Derivatives

3 Months Ended

Mar. 31, 2021

Derivatives

Derivatives

NOTE 12. Derivatives

The Company uses interest rate swaps, currency 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 12 in 3M’s 2020 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 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 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 included in accumulated 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 and treasury rate lock 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) reclassified from accumulated other comprehensive income into 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 14 in 3M’s 2020 Annual Report on Form 10-K.

As of March 31, 2021, the Company had a balance of $115 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 $106 million (after-tax loss) related to the forward starting interest rate swap and treasury rate lock contracts, which will be amortized over the respective lives of the notes. Based on exchange rates as of March 31, 2021, 3M expects to reclassify approximately $19 million over the next 12 months, $22 million over the remainder of 2021, $2 million in 2022 and $91 million after 2022 of the after-tax net unrealized foreign exchange cash flow hedging losses to earnings (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. Reclassifications of amounts from accumulated other comprehensive income into income include accumulated gains (losses) on dedesignated hedges at the time earnings are impacted by the forecasted transactions.

	Pretax Gain (Loss) Recognized in Other				Pretax Gain (Loss) Reclassified from Accumulated
	Comprehensive Income on Derivative				Other Comprehensive Income into Income
	Three months ended March 31,				Three months ended March 31,
	2021		2020			2021		2020
(Millions)	Amount		Amount		Location	Amount		Amount
Foreign currency forward/option contracts	$	66	$	79	Cost of sales	$	(7)	$	18
Interest rate contracts		—		(2)	Interest expense		(2)		(2)
Total	$	66	$	77		$	(9)	$	16

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. Additional information regarding designated interest rate swaps can be found in Note 14 in 3M’s 2020 Annual Report on Form 10-K.

Refer to the section below titled Statement of Income Location and Impact of Cash Flow and Fair Value Derivative Instruments for details on the location within the consolidated statements of income for amounts of gains and losses related to derivative instruments designated as fair value hedges and similar information relative to the hedged items for the three months ended March 31, 2021 and 2020.

The following amounts were recorded on the consolidated balance sheet related to cumulative basis adjustments for fair value hedges:

					Cumulative Amount of Fair Value Hedging
	Carrying Value of the				Adjustment Included in the Carrying Value
(Millions)	Hedged Liabilities				of the Hedged Liabilities
Location on the Consolidated Balance Sheet	March 31, 2021		December 31, 2020		March 31, 2021		December 31, 2020
Short-term borrowings and current portion of long-term debt	$	357	$	373	$	4	$	5
Long-term debt		225		225		5		6
Total	$	582	$	598	$	9	$	11

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.

At March 31, 2021, the total notional amount of foreign exchange forward contracts designated in net investment hedges was approximately 50 million euros, along with a principal amount of long-term debt instruments designated in net investment hedges totaling 3.5 billion euros. The maturity dates of these derivative and nonderivative instruments designated in net investment hedges range from 2021 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				Amount of Gain (Loss) Excluded
	as Cumulative Translation within				from Effectiveness Testing
	Other Comprehensive Income				Recognized in Income
		Three months ended March 31,			Three months ended March 31,
	2021		2020			2021		2020
(Millions)	Amount		Amount		Location	Amount		Amount
Foreign currency denominated debt	$	167	$	15	Cost of sales	$	—	$	—
Foreign currency forward contracts		2		1	Cost of sales		(1)		5
Total	$	169	$	16		$	(1)	$	5

Derivatives Not Designated as Hedging Instruments:

Derivatives not designated as hedging instruments include dedesignated foreign currency forward and option 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 currency contracts that are not designated in hedging relationships to offset, in part, the impacts of changes in value of various non-functional currency denominated items including certain intercompany financing balances. 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 statement of income and amounts of gains and losses related to derivative instruments not designated as hedging instruments are as follows:

	Gain (Loss) on Derivative Recognized in Income
	Three months ended March 31,
		2021		2020
(Millions)	Location	Amount		Amount
Foreign currency forward/option contracts	Cost of sales	$	—	$	4
Foreign currency forward contracts	Interest expense		22		(16)
Total		$	22	$	(12)

