What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-27 compared with 2021-04-27 · 252 added, 133 removed, 440 unchanged (47% of the section changed)

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In addition, risk factors with respect to COVID-19, can be found in Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q.

Given the diversity of 3M’s businesses, some of the factors described in that Overview—Consideration of COVID-19 section have increased the demand for 3M products, while others have decreased demand or made it more difficult for 3M to serve customers.

Overall, 3M experienced broad-based growth across all business segments in the first quarter of 2021, benefiting from continued improvements in certain end markets.

3M’s total sales increased 9.6% year-on-year in the first quarter of 2021 with organic local-currency sales growth of 8.0%.

3M experienced the strongest sales growth in personal safety, as well as in other areas such as home improvement, oral care, electronics, and separation and purification sciences.

COVID-related respirator sales are estimated to have impacted year-on-year organic local-currency sales growth by approximately 2.4 percent for the first quarter of 2021.

In the first quarter of 2020, as effects of COVID-19 emerged, weak demand in a number of end markets began to negatively impact oral care, automotive OEM and aftermarket, general industrial, commercial solutions and stationery and office, while demand was increasing in areas such as personal safety, home improvement, general cleaning, food safety and biopharma filtration.

3M’s operating income margins increased 1.9 percentage points year-on-year in the first quarter of 2021.

Factoring out the impact on operating income of special items as described in the Certain amounts adjusted for special items - (non-GAAP measures) section below, operating income margins increased 1.7 points to 22.5 percent for the first quarter of 2021 when compared to 2020.

Given the diversity

of 3M’s businesses, some of the factors described in that Overview—Consideration of COVID-19 section have increased the demand for 3M products, while others have decreased demand or made it more difficult for 3M to serve customers.

Overall, 3M experienced broad-based growth across all business segments and geographic areas in the second quarter of 2021, benefiting from continued improvements in certain end markets including home improvement, oral care and industrial along with healthcare elective procedure volumes increasing as COVID-19 related hospitalizations declined.

3M’s total sales increased 24.7% and 16.7% year-on-year in the second quarter and first six months of 2021, respectively.

Organic local-currency sales increased 21.4% and 14.3% year-on-year in the second quarter and first six months of 2021, respectively.

3M experienced the strongest sales growth in Transportation and Electronics and Health Care.

While COVID-related respirator sales increased year-on-year in the second quarter and first six months of 2021, they are estimated to have negatively impacted year-on-year second quarter organic local-currency sales growth by approximately 1 percent as they grew at a slower rate than the rest of the Company.

For the first six months of 2021, they positively impacted year-on-year organic-local currency sales growth by approximately 1 percent .

In the second quarter of 2020, as effects of COVID-19 set-in, weak demand in a number of end markets negatively impacted oral care, automotive and aerospace, automotive aftermarket, commercial solutions, stationery and office, and businesses aligned to general industrial applications such as industrial adhesives and tapes and abrasives.

At the same time, 2020 demand was increasing in areas such as personal safety, home improvement, general cleaning, semiconductor, data center, and biopharma filtration.

3M’s operating income margins decreased 2.3 percentage points year-on-year in the second quarter and remained flat the first six months of 2021.

Factoring out the impact on operating income of special items as described in the Certain amounts adjusted for special items - (non-GAAP measures) section below, operating income margins increased 2.4 and 2.1 percentage points to 22.0 and 22.3 percent for the second quarter and first six months of 2021, respectively, when compared to 2020.

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

Overall, the impact of the COVID-19 pandemic on 3M’s consolidated results of operations was primarily driven by factors related to changes in demand for products and disruption in global supply chains as described or referenced above.

While it is not feasible to identify or quantify all the other direct and indirect implications on 3M’s results of operations, below are factors that 3M believes have also affected its result for first quarter of 2021 when compared to 2020:

Factors contributing to charges:

● Increased raw materials and logistics costs during first-quarter 2021 from ongoing COVID-19 related manufacturing supply chain challenges further magnified in February 2021 by winter storm Uri in the United States.

● During first-quarter 2020 implemented targeted plant and/or line shutdowns due to weak customer demand or government mandates as a result of the COVID-19 pandemic.

Factors contributing to charges or other impacts:

● Increased raw materials and logistics costs during the first half of 2021 from ongoing COVID-19 related supply chain challenges further magnified in February 2021 by winter storm Uri in the United States.

● Period expenses of unabsorbed manufacturing costs and increased expected credit losses on customer receivables in the second quarter of 2020.

● Restructuring actions addressing structural enterprise costs and operations in certain end markets as a result of the COVID-19 pandemic and related economic impact resulting in a second quarter 2020 charge of $58 million.

● Committed financial support in the second quarter of 2020 to various COVID-relief and medical research initiatives.

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

Factors providing benefits or other impacts:

● Ongoing cost management in discretionary spending in areas such as travel, professional services, and advertising/merchandising .

● In 2020 ongoing cost management in discretionary spending in areas such as travel, professional services, and advertising/merchandising resulting in lower spending .

