3M CO 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 Consumer Health and Safety Division. See additional 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 to Europe, Middle East and Africa 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 53 Table of Contents 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 third quarter of 2021, benefiting from continued improvements in certain end markets including home improvement and general industrial. 3M’s total sales increased 7.1% and increased 13.3% year-on-year in the third quarter and first nine months of 2021, respectively. Organic local-currency sales increased 6.3% and increased 11.5% year-on-year in the third quarter and first nine months of 2021, respectively. 3M experienced the strongest third quarter sales growth in Consumer and Safety and Industrial. COVID-related respirator sales negatively impacted year-on-year third quarter organic-local currency sales growth by approximately 0.5 percent as they grew at a slower rate than the rest of the Company. For the first nine months of 2021, they positively impacted year-on-year organic-local currency sales growth by approximately 0.3 percent. Given the diversity of 3M's businesses, the impact of COVID-19 varied across the Company. In the first nine months of 2020, 3M experienced strong sales in personal safety, as well as in other areas such as home improvement, general cleaning, semiconductor, data center, and biopharma filtration while businesses aligned to general industrial applications with strength in abrasives and industrial adhesives and tapes. At the same time, weakness in several end markets, while improving, contributed in part to sales declines in a number of 3M's businesses such as oral care, automotive and aerospace, advanced materials, commercial solutions, stationery and office, automotive aftermarket. 3M’s operating income margins decreased 2.9 percentage points in the third quarter and decreased 1.0 percentage points in the first nine months of 2021 year-on-year. 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 decreased 2.9 and increased 0.3 percentage points to 20.0 and 21.5 percent for the third quarter and first nine 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 results for third quarter and first nine months of 2021 when compared to 2020: Factors contributing to charges or other impacts: • Increased raw materials and logistics costs from ongoing COVID-19 and Delta variant related global supply chain challenges further magnified by extreme weather events, such as February 2021 winter storm Uri in the United States. • Period expenses of unabsorbed manufacturing costs and increased expected credit losses on customer receivables in 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 $58 million. • Committed financial support in 2020 to various COVID-relief and medical research initiatives. • Charge of $22 million in the first quarter of 2020 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 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: • Cost management in discretionary spending in areas such as travel, professional services, and advertising/merchandising resulting in lower spending in 2020. • 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 the United States. • 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. 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. 54 Table of Contents 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 nine months ended September 30, 2021 and 2020. Three months ended September 30, 2021 Nine months ended September 30, 2021 Percent of net sales Earnings per diluted share Percent of net sales Earnings per diluted share Same period last year 22.9 % $ 2.45 22.5 % $ 6.95 Significant litigation-related charges/benefits — — 0.1 (0.07) Gain/loss on sale of businesses — — (1.6) (0.52) Divestiture-related restructuring actions — — 0.2 0.08 Same period last year, excluding special items 22.9 % $ 2.45 21.2 % $ 6.44 Increase/(decrease) due to: Organic growth/productivity and other (1.4) (0.02) 1.3 1.19 Selling price and raw material impact (1.3) (0.12) (1.0) (0.29) Acquisitions/divestitures — — — (0.05) Foreign exchange impacts (0.2) (0.01) — 0.20 Other expense (income), net N/A 0.08 N/A 0.17 Income tax rate N/A 0.09 N/A 0.22 Shares of common stock outstanding N/A (0.02) N/A (0.07) Current period, excluding special items 20.0 % $ 2.45 21.5 % $ 7.81 None — — — — Current period 20.0 % $ 2.45 21.5 % $ 7.81 Operating income margins decreased 2.9 percentage points in the third quarter of 2021 and decreased 1.0 percentage points for the first nine months of 2021 when compared to the same period last year. For the third quarter of 2021, net income attributable to 3M was $1.4 billion, or $2.45 per diluted share which is consistent on a per diluted share basis. For the first nine months of 2021 net income attributable to 3M was $4.6 billion, or $7.81 per diluted share compared to $4.0 billion or $6.95 per diluted share in the same period last year, an increase of 12 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 decreased 2.9 percentage points to 20.0 percent in