3M Company (MMM) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Comparisons are with 2020.
Business context and reporting period
3M is a diversified global manufacturer organized into Safety and Industrial, Transportation and Electronics, Health Care, and Consumer segments. Management reported broad-based growth across segments and geographies as markets recovered from COVID-19 disruptions. Effective in Q1 2021, 3M changed its segment performance measure and realigned certain Consumer products; comparative segment data was recast. It also retrospectively changed its pension-cost accounting method, affecting certain non-operating, earnings, and equity amounts but not operating income or operating cash flow.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $8,950 | $7,176 | $17,801 | $15,251 |
| Operating income | $1,971 | $1,740 | $3,965 | $3,403 |
| Operating margin | 22.0% | 24.3% | 22.3% | 22.3% |
| Net income attributable to 3M | $1,524 | $1,306 | $3,148 | $2,614 |
| Diluted EPS | $2.59 | $2.25 | $5.36 | $4.50 |
| Operating cash flow | Not separately stated | Not separately stated | $3,575 | $3,118 |
| Free cash flow | Not separately stated | Not separately stated | $2,871 | $2,407 |
- Q2 sales increased 24.7%; organic local-currency sales rose 21.4%. First-half sales increased 16.7%; organic local-currency sales rose 14.3%.
- On a special-item-adjusted basis, operating margin was 22.0% in Q2 versus 19.6% in 2020, and 22.3% for the first half versus 20.2%. Adjusted diluted EPS was $2.59 versus $1.81 in Q2 and $5.36 versus $3.99 for the first half. These are non-GAAP measures.
- 2020 comparisons included a $387 million Q2 gain on the drug-delivery business sale. Q2 2021 included a $91 million pre-tax benefit from a favorable Brazilian tax decision. Higher raw-material and logistics costs, including impacts from winter storm Uri, pressured results.
- First-half free-cash-flow conversion was 91%, compared with 92% in 2020. Working-capital changes in receivables, inventory, and payables reduced first-half operating cash flow by a net $570 million.
Segments and balance sheet
- Q2 segment sales and operating income: Safety and Industrial $3,254 and $718; Transportation and Electronics $2,482 and $546; Health Care $2,278 and $576; Consumer $1,482 and $311. Transportation and Electronics and Health Care led segment operating-income growth.
- At June 30, 2021, cash and cash equivalents were $4,695 and marketable securities totaled $836. Total debt was $18,248; net debt, a non-GAAP measure, was $12,717, down $1,010 from year-end 2020.
- Current assets were $16,343 and current liabilities $9,440; reported working capital was $6,903. No commercial paper was outstanding, and $4.25 billion of revolving credit facilities were undrawn. The EBITDA-to-interest covenant ratio was approximately 19:1 against a 3:1 minimum.
- First-half capital spending was $704. 3M repurchased $734 of stock and paid $1,716 in dividends during the half. The quarterly dividend was $1.48 per share.
Outlook, risks, contingencies, and unusual items
- Management estimated 2021 capital spending of $1.8–$2.0 billion, an effective tax rate of approximately 20%–21%, and pension and postretirement contributions of about $200 million. It expected 2021 pension and postretirement service cost of about $500 million and non-service benefit of about $295 million. The filing text does not provide a clear full-year sales or EPS guidance figure.
- 3M said COVID-19 effects remained uncertain. It cited supply-chain disruption, elevated raw-material and logistics costs, changing end-market demand, and respirator demand that remained above industry supply capacity.
- PFAS-related environmental and litigation exposure is a major uncertainty. Accrued “other environmental liabilities” were $493 million after a $112 million first-half increase; the company could not estimate potential losses above accruals. The company also reported $24 million for non-PFAS environmental remediation. Regulatory inquiries and PFAS proceedings continue in the U.S. and Europe.
- Respirator mask/asbestos liabilities, excluding Aearo, were accrued at $671 million after a $53 million first-half increase; Aearo-related accruals were $30 million. 3M reported approximately 2,929 claimants in respirator-related suits and stated it could not estimate losses above the accruals.
- In the Combat Arms earplug litigation, 3M reported about 3,494 lawsuits representing approximately 13,026 claimants, plus an administrative docket of approximately 236,000 unfiled and unverified claims. Bellwether verdicts were mixed, including adverse verdicts in two of the first three trials. No liability was recorded because the company said loss was not then probable and reasonably estimable.
- The company’s operational/marketing restructuring initiative was expected to affect approximately 2,900 positions and incur $250–$300 million of pre-tax charges over 2020–2021. First-half 2021 charges were $57 million; remaining approved activities were expected to be largely completed by Q1 2022, with further actions expected during 2021.
- Moody’s rated 3M A1 with a negative outlook; S&P rated it A+ with a negative outlook. Other disclosed risks include foreign exchange, litigation and regulatory outcomes, input costs, pension assumptions, and phased global ERP implementation.
Most important facts for investors to verify
- Whether organic growth and margin gains persist after accounting for recovery comparisons, the Brazilian tax benefit, and higher input and logistics costs.
- Developments and possible additional accruals in PFAS, respirator/asbestos, and Combat Arms earplug matters, including insurance recoveries and outcomes of trials or regulatory actions.
- Cash generation and working-capital requirements, especially inventory growth, alongside planned capital spending, dividends, and repurchases.
- Execution of restructuring and ERP initiatives, and any changes to the 2021 outlook or credit ratings.