This Dow Jones Stock Has a Big Risk You Didn’t Know About
3M (MMM 2.04%) has been making its way through the legal saga for several years regarding earplugs sold to the US military. The saga may have taken a definite turn this summer as evidence from a separate lawsuit regarding patent infringement is now being used to escalate troop liability cases against 3M and cripple its defense .
Liabilities for 3M could easily exceed $1 billion if all these cases were to be lost.
3M’s courtroom drama heats up
3M is fighting several cases involving military veterans who say they used 3M’s special combat earplugs and are now suffering from varying levels of hearing loss. 3M says they are non-responsive and that the earplugs are safe and effective when used properly. There are already 115,000 claims filed by the giants against 3M and another 120,000 cases are likely to be added to the docket. This massive influx of claims pertains to a separate courtroom fight between 3M and an earplug competitor named Moldex.
How did 3M get here?
It all started when 3M bought Aero Technology back in 2008 for $1.2 billion. Arrow created two-way earplugs that allowed wearers to hear conversations when one side was inserted into the ear and nothing when the other side was inserted. Competition between 3M’s Aearo subsidiary and Moldex began to intensify in 2012 when 3M filed a patent-infringement case against Moldex related to earplugs. 3M withdrew its patent suit in 2013.
Then, later in 2013, Moldex filed suit against 3M, claiming that it used the patent-infringement case to dominate the earplug market and oust Moldex. In the discovery phase of that lawsuit, Moldex obtained evidence that Aero Technologies knew its military-grade earplugs had problems in the early 2000s. Despite the known issues, Aero apparently continued to sell earplugs to the military through 2015, which was largely consistent with the evidence. Presented in court.
The evidence was so compelling that 3M settled with Senna and Moldex in 2018. Military veterans who sustained hearing loss learned of these settlements and began filing their own claims against 3M. So far, 16 cases have been tried in which 10 veterans have won their suits and 3M has won six. Another eight cases have been dismissed for various reasons.
Where is 3M now?
In conjunction with the release of 3M’s second-quarter earnings report earlier this week, the company issued a press release saying it was taking action to resolve a lawsuit related to its Combat Arms earplugs and that its Aearo subsidiary Had voluntarily entered Chapter 11 bankruptcy. As part of the bankruptcy proceedings, Arrow will set up a trust and set aside $1 billion to fund it to resolve these potential claims. 3M also pledged another $240 million in legal fees. In its earnings report, the company took a pretax charge of $1.2 billion in connection with the lawsuits.
At first blush, the cash set aside for lawsuits seems manageable, considering 3M total earnings. For example, 3M still reported $0.14 in GAAP earnings per share for the quarter, even after setting aside $1.2 billion. In addition, the company has approximately $3 billion in cash and marketable securities on its balance sheet.
The investor concern here is whether 3M’s liabilities may have been underestimated. In the cases of 3M losing earplugs so far, veterans were awarded at least $1.7 million and as much as $77.5 million in damages. With more than 230,000 pending and docked claims, some are wondering whether 3M’s total liability is more likely to be in the multi-billion-dollar range.
What should investors do with this 3M information?
3M stock is down 20% to date, which is worse than the S&P 500’s 13.9% drop or the Dow Jones Industrial Average’s 10.1% drop, but not terrible considering the 3M news coming in as of late. The stock price is actually up about 6% since the bankruptcy news was announced. This could mean that investors are not concerned with the company’s potential earplug liability or that the stock price is already included in the potential liabilities.
These matters are likely to take years to play out and it is unclear what the final tally on liability will be or how long it will take 3M stock to recover. But if it turns out to be worse than expected, shareholders should now know what they’re doing with this stock.
BJ Cook does not hold any position in any of the stocks mentioned. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.