● Continued productivity efforts, including year-on-year savings from restructuring actions taken in 2020

● Government-sponsored COVID-response stimulus and relief initiatives in 2020, including certain employee retention benefits under the Coronavirus Aid, Relief and Economic Security (CARES) Act in the United States.

● Lower incentive compensation and self-insured medical visit/insurance expense in 2020.

● Accelerated vacation usage policies in the second quarter of 2020 which benefited the second quarter of 2020, but provided a penalty in the second half of 2020.

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

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Operating income margin and earnings per share attributable to 3M common shareholders – diluted:

The following table provides a summary of the increases (decreases) in operating income margins and diluted earnings per share for the three months ended March 31, 2021.

The following table provides the increases (decreases) in operating income margins and diluted earnings per share for the three and six months ended June 30, 2021 and 2020.

Three months ended

March 31, 2021

Six months ended

June 30, 2021

diluted share

Same period last year

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Gain/loss on sale of businesses

Divestiture-related restructuring actions

Same period last year, excluding special items

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Current period

Operating income margins increased 1.9 percentage points in the first three months of 2021 when compared to the same period last year.

For the first quarter of 2021, net income attributable to 3M was $1.62 billion, or $2.77 per diluted share, versus $1.31 billion, or $2.25 per diluted share, in the same period last year, an increase of 23.1 percent on a per diluted share basis.

Operating income margins decreased 2.3 percentage points in the second quarter of 2021 and remained flat for the first six months of 2021 when compared to the same period last year.

For the second quarter of 2021, net income attributable to 3M was $1.5 billion, or $2.59 per diluted share compared to $1.3 billion or $2.25 per diluted share in the same period last year, an increase of 15.1 percent on a per diluted share basis.

For the first six months of 2021 net income attributable to 3M was $3.1 billion, or $5.36 per diluted share compared to $2.6 billion or $4.50 per diluted share in the same period last year, an increase of 19.1 percent on a per diluted share basis.

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

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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, operating margins increased 1.7 percentage points to 22.5 percent in the first three months of 2021 when compared to the same period last year.

Net income attributable to 3M on an adjusted basis was $1.62 billion, or $2.77 per diluted

share, versus $1.27 billion, or $2.19 per diluted share, for the same period last year, an increase of 26.8 percent on a per diluted share basis.

Additional discussion related to the components of the year-on-year change in operating income margins and earnings per diluted share follows:

On an adjusted basis, operating margins increased 2.4 percentage points to 22.0 percent in the second quarter of 2021 when compared to the same period last year.

For the first six months of 2021, operating margins increased 2.1 percentage points to 22.3 percent when compared to the same period last year.

Net income attributable to 3M was $1.5 billion, or $2.59 per diluted share versus $1.0 billion, or $1.81 per diluted share in the same period last year, which was an increase of 43.5 percent on a per diluted share basis.

On an adjusted basis for the first six months of 2021, net income attributable to 3M was $3.1 billion, or $5.36 per diluted share versus $2.3 billion, or $3.99 per diluted share for the same period last year, which was an increase of 34.4 percent on a per diluted share basis.

Additional discussion related to the components of the year-on-year change in earnings per diluted share follows:

Organic growth/productivity and other:

● Higher organic volume growth, ongoing cost management, and improved productivity increased operating income margins and earnings per diluted share year-on-year.

In addition, the first quarter of 2021 compared to 2020 benefited from restructuring in 2020, net of additional actions in 2021, and COVID-impacts recognized on certain assets in the first quarter of 2020.

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

● Higher organic volume growth, ongoing cost management, and improved productivity increased operating income margins and earnings per diluted share year-on-year for both the second quarter and first six months of 2021.

The following also impacted results:

o Second quarter of 2021 benefit of $91 million pre-tax ($0.12 per share after tax) from a favorable Brazilian Supreme Court decision that concluded on the impact of state value-added tax when determining Brazil’s federal sales-based social tax—essentially lowering the social tax that 3M should have paid in prior periods.

o Certain increased legal and reserve adjustments costs year-over-year.

3M regularly reviews and updates its associated liabilities and is involved in various trials and defense preparation as discussed in Note 14.

o 2021 benefit from restructuring actions taken in 2020 and positive/negative impact of year-over-year change in non-divestiture-related restructuring charges, net of adjustments, for respective periods.

Note 5 provides additional information relative to restructuring actions.

o COVID-impacts recognized on certain assets in the first quarter of 2020.

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

Selling price and raw material impact:

● Higher raw material and logistics costs from strong end-market demand and COVID-impacted manufacturing and supply chain disruptions that were further magnified by February 2021 winter storm Uri in the U.S.

These factors were partially offset by higher selling prices.

These factors were partially offset by higher selling prices for both the second quarter and first six months of 2021.

Acquisitions/divestitures:

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Foreign exchange impacts:

● Foreign currency impacts (net of hedging) increased operating income by approximately $90 million (or pre-tax earnings by approximately $95 million) year-on-year.

● Foreign currency impacts (net of hedging) increased operating income by approximately $49 million and $139 million (or pre-tax earnings by approximately $60 million and $155 million) year-on-year for the second quarter and first six months of 2021, respectively.

