3M Company — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The interim financial statements are unaudited. 3M operates across Safety and Industrial, Transportation and Electronics, Health Care, and Consumer.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $8.942bn | $8.350bn | $26.743bn | $23.601bn |
| Operating income | $1.788bn | $1.909bn | $5.753bn | $5.312bn |
| Operating margin | 20.0% | 22.9% | 21.5% | 22.5% |
| Net income attributable to 3M | $1.434bn | $1.430bn | $4.582bn | $4.044bn |
| Diluted EPS | $2.45 | $2.45 | $7.81 | $6.95 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $5.449bn | $5.598bn |
| Free cash flow | Not stated for quarter | Not stated for quarter | $4.402bn | $4.519bn |
Sales rose 7.1% in Q3 and 13.3% year to date; organic local-currency sales increased 6.3% and 11.5%, respectively. Nine-month free cash flow conversion was 96%, versus 112% in 2020. Q3 operating margin contracted 2.9 percentage points; the nine-month margin fell 1.0 point on a reported basis. Cost of sales rose to 54.3% of sales in Q3 from 51.5%, reflecting cost pressures and other factors.
Cash, cash equivalents and marketable securities totaled $5.763bn at September 30, 2021. Total debt was $18.165bn and net debt, as defined by 3M, was $12.402bn, down from $13.727bn at year-end 2020. Current assets were $16.426bn and current liabilities $9.635bn. The company reported no commercial paper outstanding; its $3.0bn revolving facility and $1.25bn 364-day facility were undrawn. Moody’s rated 3M A1 and S&P A+, both with negative outlooks.
Changes versus the prior period
- Q3 sales grew across all four segments, led by Consumer and Safety and Industrial. However, total operating income declined 6.3% and diluted EPS was unchanged year over year.
- For the first nine months, sales and operating income increased 13.3% and 8.3%, respectively. Diluted EPS increased 12% on a GAAP basis; 3M reported 21% growth on its adjusted, non-GAAP basis, reflecting prior-year special items.
- Q3 segment operating income declined in Safety and Industrial, Transportation and Electronics, and Consumer; Health Care increased. Year-to-date operating income increased in all four segments.
- Operating cash flow decreased $149m year over year, with working-capital changes and timing of tax payments among the drivers. Receivables, inventory and payables together reduced year-to-date operating cash flow by $807m, versus a $108m increase in the prior-year period.
- Debt decreased $630m from December 2020, while cash and marketable securities increased $695m. 3M repurchased $1.261bn of shares and paid $2.572bn in dividends during the first nine months.
Management commentary, outlook and unusual items
Management cited broad-based growth and improved end markets, alongside persistent global supply-chain constraints, raw-material and logistics inflation, and manufacturing productivity impacts. Higher selling prices partly offset increased input costs. COVID-related respirator sales grew more slowly than the rest of the company in Q3, reducing year-over-year organic local-currency growth by approximately 0.5 percentage point.
- Outlook provided in this filing: Estimated 2021 effective tax rate of approximately 18.5%–19.5%; expected 2021 capital spending of $1.5bn–$1.6bn; expected global pension and postretirement contributions of approximately $200m. The filing text does not provide a clear full-year sales or EPS guidance figure.
- Restructuring: The ongoing operational and marketing capability initiative is expected to affect approximately 3,100 positions worldwide and incur $300m–$325m of pretax charges over 2020 through early 2022. 2021 nine-month charges were $107m; remaining activities were expected to be largely completed through Q1 2022.
- PFAS and environmental matters: At September 30, 3M had a $494m accrual for PFAS-related “other environmental liabilities,” $28m for non-PFAS environmental remediation, and $655m for respirator mask/asbestos liabilities, excluding $29m of Aearo-related accruals. The company said it could not estimate potential losses beyond relevant environmental accruals. The filing also describes multiple PFAS regulatory inquiries, lawsuits, and facility compliance matters. October 2021 developments disclosed in the filing include proposed investments and agreements in principle; some were subject to finalization or court approval.
- Combat earplug litigation: Approximately 3,522 lawsuits representing about 13,437 claimants were pending at September 30, with an administrative docket of approximately 260,000 unfiled and unverified claims. 3M reported mixed bellwether verdicts and recorded no liability, stating that a loss was not then probable and reasonably estimable. Later October 2021 trial developments are described in the filing.
- Other items: 3M recorded an $11m pretax early debt-extinguishment charge in Q1. A favorable Brazilian Supreme Court decision provided a $91m pretax benefit in Q2. The effective tax rate declined, primarily due to favorable adjustments related to U.S. international tax provisions. The company also disclosed an ongoing FCPA investigation concerning China-based marketing-related travel, funding and record-keeping.
Management identified risks from COVID-19 and supply disruptions, inflation and raw-material availability, foreign exchange, legal and environmental proceedings, product liability, regulatory changes, pension markets, and phased implementation of its global ERP system. Management said it could not predict the ultimate effect of COVID-19 or the outcomes and potential consequences of several compliance matters.
Key facts for investors to verify
- Whether input-cost, logistics and productivity pressures continue to weigh on margins, and whether pricing offsets those costs.
- Working-capital trends and cash conversion, given the year-to-date cash-flow decline and inventory build.
- Developments in PFAS litigation, regulatory actions, environmental commitments and the adequacy of recorded accruals.
- Combat earplug litigation outcomes and any change in the company’s assessment of potential liability.
- Execution of restructuring and ERP initiatives, and progress against the disclosed tax-rate and capital-spending estimates.
- Debt maturities, credit ratings and dividend/share-repurchase capacity in light of the negative outlooks from both rating agencies.