Goodwill and Intangible Assets
The changes in the carrying amount of goodwill by segment for the years ended December 31, 2013 and December 31, 2012 are as follows:
|
| | | | | | | | | | | | | | | | |
| | Flat-rolled
Segment | | USSE
Segment | | Tubular
Segment | | Total |
Balance at January 1, 2012 | | $ | 945 |
| | $ | 4 |
| | $ | 834 |
| | $ | 1,783 |
|
Currency translation | | 39 |
| | — |
| | — |
| | 39 |
|
Balance at December 31, 2012 | | $ | 984 |
| | $ | 4 |
| | $ | 834 |
| | $ | 1,822 |
|
Goodwill from acquisitions | | — |
| | — |
| | 3 |
| | 3 |
|
Impairment | | (969 | ) | | — |
| | (837 | ) | | (1,806 | ) |
Currency translation | | (15 | ) | | — |
| | — |
| | (15 | ) |
Balance at December 31, 2013 | | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | 4 |
|
Goodwill represents the excess of the cost over the fair value of acquired identifiable tangible and intangible assets and liabilities assumed from businesses acquired.
Goodwill is tested for impairment at the reporting unit level annually in the third quarter and whenever events or circumstances indicate the carrying value may not be recoverable. The evaluation of goodwill impairment involves using either a qualitative or quantitative approach as outlined in ASC Topic 350. U. S. Steel completed its annual goodwill impairment evaluation using the two-step quantitative analysis during the third quarter of 2013. We had two reporting units that included nearly all of our goodwill: our Flat-rolled reporting unit and our Texas Operations reporting unit, which is part of our Tubular operating segment.
In the first step of the analysis, U. S. Steel compared the estimated fair value of each reporting unit to its carrying value, including goodwill. The fair value of the reporting units was determined based on a weighting of income and market approaches. Since the carrying value of both the Flat-rolled and Texas Operations reporting units exceeded the fair value, U. S. Steel performed the second step of the impairment analysis in order to determine the implied fair value of the reporting units’ goodwill. The implied fair value of goodwill represents the excess of fair value of the reporting unit over the fair value amounts assigned to all of the assets and liabilities of the reporting unit as if it were to be acquired in a business combination and the current fair value of the reporting unit (as calculated in the first step) was the purchase price. Any amount remaining after this allocation represents the implied fair value of goodwill. The implied fair value of the respective reporting units’ goodwill was then compared to the carrying value of the goodwill and any excess of carrying value over the implied fair value represents the non-cash impairment charge. The results of the second step analysis showed that the implied fair value of goodwill was zero for both reporting units. Therefore, in 2013, U. S. Steel recorded a goodwill impairment charge of $969 million and $837 million for the Flat-rolled and Texas Operations reporting units, respectively. As a result of the goodwill impairment charge, there is no goodwill remaining within the Flat-rolled and Tubular segments, and goodwill remaining on our consolidated balance sheet at December 31, 2013 is $4 million.
The impairment of the Flat-rolled reporting unit’s goodwill was primarily driven by the valuation effects of the protracted economic recovery and excess global steelmaking capacity. The impairment of the Texas Operations reporting unit’s goodwill was primarily driven by the adverse price and volume effects of an increased supply of welded tubular products in the U.S. market from the continued high level of tubular product imports and announced additional domestic tubular manufacturing capacity. Due to these factors, U. S. Steel decreased the long term estimates of its operating results and cash flows utilized in assessing goodwill for impairment. The valuation of goodwill for the second step of the goodwill impairment analysis is considered a Level 3 fair value measurement, which means that the valuation of the assets and liabilities reflect U. S. Steel's own assumptions about the assumptions that market participants would use in pricing the assets and liabilities.
The valuation methodologies used for the 2013 impairment analysis to determine fair value under step one, with the assistance of a third party valuation specialist in the case of the Texas Operations reporting unit, were a market approach and an income approach.