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

the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad;

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

Other expense (income), net:

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

● Interest expense (net of interest income) increased year-on-year due to an early debt extinguishment charge related to make-whole call offers on $450 million of debt in March 2021.

● Higher income related to non-service cost components of pension and postretirement expense, decreased expense year-on-year for both the second quarter and first six months of 2021.

● Interest expense (net of interest income) decreased slightly for the second quarter of 2021 and remained flat for the first six months of 2021 compared to the same periods year-on-year.

Income tax rate:

● Certain items above reflect specific income tax rates associated therewith.

Overall, the effective tax rate for the first quarter of 2021 was 16.4 percent, a decrease of 1.1 percentage points year-on-year.

● On an adjusted basis, the effective tax rate decreased 4.3 percentage points year-on-year primarily from nonrepeating favorable adjustments in 2021 related to impacts of U.S.

international tax provisions.

Overall, the effective tax rate for the second quarter and first six months of 2021 was 21.5 percent and 18.9 percent, respectively, largely consistent with 21.0 percent and 19.3 percent for the same periods, respectively, in prior year.

● On an adjusted basis, the effective tax rate for the second quarter and first six months of 2021 was 21.5 percent and 18.9 percent, respectively, an increase of 0.8 and decrease of 1.8 percentage points compared to the same periods year-on-year.

Shares of common stock outstanding:

● Higher shares outstanding decreased earnings per share year-on-year.

● Higher shares outstanding decreased earnings per share year-on-year for both the second quarter and first six months of 2021.

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

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For the periods presented, special items include the items described below.

Operating income (measure of segment operating performance), income before taxes, net income, earnings per share, and the effective tax rate are all measures for which 3M provides the reported GAAP measure and a measure adjusted for special items.

Operating income (measure of segment operating performance), income before taxes, net income, earnings per share, and the effective tax rate are all

measures for which 3M provides the reported GAAP measure and a measure adjusted for special items.

The adjusted measures are not in accordance with, nor are they a substitute for, GAAP measures.

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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.

Significant litigation-related charges/benefits:

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These items, in aggregate, resulted in a $39 million after tax benefit.

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.

Divestiture-related restructuring actions:

● In the second quarter 2020, following the divestiture of substantially all of the drug delivery business management approved and committed to undertake certain restructuring actions addressing corporate functional costs and manufacturing footprint across 3M in relation to the magnitude of amounts previously allocated/burdened to the divested business.

As a result, 3M recorded a pre-tax charge of $55 million ($46 million after tax).

Refer to Note 5 for further details.

(Dollars in millions, except per share amounts)

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Earnings per diluted share percent change

Three months ended March 31, 2020 GAAP

Three months ended June 30, 2020 GAAP

Adjustments for special items:

Gain/loss on sale of businesses

Divestiture-related restructuring actions

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

Three months ended June 30, 2021 GAAP

Adjustments for special items:

Three months ended June 30, 2021 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, 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, 2021 GAAP

Divestiture-related restructuring actions

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

Six months ended June 30, 2021 GAAP

Adjustments for special items:

Three months ended March 31, 2021 adjusted amounts (non-GAAP measures)

Six months ended June 30, 2021 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, 2021 and 2020.

The following tables contain sales and operating income results by business segment for the three and six months ended June 30, 2021 and 2020.

Refer to the section entitled “Performance by Business Segment” later in MD&A for additional discussion concerning 2021 versus 2020 results, including Corporate and Unallocated.

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

Three months ended March 31,

Three months ended June 30,

(Dollars in millions)

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Total Company

Three months ended March 31, 2021

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, 2021

Worldwide Sales Change

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Total Company

Six months ended June 30, 2021

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 2021 with the same period last year, unless otherwise indicated.

Percent change information compares the second quarter and first six months of 2021 with the same period last year, unless otherwise indicated.

Additional discussion of business segment results is provided in the Performance by Business Segment section.

Three months ended March 31, 2021

Three months ended June 30, 2021

Net sales (millions)

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total sales increased 21 percent and organic-local currency sales increased 22 percent.

Total sales in Mexico decreased 1 percent and organic local-currency sales decreased 2 percent.

In Canada, total sales increased 6 percent and organic local-currency sales remained flat.

In Brazil, total sales remained flat while organic local-currency sales increased 18 percent, as foreign currency translation impacts offset organic local-currency sales growth.

Total sales in Mexico increased 66 percent and organic local-currency sales increased 60 percent.

In Canada, total sales increased 52 percent and organic local-currency sales increased of 37 percent.

In Brazil, total sales increased 58 percent and organic local-currency sales increased 54 percent.

● In the Asia Pacific geographic area, China total sales increased 20 percent and organic local-currency sales increased 12 percent.

In Japan, total sales increased 1 percent and organic local-currency sales decreased 1 percent.

In Japan, total sales increased 10 percent and organic local-currency sales increased 12 percent.

Six months ended June 30, 2021

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 13 percent and organic-local currency sale increased 14 percent.

Total sales in Mexico increased 24 percent and organic local-currency sales increased 22 percent.

In Canada, total sales increased 27 percent and organic local-currency sales increased 16 percent.

In Brazil, total sales increased 24 percent and organic local-currency sales increased 33 percent.

