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 for year end 2018 and certain year-on-year comparisons between 2019 and 2018 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 .
OVERVIEW
3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. As more fully described in both the Performance by Business Segment section in MD&A and in Note 19, effective in the first quarter of 2020, the Company changed its business segment reporting in its continuing effort to improve the alignment of businesses around markets and customers. Additionally, the Company consolidated the way it presents geographic area net sales by providing an aggregateAmericas geographic region (combining formerUnited States andLatin America andCanada areas). Also, effective in the second quarter of 2020, the measure of segment operating performance used by 3M's chief operating decision maker changed and, as a result, the Company's disclosed measure of segment profit/loss has been updated. Business segment information presented 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. Consideration of COVID-19: 3M is impacted by the global pandemic and related effects associated with the coronavirus (COVID-19). The Company updated its risk factors with respect to COVID-19, which can be found in Item 1A "Risk Factors" in this document. Public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote working, have impacted 3M's operations. 3M continues to work to protect its employees and the public, maintain business continuity and sustain its operations, including ensuring the safety and protection of people who work in its plants and distribution centers across the world, many of whom support the manufacturing and delivery of products that are critical in response to the global pandemic. COVID-19 has impacted 3M's supply chains relative to global demand for products like respirators, surgical masks and commercial cleaning solutions. As this situation continues, 3M also closely monitors and responds to potential impacts to the Company's broader supply chain associated with other products. COVID-19 has also affected the ability of suppliers and vendors to provide products and services to 3M. Furthermore, COVID-19 has impacted the broader economies of affected countries, including negatively impacting economic growth.The Company has taken steps to help employees lead safe and productive lives during the outbreak including remote working; escalated procedures in factories related to personal safety, cleaning and medical screening measures; and pandemic leave policies. 3M closely monitors how the spread of COVID-19 is affecting employees and business operations and has preparedness plans to help protect the safety of employees around the world while safely continuing business. While nearly all of our manufacturing locations and distribution centers are fully or partially operational, the Company 18
Table of Contents
implemented plant and/or line shutdowns during 2020 related to certain markets due to weaker customer demand or government mandates. Some of the above factors have increased the demand for 3M products, while others have decreased demand or made it more difficult for 3M to serve customers. Serving 3M customers is a priority and teams continue to communicate with individual customers about potential disruptions. 3M's total sales increased 0.1% for the full year 2020 when compared to 2019. Organic local-currency sales decreased 1.7% for the full year 2020 when compared to 2019. Given the diversity of 3M's businesses, the impact of COVID-19 varied across the Company throughout 2020. 3M experienced strong sales growth in personal safety, as well as in other areas such as home improvement, general cleaning, semiconductor, data center, and biopharma filtration. COVID-related respirator sales are estimated to have impacted year-on-year organic local-currency sales growth by approximately 3 percent for the year endingDecember 31, 2020 . At the same time, weakness in several end markets, while improving, contributed in part to sales declines in a number of 3M's businesses with the biggest year-on-year total sales decreases in oral care (down 19 percent), advanced materials (down 17 percent), automotive and aerospace (down 16 percent), commercial solutions (down 14 percent), stationery and office (down 11 percent), closure and masking (down 11 percent), automotive aftermarket (down 10 percent), and businesses aligned to general industrial applications such as abrasives (down 15 percent) and industrial adhesives and tapes (down 5 percent). 3M's operating income margins increased 3.1 percentage points year-on-year for the year endingDecember 31, 2020 . Factoring out the impact on operating income of special items as described in the Certain amounts adjusted for special items - (non-GAAP measures) section below, operating income margins increased 0.1 points to 21.3 percent for the year endingDecember 31, 2020 when compared to 2019. Various COVID-19 implications contributed in part to these results. 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 as described above. While it is not feasible to identify or quantify all the other direct and indirect implications on 3M's results of operations, below are factors that 3M believes have also affected its 2020 results:
Factors contributing to charges:
? Period expenses of unabsorbed manufacturing costs and increased expected credit
losses on customer receivables.
Restructuring actions addressing structural enterprise costs and operations in
? certain end markets as a result of the COVID-19 pandemic and related economic
impact resulting in a second quarter 2020 charge of
discussed in Note 5).
? Committed financial support to various COVID-relief and medical research
initiatives.
Charge of
and Liabilities that are Measured at Fair Value on a Nonrecurring Basis"
section of Note 15 that use the measurement alternative described therein in
addition to an immaterial pre-tax charge related to impairment of certain
? indefinite lived tradenames in the first quarter of 2020. 3M continues to
regularly consider if COVID-19 and other related market implications could
indicate it is more likely than not the carrying amount of various applicable
assets may be impaired and assess whether certain investments without readily
determinable fair values may have been impacted.
Factors providing benefits or other impacts:
Decreased discretionary spending in areas such as travel, professional
services, and advertising/merchandising as well as cost reduction efforts,
? hiring freezes, and maintaining only essential contract workers. 3M continues
to monitor discretionary spending and deploy cost control efforts as the situation continues.
Government-sponsored COVID-response stimulus and relief initiatives, including
? certain employment retention benefits under the Coronavirus Aid, Relief and
Economic Security (CARES) Act in
? Lower self-insured medical visit/instance expense during 2020.
Instituted accelerated vacation usage policies which benefited the second
? quarter of 2020 year-on-year, but provided a penalty in comparison to prior
year in the second half of 2020. As previously disclosed, in light of circumstances, 3M took actions to ensure sources of cash may remain strong, including theMarch 2020 issuance of$1.75 billion of registered notes, suspension of share repurchases, and the decrease of its 2020 capital spending to approximately$1.5 billion . While capital spending decreased, it included additional expansion of respirator production capacity. 3M continues to have access to its commercial paper program and undrawn committed credit facility. Refer to the Financial Condition and Liquidity section below for more information on the Company's liquidity position. 19 Table of Contents The Company also continues to evaluate the extent to which it may avail itself of various government-sponsored COVID-response stimulus, relief, and production initiatives around the world, such as under the Defense Production Act (DPA) and CARES Act inthe United States . During 2020 and intoJanuary 2021 , 3M reached certain agreements with governments in theU.S. and other countries involving just over$250 million of asset funding to expand capacity to supply N-95 respirators. Due to the speed with which the COVID-19 situation is developing and evolving and the uncertainty of its duration and the timing of recovery, 3M is not able at this time to predict the extent to which the COVID-19 pandemic may have a material effect on its consolidated results of operations or financial condition. Earnings per share (EPS) attributable to 3M common shareholders - diluted: The following table provides the increase (decrease) in diluted earnings per share for 2020 compared to the same period last year, in addition to 2019 compared to 2018. As applicable, certain items in the table reflect specific income tax rates associated therewith. Year ended December 31, (Earnings per diluted share) 2020 2019 Same period last year$ 7.81 $ 8.89 Significant litigation-related charges/benefits 1.01 1.28 TCJA measurement period adjustment - 0.29 Loss on deconsolidation of Venezuelan subsidiary 0.28 - Gain/loss on sale of businesses (0.22) (0.73) Divestiture-related restructuring actions - 0.18 Same period last year, excluding special items $
8.88
(0.06) (0.60)
Non divestiture-related restructuring actions 0.12 (0.41)
Acquisitions/divestitures (0.10) (0.24)
Foreign exchange impacts (0.11) -
Income tax rate (0.03) -
Shares of common stock outstanding 0.04 0.22
Current period, excluding special items $ 8.74 $ 8.88
Significant litigation-related charges/benefits 0.07 (1.01)
Loss on deconsolidation of Venezuelan subsidiary - (0.28)
Gain/loss on sale of businesses 0.52 0.22
Divestiture-related restructuring actions (0.08) -
Current period $ 9.25 $ 7.81
Year 2020 EPS:
For year endedDecember 31, 2020 , net income attributable to 3M was$5.384 billion , or$9.25 per diluted share basis, compared to$4.570 billion , or$7.81 per diluted share, for year endedDecember 31, 2019 , an increase of 18.4 percent on a per diluted share basis. 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.
On an adjusted basis, net income attributable to 3M was$5.088 billion , or$8.74 per diluted share for 2020 compared to$5.193 billion , or$8.88 per diluted share inDecember 31, 2019 , a decrease of 1.5 percent on a per diluted share basis.
Additional discussion related to the components of the year-on-year change in earnings per diluted share follows:
Organic growth/productivity and other:
Lower organic volume growth in 2020 as a result of significant COVID-19 related
impacts, in addition to COVID-related net factors described in the preceding
? Overview-Consideration of COVID-19 section, decreased earnings per diluted
share year-on-year. 3M also experienced year-over-year increased costs as a
result of the regular review of its respirator mask
20
Table of Contents
liabilities and certain follow-on accelerated depreciation following some of the
restructuring described below. Partially offsetting this net decrease in
earnings per share were year-on-year net gains related to certain property sales
(in 2020 within Safety and Industrial and in 2019 within Corporate and
Unallocated) in addition to benefits recognized in 2020 related to the
restructuring and other actions taken in 2019 (and the adjustments thereto in
2020) along with continued cost management and productivity efforts.
? On a combined basis, higher defined benefit pension and postretirement service
cost increased expense year-on-year.
Interest expense (net of interest income) increased in 2020, as a result of
higher
? by lower average interest rates on cash balances. 2020 interest expense also
included an early debt extinguishment charge in conjunction with the repayment
of notes inDecember 2020 .
Non divestiture-related restructuring actions:
3M recorded non divestiture-related restructuring pre-tax charges aggregating
address certain COVID-related impacts and in the fourth quarter as 3M initiated
? actions to further enhance its operational and marketing capabilities. In 2019,
charges included
slower than expected 2019 sales and associated with realigning its
organizational structure and operating model. See Note 5 for additional
details.
? The year-on-year impact of the non divestiture-related restructuring actions
taken in 2020 and 2019 increased earnings per diluted share by12 cents . Acquisitions/divestitures:
Acquisition impacts, which are measured for the first twelve months
post-transaction, relate to the acquisitions of M*Modal (first quarter 2019),
and Acelity (fourth quarter 2019). These items collectively decreased earnings
? per diluted share by 7 year-on-year for 2020. The net impacts related to these
acquisitions included income from operations, more than offset by transaction
and integration costs. Financing costs related to these acquisitions is also
included.
Divestiture impacts include the lost operating income from divested businesses,
? which decreased earnings per diluted share by
This was primarily related to the divestiture of the Company's drug delivery
business. Foreign exchange impacts:
Foreign currency impacts (net of hedging) decreased pre-tax earnings
? year-on-year by approximately
diluted share by
tax rates. Income tax rate:
Certain items above reflect specific income tax rates associated therewith.
