REG - 3M Company - 3rd Quarter Results <Origin Href="QuoteRef">MMM.N</Origin> - Part 4
03/11/2014 08:05
- Part 4: For the preceding part double click ID:nRSC9102Vc
portion of the decrease in
original asset value. As of the 2013 measurement date these holdings represented less than 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.
In addition, the Company also sponsors employee savings plans under Section 401(k) of the Internal Revenue Code, as
discussed in Note 10 in 3M's Form 8-K dated May 15, 2014 (which updated 3M's 2013 Annual Report on Form 10-K).
NOTE 9. 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 10. References to information regarding derivatives and/or hedging instruments associated with the
Company's long-term debt are also made in Note 9 to the Consolidated Financial Statements in 3M's Current Report on Form
8-K dated May 15, 2014 (which updated 3M's 2013 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
and certain intercompany financing transactions. 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. Generally, 3M dedesignates 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. Hedge ineffectiveness and the amount excluded from effectiveness testing recognized in income on cash flow hedges
were not material for the three and nine months ended September 30, 2014 and 2013. 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. At September 30, 2014, the
majority of the Company's open foreign exchange forward and option contracts had maturities of one year or less. The dollar
equivalent gross notional amount of the Company's foreign exchange forward and option contracts designated as cash flow
hedges at September 30, 2014 was approximately $2.2 billion.
Cash Flow Hedging - Commodity Price Management: The Company manages commodity price risks through negotiated supply
contracts, price protection agreements and forward physical contracts. The Company uses commodity price swaps relative to
natural gas as cash flow hedges of forecasted transactions to manage price volatility. The related mark-to-market gain or
loss on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of
sales in the period during which the hedged transaction affects earnings. Generally, the length of time over which 3M
hedges its exposure to the variability in future cash flows for its forecasted natural gas transactions is 12 months. No
significant commodity cash flow hedges were discontinued and hedge ineffectiveness was not material for the three and nine
months ended September 30, 2014 and 2013. The dollar equivalent gross notional amount of the Company's natural gas
commodity price swaps designated as cash flow hedges at September 30, 2014 was $22 million.
Cash Flow Hedging - Interest Rate Contracts: In August 2011, in anticipation of the September 2011 issuance of $1 billion
in five-year fixed rate notes, 3M executed a pre-issuance cash flow hedge on a notional amount of $400 million by entering
into a forward-starting five-year floating-to-fixed interest rate swap. Upon debt issuance in September 2011, 3M terminated
the floating-to-fixed interest rate swap. The termination of the swap resulted in a $7 million pre-tax loss ($4 million
after-tax) that is amortized over the five-year life of the note and, when material, is included in the tables below as
part of the loss recognized in income on the effective portion of derivatives as a result of reclassification from
accumulated other comprehensive income.
In August 2014, the Company entered into forward starting interest rate swaps with notional amounts totaling 200 million
Euros as a hedge against interest rate volatility associated with the forecast issuance of fixed rate debt for general
corporate purposes. At the time of future debt issuance, 3M will terminate the forward starting interest rate swap and any
resulting gain or loss will be amortized over the life of the associated debt.
As of September 30, 2014, the Company had a balance of $53 million associated with the after-tax net unrealized gain
associated with cash flow hedging instruments recorded in accumulated other comprehensive income. This net gain includes a
$2 million balance(loss) related to a floating-to-fixed interest rate swap (discussed in second preceding paragraph), which
is being amortized over the five-year life of the note. 3M expects to reclassify a majority of the remaining balance to
earnings over the next 12 months (with the impact offset by cash flows from underlying hedged items).
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. Reclassifications of amounts
from accumulated other comprehensive income into income include accumulated gains (losses) on dedesignated hedges at the
time earnings are impacted by the forecasted transaction.