the third quarter of 2021 when compared to the same period last year. For the first nine months of 2021, operating margins increased 0.3 percentage points to 21.5 percent when compared to the same period last year. On an adjusted basis for the third quarter of 2021, net income attributable to 3M was $1.4 billion, or $2.45 per diluted share, which is consistent year over year on a per diluted share basis. On an adjusted basis for the first nine months of 2021 , net income attributable to 3M was $4.6 billion, or $7.81 per diluted share versus $3.7 billion, or $6.44 per diluted share for the same period last year, which was an increase of 21 percent on a per diluted share basis. Additional discussion related to the components of the year-on-year change in earnings per diluted share follows: Organic growth/productivity and other: • For the third quarter of 2021, organic volume growth was more than offset by productivity penalties from global supply chain challenges, increased investments in growth and sustainability, and increased litigation-related costs resulting in decreased operating margins and earnings per diluted share year-on-year. For the first nine months of 2021, continued organic volume growth, ongoing cost management and improved productivity offset by increased 55 Table of Contents litigation-related costs increased operating income margins and earnings per diluted share year-on-year. The following also impacted results or provide additional information: ◦ Second quarter of 2021 benefit of $91 million pre-tax ($0.12 per share after tax) from a favorable Brazilian Supreme Court decision that concluded on the impact of state value-added tax when determining Brazil’s federal sales-based 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 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 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. ◦ COVID-impacts recognized on certain assets in the first quarter of 2020. ◦ On a combined basis, higher defined benefit pension and postretirement service cost expense year-on-year. Selling price and raw material impact: • 3M experienced higher raw material, logistics, and outsourced manufacturing costs from strong end-market demand and ongoing COVID-19 and Delta variant related global supply chain challenges that were further magnified by extreme weather events, such as February 2021 winter storm Uri in the U.S. These factors were partially offset by higher selling prices for both the third quarter and first nine 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 in May 2020). Foreign exchange impacts: • Foreign currency impacts (net of hedging) decreased operating income by approximately $7 million and increased operating income by approximately $132 million (or a decrease of pre-tax earnings by approximately $7 million and an increase of pre-tax earnings by $148 million) year-on-year for the third quarter and first nine months of 2021, respectively. This estimate includes the effect of translating profits from local currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction gains and losses, including 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 third quarter and first nine months of 2021. • Interest expense (net of interest income) decreased for both the third quarter and first nine 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 third quarter and first nine months of 2021 was 18.4 percent and 18.8 percent, respectively, a decrease from 21.5 percent and 20.1 percent compared to the same periods, respectively, in prior year. • On an adjusted basis, the effective tax rate for the third quarter and first nine months of 2021 was 18.4 percent and 18.8 percent, respectively, a decrease of 3.1 and a decrease of 2.2 percentage points compared to the same periods year-on-year. • The primary factor that decreased the Company’s effective tax rate was favorable adjustments in 2021 related to impacts of U.S. international tax provisions. Shares of common stock outstanding: • Higher shares outstanding decreased earnings per share year-on-year for both the third quarter and first nine months of 2021. Certain amounts adjusted for special items - (non-GAAP measures): In addition to reporting financial results in accordance with U.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 56 Table of Contents 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 $17 million ($13 million after tax) related to PFAS (certain perfluorinated compounds) matters. The charge was more than offset by a reduction in tax expense of $52 million related to resolution of tax treatment with authorities regarding the previously disclosed 2018 agreement reached with the State of Minnesota that 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 $2 million ($1 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 $387 million ($304 million after tax) related to the sale of its drug delivery business. Refer to Note 3 for further details. Divestiture-related restructuring actions: • In the second quarter of 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. 