REG - 3M Company - Annual Financial Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 4
01/04/2016 14:49
- Part 4: For the preceding part double click ID:nRSO0010Pc
medium-term notes
program (Series F) under which 3M may issue, from time to time, up to $9 billion aggregate principal amount of notes.
Included in this $9 billion are $8.17 billion (utilizing the foreign exchange rate applicable at the time of issuance for
the Euro denominated debt) of notes previously issued in 2011, 2012, 2014, and 2015 as part of Series F. Information with
respect to long-term debt issuances and maturities for the periods presented is included in Note 10.
In August 2014, 3M amended and extended its existing $1.5 billion five-year multi-currency revolving credit agreement to a
$2.25 billion five-year multi-currency revolving credit agreement, with an expiration date of August 2019. This credit
agreement includes a provision under which 3M may request an increase of up to $2.25 billion, bringing the total facility
up to $4.5 billion (at the lenders' discretion). This facility was undrawn at December 31, 2015. Under the $2.25 billion
credit agreement, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at
not less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the
four consecutive quarters then ended to total interest expense on all funded debt for the same period. At December 31,
2015, this ratio was approximately 56 to 1. Debt covenants do not restrict the payment of dividends. Apart from the
committed facilities, an additional $241 million in stand-alone letters of credit and $18 million in bank guarantees were
also issued and outstanding at December 31, 2015. These lines of credit are utilized in connection with normal business
activities.
Balance Sheet:
3M's strong balance sheet and liquidity provide the Company with significant flexibility to take advantage of numerous
opportunities going forward. The Company will continue to invest in its operations to drive growth, including continual
review of acquisition opportunities.
Various assets and liabilities, including cash and short-term debt, can fluctuate significantly from month to month
depending on short-term liquidity needs. Working capital (defined as current assets minus current liabilities) totaled
$3.868 billion at December 31, 2015, compared with $6.339 billion at December 31, 2014, a decrease of $2.471 billion.
Current asset balance changes decreased working capital by $1.317 billion, driven by decreases in marketable securities.
Current liability balance changes decreased working capital by $1.154 billion, driven by increases in short-term debt.
The Company uses various working capital measures that place emphasis and focus on certain working capital assets and
liabilities. These measures are not defined under U.S. generally accepted accounting principles and may not be computed the
same as similarly titled measures used by other companies. One of the primary working capital measures 3M uses is a
combined index, which includes accounts receivable, inventories and accounts payable. This combined index (defined as
quarterly net sales - fourth quarter at year-end - multiplied by four, divided by ending net accounts receivable plus
inventories less accounts payable) was 4.9 at December 31, 2015 compared to 5.0 at December 31, 2014. Receivables decreased
$84 million, or 2.0 percent, compared with December 31, 2014, as currency translation impacts decreased accounts receivable
by $239 million, partially offset by 2015 acquisitions that added $103 million. Inventories decreased $188 million, or 5.1
percent, compared with December 31, 2014. The inventory decrease was attributable to currency translation, which decreased
inventories by $272 million, partially offset by 2015 acquisitions that added $102 million. Accounts payable decreased by
$113 million compared with December 31, 2014, as currency translation impacts reduced accounts payable by $76 million.
Return on Invested Capital (non-GAAP measure):
The Company uses non-GAAP measures to focus on shareholder value creation. 3M uses return on invested capital (ROIC),
defined as annualized after-tax operating income (including interest income) divided by average operating capital.
Operating capital is defined as net assets (total assets less total liabilities) excluding debt. This measure is not
recognized under U.S. GAAP and may not be comparable to similarly titled measures used by other companies. ROIC was 22.5
percent for 2015, and 22.0 percent for 2014.