? Overall, the effective tax rate for 2020 was 19.6 percent, a decrease of 0.2
percentage points versus 2019. On an adjusted basis (as discussed below), the
effective tax rate increased 0.1 percentage points year-on-year for 2020.
Factors that decreased the effective tax rate for 2020 included geographical
? income mix and adjustments to uncertain tax positions. These decreases were
partially offset by decreased benefit from stock options. Refer to Note 10 for
additional details.
Shares of common stock outstanding:
Lower shares outstanding increased earnings per share year-on-year by
per diluted share for 2020. Weighted-average diluted shares outstanding in 2020
declined 0.5 percent year-on-year, which benefited earnings per share. The
? decrease in the outstanding weighted-average diluted shares relates to the
Company's purchase of
share repurchases under its board-approved stock repurchase program in late
plans. Year 2019 EPS:
Organic growth/productivity and other:
Negative organic local-currency sales growth as a result of softness in certain
end markets and channel inventory adjustments, along with actions taken by 3M
? in response to lower sales volumes and high inventory levels, which resulted in
lower manufacturing and inventory absorption, reduced earnings per diluted
share. Partially offsetting these impacts were benefits from restructuring
actions taken in the second quarter of 2019.
21
Table of Contents
? Defined benefit pension and postretirement service cost expense decreased
expense year-on-year, which benefited earnings per diluted share.
? Lower income related to non-service cost components of pension and
postretirement expense, increased expense year-on-year.
Interest expense (net of interest income) increased in 2019, as a result of
higher
? income driven by higher balances in cash, cash equivalents and marketable
securities during the year resulting from the proceeds from debt issuances in
advance of theOctober 2019 Acelity acquisition.
Non divestiture-related restructuring actions:
During the second quarter of 2019, in light of slower than expected 2019 sales,
and additionally in the fourth quarter to realign 3M's organizational structure
? and operating model, management approved and committed to undertake certain
restructuring actions. In aggregate, the Company recorded a full year 2019
combined pre-tax charge of
Note 5 for additional details. Acquisitions/divestitures:
Acquisition impacts, which are measured for the first twelve months
post-transaction, relate to the acquisitions of M*Modal (first quarter 2019),
and Acelity (fourth quarter 2019). These items collectively decreased earnings
per diluted share by
? these acquisitions included income from operations, more than offset by
transaction and integration costs. Interest expense related to financing costs
of these acquisitions is also included. Expenses related to the
acquisition of Acelity also include financing costs and the tax effect of
repatriating funds in advance of the close of the acquisition.
Divestiture impacts collectively decreased earnings per diluted share by 5
cents year-on-year for 2019. They include remaining stranded costs and lost
operating income related to the 2018 divestiture of the Communication Markets
? Division, which decreased earnings per diluted share by
and lost operating income from other divested businesses (primarily the
Company's gas and flame detection business), which decreased earnings per
diluted share by1 cent year-on-year. Foreign exchange impacts:
? Foreign currency impacts (net of hedging) were essentially flat year-on-year,
excluding the impact of foreign currency changes on tax rates. Income tax rate:
Certain items above reflect specific income tax rates associated therewith.
? Overall, the effective tax rate for 2019 was 19.8 percent, a decrease of 3.6
percentage points versus 2018. On an adjusted basis (as discussed below), the
effective tax rate increased 0.2 percentage points year-on-year for 2019.
Factors that decreased the effective tax rate on a GAAP basis for 2019 included
prior year measurement period adjustments related to 2017 Tax Cuts and Jobs Act
(TCJA), prior year resolution of the NRD lawsuit (as described in Note 16) and
? geographical income mix. These decreases were partially offset by the
deconsolidation of the Venezuelan subsidiary, adjustments to uncertain tax
positions, and significant litigation-related charges. Refer to Note 10 for
additional details.
Shares of common stock outstanding:
Lower shares outstanding increased earnings per share year-on-year by
per diluted share for 2019. Weighted-average diluted shares outstanding in 2019
? declined 2.8 percent year-on-year which benefited earnings per share. The
decrease in the outstanding weighted-average diluted shares relates to the
Company's purchase of$1.4 billion of its own stock in 2019. 22 Table of Contents
Certain amounts adjusted for special items - (non-GAAP measures):
In addition to reporting financial results in accordance withU.S. GAAP, the Company also provides non-GAAP measures that adjust for the impacts of special items. For the periods presented, special items include the items described below. Beginning in 2020, the Company includes gain/loss on sale of businesses and divestiture-related restructuring actions as special items due to their potential distortion of underlying operating results. Information provided herein reflects the impact of this change for all periods presented. Operating income (measure of segment operating performance), 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. The Company considers these non-GAAP measures in evaluating and managing the Company's operations. The Company believes that discussion of results adjusted for these items is meaningful to investors as it provides a useful analysis of ongoing underlying operating trends. The determination of these items may not be comparable to similarly titled measures used by other companies. Special items include:
Significant litigation-related charges/benefits:
In 2020, 3M recorded a net pre-tax charge of
tax) related to PFAS (certain perfluorinated compounds) matters. The charge was
more than offset by a reduction in tax expense of
? resolution of tax treatment with authorities regarding the previously disclosed
2018 agreement reached with the
Resources Damages lawsuit. These items, in aggregate, resulted in a
after tax benefit.
In 2019, the Company recorded significant litigation-related charges of
million (
? respirator mask lawsuits of which
occurred in the fourth quarter. The aggregate 2019 pre-tax charge was reflected
in cost of sales (
(
In 2018, the Company recorded significant litigation-related charges of
million (
? disclosed agreement reached with the
Natural Resource Damages lawsuit. Essentially all of the aggregate 2018 pre-tax
charge was reflected in selling, general and administrative expense.
Gain/loss on sale of businesses:
In the first quarter of 2020, 3M recorded a pre-tax gain of
million loss after tax) related to the sale of its advanced
? ballistic-protection business and recognition of certain contingent
consideration. In the second quarter of 2020, 3M recorded a pre-tax gain of
business. Refer to Note 3 for further details.
In the first quarter of 2019, 3M recorded a gain related to the sale of certain
oral care technology comprising a business in addition to reflecting an earnout
on a previous divestiture, which together resulted in a net gain of
(
for sale" tax benefit related to the legal entities associated with the pending
? divestiture of the Company's gas and flame detection business, 3M recorded an
after-tax gain of
related to the divestiture of the Company's gas and flame detection business
and an immaterial impact as a result of measuring a disposal group at the lower
of its carrying amount or fair value less cost to sell, which in aggregate
resulted in a pre-tax gain of
In the first quarter of 2018, 3M recorded a gain related to the sale of certain
personal safety product offerings primarily focused on noise, environmental,
and heat stress monitoring, the sale of its polymer additives compounding
business, and a gain on final closing adjustments from a prior divestiture
which, in aggregate, resulted in a net pre-tax gain of
? after tax). In the second quarter of 2018, 3M recorded a pre-tax gain of
million (
products business. In the fourth quarter of 2018, 3M recorded a gain of
million related to an earnout from a previous divestiture. Additionally, in
2018, 3M completed the sale of substantially all of its Communication Markets
Division and reflected a pre-tax gain of
Divestiture-related restructuring actions:
In the second quarter 2020, following the divestiture of substantially all of
the drug delivery business (see Note 3) management approved and committed to
undertake certain restructuring actions addressing corporate functional costs
? and manufacturing footprint across 3M in relation to the magnitude of amounts
previously allocated/burdened to the divested business. As a result, 3M
recorded a second quarter 2020 pre-tax charge of
tax) and made a subsequent immaterial adjustment thereto. Refer to Note 5 for
further details.
23
Table of Contents
During 2018, management approved and committed to undertake certain
restructuring actions as further described in Note 5, related to addressing
? corporate functional costs following the Communication Markets Division
divestiture resulting in a 2018 pre-tax charge of
after tax), net of adjustments for reductions in cost estimates of
Loss on deconsolidation of Venezuelan subsidiary:
In the second quarter of 2019, 3M recorded a pre-tax charge of
? related to the deconsolidation of the Company's Venezuelan subsidiary as
further discussed in Note 1.
Measurement period accounting for TCJA:
3M recorded a net tax expense of
? adjustment to the enactment of the 2017 Tax Cuts and Jobs Act (TCJA). See Note
10 for additional information.