57 Table of Contents (Dollars in millions, except per share amounts) Operating Income Operating Income Margin Income Before Taxes Provision for Income Taxes Effective Tax Rate Net Income Attributable to 3M Earnings Per Diluted Share Earnings per diluted share percent change Three months ended September 30, 2020 GAAP $ 1,909 22.9 % $ 1,826 $ 391 21.5 % $ 1,430 $ 2.45 Adjustments for special items: None — — — — — Three months ended September 30, 2020 adjusted amounts (non-GAAP measures) $ 1,909 22.9 % $ 1,826 $ 391 21.5 % $ 1,430 $ 2.45 Three months ended September 30, 2021 GAAP $ 1,788 20.0 % $ 1,757 $ 324 18.4 % $ 1,434 $ 2.45 — % Adjustments for special items: None — — — — — Three months ended September 30, 2021 adjusted amounts (non-GAAP measures) $ 1,788 20.0 % $ 1,757 $ 324 18.4 % $ 1,434 $ 2.45 — % (Dollars in millions, except per share amounts) Operating Income Operating Income Margin Income Before Taxes Provision for Income Taxes Effective Tax Rate Net Income Attributable to 3M Earnings Per Diluted Share Earnings per diluted share percent change Nine months ended September 30, 2020 GAAP $ 5,312 22.5 % $ 5,064 $ 1,016 20.1 % $ 4,044 $ 6.95 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 Nine months ended September 30, 2020 adjusted amounts (non-GAAP measures) $ 4,995 21.2 % $ 4,747 $ 995 21.0 % $ 3,748 $ 6.44 Nine months ended September 30, 2021 GAAP $ 5,753 21.5 % $ 5,640 $ 1,058 18.8 % $ 4,582 $ 7.81 12 % Adjustments for special items: None — — — — — Nine months ended September 30, 2021 adjusted amounts (non-GAAP measures) 5,753 21.5 % 5,640 1,058 18.8 % 4,582 7.81 21 % Sales and operating income by business segment: The following tables contain sales and operating income results by business segment for the three and nine months ended September 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. 58 Table of Contents Three months ended September 30, 2021 2020 % change (Dollars in millions) Net Sales Oper. Income Net Sales Oper. Income Net Sales Oper. Income Business Segments Safety and Industrial $ 3,235 $ 620 $ 3,017 $ 774 7.2 % (19.9) % Transportation and Electronics 2,450 465 2,316 514 5.8 (9.4) Health Care 2,249 529 2,160 493 4.1 7.2 Consumer 1,525 332 1,412 343 8.1 (3.3) Corporate and Unallocated 3 (27) (2) (73) Elimination of Dual Credit (520) (131) (553) (142) Total Company $ 8,942 $ 1,788 $ 8,350 $ 1,909 7.1 % (6.3) % Nine months ended September 30, 2021 2020 % change (Dollars in millions) Net Sales Oper. Income Net Sales Oper. Income Net Sales Oper. Income Business Segments Safety and Industrial $ 9,816 $ 2,149 $ 8,601 $ 2,091 14.1 % 2.8 % Transportation and Electronics 7,463 1,602 6,492 1,338 15.0 19.8 Health Care 6,775 1,614 6,087 1,246 11.3 29.6 Consumer 4,380 932 3,893 886 12.5 5.2 Corporate and Unallocated 2 (116) (1) 125 Elimination of Dual Credit (1,693) (428) (1,471) (374) Total Company $ 26,743 $ 5,753 $ 23,601 $ 5,312 13.3 % 8.3 % Three months ended September 30, 2021 Worldwide Sales Change By Business Segment Organic local- currency sales Acquisitions Divestitures Translation Total sales change Safety and Industrial 6.1 % — % — % 1.1 % 7.2 % Transportation and Electronics 5.1 — — 0.7 5.8 Health Care 3.3 — — 0.8 4.1 Consumer 7.6 — — 0.5 8.1 Total Company 6.3 — — 0.8 7.1 Nine months ended September 30, 2021 Worldwide Sales Change By Business Segment Organic local- currency sales Acquisitions Divestitures Translation Total sales change Safety and Industrial 11.0 % — % — % 3.1 % 14.1 % Transportation and Electronics 12.4 — — 2.6 15.0 Health Care 11.4 — (2.7) 2.6 11.3 Consumer 10.8 — — 1.7 12.5 Total Company 11.5 — (0.7) 2.5 13.3 59 Table of Contents Sales by geographic area: Percent change information compares the third quarter and first nine 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 September 30, 2021 Americas Asia Pacific Europe, Middle East & Africa Other Unallocated Worldwide Net sales (millions) $ 4,692 $ 2,642 $ 1,608 $ — $ 8,942 % of worldwide sales 52.5 % 29.5 % 18.0 % — 100.0 % Components of net sales change: Volume — organic 5.4 % 5.1 % 3.1 % 4.9 % Price 2.0 0.5 1.1 1.4 Organic local-currency sales 7.4 5.6 4.2 6.3 Divestitures — — — — Translation 0.5 1.2 1.0 0.8 Total sales change 7.9 % 6.8 % 5.2 % 7.1 % Total sales change: Safety and Industrial 5.5 % 18.1 % 0.2 % 7.2 % Transportation and Electronics 13.7 0.6 12.2 5.8 Health Care 1.7 12.8 4.3 4.1 Consumer 10.0 4.2 0.5 8.1 Organic local-currency sales change: Safety and Industrial 4.9 % 15.6 % (0.8) % 6.1 % Transportation and Electronics 13.3 (0.2) 11.3 5.1 Health Care 1.4 10.9 3.1 3.3 Consumer 9.5 3.8 (0.6) 7.6 Additional information beyond what is included in the preceding table is as follows: • In the Americas geographic area, U.S. total sales increased 6 percent which included increased organic-local currency sales of 6 percent. Total sales in Mexico increased 15 percent which included increased organic local-currency sales of 12 percent. In Canada, total sales increased 12 percent which included increased organic local-currency sales of 7 percent. In Brazil, total sales increased 26 percent which included increased organic local-currency sales of 22 percent. • In the Asia Pacific geographic area, China total sales increased 8 percent which included increased organic local-currency sales of 3 percent. In Japan, total sales increased 2 percent which included increased organic local-currency sales of 6 percent. 