The Company revised amounts previously presented in the tables below for the pretax gain (loss) recognized in other
comprehensive income on effective portion of derivative ("Gain Recognized in OCI") and the pretax gain (loss) recognized in
income on effective portion of derivative as a result of reclassification from accumulated other comprehensive income
("Gain Reclassified into Income") for the three and nine months ended September 30, 2013 relative to foreign currency
forward contracts. These immaterial corrections decreased both the previously presented amounts of the Gain Recognized in
OCI and the Gain Reclassified into Income in the disclosure tables below by $15 million and $17 million for the three and
nine months ended September 30, 2013, respectively. The revisions had no impact on the Company's consolidated results of
operations or financial condition.
Three months ended September 30, 2014
(Millions) Pretax Gain (Loss) Recognized in Other Comprehensive Income on Effective Portion of Derivative Pretax Gain (Loss) Recognized in Income on Effective Portion of Derivative as a Result of Reclassification from Accumulated Other Comprehensive Income Ineffective Portion of Gain (Loss) on Derivative and Amount Excluded from Effectiveness Testing Recognized in Income
Derivatives in Cash Flow Hedging Relationships Amount Location Amount Location Amount
Foreign currency forward/option contracts $ 103 Cost of sales $ (7) Cost of sales $ -
Commodity price swap contracts (3) Cost of sales (1) Cost of sales -
Interest rate swap contracts (2) Interest expense (1) Interest expense -
Total $ 98 $ (9) $ -
Nine months ended September 30, 2014
(Millions) Pretax Gain (Loss) Recognized in Other Comprehensive Income on Effective Portion of Derivative Pretax Gain (Loss) Recognized in Income on Effective Portion of Derivative as a Result of Reclassification from Accumulated Other Comprehensive Income Ineffective Portion of Gain (Loss) on Derivative and Amount Excluded from Effectiveness Testing Recognized in Income
Derivatives in Cash Flow Hedging Relationships Amount Location Amount Location Amount
Foreign currency forward/option contracts $ 90 Cost of sales $ (9) Cost of sales $ -
Commodity price swap contracts (2) Cost of sales 2 Cost of sales -
Interest rate swap contracts (2) Interest expense (1) Interest expense -
Total $ 86 $ (8) $ -
Three months ended September 30, 2013
(Millions) Pretax Gain (Loss) Recognized in Other Comprehensive Income on Effective Portion of Derivative Pretax Gain (Loss) Recognized in Income on Effective Portion of Derivative as a Result of Reclassification from Accumulated Other Comprehensive Income Ineffective Portion of Gain (Loss) on Derivative and Amount Excluded from Effectiveness Testing Recognized in Income
Derivatives in Cash Flow Hedging Relationships Amount Location Amount Location Amount
Foreign currency forward/option contracts $ (39) Cost of sales $ 1 Cost of sales $ -
Foreign currency forward contracts 44 Interest expense 44 Interest expense -
Commodity price swap contracts - Cost of sales (1) Cost of sales -
Interest rate swap contracts - Interest expense (1) Interest expense -
Total $ 5 $ 43 $ -
Nine months ended September 30, 2013
(Millions) Pretax Gain (Loss) Recognized in Other Comprehensive Income on Effective Portion of Derivative Pretax Gain (Loss) Recognized in Income on Effective Portion of Derivative as a Result of Reclassification from Accumulated Other Comprehensive Income Ineffective Portion of Gain (Loss) on Derivative and Amount Excluded from Effectiveness Testing Recognized in Income
Derivatives in Cash Flow Hedging Relationships Amount Location Amount Location Amount
Foreign currency forward/option contracts $ 2 Cost of sales $ (8) Cost of sales $ -
Foreign currency forward contracts (110) Interest expense (111) Interest expense -
Commodity price swap contracts (1) Cost of sales (1) Cost of sales -
Interest rate swap contracts - Interest expense (1) Interest expense -
Total $ (109) $ (121) $ -
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. The dollar equivalent (based on inception date foreign currency exchange rates) gross notional amount of
the Company's interest rate swaps at September 30, 2014 was $1 billion.
