REG - 3M Company - Annual Financial Report - Updated by Form 8-K <Origin Href="QuoteRef">MMM.N</Origin> - Part 8
05/05/2017 07:07
- Part 8: For the preceding part double click ID:nRSE2625Eg
(0.1)
All other - net - 0.3 -
Effective worldwide tax rate 28.3 % 29.1 % 28.9 %
The effective tax rate for 2016 was 28.3 percent, compared to 29.1 percent in 2015, a decrease of 0.8 percentage points,
impacted by several factors. Primary factors that decreased the Company's effective tax rate included the recognition of
excess tax benefits beginning in 2016 related to employee share-based payments (resulting from the adoption of ASU No.
2016-09, as discussed in Note 1) and a reduction in state taxes. Combined, these factors decreased the Company's effective
tax rate by 3.2 percentage points. The decrease was partially offset by a 2.4 percentage point increase, which related to
remeasurements of 3M's uncertain tax positions and international taxes that were impacted by changes to both the geographic
mix of income before taxes and additional tax expense related to global cash optimization actions.
The effective tax rate for 2015 was 29.1 percent, compared to 28.9 percent in 2014, an increase of 0.2 percentage points,
impacted by many factors. Primary factors which increased the Company's effective tax rate included international taxes,
which were impacted by both changes in foreign currency rates and changes to the geographic mix of income before taxes, and
an increase in state taxes. Combined, these factors increased the Company's effective tax rate by 2.4 percentage points.
This increase was partially offset by a 2.2 percentage point decrease, which related to the remeasurements of 3M's
uncertain tax positions, including the restoration of tax basis on certain assets for which depreciation deductions were
previously limited, and increases in the domestic manufacturer's deduction and U.S. research and development credit
benefits.
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With
few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by
tax authorities for years before 2005.
The IRS has completed its field examination of the Company's U.S. federal income tax returns for the years 2005 through
2014. The Company protested certain IRS positions within these tax years and entered into the administrative appeals
process with the IRS. In December 2012, the Company received a statutory notice of deficiency for the 2006 year. The
Company filed a petition in Tax Court in the first quarter of 2013 relating to the 2006 tax year.
Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2015 and 2016.
It is anticipated that the IRS will complete its examination of the Company for 2015 by the end of the second quarter of
2017 and for 2016 by the end of the first quarter of 2018. As of December 31, 2016, the IRS has not proposed any
significant adjustments to the Company's tax positions for which the Company is not adequately reserved.
Payments relating to other proposed assessments arising from the 2005 through 2016 examinations may not be made until a
final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from
the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also audit
activity in several U.S. state and foreign jurisdictions.
3M anticipates changes to the Company's uncertain tax positions due to the closing and resolution of audit issues for
various audit years mentioned above and closure of statutes. Currently, the Company is estimating a decrease in
unrecognized tax benefits during the next 12 months as a result of anticipated resolutions of audit issues.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (UTB) is as follows:
Federal, State and Foreign Tax
(Millions) 2016 2015 2014
Gross UTB Balance at January 1 $ 381 $ 583 $ 659
Additions based on tax positions related to the current year 67 77 201
Additions for tax positions of prior years 43 140 30
Reductions for tax positions of prior years (66) (399) (74)
Settlements (95) (4) (154)
Reductions due to lapse of applicable statute of limitations (11) (16) (79)
Gross UTB Balance at December 31 $ 319 $ 381 $ 583
Net UTB impacting the effective tax rate at December 31 $ 333 $ 369 $ 265
The total amount of UTB, if recognized, would affect the effective tax rate by $333 million as of December 31, 2016, $369
million as of December 31, 2015, and $265 million as of December 31, 2014. The ending net UTB results from adjusting the
gross balance for items such as Federal, State, and non-U.S. deferred items, interest and penalties, and deductible taxes.