60 Table of Contents Nine months ended September 30, 2021 Americas Asia Pacific Europe, Middle East & Africa Other Unallocated Worldwide Net sales (millions) $ 13,602 $ 8,066 $ 5,077 $ (2) $ 26,743 % of worldwide sales 50.9 % 30.2 % 18.9 % — 100.0 % Components of net sales change: Volume — organic 11.2 % 11.1 % 8.6 % 10.7 % Price 1.3 (0.1) 0.8 0.8 Organic local-currency sales 12.5 11.0 9.4 11.5 Divestitures (0.8) — (1.5) (0.7) Translation 0.5 3.7 6.2 2.5 Total sales change 12.2 % 14.7 % 14.1 % 13.3 % Total sales change: Safety and Industrial 12.8 % 19.5 % 11.6 % 14.1 % Transportation and Electronics 13.5 14.2 21.0 15.0 Health Care 8.4 15.8 15.7 11.3 Consumer 13.0 9.7 13.9 12.5 Organic local-currency sales change: Safety and Industrial 12.2 % 14.1 % 5.4 % 11.0 % Transportation and Electronics 13.1 11.5 14.6 12.4 Health Care 10.5 10.7 14.3 11.4 Consumer 12.5 5.8 7.8 10.8 Additional information beyond what is included in the preceding table is as follows: • In the Americas geographic area, U.S. total sales increased 10 percent which included increased organic-local currency sales of 11 percent. Total sales in Mexico increased 21 percent which included increased organic local-currency sales of 18 percent. In Canada, total sales increased 21 percent which included increased organic local-currency sales of 13 percent. In Brazil, total sales increased 25 percent which included increased organic local-currency sales of 29 percent. • In the Asia Pacific geographic area, China total sales increased 21 percent which included increased organic local-currency sales of 15 percent. In Japan, total sales increased 4 percent which included increased organic local-currency sales of 5 percent. Managing currency risks: The weaker U.S. dollar had a positive impact on sales in the third quarter and first nine months of 2021 compared to the same periods last year. Net of the Company’s hedging strategy, foreign currency negatively impacted earnings in the third quarter and positively impacted earnings in the first nine months of 2021 compared to the same periods 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. 61 Table of Contents Financial condition: 3M generated $5.4 billion of operating cash flows in the first nine months of 2021, a decrease of $149 million when compared to the first nine months of 2020, with this decrease year-on-year primarily driven by working capital changes. Refer to the section entitled “Financial Condition and Liquidity” later in MD&A for a discussion of items impacting cash flows. 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 the first nine months of 2021, the Company purchased $1,261 million of its own stock, compared to $366 million of stock purchases in the first nine months of 2020. As of September 30, 2021, approximately $6.5 billion remained available under the authorization. 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 marked the 63 rd consecutive year of dividend increases for 3M. In May and August 2021, 3M’s Board of Directors declared a second and third quarter 2021 dividend of $1.48 per share for each quarter. 3M currently has an A1 credit rating with a negative outlook from Moody’s Investors Service and has an A+ credit rating with Standard & Poor’s with a negative outlook. The Company generates significant ongoing cash flow and has proven access to capital markets funding throughout business cycles. 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 its U.S. plans in 2021. RESULTS OF OPERATIONS Net 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 September 30, Nine Months Ended September 30, (Percent of net sales) 2021 2020 Change 2021 2020 Change Cost of sales 54.3 % 51.5 % 2.8 % 52.7 % 51.7 % 1.0 % Selling, general and administrative expenses (SG&A) 20.3 20.1 0.2 20.1 21.4 (1.3) Research, development and related expenses (R&D) 5.4 5.5 (0.1) 5.7 6.0 (0.3) Gain on sale of businesses — — — — (1.6) 1.6 Operating income margin 20.0 % 22.9 % (2.9) % 21.5 % 22.5 % (1.0) % 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 third quarter and first nine months of 2021 was approximately $9 million and $31 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. 