GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill and intangible assets, net, at December 31 consist of the following:
|
| | | | | | | |
| 2013 | | 2012 |
Goodwill | $ | 1,259.6 |
| | $ | 1,237.4 |
|
| | | |
Franchise rights - indefinite-lived | $ | 329.3 |
| | $ | 285.7 |
|
Other intangible assets | 11.1 |
| | 9.9 |
|
| 340.4 |
| | 295.6 |
|
Less: accumulated amortization | (5.3 | ) | | (4.3 | ) |
Intangible assets, net | $ | 335.1 |
| | $ | 291.3 |
|
Goodwill
We test goodwill of our Domestic, Import, and Premium Luxury reporting units for impairment annually on April 30 or more frequently when events or changes in circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value.
Under accounting standards, an entity is permitted to first make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it is necessary to calculate the fair value of a reporting unit under the quantitative two-step goodwill impairment test. We completed qualitative annual assessments of any potential goodwill impairment as of April 30, 2013 and 2012. Based on our qualitative assessments, we determined that it was not more likely than not that the fair values of our reporting units were less than their carrying amounts and we were therefore not required to perform the two-step goodwill impairment test for any of our reporting units.
We performed a quantitative annual impairment test as of April 30, 2011, and no goodwill impairment charges resulted from the required goodwill impairment test.
The quantitative goodwill impairment test is a two-step approach. The first step of the quantitative goodwill impairment test requires a determination of whether the fair value of a reporting unit is less than its carrying value. If the fair value of the reporting unit is less than the carrying value, the second step is required, which involves an analysis reflecting the allocation of the fair value determined in the first step (as if it was the purchase price in a business combination). This process may result in the determination of a new amount of goodwill. If the calculated fair value of the goodwill resulting from this allocation is lower than the carrying value of the goodwill in the reporting unit, the difference is reflected as a non-cash impairment loss. The purpose of the second step is only to determine the amount of goodwill that should be recorded on the balance sheet. The recorded amounts of other items on the balance sheet are not adjusted.
In a quantitative impairment test, we estimate the fair value of our reporting units using an “income” valuation approach, which discounts projected free cash flows of the reporting unit at a computed weighted average cost of capital as the discount rate. The income valuation approach requires the use of significant estimates and assumptions, which include revenue growth rates and future operating margins used to calculate projected future cash flows, weighted average costs of capital, and future economic and market conditions. In connection with this process, we also reconcile the estimated aggregate fair values of our reporting units to our market capitalization, including consideration of a control premium that represents the estimated amount an investor would pay for our equity securities to obtain a controlling interest. We believe that this reconciliation process is consistent with a market participant perspective. We base our cash flow forecasts on our knowledge of the automotive industry, our recent performance, our expectations of our future performance, and other assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We also make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units when performing a quantitative impairment test.
Goodwill allocated to our reporting units and changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2012 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Domestic | | Import | | Premium Luxury | | Corporate and other | | Consolidated |
Goodwill at January 1, 2012 (1) | $ | 156.4 |
| | $ | 518.4 |
| | $ | 497.4 |
| | $ | — |
| | $ | 1,172.2 |
|
Acquisitions and other adjustments | 8.8 |
| | 15.8 |
| | 40.6 |
| | — |
| | 65.2 |
|
Goodwill at December 31, 2012 (1) | 165.2 |
| | 534.2 |
| | 538.0 |
| | — |
| | 1,237.4 |
|
Acquisitions and other adjustments | — |
| | 21.6 |
| | 0.6 |
| | — |
| | 22.2 |
|
Goodwill at December 31, 2013 (1) | $ | 165.2 |
| | $ | 555.8 |
| | $ | 538.6 |
| | $ | — |
| | $ | 1,259.6 |
|
| |
(1) | Net of accumulated impairment losses of $1.47 billion ($1.25 billion after-tax) associated with our single reporting unit (prior to September 30, 2008, our reporting unit structure was comprised of a single reporting unit) and $140.0 million ($119.0 million after-tax) associated with our Domestic reporting unit, both of which were recorded during the year ended December 31, 2008. |
Intangible Assets
Our principal identifiable intangible assets are individual store rights under franchise agreements with vehicle manufacturers, which have indefinite lives and are tested at least annually on April 30 for impairment. As discussed in Note 1 above, the FASB issued an accounting standard update that permits an entity to first make a qualitative evaluation about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it is necessary to perform a quantitative impairment test.
We completed our qualitative assessment of any potential franchise rights impairment as of April 30, 2013. Based on our qualitative assessment, we determined that it was not more likely than not that the fair values of our franchise rights were less than their carrying amounts and we were therefore not required to perform a quantitative impairment test.
As of December 31, 2013, we had $329.3 million of franchise rights recorded on our Consolidated Balance Sheet, of which $22.8 million was related to Domestic stores, $122.5 million was related to Import stores, and $184.0 million was related to Premium Luxury stores.
We performed a quantitative annual impairment test as of April 30, 2012, and we recorded a $4.2 million ($2.6 million after-tax) non-cash impairment charge related to rights under a Premium Luxury store’s franchise agreement. This non-cash impairment charge was recorded to reduce the carrying value of the store’s franchise agreement to its estimated fair value. The decline in the fair value of rights under this store’s franchise agreement reflects the underperformance relative to expectations of this store since our acquisition of it, as well as our expectations for the store’s future prospects. These factors resulted in a reduction in forecasted cash flows and growth rates used to estimate fair value. This non-cash impairment charge is classified as Franchise Rights Impairment in the accompanying Consolidated Statements of Income.
We performed a quantitative annual impairment test as of April 30, 2011, and no franchise rights impairment charges resulted from the required impairment test.
The quantitative impairment test for intangibles with indefinite lives requires the comparison of estimated fair value to its carrying value by store. Fair values of rights under franchise agreements are estimated using Level 3 inputs by discounting expected future cash flows of the store. The forecasted cash flows contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins, working capital requirements, capital expenditures, and cost of capital, for which we utilize certain market participant-based assumptions, using third-party industry projections, economic projections, and other marketplace data we believe to be reasonable.
