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Item 1A. Risk Factors

2023-10-24 compared with 2023-07-25 · 45 added, 48 removed, 168 unchanged (36% of the section changed)

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PFAS compounds are manufactured by various companies, including 3M, and are used in everyday products, including some manufactured by 3M.

As science and technology evolve and advance, and in response to evolving knowledge and the understanding that certain PFAS compounds had the potential to build up over time, 3M announced in 2000 that we would voluntarily phase out production of two PFAS substances, perfluorooctanoate (PFOA) and perfluorooctane sulfonate (PFOS) globally as a precautionary measure.

We phased out of materials used to produce certain repellants and surfactant products, with most of these activities in the U.S.

completed by the end of 2002.

Phased out products included Aqueous Film Forming Foam (AFFF) and certain coatings for food packaging, for example.

The Company continues to review, control, or eliminate the presence of certain PFAS in purchased materials, as intended substances in products, or as byproducts of some of 3M’s current manufacturing processes, products, and waste streams.

3M announced in December 2022 it will take two actions:

As science and technology evolve and advance, and in response to evolving knowledge and the understanding that certain PFAS compounds had the potential to build up over time, 3M announced in 2000 that it would voluntarily phase out production of two PFAS substances, perfluorooctanoate (PFOA) and perfluorooctane sulfonate (PFOS) globally as a precautionary measure.

Most of the phase out activities in the United States were completed by the end of 2002.

The phase out included materials used to produce certain repellents and surfactant products, and products including Aqueous Film Forming Foam (AFFF) and certain coatings for food packaging, for example.

Following the phase out of PFOA and PFOS production, the Company has continued to review, control, or eliminate the presence of certain PFAS in purchased materials, as intended substances in products, or as byproducts of some of 3M’s current manufacturing processes, products, and waste streams.

3M announced in December 2022 it will take two actions with respect to PFAS (2022 PFAS Announcement):

exiting all PFAS manufacturing by the end of 2025;

and working to discontinue the use of PFAS across its product portfolio by the end of 2025.

3M’s decision is based on careful consideration and a thorough evaluation of the evolving external landscape, including multiple factors such as accelerating regulatory trends focused on reducing or eliminating the presence of PFAS in the environment and changing stakeholder expectations.

The Company recognized a $0.8 billion pre-tax charge in the fourth quarter of 2022 associated with this announcement related to asset impairments, and will incur additional expenses in connection with its exit activities.

In addition, these two announced actions (the “exit”) involve risks, including the actual timing, costs, and financial impact of such exit;

3M continues to make progress toward these goals, as discussed further below.

In addition, the 2022 PFAS Announcement involves risks, including:

the actual timing, costs, and financial impact of such exit;

the Company’s ability to complete such exit on the anticipated timing or at all;

potential governmental or regulatory actions relating to PFAS manufacturing and production, or the Company’s exit plans;

the Company’s ability to identify and manufacture acceptable substitutes for the discontinued products, and the possibility that such substitutes will not achieve the anticipated or desired commercial or operational results;

potential litigation relating to the Company’s exit plans;

and the possibility that the planned exit will involve greater costs than anticipated, or otherwise have negative impacts on the Company’s relationships with its customers and other counterparties.

potential governmental or regulatory actions relating to PFAS or the Company’s exit plans;

the Company’s ability to identify and manufacture, or procure from third parties if possible, acceptable options for PFAS-containing materials in 3M's supply chain;

the possibility that such non-PFAS options are not available or that such substitutes may not achieve the anticipated or desired commercial, financial or operational results;

potential litigation relating to the Company’s exit plans or to any products that include third-party manufactured materials containing PFAS that are incorporated into the products the Company sells;

and the possibility that the planned exit will involve greater costs than anticipated, may not be feasible, may not be feasible on the timeframe initially predicted, or may otherwise have negative impacts on the Company’s relationships with its customers and other counterparties.

As stated above, 3M is progressing toward exiting all PFAS manufacturing by the end of 2025.

3M is also working to discontinue the use of PFAS across its product portfolio by the end of 2025.

3M has already eliminated the PFAS use in certain product categories, and has made progress across its product portfolio in a variety of applications.

