3M 2014 Annual Report Download - page 50

Download and view the complete annual report

Please find page 50 of the 2014 3M annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 132

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132

44
Value At Risk:
The value at risk analysis is performed annually. A Monte Carlo simulation technique was used to test the Company’s
exposure to changes in currency rates, interest rates, and commodity prices and assess the risk of loss or benefit in after-
tax earnings of financial instruments (primarily debt), derivatives and underlying exposures outstanding at December 31,
2014. The model (third-party bank dataset) used a 95 percent confidence level over a 12-month time horizon. The
exposure to changes in currency rates model used 18 currencies, interest rates related to three currencies (four in 2013),
and commodity prices related to five commodities. This model does not purport to represent what actually will be
experienced by the Company. This model does not include certain hedge transactions, because the Company believes
their inclusion would not materially impact the results. 3M changed to a different third-party bank dataset in 2014 and have
revised 2013 amounts to reflect this change. Foreign exchange rate risk of loss or benefit increased in 2014, primarily due
to increases in exposures, which is one of the key drivers in the valuation model. Interest rate volatility remained stable in
2014 because the majority of 3M’s debt is fixed and interest rates are currently very low and are projected to remain low,
based on forward rates. The following table summarizes the possible adverse and positive impacts to after-tax earnings
related to these exposures.
Adverse impact on after
-
tax
earnings
Positive impact on after
-
tax
earnings
(Millions)
2014
2013
2014
2013
Foreign exchange rates
$
(164)
$
(128)
$
173
$
134
Interest rates
(4)
(2)
3
1
Commodity prices
(1)
(4)
1
3
In addition to the possible adverse and positive impacts discussed in the preceding table related to foreign exchange
rates, recent historical information is as follows. 3M estimates that year-on-year currency effects, including hedging
impacts, had the following effects on net income attributable to 3M: 2014 ($97 million decrease) and 2013 ($74 million
decrease). This estimate includes the effect of translating profits from local currencies into U.S. dollars; the impact of
currency fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction
gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks and the
negative impact of swapping Venezuelan bolivars into U.S. dollars. 3M estimates that year-on-year derivative and other
transaction gains and losses had the following effects on net income attributable to 3M: 2014 ($8 million increase) and
2013 ($12 million decrease).
An analysis of the global exposures related to purchased components and materials is performed at each year-end. A one
percent price change would result in a pre-tax cost or savings of approximately $80 million per year. The global energy
exposure is such that a ten percent price change would result in a pre-tax cost or savings of approximately $47 million per
year. Global energy exposure includes energy costs used in 3M production and other facilities, primarily electricity and
natural gas.