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 2023, 3M made the following changes: • Changes in measure of segment operating performance and segment composition used by 3M’s chief operating decision maker—impacting 3M’s disclosed measure of segment profit/loss (business segment operating income)—and realignment of 3M's Consumer business segment from four divisions to three divisions. See additional information in Note 15. 3M's disclosed disaggregated revenue was also updated as a result of these changes. See additional information in Note 2. • Changes to non-GAAP measures - certain amounts adjusted for special items. Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section below for additional information. Information provided herein reflects the impact of these changes for all periods presented. 3M manages its operations in four operating business segments: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis. References are made to organic sales change (which include both organic volume impacts and selling price impacts), which is defined as the change in net sales, absent the separate impacts on sales from foreign currency translation and acquisitions, net of divestitures. Acquisition and divestiture sales change impacts, if any, are measured separately for the first twelve months post-transaction. 3M believes this information is useful to investors and management in understanding ongoing operations and in analysis of ongoing operating trends. 3M has been and may continue to be impacted by the global pandemic and related effects associated with the coronavirus (COVID-19). The Overview section of Part II, Item 7 of the Company’s 2022 Annual Report on Form 10-K provides a description of how COVID-19 has impacted or may impact 3M. In addition within this Form 10-Q for the quarterly period ended March 31, 2023, risk factors with respect to COVID-19 can be found in Item 1A “Risk Factors” and certain COVID-19 impacts are referenced in various discussions within this Form 10-Q, including in this Item 2. 50 Table of Contents 3M is also impacted by certain special items such as costs for significant litigation and the sales and income associated with manufactured PFAS products that 3M plans to exit by the end of 2025. See Certain amounts adjusted for special items - (non-GAAP measures) section below for additional discussion of these and other special items, including references therein to where further information is provided. Additional information regarding certain items impacting pre-2023 periods that may also be relevant in 2023 can be found in the Overview section of Part II, Item 7 as well as in further sections of 3M’s 2022 Annual Report on Form 10-K. Earnings per share attributable to 3M common shareholders – diluted: The following table provides the increases (decreases) in diluted earnings per share. Earnings per diluted share Three months ended March 31, 2023 Same period last year $ 2.26 Net costs for significant litigation 0.39 Manufactured PFAS products (0.02) Total special items 0.37 Same period last year, excluding special items $ 2.63 Increase/(decrease) due to: Total organic growth/productivity and other (0.38) Restructuring (0.05) Raw material impact (0.15) Foreign exchange impacts (0.10) Divestitures (0.03) Other expense (income), net (0.02) Income tax rate — Shares of common stock outstanding 0.07 Current period, excluding special items 1.97 Net costs for significant litigation (0.07) Divestiture costs (0.15) Manufactured PFAS products 0.01 Total special items (0.21) Current period $ 1.76 The Company refers to various "adjusted" amounts or measures on an “adjusted basis.” These exclude special items. These non-GAAP measures are further described and reconciled to the most directly comparable GAAP financial measures in the Certain amounts adjusted for special items - (non-GAAP measures) section below. A discussion related to the components of year-on-year changes in earnings per diluted share follows: Total organic growth/productivity and other: • For the first quarter of 2023, the following components impacted earnings per diluted share year-on-year: ◦ Declines in disposable respirator demand year-on-year and the 2022 exit of operations in Russia negatively impacted earnings per share by $0.21. ◦ Remaining organic growth/productivity and other impacts resulted in a net year-on-year decline of $0.17 per share which was impacted by the following: ▪ Lower sales volumes (particularly electronics/consumer retail); manufacturing/supply chain headwinds; China (COVID-related); and Europe geopolitical impacts ▪ Benefits from higher selling prices; aggressive spending discipline; ongoing productivity actions ▪ Investments in growth, productivity, and sustainability 51 Table of Contents Restructuring: • 3M recorded restructuring pre-tax charges of $52 million in the first quarter of 2023 compared to $18 million in the same period last year (refer to Note 5 for additional discussion). Raw material impact: • 3M continued to experience headwinds year-on-year from the carryover impact of higher raw material, logistics and energy cost inflation. Foreign exchange impacts • Foreign currency impacts (net of hedging) decreased operating income and pre-tax earnings by approximately $76 million year-on-year for the first quarter of 2023, primarily resulting from the strength of the U.S. dollar. These estimates include: (a) the effects of year-on-year changes in exchange rates on translating current period functional currency profits into U.S. dollars and on current period non-functional currency denominated purchases or transfers of goods between 3M operations, and (b) year-on-year changes in transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks. Divestitures: • Divestiture impact includes lost income from divested businesses and remaining stranded costs (net of transition arrangement income). In the third quarter of 2022, 3M completed both the split-off of the Food Safety business (discussed in Note 3) and the deconsolidation of the Aearo Entities (discussed in Note 14). Other expense (income), net: • Lower income related to non-service cost components of pension and postretirement expense increased expense year-on-year for the first quarter of 2023. • Interest expense (net of interest income) decreased for the first quarter of 2023 compared to the same period year-on-year. Income tax rate: • Certain items above reflect specific income tax rates associated therewith. Overall, the effective tax rate for the first quarter of 2023 was 17.7 percent, a decrease from 18.8 percent in the prior year. The primary factor that decreased the Company's effective tax rate for first quarter 2023 was deferred tax impacts of 2023 activity. • On an adjusted basis (as discussed below), the effective tax rate for the first quarter of 2023 was 17.7 percent, an increase of 0.2 percentage points compared to the same period year-on-year. Shares of common stock outstanding: • Lower shares outstanding increased earnings per share year-on-year for the first quarter of 2023. 