3M 2014 Annual Report Download - page 96

90
NOTE 11. 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 12. References to information regarding derivatives and/or hedging instruments associated with the Company’s
long-term debt are also made in Note 9.
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. 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. Hedge
ineffectiveness and the amount excluded from effectiveness testing recognized in income on cash flow hedges were not
material for 2014, 2013 and 2012. Beginning in the second quarter of 2014 3M began extending the maximum length of
time over which it hedges its exposure to the variability in future cash flows of the forecasted transactions from a previous
term of 12 months to a longer term of 24 months. The dollar equivalent gross notional amount of the Company’s foreign
exchange forward and option contracts designated as cash flow hedges at December 31, 2014, was approximately $2.2
billion.
Cash Flow Hedging - Commodity Price Management: The Company manages commodity price risks through negotiated
supply contracts, price protection agreements and forward contracts. The Company uses commodity price swaps as cash
flow hedges of forecasted commodity 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. Generally, the length of time over which 3M hedges its
exposure to the variability in future cash flows for its forecasted transactions is 12 months. No significant commodity cash
flow hedges were discontinued and hedge ineffectiveness was not material for 2014, 2013 and 2012. The dollar
equivalent gross notional amount of the Company’s commodity price swaps designated as cash flow hedges at December
31, 2014, was $20 million.
Cash Flow Hedging – Interest Rate Contracts: In August 2011, in anticipation of the September 2011 issuance of $1
billion in five-year fixed rate notes, 3M executed a pre-issuance cash flow hedge on a notional amount of $400 million by
entering into a forward-starting five-year floating-to-fixed interest rate swap. Upon debt issuance in September 2011, 3M
terminated the floating-to-fixed interest rate swap. The termination of the swap resulted in a $7 million pre-tax loss ($4
million after-tax) that will be amortized over the five-year life of the note.
In the third and fourth quarters of 2014, the Company entered into forward starting interest rate swaps with notional
amounts totaling 500 million Euros as a hedge against interest rate volatility associated with the forecasted issuance of
fixed rate debt. Upon issuance in November 2014 of 750 million Euros aggregate principal amount of twelve-year fixed
rate notes, 3M terminated these interest rate swaps. The termination resulted in a $8 million pre-tax ($5 million after-tax)
loss within accumulated other comprehensive income that will be amortized over the twelve-year life of the notes.