REG - 3M Company - Annual Financial Report - Updated by Form 8-K <Origin Href="QuoteRef">MMM.N</Origin> - Part 4
05/05/2017 07:07
- Part 4: For the preceding part double click ID:nRSE2625Ec
0.7 % (2.5) % (0.6) % (2.4) % - (0.8) %
Price (0.2) (0.3) 1.0 6.1 - 0.7
Organic local-currency sales 0.5 (2.8) 0.4 3.7 - (0.1)
Acquisitions 1.3 0.7 1.7 1.3 - 1.2
Divestitures (0.6) (0.2) (0.7) (0.3) - (0.4)
Translation - 0.2 (2.5) (7.4) - (1.2)
Total sales change 1.2 % (2.1) % (1.1) % (2.7) % - (0.5) %
Operating income (millions) $ 2,948 $ 2,560 $ 1,046 $ 705 $ (36) $ 7,223
Percent change 11.4 % (0.8) % 2.8 % (0.2) % - 4.0 %
For total year 2016, as shown in the preceding table, worldwide sales declined 0.5 percent, with organic volume decreases
of 0.8 percent and selling price increases of 0.7 percent. Acquisitions added 1.2 percent, while divestitures reduced sales
by 0.4 percent. Foreign currency translation reduced sales by 1.2 percent. Organic local-currency sales increased 3.7
percent in Latin America/Canada, 0.5 percent in the United States, 0.4 percent in EMEA, and decreased 2.8 percent in Asia
Pacific. For 2016, international operations represented 59.5 percent of 3M's sales.
2015
Europe, Latin
United Asia Middle East America/ Other
States Pacific & Africa Canada Unallocated Worldwide
Net sales (millions) $ 12,049 $ 9,041 $ 6,228 $ 2,982 $ (26) $ 30,274
% of worldwide sales 39.8 % 29.9 % 20.5 % 9.8 % - 100.0 %
Components of net sales change:
Volume - organic 1.7 % 0.9 % (1.0) % (3.1) % - 0.2 %
Price 0.4 - 1.8 4.6 - 1.1
Organic local-currency sales 2.1 0.9 0.8 1.5 - 1.3
Acquisitions 1.2 0.4 0.7 0.7 - 0.8
Divestitures (0.4) (0.1) (0.1) (0.2) - (0.2)
Translation - (5.2) (14.9) (16.9) - (6.8)
Total sales change 2.9 % (4.0) % (13.5) % (14.9) % - (4.9) %
Operating income (millions) $ 2,647 $ 2,580 $ 1,017 $ 706 $ (4) $ 6,946
Percent change 4.2 % 3.8 % (17.5) % (18.5) % - (2.6) %
For total year 2015, as shown in the preceding table, sales declined 4.9 percent, with organic volume increases of 0.2
percent and selling price increases of 1.1 percent. Acquisitions added 0.8 percent, while divestitures reduced sales by 0.2
percent. Foreign currency translation reduced sales by 6.8 percent. Organic local-currency sales increased 2.1 percent in
the United States, 1.5 percent in Latin America/Canada, 0.9 percent in Asia Pacific, and 0.8 percent in EMEA. For 2015,
international operations represented 60.2 percent of 3M's sales.
Geographic Area Supplemental Information
Property, Plant and
Equipment - net
Employees as of December 31, Capital Spending as of December 31,
(Millions, except Employees) 2016 2015 2014 2016 2015 2014 2016 2015
United States 35,748 35,973 35,581 $ 834 $ 936 $ 909 $ 4,914 $ 4,838
Asia Pacific 18,124 17,642 17,854 228 172 184 1,573 1,647
Europe, Middle East and Africa 20,203 20,563 20,506 294 249 288 1,512 1,531
Latin America and Canada 17,509 15,268 15,859 64 104 112 517 499
Total Company 91,584 89,446 89,800 $ 1,420 $ 1,461 $ 1,493 $ 8,516 $ 8,515
Employment:
Employment increased by 2,138 positions in 2016 and decreased by 354 positions in 2015. The primary factor that decreased
employment in 2015 related to fourth-quarter 2015 restructuring actions that impacted approximately 1,700 positions
worldwide. The 2015 acquisitions of Ivera Medical Corp., Membrana, and Capital Safety Group S.A.R.L. increased 2015
headcount by approximately 2,000 positions.