52 Table of Contents Certain amounts adjusted for special items - (non-GAAP measures): In addition to reporting financial results in accordance with U.S. GAAP, 3M also provides certain non-GAAP measures. These measures are not in accordance with, nor are they a substitute for GAAP measures, and may not be comparable to similarly titled measures used by other companies. Certain measures adjust for the impacts of special items. Special items for the periods presented include the items described below. Because 3M provides certain information with respect to business segments, it is noteworthy that special items impacting operating income (loss) are reflected in Corporate and Unallocated, except as described below with respect to net costs for significant litigation and manufactured PFAS products items. In 2023, 3M changed certain of its non-GAAP measures by adjusting for the results of manufactured PFAS products in arriving at results, adjusted for special items. In the fourth quarter of 2022, 3M recorded a charge for PFAS manufacturing exit costs and included it as an adjustment in arriving at results, adjusted for special items. The 2023 non-GAAP measure change involved expanding the extent of adjustment to include the sales and estimates of income (including exit costs) and associated activity regarding manufactured PFAS products that 3M plans to exit by the end of 2025. The information herein reflects the impacts of these changes for all periods presented. This document contains measures for which 3M provides the reported GAAP measure and a non-GAAP measure adjusted for special items.These measures and reasons 3M believes they are useful to investors (and, as applicable, used by 3M) include: GAAP amounts for which a measure adjusted for special items is also provided: Reasons 3M believes the measure is useful • Net sales (and sales change) Considered, in addition to segment operating performance, in evaluating and managing operations; useful in understanding underlying business performance, provides additional transparency to special items • Operating income, segment operating income and operating income margin • Income before taxes • Provision for income taxes and effective tax rate • Net income • Earnings per share Special items for the periods presented include: Net costs for significant litigation: • These relate to 3M's respirator mask/asbestos, PFAS-related other environmental, and Combat Arms Earplugs matters (as discussed in Note 14). Net costs include the impacts of any changes in accrued liabilities, external legal fees, and insurance recoveries, along with the associated tax impacts. Prior to initiating voluntary chapter 11 bankruptcy proceedings in July 2022, net costs related to Combat Arms Earplugs and Aearo-respirator mask/asbestos matters along with non-Aearo respirator mask/asbestos matters were reflected as special items in the Safety and Industrial business segment. During the bankruptcy period, net costs related to Combat Arms Earplugs and Aearo-respirator mask/asbestos matters are reflected as corporate special items in Corporate and Unallocated. Divestiture costs: • These include costs related to separating and divesting substantially an entire business segment of 3M following public announcement of its intended divestiture. Manufactured PFAS products: • These amounts relate to sales and estimates of income regarding manufactured PFAS products that 3M plans to exit by the end of 2025 included within the Transportation and Electronics business segment. Estimated income does not contemplate impacts on non-operating items such as net interest income/expense and the non-service cost components portion of defined benefit plan net periodic benefit costs. 53 Table of Contents Three months ended March 31, 2022 (Dollars in millions, except per share amounts) Net Sales Operating Income Operating Income Margin Income Before Taxes Provision for Income Taxes Effective tax rate Net Income Attributable to 3M Earnings per Diluted Share Safety and Industrial GAAP amounts $ 627 20.6 % Adjustments for special items: Net costs for significant litigation 63 Total special items 63 Adjusted amounts (non-GAAP measures) $ 690 22.6 % Transportation and Electronics GAAP amounts $ 2,340 $ 464 19.8 % Adjustments for special items: Manufactured PFAS products (320) (16) Total special items (320) (16) Adjusted amounts (non-GAAP measures) $ 2,020 $ 448 22.2 % Total Company GAAP amounts $ 8,829 $ 1,641 18.6 % $ 1,603 $ 302 18.8 % $ 1,299 $ 2.26 Adjustments for special items: Net costs for significant litigation — 250 250 25 225 0.39 Manufactured PFAS products (320) (16) (16) (4) (12) (0.02) Total special items (320) 234 234 21 213 0.37 Adjusted amounts (non-GAAP measures) $ 8,509 $ 1,875 22.0 % $ 1,837 $ 323 17.5 % $ 1,512 $ 2.63 Three months ended March 31, 2023 (Dollars in millions, except per share amounts) Net Sales Sales Change 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 Safety and Industrial GAAP amounts $ 601 21.6 % Adjustments for special items: Net costs for significant litigation (39) Total special items (39) Adjusted amounts (non-GAAP measures) $ 562 20.2 % Transportation and Electronics GAAP amounts $ 2,050 (12.4) % $ 294 14.4 % Adjustments for special items: Manufactured PFAS products (345) (10) Total special items (345) (10) Adjusted amounts (non-GAAP measures) $ 1,705 (15.6) % $ 284 16.7 % Total Company GAAP amounts $ 8,031 (9.0) % $ 1,241 15.4 % $ 1,189 $ 210 17.7 % $ 976 $ 1.76 (22) % Adjustments for special items: Net costs for significant litigation — 43 43 7 36 0.07 Manufactured PFAS products (345) (10) (10) (3) (7) (0.01) Divestiture costs — 102 102 20 82 0.15 Total special items (345) 135 135 24 111 0.21 Adjusted amounts (non-GAAP measures) $ 7,686 (9.7) % $ 1,376 17.9 % $ 1,324 $ 234 17.7 % $ 1,087 $ 1.97 (25) % Three months ended March 31, 2023 Sales Change Organic sales Acquisitions Divestitures Translation Total sales change Total Company (4.9) % — % (1.3) % (2.8) % (9.0) % Remove manufactured PFAS products special item impact (0.7) — — — (0.7) Adjusted total Company (non-GAAP measures) (5.6) % — % (1.3) % (2.8) % (9.7) % Transportation and Electronics (8.0) % — % (1.0) % (3.4) % (12.4) % Remove manufactured PFAS products special item impact (3.3) — (0.1) 0.2 (3.2) Adjusted Transportation and Electronics (non-GAAP measures) (11.3) % — % (1.1) % (3.2) % (15.6) % 54 Table of Contents Sales and operating income (loss) by business segment: The following tables contain sales and operating income (loss) results by business segment for the three months ended March 31, 2023 and 2022. Refer to the section entitled Performance by Business Segment later in MD&A for additional discussion concerning 2023 versus 2022 results, including Corporate and Unallocated. Refer to Note 15 for additional information on business segments. Three months ended March 31, 2023 2022 % change (Dollars in millions) Net Sales Oper. Income (Loss) Net Sales Oper. Income (Loss) Net Sales Oper. Income (Loss) Business Segments Safety and Industrial $ 2,779 $ 601 $ 3,051 $ 627 (8.9) % (4.2) % Transportation and Electronics 2,050 294 2,340 464 (12.4) (36.6) Health Care 2,010 360 2,128 445 (5.6) (19.2) Consumer 1,192 179 1,309 219 (9.0) (18.5) Corporate and Unallocated — (193) 1 (114) Total Company $ 8,031 $ 1,241 $ 8,829 $ 1,641 (9.0) % (24.4) % Three months ended March 31, 2023 Worldwide Sales Change By Business Segment Organic sales Acquisitions Divestitures Translation Total sales change Safety and Industrial (6.0) % — % — % (2.9) % (8.9) % Transportation and Electronics (8.0) — (1.0) (3.4) (12.4) Health Care 1.4 — (4.3) (2.7) (5.6) Consumer (6.8) — (0.3) (1.9) (9.0) Total Company (4.9) — (1.3) (2.8) (9.0) Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section for additional details on the impact of special items on sales (and sales change) and operating income (loss) by business segment. Sales by geographic area: Percent change information compares the three months ended March 31, 2023 with the same prior year period, unless otherwise indicated. Additional discussion of business segment results is provided in the Performance by Business Segment section. Three months ended March 31, 2023 Americas Asia Pacific Europe, Middle East & Africa Other Unallocated Worldwide Net sales (millions) $ 4,399 $ 2,180 $ 1,452 $ — $ 8,031 % of worldwide sales 54.8 % 27.1 % 18.1 % 100.0 % Components of net sales change: Organic sales 1.2 (14.9) (4.5) (4.9) Divestitures (1.6) (1.0) (1.0) (1.3) Translation (0.5) (5.4) (4.9) (2.8) Total sales change (0.9) % (21.3) % (10.4) % (9.0) % Additional information beyond what is included in the preceding tables are as follows: • For the first quarter of 2023, in the Americas geographic area, U.S. total sales were flat which included increased organic sales of 1 percent. Total sales in Mexico increased 6 percent which included increased organic sales of 10 percent. In Canada, total sales decreased 14 percent which included decreased organic sales of 7 percent. In Brazil, total sales increased 5 percent which included increased organic sales of 8 percent. In the Asia Pacific geographic area, China total sales decreased 23 percent which included decreased organic sales of 18 percent. In Japan, total sales decreased 21 percent which included decreased organic sales of 10 percent. 55 Table of Contents Managing currency risks: The stronger U.S. dollar had a negative impact on sales in the first three months of 2023 compared to the same period last year. Net of the Company’s hedging strategy, foreign currency negatively impacted earnings in the first three months of 2023 compared to the same period last year. 3M utilizes a number of tools to manage currency risk related to earnings including natural hedges such as pricing, productivity, hard currency, hard currency-indexed billings, and localizing source of supply. 3M also uses financial hedges to mitigate currency risk. In the case of more liquid currencies, 3M hedges a portion of its aggregate exposure, using a 12, 24 or 36 month horizon, depending on the currency in question. For less liquid currencies, financial hedging is frequently more expensive with more limitations on tenor. Thus, this risk is largely managed via local operational actions using natural hedging tools as discussed above. In either case, 3M’s hedging approach is designed to mitigate a portion of foreign currency risk and reduce volatility, ultimately allowing time for 3M’s businesses to respond to changes in the marketplace. Financial condition: Refer to the section entitled Financial Condition and Liquidity later in MD&A for a discussion of items impacting cash flows. 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 three months of 2023, the Company purchased $29 million of its own stock, compared to $773 million of stock purchases in the first three months of 2022. As of March 31, 2023, approximately $4.2 billion remained available under the authorization. In February 2023, 3M’s Board of Directors declared a first-quarter 2023 dividend of $1.50 per share, an increase of 1 percent. This marked the 65th consecutive year of dividend increases for 3M. RESULTS OF 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 March 31, (Percent of net sales) 2023 2022 Change Cost of sales 57.4 % 54.7 % 2.7 % Selling, general and administrative expenses (SG&A) 21.3 21.3 — Research, development and related expenses (R&D) 5.9 5.4 0.5 Operating income margin 15.4 % 18.6 % (3.2) % Stock compensation expense was $135 million and $135 million for the three months ended March 31, 2023 and 2022, respectively, which impacts cost of sales; selling, general and administrative expenses (SG&A); and research, development and related expenses (R&D). The Company’s annual stock option and restricted stock unit grant is made in February. Accounting rules require recognition of expense under a non-substantive vesting period approach, requiring