Earnings
per
Provision Earnings diluted
Operating Income for Net Income Per share
(Dollars in millions, Operating Income Before Income Effective Attributable Diluted percent
except per share amounts) Income Margin Taxes Taxes Tax Rate to 3M Share change
Year ended December 31,
2018 GAAP $ 7,207 22.0 % $ 7,000 $ 1,637 23.4 % $ 5,349 $ 8.89
Adjustments for special
items:
Significant
litigation-related
charges/benefits 897 897 127 770 1.28
Gain/loss on sale of
businesses (547) (547) (107) (440) (0.73)
Divestiture-related
restructuring actions 127 127 17 110 0.18
Measurement period
accounting for TCJA - - (176) 176 0.29
Year ended December 31,
2018 adjusted amounts
(non-GAAP measures) $ 7,684 23.5 % $ 7,477 $ 1,498 20.0 % $ 5,965 $ 9.91
Year ended December 31,
2019 GAAP $ 6,174 19.2 % $ 5,712 $ 1,130 19.8 % $ 4,570 $ 7.81 (12.1) %
Adjustments for special
items:
Significant
litigation-related
charges/benefits 762 762 172 590 1.01
Gain/loss on sale of
businesses (114) (114) 15 (129) (0.22)
Loss on deconsolidation of
Venezuelan subsidiary - 162 - 162 0.28
Year ended December 31,
2019 adjusted amounts
(non-GAAP measures) $ 6,822 21.2 % $ 6,522 $ 1,317 20.2 % $ 5,193 $ 8.88 (10.4) %
Year ended December 31,
2020 GAAP $ 7,161 22.3 % $ 6,711 $ 1,318 19.6 % $ 5,384 $ 9.25 18.4 %
Adjustments for special
items:
Significant
litigation-related
charges/benefits 17 17 56 (39) (0.07)
Gain/loss on sale of
businesses (389) (389) (86) (303) (0.52)
Divestiture-related
restructuring actions 55 55 9 46 0.08
Year ended December 31,
2020 adjusted amounts
(non-GAAP measures) $ 6,844 21.3 % $ 6,394 $ 1,297 20.3 % $ 5,088 $ 8.74 (1.5) %
24
Table of Contents
Year 2020 sales and operating income by business segment:
The following tables contain sales and operating income results by business segment for the years endedDecember 31, 2020 and 2019. Refer to the section entitled "Performance by Business Segment" later in MD&A for additional discussion concerning 2020 verses 2019 results, including Corporate and Unallocated. Refer to Note 19 for additional information on business segments, including Elimination of Dual Credit. 2020 vs 2019 2020 2019 % change Net % of Oper. Net % of Oper. Net Oper. (Dollars in millions) Sales Total Income Sales Total Income Sales Income Business Segments Safety and Industrial$ 11,767 36.6 %$ 3,054 $ 11,514 35.8 %$ 2,510 2.2 % 21.7 % Transportation and Electronics 8,827 27.4 1,927
9,591 29.8 2,221 (8.0) (13.3) Health Care 8,345 25.9 1,828 7,431 23.1 1,858 12.3 (1.6) Consumer 5,336 16.6 1,249 5,151 16.0 1,124 3.6 11.2 Corporate and Unallocated (1) - (363) 110 0.3 (1,130) - - Elimination of Dual Credit (2,090) (6.5) (534)
(1,661) (5.0) (409) - -Total Company $ 32,184 100.0 %$ 7,161 $ 32,136 100.0 %$ 6,174 0.1 % 16.0 % Year ended December 31, 2020 Worldwide Sales Change Organic local- Total sales By Business Segment currency sales Acquisitions Divestitures Translation change Safety and Industrial 3.5 % - % (0.6) % (0.7) % 2.2 % Transportation and Electronics (7.1) - (1.1) 0.2 (8.0) Health Care 1.0 15.5 (4.1) (0.1) 12.3 Consumer 4.1 - - (0.5) 3.6Total Company (1.7) % 3.5 % (1.4) % (0.3) % 0.1 % 25 Table of Contents
Year 2020 sales results by geographic area/business segment:
Percent change information compares the year endedDecember 31, 2020 with the same period last year, unless otherwise indicated. Additional discussion of business segment results is provided in the Performance by Business Segment section. Year ended December 31, 2020 Europe, Asia Middle East Other Americas Pacific & Africa Unallocated Worldwide Net sales (millions)$ 16,525 $ 9,569 $ 6,109 $ (19) $ 32,184 % of worldwide sales 51.3 % 29.7 % 19.0 % - 100.0 % Components of net sales change: Volume - organic (1.2) % (2.9) % (4.0) % - (2.3) % Price 1.0 (0.5) 1.2 - 0.6 Organic local-currency sales (0.2) (3.4) (2.8) - (1.7) Acquisitions 5.5 0.7 2.8 - 3.5 Divestitures (1.5) (0.2) (2.9) - (1.4) Translation (1.3) 0.6 1.0 - (0.3) Total sales change 2.5 % (2.3) % (1.9) % - 0.1 % Total sales change: Safety and Industrial 2.8 % (1.4) % 4.7 % - 2.2 %
Transportation and Electronics (15.4) % (2.4) %
(12.9) % - (8.0) % Health Care 20.5 % (0.8) % 3.8 % - 12.3 % Consumer 5.2 % (1.3) % 1.5 % - 3.6 % Organic local-currency sales change: Safety and Industrial 5.0 % (1.5) % 5.6 % - 3.5 % Transportation and Electronics (11.4) % (2.8) %
(13.8) % - (7.1) % Health Care 3.9 % (6.0) % 0.2 % - 1.0 % Consumer 6.3 % (2.2) % 0.1 % - 4.1 %
Additional information beyond what is included in the preceding table is as follows:
In the
organic-local currency sales increased 1 percent. Total sales in
decreased 14 percent while organic local-currency sales decreased 12 percent.
? In
decreases of 4 percent were partially offset by acquisition-related sales
growth. In
local-currency sales increased 7 percent, as organic sales growth was more than
offset by foreign currency translation impacts.
In the
? organic local-currency sales increased 3 percent. In
decreased 3 percent and organic local currency sales decreased 7 percent.
Foreign currency translation decreased year-on-year sales by 0.3 percent, while selling prices increased by 0.6 percent year-on-year for 2020, with price growth in EMEA andAmericas , whileAsia Pacific decreased. 26 Table of Contents
Year 2019 sales results by geographic area/business segment:
Percent change information compares the full year 2019 with the full year 2018,
unless otherwise indicated. Additional discussion of business segment results is
provided in the Performance by Business Segment section.
Year ended December 31, 2019
Europe,
Asia Middle East Other
Americas Pacific & Africa Unallocated Worldwide
Net sales (millions) $ 16,124 $ 9,796 $ 6,226 $ (10) $ 32,136
% of worldwide sales 50.1 % 30.5 % 19.4 % - 100.0 %
Components of net sales change:
Volume - organic (1.5) % (2.8) % (2.2) % - (2.1) %
Price 0.8 (0.1) 1.3 - 0.6
Organic local-currency sales (0.7) (2.9) (0.9) - (1.5)
Acquisitions 3.5 0.3 1.0 - 2.0
Divestitures (0.6) (0.2) (1.9) - (0.7)
Translation (0.6) (1.7) (4.6) - (1.7)
Total sales change 1.6 % (4.5) % (6.4) % - (1.9) %
Total sales change:
Safety and Industrial (5.3) % (7.6) % (11.0) % - (7.2) %Transportation and Electronics (3.8) % (5.3) %
(6.6) % - (5.1) % Health Care 15.5 % 2.5 % 0.6 % - 8.9 % Consumer 2.2 % (2.8) % (4.6) % - 0.5 % Organic local-currency sales change: Safety and Industrial (3.3) % (4.7) % (2.4) % - (3.4) % Transportation and Electronics (3.3) % (4.1) %
(2.2) % - (3.6) % Health Care 1.1 % 3.1 % 1.4 % - 1.5 % Consumer 2.6 % (1.1) % 0.4 % - 1.7 %
Additional information beyond what is included in the preceding table is as follows:
In the
organic-local currency decreased 1 percent. Total sales remained flat in
? offset by lost sales from divested businesses and foreign currency translation
impacts. In
In
growth of 3 percent was more than offset by foreign currency translation impacts.
In the
? organic local-currency sales decreased 4 percent. In
decreased 2 percent and organic local currency sales decreased 3 percent.
Foreign currency translation decreased year-on-year sales by 1.7 percent, while selling prices increased by 0.6 percent year-on-year for 2019, with price growth in EMEA andAmericas , whileAsia Pacific was flat.
Managing currency risks:
The strongerU.S. dollar had a negative impact on sales in full year 2020 compared to the same period last year. Net of the Company's hedging strategy, foreign currency negatively impacted earnings for full year 2020 compared to the same period last year. 3M utilizes a number of tools to hedge currency risk related to earnings. 3M uses natural hedges such as pricing, productivity, hard currency and 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 27 Table of Contents
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: 3M generated$8.1 billion of operating cash flow in 2020, an increase of$1.0 billion when compared to 2019. This increase was primarily due to cost saving actions taken in response to COVID-19 and lower year-on-year significant litigation-related charges and the timing of associated payments. This followed an operating cash flow increase of$631 million when comparing 2019 to 2018. 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 2020, the Company purchased$0.4 billion of its own stock, compared to purchases of$1.4 billion in 2019. As ofDecember 31, 2020 , approximately$7.8 billion remained available under the authorization. In the first quarter of 2020, the Company suspended repurchases under its board-approved share repurchase program with other repurchase activity limited to 3M's stock compensation plans. The Company plans to resume share purchases in 2021. InFebruary 2021 , 3M's Board of Directors declared a first-quarter 2021 dividend of$1.48 per share, an increase of 1 percent. This marked the 63rd consecutive year of dividend increases for 3M. Raw materials:
In 2020, the coronavirus (COVID-19) pandemic caused fluctuations in supply markets. Generally, as demand for certain COVID-related products surged, 3M saw a corresponding tightening in supply and some degree of price inflation in associated markets. Within the supply chain of less essential products, 3M experienced raw material price deflation as economies slowed and certain producers scaled back or idled operations. Conversely, as markets re-opened and demand increased, the Company experienced raw material price inflation with some level of stabilization late in the year. In response, the Company continued to deploy productivity projects to minimize the impact of raw material inflation and market supply challenges, including input management, reformulations, and multi-sourcing activities. Overall, on a consolidated basis, 3M experienced net raw material deflation in 2020. To date, the Company is receiving sufficient quantities of all raw materials to meet its reasonably foreseeable production requirements. It is difficult to predict future shortages of raw materials or the impact any such shortages would have. 3M has avoided disruption to its manufacturing operations through careful management of existing raw material inventories, strategic relationships with key suppliers, and development as well as qualification of additional supply sources. 3M manages spend category price risks through negotiated supply contracts and price protection agreements. In addition, 3M evaluates suppliers' conformance with environmental and social compliance requirements.
Pension and postretirement defined benefit/contribution plans:
On a worldwide basis, 3M's pension and postretirement plans were 87 percent funded at year-end 2020. The primaryU.S. qualified pension plan, which is approximately 67 percent of the worldwide pension obligation, was 91 percent funded and the international pension plans were 93 percent funded. TheU.S. non-qualified pension plan is not funded due to tax considerations and other factors. Asset returns in 2020 for the primaryU.S. qualified pension plan were 13.6%, 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 2021 is 6.50%. The primaryU.S. qualified pension plan year-end 2020 discount rate was 2.55%, down 0.70 percentage points from the year-end 2019 discount rate of 3.25%. The decrease inU.S. discount rates resulted in an increased valuation of the projected benefit obligation (PBO). The primaryU.S. qualified pension plan's funded status decreased 1 percentage point in 2020 due to the higher PBO resulting from the discount rate decrease and partially offset by higher return on 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 2021. The Company does not have a required minimum cash pension contribution obligation for itsU.S. plans in 2021. 3M expects global defined benefit pension and postretirement expense in 2021 to decrease by approximately$40 million pre-tax when 28
Table of Contents
compared to 2020. 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.
RESULTS OF OPERATIONSNet 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) 2020 2019 2020 versus 2019 Cost of sales 51.6 % 53.4 % (1.8) % Selling, general and administrative expenses (SG&A) 21.5 21.9
(0.4)
Research, development and related expenses (R&D) 5.8 5.9 (0.1) Gain on sale of businesses (1.2) (0.4) (0.8) Operating income margin 22.3 % 19.2 % 3.1 % Operating income margins increased year over year for 2020. The increase from 2019 to 2020 was primarily driven by lower significant litigation-related charges and higher gains on divestitures (net of divestiture-related restructuring actions) year-on-year. These items are further described in the Certain amounts adjusted for special items - (non-GAAP measures) section above. A number of factors impact the various income statement line items. Expanded discussion of each of the income statement line items follows in the various sections below.
