3M 2011 Annual Report Download - page 38

32
As discussed in Note 17 to the Consolidated Financial Statements, effective in the first quarter of 2011, 3M made
certain product moves between its business segments. For those changes 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
2011, 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 2011 annual impairment test and is in the context of the segment structure that existed at that time.
As of September 30, 2011, 3M had 38 primary reporting units, with ten reporting units accounting for approximately
76 percent of the goodwill. These ten reporting units were comprised of the following divisions: 3M Purification Inc.,
Occupational Health and Environmental Safety, Optical Systems, Infection Prevention, Security Systems, 3M
ESPE, Industrial Adhesives and Tapes, Communication Markets, Abrasive Systems and Health Information
Systems.
The fair values for 3M Purification Inc. and Optical Systems, based on fourth quarter 2011 testing, were both in
excess of carrying value by approximately 35 percent, while Security Systems was in excess of carrying value by 38
percent, all 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 these 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. The fair values for all other significant reporting
units were in excess of carrying value by more than 40 percent.
In 2011, 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. Goodwill is testing for impairment annually in the fourth
quarter of each year. Based on fourth-quarter 2011 testing, 3M’s estimated fair value when valuing each reporting
unit individually would aggregate to approximately $68 billion, implying a control premium of 35 percent when
compared to 3M’s market value of approximately $50 billion at September 30, 2011. At December 31, 2011, 3M’s
market value was approximately $57 billion, implying a control premium of 19 percent. 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, 2011 and December 31, 2011 was significantly in excess of its equity of
approximately $17 billion and $16 billion, respectively. 3M is an integrated materials enterprise, thus; many of 3M’s
businesses could not easily be sold on a stand-alone basis. Based on its annual test in the fourth quarter of 2011, no
goodwill impairment was indicated for any of the reporting units.
Factors which could result in future impairment charges, among others, include 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. As of December 31,
2011, 3M had approximately $1 billion of goodwill related to 3M Purification Inc., $750 million related to Optical
Systems and $500 million related to Security Systems. If future non-cash asset impairment charges are taken, 3M
would expect that only a portion of the long-lived assets or goodwill would be impaired. 3M will continue to monitor its
reporting units in 2012 for any triggering events or other indicators of impairment.
Income Taxes:
The extent of 3M’s operations involves dealing with uncertainties and judgments in the application of complex tax
regulations in a multitude of jurisdictions. The final taxes paid are dependent upon many factors, including
negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and
international tax audits. The Company recognizes potential liabilities and records tax liabilities for anticipated tax
audit issues in the United States and other tax jurisdictions based on its estimate of whether, and the extent to which,
additional taxes will be due. The Company follows guidance provided by ASC 740, Income Taxes, regarding
uncertainty in income taxes, to record these liabilities (refer to Note 8 for additional information). The Company
adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that is materially different from the Company’s current
estimate of the tax liabilities. If the Company’s estimate of tax liabilities proves to be less than the ultimate
assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less
than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period
when the Company determines the liabilities are no longer necessary.