Statement of Income Location and Impact of Cash Flow and Fair Value Derivative Instruments

The location in the consolidated statement of income and pre-tax amounts recognized in income related to derivative instruments designated in a cash flow or fair value hedging relationship are as follows:

	Location and Amount of Gain (Loss) Recognized in Income				Location and Amount of Gain (Loss) Recognized in Income
	Three months ended March 31, 2021				Three months ended March 31, 2020
(Millions)	Cost of sales		Other expense (income), net		Cost of sales		Other expense (income), net
Total amounts of income and expense line items presented in the consolidated statement of income in which the effects of cash flow or fair value hedges are recorded	$	4,525	$	49	$	4,109	$	75
The effects of cash flow and fair value hedging:
Gain or (loss) on cash flow hedging relationships:
Foreign currency forward/option contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	(7)	$	—	$	18	$	—
Interest rate contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income		—		(2)		—		(2)
Gain or (loss) on fair value hedging relationships:
Interest rate contracts:
Hedged items	$	—	$	2	$	—	$	(2)
Derivatives designated as hedging instruments		—		(2)		—		2

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 for certain interest rate swaps, which are presented using the 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
	Notional			Fair			Fair
March 31, 2021 (Millions)	Amount		Location	Value Amount		Location	Value Amount
Derivatives designated as
hedging instruments
Foreign currency forward/option contracts	$	1,656	Other current assets	$	36	Other current liabilities	$	38
Foreign currency forward/option contracts		685	Other assets		21	Other liabilities		10
Interest rate contracts		403	Other current assets		5	Other current liabilities		—
Total derivatives designated as hedging instruments				$	62		$	48
Derivatives not designated as
hedging instruments
Foreign currency forward/option contracts	$	3,487	Other current assets	$	22	Other current liabilities	$	15
Total derivatives not designated as hedging instruments				$	22		$	15
Total derivative instruments				$	84		$	63

	Gross		Assets			Liabilities
	Notional			Fair			Fair
December 31, 2020 (Millions)	Amount		Location	Value Amount		Location	Value Amount
Derivatives designated as
hedging instruments
Foreign currency forward/option contracts	$	1,630	Other current assets	$	14	Other current liabilities	$	67
Foreign currency forward/option contracts		669	Other assets		10	Other liabilities		25
Interest rate contracts		403	Other current assets		7	Other current liabilities		—
Total derivatives designated as hedging instruments				$	31		$	92
Derivatives not designated as
hedging instruments
Foreign currency forward/option contracts	$	3,166	Other current assets	$	13	Other current liabilities	$	14
Total derivatives not designated as hedging instruments				$	13		$	14
Total derivative instruments				$	44		$	106

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, 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, 2021, 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 cash 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		Cash
	Consolidated		Recognized		Collateral		Net Amount of
March 31, 2021 (Millions)	Balance Sheet		Derivative Liabilities		Received		Derivative Assets
Derivatives subject to master netting agreements	$	84	$	34	$	—	$	50
Derivatives not subject to master netting agreements		—						—
Total	$	84					$	50

December 31, 2020 (Millions)
Derivatives subject to master netting agreements	$	44	$	11	$	—	$	33
Derivatives not subject to master netting agreements		—						—
Total	$	44					$	33

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		Cash		Net Amount of
	Consolidated		Recognized		Collateral		Derivative
March 31, 2021 (Millions)	Balance Sheet		Derivative Assets		Pledged		Liabilities
Derivatives subject to master netting agreements	$	63	$	34	$	—	$	29
Derivatives not subject to master netting agreements		—						—
Total	$	63					$	29

December 31, 2020 (Millions)
Derivatives subject to master netting agreements	$	106	$	11	$	—	$	95
Derivatives not subject to master netting agreements		—						—
Total	$	106					$	95

Currency Effects

3M estimates that year-on-year foreign currency transaction effects, including hedging impacts, decreased pre-tax income by approximately $10 million for the three months ended March 31, 2021. These estimates include transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks.