3M faces more legal headaches after earplug settlement

3M is on the verge of ending the largest mass tort litigation in U.S. history, but it’s still facing other expensive legal headaches.

The company said Tuesday that it settled with roughly 250,000 plaintiffs in a $6.01 billion deal. Military veterans and service members alleged 3M manufactured defective earplugs that resulted in hearing loss.

“I am confident that this more than $6 billion settlement will receive full and overwhelming support, not just because it holds 3M accountable, but more importantly, because it provides just and deserved compensation to our veterans,” Bryan Aylstock, the court-appointed lead plaintiffs’ counsel, told to CNBC over email.

While news of the settlement relieves one big legal overhang, 3M is still awaiting approval of its $10.3 billion settlement with water utilities over drinking water contaminated with substances known as “forever chemicals.”

That settlement, which is facing pushback from more than 20 states, only covers a subset of liabilities and does not include a growing list of states that have sued 3M. Nor does it include personal injury claims.

Capstone estimates 3M’s total PFAS liability risk is nearly $30 billion, beyond the existing settlements.

3M has also faced lawsuits from countries such as the Netherlands and Belgium over PFAS contamination. Europe continues to weigh a decision on whether to ban PFAS chemicals altogether. In the U.S., the Environmental Protection Agency is considering labeling PFAS a hazardous chemical. Experts say that could lead to more testing and a better understanding of just how pervasive the toxic chemical is.

To fund its settlements, 3M has cut costs, including through eliminating 8,500 jobs, or 10% of its workforce, this year.

The industrial giant is also planning to spin off its high-performing health-care business by the end of 2023 or early 2024. JPMorgan analyst Stephen Tusa expects that transaction to bring in $7 billion to $9 billion in cash flows for 3M.

Much debate has been centered around 3M’s dividend, which pays investors 6.1%. JPMorgan, UBS and RBC are among the Wall Street firms that have mentioned 3M’s dividend is at risk. “Our expectation is that 3M will lower the dividend following the spin-out of the Healthcare unit,” UBS analysts wrote in a note to clients Monday.

The timeline for the business transaction seems to be on track, with 3M announcing last week that Zimmer Biomet CEO Bryan Hanson will be joining the company as CEO of its health-care business.

In that same announcement, it was revealed that current Chief Financial Officer Monish Patolawala added president to his title. In a note to clients, RBC analyst Deane Dray said “this arguably positions him as the heir-apparent to CEO Mike Roman.”

Roman has been leading 3M for five years. That includes the Covid pandemic, during which a shortage of the company’s N95 respirators quickly became a global crisis. He’s also had to oversee the company through the earplugs and PFAS litigation, plus pushback from a top shareholder on the underperformance in the stock.

Shares of 3M have fallen 48% since he was appointed CEO in 2018. During that same timeframe, the XLI Industrials ETF has rallied 50%.

The stock rose more than 1% on Tuesday.