compensation expense recognition when an employee is eligible to retire. This retiree-eligible population represents 35 percent of the annual grant stock-based compensation expense; therefore, higher stock-based compensation expense is recognized in the first quarter each year. 3M expects global defined benefit pension and postretirement service cost expense in 2023 to decrease by approximately $160 million pre-tax when compared to 2022, which impacts cost of sales, SG&A, and R&D. The year-on-year decrease in defined benefit pension and postretirement service cost expense for the first three months of 2023 was approximately $42 million. For total year 2022, the Company recognized consolidated defined benefit pre-tax pension and postretirement service cost expense of $426 million and a benefit of $248 million related to all non-service pension and postretirement net benefit costs (after settlements, curtailments, special termination benefits and other) for a total consolidated defined benefit pre-tax pension and postretirement expense of $178 million. For total year 2023, defined benefit pension and postretirement service cost expense is anticipated to total approximately $270 million while non-service pension and postretirement net benefit cost is anticipated to be a benefit of approximately $125 million, for a total consolidated defined benefit pre-tax pension and postretirement expense of approximately $145 million, a decrease in expense of approximately $30 million compared to 2022. 56 Table of Contents The Company is continuing the ongoing deployment of an enterprise resource planning (ERP) system on a worldwide basis, with these investments impacting cost of sales, SG&A, and R&D. Cost of Sales: Cost of sales, measured as a percent of sales, increased in the first three months of 2023 when compared to the same period last year. Increases were primarily due to higher raw materials and energy costs; manufacturing productivity headwinds; investments in growth, productivity and sustainability; and restructuring. These increases were partially offset year-on-year due to lower net costs for significant litigation to address certain PFAS-related other environmental matters, strong pricing and aggressive spending discipline. Selling, General and Administrative Expenses: SG&A, measured as a percent of sales, was consistent in the first three months of 2023 when compared to the same period last year. SG&A was impacted restructuring charges and continued investment in key growth initiatives. These impacts were offset by lower net costs for significant litigation to address Combat Arms Earplugs and 3M's respirator mask/asbestos litigation matters, restructuring benefits and ongoing general 3M cost management. Research, Development and Related Expenses: R&D, measured as a percent of sales, increased in the first three months of 2023 when compared to the same period last year. 3M continues to invest in a range of R&D activities from application development, product and manufacturing support, product development and technology development aimed at disruptive innovations. Other Expense (Income), Net: See Note 6 for a detailed breakout of this line item. Interest expense (net of interest income) decreased in the first quarter of 2023 primarily due to prior period debt maturities and interest income generated on invested cash. The non-service pension and postretirement net benefit decreased approximately $36 million in the first quarter of 2023 compared to the same period year-on-year. Provision for Income Taxes: Three months ended March 31, (Percent of pre-tax income) 2023 2022 Effective tax rate 17.7 % 18.8 % The primary factor that decreased the Company's effective tax rate for first quarter 2023 was deferred tax impacts of 2023 activity. The tax rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits, changes in tax laws, and employee share-based payment accounting; as well as recurring factors, such as the geographic mix of income before taxes. Refer to Note 8 for further discussion of income taxes. Income from Unconsolidated Subsidiaries, Net of Taxes: Three months ended March 31, (Millions) 2023 2022 Income (loss) from unconsolidated subsidiaries, net of taxes $ 2 $ 2 Income (loss) from unconsolidated subsidiaries, net of taxes, is attributable to the Company’s accounting under the equity method for ownership interests in certain entities such as Kindeva following 3M's divestiture of the drug delivery business in 2020. In the fourth quarter of 2022, 3M sold its remaining ownership interest in Kindeva. 57 Table of Contents Net Income (Loss) Attributable to Noncontrolling Interest: Three months ended March 31, (Millions) 2023 2022 Net income (loss) attributable to noncontrolling interest $ 5 $ 4 Net income (loss) attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-3M ownership interests in 3M consolidated entities. The primary noncontrolling interest relates to 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 Item 1, Business Segments, provides an overview of 3M’s business segments. In addition, disclosures relating to 3M’s business segments are provided in Note 15. Effective in the first quarter of 2023, the measure of segment operating performance and segment composition used by 3M’s chief operating decision maker (CODM) changed and, as a result, 3M’s disclosed measure of segment profit/loss (business segment operating income) was updated for all comparative periods presented. The change to business segment operating income aligns with the update to how the CODM assesses performance and allocates resources for the Company’s business segments (see Note 15 for additional details). Information provided herein reflects the impact of these changes for all periods presented. 