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Annual Report 2016

Annual Report 2016

Inge G. Thulin Chairman of the Board, President and Chief Executive Officer

To our shareholders

In 2012 I laid out a new vision to guide our enterprise -- 3M technology advancing every company, 3M products enhancing every home, 3M innovation improving every life -- along with six strategies to help make that vision a reality. Since then, we have continued to roll out and execute other elements of the 3M playbook, all part of a journey to make us even stronger, more competitive and more relevant to our customers.

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Over the last five years we have strengthened and focused our portfolio of businesses, invested $8.6 billion in research and development to expand our scientific capabilities, and made solid progress on Business Transformation. We launched a new 3M brand platform and a new leadership development program, while simplifying our organization and improving our cost structure.

This progress is reflected in our 2016 results. Throughout the year we executed the 3M playbook and delivered a strong operational performance, while making investments to prepare us for the future.

Financial Results

In 2016 our team posted earnings of $8.16 per share, an increase of 8 percent versus 2015. Operating income margins companywide were 24 percent, up more than 100 basis points year over year -- with all five business groups above 22 percent. We delivered these margins on total revenue of $30 billion.

Free cash flow conversion was a robust 104 percent, which marks our third consecutive year higher than 100 percent. And for the fourth straight year, we delivered a return on invested capital above 20 percent -- coming in at 23 percent in 2016.*

Importantly, we achieved these strong results in a year of flat sales growth for 3M, as we continued to operate in a challenging external environment. This reflects our ability to execute well and control what we can control.

Throughout 2016 we also deployed significant capital to invest in our business -- including more than $3 billion in research and development and cap-ex combined -- as well as to return cash to our shareholders. Last year we returned a total of $6.4 billion to our shareholders through dividends and gross share repurchases. 2016 was a particularly notable year with respect to our dividend, as we marked 3M's 100th consecutive year of paying dividends to our shareholders.

Building for the future

In addition to financial results, we continued to build for long-term success through our three key levers, which are significant value-creators.

The first lever is Portfolio Management, an ongoing process that is strengthening and focusing our portfolio

of businesses. This improves our competitiveness, while making us even more relevant to our customers.

Portfolio Management includes consolidations within 3M as well as divestitures of non-core businesses, and we were active on both fronts in 2016. We also successfully integrated two recent and important acquisitions: Capital Safety and Membrana.

Since 2012 our portfolio work has moved us from six business groups to five, and from 40 businesses to 24, which includes recent actions that combined businesses within two of our business groups. This benefits our customers and our company, as 3M now has greater scale and can better prioritize our resources. In 2017, in fact, we are making a targeted, incremental $100 million investment to accelerate growth in our core platforms.

Investing in Innovation is the second lever. In 2016 we invested $1.7 billion -- or nearly 6 percent of sales -- in research and development, which remains the heartbeat of our enterprise. These investments support both our short- and long-term growth objectives, along with our ability to consistently deliver premium margins and return on invested capital.

In March 2016 we also celebrated the grand opening of 3M's new, $150 million laboratory at our global headquarters in St. Paul. It is home to hundreds of smart and creative scientists and will further strengthen our scientific edge.

Our third lever is Business Transformation, which starts and ends with our customers. In 2016 we continued to make solid progress with the rollout of our ERP system in West Europe, which is nearly complete. Globally, we now have a total of 16 countries live on the new ERP system.

We are already beginning to realize productivity gains from Business Transformation, which will increase in 2017 and beyond. By 2020, we expect it will result in $500?$700 million in annual operational savings and another $500 million reduction in working capital.

Beyond the three key levers, in 2016 we launched an international, multi-year partnership with the Nobel organization. This will further strengthen the 3M brand, while providing a powerful platform to advance our organizations' shared values: scientific research, education and integrity.

*2016 Operating cash flow of $6.7B. For full financial data and non-GAAP reconciliations of free cash flow conversion and return on invested capital, refer to the Financial Condition and Liquidity section of Management's Discussion and Analysis, which is included within this Annual Report.

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Sales (billions)

$29.9 $30.9 $35 $30 $25 $20 $15 $10 $5 $0

2012 2013

$31.8 2014

$30.3 2015

$30.1 2016

Cash dividends paid per share

$4.50

$2.36 $2.54 $3.42 $4.10 $4.44

$4.00

$3.50

$3.00

$2.50

$2.00

$1.50

$1.00

$0.50

$0.00

2012 2013 2014 2015 2016

Earnings per share-diluted

$6.32 $6.72 $7.49 $7.58 $8.16 $10.00

$8.00

$6.00

$4.00

$2.00

$0.00

2012 2013 2014 2015 2016

To attract and retain the best brainpower, we continued to build an even more diverse, inclusive and attractive culture where all our people can succeed -- from expanded leadership development opportunities to our new enhanced parental leave benefits. Last year, in fact, a survey of students and young professionals ranked 3M as the number one "dream company" for millennials, which is a testament to our ongoing actions to make 3M a great place to work.

In 2016 I also laid out our company's new fiveyear financial objectives, covering 2016 through 2020: 8?11 percent growth in earnings per share, 2?5 percent organic local currency sales growth, 20 percent return on invested capital and 100 percent free cash flow conversion. These targets reflect confidence in our ability to deliver efficient growth today and into the future.

As I look upon our 2016 performance, the 3M playbook is working. We are executing well and delivering premium returns, while investing for long-term success.

Going forward, the global environment will continue to change rapidly. Yet as I communicated in a recent message to all 3Mers, with change we have the opportunity to lead, evolve and strengthen our competitive edge. That is why we will continue to make change our best friend, execute our playbook and remain focused on our customers. We will do what we do best: use science to make the world a safer, healthier and better place. That is what our brand promise -- 3M Science. Applied to Life.TM -- is all about.

As always, I thank our shareholders for your confidence, our customers for their partnership and our 3M team for their contributions to our success.

Inge G. Thulin Chairman of the Board, President and Chief Executive Officer February 9, 2017

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Annual Report 2016

2016 Financial Results

Earnings per share

Organic local currency sales growth worldwide

Return on invested capital*

$8.16

+7.7% year over year

-0.1%

year over year

22.6%

Net sales

$30.1B

-0.5% year over year

Operating income margins

24.0%

+1.1 percentage points year over year

Impact of currency on worldwide sales

-1.2%

year over year

Free cash flow conversion*

104%

Impact of acquisitions, net of divestitures, on worldwide sales

+0.8%

year over year

$1.7B Investments in

research and development

Investments in capital expenditures

$1.4B

Organic local currency sales growth by business group and geographic area (year over year)

Industrial

0.0%

Safety and Graphics

+2.2%

Health Care

+3.5%

Electronics and Energy

-7.5%

Consumer

+1.9%

United States

+0.5%

Asia Pacific

-2.8%

Europe, Middle East and Africa

+0.4%

Latin America and Canada

+3.7%

Cash returned to shareholders via dividends and share repurchases

$6.4 Billion

* 2016 Operating cash flow of $6.7B. For full financial data and non-GAAP reconciliations of free cash flow conversion and return on invested capital,

refer to the Financial Condition and Liquidity section of Management's Discussion and Analysis, which is included within this Annual Report.

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