REG - 3M Company - Annual Financial Report - Part 1 <Origin Href="QuoteRef">MMM.N</Origin> - Part 4
13/02/2018 07:05
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strategic asset allocation of the plan, long-term capital market return
expectations, and expected performance from active investment management. For
the primary U.S. qualified pension plan, the expected long-term rate of return
on an annualized basis for 2018 is 7.25%, equal to 2017. Refer to Note 12 for
information on how the 2017 rate was determined. Return on assets assumptions
for international pension and other post-retirement benefit plans are
calculated on a plan-by-plan basis using plan asset allocations and expected
long-term rate of return assumptions. The weighted average expected return for
the international pension plan is 5.02% for 2018, compared to 5.16% for 2017.
For the year ended December 31, 2017, the Company recognized total
consolidated defined benefit pre-tax pension and postretirement expense (after
settlements, curtailments, special termination benefits and other) of $333
million, up from $251 million in 2016. Defined benefit pension and
postretirement expense (before settlements, curtailments, special termination
benefits and other) is anticipated to increase to approximately $409 million
in 2018, an increase of $76 million compared to 2017.
The table below summarizes the impact on 2018 pension expense for the U.S. and
international pension plans of a 0.25 percentage point increase/decrease in
the expected long-term rate of return on plan assets and discount rate
assumptions used to measure plan liabilities and 2017 net periodic benefit
cost. The table assumes all other factors are held constant, including the
slope of the discount rate yield curves.
Increase (Decrease) in Net Periodic Benefit Cost
Discount Rate Expected Return on Assets
(Millions) -0.25% +0.25% -0.25% +0.25%
U.S. pension plans $ 34 $ (33) $ 38 $ (38)
International pension plans 24 (23) 16 (16)
Asset Impairments:
As of December 31, 2017, net property, plant and equipment totaled $8.9
billion and net identifiable intangible assets totaled $2.9 billion.
Management makes estimates and assumptions in preparing the consolidated
financial statements for which actual results will emerge over long periods of
time. This includes the recoverability of long-lived assets employed in the
business, including assets of acquired businesses. These estimates and
assumptions are closely monitored by management and periodically adjusted as
circumstances warrant. For instance, expected asset lives may be shortened or
an impairment recorded based on a change in the expected use of the asset or
performance of the related asset group.
Of the $2.9 billion in net identifiable intangible assets, $0.6 billion
relates to indefinite-lived tradenames, primarily Capital Safety, whose
tradenames ($520 million at acquisition date) have been in existence for over
55 years (refer to Note 2 for more detail). The primary valuation technique
used in estimating the fair value of indefinite lived intangible assets
(tradenames) is a discounted cash flow approach. Specifically, a relief of
royalty rate is applied to estimated sales, with the resulting amounts then
discounted using an appropriate market/technology discount rate. The relief of
royalty rate is the estimated royalty rate a market participant would pay to
acquire the right to market/produce the product. If the resulting discounted
cash flows are less than the book value of the indefinite lived intangible
asset, impairment exists, and the asset value must be written down. Based on
impairment testing in the third quarter of 2017, no impairment was indicated.
The discounted cash flows related to the Capital Safety tradename exceeded its
book value by more than 15 percent.
3M goodwill totaled approximately $10.5 billion as of December 31, 2017. 3M's
annual goodwill impairment testing is performed in the fourth quarter of each
year. Impairment testing for goodwill is done at a reporting unit level, with
all goodwill assigned to a reporting unit. Reporting units are one level below
the business segment level, but are required to be combined when reporting
units within the same segment have similar economic characteristics. At 3M,
reporting units correspond to a division. 3M did not combine any of its
reporting units for impairment testing.
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, and the loss would equal that difference. The estimated fair value of a
reporting unit is determined using earnings for the reporting unit multiplied
by a price/earnings ratio for comparable industry groups, or by using a
discounted cash flow analysis. 3M typically uses the price/earnings ratio
approach for stable and growing businesses that have a long history and track
record of generating positive operating income and cash flows. 3M uses the
discounted cash flow approach for start-up, loss position and declining
businesses, in addition to using for businesses where the price/earnings ratio
valuation method indicates additional review is warranted. 3M also uses
discounted cash flow as an additional tool for businesses that may be growing
at a slower rate than planned due to economic or other conditions.
As described in Note 17, effective in the first quarter of 2017, 3M made
business segment reporting changes. For any product moves that resulted in
reporting unit changes, the Company applied the relative fair value method to
determine the impact on goodwill of the associated reporting units. During the
first quarter of 2017, the Company completed its assessment of any potential
goodwill impairment for reporting units impacted by this new structure and
determined that no impairment existed. The discussion that follows relates to
the separate fourth quarter 2017 annual impairment test and is in the context
of the reporting unit structure that existed at that time.
As of October 1, 2017, 3M had 24 primary reporting units, with ten reporting
units accounting for approximately 86 percent of the goodwill. These ten
reporting units were comprised of the following divisions: Advanced Materials,
Communication Markets, Display Materials and Systems, Health Information
Systems, Industrial Adhesives and Tapes, Infection Prevention, Oral Care
Solutions, Personal Safety, Separation and Purification, and Transportation
Safety. The estimated fair value for all reporting units was in excess of
carrying value by approximately 40 percent or more. 3M's market value at both
December 31, 2017, and September 30, 2017, was significantly in excess of its
shareholders' equity of approximately $12 billion.
As discussed in Note 2, 3M announced the sale of substantially all of its
Communication Markets division, which is expected to close in 2018, which will
result in an associated goodwill reduction of approximately $270 million upon
sale.
In 2017, 3M determined fair values using either an industry price-earnings
ratio approach or a discounted cash flows analysis. Where applicable, 3M used
a weighted-average discounted cash flow analysis for certain divisions, using
projected cash flows that were weighted based on different sales growth and
terminal value assumptions, among other factors. The weighting was based on
management's estimates of the likelihood of each scenario occurring.
3M is a highly integrated enterprise, where businesses share technology and
leverage common fundamental strengths and capabilities, thus many of 3M's
businesses could not easily be sold on a stand-alone basis. 3M's focus on
research and development has resulted in a portion of 3M's value being
comprised of internally developed businesses that have no goodwill associated
with them. Based on the annual test in the fourth quarter of 2017, no goodwill
impairment was indicated for any of the reporting units.
Factors which could result in future impairment charges include, among others,
changes in worldwide economic conditions, changes in competitive conditions
and customer preferences, and fluctuations in foreign currency exchange rates.
These risk factors are discussed in Item 1A, "Risk Factors," of this document.
In addition, changes in the weighted average cost of capital could also impact
impairment testing results. As indicated above, during the first quarter of
2017, the Company completed its assessment of any potential goodwill
impairment for reporting units impacted by changes between reporting units and
determined that no impairment existed. Long-lived assets with a definite life
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset (asset group) may not be
recoverable. If future non-cash asset impairment charges are taken, 3M would
expect that only a portion of the long-lived assets or goodwill would be
impaired. 3M will continue to monitor its reporting units and asset groups in
2018 for any triggering events or other indicators of impairment.
Income Taxes:
The extent of 3M's operations involves dealing with uncertainties and
judgments in the application of complex tax regulations in a multitude of
jurisdictions. The final taxes paid are dependent upon many factors, including
negotiations with taxing authorities in various jurisdictions and resolution
of disputes arising from federal, state, and international tax audits. The
Company recognizes potential liabilities and records tax liabilities for
anticipated tax audit issues in the United States and other tax jurisdictions
based on its estimate of whether, and the extent to which, additional taxes
will be due. The Company follows guidance provided by ASC 740, Income Taxes,
regarding uncertainty in income taxes, to record these liabilities (refer to
Note 9 for additional information). The Company adjusts these reserves in
light of changing facts and circumstances; however, due to the complexity of
some of these uncertainties, the ultimate resolution may result in a payment
that is materially different from the Company's current estimate of the tax
liabilities. If the Company's estimate of tax liabilities proves to be less
than the ultimate assessment, an additional charge to expense would result. If
payment of these amounts ultimately proves to be less than the recorded
amounts, the reversal of the liabilities would result in tax benefits being
recognized in the period when the Company determines the liabilities are no
longer necessary.