The net UTB is included as components of Other Assets, Accrued Income Taxes, and Other Liabilities within the Consolidated
Balance Sheet.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company
recognized in the consolidated statement of income on a gross basis approximately $10 million of expense, $2 million of
expense, and $14 million of benefit in 2016, 2015, and 2014, respectively. The amount of interest and penalties recognized
may be an expense or benefit due to new or remeasured unrecognized tax benefit accruals. At December 31, 2016, and December
31, 2015, accrued interest and penalties in the consolidated balance sheet on a gross basis were $52 million and $45
million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions
for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such
deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the
shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the
taxing authority to an earlier period.
As a result of certain employment commitments and capital investments made by 3M, income from certain manufacturing
activities in the following countries is subject to reduced tax rates or, in some cases, is exempt from tax for years
through the following: China (2016), Thailand (2018), Korea (2019), Brazil (2023), Switzerland (2024), and Singapore
(2025). The income tax benefits attributable to the tax status of these subsidiaries are estimated to be $142 million (23
cents per diluted share) in 2016, $114 million (18 cents per diluted share) in 2015, and $99 million (15 cents per diluted
share) in 2014.
The Company has not provided deferred taxes on unremitted earnings attributable to international companies that have been
considered to be reinvested indefinitely. The unremitted earnings relate to ongoing operations and were approximately $14
billion as of December 31, 2016. Because of the availability of U.S. foreign tax credits, the multiple avenues in which to
repatriate the earnings to minimize tax cost, and because a large portion of these earnings are not liquid, it is not
practical to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.
NOTE 9. Marketable Securities
The Company invests in asset-backed securities, certificates of deposit/time deposits, commercial paper, and other
securities. The following is a summary of amounts recorded on the Consolidated Balance Sheet for marketable securities
(current and non-current).
December 31, December 31,
(Millions) 2016 2015
Corporate debt securities $ 10 $ 10
Foreign government agency securities - 10
Commercial paper 14 12
Certificates of deposit/time deposits 197 26
U.S. municipal securities 3 3
Asset-backed securities:
Automobile loan related 31 26
Credit card related 18 10
Other 7 21
Asset-backed securities total 56 57
Current marketable securities $ 280 $ 118
U.S. municipal securities $ 17 $ 9
Non-current marketable securities $ 17 $ 9
Total marketable securities $ 297 $ 127
Classification of marketable securities as current or non-current is based on the nature of the securities and availability
for use in current operations. At December 31, 2016 and 2015, gross unrealized gains and/or losses (pre-tax) were not
material. Refer to Note 6 for a table that provides the net realized gains (losses) related to sales or impairments of debt
and equity securities, which includes marketable securities. The gross amounts of the realized gains or losses were not
material. Cost of securities sold use the first in, first out (FIFO) method. Since these marketable securities are
classified as available-for-sale securities, changes in fair value will flow through other comprehensive income, with
amounts reclassified out of other comprehensive income into earnings upon sale or "other-than-temporary" impairment.
3M reviews impairments associated with its marketable securities in accordance with the measurement guidance provided by
ASC 320, Investments-Debt and Equity Securities, when determining the classification of the impairment as "temporary" or
"other-than-temporary". A temporary impairment charge results in an unrealized loss being recorded in the other
comprehensive income component of shareholders' equity. Such an unrealized loss does not reduce net income attributable to
3M for the applicable accounting period because the loss is not viewed as other-than-temporary. The factors evaluated to
differentiate between temporary and other-than-temporary include the projected future cash flows, credit ratings actions,
and assessment of the credit quality of the underlying collateral, as well as other factors.
The balance at December 31, 2016, for marketable securities by contractual maturity are shown below. Actual maturities may
differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without
prepayment penalties.
