Goodwill and Other Intangibles

12 Months Ended

Dec. 31, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

GOODWILL AND OTHER INTANGIBLES

During the fourth quarter of each year, the Company qualitatively assesses its goodwill assigned to each of its reporting units. This qualitative assessment evaluates various events and circumstances, such as macro economic conditions, industry and market conditions, cost factors, relevant events and financial trends, that may impact a reporting unit's fair value. Using this qualitative assessment, the Company determines whether it is more-likely-than-not the reporting unit's fair value exceeds its carrying value. If it is determined that it is not more-likely-than-not the reporting unit's fair value exceeds the carrying value, or upon consideration of other factors, including recent acquisition, restructuring or divestiture activity or to refresh the fair values, the Company performs a quantitative, "step one," goodwill impairment analysis. In addition, the Company may test goodwill in between annual test dates if an event

occurs or circumstances change that could more-likely-than-not reduce the fair value of a reporting unit below its carrying value.

During the fourth quarter of 2019, the Company performed an analysis on each reporting unit. Based on the factors above, the Company elected to perform quantitative, "step one," goodwill impairment analyses, on three reporting units. This requires the Company to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates and growth rates. The basis of this goodwill impairment analysis is the Company's annual budget and long-range plan (“LRP”). The annual budget and LRP includes a five-year projection of future cash flows based on actual new products and customer commitments and assumes the last year of the LRP data is a fair indication of the future performance. Because the LRP is estimated over a significant future period of time, those estimates and assumptions are subject to a high degree of uncertainty. Further, the market valuation models and other financial ratios used by the Company require certain assumptions and estimates regarding the applicability of those models to the Company's facts and circumstances.

The Company believes the assumptions and estimates used to determine the estimated fair value are reasonable. Different assumptions could materially affect the estimated fair value. The primary assumptions affecting the Company's December 31, 2019 goodwill quantitative, "step one," impairment review are as follows:


•	Discount rate: the Company used a 10.7% weighted average cost of capital (“WACC”) as the discount rate for future cash flows. The WACC is intended to represent a rate of return that would be expected by a market participant.


•	Operating income margin: the Company used historical and expected operating income margins, which may vary based on the projections of the reporting unit being evaluated.


•	Revenue growth rate: the Company used a global automotive market industry growth rate forecast adjusted to estimate its own market participation for product lines.

In addition to the above primary assumptions, the Company notes the following risks to volume and operating income assumptions that could have an impact on the discounted cash flow models:


•	The automotive industry is cyclical, and the Company's results of operations would be adversely affected by industry downturns.


•	The Company is dependent on market segments that use our key products and would be affected by decreasing demand in those segments.


•	The Company is subject to risks related to international operations.

Based on the assumptions outlined above, the impairment testing conducted in the fourth quarter of 2019 indicated the Company's goodwill assigned to the reporting units that were quantitatively assessed were not impaired and contained fair values substantially higher than the reporting units' carrying values. Additionally, for the reporting units quantitatively assessed, sensitivity analyses were completed indicating that a one percentage point increase in the discount rate, a one percentage point decrease in the operating margin, or a one percentage point decrease in the revenue growth rate assumptions would not result in the carrying value exceeding the fair value.

The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 are as follows:



	2019						2018
(in millions)	Engine			Drivetrain			Engine			Drivetrain
Gross goodwill balance, January 1	$	1,343		$	1,012		$	1,360		$	1,024
Accumulated impairment losses, January 1	(502		)	—			(502		)	—
Net goodwill balance, January 1	$	841		$	1,012		$	858		$	1,024
Goodwill during the year:
Acquisitions*	—			7			—			2
Translation adjustment and other	(6		)	(12		)	(17		)	(14		)
Ending balance, December 31	$	835		$	1,007		$	841		$	1,012

________________


*	Acquisitions relate to the Company's 2019 purchase of Rinehart Motion Systems LLC and AM Racing LLC and the 2017 purchase of Sevcon.

The Company’s other intangible assets, primarily from acquisitions, consist of the following:



	December 31, 2019						December 31, 2018
(in millions)	Gross carrying amount		Accumulated amortization		Net carrying amount		Gross carrying amount		Accumulated amortization		Net carrying amount
Amortized intangible assets:
Patented and unpatented technology	$	154	$	70	$	84	$	152	$	61	$	91
Customer relationships	481		224		257		490		201		289
Miscellaneous	10		4		6		8		4		4
Total amortized intangible assets	645		298		347		650		266		384
Unamortized trade names	55		—		55		55		—		55
Total other intangible assets	$	700	$	298	$	402	$	705	$	266	$	439

Amortization of other intangible assets was $39 million, $40 million and $40 million for the years ended December 31, 2019, 2018 and 2017, respectively. The estimated useful lives of the Company's amortized intangible assets range from 3 to 20 years. The Company utilizes the straight line method of amortization recognized over the estimated useful lives of the assets. The estimated future annual amortization expense, primarily for acquired intangible assets, is as follows: $39 million in 2020, $38 million in 2021, $37 million in 2022, $31 million in 2023, and $31 million in 2024.

A roll forward of the gross carrying amounts of the Company's other intangible assets is presented below:



(in millions)	2019			2018
Beginning balance, January 1	$	705		$	730
Acquisitions*	5			—
Translation adjustment	(10		)	(25		)
Ending balance, December 31	$	700		$	705

________________


*	Acquisitions relate to the Company's 2019 purchase of Rinehart Motion Systems LLC and AM Racing LLC and the 2017 purchase of Sevcon.

A roll forward of the accumulated amortization associated with the Company's other intangible assets is presented below:



(in millions)	2019			2018
Beginning balance, January 1	$	266		$	237
Amortization	39			40
Translation adjustment	(7		)	(11		)
Ending balance, December 31	$	298		$	266