# Solventum Corp (SOLV) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from Solventum Corp's 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/1964738/000196473825000019/solv-20241231.htm Accession: 0001964738-25-000019 Filing date: 2025-02-28 Report date: 2024-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/SOLV/ All MD&A years: /company/SOLV/mda/ Next year: /company/SOLV/mda/fy2025/ (FY 2025) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and corresponding notes elsewhere in this Annual Report on Form 10-K. The following discussion and analysis provides information management believes to be relevant to understanding the financial condition and results of operations of Solventum for the years ended December 31, 2024 and 2023. This discussion contains forward-looking statements that are based upon current expectations and are subject to uncertainty and changes in circumstances. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors.” See “Cautionary Note Regarding Forward-Looking Statements.” All amounts discussed are in millions of U.S. dollars, unless otherwise indicated. Certain columns and rows within tables may not add up due to the use of rounded numbers. 42 Table of Contents Unless the context otherwise requires, references to “Solventum” and the “Company” refer to (i) 3M’s Health Care Business prior to the Spin-Off as a carve-out business of 3M and (ii) Solventum Corporation and its subsidiaries following the Spin-Off. Transition to Standalone Company Solventum utilized allocations and carve-out methodologies through the date of the Spin-Off to prepare combined financial statements. The consolidated financial statements herein for periods prior to the Spin-Off may not be indicative of the Company’s future performance, do not necessarily include the actual expenses that would have been incurred, and may not reflect our results of operations, financial position, and cash flows had we been a separate, standalone company during the historical periods presented. In particular, Solventum benefited from 3M’s long operating history, reputation and well-known brand. Following the separation, Solventum is operating under its own brand, and accordingly may be negatively impacted due to the loss of benefits conferred by 3M’s brand recognition and reputation. In addition, the debt obligations incurred by Solventum in connection with the separation will adversely affect its profitability and could affect its ability to use its cash flow for investing in the business, strategic transactions, including mergers and acquisitions, and returning capital. See Note 1, “Significant Accounting Policies - Organization and Description of Business and Basis of Presentation” to the consolidated financial statements and Part 1, Item 1A “Risk Factors” for additional information. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of Solventum’s financial statements with a narrative from the perspective of management. Solventum’s MD&A is presented in the following sections: •Overview •Results of Operations •Performance by Business Segment •Geographic Area Supplemental Information •Critical Accounting Estimates •New Accounting Pronouncements •Financial Condition and Liquidity •Financial Instruments Overview Solventum is a leading global healthcare company developing, manufacturing, and commercializing a broad portfolio of solutions that leverages deep material science, data science, and digital capabilities to address critical customer and patient needs. We constantly seek to enable the improvement of standards of care and move healthcare forward with innovation powered by insights, clinical intelligence, technology, and manufacturing expertise. Our 70+ year history of discovering and innovating advanced solutions has helped us solve our customers’ toughest challenges and become a trusted partner. Operating Segments and Sales Change Information Solventum manages its operations in four business segments: MedSurg, Dental Solutions, Health Information Systems, and Purification and Filtration. References are made to organic sales change, which is defined as the change in net sales, absent the separate impacts on sales from foreign currency translation and acquisitions, net of divestitures. Other, as comprised in the tables below, includes acquisition and divestiture-related activities. Acquisitions include non-health care related supply agreements that conveyed from 3M to the Company at Spin-Off and sales from new supply agreements with 3M that commenced at Spin-Off. Divestiture impacts include lost sales from the Company’s dental anesthetics business that was sold in August 2023 as well as lost sales from certain health care businesses retained by 3M India in connection with the Spin-Off. Solventum believes this information is useful to investors and management in understanding ongoing operations and in analysis of ongoing operating trends. Sales and operating income by business segment: The following tables contain sales and operating results by business segment for all periods presented. The Company’s use of the term “NM” reflects results considered not material due to not having material activity in comparable prior years. Refer to the section entitled “—Performance by Business Segment” below for discussion of sales change and operating performance. Refer to Note 17 to the consolidated financial statements for additional information on business segments. 