REG - 3M Company - 3rd Quarter Results <Origin Href="QuoteRef">MMM.N</Origin> - Part 3
02/11/2016 07:07
- Part 3: For the preceding part double click ID:nRSB0531Ob
years 2015 and 2016.
It is anticipated that the IRS will complete its examination of the Company for 2015 by the end of the first quarter of
2017 and for 2016 by the end of the first quarter of 2018. As of September 30, 2016, 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 2016 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. The Company is not currently able to reasonably estimate the
amount by which the liability for unrecognized tax benefits will increase or decrease during the next 12 months as a result
of the ongoing income tax authority examinations. The total amounts of unrecognized tax benefits that, if recognized, would
affect the effective tax rate as of September 30, 2016 and December 31, 2015 are $356 million and $369 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 $11 million and $5 million of expense for
the three months ended September 30, 2016 and September 30, 2015, respectively, and approximately $8 million and $3 million
of expense for the nine months ended September 30, 2016 and September 30, 2015, respectively. At September 30, 2016 and
December 31, 2015, accrued interest and penalties in the consolidated balance sheet on a gross basis were $50 million and
$45 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 third quarter of 2016 was 28.5 percent, compared to 29.6 percent in the third quarter of
2015, a decrease of 1.1 percentage points. Primary factors that decreased the Company's effective tax rate on a combined
basis by 6.3 percentage points year-on-year included remeasurements of 3M's uncertain tax positions, the recognition of
excess tax benefits beginning in 2016 related to employee share-based payments (resulting from the adoption of ASU No.
2016-09, as discussed in Note 1), the reinstatement of the R&D tax credit, and other items. This decrease was partially
offset by a 5.2 percentage points year-on-year increase to the Company's effective tax rate. Primary factors that increased
the effective tax rate included international taxes that were impacted by changes to both the geographic mix of income
before taxes and additional tax expense related to global cash optimization actions, and the 2015 restoration of tax basis
on certain assets for which depreciation deductions were previously limited.
The effective tax rate for the first nine months of 2016 was 28.3 percent, compared to 29.1 percent in the first nine
months of 2015, a decrease of 0.8 percentage points. Primary factors that decreased the Company's effective tax rate on a
combined basis by 4.0 percentage points for the first nine months of 2016 when compared to the same period for 2015
included the recognition of excess tax benefits beginning in 2016 related to employee share-based payments (resulting from
the adoption of ASU No. 2016-09, as discussed in Note 1), remeasurements of 3M's uncertain tax positions, the reinstatement
of the R&D tax credit, and other items. This decrease was partially offset by a 3.2 percentage point year-on-year increase,
which included international taxes that were impacted by changes to both the geographic mix of income before taxes and
additional tax expense related to global cash optimization actions, and the 2015 restoration of tax basis on certain assets
for which depreciation deductions were previously limited.
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 September 30, 2016 and December 31, 2015, the Company had valuation allowances
of $39 million and $31 million on its deferred tax assets, respectively.
NOTE 7. 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).
September 30, December 31,
(Millions) 2016 2015
Corporate debt securities $ 10 $ 10
Foreign government agency securities - 10
Commercial paper 53 12
Certificates of deposit/time deposits 233 26
U.S. municipal securities 4 3
Asset-backed securities:
Automobile loan related 32 26
Credit card related 19 10
Other 7 21
Asset-backed securities total 58 57
Current marketable securities $ 358 $ 118
U.S. municipal securities $ 14 $ 9
Non-current marketable securities $ 14 $ 9
Total marketable securities $ 372 $ 127
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 September 30, 2016 and December 31, 2015, gross unrealized gains and/or losses (pre-tax)
were not material. Refer to Note 5 for a table that provides the net realized gains (losses) related to sales or
impairments of debt and equity securities, which includes marketable securities. 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 September 30, 2016 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) September 30, 2016
Due in one year or less $ 290
Due after one year through five years 82
Total marketable securities $ 372
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 September 30, 2016, all asset-backed security investments were
in compliance with this policy. Approximately 76.9 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 8. Long-Term Debt and Short-Term Borrowings
In May 2016, 3M issued 500 million Euro aggregate principal amount of 5.75-year fixed rate medium-term notes due February
2022 with a coupon rate of 0.375% and 500 million Euro aggregate principal amount of 15-year fixed rate medium-term notes
due 2031 with a coupon rate of 1.50%.
In September 2016, 3M issued $600 million aggregate principal amount of five-year fixed rate medium-term notes due 2021
with a coupon rate of 1.625%, $650 million aggregate principal amount of 10-year fixed rate medium-term notes due 2026 with
a coupon rate of 2.250%, and $500 million aggregate principal amount of 30-year fixed rate medium-term notes due 2046 with
a coupon rate of 3.125%. In addition, 3M repaid $1 billion aggregate principal amount of medium-term notes that matured in
September 2016.
In March 2016, 3M amended and restated its existing $2.25 billion five-year revolving credit facility expiring in August
2019 to a $3.75 billion five-year revolving credit facility expiring in March 2021. This credit agreement includes a
provision under which 3M may request an increase of up to $1.25 billion (at lender's discretion), bringing the total
facility up to $5.0 billion. This revolving credit facility is undrawn at September 30, 2016. Under the $3.75 billion
credit agreement, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at
not less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the
four consecutive quarters then ended to a total interest expense on all funded debt for the same period. At September 30,
2016, this ratio was approximately 48 to 1. Debt covenants do not restrict the payment of dividends.
NOTE 9. 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
and nine months ended September 30, 2016 and 2015 follow:
Benefit Plan Information
Three months ended September 30,
Qualified and Non-qualified
Pension Benefits Postretirement
United States International Benefits
(Millions) 2016 2015 2016 2015 2016 2015
Net periodic benefit cost (benefit)
Service cost $ 64 $ 73 $ 35 $ 36 $ 13 $ 19
Interest cost 144 163 45 49 20 25
Expected return on plan assets (261) (267) (78) (74) (23) (23)
Amortization of transition (asset) obligation - - - - - -
Amortization of prior service cost (benefit) (6) (6) (3) (3) (13) (10)
Amortization of net actuarial (gain) loss 89 101 21 34 15 18
Settlements, curtailments, special termination benefits and other - - - - - -
Net periodic benefit cost (benefit) after settlements, curtailments, special termination benefits and other $ 30 $ 64 $ 20 $ 42 $ 12 $ 29
Nine months ended September 30,
Qualified and Non-qualified
Pension Benefits Postretirement
United States International Benefits
(Millions) 2016 2015 2016 2015 2016 2015
Net periodic benefit cost (benefit)
Service cost $ 194 $ 219 $ 102 $ 118 $ 40 $ 62
Interest cost 431 491 131 159 59 75
Expected return on plan assets (782) (801) (234) (236) (68) (68)
Amortization of transition (asset) obligation - - (1) (1) - -
Amortization of prior service cost (benefit) (18) (18) (10) (10) (41) (26)
Amortization of net actuarial (gain) loss 265 305 66 110 46 56
Settlements, curtailments, special termination benefits and other - - - (17) - -
Net periodic benefit cost (benefit) after settlements, curtailments, special termination benefits and other $ 90 $ 196 $ 54 $ 123 $ 36 $ 99
For the nine months ended September 30, 2016, contributions totaling $320 million were made to the Company's U.S. and
international pension plans and $3 million to its postretirement plans. For total year 2016, the Company expects to
contribute approximately $400 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 2016. 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.
Beginning in 2016, 3M changed the method used to estimate the service and interest cost components of the net periodic
pension and other postretirement benefit costs. The new method measures service cost and interest cost separately using the
spot yield curve approach applied to each corresponding obligation. Service costs are determined based on duration-specific
spot rates applied to the service cost cash flows. The interest cost calculation is determined by applying
duration-specific spot rates to the year-by-year projected benefit payments. The spot yield curve approach does not affect
the measurement of the total benefit obligations as the change in service and interest costs offset in the actuarial gains
and losses recorded in other comprehensive income. The Company changed to the new method to provide a more precise measure
of service and interest costs by improving the correlation between the projected benefit cash flows and the discrete spot
yield curve rates. The Company accounted for this change as a change in estimate prospectively beginning in the first
quarter of 2016. As a result of the change to the spot yield curve approach, 2016 annual defined benefit pension and
postretirement net periodic benefit cost has decreased approximately $180 million.
Using this methodology, the Company determined discount rates for its plans as follows:
U.S. Qualified Pension International Pension (weighted average) U.S. Postretirement Medical
December 31, 2015 Liability:
Benefit obligation 4.47 % 3.12 % 4.32 %
2016 Net Periodic Benefit Cost Components:
Service cost 4.72 % 2.84 % 4.60 %
Interest cost 3.77 % 2.72 % 3.44 %
The Company also sponsors employee savings plans under Section 401(k) of the Internal Revenue Code, as discussed in Note 11
in 3M's Current Report on Form 8-K dated May 17, 2016 (which updated 3M's 2015 Annual Report on Form 10-K). Beginning on
January 1, 2016, for U.S. employees, the Company reduced its match on employee 401(k) contributions. For eligible employees
hired prior to January 1, 2009, employee 401(k) contributions of up to 5% of eligible compensation are matched in cash at
rates of 45% or 60%, depending on the plan in which the employee participates. Employees hired on or after January 1, 2009,
receive a cash match of 100% for employee 401(k) contributions of up to 5% of eligible compensation and also continue to
receive an employer retirement income account cash contribution of 3% of the participant's total eligible compensation.
In August 2015, 3M modified the 3M Retiree Welfare Benefit Plan postretirement medical benefit reducing the future benefit
for participants not retired as of January 1, 2016. Current retirees and employees who retired on or before January 1,
2016, were not impacted by these changes. The Retiree Medical Savings Account (RMSA) is no longer credited with interest,
and the indexation on both the RMSA and the Medicare Health Reimbursement Arrangement was reduced from 3 percent to 1.5
percent per year (for those employees who are eligible for these accounts). Also effective January 1, 2016, 3M no longer
offered 3M Retiree Health Care Accounts to new hires. Due to these changes the plan was re-measured in the third quarter of
2015, resulting in a decrease to the projected benefit obligation liability of approximately $233 million, and a related
increase to shareholders' equity, specifically accumulated other comprehensive income.
In March 2015, 3M Japan modified the Japan Limited Defined Benefit Corporate Pension Plan (DBCPP). Beginning July 1, 2015,
eligible employees receive a company provided contribution match of 6.12% of their eligible salary to their defined
contribution plan. Employees no longer earn additional service towards their defined benefit pension plans after July 1,
2015, except for eligible salaries above the statutory defined contribution limits. As a result of this plan modification,
the Company re-measured the DBCPP, which resulted in a $17 million pre-tax curtailment gain for the nine months ended
September 30, 2015.
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 2015 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.
NOTE 10. 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 5. Additional information with respect to the fair value of derivative instruments is
included in Note 11. 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 Current Report on Form 8-K dated May 17, 2016 (which updated 3M's
2015 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. Beginning in the second quarter of 2014,
3M began extending the maximum length of time over which it hedges its exposure to the variability in future cash flows of
the forecasted transactions from a previous term of 12 months to a longer term of 24 months, with certain currencies being
extended further to 36 months starting in the first quarter of 2015.
Cash Flow Hedging - Commodity Price Management: The Company manages commodity price risks through negotiated supply
contracts, price protection agreements and forward contracts. 3M discontinued the use of commodity price swaps as cash flow
hedges of forecasted commodity transactions in the first quarter of 2015. The Company used commodity price swaps as cash
flow hedges of forecasted commodity transactions to manage price volatility. The related mark-to-market gain or loss on
qualifying hedges was included in other comprehensive income to the extent effective, and reclassified into cost of sales
in the period during which the hedged transaction affected earnings.
Cash Flow Hedging - Interest Rate Contracts: The Company may use forward starting interest rate contracts to hedge exposure
to variability in cash flows from 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 Current Report on Form
8-K dated May 17, 2016 (which updated 3M's 2015 Annual Report on Form 10-K).
In the first nine months of 2016, the Company entered into forward starting interest rate swaps expiring 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.
As of September 30, 2016, the Company had a balance of $58 million associated with the after-tax net unrealized loss
associated with cash flow hedging instruments recorded in accumulated other comprehensive income. This includes a remaining
balance of $6 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 September 30, 2016, 3M expects to reclassify approximately
$1 million of the after-tax net unrealized foreign exchange cash flow hedging gains to earnings over the remainder of 2016,
approximately $29 million of the after-tax net unrealized foreign exchange cash flow hedging losses to earnings in 2017,
and approximately $30 million of the after-tax net unrealized foreign exchange cash flow hedging losses to earnings after
2017 (with the impact offset by earnings/losses from underlying hedged items). 3M expects to reclassify approximately $21
million of the after-tax net unrealized foreign exchange cash flow hedging losses 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.
