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 54
Table of Contents
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 and geographic areas in the second quarter of 2021, benefiting from continued improvements in certain end markets including home improvement, oral care and industrial along with healthcare elective procedure volumes increasing as COVID-19 related hospitalizations declined. 3M's total sales increased 24.7% and 16.7% year-on-year in the second quarter and first six months of 2021, respectively. Organic local-currency sales increased 21.4% and 14.3% year-on-year in the second quarter and first six months of 2021, respectively. 3M experienced the strongest sales growth in Transportation and Electronics and Health Care. While COVID-related respirator sales increased year-on-year in the second quarter and first six months of 2021, they are estimated to have negatively impacted year-on-year second quarter organic local-currency sales growth by approximately 1 percent as they grew at a slower rate than the rest of the Company. For the first six months of 2021, they positively impacted year-on-year organic-local currency sales growth by approximately 1 percent. In the second quarter of 2020, as effects of COVID-19 set-in, weak demand in a number of end markets negatively impacted oral care, automotive and aerospace, automotive aftermarket, commercial solutions, stationery and office, and businesses aligned to general industrial applications such as industrial adhesives and tapes and abrasives. At the same time, 2020 demand was increasing in areas such as personal safety, home improvement, general cleaning, semiconductor, data center, and biopharma filtration. 3M's operating income margins decreased 2.3 percentage points year-on-year in the second quarter and remained flat the first six months 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 2.4 and 2.1 percentage points to 22.0 and 22.3 percent for the second quarter and first six months of 2021, respectively, 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 second quarter and first six months of 2021 when compared to 2020:
Factors contributing to charges or other impacts:
Increased raw materials and logistics costs during the first half of 2021 from
? ongoing COVID-19 related supply chain challenges further magnified in February
2021 by winter storm Uri in
? Period expenses of unabsorbed manufacturing costs and increased expected credit
losses on customer receivables in the second quarter of 2020.
Restructuring actions addressing structural enterprise costs and operations in
? certain end markets as a result of the COVID-19 pandemic and related economic
impact resulting in a second quarter 2020 charge of
? Committed financial support in the second quarter of 2020 to various
COVID-relief and medical research initiatives.
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:
In 2020 ongoing cost management in discretionary spending in areas such as
? travel, professional services, and advertising/merchandising resulting in lower
spending.
? Continued productivity efforts, including year-on-year savings from
restructuring actions taken in 2020
Government-sponsored COVID-response stimulus and relief initiatives in 2020,
? including certain employee retention benefits under the Coronavirus Aid, Relief
and Economic Security (CARES) Act in
? Lower incentive compensation and self-insured medical visit/insurance expense
in 2020.
Accelerated vacation usage policies in the second quarter of 2020 which
? benefited the second quarter of 2020, but provided a penalty in the second half
of 2020.
Refer to the Financial Condition and Liquidity section below for more information on the Company's liquidity position.
55
Table of Contents
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 the increases (decreases) in operating income
margins and diluted earnings per share for the three and six months ended
Three months ended Six months ended
June 30, 2021 June 30, 2021
Percent of Earnings per Percent of Earnings per
net sales diluted share net sales diluted shareSame period last year 24.3 % $ 2.25 22.3 % $ 4.50 Significant litigation-related charges/benefits - - 0.1 (0.07) Gain/loss on sale of businesses (5.4) (0.52) (2.6) (0.52) Divestiture-related restructuring actions 0.7 0.08 0.4 0.08 Same period last year, excluding special items 19.6 % $ 1.81 20.2 % $ 3.99 Increase/(decrease) due to: Organic growth/productivity and other 4.1 0.89 2.8 1.23 Selling price and raw material impact (1.4) (0.17) (0.8) (0.17) Acquisitions/divestitures (0.1) (0.02) - (0.05) Foreign exchange impacts (0.2) 0.08 0.1 0.21 Other expense (income), net N/A 0.06 N/A 0.09 Income tax rate N/A (0.03) N/A 0.12 Shares of common stock outstanding N/A (0.03) N/A (0.06) Current period, excluding special items 22.0 % $
2.59 22.3 % $ 5.36 None - - - - Current period 22.0 % $ 2.59 22.3 % $ 5.36 Operating income margins decreased 2.3 percentage points in the second quarter of 2021 and remained flat for the first six months of 2021 when compared to the same period last year. For the second quarter of 2021, net income attributable to 3M was$1.5 billion , or$2.59 per diluted share compared to$1.3 billion or$2.25 per diluted share in the same period last year, an increase of 15.1 percent on a per diluted share basis. For the first six months of 2021 net income attributable to 3M was$3.1 billion , or$5.36 per diluted share compared to$2.6 billion or$4.50 per diluted share in the same period last year, an increase of 19.1 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 2.4 percentage points to 22.0 percent in the second quarter of 2021 when compared to the same period last year. For the first six months of 2021, operating margins increased 2.1 percentage points to 22.3 percent when compared to the same period last year. Net income attributable to 3M was$1.5 billion , or$2.59 per diluted share versus$1.0 billion , or$1.81 per diluted share in the same period last year, which was an increase of 43.5 percent on a per diluted share basis. On an adjusted basis for the first six months of 2021, net income attributable to 3M was$3.1 billion , or$5.36 per diluted share versus$2.3 billion , or$3.99 per diluted share for the same period last year, which was an increase of 34.4 percent on a per diluted share basis. 56 Table of Contents
Additional discussion related to the components of the year-on-year change in 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 for both the second quarter and first six months of 2021. The
following also impacted results:
Second quarter of 2021 benefit of
tax) from a favorable
o impact of state value-added tax when determining
social tax-essentially lowering the social tax that 3M should have paid in
prior periods.