43 Table of Contents Segment and Total Company Net Sales [[GREPCENT_TABLE]] [["","","Year ended December 31,"],["(Dollars in millions)","","2024","","2023","","Total","","Currency Impact","","Other","","Organic"],["Segment Sales"],["MedSurg","","$","4,637","","","$","4,632","","","0.1","%","","(0.6)","%","","(0.5)","%","","1.2","%"],["Dental Solutions","","1,295","","","1,329","","","(2.6)","","","(0.7)","","","(1.5)","","","(0.4)"],["Health Information Systems","","1,306","","","1,285","","","1.6","","","\u2014","","","\u2014","","","1.6"],["Purification and Filtration","","956","","","951","","","0.6","","","(0.7)","","","(0.9)","","","2.1"],["Corporate and Unallocated","","59","","","\u2014","","","NM","","NM","","NM","","NM"],["Total Company","","$","8,254","","","$","8,197","","","0.7","%","","(0.5)","%","","\u2014","%","","1.2","%"],["","","Year ended December 31,"],["(Dollars in millions)","","2023","","2022","","Total","","Currency Impact","","Other","","Organic"],["Segment Sales"],["MedSurg","","$","4,632","","","$","4,585","","","1.0","%","","(0.6)","%","","\u2014","%","","1.6","%"],["Dental Solutions","","1,329","","","1,327","","","0.2","","","(0.4)","","","(1.0)","","","1.6"],["Health Information Systems","","1,285","","","1,227","","","4.7","","","\u2014","","","\u2014","","","4.7"],["Purification and Filtration","","951","","","991","","","(4.0)","","","(0.4)","","","\u2014","","","(3.6)"],["Corporate and Unallocated","","\u2014","","","\u2014","","","\u2014","","\u2014","","","\u2014","","","\u2014"],["Total Company","","$","8,197","","","$","8,130","","","0.8","%","","(0.4)","%","","(0.2)","%","","1.4","%"]] [[/GREPCENT_TABLE]] Segment and Total Company Operating Income [[GREPCENT_TABLE]] [["","","Year ended December 31,"],["(Dollars in millions)","","2024","","2023","","2024 vs 2023 change"],["Segment Operating Income"],["MedSurg","","$","887","","","$","1,107","","","(19.9)","%"],["Dental Solutions","","350","","","442","","","(20.8)"],["Health Information Systems","","431","","","423","","","1.9"],["Purification and Filtration","","94","","","162","","","(42.0)"],["Corporate and Unallocated","","(726)","","","(442)","","","64.3"],["Total Company","","$","1,036","","","$","1,692","","","(38.8)","%"],["","","Year ended December 31,"],["(Dollars in millions)","","2023","","2022","","2023 vs 2022 change"],["Segment Operating Income"],["MedSurg","","$","1,107","","","$","1,061","","","4.3","%"],["Dental Solutions","","442","","","437","","","1.1"],["Health Information Systems","","423","","","359","","","17.8"],["Purification and Filtration","","162","","","177","","","(8.5)"],["Corporate and Unallocated","","(442)","","","(341)","","","29.6"],["Total Company","","$","1,692","","","$","1,693","","","(0.1)","%"]] [[/GREPCENT_TABLE]] 44 Table of Contents Net Sales by Geographic Area While the Company manages its businesses globally and believes its business segment results are the most relevant measure of performance, the Company also utilizes geographic area data as a secondary performance measure. Sales are generally reported within the geographic area that originated the invoice to the Company's customer. Additional geographic financial information related to the Company’s operations is provided in Note 17 in the accompanying consolidated financial statements. Percent change information compares year ended December 31, 2024 and December 31, 2023 with the same periods for the prior year, unless otherwise indicated. [[GREPCENT_TABLE]] [["","","Year ended December 31, 2024"],["","","United States","","International","","Worldwide"],["Net sales (millions)","","$","4,749","","","$","3,505","","","$","8,254"],["% of worldwide sales","","57.5","%","","42.5","%","","100.0","%"],["Increase/(decrease)"],["Total","","3.2","%","","(2.5)","%","","0.7","%"],["Currency Impact","","\u2014","","","(1.2)","","","(0.5)"],["Other","","1.5","","","(1.9)","","","\u2014"],["Organic","","1.7","%","","0.6","%","","1.2","%"],["","","Year ended December 31, 2023"],["","","United States","","International","","Worldwide"],["Net sales (millions)","","$","4,603","","","$","3,594","","","$","8,197"],["% of worldwide sales","","56.2","%","","43.8","%","","100.0","%"],["Increase/(decrease)"],["Total","","3.4","%","","(2.3)","%","","0.8","%"],["Currency Impact","","\u2014","","","(1.0)","","","(0.4)"],["Other","","\u2014","","","(0.4)","","","(0.2)"],["Organic","","3.4","%","","(0.9)","%","","1.4","%"]] [[/GREPCENT_TABLE]] Additional information beyond what is included in the preceding table is as follows: Year ended 2024 results •In the United States geographic area, both total sales and organic sales increased. Organic growth was led by MedSurg and Health Information Systems. •In the International geographic area, total sales decreased while organic sales increased. Organic growth was led by Purification and Filtration. Year ended 2023 results •In the United States geographic area, all business segments saw organic sales growth year on year, led by Health Information Systems and MedSurg. •In the International geographic area, total sales growth and organic sales growth decreased. Organic growth decline in Purification and Filtration was partially offset by organic growth in MedSurg and Dental Solutions. Managing currency risks Prior to April 1, 2024, Solventum indirectly participated in 3M’s centrally managed hedging program, which utilizes a number of tools to manage currency risk including natural hedges such as pricing, productivity, hard currency, hard currency-indexed billings, and localizing source of supply. 