business and recognition of certain contingent
consideration. Refer to Note 3 for further details.
Significant litigation-related charges/benefits:
In the first quarter of 2020, 3M recorded a net pre-tax charge of
(
matters. The charge was more than offset by a reduction in tax expense of
? million related to resolution of tax treatment with authorities regarding the
previously disclosed 2018 agreement reached with the
resolved the Natural Resources Damages (NRD) lawsuit. These items, in aggregate, resulted in a$39 million after tax benefit. Earnings per Provision Earnings diluted Operating Income for Net Income Per share
(Dollars in millions, except Operating Income Before Income Effective Attributable Diluted percent per share amounts)
Income Margin Taxes Taxes Tax Rate to 3M Share change
Three months ended March 31,
2020 GAAP $ 1,663 20.6 % $ 1,588 $ 278 17.5 % $ 1,308 $ 2.25
Adjustments for special items:
Significant litigation-related
charges/benefits 17 17 56 (39) (0.06)
Gain/loss on sale of
businesses (2) (2) (3) 1 -
Three months ended March 31,
2020 adjusted amounts
(non-GAAP measures) $ 1,678 20.8 % $ 1,603 $ 331 20.7 % $ 1,270 $ 2.19
Three months ended March 31,
2021 GAAP $ 1,994 22.5 % $ 1,945 $ 319 16.4 % $ 1,624 $ 2.77 23.1 %
Adjustments for special items:
None
Three months ended March 31,
2021 adjusted amounts
(non-GAAP measures) $ 1,994 22.5 % $ 1,945 $ 319 16.4 % $ 1,624 $ 2.77 26.8 %
Sales and operating income by business segment:
The following tables contain sales and operating income results by business segment for the three months endedMarch 31, 2021 and 2020. Refer to the section entitled "Performance by Business Segment" later in MD&A for additional discussion concerning 2021 versus 2020 results, including Corporate and Unallocated. Refer to Note 16 for additional information on business segments, including Elimination of Dual Credit. Three months ended March 31, 2021 2020 % change Net Oper. Net Oper. Net Oper. (Dollars in millions) Sales Income Sales Income Sales Income Business Segments Safety and Industrial$ 3,327 $ 811 $ 2,927 $ 694 13.7 % 16.8 %
Transportation and Electronics 2,531 591 2,239 464
13.1 27.4 Health Care 2,248 509 2,104 452 6.8 12.6 Consumer 1,373 289 1,250 265 9.8 9.4 Corporate and Unallocated (2) (47) - (99) - - Elimination of Dual Credit (626) (159) (445) (113) - -Total Company $ 8,851 $ 1,994 $ 8,075 $ 1,663 9.6 % 19.9 % 55 Table of Contents Three months ended March 31, 2021
Worldwide Sales Change Organic local- Total sales By Business Segment currency sales Acquisitions Divestitures Translation change Safety and Industrial 10.3 % - % - % 3.4 % 13.7 % Transportation and Electronics 9.8 - - 3.3 13.1 Health Care 9.3 - (5.6) 3.1 6.8 Consumer 7.8 - - 2.0 9.8Total Company 8.0 % - % (1.4) % 3.0 % 9.6 % Sales by geographic area:
Percent change information compares the first three months of 2021 with the same
period last year, unless otherwise indicated. Additional discussion of business
segment results is provided in the Performance by Business Segment section.
Three
months ended
Europe,
Asia Middle East Other
Americas Pacific & Africa Unallocated Worldwide
Net sales (millions) $ 4,328 $ 2,769 $ 1,755 $ (1) $ 8,851
% of worldwide sales 48.9 % 31.3 % 19.8 % - 100.0 %
Components of net sales change:
Volume - organic 5.1 % 13.3 % 4.5 % - 7.3 %
Price 1.2 (0.5) 1.0 - 0.7
Organic local-currency sales 6.3 12.8 5.5 - 8.0
Acquisitions - - - - -
Divestitures (1.6) - (3.0) - (1.4)
Translation (0.2) 5.3 7.9 - 3.0
Total sales change 4.5 % 18.1 % 10.4 % - 9.6 %
Total sales change:
Safety and Industrial 11.9 % 15.5 % 15.6 % - 13.7 %Transportation and Electronics (3.7) % 24.0 %
7.9 % - 13.1 %
Health Care 2.4 % 14.6 % 13.2 % - 6.8 %
Consumer 8.6 % 11.5 % 14.9 % - 9.8 %
Organic local-currency sales change:
Safety and Industrial 12.3 % 8.7 % 7.4 % - 10.3 %
Transportation and Electronics (3.5) % 19.9 %
0.3 % - 9.8 %
Health Care 7.6 % 7.6 % 15.5 % - 9.3 %
Consumer 8.7 % 5.2 % 7.0 % - 7.8 %
Additional information beyond what is included in the preceding table is as follows:
In the
organic-local currency sales increased 7 percent. Total sales in
decreased 1 percent and organic local-currency sales decreased 2 percent. In
?
