3M Company — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. 3M is a diversified global manufacturer with four reportable segments: Safety and Industrial, Transportation and Electronics, Health Care, and Consumer. The filing is dated July 25, 2023.
Financial performance and liquidity
| Metric | Q2 2023 | Six months 2023 |
|---|---|---|
| Net sales | $8.325 billion; down 4.3% year over year | $16.356 billion; down 6.7% |
| Organic sales change | Down 2.2% | Down 3.6% |
| GAAP operating income (loss) | $(8.958) billion | $(7.717) billion |
| GAAP net income (loss) attributable to 3M | $(6.841) billion | $(5.865) billion |
| GAAP diluted EPS | $(12.35) | $(10.60) |
| Adjusted operating margin | 19.3% | 18.6% |
| Adjusted diluted EPS | $2.17 | $4.14 |
Adjusted figures are non-GAAP and exclude special items; they are not substitutes for GAAP results. The dominant special item was the proposed PFAS public-water-system settlement.
- Cash flow: First-half operating cash flow was $2.784 billion, versus $2.138 billion in 2022. Capital expenditures were $852 million; free cash flow was $1.932 billion, versus $1.330 billion. First-half 2023 free-cash-flow conversion was negative 33%, reflecting the GAAP net loss.
- Balance sheet at June 30: Cash and cash equivalents were $4.258 billion; cash, cash equivalents and marketable securities totaled $4.337 billion. Total debt was $15.987 billion and net debt was $11.650 billion. Working capital was $4.818 billion, down from $5.165 billion at year-end 2022.
- Borrowing and liquidity: Commercial paper outstanding was $1.8 billion, versus none at year-end. A $4.25 billion revolving credit facility was undrawn. 3M reported an approximately 17-to-1 EBITDA-to-interest ratio against a 3-to-1 covenant minimum. Moody’s rating was A2 with negative outlook; S&P’s was A- with CreditWatch negative.
- Shareholder returns: Dividends paid in the first half totaled $1.655 billion, or $3.00 per share. The quarterly dividend was $1.50 per share. Share repurchases were $29 million.
Changes versus the prior comparable period
- Sales declined in Q2 and the first half; first-half organic sales fell 3.6%. Asia Pacific was particularly weak, with sales down 12.8% in Q2 and 17.3% in the first half, including currency effects. Electronics softness, lower disposable-respirator demand, and weaker consumer and industrial markets weighed on results.
- GAAP results swung to large losses from prior-year profits, principally because of the $10.3 billion PFAS settlement charge recorded in Q2. The prior-year comparison also included a $1.2 billion charge related to Combat Arms Earplugs litigation.
- Adjusted diluted EPS decreased from $2.45 to $2.17 for Q2 and from $5.08 to $4.14 for the first half. Adjusted operating margin was 19.3% for Q2 and 18.6% for the first half, compared with 21.6% and 21.8%, respectively, a year earlier.
- Operating cash flow increased by $646 million in the first half, supported mainly by less adverse combined working-capital movements than in 2022. Dividends remained substantial; repurchases were much lower than the prior-year period.
Outlook, management commentary, risks and unusual items
- PFAS settlement: In June 2023, 3M entered a proposed settlement of U.S. public water-system claims for total payments of $10.5 billion to $12.5 billion, scheduled annually from 2024 through 2036. It recorded a $10.3 billion pre-tax charge, representing the estimated present value of expected payments. The settlement remains subject to court approval and opt-out conditions; 3M may terminate it if opt-outs exceed specified levels. The company had recorded $10.9 billion of other environmental liabilities at June 30 and could not estimate potential losses above accrued amounts.
- Other litigation: Aearo’s Chapter 11 case was dismissed in June; Aearo appealed, and the litigation stays were lifted. 3M reconsolidated Aearo in Q2. The company reported approximately 239,000 Combat Arms Earplugs claimants, including filed and administrative claims; it said no additional liability was recorded for that litigation beyond its approximately $1 billion funding commitment and related expenses because any further loss was not considered probable and reasonably estimable.
- Restructuring: The 2023–2025 program is expected to affect approximately 8,500 positions worldwide and incur $700 million to $900 million in pre-tax charges. Approximately 5,100 positions had been affected by actions approved through June 2023; first-half restructuring charges were $264 million.
- PFAS exit and operations: 3M plans to exit all PFAS manufacturing and work to discontinue PFAS use across its product portfolio by the end of 2025. Regulatory restrictions, remediation obligations, litigation, and operational limits at facilities—including the Zwijndrecht, Belgium site—could increase costs or disrupt supply.
- Health Care separation: 3M continued preparations to spin off Health Care, initially retaining a 19.9% ownership position. It targeted year-end 2023 or early 2024, subject to customary approvals, financing, tax and other conditions. A separate dental local anesthetic business sale was expected to close in Q3 2023.
- Management outlook: The filing provides no specific full-year earnings or sales guidance. It expected 2023 capital spending of $1.5 billion to $1.8 billion. Management cited lower volumes, inflation, manufacturing and supply-chain headwinds, and currency impacts, partly offset by pricing, productivity, spending discipline and restructuring benefits.
- Other risks: Results remain exposed to economic and geopolitical conditions, customer demand, raw-material and energy costs, foreign exchange, regulatory developments, litigation outcomes, credit-rating changes, and execution of restructuring and the Health Care spin-off. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the PFAS settlement receives preliminary and final court approval, how many eligible systems opt out, whether 3M exercises any termination right, and the timing and amount of payments.
- How the $10.9 billion environmental-liability balance and related cash payments evolve, including whether additional PFAS costs or recoveries become estimable.
- Developments in Combat Arms Earplugs litigation and Aearo’s appeal, including any settlement, judgments, or additional funding needs.
- Whether sales and adjusted margins stabilize, particularly in electronics, personal safety, China and consumer markets, and whether restructuring offsets lower volumes and inflation.
- Progress and conditions for the Health Care spin-off and PFAS exit, along with effects on debt, credit ratings, liquidity and the dividend.
- That adjusted results exclude significant special items; compare them with GAAP results and review the company’s non-GAAP reconciliations.