(Millions) December 31, 2016
Due in one year or less $ 216
Due after one year through five years 77
Due after five years through ten years 4
Total marketable securities $ 297
3M has a diversified marketable securities portfolio. Within this portfolio, asset-backed securities primarily include
interests in automobile loans, credit cards and other asset-backed securities. 3M's investment policy allows investments in
asset-backed securities with minimum credit ratings of Aa3 by Moody's Investors Service or AA- by Standard & Poor's or
Fitch Ratings or DBRS. Asset-backed securities must be rated by at least two of the aforementioned rating agencies, one of
which must be Moody's Investors Service or Standard & Poor's. At December 31, 2016, all asset-backed security investments
were in compliance with this policy. Approximately 84.8 percent of all asset-backed security investments were rated AAA or
A-1+ by Standard & Poor's and/or Aaa or P-1 by Moody's Investors Service and/or AAA or F1+ by Fitch Ratings. Interest rate
risk and credit risk related to the underlying collateral may impact the value of investments in asset-backed securities,
while factors such as general conditions in the overall credit market and the nature of the underlying collateral may
affect the liquidity of investments in asset-backed securities. 3M does not currently expect risk related to its holding in
asset-backed securities to materially impact its financial condition or liquidity.
NOTE 10. Long-Term Debt and Short-Term Borrowings
The following debt tables reflect effective interest rates, which include the impact of interest rate swaps, as of December
31, 2016. If the debt was issued on a combined basis, the debt has been separated to show the impact of the fixed versus
floating effective interest rates. Carrying value includes the impact of debt issuance costs and fair value hedging
activity. Long-term debt and short-term borrowings as of December 31 consisted of the following:
Long-Term Debt
Currency/ Effective Final
(Millions) Fixed vs. Interest Maturity Carrying Value
Description / 2016 Principal Amount Floating Rate Date 2016 2015
Medium-term note ($1 billion) USD Fixed - % - $ - $ 999
Medium-term note ($650 million) USD Fixed 1.10 % 2017 649 648
Medium-term note (500 million Euros) Euro Floating - % 2018 523 545
Medium-term note ($450 million) USD Floating 0.98 % 2018 448 448
Medium-term note ($600 million) USD Floating 1.00 % 2019 598 597
Medium-term note ($25 million) USD Fixed 1.74 % 2019 25 25
Medium-term note (650 million Euros) Euro Floating - % 2020 680 708
Medium-term note ($300 million) USD Floating 1.06 % 2020 297 297
Medium-term note ($200 million) USD Fixed 2.12 % 2020 199 198
Eurobond (300 million Euros) Euro Floating 0.01 % 2021 336 348
Eurobond (300 million Euros) Euro Fixed 1.97 % 2021 312 326
Medium-term note ($600 million) USD Fixed 1.63 % 2021 598 -
Medium-term note (500 million Euros) Euro Fixed 0.45 % 2022 520 -
Medium-term note ($600 million) USD Fixed 2.17 % 2022 593 592
Medium-term note (600 million Euros) Euro Fixed 1.14 % 2023 619 644
Medium-term note ($550 million) USD Fixed 3.04 % 2025 546 545
Medium-term note (750 million Euros) Euro Fixed 1.71 % 2026 770 801
Medium-term note ($650 million) USD Fixed 2.25 % 2026 640 -
30-year debenture ($330 million) USD Fixed 6.01 % 2028 342 343
Medium-term note (500 million Euros) Euro Fixed 1.90 % 2030 512 533
Medium-term note (500 million Euros) Euro Fixed 1.54 % 2031 518 -
30-year bond ($750 million) USD Fixed 5.73 % 2037 743 743
Floating rate note ($96 million) USD Floating 0.65 % 2041 96 96
Medium-term note ($325 million) USD Fixed 4.05 % 2044 313 313
Floating rate note ($55 million) USD Floating 0.61 % 2044 54 55
Medium-term note ($500 million) USD Fixed 3.13 % 2046 473 -
Other borrowings Various 0.82 % 2017-2040 74 74
Total long-term debt $ 11,478 $ 9,878
Less: current portion of long-term debt 800 1,125
Long-term debt (excluding current portion) $ 10,678 $ 8,753
Post-Swap Borrowing (Long-Term Debt, Including Current Portion)
2016 2015
Carrying Effective Carrying Effective
(Millions) Value Interest Rate Value Interest Rate
Fixed-rate debt $ 8,372 2.42 % $ 6,712 2.54 %
Floating-rate debt 3,106 0.48 % 3,166 0.32 %
Total long-term debt, including current portion $ 11,478 $ 9,878
Short-Term Borrowings and Current Portion of Long-Term Debt
Effective Carrying Value
(Millions) Interest Rate 2016 2015
Current portion of long-term debt 1.01 % $ 800 $ 1,125
U.S. dollar commercial paper - % - -
Other borrowings 0.48 % 172 919
Total short-term borrowings and current portion of long-term debt $ 972 $ 2,044
In both 2016 and 2015, other short-term borrowings primarily consisted of bank borrowings by international subsidiaries,
primarily Japan and Korea.
