GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is recognized as the excess cost of an acquired entity over the amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized, but rather tested for impairment on an annual basis and more often if circumstances require. Impairment losses are recognized whenever the implied fair value of goodwill is less than its carrying value.
The changes in the carrying amount of goodwill by segment are as follows (in thousands of dollars):
|
| | | | | | | | | | | | | | | | |
| | United States | | Canada | | Other Businesses | | Total |
Balance at January 1, 2012 |
| $ | 151,231 |
|
| $ | 150,645 |
|
| $ | 207,307 |
|
| $ | 509,183 |
|
Acquisitions | | 23,385 |
| | — |
| | 12,466 |
| | 35,851 |
|
Purchase price adjustments | | — |
| | — |
| | 4,523 |
| | 4,523 |
|
Impairment | | (4,177 | ) | | — |
| | — |
| | (4,177 | ) |
Translation | | — |
| | 4,130 |
| | (5,840 | ) | | (1,710 | ) |
Balance at December 31, 2012 | | 170,439 |
| | 154,775 |
| | 218,456 |
| | 543,670 |
|
Acquisitions | | 35,820 |
| | — |
| | — |
| | 35,820 |
|
Purchase price adjustments | | (12,900 | ) | | — |
| | 2,067 |
| | (10,833 | ) |
Impairment | | (12,861 | ) | | — |
| | (11,260 | ) | | (24,121 | ) |
Translation | | — |
| | (10,187 | ) | | (8,882 | ) | | (19,069 | ) |
Balance at December 31, 2013 | | $ | 180,498 |
| | $ | 144,588 |
| | $ | 200,381 |
| | $ | 525,467 |
|
Business acquisitions result in the recording of goodwill and identified intangible assets which affect the amount of amortization expense and possible impairment write-downs that may occur in future periods. Grainger annually reviews goodwill and intangible assets with indefinite lives for impairment in the fourth quarter and when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Grainger tests for goodwill impairment at the reporting unit level and performs a qualitative assessment of factors such as a reporting unit's current performance and overall economic factors to determine if it is more likely than not that the goodwill might be impaired and whether it is necessary to perform the two-step quantitative goodwill impairment test. In the two-step test, Grainger compares the carrying value of assets of the reporting unit to its calculated fair value. If the carrying value of assets of the reporting unit exceeds its calculated fair value, the second step is performed, where the implied fair value of goodwill is compared to the carrying value of assets, to determine the amount of impairment.
The fair value of reporting units is calculated using primarily the discounted cash flow (DCF) method and incorporating value indicators from a market approach to evaluate the reasonableness of the resulting fair values. The DCF method incorporates various assumptions including the amount and timing of future expected cash flows, including revenues, gross margins, operating expenses, capital expenditures and working capital based on operational budgets, long range strategic plans and other estimates. The terminal value growth rate is used to calculate the value of cash flows beyond the last projected period and reflects management’s best estimates for perpetual growth for the reporting units. Estimates of market-participant risk-adjusted weighted average cost of capital (WACC) are used as a basis for determining the discount rates to apply to the reporting units’ future expected cash flows and terminal value.
Grainger completed the annual impairment testing using the qualitative approach for seven reporting units and the two-step quantitative test for four of these reporting units during the fourth quarter. For two of these reporting units, Grainger Lighting Services (GLS) and Grainger Brazil (GB), the two-step quantitative test indicated that the carrying value of assets exceeded the calculated fair value and step two impairment calculations were required. As part of the review of the strategic plans for GLS during the fourth quarter, Grainger evaluated the impact of planned changes to the business model and level of investment in the business. Grainger’s estimates of future projected sales growth, operating earnings, and cash flows were revised to reflect lower estimates for new customers and projects. As a result of the lower projections, Grainger recognized impairment charges of $13 million on the GLS reporting unit.
During the fourth quarter, management provided strategic plans which included changes to the business model and level of investment required for GB based on insights gained from owning the business since the acquisition in the second quarter of 2012. Grainger’s assumptions were revised to reflect changes related to realization of expected deal synergies and anticipated short-term and long-term operating results of GB that were different from pre-acquisition projections. As a result of the lower performance expectations, Grainger’s estimates for future projected sales growth, operating earnings, and cash flows were revised accordingly. These lowered expectations, as well as an increase in relevant risk factors that increased the discount rate used in the calculations, resulted in the calculated fair value of GB being lower than the carrying value of assets in the step one analysis. As a result of the completion of step two, Grainger recognized a goodwill impairment charge of $11 million.
For the two other reporting units, the fair values calculated in the step one analysis exceeded the carrying value of assets and therefore the step two calculation was not required. Fabory, with $134 million of goodwill, had a calculated fair value which exceeded the carrying value of assets by 17%. The risk of potential failure of step one of the impairment test for Fabory in future reporting periods is highly dependent upon key assumptions including the amount and timing of future expected cash flows, sales growth rates, gross margins, capital expenditures, discount rates and estimates of market-participant risk-adjusted WACC. These assumptions require considerable management judgment and are subject to uncertainty. Changes in assumptions regarding the future performance and a continued unfavorable economic environment in Europe may also have a significant impact on cash flows in the future. Given the sensitivity of the calculated fair value to changes in these key assumptions, Grainger may be required to recognize an impairment for Fabory’s goodwill in the future due to changes in market conditions or other factors related to these key assumptions.
Grainger Colombia, with $14 million of goodwill, had a calculated fair value which exceeded the carrying value of assets by 26% as of the test date.
Intangible assets included in Other assets and intangibles - net in the Consolidated Balance Sheets were comprised of the following (in thousands of dollars):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2013 | | 2012 |
| Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Amortized customer lists and relationships | $ | 350,760 |
| | $ | 134,889 |
| | $ | 215,871 |
| | $ | 279,068 |
| | $ | 124,137 |
| | $ | 154,931 |
|
Amortized trademarks, trade names and other | 38,670 |
| | 23,919 |
| | 14,751 |
| | 34,907 |
| | 21,885 |
| | 13,022 |
|
Non-amortized trade names | 72,790 |
| | — |
| | 72,790 |
| | 74,782 |
| | — |
| | 74,782 |
|
Total intangible assets | $ | 462,220 |
| | $ | 158,808 |
| | $ | 303,412 |
| | $ | 388,757 |
| | $ | 146,022 |
| | $ | 242,735 |
|
The estimated useful lives for acquired intangibles are primarily as follows:
|
| |
Customer lists and relationships | 6 to 22 years |
Amortized trademarks, trade names and other | 3 to 17 years |
Amortization expense recognized on intangible assets was $15 million, $13 million and $12 million for the years ended December 31, 2013, 2012 and 2011, respectively, and is included in Warehousing, marketing and administrative expenses on the Consolidated Statement of Earnings.
Estimated amortization expense for future periods is as follows (in thousands of dollars):
|
| | | | | | | |
Year | | Expense | |
2014 | | $ | 20,257 | |
2015 | | 20,057 | |
2016 | | 18,587 | |
2017 | | 17,630 | |
2018 | | 16,580 | |
Thereafter | | 137,511 | |