During the fourth quarter of 2017, 3M recorded a net tax expense related to
the enactment of the Tax Cuts and Jobs Act (TCJA). The expense is primarily
related to the TCJA's transition tax on previously unremitted earnings of
non-U.S. subsidiaries and is net of remeasurement of 3M's deferred tax assets
and liabilities considering the TCJA's newly enacted tax rates and certain
other impacts. As discussed in Note 9, this expense is a provisional amount
and is subject to adjustment during the measurement period of up to one year
following the December 2017 enactment of the TCJA, as provided by recent SEC
guidance.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1 to
the Consolidated Financial Statements.
FINANCIAL CONDITION AND LIQUIDITY
The strength and stability of 3M's business model and strong free cash flow
capability, together with proven capital markets access, positions the Company
to be able to add further leverage to its capital structure. Investing in 3M's
businesses to drive organic growth remains the first priority for capital
deployment, including research and development, capital expenditures, and
commercialization capability. Investment in organic growth will be
supplemented by complementary acquisitions. 3M will also continue to return
cash to shareholders through dividends and share repurchases. Sources for cash
availability in the United States, such as ongoing cash flow from operations
and access to capital markets, have historically been sufficient to fund
dividend payments to shareholders, as well as funding U.S. acquisitions and
other items as needed. The TCJA creates additional repatriation opportunities
for 3M to access international cash positions on a continual and on-going
basis and will help support U.S. capital deployments needs. For those
international earnings still considered to be reinvested indefinitely, the
Company currently has no plans or intentions to repatriate these funds for
U.S. operations. See Note 9 for further information on earnings considered to
be reinvested indefinitely.
3M's primary short-term liquidity needs are met through cash on hand and U.S.
commercial paper issuances. 3M believes it will have continuous access to the
commercial paper market. 3M's commercial paper program permits the Company to
have a maximum of $5 billion outstanding with a maximum maturity of 397 days
from date of issuance. At December 31, 2017, there was approximately $745
million in commercial paper issued and outstanding.
Total Debt:
The strength of 3M's capital structure and significant ongoing cash flows
provide 3M proven access to capital markets. Additionally, the Company's
maturity profile is staggered to help ensure refinancing needs in any given
year are reasonable in proportion to the total portfolio. 3M currently has an
AA- credit rating with a stable outlook from Standard & Poor's and has an
A1 credit rating with a stable outlook from Moody's Investors Service.
The Company's total debt was $2.3 billion higher at December 31, 2017 when
compared to December 31, 2016. Increases in debt related to October 2017 debt
issuances of $2.0 billion, commercial paper of $745 million outstanding at
year end 2017, and the net impact of repayments and borrowings of
international subsidiaries along with foreign currency effects. These are
partially offset by June 2017 repayments of $650 million aggregate principal
amount of medium-term notes and the October 2017 $305 million debt tender. For
discussion of repayments of and proceeds from debt refer to the following
"Cash Flows from Financing Activities" section.
Effective February 24, 2017, the Company updated its "well-known seasoned
issuer" (WKSI) shelf registration statement, which registers an indeterminate
amount of debt or equity securities for future issuance and sale. This
replaced 3M's previous shelf registration dated May 16, 2014. In May 2016, in
connection with the WKSI shelf, 3M entered into an amended and restated
distribution agreement relating to the future issuance and sale (from time to
time) of the Company's medium-term notes program (Series F), up to the
aggregate principal amount of $18 billion, which was an increase from the
previous aggregate principal amount up to $9 billion of the same Series.
As of December 31, 2017, the total amount of debt issued as part of the
medium-term notes program (Series F), inclusive of debt issued in 2011, 2012,
2014, 2015, 2016, and the 2017 debt referenced above, is approximately $13.1
billion (utilizing the foreign exchange rates applicable at the time of
issuance for the Euro denominated debt). Information with respect to long-term
debt issuances and maturities for the periods presented is included in Note
11.
In March 2016, 3M amended and restated its existing $2.25 billion five-year
revolving credit facility expiring in August 2019 to a $3.75 billion five-year
revolving credit facility expiring in March 2021. This credit agreement
includes a provision under which 3M may request an increase of up to $1.25
billion (at lenders' discretion), bringing the total facility up to $5.0
billion. This revolving credit facility is undrawn at December 31, 2017. Under
the $3.75 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,
2017, this ratio was approximately 29 to 1. Debt covenants do not restrict the
payment of dividends. Apart from the committed facilities, an additional $288
million in stand-alone letters of credit and bank guarantees were also issued
and outstanding at December 31, 2017. These instruments are utilized in
connection with normal business activities.
Cash, Cash Equivalents and Marketable Securities:
At December 31, 2017, 3M had $4.2 billion of cash, cash equivalents and
marketable securities, of which approximately $3.975 billion was held by the
Company's foreign subsidiaries and approximately $180 million was held by the
United States. These balances are invested in bank instruments and other
high-quality fixed income securities. At December 31, 2016, cash, cash
equivalents and marketable securities held by the Company's foreign
subsidiaries and by the United States totaled approximately $2.35 billion and
$350 million, respectively. Specifics concerning marketable securities
investments are provided in Note 10.
Net Debt (non-GAAP measure):
Net debt is not defined under U.S. GAAP and may not be computed the same as
similarly titled measures used by other companies. The Company defines net
debt as total debt less the total of cash, cash equivalents and current and
long-term marketable securities. 3M believes net debt is meaningful to
investors as 3M considers net debt and its components to be important
indicators of liquidity and financial position. The following table provides
net debt as of December 31, 2017 and 2016.
December 31, 2017 versus
(Millions) 2017 2016 2016
Total debt $ 13,949 $ 11,650 $ 2,299
Less: Cash, cash equivalents and marketable securities 4,156 2,695 1,461
Net debt (non-GAAP measure) $ 9,793 $ 8,955 $ 838
Refer to the preceding "Total Debt" and "Cash, Cash Equivalents and Marketable
Securities" sections for additional details.
Balance Sheet:
3M's strong balance sheet and liquidity provide the Company with significant
flexibility to fund its numerous opportunities going forward. The Company will
continue to invest in its operations to drive growth, including continual
review of acquisition opportunities.
The Company uses working capital measures that place emphasis and focus on
certain working capital assets. These measures include working capital,
accounts receivable turns, and inventory turns.
Working Capital (non-GAAP measure):
December 31, 2017 versus
(Millions) 2017 2016 2016
Current assets $ 14,277 $ 11,726 $ 2,551
Less: Current liabilities 7,687 6,219 1,468
Working capital (non-GAAP measure) $ 6,590 $ 5,507 $ 1,083
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 is not defined under U.S. generally accepted accounting
principles and may not be computed the same as similarly titled measures used
by other companies. The Company defines working capital as current assets
minus current liabilities. 3M believes working capital is meaningful to
investors as a measure of operational efficiency and short-term financial
health.
Working capital increased $1.1 billion during 2017 when compared to December
31, 2016. Current asset balance changes increased working capital by $2.6
billion, driven by increases in cash/cash equivalents and marketable
securities, in addition to higher accounts receivable and inventories
(discussed further below). Current liability balance changes decreased working
capital by $1.5 billion, largely due to increases in short-term borrowings,
with commercial paper outstanding of $745 million at December 31, 2017
compared to none outstanding at December 31, 2016.
Accounts Receivable and Inventory Turns (non-GAAP measures):
Accounts receivable and inventory turns 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. 3M defines accounts receivable turns
as quarterly net sales multiplied by 4 divided by ending accounts receivable -
net, and defines inventory turns as quarterly manufacturing cost multiplied by
4 divided by ending inventory. 3M believes accounts receivable turns is
meaningful to investors as a measure of how efficiently the Company manages
credit and collects from its customers. For inventory turns calculation
purposes, manufacturing cost is defined as cost of sales less freight and
engineering costs. 3M believes inventory turns is meaningful to investors as a
measure of how quickly inventory is sold. Details of these calculations
follow.
