Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

Note 6. Goodwill and Intangible Assets

Goodwill by segment was:



	As of September 30, 2019		As of December 31, 2018
	(in millions)
Latin America	$	792	$	823
AMEA	3,098		3,210
Europe	7,234		7,519
North America	9,341		9,173
Goodwill	$	20,465	$	20,725

Intangible assets consisted of the following:



	As of September 30, 2019			As of December 31, 2018
	(in millions)
Non-amortizable intangible assets	$	16,958		$	17,201
Amortizable intangible assets	2,311			2,328
	19,269			19,529
Accumulated amortization	(1,627		)	(1,527		)
Intangible assets, net	$	17,642		$	18,002

Non-amortizable intangible assets consist principally of brand names purchased through our acquisitions of Nabisco Holdings Corp., the Spanish and Portuguese operations of United Biscuits, the global LU biscuit business of Groupe Danone S.A. and Cadbury Limited. Amortizable intangible assets consist primarily of brands, customer-related intangibles, process technology, licenses and non-compete agreements.

Amortization expense for intangible assets was $43 million for the three months and $130 million for the nine months ended September 30, 2019 and $44 million for the three months and $132 million for the nine months ended September 30, 2018. For the next five years, we currently estimate annual amortization expense of

approximately $170 million for the next two years and approximately $85 million in years three to five (reflecting September 30, 2019 exchange rates).

Changes in goodwill and intangible assets consisted of:



	Goodwill			Intangible Assets, at cost
	(in millions)
Balance at January 1, 2019	$	20,725		$	19,529
Currency	(366		)	(341		)
Divestiture	(43		)	—
Acquisition	149			138
Asset impairments	—			(57		)
Balance at September 30, 2019	$	20,465		$	19,269

Changes to goodwill and intangibles were:


•	Divestiture – During the second quarter of 2019, we divested the net assets of most of our cheese business in the Middle East and Africa to Arla Foods of Denmark resulting in a goodwill decrease of $43 million. See Note 2, Divestitures and Acquisitions, for additional information.

•

Acquisition – In connection with the acquisition of a majority interest in Perfect Snacks during the third quarter of 2019, we recorded a preliminary purchase price allocation of $150 million to goodwill and $138 million to intangible assets. In the second quarter of 2019, we also finalized the purchase price allocation for the 2018 acquisition of Tate's Bake Shop, resulting in a $1 million adjustment to goodwill. See Note 2, Divestitures and Acquisitions, for additional information.


•	Asset impairments – During the third quarter of 2019, we recorded $57 million of intangible asset impairments related to our annual testing of non-amortizable intangible assets as described further below.

Our annual impairment assessment test for goodwill and non-amortizable intangible assets was performed as of July 1, 2019. As part of our goodwill quantitative annual impairment testing, we compare a reporting unit's estimated fair value with its carrying value to evaluate the risk of potential goodwill impairment. We estimate a reporting unit's fair value using a discounted cash flow method that incorporates planned growth rates, market-based discount rates and estimates of residual value. This year, for our Europe and North America reporting units, we used a market based, weighted-average cost of capital of 5.9% to discount the projected cash flows of those operations. For our Latin America and AMEA reporting units, we used a risk-rated discount rate of 8.9%. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans and industry and economic conditions, and our actual results and conditions may differ over time. If the carrying value of a reporting unit's net assets exceeds its fair value, we would record an impairment based on the difference between the carrying value and fair value of the reporting unit.

In 2019, there were no goodwill impairments and each of our reporting units had sufficient fair value in excess of its carrying value. While all reporting units passed our annual impairment testing, if planned business performance expectations are not met or specific valuation factors outside of our control, such as discount rates, change significantly, then the estimated fair values of a reporting unit or reporting units might decline and lead to a goodwill impairment in the future.

During our 2019 annual testing of non-amortizable intangible assets, we recorded $57 million of impairment charges in the third quarter of 2019 related to nine brands. The impairments arose due to lower than expected brand earnings growth. We recorded charges related to gum, chocolate, biscuits and candy brands of $39 million in Europe, $15 million in AMEA and $3 million in Latin America. The impairment charges were calculated as the excess of the carrying value over the estimated fair value of the intangible assets on a global basis and were recorded within asset impairment and exit costs. We use several accepted valuation methods, including relief of royalty, excess earnings and excess margin, that utilize estimates of future sales, earnings growth rates, royalty rates and discount rates in determining a brand's global fair value. We also identified fourteen brands, including the nine impaired brands, with $619 million of aggregate book value as of September 30, 2019, that each had a fair value in excess of book value of 10% or less. We believe our current plans for each of these brands will allow them to not be impaired, but if the brand earnings expectations are not met or specific valuation factors outside of our control, such as discount rates, change significantly, then a brand or brands could become impaired in the future.