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Fair Value Measurements
9 Months Ended
Sep. 30, 2015
Fair Value Measurements  
Fair Value Measurements

NOTE 10.  Fair Value Measurements

 

3M follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis. Under the standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:

 

For 3M, assets and liabilities that are measured at fair value on a recurring basis primarily relate to available-for-sale marketable securities, available-for-sale investments (included as part of investments in the Consolidated Balance Sheet) and certain derivative instruments. Derivatives include cash flow hedges, interest rate swaps and most net investment hedges. The information in the following paragraphs and tables primarily addresses matters relative to these financial assets and liabilities. Separately, there were no material fair value measurements with respect to nonfinancial assets or liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis for the three and nine months ended September 30, 2015 and 2014.

 

3M uses various valuation techniques, which are primarily based upon the market and income approaches, with respect to financial assets and liabilities. Following is a description of the valuation methodologies used for the respective financial assets and liabilities measured at fair value.

 

Available-for-sale marketable securities — except certain U.S. municipal securities:

 

Marketable securities, except certain U.S. municipal securities, are valued utilizing multiple sources. A weighted average market price is used for these securities. Market prices are obtained for these securities from a variety of industry standard data providers, security master files from large financial institutions, and other third-party sources. These multiple prices are used as inputs into a distribution-curve-based algorithm to determine the daily fair value to be used. 3M classifies U.S. treasury securities as level 1, while all other marketable securities (excluding certain U.S. municipal securities) are classified as level 2. Marketable securities are discussed further in Note 6.

 

Available-for-sale marketable securities — certain U.S. municipal securities only:

 

In the fourth quarter 2014, 3M obtained a municipal bond with the City of Nevada, Missouri, which represent 3M’s only U.S. municipal securities holding as of September 30, 2015 and December 31, 2014. Due to the nature of this security, the valuation method utilized will include the financial health of the City of Nevada, any recent municipal bond issuances by Nevada, and macroeconomic considerations related to the direction of interest rates and the health of the overall municipal bond market, and as such will be classified as a level 3 security.

 

Available-for-sale investments:

 

Investments include equity securities that are traded in an active market. Closing stock prices are readily available from active markets and are used as being representative of fair value. 3M classifies these securities as level 1.

 

Derivative instruments:

 

The Company’s derivative assets and liabilities within the scope of ASC 815, Derivatives and Hedging, are required to be recorded at fair value. The Company’s derivatives that are recorded at fair value include foreign currency forward and option contracts, commodity price swaps, interest rate swaps, and net investment hedges where the hedging instrument is recorded at fair value. Net investment hedges that use foreign currency denominated debt to hedge 3M’s net investment are not impacted by the fair value measurement standard under ASC 820, as the debt used as the hedging instrument is marked to a value with respect to changes in spot foreign currency exchange rates and not with respect to other factors that may impact fair value.

 

3M has determined that foreign currency forwards, commodity price swaps, currency swaps, foreign currency options, interest rate swaps and cross-currency swaps will be considered level 2 measurements. 3M uses inputs other than quoted prices that are observable for the asset. These inputs include foreign currency exchange rates, volatilities, and interest rates. Derivative positions are primarily valued using standard calculations/models that use as their basis readily observable market parameters. Industry standard data providers are 3M’s primary source for forward and spot rate information for both interest rates and currency rates, with resulting valuations periodically validated through third-party or counterparty quotes and a net present value stream of cash flows model.

 

The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

(Millions)

 

Fair Value at

 

Using Inputs Considered as

 

Description

    

September 30, 2015

    

Level 1

    

Level 2

    

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

$

1

 

$

 —

 

$

1

 

$

 —

 

Foreign government agency securities

 

 

10

 

 

 —

 

 

10

 

 

 —

 

Corporate debt securities

 

 

11

 

 

 —

 

 

11

 

 

 —

 

Commercial paper

 

 

25

 

 

 —

 

 

25

 

 

 —

 

Certificates of deposit/time deposits

 

 

34

 

 

 —

 

 

34

 

 

 —

 

Asset-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Automobile loan related

 

 

38

 

 

 —

 

 

38

 

 

 —

 

Credit card related

 

 

10

 

 

 —

 

 

10

 

 

 —

 

Equipment lease related

 

 

3

 

 

 —

 

 

3

 

 

 —

 

Other

 

 

19

 

 

 —

 

 

19

 

 

 —

 

U.S. municipal securities

 

 

15

 

 

 —

 

 

 —

 

 

15

 

Investments

 

 

1

 

 

1

 

 

 —

 

 

 —

 

Derivative instruments — assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

 

328

 

 

 —

 

 

328

 

 

 —

 

