3M Company — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Financial statements are unaudited. Comparisons are with Q1 2021 unless noted.
Business context
3M is a diversified global manufacturer with four reportable segments: Safety and Industrial, Transportation and Electronics, Health Care, and Consumer. The company changed its segment performance measure in Q1; comparative segment figures were recast. It also updated which litigation costs it treats as special items in non-GAAP measures.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Net sales | $8.829 billion | $8.851 billion; down 0.3% reported, up 1.7% organically |
| Operating income / margin | $1.641 billion / 18.6% | $1.994 billion / 22.5% |
| Net income attributable to 3M | $1.299 billion | $1.624 billion |
| Diluted EPS | $2.26 | $2.77; down 18% |
| Adjusted diluted EPS | $2.65 | $2.95; down 10% |
| Operating cash flow | $1.011 billion | $1.688 billion |
| Free cash flow | $587 million | $1.378 billion; conversion was 45% versus 85% |
| Cash, cash equivalents and marketable securities | $3.386 billion at March 31 | $4.792 billion at December 31, 2021 |
| Total debt / net debt | $16.678 billion / $13.292 billion | Net debt was $12.571 billion at December 31, 2021 |
Cost of sales rose to 54.7% of sales from 51.1%; raw-material and logistics inflation, supply-chain and manufacturing headwinds, and litigation costs weighed on margins. The GAAP effective tax rate was 18.8%, versus 16.4%.
Material changes and segment performance
- Organic sales rose 4.7% in Health Care and 3.4% in Consumer, while Safety and Industrial rose 0.5% and Transportation and Electronics declined 0.3%. Foreign exchange reduced reported sales growth.
- Operating income fell in every segment: Safety and Industrial to $636 million (down 15.5%); Transportation and Electronics to $496 million (down 10.6%); Health Care to $448 million (down 3.5%); and Consumer to $224 million (down 16.6%).
- Net costs for significant litigation were $250 million, versus $135 million in Q1 2021, and were a major factor in the lower reported earnings. Adjusted measures exclude these costs and are non-GAAP.
- Operating cash flow declined by $677 million year over year. The filing cites higher variable compensation and benefits costs and litigation costs; working-capital movements also affected cash flow.
- 3M repaid €500 million of notes that matured in February. It paid $852 million in dividends and repurchased $773 million of stock during the quarter.
Outlook, risks and contingencies
- The filing gives no consolidated full-year sales or earnings guidance. Management estimated a 2022 effective tax rate of approximately 18.5%–19.5%, capital spending of $1.7–$2.0 billion, and global pension and postretirement contributions of $100–$200 million.
- Management cited raw-material and logistics inflation, global supply constraints, manufacturing productivity challenges, the Russia-Ukraine conflict, and COVID-related uncertainty. 3M suspended its Russian subsidiaries’ operations in March; their 2021 sales were less than 1% of company sales.
- Restrictions on PFAS wastewater discharges and air emissions at the Zwijndrecht, Belgium facility have idled some processes and could further disrupt operations and customer supply. 3M announced a €150 million investment for legacy PFAS remediation there.
- At March 31, 3M recorded $474 million of other environmental liabilities, after a $162 million Q1 increase and $100 million of related payments. It also recorded $626 million for respirator mask/asbestos liabilities and $41 million for Aearo-related claims. The company said it cannot estimate potential losses above these accruals.
- Significant unresolved exposures include PFAS litigation and regulatory proceedings, AFFF claims, and Combat Arms earplug litigation. The filing reported approximately 69,740 individual earplug claimants in lawsuits and an administrative docket of approximately 199,000 unfiled and unverified claims; no liability was recorded for the earplug matters because management said a probable, estimable amount could not be determined.
- The planned Food Safety Division transaction with Neogen was expected to close by the end of Q3 2022, subject to approvals and other conditions. The transaction contemplated approximately $1 billion of consideration to 3M, subject to adjustments.
- Other disclosed uncertainties include the West Virginia respirator matter, environmental compliance inquiries, and the company’s investigation of potential China-related FCPA issues. Outcomes and possible losses are not clear or estimable in the filing for many of these matters.
Important facts for investors to verify
- Whether inflation, supply-chain constraints, foreign exchange and weaker demand in selected markets continue to pressure sales, margins and cash generation.
- Developments in PFAS regulation and litigation, including the Zwijndrecht facility’s operating restrictions, remediation costs, and potential losses beyond recorded environmental accruals.
- Combat Arms earplug case progression, claimant transitions and trial outcomes, and whether future information makes a liability estimable.
- Completion, approvals, financing and final economics of the Neogen Food Safety transaction.
- Cash-flow recovery and the sustainability of dividends and repurchases alongside debt maturities and the company’s stated capital-spending plans.