● In the Asia Pacific geographic area, China total sales increased 29 percent and organic local-currency sales increased 22 percent.

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

Managing currency risks:

The weaker U.S.

dollar had a positive impact on sales in the first three months of 2021 compared to the same period last year.

Net of the Company’s hedging strategy, foreign currency positively impacted earnings in the first quarter of 2021 compared to the same

period last year.

dollar had a positive impact on sales in the second quarter and first six months of 2021 compared to the same periods last year.

Net of the Company’s hedging strategy, foreign currency positively impacted earnings in the second quarter and first six months of 2021 compared to the same period last year.

3M utilizes a number of tools to manage currency risk related to earnings including natural hedges such as pricing, productivity, hard currency and hard currency-indexed billings, and localizing source of supply.

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Financial condition:

3M generated $1.7 billion of operating cash flows in the first three months of 2021, an increase of $475 million when compared to the first three months of 2020, with this increase year-on-year primarily driven by higher net income as a result of strong organic sales growth and ongoing cost management.

3M generated $3.6 billion of operating cash flows in the first six months of 2021, an increase of $457 million when compared to the first six months of 2020, with this increase year-on-year primarily driven by higher net income as a result of strong organic sales

growth and ongoing cost management.

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

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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 2021, the Company purchased $231 million of its own stock, compared to $365 million of stock purchases in the first three months of 2020.

As of March 31, 2021, approximately $7.5 billion remained available under the authorization.

In the first six months of 2021, the Company purchased $734 billion of its own stock, compared to $366 million of stock purchases in the first six months of 2020.

As of June 30, 2021, approximately $7.0 billion remained available under the authorization.

In February 2021, 3M’s Board of Directors declared a first-quarter 2021 dividend of $1.48 per share, an increase of 1 percent.

This marked the 63 rd consecutive year of dividend increases for 3M.

In May 2021, 3M’s Board of Directors declared a second-quarter dividend of $1.48 per share.

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

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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 2021 was approximately $10 million.

curtailments, special termination benefits and other) for a total consolidated defined benefit pre-tax pension and postretirement expense of $322 million.

The year-on-year increase in defined benefit pension and postretirement service cost expense for the second quarter and first six months of 2021 was approximately $11 million and $22 million, respectively.

For total year 2020, the Company recognized consolidated defined benefit pre-tax pension and postretirement service cost expense of $456 million and a benefit of $134 million related to all non-service pension and postretirement net benefit costs (after settlements, curtailments, special termination benefits and other) for a total consolidated defined benefit pre-tax pension and postretirement expense of $322 million.

For total year 2021, defined benefit pension and postretirement service cost expense is anticipated to total approximately $500 million while non-service pension and postretirement net benefit cost is anticipated to be a benefit of approximately $295 million, for a total consolidated defined benefit pre-tax pension and postretirement expense of approximately $200 million, a decrease in expense of approximately $120 million compared to 2020.

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Cost of Sales:

Cost of sales, measured as a percent of sales, increased in first three months of 2021.

Increases in the first three months of 2021 primarily related to higher raw material and logistics costs from COVID-19 impacted manufacturing and supply chain disruptions, further magnified by February 2021 winter storm Uri in the U.S., partially offset by higher selling prices.

Cost of sales, measured as a percent of sales, decreased in the second quarter and first six months of 2021 when compared to the same periods last year.

Decreases primarily related to lower COVID-related net impacts taken in the first half of 2021 versus the same period last year, including period expenses of unabsorbed manufacturing costs taken in the second quarter of 2020.

These were partially offset by higher raw material and logistics costs and increased adjustments to other environmental liabilities in the first half of 2021.

Selling, General and Administrative Expenses:

SG&A in dollars increased 2.3 percent in the first three months of 2021, when compared to the same period last year.

The increase in the first three months of 2021 primarily increased net costs as a result of the regular review of 3M’s respirator mask liabilities, higher litigation and environmental costs, continued spending on key initiatives, partially offset by ongoing general cost management.

As a percent of sales, SG&A decreased as a result of continued discretionary spending cost management.

SG&A in dollars increased 9.6 percent and 5.8 percent in the second quarter and first six months of 2021, respectively, when compared to the same period last year.

These results reflect increased legal and reserve adjustment costs, continued spending on key initiatives, partially offset by the impact of the favorable decision of the Brazilian Supreme Court in the second quarter of 2021 regarding the calculation of past social taxes and ongoing general 3M cost management.

Prior year also included a number of COVID-related net impacts as described in the Overview- Consideration of COVID-19 section above.

As a percent of sales, SG&A decreased for both the second quarter and first six months of 2021 as a result of continued discretionary spending cost management.

Research, Development and Related Expenses:

R&D in dollars decreased $13 million in the first three months of 2021, when compared to the same period last year, as 3M continued to invest in its key initiatives, including R&D aimed at disruptive innovation programs with the potential to create entirely new markets and disrupt existing markets.

The overall decrease in spending is primarily driven by the May 2020 divestiture of the drug delivery business and other indirect spending reductions.