With respect to PFAS-containing products not manufactured by 3M but manufactured by companies other than 3M in the Company's supply chains, the Company continues to evaluate the availability of third-party products that do not contain PFAS.

Depending on the availability and feasibility of such third-party products not containing PFAS, the Company continues to evaluate whether there may be some circumstances in which the use of PFAS-containing materials manufactured by third parties and used in certain applications in 3M’s product portfolios, such as lithium ion batteries and printed circuit boards widely used in commerce across a variety of industries, may continue beyond 2025.

In such instances, the Company intends to continue to evaluate the adoption of third-party products that do not contain PFAS to the extent such products are available and such adoption is feasible.

3M currently is defending lawsuits concerning various PFAS-related products and chemistries, and is subject to unasserted and asserted claims and governmental regulatory proceedings and inquiries related to the production and use of PFAS in a variety of jurisdictions, as discussed in Note 14, “Commitments and Contingencies,” within the Notes to Consolidated Financial Statements.

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For example, we recorded a pre-tax charge of $897 million, inclusive of legal fees and other related obligations, in the first quarter of 2018 with respect to the settlement of a matter brought by the State of Minnesota involving the presence of PFAS in the groundwater, surface water, fish or other aquatic life, and sediments in the state.

In addition, as described in greater detail in Note 14, “Commitments and Contingencies,” within the Notes to Consolidated Financial Statements, in June 2023, the Company entered into a proposed class-action settlement (“Settlement”) to resolve a wide range of drinking water claims by public water systems in the United States regarding any PFAS, subject to court approval.

If the court approves the Settlement and all conditions in the Settlement are met, 3M will pay $10.5 billion to $12.5 billion in total to resolve the claims released by the Settlement, with payments to be made annually from 2024 through 2036, in exchange for a release of certain claims, as described further in Note 14.

The Settlement gives 3M the option to terminate the Settlement if the numbers of eligible class members opting out of the Settlement exceed specified levels.

Unexpected events related to the Settlement, including whether court approval of the Settlement will be obtained, whether the number of plaintiffs that opt out of the Settlement will exceed current expectations or will exceed the level that would permit 3M to terminate the Settlement (and whether 3M will elect to terminate the Settlement if this occurs), whether the Settlement is appealed, and the impact of the settlement on other PFAS-related matters could have a material adverse effect on the Company’s results of operations, cash flows or its consolidated financial position.

In addition, as described in greater detail in Note 14, “Commitments and Contingencies,” within the Notes to Consolidated Financial Statements, in June 2023, the Company entered into a proposed class-action settlement (“PWS Settlement”) to resolve a wide range of drinking water claims by public water systems in the United States regarding any PFAS, subject to court approval.

If the court approves the PWS Settlement and all conditions in the PWS Settlement are met, 3M will pay $10.5 billion to $12.5 billion in total to resolve the claims released by the PWS Settlement, with payments to be made from 2023 through 2036, in exchange for a release of certain claims, as described further in Note 14.

The PWS Settlement gives 3M the option to terminate the PWS Settlement if the numbers of eligible class members opting out of the PWS Settlement exceed specified levels.

Unexpected events related to the PWS Settlement, including whether court approval of the PWS Settlement will be obtained, whether the number of plaintiffs that opt out of the PWS Settlement will exceed current expectations or will exceed the level that would permit 3M to terminate the PWS Settlement (and whether 3M will elect to terminate the PWS Settlement if this occurs), whether the PWS Settlement is appealed, and the impact of the PWS Settlement on other PFAS-related matters could have a material adverse effect on the Company’s results of operations, cash flows or its consolidated financial position.

Governmental inquiries, lawsuits, or laws and regulations involving PFAS could lead to our incurring liability for damages or other costs, civil or criminal proceedings, the imposition of fines and penalties, or other remedies, including orders to conduct remediation, as well as restrictions on or added costs for our business operations going forward, including in the form of restrictions on discharges at our manufacturing facilities, requiring the installation of control technologies, suspension or shutdown of facility operations, switching costs in seeking alternative sources of supply, potential customer damage claims due to supply disruptions or otherwise, and reporting requirements or bans on PFAS and PFAS-containing products manufactured by the Company.

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and foreign regulatory authorities in such investigations, audit, monitor compliance or alter its practices as part of such investigations.

