Goodwill and Intangible Assets
The following summarizes the changes in goodwill:
|
| | | | | | | | | | | | | | | |
| Canada | | Europe | | MCI | | Consolidated |
| (In millions) |
Balance at December 31, 2011 | $ | 689.5 |
| | $ | 746.1 |
| | $ | 17.7 |
| | $ | 1,453.3 |
|
Business acquisition(1) | 57.8 |
| | 853.7 |
| | — |
| | 911.5 |
|
Impairment related to China reporting unit | — |
| | — |
| | (9.5 | ) | | (9.5 | ) |
Foreign currency translation | 16.7 |
| | 81.1 |
| | (0.4 | ) | | 97.4 |
|
Purchase price adjustment | — |
| | — |
| | 0.4 |
| | 0.4 |
|
Balance at December 29, 2012 | 764.0 |
| | 1,680.9 |
| | 8.2 |
| | 2,453.1 |
|
Foreign currency translation | (45.8 | ) | | 27.7 |
| | (0.9 | ) | | (19.0 | ) |
Purchase price adjustment(1) | — |
| | (15.4 | ) | | — |
| | (15.4 | ) |
Balance at December 31, 2013 | $ | 718.2 |
| | $ | 1,693.2 |
| | $ | 7.3 |
| | $ | 2,418.7 |
|
| |
(1) | On June 15, 2012, we completed the Acquisition of StarBev. During the second quarter of 2013, we finalized purchase accounting related to the Acquisition with a resulting reduction to Europe goodwill in the first half of 2013 of $15.4 million. We assigned the majority of the goodwill resulting from the Acquisition to our Europe reporting unit with a portion allocated to the Canada reporting unit resulting from synergies. The allocation of goodwill to our Canada reporting unit was not impacted by the changes made in the first half of 2013 and is now final. See Note 3, "Acquisition of StarBev" for further discussion. |
The following table presents details of our intangible assets, other than goodwill, as of December 31, 2013:
|
| | | | | | | | | | | | | |
| Useful life | | Gross | | Accumulated amortization | | Net |
| (Years) | | (In millions) |
Intangible assets subject to amortization: | | | | | | | |
Brands | 3 - 40 | | $ | 537.5 |
| | $ | (224.7 | ) | | $ | 312.8 |
|
Distribution rights | 2 - 23 | | 314.1 |
| | (255.0 | ) | | 59.1 |
|
Patents and technology and distribution channels | 3 - 10 | | 36.2 |
| | (32.8 | ) | | 3.4 |
|
Favorable contracts, land use rights and other | 2 - 42 | | 1.2 |
| | (1.2 | ) | | — |
|
Intangible assets not subject to amortization: | | | | | | | |
Brands | Indefinite | | 5,482.3 |
| | — |
| | 5,482.3 |
|
Distribution networks | Indefinite | | 952.3 |
| | — |
| | 952.3 |
|
Other | Indefinite | | 15.2 |
| | — |
| | 15.2 |
|
Total | | | $ | 7,338.8 |
| | $ | (513.7 | ) | | $ | 6,825.1 |
|
The following table presents details of our intangible assets, other than goodwill, as of December 29, 2012:
|
| | | | | | | | | | | | | |
| Useful life | | Gross | | Accumulated amortization | | Net |
| (Years) | | (In millions) |
Intangible assets subject to amortization: | | | | | | | |
Brands | 3 - 40 | | $ | 480.6 |
| | $ | (205.7 | ) | | $ | 274.9 |
|
Distribution rights | 2 - 23 | | 350.8 |
| | (255.0 | ) | | 95.8 |
|
Patents and technology and distribution channels | 3 - 10 | | 35.3 |
| | (31.1 | ) | | 4.2 |
|
Favorable contracts, land use rights and other | 2 - 42 | | 13.6 |
| | (5.4 | ) | | 8.2 |
|
Intangible assets not subject to amortization: | | | | | | | |
Brands | Indefinite | | 5,821.6 |
| | — |
| | 5,821.6 |
|
Distribution networks | Indefinite | | 1,014.7 |
| | — |
| | 1,014.7 |
|
Other | Indefinite | | 15.4 |
| | — |
| | 15.4 |
|
Total | | | $ | 7,732.0 |
| | $ | (497.2 | ) | | $ | 7,234.8 |
|
The changes in the gross carrying amounts of intangibles from December 29, 2012, to December 31, 2013, are driven by the impact of foreign exchange rates, as a significant amount of intangibles are denominated in foreign currencies, the indefinite-lived brand intangible impairments recorded in the third quarter of 2013, the change in classification of the Ostravar brand from an indefinite life to a useful life subject to amortization, as well as the adjustments recorded on brand intangible assets during the first half of 2013 related to the finalization of the purchase price allocation. See Note 3, "Acquisition of StarBev" for further discussion. Further, in addition to the amortization recorded during 2013 on our intangible assets subject to amortization we also recorded a $17.9 million impairment charge related to our licensing agreement with Miller in Canada as further discussed below.