Three months ended September 30, 2016
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
Derivatives in Cash Flow Hedging Relationships Portion of Derivative Comprehensive Income Recognized in Income
(Millions) Amount Location Amount Location Amount
Foreign currency forward/option contracts $ (47) Cost of sales $ 24 Cost of sales $ -
Interest rate swap contracts 3 Interest expense - Interest expense -
Total $ (44) $ 24 $ -
Nine months ended September 30, 2016
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
Derivatives in Cash Flow Hedging Relationships Portion of Derivative Comprehensive Income Recognized in Income
(Millions) Amount Location Amount Location Amount
Foreign currency forward/option contracts $ (178) Cost of sales $ 105 Cost of sales $ -
Interest rate swap contracts (2) Interest expense (1) Interest expense -
Total $ (180) $ 104 $ -
Three months ended September 30, 2015
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
Derivatives in Cash Flow Hedging Relationships Portion of Derivative Comprehensive Income Recognized in Income
(Millions) Amount Location Amount Location Amount
Foreign currency forward/option contracts $ 57 Cost of sales $ 55 Cost of sales $ -
Interest rate swap contracts - Interest expense - Interest expense -
Total $ 57 $ 55 $ -
Nine months ended September 30, 2015
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
Derivatives in Cash Flow Hedging Relationships Portion of Derivative Comprehensive Income Recognized in Income
(Millions) Amount Location Amount Location Amount
Foreign currency forward/option contracts $ 177 Cost of sales $ 120 Cost of sales $ -
Commodity price swap contracts - Cost of sales (2) Cost of sales -
Interest rate swap contracts - Interest expense (2) Interest expense -
Total $ 177 $ 116 $ -
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 due to hedge
ineffectiveness. Additional information regarding designated interest rate swaps can be found in Note 12 in 3M's Current
Report on Form 8-K dated May 17, 2016 (which updated 3M's 2015 Annual Report on Form 10-K).
The location in the consolidated statements of income and amounts of gains and losses related to derivative instruments
designated as fair value hedges and similar information relative to the hedged items are as follows:
Three months ended September 30, 2016
Gain (Loss) on Derivative Gain (Loss) on Hedged Item
Derivatives in Fair Value Hedging Relationships Recognized in Income Recognized in Income
(Millions) Location Amount Location Amount
Interest rate swap contracts Interest expense $ (10) Interest expense $ 10
Total $ (10) $ 10
Nine months ended September 30, 2016
Gain (Loss) on Derivative Gain (Loss) on Hedged Item
Derivatives in Fair Value Hedging Relationships Recognized in Income Recognized in Income
(Millions) Location Amount Location Amount
Interest rate swap contracts Interest expense $ 24 Interest expense $ (24)
Total $ 24 $ (24)
Three months ended September 30, 2015
Gain (Loss) on Derivative Gain (Loss) on Hedged Item
Derivatives in Fair Value Hedging Relationships Recognized in Income Recognized in Income
(Millions) Location Amount Location Amount
Interest rate swap contracts Interest expense $ 20 Interest expense $ (20)
Total $ 20 $ (20)
Nine months ended September 30, 2015
Gain (Loss) on Derivative Gain (Loss) on Hedged Item
Derivatives in Fair Value Hedging Relationships Recognized in Income Recognized in Income
(Millions) Location Amount Location Amount
Interest rate swap contracts Interest expense $ 15 Interest expense $ (15)
Total $ 15 $ (15)
Net Investment Hedges:
The Company may use non-derivative (foreign currency denominated debt) and derivative (foreign exchange forward contracts)
instruments to hedge portions of the Company's investment in foreign subsidiaries and manage foreign exchange risk. For
instruments that are designated and qualify as hedges of net investments in foreign operations and that meet the
effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in
cumulative translation within other comprehensive income. The remainder of the change in value of such instruments is
recorded in earnings. Recognition in earnings of amounts previously recorded in cumulative translation is limited to
circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation.
To the extent foreign currency denominated debt is not designated in or is dedesignated from a net investment hedge
relationship, changes in value of that portion of foreign currency denominated debt due to exchange rate changes are
recorded in earnings through their maturity date.
3M's use of foreign exchange forward contracts designated in hedges of the Company's net investment in foreign subsidiaries
can vary by time period depending on when foreign currency denominated debt balances designated in such relationships are
dedesignated, matured, or are newly issued and designated. Additionally, variation can occur in connection with the extent
of the Company's desired foreign exchange risk coverage.
At September 30, 2016, the total notional amount of foreign exchange forward contracts designated in net investment hedges
was approximately 150 million Euros and approximately 248 billion South Korean Won, along with a principal amount of
long-term debt instruments designated in net investment hedges totaling 4.4 billion Euros. The maturity dates of these
derivative and nonderivative instruments designated in net investment hedges range from 2016 to 2031.
The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to
derivative and nonderivative instruments designated as net investment hedges are as follows. There were no
reclassifications of the effective portion of net investment hedges out of accumulated other comprehensive income into
income for the periods presented in the table below.
Three months ended September 30, 2016
Pretax Gain (Loss)
Recognized as
Cumulative Translation
within Other Ineffective Portion of Gain (Loss) on
Comprehensive Income Instrument and Amount Excluded
Derivative and Nonderivative Instruments in Net Investment Hedging on Effective Portion of from Effectiveness Testing
Relationships Instrument Recognized in Income
(Millions) Amount Location Amount
Foreign currency denominated debt $ (55) N/A $ -
Foreign currency forward contracts (14) Cost of sales -
Total $ (69) $ -
Nine months ended September 30, 2016
Pretax Gain (Loss)
Recognized as
Cumulative Translation
within Other Ineffective Portion of Gain (Loss) on
Comprehensive Income Instrument and Amount Excluded
Derivative and Nonderivative Instruments in Net Investment Hedging on Effective Portion of from Effectiveness Testing
Relationships Instrument Recognized in Income
(Millions) Amount Location Amount
Foreign currency denominated debt $ (105) N/A $ -
Foreign currency forward contracts (41) Cost of sales 1
Total $ (146) $ 1
Three months ended September 30, 2015
Pretax Gain (Loss)
Recognized as
Cumulative Translation
within Other Ineffective Portion of Gain (Loss) on
Comprehensive Income Instrument and Amount Excluded
Derivative and Nonderivative Instruments in Net Investment Hedging on Effective Portion of from Effectiveness Testing
Relationships Instrument Recognized in Income
(Millions) Amount Location Amount
Foreign currency denominated debt $ (24) N/A $ -
Foreign currency forward contracts 19 Cost of sales 4
Total $ (5) $ 4
Nine months ended September 30, 2015
Pretax Gain (Loss)
Recognized as
Cumulative Translation
within Other Ineffective Portion of Gain (Loss) on
Comprehensive Income Instrument and Amount Excluded
Derivative and Nonderivative Instruments in Net Investment Hedging on Effective Portion of from Effectiveness Testing
Relationships Instrument Recognized in Income
(Millions) Amount Location Amount
Foreign currency denominated debt $ 161 N/A $ -
Foreign currency forward contracts 121 Cost of sales 8
Total $ 282 $ 8
Derivatives Not Designated as Hedging Instruments:
3M enters into foreign exchange forward contracts that are not designated in hedge relationships to offset, in part, the
impacts of certain intercompany transactions and to further mitigate short-term currency impacts. In addition, the Company
enters into commodity price swaps to offset, in part, fluctuations in costs associated with the use of certain precious
metals. These derivative instruments are not designated in hedging relationships; therefore, fair value gains and losses on
these contracts are recorded in earnings. The Company does not hold or issue derivative financial instruments for trading
purposes.
The location in the consolidated statements of income and amounts of gains and losses related to derivative instruments not
designated as hedging instruments are as follows:
Three months ended September 30, 2016 Nine months ended September 30, 2016
Gain (Loss) on Derivative Recognized in Gain (Loss) on Derivative Recognized in
Derivatives Not Designated as Hedging Instruments Income
- More to follow, for following part double click ID:nRSB0531OdRecent news on 3M Co
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