What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-28 compared with 2020-04-28 · 359 added, 212 removed, 459 unchanged (55% of the section changed)

8 unchanged sentences

3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services.

As described in Note 16, effective in the first quarter of 2020, the Company changed its business segment reporting in its continuing effort to improve the alignment of businesses around markets and customers.

As described in Note 16, effective in the second quarter of 2020, the measure of segment operating performance used by 3M’s chief operating decision maker changed and, as a result, the Company’s disclosed measure of segment profit/loss has been updated.

Also, effective in the first quarter of 2020, the Company changed its business segment reporting in its continuing effort to improve the alignment of businesses around markets and customers.

Additionally, the Company consolidated the way it presents geographic area net sales by providing an aggregate Americas geographic region (combining former United States and Latin America and Canada areas).

7 unchanged sentences

3M is impacted by the global pandemic and related effects associated with the coronavirus (COVID-19).

As a result, the Company has updated its risk factors, which can be found in Item 1A “Risk Factors” in this document.

The Company updated its risk factors with respect to COVID-19, which can be found in Item 1A “Risk Factors” in this document.

Public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote working, have impacted 3M’s operations.

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COVID-19 has impacted 3M’s supply chains relative to global demand for products like respirators, surgical masks and commercial cleaning solutions.

As this situation continues, 3M is also closely monitoring and responding to potential impacts to the Company’s broader supply chain associated with other products.

COVID-19 has also affected the ability of suppliers and vendors to provide products and services to 3M.

The Company has also taken steps to help employees lead safe and productive lives during the outbreak including remote working;

Furthermore, COVID-19 has impacted the broader economies of affected countries, including negatively impacting economic growth.The Company has taken steps to help employees lead safe and productive lives during the outbreak including remote working;

escalated procedures in factories related to personal safety, cleaning and medical screening measures;

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3M is closely monitoring how the spread of COVID-19 is affecting employees and business operations and has developed preparedness plans to help protect the safety of employees around the world while safely continuing business.

Some of these factors have increased the demand for 3M products, while others have decreased demand or made it more difficult for 3M to serve customers.

3M’s total sales increased 2.7% year over year in the first quarter of 2020.

Organic local-currency sales increased 0.3%.

Given the diversity of 3M’s businesses, the impact of COVID-19 varied across the Company in the first quarter of 2020.

3M experienced strong sales growth in personal safety, as well as in other areas such as home improvement, general cleaning, food safety and biopharma filtration.

COVID-related respirator sales are estimated to have impacted year over year organic local-currency sales growth by just over 1 percent.

At the same time, 3M saw weak demand in several end markets, with the biggest year over year organic local-currency sales decreases in oral care, automotive OEM and aftermarket, general industrial, commercial solutions and stationery and office.

As this situation continues, 3M is also closely monitoring and responding to potential impacts to the Company’s broader supply chain associated with other products.

As a result, while critical sites are fully operational, the Company has implemented targeted plant and/or line shutdowns due to weak customer demand or government mandates.

Serving 3M customers is a priority and teams are working to communicate with individual customers about potential disruptions.

3M considered if COVID-19 and other related market implications could indicate it is more likely than not the carrying amount of various applicable assets may be impaired and assessed whether certain investments without readily determinable fair values may have been impacted.

As a result, as discussed in the “Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis” section of Note 13, 3M reflected a net pre-tax charge of $22 million related to equity securities that use the measurement alternative described therein in addition to an immaterial pre-tax charge related to impairment of certain indefinite lived tradenames in the first quarter of 2020.

In light of the circumstances, 3M has taken a number of actions to ensure sources of cash may remain strong, including the March 2020 issuance of $1.75 billion of registered notes, suspending share-repurchases, and lowering its 2020 estimated capital spending to approximately $1.3 billion versus a previous range of $1.6 billion to $1.8 billion.

While estimated capital spending has decreased, it includes additional expansion of respirator production capacity.

While nearly all of our manufacturing locations and distribution centers are fully or partially operational, the Company implemented plant and/or line shutdowns related to certain markets due to weaker customer demand or government mandates.

Some of the above factors have increased the demand for 3M products, while others have decreased demand or made it more difficult for 3M to serve customers.

Serving 3M customers is a priority and teams continue to communicate with individual customers about potential disruptions.

3M’s total sales decreased 12.2% and 4.9% year-on-year in the second quarter and first six months of 2020, respectively.

Organic local-currency sales decreased 13.1% and 6.5% year-on-year in the second quarter and first six months of 2020, respectively.

Given the diversity of 3M’s businesses, the impact of COVID-19 varied across the Company in the second quarter and first six months of

3M experienced strong sales growth in personal safety, as well as in other areas such as home improvement, general cleaning, semiconductor, data center, and biopharma filtration.

COVID-related respirator sales are estimated to have impacted year-over-year organic local-currency sales growth by just under 3 percent and just over 2 percent for the second quarter and first six months of 2020, respectively.

At the same time, 3M saw weak demand in several end markets, contributing in part to sales declines in a number of 3M’s businesses with the biggest year over year second quarter total sales decreases in oral care (down 58 percent), automotive and aerospace (down 44 percent), automotive aftermarket (down 33 percent), commercial solutions (down 31 percent), stationery and office (down 25 percent), and businesses aligned to general industrial applications such as industrial adhesives and tapes (down 18 percent) and abrasives (down 32 percent).

3M’s operating income margins increased 3.5 and 4.6 percentage points year-on-year in the second quarter and first six months of 2020, respectively.

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 1.2 and 0.9 percentage points to 19.6 percent and 20.2 percent, respectively, for the second quarter and first six months of 2020 when compared the same periods in 2019.

Various COVID-19 implications contributed in part to these decreases.

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 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 impacted its operating income for the second quarter and first six months of 2020:

Factors contributing to charges:

● Period expenses of unabsorbed manufacturing costs and increased expected credit losses on customer receivables.

● 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 (as further discussed in Note 5).

● Committed financial support to various COVID-relief and medical research initiatives.

● Charge of $22 million 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 in the first quarter of 2020.

Factors providing benefits:

● Decreased discretionary spending in areas such as travel, professional services, and advertising/merchandising as well as cost reduction efforts, hiring freezes, and maintaining only essential contract workers.

● Government-sponsored COVID-response stimulus and relief initiatives, including certain employment retention benefits under the Coronavirus Aid, Relief and Economic Security (CARES) Act in the United States.

● Lower incentive compensation and self-insured medical visit/instance expense.

● Instituted accelerated vacation usage policies which benefit the second quarter of 2020 year-over-year.

3M plans to monitor discretionary spending and cost control efforts as the situation continues.

3M continues to consider if COVID-19 and other related market implications could indicate it is more likely than not the carrying amount of various applicable assets may be impaired and assess whether certain investments without readily determinable fair values may have been impacted.

As previously disclosed, in light of circumstances, 3M took actions to ensure sources of cash may remain strong, including the March 2020 issuance of $1.75 billion of registered notes, suspension of share repurchases, and lowering its original $1.6 billion to $1.8 billion range of full year 2020 estimated capital spending which was further updated during the second quarter of 2020 to approximately $1.4 billion.

While estimated capital spending decreased, it includes additional expansion of respirator production capacity.

3M continues to have access to its commercial paper program and undrawn committed credit facility.

Refer to the Financial Condition and Liquidity section below for more information on the Company’s liquidity position.

3M is also taking actions in the second quarter of 2020 that are expected to provide second quarter net cost savings while also committing to health and stewardship at large.

These include aggressive cost reductions, instituted paid and unpaid leave policies where possible, hiring freezes, maintaining only essential contract workers, and targeted paid short-term furloughs in businesses most negatively impacted by COVID-19.

While taking these actions, the Company also committed financial support to frontline healthcare workers, vulnerable populations disproportionately affected by the virus, and medical research initiatives.

The Company also is evaluating various government-sponsored COVID-response stimulus, relief, and production initiatives around the world, such as under the Defense Production Act and recent Coronavirus Aid, Relief and Economic Security (CARES) Act in the United States.