3M manages its operations in four business segments. The reportable segments are Safety and Industrial; Transportation and Electronics; Health Care; and Consumer. Corporate and Unallocated: In addition to these four business segments, 3M assigns certain costs to “Corporate and Unallocated,” which is presented separately in the preceding business segments table and in Note 15. Corporate and Unallocated operating income includes “corporate special items” and “other corporate expense-net”. Corporate special items include net costs for significant litigation associated with Combat Arms Earplugs and Aearo-respirator mask/asbestos matters during the chapter 11 bankruptcy period (which began in July 2022) and with PFAS-related other environmental matters (see Note 14). Corporate special items also include divestiture costs, gain/loss on business divestitures (see Note 3), divestiture-related restructuring costs (see Note 5), and Russia exit costs (see Note 13). Divestiture costs include costs related to separating and divesting substantially an entire business segment of 3M following public announcement of its intended divestiture. Other corporate expense-net includes items such as net costs related to limited unallocated corporate staff and centrally managed material resource centers of expertise costs, corporate philanthropic activity, gains/losses from sales of property, plant and equipment and other assets, and other net costs that 3M may choose not to allocate directly to its business segments. Other corporate expense-net also includes costs and income from transition supply, manufacturing and service arrangements with Neogen Corporation following the 2022 split-off of 3M's Food Safety business. Items classified as revenue from this activity are included in Corporate and Unallocated net sales. Because Corporate and Unallocated includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis. Corporate and Unallocated operating expenses increased in the first three months of 2023, when compared to the same period last year. The subsections below provide additional information. Corporate Special Items Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section for additional details on the impact of special items and to Note 15 for additional information on the components of corporate special items. Corporate special item net costs remained flat year over year. Other Corporate Expense - Net Other corporate operating expenses, net, increased in the first three months of 2023, when compared to the same period last year. The year-on-year increase was primarily due to higher pre-tax restructuring charges and lower gains on sale of property, plant and equipment. 58 Table of Contents Operating Business Segments: Information related to 3M’s business segments is presented in the tables that follow with additional context in the corresponding narrative below the tables. Refer to 3M's 2022 Annual Report on Form 10-K, Item 1, Business, for discussion of 3M products that are included in each business segment. Safety and Industrial Business: Three months ended March 31, 2023 2022 Sales (millions) $ 2,779 $ 3,051 Sales change analysis: Organic sales (6.0) % Translation (2.9) Total sales change (8.9) % Business segment operating income (loss) (millions) $ 601 $ 627 Percent change (4.2) % Percent of sales 21.6 % 20.6 % Adjusted business segment operating income (millions) (non-GAAP measure) $ 562 $ 690 Percent change (18.7) % Percent of sales 20.2 % 22.6 % The preceding table also displays business segment operating income (loss) information adjusted for special items. For Safety and Industrial these adjustments include net costs for respirator mask/asbestos (Aearo-related and non-Aearo related) and Combat Arms Earplugs litigation matters. During the Aearo chapter 11 bankruptcy period (which began in July 2022 — see Note 14), net costs related to Combat Arms Earplugs and Aearo-respirator mask/asbestos matters are reflected as corporate special items in Corporate and Unallocated while those associated with non-Aearo respirator mask/asbestos matters continue to be reflected as special items in the Safety and Industrial business segment. Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section for additional details. First quarter 2023 results: Sales in Safety and Industrial were down 8.9 percent in U.S. dollars. On an organic sales basis: • Sales increased in automotive aftermarket, electrical markets, and abrasives and decreased in personal safety, industrial adhesives and tapes, closure and masking systems and in roofing granules. • Growth was held back by the disposable respirator sales decline within personal safety along with the exit of Russia (which, together, negatively impacted year-on-year first quarter organic growth by 9.9 percentage points); declines within industrial adhesives and tapes due to consumer electronics softness, closure and masking systems was down as consumers pulled back on discretionary spending impacting e-commerce shipments. Business segment operating income margins increased year-on-year from pricing, aggressive spending discipline, and productivity actions which more than offset the decline driven by lower sales volume, manufacturing and supply chain headwinds, carryover raw material/logistics/energy cost inflation, investments in the business and China COVID-related challenges. Adjusting for special items (non-GAAP measure), business segment operating income margins decreased year-on-year as displayed above. 59 Table of Contents Transportation and Electronics Business: Three months ended March 31, 2023 2022 Sales (millions) $ 2,050 $ 2,340 Sales change analysis: Organic sales (8.0) % Divestitures (1.0) Translation (3.4) Total sales change (12.4) % Business segment operating income (millions) $ 294 $ 464 Percent change (36.6) % Percent of sales 14.4 % 19.8 % Adjusted sales (millions) (non-GAAP measure) $ 1,705 $ 2,020 Sales change analysis: Organic sales (11.3) % Divestitures (1.1) % Translation (3.2) % Total sales change (15.6) % Adjusted business segment operating income (millions) (non-GAAP measure) $ 284 $ 448 Percent change (36.4) % Percent of sales 16.7 % 22.2 % The preceding table also displays business segment sales (and sales change) and operating income (loss) information adjusted for special items. For Transportation and Electronics these adjustments include the sales and estimates of income regarding PFAS manufactured products that 3M plans to exit by the end of 2025. Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section for additional details. First quarter 2023 results: Sales in Transportation and Electronics were down 12.4 percent in U.S. dollars. Adjusting for special item PFAS manufactured products (non-GAAP measure), sales were down 15.6 percent in U.S. dollars. On an organic sales basis: • Sales increased in automotive and aerospace, and advanced materials and decreased in electronics, transportation safety and commercial solutions. • Growth continued to be held back by significant consumer electronics end-market weakness along with tiers and original equipment manufacturers (OEMs) aggressively reducing inventories particularly for smartphones, tablets and TVs. Divestitures: • Divestiture impact relates to lost Transportation and Electronics sales year-on-year from deconsolidation of the Aearo Entities in July 2022. Business segment operating income margins decreased year-on-year from lower sales volumes, manufacturing and supply chain headwinds, carryover raw material/logistics/energy cost inflation, investments in the business and China COVID-related challenges partially offset by benefits from pricing, aggressive spending discipline, and productivity actions. Adjusting for special item PFAS manufactured products (non-GAAP measure), business segment operating income margins decreased year-on-year as displayed above. 60 Table of Contents Health Care Business: Three months ended March 31, 2023 2022 Sales (millions) $ 2,010 $ 2,128 Sales change analysis: Organic sales 1.4 % Divestitures (4.3) Translation (2.7) Total sales change (5.6) % Business segment operating income (millions) $ 360 $ 445 Percent change (19.2) % Percent of sales 17.9 % 20.9 % First quarter 2023 results: Sales in Health Care were down 5.6 percent in U.S. dollars. On an organic sales basis: • Sales increased in medical solutions, and oral care; were flat in health information systems, and decreased in separation and purification. • Growth was held back by declines in separation and purification due to the normalization of post-COVID-related biopharma demand along with overall headwinds from the exit of Russia. Divestitures: • Divestiture impact relates to the lost sales year-on-year from the Food Safety Division split-off transaction in the third quarter of 2022. Business segment operating income margins decreased year-on-year due to manufacturing and supply chain headwinds, carryover raw material/logistics/energy costs inflation and investments in the business, partially offset by benefits from pricing, aggressive spending discipline, and productivity actions. As discussed in Note 3, in the third quarter of 2022, 3M announced its intention to spin off the Health Care business as a separate public company. 3M expects to initially retain a 19.9% ownership position in the Health Care business. 61 Table of Contents Consumer Business: Three months ended March 31, 2023 2022 Sales (millions) $ 1,192 $ 1,309 Sales change analysis: Organic sales (6.8) % Divestitures (0.3) Translation (1.9) Total sales change (9.0) % Business segment operating income (millions) $ 179 $ 219 Percent change (18.5) % Percent of sales 15.0 % 16.8 % First quarter 2023 results: Sales in Consumer were down 9.0 percent in U.S. dollars. On an organic sales basis: • Sales increased in stationery and office, and decreased in home improvement and home health and auto care. • Growth was negatively impacted as consumers have shifted their spending patterns to more non-discretionary items and retailers have aggressively reduced their inventory levels. Business segment operating income margins decreased year-on-year from lower sales volumes; manufacturing and supply chain headwinds and carryover raw material/logistics/energy cost inflation, partially offset by benefits from pricing, aggressive spending discipline, and productivity actions. 62 Table of Contents FINANCIAL CONDITION AND LIQUIDITY The strength and stability of 3M’s business model and strong free cash flow capability, together with proven capital markets access, provide financial flexibility to deploy capital in accordance with the Company's stated priorities and meet needs associated with contractual commitments and other obligations. Investing in 3M’s business to drive organic growth and deliver strong returns on invested capital remains the first priority for capital deployment. This includes research and development, capital expenditures, and commercialization capability. The Company also continues to actively manage its portfolio through acquisitions and divestitures to maximize value for shareholders. 3M expects to continue returning cash to shareholders through dividends and share repurchases. To fund cash needs 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 2022 Annual Report on Form 10-K for further information on earnings considered to be reinvested indefinitely. 3M maintains a strong liquidity profile. The Company’s primary short-term liquidity needs are met through cash on hand 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 $1.1 billion in commercial paper outstanding at March 31, 2023, compared to no commercial paper outstanding as of December 31, 2022. Total debt: The strength of 3M’s credit profile and significant ongoing cash flows provide 3M proven access to capital markets. Additionally, the Company’s debt maturity profile is staggered to help ensure refinancing needs in any given year are reasonable in proportion to the total portfolio. As of March 2023, 3M has a credit rating of A1, negative outlook from Moody's Investors Service, and a credit rating of A, CreditWatch negative from S&P Global Ratings. The Company’s total debt at March 31, 2023 was consistent when compared to December 31, 2022 as maturities of $1.15 billion of fixed-rate notes were offset by issuances of commercial paper of $1.1 billion. For discussion of repayments of and proceeds from debt refer to the following Cash Flows from Financing Activities section. 