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REG - 3M Company - Half-year Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 4

- Part 4: For the preceding part double click  ID:nRSC0594Gc 

                                              Gross            Assets                          Liabilities      
 December 31, 2015                                          Notional                                         Fair                         Fair                         
 (Millions)                                                 Amount           Location                        Value Amount     Location    Value Amount                 
 Derivatives designated as                                                                                                                                                      
 hedging instruments                                                                                                                                                            
 Foreign currency forward/option contracts                  $         2,815            Other current assets                $  148         Other current liabilities    $  14    
 Foreign currency forward/option contracts                            1,240            Other assets                           61          Other liabilities               3     
 Interest rate swap contracts                                         1,753            Other assets                           24          Other liabilities               1     
 Total derivatives designated as hedging instruments                                                                       $  233                                      $  18    
                                                                                                                                                                                
 Derivatives not designated as                                                                                                                                                  
 hedging instruments                                                                                                                                                            
 Foreign currency forward/option contracts                  $         5,359            Other current assets                $  63          Other current liabilities    $  51    
 Total derivatives not designated as hedging instruments                                                                   $  63                                       $  51    
                                                                                                                                                                                
 Total derivative instruments                                                                                              $  296                                      $  69    
 
 
Credit Risk and Offsetting of Assets and Liabilities of Derivative Instruments 
 
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. 3M enters into master
netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting
arrangement may allow each counterparty to net settle amounts owed between a 3M entity and the counterparty as a result of
multiple, separate derivative transactions. As of June 30, 2016, 3M has International Swaps and Derivatives Association
(ISDA) agreements with 16 applicable banks and financial institutions which contain netting provisions. In addition to a
master agreement with 3M supported by a primary counterparty's parent guarantee, 3M also has associated credit support
agreements in place with 15 of its primary derivative counterparties which, among other things, provide the circumstances
under which either party is required to post eligible collateral (when the market value of transactions covered by these
agreements exceeds specified thresholds or if a counterparty's credit rating has been downgraded to a predetermined
rating). The Company does not anticipate nonperformance by any of these counterparties. 
 
3M has elected to present the fair value of derivative assets and liabilities within the Company's consolidated balance
sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise
qualify for net presentation. However, the following tables provide information as if the Company had elected to offset the
asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default
or termination as stipulated by the terms of netting arrangements with each of the counterparties. For each counterparty,
if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period
based on the 3M entity that is a party to the transactions. Derivatives not subject to master netting agreements are not
eligible for net presentation. As of the applicable dates presented below, no collateral had been received or pledged
related to these derivative instruments. 
 
Offsetting of Financial Assets under Master Netting Agreements with Derivative Counterparties 
 
                                                                                                                                                                                                                 
 June 30, 2016                                                                                                 Gross Amounts not Offset in the                                                       
                                                                                                               Consolidated Balance Sheet that are Subject                                           
                                                         Gross Amount of         to Master Netting Agreements                                                                                     
                                                         Derivative Assets       Gross Amount of                                                                                                          
                                                         Presented in the        Eligible Offsetting                                                                                                      
                                                         Consolidated            Recognized                                                                 Cash Collateral    Net Amount of         
 (Millions)                                              Balance Sheet           Derivative Liabilities                                                     Received           Derivative Assets     
 Derivatives subject to master netting agreements        $                  243                                $                                            74                 $                  -    $  169    
 Derivatives not subject to master netting agreements                       -                                                                                                                             -      
 Total                                                   $                  243                                                                                                                        $  169    
 
 
                                                                                                                                                                                                                 
 December 31, 2015                                                                                             Gross Amounts not Offset in the                                                       
                                                                                                               Consolidated Balance Sheet that are Subject                                           
                                                         Gross Amount of         to Master Netting Agreements                                                                                     
                                                         Derivative Assets       Gross Amount of                                                                                                          
                                                         Presented in the        Eligible Offsetting                                                                                                      
                                                         Consolidated            Recognized                                                                 Cash Collateral    Net Amount of         
 (Millions)                                              Balance Sheet           Derivative Liabilities                                                     Received           Derivative Assets     
 Derivatives subject to master netting agreements        $                  296                                $                                            37                 $                  -    $  259    
 Derivatives not subject to master netting agreements                       -                                                                                                                             -      
 Total                                                   $                  296                                                                                                                        $  259    
 
 
Offsetting of Financial Liabilities under Master Netting Agreements with Derivative Counterparties 
 