In April 2020, under the DPA, the U.S.

Department of Defense initiated a technology investment agreement with 3M involving $76 million of anticipated funding of assets to expand capacity to supply N-95 respirators to the U.S.

The Company also continues to evaluate the extent to which it may avail itself of various government-sponsored COVID-response stimulus, relief, and production initiatives around the world, such as under the Defense Production Act (DPA) and CARES Act in the United States.

In the second quarter of 2020, under the DPA, the U.S.

government initiated certain agreements with 3M involving just

over $200 million of anticipated funding of assets to expand capacity to supply N-95 respirators to the U.S.

The nature of the agreement provides a program of expedited partial funding to begin expansion while final terms are completed.

Due to the speed with which the situation is developing 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.

Due to the speed with which the COVID-19 situation is developing and evolving 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.

Earnings per share attributable to 3M common shareholders – diluted:

The following table provides the increase (decrease) in diluted earnings per share for the three months ended March 31, 2020.

The following table provides the increase (decrease) in diluted earnings per share for the three and six months ended June 30, 2020 and 2019.

Three months ended

Six months ended

(Earnings per diluted share)

March 31, 2020

June 30, 2020

Same period last year

Significant litigation-related charges/benefits

Loss on deconsolidation of Venezuelan subsidiary

Gain/loss on sale of businesses

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Gain/loss on sale of businesses

Divestiture-related restructuring actions

Current period

For the first quarter of 2020, net income attributable to 3M was $1,292 million, or $2.22 per diluted share compared to $891 million or $1.51 per diluted share in the same period last year, an increase of 47.0 percent on a per diluted share basis.

For the second quarter of 2020, net income attributable to 3M was $1.3 billion, or $2.22 per diluted share compared to $1.1 billion or $1.92 per diluted share in the same period last year, an increase of 15.6 percent on a per diluted share basis.

For the first six months of 2020 net income attributable to 3M was $2.6 billion, or $4.44 per diluted share compared to $2.0 billion or $3.44 per diluted share in the same period last year, an increase of 29.1 percent on a per diluted share basis.

The Company refers to various amounts or measures on an “adjusted basis”.

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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, net income attributable to 3M was $1.254 billion, or $2.16 per diluted share for the first three months of 2020 versus $1.308 billion, or $2.22 per diluted share for the first three months of 2019, which was a decrease of 2.7 percent on a per diluted share basis.

On an adjusted basis for the second quarter 2020, net income attributable to 3M was $1.0 billion, or $1.78 per diluted share versus $1.2 billion, or $2.13 per diluted share in the same period last year, which was a decrease of 16.4 percent on a per diluted share basis.

On an adjusted basis for the first six months of 2020, net income attributable to 3M was $2.3 billion, or $3.93 per diluted share versus $2.6 billion, or $4.35 per diluted share for the same period last year, which was a decrease of 9.7 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:

● Higher organic local-currency sales growth, in addition to benefits recognized in the first quarter of 2020 related to the restructuring and other actions taken in 2019, increased earnings per diluted share.

Partially offsetting this increase were charges related to COVID-impacted asset write-downs.

● Lower organic local-currency sales growth as a result of significant COVID-19 related impacts, in addition to COVID-related net factors described in the preceding Overview—Consideration of COVID-19 section decreased earnings per diluted share year-on-year.

These net factors included cost saving actions taken in response to COVID-19 but also reflected 2020 charges for items such as restructuring actions addressing structural enterprise costs and operations in certain end markets as a result of the COVID-19 pandemic and related economic impact (further described in Note 5).

Partially offsetting this net decrease were benefits recognized in the first six months of 2020 related to the restructuring and other actions taken in 2019.

● On a combined basis, higher defined benefit pension and postretirement service cost increased expense year-on-year.

● Lower income related to non-service cost components of pension and postretirement expense, increased expense year-on-year.

● Interest expense (net of interest income) increased year-on-year for the first quarter of 2020, as a result of higher U.S.

average debt balances and lower year-on-year interest income driven by lower average cash balances.

● Interest expense (net of interest income) increased year-on-year for both the second quarter and first six months of 2020, as a result of higher U.S.

average debt balances and lower year-on-year interest income driven by lower average interest rates on cash balances.

Acquisitions/divestitures:

● Acquisition impacts, which are measured for the first twelve months post-transaction, relate to the acquisitions of M*Modal (first quarter 2019), and Acelity (fourth quarter 2019).

These items collectively decreased earnings per diluted share by 5 cents year-on-year for the first three months of 2020.

These items collectively decreased earnings per diluted share by 4 cents and 9 cents year-on-year for the second quarter and first six months of 2020, respectively.

The net impacts related to these acquisitions included income from operations, more than offset by transaction and integration costs.

Interest expense related to financing costs of these acquisitions is also included.

● Divestiture impacts include the lost operating income from divested businesses, which had an immaterial impact to earnings per diluted share for the first three months of 2020.

Financing costs related to these acquisitions is also included.

● Divestiture impacts include the lost operating income from divested businesses, which decreased earnings per diluted share by 3 cents for both the second quarter and first six months of 2020.

This was primarily related to the divestiture of the Company’s drug delivery business.

Foreign exchange impacts:

● Foreign currency impacts (net of hedging) decreased pre-tax earnings year-on-year by approximately $58 million, or the equivalent of 8 cents per diluted share for the first three months of 2020, excluding the impact of foreign currency changes on tax rates.

● Foreign currency impacts (net of hedging) decreased pre-tax earnings year-on-year by approximately $37 million and $95 million, or the equivalent of 5 cents and 13 cents per diluted share the second quarter and first six months of 2020, respectively, excluding the impact of foreign currency changes on tax rates.

Income tax rate:

● As disclosed above, certain items above reflect specific income tax rates associated with those items.

Overall, the effective tax rate for the first quarter of 2020 was 17.4 percent, a decrease of 0.5 percentage points versus 2019 .

Excluding the special items (as discussed below), the effective tax rate increased 1.1 percentage points year-on-year for the first three months of 2020 , which decreased earnings per diluted share by 3 cents.

● Factors that decreased the effective tax rate for the first quarter include the resolution of the tax treatment of the 2018 NRD lawsuit, increased benefit from U.S.

international tax provisions, and geographical income mix.

These decreases were partially offset by the decreased benefit from stock options and higher prior year litigation charges.

● Certain items above reflect specific income tax rates associated with those items.

Overall, the effective tax rate for the second quarter of 2020 was 21.0 percent, a decrease of 0.8 percentage points versus 2019.

The effective tax rate for the first six months of 2020 was 19.2 percent, a decrease of 0.9 percentage points versus 2019.

Excluding the special items (as discussed below), the effective tax rate decreased 1.6 percentage points and 0.2 percentage points year-on-year for the second quarter and first six months of 2020, respectively.

● Factors that decreased the effective tax rate for the second quarter year-over-year were the 2019 non-deductible charge related to the deconsolidation of the Venezuelan subsidiary, adjustments to uncertain tax positions not repeating in 2020 and increased year-over-year benefit from US international tax provisions.

These decreases were partially offset by the 2019 tax benefit that did not repeat related to the “held for sale” status of legal entities associated with the then pending divestiture of the gas and flame detection business and decreased year-over-year benefit from stock options.

● Factors that decreased the effective rate for the first six months of 2020 year-over-year include the 2019 non-deductible charge related to the deconsolidation of the Venezuelan subsidiary, adjustments to uncertain tax positions not repeating in 2020, 2020 resolution of the tax treatment of the 2018 NRD lawsuit, and increased year-over-year benefit from US international tax provisions.

These decreases were partially offset by the 2019 tax benefit that did not repeat related to the “held for sale” status of legal entities associated with the then-pending divestiture of the gas and flame detection business and decreased year-over-year benefit from stock options.

Shares of common stock outstanding:

● Lower shares outstanding increased earnings per share year-on-year by 3 cents per diluted share for the first three months of 2020 .