62 Table of Contents 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 the third quarter and first nine months of 2021 when compared to the same periods last year. Increases primarily related to higher raw material, logistics and outsourced manufacturing costs; increased adjustments to other environmental liabilities; and increased investments in sustainability. Cost of sales was also impacted by year-over-year changes in restructuring charges, net of restructuring benefits. Year-over-year cost increases were partially offset by lower COVID-related net impacts taken in the first nine months of 2021 versus the same period last year, including period expenses of unabsorbed manufacturing costs taken in 2020. Selling, General and Administrative Expenses: SG&A in dollars increased 8 percent and 7 percent in the third quarter and first nine months of 2021, respectively, when compared to the same period last year. These results reflect increased litigation-related costs and continued spending on key growth initiatives. SG&A was also impacted by year-over-year changes in restructuring charges, net of restructuring benefits. Cost increases were partially offset by the impact of the favorable decision of the Brazilian 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 increased in the third quarter and decreased in the first nine months of 2021 as a result of these factors. Research, Development and Related Expenses: R&D in dollars increased $21 million and $98 million in the third quarter and first nine 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 for both the third quarter and the first nine 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 $40 million and $123 million in the third quarter and first nine months of 2021, respectively, compared to the same period in 2020. Provision for Income Taxes: Three months ended September 30, Nine months ended September 30, (Percent of pre-tax income) 2021 2020 2021 2020 Effective tax rate 18.4 % 21.5 % 18.8 % 20.1 % The effective tax rate for the third quarter of 2021 was 18.4 percent, compared to 21.5 percent in the third quarter of 2020, a decrease of 3.1 percentage points. The effective tax rate for the first nine months of 2021 was 18.8 percent compared to 20.1 percent in the first nine months of 2020 a decrease of 1.3 percentage points. The primary factor that decreased the Company’s effective tax rate was favorable adjustments in 2021 related to impacts of U.S. international tax provisions. 63 Table of Contents 3M currently estimates its effective tax rate for 2021 to be approximately 18.5 to 19.5 percent. The tax rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits, changes in tax laws, and employee share-based payment accounting; as well as recurring factors, such as the geographic mix of income before taxes. Refer to Note 8 for further discussion of income taxes. Income from Unconsolidated Subsidiaries, Net of Taxes: Three months ended September 30, Nine months ended September 30, (Millions) 2021 2020 2021 2020 Income (loss) from unconsolidated subsidiaries, net of taxes $ 4 $ (1) $ 7 $ (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 (Loss) Attributable to Noncontrolling Interest: Three months ended September 30, Nine months ended September 30, (Millions) 2021 2020 2021 2020 Net income (loss) attributable to noncontrolling interest $ 3 $ 4 $ 7 $ 3 Net income (loss) attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-3M ownership interests in 3M consolidated entities. The primary noncontrolling interest relates to 3M India Limited, of which 3M’s effective ownership is 75 percent. 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. 64 Table of Contents Corporate and Unallocated operating expenses decreased in the third quarter and increased in first nine 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 third quarter and first nine 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 the Brazilian Supreme Court in the second quarter of 2021 regarding the calculation of past social taxes, continued 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 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 to Europe, Middle East and Africa 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 September 30, Nine months ended September 30, 2021 2020 2021 2020 Sales (millions) $ 3,235 $ 3,017 $ 9,816 $ 8,601 Sales change analysis: Organic local-currency 6.1 % 11.0 % Translation 1.1 3.1 Total sales change 7.2 % 14.1 % Business segment operating income (millions) $ 620 $ 774 $ 2,149 $ 2,091 Percent change (19.9) % 2.8 % Percent of sales 19.2 % 25.7 % 21.9 % 24.3 % Third quarter 2021 results: Sales in Safety and Industrial totaled $3.2 billion, up 7.2 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 abrasives, industrial adhesives and tapes, electrical markets, closure and masking systems, and automotive aftermarket driven by continued robust industrial manufacturing activity along with prior year pandemic-related impacts. • Sales declined in roofing granules and personal safety against strong comparisons from prior year and declines due to prior year's strong COVID-related respiratory demand. 