3M COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of 3M's financial statements with a narrative from the perspective of management. 3M's MD&A is presented in eight sections: •Overview •Results of Operations •Performance by Business Segment •Performance by Geographic Area •Critical Accounting Estimates •New Accounting Pronouncements •Financial Condition and Liquidity •Financial Instruments Forward-looking statements in Item 7 may involve risks and uncertainties that could cause results to differ materially from those projected (refer to the section entitled "Cautionary Note Concerning Factors That May Affect Future Results" in Item 1 and the risk factors provided in Item 1A for discussion of these risks and uncertainties). Additional information about results of operations and financial condition for 2021 and 2020 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections in 3M's Current Report on Form 8-K datedApril 26, 2022 (which updated 3M's 2021 Annual Report on Form 10-K).
OVERVIEW
3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. Effective in the first quarter of 2022, 3M made the following changes: •Changes in measure of segment operating performance used by 3M's chief operating decision maker-impacting 3M's disclosed measure of segment profit/loss (business segment operating income). See additional information in Note 19. 3M's disclosed disaggregated revenue was also updated as a result of the changes in segment reporting. See additional information in Note 2. •Changes to non-GAAP measures - certain amounts adjusted for special items. Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section below for additional information.
Information provided herein reflects the impact of these changes for all periods presented.
3M manages its operations in four operating business segments: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer. From a geographic perspective, any references to EMEA refer toEurope ,Middle East andAfrica on a combined basis. References are made to organic sales change (which include both organic volume impacts and selling price impacts), which is defined as the change in net sales, absent the separate impacts on sales from foreign currency translation and acquisitions, net of divestitures. Acquisition and divestiture sales change impacts, if any, are measured separately for the first twelve months post-transaction. 3M believes this information is useful to investors and management in understanding ongoing operations and in analysis of ongoing operating trends. 3M is impacted by the global pandemic and related effects associated with the coronavirus (COVID-19). Risk factors with respect to COVID-19 can be found in Item 1A "Risk Factors" in this document. Given the diversity of 3M's businesses, some of the factors relative to COVID-19 increase the demand for 3M products, while others decrease demand or make it more difficult for 3M to serve customers. Certain resulting impacts are referenced in various discussions within this Item 7. 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. 3M is not able to predict the extent to which the COVID-19 pandemic may have a material effect on its consolidated results of operations or financial condition. In 2022, 3M's costs for significant litigation (see Certain amounts adjusted for special items - (non-GAAP measures section below) totaled approximately$2.3 billion pre-tax and included, among things, pre-tax charges associated with steps toward resolving Combat Arms Earplugs litigation and associated with additional commitments to address PFAS-related matters at its Zwijndrecht,Belgium site (approximately$1.3 billion and$355 million , respectively, in 2022). These matters are further discussed in Note 16. In 2022, 3M also completed the split-off of its Food Safety Division business resulting in a pre-tax gain of$2.7 billion and committed to a plan to exit PFAS manufacturing by the end of 2025 resulting in a 2022 pre-tax charge of$0.8 billion related to impairment as discussed in Note 15. See Certain amounts adjusted for special items - (non-GAAP measures) section below for additional discussion of these and other special items. 19
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3M Belgium has experienced interruptions to portions of the manufacturing at its site in Zwijndrecht,Belgium , as more fully discussed in Note 16. As discussed in Note 16,3M Belgium received agreement with authorities inJune 2022 to begin the process toward restarting operations at the Zwijndrecht facility.3M Belgium has provided information required by the Flemish environmental authorities to receive agreement from the authorities to restart operations, and has done so for production or sampling purposes. Belgian government authorities continue to maintain oversight of these operations and compliance with applicable requirements. InDecember 2022 ,3M Belgium received an official infraction report from the Flemish Environmental Inspectorate and continues to work with the government authorities to comply with applicable legal requirements. See further discussion in Note 16. 3M is also impacted by theRussia -Ukraine conflict. In light of a number of factors, 3M suspended operations of its subsidiaries inRussia inMarch 2022 , the net sales of which were less than one percent of 3M's consolidated net sales for 2021. Further, inSeptember 2022 , management committed to a plan to exit and dispose of the related net assets through an intended sale of the subsidiaries. The associated charge in 2022 related to this action is further discussed in Note 15. 3M also has other operations that source certain raw materials from suppliers inRussia and have experienced related supply disruption due to the conflict. Further supply disruption could lead to downstream customer impacts. Though 3M monitors relevant factors as well as options to mitigate potential impacts, it is not able to predict the extent to which these circumstances may have a material effect on 3M's consolidated results of operations or financial condition. Relevant risk factors can be found in Item 1A "Risk Factors" in this Annual Report on Form 10-K.
Operating income margin and earnings per share attributable to 3M common shareholders - diluted:
The following table provides the increases (decreases) in operating income margins and diluted earnings per share.
Year ended December 31,
2022 2021
Percent of net Earnings per Percent of net Earnings per
sales diluted share sales diluted share
Same period last year 20.8 % $ 10.12 22.3 % $ 9.36
Net costs for significant litigation 1.4 0.61 1.0 0.37
Gain on business divestitures - - (1.2) (0.52)
Divestiture-related restructuring actions - - 0.2 0.08
Total special items 1.4 0.61 - (0.07)
Same period last year, excluding special items 22.2 10.73 22.3 9.29
Increase/(decrease) due to: Total organic growth/productivity and other 1.0 0.56 0.7 1.07 Raw material impact (2.4) (1.13) (0.8) (0.27) Divestitures - (0.05) - (0.05) Foreign exchange impacts - (0.39) - 0.16 Other expense (income), net N/A 0.02 N/A 0.27 Income tax rate N/A 0.06 N/A 0.32 Shares of common stock outstanding N/A 0.30 N/A
(0.06)
Current period, excluding special items 20.8 10.10 22.2
10.73
Net costs for significant litigation (6.7) (3.20) (1.4) (0.61) Divestiture costs (0.2) (0.08) - - Gain on business divestitures 8.0 4.73 - - Divestiture-related restructuring actions (0.1) (0.05) - - Russia exit charges (0.3) (0.20) - - PFAS manufacturing exit costs (2.4) (1.12) - - Total special items (1.7) 0.08 (1.4) (0.61) Current period 19.1 %$ 10.18 20.8 %$ 10.12 The Company refers to various "adjusted" amounts or measures on an "adjusted basis". These exclude special items. 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.
A discussion related to the components of year-on-year changes in operating income margin and earnings per diluted share follows:
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Organic growth/productivity and other:
•In 2022, the following components impacted operating margins and earnings per diluted share year-on-year: •Declines in disposable respirator demand year-on-year negatively impacted operating margins by 0.3 percent and earnings per share by$0.29 . •Remaining organic growth/productivity and other impacts resulted in a net year-on-year benefit$0.85 to earnings per share and 1.3 percent to operating margins which was impacted by the following: •Benefits from strong pricing, spending discipline and 2021 restructuring actions •Manufacturing headwinds from global supply chain challenges; geopolitical impacts due to theRussia /Ukraine conflict as well as ongoing COVID-related challenges inChina •Second quarter of 2021 benefit of$91 million pre-tax ($0.12 per share after tax) from the impact of the favorable decision of theBrazilian Supreme Court regarding the calculation of past social taxes •Increased investments in growth, productivity and sustainability •In 2021, organic volume growth and ongoing cost management increased operating income margins and earnings per diluted share year-on-year offset by manufacturing headwinds from global supply chain challenges and increased compensation/benefit costs. The following also impacted results or provide additional information: •2021 benefit of$91 million pre-tax ($0.12 per share after tax) from a favorableBrazilian Supreme Court decision that concluded on the impact of state value-added tax when determiningBrazil's federal sales-based social tax-essentially lowering the social tax that 3M should have paid in prior periods. •3M continued prioritization of investments in growth and sustainability. •2021 benefit from higher selling prices, 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. •Lower year-on-year net gains related to certain property sales. •COVID-impacts recognized on certain assets in 2020. •In 2021, higher defined benefit pension and postretirement service cost increased expense year-on-year.
