3M Company — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparisons are with the quarter and nine months ended September 30, 2022, unless noted. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $8.312 billion | $8.619 billion | $24.668 billion | $26.150 billion |
| Operating income (loss) | $(2.654) billion | $4.156 billion | $(10.371) billion | $5.907 billion |
| Net income (loss) attributable to 3M | $(2.075) billion | $3.859 billion | $(7.940) billion | $5.236 billion |
| Diluted EPS | $(3.74) | $6.77 | $(14.34) | $9.15 |
| Operating cash flow | — | $4.694 billion | $3.669 billion | |
| Capital expenditures | — | $1.257 billion | $1.243 billion | |
| Free cash flow (company-defined, non-GAAP) | — | $3.437 billion | $2.426 billion |
Q3 sales declined 3.6%; nine-month sales fell 5.7%. Nine-month organic sales decreased 3.6%. The company reported GAAP operating margins of (31.9)% for Q3 and (42.0)% for the first nine months, heavily distorted by litigation charges. Excluding special items, 3M reported adjusted diluted EPS of $2.68 for Q3, up from $2.60, and $6.82 for nine months, down from $7.69. These are company-defined non-GAAP measures.
Cash, debt, and liquidity at September 30: Cash and cash equivalents were $5.140 billion; cash, cash equivalents, and marketable securities totaled $5.236 billion. Total debt was $16.013 billion and net debt, as defined by 3M, was $10.777 billion. Current assets of $16.198 billion exceeded current liabilities of $15.466 billion by $732 million. Current liabilities include amounts related to the PFAS and earplugs settlements. The company had $1.9 billion of commercial paper outstanding and an undrawn $4.25 billion revolving credit facility; its covenant EBITDA-to-interest ratio was approximately 15:1 versus a 3:1 minimum.
Material changes and operating trends
- Litigation drove reported losses. Nine-month results included approximately $15.0 billion of pre-tax net significant litigation costs: a $10.3 billion charge for the proposed PFAS public-water-system settlement and a $4.2 billion charge for the Combat Arms Earplugs settlement, among other items. These charges are not equivalent to cash paid during the period.
- Segment sales weakened broadly. Q3 sales declined 4.9% in Safety and Industrial, 3.0% in Transportation and Electronics, 0.2% in Health Care, and 6.7% in Consumer. For nine months, all four segments also reported lower sales. Electronics softness, lower consumer discretionary spending, and weaker demand in China were cited as headwinds.
- Regional performance diverged. Q3 sales in Asia Pacific fell 15.6%, including a 20% decline in China total sales; Americas sales rose 0.6% and EMEA sales rose 3.9%. Nine-month Asia Pacific sales fell 16.8%.
- Q3 business-segment operating income was $1.784 billion versus $1.876 billion a year earlier; corporate and unallocated costs turned sharply negative, primarily reflecting litigation and divestiture costs.
- Operating cash flow increased year over year, but included a large $14.810 billion positive “other—net” adjustment and substantial deferred-tax effects. Cash flow should therefore be assessed alongside the settlement accruals, payment schedule, and cash-flow statement details.
Outlook, risks, and unusual items
- PFAS settlement: The proposed U.S. public water systems settlement provides for $10.5–$12.5 billion of payments from 2023 through 2036, subject to court approval and other conditions. Preliminary approval was granted; the final approval hearing was scheduled for February 2, 2024, with an opt-out deadline of December 11, 2023. The filing says 3M may terminate the settlement if opt-outs exceed specified levels.
- Combat Arms Earplugs: The settlement calls for $6.0 billion of contributions from 2023 through 2029, structured as $5.0 billion cash and $1.0 billion in 3M stock, subject to participation thresholds including enrollment and releases from at least 98% of covered claimants. The company recorded a $5.2 billion liability at quarter-end. Related court approval and implementation conditions remained outstanding.
- PFAS manufacturing and operations: 3M plans to exit PFAS manufacturing and work to discontinue PFAS use across its product portfolio by the end of 2025. In September, it idled all PFAS manufacturing processes at its Zwijndrecht, Belgium facility following actions by Flemish authorities. The filing warns that permit or restart developments could disrupt operations and customer supply. 3M recorded $10.9 billion of other environmental liabilities, primarily PFAS-related; it could not estimate possible losses above established accruals.
- Restructuring: The 2023–2025 structural reorganization is expected to affect approximately 8,500 positions and incur $700–$900 million of pre-tax charges. Actions approved in 2023 affected approximately 5,200 positions; $326 million of charges had been recorded through September.
- Health Care separation: 3M expected to spin off Health Care in the first half of 2024, subject to regulatory, tax, financing, board, and other conditions. It expected initially to retain 19.9% ownership and monetize that interest over time.
- Other outlook information: 3M expected 2023 capital spending of approximately $1.5–$1.7 billion. The filing does not provide a clear company-wide revenue or EPS guidance figure in the supplied text.
- Other risks include continuing respirator/asbestos and product litigation, evolving PFAS regulation and remediation obligations, market weakness and inflation, supply-chain and manufacturing disruption, foreign-exchange effects, and potential credit-rating pressure. Moody’s rating was A2 with negative outlook; S&P’s was BBB+ with CreditWatch negative.
- In August 2023, 3M resolved an SEC investigation concerning China-related travel, funding, and recordkeeping. The SEC settlement required a $6.5 million payment without admission or denial; the DOJ closed its investigation with no action.
Key facts for investors to verify
- Final approval, opt-outs, payment terms, and cash-flow timing for the PFAS public-water-system settlement.
- Claimant participation, required approvals, stock component, and payment schedule under the Combat Arms Earplugs settlement.
- Additional PFAS exposures beyond recorded liabilities, including regulatory outcomes, remediation costs, and the operating status of the Zwijndrecht facility.
- Whether reported operating cash generation is sustainable after considering the unusually large “other—net” cash-flow adjustment and future settlement payments.
- Progress and conditions for the planned Health Care spin-off, and the operational and financial effects of restructuring and PFAS exit plans.
- Segment demand, especially electronics, China, consumer markets, and disposable respirators, alongside margins excluding special items.