3M 2013 Annual Report Download - page 39

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Asset Impairments:
As of December 31, 2013, net property, plant and equipment totaled $8.7 billion and net identifiable intangible assets
totaled $1.7 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 $7.3 billion as of December 31, 2013. 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, 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 Notes 3 and 15 to the Consolidated Financial Statements, effective in the first quarter of 2013, 3M
completed a realignment of its business segments. Concurrent with this business segment realignment, certain products
were also moved between business segments. For any product moves that resulted in reporting unit changes, the
Company applied the relative fair value method to determine the impact on goodwill of the associated reporting units.
During the first quarter of 2013, 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 2013 annual impairment test and is in the context of the reporting unit structure that existed at that
time.
As of September 30, 2013, 3M had 34 primary reporting units, with ten reporting units accounting for approximately 80
percent of the goodwill. These ten reporting units were comprised of the following divisions: 3M Purification Inc., Personal
Safety, Optical Systems, Traffic Safety and Security Systems, Infection Prevention, 3M ESPE, Advanced Materials,
Industrial Adhesives and Tapes, Communication Markets, and Health Information Systems. The fair values for all
significant reporting units were in excess of carrying value by 50 percent or more, except for one reporting unit with
approximately $300 million of goodwill, where the fair value exceeded the carrying value by approximately 30 percent.
In 2013, 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 2013 testing, 3M’s estimated fair value when valuing each reporting unit individually would
aggregate to approximately $94 billion, implying a control premium of 17 percent when compared to 3M’s market value of
approximately $80 billion at September 30, 2013. 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, 2013 and
December 31, 2013 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 the annual test in the fourth quarter of 2013, 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. As indicated above, during the first quarter of 2013,