Raw material impact:
•In 2022, 3M continued to experience inflationary pressures with year-on-year increases in raw material and logistics costs driven by many geopolitical, logistics, and disruptive events that caused imbalance in the global supply chain. •In 2021, 3M experienced higher raw material, logistics, and outsourced manufacturing costs from strong end-market demand, ongoing COVID-19 and related global supply chain challenges that were further magnified by extreme weather events, such asFebruary 2021 winter storm Uri in theU.S.
Acquisitions/divestitures:
•Divestiture impacts in 2022 include lost income from divested businesses and remaining stranded costs (net of transition arrangement income). 3M completed the split-off of the Food Safety business inSeptember 2022 (discussed in Note 3). The impact also includes lost income from deconsolidation of theAearo Entities inJuly 2022 (discussed in Note 16). •Divestiture impacts in 2021 are primarily comprised of the lost income from the divestiture of the Company's drug delivery business (sale completed inMay 2020 ).
Foreign exchange impacts:
•Foreign currency impacts (net of hedging) decreased operating income by approximately$271 million and$103 million (or a decrease in pre-tax earnings of approximately$280 million and$119 million ) year-on-year for 2022 and 2021, respectively. These estimates include: (a) the effects of year-on-year changes in exchange rates on translating current period functional currency profits intoU.S. dollars and on current period non-functional currency denominated purchases or transfers of goods between 3M operations, and (b) year-on-year changes in transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks.
Other expense (income), net:
•Lower income related to higher non-service cost components of pension and
postretirement expense increased expense year-on-year for 2022. Higher income
related to non-service cost components of pension and postretirement expense
decreased expense year-on-year for 2021.
•Interest expense (net of interest income) decreased in 2022 compared to the
same period year-on-year driven by debt maturities in the ordinary course and
interest income on invested cash.
•Interest expense (net of interest income) decreased in 2021 compared to the
same period year-on-year due in part to interest expense savings from early debt
extinguishment actions in 2020.
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Income tax rate:
•Certain items above reflect specific income tax rates associated therewith. Overall, the effective tax rates for 2022, 2021, and 2020 were 9.6 percent, 17.8 percent, and 19.7 percent, respectively. These reflect a decrease of 8.2 percentage points from 2021 to 2022 and a decrease of 1.9 percentage points from 2020 to 2021. The primary factors that decreased the Company's effective tax rate for 2022 were the tax efficient structure associated with the gain on split-off of the Food Safety business (see Note 3). The primary factors that decreased the Company's effective tax rate in 2021 were geographical income mix and favorable adjustments in 2021 related to impacts ofU.S. international tax provisions. •On an adjusted basis (as discussed below), the effective tax rates for 2022, 2021, and 2020 were 17.7 percent, 18.1 percent, and 20.5 percent, respectively. These reflect a decrease of 0.4 percent percentage points from 2021 to 2022 and a decrease of 2.4 percentage points from 2020 to 2021.
Shares of common stock outstanding:
•Lower shares outstanding increased earnings per share per diluted share for 2022, while higher shares outstanding decreased earnings per share diluted share for 2021.
Certain amounts adjusted for special items - (non-GAAP measures):
In addition to reporting financial results in accordance withU.S. GAAP, 3M also provides non-GAAP measures that adjust for the impacts of special items. For the periods presented, special items include the items described below. Operating income, segment operating income (loss), 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. While the Company includes certain items in its measure of segment operating performance, it also considers these non-GAAP measures in evaluating and managing its operations. The Company believes that discussion of results adjusted for special items is useful to investors in understanding underlying business performance, while also providing additional transparency to the special items. Special items impacting operating income are reflected in Corporate and Unallocated, except as described below with respect to net costs for significant litigation and PFAS manufacturing exit costs. The determination of these items may not be comparable to similarly titled measures used by other companies. In the first quarter of 2022, the Company changed the extent of matters and charges/benefits it includes within special items with respect to net costs for significant litigation. Previously, 3M included net costs, when significant, associated with changes in accrued liabilities related to respirator mask/asbestos litigation and PFAS-related other environmental matters, along with the associated tax impacts. These non-GAAP measure changes involved including net costs for litigation related to 3M's Combat Arms Earplugs, expanding net costs to include external legal fees and insurance recoveries associated with the applicable matters in addition to changes in accrued liabilities, and to include all such net costs for the applicable matters, not just when considered significant. Information provided herein reflects the impact of these changes for all periods presented.
Special items for the periods presented include:
Net costs for significant litigation:
•These relate to 3M's respirator mask/asbestos, PFAS-related other environmental, and Combat Arms Earplugs matters (as discussed in Note 16). Net costs include the impacts of any changes in accrued liabilities, external legal fees, and insurance recoveries, along with associated tax impacts. Prior to initiating voluntary chapter 11 bankruptcy proceedings inJuly 2022 , net costs related to Combat Arms Earplugs andAearo -respirator mask/asbestos matters along with non-Aearo respirator mask/asbestos matters were reflected as special items in the Safety and Industrial business segment. During the bankruptcy period, net costs related to Combat Arms Earplugs andAearo -respirator mask/asbestos matters are reflected as corporate special items in Corporate and Unallocated while those associated with non-Aearo respirator mask/asbestos matters continue to be reflected as special items in the Safety and Industrial business segment. Net costs associated with PFAS-related other environmental matters are primarily reflected as corporate special items in Corporate and Unallocated.
Divestiture costs:
•These include costs related to separating and divesting substantially an entire business segment of 3M following public announcement of its intended divestiture.
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Gain on business divestitures:
•In 2022, 3M recorded a gain related to the split-off and combination of its Food Safety business with Neogen Corporation. In 2020, 3M recorded a gain primarily related to the divestiture of its Drug Delivery business. Refer to Note 3 for further details.
Divestiture-related restructuring actions:
•In the third quarter of 2022, following the split-off of the Food Safety business, and in 2020, following the divestiture of the Drug Delivery business, (see Note 3) management approved and committed to undertake certain restructuring actions addressing corporate functional costs across 3M in relation to the magnitude of amounts previously allocated to the divested businesses. Refer to Note 5 for further details.