Cash Flows:
Cash flows from operating, investing and financing activities are provided in the tables that follow. Individual amounts in
the Consolidated Statement of Cash Flows exclude the effects of acquisitions, divestitures and 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:
Years Ended December 31
(Millions) 2015 2014 2013
Net income including noncontrolling interest $ 4,841 $ 4,998 $ 4,721
Depreciation and amortization 1,435 1,408 1,371
Company pension contributions (264) (210) (476)
Company postretirement contributions (3) (5) (6)
Company pension expense 442 310 446
Company postretirement expense 114 81 107
Stock-based compensation expense 276 280 240
Income taxes (deferred and accrued income taxes) (349) 60 39
Excess tax benefits from stock-based compensation (154) (167) (92)
Accounts receivable (58) (268) (337)
Inventories 3 (113) (86)
Accounts payable 9 75 16
Other - net 128 177 (126)
Net cash provided by operating activities $ 6,420 $ 6,626 $ 5,817
Cash flows from operating activities can fluctuate significantly from period to period, as pension funding decisions, tax
timing differences and other items can significantly impact cash flows.
In 2015, cash flows provided by operating activities decreased $206 million compared to 2014. Operating cash flows
decreased due to $363 million in higher cash income taxes when comparing 2015 to 2014, plus lower net income, which was
partially offset by lower year-on-year working capital requirements. The combination of accounts receivable, inventories
and accounts payable increased working capital by $46 million in 2015, compared to increases of $306 million in 2014, with
the year-on-year improvement related to lower organic volume growth. Additional discussion on working capital changes is
provided earlier in the "Financial Condition and Liquidity" section.
In 2014, cash flows provided by operating activities increased $809 million compared to 2013. Operating cash flows
benefited year-on-year from increases in net income including noncontrolling interest, lower pension and postretirement
plans contributions, and lower year-on-year working capital requirements. The combination of accounts receivable,
inventories and accounts payable increased working capital by $306 million in 2014, compared to increases of $407 million
in 2013, with the year-on-year improvement partially due to higher receivable and inventory turns. Additional discussion on
working capital changes is provided earlier in the "Financial Condition and Liquidity" section.
Free Cash Flow (non-GAAP measure):
In addition, to net cash provided by operating activities, 3M believes free cash flow and free cash flow conversion are
useful measures of performance and uses these measures as an indication of the strength of the Company and its ability to
generate cash. Free cash flow and free cash flow conversion are not defined under U.S. generally accepted accounting
principles (GAAP). Therefore, they should not be considered a substitute for income or cash flow data prepared in
accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. 3M defines free
cash flow as net cash provided by operating activities less purchases of property, plant and equipment (which is classified
as an investing activity). It should not be inferred that the entire free cash flow amount is available for discretionary
expenditures. 3M defines free cash flow conversion as free cash flow divided by net income attributable to 3M. Below find a
recap of free cash flow and free cash flow conversion for 2015, 2014 and 2013.
Years ended December 31
(Millions) 2015 2014 2013
Net cash provided by operating activities $ 6,420 $ 6,626 $ 5,817
Purchases of property, plant and equipment (PP&E) (1,461) (1,493) (1,665)
Free Cash Flow $ 4,959 $ 5,133 $ 4,152
Free Cash Flow Conversion 103 % 104 % 89 %
Cash Flows from Investing Activities:
Years ended December 31
(Millions) 2015 2014 2013
Purchases of property, plant and equipment (PP&E) $ (1,461) $ (1,493) $ (1,665)
Proceeds from sale of PP&E and other assets 33 135 128
Acquisitions, net of cash acquired (2,914) (94) -
Purchases and proceeds from maturities and sale of marketable securities and investments, net 1,300 754 627
Proceeds from sale of businesses 123 - 8
Other investing activities 102 102 46
Net cash used in investing activities $ (2,817) $ (596) $ (856)
Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and
increasing manufacturing efficiency. Capital spending was $1.461 billion in 2015, compared to $1.493 billion in 2014 and
$1.665 billion in 2013. The Company expects 2016 capital spending to be approximately $1.3 billion to $1.5 billion as 3M
continues to invest in its businesses.
3M invests in renewable and maintenance programs, which pertains to cost reduction, cycle time, maintaining and renewing
current capacity, eliminating pollution, and compliance. Costs related to maintenance, ordinary repairs, and certain other
items are expensed. 3M also invests in growth, which adds to capacity, driven by new products, both through expansion of
current facilities and new facilities, plus research facilities. Finally, 3M also invests in other initiatives, such as
information technology (IT) and corporate laboratory facilities.
