3M 2008 Annual Report Download - page 37

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Pension benefits associated with these plans are generally based primarily on each participant’s years of service,
compensation, and age at retirement or termination. Two critical assumptions, the discount rate and the expected
return on plan assets, are important elements of expense and liability measurement. The assumed health care trend
rate is the most significant postretirement health care assumption. See Note 11 for additional discussion of actuarial
assumptions used in determining pension and postretirement health care liabilities and expenses.
The Company determines the discount rate used to measure plan liabilities as of the December 31 measurement
date for the U.S. pension and postretirement benefit plans. The discount rate reflects the current rate at which the
associated liabilities could be effectively settled at the end of the year. The Company sets its rate to reflect the yield
of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and
amount to settle projected future benefits. Using this methodology, the Company determined a discount rate of
6.14% to be appropriate as of December 31, 2008, which is an increase from the 6.00% rate used as of
December 31, 2007.
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 historical results for similar allocations among asset classes. For
the U.S. pension plan, refer to Note 11 for information on how the 8.50% expected long-term rate of return on an
annualized basis for 2009 is determined.
For the year ended December 31, 2008, the Company recognized total consolidated pre-tax pension expense (after
settlements, curtailments and special termination benefits) of $89 million, down from $190 million in 2007. Pension
expense (before settlements, curtailments and special termination benefits) is anticipated to increase to
approximately $125 million in 2009. 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 2009
pension expense by approximately $26 million for U.S. pension plans and approximately $9 million for international
pension plans. Also, holding all other factors constant, an increase in the discount rate used to measure plan
liabilities of 0.25 of a percentage point would decrease 2009 pension expense by approximately $30 million for U.S.
pension plans and approximately $12 million for international pension plans. A decrease in the discount rate of 0.25
of a percentage point would increase 2009 pension expense by approximately $31 million for U.S. pension plans and
approximately $14 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:
3M net property, plant and equipment totaled $6.9 billion as of December 31, 2008. 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 2008, 2007 and 2006 related to restructuring actions and other exit activities are discussed in Note 4.
3M goodwill totaled approximately $5.8 billion as of December 31, 2008, 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, 2008), but can be combined when reporting units within the same segment have similar economic
characteristics. As of December 31, 2008, 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, 2008, 3M had 34 primary reporting units, with eight reporting units accounting for nearly 80
percent of the goodwill. At 3M, reporting units generally correspond to a division. These eight reporting units were
comprised of the following divisions: Occupational Health and Environmental Safety, CUNO, Optical Systems, 3M
ESPE, Communication Markets, Security Systems, Industrial Adhesives and Tapes, and Health Information