In 2020 the Company's operating expenses were impacted by factors described in the preceding Overview - Consideration of COVID-19 section above.
In 2020 and 2019, 3M approved and committed to certain restructuring actions that impacted cost of sales, SG&A, and R&D (see Note 5 for additional details). In addition to actions related to divestitures (as discussed earlier in the Certain amounts adjusted for special items - (non-GAAP measures) section), for 2020 these included charges to address certain COVID-related impacts and actions to further enhance its operational and marketing capabilities. In 2019, charges included actions in light of slower than expected 2019 sales and associated with realigning its organizational structure and operating model. Pension and postretirement service cost expense is recorded in cost of sales, SG&A, and R&D. In total, 3M's defined benefit pension and postretirement service cost expense increased$31 million in 2020. Refer to Note 13 (Pension and Postretirement Plans) for the service cost components of net periodic benefit costs. The Company is investing in an initiative called business transformation, with these investments impacting cost of sales, SG&A, and R&D. Business transformation encompasses the ongoing multi-year phased implementation of an enterprise resource planning (ERP) system on a worldwide basis, as well as changes in processes and internal/external service delivery across 3M. Cost of Sales:
Cost of sales includes manufacturing, engineering and freight costs.
Cost of sales, measured as a percent of sales, decreased during 2020 when
compared to 2019. Decreases were related to lower significant litigation-related
charges taken in 2020, which were partially offset by 2020 COVID-related net
impacts, including period expenses of unabsorbed manufacturing costs, in
addition to higher restructuring action charges taken in 2020 along with certain
related follow-on accelerated depreciation. In addition, selling prices
increased year-on-year by 0.6 percent for full year 2020, and lower raw material
costs reduced cost of sales as a percentage of sales.
29
Table of Contents
Selling, General and Administrative Expenses:
SG&A in dollars decreased slightly in 2020 when compared to 2019. The decrease was driven by cost saving actions taken in response to COVID-19, in addition to benefits from prior year restructuring (and adjustments thereto in 2020). Additional factors that decreased SG&A in 2020 also include lower year-on-year impact related to significant litigation-related charges. In terms of SG&A as a percent of sales, partially offsetting these decreases was the overall effect of the COVID-19 pandemic on sales that resulted in higher costs as a percent of sales. SG&A was also impacted by increased spending year-on-year related to Acelity, which was acquired in the fourth quarter of 2019.
Research, Development and Related Expenses:
R&D in dollars decreased slightly in 2020 when compared to 2019 and remained relatively consistent as a percent of sales at 5.8% in 2020 compared to 5.9% in 2019. 3M continued to invest in its key initiatives, including R&D aimed at disruptive innovation programs with the potential to create entirely new markets and disrupt existing markets. Incremental R&D spending in 2020 included activities related to the Acelity business acquired in the fourth quarter of 2019. 3M also experienced lower year-on-year restructuring activities impacting R&D. Gain on Sale of Businesses:
During the first quarter of 2020, the Company recorded a pre-tax gain of$2 million ($1 million loss after tax) related to the sale of its advanced ballistic-protection business and recognition of certain contingent consideration. During the second quarter of 2020, the Company recorded a pre-tax gain of$387 million ($304 after tax) related to the sale of substantially all of its drug delivery business. During the first quarter of 2019, the Company sold certain oral care technology comprising a business and reflected an earnout on a previous divestiture resulting in a pre-tax gain of$8 million ($7 million gain after tax). In the third quarter of 2019, 3M recorded a gain related to the divestiture of the Company's gas and flame detection business and an immaterial impact as a result of measuring a disposal group at the lower of its carrying amount or fair value less cost to sell, which in aggregate resulted in a pre-tax gain of$106 million ($79 million after tax). Refer to Note 3 for additional details on divestitures. Operating Income Margin:
3M uses operating income as one of its primary business segment performance measurement tools. Refer to the table below for a reconciliation of operating income margins for 2020 and 2019.
Year ended December 31,
(Percent of net sales) 2020 2019
Same period last year 19.2 % 22.0 %Significant litigation-related charges/benefits 2.4
2.7
Gain/loss on sale of businesses (0.4)
(1.6)
Divestiture-related restructuring actions -
0.4
Same period last year, excluding special items 21.2 %
23.5 % Increase/(decrease) in operating income margin, due to: Organic volume/productivity and other
(0.1) (1.7)
Non divestiture-related restructuring actions 0.2
(0.8)
Acquisitions/divestitures (0.5)
(0.6)
Selling price and raw material impact 0.7
0.4
Foreign exchange impacts (0.2)
0.4
Current period, excluding special items 21.3 % 21.2 % Significant litigation-related charges/benefits -
(2.4)
Gain/loss on sale of businesses 1.2
0.4
Divestiture-related restructuring actions (0.2)
-
Current period 22.3 % 19.2 %
30
Table of Contents
Year 2020 operating income:
Operating income margins increased 3.1 percentage points in 2020 when compared
to 2019. Factoring out the impact on operating income of special items as
described in the Certain amounts adjusted for special items - (non-GAAP
measures) section above, operating margins increased 0.1 percentage points to
21.3 percent in 2020 when compared to 2019.
Additional discussion related to the components of the year-on-year change in operating income margins follows:
Organic volume/productivity and other:
Lower organic volume growth in 2020 as a result of significant COVID-19 related
impacts, in addition to COVID-related net factors described in the preceding
Overview-Consideration of COVID-19 section, decreased operating income margins
year-on-year. 3M also experienced year-over-year increased costs as a result of
the regular review of its respirator mask liabilities and certain follow-on
? accelerated depreciation following some of the restructuring described below.
Partially offsetting this net decrease were year-on-year net gains related to
certain property sales (in 2020 with Safety and Industrial and in 2019 within
Corporate and Unallocated) in addition to benefits recognized in 2020 related
to the restructuring and other actions taken in 2019 (and the adjustments
thereto in 2020) along with continued cost management and productivity efforts.
? Operating income margins decreased year-on-year due to higher defined benefit
pension and postretirement service cost expense.
Non divestiture-related restructuring actions:
3M recorded non divestiture-related restructuring charges that impacted
operating income aggregating
the second quarter of 2020 to address certain COVID-related impacts and in the
fourth quarter as 3M initiated actions to further enhance its operational and
? marketing capabilities. In 2019, charges included
operating income (and
Company committed to actions in light of slower than expected 2019 sales and
associated with realigning its organizational structure and operating model.
See Note 5 for additional details.
? The year-on-year impact of the non divestiture-related restructuring charges
taken in 2020 and 2019 increased operating income margins. Acquisitions/divestitures:
? Acquisition-related impacts relate to the ongoing integration of M*Modal and
Acelity, which decreased operating income margins year-on-year.
? Divestiture impacts, which includes lost operating income from divested
businesses, increased operating income margins year-on-year.
Selling price and raw material impact:
? Higher selling prices in addition to lower raw material cost impacts benefited
operating income margins year-on-year for 2020. Foreign exchange impacts:
? Foreign currency effects (net of hedge gains) decreased operating income
margins year-on-year.
Significant litigation-related charges:
Operating income margins for 2020 and 2019 included the
? million impact, respectively, of significant litigation-related charges (as
discussed earlier in the Certain amounts adjusted for special items - (non-GAAP
measures) section).
Gain/loss on sale of businesses:
2020 and 2019 included gains of
? sale of businesses. See the Certain amounts adjusted for special items
- (non-GAAP measures) section for more information.
31
Table of Contents
Divestiture-related restructuring actions:
Operating income margins for full year 2020 included the
quarter impact as a result of certain restructuring actions following the
divestiture of substantially all of the drug delivery business addressing
? corporate functional costs and manufacturing footprint across 3M in relation to
the magnitude of amounts previously allocated/burdened to the divested
business. Refer to Note 5 for further details. This item was also discussed
earlier in the Certain amounts adjusted for special items - (non-GAAP measures)
section. Year 2019 operating income: Operating income margins decreased 2.8 percentage points for the full year 2019 when compared to full year 2018. Factoring out the impact on operating income of special items as described in the Certain amounts adjusted for special items - (non-GAAP measures) section above, operating margins decreased 2.3 percentage points to 21.2 percent in 2019 when compared to 2018.
Organic volume/productivity and other:
Negative organic local sales volume growth as a result of softness in certain
end markets and channel inventory adjustments, along with actions taken by 3M
? in response to lower sales volumes and high inventory levels, which resulted in
lower manufacturing and inventory absorption, reduced operating margins.
Partially offsetting these impacts were benefits from restructuring actions
taken in the second quarter of 2019.
? Operating income margins increased year-on-year due to lower defined benefit
pension and postretirement service cost expense.
Non divestiture-related restructuring actions:
During the second quarter of 2019, in light of slower than expected 2019 sales,
and additionally in the fourth quarter to realign 3M's organizational structure
? and operating model, management approved and committed to undertake certain
restructuring actions. The resulting charges included
operating income (and
for additional details. Acquisitions/divestitures:
? Acquisition-related impacts relate to the on-going integration of M*Modal and
Acelity, which decreased operating income margins year-on-year.
Divestiture impacts include the lost operating income from divested businesses,
? which increased operating income margins year-on-year and primarily relate to
the divestiture of the Communication Markets Division.
? Remaining stranded costs from the 2018 divestiture of the Communication Markets
Division also reduced operating margins year-on-year.
Selling price and raw material impact:
? Higher selling prices, partially offset by raw material cost increases,
benefited operating income margins year-on-year for 2019.
Foreign exchange impacts:
? Foreign currency effects (net of hedge gains) increased operating income
margins year-on-year.
Significant litigation-related charges:
Operating income margins for 2018 and 2019 included the
? million impact, respectively, of significant litigation-related charges (as
discussed earlier in the Certain amounts adjusted special items - (non-GAAP
measures) section. Other Expense (Income), Net:
See Note 6 for a detailed breakout of this line item.
The decrease in other expense (income) during 2020 was primarily due to the 2019 impact of deconsolidation of the Company's Venezuelan subsidiary. Refer to
Note
1 for additional details.
