3M Confidential

Cash Flow & Long Term Financial Metrics

Nicholas Salmanowicz & Veronica Wittek, 3M

Agenda

Why cash flow is important

Statement of Cash Flows

Free Cash Flow (FCF) and FCF Conversion

Long Term Financial Metrics

Definition: Cash Flow

A revenue or expense stream that changes a cash account over a given period. Cash inflows usually arise from one of three activities - financing, operations or investing - although this also occurs as a result of donations or gifts in the case of personal finance. Cash outflows result from expenses or investments.

Why cash flow is important

Managing cash flows helps ensure long-term viability

Ensures liquidity exists when times get tough Allows for the freedom to make investment decisions

that will benefit the company

Companies can show increases in earnings not related to cash

“All we care about is how much cash a business is likely to produce between now and judgment day”

-Warren Buffet

Income Statement Versus Cash Flow

Differences can include: Cash received for

sales vs. AR balance

Expenses paid vs. AP balance

Accruals Depreciation

Revenue 1,000

Expenses 750

Operating Income 250

September Income Statement

Revenue 800

Actual Cash Expenses 375

Operating Income 425

September Cash Impact

Market Comments – Cash Management is Valued “We expect cash generation to be a key driver of …

performance among the best-in-class industrials.” Goldman Sachs

The flight to quality mindset that caused banks’ flight to cash has also translated into the equity world as a demand increases for companies with proven cash flows Credit Suisse

… companies with strong balance sheets, free cash flow, and trustworthy management will do much better in this market. Integrity as a whole will be a commodity in the coming years as distrust in the system permeates. Market Watch

“Four of the top five fund managers list strong cash flows and clean balance sheets among the most important stock investment criteria” Fortune

Cash Remains KingCash Remains King

Why cash flow is important

Agenda

Why cash flow is important

Statement of Cash Flows

Free Cash Flow (FCF) and FCF Conversion

Long Term Financial Metrics

Statement of Cash Flows

Three Sections

1. Operating activities

2. Investing activities

3. Financing activities

Purpose – Cash in, Cash out

Operating Activities

Two methods of reporting Operating Section

1. Direct• Shows actual cash disbursements and receipts• Only used by 3% of companies

2. Indirect• Net Income is adjusted for cash and non-cash

transactions (Accruals, Deferrals, Depreciation/Amortization)

• Most common approach among larger businesses

Operating Activities

Cash generated by normal business operations Changes in inventory, accounts payable,

accounts receivable balances Impact of depreciation Impact of prepaid or deferred expenses

Category Balance Sheet Change Cash Flow Impact

Asset

Asset

Liability

Liability

Operating Activities

Asset/Liability change referenceCash from operations

Investing Cash Flows: Purchases and sales of fixed assets

and software Cash activity from selling or acquiring

business Cash used or received from the sale or

purchase of investments or marketable securities

Financing Cash Flows: Cash activity from borrowing or

retiring debt

Investing & Financing Activities

Company ABCConsolidated Statement of Cash Flows

2011 2012 ChangeCash Flows from Operating ActivitiesIncrease/(Decrease) in Net Assets (1,920) 345 2,265

Adjustements to reconcile change in Net AssetsDepreciation 86 77 (9) (Increase)/Decrease in contracts and grant receivables 1,194 (1,901) (3,095) (Increase)/Decrease in prepaid expenses (5) 0 6 (Increase)/Decrease in deferred assets 35 - (35) Increase/(Decrease) in account payable and accrued expenses 92 2,079 1,987 Net Cash flows provided by Operating Activities (518) 599 1,118

Cash Flows from Investing ActivitiesFixed Asset purchases (14) (3) 11 Net Cash flows provided/(used) by investing activities (14) (3) 11

Cash flows from financing activitiesNet cash flows provided/(used) by financing activities (751) (321) 430

Net Change in cash and equivalentsNet Increase/(Decrease) in cash (1,283) 596 1,880 Cash and equivalents, beginning of fiscal year 2,148 1,530 (618)

Cash and equivalents, end of fiscal year 865 2,126 1,261

Agenda

Why cash flow is important

Statement of Cash Flows

Free Cash Flow (FCF) and FCF Conversion

Long Term Financial Metrics

Free Cash Flow

• Cash From Operations Is Not EnoughFails to account for the cash a company must spend to replace its capital investments as they depreciate

• Free Cash Flow is the remaining funds after paying out all operating expenses and replenishing factories/equipment/etc. as they wear out

Strong Free Cash Flow Provides Opportunities

Strong Free Cash Flow: Essential to Strategy & Future Opportunities

Free Cash Flow

Retirement Benefits

Additional Contributions

Net Debt & InvestmentsSpecial Projects

Maintenance

Free Cash Flow

Ways to improve cash flow Improve Operating Income

• Create efficiencies/ eliminate Low Value added tasks• Ensure over the long term Revenues grow at a faster

rate than costs. (Effective Cost control).

Reduce Operating Capital Costs• Use equipment and machinery more effectively• Eliminate unnecessary assets

Reduce working capital• Reduce inventories where appropriate while still

meeting customer needs• Reduce customer terms where appropriate to

accelerate receivables• Negotiate longer payable terms where appropriate

Key Takeaways

Agenda

Why cash flow is important

Statement of Cash Flows

Free Cash Flow (FCF) and FCF Conversion

Long Term Financial Metrics

Long Term Financial Metrics

Every company, for profit and not for profit, has a mission, vision and overall strategies

How do you measure your success on these strategies?

Financial metrics and tools help you determine whether or not you are reaching your goals and strategies

Long Term Financial Metrics are tools to help you assess the status of your overall strategies

This can be done on a quarterly basis or annual basis

Comparing to other companies in your industry

Long Term Financial Metrics: Examples Tracking Event Increases/Revenue Growth ROI/ROA Expenses to Revenue – should be ~1x or less Asset Use

AR Turns: Sales/AR Days Sales Receivable: 365/Receivable Turnover

Short Term Current Ratio: (Current Assets/Current Liab)

Long Term Cash Coverage: (EBIT + Depreciation)/Interest

# of months cash on hand Surplus/Deficit as a % expenses

Thank you!