Weighted-average diluted shares outstanding in the first three months of 2020 declined 1.2 percent year-on-year, which benefited earnings per share.

The decrease in the outstanding weighted-average diluted shares relates to the Company’s purchase of $365 million of its own stock in the first three months of 2020 .

● Lower shares outstanding increased earnings per share year-on-year by 2 cents and 4 cents per diluted share for the second quarter and first six months of 2020.

Weighted-average diluted shares outstanding in the second quarter and first six months of 2020 declined 0.9 percent and 1.0 percent year-on-year, respectively, which benefited earnings per share.

The decrease in the outstanding weighted-average diluted shares relates to the Company’s purchase $366 million of its own stock in the first six months of 2020, prior to 3M’s suspension of its stock repurchase program in late March 2020.

Certain amounts adjusted for special items - (non-GAAP measures):

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Special items include:

Gain/loss from 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.

Refer to Note 3 for further details.

● In the first quarter of 2019, 3M recorded a gain related to the sale of certain oral care technology comprising a business in addition to reflecting an earnout on a previous divestiture, which together resulted in a net gain of $8 million ($7 million after tax).

Significant litigation-related charges/benefits:

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These were reflected in cost of sales ($223 million) and selling, general and administrative expense ($325 million).

Loss on deconsolidation of Venezuelan subsidiary:

● In the second quarter of 2019, 3M recorded a pre-tax charge of $162 million related to the deconsolidation of the Company’s Venezuelan subsidiary as further discussed in Note 1.

Gain/loss on sale of businesses:

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.

In the second quarter of 2019, as a result of a “held for sale” tax benefit related to the legal entities associated with the pending divestiture of the Company’s gas and flame detection business, 3M recorded an after tax gain of $43 million.

Divestiture-related restructuring actions:

● In the second quarter 2020, following the divestiture of substantially all of the drug delivery business (see Note 3) 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.

(Dollars in millions, except per share amounts)

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Earnings per diluted share percent change

Three months ended March 31, 2019 GAAP

Three months ended June 30, 2019 GAAP

Adjustments for special items:

Significant litigation-related charges/benefits

Gain/loss on sale of businesses

Three months ended March 31, 2019 adjusted amounts (non-GAAP measures)

Three months ended March 31, 2020 GAAP

Loss on deconsolidation of Venezuelan subsidiary

Three months ended June 30, 2019 adjusted amounts (non-GAAP measures)

Three months ended June 30, 2020 GAAP

Adjustments for special items:

Significant litigation-related charges/benefits

Gain/loss on sale of businesses

Three months ended March 31, 2020 adjusted amounts (non-GAAP measures)

Three months ended March 31, 2020 (dollars in millions)

Safety and Industrial

Transportation and Electronics

Corporate and Unallocated

Elimination of Dual Credit

Total Company

Operating income (measure of segment operating performance)

Divestiture-related restructuring actions

Three months ended June 30, 2020 adjusted amounts (non-GAAP measures)

(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

Six months ended June 30, 2019 GAAP

Adjustments for special items:

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Gain/loss on sale of businesses

Adjusted operating income (non-GAAP measures)

Adjusted operating income margin (non-GAAP measures)

Three months ended March 31, 2019 (dollars in millions)

Safety and Industrial

Transportation and Electronics

Corporate and Unallocated

Elimination of Dual Credit

Total Company

Operating income (measure of segment operating performance)

Operating income margin

Loss on deconsolidation of Venezuelan subsidiary

Six months ended June 30, 2019 adjusted amounts (non-GAAP measures)

Six months ended June 30, 2020 GAAP

Adjustments for special items:

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Gain/loss on sale of businesses

Adjusted operating income (non-GAAP measures)

Adjusted operating income margin (non-GAAP measures)

Divestiture-related restructuring actions

Six months ended June 30, 2020 adjusted amounts (non-GAAP measures)

Sales and operating income by business segment:

The following tables contain sales and operating income results by business segment for the three months ended March 31, 2020 and 2019.

The following tables contain sales and operating income results by business segment for the three and six months ended June 30, 2020 and 2019.

Refer to the section entitled “Performance by Business Segment” later in MD&A for additional discussion concerning 2020 versus 2019 results, including Corporate and Unallocated.

Refer to Note 16 for additional information on business segments, including Elimination of Dual Credit.

Three months ended March 31,

Three months ended June 30,

(Dollars in millions)

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Total Company

Three months ended March 31, 2020

Six months ended June 30,

(Dollars in millions)

Business Segments

Safety and Industrial

Transportation and Electronics

Corporate and Unallocated

Elimination of Dual Credit

Total Company

Three months ended June 30, 2020

Worldwide Sales Change

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Total Company

Six months ended June 30, 2020

Worldwide Sales Change

Organic local-

By Business Segment

currency sales

Safety and Industrial

Transportation and Electronics

Total Company

Sales by geographic area:

Percent change information compares the first three months of 2020 with the same period last year, unless otherwise indicated.

Percent change information compares the second quarter and first six months of 2020 with the same period last year, unless otherwise indicated.

From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis.

Three months ended March 31, 2020

Three months ended June 30, 2020

Net sales (millions)

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● In the Americas geographic area, U.S.

total sales increased 12 percent and organic-local currency sales increased 4 percent.

Total sales in Mexico increased 4 percent and organic local-currency sales increased 5 percent.

In Canada, total sales increased 12 percent and organic local-currency sales increased 8 percent.

In Brazil, total sales decreased 9 percent while organic local-currency sales increased 7 percent, as foreign currency translation impacts more than offset organic local-currency sales growth.

● In the Asia Pacific geographic area, China/Hong Kong total sales decreased 13 percent and organic local-currency sales decreased 11 percent.

In Japan, total sales increased 5 percent and organic local-currency sales increased 2 percent.

total sales decreased 8 percent and organic-local currency sales decreased 13 percent.

Total sales in Mexico decreased 42 percent and organic local-currency sales decreased 38 percent.

In Canada, total sales decreased 21 percent and organic local-currency sales decreased 23 percent.

In Brazil, total sales decreased 36 percent and organic local-currency sales decreased 13 percent.

● In the Asia Pacific geographic area, China total sales increased 1 percent and organic local-currency sales increased 3 percent.

In Japan, total sales decreased 9 percent and organic local-currency sales decreased 12 percent.

Six months ended June 30, 2020

Net sales (millions)

% of worldwide sales

Components of net sales change:

Volume — organic

Organic local-currency sales

Total sales change

Total sales change:

Safety and Industrial

Transportation and Electronics

Organic local-currency sales change:

Safety and Industrial

Transportation and Electronics

Additional information beyond what is included in the preceding table is as follows:

● In the Americas geographic area, U.S.

total sales increased 2 percent while organic-local currency sales decreased 5 percent.

Total sales in Mexico decreased 20 percent and organic local-currency sales decreased 18 percent.

In Canada, total sales decreased 6 percent and organic local-currency sales decreased 8 percent.

In Brazil, total sales decreased 22 percent and organic local-currency sales decreased 3 percent.

● In the Asia Pacific geographic area, China total sales decreased 6 percent and organic local-currency sales decreased 4 percent.

In Japan, total sales decreased 2 percent and organic local-currency sales decreased 5 percent.

Managing currency risks:

The stronger U.S.

dollar had a negative impact on sales in the first three months of 2020 compared to the same period last year.

Net of the Company’s hedging strategy, foreign currency negatively impacted earnings in the first quarter of 2020 compared to the same period last year.

dollar had a negative impact on sales in the second quarter and first six months of 2020 compared to the same period last year.

Net of the Company’s hedging strategy, foreign currency negatively impacted earnings in the second quarter and first six months of 2020 compared to the same periods last year.

3M utilizes a number of tools to hedge currency risk related to earnings.

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Financial condition:

3M generated $1.213 billion of operating cash flows in the first three months of 2020, an increase of $165 million when compared to the first three months of 2019, with this increase primarily due to the lower year-on-year significant litigation-related charges and the timing of associated payments that impacted both the first quarter of 2020 and first quarter of 2019.