Accounts receivable turns (non-GAAP measure) December 31, 2017 versus
(Millions, except turns) 2017 2016 2016
Quarterly net sales $ 7,990 $ 7,329 $ 661
Ending accounts receivable - net $ 4,911 $ 4,392 $ 519
Accounts receivable turns 6.51 6.67 (0.16)
Inventory turns (non-GAAP measure) December 31, 2017 versus
(Millions, except turns) 2017 2016 2016
Quarterly cost of sales $ 4,080 $ 3,716 $ 364
Less: Freight and engineering $ 172 $ 160 $ 12
Manufacturing cost $ 3,908 $ 3,556 $ 352
Ending inventory $ 4,034 $ 3,385 $ 649
Inventory turns 3.88 4.20 (0.32)
Accounts receivable increased $519 million year-on-year in 2017, primarily due
to increased sales. In addition, foreign currency impacts increased 2017
accounts receivable by $215 million and acquisitions, net of divestitures,
increased accounts receivable by $57 million. As a result, accounts receivable
turns decreased 2 percent versus 2016.
Inventory increased $649 million year-on-year in 2017. Foreign currency
impacts increased 2017 inventory by $210 million and acquisitions, net of
divestitures, increased inventory by $51 million. Higher fourth quarter sales
contributed to a 10 percent increase in cost of sales, while inventory
increased 19 percent, which combined contributed to an 8 percent decrease in
inventory turns.
On a seasonal basis, both accounts receivable and inventory turns are
historically higher at year-end, driven by lower year-end accounts receivable
and inventory balances.
Return on Invested Capital (non-GAAP measure):
Return on Invested Capital (ROIC) is not defined under U.S. generally accepted
accounting principles. Therefore, ROIC should not be considered a substitute
for other measures prepared in accordance with U.S. GAAP and may not be
comparable to similarly titled measures used by other companies. The Company
defines ROIC as adjusted net income (net income including non-controlling
interest plus after-tax interest expense) divided by average invested capital
(equity plus debt). The Company believes ROIC is meaningful to investors as it
focuses on shareholder value creation. The calculation is provided in the
below table.
In 2017, ROIC of 21.3 percent was lower than both 2016 and 2015. This decrease
related to the net impact of the enactment of the TCJA and increases in
commercial paper borrowings in conjunction with the December 2017 U.S. defined
benefit pension plan contribution, which combined reduced ROIC by 3 percentage
points in 2017.
Years ended December 31
(Millions) 2017 2016 2015
Return on Invested Capital (non-GAAP measure)
Net income including non-controlling interest $ 4,869 $ 5,058 $ 4,841
Interest expense (after-tax) (1) 208 143 106
Adjusted net income (Return) $ 5,077 $ 5,201 $ 4,947
Average shareholders' equity (including non-controlling interest) (2) $ 11,627 $ 11,316 $ 12,484
Average short-term and long-term debt (3) 12,156 11,725 9,266
Average invested capital $ 23,783 $ 23,041 $ 21,750
Return on invested capital (non-GAAP measure) 21.3 % 22.6 % 22.7 %
(1) Effective income tax rate used for interest expense 35.5 % 28.3 % 29.1 %
(2) Calculation of average equity (includes non-controlling interest)
Ending total equity as of:
March 31 $ 11,040 $ 11,495 $ 13,673
June 30 11,644 11,658 12,851
September 30 12,202 11,769 11,945
December 31 11,622 10,343 11,468
Average total equity $ 11,627 $ 11,316 $ 12,484
(3) Calculation of average debt
Ending short-term and long-term debt as of:
March 31 $ 11,711 $ 11,139 $ 6,566
June 30 11,301 11,749 8,484
September 30 11,663 12,361 11,216
December 31 13,949 11,650 10,797
Average short-term and long-term debt $ 12,156 $ 11,725 $ 9,266
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) 2017 2016 2015
Net income including noncontrolling interest $ 4,869 $ 5,058 $ 4,841
Depreciation and amortization 1,544 1,474 1,435
Company pension and postretirement contributions (967) (383) (267)
Company pension and postretirement expense 333 251 556
Stock-based compensation expense 324 298 276
Gain on sale of businesses (586) (111) (47)
Income taxes (deferred and accrued income taxes) 1,074 108 (349)
Excess tax benefits from stock-based compensation - - (154)
Accounts receivable (245) (313) (58)
Inventories (387) 57 3
Accounts payable 24 148 9
Other - net 257 75 175
Net cash provided by operating activities $ 6,240 $ 6,662 $ 6,420
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 2017, cash flows provided by operating activities decreased $422 million
compared to the same period last year. Factors that decreased operating cash
flows were increases in pension contributions, plus year-on-year increases in
working capital. In December 2017, 3M contributed $600 million to its U.S.
defined benefit pension plan, contributing to a year-on-year increase in
pension and postretirement contributions of $584 million. The combination of
accounts receivable, inventories and accounts payable increased working
capital by $608 million in 2017, compared to working capital increases of $108
million in 2016. In 2017, year-on-year decreases in income tax payments (net
of refunds) increased operating cash flows by $284 million. Additional
discussion on working capital changes is provided earlier in the "Financial
Condition and Liquidity" section. Information concerning defined benefit
pension and postretirement contributions and expense is provided in Note 12,
with additional discussion in the preceding Results of Operations section.
Gain on sale of businesses in the preceding table reflects an adjustment for
divestiture gains in 2017 (discussed in Note 2), as cash divestiture activity
is presented as proceeds from sale of businesses within investing activities,
not operating activities.
In 2016, cash flows provided by operating activities increased $242 million
compared to the same period in 2015, with this increase primarily due to lower
year-on-year cash taxes and higher net income. These items were partially
offset by higher Company pension contributions. The combination of accounts
receivable, inventories and accounts payable increased working capital by $108
million in 2016, compared to working capital increase of $46 million in 2015.
Gain on sale of businesses in the preceding table reflects an adjustment for
divestiture gains in 2016 (discussed in Note 2), as cash divestiture activity
is presented as proceeds from sale of businesses within investing activities,
not operating activities.
Cash Flows from Investing Activities:
Years ended December 31
(Millions) 2017 2016 2015
Purchases of property, plant and equipment (PP&E) $ (1,373) $ (1,420) $ (1,461)
Proceeds from sale of PP&E and other assets 49 58 33
Acquisitions, net of cash acquired (2,023) (16) (2,914)
Purchases and proceeds from maturities and sale of marketable (798) (163) 1,300
securities and investments, net
Proceeds from sale of businesses, net of cash sold 1,065 142 123
Other - net (6) (4) 102
Net cash used in investing activities $ (3,086) $ (1,403) $ (2,817)
Investments in property, plant and equipment enable growth across many diverse
markets, helping to meet product demand and increasing manufacturing
efficiency. The Company expects 2018 capital spending to be approximately $1.5
billion to $1.8 billion as 3M continues to invest in its businesses.
3M invests in renewal and maintenance programs, which pertain 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.
Investments included continued expansion and sustainment of current and new
facilities across many geographies, focusing on growth, productivity and
capacity. Other investments include IT systems and infrastructure,
particularly the ongoing multi-year phased implementation of an ERP system on
a worldwide basis. Additional 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.
Refer to Note 2 for information on acquisitions and divestitures. The Company
is actively considering additional acquisitions, investments and strategic
alliances to strengthen its portfolio, and from time to time may also divest
certain businesses.
Acquisitions, net of cash acquired, in 2017 primarily includes the purchase of
Scott Safety. In 2015, this amount consisted mostly of the Capital Safety and
Membrana acquisitions. Proceeds from sale of businesses in 2017 primarily
relate to the divestiture of the assets of the prescription safety eyewear,
identity management, tolling and automated license/number plate recognition
and electronic monitoring businesses within the Safety and Graphics business
segment. Proceeds from sale of businesses in 2016 related to the divestiture
of the assets of the pressurized polyurethane foam adhesives business
(formerly known as Polyfoam) within the Industrial business segment and the
completion of the divestiture of the Library business within the Safety and
Graphics business segment. In addition, in the fourth quarter of 2016, 3M sold
the assets of its protective films business within the Industrial business
segment and its cathode battery technology out-licensing business within the
Electronics and Energy business segment.