65 Table of Contents Business segment operating income margins decreased year-on-year due to ongoing increases in raw materials, logistics and litigation-related costs along with manufacturing productivity impacts, partially offset by leverage on sales growth. First nine months 2021 results: Sales in Safety and Industrial totaled $9.8 billion, up 14.1 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 abrasives, industrial adhesives and tapes, automotive aftermarket, roofing granules, electrical markets, personal safety, and closure and masking systems. • 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 litigation-related costs along with manufacturing productivity impacts, partially offset by sales growth leverage. Transportation and Electronics Business: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Sales (millions) $ 2,450 $ 2,316 $ 7,463 $ 6,492 Sales change analysis: Organic local-currency 5.1 % 12.4 % Translation 0.7 2.6 Total sales change 5.8 % 15.0 % Business segment operating income (millions) $ 465 $ 514 $ 1,602 $ 1,338 Percent change (9.4) % 19.8 % Percent of sales 19.0 % 22.2 % 21.5 % 20.6 % Third quarter 2021 results: Sales in Transportation and Electronics totaled $2.5 billion, up 5.8 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 advanced materials, commercial solutions, automotive and aerospace and transportation safety; sales decreased in electronics. • Sales increased in automotive and aerospace with year-on-year growth in car and light truck build rates as premium vehicle production increased 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 decreased in electronics due to ongoing semiconductor constraints on customers and pandemic-related impacts. Business segment operating income margins decreased year-on-year due to strong leverage on sales growth, more than offset by increases in raw materials and logistic costs along with manufacturing productivity impacts. First nine months 2021 results: Sales in Transportation and Electronics totaled $7.5 billion, up 15.0 percent in U.S. dollars. Organic local-currency and other sales change elements are included in the table above. 66 Table of Contents On an organic local-currency sales basis: • Sales increased in automotive and aerospace, advanced materials, commercial solutions, electronics and transportation safety. • 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 third 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 along with manufacturing productivity impacts. Health Care Business: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Sales (millions) $ 2,249 $ 2,160 $ 6,775 $ 6,087 Sales change analysis: Organic local-currency 3.3 % 11.4 % Divestitures — (2.7) Translation 0.8 2.6 Total sales change 4.1 % 11.3 % Business segment operating income (millions) $ 529 $ 493 $ 1,614 $ 1,246 Percent change 7.2 % 29.6 % Percent of sales 23.5 % 22.8 % 23.8 % 20.5 % Third quarter 2021 results: Sales in Health Care totaled $2.2 billion, up 4.1 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 food safety, oral care, health information systems and separation and purification; sales declined in medical solutions. • Sales increased in oral care as dental procedures continued to be near pre-COVID levels, in food safety as food service activity returned, and in separation and purification due to ongoing demand for biopharma filtration solutions for COVID-related vaccine and therapeutics. • Sales increased in health information systems driven by strong growth in clinician solutions. • Sales decreased in medical solutions due to the continued decline in demand for COVID-related respirators along with the pace of hospital elective procedure volumes coming in at the low end of industry expectations. Business segment operating income margins increased year-on-year due to leverage on sales growth, partially offset by increasing raw materials and logistics costs, manufacturing productivity impacts, along with increased investments in growth. First nine months 2021 results: Sales in Health Care totaled $6.8 billion, up 11.3 percent in U.S. dollars. Organic local-currency and other sales change elements are included in the table above. 67 Table of Contents On an organic local-currency sales basis: • Sales increased in oral care, separation and purification, food safety, health information systems, and medical solutions. • Sales increased in oral care driven by higher year-on-year dental procedures 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 in the first six months of 2021 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 May 2020, 3M completed the sale of substantially all of its drug delivery 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, manufacturing productivity impacts, and increased investments in growth. Consumer Business: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Sales (millions) $ 1,525 $ 1,412 $ 4,380 $ 3,893 Sales change analysis: Organic local-currency 7.6 % 10.8 % Translation 0.5 1.7 Total sales change 8.1 % 12.5 % Business segment operating income (millions) $ 332 $ 343 $ 932 $ 886 Percent change (3.3) % 5.2 % Percent of sales 21.7 % 24.3 % 21.3 % 22.7 % Third quarter 2021 results: Sales in Consumer totaled $1.5 billion, up 8.1 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 stationery and office, consumer health and safety, home improvement and home care. • Sales increased in stationery and office supplies as the business laps last year’s COVID-related comparisons and due to a strong back-to-school consumer demand and holiday-related sell-in for Scotch ® -branded packaging and shipping products, Post-it ® -solutions and Scotch ® -branded home and office tapes. • Sales increased in consumer health and safety as last year’s COVID-related impacts are lapped. • Sales increased in home improvement as the business continued to experience strong demand in many of our category leading franchises particularly for Command TM adhesives and Filtrete TM air quality 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 that more than offset leverage from sales growth. First nine months 2021 results: Sales in Consumer totaled $4.4 billion, up of 12.5 percent in U.S. dollars. Organic local-currency and other sales change elements are included in the table above. 