For example, as described in greater detail in Note 14, “Commitments and Contingencies,” within the Notes to Consolidated Financial Statements, in August 2023, the Company agreed to settle with the SEC related to alleged FCPA violations in connection with the Company's business in China for approximately $6.5 million.

While the Company maintains and implements U.S.

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Risks Related to Our Business

* The Company employs information technology systems to support its business and collect, store, and/or use proprietary and confidential information, including ongoing phased implementation of an enterprise resource planning (ERP) system as part of its business transformation on a worldwide basis over the next several years.

* The Company employs information including operational technology systems to support its business and to collect, store, and/or use proprietary and confidential information, including ongoing phased implementation of an enterprise resource planning (ERP) system as part of its business transformation on a worldwide basis over the next several years.

Security and data breaches, cyberattacks, and other cybersecurity incidents involving the Company’s information technology systems, networks and infrastructure could disrupt or interfere with the Company’s operations;

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Additionally, the Company collects and stores certain data, including proprietary business information, and has access to confidential or personal information in certain of our businesses that is subject to privacy and cybersecurity laws, regulations, and customer-imposed controls.

Third parties and threat actors, including organized criminals, nation-state entities, or nation-state supported actors, regularly attempt to gain unauthorized access to the Company’s information technology networks and infrastructure, data, and other information, and many such attempts are becoming increasingly sophisticated.

Despite our cybersecurity and business continuity counter measures (including employee and third-party training, monitoring of networks and systems, patching, maintenance, and backup of systems and data), the Company’s information technology systems, networks and infrastructure are still potentially susceptible to attack, compromise, damage, disruption, or shutdown, including as a result of the exploitation of known or unknown hardware or software vulnerabilities, or zero day attacks, in our systems or in the systems of our vendors and third-party service providers, the introduction of computer viruses, malware or ransomware, service or cloud provider disruptions or security breaches, phishing attempts, employee error or malfeasance, power outages, telecommunication or utility failures, systems failures, natural disasters, or other catastrophic events.

The Company’s increased adoption of remote working, initially driven by the pandemic, also introduces additional threats and risk of disruptions to our information technology systems, networks and infrastructure.

Despite our cybersecurity counter measures, it is possible for security vulnerabilities or a cyberattack to remain undetected for an extended time period, up to and including several years, and the prioritization of decisions with respect to security measures and remediation of known vulnerabilities that we and the vendors and other third parties upon which we rely make may prove inadequate to protect against attacks.

While we and third parties we utilize have experienced, and expect to continue to experience, cyberattacks on and breaches and other disruptions of the Company’s and the third parties' information technology systems and infrastructure, we do not believe that any such incidents to date have had a material impact on the Company.

Any cybersecurity incident or information technology network disruption could result in numerous negative consequences, including the risk of legal claims or proceedings, investigations or enforcement actions by U.S., state, or foreign regulators;

Third parties and threat actors, including organized criminals, nation-state entities, and/or nation-state supported actors, regularly attempt to gain unauthorized access to the Company’s information and operational technology networks and infrastructure, data, and other information, and many such attempts are becoming increasingly sophisticated.

Despite our cybersecurity and business continuity counter measures (including employee and third-party training, monitoring of networks and systems, patching, maintenance, and backup of systems and data), the Company’s information and operational technology systems, networks and infrastructure are still potentially susceptible to cyber-attack, insider threat, compromise, damage, disruption, or shutdown, including as a result of the exploitation of known or unknown hardware or software vulnerabilities, or zero day attacks, in our systems or the systems of our vendors and third-party service providers, the introduction of computer viruses, malware or ransomware, service or cloud provider disruptions or security breaches, phishing attempts, employee error or malfeasance, power outages, telecommunication or utility failures, systems failures, natural disasters, or other catastrophic events.

The Company’s increased adoption of remote working, initially driven by the COVID-19 health pandemic, also introduces additional threats and risk of disruptions to our information technology systems, networks and infrastructure.

Despite our cybersecurity counter measures, it is possible for security vulnerabilities or a cyberattack to remain undetected for an extended time period, up to and including several months, and the prioritization of decisions with respect to security measures and remediation of known vulnerabilities that we and the vendors and other third parties upon which we rely make may prove inadequate to protect against these attacks.

