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Derivatives | 3 Months Ended
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Mar. 31, 2018
Derivatives |
Derivatives | NOTE 12. Derivatives The Company uses interest rate swaps, currency swaps, commodity price swaps, and forward and option contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity price fluctuations. The information that follows explains the various types of derivatives and financial instruments used by 3M, how and why 3M uses such instruments, how such instruments are accounted for, and how such instruments impact 3M’s financial position and performance. Additional information with respect to derivatives is included elsewhere as follows:
| · |  | Impact on other comprehensive income of nonderivative hedging and derivative instruments is included in Note 7.
| · |  | Fair value of derivative instruments is included in Note 13.
| · |  | Derivatives and/or hedging instruments associated with the Company’s long-term debt are described in Note 11 in 3M’s 2017 Annual Report on Form 10-K.
Types of Derivatives/Hedging Instruments and Inclusion in Income/Other Comprehensive Income Cash Flow Hedges: For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Cash Flow Hedging - Foreign Currency Forward and Option Contracts: 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. The settlement or extension of these derivatives will result in reclassifications (from accumulated other comprehensive income) to earnings in the period during which the hedged transactions affect earnings. 3M may dedesignate these cash flow hedge relationships in advance of the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted transaction occurs or becomes probable of not occurring. Changes in the value of derivative instruments after dedesignation are recorded in earnings and are included in the Derivatives Not Designated as Hedging Instruments section below. The maximum length of time over which 3M hedges its exposure to the variability in future cash flows of the forecasted transactions is 36 months. Cash Flow Hedging — Interest Rate Contracts: The Company may use forward starting interest rate contracts to hedge exposure to variability in cash flows from interest payments on forecasted debt issuances. The amortization of gains and losses on forward starting interest rate swaps is included in the tables below as part of the gain/(loss) recognized in income on the effective portion of derivatives as a result of reclassification from accumulated other comprehensive income. Additional information regarding previously issued but terminated interest rate contracts, which have related balances within accumulated other comprehensive income being amortized over the underlying life of related debt, can be found in Note 13 in 3M’s 2017 Annual Report on Form 10-K. In the first quarter of 2018, the Company entered into additional forward starting interest rate swaps with a notional amount of $200 million as hedges against interest rate volatility associated with a forecasted issuance of fixed rate debt. The amortization of gains and losses on forward starting interest rate swaps is included in the tables below as part of the gain/(loss) recognized in income on the effective portion of derivatives as a result of reclassification from accumulated other comprehensive income. As of March 31, 2018, the Company had a balance of $173 million associated with the after-tax net unrealized loss associated with cash flow hedging instruments recorded in accumulated other comprehensive income. This includes a remaining balance of $9 million (after tax loss) related to the forward starting interest rate swaps, which will be amortized over the respective lives of the debt. Based on exchange rates as of March 31, 2018, 3M expects to reclassify approximately $107 million, $82 million, $57 million, and $34 million of the after-tax net unrealized foreign exchange cash flow hedging losses to earnings over the next 12 months, over the remainder of 2018, in 2019, and after 2019, respectively (with the impact offset by earnings/losses from underlying hedged items). The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to derivative instruments designated as cash flow hedges are provided in the following table.