3M generated $3.1 billion of operating cash flows in the first six months of 2020, an increase of $408 million when compared to the first six months of 2019, with this increase primarily due cost saving actions taken in response to COVID-19, lower year-on-year significant litigation-related charges and the timing of associated payments that impacted both the first quarter of 2020 and first quarter of 2019, and the deferring of income tax payments into the third quarter of 2020.

Refer to the section entitled “Financial Condition and Liquidity” later in MD&A for a discussion of items impacting cash flows.

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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 2020, the Company purchased $365 million of its own stock, compared to $701 million of stock purchases in the first three months of 2019.

As of March 31, 2020, approximately $7.8 billion remained available under the authorization.

In the first six months of 2020, the Company purchased $366 million of its own stock, compared to $1.1 billion of stock purchases in the first six months of 2019.

As of June 30, 2020, approximately $7.8 billion remained available under the authorization.

In the first quarter of 2020, the Company suspended its stock repurchase program in the face of uncertainty arising from the COVID-19 pandemic.

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This marked the 62 nd consecutive year of dividend increases for 3M.

3M currently has an A1 credit rating with a negative outlook from Moody’s Investors Service and has an A+ credit rating with Standard & Poor’s with a negative outlook.

In May 2020, 3M’s Board of Directors declared a second-quarter dividend of $1.47 per share.

3M currently has an A1 credit rating with a negative outlook from Moody’s Investors Service and an A+ credit rating with a negative outlook from Standard & Poor’s.

The Company generates significant ongoing cash flow and has proven access to capital markets funding throughout business cycles.

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Three months ended

Six months ended

(Percent of net sales)

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and research, development and related expenses (R&D).

The year-on-year increase in defined benefit pension and postretirement service cost expense for the first three months of 2020 was approximately $9 million.

The year-on-year increase in defined benefit pension and postretirement service cost expense for the second quarter and first six months of 2020 was approximately $7 million and $16 million, respectively.

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.

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 discussed earlier in the Certain amounts adjusted for special items - (non-GAAP measures) .

In addition, the Company approved and committed to certain restructuring actions addressing structural enterprise costs and operations in certain end markets as a result of the COVID-19 pandemic and related economic impacts.

These restructuring actions impacted cost of sales, SG&A, and R&D.

See Note 5 for additional details.

Additionally, the Company’s operating expenses were impacted by factors described in the preceding Overview – Consideration of COVID-19 section above.

Cost of Sales:

Cost of sales includes manufacturing, engineering and freight costs.

Cost of sales, measured as a percent of sales, decreased in first three months of 2020.

Decreases in the first three months of 2020 included lower significant litigation-related charges taken in the first quarter of 2020 (as discussed earlier in the Certain amounts

adjusted special items - (non-GAAP measures) section) compared to the same period in 2019.

In addition, selling price increased net sales year-on-year by 0.4 percent and lower raw material costs reduced cost of sales as a percentage of net sales.

Cost of sales, measured as a percent of sales, increased in the second quarter of 2020 and decreased in the first six months of 2020 when compared to the same periods last year.

Increases in the second quarter of 2020 were related to COVID-related net impacts, including period expenses of unabsorbed manufacturing costs, in addition to higher restructuring action charges taken versus the same period last year.

Decreases in the first six months of 2020 included lower significant litigation-related charges taken in the first quarter of 2020 compared to the same period in 2019, which were partially offset by COVID-related net impacts, including period expenses of unabsorbed manufacturing costs, in addition to higher restructuring action charges taken versus the same period last year.

In addition, selling price increased net sales year-on-year by 0.5 percent in both the second quarter and first six months of 2020, and lower raw material costs reduced cost of sales as a percentage of sales.

Selling, General and Administrative Expenses:

SG&A in dollars decreased 9.3 percent in the first three months of 2020, when compared to the same period last year.

The decrease in the first three months of 2020 primarily relate to indirect cost reductions and lower year-on-year impact related to significant litigation-related charges (as discussed earlier in the Certain amounts adjusted for special items - (non-GAAP measures) section) and benefits recognized in the first quarter of 2020 related to restructuring and other actions taken in 2019.

SG&A as a percent of sales in 2020 was affected by the COVID-19 pandemic’s impact on overall sales.

SG&A in dollars decreased 5.4 percent and 7.5 percent in the second quarter and first six months of 2020, respectively, when compared to the same period last year.

The decrease in the second quarter and first six months of 2020 relates to cost saving actions taken in response to COVID-19, lower year-on-year impact related to restructuring action charges and benefits from prior year restructuring, partially offset by other 2020 COVID-related impacts.

The decrease in the first six months of 2020 also includes lower year-on-year impact related to significant litigation-related charges.

Research, Development and Related Expenses:

R&D in dollars increased $60 million in the first three months of 2020, when compared to the same period last year.

R&D, measured as a percent of sales, increased in the first three months of 2020, 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.

R&D in dollars decreased $46 million and increased $14 million in the second quarter and first six months of 2020, respectively, when compared to the same period last year.

R&D, measured as a percent of sales, increased in the second quarter and first six months of 2020, as 3M continued to invest in its key initiatives, including R&D aimed at disruptive innovation programs with the potential to create entirely new markets and disrupt existing markets.

The increase is primarily driven by additional R&D spending related to the Company’s acquisition of Acelity.

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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.

During the first quarter of 2019, the Company sold certain oral care technology comprising a business and reflected an earnout on a previous divestiture resulting in a pre-tax gain of $8 million ($7 million gain after tax).

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3M uses operating income as one of its primary business segment performance measurement tools.

Refer to the table below for a reconciliation of operating income margins for the three months ended March 31, 2020 versus 2019.

Refer to the table below for a reconciliation of operating income margins for the three and six months ended June 30, 2020 and 2019.

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June 30, 2020

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Gain/loss on sale of businesses

Divestiture-related restructuring actions

Current period

Operating income margins increased 6.2 percentage points in the first three months of 2020 when compared to the first three months of 2019.

Excluding the impact on operating income from special items as described in the Certain amounts adjusted for special items - (non-GAAP measures) section above, operating margins decreased 0.5 percentage points to 20.8 percent in the first three months of 2020 when compared to the first three months of 2019.

Operating income margins increased 3.5 and 4.6 percentage points year-on-year in the second quarter and first six months of 2020, respectively.

Factoring out the impact on operating income of special items as described in the Certain amounts adjusted for special items - (non-GAAP measures) section above, operating margins decreased 1.2 and 0.9 percentage points to 19.6 percent and 20.2 percent, respectively, for the second quarter and first six months of 2020 when compared to the same periods in 2019.

Additional discussion related to the components of the year-on-year change in operating income margins follows:

Organic volume/productivity and other:

Partially offsetting this increase were charges taken in response to the Company’s review of certain assets in light of COVID-19 and other related market implications.

● Lower organic volume growth as a result of significant COVID-19 related impacts, in addition to COVID-related net factors described in the preceding Overview—Consideration of COVID-19 section, decreased operating income margins year-on-year.

Partially offsetting this net decrease were benefits recognized in the first six months of 2020 related to restructuring and other actions taken in 2019.

● Operating income margins decreased year-on-year due to higher defined benefit pension and postretirement service cost expense.

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Selling price and raw material impact:

● Higher selling prices in addition to lower raw material cost impacts benefited operating income margins year-on-year for the first three months of 2020.

● Higher selling prices in addition to lower raw material cost impacts benefited operating income margins year-on-year for both the second quarter and first six months of 2020.

Foreign exchange impacts:

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Significant litigation-related charges:

● Operating income margins for the first three months of 2020 and 2019 included the $17 million and $548 million impact, respectively, of significant litigation-related charges (as discussed earlier in the Certain amounts adjusted for special items - (non-GAAP measures) section.