Certain increased legal and reserve adjustments costs year-over-year. 3M
o regularly reviews and updates its associated liabilities and is involved in
various trials and defense preparation as discussed in Note 14.
2021 benefit from restructuring actions taken in 2020 and positive/negative
o impact of year-over-year change in non-divestiture-related restructuring
charges, net of adjustments, for respective periods. Note 5 provides additional
information relative to restructuring actions.
o COVID-impacts recognized on certain assets in the first quarter of 2020.
o On a combined basis, higher defined benefit pension and postretirement service
cost 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 for both the second quarter and first
six months of 2021. 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
approximately
? and first six months of 2021, respectively. This estimate includes the effect
of translating profits from local currencies into
currency fluctuations on the transfer of goods between 3M operations in the
derivative instruments designed to reduce foreign currency exchange rate risks.
Other expense (income), net:
Higher income related to non-service cost components of pension and
? postretirement expense, decreased expense year-on-year for both the second
quarter and first six months of 2021.
Interest expense (net of interest income) decreased slightly for the second
? quarter of 2021 and remained flat for the first six months of 2021 compared to
the same periods year-on-year. Income tax rate:
Certain items above reflect specific income tax rates associated therewith.
Overall, the effective tax rate for the second quarter and first six months of
? 2021 was 21.5 percent and 18.9 percent, respectively, largely consistent with
21.0 percent and 19.3 percent for the same periods, respectively, in prior
year.
On an adjusted basis, the effective tax rate for the second quarter and first
? six months of 2021 was 21.5 percent and 18.9 percent, respectively, an increase
of 0.8 and decrease of 1.8 percentage points compared to the same periods
year-on-year.
Shares of common stock outstanding:
? Higher shares outstanding decreased earnings per share year-on-year for both
the second quarter and first six months of 2021.
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 57 Table of Contents 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:
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.
Gain/loss on sale of businesses:
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. In the second quarter of 2020, 3M recorded a pre-tax gain of
business. Refer to Note 3 for further details.
Divestiture-related restructuring actions:
In the second quarter 2020, following the divestiture of substantially all of
the drug delivery business management approved and committed to undertake
certain restructuring actions addressing corporate functional costs and
? manufacturing footprint across 3M in relation to the magnitude of amounts
previously allocated/burdened to the divested business. As a result, 3M
recorded a pre-tax charge of$55 million ($46 million after tax). Refer to Note 5 for further details. 58 Table of Contents Earnings per diluted Income Net Income Earnings share (Dollars in millions, except Operating Operating Before
Provision for Effective Tax Attributable to Per Diluted percent per share amounts)
Income Income Margin Taxes Income Taxes Rate 3M Share change
Three months ended June 30,
2020 GAAP $ 1,740 24.3 % $ 1,650 $ 347 21.0 % $ 1,306 $ 2.25
Adjustments for special
items:
Gain/loss on sale of
businesses (387) (387) (83) (304) (0.52)
Divestiture-related
restructuring actions 55 55 9 46 0.08
Three months ended June 30,
2020 adjusted amounts
(non-GAAP measures) $ 1,408 19.6 % $ 1,318 $ 273 20.7 % $ 1,048