3M also used financial hedges to mitigate currency risk. Starting in the second quarter of 2024, Solventum established its own hedging program. Refer to Note 10 to the consolidated financial statements for additional details. The stronger U.S. dollar had a negative worldwide impact on sales for the year ended December 31, 2024 compared to 2023. Solventum estimates that year-on-year foreign currency transaction effects, including hedging impacts, decreased pre-tax income by approximately $23 million in 2024. 45 Table of Contents Financial condition Refer to the section entitled “—Financial Condition and Liquidity” below for a discussion of items impacting cash flows. Results of Operations Net Sales Refer to the preceding “—Overview” section and the “—Performance by Business Segment” section later in MD&A for discussion of sales change. Costs of Sales [[GREPCENT_TABLE]] [["","","Year ended Year ended December 31,"],["(Percent of corresponding net sales)","","2024","","2023","","2022","","2024 vs 2023","","2023 vs 2022"],["Cost of product","","50.0","%","","48.0","%","","46.9","%","","2.0","%","","1.1","%"],["Cost of software and rentals","","25.7","","","25.3","","","26.3","","","0.4","","","(1.0)"]] [[/GREPCENT_TABLE]] Costs of Product Costs of product includes manufacturing, engineering and freight costs. Costs of product, measured as a percent of sales of product, increased in 2024 when compared to 2023. The increase was driven by increased costs due to the impact of higher costs on inventory sourced under the master supply and transition manufacturing agreements with 3M and due to the cost of other transition support provided by 3M. Costs of product, measured as a percent of sales of product, increased in 2023 when compared to 2022. Material and labor inflation, partially offset by benefits from both price and logistics costs, drove an increase of 0.7%. The material and labor inflation was primarily driven by a 1.4% impact from a higher cost of inventory produced in 2022 but sold in 2023. Costs of Software and Rentals Costs of software and rentals includes compensation-related costs associated with installation, training and maintenance for our software products, and depreciation, maintenance and refurbishment costs and freight costs related to our hardware rental units. Costs of software and rentals, measured as a percent of sales of software and rentals, increased in 2024 as compared to 2023. This increase was driven by higher compensation costs. Costs of software and rentals, measured as a percent of sales of software and rentals, decreased in 2023 as compared to 2022 due to product mix from higher software sales. Operating Expenses [[GREPCENT_TABLE]] [["","","Year ended December 31,"],["(Percent of total net sales)","","2024","","2023","","2022","","2024 vs 2023","","2023 vs 2022"],["Selling, general and administrative (SG&A)","","33.7","%","","27.4","%","","27.5","%","","6.3","%","","(0.1)","%"],["Research and development (R&D)","","9.4","","","9.2","","","9.4","","","0.2","","","(0.2)"],["Operating Income","","12.6","","","20.6","","","20.8","","","(8.0)","","","(0.2)"]] [[/GREPCENT_TABLE]] Selling, General and Administrative SG&A, measured as a percent of total net sales, increased in 2024 when compared to 2023. The increase was driven by higher compensation, including equity-based awards, and higher costs associated with both initial stand-up and ongoing operations to support a standalone company. SG&A, measured as a percent of total net sales, decreased slightly in 2023 when compared to 2022. This decrease was driven by the impact of the gain related to the sale of the Company’s dental local anesthetic business of 0.7%, partially offset by higher expense due to restructuring charges of 0.5%. 46 Table of Contents Research and Development R&D, measured as a percent of total net sales, increased slightly in 2024 when compared to 2023 due to initial stand-up costs. The Company continues to prioritize investment initiatives. R&D, measured as a percent of total net sales, decreased slightly in 2023 when compared to 2022 as the Company prioritized investment initiatives. Interest Expense, Net and Other Expense (Income), Net [[GREPCENT_TABLE]] [["","","Year ended December 31,"],["(Dollars in millions)","","2024","","2023","","2022"],["Interest expense, net","","$","367","","","$","\u2014","","","$","\u2014"],["Other expense (income), net","","$","64","","","$","25","","","$","1"]] [[/GREPCENT_TABLE]] Interest expense, net includes interest accrued on debt obligations, offset by interest income from cash and marketable