32
Table of Contents
Interest expense (net of interest income) increased during 2020 and 2019. The
increase in 2020 was due to higher U.S. average debt balances and lower
year-on-year interest income driven by lower average interest rates on cash
balances. 2020 interest expense also included an early debt extinguishment
charge in conjunction with the repayment of notes in December 2020 . The increase
in 2019 was driven by higher U.S. average debt balances, partially offset by the
year-on-year increase in interest income driven by higher balances in cash, cash
equivalents and marketable securities during the year resulting from the
proceeds from debt issuances in advance of the October 2019 Acelity acquisition.
In addition, other expense (income) was impacted by lower year-on-year pension
and postretirement net periodic benefit non-service benefits for 2020 and 2019,
respectively. The lower year-on-year benefit in 2020 was primarily due to the
increased expense from lower December 31, 2019 discount rates. The decreases in
2019 was primarily due to the charge associated with the voluntary retirement
program taken in the second quarter of 2019 in addition to the pension
settlement charges in the fourth quarter of 2019 related to employee
retirements. Refer to Note 13 for additional details.
Provision for Income Taxes:
(Percent of pre-tax income) 2020 2019
Effective tax rate 19.6 % 19.8 %
The effective tax rate for 2020 was 19.6 percent, a decrease of 0.2 percentage
points when compared to 2019. The effective tax rate for 2019 was 19.8 percent,
compared to 23.4 percent in 2018, a decrease of 3.6 percentage points. Factors
that impacted the tax rates between years are further discussed in the Overview
section above and in Note 10.
3M currently estimates its effective tax rate for 2021 will be approximately 20 to 21 percent.
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) 2020 2019
Income (loss) from unconsolidated subsidiaries, net of taxes
-
Income (loss) from unconsolidated subsidiaries, net of taxes, is primarily attributable to the Company's ownership interest in Kindeva using the equity method of accounting following 3M's divestiture of the drug delivery business in 2020. See Note 3 for further discussion.
Net Income Attributable to Noncontrolling Interest:
(Millions) 2020 2019 Net income (loss) attributable to noncontrolling interest$ 4 $ 12
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
Currency Effects:
3M estimates that year-on-year currency effects, including hedging impacts, decreased pre-tax income by$81 million in 2020 and increased pre-tax income by$1 million in 2019. This estimate includes the effect of translating profits from local currencies intoU.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations inthe United States and abroad; and transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks. 3M estimates that year-on-year foreign currency transaction effects, including hedging impacts, decreased pre-tax income by approximately$21 million in 2020 and increased pre-tax income by approximately$201 million in 2019. These estimates include transaction
gains
and
33
Table of Contents
losses, including derivative instruments designed to reduce foreign currency
exchange rate risks. Refer to Note 14 in the Consolidated Financial Statements
for additional information concerning 3M's hedging activities.
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 2020, the Company changed its business segment reporting in its continuing effort to improve the alignment of businesses around markets. Also, effective in the second quarter of 2020, 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) has been updated for all 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. As discussed in Note 19, 3M discloses business segment operating income as its measure of segment profit/loss, reconciled to both total 3M operating income and income before taxes. Business segment operating income includes dual credit for certain related operating income (as described below in "Elimination of Dual Credit"). Business segment operating income excludes certain expenses and income that are not allocated to business segments (as described below in "Corporate and Unallocated"). Additionally, the following special items are excluded from business segment operating income and, instead, are included within Corporate and Unallocated: significant litigation-related charges/benefits, gain/loss on sale of businesses, and divestiture-related restructuring actions. 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. 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 includes a variety of miscellaneous items, such as corporate investment gains and losses, certain derivative gains and losses, certain insurance-related gains and losses, certain litigation and environmental expenses, corporate restructuring charges and certain under- or over-absorbed costs (e.g. pension, stock-based compensation) that the Company determines not to allocate directly to its business segments. Additionally, Corporate and Unallocated operating income includes special items such as significant litigation-related charges/benefits, gain/loss on sale of businesses, and divestiture-related restructuring costs. Corporate and Unallocated also includes sales, costs, and income from contract manufacturing, transition services and other arrangements with the acquirer of the Communication Markets Division following its 2018 divestiture through 2019 and the acquirer of the former drug delivery business following its 2020 divestiture. Because this category includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis.
Corporate and Unallocated net operating loss decreased by
Special Items
Refer to the Certain amounts adjusted for special items - (non-GAAP measures)
section and Note 5 for additional details on the impact of significant
litigation-related charges/benefits, gain/loss on sale of businesses, and
divestiture-related restructuring actions that are reflected in Corporate and
Unallocated.
Other Corporate Expense - Net
Other corporate operating expenses increased in 2020. The increases were due to
year-over-year increased net costs as a result of the regular review of 3M's
respirator mask liabilities, lower year-on-year gains from certain property
sales reflected in Corporate and Unallocated, in addition to transition service
and other arrangement costs, net of income, post-divestiture of the Company's
former drug delivery business in 2020, and increased legal expenses. These
increases were partially offset by lower year-on-year non divestiture-related
restructuring costs reflected in Corporate and Unallocated.
34
Table of Contents
Operating Business Segments:
Information related to 3M's business segments is presented in the tables that follow. Organic local-currency sales include both organic volume impacts plus selling price impacts. Acquisition impacts, if any, are measured separately for the first twelve months post-transaction. The divestiture impacts, if any, foreign currency translation impacts and total sales change are also provided for each business segment. Any references to EMEA relate toEurope ,Middle East andAfrica on a combined basis. The following discusses total year results for 2020 compared to 2019 and 2019 compared to 2018, for each business segment. Refer to the preceding "Sales and operating income by geographic area" section for organic local-currency sales growth by business segment within major geographic areas.
Safety and Industrial Business (36.6% of consolidated sales):
2020 2019
Sales (millions) $ 11,767 $ 11,514
Sales change analysis:
Organic local-currency 3.5 % (3.4) %
Divestitures (0.6) (1.7)
Translation (0.7) (2.1)
Total sales change 2.2 % (7.2) %
Business segment operating income (millions) $ 3,054 $ 2,510
Percent change 21.7 % (12.2) %
Percent of sales 26.0 % 21.8 %
Year 2020 results:
Sales in Safety and Industrial totaled $11.8 billion , an increase of 2.2 percent
compared to the same period last year. Organic local-currency sales increased
3.5 percent, divestitures decreased sales by 0.6 percent, and foreign currency
translation decreased sales by 0.7 percent.
On an organic local-currency sales basis:
Sales increased in personal safety and roofing granules, while industrial
? adhesives and tapes, electrical markets, closure and masking systems,
automotive aftermarket, and abrasives sales declined year-on-year.
Strong growth related to unprecedented demand for respirators as a result of
? the COVID-19 pandemic was partially offset by softness that impacted sales
growth across most of the Company's general industrial-related portfolio.
Divestitures:
2018 divestitures that impacted 2019 results relate to the sale of certain
? personal safety product offerings primarily focused on noise, environmental,
and heat stress monitoring (first quarter 2018), and it's abrasives glass
products business (second quarter of 2018).
? Also in 2018, 3M completed the sale of substantially all of its Communication
Markets Division.
? In
Business segment operating income:
Business segment operating income margins increased 4.2 percentage points,
? primarily related to strong productivity, continued cost discipline and
benefits from certain property sale, 2019 restructuring and other actions.
35
Table of Contents
Year 2019 results:
Sales in Safety and Industrial totaled $11.5 billion , down 7.2 percent in U.S.
dollars, compared to full year 2018. Organic local-currency sales decreased 3.4
percent, divestitures decreased sales by 1.7 percent, and foreign currency
translation decreased sales by 2.1 percent.
On an organic local-currency sales basis:
Sales increased in roofing granules and personal safety, while electrical
? markets, industrial adhesives and tapes, abrasives, automotive aftermarket, and
closure and masking systems declined year-on-year. Divestitures:
In
? offerings primarily focused on noise, environmental, and heat stress
monitoring.
? In
? In 2018, 3M completed the sale of substantially all of its Communication
Markets Division.
? In
Business segment operating income:
Operating income margins decreased 1.2 percentage points, primarily related to
? sales declines, particularly in
inventory reductions and restructuring impacts.
Transportation and Electronics Business (27.4% of consolidated sales):
2020 2019
Sales (millions) $ 8,827 $ 9,591
Sales change analysis:
Organic local-currency (7.1) % (3.6) %
Divestitures (1.1) -
Translation 0.2 (1.5)
Total sales change (8.0) % (5.1) %
Business segment operating income (millions) $ 1,927 $ 2,221
Percent change (13.3) % (16.0) %
Percent of sales 21.8 % 23.2 %
Year 2020 results:
Sales in Transportation and Electronics totaled $8.8 billion , down 8.0 percent
in U.S. dollars. Organic local-currency sales decreased 7.1 percent,
divestitures decreased sales by 1.1 percent, and foreign currency translation
increased sales by 0.2 percent.
On an organic local-currency sales basis:
Sales declined in transportation safety, advanced materials, commercial
solutions, and automotive and aerospace. Automotive and aerospace was primarily
? impacted by the decline in global car and light truck builds. Commercial
solutions and transportation safety were impacted by soft-end markets such as
hospitality, advertising and highway infrastructure due to social distancing
and work-from-home protocols as a result of COVID-19.
Sales increased in 3M's electronics-related businesses. Electronics-related
? growth was led by demand for semiconductor, data center, and factory automation
end-markets, and was partially offset by softness in the consumer electronics
end-market. Divestitures:
? In
business. Refer to Note 3 for details.
36
Table of Contents
Business segment operating income:
Business segment operating income margins decreased 1.4 percentage points,
? primarily related to lower sales and reduced productivity in key end-markets
due to COVID-19 related impacts, partially offset by continued cost discipline
and benefits from last year's restructuring actions. Year 2019 results: Sales in Transportation and Electronics totaled$9.6 billion , down 5.1 percent inU.S. dollars. Organic local-currency sales decreased 3.6 percent, and foreign currency translation decreased sales by 1.5 percent.
On an organic local-currency sales basis:
? Sales increased in advanced materials and transportation safety, while
commercial solutions and automotive and aerospace solutions declined.
Automotive and aerospace was impacted by the decline in global car and light
? truck builds along with channel inventory reductions within its Automotive OEM
business, particularly inChina . Sales decreased 6 percent in 3M's electronics-related businesses, with
decreases in both display materials and systems and electronics materials
? solutions. Electronics-related growth was impacted by soft consumer electronics
and factory automation end markets in addition to channel inventory
adjustments.
? Sales decreased 4 percent in
concentrated.