In 2015, investments included new sites and buildings, investments in IT, continued expansion of current facilities and new
facilities, plus the sustainment of existing facilities, in addition to other initiatives. Specific investments in 2015
included a new state-of-the-art, four story, 400,000 square foot research facility at 3M Center in St. Paul, Minnesota. In
addition, 3M continued its investments it IT systems and infrastructure, particularly the ongoing multi-year phased
implementation of an ERP system.
In 2014, investments in growth across geographies included production equipment, new sites and buildings, capacity
investments, converting, and distribution, and other growth initiatives. Other investments include IT systems and
infrastructure, including an ongoing multi-year phased implementation of an ERP system on a worldwide basis. In addition,
3M began a multi-year program in the United States to renew and upgrade laboratory facilities and administrative
buildings.
In 2013, 3M continued its expansion of manufacturing capacity in key growth markets, including investments in the U.S.,
China, Germany, and Brazil. This included significant investments across 3M's many businesses, such as abrasives,
industrial adhesives and tapes, advanced materials, electronics-related, infection prevention, and other businesses. 3M
continued its investments in IT systems and infrastructure. In addition, 3M sustained existing facilities through general
maintenance, cost reduction, and compliance efforts.
Proceeds from sale of PP&E and other assets totaled $33 million in 2015, $135 million in 2014, and $128 million in 2013.
Apart from the normal periodic sales of PP&E, 2014 included proceeds of $114 million related to the sales of real estate
and non-production equipment, and 2013 included proceeds of $79 million related to non-production equipment.
Refer to Note 2 for information on acquisitions and divestitures. The Company is actively considering additional
acquisitions, investments and strategic alliances, and from time to time may also divest certain businesses.
Purchases of marketable securities and investments and proceeds from maturities and sale of marketable securities and
investments are primarily attributable to asset-backed securities, agency securities, corporate debt securities and other
securities, which are classified as available-for-sale. Refer to Note 9 for more details about 3M's diversified marketable
securities portfolio. Purchases of investments include additional survivor benefit insurance, plus cost method and equity
investments.
Cash Flows from Financing Activities:
Years ended December 31
(Millions) 2015 2014 2013
Change in short-term debt - net $ 860 $ 27 $ (2)
Repayment of debt (maturities greater than 90 days) (800) (1,625) (859)
Proceeds from debt (maturities greater than 90 days) 3,422 2,608 824
Total cash change in debt $ 3,482 $ 1,010 $ (37)
Purchases of treasury stock (5,238) (5,652) (5,212)
Proceeds from issuances of treasury stock pursuant to stock option and benefit plans 635 968 1,609
Dividends paid to stockholders (2,561) (2,216) (1,730)
Excess tax benefits from stock-based compensation 154 167 92
Purchase of noncontrolling interest - (861) -
Other - net (120) (19) 32
Net cash used in financing activities $ (3,648) $ (6,603) $ (5,246)
Total debt was $10.8 billion at December 31, 2015, $6.8 billion at December 31, 2014, and $6.0 billion at December 31,
2013. Total debt was 48 percent of total capital (total capital is defined as debt plus equity) at year-end 2015, 34
percent of total capital at year-end 2014, and 25 percent of total capital at year-end 2013.
In both 2015 and 2014, the change in short-term debt primarily related to bank borrowings by international subsidiaries,
primarily Japan and Korea in 2015. In 2015, repayment of debt primarily related to debt assumed (and paid off) as part of
the Capital Safety acquisition (refer to Note 2). In 2014, repayment of debt primarily includes repayment of a Eurobond in
July 2014 totaling 1.025 billion Euros (approximately $1.4 billion carrying value), repayment of the three-year 66 million
British Pound committed credit facility agreement entered into in December 2012, and repayment of other international debt.
In 2013, repayment of debt related to the August 2013 repayment of $850 million (principal amount) of medium-term notes.