securities. Interest expense, net increased in 2024 as compared to 2023 due to interest incurred on the February 2024 issuance of senior notes and March 2024 draw on the senior term loan credit facilities. Refer to Note 8 to the consolidated financial statements for more information. This increase was partially offset by interest earned from cash and marketable securities held during the period. There was no material activity in the years ended December 31, 2023 or 2022. Other expense (income), net includes the non-service component of periodic pension cost, investment gains and losses, and currency-related impacts from foreign currency translation. Other expense (income), net increased in 2024 as compared to 2023 resulting from charges associated with the substantial liquidation of foreign operations completed as part of our separation from 3M in addition to foreign currency impacts and investment losses. Other expense (income), net increased in 2023 as compared to 2022 due to investment losses and higher foreign currency transaction losses. Provision (benefit) for Income Taxes: [[GREPCENT_TABLE]] [["","","Year ended December 31,"],["(Percent of pre-tax income/loss)","","2024","","2023","","2022"],["Effective tax rate","","20.9","%","","19.3","%","","20.6","%"]] [[/GREPCENT_TABLE]] Refer to Note 7 to the consolidated financial statements for further discussion of income taxes. Performance by Business Segment Note 17 to the consolidated financial statements provides an overview of Solventum’s business segments in addition to disclosures relating to Solventum’s segments. We manage our operations in four business segments. The reportable segments are MedSurg, Dental Solutions, Health Information Systems, and Purification and Filtration. Our Chief Operating Decision Maker evaluates segment operating performance using net sales and business segment operating income. Corporate and Unallocated Certain items are maintained at the corporate level and not allocated to the segments ("Corporate and Unallocated"). Prior to Spin-Off, Corporate and Unallocated primarily included amortization of acquired intangible assets, restructuring and related charges, and benefits or costs related to capitalized manufacturing variances. Corporate and Unallocated also includes Spin-Off and separation related costs. Spin-Off and separation related costs include any costs incurred as part of our separation from 3M and costs to setup operations as a standalone company, including system implementations, manufacturing relocations, legal entity separations, certain equity awards granted as part of the Spin-Off, profit mark-ups on transition service arrangements with 3M and other one-time costs. Corporate and Unallocated also includes sales and cost of sales related to our supply agreements with 3M and other supply agreements assumed by the Company at Spin-Off related to legacy 3M businesses. Because Corporate and Unallocated includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis. Operating Business Segments Information related to the Company’s segments is presented in the tables that follow with additional context in the corresponding narrative below the tables. 47 Table of Contents MedSurg (56.2% of consolidated sales for the year ended December 31, 2024 ) [[GREPCENT_TABLE]] [["","","Year ended December 31,"],["","","2024","","2023","","2022"],["Net sales (millions)","","$","4,637","","$","4,632","","$","4,585"],["Increase/(decrease)"],["Organic","","1.2","%","","1.6","%","","2.7","%"],["Other","","(0.5)","","","\u2014","","","\u2014"],["Currency Impact","","(0.6)","","","(0.6)","","","(3.7)"],["Total","","0.1","%","","1.0","%","","(1.0","%)"],["Business segment operating income (millions)","","$","887","","$","1,107","","$","1,061"],["Percent change","","(19.9)","%","","4.3","%","","(13.5","%)"],["Percent of sales","","19.1","%","","23.9 %","","23.1 %"]] [[/GREPCENT_TABLE]] Year 2024 results: Sales in MedSurg were up 0.1%: •Organic sales growth of 1.2% was driven by volumes, primarily due to benefits from medical OEM products, I.V. site management, and single-use negative pressure wound therapy, partially offset by declines in traditional negative pressure wound therapy and sterilization assurance products. •Other includes lost sales from certain health care businesses retained by 3M India in connection with the Spin-Off. •Foreign currency translation negatively impacted sales by (0.6%). Business segment operating income margin decreased when compared to the same period last year. The decrease was driven by higher costs to stand-up and operate our standalone structure after Spin-Off. Year 2023 results: Sales in MedSurg were up 1.0%: •Organic sales growth of 1.6% was driven by price partially offset by lower volume. Volume declines from our microfluidics and hand hygiene product lines, which benefited from higher sales during the pandemic, negatively impacted growth by 1.1%. Business segment operating income margin increased when compared to the same period last year. The increase was driven by spending control and price partially offset by material inflation. Dental Solutions (15.7% of consolidated sales for the year ended December 31, 2024) [[GREPCENT_TABLE]] [["","","Year