REG - 3M Company - Annual Financial Report - Updated by Form 8-K <Origin Href="QuoteRef">MMM.N</Origin> - Part 8
19/05/2016 07:09
- Part 8: For the preceding part double click ID:nRSS6547Yg
benefit plans to a savings account benefits-based plan. The contributions provided by the Company to the health savings
accounts increase 3 percent per year for employees who retired prior to January 1, 2016 and increase 1.5 percent for
employees who retire on or after January 1, 2016. Therefore, the Company no longer has material exposure to health care
cost inflation.
The Company determines the discount rate used to measure plan liabilities as of the December 31 measurement date for the
pension and postretirement benefit plans, which is also the date used for the related annual measurement assumptions. The
discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the
year. The Company sets its rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that
would produce cash flows sufficient in timing and amount to settle projected future benefits. Using this methodology, the
Company determined a discount rate of 4.47% for pension and 4.48% for postretirement benefits to be appropriate for its
U.S. plans as of December 31, 2015, which is an increase of 0.37 percentage points and 0.41 percentage points,
respectively, from the rates used as of December 31, 2014. For the international pension and postretirement plans the
discount rates also reflect the current rate at which the associated liabilities could be effectively settled at the end of
the year. If the country has a deep market in corporate bonds the Company matches the expected cash flows from the plan
either to a portfolio of bonds that generate sufficient cash flow or a notional yield curve generated from available bond
information. In countries that do not have a deep market in corporate bonds, government bonds are considered with a risk
premium to approximate corporate bond yields. 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 and interest costs 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.
For the primary U.S. qualified pension plan, the Company's assumption for the expected return on plan assets was 7.75% in
2015. Projected returns are based primarily on broad, publicly traded equity and fixed-income indices and forward-looking
estimates of active portfolio and investment management. As of December 31, 2015, the Company's 2016 expected long-term
rate of return on U.S. plan assets is 7.50%, a decrease of 0.25 percentage points from 2015. The expected return assumption
is based on the strategic asset allocation of the plan, long term capital market return expectations and expected
performance from active investment management. The 2015 expected long-term rate of return is based on an asset allocation
assumption of 25% global equities, 18% private equities, 41% fixed-income securities, and 16% absolute return investments
independent of traditional performance benchmarks, along with positive returns from active investment management. The
actual net rate of return on plan assets in 2015 was 0.7%. In 2014 the plan earned a rate of return of 13.0% and in 2013
earned a return of 6.0%. The average annual actual return on the plan assets over the past 10 and 25 years has been 7.8%
and 10.0%, respectively. Return on assets assumptions for international pension and other post-retirement benefit plans are
calculated on a plan-by-plan basis using plan asset allocations and expected long-term rate of return assumptions.
During 2015, the Company contributed $264 million to its U.S. and international pension plans and $3 million to its
postretirement plans. During 2014, the Company contributed $210 million to its U.S. and international pension plans and $5
million to its postretirement plans. In 2016, the Company expects to contribute an amount in the range of $100 million to
$200 million of cash to its U.S. and international retirement 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.
Future Pension and Postretirement Benefit Payments
The following table provides the estimated pension and postretirement benefit payments that are payable from the plans to
participants.
Qualified and Non-qualified
Pension Benefits Postretirement
(Millions) United States International Benefits
2016 Benefit Payments $ 987 $ 205 $ 141
2017 Benefit Payments 997 215 156
2018 Benefit Payments 1,008 228 172
2019 Benefit Payments 1,017 241 153
2020 Benefit Payments 1,029 250 155
Next five years 5,187 1,480 797
Plan Asset Management
3M's investment strategy for its pension and postretirement plans is to manage the funds on a going-concern basis. The
primary goal of the trust funds is to meet the obligations as required. The secondary goal is to earn the highest rate of
return possible, without jeopardizing its primary goal, and without subjecting the Company to an undue amount of
contribution risk. Fund returns are used to help finance present and future obligations to the extent possible within
actuarially determined funding limits and tax-determined asset limits, thus reducing the potential need for additional
contributions from 3M. The investment strategy has used long duration cash bonds and derivative instruments to offset a
significant portion of the interest rate sensitivity of U.S. pension liabilities.
