3M Company (3M): Q1 2021 Form 10-Q Summary
Reporting period: Three months ended March 31, 2021; unaudited. Comparisons are with Q1 2020 unless stated otherwise. 3M is a diversified global manufacturer organized into Safety and Industrial, Transportation and Electronics, Health Care, and Consumer. The company changed its pension-cost accounting and segment-performance measure in Q1; comparative periods were adjusted for these changes.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $8.851 billion | $8.075 billion | +9.6%; organic local-currency growth +8.0% |
| Operating income | $1.994 billion | $1.663 billion | +19.9% |
| Operating margin | 22.5% | 20.6% | +1.9 percentage points |
| Net income attributable to 3M | $1.624 billion | $1.308 billion | +24.2% |
| Diluted EPS | $2.77 | $2.25 | +23.1% |
| Operating cash flow | $1.688 billion | $1.213 billion | +$475 million |
| Free cash flow | $1.378 billion | $881 million | Free cash flow conversion: 85% vs. 67% |
Adjusted, non-GAAP operating margin was 22.5%, up 1.7 percentage points, and adjusted diluted EPS was $2.77 versus $2.19. Q1 2020 adjustments included litigation-related items and a business-sale gain; Q1 2021 had no special-item adjustments in the company’s reconciliation. The reported Q1 2020 comparison reflects the retrospective pension accounting change.
Cost of sales was 51.1% of sales versus 50.9%; SG&A was 20.5% versus 21.9%; R&D was 5.9% versus 6.6%. Higher raw-material and logistics costs pressured cost of sales, partly offset by pricing. Lower SG&A and R&D as a share of sales reflected cost management and higher revenue.
Segments and material changes
- Safety and Industrial: Sales $3.327 billion, up 13.7%; segment operating income $811 million, up 16.8%. Organic growth was 10.3%, led by personal safety and improving industrial demand.
- Transportation and Electronics: Sales $2.531 billion, up 13.1%; segment operating income $591 million, up 27.4%. Electronics-related demand was strong.
- Health Care: Sales $2.248 billion, up 6.8%; segment operating income $509 million, up 12.6%. Organic growth was 9.3%, partly offset in reported sales by the 2020 drug-delivery divestiture.
- Consumer: Sales $1.373 billion, up 9.8%; segment operating income $289 million, up 9.4%. Home improvement, home care, and stationery and office grew.
COVID-related respirator sales contributed an estimated 2.4 percentage points to Q1 2021 organic local-currency sales growth. Foreign currency effects increased pre-tax income by approximately $95 million year over year, including hedging impacts. Raw-material and logistics inflation, supply-chain disruptions, and February’s winter storm Uri were cost pressures.
Cash, debt, and liquidity
- Cash, cash equivalents, and marketable securities totaled $5.168 billion at March 31, 2021, compared with $5.068 billion at year-end 2020. About $3.0 billion was held by foreign subsidiaries and $2.2 billion in the United States.
- Total debt was $18.187 billion; net debt, a non-GAAP measure, was $13.019 billion. 3M redeemed $450 million of 2.75% notes due 2022 in March and recorded an approximately $11 million pre-tax early-extinguishment charge. No commercial paper was outstanding.
- Current assets were $15.345 billion and current liabilities $8.363 billion. The company reported working capital of $6.982 billion, down $52 million from December 31, 2020.
- Cash dividends paid were $858 million; the declared dividend was $1.48 per share. 3M repurchased $231 million of stock and had approximately $7.5 billion remaining under its $10 billion repurchase authorization.
- Credit ratings were A1 with a negative outlook from Moody’s and A+ with a negative outlook from S&P. Revolving credit facilities were undrawn; the company reported an EBITDA-to-interest ratio of approximately 18:1 against a 3:1 minimum covenant.
Outlook, risks, contingencies, and unusual items
- Management estimated a 2021 effective tax rate of approximately 20% to 21% and capital expenditures of approximately $1.8 billion to $2.0 billion. Expected 2021 global defined-benefit pension and postretirement contributions were approximately $200 million.
- Management described broad-based growth and continued cost management, but said the duration and effects of COVID-19 remained uncertain and could not be reliably predicted. Supply-chain disruption, inflation, market demand, currency movements, and execution of the multiyear ERP transformation were identified as relevant risks.
- 3M’s operational/marketing restructuring initiative, spanning 2020 and 2021, was expected to affect approximately 2,900 positions and incur total pre-tax charges of $250 million to $300 million. Q1 2021 charges were $14 million; remaining activities were expected to be largely completed during 2021.
- PFAS and environmental exposure: The company recorded $463 million of other environmental liabilities at March 31, 2021, after a $55 million Q1 increase; related insurance receivables were $8 million. It also recorded $24 million for non-PFAS environmental remediation. 3M said it could not estimate potential losses above its established environmental accruals.
- Respirator/asbestos claims: The accrual, excluding Aearo, was $679 million after a $36 million Q1 increase; related insurance receivables were $4 million. The company could not estimate the amount by which future liability might exceed the accrual. A separate Aearo-related accrual was $27 million.
- Combat earplug litigation: 3M was named in approximately 3,349 lawsuits representing about 12,700 claimants. The filing reported no accrual because the company considered any liability not probable and estimable at that time. Bellwether trials were underway or scheduled in 2021.
- Other material legal and regulatory matters include AFFF-related PFAS litigation, PFAS-related claims and regulatory inquiries, and a disclosed internal investigation concerning China-based travel, funding, and record-keeping issues potentially involving anti-corruption laws. Outcomes were uncertain; the company stated it could not predict potential agency actions.
Key facts for investors to verify
- Whether organic growth, segment profitability, and margin improvements persist as pandemic-related demand normalizes and input and logistics costs evolve.
- Developments in PFAS and product-liability litigation, regulatory proceedings, and the adequacy of recorded accruals and insurance recoveries.
- Progress against restructuring plans, capital-spending expectations, and the multiyear ERP implementation.
- Cash generation, debt reduction, dividend and repurchase levels, and the negative outlooks attached to 3M’s credit ratings.
- The sustainability of the Q1 tax benefit: management attributed the lower quarterly effective rate partly to nonrecurring favorable U.S. international tax adjustments.