                                                                                                                                                                                                                           
 June 30, 2016                                                                                                      Gross Amounts not Offset in the                                                            
                                                                                                                    Consolidated Balance Sheet that are Subject                                                
                                                         Gross Amount of              to Master Netting Agreements                                                                                          
                                                         Derivative Liabilities       Gross Amount of                                                                                                               
                                                         Presented in the             Eligible Offsetting                                                                                                           
                                                         Consolidated                 Recognized                                                                 Cash Collateral    Net Amount of              
 (Millions)                                              Balance Sheet                Derivative Assets                                                          Pledged            Derivative Liabilities     
 Derivatives subject to master netting agreements        $                       180                                $                                            74                 $                       -    $  106    
 Derivatives not subject to master netting agreements                            11                                                                                                                                 11     
 Total                                                   $                       191                                                                                                                             $  117    
 
 
                                                                                                                                                                                                                         
 December 31, 2015                                                                                                 Gross Amounts not Offset in the                                                            
                                                                                                                   Consolidated Balance Sheet that are Subject                                                
                                                         Gross Amount of             to Master Netting Agreements                                                                                          
                                                         Derivative Liabilities      Gross Amount of                                                                                                               
                                                         Presented in the            Eligible Offsetting                                                                                                           
                                                         Consolidated                Recognized                                                                 Cash Collateral    Net Amount of              
 (Millions)                                              Balance Sheet               Derivative Assets                                                          Pledged            Derivative Liabilities     
 Derivatives subject to master netting agreements        $                       64                                $                                            37                 $                       -    $  27    
 Derivatives not subject to master netting agreements                            5                                                                                                                                 5     
 Total                                                   $                       69                                                                                                                             $  32    
 
 
Currency Effects 
 
3M estimates that year-on-year foreign currency transactions effects, including hedging impacts, decreased pre-tax income
by approximately $10 million for the three months ended June 30, 2016, which resulted in a minimal impact for the six
months ended June 30, 2016. These estimates include transaction gains and losses, including derivative instruments designed
to reduce foreign currency exchange rate risks and any impacts from swapping Venezuelan bolivars into U.S. dollars. 
 
NOTE 11.  Fair Value Measurements 
 
3M follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured at
fair value on a recurring basis and nonrecurring basis. Under the standard, fair value is defined as the exit price, or the
amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value
that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset
or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are
inputs that reflect the Company's assumptions about the factors market participants would use in valuing the asset or
liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three
levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs
include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or
liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. 
 
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis: 
 
For 3M, assets and liabilities that are measured at fair value on a recurring basis primarily relate to available-for-sale
marketable securities, available-for-sale investments (included as part of investments in the Consolidated Balance Sheet)
and certain derivative instruments. Derivatives include cash flow hedges, interest rate swaps and net investment hedges.
The information in the following paragraphs and tables primarily addresses matters relative to these financial assets and
liabilities. Separately, there were no material fair value measurements with respect to nonfinancial assets or liabilities
that are recognized or disclosed at fair value in the Company's financial statements on a recurring basis for the three and
six months ended June 30, 2016 and 2015. 
 
3M uses various valuation techniques, which are primarily based upon the market and income approaches, with respect to
financial assets and liabilities. Following is a description of the valuation methodologies used for the respective
financial assets and liabilities measured at fair value. 
 
Available-for-sale marketable securities - except certain U.S. municipal securities: 
 
Marketable securities, except certain U.S. municipal securities, are valued utilizing multiple sources. A weighted average
market price is used for these securities. Market prices are obtained for these securities from a variety of industry
standard data providers, security master files from large financial institutions, and other third-party sources. These
multiple prices are used as inputs into a distribution-curve-based algorithm to determine the daily fair value to be used.
3M classifies U.S. treasury securities as level 1, while all other marketable securities (excluding certain U.S. municipal
securities) are classified as level 2. Marketable securities are discussed further in Note 7. 
 
Available-for-sale marketable securities - certain U.S. municipal securities only: 
 
In the fourth quarter of 2014 and first quarter of 2016, 3M obtained municipal bonds from the City of Nevada, Missouri,
which represent 3M's only U.S. municipal securities holding as of June 30, 2016 and December 31, 2015. Due to the nature of
this security, the valuation method utilized will include the financial health of the City of Nevada, any recent municipal
bond issuances by Nevada, and macroeconomic considerations related to the direction of interest rates and the health of the
overall municipal bond market, and as such has been classified as a level 3 security. 
 
Available-for-sale investments: 
 
Investments include equity securities that are traded in an active market. Closing stock prices are readily available from
active markets and are used as being representative of fair value. 3M classifies these securities as level 1. 
 