In 2015, proceeds from debt primarily related to the May 2015 issuance of 650 million Euros aggregate principal amount of
five-year floating rate medium-term notes due 2020, 600 million Euros aggregate principal amount of eight-year fixed rate
medium-term notes due 2023, and 500 million Euros aggregate principal amount of fifteen-year fixed rate medium-term notes
due 2030, which in the aggregate total approximately $1.9 billion at issue date exchange rates. In addition, August 2015
issuances included $450 million aggregate principal amount of three-year fixed rate medium-term notes due 2018, $500
million aggregate principal amount of five-year fixed rate medium-term notes due 2020, and $550 million aggregate principal
amount of 10-year fixed rate medium-term notes due 2025, which in aggregate total $1.5 billion. In 2014, proceeds from debt
primarily related to the June 2014 issuances of $625 million aggregate principal amount of five-year fixed rate medium-term
notes due 2019 and $325 million aggregate principal amount of thirty-year fixed rate medium-term notes due 2044, as well as
the November 2014 issuances of 500 million Euros principal amount of four-year floating rate medium-term notes due 2018 and
750 million Euros principal amount of 12-year fixed rate medium-term notes due 2026. In addition, proceeds from debt for
2014 also include bank borrowings by international subsidiaries. Proceeds from debt in 2013 related to the November 2013
issuance of an eight-year Eurobond for an amount of 600 million Euros. Refer to Note 10 for additional discussion of debt.
Repurchases of common stock are made to support the Company's stock-based employee compensation plans and for other
corporate purposes. In February 2016, 3M's Board of Directors authorized the repurchase of up to $10 billion of 3M's
outstanding common stock, which replaced the Company's February 2014 repurchase program. This authorization has no
pre-established end date. In 2015, 2014, and 2013, the Company purchased more than $5 billion of its own stock each year.
The Company expects full-year 2016 gross share repurchases will be in the range of $4 billion to $6 billion. For more
information, refer to the table titled "Issuer Purchases of Equity Securities" in Part II, Item 5. The Company does not
utilize derivative instruments linked to the Company's stock.
Cash dividends paid to shareholders totaled $2.561 billion ($4.10 per share) in 2015, $2.216 billion ($3.42 per share) in
2014, and $1.730 billion ($2.54 per share) in 2013. 3M has paid dividends since 1916. In February 2016, 3M's Board of
Directors declared a first-quarter 2016 dividend of $1.11 per share, an increase of 8 percent. This is equivalent to an
annual dividend of $4.44 per share and marked the 58th consecutive year of dividend increases.
On September 1, 2014, 3M purchased (via Sumitomo 3M Limited) Sumitomo Electric Industries, Ltd.'s 25 percent interest in
3M's consolidated Sumitomo 3M Limited subsidiary for 90 billion Japanese Yen. Upon completion of this transaction, 3M owned
100 percent of Sumitomo 3M Limited. This was reflected as a "Purchase of noncontrolling interest" in the financing section
of the consolidated statement of cash flows. In addition, in April 2014, 3M purchased the remaining noncontrolling interest
in a consolidated 3M subsidiary for an immaterial amount, which was also classified as a "Purchase of noncontrolling
interest" in the financing section of the consolidated statement of cash flows.
In March 2013, 3M sold shares in 3M India Limited, a subsidiary of the Company, in return for $8 million. The
noncontrolling interest shares of this subsidiary trade on a public exchange in India. This sale of shares complied with an
amendment to Indian securities regulations that required 3M India Limited, as a listed company, to achieve a minimum public
shareholding of at least 25 percent. As a result of this transaction, 3M's ownership in 3M India Limited was reduced from
76 percent to 75 percent. The $8 million received in the first quarter of 2013 was classified as other financing activity
in the consolidated statement of cash flows.
In addition to the March 2013 sale of noncontrolling interest described above, other cash flows from financing activities
may include various other items, such as changes in cash overdraft balances, and principal payments for capital leases.
Off-Balance Sheet Arrangements and Contractual Obligations:
As of December 31, 2015, the Company has not utilized special purpose entities to facilitate off-balance sheet financing
arrangements. Refer to the section entitled "Warranties/Guarantees" in Note 14 for discussion of accrued product warranty
liabilities and guarantees.
In addition to guarantees, 3M, in the normal course of business, periodically enters into agreements that require the
Company to indemnify either major customers or suppliers for specific risks, such as claims for injury or property damage
arising out of the use of 3M products or the negligence of 3M personnel, or claims alleging that 3M products infringe
third-party patents or other intellectual property. While 3M's maximum exposure under these indemnification provisions
cannot be estimated, these indemnifications are not expected to have a material impact on the Company's consolidated
results of operations or financial condition.