•In the third quarter of 2022, 3M recorded a charge primarily related to
impairment of net assets in
PFAS manufacturing exit costs:
•These costs relate to 3M'sDecember 2022 commitment to a plan to exit PFAS manufacturing by the end of 2025. Charges for the applicable period relate to asset impairments. These charges were reflected within the Transportation and Electronics business segment. Refer to Note 15 for further details. 23
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Operating Income (Loss)
Earnings per
Safety and Safety and Transportation and Transportation and Total Company Income Before Provision for Income Net Income Attributable Earnings per diluted share
(Dollars in millions, except per share amounts) Industrial Industrial Margin Electronics Electronics Margin Total Company Margin Taxes Taxes Effective Tax Rate to 3M Diluted Share percent change
Year ended December 31, 2020 GAAP $ 2,588 23.6% $ 1,701 20.2% $ 7,161 22.3 % $ 6,795 $ 1,337 19.7 % $ 5,449 $ 9.36
Adjustments for special items:
Net costs for significant litigation 205 - 353 353 136 217 0.37
Gain on business divestitures - - (389) (389) (86) (303) (0.52)
Divestiture-related restructuring actions - - 55 55 9 46 0.08
Total special items 205 - 19 19 59 (40) (0.07)
Year ended December 31, 2020 adjusted amounts
(non-GAAP measures) $ 2,793 25.5% $ 1,701 20.2% $ 7,180 22.3 % $ 6,814 $ 1,396 20.5 % $ 5,409 $ 9.29
Year ended December 31, 2021 GAAP $ 2,466 20.6% $ 1,880 20.3% $ 7,369 20.8 % $ 7,204 $ 1,285 17.8 % $ 5,921 $ 10.12 8 %
Adjustments for special items:
Net costs for significant litigation 249 - 463 463 104 359 0.61
Total special items 249 - 463 463 104 359 0.61
Year ended December 31, 2021 adjusted amounts
(non-GAAP measures) $ 2,715 22.7% $ 1,880 20.3% $ 7,832 22.2 % $ 7,667 $ 1,389 18.1 % $ 6,280 $ 10.73 16 %
Year ended December 31, 2022 GAAP $ 1,199 10.3% $ 1,012 11.4% $ 6,539 19.1 % $ 6,392 $ 612 9.6 % $ 5,777 $ 10.18 1 %
Adjustments for special items:
Net costs for significant litigation 1,414 - 2,291 2,291 476 1,815 3.20
Divestiture costs - - 60 60 13 47 0.08
Gain on business divestitures - - (2,724) (2,724) (39) (2,685) (4.73)
Divestiture-related restructuring actions - - 41 41 9 32 0.05
Russia exit charges - - 109 109 (2) 111 0.20
PFAS manufacturing exit costs - 800 800 800 162 638 1.12
Total special items 1,414 800 577 577 619 (42) (0.08)
Year ended December 31, 2022 adjusted amounts
(non-GAAP measures) $ 2,613 22.5% $ 1,812 20.4% $ 7,116 20.8 % $ 6,969 $ 1,231 17.7 % $ 5,735 $ 10.10 (6) %
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Sales and operating income (loss) by business segment:
The following tables contain sales and operating income (loss) results by business segment for the years endedDecember 31, 2022 and 2021. Refer to the section entitled "Performance by Business Segment" later in MD&A for additional discussion concerning 2022 versus 2021 results, including Corporate and Unallocated. Refer to Note 19 for additional information on business segments. 2022 2021 % change Operating Income Operating Operating Income (Dollars in millions)Net Sales % of Total (Loss)Net Sales % of Total Income (Loss)Net Sales (Loss) Business Segments Safety and Industrial$ 11,604 33.9 % $ 1,199$ 11,981 33.9 % $ 2,466 (3.2) % (51.4) % Transportation and Electronics 8,902 26.0 1,012 9,262 26.2 1,880 (3.9) (46.2) Health Care 8,421 24.6 1,815 8,597 24.3 2,037 (2.0) (10.9) Consumer 5,298 15.5 994 5,513 15.6 1,162 (3.9) (14.4) Corporate and Unallocated 4 - 1,519 2 - (176)Total Company $ 34,229 100.0 % $ 6,539$ 35,355 100.0 %$ 7,369 (3.2) % (11.3) % Year ended December 31, 2022 Worldwide Sales Change Total sales By Business Segment Organic sales Acquisitions Divestitures Translation change Safety and Industrial 1.0 % - % - % (4.2) % (3.2) % Transportation and Electronics 1.2 - (0.5) (4.6) (3.9) Health Care 3.2 - (1.4) (3.8) (2.0) Consumer (0.9) - (0.4) (2.6) (3.9)Total Company 1.2 - (0.5) (3.9) (3.2) Sales by geographic area:
Percent change information compares the years ended
Year ended December 31, 2022
Europe, Middle East
Americas Asia Pacific & Africa Other Unallocated Worldwide
Net sales (millions) $ 18,400 $ 9,901 $ 5,928 $ - $ 34,229
% of worldwide sales 53.8 % 28.9 % 17.3 % 100.0 %
Components of net sales change:
Organic sales 2.6 0.3 (0.6) 1.2
Divestitures (0.6) (0.4) (0.6) (0.5)
Translation (0.3) (6.5) (9.8) (3.9)
Total sales change 1.7 % (6.6) % (11.0) % (3.2) %
Year ended December 31, 2021
Europe, Middle East
Americas Asia Pacific & Africa Other Unallocated Worldwide
Net sales (millions) $ 18,097 $ 10,600 $ 6,660 $ (2) $ 35,355
% of worldwide sales 51.2 % 30.0 % 18.8 % 100.0 %
Components of net sales change:
Organic sales 9.8 8.5 6.3 8.8
Divestitures (0.6) - (1.1) (0.5)
Translation 0.3 2.3 3.8 1.6
Total sales change 9.5 % 10.8 % 9.0 % 9.9 %
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Additional information beyond what is included in the preceding tables is as follows:
•For the full year 2022, in theAmericas geographic area,U.S. total sales were flat which included increased organic sales of 1 percent. Total sales inMexico increased 8 percent which included increased organic sales of 12 percent. InCanada , total sales increased 9 percent which included increased organic sales of 13 percent. InBrazil , total sales increased 15 percent which included increased organic sales of 12 percent. In theAsia Pacific geographic area,China total sales decreased 6 percent which included decreased organic sales of 3 percent. InJapan , total sales decreased 12 percent which included increased organic sales of 2 percent. •For the full year 2021, in theAmericas geographic area,U.S. total sales increased 8 percent which included increased organic sales of 8 percent. Total sales inMexico increased 18 percent which included increased organic sales of 16 percent. InCanada , total sales increased 18 percent which included increased organic sales of 11 percent. InBrazil , total sales increased 18 percent which included increased organic sales of 22 percent. In theAsia Pacific geographic area,China total sales increased 17 percent which included increased organic sales of 11 percent. InJapan , total sales were flat which included increased organic sales of 2 percent.
Managing currency risks:
The strongerU.S. dollar had a negative impact on sales in full year 2022 compared to the same periods last year. Net of the Company's hedging strategy, foreign currency negatively impacted earnings in full year 2022 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, hard currency-indexed billings, and localizing source of supply. 3M also uses financial hedges to mitigate currency risk. In the case of more liquid currencies, 3M hedges a portion of its aggregate exposure, using a 12, 24 or 36 month horizon, depending on the currency in question. For less liquid currencies, financial hedging is frequently more expensive with more limitations on tenor. Thus, this risk is largely managed via local operational actions using natural hedging tools as discussed above. In either case, 3M's hedging approach is designed to mitigate a portion of foreign currency risk and reduce volatility, ultimately allowing time for 3M's businesses to respond to changes in the marketplace. Financial condition:
Refer to the section entitled "Financial Condition and Liquidity" later in MD&A for a discussion of items impacting cash flows.
InNovember 2018 , 3M's Board of Directors replaced the Company'sFebruary 2016 repurchase program with a new repurchase program. This new program authorizes the repurchase of up to$10 billion of 3M's outstanding common stock, with no pre-established end date. In 2022, the Company purchased$1.5 billion of its own stock, compared to$2.2 billion of stock purchases in 2021. As ofDecember 31, 2022 , approximately$4.2 billion remained available under the authorization. InFebruary 2023 , 3M's Board of Directors declared a first-quarter 2023 dividend of$1.50 per share, an increase of 1 percent. This marked the 65th consecutive year of dividend increases for 3M.
Raw materials:
Refer to the section entitled "Raw materials" in Item 1 for discussion of 3M's sources and availability of raw materials in 2022.
Pension and postretirement defined benefit/contribution plans:
On a worldwide basis, 3M's pension and postretirement plans were 96 percent funded at year-end 2022. The primaryU.S. qualified pension plan, which is approximately 70 percent of the worldwide pension obligation, was 97 percent funded and the international pension plans were 116 percent funded. TheU.S. non-qualified pension plan is not funded due to tax considerations and other factors. Asset returns in 2022 for the primaryU.S. qualified pension plan were -17.4 percent, as 3M strategically invests in both growth assets and fixed income matching assets to manage its funded status. For the primaryU.S. qualified pension plan, the expected long-term rate of return on an annualized basis for 2023 is 7.5 percent. The primaryU.S. qualified pension plan year-end 2022 discount rate was 5.18%, up 2.29 percentage points from the year-end 2021 discount rate of 2.89%. The increase inU.S. discount rates resulted in a decreased valuation of the projected benefit obligation (PBO). The primaryU.S. qualified pension plan's funded status remained at 97% as ofDecember 31, 2022 due to the lower PBO resulting from the discount rate increase, offset by the negative returns of the plan's assets. Additional detail and discussion of international plan asset returns and discount rates is provided in Note 13 (Pension and Postretirement Benefit Plans). 3M expects to contribute approximately$100 million to$200 million of cash to its global defined benefit pension and postretirement plans in 2023. The Company does not have a required minimum cash pension contribution obligation for itsU.S. plans in 2023. 3M expects global defined benefit pension and postretirement expense in 2023 to decrease by approximately$30 million pre-tax when compared to 2022. Refer to "Critical Accounting Estimates" within MD&A and Note 13 (Pension and Postretirement Benefit Plans) for additional information concerning 3M's pension and post-retirement plans. 26
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T able of Contents RESULTS OF OPERATIONS Net Sales:
Refer to the preceding "Overview" section and the "Performance by Business Segment" section later in MD&A for additional discussion of sales change.