Gain/loss from sale of businesses:

● Operating income margins for the first three months of 2020 and 2019 included a gain of $2 million and $8 million, respectively, of gains/losses from sale of businesses (as discussed earlier in the Certain amounts adjusted for special items - (non-GAAP measures) section.

● Operating income margins for the first six months of 2020 and 2019 included the $17 million and $548 million impact, respectively, of significant litigation-related charges (as discussed earlier in the Certain amounts adjusted for special items - (non-GAAP measures) section).

Gain/loss on sale of businesses:

● Operating income margins for the second quarter of 2020 included a gain of $387 million on sale of businesses.

There were no operating income margin impact related to gains on sale of businesses in the second quarter of 2019.

For the first six months of 2020 and 2019 included a gain of $389 million and $8 million, respectively, on sale of businesses (as discussed earlier in the Certain amounts adjusted for special items - (non-GAAP measures) section).

Divestiture-related restructuring actions:

● Operating income margins for both the second quarter and first six months of 2020 included the $55 million impact as a result of certain restructuring actions following the divestiture of substantially all of the drug delivery business addressing corporate functional costs and manufacturing footprint across 3M in relation to the magnitude of amounts previously allocated/burdened to the divested business.

Refer to Note 5 for further details.

This item was also discussed earlier in the Certain amounts adjusted for special items - (non-GAAP measures) section.

Other Expense (Income), Net:

See Note 6 for a detailed breakout of this line item.

Interest expense (net of interest income) increased in the first three months of 2020 compared to the same period in 2019 due to higher U.S.

average debt balances and year-on-year decrease in interest income driven by lower average balances in cash, cash equivalents and marketable securities.

Interest expense (net of interest income) increased in the second quarter and first six months of 2020 compared to the same period in 2019 due to higher U.S.

average debt balances and lower year-on-year interest income driven by lower average interest rates on cash balances.

Other expense (income) decreased year-on-year in the first six months 2020 primarily due to the impact of the 2019 deconsolidation of the Company’s Venezuelan subsidiary.

Refer to Note 1 for additional details.

In addition, other expense (income) also decreased year-on-year due to the charge associated with the voluntary retirement incentive program taken in the second quarter of 2019.

Refer to Note 11 for additional details.

Provision for Income Taxes:

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(Percent of pre-tax income)

Effective tax rate

The effective tax rate for the first three months of 2020 was 17.4 percent, compared to 17.9 percent in the first three months 2019, a decrease of 0.5 percentage points.

The changes in the tax rates between years were impacted by many factors, including resolution of the tax treatment of the 2018 NRD lawsuit, increased benefit from U.S.

international tax provisions, and geographical income mix.

These decreases were partially offset by decreased benefit from stock options and higher prior year litigation charges.

Additional factors that impacted the tax rates between years are further discussed in Note 8.

The effective tax rate for the second quarter of 2020 was 21.0 percent, compared to 21.8 percent in the second quarter of 2019, a decrease of 0.8 percentage points.

The effective tax rate for the first six months of 2020 was 19.2 percent, compared to 20.1 percent in the first six months 2019, a decrease of 0.9 percentage points.

Factors that impacted the tax rates between years are further discussed in the Overview section above and in Note 8.

Due to uncertainty around the ultimate impact from the COVID-19 pandemic, 3M is not providing an estimated range of its 2020 effective tax rate at this time.

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Refer to Note 8 for further discussion of income taxes.

Net Income Attributable to Noncontrolling Interest:

Net Income (Loss) Attributable to Noncontrolling Interest:

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Net income attributable to noncontrolling interest

Net income attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-3M ownership interests in 3M consolidated entities.

Six months ended

Net income (loss) attributable to noncontrolling interest

Net income (loss) attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-3M ownership interests in 3M consolidated entities.

The primary noncontrolling interest relates to 3M India Limited, of which 3M’s effective ownership is 75 percent.

Currency Effects:

3M estimates that year-on-year currency effects, including hedging impacts, decreased pre-tax income by approximately $58 million for the three months ended March 31, 2020.

3M estimates that year-on-year currency effects, including hedging impacts, decreased pre-tax income by approximately $37 million and $95 million for the second quarter of 2020 and six months ended June 30, 2020, respectively.

This estimate includes the effect of translating profits from local currencies into U.S.

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and transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks.

3M estimates that year-on-year foreign currency transaction effects, including hedging impacts, decreased pre-tax income by approximately $1 million for the three months ended March 31, 2020.

3M estimates that year-on-year foreign currency transaction effects, including hedging impacts, increased pre-tax income by approximately $12 million and $11 million for the three and six months ended June 30, 2020, respectively.

These estimates include transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks.

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Disclosures relating to 3M’s business segments are provided in Note 16.

Effective in the first quarter of 2020, the Company changed its business segment reporting (see Note 16 for additional details).

Effective in the second quarter of 2020, 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) has been updated for all 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.

As discussed in Note 16, 3M discloses business segment operating income as its measure of segment profit/loss, reconciled to both total 3M operating income and income before taxes.

Business segment operating income includes dual credit for certain related operating income (as described below in “Elimination of Dual Credit”).

Business segment operating income excludes certain expenses and income that are not allocated to business segments (as described below in “Corporate and Unallocated”).

Additionally, the following special items are excluded from business segment operating income and, instead, are included within Corporate and Unallocated:

significant litigation-related charges/benefits, gain/loss on sale of businesses, and divestiture-related restructuring actions.

Additionally, effective in the first quarter of 2020, the Company changed its business segment reporting (see Note 16 for additional details).

Information provided herein reflects the impact of these changes for all periods presented.

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Corporate and Unallocated includes a variety of miscellaneous items, such as corporate investment gains and losses, certain derivative gains and losses, certain insurance-related gains and losses, certain litigation and environmental expenses, corporate restructuring charges and certain under- or over-absorbed costs (e.g.

pension, stock-based compensation) that the Company determines not to allocate directly to its business segments.

pension, stock-based

compensation) that the Company determines not to allocate directly to its business segments.

Additionally, Corporate and Unallocated operating income includes special items such as significant litigation-related charges/benefits, gain/loss on sale of businesses, and divestiture-related restructuring costs.

Corporate and Unallocated also includes sales, 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.

Because this category includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis.

Corporate and Unallocated operating expenses decreased in the first three months of 2020, when compared to the same period last year.

In the first quarter of 2019 and 2020, significant litigation-related charges of $548 million and $17 million, respectively, were reflected in Corporate and Unallocated.

In addition, 3M’s defined benefit pension and postretirement service-cost expense allocation to Corporate and Unallocated increased year-on-year.

Corporate and Unallocated expense for the second quarter and first six months 2020 when compared to same periods last year are as follows:

Special Items

Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section and Note 5 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 decreased in both the second quarter and first six months of 2020, when compared to the same periods last year, primarily due to lower year-on-year restructuring charges.

In the second quarter of 2020 and 2019, operating expenses included non-divestiture-related restructuring charges of $23 million and $82 million, respectively, as further discussed in Note 5.

In addition, 3M’s defined benefit pension and postretirement service-cost expense allocation to Corporate and Unallocated decreased year-on-year.

Operating Business Segments:

Information related to 3M’s business segments for the first three months of 2020 and 2019 are presented in the tables that follow.

Information related to 3M’s business segments for both the second quarter and first six months of 2020 and 2019 are presented in the tables that follow.

Organic local-currency sales include both organic volume impacts plus selling price impacts.

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Sales (millions)

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Total sales change

Operating income (millions)

Business segment operating income (millions)

Percent change

Percent of sales

First quarter 2020 results:

Second quarter 2020 results:

Sales in Safety and Industrial totaled $2.7 billion, down 9.2 percent in U.S.

Organic local-currency sales increased 2.2 percent, divestitures decreased sales by 1.0 percent, and foreign currency translation decreased sales by 2.2 percent.

Organic local-currency sales decreased 6.1 percent, divestitures decreased sales by 0.9 percent, and foreign currency translation decreased sales by 2.2 percent.