Derivative instruments: 
 
The Company's derivative assets and liabilities within the scope of ASC 815, Derivatives and Hedging, are required to be
recorded at fair value. The Company's derivatives that are recorded at fair value include foreign currency forward and
option contracts, commodity price swaps, interest rate swaps, and net investment hedges where the hedging instrument is
recorded at fair value. Net investment hedges that use foreign currency denominated debt to hedge 3M's net investment are
not impacted by the fair value measurement standard under ASC 820, as the debt used as the hedging instrument is marked to
a value with respect to changes in spot foreign currency exchange rates and not with respect to other factors that may
impact fair value. 
 
3M has determined that foreign currency forwards, commodity price swaps, currency swaps, foreign currency options, interest
rate swaps and cross-currency swaps will be considered level 2 measurements. 3M uses inputs other than quoted prices that
are observable for the asset. These inputs include foreign currency exchange rates, volatilities, and interest rates.
Derivative positions are primarily valued using standard calculations/models that use as their basis readily observable
market parameters. Industry standard data providers are 3M's primary source for forward and spot rate information for both
interest rates and currency rates, with resulting valuations periodically validated through third-party or counterparty
quotes and a net present value stream of cash flows model. 
 
The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring
basis. 
 
                                                                                                                                                           
                                                                                              Fair Value Measurements           
 Description                                  Fair Value at       Using Inputs Considered as                           
 (Millions)                                   June 30, 2016       Level 1                                              Level 2    Level 3       
 Assets:                                                                                                                                                   
 Available-for-sale:                                                                                                                                       
 Marketable securities:                                                                                                                                    
 Foreign government agency securities         $              10                               $                        -          $        10     $  -     
 Corporate debt securities                                   10                                                        -                   10        -     
 Commercial paper                                            36                                                        -                   36        -     
 Certificates of deposit/time deposits                       55                                                        -                   55        -     
 Asset-backed securities:                                                                                                                                  
 Automobile loan related                                     36                                                        -                   36        -     
 Credit card related                                         19                                                        -                   19        -     
 Other                                                       7                                                         -                   7         -     
 U.S. municipal securities                                   18                                                        -                   -         18    
 Derivative instruments - assets:                                                                                                                          
 Foreign currency forward/option contracts                   185                                                       -                   185       -     
 Interest rate swap contracts                                58                                                        -                   58        -     
                                                                                                                                                           
 Liabilities:                                                                                                                                              
 Derivative instruments - liabilities:                                                                                                                     
 Foreign currency forward/option contracts                   186                                                       -                   186       -     
 Interest rate swap contracts                                5                                                         -                   5         -     
 
 
                                                                                                                                                               
                                                                                                  Fair Value Measurements           
 Description                                  Fair Value at           Using Inputs Considered as                           
 (Millions)                                   December 31, 2015       Level 1                                              Level 2    Level 3       
 Assets:                                                                                                                                                       
 Available-for-sale:                                                                                                                                           
 Marketable securities:                                                                                                                                        
 Foreign government agency securities         $                  10                               $                        -          $        10     $  -     
 Corporate debt securities                                       10                                                        -                   10        -     
 Commercial paper                                                12                                                        -                   12        -     
 Certificates of deposit/time deposits                           26                                                        -                   26        -     
 Asset-backed securities:                                                                                                                                      
 Automobile loan related                                         26                                                        -                   26        -     
 Credit card related                                             10                                                        -                   10        -     
 Other                                                           21                                                        -                   21        -     
 U.S. municipal securities                                       12                                                        -                   -         12    
 Derivative instruments - assets:                                                                                                                              
 Foreign currency forward/option contracts                       272                                                       -                   272       -     
 Interest rate swap contracts                                    24                                                        -                   24        -     
                                                                                                                                                               
 Liabilities:                                                                                                                                                  
 Derivative instruments - liabilities:                                                                                                                         
 Foreign currency forward/option contracts                       68                                                        -                   68        -     
 Interest rate swap contracts                                    1                                                         -                   1         -     
 
 
The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a
recurring basis in the table above that used significant unobservable inputs (Level 3). 
 
