GOODWILL AND OTHER INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2017

Goodwill and Intangible Assets Disclosure [Abstract]

Grainger had approximately $1.1 billion of goodwill and intangible assets as of September 30, 2017 and December 31, 2016, or 19% and 20% of total assets, respectively. Grainger tests reporting units’ goodwill and intangible assets for impairment annually during the fourth quarter and more frequently if impairment indicators exist. Accordingly, Grainger periodically performs qualitative assessments of significant events and circumstances such as reporting units' historical and current results, assumptions regarding future performance, strategic initiatives and overall economic factors to determine the existence of impairment indicators and assess if it is more likely than not that the fair value of the reporting unit or indefinite-lived intangible assets is less than its carrying value and if a quantitative impairment test is necessary. In the quantitative test, Grainger compares the carrying value of the reporting unit or an indefinite-lived intangible asset with its fair value. Any excess of the carrying value over fair value is recorded as an impairment charge.

The fair value of reporting units is calculated primarily using the discounted cash flow (DCF) method and utilizing 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 are used as a basis for determining the discount rates to apply to the reporting units’ future expected cash flows and terminal value.

Grainger’s indefinite-lived intangibles are primarily trade names. The fair value of trade names is calculated primarily using the relief from royalty method, which estimates the expected royalty savings attributable to the ownership of the trade name asset. The key assumptions when valuing a trade name are the revenue base, the royalty rate and the discount rate.

During the quarter ended September 30, 2017, the Company performed qualitative assessments of its reporting units’ goodwill and intangible assets. The operating performance of two of its reporting units has been below expectations and resulted in lowered short-term forecasts. Accordingly, the Company concluded that further evaluation was required. Based on the results of the quantitative tests, the Company concluded that there was no impairment of goodwill or indefinitely-lived intangible assets as of September 30, 2017. The fair values of the reporting units exceeded their carrying values by approximately 31 percent for the Canada reporting unit and 15 percent for the reporting unit included in Other Businesses. Changes in assumptions regarding future performance as well as the ability to execute on growth initiatives and productivity improvements may have a significant impact on future cash flows. Likewise, unfavorable economic environment and changes in market conditions or other factors may result in future impairments of the goodwill and intangible assets.

Additionally, the Company performed an impairment test on the intangible assets subject to amortization for the two reporting units. The first step of the impairment test is to compare the undiscounted cash flows of the reporting units to their carrying values. If the results of the test determine that the undiscounted cash flows of the reporting units are less than their carrying values, then an impairment risk exists and further testing is required. An impairment charge was not required as of September 30, 2017 using this test.

The balances and changes in the carrying amount of Goodwill by segment are as follows (in thousands of dollars):



	United States			Canada		Other Businesses		Total
Balance at December 31, 2016	$	202,020		$	122,140	$	202,990	$	527,150
Divestiture	(3,316		)	—		—		(3,316		)
Impairment	(7,169		)	—		—		(7,169		)
Translation	—			9,433		17,150		26,583
Balance at September 30, 2017	$	191,535		$	131,573	$	220,140	$	543,248



Cumulative goodwill impairment charges, December 31, 2016	$	17,038	$	32,265	$	70,299	$	119,602
Impairment charges	7,169		—		—		7,169
Cumulative goodwill impairment charges, September 30, 2017	$	24,207	$	32,265	$	70,299	$	126,771

The balances and changes in Intangible assets - net are as follows (in thousands of dollars):



		September 30, 2017						December 31, 2016
	Weighted average life	Gross carrying amount		Accumulated amortization		Net carrying amount		Gross carrying amount		Accumulated amortization		Net carrying amount
Customer relationships	13.8 years	$	428,041	$	190,395	$	237,646	$	424,405	$	175,112	$	249,293
Trade names and other	13.5 years	25,960		15,611		$	10,349	25,353		14,262		11,091
Non-amortized trade names and other	—	136,333		—		$	136,333	128,282		—		128,282
Capitalized software	4.1 years	626,652		428,706		$	197,946	571,978		374,518		197,460
Total	8.2 years	$	1,216,986	$	634,712	$	582,274	$	1,150,018	$	563,892	$	586,126

For the nine months ended September 30, 2017 and the twelve months ended December 31, 2016, amortization expense recognized on intangible assets was $67 million and $82 million, respectively, and is included in Warehousing, marketing and administrative expenses on the Consolidated statement of earnings.

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

+ References + Details