3M 2006 Annual Report Download - page 93

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
The following estimated benefit payments are payable from the plans to participants:
Qualified and Non-qualified Postretirement Medicare Subsidy
Pension Benefits Benefits Receipts
(Millions) United States International
2007 Benefit Payments $ 548 $ 152 $116 $ 12
2008 Benefit Payments 563 159 124 14
2009 Benefit Payments 580 167 131 16
2010 Benefit Payments 599 176 139 18
2011 Benefit Payments 620 184 145 20
Following five years 3,463 1,071 794 129
NOTE 12. Derivatives and Other Financial Instruments
The Company uses interest rate swaps, currency 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, and includes a table that recaps cash flow hedging
amounts.
Foreign Currency Forward and Option Contracts: The Company enters into foreign exchange forward contracts, options
and swaps 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. At December 31,
2006, the Company had various open foreign exchange forward and option contracts, the majority of which had maturities
of one year or less. The settlement or extension of these derivatives will result in reclassifications to earnings in the period
during which the hedged transactions affect earnings (from other comprehensive income). The maximum length of time
over which 3M is hedging its exposure to the variability in future cash flows for a majority of the forecasted transactions is
12 months. Hedge ineffectiveness was not material for the years 2006, 2005 and 2004.
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 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. 3M has hedged its exposure to the variability of future cash flows for
certain forecasted transactions through 2008. No significant commodity cash flow hedges were discontinued and hedge
ineffectiveness was not material during the years 2006, 2005 and 2004.
Amounts recorded in accumulated other comprehensive income (loss) related to cash flow hedging instruments follow.
     
Cash Flow Hedging Instruments Twelve months ended
Net of Tax December 31
(Millions) 2006 2005 2004
  
Beginning balance $ 38 $(42) $(45)
Changes in fair value of derivatives (53) 70 (48)
Reclassifications to earnings from equity (3) 10 51
Total activity (56) 80 3
 
Ending balance $(18) $ 38 $(42)
At December 31, 2006, the Company expects to reclassify to earnings over the next 12 months a majority of the cash flow
hedging instruments after-tax loss of $18 million (with the impact offset by cash flows from underlying hedged items).
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