3M 2004 Annual Report Download - page 55

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As previously disclosed in the Company’s June 30, 2004 and September 30, 2004 Form 10-Qs, in 2004, the
Company’s U.S. plan measurement date was changed from September 30 to December 31. The primary reasons
for this change include consistency between the U.S. and international dates, the increased clarity that results
from having the same measurement and balance sheet dates, and administrative simplification. This change did
not have a material impact on the determination of periodic pension cost or pension obligations.
A significant element in determining the Company’s pension expense in accordance with SFAS No. 87 is the
expected return on plan assets, which is based on projected results for similar allocations among asset classes.
The difference between the expected return and the actual return on plan assets is deferred and, under certain
circumstances, amortized over future years of service. Therefore, the net deferral of past asset gains (losses)
ultimately affects future pension expense. For the U.S. pension plan, the Company’s assumption for the expected
return on plan assets was 9.00% for 2004. Refer to Note 11 to the Consolidated Financial Statements for
information on how this rate is determined. The Company is lowering the 2005 expected return on plan assets by
0.25 percentage points to 8.75%.
The discount rate used to measure pension plan liabilities reflects the current rate at which the pension liabilities
could be effectively settled as of December 31, 2004. In estimating this rate, the Company looks at rates of return
on fixed-income investments of similar duration to the liabilities in the plan that receive high, investment grade
ratings by recognized ratings agencies. By applying this methodology, the Company determined a discount rate of
5.75% to be appropriate as of December 31, 2004, which is a reduction of 0.25 percentage points from the rate
used as of September 30, 2003.
For the year ended December 31, 2004, the change in the minimum pension liability within accumulated other
comprehensive income increased stockholders’ equity by $1.193 billion (after-tax). This increase was primarily the
result of the assets being above the Accumulated Benefit Obligation for the U.S. qualified plan, which caused the
minimum pension liability recorded for the years ended December 31, 2003 and 2002 to be reversed. As a result,
the Company’s U.S. qualified plan recorded a Prepaid Pension Asset of $1.851 billion.
For the year ended December 31, 2004, the Company recognized total consolidated pre-tax pension expense
(after settlements, curtailments and special termination benefits) of $325 million, up from $168 million in 2003.
Pension expense (before settlements, curtailments and special termination benefits) is anticipated to increase to
approximately $342 million in 2005. As previously mentioned, the Company lowered the expected return on assets
assumption from 9.00% in 2004 to 8.75% in 2005. For the U.S. pension plans, holding all other factors constant,
an increase/decrease in the expected long-term rate of return on plan assets by 0.25 percentage points would
decrease/increase U.S. pension expense by approximately $19 million in 2005. For the U.S. pension plans,
holding all other factors constant, an increase/decrease in the discount rate used to measure plan liabilities by
0.25 percentage points would decrease/increase U.S. pension expense by approximately $30 million in 2005.
Potential Asset Impairment Issues:
3M net property, plant and equipment totaled approximately $5.7 billion at December 31, 2004. 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 business reporting unit. In addition, 3M goodwill totaled approximately $2.7 billion at December 31, 2004,
which, based on impairment testing, is not impaired. A portion of this goodwill (approximately $300 million) is in
3M’s telecommunications business, which competes in a very uncertain industry. While the Company believes this
business will maintain its value, events such as a significant adverse change in the business climate, could create
future impairment losses.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment”. SFAS No. 123R supersedes APB Opinion
No. 25, which requires recognition of an expense when goods or services are provided. SFAS No. 123R requires
the determination of the fair value of the share-based compensation at the grant date and the recognition of the
related expense over the period in which the share-based compensation vests. The Company is required to adopt
the provisions of SFAS No. 123R effective July 1, 2005. Additional information regarding this and other accounting
pronouncements is included in Note 1 to the Consolidated Financial Statements.