Purchases of marketable securities and investments and proceeds from
maturities and sale of marketable securities and investments are primarily
attributable to asset-backed securities, certificates of deposit/time
deposits, commercial paper, and other securities, which are classified as
available-for-sale. Net proceeds from maturities and sale of marketable
securities in 2015 were used to help fund the August 2015 acquisitions of
Capital Safety and Membrana. Refer to Note 10 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) 2017 2016 2015
Change in short-term debt - net $ 578 $ (797) $ 860
Repayment of debt (maturities greater than 90 days) (962) (992) (800)
Proceeds from debt (maturities greater than 90 days) 1,987 2,832 3,422
Total cash change in debt $ 1,603 $ 1,043 $ 3,482
Purchases of treasury stock (2,068) (3,753) (5,238)
Proceeds from issuances of treasury stock pursuant to stock option and benefit 734 804 635
plans
Dividends paid to stockholders (2,803) (2,678) (2,561)
Excess tax benefits from stock-based compensation - - 154
Other - net (121) (42) (120)
Net cash used in financing activities $ (2,655) $ (4,626) $ (3,648)
2017 Debt Activity:
The Company's total debt was $2.3 billion higher at December 31, 2017 when
compared to December 31, 2016. Increases in debt related to October 2017 debt
issuances of $2.0 billion, commercial paper of $745 million outstanding at
year end 2017, and the net impact of repayments and borrowings of
international subsidiaries. These are partially offset by June 2017 repayments
of $650 million aggregate principal amount of medium-term notes and the
October 2017 $305 million debt tender. Net commercial paper issuances and
repayments and borrowings by international subsidiaries are largely reflected
in "Change in short-term debt - net" in the preceding table. Foreign exchange
rate changes also impacted debt balances.
Proceeds from debt for 2017 primarily related to the October 2017 issuance of
$650 million aggregate principal amount of 5.5-year fixed rate medium-term
notes due 2023 with a coupon rate of 2.25%, $850 million aggregate principal
amount of 10-year fixed rate medium-term notes due 2027 with a coupon rate of
2.875%, and $500 million aggregate principal amount of 30-year fixed rate
medium-term notes due 2047 with a coupon rate of 3.625%. Refer to Note 11 for
more detail of these debt issuances.
In October 2017, via cash tender offers, 3M repurchased $305 million aggregate
principal amount of its outstanding notes. This included $110 million of its
$330 million principal amount of 6.375% notes due 2028 and $195 million of its
$750 million principal amount of 5.70% notes due 2037. The Company recorded an
early debt extinguishment charge of $96 million in the fourth quarter of 2017
within interest expense associated with the differential between the carrying
value and the amount paid to acquire the tendered notes and related expenses.
2016 Debt Activity:
Total debt at December 31, 2016 increased $853 million when compared to
year-end 2015, with the increase primarily due to May 2016 debt issuances
(approximately $1.1 billion at issue date exchange rates) and September 2016
debt issuances of approximately $1.75 billion. This increase was partially
offset by the repayment of $1 billion aggregate principal amount of
medium-term notes due September 2016 along with the net impact of repayments
and borrowings by international subsidiaries, primarily Japan and Korea
(approximately $0.8 million decrease), which is reflected in "Change in
short-term debt-net" in the preceding table. Foreign exchange rate changes
also impacted debt balances.
Proceeds from debt for 2016 primarily related to the May 2016 issuance of 500
million Euro aggregate principal amount of 5.75-year fixed rate medium-term
notes due February 2022 with a coupon rate of 0.375% and 500 million Euro
aggregate principal amount of 15-year fixed rate medium-term notes due 2031
with a coupon rate of 1.50%. In September 2016, 3M issued $600 million
aggregate principal amount of five-year fixed rate medium-term notes due 2021
with a coupon rate of 1.625%, $650 million aggregate principal amount of
10-year fixed rate medium-term notes due 2026 with a coupon rate of 2.250%,
and $500 million aggregate principal amount of 30-year fixed rate medium-term
notes due 2046 with a coupon rate of 3.125%. All of these 2016 issuances were
under the medium-term notes program (Series F).
2015 Debt Activity:
In 2015, the change in short-term debt primarily related to bank borrowings by
international subsidiaries, primarily Japan and Korea. Repayment of debt
primarily related to debt assumed (and paid off) as part of the Capital Safety
acquisition. 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.
Repurchases of Common Stock:
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. This authorization has no
pre-established end date. In 2017, the Company purchased $2.1 billion of its
own stock, compared to purchases of $3.8 billion and $5.2 billion in 2016 and
2015, respectively. The Company expects full-year 2018 gross share repurchases
to be between $2.0 billion to $5.0 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.
Dividends Paid to Shareholders:
Cash dividends paid to shareholders totaled $2.803 billion ($4.70 per share)
in 2017, $2.678 billion ($4.44 per share) in 2016, and $2.561 billion ($4.10
per share) in 2015. 3M has paid dividends since 1916. In January 2018, 3M's
Board of Directors declared a first-quarter 2018 dividend of $1.36 per share,
an increase of 16 percent. This is equivalent to an annual dividend of $5.44
per share and marked the 60th consecutive year of dividend increases.
Other cash flows from financing activities may include various other items,
such as changes in cash overdraft balances, and principal payments for capital
leases. In addition, in 2017, this included a payment related to the $96
million in interest expense associated with premiums and fees for the early
retirement of debt. See Note 11 for additional details.
Free Cash Flow (non-GAAP measure):
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. The Company defines free cash flow as net cash provided by
operating activities less purchases of property, plant and equipment. It
should not be inferred that the entire free cash flow amount is available for
discretionary expenditures. The Company defines free cash flow conversion as
free cash flow divided by net income attributable to 3M. The Company believes
free cash flow and free cash flow conversion are meaningful to investors as
they are useful measures of performance and the Company uses these measures as
an indication of the strength of the company and its ability to generate cash.
The first quarter of each year is typically 3M's seasonal low for free cash
flow and free cash flow conversion. Below find a recap of free cash flow and
free cash flow conversion for 2017, 2016 and 2015.
In 2017, free cash flow conversion was impacted by enactment of the TCJA,
along with an additional U.S. pension contribution of $600 million that 3M
made following the signing of tax reform. On a combined basis, these items
benefited free cash flow conversion by 3 percentage points. Refer to the
preceding "Cash Flows from Operating Activities" section for discussion of
additional items that impacted operating cash flow. Refer to the preceding
"Cash Flows from Investing Activities" section for discussion on capital
spending for property, plant and equipment.
Years ended December 31
(Millions) 2017 2016 2015
Major GAAP Cash Flow Categories
Net cash provided by operating activities $ 6,240 $ 6,662 $ 6,420
Net cash provided by (used in) investing activities (3,086) (1,403) (2,817)
Net cash used in financing activities (2,655) (4,626) (3,648)
Free Cash Flow (non-GAAP measure)
Net cash provided by operating activities $ 6,240 $ 6,662 $ 6,420
Purchases of property, plant and equipment (PP&E) (1,373) (1,420) (1,461)
Free cash flow $ 4,867 $ 5,242 $ 4,959
Net income attributable to 3M $ 4,858 $ 5,050 $ 4,833
Free cash flow conversion 100 % 104 % 103 %
Off-Balance Sheet Arrangements and Contractual Obligations:
As of December 31, 2017, the Company has not utilized special purpose
entities to facilitate off-balance sheet financing arrangements. Refer to the
section entitled "Warranties/Guarantees" in Note 15 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, 2017, follows:
Contractual Obligations
Payments due by year
After
(Millions) Total 2018 2019 2020 2021 2022 2022
Total debt (Note 11) $ 13,949 $ 1,853 $ 692 $ 1,368 $ 1,333 $ 1,191 $ 7,512
Interest on long-term debt 3,375 269 256 251 241 212 2,146
Operating leases (Note 15) 1,098 258 212 160 106 88 274
Capital leases (Note 15) 76 12 10 9 6 5 34
Tax Cuts and Jobs Act (TCJA) transition tax payments (Note 9) 745 122 59 59 59 111 335
Unconditional purchase obligations and other 1,561 1,032 211 150 99 56 13
Total contractual cash obligations $ 20,804 $ 3,546 $ 1,440 $ 1,997 $ 1,844 $ 1,663 $ 10,314
Long-term debt payments due in 2018, 2019, and 2020 include floating rate
notes totaling $54 million, $71 million, and $95 million, respectively, as a
result of put provisions associated with these debt instruments.
During the fourth quarter of 2017, 3M recorded a net tax expense related to
the enactment of the Tax Cuts and Jobs Act (TCJA). The expense is primarily
related to the TCJA's transition tax. The transition tax is payable over 8
years at the election of the taxpayer. As discussed in Note 9, this balance is
a provisional amount and is subject to adjustment during the measurement
period of up to one year following the December 2017 enactment of the TCJA, as
provided by recent SEC guidance.