ended December 31,"],["","","2024","","2023","","2022"],["Net sales (millions)","","$","1,295","","$","1,329","","$","1,327"],["Increase/(decrease)"],["Organic","","(0.4)","%","","1.6","%","","(0.1)","%"],["Other","","(1.5)","","","(1.0)","","","\u2014"],["Currency Impact","","(0.7)","","","(0.4)","","","(4.8)"],["Total","","(2.6)","%","","0.2","%","","(4.9)","%"],["Business segment operating income (millions)","","$","350","","","$","442","","","$","437"],["Percent change","","(20.8)","%","","1.1","%","","(9.3)","%"],["Percent of sales","","27.0","%","","33.3","%","","32.9","%"]] [[/GREPCENT_TABLE]] Year 2024 results: Sales in Dental Solutions were down (2.6%): •Volume declines associated with softening end-market demand were partially offset by the favorable impact of prior year price actions. 48 Table of Contents •Other is primarily driven by lost sales from the Company’s dental anesthetics business that was sold in August 2023 as well as lost sales from certain health care businesses retained by 3M India in connection with the Spin-Off. •Foreign currency translation negatively impacted sales by (0.7%). Business segment operating income margin decreased when compared to the same period last year as a result of higher costs to stand-up and operate our standalone structure after Spin-Off. Year 2023 results: Sales in Dental Solutions were up 0.2%: •Positive volume and price growth of 3.5% from dental products were partially offset by declines in traditional orthodontic products. •Other was negatively impacted by 1.1% due to the exit of Health Care operations in Russia. Business segment operating income margin increased slightly when compared to the same period last year as price increases offset the cost of material inflation. Health Information Systems (15.8% of consolidated sales for year ended December 31, 2024) [[GREPCENT_TABLE]] [["","","Year ended December 31,"],["","","2024","","2023","","2022"],["Net sales (millions)","","$","1,306","","","$","1,285","","","$","1,227"],["Increase/(decrease)"],["Organic","","1.6","%","","4.7","%","","6.6","%"],["Other","","\u2014","","\u2014","","","\u2014"],["Currency Impact","","\u2014","","\u2014","","(0.8)"],["Total","","1.6","%","","4.7","%","","5.8","%"],["Business segment operating income (millions)","","$","431","","","$","423","","","$","359"],["Percent change","","1.9","%","","17.8","%","","1.4","%"],["Percent of sales","","33.0","%","","32.9","%","","29.3","%"]] [[/GREPCENT_TABLE]] Year 2024 results: Sales in Health Information Systems were up 1.6%: •Positive sales growth was driven by continued adoption of our 3MTM 360 EncompassTM. •Clinician productivity solutions declined primarily due to impacts from changing market conditions. Business segment operating income margin increased slightly when compared to the same period last year as product mix benefit due to higher software sales and lower professional services was partially offset by higher compensation costs. Year 2023 results: Sales in Health Information Systems were up 4.7%: •Sales growth was broadly driven across the portfolio, including revenue cycle management, performance management and clinician productivity solutions. Growth was driven by both new customers and product upgrades at existing customers. •Sales growth was negatively impacted by delays to customers’ investments in IT, which were driven by ongoing stress on hospital budgets. Business segment operating income margin increased when compared to the same period last year driven by both price increases and lower spending, partially offset by wage inflation. Volume growth into higher margin products drove mix benefit. 49 Table of Contents Purification and Filtration (11.6% of consolidated sales for the year ended December 31, 2024) [[GREPCENT_TABLE]] [["","","Year ended December 31,"],["","","2024","","2023","","2022"],["Net sales (millions)","","$","956","","$","951","","$","991"],["Increase/(decrease)"],["Organic","","2.1","%","","(3.6)","%","","7.1","%"],["Other","","(0.9)","","","\u2014","","","\u2014"],["Currency Impact","","(0.7)","","","(0.4)","","","(6.3)"],["Total","","0.6","%","","(4.0)","%","","0.8","%"],["Business segment operating income (millions)","","$","94","","","$","162","","","$","177"],["Percent change","","(42.0)","%","","(8.5)","%","","(22.7)","%"],["Percent of sales","","9.9","%","","17.0","%","","17.9","%"]] [[/GREPCENT_TABLE]] Year 2024 results: Sales in Purification and Filtration were up 0.6%: •Primarily driven by higher volume growth in our bioprocessing filtration product category. This growth was partially offset by our membranes OEM and drinking water filtration product categories. •Other includes lost sales from certain health care businesses retained by 3M India in connection with the Spin-Off. •Foreign currency translation negatively impacted sales by (0.7%). Business segment operating income margin decreased primarily due to the negative impact from costs to stand-up and operate our standalone structure after Spin-Off. Year 2023 results: Sales in Purification and Filtration were down 4.0%. •Sales growth was primarily impacted by inventory rebalancing at our bioprocessing filtration customers, which reduced