|  |  |  | Pretax Gain (Loss) Recognized in |  |  |
|  | Pretax Gain (Loss) |  | Income on Effective Portion of |  | Ineffective Portion of Gain |
|  | Recognized in Other |  | Derivative as a Result of |  | (Loss) on Derivative and |
|  | Comprehensive |  | Reclassification from |  | Amount Excluded from |
|  | Income on Effective |  | Accumulated Other |  | Effectiveness Testing |
Three months ended March 31, 2018 |  | Portion of Derivative |  | Comprehensive Income |  | Recognized in Income |
(Millions) |  | Amount |  | Location |  | Amount |  | Location |  | Amount |
Foreign currency forward/option contracts |  | $ | (79) |  | Cost of sales |  | $ | (34) |  | Cost of sales |  | $ | — |
Interest rate swap contracts |  |  | (3) |  | Interest expense |  |  | — |  | Interest expense |  |  | — |
Total |  | $ | (82) |  |  |  | $ | (34) |  |  |  | $ | — |
Three months ended March 31, 2017 |  | Portion of Derivative |  | Comprehensive Income |  | Recognized in Income |
(Millions) |  | Amount |  | Location |  | Amount |  | Location |  | Amount |
Foreign currency forward/option contracts |  | $ | (100) |  | Cost of sales |  | $ | 18 |  | Cost of sales |  | $ | — |
Interest rate swap contracts |  |  | (1) |  | Interest expense |  |  | — |  | Interest expense |  |  | — |
Total |  | $ | (101) |  |  |  | $ | 18 |  |  |  | $ | — |
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. Additional information regarding designated interest rate swaps can be found in Note 13 in 3M’s 2017 Annual Report on Form 10-K. The location in the consolidated statements of income and amounts of gains and losses related to derivative instruments designated as fair value hedges and similar information relative to the hedged items are as follows:
|  | Gain (Loss) on Derivative |  | Gain (Loss) on Hedged Item |
Three months ended March 31, 2018 |  | Recognized in Income |  | Recognized in Income |
(Millions) |  | Location |  | Amount |  | Location |  | Amount |
Interest rate swap contracts |  | Interest expense |  | $ | (11) |  | Interest expense |  | $ | 11 |
Total |  |  |  | $ | (11) |  |  |  | $ | 11 |
Three months ended March 31, 2017 |  |  |  |  |
(Millions) |  | Location |  | Amount |  | Location |  | Amount |
Interest rate swap contracts |  | Interest expense |  | $ | (5) |  | Interest expense |  | $ | 5 |
Total |  |  |  | $ | (5) |  |  |  | $ | 5 |
Net Investment Hedges: The Company may use non-derivative (foreign currency denominated debt) and derivative (foreign exchange forward contracts) instruments to hedge portions of the Company’s investment in foreign subsidiaries and manage foreign exchange risk. For instruments that are designated and qualify as hedges of net investments in foreign operations and 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. Recognition in earnings of amounts previously recorded in cumulative translation is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. To the extent foreign currency denominated debt is not designated in or is dedesignated from a net investment hedge relationship, changes in value of that portion of foreign currency denominated debt due to exchange rate changes are recorded in earnings through their maturity date. 3M’s use of foreign exchange forward contracts designated in hedges of the Company’s net investment in foreign subsidiaries can vary by time period depending on when foreign currency denominated debt balances designated in such relationships are dedesignated, matured, or are newly issued and designated. Additionally, variation can occur in connection with the extent of the Company’s desired foreign exchange risk coverage. During the first quarter of 2018, the Company dedesignated 300 million Euros of foreign currency denominated debt from a former net investment hedge relationship. At March 31, 2018, the total notional amount of foreign exchange forward contracts designated in net investment hedges was approximately 150 million Euros and approximately 248 billion South Korean Won, along with a principal amount of long-term debt instruments designated in net investment hedges totaling 4.1 billion Euros. The maturity dates of these derivative and nonderivative instruments designated in net investment hedges range from 2018 to 2031. The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to derivative and nonderivative instruments designated as net investment hedges are as follows. There were no reclassifications of the effective portion of net investment hedges out of accumulated other comprehensive income into income for the periods presented in the table below.
|  | Pretax Gain (Loss) |  |  |  |  |  |
|  | Recognized as |  |  |  |  |  |
|  | Cumulative Translation |  |  |
|  | within Other |  | Ineffective Portion of Gain (Loss) on |
|  | Comprehensive Income |  | Instrument and Amount Excluded |
|  | on Effective Portion of |  | from Effectiveness Testing |
Three months ended March 31, 2018 |  | Instrument |  | Recognized in Income |
(Millions) |  | Amount |  | Location |  | Amount |