Three months ended June 30, 2021 GAAP$ 1,971 22.0 %$ 1,938 $ 415 21.5 % $ 1,524$ 2.59 15.1 % Adjustments for special items: None Three months endedJune 30, 2021 adjusted amounts (non-GAAP measures)$ 1,971 22.0 %$ 1,938 $ 415 21.5 % $ 1,524$ 2.59 43.5 % Earnings per Provision Earnings diluted Operating Income for Net Income Per share (Dollars in millions, Operating Income Before Income Effective Attributable Diluted percent except per share amounts) Income Margin Taxes Taxes Tax Rate to 3M Share change Six months ended June 30, 2020 GAAP$ 3,403 22.3 %$ 3,238 $ 625 19.3 %$ 2,614 $ 4.50 Adjustments for special items: Significant litigation-related charges/benefits 17 17 56 (39) (0.07) Gain/loss on sale of businesses (389) (389) (86) (303) (0.52) Divestiture-related restructuring actions 55 55 9 46 0.08 Six months endedJune 30, 2020 adjusted amounts (non-GAAP measures)$ 3,086 20.2 %$ 2,921 $ 604 20.7 %$ 2,318 $ 3.99 Six months ended June 30, 2021 GAAP$ 3,965 22.3 %$ 3,883 $ 734 18.9 %$ 3,148 $ 5.36 19.1 % Adjustments for special items: None - - - - - Six months endedJune 30, 2021 adjusted amounts (non-GAAP measures)$ 3,965 22.3 %$ 3,883 $ 734 18.9 %$ 3,148 $ 5.36 34.4 % 59 Table of Contents
Sales and operating income by business segment:
The following tables contain sales and operating income results by business segment for the three and six months endedJune 30, 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 June 30, 2021 2020 % change Net Oper. Net Oper. Net Oper. (Dollars in millions) Sales Income Sales Income Sales Income Business Segments Safety and Industrial$ 3,254 $ 718 $ 2,657 $ 623 22.4 % 15.3 %
Transportation and Electronics 2,482 546 1,937 360
28.1 51.6 Health Care 2,278 576 1,823 301 24.9 91.9 Consumer 1,482 311 1,231 278 20.4 11.8 Corporate and Unallocated 1 (42) 1 297 - - Elimination of Dual Credit (547) (138) (473) (119) - -Total Company $ 8,950 $ 1,971 $ 7,176 $ 1,740 24.7 % 13.2 % Six months ended June 30, 2021 2020 % change Net Oper. Net Oper. Net Oper. (Dollars in millions) Sales Income Sales Income Sales Income Business Segments Safety and Industrial$ 6,581 $ 1,529 $ 5,584 $ 1,317 17.8 % 16.1 %
Transportation and Electronics 5,013 1,137 4,176
824 20.0 38.0 Health Care 4,526 1,085 3,927 753 15.2 44.2 Consumer 2,855 600 2,481 543 15.1 10.6 Corporate and Unallocated (1) (89) 1 198 - - Elimination of Dual Credit (1,173) (297) (918) (232) - -Total Company $ 17,801 $ 3,965 $ 15,251 $ 3,403 16.7 % 16.5 % Three months ended June 30, 2021 Worldwide Sales Change Organic local- Total sales By Business Segment currency sales Acquisitions Divestitures Translation change Safety and Industrial 17.6 % - % - % 4.8 % 22.4 % Transportation and Electronics 24.2 -
- 3.9 28.1 Health Care 23.2 - (2.6) 4.3 24.9 Consumer 17.8 - - 2.6 20.4Total Company 21.4 % - % (0.7) % 4.0 % 24.7 % Six months ended June 30, 2021 Worldwide Sales Change Organic local- Total sales By Business Segment currency sales Acquisitions Divestitures Translation change Safety and Industrial 13.7 % - % - % 4.1 % 17.8 % Transportation and Electronics 16.4 -
- 3.6 20.0 Health Care 15.8 - (4.3) 3.7 15.2 Consumer 12.8 - - 2.3 15.1Total Company 14.3 % - % (1.1) % 3.5 % 16.7 % 60 Table of Contents Sales by geographic area: Percent change information compares the second quarter and first six 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 June 30, 2021 Europe, Asia Middle East Other Americas Pacific & Africa Unallocated Worldwide Net sales (millions)$ 4,582 $ 2,655 $ 1,714 $ (1)$ 8,950 % of worldwide sales 51.2 % 29.7 % 19.1 % - 100.0 % Components of net sales change: Volume - organic 25.3 % 15.9 % 19.8 % - 21.3 % Price 0.3 (0.5) 0.3 - 0.1 Organic local-currency sales 25.6 15.4 20.1 - 21.4 Acquisitions - - - - - Divestitures (0.7) - (1.6) - (0.7) Translation 1.2 4.8 10.2 - 4.0 Total sales change 26.1 % 20.2 % 28.7 % - 24.7 % Total sales change: Safety and Industrial 22.3 % 25.5 % 19.7 % - 22.4 %
Transportation and Electronics 34.9 % 20.1 %
50.5 % - 28.1 %
Health Care 24.0 % 20.2 % 31.8 % - 24.9 %
Consumer 20.8 % 13.6 % 29.6 % - 20.4 %
Organic local-currency sales change:
Safety and Industrial 20.8 % 18.4 % 10.2 % - 17.6 %
Transportation and Electronics 33.8 % 16.7 %
38.8 % - 24.2 %
Health Care 25.3 % 13.8 % 26.4 % - 23.2 %
Consumer 19.7 % 8.7 % 19.2 % - 17.8 %
Additional information beyond what is included in the preceding table is as follows:
In the
organic-local currency sales increased 22 percent. Total sales in
? increased 66 percent and organic local-currency sales increased 60 percent. In
increased of 37 percent. InBrazil , total sales increased 58 percent and organic local-currency sales increased 54 percent.