Operating Expenses:
(Percent of net sales) 2022 2021 Change Cost of sales 56.2 % 53.2 % 3.0 % Selling, general and administrative expenses (SG&A) 26.5 20.4 6.1 Research, development and related expenses (R&D) 5.4 5.6 (0.2) Gain on business divestitures (8.0) - (8.0) Goodwill impairment expense 0.8 - 0.8 Operating income margin
19.1 % 20.8 % (1.7) %
The Company is continuing the ongoing deployment of an enterprise resource planning (ERP) system on a worldwide basis, with these investments impacting cost of sales, SG&A, and R&D.
Cost of Sales: Cost of sales, measured as a percent of sales, increased in 2022 when compared to the same period last year. Increases were primarily due to 2022 special item costs for significant litigation from additional commitments to address PFAS-related matters at 3M's Zwijndrecht,Belgium site (discussed in Note 16), higher raw materials and logistics costs, manufacturing productivity headwinds which were further magnified by the shutdown of certain operations inBelgium and progress on restarting previously-idled operations, and investments in growth, productivity and sustainability. On a percent of sales basis, these increases were partially offset by increases in selling prices.
Selling, General and Administrative Expenses:
SG&A, measured as a percent of sales, increased in 2022 when compared to the same period last year. SG&A was impacted by increased special item costs for significant litigation primarily related to steps toward resolving Combat Arms Earplugs litigation (discussed in Note 16) resulting in a 2022 second quarter pre-tax charge of approximately$1.2 billion , certain impairment costs related to exiting PFAS manufacturing (see Note 15), costs related to exitingRussia (see Note 15), divestiture-related restructuring charges (see Note 5), and continued investment in key growth initiatives. These increases were partially offset by restructuring benefits and ongoing general 3M cost management.
Research, Development and Related Expenses:
R&D, measured as a percent of sales, decreased in 2022 when compared to the same period last year. 3M continues to invest in a range of R&D activities from application development, product and manufacturing support, product development and technology development aimed at disruptive innovations.
Gain on Business Divestitures:
In the third quarter of 2022, 3M recorded a pre-tax gain of$2.7 billion ($2.7 billion after tax) related to the split-off and combination of its Food Safety business with Neogen Corporation. Refer to Note 3 for further details.
Goodwill Impairment Expense:
As a result of 3M's commitment to exit per- and polyfluoroalkyl substance (PFAS)
manufacturing, 3M recorded a goodwill impairment charge related to the Advanced
Materials reporting unit (within the Transportation and Electronics business).
Refer to Note 15 for further details.
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Other Expense (Income), Net:
See Note 6 for a detailed breakout of this line item.
Interest expense (net of interest income) decreased in 2022 compared to the same period year-on-year driven by debt maturities in the ordinary course and interest income on invested cash. Interest expense (net of interest income) decreased in 2021 compared to the same period year-on-year due in part to interest expense savings from early debt extinguishment actions in 2020.
The non-service pension and postretirement net benefit decreased$49 million and increased$163 million in 2022 and 2021, respectively. The lower year-on-year benefit in 2022 was primarily due to higher interest costs due to higher discount rates as of the year-end 2021, lower expected returns on plan assets for 2023, partially offset by a reduction in actuarial loss amortization, which was driven by the lower discount rates. Refer to Note 13 for additional details. Provision for Income Taxes: (Percent of pre-tax income) 2022 2021 Effective tax rate 9.6 % 17.8 %
Factors that impacted the tax rates between years are further discussed in the Overview section above and in Note 10.
The tax rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits, changes in tax laws, and employee share-based payment accounting; as well as recurring factors, such as the geographic mix of income before taxes.
Refer to Note 10 for further discussion of income taxes.
Income from Unconsolidated Subsidiaries, Net of Taxes:
(Millions) 2022 2021 Income (loss) from unconsolidated subsidiaries, net of taxes
Income (loss) from unconsolidated subsidiaries, net of taxes, is attributable to the Company's accounting under the equity method for ownership interests in certain entities such as Kindeva following 3M's divestiture of the drug delivery business in 2020. In the fourth quarter of 2022, 3M sold its remaining ownership interest in Kindeva resulting in an immaterial gain.
Net Income (Loss) Attributable to Noncontrolling Interest:
(Millions) 2022 2021 Net income (loss) attributable to noncontrolling interest
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
PERFORMANCE BY BUSINESS SEGMENT
Item 1, Business Segments, provides an overview of 3M's business segments. In
addition, disclosures relating to 3M's business segments are provided in Note
19. Effective in the first quarter of 2022, the measure of segment operating
performance used by 3M's chief operating decision maker (CODM) changed and, as a
result, 3M's disclosed measure of segment profit/loss (business segment
operating income) was updated for all comparative periods presented. The change
to business segment operating income aligns with the update to how the CODM
assesses performance and allocates resources for the Company's business segments
(see Note 19 for additional details).
Information provided herein reflects the impact of these changes for all periods
presented. 3M manages its operations in four business segments. The reportable
segments are Safety and Industrial; Transportation and Electronics; Health Care;
and Consumer.
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Corporate and Unallocated:
In addition to these four business segments, 3M assigns certain costs to "Corporate and Unallocated," which is presented separately in the preceding business segments table and in Note 19. Corporate and Unallocated operating income includes "corporate special items" and "other corporate expense-net". Corporate special items include net costs for significant litigation associated with Combat Arms Earplugs andAearo -respirator mask/asbestos matters during the chapter 11 bankruptcy period (which began inJuly 2022 ) and with PFAS-related other environmental matters (see Note 16). Corporate special items also include divestiture costs, gain/loss on business divestitures (see Note 3), divestiture-related restructuring costs (see Note 5), andRussia exit costs (see Note 15). Divestiture costs include costs related to separating and divesting substantially an entire business segment of 3M following public announcement of its intended divestiture. Other corporate expense-net includes items such as net costs related to limited unallocated corporate staff and centrally managed material resource centers of expertise costs, corporate philanthropic activity, and other net costs that 3M may choose not to allocate directly to its business segments. Other corporate expense-net also includes costs and income from transition supply, manufacturing and service arrangements with Neogen Corporation following the split-off of 3M's Food Safety business in 2022 and with the acquirer of the former Drug Delivery business following its 2020 divestiture. Items classified as revenue from this activity are included in Corporate and Unallocated net sales. 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 2022, when compared to the same period last year. The subsections below provide additional information.
Corporate Special Items
Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section for additional details on the impact of special items and to Note 19 for additional information on the components of corporate special items. Corporate special item net costs decreased in 2022 year over year primarily due to the gain on divestiture associated with the 2022 split-off of the Food Safety business (discussed in Note 3) partially offset by additional commitments in 2022 to address PFAS-related matters, including at 3M's Zwijndrecht,Belgium site (discussed in Note 16). Other Corporate Expense - Net Other corporate operating expenses, net, increased 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 theBrazilian Supreme Court included in the second quarter of 2021 regarding the calculation of past social taxes.
Operating Business Segments:
Information related to 3M's business segments is presented in the tables that follow with additional context in the corresponding narrative below the tables.
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Safety and Industrial Business (33.9% of consolidated sales):
2022 2021
Sales (millions) $ 11,604 $ 11,981
Sales change analysis:
Organic sales 1.0 % 7.3 %
Translation (4.2) 1.9
Total sales change (3.2 %) 9.2 %
Business segment operating income (loss) (millions) $ 1,199 $ 2,466
Percent change (51.4 %) (4.7 %)
Percent of sales 10.3 % 20.6 %
Adjusted business segment operating income (millions) $ 2,613 $ 2,715
(non-GAAP measure)
Percent change (3.7) % (2.8) %
Percent of sales 22.5 % 22.7 %
The preceding table also displays business segment operating income (loss)
information adjusted for special items. For Safety and Industrial these
adjustments include net costs for respirator mask/asbestos (Aearo -related and
non-Aearo related) and Combat Arms Earplugs litigation matters. During the Aearo
chapter 11 bankruptcy period (which began in July 2022 - see Note 16), net costs
related to Combat Arms Earplugs and Aearo -respirator mask/asbestos matters are
reflected as corporate special items in Corporate and Unallocated while those
associated with non-Aearo respirator mask/asbestos matters continue to be
reflected as special items in the Safety and Industrial business segment. Refer
to the Certain amounts adjusted for special items - (non-GAAP measures) section
for additional details.
