MINNEAPOLIS — 3M's beleaguered executives are facing perhaps the most significant set of challenges in the company's 121-year history.
The Maplewood-based industrial giant, one of Minnesota's most storied companies, is hobbled by litigation, slowing sales and a stock price cut in half over the past five years. Thousands of jobs are being shed. The company's prized dividend payment may soon shrink, affecting not just Wall Street investors but 3M retirees and employees.
Its promised turnaround is taking too long for some investors who are losing patience with 3M and its leaders.
"I think they need an outsider, someone who can say: This isn't working," Morningstar analyst Josh Aguilar told the Star Tribune. "How can you regain trust? I don't think this is the right team to do it anymore. They're good people but they don't have credibility with the market."
One of 3M's largest investors, Flossbach von Storch, expressed a similar lack of confidence earlier this year.
"We find it increasingly unacceptable to be constantly put off in anticipation of a distant better future," the German firm's co-founder wrote to 3M's chief executive in January, according to the Financial Times. "We also ask ourselves to what extent your leadership team and employees still stand behind your decisions."
Amid all this pressure, CEO Mike Roman is orchestrating a companywide transformation ahead of his mandatory retirement in 2024.
Roman was not made available for an interview for this story. 3M did not directly respond to questions about its leadership and instead referred to comments Roman made in May at an investor conference.
"We reduced costs at the center of the company. We simplified our supply chain model, and we've streamlined our commercial go-to-market models," he said. "And I would say [we are] focusing our strategy around how we can best prioritize our innovation."
By next year, 3M's health care business will be a separate company, and the smaller 3M left behind will have a renewed focus on climate tech, automation and consumer electronics. In 2025 it will quit making the "forever chemicals" known as PFAS that have embroiled the company in controversy and legal battles.
The company recently agreed to settle one set of PFAS legal cases for up to $12.5 billion.
"This is only the first step, albeit it is an important step," Wolfe Research analyst Nigel Coe wrote recently.
More payouts may be looming. Some observers, including Coe, expect $20 billion to $30 billion in settlements over the next few years, which 3M would likely be able to weather. Still others have proposed legal costs higher than the company's entire market value.
However, 3M's chief technology officer, John Banovetz, strikes an optimistic tone about the company's future and the path it's on. Banovetz says it all comes back to the reason the company was created: to solve problems with science.
"Our technology and science are the elements we stand on to differentiate ourselves and how we grow as a company," he said. "For me, the future of 3M is incredibly bright."
3M focuses on 'Forward'
While some of its largest investors and analysts dismiss the company's future-looking plans, 3M has nonetheless outlined a path for what it says will be crucial for its transformation. This includes a focus on "megatrends" like industrial automation, vehicle electrification and augmented reality as part of the 3M Forward initiative.
"How do we continue to drive innovation in a changing world, where climate change is important, where the digital and physical worlds are colliding, where demographics are changing?" Banovetz said. "At 3M we look at those trends and you say, OK, where can we have an impact? Where can we solve tough challenges for our customers?"
One way is to address the labor shortage in manufacturing plants with robotic solutions for automakers.
3M now makes the attachments, abrasives and software for robots that fix paint imperfections, replacing some of the last remnants of labor-intensive work on automobile assembly lines. BMW has already adopted the automated approach at a German factory.
Typically if one automaker takes a risk on technology like this and finds it successful, others will follow fast.
"When things start to look successful, our deployments will all of a sudden rocket — so you better be ready," Scott Barnett, 3M's director of robotics and automation application engineering, said.
Those solutions have long come with a healthy profit. Many 3M products sell at a higher price compared to competitors because customers have long had faith in the 3M brand.
But that reputation is at risk given the company's ongoing connection to PFAS pollution, which will "start to undermine your value to customers," Aguilar, the Morningstar analyst, said.
"You start to question the products around your home," he said. "They can reframe the story all they want, but it's about the brand promise."