R&D in dollars increased $90 million and $77 million in the second quarter and first six months of 2021, respectively, when compared to the same period last year, as 3M continued to invest in its key initiatives, including R&D aimed at disruptive innovation programs with the potential to create entirely new markets and disrupt existing markets.

Gain on Sale of Businesses:

During the first quarter of 2020, the Company recorded a pre-tax gain of $2 million ($1 million loss after tax) related to the sale of its advanced ballistic-protection business and recognition of certain contingent consideration.

During the second quarter of 2020, the Company recorded a pre-tax gain of $387 million ($304 after tax) related to the sale of substantially all of its drug delivery business.

Refer to Note 3 for additional details on divestitures.

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

Interest expense (net of interest income) increased in the first three months of 2021 compared to the same period in 2020 due to an early debt extinguishment charge related to make-whole call offers on $450 million of debt in March 2021.

The non-service pension and postretirement net benefit increased approximately $40 million in the first three months of 2021 compared to the same period in 2020.

Interest expense (net of interest income) decreased slightly for the second quarter and remained flat for the first six months of 2021 compared to the same periods year-on-year.

Interest expense includes an early debt extinguishment pre-tax charge in the first quarter of 2021.

The non-service pension and postretirement net benefit increased approximately $42 million and $83 million in the second quarter and first six months of 2021, respectively, compared to the same period in 2020.

Provision for Income Taxes:

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Six months ended

(Percent of pre-tax income)

Effective tax rate

The effective tax rate for the first three months of 2021 was 16.4 percent, compared to 17.5 percent in the first three months 2020, a decrease of 1.1 percentage points.

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

The effective tax rate for the second quarter and first six months of 2021 was 21.5 percent and 18.9 percent, respectively, largely consistent with 21.0 percent and 19.3 percent for the same periods, respectively, in prior year.

3M currently estimates its effective tax rate for 2021 to be approximately 20 to 21 percent.

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Six months ended

Income (loss) from unconsolidated subsidiaries, net of taxes

Income (loss) from unconsolidated subsidiaries, net of taxes, is primarily attributable to the Company’s ownership interest in Kindeva using the equity method of accounting following 3M’s divestiture of the drug delivery business in 2020.

Net Income Attributable to Noncontrolling Interest:

Net Income (Loss) Attributable to Noncontrolling Interest:

Three months ended

Six months ended

Net income (loss) 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.

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, increased pre-tax income by approximately $95 million for the three months ended March 31, 2021.

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

the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad;

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

3M estimates that year-on-year foreign currency transaction effects, including hedging impacts, decreased pre-tax income by approximately $10 million for the three months ended March 31, 2021.

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

Refer to Note 12 in the Consolidated Financial Statements for additional information concerning 3M’s hedging activities.

Significant Accounting Policies:

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

Corporate and Unallocated operating expenses decreased in the first three months of 2021, when compared to the same period last year.

Corporate and Unallocated operating expenses increased in the second quarter and first six months of 2021, when compared to the same period last year.

Special Items

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Other Corporate Expense - Net

Other corporate operating expenses, net, decreased in the first three months of 2021, when compared to the same period last year primarily due to lower overall corporate staff spending and first quarter 2020 charges related to equity securities (as discussed in the “Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis” section of Note 13), partially offset by increased 2021 legal expenses.

Other corporate operating expenses, net, increased and decreased in the second quarter and first six months of 2021, respectively, when compared to the same period last year primarily due to a $91 million pre-tax benefit from the impact of the favorable decision of the Brazilian Supreme Court in the second quarter of 2021 regarding the calculation of past social taxes, lower overall corporate staff spending and first quarter 2020 charges related to equity securities (as discussed in the “Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis” section of Note 13), offset by increased 2021 legal and reserve adjustment costs.

Operating Business Segments:

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Sales (millions)

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Percent of sales

First quarter 2021 results:

Second quarter 2021 results:

Sales in Safety and Industrial totaled $3.3 billion, up 22.4 percent in U.S.

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On an organic local-currency sales basis:

● Sales increased in personal safety, roofing granules, industrial adhesives and tapes, automotive aftermarket, electrical markets, and abrasives;

sales declined in closure and masking systems.

● Growth includes benefits from continued pandemic-related respirator mask demand, improving general industrial manufacturing activity and other end-market demand contributing to sales increases.

Business segment operating income margins increased year-on-year due to sales growth leverage, partially offset by rising raw materials, logistics and legal costs.

● Sales increased in automotive aftermarket, roofing granules, abrasives, industrial adhesives and tapes, electrical markets, and closure and masking driven by continued end market strength (industrial, automotive, electronics and construction) and prior year pandemic impacts.

● Sales declined in personal safety as growth in head, face, hearing, fall protection and disposable respirator growth was more than offset by declines across the rest of the respiratory protection portfolio.

Business segment operating income margins decreased year-on-year due to increases in raw materials, logistics and ongoing legal costs partially offset by leverage on sales growth.

First six months 2021 results:

Sales in Safety and Industrial totaled $6.6 billion, up 17.8 percent in U.S.

Organic local-currency and other sales change elements are included in the table above.