A summary of the Company's significant contractual obligations as of December 31, 2015, follows:
Contractual Obligations
Payments due by year
After
(Millions) Total 2016 2017 2018 2019 2020 2020
Long-term debt, including current portion (Note 10) $ 9,878 $ 1,125 $ 744 $ 993 $ 622 $ 1,203 $ 5,191
Interest on long-term debt 2,244 174 157 153 149 146 1,465
Operating leases (Note 14) 943 234 191 134 86 72 226
Capital leases (Note 14) 59 11 6 4 3 3 32
Unconditional purchase obligations and other 1,631 1,228 160 102 54 56 31
Total contractual cash obligations $ 14,755 $ 2,772 $ 1,258 $ 1,386 $ 914 $ 1,480 $ 6,945
Long-term debt payments due in 2016 and 2017 include floating rate notes totaling $126 million (classified as current
portion of long-term debt), and $96 million (included as a separate floating rate note in the long-term debt table),
respectively, as a result of put provisions associated with these debt instruments. Interest projections on both floating
and fixed rate long-term debt, including the effects of interest rate swaps, are based on effective interest rates as of
December 31, 2015.
Unconditional purchase obligations are defined as an agreement to purchase goods or services that is enforceable and
legally binding on the Company. Included in the unconditional purchase obligations category above are certain obligations
related to take or pay contracts, capital commitments, service agreements and utilities. These estimates include both
unconditional purchase obligations with terms in excess of one year and normal ongoing purchase obligations with terms of
less than one year. Many of these commitments relate to take or pay contracts, in which 3M guarantees payment to ensure
availability of products or services that are sold to customers. The Company expects to receive consideration (products or
services) for these unconditional purchase obligations. Contractual capital commitments are included in the preceding
table, but these commitments represent a small part of the Company's expected capital spending in 2016 and beyond. The
purchase obligation amounts do not represent the entire anticipated purchases in the future, but represent only those items
for which the Company is contractually obligated. The majority of 3M's products and services are purchased as needed, with
no unconditional commitment. For this reason, these amounts will not provide a reliable indicator of the Company's expected
future cash outflows on a stand-alone basis.
Other obligations, included in the preceding table within the caption entitled "Unconditional purchase obligations and
other," include the current portion of the liability for uncertain tax positions under ASC 740, which is expected to be
paid out in cash in the next 12 months. The Company is not able to reasonably estimate the timing of the long-term payments
or the amount by which the liability will increase or decrease over time; therefore, the long-term portion of the net tax
liability of $208 million is excluded from the preceding table. Refer to Note 8 for further details.
As discussed in Note 11, the Company does not have a required minimum cash pension contribution obligation for its U.S.
plans in 2016 and Company contributions to its U.S. and international pension plans are expected to be largely
discretionary in future years; therefore, amounts related to these plans are not included in the preceding table.
FINANCIAL INSTRUMENTS
The Company enters into foreign exchange forward contracts, options and swaps to hedge against the effect of exchange rate
fluctuations on cash flows denominated in foreign currencies and certain intercompany financing transactions. The Company
manages interest rate risks using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may
enter into interest rate swaps. Under these arrangements, the Company agrees to exchange, at specified intervals, the
difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.
The Company manages commodity price risks through negotiated supply contracts, price protection agreements and forward
contracts.
Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", for further discussion of foreign exchange
rates risk, interest rates risk, commodity prices risk and value at risk analysis.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the context of Item 7A, 3M is exposed to market risk due to the risk of loss arising from adverse changes in foreign
currency exchange rates, interest rates and commodity prices. Changes in those factors could cause fluctuations in earnings
and cash flows. Senior management provides oversight for risk management and derivative activities, determines certain of
the Company's financial risk policies and objectives, and provides guidelines for derivative instrument utilization. Senior
management also establishes certain associated procedures relative to control and valuation, risk analysis, counterparty
credit approval, and ongoing monitoring and reporting.
The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps, currency
swaps, commodity price swaps, and forward and option contracts. However, the Company's risk is limited to the fair value of
the instruments. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit
limits, and by selecting major international banks and financial institutions as counterparties. The Company does not
anticipate nonperformance by any of these counterparties.