On an organic local-currency sales basis:

● Sales increased in personal safety, roofing granules, and industrial adhesives and tapes, while closure and masking systems, electrical markets, automotive aftermarket, and abrasives sales declined year-on-year.

● Strong growth related to unprecedented demand for respirators as a result of the COVID-19 pandemic was partially offset by softness and channel inventory reductions that impacted sales growth across most of the Company’s general industrial-related portfolio.

● Sales increased in personal safety, while closure and masking systems, electrical markets, roofing granules, industrial adhesives and tape, abrasives, and automotive aftermarket sales declined year-on-year.

● Strong growth related to unprecedented demand for respirators as a result of the COVID-19 pandemic was more than offset by softness that impacted sales growth across most of the Company’s general industrial-related portfolio.

Divestitures:

● 2018 divestitures that impacted 2019 results relate to the sale of certain personal safety product offerings primarily focused on noise, environmental, and heat stress monitoring (first quarter 2018), and it’s abrasives glass products business (second quarter of 2018).

● Also in 2018, 3M completed the sale of substantially all of its Communication Markets Division and recorded a pre-tax gain of approximately $509 million .

● 2018 divestitures that impacted second quarter 2019 results relate to the sale of the Company’s abrasives glass products business (second quarter of 2018).

● Also in 2018, 3M completed the sale of substantially all of its Communication Markets Division .

● In August 2019, 3M completed the sale of its gas and flame detection business.

Operating income:

● Operating income margins increased 3.2 percentage points, primarily related to sales increases along with improvements in productivity.

Business segment operating income:

● Business segment operating income margins increased 1.8 percentage points, primarily related to strong productivity, cost discipline and benefits from second quarter 2019 restructuring and other actions.

First six months 2020 results:

Sales in Safety and Industrial totaled $5.6 billion, down 5.0 percent in U.S.

Organic local-currency sales decreased 1.9 percent, divestitures decreased sales by 0.9 percent, and foreign currency translation decreased sales by 2.2 percent.

On an organic local-currency sales basis:

● Sales increased in personal safety, while roofing granules, closure and masking systems, industrial adhesives and tapes, electrical markets, automotive aftermarket, and abrasives sales declined year-on-year.

Divestitures:

● 2018 divestitures that impacted the first six months of 2019 results relate to the sale of certain personal safety product offerings primarily focused on noise, environmental, and heat stress monitoring (first quarter 2018), and it’s abrasives glass products business (second quarter of 2018).

● Also in 2018, 3M completed the sale of substantially all of its Communication Markets Division .

● In August 2019, 3M completed the sale of its gas and flame detection business.

Business segment operating income:

● Business segment operating income margins increased 2.5 percentage points, primarily related to strong productivity, cost discipline and benefits from second quarter 2019 restructuring and other actions.

Transportation and Electronics Business:

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Total sales change

Operating income (millions)

Business segment operating income (millions)

Percent change

Percent of sales

First quarter 2020 results:

Second quarter 2020 results:

Sales in Transportation and Electronics totaled $1.9 billion, down 20.9 percent in U.S.

Organic local-currency sales decreased 18.9 percent, divestitures decreased sales by 1.1 percent, and foreign currency translation decreased sales by 0.9 percent.

Total sales were flat within the electronics-related businesses and decreased 4 percent within Asia Pacific.

On an organic local-currency sales basis:

● Sales remained flat in advanced materials and transportation safety, while sales declined in commercial solutions and automotive and aerospace solutions.

● Sales declined in electronics, transportation safety, advanced materials , commercial solutions, and automotive and aerospace.

● Automotive and aerospace was primarily impacted by the decline in global car and light truck builds .

● Sales increased 1 percent in 3M’s electronics-related businesses, with an increase in electronics material solutions and a decrease in display materials and systems.

Electronics-related growth was led by demand for fluids and semiconductor end-market, partially offset by soft consumer electronics and factory automation end markets in addition to channel inventory adjustments.

● Sales decreased 3 percent in Asia Pacific, where 3M’s electronics business is concentrated.

● Sales decreased 1 percent in 3M’s electronics-related businesses.

Electronics-related sales declines were primarily related to softness in the consumer electronics end-market, partially offset by demand in semiconductor, data center, and factory automation end-markets.

Divestitures:

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Refer to Note 3 for details.

Operating income:

● Operating income margins decreased 0.6 percentage points, primarily related to lower sales and reduced productivity in key end-markets.

● Excluding the impact on operating income from special items as described in the Certain amounts adjusted for special items - (non-GAAP measures) section above, operating income was $482 million and $519 million for the three months ended March 31, 2020 and 2019, respectively, an operating income margin decrease of 0.6 percentage points year-on-year.

Business segment operating income:

● Business segment operating income margins decreased 4.4 percentage points, primarily related to lower sales which were partially offset by cost discipline and benefits from second quarter 2019 restructuring and other actions.

First six months 2020 results:

Sales in Transportation and Electronics totaled $4.2 billion, down 13.1 percent in U.S.

Organic local-currency sales decreased 11.1 percent, divestitures decreased sales by 0.9 percent, and foreign currency translation decreased sales by 1.1 percent.

On an organic local-currency sales basis:

● Sales were flat in electronics and declined in transportation safety, advanced materials, commercial solutions, and automotive and aerospace.

● Automotive and aerospace was primarily impacted by the decline in global car and light truck builds .

● Sales were flat in 3M’s electronics-related businesses.

Electronics-related growth was led by demand for semiconductor, data center, and factory automation end-markets, offset by softness in the consumer electronics end-market.

Divestitures:

● In January 2020, 3M completed the sale of its advanced ballistic-protection business.

Refer to Note 3 for details.

Business segment operating income:

● Business segment operating income margins decreased 2.4 percentage points, primarily related to lower sales and reduced productivity in key end-markets due to COVID-19 related impacts, partially offset by cost discipline and benefits from last year’s restructuring actions.

Health Care Business:

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Total sales change

Operating income (millions)

Business segment operating income (millions)

Percent change

Percent of sales

First quarter 2020 results:

Second quarter 2020 results:

Sales in Health Care totaled $1.8 billion, down 0.4 percent in U.S.

Organic local-currency sales decreased 12.4 percent, acquisitions increased sales by 17.9 percent, divestitures decreased sales by 4.3 percent, and foreign currency translation decreased sales by 1.6 percent.

On an organic local-currency sales basis:

● Sales increased in separation and purification sciences, while sales declined in medical solutions, food safety, and health information systems, and oral care.

● Sales declines year-on-year were primarily due to delays in elective medical procedures and closures of most dental offices across the world as a result of the COVID-19 pandemic.

These impacts were most prevalent in the oral care and medical solutions businesses.

Acquisitions:

● In February 2019, 3M acquired M*Modal, a leading healthcare technology provider of cloud-based, conversational artificial intelligence-powered systems that help physicians efficiently capture and improve the patient narrative.

● In October 2019, 3M completed the acquisition of Acelity Inc.

and its KCI subsidiaries, a leading global medical technology company focused on advanced wound care and specialty surgical applications

Divestitures:

● In the first quarter of 2019, the Company sold certain oral care technology comprising a business.

● In May 2020, 3M completed the sale of substantially all of its drug delivery business.

Business segment operating income:

● Business segment operating income margins decreased 9.6 percentage points year-on-year, driven by sales declines and impacts related to the Acelity acquisition, partially offset by cost discipline and benefits from second quarter 2019 restructuring and other costs.

First six months 2020 results:

Sales in Health Care totaled $3.9 billion, up 10.1 percent in U.S.

Organic local-currency sales increased 1.2 percent, acquisitions increased sales by 21.6 percent, and foreign currency translation decreased sales by 1.8 percent.

Organic local-currency sales decreased 5.6 percent, acquisitions increased sales by 19.7 percent, divestitures decreased sales by 2.3 percent, and foreign currency translation decreased sales by 1.7 percent.

On an organic local-currency sales basis:

● Sales increased in drug delivery, food safety, medical solutions and separation and purification sciences, while sales were flat in health information systems.