Maturities of Long-term Debt
Maturities of long-term debt for the five years subsequent of December 31, 2016 are as follows (in millions):
After
2017 2018 2019 2020 2021 2021 Total
$ 800 $ 1,042 $ 623 $ 1,176 $ 1,246 $ 6,591 $ 11,478
Long-term debt payments due in 2017 and 2018 include floating rate notes totaling $150 million (classified as current
portion of long-term debt), and $71 million (included in other borrowings in the long-term debt table), respectively, as a
result of put provisions associated with these debt instruments.
Credit Facilities
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 lender's discretion), bringing the total
facility up to $5.0 billion. This revolving credit facility was 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.
Other Credit Facilities
Apart from the committed revolving facility, 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.
Long-Term Debt Issuances
The principal amounts, interest rates and maturity dates of individual long-term debt issuances can be found in the
long-term debt table found at the beginning of this note.
In May 2016, 3M issued 1 billion Euros aggregate principal amount of medium-term notes. In September 2016, 3M issued $1.75
billion aggregate principal amount of medium-term notes.
In May 2015, 3M issued 1.750 billion Euros aggregate principal amount of medium-term notes. In August 2015, 3M issued
$1.500 billion aggregate principal amount of medium-term notes. Upon debt issuance, the Company entered into two interest
rate swaps as fair value hedges of a portion of the fixed interest rate medium-term note obligation. The first converted a
$450 million three-year fixed rate note, and the second converted $300 million of a five-year fixed rate note included in
this issuance to an interest rate based on a floating three-month LIBOR index.
In June 2014, 3M issued $950 million aggregate principal amount of medium-term notes. Upon debt issuance, the Company
entered into an interest rate swap to convert $600 million of a $625 million note included in this issuance to an interest
rate based on a floating three-month LIBOR index as a fair value hedge of a portion of the fixed interest rate medium-term
note obligation. In November 2014, the Company issued 1.250 billion Euros aggregate principal amount of medium-term notes.
Long-Term Debt Maturities
In September 2016, 3M repaid $1 billion aggregate principal amount of medium-term notes.
In July 2014, 3M retired at maturity 1.025 billion Euros of seven-year 5.0% fixed rate Eurobonds. In December 2012, 3M
entered into a three-year 66 million British Pound (approximately $106 million based on agreement date exchange rates)
committed credit facility agreement with JP Morgan Chase Bank, which was fully drawn as of December 31, 2012. 3M repaid the
balance in 2014.
Floating Rate Notes
At various times, 3M has issued floating rate notes containing put provisions. 3M would be required to repurchase these
securities at various prices ranging from 99 percent to 100 percent of par value according to the reduction schedules for
each security. In December 2004, 3M issued a forty-year $60 million floating rate note, with a rate based on a floating
LIBOR index. Under the terms of this floating rate note due in 2044, holders have an annual put feature at 100 percent of
par value from 2014 and every anniversary thereafter until final maturity. Under the terms of the floating rate notes due
in 2027, 2040 and 2041, holders have put options that commence ten years from the date of issuance and each third
anniversary thereafter until final maturity at prices ranging from 99 percent to 100 percent of par value. For the periods
presented, 3M was required to repurchase an immaterial amount of principal on the aforementioned floating rate notes.