Business segment operating income:
Operating income margins decreased 3.0 percentage points, primarily impacted by
? continued sales declines, particularly in
to inventory reductions. Operating income margins were also impacted by the
restructuring charges initiated in 2019.
Health Care Business (25.9% of consolidated sales):
2020 2019
Sales (millions) $ 8,345 $ 7,431
Sales change analysis:
Organic local-currency 1.0 % 1.5 %
Acquisitions 15.5 9.4
Divestitures (4.1) -
Translation (0.1) (2.0)
Total sales change 12.3 % 8.9 %
Business segment operating income (millions) $ 1,828 $ 1,858
Percent change (1.6) % (3.1) %
Percent of sales 21.9 % 25.0 %
Year 2020 results:
Sales in Health Care totaled
On an organic local-currency sales basis:
? Sales increased in medical solutions, separation and purification sciences, and
food safety, while sales decreased in health information systems and oral care.
Increases in healthcare volumes benefited both medical solutions and oral care
after significant disruptions in the second quarter, with strong
? pandemic-related demand for disposable respirators resulting in increased sales
for medical solutions, while oral care sales decreased year-on-year. In
addition, health information systems decreased due to hospitals remaining
cautious relative to their information technology investments.
37
Table of Contents
Acquisitions:
In
? of cloud-based, conversational artificial intelligence-powered systems that
help physicians efficiently capture and improve the patient narrative.
In
? subsidiaries, a leading global medical technology company focused on advanced
wound care and specialty surgical applications. Divestitures:
? In the first quarter of 2019, the Company sold certain oral care technology
comprising a business.
? In
business.
Business segment operating income:
Operating income margins decreased 3.1 percentage points year-on-year, driven
? by impacts related to the Acelity acquisition in addition to significant sales
declines in oral care during the second quarter of 2020, partially offset by
continued cost discipline and benefits from 2019 restructuring and other costs.
Year 2019 results:
Sales in Health Care totaled
On an organic local-currency sales basis:
Sales increased in health information systems, food safety, and medical
? solutions, while separation and purification sciences decreased, and oral care
was flat.
? Drug delivery declined year-on-year, as continued softness in the business
negatively impacted overall Health Care organic growth. Acquisitions:
In
? of cloud-based, conversational artificial intelligence-powered systems that
help physicians efficiently capture and improve the patient narrative.
In
? subsidiaries, a leading global medical technology company focused on advanced
wound care and specialty surgical applications. Divestitures:
? In the first quarter of 2018, 3M completed the sale of its polymer additives
compounding business.
? In the first quarter of 2019, the Company sold certain oral care technology
comprising a business.
Business segment operating income:
? Operating income margins decreased 3.1 percentage points year-on-year.
38
Table of Contents
Consumer Business (16.6% of consolidated sales):
2020 2019
Sales (millions) $ 5,336 $ 5,151
Sales change analysis:
Organic local-currency 4.1 % 1.7 %
Translation (0.5) (1.2)
Total sales change 3.6 % 0.5 %
Business segment operating income (millions) $ 1,249 $ 1,124
Percent change 11.2 % 3.7 %
Percent of sales 23.4 % 21.8 %
Year 2020 results:
Sales in Consumer totaled
On an organic local-currency sales basis:
? Sales grew in home improvement and home care, while consumer health care and
stationery and office declined.
? Stationery and office declined year-on-year as a result of many business
offices and schools remaining partially or fully closed due to the pandemic.
? Sales showed continued strength in the Company's CommandTM, FiltreteTM, Scotch
BlueTM, Scotch BriteTM, and MeguiarsTM brands.
Business segment operating income:
? Operating income margins increased 1.6 percentage points year-on-year as a
result of strong organic sales growth and continued cost discipline.
Year 2019 results:
Sales in Consumer totaled
On an organic local-currency sales basis:
? Sales grew in home improvement, while home care and stationery and office were
flat. Consumer health care decreased year on year.
Geographically, the
? and CommandTM brands, while
for respiratory solutions.
Business segment operating income:
Operating income margins increased 0.7 percentage points year-on-year.
? Increases in operating income margins were primarily due to benefits from
portfolio and footprint actions taken, partially offset by the restructuring
charges initiated in 2019.
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.
39
Table of Contents
Refer to the "Overview" section for a summary of net sales by geographic area and business segment.
Geographic Area Supplemental Information
Property, Plant and
Equipment - net
Employees as of December 31, Capital Spending as of December 31,(Millions, except Employees) 2020 2019 2018
2020 2019 2018 2020 2019
Americas 56,042 56,027 53,661 $ 943 $ 1,218 $ 1,044 $ 5,752 $ 5,873
Asia Pacific 18,271 18,724 18,971
235 241 238 1,662 1,637
20,674 21,412 20,884 323 240 295 2,007 1,823
Total Company 94,987 96,163 93,516 $ 1,501 $ 1,699 $ 1,577 $ 9,421 $ 9,333
Employment:
Employment decreased by approximately 1,200 positions in 2020 and increased by approximately 2,600 positions in 2019. The above table includes the impact of acquisitions (which involved approximately 5,500 positions in 2019), 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. In 2020, 63 percent of 3M's capital spending was within theAmericas , followed byEurope ,Middle East andAfrica , andAsia Pacific . 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 of the consolidated financial statements. As stated in Note 1, the preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The Company believes its most critical accounting estimates relate to legal proceedings, pension and postretirement obligations, goodwill and certain long-lived assets, and uncertainty in income tax positions. 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 and can rely heavily on estimates and assumptions. The Company accrues an estimated liability for legal proceeding claims that are both probable and 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 makes certain estimates and judgements in relation to its defined benefit pension and postretirement obligations.
The benefit 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 40 Table of Contents
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 in the actuarial
gains and losses recorded in other comprehensive income.
Using this methodology, the Company determined discount rates for its plans as
follow:
International
U.S. Pension U.S.
Qualified (weighted Postretirement
Pension average) Medical
December 31, 2020 Liability:
Benefit obligation 2.55 % 1.38 % 2.35 %
2021 Net Periodic Benefit Cost Components:
Service cost 2.84 % 1.23 % 2.71 %
Interest cost 1.93 % 1.13 % 1.68 %
Another significant element in determining the Company's pension expense is the 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 2021 is 6.50%, a decrease from 6.75% in 2020. 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 4.36% for 2021 compared to 4.70% for 2020. Refer to Note 13 for information on how the 2020 rates were determined. 3M follows ASC 820, Fair Value Measurements and Disclosures in determining the fair value of plan assets within the Company's pension and postretirement benefit plans. While the Company believes the valuation methods used to determine the fair value of plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. See Note 13 for additional discussion of actuarial assumptions used in determining defined benefit pension and postretirement health care liabilities and expenses. For the year endedDecember 31, 2020 , the Company recognized consolidated defined benefit pre-tax pension and postretirement service cost expense of$456 million and a benefit of$50 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$406 million , up from$357 million in 2019. In 2021, defined benefit pension and postretirement service cost expense is anticipated to total approximately$497 million while non-service pension and postretirement net benefit costs is anticipated to be a benefit of approximately$130 million , for a total consolidated defined benefit pre-tax pension and postretirement expense of$367 million , a decrease of approximately$40 million compared to 2020.
The table below summarizes the impact on 2021 pension expense for theU.S. and international pension plans of a 0.25 percentage point increase/decrease in the expected long-term rate of return on plan assets and discount rate assumptions used to measure plan liabilities and 2020 net periodic benefit cost. The table assumes all other factors are held constant, including the slope of the discount rate yield curves. Increase (Decrease)
in Net Periodic Benefit Cost
Discount Rate Expected Return on Assets
(Millions) -0.25% +0.25% -0.25% +0.25%
U.S. pension plans $ 34 $ (34) $ 39 $ (39)
International pension plans 27 (28) 21 (17)
41
Table of Contents
The Company makes certain estimates and judgments in relation to goodwill and certain long-lived assets. Those include considerations made in the valuation of certain acquired identifiable definite-lived and indefinite-lived assets as a result of business combinations as well as considerations in the recoverability and impairment assessments of long-lived assets and goodwill.
Acquisition of certain identifiable definite-lived and indefinite-lived assets
In conjunction with an acquisition of a business, the Company records identifiable definite-lived and indefinite-lived intangible assets acquired at their respective fair values as of the date of acquisition. The corresponding fair value estimates for these assets acquired include projected future cash flows, associated discount rates used to calculate present value, asset life cycles, royalty rates, and customer retention rates. The fair value calculated for indefinite-lived intangible assets such as certain tradenames, in addition to intangible assets that are definite-lived such as patents, customer relationships, tradenames and other technology-based assets may change during the finalization of the purchase price allocation, due to the significant estimates used in determining their fair value. As a result, the Company may make adjustments to the provisional amounts recorded for certain items as part of the purchase price allocation subsequent to the acquisition, not to exceed one year after the acquisition date, until the purchase accounting allocation is finalized.
Assessments of long-lived assets and goodwill
As ofDecember 31, 2020 , net property, plant and equipment totaled$9.4 billion and net identifiable intangible assets totaled$5.8 billion , of which$0.7 billion related to indefinite-lived tradenames. In addition, 3M goodwill totaled approximately$13.8 billion as ofDecember 31, 2020 . Long-lived assets with a definite life are tested for impairment whenever events or 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 cash flows from the asset's or asset group's ongoing use and eventual disposition. If an impairment is identified, the amount of the impairment loss recorded is calculated by the excess of the asset's carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. Intangible assets with an indefinite life, namely certain tradenames, are not amortized. Indefinite-lived intangible assets are tested for impairment annually and are tested for impairment between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired. An impairment loss would be recognized when the fair value is less than the carrying value of the indefinite-lived intangible asset.Goodwill is tested for impairment annually in the fourth quarter of each year, as further discussed below, 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 long-lived assets or goodwill would be impaired. Management makes estimates and assumptions in preparing the consolidated financial statements for which actual results will emerge over long periods of time. This includes the recoverability of long-lived assets employed in the business, including assets of acquired businesses. These estimates and assumptions are closely monitored by management and periodically adjusted as circumstances warrant. For instance, expected asset lives may be shortened or an impairment recorded based on a change in the expected use of the asset or performance of the related asset group. Factors which could result in future impairment charges include, among others, changes in worldwide economic conditions, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These risk factors are discussed in Item 1A, "Risk Factors," of this document. In addition, changes in the weighted average cost of capital could also impact impairment testing results. As ofDecember 31, 2020 , the$0.7 billion of indefinite-lived tradenames primarily relates to Capital Safety (acquired in 2015), whose tradenames ($520 million at acquisition date) have been in existence for over 60 years (refer to Note 4 for more detail). The primary valuation technique used in estimating the fair value of indefinite lived intangible assets (tradenames) is a discounted cash flow approach. Specifically, a relief of royalty rate is applied to estimated sales, with the resulting amounts then discounted using an appropriate market/technology discount rate. The relief of royalty rate is the estimated royalty rate a market participant would pay to acquire the right to market/produce the product. In the first quarter of 2020, 3M reflected an immaterial charge related to impairment of certain indefinite-lived assets in 2020. Based on annual impairment testing in the third quarter of 2020, no additional impairment was indicated. 3M goodwill totaled approximately$13.8 billion as ofDecember 31, 2020 . 3M's annual goodwill impairment testing is performed in the fourth quarter of each year. 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
42
Table of Contents
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 using earnings for the reporting unit
multiplied by a price/earnings ratio for comparable industry groups, or by using
a discounted cash flow analysis. 3M typically uses the price/earnings ratio
approach for stable and growing businesses that have a long history and track
record of generating positive operating income and cash flows. 3M uses the
discounted cash flow approach for start-up, loss position and declining
businesses, in addition to using for businesses where the price/earnings ratio
valuation method indicates additional review is warranted. 3M also uses
discounted cash flow as an additional tool for businesses that may be growing at
a slower rate than planned due to economic or other conditions. Where
applicable, 3M uses a weighted-average discounted cash flow analysis for certain
divisions, using projected cash flows that were weighted based on different
sales growth and terminal value assumptions, among other factors. The weighting
was based on management's estimates of the likelihood of each scenario
occurring.
