GOODWILL AND OTHER INTANGIBLE ASSETS

12 Months Ended

Dec. 31, 2017

GOODWILL AND OTHER INTANGIBLES [Abstract]

Grainger had approximately $1.1 billion of goodwill and intangible assets as of December 31, 2017 and 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. 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. Quantitative tests on two of its reporting units were performed due to lower than expected operating performance and lowered short-term forecasts. Based on the results of the quantitative tests performed, the Company concluded that there was no impairment of goodwill or indefinite-lived intangible assets for the two reporting units 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 Cromwell reporting unit included in other businesses.

Grainger completed its annual goodwill impairment testing in the fourth quarter. The testing included qualitative assessment of each reporting units’ goodwill and intangible assets. The Company concluded that for each of its reporting units, including the two reporting units for which quantitative tests were performed during the third quarter, it was not more likely than not that the fair value of the reporting unit or indefinite-lived intangible assets is less than their carrying value.

The risk of potential failure of future impairment tests is highly dependent upon a number of assumptions. Changes in assumptions regarding discount rate and 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.

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 January 1, 2016	$	202,020		$	118,529	$	261,787		$	582,336
Purchase Price Adjustments	—			—		8,362			8,362
Impairment	—			—		(47,244		)	(47,244		)
Translation	—			3,611		(19,915		)	(16,304		)
Balance at December 31, 2016	202,020			122,140		202,990			527,150
Divestiture	(3,316		)	—		—			(3,316		)
Impairment	(7,169		)	—		—			(7,169		)
Translation	—			8,282		18,956			27,238
Balance at December 31, 2017	$	191,535		$	130,422	$	221,946		$	543,903



Cumulative goodwill impairment charges, January 1, 2017	$	17,038	$	32,265	$	70,299	$	119,602
Impairment	7,169		—		—		7,169
Cumulative goodwill impairment charges, December 31, 2017	$	24,207	$	32,265	$	70,299	$	126,771

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



		As of December 31,
		2017						2016
	Weighted average life	Gross carrying amount		Accumulated amortization		Net carrying amount		Gross carrying amount		Accumulated amortization		Net carrying amount
Customer lists and relationships	13.8 years	$	430,026	$	195,842	$	234,184	$	424,405	$	175,112	$	249,293
Trademarks, trade names and other	13.5 years	25,886		16,054		9,832		25,353		14,262		11,091
Non-amortized trade names and other		137,491		—		137,491		128,282		—		128,282
Capitalized software	4.1 years	632,431		444,823		187,608		571,978		374,518		197,460
Total intangible assets	8.2 years	$	1,225,834	$	656,719	$	569,115	$	1,150,018	$	563,892	$	586,126

Amortization expense recognized on intangible assets was $89 million, $82 million and $65 million for the years ended December 31, 2017, 2016 and 2015, 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
2018	$	91,178
2019	73,995
2020	52,409
2021	40,315
2022	28,468
Thereafter	145,259

- 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.

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