remained flat. In
local-currency sales increased 18 percent, as foreign currency translation
impacts offset organic local-currency sales growth.
In the
? organic local-currency sales increased 32 percent. In
increased 1 percent and organic local-currency sales decreased 1 percent.
Managing currency risks: The weakerU.S. dollar had a positive impact on sales in the first three months of 2021 compared to the same period last year. Net of the Company's hedging strategy, foreign currency positively impacted earnings in the first quarter of 2021 compared to the same 56 Table of Contents 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 and 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:
3M generated$1.7 billion of operating cash flows in the first three months of 2021, an increase of$475 million when compared to the first three months of 2020, with this increase year-on-year primarily driven by higher net income as a result of strong organic sales growth and ongoing cost management. 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 2021, the Company purchased$231 million of its own stock, compared to$365 million of stock purchases in the first three months of 2020. As ofMarch 31, 2021 , approximately$7.5 billion remained available under the authorization. InFebruary 2021 , 3M's Board of Directors declared a first-quarter 2021 dividend of$1.48 per share, an increase of 1 percent. This marked the 63rd consecutive year of dividend increases for 3M.
3M currently has an A1 credit rating with a negative outlook from Moody's
Investors Service and has an A+ credit rating with
3M expects to contribute approximately$200 million of cash to its global defined benefit pension and postretirement plans in 2021. The Company does not have a required minimum cash pension contribution obligation for itsU.S. plans in 2021. 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) 2021 2020 Change
Cost of sales 51.1 % 50.9 % 0.2 %
Selling, general and administrative expenses (SG&A) 20.5 21.9 (1.4)
Research, development and related expenses (R&D) 5.9 6.6 (0.7)
Gain on sale of businesses - - -
Operating income margin 22.5 % 20.6 % 1.9 %
3M expects global defined benefit pension and postretirement service cost
expense in 2021 to increase by approximately $40 million pre-tax when compared
to 2020, which impacts cost of sales; selling, general and administrative
expenses (SG&A); and research, development and related expenses (R&D). The
year-on-year increase in defined benefit pension and postretirement service cost
expense for the first three months of 2021 was approximately $10 million .
For total year 2020, the Company recognized consolidated defined benefit pre-tax
pension and postretirement service cost expense of $456 million and a benefit of
$134 million related to all non-service pension and postretirement net benefit
costs (after settlements,
57
Table of Contents
curtailments, special termination benefits and other) for a total consolidated
defined benefit pre-tax pension and postretirement expense of
For total year 2021, defined benefit pension and postretirement service cost expense is anticipated to total approximately$500 million while non-service pension and postretirement net benefit cost is anticipated to be a benefit of approximately$295 million , for a total consolidated defined benefit pre-tax pension and postretirement expense of approximately$200 million , a decrease in expense of approximately$120 million compared to 2020. The Company is investing in an initiative called business transformation, with these investments impacting cost of sales, SG&A, and R&D. Business transformation encompasses the ongoing multi-year phased implementation of an enterprise resource planning (ERP) system on a worldwide basis, as well as changes in processes and internal/external service delivery across 3M. Cost of Sales: Cost of sales, measured as a percent of sales, increased in first three months of 2021. Increases in the first three months of 2021 primarily related to higher raw material and logistics costs from COVID-19 impacted manufacturing and supply chain disruptions, further magnified byFebruary 2021 winter storm Uri in theU.S. , partially offset by higher selling prices.
