REG - 3M Company - 1st Quarter Results <Origin Href="QuoteRef">MMM.N</Origin> - Part 2
05/05/2017 07:05
- Part 2: For the preceding part double click ID:nRSE2620Ea
issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for
Partial Sales of Nonfinancial Assets. This ASU addresses scope-related questions that arose after the FASB issued its
revenue guidance in ASU No. 2014-09, Revenue from Contracts with Customers. The new standard clarifies the accounting for
derecognition of nonfinancial assets and defines what is considered an in substance nonfinancial asset. Nonfinancial assets
largely relate to items such as real estate, ships and intellectual property that do not constitute a business. The new ASU
impacts entities derecognizing (e.g. selling) nonfinancial assets (or in substance nonfinancial assets), including partial
interests therein, when the purchaser is not a customer. Under the new guidance, the seller would apply certain recognition
and measurement principles of ASU No. 2014-09, Revenue from Contracts with Customers, even though the purchaser is not a
customer. For 3M, this new standard is effective coincident with the Company's January 1, 2018 adoption of ASU No. 2014-09.
The Company is currently assessing this ASU's impact on 3M's consolidated results of operations and financial condition.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost. This ASU changes how employers that sponsor defined benefit pension and/or other
postretirement benefit plans present the net periodic benefit cost in the income statement. Under the new standard, only
the service cost component of net periodic benefit cost would be included in operating expenses and only the service cost
component would be eligible for capitalization into assets such as inventory. All other net periodic benefit costs
components (such as interest, expected return on plan assets, prior service cost amortization and actuarial gain/loss
amortization) would essentially be reported outside of operating income. For 3M, this ASU is effective January 1, 2018 on a
retrospective basis; however, guidance limiting the capitalization to only the service cost component is applied on
prospective basis. The components of 3M's net periodic defined benefit pension and postretirement benefit costs are
presented in Note 7. These include components totaling a benefit of $32 million and $52 million for the three months ended
March 31, 2017 and 2016, respectively, that would no longer be included within operating expenses and instead would be
reported outside of income from operations under the new standard.
In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amends
the amortization period for certain purchased callable debt securities held at a premium. Under existing standards,
entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The new
guidance shortens the amortization period to the earliest call date for certain callable debt securities that have
explicit, noncontingent call features and are callable at a fixed price and preset date. The amendments do not require an
accounting change for securities held at a discount. For 3M, this ASU is effective January 1, 2019 with a modified
retrospective transition resulting in a cumulative-effect adjustment to retained earnings as of the beginning of the first
reporting period in which the guidance is adopted. Early adoption is permitted. 3M's marketable security portfolio includes
very limited instances of callable debt securities held at a premium. As a result, the Company does not expect this ASU to
have a material impact on 3M's consolidated results of operations and financial condition.
NOTE 2. Acquisitions and Divestitures
Acquisitions:
3M makes acquisitions of certain businesses from time to time that are aligned with its strategic intent with respect to,
among other factors, growth markets and adjacent product lines or technologies.
There were no business combinations that closed during the three months ended March 31, 2017.
In March 2017, 3M (Safety and Graphics Business) announced that it entered into an agreement to acquire Scott Safety, which
is headquartered in Monroe, North Carolina, from Johnson Controls for $2.0 billion, subject to closing and other
adjustments. Scott Safety is a premier manufacturer of innovative products, including self-contained breathing apparatus
systems, gas and flame detection instruments, and other safety devices that complement 3M's personal safety portfolio. The
business had revenues of approximately $570 million in 2016. The transaction is expected to close in the second half of
2017, subject to customary closing conditions, regulatory approvals, and information or consultation requirements with
relevant works councils.
Divestitures:
3M may divest certain businesses from time to time based upon reviews of the Company's portfolio considering, among other
items, factors relative to the extent of strategic and technological alignment and optimization of capital deployment, in
addition to considering if selling the businesses results in the greatest value creation for the Company and for
shareholders.
In January 2017, 3M (Safety and Graphics Business) sold the assets of its safety prescription eyewear business, with annual
sales of approximately $45 million, to HOYA Vision Care. The Company recorded a pre-tax gain of $29 million in the first
quarter of 2017 as a result of this sale (recorded in selling, general and administrative expenses).