                                                                                                                                                                                                                
                                                                                                                                    Three months ended      Six months ended           
 Marketable securities - certain U.S. municipal securities only                                                                     June 30,                June 30,                   
 (Millions)                                                                                                                         2016                    2015                 2016    2015        
 Beginning balance                                                                                                                  $                   18                    $  15      $     12    $  15      
 Total gains or losses:                                                                                                                                                                                         
 Included in earnings                                                                                                                                   -                        -             -        -       
 Included in other comprehensive income                                                                                                                 -                        -             -        -       
 Purchases and issuances                                                                                                                                -                        -             6        -       
 Sales and settlements                                                                                                                                  -                        -             -        -       
 Transfers in and/or out of level 3                                                                                                                     -                        -             -        -       
 Ending balance                                                                                                                     $                   18                    $  15      $     18    $  15      
                                                                                                                                                                                                                
 Change in unrealized gains or losses for the period included in earnings for securities held at the end of the reporting period                        -                        -             -        -       
 
 
In addition, the plan assets of 3M's pension and postretirement benefit plans are measured at fair value on a recurring
basis (at least annually). Refer to Note 11 in 3M's Current Report on Form 8-K dated May 17, 2016 (which updated 3M's 2015
Annual Report on Form 10-K). 
 
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis: 
 
Disclosures are required for certain assets and liabilities that are measured at fair value, but are recognized and
disclosed at fair value on a nonrecurring basis in periods subsequent to initial recognition. For 3M, such measurements of
fair value relate primarily to long-lived asset impairments. There were no material long-lived asset impairments for the
three and six months ended June 30, 2016 and 2015. 
 
Fair Value of Financial Instruments: 
 
The Company's financial instruments include cash and cash equivalents, marketable securities, accounts receivable, certain
investments, accounts payable, borrowings, and derivative contracts. The fair values of cash and cash equivalents, accounts
receivable, accounts payable, and short-term borrowings and current portion of long-term debt approximated carrying values
because of the short-term nature of these instruments. Available-for-sale marketable securities and investments, in
addition to certain derivative instruments, are recorded at fair values as indicated in the preceding disclosures. For its
long-term debt, the Company utilized third-party quotes to estimate fair values (classified as level 2). Information with
respect to the carrying amounts and estimated fair values of these financial instruments follow: 
 
                                                                                                                                  
                                              June 30, 2016         December 31, 2015     
                                              Carrying              Fair                  Carrying    Fair          
 (Millions)                                   Value                 Value                 Value       Value         
 Long-term debt, excluding current portion    $              9,299                     $  10,115      $      8,753    $  9,101    
 
 
The fair values reflected above consider the terms of the related debt absent the impacts of derivative/hedging activity.
The carrying amount of long-term debt referenced above is impacted by certain fixed-to-floating interest rate swaps that
are designated as fair value hedges and by the designation of fixed rate Eurobond securities issued by the Company as
hedging instruments of the Company's net investment in its European subsidiaries. Many of 3M's fixed-rate bonds were
trading at a premium at June 30, 2016 and December 31, 2015 due to the low interest rates and tightening of 3M's credit
spreads. 
 
NOTE 12.  Commitments and Contingencies 
 
Legal Proceedings: 
 
The Company and some of its subsidiaries are involved in numerous claims and lawsuits, principally in the United States,
and regulatory proceedings worldwide. These include various products liability (involving products that the Company now or
formerly manufactured and sold), intellectual property, and commercial claims and lawsuits, including those brought under
the antitrust laws, and environmental proceedings. Unless otherwise stated, the Company is vigorously defending all such
litigation. Additional information about the Company's process for disclosure and recording of liabilities and insurance
receivables related to legal proceedings can be found in Note 14 "Commitments and Contingencies" in the Company's Annual
Report on Form 10-K for the year ended December 31, 2015 as updated by the Company's Current Report on Form 8-K dated May
17, 2016. 
 
The following sections first describe the significant legal proceedings in which the Company is involved, and then describe
the liabilities and associated insurance receivables the Company has accrued relating to its significant legal
proceedings. 
 
Respirator Mask/Asbestos Litigation 
 
As of June 30, 2016, the Company is a named defendant, with multiple co-defendants, in numerous lawsuits in various courts
that purport to represent approximately 2,325 individual claimants, compared to approximately 2,130 individual claimants
with actions pending at December 31, 2015. 
 
The vast majority of the lawsuits and claims resolved by and currently pending against the Company allege use of some of
the Company's mask and respirator products and seek damages from the Company and other defendants for alleged personal
injury from workplace exposures to asbestos, silica, coal mine dust or other occupational dusts found in products
manufactured by other defendants or generally in the workplace. A minority of the lawsuits and claims resolved by and
currently pending against the Company generally allege personal injury from occupational exposure to asbestos from products
previously manufactured by the Company, which are often unspecified, as well as products manufactured by other defendants,
or occasionally at Company premises. 
 