In the
? organic local-currency sales increased 12 percent. In
increased 10 percent and organic local-currency sales increased 12 percent.
61
Table of Contents
Six months ended June 30, 2021
Europe,
Asia Middle East Other
Americas Pacific & Africa Unallocated Worldwide
Net sales (millions) $ 8,910 $ 5,424 $ 3,469 $ (2) $ 17,801
% of worldwide sales 50.0 % 30.5 % 19.5 % - 100.0 %
Components of net sales change:
Volume - organic 14.5 % 14.5 % 11.4 % - 13.9 %
Price 0.8 (0.5) 0.7 - 0.4
Organic local-currency sales 15.3 14.0 12.1 - 14.3
Acquisitions - - - - -
Divestitures (1.2) - (2.4) - (1.1)
Translation 0.5 5.1 9.0 - 3.5
Total sales change 14.6 % 19.1 % 18.7 % - 16.7 %
Total sales change:
Safety and Industrial 16.8 % 20.2 % 17.6 % - 17.8 %Transportation and Electronics 13.3 % 22.1 %
25.5 % - 20.0 %
Health Care 12.2 % 17.4 % 21.7 % - 15.2 %
Consumer 14.8 % 12.5 % 22.0 % - 15.1 %
Organic local-currency sales change:
Safety and Industrial 16.3 % 13.2 % 8.8 % - 13.7 %
Transportation and Electronics 12.9 % 18.3 %
16.2 % - 16.4 %
Health Care 15.8 % 10.7 % 20.7 % - 15.8 %
Consumer 14.3 % 6.9 % 12.9 % - 12.8 %
Additional information beyond what is included in the preceding table is as follows:
In the
organic-local currency sale increased 14 percent. Total sales in
? increased 24 percent and organic local-currency sales increased 22 percent. In
increased 16 percent. In
local-currency sales increased 33 percent.
In the
? organic local-currency sales increased 22 percent. In
increased 5 percent and organic local-currency sales increased 5 percent.
Managing currency risks: The weakerU.S. dollar had a positive impact on sales in the second quarter and first six months of 2021 compared to the same periods last year. Net of the Company's hedging strategy, foreign currency positively impacted earnings in the second quarter and first six months of 2021 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 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$3.6 billion of operating cash flows in the first six months of 2021, an increase of$457 million when compared to the first six months of 2020, with this increase year-on-year primarily driven by higher net income as a result of strong organic sales 62
Table of Contents
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 six months of 2021, the Company purchased$734 billion of its own stock, compared to$366 million of stock purchases in the first six months of 2020. As ofJune 30, 2021 , approximately$7.0 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. InMay 2021 , 3M's Board of Directors declared a second-quarter dividend
of$1.48 per share.
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 Six months ended
June 30, June 30,
(Percent of net sales) 2021 2020 Change 2021 2020 Change
Cost of sales 52.7 % 53.0 % (0.3) % 51.9 % 52.0 % (0.1) %
Selling, general andadministrative expenses (SG&A) 19.6 22.2 (2.6) 20.0
22.0 (2.0) Research, development and related expenses (R&D) 5.7 5.9 (0.2) 5.8 6.3 (0.5) Gain on sale of businesses - (5.4) 5.4 - (2.6) 2.6 Operating income margin 22.0 % 24.3 % (2.3) % 22.3 % 22.3 % - % 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 second quarter and first six months of 2021 was approximately$11 million and$22 million , respectively. 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, curtailments, special termination benefits and other) for a total consolidated defined benefit pre-tax pension and postretirement expense of$322 million . 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. 63 Table of Contents Cost of Sales: Cost of sales, measured as a percent of sales, decreased in the second quarter and first six months of 2021 when compared to the same periods last year. Decreases primarily related to lower COVID-related net impacts taken in the first half of 2021 versus the same period last year, including period expenses of unabsorbed manufacturing costs taken in the second quarter of 2020. These were partially offset by higher raw material and logistics costs and increased adjustments to other environmental liabilities in the first half of 2021.