Foreign Exchange Rates Risk:
Foreign currency exchange rates and fluctuations in those rates may affect the Company's net investment in foreign
subsidiaries and may cause fluctuations in cash flows related to foreign denominated transactions. 3M is also exposed to
the translation of foreign currency earnings to the U.S. dollar. The Company enters into foreign exchange forward and
option contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies.
These transactions are designated as cash flow hedges. 3M may dedesignate these cash flow hedge relationships in advance of
the occurrence of the forecasted transaction. Beginning in the second quarter of 2014, 3M began extending the maximum
length of time over which it hedges its exposure to the variability in future cash flows of the forecasted transactions
from a previous term of 12 months to a longer term of 24 months, with certain currencies being extended further to 36
months starting in the first quarter of 2015. In addition, 3M enters into foreign currency forward contracts that are not
designated in hedging relationships to offset, in part, the impacts of certain intercompany activities (primarily
associated with intercompany licensing arrangements and intercompany financing transactions). As circumstances warrant, the
Company also uses foreign currency forward contracts and foreign currency denominated debt as hedging instruments to hedge
portions of the Company's net investments in foreign operations. The dollar equivalent gross notional amount of the
Company's foreign exchange forward and option contracts designated as cash flow hedges and those not designated as hedging
instruments were $2.8 billion and $5.4 billion, respectively, at December 31, 2015. As of December 31, 2015, the Company
had 974 million Euros and 248 billion South Korean Won in notional amount of foreign currency forward contracts designated
as net investment hedges along with 3.6 billion Euros in principal amount of foreign currency denominated debt designated
as non-derivative hedging instruments in certain net investment hedges as discussed in Note 12 in the "Net Investment
Hedges" section.
Interest Rates Risk:
The Company may be impacted by interest rate volatility with respect to existing debt and future debt issuances. 3M manages
interest expense using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may enter into
interest rate swaps that are designated and qualify as fair value hedges. Under these arrangements, the Company agrees to
exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an
agreed-upon notional principal amount. The dollar equivalent (based on inception date foreign currency exchange rates)
gross notional amount of the Company's interest rate swaps at December 31, 2015 was $1.8 billion. Additional details about
3M's long-term debt can be found in Note 10, including references to information regarding derivatives and/or hedging
instruments associated with the Company's long-term debt.
Commodity Prices Risk:
The Company manages commodity price risks through negotiated supply contracts, price protection agreements and forward
contracts. 3M used commodity price swaps as cash flow hedges of forecasted commodity transactions to manage price
volatility, but discontinued this practice in the first quarter of 2015. The related mark-to-market gain or loss on
qualifying hedges was included in other comprehensive income to the extent effective, and reclassified into cost of sales
in the period during which the hedged transaction affected earnings.
Value At Risk:
The value at risk analysis is performed annually to assess the Company's sensitivity to changes in currency rates, interest
rates, and commodity prices. A Monte Carlo simulation technique was used to test the impact on after-tax earnings related
to financial instruments (primarily debt), derivatives and underlying exposures outstanding at December 31, 2015. The model
(third-party bank dataset) used a 95 percent confidence level over a 12-month time horizon. The exposure to changes in
currency rates model used 18 currencies, interest rates related to three currencies, and commodity prices related to five
commodities. This model does not purport to represent what actually will be experienced by the Company. This model does not
include certain hedge transactions, because the Company believes their inclusion would not materially impact the results.
The risk of loss or benefit associated with exchange rates was higher in 2015 due to a greater mix of floating rate debt
and a rising interest rate environment in the U.S. Interest rate volatility increased in 2015, based on a higher mix of
floating rate debt and the use of forward rates. The following table summarizes the possible adverse and positive impacts
to after-tax earnings related to these exposures.
