3M 2007 Annual Report Download - page 79

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Credit risk: The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate
swaps, currency swaps, and option and foreign exchange 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. The Company
does not anticipate nonperformance by any of these counterparties. During the second quarter of 2006, the Company
entered into a credit support agreement with one of its primary derivatives counterparties. Under this agreement either
party is required to post eligible collateral when the market value of transactions covered by the agreement exceeds
specified thresholds, thus limiting credit exposure for both parties.
Fair value of financial instruments: At December 31, 2007 and 2006, the Company’s financial instruments included cash
and cash equivalents, marketable securities, accounts receivable, investments, accounts payable, borrowings, and
derivative contracts. The fair values of cash and cash equivalents, accounts receivable, accounts payable, and short-term
borrowings and current portion of long-term debt (except the $350 million dealer remarketable security) approximated
carrying values because of the short-term nature of these instruments. Available-for-sale marketable securities,
investments and derivative contracts are reported at fair values. Fair values for investments held at cost are not readily
available, but are estimated to approximate fair value. The carrying amounts and estimated fair values of other financial
instruments based on third-party quotes as of December 31 follow:
Financial Instruments’ Carrying Amounts and Estimated Fair Values
2007 2006
Carrying Fair Carrying Fair
(Millions) Amount Value Amount Value
Dealer remarketable securities $ 350 $ 368 $ 350 $ 358
Convertible note (long-term in 2007 and short-term
in 2006)
222 212
542 568
Long-term debt 3,797 3,796 1,047 1,054
NOTE 13. Commitments and Contingencies
Capital and Operating Leases:
Rental expense under operating leases was $226 million in 2007, $211 million in 2006, and $195 million in 2005. It is
3M’s practice to secure renewal rights for leases, thereby giving 3M the right, but not the obligation, to maintain a
presence in a leased facility. 3M’s primary capital lease, which became effective in April 2003, involves a building in
the United Kingdom (with a lease term of 22 years). During the second quarter of 2003, 3M recorded a capital lease
asset and obligation of approximately 33.5 million United Kingdom pounds (approximately $67 million at December
31, 2007 exchange rates). Minimum lease payments under capital and operating leases with non-cancelable terms in
excess of one year as of December 31, 2007, were as follows:
Capital Operating
(Millions) Leases Leases
2008 $ 7 $ 98
2009 6 79
2010 6 58
2011 6 35
2012 5 30
After 2012 54 141
Total 84 $441
Less: Amounts representing interest 13
Present value of future minimum lease payments 71
Less: Current obligations under capital leases 2
Long-term obligations under capital leases $69
Warranties/Guarantees:
3M’s accrued product warranty liabilities, recorded on the Consolidated Balance Sheet as part of current and long-
term liabilities, are estimated at approximately $21 million as of December 31, 2007. 3M does not consider this
amount to be material. The fair value of 3M guarantees of loans with third parties and other guarantee arrangements
are not material.