Normally, 3M does not buy or sell any of its own securities as a direct investment for its pension and other postretirement
benefit funds. However, due to external investment management of the funds, the plans may indirectly buy, sell or hold 3M
securities. The aggregate amount of 3M securities are not considered to be material relative to the aggregate fund
percentages.
The discussion that follows references the fair value measurements of certain assets in terms of levels 1, 2 and 3. See
Note 13 for descriptions of these levels. While the company believes the valuation methods are appropriate and consistent
with other market participants, the use of different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different estimate of fair value at the reporting date.
U.S. Pension Plans and Postretirement Benefit Plan Assets
In order to achieve the investment objectives in the U.S. pension plans and U.S. postretirement benefit plans, the
investment policies include a target strategic asset allocation. The investment policies allow some tolerance around the
target in recognition that market fluctuations and illiquidity of some investments may cause the allocation to a specific
asset class to vary from the target allocation, potentially for long periods of time. Acceptable ranges have been designed
to allow for deviation from strategic targets and to allow for the opportunity for tactical over- and under-weights. The
portfolios will normally be rebalanced when the quarter-end asset allocation deviates from acceptable ranges. The
allocation is reviewed regularly by the named fiduciary of the plans. Approximately 39% of the postretirement benefit plan
assets are in a 401(h) account. The 401(h) account assets are in the same trust as the primary U.S. pension plan and
invested with the same investment objectives as the primary U.S. pension plan.
The fair values of the assets held by the U.S. pension plans by asset class are as follows:
Fair Value Measurements Using Inputs Considered as Fair Value at
(Millions) Level 1 Level 2 Level 3 Dec. 31,
Asset Class 2015 2014 2015 2014 2015 2014 2015 2014
Equities
U.S. equities $ 1,897 $ 1,766 $ - $ - $ - $ - $ 1,897 $ 1,766
Non-U.S. equities 1,149 1,214 - - - - 1,149 1,214
Index and long/short equity funds* 578 607
Total Equities $ 3,046 $ 2,980 $ - $ - $ - $ - $ 3,624 $ 3,587
Fixed Income
U.S. government securities $ 1,095 $ 1,032 $ 456 $ 590 $ - $ - $ 1,551 $ 1,622
Non-U.S. government securities - 7 126 381 - - 126 388
Preferred and convertible securities 4 6 8 9 - - 12 15
U.S. corporate bonds 9 8 2,820 2,889 - - 2,829 2,897
Non-U.S. corporate bonds - - 616 566 - - 616 566
Derivative instruments (1) 6 40 126 - - 39 132
Other* 11 32
Total Fixed Income $ 1,107 $ 1,059 $ 4,066 $ 4,561 $ - $ - $ 5,184 $ 5,652
Private Equity
Derivative instruments $ - $ - $ - $ - $ (106) $ (74) $ (106) $ (74)
Growth equity 24 15 - - - - 24 15
Partnership investments* 2,450 2,561
Total Private Equity $ 24 $ 15 $ - $ - $ (106) $ (74) $ 2,368 $ 2,502
Absolute Return
Derivative instruments $ - $ - $ (5) $ - $ - $ - $ (5) $ -
Fixed income and other 253 26 46 52 - - 299 78
Hedge fund/fund of funds* 1,409 1,807
Partnership investments* 355 288
Total Absolute Return $ 253 $ 26 $ 41 $ 52 $ - $ - $ 2,058 $ 2,173
Cash and Cash Equivalents
Cash and cash equivalents $ 102 $ 287 $ 6 $ 86 $ - $ - $ 108 $ 373
Cash and cash equivalents, valued at net asset value* 783 531
Total Cash and Cash Equivalents $ 102 $ 287 $ 6 $ 86 $ - $ - $ 891 $ 904
Total $ 4,532 $ 4,367 $ 4,113 $ 4,699 $ (106) $ (74) $ 14,125 $ 14,818
Other items to reconcile to fair value of plan assets $ (159) $ (175)
Fair value of plan assets $ 13,966 $ 14,643
* In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value (NAV) per
share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The NAV is based
on the fair value of the underlying assets owned by the fund, minus its liabilities then divided by the number of units
outstanding and is determined by the investment manager or custodian of the fund. The fair value amounts presented in this
table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the fair value of plan
assets.