sales by 5.4%. This decline was partially offset by growth in our separation products. Business segment operating income margin decreased primarily due to the negative impact of product mix from lower bioprocessing filtration sales. Geographic Area Supplemental Information [[GREPCENT_TABLE]] [["","","Employees as of December 31,","","Capital Spending for the year ended December 31,","","Property, Plant and Equipment - net as of December 31,"],["(Millions, except Employees)","","2024","","2023","","2022","","2024","","2023","","2022","","2024","","2023","","2022"],["United States","","10,919","","","10,906","","","9,850","","","$","229","","","$","160","","","$","144","","","$","893","","","$","770","","","$","718"],["International","","11,062","","","11,101","","","10,248","","","151","","","130","","","107","","","729","","","687","","","601"],["Total Company","","21,981","","","22,007","","","20,098","","","$","380","","","$","290","","","$","251","","","$","1,622","","","$","1,457","","","$","1,319"]] [[/GREPCENT_TABLE]] Employment: Employment decreased slightly in 2024 when compared to 2023 and increased in 2023 when compared to 2022. The above table includes the impact of acquisitions and other actions. Capital Spending and Property, Plant and Equipment - Net: Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and increasing manufacturing efficiency. The Company is increasing its investment in manufacturing and sourcing capability in order to more closely align its production capability with its sales in major geographic areas in order to best serve its customers 50 Table of Contents throughout the world with proprietary, automated, efficient, safe and sustainable processes. Capital spending is discussed in more detail below in the section entitled “—Cash Flows from Investing Activities.” Critical Accounting Estimates Information regarding significant accounting policies is included in Note 1 of the accompanying consolidated financial statements. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions. Such estimates and assumptions are subject to inherent uncertainties which may result in actual amounts differing from these estimates. The Company considers the items below to be critical accounting estimates. Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the Company. Legal Proceedings Assessments of lawsuits and claims can involve a series of complex judgments about future events, the outcomes of which are inherently uncertain, and can rely heavily on estimates and assumptions. The Company accrues an estimated liability for legal proceeding claims that are both probable and reasonably estimable in accordance with Accounting Standard Codification (ASC) 450, Contingencies. Please refer to the section entitled “Process for Disclosure and Recording of Liabilities Related to Legal Proceedings” (contained in “Legal Proceedings” in Note 11 to the accompanying consolidated financial statements) for additional information about such estimates. Goodwill The Company makes certain estimates and judgments in impairment assessments of goodwill. Goodwill is tested for impairment annually in the fourth quarter of each year, as further discussed below, and is tested between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level, with all goodwill assigned to a reporting unit. The Company's reporting units correspond to a business segment as this represents the lowest level of discrete financial information below sales that is available and is regularly reviewed by segment management. An impairment loss would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The estimated fair value of a reporting unit is determined based on a market approach using comparable company information such as EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. The Company also performs a discounted cash flow analysis for certain reporting units where the market approach indicates additional review is warranted. A discounted cash flow analysis involves key assumptions including projected sales, EBITDA margins, capital expenditures, and discount rates. Changes in reporting unit earnings, comparable company information, and expected future cash flows, as well as underlying market and overall economic conditions, among other factors, make these estimates subject to uncertainty. The Company did not perform a discounted cash flow analysis for any reporting unit for any period presented, as the market approach analysis resulted in sufficient headroom between the fair value and the carrying value for each of the Company's reporting units. As of December 31, 2024, goodwill totaled approximately $6.4 billion. The Company has four reporting units, with the MedSurg reporting unit accounting for approximately 56 percent of the goodwill. Based on the annual tests in the fourth quarter of 2024, 2023, and 2022, no goodwill impairment was indicated for any of the Company's reporting units. Further, there were no events or changes in circumstances during the year ended December 31, 2024 that would indicate the carrying amount of a reporting unit may be impaired. The Company will continue to monitor its reporting units for any triggering events or other indicators of impairment. New Accounting Pronouncements Information regarding new accounting pronouncements is included in Note 1 to the Company's consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Financial Condition and Liquidity The strength and stability of Solventum’s operating model and strong free cash flow capability provides financial flexibility and enables the Company to invest through business cycles. Historically, Solventum generated positive operating cash flows and a majority of such cash flows were transferred to 3M as part of 3M’s cash pooling arrangements, the effect of which is presented as Net transfers to 3M in our consolidated financial statements. 