3M 2009 Annual Report Download - page 40

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approximately $300 million in 2010. For the pension plans, holding all other factors constant, an increase/decrease in
the expected long-term rate of return on plan assets of 0.25 of a percentage point would decrease/increase 2010
pension expense by approximately $27 million for U.S. pension plans and approximately $10 million for international
pension plans. Also, holding all other factors constant, an increase/decrease in the discount rate used to measure
plan liabilities of 0.25 of a percentage point would decrease/increase 2010 pension expense by approximately $33
million for U.S. pension plans and approximately $17 million for international pension plans. See Note 11 for details
of the impact of a one percentage point change in assumed health care trend rates on the postretirement health care
benefit expense and obligation.
Asset Impairments:
As of December 31, 2009, net property, plant and equipment totaled $7.0 billion and net identifiable intangible assets
totaled $1.3 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. Impairments recorded in 2009, 2008 and 2007 related to restructuring
actions and other exit activities are discussed in Note 4.
In June 2009, 3M’s Security Systems Division (within the Safety, Security and Protection Services business
segment) was notified that the UK government decided to award the production of its passports to a competitor upon
the expiration of 3M’s existing UK passport contracts in October 2010. 3M remains confident in the future of its
overall passport business, and the growth prospects remain strong. 3M continues to aggressively work to win
additional contracts in other countries. However, as a result of this event, in June 2009, 3M tested the long lived
assets associated with the UK passport activity for recoverability and also reassessed their remaining useful lives. In
addition, 3M tested goodwill for impairment at the reporting unit (Security Systems Division) level.
The result of the June 2009 test of recoverability of long lived assets associated with the UK passport activity
indicated that the asset grouping’s carrying amount of approximately $54 million (before impairment) exceeded the
remaining expected cash flows. Accordingly, 3M recorded a non-cash impairment charge of approximately $13
million in the second quarter of 2009 to write these assets down to their fair value. In addition, accelerated
depreciation/amortization is being taken over the period June 2009 through the date of expiration of the contract
based on a reassessment of the remaining expected useful life of these assets.
3M goodwill totaled approximately $5.8 billion as of December 31, 2009, which, based on impairment testing, is not
impaired. 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, 2009), but can be combined when reporting units within the same segment have similar economic
characteristics. At 3M, reporting units generally correspond to a division. As of December 31, 2009, 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. 3M completes its annual impairment tests in the fourth quarter of each year.
As of December 31, 2009, 3M had 37 primary reporting units, with eight reporting units accounting for approximately
75 percent of the goodwill. These eight reporting units were comprised of the following divisions: 3M Purification Inc.,
Occupational Health and Environmental Safety, Optical Systems, 3M ESPE, Communication Markets, Industrial
Adhesives and Tapes, Security Systems, and Health Information Systems.
The fair values for the majority of reporting units were in excess of carrying value by more than 30 percent. The fair
values for 3M Purification Inc., Optical Systems and Security Systems, based on fourth quarter 2009 testing, were in
excess of carrying value by approximately 15 percent to 30 percent, with no impairment indicated. As part of its
annual impairment testing in the fourth quarter, 3M used a weighted-average discounted cash flow analysis for its 3M
Purification Inc., Optical Systems and Security Systems divisions, using projected cash flows that were weighted