At September 30, 2014, the Company had interest rate swaps designated as fair value hedges of underlying fixed rate
obligations. In July 2007, in connection with the issuance of a seven-year Eurobond for an amount of 750 million Euros, the
Company completed a fixed-to-floating interest rate swap on a notional amount of 400 million Euros as a fair value hedge of
a portion of the fixed interest rate Eurobond obligation. In August 2010, the Company terminated 150 million Euros of the
notional amount of this swap. As a result, a gain of 18 million Euros, recorded as part of the balance of the underlying
debt, was amortized as an offset to interest expense over this debt's remaining life. Prior to termination of the
applicable portion of the interest rate swap, the mark-to-market of the hedge instrument was recorded as gains or losses in
interest expense and was offset by the gain or loss on carrying value of the underlying debt instrument. Consequently, the
subsequent amortization of the 18 million Euros recorded as part of the underlying debt balance was not part of the gain on
hedged items recognized in income in the tables below. The remaining interest rate swap of 250 million Euros (notional
amount) matured in July 2014.
In November 2013, 3M issued an eight-year 1.875% fixed rate Eurobond for a face amount of 600 million Euros. Upon debt
issuance, 3M completed a fixed-to-floating interest rate swap on a notional amount of 300 million Euros as a fair value
hedge of a portion of the fixed interest rate Eurobond obligation.
In June 2014, 3M issued a five-year 1.625% fixed rate medium-term note for a face amount of $625 million. Upon debt
issuance, 3M completed a fixed-to-floating interest rate swap on a notional amount of $600 million as a fair value hedge of
a portion of the fixed interest rate medium-term note obligation.
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, 2014 Gain (Loss) on Derivative Gain (Loss) on Hedged Item
(Millions) Recognized in Income Recognized in Income
Derivatives in Fair Value Hedging Relationships Location Amount Location Amount
Interest rate swap contracts Interest expense $ - Interest expense $ -
Total $ - $ -
Nine months ended September 30, 2014 Gain (Loss) on Derivative Gain (Loss) on Hedged Item
(Millions) Recognized in Income Recognized in Income
Derivatives in Fair Value Hedging Relationships Location Amount Location Amount
Interest rate swap contracts Interest expense $ 13 Interest expense $ (13)
Total $ 13 $ (13)
Three months ended September 30, 2013 Gain (Loss) on Derivative Gain (Loss) on Hedged Item
(Millions) Recognized in Income Recognized in Income
Derivatives in Fair Value Hedging Relationships Location Amount Location Amount
Interest rate swap contracts Interest expense $ (3) Interest expense $ 3
Total $ (3) $ 3
Nine months ended September 30, 2013 Gain (Loss) on Derivative Gain (Loss) on Hedged Item
(Millions) Recognized in Income Recognized in Income
Derivatives in Fair Value Hedging Relationships Location Amount Location Amount
Interest rate swap contracts Interest expense $ (11) Interest expense $ 11
Total $ (11) $ 11
Net Investment Hedges:
As circumstances warrant, the Company uses cross currency swaps, forwards and foreign currency denominated debt to hedge
portions of the Company's net investments in foreign operations. For hedges 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.
In addition to the derivative instruments used as hedging instruments in net investment hedges, 3M also uses foreign
currency denominated debt as nonderivative hedging instruments in certain net investment hedges. In July and December 2007,
the Company issued seven-year fixed rate Eurobond securities for amounts of 750 million Euros and 275 million Euros,
respectively. 3M designated each of these Eurobond issuances as hedging instruments of the Company's net investment in its
European subsidiaries. In the second and third quarter of 2014, the Company dedesignated 716 million Euros and 309 million
Euros, respectively, of the seven-year Eurobond securities due in July 2014 from the net investment hedge relationship.
Accordingly, changes in carrying value of this portion of the foreign currency denominated debt due to exchange rate
changes were recorded in earnings through their July 2014 maturity.
In November 2013, the Company issued eight-year fixed rate Eurobond securities for 600 million Euros. 3M designated each of
these Eurobond issuances as hedging instruments of the Company's net investment in its European subsidiaries.
In anticipation of the November 2013 Eurobond issuance, the Company entered into foreign currency forward contracts with
notional amounts totaling 594 million Euros. These forward contracts were designated as hedging instruments of the
Company's net investment in its European subsidiaries. These contracts matured in November 2013.