In December 2016, 3M (Safety and Graphics Business) agreed to sell its identity management business to Gemalto N.V. for
$850 million, subject to closing and other adjustments. In May 2017, 3M completed the related sale or transfer of control,
as applicable. This business, with 2016 sales of approximately $205 million, is a leading provider in identity management
solutions, including biometric hardware and software that enable identity verification and authentication, as well as
secure materials and document readers. The Company expects a pre-tax gain of approximately $470 million as a result of this
divestiture.
The aggregate operating income of these two businesses was less than $20 million in each of 2016 and 2015. The approximate
amounts of major assets and liabilities associated with disposal groups classified as held-for-sale as of March 31, 2017
and December 31, 2016 included the following:
March 31, December 31,
(Millions) 2017 2016
Accounts receivable $ 25 $ 25
Property, plant and equipment (net) 20 25
Intangible assets 25 35
Deferred revenue (other current liabilities) 30 35
In addition, approximately $250 million and $270 million of goodwill was estimated to be attributable to disposal groups
classified as held-for-sale as of March 31, 2017 and December 31, 2016, respectively, based upon relative fair value. The
amounts above have not been segregated and are classified within the existing corresponding line items on the Company's
consolidated balance sheet.
Refer to Note 2 in 3M's 2016 Annual Report on Form 10-K for more information on 3M's acquisitions and divestitures.
NOTE 3. Goodwill and Intangible Assets
There were no acquisitions that closed during the first three months of 2017. The amounts in the "Translation and other"
column in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balances by
business segment as of December 31, 2016 and March 31, 2017, follow:
Goodwill
December 31, 2016 Acquisition Translation March 31, 2017
(Millions) Balance activity and other Balance
Industrial $ 2,536 $ - $ 41 $ 2,577
Safety and Graphics 3,324 - 20 3,344
Health Care 1,609 - 18 1,627
Electronics and Energy 1,489 - 13 1,502
Consumer 208 - - 208
Total Company $ 9,166 $ - $ 92 $ 9,258
Accounting standards require that goodwill be tested for impairment annually and between annual tests in certain
circumstances such as a change in reporting units or the testing of recoverability of a significant asset group within a
reporting unit. At 3M, reporting units generally correspond to a division.
As described in Note 12, effective in the first quarter of 2017, the Company changed its business segment reporting in its
continuing effort to improve the alignment of its businesses around markets and customers. For any product changes that
resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on goodwill
of the associated reporting units. During the first quarter of 2017, the Company completed its assessment of any potential
goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed.
Acquired Intangible Assets
The carrying amount and accumulated amortization of acquired finite-lived intangible assets, in addition to the balance of
non-amortizable intangible assets, as of March 31, 2017, and December 31, 2016, follow:
March 31, December 31,
(Millions) 2017 2016
Customer related intangible assets $ 1,935 $ 1,939
Patents 604 602
Other technology-based intangible assets 527 524
Definite-lived tradenames 417 420
Other amortizable intangible assets 213 211
Total gross carrying amount $ 3,696 $ 3,696
Accumulated amortization - customer related (824) (797)
Accumulated amortization - patents (506) (497)
Accumulated amortization - other technology based (315) (302)
Accumulated amortization - definite-lived tradenames (239) (236)
Accumulated amortization - other (176) (173)
Total accumulated amortization $ (2,060) $ (2,005)
Total finite-lived intangible assets - net $ 1,636 $ 1,691
Non-amortizable intangible assets (primarily tradenames) 633 629
Total intangible assets - net $ 2,269 $ 2,320
Certain tradenames acquired by 3M are not amortized because they have been in existence for over 55 years, have a history
of leading-market share positions, have been and are intended to be continuously renewed, and the associated products of
which are expected to generate cash flows for 3M for an indefinite period of time.
