Goodwill and Intangible Assets
In the second quarter of 2013, Silpada was classified within discontinued operations. See Note 3, Discontinued Operations for more information. Accordingly, all amounts exclude the results of Silpada for all periods presented.
Q3 2013 China Impairment Assessment
As compared to our projections used in our fourth quarter 2012 impairment analysis ("Q4 2012 projections"), China performed generally in line with our revenue and earnings projections during the first half of 2013. As assumed in our Q4 2012 projections, China's revenue in the first half of 2013 continued to deteriorate versus the prior-year period; however, beginning in the third quarter of 2013, this revenue decline was significantly in excess of our assumptions. Revenue in the third quarter of 2013 declined 67% versus the third quarter of 2012, compared to a revenue decline of 28% in the first half of 2013 versus the first half of 2012. As a result, in the third quarter of 2013, it became apparent that we would not achieve our 2013 and long-term forecasted revenue and earnings, and we completed an interim impairment assessment of the fair value of goodwill related to our operations in China.
China's revenue performance in the third quarter of 2013 was approximately 67% less (when excluding the impact of foreign currency) than the revenue in our Q4 2012 projections. The revenue decline in China during the third quarter of 2013 resulted in the recognition of an operating loss while we had expected operating profit in our Q4 2012 projections. In the third quarter of 2013, we significantly lowered our long-term revenue and earnings projections for China that was included in our DCF model utilized in our interim impairment assessment. Based upon this interim analysis, we determined that the goodwill related to our operations in China was impaired. Specifically, the results of our interim impairment analysis indicated the estimated fair value of our China reporting unit was less than its respective carrying amount. As a result of our impairment testing, we recorded a non-cash before tax impairment charge of $38.4 ($38.4 after tax) to reduce the carrying amount of goodwill. There is no goodwill remaining for our China reporting unit as a result of this impairment. The decline in the fair value of the China reporting unit was primarily driven by the significant reduction in the forecasted long-term growth rates and cash flows used to estimate fair value. Fiscal year 2013 revenue for China was expected to be approximately 38% less than the revenue in our Q4 2012 projections and 47% less than fiscal year 2012 results.
We also performed an interim impairment analysis for our China finite-lived intangible assets, which indicated the carrying value of these intangible assets exceeded the estimated future undiscounted cash flows of the business. This resulted in a non-cash before tax impairment charge of $3.7 ($2.8 after tax) to reduce the carrying amount of these assets. There are no intangible assets remaining for China as a result of this impairment charge.
China had historically generated positive cash flows, but was not expected to generate positive cash flows in 2013 or for a number of years thereafter as there was a need for further investment than was previously anticipated. As a result, the expected cash flows of the business as of the date of our impairment analysis were not at a level sufficient to support the carrying value of the business. As compared to prior years' projections for China, the future expectations declined significantly in the 2012 and 2013 impairment analyses. This reduction in future expectations led to impairments of $44.0 and $42.1 being recorded during the third quarters of 2012 and 2013, respectively.
Q3 2012 China Impairment Assessment
Based on the continued decline in revenue performance in China during the third quarter of 2012 and a corresponding lowering of our long-term growth estimates in China, we completed an interim impairment assessment of the fair value of goodwill related to our operations in China. The changes to our long-term growth estimates were based on the state of our China business, as the China business did not achieve our revenue, earnings and cash flows expectations primarily due to challenges in our business model. Based upon this interim analysis, we determined that the goodwill related to our operations in China was impaired. Specifically, the results of our interim impairment test indicated the estimated fair value of our China reporting unit was less than its respective carrying amount. As a result of our impairment testing, we recorded a non-cash impairment charge of $44.0 ($44.0 after tax) to reduce the carrying amount of goodwill for China to its estimated fair value.
Key Assumptions - China
Key assumptions used in measuring the fair value of China during these impairment assessments included projections of revenue and the resulting cash flows, as well as the discount rate (based on the weighted-average cost of capital). To estimate the fair value of China, we forecasted revenue and the resulting cash flows over ten years using a DCF model which included a terminal value at the end of the projection period. We believed that a ten-year period was a reasonable amount of time in order to return China's cash flows to normalized, sustainable levels.
Goodwill
|
| | | | | | | | | | | | | | | |
| Latin America | | Europe, Middle East & Africa | | Asia Pacific | | Total |
Gross balance at December 31, 2012 | $ | 122.8 |
| | $ | 167.3 |
| | $ | 84.2 |
| | $ | 374.3 |
|
Accumulated impairments | — |
| | — |
| | (44.0 | ) | | (44.0 | ) |
Net balance at December 31, 2012 | $ | 122.8 |
| | $ | 167.3 |
| | $ | 40.2 |
| | $ | 330.3 |
|
| | | | | | | |
Changes during the period ended December 31, 2013: | | | | | | | |
Impairment | $ | — |
| | $ | — |
| | $ | (38.4 | ) | | $ | (38.4 | ) |
Other(1) | (10.2 | ) | | — |
| | .8 |
| | (9.4 | ) |
| | | | | | | |
Gross balance at December 31, 2013 | $ | 112.6 |
| | $ | 167.3 |
| | $ | 85.0 |
| | $ | 364.9 |
|
Accumulated impairments | — |
| | — |
| | (82.4 | ) | | (82.4 | ) |
Net balance at December 31, 2013 | $ | 112.6 |
| | $ | 167.3 |
| | $ | 2.6 |
| | $ | 282.5 |
|
(1) Other is primarily comprised of foreign currency translation.
Other intangible assets
|
| | | | | | | | | | | | | | | | |
| | 2013 | | 2012 |
| | Gross Amount | | Accumulated Amortization | | Gross Amount | | Accumulated Amortization |
Finite-Lived Intangible Assets | | | | | | | | |
Customer relationships | | $ | 39.9 |
| | $ | (36.5 | ) | | $ | 52.7 |
| | $ | (46.0 | ) |
Licensing agreements | | 52.3 |
| | (47.3 | ) | | 62.8 |
| | (53.6 | ) |
Noncompete agreements | | 8.1 |
| | (8.1 | ) | | 8.6 |
| | (8.6 | ) |
Trademarks | | 6.6 |
| | (6.6 | ) | | 6.6 |
| | (6.3 | ) |
Indefinite-Lived Trademarks | | 25.1 |
| | — |
| | 24.4 |
| | — |
|
Total | | $ | 132.0 |
| | $ | (98.5 | ) | | $ | 155.1 |
| | $ | (114.5 | ) |
Actual amortization expense may differ from the amounts above due to, among other things, future acquisitions, disposals, impairments, accelerated amortization or fluctuations in foreign currency exchange rates. The aggregate amortization expense was $4.4, $9.5 and $6.7 for the years ended December 31, 2013, 2012 and 2011, respectively. Amortization expense in future periods is not expected to be material.