Foreign currency denominated debt |  | $ | (128) |  | Cost of sales |  | $ | (2) |
Foreign currency forward contracts |  |  | (6) |  | Cost of sales |  |  | (1) |
Total |  | $ | (134) |  |  |  | $ | (3) |
Three months ended March 31, 2017 |  | Comprehensive Income |  | Instrument and Amount Excluded |
(Millions) |  | Amount |  | Location |  | Amount |
Foreign currency denominated debt |  | $ | (121) |  | N/A |  | $ | — |
Foreign currency forward contracts |  |  | (20) |  | Cost of sales |  |  | 2 |
Total |  | $ | (141) |  |  |  | $ | 2 |
Derivatives Not Designated as Hedging Instruments: Derivatives not designated as hedging instruments include dedesignated foreign currency forward and options contracts that formerly were designated in cash flow hedging relationships (as referenced in the Cash Flow Hedges section above). In addition, 3M enters into foreign exchange forward contracts to offset, in part, the impacts of certain intercompany transactions, foreign currency denominated debt (not otherwise in net investment hedge relationships), and to further mitigate short term currency impacts. In addition, the Company enters into commodity price swaps to offset, in part, fluctuations in costs associated with the use of certain commodities and precious metals. These derivative instruments are not designated in hedging relationships; therefore, fair value gains and losses on these contracts are recorded in earnings. The Company does not hold or issue derivative financial instruments for trading purposes. The location in the consolidated statements of income and amounts of gains and losses related to derivative instruments not designated as hedging instruments are as follows:
|  | Three months ended March 31, 2018 |
|  | Gain (Loss) on Derivative Recognized in |
|  | Income |
(Millions) |  | Location |  | Amount |
Foreign currency forward/option contracts |  | Cost of sales |  | $ | (3) |
Foreign currency forward contracts |  | Interest expense |  |  | 23 |
Total |  |  |  | $ | 20 |
|  | Three months ended March 31, 2017 |
|  | Gain (Loss) on Derivative Recognized in |
|  | Income |
(Millions) |  | Location |  | Amount |
Foreign currency forward/option contracts |  | Cost of sales |  | $ | (1) |
Foreign currency forward contracts |  | Interest expense |  |  | 42 |
Total |  |  |  | $ | 41 |
Location and Fair Value Amount of Derivative Instruments The following tables summarize the fair value of 3M’s derivative instruments, excluding nonderivative instruments used as hedging instruments, and their location in the consolidated balance sheet. Notional amounts below are presented at period end foreign exchange rates, except interest rate swaps, which are presented using the contract inception date’s foreign exchange rate. Additional information with respect to the fair value of derivative instruments is included in Note 13.
|  | Gross |  | Assets |  | Liabilities |
March 31, 2018 |  | Notional |  |  |  | Fair |  |  |  | Fair |
(Millions) |  | Amount |  | Location |  | Value Amount |  | Location |  | Value Amount |
Derivatives designated as |  |  |  |  |  |  |  |  |  |  |  |  |  |
hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward/option contracts |  | $ | 2,225 |  | Other current assets |  | $ | 5 |  | Other current liabilities |  | $ | 122 |
Foreign currency forward/option contracts |  |  | 1,313 |  | Other assets |  |  | 11 |  | Other liabilities |  |  | 63 |
Interest rate swap contracts |  |  | 450 |  | Other current assets |  |  | — |  | Other current liabilities |  |  | 2 |
Interest rate swap contracts |  |  | 1,703 |  | Other assets |  |  | 20 |  | Other liabilities |  |  | 18 |
Total derivatives designated as hedging instruments |  |  |  |  |  |  | $ | 36 |  |  |  | $ | 205 |
Derivatives not designated as |  |  |  |  |  |  |  |  |  |  |  |  |  |
hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward/option contracts |  | $ | 6,070 |  | Other current assets |  | $ | 16 |  | Other current liabilities |  | $ | 33 |
Total derivatives not designated as hedging instruments |  |  |  |  |  |  | $ | 16 |  |  |  | $ | 33 |
Total derivative instruments |  |  |  |  |  |  | $ | 52 |  |  |  | $ | 238 |
|  | Gross |  | Assets |  | Liabilities |
December 31, 2017 |  | Notional |  |  |  | Fair |  |  |  | Fair |
(Millions) |  | Amount |  | Location |  | Value Amount |  | Location |  | Value Amount |
Derivatives designated as |  |  |  |  |  |  |  |  |  |  |  |  |  |
hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward/option contracts |  | $ | 2,204 |  | Other current assets |  | $ | 7 |  | Other current liabilities |  | $ | 109 |
Foreign currency forward/option contracts |  |  | 1,392 |  | Other assets |  |  | 20 |  | Other liabilities |  |  | 56 |
Interest rate swap contracts |  |  | 450 |  | Other current assets |  |  | — |  | Other current liabilities |  |  | 1 |
Interest rate swap contracts |  |  | 1,503 |  | Other assets |  |  | 21 |  | Other liabilities |  |  | 6 |
Total derivatives designated as hedging instruments |  |  |  |  |  |  | $ | 48 |  |  |  | $ | 172 |