● Oral care declined year on year primarily due to dental and orthodontia offices being closed as a result of the COVID-19 pandemic.

● Sales increased in food safety, separation and purification sciences, and medical solutions, while sales decreased in health information systems and oral care.

● Oral care declined year-on-year primarily due to dental and orthodontia offices being impacted as a result of the COVID-19 pandemic.

Acquisitions:

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Divestitures:

● 2018 divestitures that impacted 2019 results relate to the sale of its polymer additives compounding business (first quarter 2018).

● In the first quarter of 2019, the Company sold certain oral care technology comprising a business.

Operating income:

● Operating income margins decreased 5.0 percentage points year-on-year, driven by a 4.6 percentage point impact related to the the M*Modal and Acelity acquisitions.

● Excluding the impact on operating income from special items as described in the Certain amounts adjusted for special items - (non-GAAP measures) section above, operating income was $456 million and $459 million for the three months ended March 31, 2020 and 2019, respectively, an operating income margin decrease of 4.7 percentage points year-on-year .

In December 2019, 3M agreed to sell substantially all of its drug delivery business to an affiliate of Altaris Capital Partners, LLC.

Subject to closing and other adjustments, 3M will receive approximately $650 million in consideration.

The sale is expected to close in the second quarter of 2020.

See Note 3 for additional details.

● In May 2020, 3M completed the sale of substantially all of its drug delivery business.

Business segment operating income:

● Business segment operating income margins decreased 7.0 percentage points year-on-year, driven by sales declines and impacts related to the Acelity acquisition, partially offset by cost discipline and benefits from second quarter 2019 restructuring and other costs.

Consumer Business:

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Total sales change

Operating income (millions)

Business segment operating income (millions)

Percent change

Percent of sales

First quarter 2020 results:

Sales in Consumer totaled $1.3 billion, an increase of 4.6 percent in U.S.

Second quarter 2020 results:

Sales in Consumer totaled $1.2 billion, a decrease of 6.2 percent in U.S.

Organic local-currency sales decreased 5.0 percent and foreign currency translation decreased sales by 1.2 percent.

On an organic local-currency sales basis:

● Sales grew in home care and home improvement, while consumer health care and stationery and office declined.

● Sales showed continued strength in the Company’s Filtrete TM , Scotch Blue TM , Scotch Brite TM , and Meguiars TM brands.

Business segment operating income:

● Business segment operating income margins increased 2.5 percentage points year-on-year as a result of strong productivity and cost discipline.

First six months 2020 result:

Sales in Consumer totaled $2.5 billion, an decrease of 1.0 percent in U.S.

Organic local-currency sales increased 0.3 percent and foreign currency translation decreased sales by 1.3 percent.

On an organic local-currency sales basis:

● Sales grew in home improvement, home care, and consumer health care, while stationery and office declined.

● Sales showed continued strength in the Company’s Filtrete TM , Scotch Blue TM , Scotch Brite TM , and Nexcare TM brands.

Operating income:

● Operating income margins increased 1.8 percentage points year-on-year as a result of improvements related portfolio and footprint actions taken.

● Sales grew in home care and home improvement, home care, while consumer health care and stationery and office declined.

● Sales showed continued strength in the Company’s Filtrete TM , Scotch Blue TM , Scotch Brite TM , and Meguiars TM brands.

Business segment operating income:

● Business segment operating income margins increased 2.1 percentage points year-on-year as a result of strong productivity and cost discipline.

FINANCIAL CONDITION AND LIQUIDITY

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3M will continue to return cash to shareholders through dividends and will consider whether to resume share repurchases once the COVID-19 impacts are better known.

3M maintains strong liquidity and further added to its liquidity position through issuance of $1.75B in registered notes in March 2020.

3M maintains strong liquidity and further added to its liquidity position through the issuance of $1.75 billion in registered notes in March 2020.

Sources for cash availability in the United States, such as ongoing cash flow from operations and access to capital markets, have historically been sufficient to fund dividend payments to shareholders, as well as funding U.S.

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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.

At March 31, 2020, there was $585 million commercial paper issued and outstanding, compared to $150 million outstanding at December 31, 2019.

At June 30, 2020, there was no commercial paper issued and outstanding, compared to $150 million outstanding at December 31, 2019.

The strength of 3M’s credit profile and significant ongoing cash flows provide 3M proven access to capital markets.

Additionally, the Company’s maturity profile is staggered to help ensure refinancing needs in any given year are reasonable in proportion to the total

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’s total debt was $2.2 billion higher at March 31, 2020 when compared to December 31, 2019.

Increases in debt related to the March 2020 issuance of $1.75 billion of registered notes in addition to a higher commercial paper balance.

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 a negative outlook from Standard & Poor’s.

The Company’s total debt was $0.4 billion higher at June 30, 2020 when compared to December 31, 2019.

Increases in debt related to the March 2020 issuance of $1.75 billion of registered notes, partially offset by the repayment of aggregate $445 million principal amount of Third Lien Notes subject to in-substance defeasance (see Note 10) and 650 million euros aggregate principal amount of floating-rate medium-term notes that matured, and lower commercial paper balance.

For discussion of repayments of and proceeds from debt refer to the following “Cash Flows from Financing Activities” section.

In conjunction with the October 2019 acquisition of Acelity Inc.

of the debt assumed, 3M did not immediately settle at close $0.5 billion of notes and, instead, satisfied and discharged those notes via an in-substance defeasance.

Refer to Note 10 for additional information.

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.

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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 March 31, 2020, 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).

As of June 30, 2020, 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).

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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 March 31, 2020.

These credit facilities were undrawn at June 30, 2020.

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, 2020, this ratio was approximately 18 to 1.

At June 30, 2020, this ratio was approximately 18 to 1.

Debt covenants do not restrict the payment of dividends.

Apart from the committed credit facilities described above, in September 2019, 3M entered into a credit facility expiring in July 2020 in the amount of 80 billion Japanese Yen.

At March 31, 2020, 69 billion Japanese Yen, or approximately $641 million at March 31, 2020 exchange rates, was drawn and outstanding.

Apart from the committed credit facilities described above, 3M has a credit facility expiring in July 2020 in the amount of 80 billion Japanese yen that in July 2020 was further extended until August 2021.

At June 30, 2020, 69 billion Japanese yen, or approximately $646 million at June 30, 2020 exchange rates, was drawn and outstanding.

In November 2019, 3M entered into a credit facility expiring in November 2020 in the amount of 150 million euros.

At March 31, 2020, 150 million Euros, or $167 million at March 31, 2020 exchange rates, was drawn and outstanding.

The Company also had an additional $278 million in stand-alone letters of credit and bank guarantees were also issued and outstanding at March 31, 2020.

At June 30, 2020, 150 million euros, or $168 million at June 30, 2020 exchange rates, was drawn and outstanding.

The Company also had an additional $267 million in stand-alone letters of credit and bank guarantees were also issued and outstanding at June 30, 2020.

These instruments are utilized in connection with normal business activities.

Cash, cash equivalents and marketable securities:

At March 31, 2020, 3M had $4.5 billion of cash, cash equivalents and marketable securities, of which approximately $2.4 billion was held by the Company’s foreign subsidiaries and approximately $2.1 billion was held by the United States.

At June 30, 2020, 3M had $4.5 billion of cash, cash equivalents and marketable securities, of which approximately $3.0 billion was held by the Company’s foreign subsidiaries and approximately $1.5 billion was held in the United States.

These balances are invested in bank instruments and other high-quality fixed income securities.

At December 31, 2019, cash, cash equivalents and marketable securities held by the Company’s foreign subsidiaries and by the United States totaled approximately $2.4 billion and $100 million, respectively.

At December 31, 2019, cash, cash equivalents and marketable securities held by the Company’s foreign subsidiaries and in the United States totaled approximately $2.4 billion and $100 million, respectively.