The Company's current volume of new and pending matters is substantially lower than it experienced at the peak of filings
in 2003. The Company expects that filing of claims by unimpaired claimants in the future will continue to be at much lower
levels than in the past. Accordingly, the number of claims alleging more serious injuries, including mesothelioma and other
malignancies, will represent a greater percentage of total claims than in the past. The Company has prevailed in all ten
cases taken to trial, including eight of the nine cases tried to verdict (such trials occurred in 1999, 2000, 2001, 2003,
2004, 2007, and 2015), and an appellate reversal in 2005 of the 2001 jury verdict adverse to the Company. The remaining
case, tried in 2009, was dismissed by the court at the close of plaintiff's evidence, based on the court's legal finding
that the plaintiff had not presented sufficient evidence to support a jury verdict. The plaintiff in the 2015 trial filed
an appeal to the Missouri Court of Appeals for the Eastern District. In June 2016, the Missouri Court of Appeals affirmed
the trial court's judgment and jury verdict in favor of 3M, a decision that is final as the Plaintiff did not file an
appeal to the Missouri Supreme Court. 
 
The Company has demonstrated in these past trial proceedings that its respiratory protection products are effective as
claimed when used in the intended manner and in the intended circumstances. Consequently the Company believes that
claimants are unable to establish that their medical conditions, even if significant, are attributable to the Company's
respiratory protection products. Nonetheless the Company's litigation experience indicates that claims of persons with
malignant conditions are costlier to resolve than the claims of unimpaired persons, and it therefore believes the average
cost of resolving pending and future claims on a per-claim basis will continue to be higher than it experienced in prior
periods when the vast majority of claims were asserted by medically unimpaired claimants. 
 
As previously reported, the State of West Virginia, through its Attorney General, filed a complaint in 2003 against the
Company and two other manufacturers of respiratory protection products in the Circuit Court of Lincoln County, West
Virginia and amended its complaint in 2005. The amended complaint seeks substantial, but unspecified, compensatory damages
primarily for reimbursement of the costs allegedly incurred by the State for worker's compensation and healthcare benefits
provided to all workers with occupational pneumoconiosis and unspecified punitive damages. The case was inactive from the
fourth quarter of 2007 until late 2013, other than a case management conference in March 2011. In November 2013, the State
filed a motion to bifurcate the lawsuit into separate liability and damages proceedings. At the hearing on the motion, the
court declined to bifurcate the lawsuit. No liability has been recorded for this matter because the Company believes that
liability is not probable and estimable at this time. In addition, the Company is not able to estimate a possible loss or
range of loss given the lack of any meaningful discovery responses by the State of West Virginia, the otherwise minimal
activity in this case and the fact that the complaint asserts claims against two other manufacturers where a defendant's
share of liability may turn on the law of joint and several liability and by the amount of fault, if any, a jury might
allocate to each defendant if the case is ultimately tried. 
 
Respirator Mask/Asbestos Liabilities and Insurance Receivables: The Company estimates its respirator mask/asbestos
liabilities, including the cost to resolve the claims and defense costs, by examining: (i) the Company's experience in
resolving claims, (ii) apparent trends, (iii) the apparent quality of claims (e.g., whether the claim has been asserted on
behalf of asymptomatic claimants), (iv) changes in the nature and mix of claims (e.g., the proportion of claims asserting
usage of the Company's mask or respirator products and alleging exposure to each of asbestos, silica, coal or other
occupational dusts, and claims pleading use of asbestos-containing products allegedly manufactured by the Company), (v) the
number of current claims and a projection of the number of future asbestos and other claims that may be filed against the
Company, (vi) the cost to resolve recently settled claims, and (vii) an estimate of the cost to resolve and defend against
current and future claims. 
 
Developments may occur that could affect the Company's estimate of its liabilities. These developments include, but are not
limited to, significant changes in (i) the number of future claims, (ii) the average cost of resolving claims, (iii) the
legal costs of defending these claims and in maintaining trial readiness, (iv) changes in the mix and nature of claims
received, (v) trial and appellate outcomes, (vi) changes in the law and procedure applicable to these claims, and (vii) the
financial viability of other co-defendants and insurers. 
 
As a result of the Company's cost of resolving claims of persons who claim more serious injuries, including mesothelioma
and other malignancies, the Company increased its accruals in the first six months of 2016 for respirator mask/asbestos
liabilities by $29 million, $18 million of which occurred in the second quarter of 2016. In the first six months of 2016,
the Company made payments for legal fees and settlements of $26 million related to the respirator mask/asbestos litigation,
$12 million of which occurred in the second quarter of 2016. As of June 30, 2016, the Company had accruals for respirator
mask/asbestos liabilities of $147 million (excluding Aearo accruals). This accrual represents the low end in a range of
loss. 
 