Selling, General and Administrative Expenses:
SG&A in dollars increased 2.3 percent in the first three months of 2021, when compared to the same period last year. The increase in the first three months of 2021 primarily increased net costs as a result of the regular review of 3M's respirator mask liabilities, higher litigation and environmental costs, continued spending on key initiatives, partially offset by ongoing general cost management. As a percent of sales, SG&A decreased as a result of continued discretionary spending cost management.
Research, Development and Related Expenses:
R&D in dollars decreased$13 million in the first three months of 2021, when compared to the same period last year, as 3M continued to invest in its key initiatives, including R&D aimed at disruptive innovation programs with the potential to create entirely new markets and disrupt existing markets. The overall decrease in spending is primarily driven by theMay 2020 divestiture of the drug delivery business and other indirect spending reductions. Gain on Sale of Businesses:
During the first quarter of 2020, the Company recorded a pre-tax gain of
Other Expense (Income), Net:
See Note 6 for a detailed breakout of this line item.
Interest expense (net of interest income) increased in the first three months of 2021 compared to the same period in 2020 due to an early debt extinguishment charge related to make-whole call offers on$450 million of debt inMarch 2021 . The non-service pension and postretirement net benefit increased approximately$40 million in the first three months of 2021 compared to the same period in 2020. Provision for Income Taxes: Three months ended March 31, (Percent of pre-tax income) 2021 2020 Effective tax rate 16.4 % 17.5 % 58 Table of Contents
The effective tax rate for the first three months of 2021 was 16.4 percent, compared to 17.5 percent in the first three months 2020, a decrease of 1.1 percentage points. Factors that impacted the tax rates between years are further discussed in the Overview section above and in Note 8.
3M currently estimates its effective tax rate for 2021 to be approximately 20 to 21 percent. The tax rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits, changes in tax laws, and employee share-based payment accounting; as well as recurring factors, such as the geographic mix of income before taxes.
Refer to Note 8 for further discussion of income taxes.
Income from Unconsolidated Subsidiaries, Net of Taxes:
Three months ended
March 31,
(Millions) 2021 2020
Income (loss) from unconsolidated
subsidiaries, net of taxes $ 1 $ -
Income (loss) from unconsolidated subsidiaries, net of taxes, is primarily attributable to the Company's ownership interest in Kindeva using the equity method of accounting following 3M's divestiture of the drug delivery business in 2020.
Net Income Attributable to Noncontrolling Interest:
Three months ended
March 31,
(Millions) 2021 2020
Net income (loss) attributable to
noncontrolling interest $ 3 $ 2
Net income 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 3M India Limited , of
which 3M's effective ownership is 75 percent.
Currency Effects:
3M estimates that year-on-year currency effects, including hedging impacts, increased pre-tax income by approximately$95 million for the three months endedMarch 31, 2021 . This estimate includes the effect of translating profits from local currencies intoU.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations inthe United States and abroad; and transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks. 3M estimates that year-on-year foreign currency transaction effects, including hedging impacts, decreased pre-tax income by approximately$10 million for the three months endedMarch 31, 2021 . These estimates include transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks. Refer to Note 12 in the Consolidated Financial Statements for additional information concerning 3M's hedging activities.
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 2021, 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).
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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; HealthCare; and Consumer. Corporate and Unallocated: In addition to these four business segments, 3M assigns certain costs to "Corporate and Unallocated," which is presented separately in the preceding business segments table and in Note 16. Corporate and Unallocated operating income includes "special items" and "other corporate expense-net". Special items include significant litigation-related charges/benefits, gain/loss on sale of businesses, 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, certain litigation and environmental expenses largely related to legacy products/businesses not allocated to business segments, 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 Communication Markets Division following its 2018 divestiture through 2019 and 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 decreased in the first three months of 2021, when compared to the same period last year.
Special Items
Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section for additional details on the impact of significant litigation-related charges/benefits, gain/loss on sale of businesses, and divestiture-related restructuring actions that are reflected in Corporate and Unallocated.