Selling, General and Administrative Expenses:
SG&A in dollars increased 9.6 percent and 5.8 percent in the second quarter and first six months of 2021, respectively, when compared to the same period last year. These results reflect increased legal and reserve adjustment costs, continued spending on key initiatives, partially offset by the impact of the favorable decision of theBrazilian Supreme Court in the second quarter of 2021 regarding the calculation of past social taxes and ongoing general 3M cost management. Prior year also included a number of COVID-related net impacts as described in the Overview- Consideration of COVID-19 section above. As a percent of sales, SG&A decreased for both the second quarter and first six months of 2021 as a result of continued discretionary spending cost management.
Research, Development and Related Expenses:
R&D in dollars increased$90 million and$77 million in the second quarter and first six months of 2021, respectively, 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.
Gain on Sale of Businesses:
During the first quarter of 2020, the Company recorded a pre-tax gain of$2 million ($1 million loss after tax) related to the sale of its advanced ballistic-protection business and recognition of certain contingent consideration. During the second quarter of 2020, the Company recorded a pre-tax gain of$387 million ($304 after tax) related to the sale of substantially all of its drug delivery business. Refer to Note 3 for additional details on divestitures. Other Expense (Income), Net:
See Note 6 for a detailed breakout of this line item.
Interest expense (net of interest income) decreased slightly for the second quarter and remained flat for the first six months of 2021 compared to the same periods year-on-year. Interest expense includes an early debt extinguishment pre-tax charge in the first quarter of 2021. The non-service pension and postretirement net benefit increased approximately$42 million and$83 million in the second quarter and first six months of 2021, respectively, compared to the same period in 2020. Provision for Income Taxes: Three months ended Six months ended June 30, June 30, (Percent of pre-tax income) 2021 2020 2021 2020 Effective tax rate 21.5 % 21.0 % 18.9 % 19.3 %
The effective tax rate for the second quarter and first six months of 2021 was 21.5 percent and 18.9 percent, respectively, largely consistent with 21.0 percent and 19.3 percent for the same periods, respectively, in prior year.
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.
64
Table of Contents
Refer to Note 8 for further discussion of income taxes.
Income from Unconsolidated Subsidiaries, Net of Taxes:
Three months ended Six months ended
June 30, June 30,
(Millions) 2021 2020 2021 2020
Income (loss) from
unconsolidated
subsidiaries, net of taxes $ 2 $ - $ 3 $ -
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 (Loss) Attributable to Noncontrolling Interest:
Three months ended Six months ended
June 30, June 30,
(Millions) 2021 2020 2021 2020
Net income (loss)
attributable to
noncontrolling interest $ 1 $ (3) $
4 $ (1)
Net income (loss) attributable to noncontrolling interest represents the
elimination of the income or loss attributable to non-3M ownership interests in
3M consolidated entities. The primary noncontrolling interest relates to
Significant Accounting Policies:
Information regarding new accounting standards is included in Note 1 to the Consolidated Financial Statements.
PERFORMANCE BY BUSINESS SEGMENT
Disclosures relating to 3M's business segments are provided in Note 16. Effective in the first quarter of 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). Information provided herein reflects the impact of these changes for all periods presented. 3M manages its operations in four business segments. The reportable segments are Safety and Industrial; Transportation and Electronics; Health
Care;
and Consumer.
Corporate and Unallocated:
In addition to these four business segments, 3M assigns certain costs to
"Corporate and Unallocated," which is presented separately in the preceding
business segments table and in Note 16. Corporate and Unallocated operating
income includes "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.
65
Table of Contents
Corporate and Unallocated operating expenses increased in the second quarter and first six 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, increased and decreased in the second quarter and first six months of 2021, respectively, when compared to the same period last year primarily due to a$91 million pre-tax benefit from the impact of the favorable decision of theBrazilian Supreme Court in the second quarter of 2021 regarding the calculation of past social taxes, 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), offset by increased 2021 legal and
reserve adjustment costs. 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.
Safety and Industrial Business:
Three months ended Six months ended
June 30, June 30,
2021 2020 2021 2020
Sales (millions) $ 3,254 $ 2,657 $ 6,581 $ 5,584
Sales change analysis:
Organic local-currency 17.6 % 13.7 %
Translation 4.8 4.1
Total sales change 22.4 % 17.8 %
Business segment operating
income (millions) $ 718 $ 623 $ 1,529 $ 1,317
Percent change 15.3 % 16.1 %
Percent of sales 22.1 % 23.4 % 23.2 % 23.6 %
Second quarter 2021 results:
Sales in Safety and Industrial totaled $3.3 billion , up 22.4 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 automotive aftermarket, roofing granules, abrasives,
? industrial adhesives and tapes, electrical markets, and closure and masking
driven by continued end market strength (industrial, automotive, electronics
and construction) and prior year pandemic impacts.
