3M's (MMM -1.64%) small-scale earplug business may become a big problem for the industrial giant. A potential blockbuster settlement related to earplugs sold to the military could add monumental risk to the stock. Here's what it could mean for the company.
U.S. military veterans across the country have filed lawsuits against 3M, saying the company's Dual-Ended Combat Arms earplugs were defective and caused hearing damage. The plaintiffs complain of ringing in their ears after using the earplugs. Over 100,000 veterans have already filed suits, and even more could be right behind them.
It all started with a 2018 settlement between 3M and the Justice Department. The company paid a $9.1 million settlement over allegations that it knowingly sold the earplugs to the military without disclosing defects. The settlement concluded without 3M admitting it did anything wrong.
To this point, veterans have already gone to court several times over the earplugs. Ten veterans have won their cases and were awarded damages from $1.7 million to $77.5 million. 3M won six other cases, and eight were dismissed. The company will likely appeal the cases it lost. A judge in Florida has asked 3M and lawyers representing the veterans to begin discussions about a potential settlement.
To add some clarity to a potential resolution, soldiers are given a hearing test before entering the military and receive follow-up exams after they leave. The exams may provide some insight into the hearing damage of each veteran, but proving the ear damage is attributable to the earplugs may be daunting for the plaintiffs.
Military contractors are afforded some help in situations like this. Legal protection called contractor defense can be used when the military requests a product from a contractor like 3M. The company has raised the issue in an appeal in which the judge said that contractor defense does not apply because the military didn't offer specifications for the earplugs. The U.S. Chamber of Commerce has backed 3M because limiting contractor defense could make other contractors think twice about signing contracts with the military.
This is not 3M's first go-round with faulty product settlements. For instance, the company has a liability on its balance sheet related to a settlement with customers harmed after using protective masks containing asbestos that 3M produced. At the end of 2021, 3M said it was the defendant in asbestos cases covering 3,876 individuals. The company has a balance sheet liability of $640 million for potential payouts from the claims.
The non-GAAP (generally accepted accounting principles) earnings-per-share metric disclosed by 3M includes money set aside for asbestos-related litigation costs. The company's first-quarter earnings report noted that the metric would now include litigation expenses related to the Combat Arms earplug proceedings. Meaning those costs are mounting and are now material to the company. Because 3M has no visibility into the final decision of the earplug case, it has not set aside money for settlements.
Given the damages already awarded for earplug settlements, it is likely that more claimants could be coming. Though it might be difficult to determine the amount of monetary damages 3M will face, it is estimated that the settlement could be in the multibillion-dollar range.
At the end of the first quarter of 2022, 3M had $3.2 billion in cash and $5.9 billion in net income in 2021. So, the settlement over the earplugs probably won't put the company out of business. However, cash settlements and litigation costs could limit 3Ms ability to grow the company, pay its dividend, and repurchase shares.
Assessing the magnitude of the risk embedded in 3M stock regarding the earplug case may be difficult, but there is a risk regardless. The tanking stock market may be giving opportunistic investors plenty of bargains for the long run. Though 3M stock is down nearly 35% over the last year, this stock may not be one of those bargains.