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 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.



In 2009, for those reporting units whose fair value was in excess of carrying value by more than 30 percent, 3M primarily used an industry price-earnings ratio approach, but also used a discounted cash flows approach for certain reporting units. In 2008, 3M adjusted the stated applicable industry price-earnings ratio downward for its annual test in the fourth quarter, unlike prior years when no adjustment was required. Without this adjustment, the addition of each reporting unit’s estimated market values would have been significantly in excess of 3M’s total Company market value, which would have resulted in an unusually high implied control premium. The control premium is defined as the sum of the individual reporting units estimated market values compared to 3M’s total Company market value, with the sum of the individual values typically being larger than the value for the total Company. For example, at year-end 2008, 3M’s market value was approximately $40 billion, but if each reporting unit was sold individually, 3M’s value would be approximately $52 billion using a 30 percent control premium. 3M factored down its price/earnings ratio significantly for the respective reporting units to approximate what the price/earnings ratio would be at a more normal historical control premium of approximately 30 percent for the total Company. Even after including this adjustment to the price-earnings ratio, no goodwill impairment was indicated for any of the reporting units in 2008. In the fourth quarter of 2009, 3M’s estimated control premium ranged from 15 to 30 percent, with no adjustment required to the price/earnings ratios. Based on its annual test in the fourth quarter of 2009, no goodwill impairment was indicated for any of the reporting units. In addition, 3M’s market value at December 31, 2009 of approximately $59 billion is significantly in