NOTE 11. Pension and Postretirement Benefit Plans
3M has company-sponsored retirement plans covering substantially all U.S. employees and many employees outside the United
States. In total, 3M has over 80 defined benefit plans in 27 countries. Pension benefits associated with these plans
generally are based on each participant's years of service, compensation, and age at retirement or termination. The primary
U.S. defined-benefit pension plan was closed to new participants effective January 1, 2009. The Company also provides
certain postretirement health care and life insurance benefits for its U.S. employees who reach retirement age while
employed by the Company and were employed by the Company prior to January 1, 2016. Most international employees and
retirees are covered by government health care programs. The cost of company-provided postretirement health care plans for
international employees is not material and is combined with U.S. amounts in the tables that follow.
The Company has made deposits for its defined benefit plans with independent trustees. Trust funds and deposits with
insurance companies are maintained to provide pension benefits to plan participants and their beneficiaries. There are no
plan assets in the non-qualified plan due to its nature. For its U.S. postretirement health care and life insurance benefit
plans, the Company has set aside amounts at least equal to annual benefit payments with an independent trustee.
3M's primary U.S. qualified defined benefit plan does not have a mandatory cash contribution because the Company has a
significant credit balance from previous discretionary contributions that can be applied to any Pension Protection Act
funding requirements.
The Company also sponsors employee savings plans under Section 401(k) of the Internal Revenue Code. These plans are offered
to substantially all regular U.S. employees. Beginning on January 1, 2016, for U.S. employees, the Company reduced its
match on employee 401(k) contributions. For eligible employees hired prior to January 1, 2009, employee 401(k)
contributions of up to 5% (down from 6% prior to 2016) of eligible compensation matched in cash at rates of 45% or 60%,
depending on the plan in which the employee participates. Employees hired on or after January 1, 2009, receive a cash match
of 100% for employee 401(k) contributions of up to 5% (down from 6% prior to 2016) of eligible compensation and receive an
employer retirement income account cash contribution of 3% of the participant's total eligible compensation. All
contributions are invested in a number of investment funds pursuant to the employees' elections. Employer contributions to
the U.S. defined contribution plans were $139 million, $165 million and $153 million for 2016, 2015 and 2014, respectively.
3M subsidiaries in various international countries also participate in defined contribution plans. Employer contributions
to the international defined contribution plans were $87 million, $77 million and $75 million for 2016, 2015 and 2014,
respectively.
As a result of changes made to its U.S. postretirement health care benefit plans in 2010, the Company has transitioned all
current and future retirees to a savings account benefits-based plan. These changes became effective beginning January 1,
2013, for all Medicare eligible retirees and their Medicare eligible dependents and became effective beginning January 1,
2016, for all non-Medicare eligible retirees and their eligible dependents. In August 2015, 3M modified the 3M Retiree
Welfare Benefit Plan postretirement medical benefit reducing the future benefit for participants not retired as of January
1, 2016. For participants retiring after January 1, 2016, the Retiree Medical Savings Account (RMSA) is no longer credited
with interest and the indexation on both the RMSA and the Medicare Health Reimbursement Arrangement is reduced from 3
percent to 1.5 percent per year (for those employees who are eligible for these accounts). Also effective January 1, 2016,
3M no longer offers 3M Retiree Health Care Accounts to new hires. Due to these changes the plan was re-measured in the
third quarter of 2015, resulting in a decrease to the projected benefit obligation liability of approximately $233 million,
and a related increase to shareholders' equity, specifically accumulated other comprehensive income.
As of December 31, 2014, the Company converted to the "RP 2014 Mortality Tables" and updated the mortality improvement
scale it used for calculating the year-end 2014 U.S. defined benefit pension annuitant and postretirement obligations and
2015 expense. The impact of this change increased the year-end 2014 U.S. pension projected benefit obligation (PBO) by
approximately $820 million and the U.S. accumulated postretirement benefit obligation by approximately $100 million. As of
December 31, 2016, the Company updated the mortality improvement scale to Scale MP-2016, which was released by the Society
of Actuaries in October 2016. The impact of this change decreased the year-end 2016 U.S. pension PBO by approximately $440
million and the U.S. accumulated postretirement benefit obligation by approximately $60 million.