Other Corporate Expense - Net
Other corporate operating expenses, net, decreased in the first three months of 2021, when compared to the same period last year primarily due to lower overall corporate staff spending and first quarter 2020 charges related to equity securities (as discussed in the "Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis" section of Note 13), partially offset by increased 2021 legal expenses. 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. Organic local-currency sales include both organic volume impacts plus selling price impacts. Acquisition impacts, if any, are measured separately for the first twelve months post-transaction. The divestiture impacts, if any, foreign currency translation impacts and total sales change are also provided for each business segment. Any references to EMEA relate toEurope ,Middle East andAfrica on a combined basis.
Refer to the preceding "Sales and operating income by geographic area" section for organic local-currency sales growth by business segment within major geographic areas.
Refer to 3M's 2020 Annual Report on Form 10-K, Item 1, Business, for discussion of 3M products that are included in each business segment.
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Safety and Industrial Business:
Three months ended
March 31,
2021 2020
Sales (millions) $ 3,327 $ 2,927
Sales change analysis:
Organic local-currency 10.3 %
Translation 3.4
Total sales change 13.7 %
Business segment operating income (millions) $ 811 $ 694
Percent change 16.8 %
Percent of sales 24.4 % 23.7 %
First quarter 2021 results:
Sales in Safety and Industrial totaled $3.3 billion , up 13.7 percent in U.S.
dollars. Organic local-currency and other sales change elements are included in
the table above.
On an organic local-currency sales basis:
Sales increased in personal safety, roofing granules, industrial adhesives and
? tapes, automotive aftermarket, electrical markets, and abrasives; sales
declined in closure and masking systems.
Growth includes benefits from continued pandemic-related respirator mask
? demand, improving general industrial manufacturing activity and other
end-market demand contributing to sales increases.
Business segment operating income margins increased year-on-year due to sales growth leverage, partially offset by rising raw materials, logistics and legal costs.
Transportation and Electronics Business:
Three months ended
March 31,
2021 2020
Sales (millions) $ 2,531 $ 2,239
Sales change analysis:
Organic local-currency 9.8 %
Translation 3.3
Total sales change 13.1 %
Business segment operating income (millions) $ 591 $ 464
Percent change 27.4 %
Percent of sales 23.3 % 20.7 %
First quarter 2021 results:
Sales in Transportation and Electronics totaled
On an organic local-currency sales basis:
? Sales increased in electronics-related businesses due to strong demand in data
center, semiconductor, interconnect and consumer electronics markets.
Sales increased in automotive and aerospace solutions and advanced materials
? driven by improving automotive end-market activity, and increases in car and
light truck builds.
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Transportation safety was flat year-on-year due to a slow 2021 start to roadway
? industry construction projects; commercial solutions sales decreased due to
continued negative pandemic-related impacts on advertising spend and demand for
workplace cleaning and safety products and solutions.
Business segment operating income margins increased year-on-year due to sales growth leverage and COVID impacts recognized on certain assets in 2020, partially offset by rising raw materials and logistic costs.
Health Care Business:
Three months ended
March 31,
2021 2020
Sales (millions) $ 2,248 $ 2,104
Sales change analysis:
Organic local-currency 9.3 %
Divestitures (5.6)
Translation 3.1
Total sales change 6.8 %
Business segment operating income (millions) $ 509 $ 452
Percent change 12.6 %
Percent of sales 22.7 % 21.5 %
First quarter 2021 results:
Sales in Health Care totaled
On an organic local-currency sales basis:
Sales increased in oral care, separation and purification, medical solutions,
and health information systems. Growth was driven by higher year-on-year dental
industry activity, continued high demand for biopharma filtration solutions for
? COVID-related vaccine and therapeutic development and manufacturing, continued
strong respirator demand, and improving hospital information technology
investments, partially offset by year-on-year declines in elective healthcare
procedure volumes.
? Sales declined in food safety as the food service industry had strong early
COVID buy-ins in 2020. Divestitures:
? In
business.
Business segment operating income margins increased year-on-year due to sales
growth leverage, partially offset by supply chain disruptions and rising raw
materials and logistics costs.
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Consumer Business:
Three months ended
March 31,
2021 2020
Sales (millions) $ 1,373 $ 1,250
Sales change analysis:
Organic local-currency 7.8 %
Translation 2.0
Total sales change 9.8 %
Business segment operating income (millions) $ 289 $ 265
Percent change 9.4 %
Percent of sales 21.1 % 21.2 %
First quarter 2021 results:
Sales in Consumer totaled
On an organic local-currency sales basis:
Sales increased in home improvement and stationery and office supplies. Growth
in home improvement was driven by continued strong demand for CommandTM
? adhesives, FiltreteTM air quality solutions and Scotch BlueTM painter's tape.
