3M 2005 Annual Report Download - page 58

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exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to
an agreed-upon notional principal amount. The Company manages commodity price risks through negotiated supply
contracts, price protection agreements and forward physical contracts.
A variance/co-variance statistical modeling technique was used to test the Company’s exposure to changes in
currency and interest rates and assess the risk of loss in after-tax earnings of financial instruments, derivatives and
underlying exposures outstanding at December 31, 2005. The model (third-party bank dataset) used a 95%
confidence level over a 12-month time horizon. Based on this analysis of the Company’s interest rate risks, possible
increases in interest rates would not have a material adverse effect on after-tax earnings ($2 million at December 31,
2005 and $5 million at December 31, 2004). A decrease in interest rates would have increased after-tax earnings by
$2 million at December 31, 2005. Based on this analysis of the primary foreign exchange risks, possible changes in
foreign exchange rates would have adversely impacted after-tax earnings by $69 million at December 31, 2005
($61 million at December 31, 2004). A positive change in exchange rates would have benefited after-tax earnings
by $66 million at December 31, 2005. When including certain commodity risks, possible changes in commodity
rates would have adversely impacted after-tax earnings by an additional $4 million at December 31, 2005 (an
additional $10 million at December 31, 2004). A positive change in commodity rates would not have materially
impacted after-tax earnings at December 31, 2005. The model used analyzed over 20 different currencies and five
commodities, but 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.
The global exposures related to purchased components and materials are such that a one percent price change
would result in a pre-tax cost or savings of approximately $45 million per year. The global energy exposure is such
that a 10% price change would result in a pre-tax cost or savings of approximately $35 million per year. Derivative
instruments are used to hedge less than two percent of the purchased components and materials exposure and are
used to hedge approximately 10% of this energy exposure.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Item 7, contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.The Company may also make forward-looking statements in other reports filed with
the Securities and Exchange Commission, in materials delivered to stockholders and in press releases. In
addition, the Company’s representatives may from time to time make oral forward-looking statements.
Forward-looking statements relate to future events and typically address the Company’s expected future business
and financial performance. Words such as “plan,” “expect,” “aim,” “believe,” “project,” “target,” “anticipate,”
“intend,” “estimate,” “will,” “should,” “could” and other words and terms of similar meaning, typically identify such
forward-looking statements. In particular, these include statements about the Company’s strategy for growth,
product development, market position, future performance or results of current or anticipated products, interest
rates, foreign exchange rates, financial results, and the outcome of contingencies, such as legal proceedings. The
Company assumes no obligation to update or revise any forward-looking statements.
Forward-looking statements are based on certain assumptions and expectations of future events and trends that
are subject to risks and uncertainties. Actual future results and trends may differ materially from historical results
or those reflected in any such forward-looking statements depending on a variety of factors. Discussion of these
factors is incorporated by reference from Part I, Item 1A, “Risk Factors”, of this document, and should be
considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations”.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the context of Item 7A, market risk refers to the risk of loss arising from adverse changes in financial and derivative
instrument market rates and prices, such as fluctuations in interest rates and foreign currency exchange rates. The
Company discusses risk management in various places throughout this document, including discussions in Item 7
concerning Financial Condition and Liquidity, and Financial Instruments, and in the Notes to Consolidated Financial
Statements (Long-Term Debt and Short-Term Borrowings, Derivatives and Other Financial Instruments, and the
Derivatives and Hedging Activities accounting policy). All derivative activity is governed by written policies, and a
value-at-risk analysis is provided for these derivatives. The Company does not have leveraged derivative positions.
However, the Company does have contingently convertible debt that, if conditions for conversion are met, is
convertible into shares of 3M common stock (refer to Note 8 in this document).