Unconditional purchase obligations are defined as agreements to purchase goods
or services that are 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. 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, other than the
transition tax prescribed under the Tax Cuts and Jobs Act (TCJA) which is
separately included in the table above, or the amount by which the liability
will increase or decrease over time; therefore, the long-term portion of the
net tax liability of $523 million is excluded from the preceding table. Refer
to Note 9 for further details.
As discussed in Note 12, the Company does not have a required minimum cash
pension contribution obligation for its U.S. plans in 2018 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 commodity price swaps.
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. The maximum length of time over which 3M hedges
its exposure to the variability in future cash flows of the forecasted
transactions is 36 months. 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 either cash flow
hedges or net investment hedges was $3.6 billion at December 31, 2017. The
dollar equivalent gross notional amount of the Company's foreign exchange
forward and option contracts not designated as hedging instruments was $5.0
billion at December 31, 2017. In addition, as of December 31, 2017, the
Company had 4.4 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 13 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 rate risk and
expense using a mix of fixed and floating rate debt. In addition, 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, 2017
- More to follow, for following part double click ID:nRSM6559Ee .S. dollars. Organic local-currency sales increased 3.6 percent,
acquisitions added 0.2 percent, and foreign currency translation reduced sales by 1.7 percent.
On an organic local-currency sales basis:
· Sales growth was broad-based across the entire Health Care portfolio, led by food safety, critical and chronic care,
and drug delivery systems.
· In developing markets, Health Care organic local-currency sales grew 7 percent.
· 3M continued to increase investments across the businesses to drive efficient growth.
Acquisitions:
· Acquisition sales growth related to the March 2015 purchase of Ivera Medical Corp, a manufacturer of health care
products that disinfect and protect devices used for access into a patient's bloodstream.
Operating income:
· Operating income increased 1.9 percent to $1.8 billion, while margins held steady at 31.7 percent.
· Acquisitions had a minimal impact on operating income margins.
Electronics and Energy Business (16.3% of consolidated sales):
2017 2016 2015
Sales (millions) $ 5,159 $ 4,643 $ 5,069
Sales change analysis:
Organic local-currency 11.0 % (7.8) %
Divestitures (0.2) -
Translation 0.3 (0.6)
Total sales change 11.1 % (8.4) %
Operating income (millions) $ 1,254 $ 1,041 $ 1,083
Percent change 20.4 % (3.9) %
Percent of sales 24.3 % 22.4 % 21.4 %
Year 2017 results:
Sales in Electronics and Energy totaled $5.2 billion, up 11.1 percent in U.S. dollars. Organic local-currency sales
increased 11.0 percent, divestitures reduced sales by 0.2 percent, and foreign currency translation increased sales by 0.3
percent.
Total sales within the electronics-related businesses were up 16 percent while energy-related businesses were up 2
percent.
On an organic local-currency sales basis:
· Sales increased 16 percent in 3M's electronics-related businesses, with increases in both display materials and
systems and electronics materials solutions, as the businesses drove increased penetration on OEM platforms in addition to
strengthened end-market demand in consumer electronics.
· Sales increased 1 percent in 3M's energy-related businesses, as sales growth in electrical markets was partially
offset by declines in telecommunications.
Divestitures:
· In the fourth quarter of 2017, 3M sold the assets of its electrical marking/labeling business.
· In December 2016, 3M sold the assets of its cathode battery technology out-licensing business.
· In December 2017, 3M announced the sale of substantially all of its Communication Markets division, which is
expected to close in 2018.
Operating income:
· Operating income margins increased 1.9 percentage points, as benefits from higher organic volume were partially
offset by 2017 footprint and portfolio actions and year-on-year divestiture impacts. These actions resulted in a
year-on-year operating income margin reduction of 2.3 percentage points.
Year 2016 results:
Sales totaled $4.6 billion, down 8.4 percent in U.S. dollars. Organic local-currency sales declined 7.8 percent, and
foreign currency translation reduced sales by 0.6 percent.
Total sales within the electronics-related and energy-related businesses decreased 10 percent and 4 percent, respectively.
On an organic local-currency sales basis:
· Sales decreased 10 percent in 3M's electronics-related businesses, with declines in both electronics materials
solutions and display materials and systems. 3M was impacted by weak end-market demand across most consumer electronic
applications.
· Sales decreased approximately 3 percent in 3M's energy-related businesses, with an increase in telecommunications
more than offset by a decline in electrical markets. 3M exited its backsheet business in December 2015, which contributed
to the reduction in energy-related sales.
Divestitures:
· In December 2016, 3M sold the assets of its cathode battery technology out-licensing business.
Operating income:
· Operating income decreased 3.9 percent to $1.0 billion.
· Operating income margins were 22.4 percent compared to 21.4 percent in 2015, as divestiture gains and productivity
benefits from past portfolio and restructuring actions benefited results.
· Expenses related to portfolio management actions in 2016, in addition to lower organic volume, reduced operating
income margins.
Consumer Business (14.5% of consolidated sales):
2017 2016 2015
Sales (millions) $ 4,589 $ 4,484 $ 4,429
Sales change analysis:
Organic local-currency 1.7 % 1.8 %
Translation 0.6 (0.6)
Total sales change 2.3 % 1.2 %
Operating income (millions) $ 993 $ 1,065 $ 1,048
Percent change (6.8) % 1.6 %
Percent of sales 21.6 % 23.7 % 23.7 %
Year 2017 results:
Sales in Consumer totaled $4.6 billion, up 2.3 percent in U.S. dollars. Organic local-currency sales increased 1.7 percent,
while foreign currency translation increased sales by 0.6 percent.
On an organic local-currency sales basis:
· Sales grew in consumer health care, home improvement, and home care.
· The stationery and office supplies business declined due to channel inventory adjustments, primarily in the U.S.
office retail and wholesale market.
Operating income:
· Operating income margins declined 2.1 percentage points year-on-year, in part due to incremental strategic
investments, which reduced margins by 1.9 percentage points.
Year 2016 results:
Consumer sales totaled $4.5 billion, up 1.2 percent in U.S. dollars. Organic local-currency sales increased 1.8 percent,
and foreign currency translation reduced sales by 0.6 percent.
On an organic local-currency sales basis:
· Sales growth was led by home improvement, in addition to consumer health care.
Operating income:
· Operating income was $1.1 billion, up 1.6 percent from 2015.
· Operating income margins were 23.7 percent, benefiting from ongoing productivity efforts.
PERFORMANCE BY GEOGRAPHIC AREA
While 3M 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. Export sales are generally
reported within the geographic area where the final sales to 3M customers are made. A portion of the products or components
sold by 3M's operations to its customers are exported by these customers to different geographic areas. As customers move
their operations from one geographic area to another, 3M's results will follow. Thus, net sales in a particular geographic
area are not indicative of end-user consumption in that geographic area. Financial information related to 3M operations in
various geographic areas is provided in Note 18.
Refer to the "Overview" section for a summary of net sales by geographic area and business segment.
Geographic Area Supplemental Information
Property, Plant and
Equipment - net
Employees as of December 31, Capital Spending as of December 31,
(Millions, except Employees) 2017 2016 2015 2017 2016 2015 2017 2016
United States 36,958 35,748 35,973 $ 852 $ 834 $ 936 $ 4,891 $ 4,914
Asia Pacific 18,283 18,124 17,642 209 228 172 1,672 1,573
Europe, Middle East and Africa 20,869 20,203 20,563 256 294 249 1,798 1,512
Latin America and Canada 15,426 17,509 15,268 56 64 104 505 517
Total Company 91,536 91,584 89,446 $ 1,373 $ 1,420 $ 1,461 $ 8,866 $ 8,516
Employment:
Employment decreased by 48 positions in 2017 and increased by 2,138 positions in 2016.
Capital Spending/Net Property, Plant and Equipment:
Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and
increasing manufacturing efficiency. In 2017, 62% of 3M's capital spending was within the United States, followed by
Europe, Middle East and Africa; Asia Pacific; and Latin America/Canada. 3M is increasing its investment in manufacturing
and sourcing capability in order to more closely align its product capability with its sales in major geographic areas in
order to best serve its customers throughout the world with proprietary, automated, efficient, safe and sustainable
processes. Capital spending is discussed in more detail later in MD&A in the section entitled "Cash Flows from Investing
Activities."