Growth in stationery and office was led by ongoing strength in consumer demand
for packaging and shipping products and Scotch® brand office tapes as prior
year remote work and school trends begin to be lapped.
Home care experienced continued growth due to consumer demand for home cleaning
? products and solutions. Consumer health and safety declined as the global
economy impacted by COVID continues to evolve versus 2020.
Business segment operating income margins decreased 0.1 points year-on-year as a result of higher raw materials, logistics, outsourced hardgoods manufacturing costs and investments in advertising and merchandising offsetting sales growth leverage.
FINANCIAL CONDITION AND LIQUIDITY
The strength and stability of 3M's business model and strong free cash flow capability, together with proven capital markets access, provides financial flexibility and enables the Company to invest through business cycles. Investing in 3M's business to drive organic growth and deliver strong returns on invested capital remains the first priority for capital deployment. This includes research and development, capital expenditures, and commercialization capability. Organic investments will be supplemented by complementary acquisitions. The Company also continues to actively manage its portfolio to maximize value for shareholders. 3M repurchased shares in the first three months of 2021, after having suspended repurchases under its board-approved share repurchase program (with other repurchase activity limited to 3M's stock compensation plans) in the first quarter of 2020. 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 2020 Annual Report on Form 10-K for further information on earnings considered to be reinvested indefinitely. 3M maintains a strong liquidity profile. The company's primary short-term liquidity needs are met through cash on hand andU.S. commercial paper issuances. 3M believes it will have continuous access to the commercial paper market. 3M's commercial paper program permits the Company to have a maximum of$5 billion outstanding with a maximum maturity of 397 days from date of issuance. The Company had no commercial paper outstanding atMarch 31, 2021
andDecember 31, 2020 . 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 63
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total portfolio. 3M currently has an A1 credit rating with a negative outlook from Moody's Investors Service and an A+ credit rating with negative outlook from Standard and Poor's. The Company's total debt was$0.6 billion lower atMarch 31, 2021 when compared toDecember 31, 2020 . Decreases in debt were largely due to theMarch 2021 early redemption via make-whole call offers of$450 million in debt. 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 stated it will cease publication of certain LIBOR rates afterDecember 31, 2021 . USD LIBOR rates that do not cease onDecember 31,2021 will continue to be published throughJune 30, 2023 . The Company has reviewed its debt securities, bank facilities, and derivative instruments and continues to evaluate commercial contracts that may utilize LIBOR as the reference rate. 3M will continue its assessment and monitor regulatory developments during the transition period. EffectiveFebruary 10, 2020 , the Company updated its "well-known seasoned issuer" (WKSI) shelf registration statement, which registers an indeterminate amount of debt or equity securities for future issuance and sale. This replaced 3M's previous shelf registration datedFebruary 24, 2017 . InMay 2016 , in connection with the WKSI shelf, 3M entered into an amended and restated distribution agreement relating to the future issuance and sale (from time to time) of the Company's medium-term notes program (Series F), up to the aggregate principal amount of$18 billion , which was an increase from the previous aggregate principal amount up to$9 billion of the same Series. As ofMarch 31, 2021 , 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). Additionally, theAugust 2019 andMarch 2020 debt was issued under the WKSI shelf registration, but not as part of the medium-term notes program (Series F). 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 of 3M's 2020 Annual Report on Form 10-K. The Company has a$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 2020 with an expiration date ofNovember 2021 . The 364-day credit agreement includes a provision under which 3M may convert any advances outstanding on the maturity date into term loans with a maturity date one year later. These credit facilities were undrawn atMarch 31, 2021 . 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, 2021 , this ratio was approximately 18 to 1. Debt covenants do not restrict the payment of dividends.