Year 2022 results:
Sales in Safety and Industrial were down 3.2 percent in
On an organic sales basis:
•Sales increased in electrical markets, abrasives, automotive aftermarket, roofing granules, closure and masking systems, and industrial adhesives and tapes and decreased in personal safety. •Growth from continued improving general industrial manufacturing activity and other end-market demand was partially offset by the disposable respirator sales decline within personal safety, which negatively impacted year-on-year organic growth by 4.5 percentage points. Business segment operating income margins decreased year-on-year due to special item costs for significant litigation primarily related to steps toward resolving Combat Arms Earplugs litigation (discussed in Note 16) resulting in a 2022 second quarter pre-tax charge of approximately$1.2 billion . Margins were also impacted by increased raw materials and logistics costs, manufacturing productivity headwinds, partially offset by selling price actions, spending discipline and restructuring actions. Adjusting for special item costs for significant litigation (non-GAAP measure), business segment operating income margins decreased year-on-year as displayed above.
Year 2021 results:
Sales in Safety and Industrial were up 9.2 percent in
On an organic sales basis:
•Sales increased in abrasives, industrial adhesives and tapes, automotive
aftermarket, electrical markets, roofing granules, and closure and masking
systems and decreased in personal safety.
•Growth was driven by improving general industrial manufacturing activity and
other end-market demand partially offset by prior-year strong pandemic-related
respirator mask demand.
Business segment operating income margins decreased year-on-year due to
increases in raw materials, logistics and special item costs for significant
litigation; lower gain on sale of properties; and manufacturing productivity
impacts that were partially offset by sales growth leverage, and benefits from
restructuring actions and lower related charges. Adjusting for special item
costs for significant litigation (non-GAAP measure), business segment operating
income margins decreased year-on-year as displayed above.
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Transportation and Electronics Business (26.0% of consolidated sales):
2022 2021
Sales (millions) $ 8,902 $ 9,262
Sales change analysis:
Organic sales 1.2 % 8.7 %
Divestitures (0.5) -
Translation (4.6) 1.5
Total sales change (3.9) % 10.2 %
Business segment operating income (millions) $ 1,012 $ 1,880
Percent change (46.2) % 10.6 %
Percent of sales 11.4 % 20.3 %
Adjusted business segment operating income (millions) $ 1,812 $ 1,880
(non-GAAP measure)
Percent change (3.6) % 10.6 %
Percent of sales 20.4 % 20.3 %
The preceding table also displays business segment operating income (loss)
information adjusted for special items. For Transportation and Electronics these
adjustments include PFAS manufacturing exit costs. Refer to the Certain amounts
adjusted for special items - (non-GAAP measures) section for additional details.
Year 2022 results:
Sales in Transportation and Electronics were down 3.9 percent in
On an organic sales basis:
•Sales increased in automotive and aerospace, commercial solutions and advanced materials, and decreased in transportation safety and electronics. •Growth was held back by weaker consumer electronics end-market demand and ongoing impacts of semiconductor supply chain constraints on automotive markets.
Divestitures:
•Divestiture impact relates to lost Transportation and Electronics sales
year-on-year from deconsolidation of the Aearo Entities in
Business segment operating income margins decreased year-on-year due to special item charges for PFAS manufacturing exit costs related to asset impairments (discussed in Note 15) resulting in a 2022 fourth quarter pre-tax charge of$0.8 billion . Margins were also impacted by increased raw materials and logistics costs, manufacturing productivity headwinds which were further magnified by the shutdown of certain operations inBelgium and investments in auto electrification, partially offset by selling price actions, strong spending discipline and restructuring actions. Adjusting for special item PFAS manufacturing exit costs (non-GAAP measure), business segment operating income margins increased year-on-year as displayed above.
Year 2021 results:
Sales in Transportation and Electronics were up 10.2 percent in
On an organic sales basis:
•Sales increased in advanced materials, commercial solutions, automotive and
aerospace, electronics and transportation safety.
•Growth benefited from improving automotive-end market activity such as
increases in car and light truck builds, strong demand in data center,
semiconductor, interconnect and consumer electronics markets and increased
advertising spend and return to workplace trends partially offset by impacts
from semiconductor supply chain constraints.
Business segment operating income margins increased year-on-year due to sales
growth leverage, benefits from restructuring actions and lower related charges,
and COVID impacts recognized on certain assets in 2020 that were partially
offset by increases in raw materials and logistic costs, manufacturing
productivity impacts, and increased compensation and benefit costs.
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Health Care Business (24.6% of consolidated sales):
2022 2021
Sales (millions) $ 8,421 $ 8,597
Sales change analysis:
Organic sales 3.2 % 10.2 %
Divestitures (1.4) (2.0)
Translation (3.8) 1.6
Total sales change (2.0) % 9.8 %
Business segment operating income (millions) $ 1,815 $ 2,037
Percent change (10.9) % 22.5 %
Percent of sales 21.6 % 23.7 %
Year 2022 results:
Sales in Health Care were down 2.0 percent in
On an organic sales basis:
•Sales increased in separation and purification, health information systems, food safety and medical solutions, and was flat in oral care. •Growth continues to be impacted by COVID-related trends on elective procedure volumes and ongoing inflationary pressures.
Divestitures:
•Divestiture impact relates to the lost sales year-on-year from the divestiture from the Food Safety Division split-off transaction and combination with Neogen completed in the third quarter of 2022. Business segment operating income margins decreased year-on-year due to increased raw materials and logistics costs along with manufacturing productivity headwinds, investments in the business and transaction-related costs associated with the announced divestiture of the food safety business (see Note 3), partially offset by sales growth (including selling price actions), strong spending discipline and restructuring actions.
As discussed in Note 3, in
Year 2021 results:
Sales in Health Care were up 9.8 percent in
On an organic sales basis:
•Sales increased in oral care, separation and purification, food safety, health information systems and medical solutions. •Growth benefited from higher year-on-year dental procedures, continued high demand for biopharma filtration solutions for COVID-related vaccine and therapeutic development and manufacturing, rising elective procedure volumes in the first six months of 2021 and due to improving hospital information technology investments.
Divestitures:
•In
Business segment operating income margins increased year-on-year due to sales
growth leverage and benefits from restructuring actions and lower related
charges that were partially offset by supply chain disruptions, increases in raw
materials and logistics costs, deal-related costs associated with the announced
divestiture of the food safety business (see Note 3), manufacturing productivity
impacts, increased compensation and benefit costs, and increased investments in
growth.
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Consumer Business (15.5% of consolidated sales):
2022 2021
Sales (millions) $ 5,298 $ 5,513
Sales change analysis:
Organic sales (0.9) % 9.8 %
Divestitures (0.4) -
Translation (2.6) 1.0
Total sales change (3.9) % 10.8 %
Business segment operating income (millions) $ 994 $ 1,162
Percent change (14.4) % 3.8 %
Percent of sales 18.8 % 21.1 %
Year 2022 results:
Sales in Consumer were down 3.9 percent in
On an organic sales basis:
•Sales increased in stationery and office and home care, was flat in consumer health and safety, and decreased in home improvement. •Growth was impacted by softening trends in the Consumer retail business as consumers pulled back on discretionary spending and retailers took actions to reduce their inventories. These impacts were partially offset by demand for Scotch BlueTM painter's tape, Scotch-BriteTM, and Post-it®-solutions. Business segment operating income margins decreased year-on-year as a result of increased raw materials, logistics and outsourced hardgoods manufacturing costs along with manufacturing productivity headwinds and investments in the business, partially offset by sales growth (including selling price actions), strong spending discipline and restructuring actions.
Year 2021 results:
Sales in Consumer were up 10.8 percent in
On an organic sales basis:
•Sales increased in stationery and office, home improvement, consumer health and safety and home care. •Growth driven by continued strength in the market with strong demand for CommandTM adhesives, FiltreteTM air quality solutions, MeguiarsTM auto care and Scotch BlueTM painter's tape and from ongoing strength in demand for packaging and shipping products, Post-it®-solutions and Scotch® brand office tapes as the business laps last year's COVID-related comparisons. Business segment operating income margins decreased year-on-year as a result of increases in raw materials, logistics, and outsourced hardgoods manufacturing costs, manufacturing productivity impacts, and increased compensation and benefit costs that more than offset leverage from sales growth and benefits from restructuring actions and lower related charges.
