3M 2015 Annual Report Download - page 45

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TableofContents
RefertoItem7A,“QuantitativeandQualitativeDisclosuresAboutMarketRisk”,forfurtherdiscussionofforeignexchangerates
risk,interestratesrisk,commoditypricesriskandvalueatriskanalysis.
Item7A.QuantitativeandQualitativeDisclosuresAboutMarketRisk.
InthecontextofItem7A,3Misexposedtomarketriskduetotheriskoflossarisingfromadversechangesinforeigncurrency
exchangerates,interestratesandcommodityprices.Changesinthosefactorscouldcausefluctuationsinearningsandcashflows.
Seniormanagementprovidesoversightforriskmanagementandderivativeactivities,determinescertainoftheCompany’sfinancial
riskpoliciesandobjectives,andprovidesguidelinesforderivativeinstrumentutilization.Seniormanagementalsoestablishescertain
associatedproceduresrelativetocontrolandvaluation,riskanalysis,counterpartycreditapproval,andongoingmonitoringand
reporting.
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.TheCompanydoesnotanticipatenonperformanceby
anyofthesecounterparties.
ForeignExchangeRatesRisk:
ForeigncurrencyexchangeratesandfluctuationsinthoseratesmayaffecttheCompany’snetinvestmentinforeignsubsidiariesand
maycausefluctuationsincashflowsrelatedtoforeigndenominatedtransactions.3Misalsoexposedtothetranslationofforeign
currencyearningstotheU.S.dollar.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.3Mmaydedesignatethesecashflowhedgerelationshipsinadvanceoftheoccurrenceoftheforecastedtransaction.
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,with
certaincurrenciesbeingextendedfurtherto36monthsstartinginthefirstquarterof2015.Inaddition,3Mentersintoforeign
currencyforwardcontractsthatarenotdesignatedinhedgingrelationshipstooffset,inpart,theimpactsofcertainintercompany
activities(primarilyassociatedwithintercompanylicensingarrangementsandintercompanyfinancingtransactions).As
circumstanceswarrant,theCompanyalsousesforeigncurrencyforwardcontractsandforeigncurrencydenominateddebtashedging
instrumentstohedgeportionsoftheCompany’snetinvestmentsinforeignoperations.Thedollarequivalentgrossnotionalamount
oftheCompany’sforeignexchangeforwardandoptioncontractsdesignatedascashflowhedgesandthosenotdesignatedas
hedginginstrumentswere$2.8billionand$5.4billion,respectively,atDecember31,2015.AsofDecember31,2015,the
Companyhad974millionEurosand248billionSouthKoreanWoninnotionalamountofforeigncurrencyforwardcontracts
designatedasnetinvestmenthedgesalongwith3.6billionEurosinprincipalamountofforeigncurrencydenominateddebt
designatedasnon-derivativehedginginstrumentsincertainnetinvestmenthedgesasdiscussedinNote12inthe“NetInvestment
Hedges”section.
InterestRatesRisk:
TheCompanymaybeimpactedbyinterestratevolatilitywithrespecttoexistingdebtandfuturedebtissuances.3M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thataredesignatedandqualifyasfairvaluehedges.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dollarequivalent(basedoninceptiondateforeigncurrencyexchangerates)grossnotionalamountofthe
Company’sinterestrateswapsatDecember31,2015was$1.8billion.Additionaldetailsabout3M’slong-termdebtcanbefoundin
Note10,includingreferencestoinformationregardingderivativesand/orhedginginstrumentsassociatedwiththeCompany’slong-
termdebt.
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