Amortization expense for acquired intangible assets for the three-month periods ended March 31, 2017 and 2016 follows:
Three months ended
March 31,
(Millions) 2017 2016
Amortization expense $ 64 $ 66
Expected amortization expense for acquired amortizable intangible assets recorded as of March 31, 2017:
Remainder
of After
(Millions) 2017 2018 2019 2020 2021 2022 2022
Amortization expense $ 183 $ 195 $ 186 $ 177 $ 161 $ 146 $ 588
The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from
estimated amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment
of intangible assets, accelerated amortization of intangible assets and other events. 3M expenses the costs incurred to
renew or extend the term of intangible assets.
NOTE 4. Supplemental Equity and Comprehensive Income Information
Consolidated Statement of Changes in Equity
Three months ended March 31, 2017
3M Company Shareholders
Common Accumulated
Stock and Other
Additional Comprehensive Non-
Paid-in Retained Treasury Income controlling
(Millions) Total Capital Earnings Stock (Loss) Interest
Balance at December 31, 2016 $ 10,343 $ 5,070 $ 37,907 $ (25,434) $ (7,245) $ 45
Net income 1,326 1,323 3
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment 292 289 3
Defined benefit pension and post-retirement plans adjustment 83 83 -
Cash flow hedging instruments - unrealized gain (loss) (76) (76) -
Total other comprehensive income (loss), net of tax 299
Dividends declared (702) (702)
Stock-based compensation 128 128
Reacquired stock (678) (678)
Issuances pursuant to stock option and benefit plans 324 (434) 758
Balance at March 31, 2017 $ 11,040 $ 5,198 $ 38,094 $ (25,354) $ (6,949) $ 51
Three months ended March 31, 2016
3M Company Shareholders
Common Accumulated
Stock and Other
Additional Comprehensive Non-
Paid-in Retained Treasury Income controlling
(Millions) Total Capital Earnings Stock (Loss) Interest
Balance at December 31, 2015 $ 11,468 $ 4,800 $ 36,296 $ (23,308) $ (6,359) $ 39
Net income 1,278 1,275 3
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment 138 139 (1)
Defined benefit pension and post-retirement plans adjustment 69 69 -
Cash flow hedging instruments - unrealized gain (loss) (110) (110) -
Total other comprehensive income (loss), net of tax 97
Dividends declared (672) (672)
Stock-based compensation 125 125
Reacquired stock (1,163) (1,163)
Issuances pursuant to stock option and benefit plans 362 (393) 755
Balance at March 31, 2016 $ 11,495 $ 4,925 $ 36,506 $ (23,716) $ (6,261) $ 41
Changes in Accumulated Other Comprehensive Income (Loss) Attributable to 3M by Component
Three months ended March 31, 2017
Total
Defined Benefit Cash Flow Accumulated
Pension and Hedging Other
Cumulative Postretirement Instruments, Comprehensive
Translation Plans Unrealized Income
(Millions) Adjustment Adjustment Gain (Loss) (Loss)
Balance at December 31, 2016, net of tax: $ (2,008) $ (5,328) $ 91 $ (7,245)
Other comprehensive income (loss), before tax:
Amounts before reclassifications 226 - (101) 125
Amounts reclassified out - 119 (18) 101
Total other comprehensive income (loss), before tax 226 119 (119) 226
Tax effect 63 (36) 43 70
Total other comprehensive income (loss), net of tax 289 83 (76) 296
Balance at March 31, 2017, net of tax: $ (1,719) $ (5,245) $ 15 $ (6,949)
Three months ended March 31, 2016
Total
Defined Benefit Cash Flow Accumulated
Pension and Hedging Other
Cumulative Postretirement Instruments, Comprehensive
Translation Plans Unrealized Income
(Millions) Adjustment Adjustment Gain (Loss) (Loss)
Balance at December 31, 2015, net of tax: $ (1,679) $ (4,804) $ 124 $ (6,359)
Other comprehensive income (loss), before tax:
Amounts before reclassifications 60 - (121) (61)
Amounts reclassified out - 103 (52) 51
Total other comprehensive income (loss), before tax 60 103 (173) (10)
Tax effect 79 (34) 63 108
Total other comprehensive income (loss), net of tax 139 69 (110) 98
Balance at March 31, 2016, net of tax: $ (1,540) $ (4,735) $ 14 $ (6,261)
Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries, but
tax effects within cumulative translation does include impacts from items such as net investment hedge transactions.
Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part
of net income.
Reclassifications out of Accumulated Other Comprehensive Income Attributable to 3M
Amount Reclassified from
Details about Accumulated Other Accumulated Other Comprehensive Income
Comprehensive Income Components Three months ended March 31, Location on Income
(Millions) 2017 2016 Statement
Gains (losses) associated with, defined benefit pension and postretirement plans amortization
Transition asset $ - $ - See Note 7
Prior service benefit 22 23 See Note 7
Net actuarial loss (141) (126) See Note 7
Total before tax (119) (103)
Tax effect 36 34 Provision for income taxes
Net of tax $ (83) $ (69)
Cash flow hedging instruments gains (losses)
Foreign currency forward/option contracts $ 18 $ 53 Cost of sales
Interest rate swap contracts - (1) Interest expense
Total before tax 18 52
Tax effect (6) (18) Provision for income taxes
Net of tax $ 12 $ 34
Total reclassifications for the period, net of tax $ (71) $ (35)
NOTE 5. Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With
few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by
tax authorities for years before 2005.
The IRS has completed its field examination of the Company's U.S. federal income tax returns for the years 2005 through
2014. The Company protested certain IRS positions within these tax years and entered into the administrative appeals
process with the IRS. In December 2012, the Company received a statutory notice of deficiency for the 2006 year. The
Company filed a petition in Tax Court in the first quarter of 2013 relating to the 2006 tax year.
Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2015, 2016,
and 2017. It is anticipated that the IRS will complete its examination of the Company for 2015 by the end of the fourth
quarter of 2017, for 2016 by the end of the first quarter of 2018, and for 2017 by the end of the first quarter of 2019. As
of March 31, 2017, the IRS has not proposed any significant adjustments to the Company's tax positions for which the
Company is not adequately reserved.
Payments relating to other proposed assessments arising from the 2005 through 2017 examinations may not be made until a
final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from
the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also audit
activity in several U.S. state and foreign jurisdictions.
3M anticipates changes to the Company's uncertain tax positions due to the closing and resolution of audit issues for
various audit years mentioned above and closure of statutes. Currently, the Company is estimating a decrease in
unrecognized tax benefits during the next 12 months as a result of anticipated resolutions of audit issues. The total
amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of March 31, 2017 and
December 31, 2016 are $348 million and $333 million, respectively.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company
recognized in the consolidated statement of income on a gross basis approximately $3 million of expense and $4 million of
benefit for the three months ended March 31, 2017 and March 31, 2016, respectively. At March 31, 2017 and December 31,
2016, accrued interest and penalties in the consolidated balance sheet on a gross basis were $55 million and $52 million,
respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for which
the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.
Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter
deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing
authority to an earlier period.
The effective tax rate for the first quarter of 2017 was 23.7 percent, compared to 26.8 percent in the first quarter of
2016, a decrease of 3.1 percentage points. Primary factors that decreased the Company's effective tax rate on a combined
basis by 3.6 percentage points for the first three months of 2017 when compared to the same period for 2016 included an
increase in excess tax benefits related to employee share-based payments, international taxes that were impacted by changes
to the geographic mix of income before taxes and prior year cash optimization actions, and other items. This decrease was
partially offset by a 0.5 percentage point year-on-year increase related to remeasurements of 3M's uncertain tax
positions.
The provision for income taxes is determined using the asset and liability approach. Under this approach, deferred income
taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of
assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty
regarding their realizability exits. As of March 31, 2017 and December 31, 2016, the Company had valuation allowances of
$51 million and $47 million on its deferred tax assets, respectively.
NOTE 6. Marketable Securities
The Company invests in asset-backed securities, certificates of deposit/time deposits, commercial paper, and other
securities. The following is a summary of amounts recorded on the Consolidated Balance Sheet for marketable securities
(current and non-current).
March 31, December 31,
(Millions) 2017 2016
Corporate debt securities $ 10 $ 10
Commercial paper 1 14
Certificates of deposit/time deposits 89 197
U.S. municipal securities 3 3
Asset-backed securities:
Automobile loan related 29 31
Credit card related 9 18
Other - 7
Asset-backed securities total 38 56
Current marketable securities $ 141 $ 280
U.S. municipal securities $ 17 $ 17
Non-current marketable securities $ 17 $ 17
Total marketable securities $ 158 $ 297
Classification of marketable securities as current or non-current is based on the nature of the securities and availability
for use in current operations. At March 31, 2017 and December 31, 2016, gross unrealized gains and/or losses (pre-tax) were
not material. The gross amounts of the realized gains or losses were not material. Cost of securities sold use the first
in, first out (FIFO) method. Since these marketable securities are classified as available-for-sale securities, changes in
fair value will flow through other comprehensive income, with amounts reclassified out of other comprehensive income into
earnings upon sale or "other-than-temporary" impairment.
3M reviews impairments associated with its marketable securities in accordance with the measurement guidance provided by
ASC 320, Investments-Debt and Equity Securities, when determining the classification of the impairment as "temporary" or
"other-than-temporary". A temporary impairment charge results in an unrealized loss being recorded in the other
comprehensive income component of shareholders' equity. Such an unrealized loss does not reduce net income attributable to
3M for the applicable accounting period because the loss is not viewed as other-than-temporary. The factors evaluated to
differentiate between temporary and other-than-temporary include the projected future cash flows, credit ratings actions,
and assessment of the credit quality of the underlying collateral, as well as other factors.
The balances at March 31, 2017 for marketable securities by contractual maturity are shown below. Actual maturities may
differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without
prepayment penalties.
(Millions) March 31, 2017
Due in one year or less $ 95
Due after one year through five years 59
Due after five years through ten years 4
Total marketable securities $ 158
3M has a diversified marketable securities portfolio. Within this portfolio, asset-backed securities primarily include
interests in automobile loans, credit cards and other asset-backed securities. 3M's investment policy allows investments in
asset-backed securities with minimum credit ratings of Aa2 by Moody's Investors Service or AA by Standard & Poor's or Fitch
Ratings or DBRS. Asset-backed securities must be rated by at least two of the aforementioned rating agencies, one of which
must be Moody's Investors Service or Standard & Poor's. At March 31, 2017, all asset-backed security investments were in
compliance with this policy. Approximately 77.4 percent of all asset-backed security investments were rated AAA or A-1+ by
Standard & Poor's and/or Aaa or P-1 by Moody's Investors Service and/or AAA or F1+ by Fitch Ratings. Interest rate risk and
credit risk related to the underlying collateral may impact the value of investments in asset-backed securities, while
factors such as general conditions in the overall credit market and the nature of the underlying collateral may affect the
liquidity of investments in asset-backed securities. 3M does not currently expect risk related to its holding in
asset-backed securities to materially impact its financial condition or liquidity.
NOTE 7. Pension and Postretirement Benefit Plans
Net periodic benefit cost is recorded in cost of sales, selling, general and administrative expenses, and research,
development and related expenses. Components of net periodic benefit cost and other supplemental information for the three
months ended March 31, 2017 and 2016 follow:
Benefit Plan Information
Three months ended March 31,
Qualified and Non-qualified
Pension Benefits Postretirement
United States International Benefits
(Millions) 2017 2016 2017 2016 2017 2016
Net periodic benefit cost (benefit)
Service cost $ 67 $ 65 $ 33 $ 33 $ 13 $ 13
Interest cost 142 143 37 43 19 20
Expected return on plan assets (259) (260) (69) (78) (21) (23)
Amortization of transition (asset) obligation - - - - - -
Amortization of prior service cost (benefit) (6) (6) (3) (3) (13) (14)
Amortization of net actuarial (gain) loss 97 88 30 22 14 16
Settlements, curtailments, special termination benefits and other - - - - - -
Net periodic benefit cost (benefit) after settlements, curtailments, special termination benefits and other $ 41 $ 30 $ 28 $ 17 $ 12 $ 12
For the three months ended March 31, 2017, contributions totaling $247 million were made to the Company's U.S. and
international pension plans and $1 million to its postretirement plans. For total year 2017, the Company expects to
contribute approximately $300 million to $500 million of cash to its global defined benefit pension and postretirement
plans. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2017. Future
contributions will depend on market conditions, interest rates and other factors. 3M's annual measurement date for pension
and postretirement assets and liabilities is December 31 each year, which is also the date used for the related annual
measurement assumptions.