Interest rate swap contracts

 

 

40

 

 

 —

 

 

40

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments — liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

 

87

 

 

 —

 

 

87

 

 

 —

 

Commodity price swap contracts

 

 

1

 

 

 —

 

 

1

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

(Millions)

 

Fair Value at

 

Using Inputs Considered as

 

Description

    

December 31, 2014

    

Level 1

    

Level 2

    

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

$

108

 

$

 —

 

$

108

 

$

 —

 

Foreign government agency securities

 

 

95

 

 

 —

 

 

95

 

 

 —

 

Corporate debt securities

 

 

619

 

 

 —

 

 

619

 

 

 —

 

Certificates of deposit/time deposits

 

 

41

 

 

 —

 

 

41

 

 

 —

 

Asset-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Automobile loan related

 

 

282

 

 

 —

 

 

282

 

 

 —

 

Credit card related

 

 

162

 

 

 —

 

 

162

 

 

 —

 

Equipment lease related

 

 

48

 

 

 —

 

 

48

 

 

 —

 

Other

 

 

46

 

 

 —

 

 

46

 

 

 —

 

U.S. treasury securities

 

 

38

 

 

38

 

 

 —

 

 

 —

 

U.S. municipal securities

 

 

15

 

 

 —

 

 

 —

 

 

15

 

Investments

 

 

1

 

 

1

 

 

 —

 

 

 —

 

Derivative instruments — assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

 

229

 

 

 —

 

 

229

 

 

 —

 

Interest rate swap contracts

 

 

27

 

 

 —

 

 

27

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments — liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

 

36

 

 

 —

 

 

36

 

 

 —

 

Commodity price swap contracts

 

 

4

 

 

 —

 

 

4

 

 

 —

 

Interest rate swap contracts

 

 

3

 

 

 —

 

 

3

 

 

 —

 

 

The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions)

    

Three months ended 

    

Nine months ended 

 

Marketable securities — auction rate securities and certain U.S. municipal

 

September 30,

 

September 30,

 

securities only

 

2015

    

2014

 

2015

    

2014

 

Beginning balance

 

$

15

 

$

12

 

$

15

 

$

11

 

Total gains or losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

 

 —

 

 

 

 

 

 

 

Included in other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

1

 

Purchases and issuances

 

 

 —

 

 

 

 

 

 

 

Sales and settlements

 

 

 —

 

 

 

 

 

 

 

Transfers in and/or out of level 3

 

 

 

 

 

 

 

 

 

Ending balance

 

$

15

 

$

12

 

$

15

 

$

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gains or losses for the period included in earnings for securities held at the end of the reporting period

 

 

 

 

 

 

 

 

 

 

In addition, the plan assets of 3M’s pension and postretirement benefit plans are measured at fair value on a recurring basis (at least annually). Refer to Note 10 in 3M’s 2014 Annual Report on Form 10-K.

 

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis:

 

Disclosures are required for certain assets and liabilities that are measured at fair value, but are recognized and disclosed at fair value on a nonrecurring basis in periods subsequent to initial recognition. For 3M, such measurements of fair value relate primarily to long-lived asset impairments. There were no material long-lived asset impairments for the three and nine months ended September 30, 2015 and 2014.

 

Fair Value of Financial Instruments:

 

The Company’s financial instruments include cash and cash equivalents, marketable securities, accounts receivable, certain investments, accounts payable, borrowings, and derivative contracts. The fair values of cash and cash equivalents, accounts receivable, accounts payable, and short-term borrowings and current portion of long-term debt approximated carrying values because of the short-term nature of these instruments. Available-for-sale marketable securities and investments, in addition to certain derivative instruments, are recorded at fair values as indicated in the preceding disclosures. For its long-term debt the Company utilized third-party quotes to estimate fair values (classified as level 2). Information with respect to the carrying amounts and estimated fair values of these financial instruments follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

 

 

    

Carrying

    

Fair

    

Carrying

    

Fair

 

(Millions)

 

Value

 

Value

 

Value

 

Value

 

Long-term debt, excluding current portion

 

$

8,974

 

$

10,260

 

$

6,731

 

$

7,203

 

 

The fair values reflected above consider the terms of the related debt absent the impacts of derivative/hedging activity. The carrying amount of long-term debt referenced above is impacted by certain fixed-to-floating interest rate swaps that are designated as fair value hedges and by the designation of fixed rate Eurobond securities issued by the Company as hedging instruments of the Company’s net investment in its European subsidiaries. Many of 3M’s fixed-rate bonds were trading at a premium at September 30, 2015 and December 31, 2014 due to the low interest rates and tightening of 3M’s credit spreads.