3M 2010 Annual Report Download - page 98

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92
Year ended December 31, 2010
(Millions)
Pretax Gain (Loss)
Recognized in Other
Comprehensive Income
On Effective Portion of
Derivative
Pretax Gain (Loss) Recognized
in Income on Effective Portion
of Derivative as a Result of
Reclassification from
Accumulated Other
Comprehensive Income
Ineffective Portion of Gain
(Loss) on Derivative and
Amount Excluded from
Effectiveness Testing
Recognized in Income
Derivatives in Cash Flow Hedging
Relationships
Amount
Location
Amount
Location
Amount
Foreign currency forward/option contracts ....
$
(30
)
Cost of sales
$
(39
)
Cost of sales
$
—
Foreign currency forward contracts ...............
34
Interest expense
33
Interest expense
—
Commodity price swap contracts ..................
(13
)
Cost of sales
(9
)
Cost of sales
—
Total .........................................................
$
(9
)
$
(15
)
$
—
Year ended December 31, 2009
(Millions)
Pretax Gain (Loss)
Recognized in Other
Comprehensive Income
on Effective Portion of
Derivative
Pretax Gain (Loss) Recognized
in Income on Effective Portion
of Derivative as a Result of
Reclassification from
Accumulated Other
Comprehensive Income
Ineffective Portion of Gain
(Loss) on Derivative and
Amount Excluded from
Effectiveness Testing
Recognized in Income
Derivatives in Cash Flow Hedging
Relationships
Amount
Location
Amount
Location
Amount
Foreign currency forward/option contracts ....
$
(58
)
Cost of sales
$
96
Cost of sales
$
—
Foreign currency forward contracts ...............
55
Interest expense
47
Interest expense
—
Commodity price swap contracts ..................
(18
)
Cost of sales
(34
)
Cost of sales
—
Total .........................................................
$
(21
)
$
109
$
—
As of December 31, 2010, the Company had a balance of $32 million associated with the after tax net unrealized
loss associated with cash flow hedging instruments recorded in accumulated other comprehensive income. 3M
expects to reclassify to earnings over the next 12 months a majority of this balance (with the impact offset by cash
flows from underlying hedged items).
Fair Value Hedges:
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivatives as
well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current
earnings.
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. 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 of the underlying
debt instrument, which also is recorded in interest expense. These fair value hedges are highly effective and, thus,
there is no impact on earnings due to hedge ineffectiveness. The dollar equivalent (based on inception date foreign
currency exchange rates) gross notional amount of the Company’s interest rate swaps at December 31, 2010 was
$1.1 billion.
At December 31, 2010, the Company had interest rate swaps designated as fair value hedges of underlying fixed
rate obligations. 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. 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. In August 2010, the Company terminated 150 million Euros of the notional amount of this
swap. As a result, a gain of 18 million Euros, recorded as part of the balance of the underlying debt, will be amortized
over this debt’s remaining life. The Company also has two fixed-to-floating interest rate swaps with an aggregate
notional amount of $800 million designated as fair value hedges of the fixed interest rate obligation under the existing
$800 million, three-year, 4.50% notes issued in October 2008.
Fair Value Hedging — Foreign Currency: In November 2008, the Company entered into foreign currency forward
contracts to purchase Japanese Yen, Pound Sterling, and Euros with a notional amount of $255 million at the
contract rates. These contracts were designated as fair value hedges of a U.S. dollar tax obligation. These fair value
hedges matured in early January 2009. The mark-to-market of these forward contracts was recorded as gains or
losses in tax expense and was offset by the gain or loss on the underlying tax obligation, which also was recorded in
tax expense. Changes in the value of these contracts in 2009 through their maturity were not material.