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 ceased publication of certain LIBOR rates after December 31, 2021. USD LIBOR rates that did not cease on December 31, 2021 will continue to be published through June 30, 2023. The Company has reviewed its debt securities, bank facilities, derivative instruments, and commercial contracts that may utilize LIBOR as the reference rate. Contracts will be modified to apply a new reference rate where applicable. Effective February 8, 2023, the Company updated its “well-known seasoned issuer” (WKSI) shelf registration statement, which registers an indeterminate amount of debt or equity securities for future issuance and sale. This replaced 3M’s previous shelf registration dated February 10, 2020. In May 2016, 3M entered into an amended and restated distribution agreement relating to the future issuance and sale (from time to time) of the Company’s medium-term notes program (Series F), up to the aggregate principal amount of $18 billion, which was an increase from the previous aggregate principal amount up to $9 billion of the same Series. As of March 31, 2023, 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). Information with respect to long-term debt issuances and maturities for the periods presented is included in Note 10 of this Form 10-Q and Note 12 in 3M's 2022 Annual Report on Form 10-K. 3M has an amended and restated $3.0 billion five-year revolving credit facility expiring 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 2022 with an expiration date of November 2023. The 364-day credit agreement includes a provision under which 3M may convert any advances outstanding on the maturity date into term loans having a maturity date one year later. These credit facilities were undrawn at March 31, 2023. Under both the $3.0 billion and $1.25 billion credit agreements, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at not less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the four consecutive quarters then ended to total interest expense on all funded debt for the same period. At March 31, 2023, this ratio was approximately 17 to 1. Debt covenants do not restrict the payment of dividends. 63 Table of Contents The Company also had $320 million in stand-alone letters of credit and bank guarantees issued and outstanding at March 31, 2023. These instruments are utilized in connection with normal business activities. Cash, cash equivalents and marketable securities: At March 31, 2023, 3M had $4.0 billion of cash, cash equivalents and marketable securities, of which approximately $2.7 billion was held by the Company’s foreign subsidiaries and approximately $1.3 billion was held in the United States. These balances are invested in bank instruments and other high-quality fixed income securities. At December 31, 2022, 3M had $3.9 billion of cash, cash equivalents and marketable securities, of which approximately $2.7 billion was held by the Company’s foreign subsidiaries and $1.2 billion was held by the United States. The increase from December 31, 2022 primarily resulted from cash flow from operations. 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 March 31, 2023 and December 31, 2022. (Millions) March 31, 2023 December 31, 2022 Change Total debt $ 15,960 $ 15,939 $ 21 Less: Cash, cash equivalents and marketable securities 3,992 3,916 76 Net debt (non-GAAP measure) $ 11,968 $ 12,023 $ (55) Refer to the preceding Total Debt and Cash, Cash Equivalents and Marketable Securities sections for additional details. Balance Sheet: 3M’s strong balance sheet and liquidity provide the Company with significant flexibility to fund its numerous opportunities going forward. The Company will continue to invest in its operations to drive growth, including continual review of acquisition opportunities. The Company uses working capital measures that place emphasis and focus on certain working capital assets, such as accounts receivable and inventory activity. Working capital (non-GAAP measure): (Millions) March 31, 2023 December 31, 2022 Change Current assets $ 14,963 $ 14,688 $ 275 Less: Current liabilities 10,556 9,523 1,033 Working capital (non-GAAP measure) $ 4,407 $ 5,165 $ (758) Various assets and liabilities, including cash and short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. Working capital is not defined 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 $0.8 billion compared with December 31, 2022. Balance changes in current assets increased working capital by $0.3 billion, driven largely by increases in cash and cash equivalents and accounts receivable. Balance changes in current liabilities decreased working capital by $1.0 billion, primarily due to increases in short-term borrowings driven by issuances of commercial paper partially offset by decreases in accrued payroll. 64 Table of Contents 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. Cash Flows from Operating Activities: Three months ended March 31, (Millions) 2023 2022 Net income including noncontrolling interest $ 981 $ 1,303 Depreciation and amortization 466 459 Company pension and postretirement contributions (27) (42) Company pension and postretirement expense 37 43 Stock-based compensation expense 135 135 Income taxes (deferred and accrued income taxes) (130) 130 Accounts receivable (73) (189) Inventories 91 (319) Accounts payable 36 261 Other — net (241) (770) Net cash provided by (used in) operating activities $ 1,275 $ 1,011 Cash flows from operating activities can fluctuate significantly from period to period, as working capital movements, tax timing differences and other items can significantly impact cash flows. In the first three months of 2023, cash flows provided by operating activities increased $264 million compared to the same period last year, primarily driven by the combination of accounts receivable, inventories and accounts payable increasing operating cash flow by $54 million in the first three months of 2023, compared to operating cash flow decreasing by $247 million for these items in the first three months of 2022 (additional discussion on working capital changes is provided earlier in the Financial Condition and Liquidity section). These favorable working capital changes along with decreased annual incentive cash compensation were partially offset by lower net income. Cash Flows from Investing Activities: Three months ended March 31, (Millions) 2023 2022 Purchases of property, plant and equipment (PP&E) $ (475) $ (424) Proceeds from sale of PP&E and other assets 3 56 Purchases and proceeds from maturities and sale of marketable securities and investments, net 86 92 Proceeds from sale of businesses, net of cash sold — 13 Net cash provided by (used in) investing activities $ (386) $ (263) Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and increasing manufacturing efficiency. The Company expects 2023 capital spending to be approximately $1.5 billion to $1.8 billion as 3M continues to invest in growth, productivity and sustainability. 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. 