Business context and reporting period
3M Company’s Form 10-K covers the fiscal year ended December 31, 2022; the filing is annual, not a standalone fourth-quarter report. 3M is a diversified global manufacturer operating in Safety and Industrial, Transportation and Electronics, Health Care, and Consumer. It announced plans to spin off Health Care and completed the split-off of its Food Safety business during 2022.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Net sales | $34.229 billion | $35.355 billion |
| Organic sales change | +1.2% | +8.8% |
| Operating income / margin | $6.539 billion / 19.1% | $7.369 billion / 20.8% |
| Net income attributable to 3M | $5.777 billion | $5.921 billion |
| Diluted EPS | $10.18 | $10.12 |
| Cash from operations | $5.591 billion | $7.454 billion |
| Free cash flow (company-defined, non-GAAP) | $3.842 billion | $5.851 billion |
| Capital expenditures | $1.749 billion | $1.603 billion |
| Total debt / net debt | $15.939 billion / $12.023 billion | $17.363 billion / $12.571 billion |
| Cash, cash equivalents and marketable securities | $3.916 billion | $4.792 billion |
Reported results included substantial special items. On 3M’s non-GAAP adjusted basis, operating margin was 20.8% and diluted EPS was $10.10, versus 22.2% and $10.73 in 2021. The company’s adjusted measures exclude special items and are not substitutes for GAAP results. Working capital was $5.165 billion, down $1.203 billion year over year. 3M paid $3.369 billion in dividends and repurchased $1.464 billion of stock.
Segment results
Sales declined in each segment in reported dollars, with currency translation weighing on results. Organic sales increased 1.0% in Safety and Industrial, 1.2% in Transportation and Electronics, and 3.2% in Health Care; Consumer organic sales declined 0.9%. Reported segment operating income fell across all four segments. Safety and Industrial results included significant litigation costs; Transportation and Electronics included PFAS-exit impairment charges. Consumer demand was affected by discretionary-spending softness and retailer inventory reductions.
Material changes, unusual items and outlook
- Consolidated sales fell 3.2%; positive organic growth was more than offset by a 3.9% adverse foreign-currency impact and divestitures. Operating margin declined 1.7 percentage points, while operating cash flow fell $1.863 billion.
- 3M recorded a $2.724 billion pre-tax gain on the Food Safety split-off, completed in September 2022. The transaction generated $478 million of net cash proceeds and reduced shares outstanding through an exchange offer.
- In December, 3M committed to exit PFAS manufacturing and work to discontinue PFAS use across its product portfolio by the end of 2025. It recorded a fourth-quarter pre-tax impairment charge of $0.8 billion, including about $0.5 billion of long-lived asset impairments and $0.3 billion of goodwill impairment.
- 2022 net costs for significant litigation were approximately $2.3 billion pre-tax, including a $1.2 billion second-quarter charge associated with steps toward resolving Combat Arms Earplugs litigation and additional PFAS-related commitments. The company also recorded a $109 million Russia-exit charge.
- 3M’s Aearo subsidiaries entered voluntary Chapter 11 proceedings in July 2022. 3M committed $1.0 billion to a trust and another $0.2 billion for projected case expenses, with further funding possible. Outcomes, timing and ultimate costs remain uncertain.
- For PFAS matters, 3M recorded $592 million of other environmental liabilities at year-end; it added $659 million to the accrual during 2022 and made $479 million of related payments. Its agreement concerning the Zwijndrecht, Belgium site included a total commitment of €571 million, including previously announced commitments.
- Management expected 2023 capital spending of approximately $1.5–$1.8 billion and pension and postretirement contributions of approximately $100–$200 million. It expected related benefit expense to decrease by about $30 million pre-tax versus 2022. In February 2023, the board declared a $1.50-per-share quarterly dividend.
- Management expected to complete the planned Health Care spin-off by year-end 2023, subject to approvals and other conditions, and expected initially to retain 19.9% ownership. Completion and tax treatment are not assured.
Risks and contingencies
Key exposures include PFAS regulation, remediation and litigation; Combat Arms Earplugs and respirator/asbestos claims; the uncertainty of the Aearo bankruptcy proceedings; execution and potential tax consequences of the planned Health Care spin-off; inflation and supply-chain disruption; foreign-exchange movements; and demand weakness in some end markets. The filing describes thousands of PFAS-related suits, including approximately 3,350 AFFF lawsuits at year-end, and approximately 232,000 Combat Arms Earplugs claimants. For several proceedings, 3M stated it could not reasonably estimate a possible loss or range beyond recorded accruals, or could not estimate a loss at all.
3M reported Moody’s A1 rating with stable outlook and S&P’s A+ rating on CreditWatch negative at December 2022. It had no commercial paper outstanding at year-end and undrawn revolving credit facilities. The company reported effective internal control over financial reporting, with an unqualified auditor opinion.
Important facts for investors to verify
- Whether litigation developments, particularly the Aearo Chapter 11 case and PFAS proceedings, require additional accruals, funding or cash payments.
- Progress, costs and operational effects of the PFAS exit, including compliance and remediation developments at Zwijndrecht and other facilities.
- Execution, timing, financing and tax conditions for the Health Care spin-off, and the value and monetization timing of 3M’s anticipated retained interest.
- Underlying sales, pricing, margins and cash generation excluding currency effects and special items, and the comparability of 3M’s non-GAAP adjustments.
- Near-term debt maturities, liquidity needs, capital spending, and the sustainability of dividends and share repurchases amid legal and environmental commitments.