On an organic local-currency sales basis:

● Sales increased in roofing granules, automotive aftermarket, industrial adhesives and tapes, abrasives, electrical markets, and personal safety;

sales declined in closure and masking.

● Growth was driven by improving general industrial manufacturing activity and other end-market demand along with pandemic-related respirator mask demand in the first quarter of 2021.

Business segment operating income margins decreased year-on-year due to rising raw materials, logistics and legal costs partially offset by sales growth leverage.

Transportation and Electronics Business:

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Sales (millions)

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Percent of sales

First quarter 2021 results:

Second quarter 2021 results:

Sales in Transportation and Electronics totaled $2.5 billion, up 28.1 percent in U.S.

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On an organic local-currency sales basis:

● Sales increased in electronics-related businesses due to strong demand in data center, semiconductor, interconnect and consumer electronics markets.

● Sales increased in automotive and aerospace solutions and advanced materials driven by improving automotive end-market activity, and increases in car and light truck builds.

● Transportation safety was flat year-on-year due to a slow 2021 start to roadway industry construction projects;

commercial solutions sales decreased due to continued negative pandemic-related impacts on advertising spend and demand for workplace cleaning and safety products and solutions.

● Sales increased in automotive and aerospace with year-on-year growth in car and light truck build rates in regions where 3M has higher content per vehicle, a year-on-year increase in sell-in of 3M products versus change in build rate, and continued penetration gains into new platforms.

● Sales increased in commercial solutions, advanced materials and transportation safety from return to workplace trends.

● Sales increased in electronics driven by continued strength in semiconductor, factory automation and data centers along with consumer electronic devices, namely tablets and TV’s.

Business segment operating income margins increased year-on-year due to strong leverage on sales growth, partially offset by increases in raw materials and logistic costs.

First six months 2021 results:

Sales in Transportation and Electronics totaled $5.0 billion, up 20.0 percent in U.S.

Organic local-currency and other sales change elements are included in the table above.

On an organic local-currency sales basis:

● Sales increased in automotive and aerospace from improving automotive-end market activity and increases in car and light truck builds and factors mentioned above relative to second quarter results.

● Sales increased in electronics due to strong demand in data center, semiconductor, interconnect and consumer electronics markets.

● Sales increased in commercial solutions, advanced materials and transportation safety due to increased advertising spend and return to workplace trends.

Business segment operating income margins increased year-on-year due to sales growth leverage and COVID impacts recognized on certain assets in 2020, partially offset by rising raw materials and logistic costs.

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Sales (millions)

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Percent of sales

First quarter 2021 results:

Second quarter 2021 results:

Sales in Health Care totaled $2.3 billion, up 24.9 percent in U.S.

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On an organic local-currency sales basis:

● Sales increased in oral care, separation and purification, medical solutions, and health information systems.

Growth was driven by higher year-on-year dental industry activity, continued high demand for biopharma filtration solutions for COVID-related vaccine and therapeutic development and manufacturing, continued strong respirator demand, and improving hospital information technology investments, partially offset by year-on-year declines in elective healthcare procedure volumes.

● Sales declined in food safety as the food service industry had strong early COVID buy-ins in 2020.

● Sales increased in oral care as patient visits returned to pre-COVID levels, in food safety as food service activity returned along with continued strong growth from new product introductions, and in medical solutions due to rising elective procedure volumes as COVID-related hospitalizations declined.

● Sales increased in separation and purification due to continued demand for biopharma solutions for COVID-related vaccine and therapeutics along with improving demand trends for water filtration solutions.

● Sales increased in health information systems driven by strong growth in clinician solutions.

Divestitures:

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

Business segment operating income margins increased year-on-year due to sales growth leverage, partially offset by supply chain disruptions and rising raw materials and logistics costs.

Business segment operating income margins increased year-on-year due to leverage on sales growth, partially offset by increasing raw materials and logistics costs along with increased investments in growth.

First six months 2021 results:

Sales in Health Care totaled $4.5 billion, up 15.2 percent in U.S.

Organic local-currency and other sales change elements are included in the table above.

On an organic local-currency sales basis:

● Sales increased in oral care driven by higher year-on-year dental industry activity and in separation and purification from continued high demand for biopharma filtration solutions for COVID-related vaccine and therapeutic development and manufacturing.

● Sales increased in medical solutions from rising elective procedure volumes and strong respirator demand in the first quarter of 2021.

● Sales increased in health information systems due to improving hospital information technology investments.

Divestitures:

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

Business segment operating income margins increased year-on-year due to sales growth leverage, partially offset by supply chain disruptions, rising raw materials and logistics costs along with increased investments in growth.

Consumer Business:

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Sales (millions)

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Percent of sales

First quarter 2021 results:

Second quarter 2021 results:

Sales in Consumer totaled $1.5 billion, an increase of 20.4 percent in U.S.

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On an organic local-currency sales basis:

● Sales increased in home improvement and stationery and office supplies.

Growth in home improvement was driven by continued strong demand for Command TM adhesives, Filtrete TM air quality solutions and Scotch Blue TM painter’s tape.

Growth in stationery and office was led by ongoing strength in consumer demand for packaging and shipping products and Scotch ® brand office tapes as prior year remote work and school trends begin to be lapped.