The increase from December 31, 2019 primarily resulted from $1.75 billion of debt the Company issued in March 2020 in light of the uncertain impact of the COVID-19 pandemic.

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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, 2020 and December 31, 2019.

March 31, 2020

The following table provides net debt as of June 30, 2020 and December 31, 2019.

June 30, 2020

December 31, 2019

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Working capital (non-GAAP measure):

March 31, 2020

June 30, 2020

December 31, 2019

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3M believes working capital is meaningful to investors as a measure of operational efficiency and short-term financial health.

Working capital increased $2,207 million compared with December 31, 2019.

Balance changes in current assets increased working capital by $2,119 million, driven by increases to cash and cash equivalents.

Balance changes in current liabilities increased working capital by $88 million, primarily due to decreases in accrued payroll and other current liabilities, partially offset by increases in short-term debt.

Accounts receivable increased $30 million from to December 31, 2019, primarily due to higher sales in March 2020 compared to December 2019, partially offset by impacts from foreign exchange rates.

Inventory increased $83 million from December 31, 2019 as a result of slowing growth conditions in several key end markets and channel inventory adjustments by customers, partially offset by impacts from foreign exchange rates.

Working capital increased $3.1 billion compared with December 31, 2019.

Balance changes in current assets increased working capital by $1.1 billion, driven by increases to cash and cash equivalents, partially offset by decreases in account receivable.

Balance changes in current liabilities increased working capital by $1.9 billion, primarily due to decreases in the current portion of long-term debt and accrued payroll.

Accounts receivable decreased $332 million compared to December 31, 2019, primarily due to lower sales in the second quarter of 2020 in relation to sales in the fourth quarter 2019 and increased expected credit losses on customer receivables related to COVID-19 uncertainty.

Inventory increased $34 million from December 31, 2019 as a result of slowing growth conditions in several key end-markets and changes in channel inventory levels by customers, partially offset by impacts from foreign exchange rates and inventory included in the divestiture of the drug delivery business.

Cash flows from operating, investing and financing activities are provided in the tables that follow.

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Cash Flows from Operating Activities:

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Net income including noncontrolling interest

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Income taxes (deferred and accrued income taxes)

Loss on deconsolidation of Venezuelan subsidiary

Accounts receivable

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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 three months of 2020, cash flows provided by operating activities increased $165 million compared to the same period last year, with this increase primarily due to lower year-on-year significant litigation-related charges and the timing of associated payments.

Factors that decreased operating cash flows included increases in accounts receivable and inventory.

The combination of accounts receivable, inventories and accounts payable increased working capital by $338 million in the first three months of 2020, compared to the working capital increases of $259 million in the first three months of 2019.

In the first six months of 2020, cash flows provided by operating activities increased $408 million compared to the same period last year, with this increase primarily due to cost saving actions taken in response to COVID-19, lower year-on-year significant litigation-related charges and the timing of associated payments and the deferring of income tax payments into the third quarter of 2020.

Factors that decreased operating cash flows included decreases in accounts payable and increases in inventories The combination of accounts receivable, inventories and accounts payable increased working capital by $226 million in the first six months of 2020, compared to the working capital increases of $356 million in the first six months of 2019.

Additional discussion on working capital changes is provided earlier in the “Financial Condition and Liquidity” section.

Cash Flows from Investing Activities:

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Purchases of property, plant and equipment (PP&E)

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Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and increasing manufacturing efficiency.

The Company expects full-year 2020 capital spending to be approximately $1.3 billion (versus previous guidance of $1.6 billion to $1.8 billion) as 3M reduces overall spending in light of uncertainty regarding COVID-19, but continues to invest in expanding the Company’s ability to increase production of respiratory products to meet worldwide demand.

The Company expects full-year 2020 estimated capital spending to be approximately $1.4 billion

(which was further updated in the second quarter of 2020 versus original guidance of $1.6 billion to $1.8 billion) as 3M reduces overall spending in light of uncertainty regarding COVID-19, but continues to invest in expanding the Company’s ability to increase production of respiratory products to meet worldwide demand.

3M invests in renewal and maintenance programs, which pertain to cost reduction, cycle time, maintaining and renewing current capacity, eliminating pollution, and compliance.

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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 2019 primarily includes the purchase of M*Modal.

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.

Acquisitions, net of cash acquired, in the first six months of 2019 primarily includes the purchase of M*Modal.

Acquisitions, net of cash acquired, in the first six months of 2020 primarily relate to the payment made for contingent consideration in regards to the Acelity acquisition.

Proceeds from sale of businesses in 2019 primarily relate to the sale of certain oral care technology comprising a business.

Proceeds from sale of businesses in 2020 primarily relate to the sale of the Company’s advanced ballistic-protection business.

Proceeds from sale of businesses in 2020 primarily relate to the sales 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.

In the first six months of 2020 these included the maturity of the held-to-maturity debt security that was entered into to satisfy the redemption of the Third Lien Notes (which matured in May 2020).

Refer to Note 9 for more details about 3M’s diversified marketable securities portfolio.

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Cash Flows from Financing Activities:

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Change in short-term debt — net

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Net cash provided by (used in) financing activities

Total debt was approximately $22.5 billion at March 31, 2020 and $20.3 billion at December 31, 2019.

Increases in debt related to the March 2020 issuance of $1.75 billion in registered notes in addition to increases in commercial paper balances.

Outstanding commercial paper was $585 million at March 31, 2020, as compared to $150 million at December 31, 2019.

Total debt was approximately $20.8 billion at June 30, 2020 and $20.3 billion at December 31, 2019.

Increases in debt related to the March 2020 issuance of $1.75 billion in registered notes.

Repayment of debt primarily consists of the aggregate $445 million principal amount of Third Lien Notes and the 650 million euros aggregate principal amount of floating-rate medium-term notes that matured in May 2020.

Outstanding commercial paper was zero at June 30, 2020, as compared to $150 million at December 31, 2019.

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.

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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 2020, the Company purchased $365 million of its own stock prior to 3M’s suspension of its share repurchase program in late March.

In the first six months of 2020, the Company purchased $366 million of its own stock prior to 3M’s suspension of its share repurchase program in late March.

For more information, refer to the table titled “Issuer Purchases of Equity Securities” in Part II, Item 2.

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This is equivalent to an annual dividend of $5.88 per share and marked the 62 nd consecutive year of dividend increases.

In May 2020, 3M’s Board of Directors declared a second-quarter 2020 dividend of $1.47 per share.

Other cash flows from financing activities may include various other items, such as cash paid associated with certain derivative instruments, distributions to or sales of noncontrolling interests, changes in cash overdraft balances, and principal payments for finance leases.

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The first quarter of each year is typically 3M’s seasonal low for free cash flow and free cash flow conversion.

In the table below details the components of free cash flow for the three months ended March 31, 2020 and 2019.

In the first three months of 2019 and 2020, free cash flow conversion was impacted by significant litigation-related charges and timing of associated payments.

In the table below details the components of free cash flow for the six months ended June 30, 2020 and 2019.

In the first six months of 2020 and 2019, free cash flow conversion was impacted by cost saving actions taken in response to COVID-19, significant litigation-related charges and timing of associated payments, and deferral of income tax payments into the third quarter of 2020.

Refer to the preceding “Cash Flows from Operating Activities” section for discussion of additional items that impacted operating cash flow.

Refer to the proceeding “Cash Flows from Investing Activities” section for discussion on capital spending for property, plant and equipment.

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Major GAAP Cash Flow Categories

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Actual future results and trends may differ materially from historical results or those reflected in any such forward-looking statements depending on a variety of factors.

Important information as to these factors can be found in this document, including, among others, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings of “Overview,” “Financial Condition and Liquidity” and annually in “Critical Accounting Estimates.” Discussion of these factors is incorporated by reference from Part I, Item 1A, “Risk Factors,” of this document, and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For additional information concerning factors that may cause actual results to vary materially from those stated in the forward-looking statements, see our reports on Form 10-K, 10-Q and 8-K filed with the SEC from time to time.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis