REG - 3M Company - Half-year Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 3
03/08/2017 07:06
- Part 3: For the preceding part double click ID:nRSC9629Mb
IRS will complete its examination of the Company for 2015 by the end of the fourth
quarter of 2017, for 2016 by the end of the first quarter of 2018, and for 2017 by the end of the first quarter of 2019. As
of June 30, 2017, the IRS has not proposed any significant adjustments to the Company's tax positions for which the Company
is not adequately reserved.
Payments relating to other proposed assessments arising from the 2005 through 2017 examinations may not be made until a
final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from
the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also audit
activity in several U.S. state and foreign jurisdictions.
3M anticipates changes to the Company's uncertain tax positions due to the closing and resolution of audit issues for
various audit years mentioned above and closure of statutes. Currently, the Company is estimating a decrease in
unrecognized tax benefits during the next 12 months as a result of anticipated resolutions of audit issues. The total
amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of June 30, 2017 and
December 31, 2016 are $370 million and $333 million, respectively.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company
recognized in the consolidated statement of income on a gross basis approximately $5 million and $1 million of expense for
the three months ended June 30, 2017 and June 30, 2016, respectively, and approximately $8 million of expense and $3
million of benefit for the six months ended June 30, 2017 and June 30, 2016, respectively. At June 30, 2017 and December
31, 2016, accrued interest and penalties in the consolidated balance sheet on a gross basis were $56 million and $52
million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions
for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such
deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the
shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the
taxing authority to an earlier period.
The effective tax rate for the second quarter of 2017 was 26.0 percent, compared to 29.6 percent in the second quarter of
2016, a decrease of 3.6 percentage points. Primary factors that decreased the Company's effective tax rate on a combined
basis by 5.0 percentage points year-on-year included international taxes that were impacted by changes to the geographic
mix of income before taxes and prior year cash optimization actions, tax benefits resulting from the held-for-sale status
of certain legal entities, and other items. This decrease was partially offset by a 1.4 percentage points year-on-year
increase to the Company's effective tax rate, which reflects a lower year-on-year excess tax benefit related to employee
share-based payments, and remeasurements of 3M's uncertain tax positions.
The effective tax rate for the first six months of 2017 was 25.0 percent, compared to 28.2 percent in the first six months
of 2016, a decrease of 3.2 percentage points. Primary factors that decreased the Company's effective tax rate included
international taxes that were impacted by changes to the geographic mix of income before taxes and prior year cash
optimization actions, tax benefits resulting from the held-for-sale status of certain legal entities, remeasurements of
3M's uncertain tax positions, an increase in excess tax benefits related to employee share-based payments, and other
items.
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 June 30, 2017 and December 31, 2016, the Company had valuation allowances of $57
million and $47 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).
June 30, December 31,
(Millions) 2017 2016
Corporate debt securities $ 10 $ 10
Commercial paper 37 14
Certificates of deposit/time deposits 53 197
U.S. municipal securities 3 3
Asset-backed securities:
Automobile loan related 28 31
Credit card related 9 18
Other - 7
Asset-backed securities total 37 56
Current marketable securities $ 140 $ 280
U.S. municipal securities $ 17 $ 17
Non-current marketable securities $ 17 $ 17
Total marketable securities $ 157 $ 297
Classification of marketable securities as current or non-current is based on the nature of the securities and availability
for use in current operations. At June 30, 2017 and December 31, 2016, gross unrealized gains and/or losses (pre-tax) were
not material. The gross amounts of the realized gains or losses were not material. Cost of securities sold use the first
in, first out (FIFO) method. Since these marketable securities are classified as available-for-sale securities, changes in
fair value will flow through other comprehensive income, with amounts reclassified out of other comprehensive income into
earnings upon sale or "other-than-temporary" impairment.
3M reviews impairments associated with its marketable securities in accordance with the measurement guidance provided by
ASC 320, Investments-Debt and Equity Securities, when determining the classification of the impairment as "temporary" or
"other-than-temporary". A temporary impairment charge results in an unrealized loss being recorded in the other
comprehensive income component of shareholders' equity. Such an unrealized loss does not reduce net income attributable to
3M for the applicable accounting period because the loss is not viewed as other-than-temporary. The factors evaluated to
differentiate between temporary and other-than-temporary include the projected future cash flows, credit ratings actions,
and assessment of the credit quality of the underlying collateral, as well as other factors.
The balances at June 30, 2017 for marketable securities by contractual maturity are shown below. Actual maturities may
differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without
prepayment penalties.
(Millions) June 30, 2017
Due in one year or less $ 104
Due after one year through five years 49
Due after five years through ten years 4
Total marketable securities $ 157
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 June 30, 2017, all asset-backed security investments were in
compliance with this policy. Approximately 76.8 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 June 2017, 3M repaid $650 million aggregate principal amount of fixed rate medium-term notes.
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 six months ended June 30, 2017 and 2016 follow:
Benefit Plan Information
Three months ended June 30,
Qualified and Non-qualified
Pension Benefits Postretirement
United States International Benefits
(Millions) 2017 2016 2017 2016 2017 2016
Net periodic benefit cost (benefit)
Service cost $ 67 $ 65 $ 34 $ 34 $ 12 $ 14
Interest cost 142 144 37 43 20 19
Expected return on plan assets (259) (261) (70) (78) (21) (22)
Amortization of transition (asset) obligation - - - (1) - -
Amortization of prior service cost (benefit) (6) (6) (3) (4) (13) (14)
Amortization of net actuarial (gain) loss 97 88 30 23 14 15
Settlements, curtailments, special termination benefits and other - - - - - -
Net periodic benefit cost (benefit) after settlements, curtailments, special termination benefits and other $ 41 $ 30 $ 28 $ 17 $ 12 $ 12
Six months ended June 30,
Qualified and Non-qualified
Pension Benefits Postretirement
United States International Benefits
(Millions) 2017 2016 2017 2016 2017 2016
Net periodic benefit cost (benefit)
Service cost $ 134 $ 130 $ 67 $ 67 $ 25 $ 27
Interest cost 284 287 74 86 39 39
Expected return on plan assets (518) (521) (139) (156) (42) (45)
Amortization of transition (asset) obligation - - - (1) - -
Amortization of prior service cost (benefit) (12) (12) (6) (7) (26) (28)
Amortization of net actuarial (gain) loss 194 176 60 45 28 31
Settlements, curtailments, special termination benefits and other - - - - - -
Net periodic benefit cost (benefit) after settlements, curtailments, special termination benefits and other $ 82 $ 60 $ 56 $ 34 $ 24 $ 24
For the six months ended June 30, 2017, contributions totaling $277 million were made to the Company's U.S. and
international pension plans and $2 million to its postretirement plans. For total year 2017, the Company expects to
contribute approximately $300 million to $500 million of cash to its global defined benefit pension and postretirement
plans. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2017. Future
contributions will depend on market conditions, interest rates and other factors. 3M's annual measurement date for pension
and postretirement assets and liabilities is December 31 each year, which is also the date used for the related annual
measurement assumptions.
3M was informed in 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. 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. In May 2017, the appellate court affirmed
the lower court's decision. The decision will reduce U.S. pension and postretirement plan assets by $73 million at the
December 31, 2017 measurement date and will not have a material adverse effect on the consolidated financial position of
the Company.
As part of a diversified investment strategy, the U.S. pension and postretirement benefit plans made investments in the
natural gas fired power generation industry during the period 2011 through 2013. In April 2017, one of these entities,
Panda Temple Power, LLC, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of
Delaware. This investment represented less than one percent of the fair value of the U.S. pension and postretirement plans'
assets as of their 2016 measurement date.
NOTE 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 4, 2017 (which updated 3M's
2016 Annual Report on Form 10-K).
Types of Derivatives/Hedging Instruments and Inclusion in Income/Other Comprehensive Income
Cash Flow Hedges:
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss
on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same
period during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge
ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
Cash Flow Hedging - Foreign Currency Forward and Option Contracts: The Company enters into foreign exchange forward and
option contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies.
These transactions are designated as cash flow hedges. The settlement or extension of these derivatives will result in
reclassifications (from accumulated other comprehensive income) to earnings in the period during which the hedged
transactions affect earnings. 3M may dedesignate these cash flow hedge relationships in advance of the occurrence of the
forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other
comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted
transaction occurs or is no longer probable of occurring. Changes in the value of derivative instruments after
dedesignation are recorded in earnings and are included in the Derivatives Not Designated as Hedging Instruments section
below. The maximum length of time over which 3M hedges its exposure to the variability in future cash flows of the
forecasted transactions is 36 months.
Cash Flow Hedging - Interest Rate Contracts: The Company may use forward starting interest rate contracts to hedge exposure
to variability in cash flows from interest payments on forecasted debt issuances. The amortization of gains and losses on
forward starting interest rate swaps is included in the tables below as part of the gain/(loss) recognized in income on the
effective portion of derivatives as a result of reclassification from accumulated other comprehensive income. Additional
information regarding previously issued and terminated interest rate contracts can be found in Note 12 in 3M's Current
Report on Form 8-K dated May 4, 2017 (which updated 3M's 2016 Annual Report on Form 10-K).
In the first six months of 2016, the Company entered into forward starting interest rate swaps that expired in December
2016 with an aggregate notional amount of $300 million as a hedge against interest rate volatility associated with a
forecasted issuance of fixed rate debt. Upon issuance of medium-term notes in September 2016, 3M terminated these interest
rate swaps. The termination resulted in an immaterial loss within accumulated other comprehensive income that will be
amortized over the respective lives of the debt.
In the fourth quarter of 2016, the Company entered into forward starting interest rate swaps with a notional amount of $200
million as a hedge against interest rate volatility associated with a forecasted issuance of fixed rate debt. In the first
quarter of 2017, the Company entered into forward starting interest rate swaps with a notional amount of $200 million as a
hedge against interest rate volatility associated with a forecasted issuance of fixed rate debt. In the second quarter of
2017, the Company entered into forward starting interest rate swaps with a notional amount of $200 million as a hedge
against interest rate volatility associated with a forecasted issuance of fixed rate debt.
As of June 30, 2017, the Company had a balance of $36 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
$5 million (after tax loss) related to the forward starting interest rate swaps, which will be amortized over the
respective lives of the debt. Based on exchange rates as of June 30, 2017, 3M expects to reclassify approximately $1
million of the after-tax net unrealized foreign exchange cash flow hedging losses to earnings over the remainder of 2017,
approximately $18 million of the after-tax net unrealized foreign exchange cash flow hedging losses to earnings in 2018,
and approximately $17 million of the after-tax net unrealized foreign exchange cash flow hedging losses to earnings after
2018 (with the impact offset by earnings/losses from underlying hedged items). 3M expects to reclassify approximately $16
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.
Pretax Gain (Loss) Recognized in
Pretax Gain (Loss) Income on Effective Portion of Ineffective Portion of Gain
Recognized in Other Derivative as a Result of (Loss) on Derivative and
Comprehensive Reclassification from Amount Excluded from
Income on Effective Accumulated Other Effectiveness Testing
Three months ended June 30, 2017 Portion of Derivative Comprehensive Income Recognized in Income
(Millions) Amount Location Amount Location Amount
Foreign currency forward/option contracts $ (72) Cost of sales $ 5 Cost of sales $ -
Interest rate swap contracts (2) Interest expense - Interest expense -
Total $ (74) $ 5 $ -
Six months ended June 30, 2017
(Millions) Amount Location Amount Location Amount
Foreign currency forward/option contracts $ (172) Cost of sales $ 23 Cost of sales $ -
Interest rate swap contracts (3) Interest expense - Interest expense -
Total $ (175) $ 23 $ -
Three months ended June 30, 2016
(Millions) Amount Location Amount Location Amount
Foreign currency forward/option contracts $ (11) Cost of sales $ 28 Cost of sales $ -
Interest rate swap contracts (4) Interest expense - Interest expense -
Total $ (15) $ 28 $ -
Six months ended June 30, 2016
(Millions) Amount Location Amount Location Amount
Foreign currency forward/option contracts $ (131) Cost of sales $ 81 Cost of sales $ -
Interest rate swap contracts (5) Interest expense (1) Interest expense -
Total $ (136) $ 80 $ -
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 4, 2017 (which updated 3M's 2016 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:
Gain (Loss) on Derivative Gain (Loss) on Hedged Item
Three months ended June 30, 2017 Recognized in Income Recognized in Income
(Millions) Location Amount Location Amount
Interest rate swap contracts Interest expense $ 1 Interest expense $ (1)
Total $ 1 $ (1)
Six months ended June 30, 2017
(Millions) Location Amount Location Amount
Interest rate swap contracts Interest expense $ (4) Interest expense $ 4
Total $ (4) $ 4
Three months ended June 30, 2016
(Millions) Location Amount Location Amount
Interest rate swap contracts Interest expense $ 5 Interest expense $ (5)
Total $ 5 $ (5)
Six months ended June 30, 2016
(Millions) Location Amount Location Amount
Interest rate swap contracts Interest expense $ 34 Interest expense $ (34)
Total $ 34 $ (34)
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 June 30, 2017, the total notional amount of foreign exchange forward contracts designated in net investment hedges was
approximately 250 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 2017 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.
Pretax Gain (Loss)
Recognized as
Cumulative Translation
within Other Ineffective Portion of Gain (Loss) on
Comprehensive Income Instrument and Amount Excluded
on Effective Portion of from Effectiveness Testing
Three months ended June 30, 2017 Instrument Recognized in Income
(Millions) Amount Location Amount
Foreign currency denominated debt $ (270) N/A $ -
Foreign currency forward contracts (7) Cost of sales 3
Total $ (277) $ 3
Six months ended June 30, 2017
(Millions) Amount Location Amount
Foreign currency denominated debt $ (391) N/A $ -
Foreign currency forward contracts (27) Cost of sales 5
Total $ (418) $ 5
Three months ended June 30, 2016
(Millions) Amount Location Amount
Foreign currency denominated debt $ 94 N/A $ -
Foreign currency forward contracts 16 Cost of sales 3
Total $ 110 $ 3
Six months ended June 30, 2016
(Millions) Amount Location Amount
Foreign currency denominated debt $ (50) N/A $ -
Foreign currency forward contracts (27) Cost of sales 1
Total $ (77) $ 1
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 Company revised amounts previously presented in the table below for the gain (loss) on derivatives recognized in income
for the three and six months ended June 30, 2016 relative to foreign currency forward contracts. This immaterial correction
increased the previously presented amount of the gain recognized in income in the disclosure table below by $40 million for
the three months ended June 30, 2016 and decreased the previously presented amount of the gain recognized in income by $18
million for the six months ended June 30, 2016. This revision had no impact on the Company's consolidated results of
operations, financial condition, or cash flows.
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 June 30, 2017 Six months ended June 30, 2017
Gain (Loss) on Derivative Recognized in Gain (Loss) on Derivative Recognized in
Income Income
(Millions) Location Amount Location Amount
Foreign currency forward/option contracts Cost of sales $ 6 Cost of sales $ 5
Foreign currency forward contracts Interest expense (138) Interest expense (96)
Total $ (132) $ (91)
Three months ended June 30, 2016 Six months ended June 30, 2016
Gain (Loss) on Derivative Recognized in Gain (Loss) on Derivative Recognized in
Income Income
(Millions) Location Amount Location Amount
Foreign currency forward/option contracts Cost of sales $ (1) Cost of sales $ (6)
Foreign currency forward contracts Interest expense 89 Interest expense 24
Total $ 88 $ 18
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. Notional amounts below are presented at period
end foreign exchange rates, except interest rate swaps, which are presented using the contract inception date's foreign
exchange rate. Additional information with respect to the fair value of derivative instruments is included in Note 11.
Gross Assets Liabilities
June 30, 2017 Notional Fair Fair
(Millions) Amount Location Value Amount Location Value Amount
Derivatives designated as
hedging instruments
Foreign currency forward/option contracts $ 2,208 Other current assets $ 11 Other current liabilities $ 42
Foreign currency forward/option contracts 1,488 Other assets 32 Other liabilities 27
Interest rate swap contracts 590 Other current assets 2 Other current liabilities 4
Interest rate swap contracts 1,753 Other assets 22 Other liabilities 2
Total derivatives designated as hedging instruments $ 67 $ 75
Derivatives not designated as
hedging instruments
Foreign currency forward/option contracts $ 5,914 Other current assets $ 23 Other current liabilities $ 118
Total derivatives not designated as hedging instruments $ 23 $ 118
Total derivative instruments $ 90 $ 193
Gross Assets Liabilities
December 31, 2016 Notional Fair Fair
(Millions) Amount Location Value Amount Location Value Amount
Derivatives designated as
hedging instruments
Foreign currency forward/option contracts $ 2,160 Other current assets $ 107 Other current liabilities $ 9
Foreign currency forward/option contracts 1,459 Other assets 86 Other liabilities 3
Interest rate swap contracts 1,953 Other assets 25 Other current liabilities 1
Total derivatives designated as hedging instruments $ 218 $ 13
Derivatives not designated as
hedging instruments
Foreign currency forward/option contracts $ 5,655 Other current assets $ 41 Other current liabilities $ 82
Total derivatives not designated as hedging instruments $ 41 $ 82
Total derivative instruments $ 259 $ 95
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 June 30, 2017, 3M has International Swaps and Derivatives Association
(ISDA) agreements with 16 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 15 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 collateral had been received or pledged
related to these derivative instruments.
Offsetting of Financial Assets under Master Netting Agreements with Derivative Counterparties
Gross Amounts not Offset in the
Consolidated Balance Sheet that are Subject
Gross Amount of to Master Netting Agreements
Derivative Assets Gross Amount of
Presented in the Eligible Offsetting
June 30, 2017 Consolidated Recognized Cash Collateral Net Amount of
(Millions) Balance Sheet Derivative Liabilities Received Derivative Assets
Derivatives subject to master netting agreements $ 90 $ 35 $ - $ 55
Derivatives not subject to master netting agreements - -
Total $ 90 $ 55
December 31, 2016
(Millions)
Derivatives subject to master netting agreements $ 259 $ 39 $ - $ 220
Derivatives not subject to master netting agreements - -
Total $ 259 $ 220
Offsetting of Financial Liabilities under Master Netting Agreements with Derivative Counterparties
Gross Amounts not Offset in the
Consolidated Balance Sheet that are Subject
Gross Amount of to Master Netting Agreements
Derivative Liabilities Gross Amount of
Presented in the Eligible Offsetting
June 30, 2017 Consolidated Recognized Cash Collateral Net Amount of
(Millions) Balance Sheet Derivative Assets Pledged Derivative Liabilities
Derivatives subject to master netting agreements $ 189 $ 35 $ - $ 154
Derivatives not subject to master netting agreements 4 4
Total $ 193 $ 158
December 31, 2016
(Millions)
Derivatives subject to master netting agreements $ 93 $ 39 $ - $ 54
Derivatives not subject to master netting agreements 2 2
Total $ 95 $ 56
Currency Effects
3M estimates that year-on-year foreign currency transactions effects, including hedging impacts, decreased pre-tax income
by approximately $28 million and $65 million for the three and six months ended June 30, 2017, respectively. These
estimates include transaction gains and losses, including derivative instruments designed to reduce foreign currency
exchange rate risks and any impacts from swapping Venezuelan bolivars into U.S. dollars.
NOTE 11. Fair Value Measurements
3M follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured at
fair value on a recurring basis and nonrecurring basis. Under the standard, fair value is defined as the exit price, or the
amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value
that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the
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