CRITICAL ACCOUNTING ESTIMATES
Information regarding significant accounting policies is included in Note 1 of the consolidated financial statements. As
stated in Note 1, the preparation of financial statements requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and
liabilities. Management bases its estimates on historical experience and on various assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The Company believes its most critical accounting estimates relate to legal proceedings, the Company's pension and
postretirement obligations, asset impairments and income taxes. Senior management has discussed the development, selection
and disclosure of its critical accounting estimates with the Audit Committee of 3M's Board of Directors.
Legal Proceedings:
The categories of claims for which the Company has a probable and estimable liability, the amount of its liability
accruals, and the estimates of its related insurance receivables are critical accounting estimates related to legal
proceedings. Please refer to the section entitled "Process for Disclosure and Recording of Liabilities and Insurance
Receivables Related to Legal Proceedings" (contained in "Legal Proceedings" in Note 15) for additional information about
such estimates.
Pension and Postretirement Obligations:
3M has various company-sponsored retirement plans covering substantially all U.S. employees and many employees outside the
United States. The primary U.S. defined-benefit pension plan was closed to new participants effective January 1, 2009. The
Company accounts for its defined benefit pension and postretirement health care and life insurance benefit plans in
accordance with Accounting Standard Codification (ASC) 715, Compensation - Retirement Benefits, in measuring plan assets
and benefit obligations and in determining the amount of net periodic benefit cost. ASC 715 requires employers to recognize
the underfunded or overfunded status of a defined benefit pension or postretirement plan as an asset or liability in its
statement of financial position and recognize changes in the funded status in the year in which the changes occur through
accumulated other comprehensive income, which is a component of stockholders' equity. While the company believes the
valuation methods used to determine the fair value of plan assets are appropriate and consistent with other market
participants, the use of different methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different estimate of fair value at the reporting date. See Note 12 for additional discussion
of actuarial assumptions used in determining defined benefit pension and postretirement health care liabilities and
expenses.
Pension benefits associated with these plans are generally based primarily on each participant's years of service,
compensation, and age at retirement or termination. The benefit obligation represents the present value of the benefits
that employees are entitled to in the future for services already rendered as of the measurement date. The Company measures
the present value of these future benefits by projecting benefit payment cash flows for each future period and discounting
these cash flows back to the December 31 measurement date, using the yields of a portfolio of high quality, fixed-income
debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits.
Historically, the single aggregated discount rate used for each plan's benefit obligation was also used for the calculation
of all net periodic benefit costs, including the measurement of the service and interest costs. Beginning in 2016, 3M
changed the method used to estimate the service and interest cost components of the net periodic pension and other
postretirement benefit costs. The new method measures service cost and interest cost separately using the spot yield curve
approach applied to each corresponding obligation. Service costs are determined based on duration-specific spot rates
applied to the service cost cash flows. The interest cost calculation is determined by applying duration-specific spot
rates to the year-by-year projected benefit payments. The spot yield curve approach does not affect the measurement of the
total benefit obligations as the change in service and interest costs offset in the actuarial gains and losses recorded in
other comprehensive income. The Company changed to the new method to provide a more precise measure of service and interest
costs by improving the correlation between the projected benefit cash flows and the discrete spot yield curve rates. The
Company accounted for this change as a change in estimate prospectively beginning in the first quarter of 2016.
Using this methodology, the Company determined discount rates for its plans as follow:
U.S. Qualified Pension International Pension (weighted average) U.S. Postretirement Medical
December 31, 2017 Liability:
Benefit obligation 3.68 % 2.41 % 3.60 %
2018 Net Periodic Benefit Cost Components:
Service cost 3.78 % 2.28 % 3.77 %
Interest cost 3.35 % 2.14 % 3.20 %
Another significant element in determining the Company's pension expense in accordance with ASC 715 is the expected return
on plan assets, which is based on strategic asset allocation of the plan, long-term capital market return expectations, and
expected performance from active investment management. For the primary U.S. qualified pension plan, the expected long-term
rate of return on an annualized basis for 2018 is 7.25%, equal to 2017. Refer to Note 12 for information on how the 2017
rate was determined. Return on assets assumptions for international pension and other post-retirement benefit plans are
calculated on a plan-by-plan basis using plan asset allocations and expected long-term rate of return assumptions. The
weighted average expected return for the international pension plan is 5.02% for 2018, compared to 5.16% for 2017.
For the year ended December 31, 2017, the Company recognized total consolidated defined benefit pre-tax pension and
postretirement expense (after settlements, curtailments, special termination benefits and other) of $333 million, up from
$251 million in 2016. Defined benefit pension and postretirement expense (before settlements, curtailments, special
termination benefits and other) is anticipated to increase to approximately $409 million in 2018, an increase of $76
million compared to 2017.
The table below summarizes the impact on 2018 pension expense for the U.S. and international pension plans of a 0.25
percentage point increase/decrease in the expected long-term rate of return on plan assets and discount rate assumptions
used to measure plan liabilities and 2017 net periodic benefit cost. The table assumes all other factors are held constant,
including the slope of the discount rate yield curves.
Increase (Decrease) in Net Periodic Benefit Cost
Discount Rate Expected Return on Assets
(Millions) -0.25% +0.25% -0.25% +0.25%
U.S. pension plans $ 34 $ (33) $ 38 $ (38)
International pension plans 24 (23) 16 (16)
Asset Impairments:
As of December 31, 2017, net property, plant and equipment totaled $8.9 billion and net identifiable intangible assets
totaled $2.9 billion. Management makes estimates and assumptions in preparing the consolidated financial statements for
which actual results will emerge over long periods of time. This includes the recoverability of long-lived assets employed
in the business, including assets of acquired businesses. These estimates and assumptions are closely monitored by
management and periodically adjusted as circumstances warrant. For instance, expected asset lives may be shortened or an
impairment recorded based on a change in the expected use of the asset or performance of the related asset group.
Of the $2.9 billion in net identifiable intangible assets, $0.6 billion relates to indefinite-lived tradenames, primarily
Capital Safety, whose tradenames ($520 million at acquisition date) have been in existence for over 55 years (refer to Note
2 for more detail). The primary valuation technique used in estimating the fair value of indefinite lived intangible assets
(tradenames) is a discounted cash flow approach. Specifically, a relief of royalty rate is applied to estimated sales, with
the resulting amounts then discounted using an appropriate market/technology discount rate. The relief of royalty rate is
the estimated royalty rate a market participant would pay to acquire the right to market/produce the product. If the
resulting discounted cash flows are less than the book value of the indefinite lived intangible asset, impairment exists,
and the asset value must be written down. Based on impairment testing in the third quarter of 2017, no impairment was
indicated. The discounted cash flows related to the Capital Safety tradename exceeded its book value by more than 15
percent.
3M goodwill totaled approximately $10.5 billion as of December 31, 2017. 3M's annual goodwill impairment testing is
performed in the fourth quarter of each year. Impairment testing for goodwill is done at a reporting unit level, with all
goodwill assigned to a reporting unit. Reporting units are one level below the business segment level, but are required to
be combined when reporting units within the same segment have similar economic characteristics. At 3M, reporting units
correspond to a division. 3M did not combine any of its reporting units for impairment testing.
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, and the loss would equal that difference. The estimated fair value of a reporting unit is
determined using earnings for the reporting unit multiplied by a price/earnings ratio for comparable industry groups, or by
using a discounted cash flow analysis. 3M typically uses the price/earnings ratio approach for stable and growing
businesses that have a long history and track record of generating positive operating income and cash flows. 3M uses the
discounted cash flow approach for start-up, loss position and declining businesses, in addition to using for businesses
where the price/earnings ratio valuation method indicates additional review is warranted. 3M also uses discounted cash flow
as an additional tool for businesses that may be growing at a slower rate than planned due to economic or other
conditions.
As described in Note 17, effective in the first quarter of 2017, 3M made business segment reporting changes. For any
product moves that resulted in reporting unit changes, the Company applied the relative fair value method to determine the
impact on goodwill of the associated reporting units. During the first quarter of 2017, the Company completed its
assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no
impairment existed. The discussion that follows relates to the separate fourth quarter 2017 annual impairment test and is
in the context of the reporting unit structure that existed at that time.
