3M Company — Q3 2020 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2020, compared with the corresponding 2019 periods. 3M is a diversified global manufacturer reporting Safety and Industrial, Transportation and Electronics, Health Care, and Consumer segments. COVID-19 affected demand, supply chains, operations, and costs; segment and geographic results were recast to reflect reporting changes.
Financial results
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Net sales | $8.350 billion | $7.991 billion | $23.601 billion | $24.025 billion |
| Operating income | $1.909 billion | $2.011 billion | $5.312 billion | $4.849 billion |
| Operating margin, GAAP | 22.9% | 25.2% | 22.5% | 20.2% |
| Net income attributable to 3M | $1.413 billion | $1.583 billion | $3.995 billion | $3.601 billion |
| Diluted EPS | $2.43 | $2.72 | $6.87 | $6.15 |
| Operating cash flow | Not stated separately for the quarter | Not stated separately for the quarter | $5.598 billion | $4.732 billion |
| Free cash flow (non-GAAP) | Not stated separately for the quarter | Not stated separately for the quarter | $4.519 billion | $3.571 billion |
Margins and adjusted results. Excluding special items, operating margin was 22.9% in Q3, down 0.9 percentage points year over year, and 21.2% for the nine months, down 0.8 points. Adjusted diluted EPS was $2.43 in Q3, down 5.8%, and $6.36 for the nine months, down 8.2%. GAAP nine-month EPS rose 11.7%, substantially reflecting the prior-year comparison, including 2019 litigation charges, and 2020 business-sale gains. These non-GAAP measures are not substitutes for GAAP results.
Cash generation and capital returns. Nine-month free cash flow conversion was 113%, versus 99% in 2019. Operating cash flow growth was attributed primarily to COVID-related cost actions and lower year-on-year litigation charges and payment timing. 3M paid $2.540 billion in dividends during the nine months; dividends declared were $1.47 per share in each of the first three quarters. Share repurchases were suspended in late March; $366 million was repurchased before suspension.
Debt and liquidity. At September 30, cash and cash equivalents were $4.121 billion, marketable securities $474 million, total debt $19.598 billion, and net debt (non-GAAP) $15.003 billion. Total debt was down $715 million from year-end 2019, while net debt declined $2.816 billion. Current assets were $14.110 billion and current liabilities $7.410 billion; reported working capital was $6.700 billion. The $3.0 billion revolving facility and $1.25 billion 364-day facility were undrawn; the debt-covenant EBITDA-to-interest ratio was approximately 17:1 against a 3:1 minimum. Credit ratings were A1 and A+, both with negative outlooks.
Material changes and segment performance
- Consolidated sales: Q3 sales increased 4.5% year over year, while organic local-currency sales increased 0.9%. For the nine months, sales decreased 1.8% and organic local-currency sales decreased 4.1%. COVID-related respirator sales contributed an estimated 3 percentage points to Q3 and 2 points to nine-month organic local-currency growth.
- Safety and Industrial: Q3 sales rose 6.9% to $3.024 billion and segment operating income increased to $823 million. Personal safety, particularly respirators, supported results; general industrial softness remained.
- Transportation and Electronics: Q3 sales declined 7.4% to $2.314 billion and operating income fell to $552 million. Automotive, aerospace, transportation safety, and commercial solutions were weak; electronics-related sales increased 1% organically.
- Health Care: Q3 sales rose 25.5% to $2.160 billion, including acquisition contribution; organic local-currency sales increased 8.1%. Operating income was $508 million. Acelity materially contributed to reported sales; elective procedure recovery and respirator demand helped, while the drug-delivery divestiture reduced sales.
- Consumer: Q3 sales increased 5.6% to $1.417 billion and operating income rose to $358 million, supported by home care and home improvement; stationery and office remained weak.
For the first nine months, Health Care sales rose 15.1% but segment operating income declined 9.4%; Transportation and Electronics sales fell 11.2% and operating income fell 18.9%. Safety and Industrial sales declined 1.2% while operating income rose 13.2%; Consumer sales rose 1.3% and operating income rose 11.4%.
Outlook, commentary, risks, and unusual items
- Outlook: 3M said COVID-19’s duration and recovery effects could not be predicted and did not provide an estimated 2020 effective tax rate range. Full-year 2020 capital spending was estimated at approximately $1.4–$1.5 billion, reduced from the original $1.6–$1.8 billion range, while still including respirator capacity expansion. The filing provides no clear full-year sales or EPS guidance.
- COVID-19: Demand was strong for personal safety products and certain home, cleaning, semiconductor, data-center, and biopharma filtration offerings, but weaker in several end markets, including automotive, aerospace, oral care, and general industrial. Management cited supply-chain disruption, unabsorbed manufacturing costs, cost controls, and restructuring actions.
- Divestitures and restructuring: Sale of substantially all of the drug-delivery business generated a $387 million pre-tax gain ($304 million after tax). 3M recorded $55 million of related restructuring charges affecting about 1,300 positions, and $58 million of other COVID-related restructuring charges affecting about 400 positions. The drug-delivery business was sold for consideration of $617 million; 3M retained a 17% interest in the buyer.
- Legal and environmental contingencies: At September 30, 3M accrued $586 million for respirator mask/asbestos claims (excluding Aearo), $20 million for Aearo-related claims, $375 million for other environmental liabilities, and $23 million for non-PFAS environmental remediation. The company said it could not estimate possible losses above established accruals for several matters. The filing describes extensive PFAS litigation, regulatory inquiries, and facility compliance matters; the AFFF multidistrict litigation included 784 lawsuits, and combat-earplug litigation comprised approximately 3,000 lawsuits representing about 12,000 claimants. These matters could have material financial or operational consequences.
- Other risks: Management highlighted uncertainty around global economic conditions and COVID-19, foreign exchange, customer demand, raw-material availability, acquisitions and integration, pension assumptions, cybersecurity and ERP implementation, and legal, regulatory, and tax proceedings. A separate internal investigation into China-based travel, funding, and recordkeeping issues was voluntarily disclosed to the DOJ and SEC; its outcome was uncertain.
Investor verification priorities
- Reconcile GAAP and adjusted earnings, especially the $387 million drug-delivery sale gain and the differing 2019 litigation and divestiture comparison items.
- Assess whether respirator-driven demand and other COVID-related product gains can offset persistent weakness in transportation, industrial, and other affected end markets.
- Review PFAS, respirator/asbestos, and combat-earplug claims, accrued liabilities, insurance recovery, and the company’s stated inability to estimate potential losses above certain accruals.
- Track cash generation, debt maturities, credit-rating outlooks, and whether suspended share repurchases resume while dividends and capital spending continue.
- Monitor Acelity integration and Health Care segment profitability, restructuring execution, and the stated capital-spending range.