Adverse impact on after-tax Positive impact on after-tax
earnings earnings
(Millions) 2015 2014 2015 2014
Foreign exchange rates $ (254) $ (164) $ 273 $ 173
Interest rates (13) (4) 9 3
Commodity prices (1) (1) 1 1
In addition to the possible adverse and positive impacts discussed in the preceding table related to foreign exchange
rates, recent historical information is as follows. 3M estimates that year-on-year currency effects, including hedging
impacts, had the following effects on pre-tax income: 2015 ($390 million decrease) and 2014 ($100 million decrease). This
estimate includes the effect of translating profits from local currencies into U.S. dollars; the impact of currency
fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction gains and
losses, including derivative instruments designed to reduce foreign currency exchange rate risks and the negative impact of
swapping Venezuelan bolivars into U.S. dollars. 3M estimates that year-on-year derivative and other transaction gains and
losses had the following effects on pre-tax income: 2015 ($180 million increase) and 2014 ($10 million increase).
An analysis of the global exposures related to purchased components and materials is performed at each year-end. A one
percent price change would result in a pre-tax cost or savings of approximately $70 million per year. The global energy
exposure is such that a ten percent price change would result in a pre-tax cost or savings of approximately $40 million per
year. Global energy exposure includes energy costs used in 3M production and other facilities, primarily electricity and
natural gas.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Beginning
page
Management's Responsibility for Financial Reporting 48
Management's Report on Internal Control Over Financial Reporting 48
Report of Independent Registered Public Accounting Firm 49
Consolidated Statement of Income for the years ended December 31, 2015, 2014 and 2013 50
Consolidated Statement of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013 51
Consolidated Balance Sheet at December 31, 2015 and 2014 52
Consolidated Statement of Changes in Equity for the years ended December 31, 2015, 2014 and 2013 53
Consolidated Statement of Cash Flows for the years ended December 31, 2015, 2014 and 2013 54
Notes to Consolidated Financial Statements 55
Note 1. Significant Accounting Policies 55
Note 2. Acquisitions and Divestitures 64
Note 3. Goodwill and Intangible Assets 67
Note 4. Restructuring Actions 68
Note 5. Supplemental Balance Sheet Information 70
Note 6. Supplemental Equity and Comprehensive Income Information 71
Note 7. Supplemental Cash Flow Information 73
Note 8. Income Taxes 73
Note 9. Marketable Securities 77
Note 10. Long-Term Debt and Short-Term Borrowings 79
Note 11. Pension and Postretirement Benefit Plans 81
Note 12. Derivatives 91
Note 13. Fair Value Measurements 98
Note 14. Commitments and Contingencies 102
Note 15. Stock-Based Compensation 112
Note 16. Business Segments 115
Note 17. Geographic Areas 117
Note 18. Quarterly Data (Unaudited) 117
Management's Responsibility for Financial Reporting
Management is responsible for the integrity and objectivity of the financial information included in this report. The
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America. Where necessary, the financial statements reflect estimates based on management's judgment.
Management has established and maintains a system of internal control over financial reporting for the Company and its
subsidiaries. This system and its established accounting procedures and related controls are designed to provide reasonable
assurance that assets are safeguarded, that the books and records properly reflect all transactions, that policies and
procedures are implemented by qualified personnel, and that published financial statements are properly prepared and fairly
presented. The Company's system of internal control over financial reporting is supported by widely communicated written
policies, including business conduct policies, which are designed to require all employees to maintain high ethical
standards in the conduct of Company affairs. Internal auditors continually review the accounting and control system.
3M Company
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting.
Management conducted an assessment of the Company's internal control over financial reporting based on the framework
established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated
Framework (2013). Management's assessment of the effectiveness of the Company's internal control over financial reporting
as of December 31, 2015 excluded Capital Safety Group S.A.R.L. and Polypore International, Inc.'s Separation Media
Business, which were both acquired by the Company in August 2015 in purchase business combinations. These acquired
businesses' total assets and total net sales, in the aggregate, represented less than 2 percent and less than 1 percent,
respectively, of the Company's consolidated financial statement amounts as of and for the year ended December 31, 2015.
Companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the
first year of acquisition while integrating the acquired company under guidelines established by the Securities and
Exchange Commission. Based on the assessment, management concluded that, as of December 31, 2015, the Company's internal
control over financial reporting is effective.
The Company's internal control over financial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report which is included herein, which expresses
an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31,
2015.