The fair values of the assets held by the postretirement benefit plans by asset class are as follows:
Fair Value Measurements Using Inputs Considered as Fair Value at
(Millions) Level 1 Level 2 Level 3 Dec. 31,
Asset Class 2015 2014 2015 2014 2015 2014 2015 2014
Equities
U.S. equities $ 508 $ 565 $ - $ - $ - $ - $ 508 $ 565
Non-U.S. equities 59 56 - - - - 59 56
Index and long/short equity funds* 49 55
Total Equities $ 567 $ 621 $ - $ - $ - $ - $ 616 $ 676
Fixed Income
U.S. government securities $ 71 $ 68 $ 192 $ 186 $ - $ - $ 263 $ 254
Non-U.S. government securities - - 8 17 - - 8 17
U.S. corporate bonds - - 153 146 - - 153 146
Non-U.S. corporate bonds - - 35 34 - - 35 34
Derivative instruments - - 2 5 - - 2 5
Other* - 1
Total Fixed Income $ 71 $ 68 $ 390 $ 388 $ - $ - $ 461 $ 457
Private Equity
Derivative instruments $ - $ - $ - $ - $ (4) $ (3) $ (4) $ (3)
Growth equity 1 1 - - - - 1 1
Partnership investments* 136 162
Total Private Equity $ 1 $ 1 $ - $ - $ (4) $ (3) $ 133 $ 160
Absolute Return
Fixed income and other $ 10 $ 1 $ 2 $ 2 $ - $ - $ 12 $ 3
Hedge fund/fund of funds* 54 66
Partnership investments* 14 10
Total Absolute Return $ 10 $ 1 $ 2 $ 2 $ - $ - $ 80 $ 79
Cash and Cash Equivalents
Cash and cash equivalents $ 38 $ 33 $ - $ 3 $ - $ - $ 38 $ 36
Cash and cash equivalents, valued at net asset value* 30 20
Total Cash and Cash Equivalents $ 38 $ 33 $ - $ 3 $ - $ - $ 68 $ 56
Total $ 687 $ 724 $ 392 $ 393 $ (4) $ (3) $ 1,358 $ 1,428
Other items to reconcile to fair value of plan assets $ 9 $ 8
Fair value of plan assets $ 1,367 $ 1,436
*In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value per share (or
its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The NAV is based on the fair
value of the underlying assets owned by the fund, minus its liabilities then divided by the number of units outstanding and
is determined by the investment manager or custodian of the fund. The fair value amounts presented in this table are
intended to permit reconciliation of the fair value hierarchy to the amounts presented in the fair value of plan assets.
Publicly traded equities are valued at the closing price reported in the active market in which the individual securities
are traded.
Fixed income includes derivative instruments such as credit default swaps, interest rate swaps and futures contracts.
Corporate debt includes bonds and notes, asset backed securities, collateralized mortgage obligations and private
placements. Swaps and derivative instruments are valued by the custodian using closing market swap curves and market
derived inputs. U.S. government and government agency bonds and notes are valued at the closing price reported in the
active market in which the individual security is traded. Corporate bonds and notes, asset backed securities and
collateralized mortgage obligations are valued at either the yields currently available on comparable securities of issuers
with similar credit ratings or valued under a discounted cash flow approach that utilizes observable inputs, such as
current yields of similar instruments, but includes adjustments for certain risks that may not be observable such as credit
and liquidity risks. Private placements are valued by the custodian using recognized pricing services and sources.
The private equity portfolio is a diversified mix of derivative instruments, growth equity and partnership interests.
Derivative investments are written options that are valued by independent parties using market inputs and valuation models.
Growth equity investments are valued at the closing price reported in the active market in which the individual securities
are traded.
Absolute return consists primarily of partnership interests in hedge funds, hedge fund of funds or other private fund
vehicles. Corporate debt instruments are valued at either the yields currently available on comparable securities of
issuers with similar credit ratings or valued under a discounted cash flow approach that utilizes observable inputs, such
as current yields of similar instruments, but includes adjustments for certain risks that may not be observable such as
credit and liquidity risk ratings.
Other items to reconcile to fair value of plan assets include the net of insurance receivables for WG Trading Company,
interest receivables, amounts due for securities sold, amounts payable for securities purchased and interest payable.
The balances of and changes in the fair values of the U.S. pension plans' and postretirement plans' level 3 assets for the
periods ended December 31, 2015 and 2014 were not material.
International Pension Plans Assets
Outside the U.S., pension plan assets are typically managed by decentralized fiduciary committees. The disclosure below of
asset categories is presented in aggregate for over 70 defined benefit plans in 27 countries; however, there is significant
variation in asset allocation policy from country to country. Local regulations, local funding rules, and local financial
and tax considerations are part of the funding and investment allocation process in each country. The Company provides
standard funding and investment guidance to all international plans with more focused guidance to the larger plans.
Each plan has its own strategic asset allocation. The asset allocations are reviewed periodically and rebalanced when
necessary.
The fair values of the assets held by the international pension plans by asset class are as follows:
Fair Value Measurements Using Inputs Considered as Fair Value at
(Millions) Level 1 Level 2 Level 3 Dec. 31,
Asset Class 2015 2014 2015 2014 2015 2014 2015 2014
Equities
Growth equities $ 718 $ 672 $ 195 $ 176 $ - $ - $ 913 $ 848
Value equities 494 595 27 23 - - 521 618
Core equities 31 19 671 624 4 4 706 647
Equities, valued at net asset value* 17 18
Total Equities $ 1,243 $ 1,286 $ 893 $ 823 $ 4 $ 4 $ 2,157 $ 2,131
Fixed Income
Domestic government $ 283 $ 87 $ 346 $ 533 $ 4 $ 3 $ 633 $ 623
Foreign government - 45 206 670 - - 206 715
Corporate debt securities 30 1 661 701 10 12 701 714
Fixed income securities, valued at net asset value* 770 863
Total Fixed Income $ 313 $ 133 $ 1,213 $ 1,904 $ 14 $ 15 $ 2,310 $ 2,915
Private Equity
Real estate $ 1 $ 3 $ 5 $ 5 $ 4 $ 4 $ 10 $ 12
Real estate, valued at net asset value* 126 119
Partnership investments* 24 23
Total Private Equity $ 1 $ 3 $ 5 $ 5 $ 4 $ 4 $ 160 $ 154
Absolute Return
Derivatives $ (2) $ - $ 15 $ (4) $ - $ - $ 13 $ (4)
Insurance - - - - 456 476 456 476
Other - - 4 10 3 3 7 13
Other, valued at net asset value* 1 3
Hedge funds* 119 117
Total Absolute Return $ (2) $ - $ 19 $ 6 $ 459 $ 479 $ 596 $ 605
Cash and Cash Equivalents
Cash and cash equivalents $ 126 $ 161 $ 347 $ 29 $ - $ - $ 473 $ 190
Cash and cash equivalents, valued at net asset value* 1 3
Total Cash and Cash Equivalents $ 126 $ 161 $ 347 $ 29 $ - $ - $ 474 $ 193
Total $ 1,681 $ 1,583 $ 2,477 $ 2,767 $ 481 $ 502 $ 5,697 $ 5,998
Other items to reconcile to fair value of plan assets $ (28) $ (41)
Fair value of plan assets $ 5,669 $ 5,957
*In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value per share (or
its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The NAV is based on the fair
value of the underlying assets owned by the fund, minus its liabilities then divided by the number of units outstanding and
is determined by the investment manager or custodian of the fund. The fair value amounts presented in this table are
intended to permit reconciliation of the fair value hierarchy to the amounts presented in the fair value of plan assets.
Equities consist primarily of mandates in public equity securities managed to various public equity indices. Publicly
traded equities are valued at the closing price reported in the active market in which the individual securities are
traded.
Fixed Income investments include domestic and foreign government, and corporate, (including mortgage backed and other debt)
securities. Governments, corporate bonds and notes and mortgage backed securities are valued at the closing price reported
if traded on an active market or at yields currently available on comparable securities of issuers with similar credit
ratings or valued under a discounted cash flow approach that utilizes observable inputs, such as current yields of similar
instruments, but includes adjustments for certain risks that may not be observable such as credit and liquidity risks.
Private equity funds consist of partnership interests in a variety of funds. Real estate consists of property funds and
REITS (Real Estate Investment Trusts). REITS are valued at the closing price reported in the active market in which it is
traded.
Absolute return consists of private partnership interests in hedge funds, insurance contracts, derivative instruments,
hedge fund of funds, and other alternative investments. Insurance consists of insurance contracts, which are valued using
cash surrender values which is the amount the plan would receive if the contract was cashed out at year end. Derivative
instruments consist of interest rate swaps that are used to help manage risks.
Other items to reconcile to fair value of plan assets include the net of interest receivables, amounts due for securities
sold, amounts payable for securities purchased and interest payable.
The balances of and changes in the fair values of the international pension plans' level 3 assets consist primarily of
insurance contracts under the absolute return asset class. The aggregate of net purchases and net unrealized gains
increased this balance by $16 million and $46 million in 2015 and 2014, respectively. Foreign currency exchange impacts
decreased this balance by $36 million and $62 million in 2015 and 2014, respectively.
NOTE 12. 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 6. Additional information with respect to the fair value of derivative instruments is
included in Note 13. References to information regarding derivatives and/or hedging instruments associated with the
Company's long-term debt are also made in Note 10.
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: In the third and fourth quarters of 2014, the Company entered into forward
starting interest rate swaps with notional amounts totaling 500 million Euros as a hedge against interest rate volatility
associated with the forecasted issuance of fixed rate debt. 3M terminated these interest rate swaps upon issuance of 750
million Euros aggregate principal amount of twelve-year fixed rate notes in connection with 3M's 1.250 billion Eurobond
offering in November 2014. The termination resulted in a $8 million pre-tax ($5 million after-tax) loss within accumulated
other comprehensive income that will be amortized over the twelve-year life of the notes.
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 December 31, 2015, the Company had a balance of $124 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 forward starting interest rate swaps, which will be amortized over the
respective lives of the notes. Based on exchange rates as of December 31, 2015, 3M expects to reclassify approximately $98
million of the after-tax net unrealized foreign exchange cash flow hedging gains to earnings in 2016, approximately $23
million of the after-tax net unrealized foreign exchange cash flow hedging gains to earnings in 2017, and approximately $3
million of the after-tax net unrealized foreign exchange cash flow hedging gains to earnings after 2017 (with the impact
offset by earnings/losses 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.
Year Ended December 31, 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
(Millions) Portion of Derivative Comprehensive Income Recognized in Income
Derivatives in Cash Flow Hedging Relationships Amount Location Amount Location Amount
Foreign currency forward/option contracts $ 212 Cost of sales $ 178 Cost of sales $ -
Commodity price swap contracts - Cost of sales (2) Cost of sales -
Interest rate swap contracts - Interest expense (2) Interest expense -
Total $ 212 $ 174 $ -
Year Ended December 31, 2014
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
(Millions) Portion of Derivative Comprehensive Income Recognized in Income
Derivatives in Cash Flow Hedging Relationships Amount Location Amount Location Amount
Foreign currency forward/option contracts $ 183 Cost of sales $ 3 Cost of sales $ -
Commodity price swap contracts (4) Cost of sales 2 Cost of sales -
Interest rate swap contracts (8) Interest expense (1) Interest expense -
Total $ 171 $ 4 $ -
Year Ended December 31, 2013
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
(Millions) Portion of Derivative Comprehensive Income Recognized in Income
Derivatives in Cash Flow Hedging Relationships Amount Location Amount Location Amount
Foreign currency forward/option contracts $ 9 Cost of sales $ (11) Cost of sales $ -
Foreign currency forward contracts (108) Interest expense (108) Interest expense -
Commodity price swap contracts 1 Cost of sales (2) Cost of sales -
Interest rate swap contracts - Interest expense (1) Interest expense -
Total $ (98) $ (122) $ -
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.
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 gains 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 a Eurobond due in 2021 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 $950 million aggregate principal amount of medium-term notes. Upon debt issuance, the Company
entered into an interest rate swap to convert $600 million of a $625 million note included in this issuance to an interest
rate based on a floating three-month LIBOR index as a fair value hedge of a portion of the fixed interest rate medium-term
note obligation.
In August 2015, 3M issued $1.500 billion aggregate principal amount of medium-term notes. Upon debt issuance, the Company
entered into two interest rate swaps as fair value hedges of a portion of the fixed interest rate medium-term note
obligation. The first converted a $450 million three-year fixed rate note, and the second converted $300 million of a
five-year fixed rate note included in this issuance to an interest rate based on a floating three-month LIBOR index.
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:
Year ended December 31, 2015 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 $ (2) Interest expense $ 2
Total $ (2) $ 2
Year ended December 31, 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 $ 11 Interest expense $ (11)
Total $ 11 $ (11)
Year ended December 31, 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 $ (21)
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