3M Company (3M): Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. 3M is a diversified global manufacturer with four reporting segments: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $8,619 | $8,942 | $26,150 | $26,743 |
| Operating income | $4,156 | $1,788 | $5,907 | $5,753 |
| Net income attributable to 3M | $3,859 | $1,434 | $5,236 | $4,582 |
| Diluted EPS | $6.77 | $2.45 | $9.15 | $7.81 |
| Adjusted diluted EPS, excluding special items | $2.69 | $2.58 | $7.82 | $8.28 |
| Operating margin | 48.2% | 20.0% | 22.6% | 21.5% |
| Adjusted operating margin, excluding special items | 21.5% | 21.1% | 21.3% | 22.9% |
Reported Q3 operating income and EPS were substantially affected by a $2.7 billion pre-tax gain on the Food Safety split-off. Excluding special items, Q3 adjusted diluted EPS rose 4% year over year, while nine-month adjusted diluted EPS fell 6%. These non-GAAP measures are not substitutes for GAAP results.
- Sales: Q3 sales declined 3.6% year over year, with organic sales up 2.0% and foreign-currency translation reducing sales by 5.1%. Nine-month sales declined 2.2%, despite 1.6% organic growth; currency reduced sales by 3.6%.
- Cash flow: Nine-month operating cash flow was $3,669, down from $5,449. Free cash flow, as defined by 3M, was $2,426 versus $4,402; free-cash-flow conversion was 46% versus 96%. Management cited litigation payments, compensation and benefits costs, tax timing and working-capital demands.
- Balance sheet: At September 30, cash and cash equivalents were $3,404; cash, cash equivalents and marketable securities totaled $3,616. Total debt was $15,705 and net debt was $12,089, compared with $17,363 and $12,571, respectively, at year-end 2021. Working capital was $5,352, down $1,016 from year-end.
- Capital returns and investment: Nine-month dividends paid were $2,550 and share repurchases were $928. Capital expenditures were $1,243. 3M declared dividends of $1.49 per share for each of the first three quarters.
Material changes and segment results
Organic sales grew in each segment in Q3, but currency translation drove reported sales declines across all four segments. Q3 reported sales and segment operating income were: Safety and Industrial, $2,894 and $652; Transportation and Electronics, $2,239 and $474; Health Care, $2,076 and $452; Consumer, $1,409 and $299. Nine-month segment operating income declined in each segment versus the prior-year period; Safety and Industrial was particularly affected by litigation charges.
In September, 3M completed the Food Safety business split-off and combination with Neogen, recording a $2.7 billion gain. The transaction included a $478 million cash payment to 3M, a $350 million non-cash debt exchange, and 16 million 3M shares accepted in the exchange offer. In July, 3M announced plans to spin off Health Care as a separate public company, targeting completion by year-end 2023 and expecting to retain an initial 19.9% ownership interest.
Outlook, risks and unusual items
- Outlook and spending: The filing gives no clear updated full-year sales or EPS guidance. Management expected 2022 capital spending of approximately $1.75–$1.85 billion and pension and postretirement contributions of $100–$200 million. Management cited pricing, spending discipline and restructuring benefits, offset by inflation in raw materials and logistics, supply-chain and manufacturing headwinds, foreign exchange, and weaker disposable-respirator demand.
- Combat Arms and Aearo: Aearo entities entered Chapter 11 in July. 3M committed $1.0 billion to a claims trust and another $0.2 billion for projected case expenses, and recorded a $1.2 billion second-quarter pre-tax charge. The filing cited approximately 227,000 claimants overall, including approximately 132,300 claimants in lawsuits and about 94,500 unfiled, unverified administrative claims. Litigation against 3M was not generally stayed by the Aearo filing; outcomes and additional funding needs remain uncertain.
- PFAS and environmental exposure: 3M increased its PFAS-related other environmental liability accrual by $626 million during the first nine months and reported a $644 million balance at September 30; it paid $394 million during the period. The company recorded an approximately $500 million charge in the first half related to the Zwijndrecht, Belgium matter and disclosed an aggregate commitment of €571 million under its agreement with Flemish authorities. The filing says it cannot estimate possible losses beyond established environmental accruals. Regulatory, remediation and litigation developments could add costs or disrupt operations.
- Other significant items: 3M recorded a $109 million charge related primarily to its planned exit from Russia. It also recorded $41 million of restructuring charges after the Food Safety split-off, affecting approximately 850 positions. Russia-related supply disruptions and operational constraints at the Belgium site remain risks.
- Other legal and transaction risks: The filing describes extensive PFAS, product-liability and other proceedings, including AFFF litigation and respirator claims. The Food Safety transaction’s intended tax-free treatment could be challenged by tax authorities. The proposed Health Care spin-off depends on approvals and other conditions and may not be completed on the anticipated timetable or terms.
Key facts investors should verify
- Reconcile the $2.7 billion Food Safety gain and other special items to reported versus adjusted earnings and margins.
- Track operating cash flow, free cash flow, working capital and the cash costs of litigation and environmental commitments.
- Monitor the scope, timing, funding and court treatment of Aearo’s Chapter 11 proceedings and the Combat Arms claims.
- Assess whether PFAS accruals and the €571 million Belgium commitment adequately reflect evolving regulatory, remediation and litigation exposure.
- Confirm progress, conditions, tax treatment and expected retained ownership for the planned Health Care spin-off.