The Company also had
Cash, cash equivalents and marketable securities:
AtMarch 31, 2021 , 3M had$5.2 billion of cash, cash equivalents and marketable securities, of which approximately$3.0 billion was held by the Company's foreign subsidiaries and approximately$2.2 billion was held bythe United States . These balances are invested in bank instruments and other high-quality fixed income securities. AtDecember 31, 2020 , 3M had$5.1 billion of cash, cash equivalents and marketable securities, of which approximately$2.8 billion was held by the Company's foreign subsidiaries and$2.3 billion was held bythe United States . The increase fromDecember 31, 2020 primarily resulted from strong cash flow from operations offset by ongoing dividend payments, capital expenditures, and theMarch 2021 early redemption via make-whole call offers of$450 million in debt. 64 Table of Contents
Net Debt (non-GAAP measure):
Net debt is not defined underU.S. GAAP and may not be computed the same as similarly titled measures used by other companies. The Company defines net debt as total debt less the total of cash, cash equivalents and current and long-term marketable securities. 3M believes net debt is meaningful to investors as 3M considers net debt and its components to be important indicators of liquidity and financial position. The following table provides net debt as ofMarch 31, 2021 andDecember 31, 2020 . (Millions) March 31, 2021 December 31, 2020 Change Total debt$ 18,187 $ 18,795$ (608) Less: Cash, cash equivalents and marketable securities 5,168 5,068 100 Net debt (non-GAAP measure)$ 13,019 $
13,727$ (708)
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, 2021 December 31, 2020 Change Current assets $ 15,345 $ 14,982$ 363 Less: Current liabilities (8,363) (7,948) (415)
Working capital (non-GAAP measure) $ 6,982 $ 7,034
$ (52) 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 as ofMarch 31, 2021 was largely consistent withDecember 31, 2020 . Balance changes in current assets increased working capital by$0.4 billion , driven largely by increases in inventory, accounts receivable and marketable securities offset by decreases in prepaids. Balance changes in current liabilities decreased working capital by$0.4 billion , primarily due to increases in current-portion of long-term debt and accounts payable, offset by decrease in accrued payroll and other current liabilities. Accounts receivable and inventory increased$112 million and$219 million , respectively, fromDecember 31, 2020 , primarily as a result of increased sequential sales and related operating activity from that of late 2020 partially offset by foreign currency translation impacts. Current portion of long-term debt increased based on underlying debt maturities while accounts payable also increased as a result of increased sequential operating activity from that of late 2020 partially offset by foreign currency translation impacts. Accrued payroll decreased as accrued annual incentive compensation was paid in early 2021. Cash Flows:
Cash flows from operating, investing and financing activities are provided in
the tables that follow. Individual amounts in the Consolidated Statement of Cash
Flows exclude the effects of acquisitions, divestitures and exchange rate
impacts on cash and cash equivalents, which are presented separately in the cash
flows. Thus, the amounts presented in the following operating, investing and
financing activities tables reflect changes in balances from period to period
adjusted for these effects.
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Cash Flows from Operating Activities:
Three months ended
March 31,
(Millions) 2021 2020
Net income including noncontrolling interest $ 1,627 $ 1,310
Depreciation and amortization 460
440
Company pension and postretirement contributions (47)
(39)
Company pension and postretirement expense 47
77
Stock-based compensation expense 131
120
Gain on sale of businesses -
(2)
Income taxes (deferred and accrued income taxes) 58
97 Accounts receivable (205) (143) Inventories (304) (207) Accounts payable 155 12 Other - net (234) (452)
Net cash provided by (used in) operating activities
Cash flows from operating activities can fluctuate significantly from period to period, as changes in working capital needs, tax timing differences and other items can significantly impact cash flows. In the first three months of 2021, cash flows provided by operating activities increased$475 million compared to the same period last year, with this increase primarily due to overall sales growth and continued spending discipline leading to higher net income year-on-year. The combination of accounts receivable, inventories and accounts payable decreased operating cash flow by$354 million in the first three months of 2021, compared to an operating cash flow decrease of$338 million in the first three months of 2020. Additional discussion on working capital changes is provided earlier in the "Financial Condition and Liquidity" section.
