3M 2013 Annual Report Download - page 47

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FINANCIAL INSTRUMENTS
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.
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. Generally, 3M dedesignates these cash flow hedge
relationships in advance of the occurrence of the forecasted transaction. The maximum length of time over which 3M
hedges its exposure to the variability in future cash flows for a majority of the forecasted transactions is 12 months and,
accordingly, at December 31, 2013, the majority of the Company’s open foreign exchange forward and option contracts
had maturities of one year or less. 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 cross currency swaps, forwards 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 $1.7 billion and $7.5 billion, respectively, at December 31, 2013. As of December 31, 2013, the
Company had no cross currency swap and foreign currency forward contracts designated as net investment hedges, but
had designated certain of 3M’s foreign currency denominated debt as nonderivative hedging instruments in certain net
investment hedges as discussed in Note 11 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, 2013 was $745 million.
Additional details about 3M’s long-term debt can be found in Note 9, including references to information regarding
derivatives and/or hedging instruments associated with the Company’s long-term debt.