68 Table of Contents On an organic local-currency sales basis: • Sales increased in stationery and office, home improvement, consumer health and safety and home care. • Sales increased in home improvement driven by continued strength in home improvement with strong demand for Command TM adhesives, Filtrete TM air quality solutions, Meguiars TM auto care and Scotch Blue TM painter’s tape. • Sales increased in stationery and office supplies from ongoing strength in consumer demand for packaging and shipping products, Post-it ® -solutions 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 nine 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 in the United States, the Company relies on ongoing cash flow from U.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 for U.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 and U.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 at September 30, 2021 and December 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 $630 million lower at September 30, 2021 when compared to December 31, 2020. Decreases in debt were largely due to the March 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, during the second and third quarters 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. In July 2017, the United 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. In November 2020, the ICE Benchmark Administration (IBA), LIBOR’s administrator, proposed extending the publication of USD LIBOR through June 2023. Subsequently, in March of 2021, IBA stated it will cease publication of certain LIBOR rates after December 31, 2021. USD LIBOR rates that do not cease on December 31, 2021 will continue to be published through June 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. 69 Table of Contents Effective February 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 dated February 24, 2017. In May 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 of September 30, 2021, the total amount of debt issued as part of the medium-term notes program (Series F), inclusive of debt issued in February 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, the August 2019 and March 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 in November 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 in November 2020 with an expiration date of November 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 at September 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. At September 30, 2021, this ratio was approximately 19 to 1. Debt covenants do not restrict the payment of dividends. The Company also had $268 million in stand-alone letters of credit and bank guarantees issued and outstanding at September 30, 2021. These instruments are utilized in connection with normal business activities. Cash, cash equivalents and marketable securities: At September 30, 2021, 3M had $5.8 billion of cash, cash equivalents and marketable securities, of which approximately $4.9 billion was held by the Company’s foreign subsidiaries and approximately $0.9 billion was held in the United States. These balances are invested in bank instruments and other high-quality fixed income securities. At December 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 by the United States. The increase from December 31, 2020 primarily resulted from strong cash flow from operations offset by ongoing dividend payments, purchases of treasury stock, capital expenditures, and the March 2021 early redemption via make-whole call offers of $450 million in debt. Net Debt (non-GAAP measure): Net debt is not defined under U.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 of September 30, 2021 and December 31, 2020. (Millions) September 30, 2021 December 31, 2020 Change Total debt $ 18,165 $ 18,795 $ (630) Less: Cash, cash equivalents and marketable securities 5,763 5,068 695 Net debt (non-GAAP measure) $ 12,402 $ 13,727 $ (1,325) Refer to the preceding “Total Debt” and “Cash, Cash Equivalents and Marketable Securities” sections for additional details. 70 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) September 30, 2021 December 31, 2020 Change Current assets $ 16,426 $ 14,982 $ 1,444 Less: Current liabilities 9,635 7,948 1,687 Working capital (non-GAAP measure) $ 6,791 $ 7,034 $ (243) 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 under U.S. generally accepted accounting principles and may not be computed the same as similarly titled measures used by other companies. The Company defines working capital as current assets minus current liabilities. 