3M 2014 Annual Report Download - page 49

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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. 3M may dedesignate these cash flow hedge
relationships in advance of the occurrence of the forecasted transaction. Beginning in the second quarter of 2014, 3M
began extending the maximum length of time over which it hedges its exposure to the variability in future cash flows of the
forecasted transactions from a previous term of 12 months to a longer term of 24 months. 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 foreign currency forward contracts 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 $2.2 billion and $6.6 billion, respectively, at
December 31, 2014. As of December 31, 2014, the Company had 200 million Euros in notional amount of foreign
currency forward contracts designated as net investment hedges along with 1.85 billion Euros in principal amount of
foreign currency denominated debt designated as non-derivative 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, 2014 was $1 billion.
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.
Commodity Prices Risk:
Certain commodities the Company uses in the production of its products are exposed to market price risks. 3M manages
commodity price risks through negotiated supply contracts, price protection agreements and forward contracts. The
Company uses commodity price swaps as cash flow hedges of forecasted commodity transactions to manage price
volatility. Generally, the length of time over which 3M hedges its exposure to the variability in future cash flows for its
forecasted transactions is 12 months. 3M also enters into commodity price swaps that are not designated in hedge
relationships to offset, in part, the impacts of fluctuations in costs associated with the use of certain commodities and
precious metals.
The dollar equivalent gross notional amount of the Company’s commodity price swaps designated as cash flow hedges
and commodity price swaps not designated in hedge relationships were $20 million and $2 million, respectively, at
December 31, 2014.