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. 3M's capital spending by geography has been led by the United States (59% of spending
in 2016), followed by Europe, Middle East and Africa, Asia Pacific, and Latin America/Canada. 3M is continuing to increase
its manufacturing and sourcing capability, particularly in developing economies, in order to more closely align its product
capability with its sales in major geographic areas. 3M will continue to make investments in critical developing markets,
such as Brazil, China, Mexico, Panama, Poland, Southeast Asia, and Turkey. 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. 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 14) 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 11 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, 2016 Liability:
Benefit obligation 4.21 % 2.54 % 4.08 %
2017 Net Periodic Benefit Cost Components:
Service cost 4.44 % 2.32 % 4.37 %
Interest cost 3.62 % 2.25 % 3.41 %
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 historical results for similar allocations among asset classes. For the primary U.S.
qualified pension plan, the expected long-term rate of return on an annualized basis for 2017 is 7.25%, 0.25% lower than
2016. Refer to Note 11 for information on how the 2016 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
5.16% for 2017, compared to 5.77% for 2016.
For the year ended December 31, 2016, the Company recognized total consolidated defined benefit pre-tax pension and
postretirement expense (after settlements, curtailments, special termination benefits and other) of $251 million, down from
$556 million in 2015. Defined benefit pension and postretirement expense (before settlements, curtailments, special
termination benefits and other) is anticipated to increase to approximately $325 million in 2017, an increase of $74
million compared to 2016.
The table below summarizes the impact on 2017 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 2016 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 $ 31 $ (28) $ 36 $ (36)
International pension plans 23 (19) 14 (14)
Asset Impairments:
As of December 31, 2016, net property, plant and equipment totaled $8.5 billion and net identifiable intangible assets
totaled $2.3 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 $2.3 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 2016, no impairment was
indicated. The discounted cash flows related to the Capital Safety tradename exceeded its book value by more than 10
percent.
3M goodwill totaled approximately $9.2 billion as of December 31, 2016. 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 can 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 generally would be recognized when the carrying amount of the reporting unit's net assets exceeds the
estimated fair value of the reporting unit. The estimated fair value of a reporting unit is determined 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 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 16, 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 2016 annual impairment test and is
in the context of the reporting unit structure that existed at that time.
As of October 1, 2016, 3M had 26 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 (which includes the Capital Safety acquisition), Separation and Purification (which
includes the Membrana acquisition), and Traffic Safety and Security. The estimated fair values for these reporting units
were in excess of carrying value by approximately 35 percent or more, except for one reporting unit with approximately $250
million of goodwill, where the fair value exceeded the carrying value by approximately 30 percent. 3M's market value at
both December 31, 2016, and September 30, 2016, was significantly in excess of its shareholders' equity of approximately
$10 billion and $12 billion, at December 31, 2016 and September 30, 2016, respectively.
In 2016, 3M primarily used an industry price-earnings ratio approach, but also used a discounted cash flows approach for
certain reporting units, to determine fair values. 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 an integrated materials enterprise, 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 2016, 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 2017 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 8 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.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which modifies
certain accounting aspects for share-based payments to employees including, among other elements, the accounting for income
taxes and forfeitures, as well as classifications in the statement of cash flows. The Company early adopted ASU No. 2016-09
as of January 1, 2016. Prospectively beginning January 1, 2016, excess tax benefits/deficiencies have been reflected as
income tax benefit/expense in the statement of income resulting in a $184 million tax benefit for 2016. 3M typically
experiences the largest volume of stock option exercises and restricted stock unit vestings in the first quarter of its
fiscal year. Refer to Note 1 for additional detail.
FINANCIAL CONDITION AND LIQUIDITY
3M continues its transition to a better-optimized capital structure and is adding leverage at a measured pace. The strength
and stability of 3M's business model and strong free cash flow capability, together with proven capital markets access,
enable the Company to implement this strategy. 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 and share repurchases, as well as funding U.S. acquisitions and other items as needed. For those
international earnings considered to be reinvested indefinitely, the Company currently has no plans or intentions to
repatriate these funds for U.S. operations. However, if these international funds are needed for operations in the U.S., 3M
would be required to accrue and pay U.S. taxes to repatriate them. See Note 8 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. Effective July 15, 2016, this
program was increased to a maximum of $5 billion outstanding from a previous program size of $3 billion.
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 has a "well-known seasoned issuer" (WKSI) shelf registration statement, effective May 16, 2014, which registers
an indeterminate amount of debt and equity securities for future sales. 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.
The Company's total debt was $853 million higher at December 31, 2016 when compared to December 31, 2015, with the increase
primarily due to May 2016 and September 2016 debt issuances, partially offset by the September 2016 repayment of $1 billion
aggregate principal amount of medium-term notes. In May 2016, 3M issued 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). As of December 31, 2016, 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 and the
2016 debt referenced above, is approximately $11.1 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 10.
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, 2016. 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, 2016,
this ratio was approximately 44 to 1. Debt covenants do not restrict the payment of dividends. Apart from the committed
facilities, an additional $291 million in stand-alone letters of credit and bank guarantees were also issued and
outstanding at December 31, 2016. These instruments are utilized in connection with normal business activities.
