3M 2011 Annual Report Download - page 45

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39
reason, these amounts will not provide a reliable indicator of the Company’s expected future cash outflows on a
stand-alone basis.
Other obligations, included in the preceding table within the caption entitled “Unconditional purchase obligations and
other,” include the current portion of the liability for uncertain tax positions under ASC 740, which is expected to be
paid out in cash in the next 12 months. The Company is not able to reasonably estimate the timing of the long-term
payments or the amount by which the liability will increase or decrease over time; therefore, the long-term portion of
the net tax liability of $230 million is excluded from the preceding table. Refer to Note 8 for further details.
As discussed in Note 11, the Company does not have a required minimum cash pension contribution obligation for its
U.S. plans in 2012 and Company contributions to its U.S. and international pension plans are expected to be largely
discretionary in future years; therefore, amounts related to these plans are not included in the preceding table.
FINANCIAL INSTRUMENTS
The Company enters into contractual derivative arrangements in the ordinary course of business to manage foreign
currency exposure, interest rate risks and commodity price risks. A financial risk management committee, composed
of senior management, provides oversight for risk management and derivative activities. This committee determines
the Company’s financial risk policies and objectives, and provides guidelines for derivative instrument utilization. This
committee also establishes procedures for control and valuation, risk analysis, counterparty credit approval, and
ongoing monitoring and reporting.
The Company enters into foreign exchange forward contracts, options and swaps to hedge against the effect of
exchange rate fluctuations on cash flows denominated in foreign currencies and certain intercompany financing
transactions. The Company manages interest rate risks 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. The Company manages commodity price risks through
negotiated supply contracts, price protection agreements and forward physical contracts.
A Monte Carlo simulation technique was used to test the Company’s exposure to changes in currency and interest
rates and assess the risk of loss or benefit in after-tax earnings of financial instruments, derivatives and underlying
exposures outstanding at December 31, 2011. The model (third-party bank dataset) used a 95 percent confidence
level over a 12-month time horizon. The model used analyzed 18 currencies, interest rates related to two 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. Foreign exchange rate risk of loss or benefit increased in 2011, primarily due to
increases in exposures, which is one of the key drivers in the valuation model. Interest rate volatility decreased in
2011 because interest rates are currently very low and are projected to remain low, based on forward rates. The
following table summarizes the possible adverse and positive impacts to after-tax earnings related to these
exposures.
Adverse impact on Positive impact on
after-tax earnings after-tax earnings
(Millions) 2011 2010 2011 2010
Foreign exchange rates ............................... $ (131 ) $ (108 ) $ 146 $ 120
Interest rates ................................................ (2 ) (4 ) 2 4
Commodity rates .......................................... (10 ) (15 ) 7 12
The global exposures related to purchased components and materials are such that a 1 percent price change would
result in a pre-tax cost or savings of approximately $71 million per year. The global energy exposure is such that a 10
percent price change would result in a pre-tax cost or savings of approximately $43 million per year. Derivative
instruments are used to hedge approximately 1 percent of the purchased components and materials exposure and
are used to hedge approximately 10 percent of this energy exposure.