Derivatives not designated as |  |  |  |  |  |  |  |  |  |  |  |  |  |
hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward/option contracts |  | $ | 4,974 |  | Other current assets |  | $ | 30 |  | Other current liabilities |  | $ | 25 |
Total derivatives not designated as hedging instruments |  |  |  |  |  |  | $ | 30 |  |  |  | $ | 25 |
Total derivative instruments |  |  |  |  |  |  | $ | 78 |  |  |  | $ | 197 |
Credit Risk and Offsetting of Assets and Liabilities of Derivative Instruments 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. 3M enters into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow each counterparty to net settle amounts owed between a 3M entity and the counterparty as a result of multiple, separate derivative transactions. As of March 31, 2018, 3M has International Swaps and Derivatives Association (ISDA) agreements with 17 applicable banks and financial institutions which contain netting provisions. In addition to a master agreement with 3M supported by a primary counterparty’s parent guarantee, 3M also has associated credit support agreements in place with 16 of its primary derivative counterparties which, among other things, provide the circumstances under which either party is required to post eligible collateral (when the market value of transactions covered by these agreements exceeds specified thresholds or if a counterparty’s credit rating has been downgraded to a predetermined rating). The Company does not anticipate nonperformance by any of these counterparties. 3M has elected to present the fair value of derivative assets and liabilities within the Company’s consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. However, the following tables provide information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default or termination as stipulated by the terms of netting arrangements with each of the counterparties. For each counterparty, if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period based on the 3M entity that is a party to the transactions. Derivatives not subject to master netting agreements are not eligible for net presentation. As of the applicable dates presented below, no collateral had been received or pledged related to these derivative instruments. Offsetting of Financial Assets under Master Netting Agreements with Derivative Counterparties
|  |  |  | Gross Amounts not Offset in the |  |  |  |
|  |  |  | Consolidated Balance Sheet that are Subject |  |  |  |
|  | Gross Amount of |  | to Master Netting Agreements |  |  |  |
|  | Derivative Assets |  | Gross Amount of |  |  |  |  |
|  | Presented in the |  | Eligible Offsetting |  |  |  |  |
March 31, 2018 |  | Consolidated |  | Recognized |  | Cash Collateral |  | Net Amount of |
(Millions) |  | Balance Sheet |  | Derivative Liabilities |  | Received |  | Derivative Assets |
Derivatives subject to master netting agreements |  | $ | 52 |  | $ | 26 |  | $ | — |  | $ | 26 |
Derivatives not subject to master netting agreements |  |  | — |  |  |  |  |  |  |  |  | — |
Total |  | $ | 52 |  |  |  |  |  |  |  | $ | 26 |
December 31, 2017 |  |  |  |  |  |  |  |  |
(Millions) |  |  |  |  |  |  |  |  |
Derivatives subject to master netting agreements |  | $ | 78 |  | $ | 27 |  | $ | — |  | $ | 51 |
Derivatives not subject to master netting agreements |  |  | — |  |  |  |  |  |  |  |  | — |
Total |  | $ | 78 |  |  |  |  |  |  |  | $ | 51 |
Offsetting of Financial Liabilities under Master Netting Agreements with Derivative Counterparties
|  |  |  | Gross Amounts not Offset in the |  |  |  |
|  |  |  | Consolidated Balance Sheet that are Subject |  |  |  |
|  | Gross Amount of |  | to Master Netting Agreements |  |  |  |
|  | Derivative Liabilities |  | Gross Amount of |  |  |  |  |
|  | Presented in the |  | Eligible Offsetting |  |  |  |  |
March 31, 2018 |  | Consolidated |  | Recognized |  | Cash Collateral |  | Net Amount of |
(Millions) |  | Balance Sheet |  | Derivative Assets |  | Pledged |  | Derivative Liabilities |
Derivatives subject to master netting agreements |  | $ | 238 |  | $ | 26 |  | $ | — |  | $ | 212 |
Derivatives not subject to master netting agreements |  |  | — |  |  |  |  |  |  |  |  | — |
Total |  | $ | 238 |  |  |  |  |  |  |  | $ | 212 |
December 31, 2017 |  |  |  |  |  |  |  |  |
(Millions) |  |  |  |  |  |  |  |  |
Derivatives subject to master netting agreements |  | $ | 197 |  | $ | 27 |  | $ | — |  | $ | 170 |
Derivatives not subject to master netting agreements |  |  | — |  |  |  |  |  |  |  |  | — |
Total |  | $ | 197 |  |  |  |  |  |  |  | $ | 170 |
Currency Effects 3M estimates that year-on-year foreign currency transaction effects, including hedging impacts, decreased pre-tax income by approximately $64 million for the three months ended March 31, 2018. These estimates include transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks and any impacts from swapping Venezuelan bolivars into U.S. dollars.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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