66
Table of Contents
Sales declined in personal safety as growth in head, face, hearing, fall
? protection and disposable respirator growth was more than offset by declines
across the rest of the respiratory protection portfolio.
Business segment operating income margins decreased year-on-year due to increases in raw materials, logistics and ongoing legal costs partially offset by leverage on sales growth.
First six months 2021 results:
Sales in Safety and Industrial totaled$6.6 billion , up 17.8 percent inU.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 roofing granules, automotive aftermarket, industrial
? adhesives and tapes, abrasives, electrical markets, and personal safety; sales
declined in closure and masking.
Growth was driven by improving general industrial manufacturing activity and
? other end-market demand along with pandemic-related respirator mask demand in
the first quarter of 2021.
Business segment operating income margins decreased year-on-year due to rising raw materials, logistics and legal costs partially offset by sales growth leverage.
Transportation and Electronics Business:
Three months ended Six months ended
June 30, June 30,
2021 2020 2021 2020
Sales (millions) $ 2,482 $ 1,937 $ 5,013 $ 4,176
Sales change analysis:
Organic local-currency 24.2 % 16.4 %
Translation 3.9 3.6
Total sales change 28.1 % 20.0 %
Business segment operating
income (millions) $ 546 $ 360 $ 1,137 $ 824
Percent change 51.6 % 38.0 %
Percent of sales 22.0 % 18.6 % 22.7 % 19.7 %
Second quarter 2021 results:
Sales in Transportation and Electronics totaled
On an organic local-currency sales basis:
Sales increased in automotive and aerospace with year-on-year growth in car and
? light truck build rates in regions where 3M has higher content per vehicle, a
year-on-year increase in sell-in of 3M products versus change in build rate,
and continued penetration gains into new platforms.
? Sales increased in commercial solutions, advanced materials and transportation
safety from return to workplace trends.
Sales increased in electronics driven by continued strength in semiconductor,
? factory automation and data centers along with consumer electronic devices,
namely tablets and TV's. Business segment operating income margins increased year-on-year due to strong leverage on sales growth, partially offset by increases in raw materials and logistic costs.
First six months 2021 results:
Sales in Transportation and Electronics totaled
67
Table of Contents
On an organic local-currency sales basis:
Sales increased in automotive and aerospace from improving automotive-end
? market activity and increases in car and light truck builds and factors
mentioned above relative to second quarter results.
? Sales increased in electronics due to strong demand in data center,
semiconductor, interconnect and consumer electronics markets.
? Sales increased in commercial solutions, advanced materials and transportation
safety due to increased advertising spend and return to workplace trends.
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 Six months ended
June 30, June 30,
2021 2020 2021 2020
Sales (millions) $ 2,278 $ 1,823 $ 4,526 $ 3,927
Sales change analysis:
Organic local-currency 23.2 % 15.8 %
Divestitures (2.6) (4.3)
Translation 4.3 3.7
Total sales change 24.9 % 15.2
Business segment operating
income (millions) $ 576 $ 301 $ 1,085 $ 753
Percent change 91.9 % 44.2 %
Percent of sales 25.3 % 16.5 % 24.0 % 19.2 %
Second quarter 2021 results:
Sales in Health Care totaled
On an organic local-currency sales basis:
Sales increased in oral care as patient visits returned to pre-COVID levels, in
? food safety as food service activity returned along with continued strong
growth from new product introductions, and in medical solutions due to rising
elective procedure volumes as COVID-related hospitalizations declined.
Sales increased in separation and purification due to continued demand for
? biopharma solutions for COVID-related vaccine and therapeutics along with
improving demand trends for water filtration solutions.
? Sales increased in health information systems driven by strong growth in
clinician solutions. Divestitures:
? In
business.
Business segment operating income margins increased year-on-year due to leverage on sales growth, partially offset by increasing raw materials and logistics costs along with increased investments in growth.
First six months 2021 results:
Sales in Health Care totaled
On an organic local-currency sales basis:
68
Table of Contents
Sales increased in oral care driven by higher year-on-year dental industry
? activity and in separation and purification from continued high demand for
biopharma filtration solutions for COVID-related vaccine and therapeutic
development and manufacturing.
? Sales increased in medical solutions from rising elective procedure volumes and
strong respirator demand in the first quarter of 2021.
? Sales increased in health information systems due to improving hospital
information technology investments.
Divestitures:
? In
business.
Business segment operating income margins increased year-on-year due to sales growth leverage, partially offset by supply chain disruptions, rising raw materials and logistics costs along with increased investments in growth.