51 Table of Contents Upon completion of the Spin-Off, Solventum has ceased participation in 3M's cash pooling arrangement and our cash and cash equivalents are held and used solely for our own operations. As a result, the Company's capital structure, long-term commitments and sources of liquidity have changed significantly. Debt and Credit Facilities On February 16, 2024, the Company entered into a five-year $2.0 billion unsecured revolving credit facility expiring in 2029, an 18-month senior unsecured term loan facility of $500 million and a three-year senior unsecured term loan facility of $1.0 billion (collectively, the “Facilities”). In March 2024, the Company withdrew $1.48 billion under the Facilities. The funds from the Facilities were transferred to 3M as partial consideration for the Spin-Off. On February 27, 2024, Solventum issued $6.9 billion of Senior Notes in preparation for the payment of partial consideration to 3M in connection with the Spin-Off. In August 2024, the Company prepaid $200 million of the outstanding principal amount from the 18-month senior unsecured term loan credit facility. In December 2024, the Company prepaid an additional $100 million of the outstanding principal amount from the same facility. The Company also had approximately $40 million in bank guarantees, surety bonds, and other similar instruments issued and outstanding at December 31, 2024. These instruments are utilized in connection with normal business activities. Refer to Note 8 of the Company's consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information. Commercial Paper On March 4, 2024, the Company entered into a commercial paper program that allows it to issue up to $2.0 billion aggregate principal amount of short-term notes to finance short-term liabilities. Any such issuance will mature within 364 days from date of issue. There was no commercial paper outstanding as of December 31, 2024. Cash, cash equivalents and marketable securities As of December 31, 2024, Solventum had $762 million of cash and cash equivalents, of which approximately $611 million was held by the Company’s foreign subsidiaries and approximately $151 million was held in the United States. These balances are invested in bank instruments and other high-quality fixed income securities. As of December 31, 2023, Solventum had $194 million of cash and cash equivalents, of which approximately $150 million was held by the Company’s foreign subsidiaries and $44 million was held in the United States. There were immaterial amounts of marketable securities at both December 31, 2024 and December 31, 2023. The increase from December 31, 2023 resulted from both cash retained by the Company at Spin-Off and operating cash flow generated by the Company subsequent to the Spin-Off. Cash Flows Cash flows from operating, investing and financing activities are provided in the tables that follow. Individual amounts in the consolidated statements of cash flows exclude the effect of exchange rate impacts on cash and cash equivalents, which are presented separately in the cash flows. Thus, the amounts presented in the following operating, investing and financing activities tables reflect changes in balances from period to period adjusted for these effects. Cash Flows from Operating Activities: [[GREPCENT_TABLE]] [["","","Year ended December 31,"],["(Millions)","","2024","","2023","","2022"],["Cash Flows from Operating Activities"],["Net income","","$","479","","","$","1,346","","","$","1,343"],["Adjustments to reconcile net income to net cash provided by operating activities"],["Depreciation and amortization","","555","","","561","","","578"],["Postretirement benefit plan expense","","34","","","41","","","64"],["Stock-based compensation expense","","112","","","39","","","37"],["Gain on business divestitures","","\u2014","","","(56)","","","\u2014"],["Deferred income taxes","","(155)","","","(142)","","","(141)"],["Changes in assets and liabilities"],["Accounts receivable","","43","","","(129)","","","(32)"],["Due from related parties","","233","","","\u2014","","","\u2014"],["Inventories","","(132)","","","23","","","(82)"],["Accounts payable","","266","","","105","","","25"],["Due to related parties","","(565)","","","\u2014","","","\u2014"],["All other operating activities","","315","","","127","","","(113)"],["Net cash provided by operating activities","","$","1,185","","","$","1,915","","","1,679"]] [[/GREPCENT_TABLE]] In 2024, cash flows provided by operating activities decreased compared to 2023 primarily due