The Company cannot estimate the amount or upper end of the range of amounts by which the liability may exceed the accrual
the Company has established because of the (i) inherent difficulty in projecting the number of claims that have not yet
been asserted or the time period in which future claims may be asserted, (ii) the complaints nearly always assert claims
against multiple defendants where the damages alleged are typically not attributed to individual defendants so that a
defendant's share of liability may turn on the law of joint and several liability, which can vary by state, (iii) the
multiple factors described above that the Company considers in estimating its liabilities, and (iv) the several possible
developments described above that may occur that could affect the Company's estimate of liabilities. 
 
As of June 30, 2016, the Company's receivable for insurance recoveries related to the respirator mask/asbestos litigation
was $4 million. The Company estimates insurance receivables based on an analysis of its policies, including their
exclusions, pertinent case law interpreting comparable policies, its experience with similar claims, and an assessment of
the nature of each claim and remaining coverage. The Company then records an amount it has concluded is likely to be
recovered. Various factors could affect the timing and amount of recovery of this receivable, including (i) delays in or
avoidance of payment by insurers; (ii) the extent to which insurers may become insolvent in the future, and (iii) the
outcome of negotiations with insurers and legal proceedings with respect to respirator mask/asbestos liability insurance
coverage. 
 
As a result of a final arbitration decision in June 2016 regarding insurance coverage under two policies, 3M reversed its
receivable for insurance recoveries related to respirator mask/asbestos litigation by $35 million. The Company is seeking
coverage under the policies of certain insolvent insurers. Once those claims for coverage are resolved, the Company will
have collected substantially all of its remaining insurance coverage for respirator mask/asbestos claims. 
 
Respirator Mask/Asbestos Litigation - Aearo Technologies 
 
On April 1, 2008, a subsidiary of the Company purchased the stock of Aearo Holding Corp., the parent of Aearo Technologies
("Aearo"). Aearo manufactured and sold various products, including personal protection equipment, such as eye, ear, head,
face, fall and certain respiratory protection products. 
 
As of June 30, 2016, Aearo and/or other companies that previously owned and operated Aearo's respirator business (American
Optical Corporation, Warner-Lambert LLC, AO Corp. and Cabot Corporation ("Cabot")) are named defendants, with multiple
co-defendants, including the Company, in numerous lawsuits in various courts in which plaintiffs allege use of mask and
respirator products and seek damages from Aearo and other defendants for alleged personal injury from workplace exposures
to asbestos, silica-related, or other occupational dusts found in products manufactured by other defendants or generally in
the workplace. 
 
As of June 30, 2016, the Company, through its Aearo subsidiary, had accruals of $20 million for product liabilities and
defense costs related to current and future Aearo-related asbestos and silica-related claims. Responsibility for legal
costs, as well as for settlements and judgments, is currently shared in an informal arrangement among Aearo, Cabot,
American Optical Corporation and a subsidiary of Warner Lambert and their respective insurers (the "Payor Group").
Liability is allocated among the parties based on the number of years each company sold respiratory products under the "AO
Safety" brand and/or owned the AO Safety Division of American Optical Corporation and the alleged years of exposure of the
individual plaintiff. Aearo's share of the contingent liability is further limited by an agreement entered into between
Aearo and Cabot on July 11, 1995. This agreement provides that, so long as Aearo pays to Cabot a quarterly fee of $100,000,
Cabot will retain responsibility and liability for, and indemnify Aearo against, any product liability claims involving
exposure to asbestos, silica, or  silica products for respirators sold prior to July 11, 1995. Because of the difficulty in
determining how long a particular respirator remains in the stream of commerce after being sold, Aearo and Cabot have
applied the agreement to claims arising out of the alleged use of respirators involving exposure to asbestos, silica or
silica products prior to January 1, 1997. With these arrangements in place, Aearo's potential liability is limited to
exposures alleged to have arisen from the use of respirators involving exposure to asbestos, silica, or silica products on
or after January 1, 1997. To date, Aearo has elected to pay the quarterly fee. Aearo could potentially be exposed to
additional claims for some part of the pre-July 11, 1995 period covered by its agreement with Cabot if Aearo elects to
discontinue its participation in this arrangement, or if Cabot is no longer able to meet its obligations in these matters. 
 