3M Company
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of 3M Company
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material
respects, the financial position of 3M Company and its subsidiaries (the "Company") at December 31, 2015 and 2014, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on
criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our
responsibility is to express opinions on these financial statements and on the Company's internal control over financial
reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for
marketable securities and deferred tax assets and liabilities in 2015.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
As described in Management's Report on Internal Control over Financial Reporting, management has excluded Capital Safety
Group S.A.R.L. ("Capital Safety") and Polypore International, Inc.'s Separations Media Business ("Polypore Separations
Media") from its assessment of internal control over financial reporting as of December 31, 2015 because these businesses
were acquired by the Company in purchase business combinations during 2015. We have also excluded Capital Safety and
Polypore Separations Media from our audit of internal control over financial reporting. Capital Safety is a wholly-owned
subsidiary of the Company and the Company acquired the assets and liabilities of Polypore Separations Media whose total
assets and total net sales, in the aggregate, represent less than 2 percent and less than 1 percent, respectively, of the
related consolidated financial statement amounts as of and for the year ended December 31, 2015.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 11, 2016
Consolidated Statement of Income
3M Company and Subsidiaries
Years ended December 31
2015 2014 2013
Net sales $ 30,274 $ 31,821 $ 30,871
Operating expenses
Cost of sales 15,383 16,447 16,106
Selling, general and administrative expenses 6,182 6,469 6,384
Research, development and related expenses 1,763 1,770 1,715
Total operating expenses 23,328 24,686 24,205
Operating income 6,946 7,135 6,666
Interest expense and income
Interest expense 149 142 145
Interest income (26) (33) (41)
Total interest expense - net 123 109 104
Income before income taxes 6,823 7,026 6,562
Provision for income taxes 1,982 2,028 1,841
Net income including noncontrolling interest $ 4,841 $ 4,998 $ 4,721
Less: Net income attributable to noncontrolling interest 8 42 62
Net income attributable to 3M $ 4,833 $ 4,956 $ 4,659
Weighted average 3M common shares outstanding - basic 625.6 649.2 681.9
Earnings per share attributable to 3M common shareholders - basic $ 7.72 $ 7.63 $ 6.83
Weighted average 3M common shares outstanding - diluted 637.2 662.0 693.6
Earnings per share attributable to 3M common shareholders - diluted $ 7.58 $ 7.49 $ 6.72
Cash dividends paid per 3M common share $ 4.10 $ 3.42 $ 2.54
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
Consolidated Statement of Comprehensive Income
3M Company and Subsidiaries
Years ended December 31
(Millions) 2015 2014 2013
Net income including noncontrolling interest $ 4,841 $ 4,998 $ 4,721
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment (586) (942) (505)
Defined benefit pension and postretirement plans adjustment 489 (1,562) 1,245
Debt and equity securities, unrealized gain (loss) - 2 -
Cash flow hedging instruments, unrealized gain (loss) 25 107 15
Total other comprehensive income (loss), net of tax (72) (2,395) 755
Comprehensive income (loss) including noncontrolling interest 4,769 2,603 5,476
Comprehensive (income) loss attributable to noncontrolling interest (6) (48) 20
Comprehensive income (loss) attributable to 3M $ 4,763 $ 2,555 $ 5,496
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
Consolidated Balance Sheet
3M Company and Subsidiaries
At December 31
(Dollars in millions, except per share amount) 2015 2014
Assets
Current assets
Cash and cash equivalents $ 1,798 $ 1,897
Marketable securities - current 118 1,439
Accounts receivable - net of allowances of $91 and $94 4,154 4,238
Inventories
Finished goods 1,655 1,723
Work in process 1,008 1,081
Raw materials and supplies 855 902
Total inventories 3,518 3,706
Other current assets 1,398 1,023
Total current assets 10,986 12,303
Marketable securities - non-current 9 15
Investments 117 102
Property, plant and equipment 23,098 22,841
Less: Accumulated depreciation (14,583) (14,352)
Property, plant and equipment - net 8,515 8,489
Goodwill 9,249 7,050
Intangible assets - net 2,601 1,435
Prepaid pension benefits 188 46
Other assets 1,053 1,769
Total assets $ 32,718 $ 31,209
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt $ 2,044 $ 106
Accounts payable 1,694 1,807
Accrued payroll 644
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