GOODWILL AND OTHER INTANGIBLES
During the fourth quarter of each year, the Company qualitatively assesses its goodwill and indefinite-lived intangible assets assigned to each of its reporting units. This qualitative assessment evaluates various events and circumstances, such as macro economic conditions, industry and market conditions, cost factors, relevant events and financial trends, that may impact a reporting unit's fair value. Using this qualitative assessment, the Company determines whether it is more-likely-than not the reporting unit's fair value exceeds its carrying value. If it is determined that it is not more-likely-than-not the reporting unit's fair value exceeds the carrying value, or upon a triggering event, including recent acquisition or divestiture activity, the Company performs a quantitative, "step one," goodwill impairment analysis.
During the fourth quarter of 2013, the Company performed a qualitative analysis on each reporting unit and determined it was more-likely-than-not the fair value exceeded the carrying value of these reporting units. For the reporting unit with recent restructuring activity, the Company performed a quantitative, "step one," goodwill impairment analysis, which requires the Company to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates and growth rates. The basis of this goodwill impairment analysis is the Company's annual budget and long-range plan (“LRP”). The annual budget and LRP includes a five year projection of future cash flows based on actual new products and customer commitments and assumes the last year of the LRP data is a fair indication of the future performance. Because the LRP is estimated over a significant future period of time, those estimates and assumptions are subject to a high degree of uncertainty. Further, the market valuation models and other financial ratios used by the Company require certain assumptions and estimates regarding the applicability of those models to the Company's facts and circumstances.
The Company believes the assumptions and estimates used to determine its estimated fair value are reasonable. Different assumptions could materially affect the estimated fair value. The primary assumptions affecting the Company's December 31, 2013 goodwill quantitative, "step one," impairment review are as follows:
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• | Discount rate: The Company used a 10% weighted average cost of capital (“WACC”) as the discount rate for future cash flows. The WACC is intended to represent a rate of return that would be expected by a market participant. |
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• | Operating income margin: The Company used historical and expected operating income margins, which may vary based on the projections of the reporting unit being evaluated. |
In addition to the above primary assumptions, the Company notes the following risks to volume and operating income assumptions that could have an impact on the discounted cash flow model:
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• | The automotive industry is cyclical and the Company's results of operations would be adversely affected by industry downturns. |
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• | The Company is dependent on market segments that use our key products and would be affected by decreasing demand in those segments. |
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• | The Company is subject to risks related to international operations. |
Based on the assumptions outlined above, the impairment testing conducted in the fourth quarter of 2013 indicated the Company's goodwill assigned to the reporting unit quantitatively assessed was not impaired. Additionally, a sensitivity analysis was completed indicating a 1% increase in the discount rate or a 1% decrease in the operating margin assumptions would not result in the carrying value exceeding the fair value of the reporting unit quantitatively assessed.
The changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2012 are as follows:
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| | | | | | | | | | | | | | | |
| 2013 | | 2012 |
(millions of dollars) | Engine | | Drivetrain | | Engine | | Drivetrain |
Gross goodwill balance, January 1 | $ | 1,324.1 |
| | $ | 359.3 |
| | $ | 1,334.7 |
| | $ | 353.5 |
|
Accumulated impairment losses, January 1 | (501.8 | ) | | (0.2 | ) | | (501.8 | ) | | (0.2 | ) |
Net goodwill balance, January 1 | $ | 822.3 |
| | $ | 359.1 |
| | $ | 832.9 |
| | $ | 353.3 |
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Goodwill during the year: | |
| | |
| | |
| | |
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Divestitures* | (4.6 | ) | | — |
| | (16.9 | ) | | — |
|
Translation adjustment and other | 12.4 |
| | 7.8 |
| | 6.3 |
| | 5.8 |
|
Ending balance, December 31 | $ | 830.1 |
| | $ | 366.9 |
| | $ | 822.3 |
| | $ | 359.1 |
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* Goodwill divested relates to the Company's 2012 sale of the spark plug business.
The Company’s other intangible assets, primarily from acquisitions, consist of the following:
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| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2013 | | December 31, 2012 |
(millions of dollars) | Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Amortized intangible assets: | |
| | |
| | |
| | |
| | |
| | |
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Patented and unpatented technology | $ | 85.9 |
| | $ | 36.5 |
| | $ | 49.4 |
| | $ | 80.0 |
| | $ | 26.2 |
| | $ | 53.8 |
|
Customer relationships | 201.8 |
| | 111.4 |
| | 90.4 |
| | 216.3 |
| | 100.0 |
| | 116.3 |
|
Miscellaneous | 2.9 |
| | 2.9 |
| | — |
| | 2.9 |
| | 2.9 |
| | — |
|
Total amortized intangible assets | 290.6 |
| | 150.8 |
| | 139.8 |
| | 299.2 |
| | 129.1 |
| | 170.1 |
|
In-process R&D | 10.8 |
| | — |
| | 10.8 |
| | 10.8 |
| | — |
| | 10.8 |
|
Unamortized trade names | 18.9 |
| | — |
| | 18.9 |
| | 25.4 |
| | — |
| | 25.4 |
|
Total other intangible assets | $ | 320.3 |
| | $ | 150.8 |
| | $ | 169.5 |
| | $ | 335.4 |
| | $ | 129.1 |
| | $ | 206.3 |
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Amortization of other intangible assets was $26.7 million, $28.4 million and $30.8 million for the years ended December 31, 2013, 2012 and 2011, respectively. The estimated useful lives of the Company's amortized intangible assets range from three to 15 years. The Company utilizes the straight line method of amortization recognized over the estimated useful lives of the assets. The estimated future annual amortization expense, primarily for acquired intangible assets, is as follows: $25.4 million in 2014, $16.4 million in 2015, $16.3 million in 2016, $14.9 million in 2017 and $13.3 million in 2018.
A roll forward of the gross carrying amounts of the Company's other intangible assets is presented below:
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| | | | | | | |
(millions of dollars) | 2013 | | 2012 |
Beginning balance, January 1 | $ | 335.4 |
| | $ | 341.7 |
|
Impairment* | (26.4 | ) | | — |
|
Divestitures** | (1.1 | ) | | (15.7 | ) |
Translation adjustment | 12.4 |
| | 9.4 |
|
Ending balance, December 31 | $ | 320.3 |
| | $ | 335.4 |
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* | Impairment relates to Drivetrain customer relationships and Engine unamortized trade names. The impairment charges are recorded in restructuring expense in Other expense (income). |
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** | Divestitures relate to the Company's 2012 sale of the spark plug business. |
A roll forward of the accumulated amortization associated with the Company's other intangible assets is presented below:
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| | | | | | | |
(millions of dollars) | 2013 | | 2012 |
Beginning balance, January 1 | $ | 129.1 |
| | $ | 98.4 |
|
Amortization | 26.7 |
| | 28.4 |
|
Impairment* | (13.9 | ) | | — |
|
Divestitures** | (0.4 | ) | | (0.6 | ) |
Translation adjustment | 9.3 |
| | 2.9 |
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Ending balance, December 31 | $ | 150.8 |
| | $ | 129.1 |
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________________
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* | Impairment relates to Drivetrain customer relationships and Engine unamortized trade names. The impairment charges are recorded in restructuring expense in Other expense (income). |
** Divestitures relate to the Company's 2012 sale of the spark plug business.