3M was informed during the first quarter of 2009, that the general partners of WG Trading Company, in which 3M's benefit
plans hold limited partnership interests, are the subject of a criminal investigation as well as civil proceedings by the
SEC and CFTC (Commodity Futures Trading Commission). In March 2011, over the objections of 3M and six other limited
partners of WG Trading Company, the district court judge ruled in favor of the court appointed receiver's proposed
distribution plan (and in April 2013, the United States Court of Appeals for the Second Circuit affirmed the district
court's ruling). The benefit plan trustee holdings of WG Trading Company interests were adjusted to reflect the decreased
estimated fair market value, inclusive of estimated insurance proceeds, as of the annual measurement dates. The Company has
insurance that it believes, based on what is currently known, will result in the probable recovery of a portion of the
decrease in original asset value. In the first quarter of 2014, 3M and certain 3M benefit plans filed a lawsuit in the U.S.
District Court for the District of Minnesota against five insurers seeking insurance coverage for the WG Trading Company
claim. In September 2015, the court ruled in favor of the defendant insurance companies on a motion for summary judgment
and dismissed the lawsuit. In October 2015, 3M and the 3M benefit plans filed a notice of appeal to the United States Court
of Appeals for the Eighth Circuit. As of the 2016 measurement date, these holdings represented less than one half of one
percent of 3M's fair value of total plan assets. 3M currently believes that the resolution of these events will not have a
material adverse effect on the consolidated financial position of the Company.
As part of a diversified investment strategy, the U.S. pension and postretirement benefit plans made investments in the
natural gas fired power generation industry during the period 2011 through 2013. In April 2017, one of these entities,
Panda Temple Power, LLC, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of
Delaware. This investment represented less than one percent of the fair value of the U.S. pension and postretirement plans'
assets as of their 2016 measurement date.
NOTE 8. Derivatives
The Company uses interest rate swaps, currency swaps, commodity price swaps, and forward and option contracts to manage
risks generally associated with foreign exchange rate, interest rate and commodity price fluctuations. The information that
follows explains the various types of derivatives and financial instruments used by 3M, how and why 3M uses such
instruments, how such instruments are accounted for, and how such instruments impact 3M's financial position and
performance.
Additional information with respect to the impacts on other comprehensive income of nonderivative hedging and derivative
instruments is included in Note 4. Additional information with respect to the fair value of derivative instruments is
included in Note 9. References to information regarding derivatives and/or hedging instruments associated with the
Company's long-term debt are also made in Note 10 in 3M's 2016 Annual Report on Form 10-K.
Types of Derivatives/Hedging Instruments and Inclusion in Income/Other Comprehensive Income
Cash Flow Hedges:
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss
on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same
period during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge
ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
Cash Flow Hedging - Foreign Currency Forward and Option Contracts: The Company enters into foreign exchange forward and
option contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies.
These transactions are designated as cash flow hedges. The settlement or extension of these derivatives will result in
reclassifications (from accumulated other comprehensive income) to earnings in the period during which the hedged
transactions affect earnings. 3M may dedesignate these cash flow hedge relationships in advance of the occurrence of the
forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other
comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted
transaction occurs. Changes in the value of derivative instruments after dedesignation are recorded in earnings and are
included in the Derivatives Not Designated as Hedging Instruments section below. The maximum length of time over which 3M
hedges its exposure to the variability in future cash flows of the forecasted transactions is 36 months.
Cash Flow Hedging - Interest Rate Contracts: The Company may use forward starting interest rate contracts to hedge exposure
to variability in cash flows from interest payments on forecasted debt issuances. The amortization of gains and losses on
forward starting interest rate swaps is included in the tables below as part of the gain/(loss) recognized in income on the
effective portion of derivatives as a result of reclassification from accumulated other comprehensive income. Additional
information regarding previously issued and terminated interest rate contracts can be found in Note 12 in 3M's 2016 Annual
Report on Form 10-K.