Cash Flows from Investing Activities:
Three months ended
March 31,
(Millions) 2021 2020
Purchases of property, plant and equipment (PP&E)
32 7
Acquisitions, net of cash acquired -
(25)
Purchases and proceeds from maturities and sale of marketable securities and investments, net
(110) (111)
Proceeds from sale of businesses, net of cash sold -
86
Other - net 19
-
Net cash provided by (used in) investing activities
Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and increasing manufacturing efficiency. The Company expects 2021 capital spending to be approximately$1.8 billion to$2.0 billion as 3M continues to invest in growth, productivity and sustainability. In 2020, 3M reduced overall spending in light of uncertainty regarding COVID-19-resulting in full year capital spending of$1.5 billion -but continued to invest in expanding the Company's ability to increase production of respiratory products to meet worldwide demand.
3M records capital-related government grants earned as reductions to the cost of property, plant and equipment; and associated unpaid liabilities and grant proceeds receivable are considered non-cash changes in such balances for purposes of preparation of statement of cash flows.
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3M invests in renewal and maintenance programs, which pertain to cost reduction,
cycle time, maintaining and renewing current capacity, eliminating pollution,
and compliance. Costs related to maintenance, ordinary repairs, and certain
other items are expensed. 3M also invests in growth, which adds to capacity,
driven by new products, both through expansion of current facilities and new
facilities. Finally, 3M also invests in other initiatives, such as information
technology (IT), laboratory facilities, and a continued focus on investments in
sustainability.
Refer to Note 3 for information on acquisitions and divestitures. The Company is
actively considering additional acquisitions, investments and strategic
alliances, and from time to time may also divest certain businesses.
Acquisitions, net of cash acquired, in the first three months of 2020 primarily
relate to the payment made for contingent consideration in regards to the
Acelity acquisition. Proceeds from sale of businesses in 2020 primarily relate
to the sale of the Company's advanced ballistic-protection business.
Purchases of marketable securities and investments and proceeds from maturities
and sale of marketable securities and investments are primarily attributable to
certificates of deposit/time deposits, commercial paper, and other securities,
which are classified as available-for-sale. Refer to Note 9 for more details
about 3M's diversified marketable securities portfolio. Purchases of investments
include additional survivor benefit insurance, plus investments in equity
securities.
Cash Flows from Financing Activities:
Three months ended
March 31,
(Millions) 2021 2020
Change in short-term debt - net $ 6 $
462
Repayment of debt (maturities greater than 90 days) (450)
-
Proceeds from debt (maturities greater than 90 days) -
1,745
Total cash change in debt $ (444) $ 2,207
Purchases of treasury stock (231) (365)Proceeds from issuances of treasury stock pursuant to stock option and benefit plans
293 149
Dividends paid to shareholders (858)
(847)
Other - net (11)
(36)
Net cash provided by (used in) financing activities
1,108
Total debt was approximately $18.2 billion at March 31, 2021 and $18.8 billion
at December 31, 2020 . Decreases in debt were largely due to the March 2021 early
redemption of $450 million in debt maturing in 2022 via make-whole call offers.
The Company had no commercial paper outstanding at March 31, 2021 and December
31, 2020 . Net commercial paper issuances in addition to repayments and
borrowings by international subsidiaries are largely reflected in "Change in
short-term debt - net" in the preceding table. 3M's primary short-term liquidity
needs are met through cash on hand and U.S. commercial paper issuances. 2020
issuances, maturities, and extinguishments of short-and long-term debt are
described in Note 5 in 3M's 2020 Annual Report on Form 10-K.
Repurchases of common stock are made to support the Company's stock-based
employee compensation plans and for other corporate purposes. In November 2018 ,
3M's Board of Directors replaced the Company's February 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 first three months of 2021, the Company purchased $0.2 billion of its
own stock. 3M repurchased shares in 2021, after having suspended repurchases
(with other repurchase activity limited to 3M's stock compensation plans) in the
first quarter of 2020. For more information, refer to the table titled "Issuer
Purchases of Equity Securities " in Part II, Item 2. The Company does not utilize
derivative instruments linked to the Company's stock.
3M has paid dividends each year since 1916. In February 2021 , 3M's Board of
Directors declared a first-quarter 2021 dividend of $1.48 per share, an increase
of 1 percent. This is equivalent to an annual dividend of $5.92 per share and
marked the 63rd consecutive year of dividend increases.
Other cash flows from financing activities may include various other items, such
as cash paid associated with certain derivative instruments, distributions to or
sales of noncontrolling interests, changes in overdraft balances, and principal
payments for finance leases.