PERFORMANCE BY GEOGRAPHIC AREA
While 3M manages its businesses globally and believes its business segment results are the most relevant measure of performance, the Company also utilizes geographic area data as a secondary performance measure. Export sales are generally reported within the geographic area where the final sales to 3M customers are made. A portion of the products or components sold by 3M's operations to its customers are exported by these customers to different geographic areas. As customers move their operations from one geographic area to another, 3M's results will follow. Thus, net sales in a particular geographic area are not indicative of end-user consumption in that geographic area. Financial information related to 3M operations in various geographic areas is provided in Note 2 and Note 19.
Refer to the "Overview" section for a summary of net sales by geographic area and business segment.
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Geographic Area Supplemental Information
Property, Plant and Equipment
Employees as of December 31, Capital Spending - net as of December 31,(Millions, except Employees) 2022 2021 2022 2021 2022 2021 Americas 54,000 56,000$ 1,321 $ 1,046 $ 6,066 $ 5,864 Asia Pacific 18,000 18,000 182 216 1,389 1,582 Europe, Middle East and 20,000 21,000 246 341 1,723 1,983Africa Total Company 92,000 95,000$ 1,749 $ 1,603 $ 9,178 $ 9,429 Employment:
Employment decreased in 2022 when compared to 2021. The above table includes the impact of acquisitions, net of divestitures and other actions.
Capital Spending/Net Property, Plant and Equipment:
Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and increasing manufacturing efficiency. 3M is increasing its investment in manufacturing and sourcing capability in order to more closely align its product capability with its sales in major geographic areas in order to best serve its customers throughout the world with proprietary, automated, efficient, safe and sustainable processes. Capital spending is discussed in more detail later in MD&A in the section entitled "Cash Flows from Investing Activities."
CRITICAL ACCOUNTING ESTIMATES
Information regarding significant accounting policies is included in Note 1 to the consolidated financial statements. As stated in Note 1, the preparation of financial statements in conformity withU.S. generally accepted accounting principles requires management to make certain estimates and assumptions. Such estimates and assumptions are subject to inherent uncertainties which may result in actual amounts differing from these estimates. The Company considers the items below to be critical accounting estimates. Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the Company. Senior management has discussed the development, selection and disclosure of its critical accounting estimates with the Audit Committee of 3M's Board of Directors.
Legal Proceedings:
Assessments of lawsuits and claims can involve a series of complex judgments about future events, the outcomes of which are inherently uncertain, and can rely heavily on estimates and assumptions. The Company accrues an estimated liability for legal proceeding claims that are both probable and reasonably estimable in accordance with Accounting Standard Codification (ASC) 450, Contingencies. Please refer to the section entitled "Process for Disclosure and Recording of Liabilities Related to Legal Proceedings" (contained in "Legal Proceedings" in Note 16) for additional information about such estimates.
Pension and Postretirement Obligations:
The Company applies certain estimates for the discount rates and expected return
on plan assets in determining its defined benefit pension and postretirement
obligations and related net periodic benefit costs. The below further describes
these estimates. Note 13 provides the weighted averages of these assumptions as
of applicable dates and for respective periods and additional information on how
the rates were determined.
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Discount rate
The defined benefit pension and postretirement obligation represents the present value of the benefits that employees are entitled to in the future for services already rendered as of the measurement date. The Company measures the present value of these future benefits by projecting benefit payment cash flows for each future period and discounting these cash flows back to theDecember 31 measurement date, using the yields of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits. Service cost and interest cost are measured separately using the spot yield curve approach applied to each corresponding obligation. Service costs are determined based on duration-specific spot rates applied to the service cost cash flows. The interest cost calculation is determined by applying duration-specific spot rates to the year-by-year projected benefit payments. The spot yield curve approach does not affect the measurement of the total benefit obligations as the change in service and interest costs offset the actuarial gains and losses recorded in other comprehensive income. Changes in expected benefit payment and service cost cash flows, as well as ongoing changes in market activity and yields, cause these rates to be subject to uncertainty. Using this methodology, the Company determined discount rates for its plans as follow: International Pension U.S. Qualified Pension (weighted average) U.S. Postretirement MedicalDecember 31, 2022 Liability: Benefit obligation 5.18 % 4.39 % 5.13 % 2023 Net Periodic Benefit Cost Components: Service cost 5.27 % 4.06 % 5.26 % Interest cost 5.11 % 4.39 % 5.05 %
Expected return on plan assets
The expected return on plan assets for the primaryU.S. qualified pension plan is based on strategic asset allocation of the plan, long-term capital market return expectations, and expected performance from active investment management. For the primaryU.S. qualified pension plan, the expected long-term rate of return on an annualized basis for 2023 is 7.50%, an increase from 6.00% in 2022. Return on assets assumptions for international pension and other post-retirement benefit plans are calculated on a plan-by-plan basis using plan asset allocations and expected long-term rate of return assumptions. The weighted average expected return for the international pension plans is 4.61% for 2023 compared to 3.86% for 2022. Changes in asset allocation and market performance over time, among other factors, cause these estimates to be subject to uncertainty. For the year endedDecember 31, 2022 , the Company recognized consolidated defined benefit pre-tax pension and postretirement service cost expense of$426 million and a benefit of$248 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$178 million , down from$206 million in 2021. In 2023, defined benefit pension and postretirement service cost expense is anticipated to total approximately$270 million while non-service pension and postretirement net benefit costs is anticipated to be a benefit of approximately$125 million , for a total consolidated defined benefit pre-tax pension and postretirement expense of approximately$145 million , a decrease of approximately$30 million compared to 2022.
Assessments of
The Company makes certain estimates and judgments in impairment assessments of goodwill. As ofDecember 31, 2022 , 3M goodwill totaled approximately$12.8 billion .Goodwill is tested for impairment annually in the fourth quarter of each year and is tested between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. If future non-cash asset impairment charges are taken, 3M would expect that only a portion of the goodwill would be impaired. 35
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Impairment testing for goodwill is done at a reporting unit level, with all goodwill assigned to a reporting unit. Reporting units are one level below the business segment level, but are required to be combined when reporting units within the same segment have similar economic characteristics. At 3M, reporting units correspond to a division. 3M did not combine any of its reporting units for impairment testing. An impairment loss would be recognized when the carrying amount of the reporting unit's net assets exceeds the estimated fair value of the reporting unit, and the loss would equal that difference. The estimated fair value of a reporting unit is determined based on a market approach using comparable company information such as EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. 3M also performs a discounted cash flow analysis for certain reporting units where the market approach indicates additional review is warranted. A discounted cash flow analysis involves key assumptions including projected sales, EBITDA margins, capital expenditures, and discount rates. Changes in reporting unit earnings, comparable company information, and expected future cash flows, as well as underlying market and overall economic conditions, among other factors, make these estimates subject to uncertainty. Based on the annual test in the fourth quarter of 2022 completed as ofOctober 1, 2022 , no goodwill impairment was indicated for any of the reporting units. As ofOctober 1, 2022 , 3M had 21 primary reporting units, with ten reporting units accounting for approximately 94 percent of the goodwill. These ten reporting units were comprised of the following divisions: Advanced Materials, Display Materials and Systems, Electronics Materials Solutions, Health Information Systems, Industrial Adhesives and Tapes, Medical Solutions,Oral Care , Personal Safety, Separation and Purification Sciences, and Transportation Safety.
3M is a highly integrated enterprise, where businesses share technology and leverage common fundamental strengths and capabilities, thus many of 3M's businesses could not easily be sold on a stand-alone basis. 3M's focus on research and development has resulted in a portion of 3M's value being comprised of internally developed businesses.
Following the annual impairment test, as a result of 3M'sDecember 2022 announced commitment to a plan to exit per- and polyfluoroalkyl substance (PFAS) manufacturing as described in Notes 4 and 15, 3M tested the Advanced Materials and Electronics Materials Solutions reporting units (within the Transportation and Electronics business) for impairment resulting in a goodwill impairment charge related to the Advanced Materials reporting unit.
3M will continue to monitor its reporting units and asset groups in 2023 for any triggering events or other indicators of impairment.