As described in Note 19, effective in the first quarter of 2020, the Company
changed its business segment reporting. For any product changes that resulted in
reporting unit changes, the Company applied the relative fair value method to
determine the impact on goodwill of the associated reporting units, the results
of which were immaterial. In conjunction with the change in segment reporting,
3M completed an assessment indicating no goodwill impairment existed as a result
of this new segment structure. The discussion that follows relates to the
separate fourth quarter 2020 annual impairment test and is in the context of the
reporting unit structure that existed at that time.
Based on the annual test in the fourth quarter of 2020, no goodwill impairment
was indicated for any of the reporting units. As of October 1, 2020 , 3M had 22
primary reporting units, with ten reporting units accounting for approximately
93 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 Solutions, 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 that have no goodwill associated with them.
3M will continue to monitor its reporting units and asset groups in 2021 for any triggering events or other indicators of impairment.
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.
43
Table of Contents
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, provides financial flexibility and enables the Company to invest through business cycles. 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. Organic investments will be supplemented by complementary acquisitions. The Company also continues to actively manage its portfolio to maximize value for shareholders. Given uncertainty arising from COVID-19, the Company suspended repurchases under its board-approved share repurchase program effectiveMarch 2020 with other repurchase activity limited to 3M's stock compensation plans. 3M will continue to return cash to shareholders through dividends and plans to resume share repurchases in 2021. 3M maintains strong liquidity and further added to its liquidity position through the issuance of$1.75 billion in registered notes inMarch 2020 . 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'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. AtDecember 31, 2020 , there was no commercial paper
issued and outstanding. 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. 3M currently has an A1 credit rating with a negative outlook from Moody's Investors Service and an A+ credit rating with negative outlook from Standard and Poor's. The Company's total debt was$1.5 billion lower atDecember 31, 2020 when compared toDecember 31, 2019 . Decreases in debt are further described in Note 12 and include the repayment of aggregate$445 million principal amount of Third Lien Notes subject to in-substance defeasance,650 million euros and$500 million aggregate principal amount of floating-rate medium-term notes that matured, theDecember 2020 repayment of$1 billion aggregate principal amount of notes related to make-whole-call offers, lower commercial paper balance, and the repayment of the80 billion Japanese yen and150 million euro credit facilities. These decreases were partially offset by theMarch 2020 issuance of$1.75 billion of registered notes. 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 . The Company has reviewed its debt securities, bank facilities, and derivative instruments and continues to evaluate commercial contracts that may utilize LIBOR as the reference rate. 3M will continue its assessment and monitor regulatory developments during the transition period. 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, 2020 , 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). Additionally, theAugust 2019 andMarch 2020 debt was issued under the WKSI shelf registration, but not as part of the medium-term notes program (Series F). Information with respect to long-term debt issuances and maturities for the periods presented is included in Note 12. 44
Table of Contents
The Company has a$3.0 billion five-year revolving credit facility expiring inNovember 2024 . The revolving credit agreement includes a provision under which 3M may request an increase of up to$1.0 billion (at lender's discretion), bringing the total facility up to$4.0 billion . In addition, 3M entered into a$1.25 billion 364-day credit facility, which was renewed inNovember 2020 with an expiration date ofNovember 2021 . The 364-day credit agreement includes a provision under which 3M may convert any advances outstanding on the maturity date into term loans with a maturity date one year later. These credit facilities were undrawn atDecember 31, 2020 . Under both the$3.0 billion and$1.25 billion credit agreements, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at not less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the four consecutive quarters then ended to total interest expense on all funded debt for the same period. AtDecember 31, 2020 , this ratio was approximately 17 to 1. Debt covenants do not restrict the payment of dividends. Apart from the committed credit facilities described above, inSeptember 2019 , 3M entered into a credit facility initially expiring inJuly 2020 that was further extended toAugust 2021 in the amount of80 billion Japanese yen . InNovember 2019 , 3M entered into a credit facility expiring inNovember 2020 in the amount of150 million euros . During the third quarter of 2020, the Company paid the outstanding balances and closed these credit facilities. The Company also had$273 million in stand-alone letters of credit and bank guarantees issued and outstanding atDecember 31, 2020 . These instruments are utilized in connection with normal business activities.
Cash,
AtDecember 31, 2020 , 3M had$5.1 billion of cash, cash equivalents and marketable securities, of which approximately$2.8 billion was held by the Company's foreign subsidiaries and approximately$2.3 billion was held bythe United States . These balances are invested in bank instruments and other high-quality fixed income securities. AtDecember 31, 2019 , 3M had$2.5 billion of cash, cash equivalents and marketable securities, of which approximately$2.4 billion was held by the Company's foreign subsidiaries and approximately$100 million was held bythe United States . The increase fromDecember 31, 2019 primarily resulted from strong cash flow from operations, reduced capital expenditures, and lower share repurchases.
Net Debt (non-GAAP measure):
Net debt is not defined underU.S. GAAP and may not be computed the same as similarly titled measures used by other companies. The Company defines net debt as total debt less the total of cash, cash equivalents and current and long-term marketable securities. 3M believes net debt is meaningful to investors as 3M considers net debt and its components to be important indicators of liquidity and financial position. The following table provides net debt as ofDecember 31, 2020 and 2019. December 31, 2020 versus (Millions) 2020 2019 2019 Total debt$ 18,795 $ 20,313 $ (1,518) Less: Cash, cash equivalents and marketable securities 5,068 2,494
2,574
Net debt (non-GAAP measure)$ 13,727 $ 17,819
$ (4,092)
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.
45
Table of Contents
Working Capital (non-GAAP measure):
December 31, 2020 versus
(Millions) 2020 2019 2019
Current assets $ 14,982 $ 12,971 $ 2,011
Less: Current liabilities 7,948 9,222 (1,274)
Working capital (non-GAAP measure)
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 increased$3.3 billion compared withDecember 31, 2019 . Balance changes in current assets increased working capital by$2.0 billion , driven by increases in cash and cash equivalents and inventory, partially offset by decreases in accounts receivable. Balance changes in current liabilities increased working capital by$1.3 billion , primarily due to decreases in short-term borrowing and the current portion of long-term debt. Accounts receivable decreased$86 million fromDecember 31, 2019 , primarily due to ongoing collection management and increased expected credit losses on customer receivables related to COVID-19 uncertainty. Inventory increased$105 million fromDecember 31, 2019 primarily as a result of foreign currency impacts. These increases were partially offset by inventory decreases as a result of the divestiture of the drug delivery business.
Return on
Return onInvested Capital (ROIC) is not defined underU.S. generally accepted accounting principles. Therefore, ROIC should not be considered a substitute for other measures prepared in accordance withU.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines ROIC as adjusted net income (net income including non-controlling interest plus after-tax interest expense) divided by average invested capital (equity plus debt). The Company believes ROIC is meaningful to investors as it focuses on shareholder value creation. The calculation is provided in the below table.
46
Table of Contents
In 2020, ROIC of 18.2 percent was higher than 2019. The increase was driven by the lower year-over-year impact of significant litigation-related charges in addition to the non-repeating charge from the 2019 deconsolidation of the Company'sVenezuela subsidiary. 2019 ROIC was also negatively impacted by the increase in cash and cash equivalents in anticipation of the funding of the
acquisition of Acelity. Years endedDecember 31 (Millions) 2020 2019 Return onInvested Capital (non-GAAP measure) Net income including non-controlling interest$ 5,388 $
4,582
Interest expense (after-tax) (1) 425
359
Adjusted net income (Return)$ 5,813
Average shareholders' equity (including non-controlling interest) (2)$ 11,500 $
10,198
Average short-term and long-term debt (3) 20,413
17,982
Average invested capital$ 31,913 $
28,180
Return on invested capital (non-GAAP measure) 18.2 %
17.5 %
(1) Effective income tax rate used for interest expense 19.6 %
19.8 %
(2) Calculation of average equity (includes non-controlling interest) Ending total equity as of: March 31$ 10,209 $ 9,757 June 30 10,915 10,142 September 30 11,943 10,764 December 31 12,931 10,126 Average total equity$ 11,500 $ 10,198 (3) Calculation of average debt Ending short-term and long-term debt as of: March 31$ 22,495 $ 16,370 June 30 20,762 15,806 September 30 19,598 19,439 December 31 18,795 20,313
Average short-term and long-term debt$ 20,413 $
17,982 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.
47
Table of Contents
Cash Flows from Operating Activities:
Years EndedDecember 31 (Millions) 2020 2019
Net income including noncontrolling interest
1,911 1,593
Company pension and postretirement contributions (156) (210) Company pension and postretirement expense
406 357
Stock-based compensation expense 262 278
Gain on sale of businesses (389) (111)
Income taxes (deferred and accrued income taxes) (33) (68) Loss on deconsolidation of Venezuelan subsidiary
- 162
Accounts receivable 165 345
Inventories (91) 370
Accounts payable 252 (117)
Other - net 398 (111)
Net cash provided by operating activities $ 8,113 $ 7,070
Cash flows from operating activities can fluctuate significantly from period to
period, as pension funding decisions, tax timing differences and other items can
significantly impact cash flows.