In the second and third quarter of 2014, the Company entered into foreign currency forward contracts with notional amounts
totaling 1.25 billion Euros, of which 550 million Euros matured and settled in September 2014 with 3M receiving net cash
proceeds of $37 million. The remaining foreign currency forward contracts with a notional amount of 700 million Euros
mature in November 2014. These forward contracts were designated as hedging instruments of the Company's net investment in
its European subsidiaries.
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, 2014
Derivative and Nonderivative Instruments in Net Investment Hedging Relationships Pretax Gain (Loss) Recognized as Cumulative Translation within Other Comprehensive Income on Effective Portion of Instrument Ineffective Portion of Gain (Loss) on Instrument and Amount Excluded from Effectiveness Testing Recognized in Income
(Millions) Amount Location Amount
Foreign currency denominated debt $ (54) N/A $ -
Foreign currency forward contracts 55 N/A -
Total $ 1 $ -
Nine months ended September 30, 2014
Derivative and Nonderivative Instruments in Net Investment Hedging Relationships Pretax Gain (Loss) Recognized as Cumulative Translation within Other Comprehensive Income on Effective Portion of Instrument Ineffective Portion of Gain (Loss) on Instrument and Amount Excluded from Effectiveness Testing Recognized in Income
(Millions) Amount Location Amount
Foreign currency denominated debt $ (81) N/A $ -
Foreign currency forward contracts 56 N/A -
Total $ (25) $ -
Three months ended September 30, 2013
Derivative and Nonderivative Instruments in Net Investment Hedging Relationships Pretax Gain (Loss) Recognized as Cumulative Translation within Other Comprehensive Income on Effective Portion of Instrument Ineffective Portion of Gain (Loss) on Instrument and Amount Excluded from Effectiveness Testing Recognized in Income
(Millions) Amount Location Amount
Foreign currency denominated debt $ (52) N/A $ -
Total $ (52) $ -
Nine months ended September 30, 2013
Derivative and Nonderivative Instruments in Net Investment Hedging Relationships Pretax Gain (Loss) Recognized as Cumulative Translation within Other Comprehensive Income on Effective Portion of Instrument Ineffective Portion of Gain (Loss) on Instrument and Amount Excluded from Effectiveness Testing Recognized in Income
(Millions) Amount Location Amount
Foreign currency denominated debt $ (35) N/A $ -
Total $ (35) $ -
Derivatives Not Designated as Hedging Instruments:
Derivatives not designated as hedging instruments include dedesignated foreign currency forward and option contracts that
formerly were designated in cash flow hedging relationships (as referenced in the preceding Cash Flow Hedges section). In
addition, 3M enters into foreign currency forward contracts and commodity price swaps to offset, in part, the impacts of
certain intercompany activities (primarily associated with intercompany licensing arrangements) and fluctuations in costs
associated with the use of certain precious metals, respectively. These derivative instruments are not designated in
hedging relationships; therefore, fair value gains and losses on these contracts are recorded in earnings. The dollar
equivalent gross notional amount of these forward, option and swap contracts not designated as hedging instruments totaled
$6.9 billion as of September 30, 2014. The Company does not hold or issue derivative financial instruments for trading
purposes.
The Company revised amounts previously presented in the tables below for the gain (loss) on derivative recognized in income
("Gain Recognized in Income") relative to foreign currency forward contracts. These immaterial corrections decreased the
previously presented amounts of the Gain Recognized in Income in the disclosure tables below by $21 million for nine months
ended September 30, 2013. The revisions had no impact on the Company's consolidated results of operations or financial
condition.
