3M 2005 Annual Report Download - page 53

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27
Additional information regarding these and other accounting pronouncements is included in Note 1 to the
Consolidated Financial Statements.
FINANCIAL CONDITION AND LIQUIDITY
The Company generates significant ongoing cash flow. Net debt decreased significantly in 2004, but increased in
2005, primarily related to the $1.36 billion CUNO acquisition.
At December 31
(Millions) 2005 2004 2003
Total Debt $2,381 $2,821 $2,937
Less: Cash & Cash Equiv. 1,072 2,757 1,836
Net Debt $1,309 $ 64 $1,101
3M believes its ongoing cash flows provide ample cash to fund expected investments and capital expenditures.
The Company has an AA credit rating from Standard & Poor’s and an Aa1 credit rating from Moody’s Investors
Service. The Company has sufficient access to capital markets to meet currently anticipated growth and
acquisition investment funding needs. The Company does not utilize derivative instruments linked to the
Company’s stock. However, the Company does have contingently convertible debt that, if conditions for
conversion are met, is convertible into shares of 3M common stock (refer to Note 8 in this document).
The Company’s financial condition and liquidity at December 31, 2005, remained strong. Various assets and liabilities,
including cash and short-term debt, can fluctuate significantly from month-to-month depending on short-term liquidity
needs. Working capital (defined as current assets minus current liabilities) totaled $1.877 billion at December 31, 2005,
compared with $2.649 billion at December 31, 2004. This decrease was primarily related to a decrease in cash and
cash equivalents ($1.685 billion) partially offset by a decrease in debt classified as short-term borrowings and current
portion of long-term debt ($1.022 billion). The cash and cash equivalents balance was impacted by the acquisition of
CUNO and repayment of debt.
The Company uses various working capital measures that place emphasis and focus on certain working capital assets
and liabilities. These measures are not defined under U.S. generally accepted accounting principles and may not be
computed the same as similarly titled measures used by other companies. One of the primary working capital
measures 3M uses is a combined index, which includes accounts receivables, inventory and accounts payable. This
combined index (defined as quarterly net sales – fourth quarter at year-end – multiplied by four, divided by ending net
accounts receivable plus inventory less accounts payable) was 5.7 at December 31, 2005, down from 5.8 at December
31, 2004. Excluding CUNO, net working capital turns at December 31, 2005, were 5.8, the same as at December 31,
2004. Receivables increased $46 million, or 1.6%, compared with December 31, 2004. At December 31, 2005, the
CUNO acquisition increased accounts receivable by $88 million. Currency translation (due to the stronger U.S dollar)
reduced accounts receivable by $231 million year-on-year. Inventories increased $265 million, or 14.0%, compared
with December 31, 2004. At December 31, 2005, the CUNO acquisition increased inventories by $56 million. Currency
translation reduced inventories by $89 million year-on-year. Accounts payable increased $88 million compared with
December 31, 2004, with CUNO accounting for $18 million of this increase.
Cash flows from operating, investing and financing activities are provided in the tables that follow. Individual amounts
in the Consolidated Statement of Cash Flows exclude the effects of acquisitions, divestitures and exchange rate
impacts, which are presented separately in the cash flows. Thus, the amounts presented in the following operating,
investing and financing activities tables reflect changes in balances from period to period adjusted for these effects.