Cash, Cash Equivalents and Marketable Securities:
At December 31, 2016, 3M had $2.7 billion of cash, cash equivalents and marketable securities, of which approximately $2.35
billion was held by the Company's foreign subsidiaries and approximately $350 million was held by the United States. These
balances are invested in bank instruments and other high-quality fixed income securities. At December 31, 2015, cash, cash
equivalents and marketable securities held by the Company's foreign subsidiaries and by the United States totaled
approximately $1.7 billion and $200 million, respectively. Specifics concerning marketable securities investments are
provided in Note 9.
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, 2016 and
2015.
At December 31
(Millions) 2016 2015
Total Debt $ 11,650 $ 10,797
Less: Cash and cash equivalents and marketable securities 2,695 1,925
Net Debt (non-GAAP measure) $ 8,955 $ 8,872
In 2016, net debt rose by $83 million to a net debt balance of $9.0 billion (as of December 31, 2016), as 3M progressed on
its capital structure strategy. Debt levels were higher due to 2016 issuances, with this increase partially offset by the
September 2016 repayment of $1 billion aggregate principal amount of medium-term notes. Cash and cash equivalents and
marketable securities were higher in both the U.S. and internationally.
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 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. Working capital totaled $5.507 billion at December 31, 2016, compared with
$3.868 billion at December 31, 2015, an increase of $1.639 billion. Current asset balance changes increased working capital
by $740 million, largely due to higher cash, cash equivalents, and marketable securities balances. Current liability
balance changes increased working capital by $899 million, driven by lower short-term debt balances. 3M believes working
capital is meaningful to investors as a measure of operational efficiency and short-term financial health.
Accounts receivable turns 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. Freight and
engineering cost totaled $160 million for the fourth quarter of 2016, and $159 million for the fourth quarter of 2015. 3M
believes inventory turns is meaningful to investors as a measure of how quickly inventory is sold.
Accounts receivable increased $238 million, or approximately 5.7%, compared with December 31, 2015, as higher December 2016
sales compared to December 2015 sales contributed to this increase. Accounts receivable turns were 6.67 at December 31,
2016, compared to 7.03 at December 31, 2015. Inventories decreased $133 million, or approximately 3.8 percent, compared
with December 31, 2015. Inventory turns were 4.20 at December 30, 2016, up from 4.13 at December 31, 2015. Accounts payable
increased by $104 million compared with December 31, 2015, as changes in business activity impacted 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). Total
equity has been immaterially revised for prior periods as discussed in Note 1, Significant Accounting Policies, Basis of
Presentation. The Company believes ROIC is meaningful to investors as it focuses on shareholder value creation. ROIC was
22.6 percent for 2016, 22.7 percent for 2015, and 22.3 percent for 2014. The calculation is provided in the below table.
Years ended December 31
(Millions) 2016 2015 2014
Return on Invested Capital (non-GAAP measure)
Net income including non-controlling interest $ 5,058 $ 4,841 $ 4,998
Interest expense (after-tax) (1) 143 106 102
Adjusted net income (Return) $ 5,201 $ 4,947 $ 5,100
Average shareholders' equity (including non-controlling interest) (2) $ 11,316 $ 12,484 $ 16,000
Average short-term and long-term debt (3) 11,725 9,266 6,913
Average invested capital $ 23,041 $ 21,750 $ 22,913
Return on invested capital (non-GAAP measure) 22.6 % 22.7 % 22.3 %
(1) Effective income tax rate used for interest expense 28.3 % 29.1 % 28.9 %
(2) Calculation of average equity (includes non-controlling interest)
Ending total equity as of:
March 31 $ 11,495 $ 13,673 $ 17,645
June 30 11,658 12,851 17,567
September 30 11,769 11,945 15,927
December 31 10,343 11,468 12,863
Average total equity $ 11,316 $ 12,484 $ 16,000
(3) Calculation of average debt
Ending short-term and long-term debt as of:
March 31 $ 11,139 $ 6,566 $ 6,560
June 30 11,749 8,484 6,956
September 30 12,361 11,216 7,323
December 31 11,650 10,797 6,811
Average short-term and long-term debt $ 11,725 $ 9,266 $ 6,913
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) 2016 2015 2014
Net income including noncontrolling interest $ 5,058 $ 4,841 $ 4,998
Depreciation and amortization 1,474 1,435 1,408
Company pension contributions (380) (264) (210)
Company postretirement contributions (3) (3) (5)
Company pension expense 202 442 310
Company postretirement expense 49 114 81
Stock-based compensation expense 298 276 280
Income taxes (deferred and accrued income taxes) 108 (349) 60
Excess tax benefits from stock-based compensation - (154) (167)
Accounts receivable (313) (58) (268)
Inventories 57 3 (113)
Accounts payable 148 9 75
Other - net (36) 128 177
Net cash provided by operating activities $ 6,662 $ 6,420 $ 6,626
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 2016, cash flows provided by operating activities increased $242 million compared to the same period last year, 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 increases of $46 million in 2015. 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 11, with additional
discussion in the preceding Results of Operations section. Other-net in the preceding table reflects a reduction in cash
flows from operating activities, partially due to 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. Additional
discussion on working capital changes is provided earlier in the "Financial Condition and Liquidity" section.