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. 65 Table of Contents Refer to Note 3 for information on acquisitions and divestitures (including the cash payment from the Food Safety business split-off). The Company is actively considering additional acquisitions, investments and strategic alliances, and from time to time may also divest certain businesses. Purchases of marketable securities and investments and proceeds from maturities and sale of marketable securities and investments are primarily attributable to certificates of deposit/time deposits, commercial paper, and other securities, which are classified as available-for-sale. Refer to Note 9 for more details about 3M’s diversified marketable securities portfolio. Purchases of investments include additional survivor benefit insurance, plus investments in equity securities. Cash Flows from Financing Activities: Three months ended March 31, (Millions) 2023 2022 Change in short-term debt — net $ — $ (5) Repayment of debt (maturities greater than 90 days) (1,150) (579) Proceeds from debt (maturities greater than 90 days) 1,107 — Total cash change in debt (43) (584) Purchases of treasury stock (29) (773) Proceeds from issuances of treasury stock pursuant to stock option and benefit plans 187 164 Dividends paid to shareholders (827) (852) Other — net (4) (9) Net cash provided by (used in) financing activities $ (716) $ (2,054) Total debt was approximately $16.0 billion at March 31, 2023 and $15.9 billion at December 31, 2022. During the first quarter of 2023, maturities of $1.15 billion of fixed-rate notes were offset by issuances of commercial paper of $1.1 billion. The Company had $1.1 billion in commercial paper outstanding at March 31, 2023, compared to no commercial paper outstanding as of December 31, 2022. Net commercial paper issuances in addition to repayments and borrowings by international subsidiaries are largely reflected in “Proceeds from debt (maturities greater than 90 days)” in the preceding table. 3M’s primary short-term liquidity needs are met through cash on hand and U.S. commercial paper issuances. 2022 issuances, maturities, and extinguishments of short-and long-term debt are described in Note 10 to the Consolidated Financial Statements in 3M’s 2022 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 the first three months of 2023, the Company purchased $29 million of its own stock. 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 since 1916. In February 2023, 3M’s Board of Directors declared a first-quarter 2023 dividend of $1.50 per share, an increase of 1 percent. This is equivalent to an annual dividend of $6.00 per share and marked the 65th consecutive year of dividend increases. Other cash flows from financing activities may include various other items, such as cash paid associated with certain derivative instruments, distributions to or sales of noncontrolling interests, changes in overdraft balances, and principal payments for finance leases. 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. 66 Table of Contents Refer to the preceding Cash Flows from Operating Activities and Cash Flows from Investing Activities sections for discussion of items that impacted the operating cash flow and purchases of PP&E components of the calculation of free cash flow. Refer to the preceding Results of Operations section for discussion of items that impacted the net income attributable to 3M component of the calculation of free cash flow conversion. Three months ended March 31, (Millions) 2023 2022 Major GAAP Cash Flow Categories Net cash provided by (used in) operating activities $ 1,275 $ 1,011 Net cash provided by (used in) investing activities (386) (263) Net cash provided by (used in) financing activities (716) (2,054) Free Cash Flow (non-GAAP measure) Net cash provided by (used in) operating activities $ 1,275 $ 1,011 Purchases of property, plant and equipment (475) (424) Free cash flow 800 587 Net income attributable to 3M $ 976 $ 1,299 Free cash flow conversion 82 % 45 % Material Cash Requirements from Known Contractual and Other Obligations: See the Financial Condition and Liquidity - Material Cash Requirements from Known Contractual and Other Obligations section of Item 7 of 3M's 2022 Annual Report on Form 10-K. 67 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 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, geopolitical, capital markets and other external conditions, such as interest rates, monetary policy, financial conditions of our suppliers and customers, trade restrictions such as tariffs and retaliatory counter measures, inflation, recession, military conflicts, and natural and other disasters or climate change affecting the operations of the Company or our suppliers and customers, • risks related to unexpected events such as the public health crises associated with the coronavirus (COVID-19) global pandemic, • liabilities and the outcome of contingencies related to certain fluorochemicals known as "PFAS," as well as matters related to the Company's plans to discontinue the use of PFAS, • 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 and service development, and future performance or results of current or anticipated products and services, • fluctuations in the costs and availability of purchased components, compounds, raw materials and energy, • information technology systems including implementation of an enterprise resource planning (ERP) system, • 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 and impact of organizational restructuring activities, • future levels of indebtedness, common stock repurchases and capital spending, • future access to credit markets and the cost of credit, • pension and postretirement obligation assumptions and future contributions, • asset impairments, • tax liabilities and effects of changes in tax rates, laws or regulations, • the proposed spin-off of the Company's Health Care business to establish two separate public companies, • the voluntary chapter 11 proceedings initiated by the Company's Aearo Entities, and • laws and regulations, as well as legal compliance risks (including third-party risks), and legal and regulatory proceedings related to the same, including with regards to environmental matters and product liability, 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. 68 Table of Contents