As of October 1, 2017, 3M had 24 primary reporting units, with ten reporting units accounting for approximately 86 percent
of the goodwill. These ten reporting units were comprised of the following divisions: Advanced Materials, Communication
Markets, Display Materials and Systems, Health Information Systems, Industrial Adhesives and Tapes, Infection Prevention,
Oral Care Solutions, Personal Safety, Separation and Purification, and Transportation Safety. The estimated fair value for
all reporting units was in excess of carrying value by approximately 40 percent or more. 3M's market value at both December
31, 2017, and September 30, 2017, was significantly in excess of its shareholders' equity of approximately $12 billion.
As discussed in Note 2, 3M announced the sale of substantially all of its Communication Markets division, which is expected
to close in 2018, which will result in an associated goodwill reduction of approximately $270 million upon sale.
In 2017, 3M determined fair values using either an industry price-earnings ratio approach or a discounted cash flows
analysis. Where applicable, 3M used a weighted-average discounted cash flow analysis for certain divisions, using projected
cash flows that were weighted based on different sales growth and terminal value assumptions, among other factors. The
weighting was based on management's estimates of the likelihood of each scenario occurring.
3M is a highly integrated enterprise, where businesses share technology and leverage common fundamental strengths and
capabilities, thus many of 3M's businesses could not easily be sold on a stand-alone basis. 3M's focus on research and
development has resulted in a portion of 3M's value being comprised of internally developed businesses that have no
goodwill associated with them. Based on the annual test in the fourth quarter of 2017, no goodwill impairment was indicated
for any of the reporting units.
Factors which could result in future impairment charges include, among others, changes in worldwide economic conditions,
changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These risk
factors are discussed in Item 1A, "Risk Factors," of this document. In addition, changes in the weighted average cost of
capital could also impact impairment testing results. As indicated above, during the first quarter of 2017, the Company
completed its assessment of any potential goodwill impairment for reporting units impacted by changes between reporting
units and determined that no impairment existed. Long-lived assets with a definite life are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be
recoverable. If future non-cash asset impairment charges are taken, 3M would expect that only a portion of the long-lived
assets or goodwill would be impaired. 3M will continue to monitor its reporting units and asset groups in 2018 for any
triggering events or other indicators of impairment.
Income Taxes:
The extent of 3M's operations involves dealing with uncertainties and judgments in the application of complex tax
regulations in a multitude of jurisdictions. The final taxes paid are dependent upon many factors, including negotiations
with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and international
tax audits. The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues in
the United States and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes
will be due. The Company follows guidance provided by ASC 740, Income Taxes, regarding uncertainty in income taxes, to
record these liabilities (refer to Note 9 for additional information). The Company adjusts these reserves in light of
changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution
may result in a payment that is materially different from the Company's current estimate of the tax liabilities. If the
Company's estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would
result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities
would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer
necessary.
During the fourth quarter of 2017, 3M recorded a net tax expense related to the enactment of the Tax Cuts and Jobs Act
(TCJA). The expense is primarily related to the TCJA's transition tax on previously unremitted earnings of non-U.S.
subsidiaries and is net of remeasurement of 3M's deferred tax assets and liabilities considering the TCJA's newly enacted
tax rates and certain other impacts. As discussed in Note 9, this expense is a provisional amount and is subject to
adjustment during the measurement period of up to one year following the December 2017 enactment of the TCJA, as provided
by recent SEC guidance.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.
FINANCIAL CONDITION AND LIQUIDITY
The strength and stability of 3M's business model and strong free cash flow capability, together with proven capital
markets access, positions the Company to be able to add further leverage to its capital structure. Investing in 3M's
businesses to drive organic growth remains the first priority for capital deployment, including research and development,
capital expenditures, and commercialization capability. Investment in organic growth will be supplemented by complementary
acquisitions. 3M will also continue to return cash to shareholders through dividends and share repurchases. Sources for
cash availability in the United States, such as ongoing cash flow from operations and access to capital markets, have
historically been sufficient to fund dividend payments to shareholders, as well as funding U.S. acquisitions and other
items as needed. The TCJA creates additional repatriation opportunities for 3M to access international cash positions on a
continual and on-going basis and will help support U.S. capital deployments needs. For those international earnings still
considered to be reinvested indefinitely, the Company currently has no plans or intentions to repatriate these funds for
U.S. operations. See Note 9 for further information on earnings considered to be reinvested indefinitely.
3M's primary short-term liquidity needs are met through cash on hand and U.S. commercial paper issuances. 3M believes it
will have continuous access to the commercial paper market. 3M's commercial paper program permits the Company to have a
maximum of $5 billion outstanding with a maximum maturity of 397 days from date of issuance. At December 31, 2017, there
was approximately $745 million in commercial paper issued and outstanding.
Total Debt:
The strength of 3M's capital structure and significant ongoing cash flows provide 3M proven access to capital markets.
Additionally, the Company's maturity profile is staggered to help ensure refinancing needs in any given year are reasonable
in proportion to the total portfolio. 3M currently has an AA- credit rating with a stable outlook from Standard & Poor's
and has an A1 credit rating with a stable outlook from Moody's Investors Service.
The Company's total debt was $2.3 billion higher at December 31, 2017 when compared to December 31, 2016. Increases in debt
related to October 2017 debt issuances of $2.0 billion, commercial paper of $745 million outstanding at year end 2017, and
the net impact of repayments and borrowings of international subsidiaries along with foreign currency effects. These are
partially offset by June 2017 repayments of $650 million aggregate principal amount of medium-term notes and the October
2017 $305 million debt tender. For discussion of repayments of and proceeds from debt refer to the following "Cash Flows
from Financing Activities" section.
Effective February 24, 2017, the Company updated its "well-known seasoned issuer" (WKSI) shelf registration statement,
which registers an indeterminate amount of debt or equity securities for future issuance and sale. This replaced 3M's
previous shelf registration dated May 16, 2014. In May 2016, in connection with the WKSI shelf, 3M entered into an amended
and restated distribution agreement relating to the future issuance and sale (from time to time) of the Company's
medium-term notes program (Series F), up to the aggregate principal amount of $18 billion, which was an increase from the
previous aggregate principal amount up to $9 billion of the same Series.
As of December 31, 2017, the total amount of debt issued as part of the medium-term notes program (Series F), inclusive of
debt issued in 2011, 2012, 2014, 2015, 2016, and the 2017 debt referenced above, is approximately $13.1 billion (utilizing
the foreign exchange rates applicable at the time of issuance for the Euro denominated debt). Information with respect to
long-term debt issuances and maturities for the periods presented is included in Note 11.
In March 2016, 3M amended and restated its existing $2.25 billion five-year revolving credit facility expiring in August
2019 to a $3.75 billion five-year revolving credit facility expiring in March 2021. This credit agreement includes a
provision under which 3M may request an increase of up to $1.25 billion (at lenders' discretion), bringing the total
facility up to $5.0 billion. This revolving credit facility is undrawn at December 31, 2017. Under the $3.75 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, 2017,
this ratio was approximately 29 to 1. Debt covenants do not restrict the payment of dividends. Apart from the committed
facilities, an additional $288 million in stand-alone letters of credit and bank guarantees were also issued and
outstanding at December 31, 2017. These instruments are utilized in connection with normal business activities.
Cash, Cash Equivalents and Marketable Securities:
At December 31, 2017, 3M had $4.2 billion of cash, cash equivalents and marketable securities, of which approximately
$3.975 billion was held by the Company's foreign subsidiaries and approximately $180 million was held by the United States.
These balances are invested in bank instruments and other high-quality fixed income securities. At December 31, 2016, cash,
cash equivalents and marketable securities held by the Company's foreign subsidiaries and by the United States totaled
approximately $2.35 billion and $350 million, respectively. Specifics concerning marketable securities investments are
provided in Note 10.
Net Debt (non-GAAP measure):
Net debt is not defined under U.S. GAAP and may not be computed the same as similarly titled measures used by other
companies. The Company defines net debt as total debt less the total of cash, cash equivalents and current and long-term
marketable securities. 3M believes net debt is meaningful to investors as 3M considers net debt and its components to be
important indicators of liquidity and financial position. The following table provides net debt as of December 31, 2017 and
2016.