In March 2015, 3M Japan modified the Japan Limited Defined Benefit Corporate Pension Plan (DBCPP). Beginning July 1, 2015,
eligible employees receive a company provided contribution match of 6.12% of their eligible salary to their defined
contribution plan. Employees no longer earn additional service towards their defined benefit pension plans after July 1,
2015, except for eligible salaries above the statutory defined contribution limits. As a result of this plan modification,
the Company re-measured the DBCPP, which resulted in a $17 million pre-tax curtailment gain for the year ended December 31,
2015. In March 2015, 3M also received a favorable Internal Revenue Service tax determination letter to terminate a frozen
defined benefit pension plan of one of 3M's acquired subsidiaries. By the end of 2015, this plan made final distributions
of $16 million to participants. The Company also had other settlements, curtailments, special termination benefits and
other items in 2015 aggregating to the amounts indicated in these components in the applicable tables that follow.
3M was informed during the first quarter of 2009, that the general partners of WG Trading Company, in which 3M's benefit
plans hold limited partnership interests, are the subject of a criminal investigation as well as civil proceedings by the
SEC and CFTC (Commodity Futures Trading Commission). In March 2011, over the objections of 3M and six other limited
partners of WG Trading Company, the district court judge ruled in favor of the court appointed receiver's proposed
distribution plan (and in April 2013, the United States Court of Appeals for the Second Circuit affirmed the district
court's ruling). The benefit plan trustee holdings of WG Trading Company interests were adjusted to reflect the decreased
estimated fair market value, inclusive of estimated insurance proceeds, as of the annual measurement dates. The Company has
insurance that it believes, based on what is currently known, will result in the probable recovery of a portion of the
decrease in original asset value. In the first quarter of 2014, 3M and certain 3M benefit plans filed a lawsuit in the U.S.
District Court for the District of Minnesota against five insurers seeking insurance coverage for the WG Trading Company
claim. In September 2015, the court ruled in favor of the defendant insurance companies on a motion for summary judgment
and dismissed the lawsuit. In October 2015, 3M and the 3M benefit plans filed a notice of appeal to the United States Court
of Appeals for the Eighth Circuit. As of the 2016 measurement date, these holdings represented less than one half of one
percent of 3M's fair value of total plan assets. 3M currently believes that the resolution of these events will not have a
material adverse effect on the consolidated financial position of the Company.
The following tables include a reconciliation of the beginning and ending balances of the benefit obligation and the fair
value of plan assets as well as a summary of the related amounts recognized in the Company's consolidated balance sheet as
of December 31 of the respective years. 3M also has certain non-qualified unfunded pension and postretirement benefit
plans, inclusive of plans related to supplement/excess benefits for employees impacted by particular relocations and other
matters, that individually and in the aggregate are not significant and which are not included in the tables that follow.
The obligations for these plans are included within other liabilities in the Company's consolidated balance sheet and
aggregated less than $35 million as of December 31, 2016 and 2015.
Qualified and Non-qualified
Pension Benefits Postretirement
United States International Benefits
(Millions) 2016 2015 2016 2015 2016 2015
Change in benefit obligation
Benefit obligation at beginning of year $ 15,856 $ 16,452 $ 6,322 $ 6,979 $ 2,216 $ 2,462
Acquisitions/Transfers - - (5) 94 - -
Service cost 259 293 133 154 54 75
Interest cost 575 655 171 206 79 98
Participant contributions - - 8 9 - 14
Foreign exchange rate changes - - (472) (589) 7 (22)
Plan amendments 5 - (4) (6) - (211)
Actuarial (gain) loss 427 (657) 724 (274) 7 (80)
Medicare Part D Reimbursement - - - - - 1