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:
Derivatives Not Designated as Hedging Instruments Three months ended September 30, 2014 Nine months ended September 30, 2014
Gain (Loss) on Derivative Recognized in Income Gain (Loss) on Derivative Recognized in Income
(Millions) Location Amount Location Amount
Foreign currency forward/option contracts Cost of sales $ 8 Cost of sales $ 5
Foreign currency forward contracts Interest expense (72) Interest expense (4)
Total $ (64) $ 1
Derivatives Not Designated as Hedging Instruments Three months ended September 30, 2013 Nine months ended September 30, 2013
Gain (Loss) on Derivative Recognized in Income Gain (Loss) on Derivative Recognized in Income
(Millions) Location Amount Location Amount
Foreign currency forward/option contracts Cost of sales $ (16) Cost of sales $ 15
Foreign currency forward contracts Interest expense - Interest expense (6)
Commodity price swap contracts Cost of sales - Cost of sales (1)
Total $ (16) $ 8
Location and Fair Value Amount of Derivative Instruments
The following tables summarize the fair value of 3M's derivative instruments, excluding nonderivative instruments used as
hedging instruments, and their location in the consolidated balance sheet. Additional information with respect to the fair
value of derivative instruments is included in Note 10.
September 30, 2014
(Millions) Assets Liabilities
Fair Value of Derivative Instruments Location Amount Location Amount
Derivatives designated as hedging instruments
Foreign currency forward/option contracts Other current assets $ 81 Other current liabilities $ 4
Foreign currency forward/option contracts Other assets 26 Other liabilities -
Commodity price swap contracts Other current assets - Other current liabilities 3
Interest rate swap contracts Other assets 23 Other liabilities 11
Total derivatives designated as
hedging instruments $ 130 $ 18
Derivatives not designated as hedging instruments
Foreign currency forward/option contracts Other current assets $ 68 Other current liabilities $ 46
Total derivatives not designated as
hedging instruments $ 68 $ 46
Total derivative instruments $ 198 $ 64
December 31, 2013
(Millions) Assets Liabilities
Fair Value of Derivative Instruments Location Amount Location Amount
Derivatives designated as hedging instruments
Foreign currency forward/option contracts Other current assets $ 24 Other current liabilities $ 35
Commodity price swap contracts Other current assets 1 Other current liabilities -
Interest rate swap contracts Other assets 8 Other liabilities 7
Total derivatives designated as
hedging instruments $ 33 $ 42
Derivatives not designated as hedging instruments
Foreign currency forward/option contracts Other current assets $ 51 Other current liabilities $ 68
Total derivatives not designated as
hedging instruments $ 51 $ 68
Total derivative instruments $ 84 $ 110
Credit Risk and Offsetting of Assets and Liabilities of Derivative Instruments
The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps, currency
swaps, commodity price swaps, and forward and option contracts. However, the Company's risk is limited to the fair value of
the instruments. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit
limits, and by selecting major international banks and financial institutions as counterparties. 3M enters into master
netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting
arrangement may allow each counterparty to net settle amounts owed between a 3M entity and the counterparty as a result of
multiple, separate derivative transactions. As of September 30, 2014, 3M has International Swaps and Derivatives
Association (ISDA) agreements with 12 applicable banks and financial institutions which contain netting provisions. In
addition to a master agreement with 3M supported by a primary counterparty's parent guarantee, 3M also has associated
credit support agreements in place with 11 of its primary derivative counterparties which, among other things, provide the
circumstances under which either party is required to post eligible collateral (when the market value of transactions
covered by these agreements exceeds specified thresholds or if a counterparty's credit rating has been downgraded to a
predetermined rating). The Company does not anticipate nonperformance by any of these counterparties.
3M has elected to present the fair value of derivative assets and liabilities within the Company's consolidated balance
sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise
qualify for net presentation. However, the following tables provide information as if the Company had elected to offset the
asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default
or termination as stipulated by the terms of netting arrangements with each of the counterparties. For each counterparty,
if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period
based on the 3M entity that is a party to the transactions. Derivatives not subject to master netting agreements are not
eligible for net presentation. As of the applicable dates presented below, no cash collateral had been received or pledged
related to these derivative instruments.
Offsetting of Financial Assets/Liabilities under Master Netting Agreements with Derivative Counterparties
September 30, 2014
Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
(Millions) Gross Amount of Derivative Assets Presented in the Consolidated Balance Sheet Gross Amount of Eligible Offsetting Recognized Derivative Liabilities Cash Collateral Received Net Amount of Derivative Assets
Derivatives subject to master
netting agreements $ 198 $ 27 $ - $ 171
Derivatives not subject to master
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