December 31, 2017 versus
(Millions) 2017 2016 2016
Total debt $ 13,949 $ 11,650 $ 2,299
Less: Cash, cash equivalents and marketable securities 4,156 2,695 1,461
Net debt (non-GAAP measure) $ 9,793 $ 8,955 $ 838
Refer to the preceding "Total Debt" and "Cash, Cash Equivalents and Marketable Securities" sections for additional
details.
Balance Sheet:
3M's strong balance sheet and liquidity provide the Company with significant flexibility to fund its numerous opportunities
going forward. The Company will continue to invest in its operations to drive growth, including continual review of
acquisition opportunities.
The Company uses working capital measures that place emphasis and focus on certain working capital assets. These measures
include working capital, accounts receivable turns, and inventory turns.
Working Capital (non-GAAP measure):
December 31, 2017 versus
(Millions) 2017 2016 2016
Current assets $ 14,277 $ 11,726 $ 2,551
Less: Current liabilities 7,687 6,219 1,468
Working capital (non-GAAP measure) $ 6,590 $ 5,507 $ 1,083
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 is not defined under U.S. generally accepted accounting principles
and may not be computed the same as similarly titled measures used by other companies. The Company defines working capital
as current assets minus current liabilities. 3M believes working capital is meaningful to investors as a measure of
operational efficiency and short-term financial health.
Working capital increased $1.1 billion during 2017 when compared to December 31, 2016. Current asset balance changes
increased working capital by $2.6 billion, driven by increases in cash/cash equivalents and marketable securities, in
addition to higher accounts receivable and inventories (discussed further below). Current liability balance changes
decreased working capital by $1.5 billion, largely due to increases in short-term borrowings, with commercial paper
outstanding of $745 million at December 31, 2017 compared to none outstanding at December 31, 2016.
Accounts Receivable and Inventory Turns (non-GAAP measures):
Accounts receivable and inventory turns 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. 3M defines accounts receivable turns as quarterly
net sales multiplied by 4 divided by ending accounts receivable - net, and defines inventory turns as quarterly
manufacturing cost multiplied by 4 divided by ending inventory. 3M believes accounts receivable turns is meaningful to
investors as a measure of how efficiently the Company manages credit and collects from its customers. For inventory turns
calculation purposes, manufacturing cost is defined as cost of sales less freight and engineering costs. 3M believes
inventory turns is meaningful to investors as a measure of how quickly inventory is sold. Details of these calculations
follow.
Accounts receivable turns (non-GAAP measure) December 31, 2017 versus
(Millions, except turns) 2017 2016 2016
Quarterly net sales $ 7,990 $ 7,329 $ 661
Ending accounts receivable - net $ 4,911 $ 4,392 $ 519
Accounts receivable turns 6.51 6.67 (0.16)
Inventory turns (non-GAAP measure) December 31, 2017 versus
(Millions, except turns) 2017 2016 2016
Quarterly cost of sales $ 4,080 $ 3,716 $ 364
Less: Freight and engineering $ 172 $ 160 $ 12
Manufacturing cost $ 3,908 $ 3,556 $ 352
Ending inventory $ 4,034 $ 3,385 $ 649
Inventory turns 3.88 4.20 (0.32)
Accounts receivable increased $519 million year-on-year in 2017, primarily due to increased sales. In addition, foreign
currency impacts increased 2017 accounts receivable by $215 million and acquisitions, net of divestitures, increased
accounts receivable by $57 million. As a result, accounts receivable turns decreased 2 percent versus 2016.
Inventory increased $649 million year-on-year in 2017. Foreign currency impacts increased 2017 inventory by $210 million
and acquisitions, net of divestitures, increased inventory by $51 million. Higher fourth quarter sales contributed to a 10
percent increase in cost of sales, while inventory increased 19 percent, which combined contributed to an 8 percent
decrease in inventory turns.
On a seasonal basis, both accounts receivable and inventory turns are historically higher at year-end, driven by lower
year-end accounts receivable and inventory balances.
Return on Invested Capital (non-GAAP measure):
Return on Invested Capital (ROIC) is not defined under U.S. generally accepted accounting principles. Therefore, ROIC
should not be considered a substitute for other measures prepared in accordance with U.S. GAAP and may not be comparable to
similarly titled measures used by other companies. The Company defines ROIC as adjusted net income (net income including
non-controlling interest plus after-tax interest expense) divided by average invested capital (equity plus debt). The
Company believes ROIC is meaningful to investors as it focuses on shareholder value creation. The calculation is provided
in the below table.
In 2017, ROIC of 21.3 percent was lower than both 2016 and 2015. This decrease related to the net impact of the enactment
of the TCJA and increases in commercial paper borrowings in conjunction with the December 2017 U.S. defined benefit pension
plan contribution, which combined reduced ROIC by 3 percentage points in 2017.
Years ended December 31
(Millions) 2017 2016 2015
Return on Invested Capital (non-GAAP measure)
Net income including non-controlling interest $ 4,869 $ 5,058 $ 4,841
Interest expense (after-tax) (1) 208 143 106
Adjusted net income (Return) $ 5,077 $ 5,201 $ 4,947
Average shareholders' equity (including non-controlling interest) (2) $ 11,627 $ 11,316 $ 12,484
Average short-term and long-term debt (3) 12,156 11,725 9,266
Average invested capital $ 23,783 $ 23,041 $ 21,750
Return on invested capital (non-GAAP measure) 21.3 % 22.6 % 22.7 %
(1) Effective income tax rate used for interest expense 35.5 % 28.3 % 29.1 %
(2) Calculation of average equity (includes non-controlling interest)
Ending total equity as of:
March 31 $ 11,040 $ 11,495 $ 13,673
June 30 11,644 11,658 12,851
September 30 12,202 11,769 11,945
December 31 11,622 10,343 11,468
Average total equity $ 11,627 $ 11,316 $ 12,484
(3) Calculation of average debt
Ending short-term and long-term debt as of:
March 31 $ 11,711 $ 11,139 $ 6,566
June 30 11,301 11,749 8,484
September 30 11,663 12,361 11,216
December 31 13,949 11,650 10,797
Average short-term and long-term debt $ 12,156 $ 11,725 $ 9,266
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) 2017 2016 2015
Net income including noncontrolling interest $ 4,869 $ 5,058 $ 4,841
Depreciation and amortization 1,544 1,474 1,435
Company pension and postretirement contributions (967) (383) (267)
Company pension and postretirement expense 333 251 556
Stock-based compensation expense 324 298 276
Gain on sale of businesses (586) (111) (47)
Income taxes (deferred and accrued income taxes) 1,074 108 (349)
Excess tax benefits from stock-based compensation - - (154)
Accounts receivable (245) (313) (58)
Inventories (387) 57 3
Accounts payable 24 148 9
Other - net 257 75 175
Net cash provided by operating activities $ 6,240 $ 6,662 $ 6,420
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 2017, cash flows provided by operating activities decreased $422 million compared to the same period last year. Factors
that decreased operating cash flows were increases in pension contributions, plus year-on-year increases in working
capital. In December 2017, 3M contributed $600 million to its U.S. defined benefit pension plan, contributing to a
year-on-year increase in pension and postretirement contributions of $584 million. The combination of accounts receivable,
inventories and accounts payable increased working capital by $608 million in 2017, compared to working capital increases
of $108 million in 2016. In 2017, year-on-year decreases in income tax payments (net of refunds) increased operating cash
flows by $284 million. Additional discussion on working capital changes is provided earlier in the "Financial Condition and
Liquidity" section. Information concerning defined benefit pension and postretirement contributions and expense is provided
in Note 12, with additional discussion in the preceding Results of Operations section. Gain on sale of businesses in the
preceding table reflects an adjustment for divestiture gains in 2017 (discussed in Note 2), as cash divestiture activity is
presented as proceeds from sale of businesses within investing activities, not operating activities.
In 2016, cash flows provided by operating activities increased $242 million compared to the same period in 2015, with this
increase primarily due to lower year-on-year cash taxes and higher net income. These items were partially offset by higher
Company pension contributions. The combination of accounts receivable, inventories and accounts payable increased working
capital by $108 million in 2016, compared to working capital increase of $46 million in 2015. Gain on sale of businesses in
the preceding table reflects an adjustment for divestiture
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