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9. | Goodwill and Intangible Assets |
Goodwill
The changes in the carrying amount of goodwill, by reportable segment, for the 53 weeks ended February 2, 2013 and the 52 weeks ended February 1, 2014 were as follows:
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| | | | | | | | | | | | | | | | | | | | | | | |
| | United States | | Canada | | Australia | | Europe | | Technology Brands | Total |
| | (In millions) |
Balance at January 28, 2012 | | $ | 1,152.0 |
| | $ | 137.4 |
| | $ | 210.0 |
| | $ | 519.6 |
| | $ | — |
| $ | 2,019.0 |
|
Acquisitions (Note 3) | | 1.5 |
| | — |
| | — |
| | — |
| | — |
| 1.5 |
|
Impairment | | — |
| | (100.3 | ) | | (107.1 | ) | | (419.6 | ) | | — |
| (627.0 | ) |
Foreign currency translation adjustment | | — |
| | 0.6 |
| | (6.3 | ) | | (4.7 | ) | | — |
| (10.4 | ) |
Balance at February 2, 2013 | | 1,153.5 |
| | 37.7 |
| | 96.6 |
| | 95.3 |
| | — |
| 1,383.1 |
|
Acquisitions (Note 3) | | — |
| | — |
| | — |
| | — |
| | 62.1 |
| 62.1 |
|
Impairment | | (10.2 | ) | | — |
| | — |
| | — |
| | — |
| (10.2 | ) |
Foreign currency translation adjustment | | — |
| | (3.9 | ) | | (15.3 | ) | | (1.1 | ) | | — |
| (20.3 | ) |
Balance at February 1, 2014 | | $ | 1,143.3 |
| | $ | 33.8 |
| | $ | 81.3 |
| | $ | 94.2 |
| | $ | 62.1 |
| $ | 1,414.7 |
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Goodwill represents the excess purchase price over tangible net assets and identifiable intangible assets acquired. Our management is required to evaluate goodwill and other intangible assets not subject to amortization for impairment at least annually. This annual test is completed at the beginning of the fourth quarter of each fiscal year or when circumstances indicate the carrying value of the goodwill or other intangible assets might be impaired. Goodwill has been assigned to reporting units for the purpose of impairment testing. We have five operating segments, including Video Game Brands in the United States, Australia, Canada and Europe, and Technology Brands in the United States, which also define our reporting units based upon the similar economic characteristics of operations within each segment, including the nature of products, product distribution and the type of customer and separate management within those regions.
We estimate the fair value of each reporting unit based on the discounted cash flows of each reporting unit. We use a two-step process to measure goodwill impairment. If the fair value of the reporting unit is higher than its carrying value, then goodwill is not impaired. If the carrying value of the reporting unit is higher than the fair value, then the second step of the goodwill impairment test is needed. The second step compares the implied fair value of the reporting unit’s goodwill with its carrying amount. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value, then an impairment loss is recognized in the amount of the excess.
During the third quarter of fiscal 2012, our management determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment test. These indicators included the recent trading prices of our Class A Common Stock and the decrease in our market capitalization below the total amount of stockholders’ equity on our consolidated balance sheet.
To perform step one of the interim goodwill impairment test, we utilized a discounted cash flow method to determine the fair value of reporting units. Our management was required to make significant judgments based on our projected annual business plans, long-term business strategies, comparable store sales, store count, gross margins, operating expenses, working capital needs, capital expenditures and long-term growth rates, all considered in light of current and anticipated economic factors. Discount rates used in the analysis reflect a hypothetical market participant’s weighted average cost of capital, current market rates and the risks associated with the projected cash flows. Terminal growth rates were based on long-term growth rate potential and a long-term inflation forecast. Given the significant decline in our market capitalization during the second quarter of fiscal 2012, we increased the discount rates for each of our reporting units from those used in step one of our fiscal 2011 annual goodwill impairment test to better reflect the market participant’s perceived risk associated with the projected cash flows, which had the effect of decreasing the fair value of each of the reporting units. We also updated its estimated cash flows from those used in step one of the fiscal 2011 annual goodwill impairment test to reflect the most recent strategic forecast, which resulted in, among other things, a decrease in the projected growth rates in store count and modifications to the projected growth rates in same-store sales.
Upon completion of step one of the interim goodwill impairment test, our management determined that the fair values of its Australia, Canada and Europe reporting units were below their carrying values and, as a result, conducted step two of the interim goodwill impairment test to determine the implied fair value of goodwill for the Australia, Canada and Europe reporting units. The calculated fair value of the United States reporting unit significantly exceeded its carrying value. Therefore, step two of the interim goodwill impairment test was not required for the United States reporting unit.