Benefit payments (919) (874) (245) (232) (104) (122)
Settlements, curtailments, special termination benefits and other (1) (13) (7) (19) - 1
Benefit obligation at end of year $ 16,202 $ 15,856 $ 6,625 $ 6,322 $ 2,259 $ 2,216
Change in plan assets
Fair value of plan assets at beginning of year $ 13,966 $ 14,643 $ 5,669 $ 5,957 $ 1,367 $ 1,436
Acquisitions/Transfers - - - 8 - -
Actual return on plan assets 779 100 512 287 90 36
Company contributions 259 113 121 151 3 3
Participant contributions - - 8 9 - 14
Foreign exchange rate changes - - (444) (498) - -
Benefit payments (919) (874) (245) (232) (104) (122)
Settlements, curtailments, special termination benefits and other (4) (16) (4) (13) - -
Fair value of plan assets at end of year $ 14,081 $ 13,966 $ 5,617 $ 5,669 $ 1,356 $ 1,367
Funded status at end of year $ (2,121) $ (1,890) $ (1,008) $ (653) $ (903) $ (849)
Qualified and Non-qualified
Pension Benefits Postretirement
United States International Benefits
(Millions) 2016 2015 2016 2015 2016 2015
Amounts recognized in the Consolidated Balance Sheet as of Dec. 31,
Non-current assets $ 4 $ 3 $ 48 $ 185 $ - $ -
Accrued benefit cost
Current liabilities (52) (47) (10) (10) (4) (3)
Non-current liabilities (2,073) (1,846) (1,046) (828) (899) (846)
Ending balance $ (2,121) $ (1,890) $ (1,008) $ (653) $ (903) $ (849)
Qualified and Non-qualified
Pension Benefits Postretirement
United States International Benefits
(Millions) 2016 2015 2016 2015 2016 2015
Amounts recognized in accumulated other comprehensive income as of Dec. 31,
Net transition obligation (asset) $ - $ - $ - $ (2) $ - $ -
Net actuarial loss (gain) 5,704 5,366 1,933 1,610 761 815
Prior service cost (credit) (198) (227) (56) (68) (214) (270)
Ending balance $ 5,506 $ 5,139 $ 1,877 $ 1,540 $ 547 $ 545
The balance of amounts recognized for international plans in accumulated other comprehensive income as of December 31 in
the preceding table are presented based on the foreign currency exchange rate on that date.
The pension accumulated benefit obligation represents the actuarial present value of benefits based on employee service and
compensation as of the measurement date and does not include an assumption about future compensation levels. The
accumulated benefit obligation of the U.S. pension plans was $15.149 billion and $14.834 billion at December 31, 2016 and
2015, respectively. The accumulated benefit obligation of the international pension plans was $6.058 billion and $5.773
billion at December 31, 2016 and 2015, respectively.
The following amounts relate to pension plans with accumulated benefit obligations in excess of plan assets as of December
31:
Qualified and Non-qualified Pension Plans
United States International
(Millions) 2016 2015 2016 2015
Projected benefit obligation $ 16,202 $ 15,856 $ 2,590 $ 2,382
Accumulated benefit obligation 15,149 14,834 2,351 2,149
Fair value of plan assets 14,081 13,966 1,635 1,566
Components of net periodic cost and other amounts recognized in other comprehensive income
Net periodic benefit cost is recorded in cost of sales, selling, general and administrative expenses, and research,
development and related expenses. Components of net periodic benefit cost and other changes in plan assets and benefit
obligations recognized in other comprehensive income for the years ended December 31 follow:
Qualified and Non-qualified
Pension Benefits Postretirement
United States International Benefits
(Millions) 2016 2015 2014 2016 2015 2014 2016 2015 2014
Net periodic benefit cost (benefit)
Service cost $ 259 $ 293 $ 241 $ 133 $ 154 $ 141 $ 54 $ 75 $ 65
Interest cost 575 655 676 171 206 252 79 98 97
Expected return on plan assets (1,043) (1,069) (1,043) (308) (308) (312) (90) (91) (90)
Amortization of transition (asset) obligation - - - (1) (1) (1) - - -
Amortization of prior service cost (benefit) (24) (24) 4 (13) (13) (16) (55) (42) (47)
Amortization of net actuarial (gain) loss 354 409 243 91 144 121 61 73 56
Settlements, curtailments, special termination benefits and other 4 2 - 4 (6) 4 - 1 -
Net periodic benefit cost (benefit) after settlements, curtailments, special termination benefits and other $ 125 $ 266 $ 121 $ 77 $ 176 $ 189 $ 49 $ 114 $ 81
Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss
Amortization of transition (asset) obligation - - - 1 1 1 - - -
Prior service cost (benefit) 5 - (266) (5) 10 3 - (212) -
Amortization of prior service cost (benefit) 24 24 (4) 13 13 16 55 42 47
Net actuarial (gain) loss 692 312 2,167 512 (270) 592 8 (23) 358
Amortization of net actuarial (gain) loss (354) (409) (243) (91) (144) (121) (61) (73) (56)
Foreign currency - - - (93) (174) (215) - (1) (1)
Total recognized in other comprehensive (income) loss $ 367 $ (73) $ 1,654 $ 337 $ (564) $ 276 $ 2 $ (267) $ 348
Total recognized in net periodic benefit cost (benefit) and other comprehensive (income) loss $ 492 $ 193 $ 1,775 $ 414 $ (388) $ 465 $ 51 $ (153) $ 429
Amounts expected to be amortized from accumulated other comprehensive income into net periodic benefit costs over the next
fiscal year
Qualified and Non-qualified
Pension Benefits Postretirement
(Millions) United States International Benefits
Amortization of transition (asset) obligation $ - $ - $ -
Amortization of prior service cost (benefit) (23) (12) (53)
Amortization of net actuarial (gain) loss 387 119 56
Total amortization expected over the next fiscal year $ 364 $ 107 $ 3
The Company primarily amortizes amounts recognized as prior service cost (benefit) over the average future service period
of active employees at the date of the amendment.
Weighted-average assumptions used to determine benefit obligations as of December 31
Qualified and Non-qualified Pension Benefits Postretirement
United States International Benefits
2016 2015 2014 2016 2015 2014 2016 2015 2014
Discount rate 4.21 % 4.47 % 4.10 % 2.54 % 3.12 % 3.11 % 4.26 % 4.48 % 4.07 %
Compensation rate increase 4.10 % 4.10 % 4.10 % 2.90 % 2.90 % 3.33 % N/A N/A N/A
Weighted-average assumptions used to determine net cost for years ended December 31
Qualified and Non-qualified Pension Benefits Postretirement
United States International Benefits
2016 2015 2014 2016 2015 2014 2016 2015 2014
Discount rate - service cost 4.70 % 4.10 % 4.98 % 2.84 % 3.11 % 4.02 % 4.70 % 4.07 % 4.83 %
Discount rate - interest cost 3.73 % 4.10 % 4.98 % 2.72 % 3.11 % 4.02 % 3.80 % 4.07 % 4.83 %
Expected return on assets 7.50 % 7.75 % 7.75 % 5.77 % 5.90 % 5.83 % 6.91 % 6.91 % 7.11 %
Compensation rate increase 4.10 % 4.10 % 4.00 % 2.90 % 3.33 % 3.35 % N/A N/A N/A
The Company provides eligible retirees in the U.S. postretirement health care benefit plans to a savings account
benefits-based plan. The contributions provided by the Company to the health savings accounts increase 3 percent per year
for employees who retired prior to January 1, 2016 and increase 1.5 percent for employees who retire on or after January 1,
2016. Therefore, the Company no longer has material exposure to health care cost inflation.
The Company determines the discount rate used to measure plan liabilities as of the December 31 measurement date for the
pension and postretirement benefit plans, which is also the date used for the related annual measurement assumptions. The
discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the
year. The Company sets its rate to reflect the yield 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. Using this methodology, the
Company determined a discount rate of 4.21% for pension and 4.26% for postretirement benefits to be appropriate for its
U.S. plans as of December 31, 2016, which is a decrease of 0.26 percentage points and 0.22 percentage points, respectively,
from the rates used as of December 31, 2015. For the international pension and postretirement plans the discount rates also
reflect the current rate at which the associated liabilities could be effectively settled at the end of the year. If the
country has a deep market in corporate bonds the Company matches the expected cash flows from the plan either to a
portfolio of bonds that generate sufficient cash flow or a notional yield curve generated from available bond information.
In countries that do not have a deep market in corporate bonds, government bonds are considered with a risk premium to
approximate corporate bond yields.
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
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