3M 2012 Annual Report Download - page 38
Download and view the complete annual report
Please find page 38 of the 2012 3M annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.32
Asset Impairments:
As of December 31, 2012, net property, plant and equipment totaled $8.4 billion and net identifiable intangible assets
totaled $1.9 billion. Management makes estimates and assumptions in preparing the consolidated financial statements for
which actual results will emerge over long periods of time. This includes the recoverability of long-lived assets employed
in the business, including assets of acquired businesses. These estimates and assumptions are closely monitored by
management and periodically adjusted as circumstances warrant. For instance, expected asset lives may be shortened or
an impairment recorded based on a change in the expected use of the asset or performance of the related asset group.
3M goodwill totaled approximately $7.4 billion as of December 31, 2012. 3M’s annual goodwill impairment testing is
performed in the fourth quarter of each year. Impairment testing for goodwill is done at a reporting unit level, with all
goodwill assigned to a reporting unit. Reporting units are one level below the business segment level (3M has six
business segments at December 31, 2012), but can be combined when reporting units within the same segment have
similar economic characteristics. At 3M, reporting units generally correspond to a division. 3M did not combine any of its
reporting units for impairment testing.
An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds
the estimated fair value of the reporting unit. The estimated fair value of a reporting unit is determined using earnings for
the reporting unit multiplied by a price/earnings ratio for comparable industry groups, or by using a discounted cash flow
analysis. 3M typically uses the price/earnings ratio approach for stable and growing businesses that have a long history
and track record of generating positive operating income and cash flows. 3M uses the discounted cash flow approach for
start-up, loss position and declining businesses, but also uses discounted cash flow as an additional tool for businesses
that may be growing at a slower rate than planned due to economic or other conditions.
As discussed in Note 3 to the Consolidated Financial Statements, effective in the first quarter of 2012, 3M made certain
product moves across divisions within its business segments, but none were across business segments. For any product
moves that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact
to reporting units. During the first quarter of 2012, the Company completed its assessment of any potential goodwill
impairment for reporting units impacted by this new structure and determined that no impairment existed. The discussion
that follows relates to the separate fourth quarter 2012 annual impairment test and is in the context of the segment
structure that existed at that time.
As of September 30, 2012, 3M had 36 primary reporting units, with ten reporting units accounting for approximately 77
percent of the goodwill. These ten reporting units were comprised of the following divisions: 3M Purification Inc.,
Occupational Health and Environmental Safety, Optical Systems, Security Systems, Infection Prevention, 3M ESPE,
Industrial Adhesives and Tapes, Communication Markets, Health Information Systems, and Abrasive Systems. The fair
values for all these significant reporting units were in excess of carrying value by approximately 50 percent or more.
In 2012, 3M primarily used an industry price-earnings ratio approach, but also used a discounted cash flows approach for
certain reporting units, to determine fair values. Where applicable, 3M used a weighted-average discounted cash flow
analysis for certain divisions, using projected cash flows that were weighted based on different sales growth and terminal
value assumptions, among other factors. The weighting was based on management’s estimates of the likelihood of each
scenario occurring.
Based on fourth-quarter 2012 testing, 3M’s estimated fair value when valuing each reporting unit individually would
aggregate to approximately $77 billion, implying a control premium of 21 percent when compared to 3M’s market value of
approximately $64 billion at both September 30, 2012 and December 31, 2012. The control premium is defined as the
sum of the individual reporting units estimated market values compared to 3M’s total Company estimated fair value, with
the sum of the individual values typically being larger than the value for the total Company. 3M’s market value at both
September 30, 2012 and December 31, 2012 was significantly in excess of its equity of approximately $18 billion. 3M is
an integrated materials enterprise, thus many of 3M’s businesses could not easily be sold on a stand-alone basis. 3M’s
focus on research and development has resulted in a portion of 3M’s value being comprised of internally developed
businesses that have no goodwill associated with them. Based on its annual test in the fourth quarter of 2012, no goodwill
impairment was indicated for any of the reporting units.
Factors which could result in future impairment charges include, among others, changes in worldwide economic
conditions, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange
rates. These risk factors are discussed in Item 1A, “Risk Factors,” of this document. In addition, changes in the weighted
average cost of capital could also impact impairment testing results. Given the current overall economic and other
conditions in markets served by certain reporting units and asset groups within these reporting units (particularly Security