Paying the bills
This spring a federal judge demanded Roman attend a mediation session — in person — to settle thousands of lawsuits over military ear plugs.
"Sometimes, the nature and demands of a situation are far-reaching and consequential enough that the leader must be in the room," Judge M. Casey Rodgers wrote. "This is one of those times."
She could have been talking about any number of consequential situations Roman now faces, but the legal uncertainty looms largest.
Even after the recently announced settlement, 3M faces a number of ongoing and potential lawsuits regarding PFAS. The family of chemicals is found in thousands of products and manufacturing processes but does not break down in the environment and has been linked to health issues. It could cost $10 billion to $20 billion or more to settle the bulk of those issues, analysts estimate.
Then there are the Combat Arms military earplug cases, which 3M tried to circumvent by having a subsidiary declare bankruptcy. A settlement with veterans who say they are suffering hearing loss and other issues due to defective earplugs could cost about $10 billion, by some estimates.
"It's never good to have this kind of litigation hanging over your head, because it's expensive to do, it leaves everybody wondering and it's bad publicity," said Carl Tobias, a professor at the University of Richmond School of Law. "The PR stuff can't be underestimated. It's important to have a relationship with the public and make sure they have a good feeling about the company."
Settlements also avoid new information coming to light at trial, Tobias said — including crucial questions of liability around who knew what, and when.
After years of saying 3M will "vigorously defend ourselves" against lawsuits, Roman's stance has softened.
"The preference is to resolve it," he told investors in May.
Taking steps
The company will attempt to put PFAS in the rearview mirror entirely when 3M stops manufacturing the chemicals in 2025.
The move "might help the company find its footing operationally later this decade, but also supports concerns that there is more litigation risk longer-term," writes Jefferies analyst Laurence Alexander.
3M is spinning off its health care unit by the end of the year, which will provide the company an influx of cash at a crucial time. The remaining 3M will maintain a 20% stake in the $8.6 billion business that will be sold over time.
The company has offered few details about its health care spinoff since the initial announcement came a year ago — no name, no decision on a permanent headquarters or leadership team, no timeline to provide any of that information despite already posting jobs for the new health care company.
"We're making progress and will offer updates as we have them," 3M said Monday.
The company has made a habit of announcing news — such as the health spinoff and Combat Arms bankruptcy — when releasing its quarterly results.
Most recently, 3M announced it would cut 6,000 jobs globally in addition to 2,500 manufacturing jobs being shed this year.
As of May 2022, 3M was the state's 12th-largest employer with nearly 13,700 employees based here, according to the state Department of Employment and Economic Development. At least 500 jobs will be lost in Minnesota as part of the 1,100 headquarters job losses, with most HQ cuts affecting remote workers out of state.
The next quarterly report is due the last week of July. Analysts expect earnings per share to drop about 35% compared with last year.
Once health care is spun off as its own entity and the latest PFAS settlement payments kick in next year, the remaining company's profitability will be tighter than ever.
"In our view, the 3M board needs to protect the balance sheet and cut the dividend," Coe, the Wolfe Research analyst, said.
Such a move could have a drastic impact on 3M stock, which is seen as a "dividend king" — industry parlance for public companies that have paid increasing dividends for more than 50 years. 3M has paid dividends for more than 100 years in a row and has consistently increased the stockholder payouts for more than 60 years.
"If the dividend is cut then its stock will crumble, as the dividend is paramount to 3M's shareholder base," Aguilar said.
Unless 3M's board waives the mandatory retirement age, as it did with Roman's predecessor, the clock is ticking for the CEO to cement his legacy of change and vet a successor before September 2024 rolls around.
Roman's heir apparent, Michael Vale, was fired earlier this year for undisclosed improprieties.
If there is a clear strategy, investors remain wary.
"They need to (shrink) in order to grow again," Aguilar said about 3M's future. "It could be painful for several years."
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