In 2020, cash flows provided by operating activities increased $1.0 billion
compared to the same period last year, with this increase primarily due to cost
saving actions taken in response to COVID-19 and lower year-on-year significant
litigation-related charges and the timing of associated payments. The
combination of accounts receivable, inventories and accounts payable improved
operating cash flow by $326 million in 2020, compared to an operating cash flow
improvement of $598 million in 2019. Additional discussion on working capital
changes is provided earlier in the "Financial Condition and Liquidity" section.
Cash Flows from Investing Activities:
Years endedDecember 31 (Millions) 2020 2019
Purchases of property, plant and equipment (PP&E)
(1,699)
Proceeds from sale of PP&E and other assets 128
123
Acquisitions, net of cash acquired (25)
(4,984)
Purchases and proceeds from maturities and sale of marketable securities and investments, net
232 (192)
Proceeds from sale of businesses, net of cash sold 576
236
Other - net 10
72
Net cash provided by (used in) investing activities
(6,444)
Investments in property, plant and equipment enable growth across many diverse
markets, helping to meet product demand and increasing manufacturing efficiency.
In 2020, 3M reduced overall spending in light of uncertainty regarding COVID-19,
but continued to invest in expanding the Company's ability to increase
production of respiratory products to meet worldwide demand. The Company expects
2021 capital spending to be approximately $1.8 billion to $2.0 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.
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.
48
Table of Contents
Refer to Note 3 for information on acquisitions and divestitures. The Company is
actively considering additional acquisitions, investments and strategic
alliances, and from time to time may also divest certain businesses.
Acquisitions, net of cash acquired, in 2020 primarily relate to the payment made
for contingent consideration in regards to the Acelity acquisition. Proceeds
from sale of businesses in 2020 primarily relate to the sales of the Company's
advanced ballistic-protection business and its drug delivery business.
Acquisitions, net of cash acquired, in 2019 primarily include the purchase of
M*Modal and Acelity Inc. Proceeds from sale of businesses in 2019 primarily
relate to the sale of certain oral care technology comprising a business and the
gas and flame detection business.
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. In 2020 these included the maturity
of the held-to-maturity debt security that was purchased to satisfy the
redemption of the Third Lien Notes (which matured in May 2020 ). 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:
Years endedDecember 31 (Millions) 2020 2019
Change in short-term debt - net$ (143) $
(316)
Repayment of debt (maturities greater than 90 days) (3,482)
(2,716)
Proceeds from debt (maturities greater than 90 days) 1,750 6,281 Total cash change in debt$ (1,875) $ 3,249 Purchases of treasury stock (368) (1,407)
Proceeds from issuances of treasury stock pursuant to stock option and benefit plans
429 547
Dividends paid to stockholders (3,388)
(3,316)
Other - net (98)
(197)
Net cash used in financing activities$ (5,300) $
(1,124)
2020 Debt Activity:
Total debt was approximately $18.8 billion at December 31, 2020 and $20.3
billion at December 31, 2019 . Repayment of debt primarily consists of the
aggregate $445 million principal amount of Third Lien Notes and the 650 million
euros and $500 million aggregate principal amount of floating-rate medium-term
notes that matured in May 2020 and August 2020 , respectively. During the third
quarter of 2020, the Company paid the outstanding balances on their Japanese yen
and euro credit facilities. In addition, $1.0 billion aggregate principal amount
of notes maturing in September 2021 were repaid in December 2020 via
make-whole-call offers. Increases in debt were related to the March 2020
issuance of $1.75 billion in registered notes. There was no outstanding
commercial paper at December 31, 2020 , as compared to $150 million at
December 31, 2019 . 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 and U.S. commercial paper issuances. Refer to
Note 12 for more detail regarding debt.
2019 Debt Activity:
Total debt was approximately$5.7 billion higher atDecember 31, 2019 when compared toDecember 31, 2018 . Increases in debt related to the first quarter and third quarter 2019 issuances of$2.25 billion of medium-term notes and$3.25 billion of other registered notes, respectively,69 billion Japanese yen (approximately$632 million atDecember 31, 2019 exchange rates) outstanding from the80 billion Japanese yen credit facility established inSeptember 2019 ,150 million euros (approximately$168 million atDecember 31, 2019 exchange rates) outstanding credit facility established inNovember 2019 , and$0.5 billion of debt assumed and not yet repaid as a result of the Company's acquisition ofAcelity Inc. Repayment of debt primarily consists of theJune 2019 repayment of$625 million aggregate principal amount of fixed-rate medium-term notes that had matured, in addition to debt assumed and subsequently repaid as a result of the Company's acquisitions of M*Modal andAcelity Inc. as discussed in Note 3. Outstanding commercial paper decreased$285 million fromDecember 31, 2018 toDecember 31, 2019 . Refer to Note 12 for more detail regarding debt. 49 Table of Contents
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. 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 2020, the Company purchased$0.4 billion of its own stock, compared to purchases of$1.4 billion in 2019. As ofDecember 31, 2020 , approximately$7.8 billion remained available under the authorization. In the first quarter of 2020, the Company suspended repurchases under its board-approved share repurchase program with other repurchase activity limited to 3M's stock compensation plans. The Company plans to resume share purchases in 2021. 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.
Dividends Paid to Shareholders:
Cash dividends paid to shareholders totaled$3.388 billion ($5.88 per share) in 2020,$3.316 billion ($5.76 per share) in 2019, and$3.193 billion ($5.44 per share) in 2018. 3M has paid dividends since 1916. InFebruary 2021 , 3M's Board of Directors declared a first-quarter 2021 dividend of$1.48 per share, an increase of 1 percent. This is equivalent to an annual dividend of$5.92 per share and marked the 63rd consecutive year of dividend increases. 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 cash 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. The first quarter of each year is typically 3M's seasonal low for free cash flow and free cash flow conversion. 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. 50 Table of Contents
Free cash flow conversion grew to 123% in 2020 compared to 118% in 2019 as increases in free cash flow out-paced increases in net income attributable to 3M.
Years endedDecember 31 (Millions) 2020 2019 Major GAAP Cash Flow Categories Net cash provided by (used in) operating activities$ 8,113 $ 7,070 Net cash provided by (used in) investing activities (580) (6,444) Net cash provided by (used in) financing activities (5,300) (1,124) Free Cash Flow (non-GAAP measure) Net cash provided by (used in) operating activities$ 8,113 $ 7,070 Purchases of property, plant and equipment (1,501)
(1,699)
Free cash flow$ 6,612 $
5,371
Net income attributable to 3M$ 5,384 $ 4,570 Free cash flow conversion 123 % 118 %
Off-Balance Sheet Arrangements and Contractual Obligations:
As ofDecember 31, 2020 , the Company has not utilized special purpose entities to facilitate off-balance sheet financing arrangements. Refer to the section entitled "Warranties/Guarantees" in Note 16 for discussion of accrued product warranty liabilities and guarantees. In addition to guarantees, 3M, in the normal course of business, periodically enters into agreements that require the Company to indemnify either major customers or suppliers for specific risks, such as claims for injury or property damage arising out of the use of 3M products or the negligence of 3M personnel, or claims alleging that 3M products infringe third-party patents or other intellectual property. While 3M's maximum exposure under these indemnification provisions cannot be estimated, these indemnifications are not expected to have a material impact on the Company's consolidated results of operations or financial condition. Contractual Obligations
A summary of the Company's significant contractual obligations as of
Payments due by year
After
(Millions) Total 2021 2022 2023 2024 2025 2025
Total debt (Note 12) $ 18,795 $ 806 $ 1,659 $ 1,878 $ 1,100 $ 1,790 $ 11,562 Interest on long-term debt 6,540 501 475 449 416 389 4,310 Operating leases (Note 17) 930 273 201 141 93 60 162 Finance leases (Note 17) 123 20 18 18 16 10 41 Tax Cuts and Jobs Act (TCJA) transition tax (Note 10) 653 69 69
129 172 214 - Unconditional purchase obligations and other 1,735 1,027 330 218 97 48 15 Total contractual cash obligations$ 28,776 $ 2,696 $ 2,752 $ 2,833 $ 1,894 $ 2,511 $ 16,090
As a result of put provisions associated with certain debt instruments,
long-term debt payments due in 2021 include floating rate notes totaling
In conjunction with the 2017 Tax Cuts and Jobs Act (TCJA), the Company has a transition tax liability that is payable over 8 years beginning in 2018. See Note 10 for additional details. Unconditional purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding on the Company. Included in the unconditional purchase obligations category above are certain obligations related to take or pay contracts, capital commitments, service agreements and utilities. These estimates include both unconditional purchase obligations
with
51
Table of Contents
terms in excess of one year and normal ongoing purchase obligations with terms
of less than one year. Many of these commitments relate to take or pay
contracts, in which 3M guarantees payment to ensure availability of products or
services that are sold to customers. The Company expects to receive
consideration (products or services) for these unconditional purchase
obligations. Contractual capital commitments are included in the preceding
table, but these commitments represent a small part of the Company's expected
capital spending. The purchase obligation amounts do not represent the entire
anticipated purchases in the future but represent only those items for which the
Company is contractually obligated. The majority of 3M's products and services
are purchased as needed, with no unconditional commitment. For this reason,
these amounts will not provide a reliable indicator of the Company's expected
future cash outflows on a stand-alone basis.
Other obligations, included in the preceding table within the caption entitled
"Unconditional purchase obligations and other" include the current portion of
the liability for uncertain tax positions under ASC 740, which is expected to be
paid out in cash in the next 12 months, when applicable. The Company is not able
to reasonably estimate the timing of the long-term payments, or the amount by
which the liability will increase or decrease over time; therefore, the
long-term portion of the total net tax liability of $933 million is excluded
from the preceding table. In addition, the transition tax prescribed under the
Tax Cuts and Jobs Act (TCJA) is separately included in the table above. Refer to
Note 10 for further details. Additionally, included within the caption entitled
"Unconditional purchase obligations and other" are operating lease commitments
that have not yet commenced, which as of December 31, 2020 , totaled
approximately $18 million . These commitments pertain to 3M's right of use
buildings.
As discussed in Note 13, the Company does not have a required minimum cash
pension contribution obligation for its U.S. plans in 2021 and Company
contributions to its U.S. and international pension plans are expected to be
largely discretionary in future years; therefore, amounts related to these plans
are not included in the preceding table.
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.
© Edgar Online, source