Consumer Business:
Three months ended Six months ended
June 30, June 30,
2021 2020 2021 2020
Sales (millions) $ 1,482 $ 1,231 $ 2,855 $ 2,481
Sales change analysis:
Organic local-currency 17.8 % 12.8 %
Translation 2.6 2.3
Total sales change 20.4 % 15.1 %
Business segment operating
income (millions) $ 311 $ 278 $ 600 $ 543
Percent change 11.8 % 10.6 %
Percent of sales 21.0 % 22.6 % 21.0 % 21.9 %
Second quarter 2021 results:
Sales in Consumer totaled
On an organic local-currency sales basis:
Sales increased in stationery and office supplies as the business laps last
year's COVID-related comparisons, continued strength in consumer demand for
? Scotch®-branded packaging and shipping products, along with improved sell-in
trends in Post-it®-solutions and Scotch®-branded home and office tapes as
retailers prepare for back-to-school and return-to-workplace.
Sales increased in consumer health and safety as last year's COVID-related
? impacts are lapped along with improved supply of safety products for retail
customers.
Sales increased in home improvement as the business continued to experience
? strong demand in many of our category leading franchises particularly for
CommandTM adhesives, FiltreteTM air quality solutions, and MeguiarsTM auto care
solutions.
? Sales increased in home care due to continued strength in home cleaning.
Business segment operating income margins decreased year-on-year as a result of increased costs for raw materials, logistics and outsourced hardgoods manufacturing costs, along with rising investments in advertising and merchandising, more than offset leverage from sales growth.
First six months 2021 result:
69
Table of Contents
Sales in Consumer totaled
On an organic local-currency sales basis:
Sales increased in home improvement driven by continued strength in home
? improvement with strong demand for CommandTM adhesives, FiltreteTM air quality
solutions, MeguiarsTM auto care and Scotch BlueTM painter's tape.
Sales increased in stationery and office supplies from ongoing strength in
? consumer demand for packaging and shipping products and Scotch® brand office
tapes as the business laps last year's COVID-related comparisons.
Sales also increased in consumer health and safety as the global economy
? impacted by COVID continues to evolve versus 2020 and in home care due to
consumer demand for home cleaning products and solutions. Business segment operating income margins decreased year-on-year as a result of rising raw materials, logistics and outsourced hardgoods manufacturing costs, and higher investments in advertising and merchandising, partially offset by 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 six 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 atJune 30, 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 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$547 million lower atJune 30, 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. As discussed in Note 10, in the second quarter of 2021, 3M entered into interest rate swaps that converted part of the Company's$1.0 billion and$650 million principal amount of fixed rate notes due 2049 and 2050, respectively, into floating rate debt for the portion of their terms through mid-2028. 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. 70 Table of Contents EffectiveFebruary 10, 2020 , the Company updated its "well-known seasoned issuer" (WKSI) shelf registration statement, which registers an indeterminate amount of debt or equity securities for future issuance and sale. This replaced 3M's previous shelf registration datedFebruary 24, 2017 . InMay 2016 , in connection with the WKSI shelf, 3M entered into an amended and restated distribution agreement relating to the future issuance and sale (from time to time) of the Company's medium-term notes program (Series F), up to the aggregate principal amount of$18 billion , which was an increase from the previous aggregate principal amount up to$9 billion of the same Series. As ofJune 30, 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 atJune 30, 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. AtJune 30, 2021 , this ratio was approximately 19 to 1. Debt covenants do not restrict the payment of dividends.
The Company also had
Cash, cash equivalents and marketable securities:
AtJune 30, 2021 , 3M had$5.5 billion of cash, cash equivalents and marketable securities, of which approximately$4.3 billion was held by the Company's foreign subsidiaries and approximately$1.2 billion was held inthe 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, purchases of treasury stock, capital expenditures, and theMarch 2021 early redemption via make-whole call offers of$450 million in debt.
Net Debt (non-GAAP measure):
Net debt is not defined underU.S. GAAP and may not be computed the same as similarly titled measures used by other companies. The Company defines net debt as total debt less the total of cash, cash equivalents and current and long-term marketable securities. 3M believes net debt is meaningful to investors as 3M considers net debt and its components to be important indicators of liquidity and financial position. The following table provides net debt as ofJune 30, 2021 andDecember 31, 2020 . (Millions) June 30, 2021 December 31, 2020 Change Total debt$ 18,248 $ 18,795$ (547) Less: Cash, cash equivalents and marketable securities 5,531 5,068 463 Net debt (non-GAAP measure)$ 12,717 $
13,727$ (1,010)
Refer to the preceding "Total Debt" and "Cash,
71
Table of Contents
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) June 30, 2021 December 31, 2020 Change Current assets$ 16,343 $ 14,982$ 1,361 Less: Current liabilities 9,440 7,948 1,492
Working capital (non-GAAP measure) $ 6,903 $ 7,034
$ (131) 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 ofJune 30, 2021 was largely consistent withDecember 31, 2020 . Balance changes in current assets increased working capital by$1.4 billion , driven largely by increases in inventory, marketable securities and accounts receivable. Balance changes in current liabilities decreased working capital by$1.5 billion , primarily due to increases in current-portion of long-term debt and accounts payable. Accounts receivable and inventory increased$286 million and$603 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.