In the first six months of 2016, the Company entered into a forward starting interest rate swaps that expired in December
2016 with an aggregate notional amount of $300 million as a hedge against interest rate volatility associated with a
forecasted issuance of fixed rate debt. Upon issuance of medium-term notes in September 2016, 3M terminated these interest
rate swaps. The termination resulted in an immaterial loss within accumulated other comprehensive income that will be
amortized over the respective lives of the debt.
In the fourth quarter of 2016, the Company entered into forward starting interest rate swaps with a notional amount of $200
million as a hedge against interest rate volatility associated with a forecasted issuance of fixed rate debt. In the first
quarter of 2017, the Company entered into forward starting interest rate swaps with a notional amount of $200 million as a
hedge against interest rate volatility associated with a forecasted issuance of fixed rate debt.
The amortization of gains and losses on forward starting interest rate swaps is included in the tables below as part of the
gain/(loss) recognized in income on the effective portion of derivatives as a result of reclassification from accumulated
other comprehensive income.
As of March 31, 2017, the Company had a balance of $15 million associated with the after-tax net unrealized gain associated
with cash flow hedging instruments recorded in accumulated other comprehensive income. This includes a remaining balance of
$5 million (after tax loss) related to the forward starting interest rate swaps, which will be amortized over the
respective lives of the debt. Based on exchange rates as of March 31, 2017, 3M expects to reclassify approximately $13
million of the after-tax net unrealized foreign exchange cash flow hedging gains to earnings over the remainder of 2017,
approximately $2 million of the after-tax net unrealized foreign exchange cash flow hedging gains to earnings in 2018, and
an immaterial amount of after-tax net unrealized foreign exchange cash flow hedging losses to earnings after 2018 (with the
impact offset by earnings/losses from underlying hedged items). 3M expects to reclassify approximately $9 million of the
after-tax net unrealized foreign exchange cash flow hedging gains to earnings over the next 12 months.
The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to
derivative instruments designated as cash flow hedges are provided in the following table.
Pretax Gain (Loss) Recognized in
Pretax Gain (Loss) Income on Effective Portion of Ineffective Portion of Gain
Recognized in Other Derivative as a Result of (Loss) on Derivative and
Comprehensive Reclassification from Amount Excluded from
Income on Effective Accumulated Other Effectiveness Testing
Three months ended March 31, 2017 Portion of Derivative Comprehensive Income Recognized in Income
(Millions) Amount Location Amount Location Amount
Foreign currency forward/option contracts $ (100) Cost of sales $ 18 Cost of sales $ -
Interest rate swap contracts (1) Interest expense - Interest expense -
Total $ (101) $ 18 $ -
Three months ended March 31, 2016
(Millions) Amount Location Amount Location Amount
Foreign currency forward/option contracts $ (120) Cost of sales $ 53 Cost of sales $ -
Interest rate swap contracts (1) Interest expense (1) Interest expense -
Total $ (121) $ 52 $ -
Fair Value Hedges:
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivatives as
well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.
Fair Value Hedging - Interest Rate Swaps: The Company manages interest expense using a mix of fixed and floating rate debt.
To help manage borrowing costs, the Company may enter into interest rate swaps. Under these arrangements, the Company
agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by
reference to an agreed-upon notional principal amount. The mark-to-market of these fair value hedges is recorded as gains
or losses in interest expense and is offset by the gain or loss of the underlying debt instrument, which also is recorded
in interest expense. These fair value hedges are highly effective and, thus, there is no impact on earnings
- More to follow, for following part double click ID:nRSE2620EcRecent news on 3M Co
See all newsREG - Stock Exch Notice - Admission to ISM - 30/11/2023
AnnouncementRCS - 3M Company - StageZero Announces COC Protocol in Europe
AnnouncementREG - Official List - Removal: 3M Company
AnnouncementREG - Stock Exch Notice - Cancellation - 3M Company
AnnouncementREG - 3M Company - 3rd Quarter Results
Announcement