Assessments of Long-Lived Assets:
The Company makes certain estimates and judgments in impairment assessments of long-lived assets. As discussed in Note 1, long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying amount exceeds the estimated undiscounted future cash flows expected to result from the use of the asset group and its eventual disposition. The amount of the impairment is based on the excess of the asset group's carrying value over its fair value. As discussed in Notes 4 and 15, inDecember 2022 , as a result of 3M's commitment to a plan to exit per- and polyfluoroalkyl substance (PFAS) manufacturing, 3M recorded a charge related to impairment of long-lived assets. Underlying fair values were determined primarily using discounted cash flow models. Key assumptions included projected sales, EBITDA margins, capital expenditures, and discount rates. Changes in underlying market and overall economic conditions, including changes in competitive conditions and customer preferences; operational execution of activities associated with these asset groupings; and items mentioned in Item 1A-Risk Factors with respect to 3M's exit of PFAS manufacturing, among other factors, make these estimates subject to uncertainty.
Uncertainty in Income Tax Positions:
The extent of 3M's operations involves dealing with uncertainties and judgments in the application of complex tax regulations in a multitude of jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and international tax audits. The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues inthe United States and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes will be due. The Company follows guidance provided by ASC 740, Income Taxes, a subset of which relates to uncertainty in income taxes, to record these liabilities (refer to Note 10 for additional information). The Company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the tax liabilities. If the Company's estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.
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FINANCIAL CONDITION AND LIQUIDITY
The strength and stability of 3M's business model and strong free cash flow capability, together with proven capital markets access, provide financial flexibility to deploy capital in accordance with the Company's stated priorities and meet needs associated with contractual commitments and other obligations. Investing in 3M's business to drive organic growth and deliver strong returns on invested capital remains the first priority for capital deployment. This includes research and development, capital expenditures, and commercialization capability. The Company also continues to actively manage its portfolio through acquisitions and divestitures to maximize value for shareholders. 3M expects to continue returning cash to shareholders through dividends and share repurchases. To fund cash needs inthe United States , the Company relies on ongoing cash flow fromU.S. operations, access to capital markets and repatriation of the earnings of its foreign affiliates that are not considered to be permanently reinvested. For those international earnings still considered to be reinvested indefinitely, the Company currently has no plans or intentions to repatriate these funds forU.S. operations. See Note 10 for further information on earnings considered to be reinvested indefinitely. 3M maintains a strong liquidity profile. The Company's primary short-term liquidity needs are met through cash on hand andU.S. commercial paper issuances. 3M believes it will have continuous access to the commercial paper market. 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 atDecember 31, 2022 andDecember 31, 2021 . Total debt: 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. As ofDecember 2022 , 3M has a credit rating of A1, stable outlook from Moody's Investors Service, and a credit rating of A+, CreditWatch negative fromS&P Global Ratings . The Company's total debt was lower atDecember 31, 2022 when compared toDecember 31, 2021 . Decreases in debt were largely due to the repayments of500 million euros and$600 million aggregate principal amounts of fixed-rate medium-term notes inFebruary 2022 andJune 2022 , respectively. For discussion of repayments of and proceeds from debt refer to the following "Cash Flows from Financing Activities" section. InJuly 2017 , theUnited 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. InNovember 2020 , theICE Benchmark Administration (IBA), LIBOR's administrator, proposed extending the publication of USD LIBOR throughJune 2023 . Subsequently, in March of 2021, IBA ceased publication of certain LIBOR rates afterDecember 31, 2021 . USD LIBOR rates that did not cease onDecember 31, 2021 will continue to be published throughJune 30, 2023 . The Company has reviewed its debt securities, bank facilities, derivative instruments, and commercial contracts that may utilize LIBOR as the reference rate. Contracts will be modified to apply a new reference rate where applicable. EffectiveFebruary 10, 2020 , the Company updated its "well-known seasoned issuer" (WKSI) shelf registration statement, which registers an indeterminate amount of debt or equity securities for future issuance and sale. This replaced 3M's previous shelf registration datedFebruary 24, 2017 . InMay 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 ofDecember 31, 2022 , the total amount of debt issued as part of the medium-term notes program (Series F), inclusive of debt issued inFebruary 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). Information with respect to long-term debt issuances and maturities for the periods presented is included in Note 12. As disclosed in Note 12, 3M had debt financing facilities providing commitments for term loans and potential bridge financing aggregating$1.0 billion related to the Food Safety Division split-off transaction and combination with Neogen (discussed in Note 3). The debt commitments also included a$150 million revolving credit facility for the Food Safety business. Coincident with completion of theSeptember 2022 split-off, the Food Safety business term loan borrowings funded the cash payment to 3M discussed in Note 3. The bridge financing component of these facilities was terminated early and not utilized. Obligations under the commitments (including the$150 million revolving credit facility) transferred with the Food Safety business and became those of Neogen. 37
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Cash, cash equivalents and marketable securities:
AtDecember 31, 2022 , 3M had$3.9 billion of cash, cash equivalents and marketable securities, of which approximately$2.7 billion was held by the Company's foreign subsidiaries and approximately$1.2 billion was held inthe United States . These balances are invested in bank instruments and other high-quality fixed income securities. AtDecember 31, 2021 , 3M had$4.8 billion of cash, cash equivalents and marketable securities, of which approximately$3.1 billion was held by the Company's foreign subsidiaries and$1.7 billion was held bythe United States . The decrease fromDecember 31, 2021 primarily resulted from cash flow from operations and Food Safety transaction-related cash consideration and earlier borrowings (see Note 3) offset by ongoing dividend payments, purchases of treasury stock, capital expenditures, and the fixed-rate medium-term note maturities in 2022.
Net Debt (non-GAAP measure):
Net debt is not defined underU.S. GAAP and may not be computed the same as similarly titled measures used by other companies. The Company defines net debt as total debt less the total of cash, cash equivalents and current and long-term marketable securities. 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 ofDecember 31, 2022 and 2021. December 31, (Millions) 2022 2021 Change Total debt $ 15,939 $ 17,363$ (1,424) Less: Cash, cash equivalents and marketable 3,916 4,792 (876)
securities
Net debt (non-GAAP measure) $ 12,023 $ 12,571$ (548)
Refer to the preceding "Total Debt" and "Cash,
Balance Sheet:
3M's strong balance sheet and liquidity provide the Company with significant flexibility to fund its numerous opportunities going forward. The Company will continue to invest in its operations to drive growth, including continual review of acquisition opportunities.
The Company uses working capital measures that place emphasis and focus on certain working capital assets, such as accounts receivable and inventory activity.
Working capital (non-GAAP measure):
December 31,
(Millions) 2022 2021 Change
Current assets $ 14,688 $ 15,403 $ (715)
Less: Current liabilities 9,523 9,035 488
Working capital (non-GAAP measure) $ 5,165 $ 6,368 Various assets and liabilities, including cash and short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. Working capital is not defined underU.S. generally accepted accounting principles and may not be computed the same as similarly titled measures used by other companies. The Company defines working capital as current assets minus current liabilities. 3M believes working capital is meaningful to investors as a measure of operational efficiency and short-term financial health. Working capital decreased$1.2 billion compared withDecember 31, 2021 . Balance changes in current assets decreased working capital by$0.7 billion , driven largely by decreases in cash and cash equivalents. Balance changes in current liabilities decreased working capital by$0.5 billion , primarily due to increases in short-term borrowings and current-portion of long-term debt offset by decreases in accrued payroll. Inventory increased$387 million fromDecember 31, 2021 , primarily as a result of increased underlying operating activity partially offset by foreign currency translation impacts. Current portion of long-term debt increased as upcoming debt maturities now considered current were partially offset by the bond maturities in 2022, while accounts payable also increased as a result of increased sequential operating activity partially offset by foreign currency translation impacts. 38
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Cash Flows:
Cash flows from operating, investing and financing activities are provided in the tables that follow. Individual amounts in the Consolidated Statement of Cash Flows exclude the effects of acquisitions, divestitures and exchange rate impacts on cash and cash equivalents, which are presented separately in the cash flows. Thus, the amounts presented in the following operating, investing and financing activities tables reflect changes in balances from period to period adjusted for these effects.