to lower net income. Cash flow activity with 3M is reflected in the due from and due to related parties. This activity includes settlement of payables and receivables transferred at Spin-Off related to operating transactions between 3M and Solventum entities that occurred prior to the Spin-Off and transactions under the transition agreements with 3M. In 2023, cash flows provided by operating activities increased compared to 2022 primarily due to decreases in inventories, increases in accounts payable, and higher year over year accrued compensation, partially offset by increases in accounts receivables. The lower cash outflows from inventory was driven by supply chain stabilization. Cash Flows from Investing Activities: [[GREPCENT_TABLE]] [["","","Year ended December 31,"],["(Millions)","","2024","","2023","","2022"],["Cash Flows from Investing Activities"],["Purchases of property, plant and equipment","","$","(380)","","","$","(290)","","","(251)"],["Proceeds from sale of business","","\u2014","","","60","","","\u2014"],["Other \u2014 net","","\u2014","","","\u2014","","","(2)"],["Net cash used in investing activities","","$","(380)","","","$","(230)","","","(253)"]] [[/GREPCENT_TABLE]] Purchases of property, plant and equipment increased in 2024 as compared to 2023. The increase is primarily driven by additional separation related capital spending as the Company relocates manufacturing and source of supply from 3M. In addition, the Company is focused on investments to support growth, renewal and maintenance programs, and environmental health services. Overall property, plant and equipment spending increased in 2023 as compared to 2022 as the Company continues to invest in growth, productivity and sustainability. Proceeds from sale of businesses include the sale of assets associated with the Company’s dental local anesthetic business. Cash Flows from Financing Activities: [[GREPCENT_TABLE]] [["","","Year ended December 31,"],["(Millions)","","2024","","2023","","2022"],["Cash Flows from Financing Activities"],["Repayment of debt","","$","(300)","","","$","\u2014","","","\u2014"],["Net transfers to 3M","","(8,251)","","","(1,553)","","","(1,456)"],["Proceeds from long-term debt, net of issuance costs","","8,303","","","\u2014"],["Other \u2014 net","","8","","","1","","","(4)"],["Net cash provided by (used in) financing activities","","$","(240)","","","$","(1,552)","","","(1,460)"]] [[/GREPCENT_TABLE]] Proceeds from long-term debt of $8.3 billion were related to the first quarter issuance of $6.9 billion in senior notes and $1.5 billion in senior term loan credit facilities. The proceeds from these financing transactions were transferred to 3M in connection with the Spin-Off transaction, other than the amounts retained in order to achieve the $600 million retained cash target. The Company repaid $300 million outstanding principle issued under the senior term loan credit facilities. Financing cash outflows increased in 2023 due to higher net transfers to 3M. Material Cash Requirements from Known Contractual and Other Obligations: Solventum’s material cash requirements from known contractual and other obligations primarily relate to the following, for which information on both a short-term and long-term basis is provided in the indicated notes to the consolidated financial statements: •Tax obligations—Refer to Note 7 to the consolidated financial statements. •Debt—Refer to Note 8 to the consolidated financial statements. •Commitments and contingencies—Refer to Note 11 to the consolidated financial statements. •Operating leases—Refer to Note 12 to the consolidated financial statements. Solventum purchases the majority of its materials and services as needed, with no unconditional commitments. In limited circumstances, in the normal course of business, the Company enters into unconditional purchase obligations with various vendors that may take the form of, for example, take or pay contracts in which the Company guarantees payment to ensure availability of certain materials or services or to ensure ongoing efforts on capital projects. The Company expects to receive underlying materials or services for these purchase obligations. To the extent the limited amount of these purchase obligations fluctuates, it largely trends with normal-course changes in regular operating activities. Additionally, contractual capital commitments represent a small part of the Company’s expected capital spending. Financial Instruments The Company enters into foreign exchange forward contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies and to offset, in part, the impacts of changes in value of various non-functional currency denominated items including certain intercompany financing balances. As circumstances warrant, the Company also uses cross currency swaps as hedging instruments to hedge portions of the Company’s net investments in foreign operations. To help manage borrowing costs, the Company may enter into interest rate swaps, interest rate locks or other hedging instruments. Refer to Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” for further discussion of foreign exchange rates risk, and interest rates risk and commodity prices risk.