3M 2009 Annual Report Download - page 100

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94
Net Investment Hedges:
As circumstances warrant, the Company uses cross currency swaps, forwards and foreign currency denominated
debt to hedge portions of the Company’s net investments in foreign operations. For hedges that meet the
effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in
cumulative translation within other comprehensive income. The remainder of the change in value of such instruments
is recorded in earnings. Recognition in earnings of amounts previously recorded in cumulative translation is limited to
circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign
operation. At December 31, 2009, there were no cross currency swaps or foreign currency forward contracts
designated as net investment hedges.
In November 2006, the Company entered into a three-year floating-to-floating cross currency swap with a notional
amount of $200 million. This transaction was a partial hedge of the Company’s net investment in its European
subsidiaries. This swap converted U.S. dollar-based variable interest payments to Euro-based variable interest
payments associated with the notional amount. This swap matured in November 2009.
In September 2006, the Company entered into a three-year floating-to-floating cross currency swap with a notional
amount of $300 million. This transaction was a partial hedge of the Company’s net investment in its Japanese
subsidiaries. This swap converted U.S. dollar-based variable interest payments to yen-based variable interest
payments associated with the notional amount. This swap matured in September 2009.
In addition to the derivative instruments used as hedging instruments in net investment hedges, 3M also uses foreign
currency denominated debt as nonderivative hedging instruments in certain net investment hedges. In July and
December 2007, the Company issued seven-year fixed rate Eurobond securities for amounts of 750 million Euros
and 275 million Euros, respectively. 3M designated each of these Eurobond issuances as hedging instruments of the
Company’s net investment in its European subsidiaries.
The location in the consolidated statements of income and comprehensive income and amounts of gains and losses
related to derivative and nonderivative instruments designated as net investment hedges are as follows. There were
no reclassifications of the effective portion of net investment hedges out of accumulated other comprehensive
income into income for the period presented in the table below.
Year ended December 31, 2009
(Millions)
Derivative and Nonderivative Instruments in
Pretax Gain (Loss) Recognized as
Cumulative Translation within Other
Comprehensive Income on Effective
Portion of Instrument
Ineffective Portion of Gain (Loss) on
Instrument and Amount Excluded from
Effectiveness Testing Recognized in
Income
Net Investment Hedging Relationships Amount Location Amount
Cross currency swap contracts ....................
.
$ (12) Interest expense $ —
Foreign currency denominated debt ............
.
(27) N/A —
Total..........................................................
.
$ (39) $ —
Derivatives Not Designated as Hedging Instruments:
Derivatives not designated as hedging instruments include dedesignated foreign currency forward and option
contracts that formerly were designated in cash flow hedging relationships (as referenced in the preceding Cash
Flow Hedges section). In addition, 3M enters into foreign currency forward contracts and commodity price swaps to
offset, in part, the impacts of certain intercompany activities (primarily associated with intercompany licensing
arrangements and certain intercompany loans) and fluctuations in costs associated with the use of certain precious
metals, respectively. These derivative instruments are not designated in hedging relationships; therefore, fair value
gains and losses on these contracts are recorded in earnings. The dollar equivalent gross notional amount of these
forward, option and swap contracts not designated as hedging instruments totaled $860 million as of December 31,
2009. The Company does not hold or issue derivative financial instruments for trading purposes.