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.
Cash Flows from Investing Activities:
Years ended December 31
(Millions) 2016 2015 2014
Purchases of property, plant and equipment (PP&E) $ (1,420) $ (1,461) $ (1,493)
Proceeds from sale of PP&E and other assets 58 33 135
Acquisitions, net of cash acquired (16) (2,914) (94)
Purchases and proceeds from maturities and sale of marketable securities and investments, net (163) 1,300 754
Proceeds from sale of businesses 142 123 -
Other investing activities (4) 102 102
Net cash used in investing activities $ (1,403) $ (2,817) $ (596)
Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and
increasing manufacturing efficiency. Capital spending was $1.420 billion in 2016, $1.461 billion in 2015, and $1.493
billion in 2014. The Company expects 2017 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 2016, investments included new sites and buildings, in addition to continued expansion and sustainment of current and
new facilities; specifically renewal projects done at the 3M Center in St. Paul, Minnesota. Other investments across
geographies included growth, productivity, and capacity, as well as IT systems and infrastructure, particularly the ongoing
multi-year phased implementation of an ERP system on a worldwide basis.
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.
Proceeds from sale of PP&E and other assets totaled $58 million in 2016, $33 million in 2015, and $135 million in 2014.
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.
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. 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 (Industrial) and its cathode battery technology out-licensing business (Electronics and
Energy).
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 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) 2016 2015 2014
Change in short-term debt - net $ (797) $ 860 $ 27
Repayment of debt (maturities greater than 90 days) (992) (800) (1,625)
Proceeds from debt (maturities greater than 90 days) 2,832 3,422 2,608
Total cash change in debt $ 1,043 $ 3,482 $ 1,010
Purchases of treasury stock (3,753) (5,238) (5,652)
Proceeds from issuances of treasury stock pursuant to stock option and benefit plans 804 635 968
Dividends paid to stockholders (2,678) (2,561) (2,216)
Excess tax benefits from stock-based compensation - 154 167
Purchase of noncontrolling interest - - (861)
Other - net (42) (120) (19)
Net cash used in financing activities $ (4,626) $ (3,648) $ (6,603)
Total debt was $11.7 billion at December 31, 2016, $10.8 billion at December 31, 2015, and $6.8 billion at December 31,
2014. Total debt was 53 percent of total capital (total capital is defined as debt plus equity) at year-end 2016, 48
percent at year-end 2015, and 35 percent at year-end 2014.
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 impact debt balances.
Proceeds from debt for 2016 primarily related to the May 2016 issuance of 500 million Euros aggregate principal amount of
5.75-year fixed rate medium-term notes due February 2022, and 500 million Euros aggregate principal amount of 15-year fixed
rate medium-term notes due 2031 along with the September 2016 issuances of $600 million aggregate principal amount of
five-year fixed rate medium-term notes due 2021, $650 million aggregate principal amount of 10-year fixed rate medium-term
notes due 2026, and $500 million aggregate principal amount of 30-year fixed rate medium-term notes due 2046 (refer to Note
10 for more detail).
2015 and 2014 Debt Activity:
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 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. Refer to Note 10 for additional discussion of debt.
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, which replaced the Company's February 2014 repurchase program. This authorization has no
pre-established end date. In 2016, the Company purchased $3.75 billion of its own stock, compared to purchases in 2015 and
2014 of more than $5 billion of its own stock in each year. The Company expects full-year 2017 gross share repurchases will
be in the range of $2.5 billion to $4.5 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 $2.678 billion ($4.44 per share) in 2016, $2.561 billion ($4.10 per share) in
2015, and $2.216 billion ($3.42 per share) in 2014. 3M has paid dividends since 1916. In February 2017, 3M's Board of
Directors declared a first-quarter 2017 dividend of $1.175 per share, an increase of 6 percent. This is equivalent to an
annual dividend of $4.70 per share and marked the 59th consecutive year of dividend increases.
Purchase of Noncontrolling Interest:
On September 1, 2014, 3M
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