Cash Flows from Operating Activities:
Year endedDecember 31 , (Millions) 2022
2021
Net income including noncontrolling interest$ 5,791 $ 5,929 Depreciation and amortization 1,831
1,915
Long-lived and indefinite-lived asset impairment expense 618
-
Goodwill impairment expense 271
-
Company pension and postretirement contributions (158)
(180)
Company pension and postretirement expense 178
206
Stock-based compensation expense 263
274
Gain on business divestitures (2,724)
-
Income taxes (deferred and accrued income taxes) (710) (410) Accounts receivable (105) (122) Inventories (629) (903) Accounts payable 111 518 Other - net 854 227 Net cash provided by (used in) operating activities$ 5,591
Cash flows from operating activities can fluctuate significantly from period to period, as working capital movements, tax timing differences and other items can significantly impact cash flows. In 2022, cash flows provided by operating activities decreased$1,863 million compared to the same period last year, with this decrease primarily due to lower net income and the cash impact from capitalization of R&D forU.S. tax purposes. The combination of accounts receivable, inventories and accounts payable decreased operating cash flow by$623 million in 2022, compared to an operating cash flow decrease of$507 million in 2021. Additional discussion on working capital changes is provided earlier in the "Financial Condition and Liquidity" section. The 2022 second quarter pre-tax charge of approximately$1.2 billion related to steps toward resolving Combat Arms Earplugs litigation (discussed in Note 16) largely impacted the 2022 net income component above, with offsets in the other-net and deferred tax elements. The 2022 non-cash impairment expenses added back to net income in arriving at net cash provided by operating activities above primarily relate to 3M's commitment to a plan to exit per- and polyfluoroalkyl substance (PFAS) manufacturing as described in Note 15.
Cash Flows from Investing Activities:
Year ended December 31, (Millions) 2022 2021 Purchases of property, plant and equipment (PP&E)$ (1,749) $ (1,603) Proceeds from sale of PP&E and other assets 200 51 Purchases and proceeds from maturities and sale of 11 204 marketable securities and investments, net Proceeds from sale of businesses, net of cash sold 13 - Cash payment from Food Safety business split-off, net of 478 - divested cash Other - net 1 31 Net cash provided by (used in) investing activities $
(1,046)
Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and increasing manufacturing efficiency. The Company expects 2023 capital spending to be approximately$1.5 billion to$1.8 billion as 3M continues to invest in growth, productivity and sustainability.
3M records capital-related government grants earned as reductions to the cost of property, plant and equipment; and associated unpaid liabilities and grant proceeds receivable are considered non-cash changes in such balances for purposes of preparation of statement of cash flows.
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3M invests in renewal and maintenance programs, which pertain to cost reduction, cycle time, maintaining and renewing current capacity, eliminating pollution, and compliance. Costs related to maintenance, ordinary repairs, and certain other items are expensed. 3M also invests in growth, which adds to capacity, driven by new products, both through expansion of current facilities and new facilities. Finally, 3M also invests in other initiatives, such as information technology (IT), laboratory facilities, and a continued focus on investments in sustainability. Refer to Note 3 for information on acquisitions and divestitures (including the cash payment from the Food Safety business split-off). The Company is actively considering additional acquisitions, investments and strategic alliances, and from time to time may also divest certain businesses. Purchases of marketable securities and investments and proceeds from maturities and sale of marketable securities and investments are primarily attributable to certificates of deposit/time deposits, commercial paper, and other securities, which are classified as available-for-sale. Refer to Note 11 for more details about 3M's diversified marketable securities portfolio. Purchases of investments include additional survivor benefit insurance, plus investments in equity securities.
Cash Flows from Financing Activities:
Year ended December 31, (Millions) 2022 2021 Change in short-term debt - net$ 340 $ (2) Repayment of debt (maturities greater than 90 days) (1,179) (1,144) Proceeds from debt (maturities greater than 90 days) 1 1 Total cash change in debt (838) (1,145) Purchases of treasury stock (1,464) (2,199) Proceeds from issuances of treasury stock pursuant to 381 639 stock option and benefit plans Dividends paid to shareholders (3,369) (3,420) Other - net (60) (20) Net cash provided by (used in) financing activities $
(5,350)
2022 Debt Activity:
Total debt was approximately$15.9 billion atDecember 31, 2022 and$17.4 billion atDecember 31, 2021 . Decreases in debt were largely due to the repayments of500 million euros and$600 million aggregate principal amounts of fixed-rate medium-term notes inFebruary 2022 andJune 2022 , respectively. The Company had no commercial paper outstanding atDecember 31, 2022 and 2021. In conjunction with the Food Safety Division split-off transaction and combination with Neogen (discussed in Note 3), the associated non-cash debt-for-debt exchange in the third quarter of 2022 reduced then-outstanding 3M commercial paper indebtedness of$350 million (borrowed earlier in the year) which became new term-debt obligations of Neogen. 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. 3M's primary short-term liquidity needs are met through cash on hand andU.S. commercial paper issuances. Refer to Note 12 for more detail regarding debt.
2021 Debt Activity:
Decreases in debt were largely due to theMarch 2021 early redemption of$450 million in debt maturing in 2022 via make-whole call offers and theNovember 2021 repayment of600 million euros aggregate principal amount of Eurobonds that matured. The Company had no commercial paper outstanding atDecember 31, 2021 andDecember 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.
Repurchases of Common Stock:
Repurchases of common stock are made to support the Company's stock-based employee compensation plans and for other corporate purposes. In 2022, the Company purchased$1,464 million of its own stock. For more information, refer to the table titled "Issuer Purchases ofEquity Securities " in Part II, Item 5. The Company does not utilize derivative instruments linked to the Company's stock. 40
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Dividends Paid to Shareholders:
3M has paid dividends since 1916. In
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.
Free Cash Flow (non-GAAP measure):
Free cash flow and free cash flow conversion are not defined underU.S. generally accepted accounting principles (GAAP). Therefore, they should not be considered a substitute for income or cash flow data prepared in accordance withU.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The Company defines free cash flow conversion as free cash flow divided by net income attributable to 3M. The Company believes free cash flow and free cash flow conversion are meaningful to investors as they are useful measures of performance and the Company uses these measures as an indication of the strength of the company and its ability to generate cash. Free cash flow and free cash flow conversion vary across quarters throughout the year. Below find a recap of free cash flow and free cash flow conversion. Refer to the preceding "Cash Flows from Operating Activities" and "Cash Flows from Investing Activities" sections for discussion of items that impacted the operating cash flow and purchases of PP&E components of the calculation of free cash flow. 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. Year endedDecember 31 , (Millions) 2022
2021
Major GAAP Cash Flow Categories Net cash provided by (used in) operating activities$ 5,591 $ 7,454 Net cash provided by (used in) investing activities (1,046) (1,317) Net cash provided by (used in) financing activities (5,350) (6,145) Free Cash Flow (non-GAAP measure) Net cash provided by (used in) operating activities$ 5,591 $ 7,454 Purchases of property, plant and equipment (1,749) (1,603) Free cash flow 3,842 5,851 Net income attributable to 3M$ 5,777 $ 5,921 Free cash flow conversion 66 % 99 %
Material Cash Requirements from Known Contractual and Other Obligations:
3M's material cash requirements from known contractual and other obligations primarily relate to following, for which information on both a short-term and long-term basis is provided in the indicated notes to the consolidated financial statements: •Tax obligations-Refer to Note 10. •Debt-Refer to Note 12. Future cash payments for interest on long-term debt is approximately$6 billion . •Commitments and contingencies-Refer to Note 16. •Operating and finance leases-Refer to Note 17. 3M purchases the majority of its materials and services as needed, with no unconditional commitments. In limited circumstances, in the normal course of business, 3M enters into unconditional purchase obligations with various vendors that may take the form of, for example, take or pay contracts in which 3M guarantees payment to ensure availability to 3M of certain materials or services or to ensure ongoing efforts on capital projects. The Company expects to receive underlying materials or services for these purchase obligations. To the extent the limited amount of these purchase obligations fluctuates, it largely trends with normal-course changes in regular operating activities. Additionally, contractual capital commitments represent a small part of the Company's expected capital spending. 41
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FINANCIAL INSTRUMENTS
The Company enters into foreign exchange forward contracts, options and swaps to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies and to offset, in part, the impacts of changes in value of various non-functional currency denominated items including certain intercompany financing balances. The Company manages interest rate risks using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may enter into interest rate swaps. Under these arrangements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The Company manages commodity price risks through negotiated supply contracts and price protection agreements.
Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", for further discussion of foreign exchange rates risk, interest rates risk, commodity prices risk and value at risk analysis.
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