3M believes working capital is meaningful to investors as a measure of operational efficiency and short-term financial health. Working capital decreased $0.2 billion compared with December 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 $1.7 billion, primarily due to increases in current-portion of long-term debt and accounts payable. Accounts receivable increased $211 million and inventory increased $711 million, respectively, from December 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. 71 Table of Contents Cash Flows from Operating Activities: Nine months ended September 30, (Millions) 2021 2020 Net income including noncontrolling interest $ 4,589 $ 4,047 Depreciation and amortization 1,408 1,413 Company pension and postretirement contributions (121) (122) Company pension and postretirement expense 137 232 Stock-based compensation expense 227 216 Gain on sale of businesses — (389) Income taxes (deferred and accrued income taxes) (196) 89 Accounts receivable (324) 113 Inventories (823) 43 Accounts payable 340 (48) Other — net 212 4 Net cash provided by (used in) operating activities $ 5,449 $ 5,598 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 nine months of 2021, cash flows provided by operating activities decreased $149 million compared to the same period last year, with this decrease primarily due to working capital changes and the timing of income tax payments offset by higher net income year-on-year. The combination of accounts receivable, inventories and accounts payable decreased operating cash flow by $807 million and increased operating cash flow by $108 million in the first nine months of 2021 and 2020, respectively. Additional discussion on working capital changes is provided earlier in the “Financial Condition and Liquidity” section. Cash Flows from Investing Activities: Nine months ended September 30, (Millions) 2021 2020 Purchases of property, plant and equipment (PP&E) $ (1,047) $ (1,079) Proceeds from sale of PP&E and other assets 44 29 Acquisitions, net of cash acquired — (25) Purchases and proceeds from maturities and sale of marketable securities and investments, net (447) 170 Proceeds from sale of businesses, net of cash sold — 576 Other — net 18 8 Net cash provided by (used in) investing activities $ (1,432) $ (321) 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 $1.5 billion to $1.6 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. 72 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 its drug 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: Nine months ended September 30, (Millions) 2021 2020 Change in short-term debt — net $ 4 $ (138) Repayment of debt (maturities greater than 90 days) (450) (2,477) Proceeds from debt (maturities greater than 90 days) 1 1,745 Total cash change in debt (445) (870) Purchases of treasury stock (1,261) (366) Proceeds from issuances of treasury stock pursuant to stock option and benefit plans 566 325 Dividends paid to shareholders (2,572) (2,540) Other — net (21) (47) Net cash provided by (used in) financing activities $ (3,733) $ (3,498) Total debt was approximately $18.2 billion at September 30, 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 September 30, 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 the first nine months of 2021, the Company purchased $1.3 billion of its own stock. 3M repurchased shares, 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. In May and August 2021, 3M’s Board of Directors declared a second and third quarter 2021 dividend of $1.48 per share for each quarter. 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. 73 Table of Contents Free Cash Flow (non-GAAP measure): Free cash flow and free cash flow conversion are not defined under U.S. generally accepted accounting principles (GAAP). Therefore, they should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The Company defines free cash flow conversion as free cash flow divided by net income attributable to 3M. The Company believes free cash flow and free cash flow conversion are meaningful to investors as they are useful measures of performance and the Company uses these measures as an indication of the strength of the company and its ability to generate cash. Free cash flow and free cash flow conversion vary across quarters throughout the year. Below find a recap of free cash flow and free cash flow conversion. 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. Nine months ended September 30, (Millions) 2021 2020 Major GAAP Cash Flow Categories Net cash provided by (used in) operating activities $ 5,449 $ 5,598 Net cash provided by (used in) investing activities (1,432) (321) Net cash provided by (used in) financing activities (3,733) (3,498) Free Cash Flow (non-GAAP measure) Net cash provided by (used in) operating activities $ 5,449 $ 5,598 Purchases of property, plant and equipment (1,047) (1,079) Free cash flow 4,402 4,519 Net income attributable to 3M $ 4,582 $ 4,044 Free cash flow conversion 96 % 112 % 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 the Securities 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, 74 Table of Contents • 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 United States and other countries in which we operate. 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 the SEC from time to time.