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Goodwill and Other Intangible Assets
9 Months Ended
Sep. 30, 2012
Goodwill and Other Intangible Assets  
Goodwill and Other Intangible Assets

6.         Goodwill and Other Intangible Assets

 

The company tests goodwill for impairment on an annual basis during the second quarter. The company’s reporting units are its operating units, which subsequent to the Nalco merger also include Global Water, Global Paper and Global Energy. If circumstances change significantly, the company would also test a reporting unit’s goodwill for impairment during interim periods between its annual tests.

 

During the second quarter ended June 30, 2012, the company completed its annual test for goodwill impairment. The current year review incorporated the new qualitative assessment guidance as discussed in Note 14. In addition to the qualitative analysis, the company performed quantitative procedures including a review of sensitivities around key inputs, assumptions and business projections for certain reporting units. Supplemental quantitative procedures were performed on the Europe/Middle East/Africa (“EMEA”) reporting unit given the European economic conditions as well as the Global Water, Global Paper and Global Energy reporting units given the recent closing of the Nalco merger on December 1, 2011.

 

As expected, the estimated fair value exceeded the carrying value of Global Water, Global Paper and Global Energy reporting units by a low margin as these separate reporting units were acquired on December 1, 2011 when the carrying value equaled the fair value. As part of this analysis the company updated the discount rate assumptions used in the quantitative procedures for the reduction in risk free rates in 2012 and other reductions in risk given the successful integration to date. The company used a range of discount rates from 9.6% to 10.4% compared to the 11.5% discount rate used in the original Nalco purchase price allocation. The combined effect of lower discount rates and the updated projections drove an increase in estimated fair value for these reporting units in all cases.

 

Based on this testing, no adjustment to the carrying value of goodwill was necessary. Additionally, based on the current performance of the company’s operating units, updating the impairment testing during the third quarter of 2012 was not deemed necessary. There has been no impairment of goodwill since the adoption of Financial Accounting Standards Board (“FASB”) guidance for goodwill and other intangibles on January 1, 2002.

 

The merger with Nalco resulted in the addition of $4.4 billion of goodwill. Subsequent performance of the reporting units acquired through the Nalco merger relative to projections used for the purchase price allocation of goodwill could result in an impairment if there is either underperformance by the reporting unit or if the carrying value of the reporting unit were to fluctuate due to working capital changes or other reasons that did not proportionately increase fair value.

 

The changes in the carrying amount of goodwill for each of the company’s reportable segments during the nine months ended September 30, 2012 were as follows:

 

 

 

 

 

 

 

Int’ l

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cleaning

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

U.S.

 

Sanitizing

 

 

 

 

 

 

 

 

 

 

 

Cleaning &

 

Other

 

& Other

 

Global

 

Global

 

Global

 

 

 

(millions)

 

Sanitizing

 

Services

 

Services

 

Water (b)

 

Paper (b)

 

Energy (b)

 

Total

 

Goodwill as of December 31, 2011

 

$

543.6

 

$

50.5

 

$

857.3

 

$

1,933.0

 

$

179.3

 

$

2,291.6

 

$

5,855.3

 

Current year business acquisitions(a)

 

 

 

17.2

 

6.1

 

 

 

23.3

 

Prior year business acquisitions

 

 

 

 

24.0

 

2.2

 

28.4

 

54.6

 

Effect of foreign currency translation

 

 

 

(38.6

)

(0.4

)

 

(0.5

)

(39.5

)

Goodwill as of September 30, 2012

 

$

543.6

 

$

50.5

 

$

835.9

 

$

1,962.7

 

$

181.5

 

$

2,319.5

 

$

5,893.7

 

 

(a)          For 2012, none of the goodwill related to businesses acquired is expected to be tax deductible.

 

(b)         The company completed its segment goodwill allocation related to the Nalco merger during the second quarter of 2012. As such, goodwill acquired through the Nalco merger has been disclosed for each legacy Nalco reportable segment beginning in the second quarter of 2012, with disclosure back to year end 2011.

 

As part of the Nalco merger, the company added the “Nalco” trade name as an indefinite life intangible asset. The $1.2 billion carrying value of this asset was subject to impairment testing during the second quarter of 2012. Based on this testing, no adjustment to the carrying value was necessary.

 

The company’s other intangible assets subject to amortization primarily include customer relationships, trademarks, patents and other technology. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. Total amortization expense related to other intangible assets during the third quarter ended September 30, 2012 and 2011 was $59.3 million and $13.7 million, respectively. Total amortization expense related to other intangible assets during the nine months ended September 30, 2012 and 2011 was $178.0 million and $39.0 million, respectively. The large increase from 2011 to 2012 is primarily due to the Nalco merger. As of September 30, 2012, future estimated amortization expense related to amortizable other identifiable intangible assets is expected to be:

 

(millions)

 

 

 

 

 

 

 

 

2012 (Remainder: three-month period)

 

$

60

 

2013

 

236

 

2014

 

225

 

2015

 

222

 

2016

 

217