● Home care experienced continued growth due to consumer demand for home cleaning products and solutions.

Consumer health and safety declined as the global economy impacted by COVID continues to evolve versus 2020.

Business segment operating income margins decreased 0.1 points year-on-year as a result of higher raw materials, logistics, outsourced hardgoods manufacturing costs and investments in advertising and merchandising offsetting sales growth leverage.

● Sales increased in stationery and office supplies as the business laps last year’s COVID-related comparisons, continued strength in consumer demand for Scotch ® -branded packaging and shipping products, along with improved sell-in trends in Post-it ® -solutions and Scotch ® -branded home and office tapes as retailers prepare for back-to-school and return-to-workplace.

● Sales increased in consumer health and safety as last year’s COVID-related impacts are lapped along with improved supply of safety products for retail customers.

● Sales increased in home improvement as the business continued to experience strong demand in many of our category leading franchises particularly for Command TM adhesives, Filtrete TM air quality solutions, and Meguiars TM auto care solutions.

● Sales increased in home care due to continued strength in home cleaning.

Business segment operating income margins decreased year-on-year as a result of increased costs for raw materials, logistics and outsourced hardgoods manufacturing costs, along with rising investments in advertising and merchandising, more than offset leverage from sales growth.

First six months 2021 result:

Sales in Consumer totaled $2.9 billion, an increase of 15.1 percent in U.S.

Organic local-currency and other sales change elements are included in the table above.

On an organic local-currency sales basis:

● Sales increased in home improvement driven by continued strength in home improvement with strong demand for Command TM adhesives, Filtrete TM air quality solutions, Meguiars TM auto care and Scotch Blue TM painter’s tape.

● Sales increased in stationery and office supplies from ongoing strength in consumer demand for packaging and shipping products and Scotch ® brand office tapes as the business laps last year’s COVID-related comparisons.

● Sales also increased in consumer health and safety as the global economy impacted by COVID continues to evolve versus 2020 and in home care due to consumer demand for home cleaning products and solutions.

Business segment operating income margins decreased year-on-year as a result of rising raw materials, logistics and outsourced hardgoods manufacturing costs, and higher investments in advertising and merchandising, partially offset by sales growth leverage.

FINANCIAL CONDITION AND LIQUIDITY

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The Company also continues to actively manage its portfolio to maximize value for shareholders.

3M repurchased shares in the first three months of 2021, after having suspended repurchases under its board-approved share repurchase program (with other repurchase activity limited to 3M’s stock compensation plans) in the first quarter of 2020.

3M repurchased shares in the first six months of 2021, after having suspended repurchases under its board-approved share repurchase program (with other repurchase activity limited to 3M’s stock compensation plans) in the first quarter of 2020.

To fund cash needs in the United States, the Company relies on ongoing cash flow from 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.

The Company had no commercial paper outstanding at March 31, 2021 and December 31, 2020.

The Company had no commercial paper outstanding at June 30, 2021 and December 31, 2020.

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

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

total portfolio.

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

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

The Company’s total debt was $0.6 billion lower at March 31, 2021 when compared to December 31, 2020.

The Company’s total debt was $547 million lower at June 30, 2021 when compared to December 31, 2020.

Decreases in debt were largely due to the March 2021 early redemption via make-whole call offers of $450 million in debt.

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

As discussed in Note 10, in the second quarter of 2021, 3M entered into interest rate swaps that converted part of the Company’s $1.0 billion and $650 million principal amount of fixed rate notes due 2049 and 2050, respectively, into floating rate debt for the portion of their terms through mid-2028.

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, 2021, the total amount of debt issued as part of the medium-term notes program (Series F), inclusive of debt issued in February 2019 and prior years is approximately $17.6 billion (utilizing the foreign exchange rates applicable at the time of issuance for the euro denominated debt).

As of June 30, 2021, the total amount of debt issued as part of the medium-term notes program (Series F), inclusive of debt issued in February 2019 and prior years is approximately $17.6 billion (utilizing the foreign exchange rates applicable at the time of issuance for the euro denominated debt).

Additionally, the August 2019 and March 2020 debt was issued under the WKSI shelf registration, but not as part of the medium-term notes program (Series F).

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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, 2021.

These credit facilities were undrawn at June 30, 2021.

Under both the $3.0 billion and $1.25 billion credit agreements, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at not less than 3.0 to 1.

This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the four consecutive quarters then ended to total interest expense on all funded debt for the same period.

At March 31, 2021, this ratio was approximately 18 to 1.

At June 30, 2021, this ratio was approximately 19 to 1.

Debt covenants do not restrict the payment of dividends.

The Company also had $266 million in stand-alone letters of credit and bank guarantees issued and outstanding at March 31, 2021.

The Company also had $271 million in stand-alone letters of credit and bank guarantees issued and outstanding at June 30, 2021.

These instruments are utilized in connection with normal business activities.

Cash, cash equivalents and marketable securities:

At March 31, 2021, 3M had $5.2 billion of cash, cash equivalents and marketable securities, of which approximately $3.0 billion was held by the Company’s foreign subsidiaries and approximately $2.2 billion was held by the United States.