In March 2012, Cabot CSC Corporation and Cabot Corporation filed a lawsuit against Aearo in the Superior Court of Suffolk
County, Massachusetts seeking declaratory relief as to the scope of Cabot's indemnity obligations under the July 11, 1995
agreement, including whether Cabot has retained liability for coal workers' pneumoconiosis claims, and seeking damages for
breach of contract. In 2014, the court granted Aearo's motion for summary judgment on two claims, but declined to rule on
two issues: the specific liability for certain known coal mine dust lawsuits; and Cabot's claim for allocation of liability
between injuries allegedly caused by exposure to coal mine dust and injuries allegedly caused by exposure to silica dust.
Following additional discovery, the parties filed new motions for summary judgment. In February 2016, the court ruled in
favor of Aearo on these two remaining issues, and ordered that Cabot, and not Aearo, is solely responsible for all
liability for the coal mine dust lawsuits under the 1995 agreement. Cabot has appealed. 
 
Developments may occur that could affect the estimate of Aearo's liabilities. These developments include, but are not
limited to: (i) significant changes in the number of future claims, (ii) significant changes in the average cost of
resolving claims, (iii) significant changes in the legal costs of defending these claims, (iv) significant changes in the
mix and nature of claims received, (v) trial and appellate outcomes, (vi) significant changes in the law and procedure
applicable to these claims, (vii) significant changes in the liability allocation among the co-defendants, (viii) the
financial viability of members of the Payor Group including exhaustion of available insurance coverage limits, and/or (ix)
a determination that the interpretation of the contractual obligations on which Aearo has estimated its share of liability
is inaccurate. The Company cannot determine the impact of these potential developments on its current estimate of Aearo's
share of liability for these existing and future claims. If any of the developments described above were to occur, the
actual amount of these liabilities for existing and future claims could be significantly larger than the amount accrued. 
 
Because of the inherent difficulty in projecting the number of claims that have not yet been asserted, the complexity of
allocating responsibility for future claims among the Payor Group, and the several possible developments that may occur
that could affect the estimate of Aearo's liabilities, the Company cannot estimate the amount or range of amounts by which
Aearo's liability may exceed the accrual the Company has established. 
 
Environmental Matters and Litigation 
 
The Company's operations are subject to environmental laws and regulations including those pertaining to air emissions,
wastewater discharges, toxic substances, and the handling and disposal of solid and hazardous wastes enforceable by
national, state, and local authorities around the world, and private parties in the United States and abroad. These laws
and regulations provide, under certain circumstances, a basis for the remediation of contamination, for restoration of or
compensation for damages to natural resources, and for personal injury and property damage claims. The Company has
incurred, and will continue to incur, costs and capital expenditures in complying with these laws and regulations,
defending personal injury and property damage claims, and modifying its business operations in light of its environmental
responsibilities. In its effort to satisfy its environmental responsibilities and comply with environmental laws and
regulations, the Company has established, and periodically updates, policies relating to environmental standards of
performance for its operations worldwide. 
 
Under certain environmental laws, including the United States Comprehensive Environmental Response, Compensation and
Liability Act of 1980 and similar state laws, the Company may be jointly and severally liable, typically with other
companies, for the costs of remediation of environmental contamination at current or former facilities and at off-site
locations. The Company has identified numerous locations, most of which are in the United States, at which it may have some
liability. Please refer to the section entitled "Environmental Liabilities and Insurance Receivables" that follows for
information on the amount of the accrual. 
 
Environmental Matters 
 
As previously reported, the Company has been voluntarily cooperating with ongoing reviews by local, state, federal
(primarily the U.S. Environmental Protection Agency (EPA)), and international agencies of possible environmental and health
effects of various perfluorinated compounds ("PFCs"), including perfluorooctanyl compounds such as perfluorooctanoate
("PFOA") and perfluorooctane sulfonate ("PFOS"). As a result of its phase-out decision in May 2000, the Company no longer
manufactures perfluorooctanyl compounds. The company ceased manufacturing and using the vast majority of these compounds
within approximately two years of the phase-out announcement, and ceased all manufacturing and the last significant use of
this chemistry by the end of 2008. Through its ongoing life cycle management and its raw material composition
identification processes associated with the Company's policies covering the use of all persistent and bio-accumulative
materials, the Company has on occasion identified the presence of precursor chemicals in materials received from suppliers
that may ultimately degrade to PFOA, PFOS, or similar compounds. Upon such identification, the Company works to find
alternatives for such materials. 
 
Regulatory activities concerning PFOA and/or PFOS continue in the United States, Europe and elsewhere, and before certain
international bodies. These activities include gathering of exposure and use information, risk assessment, and
consideration of regulatory approaches. As the database of studies of both chemicals has expanded, the EPA has developed
human health effects documents summarizing the available data from these studies. In February 2014, the EPA initiated
external peer review of its draft human health effects documents for PFOA and PFOS. The peer review panel met in August
2014. In May 2016, the EPA announced lifetime health advisory levels for PFOA and PFOS at 70 parts per trillion
(superseding the provisional levels established by the EPA in 2009 of 400 parts per trillion for PFOA and 200 parts per
trillion for PFOS). Where PFOA and PFOS are found together, EPA recommends that the concentrations be added together, and
the lifetime health advisory for PFOA and PFOS combined is also 70 parts per trillion. Lifetime health advisories, while
not enforceable, serve as guidance and are benchmarks for determining if concentrations of chemicals in tap water from
public utilities are safe for public consumption. In an effort to collect exposure information under the Safe Drinking
Water Act, the EPA published on May 2, 2012 a list of unregulated substances, including six PFCs, required to be monitored
during the period 2013-2015 by public water system suppliers to determine the extent of their occurrence. The EPA is
reporting results from this exercise on a rolling basis that will continue in 2016. Through April 2016, the EPA has
reported results for 4,864 public water supplies nationwide. Based on the 2016 lifetime health advisory, 13 public water
supplies exceed the level for PFOA, 46 exceed the level for PFOS, and 72 exceed the combined level for PFOA and PFOS. These
results are based on one or more samples collected during the period 2012-2015 and do not necessarily reflect current
conditions of these public water supplies. EPA reporting does not identify the sources of the PFOA and PFOS in the public
water supplies. 
 
The Company is continuing to make progress in its work, under the supervision of state regulators, to address its historic
disposal of PFC-containing waste associated with manufacturing operations at the Decatur, Alabama, Cottage Grove,
Minnesota, and Cordova, Illinois plants. 
 
As previously reported, the Company entered into a voluntary remedial action agreement with the Alabama Department of
Environmental Management (ADEM) to address the presence of PFCs in the soil at the Company's manufacturing facility in
Decatur, Alabama. Pursuant to a permit issued by ADEM, for approximately twenty years, the Company incorporated its
wastewater treatment plant sludge containing PFCs in fields at its Decatur facility. After a review of the available
options to address the presence of PFCs in the soil, ADEM agreed that the preferred remediation option is to use a
multilayer cap over the former sludge incorporation areas on the manufacturing site with subsequent groundwater migration
controls and treatment. Implementation of that plan continues and is expected to be completed in 2018. 
 
The Company continues to work with the Minnesota Pollution Control Agency (MPCA) pursuant to the terms of the previously
disclosed May 2007 Settlement Agreement and Consent Order to address the presence of certain PFCs in the soil and
groundwater at former disposal sites in Washington County, Minnesota (Oakdale and Woodbury) and at the Company's
manufacturing facility at Cottage Grove, Minnesota. Under this agreement, the Company's principal obligations include (i)
evaluating releases of certain PFCs from these sites and proposing response actions; (ii) providing treatment or
alternative drinking water upon identifying any level exceeding a Health Based Value ("HBV") or Health Risk Limit ("HRL")
(i.e., the amount of a chemical in drinking water determined by the Minnesota Department of Health (MDH) to be safe for
human consumption over a lifetime) for certain PFCs for which a HBV and/or HRL exists as a result of contamination from
these sites; (iii) remediating identified sources of other PFCs at these sites that are not controlled by actions to
remediate PFOA and PFOS; and (iv) sharing information with the MPCA about certain perfluorinated compounds. During 2008,
the MPCA issued formal decisions adopting remedial options for the former disposal sites in Washington County, Minnesota
(Oakdale and Woodbury). In August 2009, the MPCA issued a formal decision adopting remedial options for the Company's
Cottage Grove manufacturing facility. During the spring and summer of 2010, 3M began implementing the agreed upon remedial
options at the Cottage Grove and Woodbury sites. 3M commenced the remedial option at the Oakdale site in late 2010. At each
location the remedial options were recommended by the Company and approved by the MPCA. Remediation work has been completed
at the Oakdale and Woodbury sites, and they are in an operational maintenance mode. Remediation will continue at the
Cottage Grove site during 2016. 
 
In August 2014, the Illinois EPA approved a request by the Company to establish a groundwater management zone at its
manufacturing facility in Cordova, Illinois, which includes ongoing pumping of impacted site groundwater, groundwater
monitoring, and routine reporting of results. 
 
The Company cannot predict what additional regulatory actions arising from the foregoing proceedings and activities, if
any, may be taken regarding such compounds or the consequences of any such actions. 
 
Environmental Litigation 
 
As previously reported, a former employee filed a purported class action lawsuit in 2002 in the Circuit Court of Morgan
County, Alabama (the St. John case), 

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