For purposes of the income approach, fair value was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate (DCF analysis). U. S. Steel made assumptions about the amount and timing of future expected cash flows, terminal value growth rates and appropriate discount rates. The amount and timing of future cash flows within U. S. Steel’s DCF analysis was based on its most recent operational budgets, long range strategic plans and other estimates including probability weighting of cash flow scenarios. A three percent perpetual growth rate was used to calculate the value of cash flows beyond the last projected period in U. S. Steel’s DCF analysis and reflects its best estimates for stable, perpetual growth of its reporting units. Actual results may differ from those assumed in U. S. Steel’s forecasts. U. S. Steel used estimates of market participant weighted average cost of capital as a basis for determining the discount rates applied to its reporting units’ future expected cash flows, adjusted for risks and uncertainties inherent in the steel industry and in its internally developed forecasts. A discount rate of 10 percent was used for both reporting units.
The market approach is based upon an analysis of valuation metrics for companies comparable to each reporting unit. Fair values for the Flat-rolled and Texas Operations reporting units were estimated using an appropriate valuation multiple, as well as estimated normalized earnings and an estimated control premium.
In order to validate the reasonableness of the estimated fair values of the reporting units as of the valuation date, a reconciliation of the aggregate fair values of all reporting units to market capitalization was performed using a reasonable control premium. We further validated the reasonableness of the estimated fair values of our reporting units using other valuation metrics that included data from U. S Steel's historical transactions as well as published industry analyst reports.
Goodwill impairment tests in prior years indicated that goodwill was not impaired for any of U. S. Steel's reporting units and there were no triggering events since that time that necessitated an impairment test outside of the normal annual assessment.
Amortizable intangible assets are amortized on a straight-line basis over their estimated useful lives and are detailed below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, 2013 | | As of December 31, 2012 |
(In millions) | | Useful
Lives | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Amount |
Customer relationships | | 22-23 Years | | $ | 215 |
| | $ | 63 |
| | $ | 152 |
| | $ | 221 |
| | $ | 54 |
| | $ | 167 |
|
Other | | 2-20 Years | | 23 |
| | 12 |
| | 11 |
| | 22 |
| | 11 |
| | 11 |
|
Total amortizable intangible assets | | | | $ | 238 |
| | $ | 75 |
| | $ | 163 |
| | $ | 243 |
| | $ | 65 |
| | $ | 178 |
|
The carrying amount of acquired water rights with indefinite lives as of December 31, 2013 and December 31, 2012 totaled $75 million. The water rights are tested for impairment annually in the third quarter. U. S. Steel performed a qualitative impairment evaluation of its water rights for 2013. The 2013 and prior year tests indicated the water rights were not impaired.
During the year ended December 31, 2013, U. S. Steel acquired indefinite-lived intangible assets for $12 million and entered into an agreement to make future payments contingent upon certain factors. The aggregate purchase price was $36 million, and U. S. Steel allocated $33 million to indefinite-lived intangible assets, based upon their estimated fair value. The liability for contingent consideration will be reassessed each quarter. The maximum potential liability for contingent consideration is $53 million. As of December 31, 2013, U. S. Steel has recorded a liability of $24 million to reflect the estimated fair value of the contingent consideration. Contingent consideration was valued using a probability weighted discounted cash flow using both Level 2 inputs based on 2013 Standard and Poor’s Bond Guide as well Level 3, significant other unobservable inputs, based on internal forecasts and weighted average cost of capital derived from market data.
Identifiable intangible assets with finite lives are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. During the third quarter of 2013, U. S. Steel completed a review of its identifiable intangible assets with finite lives and determined that the assets were not impaired.
Amortization expense was $10 million for the year ended December 31, 2013 and $11 million for the years ended December 31, 2012 and 2011. The estimated future amortization expense of identifiable intangible assets during the next five years is $11 million in each year from 2014 to 2017 and $10 million for 2018.