The implied fair value of goodwill is determined in step two of the goodwill impairment test by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation used in a business combination and the residual fair value after this allocation is the implied fair value of the reporting unit’s goodwill. In the process of conducting the second step of the goodwill impairment test, we identified intangible assets consisting of trade names in our Australia, Canada and Europe reporting units. Additionally, we identified hypothetical unrecognized fair value changes to merchandise inventories, property and equipment, unfavorable leasehold interests and deferred income taxes. The combination of these hypothetical unrecognized intangible assets and other hypothetical unrecognized fair value changes to the carrying values of other assets and liabilities, together with the lower reporting unit fair values calculated in step one, resulted in an implied fair value of goodwill below the carrying value of goodwill for the Australia, Canada and Europe reporting units. Accordingly, we recorded non-cash, non-tax deductible goodwill impairments for the third quarter of fiscal 2012 of $107.1 million, $100.3 million and $419.6 million in our Australia, Canada and Europe reporting units, respectively, to reduce the carrying value of goodwill.
There were no impairments to goodwill prior to the $627 million charge recorded in fiscal 2012, with the exception of a $3.3 million charge recorded in fiscal 2011 related to the exit of non-core operations. During fiscal 2013, $10.2 million of goodwill was expensed in the United States segment as a result of the exiting of an immaterial non-core business. Cumulative goodwill impairment losses were $640.5 million as of February 1, 2014, of which $13.5 million, $100.3 million, $107.1 million and $419.6 million were attributable to our United States, Canada, Australia and Europe reporting units, respectively.
Intangible Assets
Intangible assets, primarily from the EB merger and Micromania acquisition, consist of internally developed software, amounts attributed to favorable leasehold interests and advertiser relationships which are included in other intangible assets in the consolidated balance sheet. The trade names acquired, primarily Micromania, have been determined to be indefinite-lived intangible assets and are therefore not subject to amortization. The total weighted-average amortization period for the remaining intangible assets, excluding goodwill, is approximately six years. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized, with no expected residual value.
As a result of the impairment indicators described in the discussion above of the interim goodwill impairment test, during the third quarter of fiscal 2012, we also tested our long-lived assets for impairment and concluded that our Micromania trade name was impaired. As a result of the interim impairment test, we recorded a $44.9 million impairment charge of our Micromania trade name for the third quarter of fiscal 2012. For fiscal 2011, we recorded a $37.8 million charge as a result of our annual impairment test of our Micromania trade name. There were no trade name impairments recorded as a result of the fiscal 2013 annual impairment test. For each impairment test, the fair value of our Micromania trade name was calculated using a relief-from-royalty approach, which assumes the fair value of the trade name is the discounted cash flows of the amount that would be paid by a hypothetical market participant had they not owned the trade name and instead licensed the trade name from another company. The basis for future cash flow projections is internal revenue forecasts, which we believe represent reasonable market participant assumptions, to which the selected royalty rate is applied. These future cash flows are discounted using the applicable discount rate, as well as any potential risk premium to reflect the inherent risk of holding a standalone intangible asset. The discount rate used in the analysis reflects a hypothetical market participant’s weighted average cost of capital, current market rates and the risks associated with the projected cash flows.
The gross carrying amount and accumulated amortization of our intangible assets other than goodwill as of February 1, 2014 and February 2, 2013 were as follows (in millions):
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of February 1, 2014 | | As of February 2, 2013 |
| | Gross Carrying Amount(1) | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Intangible assets with indefinite lives: | | | | | | | | | | | | |
Trade names | | $ | 54.2 |
| | $ | — |
| | $ | 54.2 |
| | $ | 54.8 |
| | $ | — |
| | $ | 54.8 |
|
Dealer agreement | | 57.2 |
| | — |
| | 57.2 |
| | — |
| | — |
| | — |
|
Intangible assets with finite lives: | | | | | | | | | | | | |
Key money | | 113.6 |
| | (44.4 | ) | | 69.2 |
| | 115.9 |
| | (39.1 | ) | | 76.8 |
|
Other | | 40.9 |
| | (27.2 | ) | | 13.7 |
| | 42.2 |
| | (20.4 | ) | | 21.8 |
|
Total | | $ | 265.9 |
| | $ | (71.6 | ) | | $ | 194.3 |
| | $ | 212.9 |
| | $ | (59.5 | ) | | $ | 153.4 |
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(1) The majority of the change in the gross carrying amount of intangible assets is due to business acquisitions (Note 3).
Intangible asset amortization expense for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012 was $14.0 million, $14.3 million and $17.8 million, respectively.
The estimated aggregate intangible asset amortization expense for the next five fiscal years is as follows (in millions):
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| | | | | |
Fiscal Year Ending on or around January 31, | | | Projected Amortization Expense |
| | |
2015 | | | $ | 12.5 |
|
2016 | | | 11.9 |
|
2017 | | | 9.8 |
|
2018 | | | 9.0 |
|
2019 | | | 8.6 |
|
| | | $ | 51.8 |
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