Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R).”  Refer to Note 11 for additional information concerning this standard.

Additional information regarding other accounting pronouncements is included in Note 1.

FINANCIAL CONDITION AND LIQUIDITY

The Company generates significant ongoing cash flow. Net debt increased slightly in 2006, primarily related to increased short-term debt supporting share repurchase activities and acquisitions. The increase in 2005 primarily related to the $1.36 billion CUNO acquisition. 

Cash, cash equivalents and marketable securities at December 31, 2006, were higher compared with December 31, 2005, due to the significant pharmaceuticals sales proceeds received in December 2006. 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 10 in this document).

The Company’s financial condition and liquidity are 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 $1.623 billion at December 31, 2006, compared with $1.877 billion at December 31, 2005. This decrease was primarily related to an increase in debt classified as short-term borrowings and current portion of long-term debt, partially offset by increases in cash and cash equivalents, short-term marketable securities, and inventories.

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 5.4 at December 31, 2006, down from 5.7 at December 31, 2005. Receivables increased $264 million, or 9.3%, compared with December 31, 2005. Currency translation (due to the stronger U.S. dollar) increased accounts receivable by $113 million year-on-year. Inventories increased $439 million, or 20.3%, compared with December 31, 2005. Currency translation increased inventories by $92 million year-on-year. Accounts payable increased $146 million compared with December 31, 2005, with $53 million of this year-on-year increase related to currency translation.

Cash flows from