3M 2007 Annual Report Download - page 78

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At December 31, 2007, the Company expects to reclassify to earnings over the next 12 months a majority of the cash flow
hedging instruments after-tax loss of $28 million (with the impact offset by cash flows from underlying hedged items).
Fair Value Hedging - Interest Rate Swaps: The Company 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. 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.
At December 31, 2007, the Company had interest rate swaps designated as fair value hedges of underlying fixed rate
obligations. In June 2006, the Company entered into a $330 million fixed-to-floating interest rate swap to hedge the 30-
year bond due in 2028. The Company terminated the swap in March 2007 and the resulting gain will be recognized over
the remaining life of the underlying debt. Accordingly, the termination of the swap did not have a material impact on 3M’s
consolidated results of operations or financial condition. As indicated in Note 10, in November 2006, the Company
entered into a $400 million fixed-to-floating interest rate swap concurrent with the issuance of the three-year medium-
term note due in 2009. Also as indicated in Note 10, in July 2007, in connection with the issuance of a seven-year
Eurobond for an amount of 750 million Euros, the Company completed a fixed-to-floating interest rate swap on a
notional amount of 400 million Euros as a fair value hedge of a portion of the fixed interest rate Eurobond obligation.
The mark-to-market of these fair value hedges is recorded as gains or losses in interest expense and is offset by the gain
or loss on the underlying debt instrument, which also is recorded in interest expense. The fair value of these interest rate
swaps were $36 million and $26 million as of December 31, 2007 and 2006, respectively. These fair value hedges are
100% effective and, thus, there is no impact on earnings due to hedge ineffectiveness.
Net Investment Hedging: 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.
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 is a partial hedge of the Company’s net investment in its Japanese subsidiaries.
This swap converts U.S. dollar-based variable interest payments to yen-based variable interest payments associated with
the notional amount.
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 is a partial hedge of the Company’s net investment in its European
subsidiaries. This swap converts U.S. dollar-based variable interest payments to Euro-based variable interest payments
associated with the notional amount.
In December 2006, the Company entered into foreign currency forward contracts with a notional amount of
$556 million relative to the Company’s net investment in its European subsidiaries and with a notional amount of
$209 million relative to the Company’s net investment in its Japanese subsidiaries. These forwards matured in
December 2007.
In July and December 2007, as discussed in Note 10, 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.
In November and December 2007, the Company entered into foreign currency forward contracts with a notional
amount of $200 million that were designated as a partial hedge of the Company's net investment in its Chinese
subsidiaries. These forwards mature in December 2008.
The unrealized loss recorded in cumulative translation related to net investment hedging at December 31, 2007 was
$28 million and the unrealized loss at December 31, 2006 was $18 million.
Currency Effects: 3M estimates that year-on-year currency effects, including hedging impacts, increased net income
by approximately $150 million in 2007, $20 million in 2006, and $115 million in 2005. 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. 3M estimates that year-on-year derivative and
other transaction gains and losses increased net income by approximately $10 million in 2007, had an immaterial
impact on net income in 2006, and increased net income by approximately $50 million in 2005.