At June 30, 2021, 3M had $5.5 billion of cash, cash equivalents and marketable securities, of which approximately $4.3 billion was held by the Company’s foreign subsidiaries and approximately $1.2 billion was held in the United States.

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

At December 31, 2020, 3M had $5.1 billion of cash, cash equivalents and marketable securities, of which approximately $2.8 billion was held by the Company’s foreign subsidiaries and $2.3 billion was held by the United States.

The increase from December 31, 2020 primarily resulted from strong cash flow from operations offset by ongoing dividend payments, capital expenditures, and the March 2021 early redemption via make-whole call offers of $450 million in debt.

The increase from December 31, 2020 primarily resulted from strong cash flow from operations offset by ongoing dividend payments, purchases of treasury stock, capital expenditures, and the March 2021 early redemption via make-whole call offers of $450 million in debt.

Net Debt (non-GAAP measure):

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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, 2021 and December 31, 2020.

March 31, 2021

The following table provides net debt as of June 30, 2021 and December 31, 2020.

June 30, 2021

December 31, 2020

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Working capital (non-GAAP measure):

March 31, 2021

June 30, 2021

December 31, 2020

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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 as of March 31, 2021 was largely consistent with December 31, 2020.

Balance changes in current assets increased working capital by $0.4 billion, driven largely by increases in inventory, accounts receivable and marketable securities offset by decreases in prepaids.

Balance changes in current liabilities decreased working capital by $0.4 billion, primarily due to increases in current-portion of long-term debt and accounts payable, offset by decrease in accrued payroll and other current liabilities.

Working capital as of June 30, 2021 was largely consistent with December 31, 2020.

Balance changes in current assets increased working capital by $1.4 billion, driven largely by increases in inventory, marketable securities and accounts receivable.

Balance changes in current liabilities decreased working capital by $1.5 billion, primarily due to increases in current-portion of long-term debt and accounts payable.

Accounts receivable and inventory increased $286 million and $603 million, respectively, from December 31, 2020, primarily as a result of increased sequential sales and related operating activity from that of late 2020 partially offset by foreign currency translation impacts.

Current portion of long-term debt increased based on underlying debt maturities while accounts payable also increased as a result of increased sequential operating activity from that of late 2020 partially offset by foreign currency translation impacts.

Accrued payroll decreased as accrued annual incentive compensation was paid in early 2021.

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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Net cash provided by (used in) operating activities

Cash flows from operating activities can fluctuate significantly from period to period, as changes in working capital needs, tax timing differences and other items can significantly impact cash flows.

In the first three months of 2021, cash flows provided by operating activities increased $475 million compared to the same period last year, with this increase primarily due to overall sales growth and continued spending discipline leading to higher net income year-on-year.

The combination of accounts receivable, inventories and accounts payable decreased operating cash flow by $354 million in the first three months of 2021, compared to an operating cash flow decrease of $338 million in the first three months of 2020.

Cash flows from operating activities can fluctuate significantly from period to period, as pension funding decisions, tax timing differences and other items can significantly impact cash flows.

In the first six months of 2021, cash flows provided by operating activities increased $457 million compared to the same period last year, with this increase primarily due to overall sales growth and continued spending discipline leading to higher net income year-on-year, offset by working capital changes and the timing of income tax payments.

The combination of accounts receivable, inventories and accounts payable decreased operating cash flow by $570 million and $226 million in the first six months of 2021 and 2020, respectively.

In addition, operating cash flows for the first six months of 2020 benefited from the deferral of income tax payments into the third quarter of 2020.

This deferral did not repeat in 2021.

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

Cash Flows from Investing Activities:

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

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

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

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

Purchases of marketable securities and investments and proceeds from maturities and sale of marketable securities and investments are primarily attributable to certificates of deposit/time deposits, commercial paper, and other securities, which are classified as available-for-sale.

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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 $18.2 billion at March 31, 2021 and $18.8 billion at December 31, 2020.

Total debt was approximately $18.2 billion at June 30, 2021 and $18.8 billion at December 31, 2020.

Decreases in debt were largely due to the March 2021 early redemption of $450 million in debt maturing in 2022 via make-whole call offers.

The Company had no commercial paper outstanding at March 31, 2021 and December 31, 2020.

The Company had no commercial paper outstanding at June 30, 2021 and December 31, 2020.

Net commercial paper issuances in addition to repayments and borrowings by international subsidiaries are largely reflected in “Change in short-term debt – net” in the preceding table.

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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 first three months of 2021, the Company purchased $0.2 billion of its own stock.

In the first six months of 2021, the Company purchased $734 million of its own stock.

3M repurchased shares in 2021, after having suspended repurchases (with other repurchase activity limited to 3M’s stock compensation plans) in the first quarter of 2020.

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This is equivalent to an annual dividend of $5.92 per share and marked the 63rd consecutive year of dividend increases.

In May 2021, 3M’s Board of Directors declared a second-quarter 2021 dividend of $1.48 per share.

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

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Refer to the preceding “Results of Operations” section for discussion of items that impacted the net income attributable to 3M component of the calculation of free cash flow conversion.

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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