While we and third parties we utilize have experienced, and expect to continue to experience, cyberattacks that may lead to other disruptions of the Company’s and the third parties' information and operational technology systems and infrastructure, we do not believe that any such incidents to date have had a material impact on the Company.

Any cybersecurity incident or information or operational technology network disruption could result in numerous negative consequences, including the risk of legal claims or proceedings, investigations or enforcement actions by U.S., state, or foreign regulators;

liabilities or penalties under applicable laws and regulations, including privacy laws and regulations in the U.S.

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The Company’s credit ratings have served to lower 3M’s borrowing costs and facilitate access to a variety of lenders.

As of June 2023, 3M has a credit rating of A2, negative outlook from Moody's Investors Service, and a credit rating of A-, CreditWatch negative from S&P Global Ratings.

Moody’s Investor Service downgraded the Company’s credit rating from A1 to A2, and S&P Global Ratings downgraded the Company’s credit rating from A to A- (and downgraded the Company’s short-term credit rating from A-2 to A-1), in connection with the Company’s announcement of the Settlement.

As of September 2023, 3M has a credit rating of A2, negative outlook from Moody's Investors Service, and a credit rating of BBB+, CreditWatch negative from S&P Global Ratings.

Moody’s Investor Service downgraded the Company’s credit rating from A1 to A2, and S&P Global Ratings downgraded the Company’s credit rating twice from A to BBB+ (and downgraded the Company’s short-term credit rating from A-2 to A-1), in connection with the Company’s announcements of the PWS Settlement and CAE Settlement.

The addition of further leverage to the Company’s capital structure could impact 3M’s credit ratings in the future.

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Due to the evolving nature of global tax laws and regulations and compliance approaches, it is currently not possible to assess the ultimate impact of these actions on our financial statements, but these actions could have an adverse impact on the Company's financial results.

Risks Related to the Voluntary Chapter 11 Proceedings Initiated by the Company’s Aearo Entities

* The Company is subject to risks related to its subsidiaries’ chapter 11 proceedings.

On July 26, 2022, Aearo Technologies and certain of its related entities ("Aearo Entities"), all wholly owned subsidiaries of the Company, voluntarily initiated chapter 11 proceedings seeking bankruptcy court supervision to establish a trust – funded by the Company – to address potential liabilities related to Dual-Ended Combat Arms – Version 2 earplugs and mask/respirator products historically manufactured and sold by Aearo Entities.

This represented a change in strategy for managing the Combat Arms Version 2 earplugs and Aearo respirator mask/asbestos alleged litigation liabilities.

Aearo Entities were acquired by the Company in 2008 and they, along with its related subsidiaries, have operated as Company subsidiaries since that time.

3M has entered into a funding agreement with Aearo Entities and committed to fund a trust to satisfy all claims determined to be entitled to compensation, and to support Aearo Entities as they continue to operate during the chapter 11 proceedings.

3M committed $1.0 billion to fund this trust and an additional $0.2 billion to fund projected related case expenses.

Under the terms of the funding agreement, 3M would provide additional funding if required by the Aearo Entities.

As discussed in Note 14, “Commitments and Contingencies,” within the Notes to Consolidated Financial Statements, in June 2023, the bankruptcy court dismissed the bankruptcy proceeding, and the judge certified a direct appeal of the dismissal to the U.S.

Court of Appeals for the Seventh Circuit.

Aearo has appealed the decision.

Following dismissal of the bankruptcy, Combat Arms earplugs claims against the Aearo Entities will proceed in the federal and state multidistrict litigation, and will continue to proceed against 3M, which is a defendants in those litigation matters.

3M has been engaged in active confidential mediation pursuant to the orders of the federal and state MDL courts.

There are a number of risks and uncertainties associated with the chapter 11 proceedings, including, among others, those related to:

legal risks related to the chapter 11 proceedings;

potential impacts to the Company’s reputation and relationships with its customers, suppliers, federal contracting officials, employees, regulators, and other counterparties and community members;

impacts to the Company’s liquidity or results of operations, including risks related to the amount that will be necessary to fully and finally resolve all of the Company’s obligations to make payments to resolve such claims under the terms of its funding and indemnification agreement with Aearo Entities;

the costs of chapter 11 proceedings and length of time necessary to resolve the cases;

and Aearo Entities’ ability to reach acceptable agreements with claimants and navigate the chapter 11 proceedings to obtain approval and consummation of a plan of reorganization.

In addition, due to the dismissal of the Aearo Entities bankruptcy proceeding, attempts to comprehensibly resolve with finality all Combat Arms earplugs claims against the Aearo Entities and 3M outside of the bankruptcy proceeding and in a litigation settlement involve significant challenges that could cause the Company to incur substantial and material costs.

Due to the inherent uncertainty of litigation, the Company cannot predict the timing, outcome, or financial impact of this matter, or any other ongoing or future related litigation.

Risks Related to the Company’s Aearo Entities and Combat Arms Earplug Settlement

* The Company is subject to risks related to the Company's Aearo Entities and CAE Settlement.

As previously disclosed, and as discussed further in Note 14, “Commitments and Contingencies,” within the Notes to Consolidated Financial Statements, Aearo Technologies sold Dual-Ended Combat Arms – Version 2 earplugs starting in about 1999.

3M acquired Aearo Technologies in 2008 and sold these earplugs from 2008 through 2015, when the product was discontinued.

3M and Aearo Technologies believe the Combat Arms Earplugs were effective and safe when used properly, but nevertheless faced significant litigation relating to the earplugs.In August 2023, the Company and the Aearo Entities entered into a settlement arrangement (the “CAE Settlement”) which is structured to promote participation by claimants and is intended to resolve, to the fullest extent possible, all litigation and alleged claims involving the CAE sold or manufactured by the Aearo Entities and/or 3M.

Pursuant to the CAE Settlement, 3M will contribute a total amount of $6.0 billion between 2023 and 2029, which is structured under the CAE Settlement to include $5.0 billion in cash consideration and $1.0 billion in 3M common stock.

The Company may, in its sole discretion, settle the equity portion in cash.

The actual amount, payment terms, and dates are subject to satisfaction of certain participation thresholds claimants must meet, including that at least 98% of individuals with actual or potential litigation claims involving the CAE (calculated as described in the CAE Settlement) must have enrolled in the CAE Settlement and provided 3M with a full release of any and all claims involving the CAE.

The CAE Settlement contemplates that the shares of 3M common stock to be issued in the CAE Settlement, if and when issued, will be issued in reliance on the exemption from registration provided by Section 3(a)(10) of the Securities Act of 1933, as amended.

The CAE Settlement is subject to risk and uncertainties, including, but not limited to, whether the anticipated full participation by plaintiffs in the CAE Settlement will be achieved, whether the number of plaintiffs who participate in the CAE Settlement will meet the full participation expectations or will fall below the level that would permit 3M to terminate the CAE Settlement (and whether 3M will elect to terminate the CAE Settlement if this occurs), whether there will be a significant number of future claims by plaintiffs that decline to participate in the CAE Settlement, whether the CAE Settlement is appealed or challenged, whether the requirements applicable to the issuance of the equity securities that are contemplated to be part of the CAE Settlement will be met, the filing and outcome of additional litigation, if any, relating to the products that are the subject of the CAE Settlement, or changes in laws or regulations related to the CAE products or the CAE Settlement.

Risks Related to the Planned Spin-off of the Company’s Health Care Business

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The spin-off will be subject to the satisfaction of a number of conditions, including the filing and effectiveness of a Form 10 registration statement, receipt of a private letter ruling from the Internal Revenue Service and a tax opinion from external counsel, satisfactory completion of financing, final approval by the Company’s Board of Directors, and other customary conditions.

The failure to satisfy all of the required conditions, as well as additional factors such as conditions in the equity and debt markets, other external conditions, or developments involving the Company or any of its businesses, many of which are outside of the Company’s control, could delay the completion of the spin-off relative to the anticipated timeline or prevent it from occurring.

The failure to satisfy all of the required conditions, as well as additional factors such as conditions in the equity and debt markets, other external conditions, developments or challenges involving the intended spin-off, the Company or any of its businesses, many of which are outside of the Company’s control, could delay the completion of the spin-off relative to the anticipated timeline or prevent it from occurring.

Any delay in the completion of the spin-off or any change to the anticipated terms of the transaction could reduce the expected benefits of the transaction, or delay the time at which such benefits are realized.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors