REG - 3M Company - Half Yearly Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 4
29/10/2014 09:34
- Part 4: For the preceding part double click ID:nRSA0731Oc
(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 six months ended June 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 $37 million and $2 million in for the three and six
months ended June 30, 2013, respectively. The revisions had no impact on the Company's consolidated results of operations
or financial condition.
Three months ended June 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 $ (20) Cost of sales $ (6) Cost of sales $ -
Commodity price swap contracts (1) Cost of sales 1 Cost of sales -
Total $ (21) $ (5) $ -
Six months ended June 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 $ (13) Cost of sales $ (2) Cost of sales $ -
Commodity price swap contracts 1 Cost of sales 3 Cost of sales -
Total $ (12) $ 1 $ -
Three months ended June 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 $ 10 Cost of sales $ (3) Cost of sales $ -
Foreign currency forward contracts (86) Interest expense (89) Interest expense -
Commodity price swap contracts (3) Cost of sales 1 Cost of sales -
Total $ (79) $ (91) $ -
Six months ended June 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 $ 41 Cost of sales $ (9) Cost of sales $ -
Foreign currency forward contracts (154) Interest expense (155) Interest expense -
Commodity price swap contracts (1) Cost of sales - Cost of sales -
Total $ (114) $ (164) $ -
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 June 30, 2014 was $1.3 billion.
At June 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, is 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 is not part of the gain on
hedged items recognized in income in the tables below.
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 June 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 $ 6 Interest expense $ (6)
Total $ 6 $ (6)
Six months ended June 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 June 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
Six months ended June 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 $ (8) Interest expense $ 8
Total $ (8) $ 8
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 quarter of 2014, the Company dedesignated 716 million Euros 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 will be recorded in earnings going forward
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 quarter of 2014, the Company entered into foreign currency forward contracts with notional amounts totaling
450 million Euros. These forward contracts were designated as hedging instruments of the Company's net investment in its
European subsidiaries. These contracts mature in September 2014.
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 June 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 $ (18) N/A $ -
Foreign currency forward contracts 1 N/A -
Total $ (17) $ -
Six months ended June 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 $ (27) N/A $ -
Foreign currency forward contracts 1 N/A -
Total $ (26) $ -
Three months ended June 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 $ (24) N/A $ -
Total $ (24) $ -
Six months ended June 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 $ 17 N/A $ -
Total $ 17 $ -
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
$8.1 billion as of June 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") for the three and six months ended June 30, 2013 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 both the three and six months ended June 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 June 30, 2014 Six months ended June 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 $ (2) Cost of sales $ (3)
Foreign currency forward contracts Interest expense 35 Interest expense 68
Total $ 33 $ 65
Derivatives Not Designated as Hedging Instruments Three months ended June 30, 2013 Six months ended June 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 $ 21 Cost of sales $ 31
Foreign currency forward contracts Interest expense (27) Interest expense (6)
Commodity price swap contracts Cost of sales (1) Cost of sales (1)
Total $ (7) $ 24
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.
June 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 $ 12 Other current liabilities $ 23
Commodity price swap contracts Other current assets 1 Other current liabilities 1
Interest rate swap contracts Other assets 17 Other liabilities 2
Total derivatives designated as
hedging instruments $ 30 $ 26
Derivatives not designated as hedging instruments
Foreign currency forward/option contracts Other current assets $ 40 Other current liabilities $ 31
Total derivatives not designated as
hedging instruments $ 40 $ 31
Total derivative instruments $ 70 $ 57
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 June 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
June 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 $ 69 $ 33 $ - $ 36
Derivatives not subject to master
netting agreements 1 1
Total $ 70 $ 37
June 30, 2014
Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
(Millions) Gross Amount of Derivative Liabilities Presented in the Consolidated Balance Sheet Gross Amount of Eligible Offsetting Recognized Derivative Assets Cash Collateral Pledged Net Amount of Derivative Liabilities
Derivatives subject to master
netting agreements $ 57 $ 33 $ - $ 24
Derivatives not subject to master
netting agreements - -
Total $ 57 $ 24
December 31, 2013
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 $ 83 $ 51 $ - $ 32
Derivatives not subject to master
netting agreements 1 1
Total $ 84 $ 33
December 31, 2013
Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
(Millions) Gross Amount of Derivative Liabilities Presented in the Consolidated Balance Sheet Gross Amount of Eligible Offsetting Recognized Derivative Assets Cash Collateral Pledged Net Amount of Derivative Liabilities
Derivatives subject to master
netting agreements $ 110 $ 51 $ - $ 59
Derivatives not subject to master
netting agreements - -
Total $ 110
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