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Free Cash Flow (non-GAAP measure):
Free cash flow and free cash flow conversion are not defined underU.S. generally accepted accounting principles (GAAP). Therefore, they should not be considered a substitute for income or cash flow data prepared in accordance withU.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The Company defines free cash flow conversion as free cash flow divided by net income attributable to 3M. The Company believes free cash flow and free cash flow conversion are meaningful to investors as they are useful measures of performance and the Company uses these measures as an indication of the strength of the company and its ability to generate cash. The first quarter of each year is typically 3M's seasonal low for free cash flow and free cash flow conversion. Below find a recap of free cash flow and free cash flow conversion. Refer to the preceding "Cash Flows from Operating Activities" and "Cash Flows from Investing Activities" sections for discussion of items that impacted the operating cash flow and purchases of PP&E components of the calculation of free cash flow. Refer to the preceding "Results of Operations" section for discussion of items that impacted the net income attributable to 3M component of the calculation of free cash flow conversion. Three months ended March 31, (Millions) 2021 2020 Major GAAP Cash Flow Categories Net cash provided by (used in) operating activities$ 1,688 $ 1,213 Net cash provided by (used in) investing activities (369) (375) Net cash provided by (used in) financing activities (1,251) 1,108 Free Cash Flow (non-GAAP measure) Net cash provided by (used in) operating activities$ 1,688 $ 1,213 Purchases of property, plant and equipment (310) (332) Free cash flow$ 1,378 $ 881 Net income attributable to 3M$ 1,624 $ 1,308 Free cash flow conversion 85 % 67 % 68 Table of Contents
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company may also make forward-looking statements in other reports filed with theSecurities and Exchange Commission , in materials delivered to shareholders and in press releases. In addition, the Company's representatives may from time to time make oral forward-looking statements. Forward-looking statements relate to future events and typically address the Company's expected future business and financial performance. Words such as "plan," "expect," "aim," "believe," "project," "target," "anticipate," "intend," "estimate," "will," "should," "could," "forecast" and other words and terms of similar meaning, typically identify such forward-looking statements. In particular, these include, among others, statements relating to: ?worldwide economic, political, regulatory, international trade, capital markets and other external conditions, such as interest rates, financial conditions of our suppliers and customers, trade restrictions such as tariffs in addition to retaliatory counter measures, inflation, and natural and other disasters or climate change affecting the operations of the Company or our suppliers and customers,
? risks related to public health crises such as the global pandemic associated
with the coronavirus (COVID-19),
? liabilities related to certain fluorochemicals and the outcome of
contingencies,
?the Company's strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of financial performance, and market position,
? competitive conditions and customer preferences,
? foreign currency exchange rates and fluctuations in those rates,
? new business opportunities, product development, and future performance or
results of current or anticipated products,
? fluctuations in the costs and availability of purchased components, compounds,
raw materials and energy,
? Information technology systems including ERP system roll-out and
implementations,
? Security breaches and other disruptions to information technology
infrastructure,
? the scope, nature or impact of acquisition, strategic alliance and divestiture
activities,
? operational execution, including inability to generate productivity
improvements as estimated,
? future levels of indebtedness, common stock repurchases and capital spending,
? future availability of and access to credit markets,
? pension and postretirement obligation assumptions and future contributions,
? asset impairments,
? tax liabilities and effects of changes in tax rates, laws or regulations, and
?legal and regulatory proceedings, legal compliance risks (including third-party
risks) with regards to environmental, product liability and other laws and
regulations in
The Company assumes no obligation to update or revise any forward-looking statements.
Forward-looking statements are based on certain assumptions and expectations of future events and trends that are subject to risks and uncertainties. Actual future results and trends may differ materially from historical results or those reflected in any such forward-looking statements depending on a variety of factors. Important information as to these factors can be found in this document, including, among others, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings of "Overview," "Financial Condition and Liquidity" and annually in "Critical Accounting Estimates." Discussion of these factors is incorporated by reference from Part I, Item 1A, "Risk Factors," of this document, and should be considered an integral part of Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." For additional information concerning factors that may cause actual results to vary materially from those stated in the forward-looking statements, see our reports on Form 10-K, 10-Q and 8-K filed with theSEC from time to time. 69 Table of Contents
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