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.
72
Table of Contents
Cash Flows from Operating Activities:
Six months ended
June 30,
(Millions) 2021 2020
Net income including noncontrolling interest $ 3,152 $ 2,613
Depreciation and amortization 932
932
Company pension and postretirement contributions (85)
(77)
Company pension and postretirement expense 92
155
Stock-based compensation expense 184
172
Gain on sale of businesses -
(389)
Income taxes (deferred and accrued income taxes) (50) 314 Accounts receivable (337) 241 Inventories (644) (198) Accounts payable 411 (269) Other - net (80) (376)
Net cash provided by (used in) operating activities
Cash flows from operating activities can fluctuate significantly from period to period, as pension funding decisions, tax timing differences and other items can significantly impact cash flows. In the first six months of 2021, cash flows provided by operating activities increased$457 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, offset by working capital changes and the timing of income tax payments. The combination of accounts receivable, inventories and accounts payable decreased operating cash flow by$570 million and$226 million in the first six months of 2021 and 2020, respectively. In addition, operating cash flows for the first six months of 2020 benefited from the deferral of income tax payments into the third quarter of 2020. This deferral did not repeat in 2021. Additional discussion on working capital changes is provided earlier in the "Financial Condition and Liquidity" section.
Cash Flows from Investing Activities:
Six months ended
June 30,
(Millions) 2021 2020
Purchases of property, plant and equipment (PP&E)
(711)
Proceeds from sale of PP&E and other assets 43
16
Acquisitions, net of cash acquired -
(25)
Purchases and proceeds from maturities and sale of marketable securities and investments, net
(402) 342
Proceeds from sale of businesses, net of cash sold -
573
Other - net 20
7
Net cash provided by (used in) investing activities
202
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.
73
Table of Contents
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 and itsdrug delivery 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:
Six months ended
June 30,
(Millions) 2021 2020
Change in short-term debt - net $ 4 $
(132)
Repayment of debt (maturities greater than 90 days) (450)
(1,146)
Proceeds from debt (maturities greater than 90 days) 1
1,745 Total cash change in debt$ (445) $ 467 Purchases of treasury stock (734) (366)
Proceeds from issuances of treasury stock pursuant to stock option and benefit plans
480 236
Dividends paid to shareholders (1,716)
(1,693)
Other - net (19)
(45)
Net cash provided by (used in) financing activities
(1,401) Total debt was approximately$18.2 billion atJune 30, 2021 and$18.8 billion atDecember 31, 2020 . Decreases in debt were largely due to theMarch 2021 early redemption of$450 million in debt maturing in 2022 via make-whole call offers. The Company had no commercial paper outstanding atJune 30, 2021 andDecember 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 andU.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. InNovember 2018 , 3M's Board of Directors replaced the Company'sFebruary 2016 repurchase program with a new repurchase program. This new program authorizes the repurchase of up to$10 billion of 3M's outstanding common stock, with no pre-established end date. In the first six months of 2021, the Company purchased$734 million 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 ofEquity 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. InFebruary 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. InMay 2021 , 3M's Board of Directors declared a second-quarter 2021 dividend of$1.48 per share. 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. 74 Table of Contents
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. Six months ended June 30, (Millions) 2021 2020 Major GAAP Cash Flow Categories Net cash provided by (used in) operating activities$ 3,575 $ 3,118 Net cash provided by (used in) investing activities (1,043) 202 Net cash provided by (used in) financing activities (2,434) (1,401) Free Cash Flow (non-GAAP measure) Net cash provided by (used in) operating activities$ 3,575 $ 3,118 Purchases of property, plant and equipment (704) (711) Free cash flow$ 2,871 $ 2,407 Net income attributable to 3M$ 3,148 $ 2,614 Free cash flow conversion 91 % 92 % 75 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 II, Item 1A, "Risk Factors," of this document, and should be considered an integral part of Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations." For additional information concerning factors that may cause actual results to vary materially from those stated in the forward-looking statements, see our reports on Form 10-K, 10-Q and 8-K filed with theSEC from time to time. 76 Table of Contents
© Edgar Online, source