Based on foreign exchange rates as of December 31, 2013, the estimated future amortization expense of intangible assets is as follows: |
| | | | |
Fiscal year | | Amount |
| | (In millions) |
2014 | | $ | 43.5 |
|
2015 | | $ | 41.0 |
|
2016 | | $ | 41.0 |
|
2017 | | $ | 15.3 |
|
2018 | | $ | 11.8 |
|
Amortization expense of intangible assets was $48.0 million, $42.4 million, and $40.1 million for the years ended December 31, 2013, December 29, 2012, and December 31, 2011, respectively, and is presented within marketing, general and administrative expenses.
We completed our required annual goodwill and indefinite-lived intangible impairment testing as of June 30, 2013, the first day of our fiscal third quarter, and concluded there were no impairments of goodwill within our Europe, Canada or India reporting units or impairments of our indefinite-lived intangible assets, with the exception of the Jelen and Ostravar brand intangibles as discussed below.
Reporting Units and Goodwill
Given the change in our operating segments effective the first day of our fiscal year 2013 to combine our U.K. and Ireland business with our Central Europe organization, which resulted in a single European segment, we re-evaluated our reporting units during the first quarter of 2013. This re-evaluation resulted in an aggregation of our U.K. and Central Europe businesses into one Europe reporting unit during the first quarter of 2013 and for purposes of our 2013 annual impairment test. As part of this re-evaluation, we also determined that a goodwill impairment trigger did not exist at either of the previous U.K. or Central Europe reporting unit levels prior to or upon aggregation. Our annual goodwill impairment testing determined that our Europe and Canada reporting units were at risk of failing step one of the goodwill impairment test. Specifically, the fair value of the Europe and Canada reporting units were estimated at approximately 11% and 16% in excess of carrying value, respectively. The risk in the Europe reporting unit is due to continued adverse impacts of a weak economy in Europe partially offset by the realized benefits of combining our U.K. and Central Europe businesses. The Canada reporting unit had a marginal improvement over the prior year primarily as a result of incremental anticipated cost savings and improvements to market multiples more than offsetting the continued competitive pressures and challenging macroeconomic conditions in the Canada market.
Indefinite-Lived Intangibles
In 2013, our annual indefinite-lived intangible impairment testing determined that the fair values of the Jelen and Ostravar indefinite-lived brand intangibles within our Europe segment were below their respective carrying values. As a result, we recorded an aggregate impairment charge of $150.9 million recorded within special items in our consolidated statements of operations in the third quarter of 2013. The impairment of Jelen was primarily the result of increased competition, reduced market share and macroeconomic difficulties driving decreased projected cash flows, as well as unfavorable discount rate and income tax rate movements within Serbia. The impairment of Ostravar was primarily the result of decreased projected cash flows driven by recent economic challenges within the Ostrava region of Czech Republic. These changes in assumptions, driven by adverse economic and competitive factors specific to the markets in which these brands perform, have outpaced forecasted macroeconomic recoveries, resulting in the impairments. The remaining Europe indefinite-lived brand intangibles' fair values, including Staropramen and Carling brands, while facing similar macroeconomic challenges, were sufficiently in excess of their respective carrying values, with the exception of two brands acquired in the Acquisition. Specifically, these two brands, Ozujsko in Croatia and Branik in Czech Republic, are at risk of future impairment as a result of discount rate pressures due to country specific macroeconomic risk factors that are currently more than offset by improved cash flow projections driven by post-Acquisition performance and innovations. The Jelen, Ozujsko and Branik brands are therefore at risk of future impairment with an aggregate fair value estimated at approximately 1% in excess of their aggregate carrying value as of the impairment testing date. As of December 31, 2013 these at-risk intangible assets had a carrying value of $1,310.9 million.
Additionally, in conjunction with the brand impairment tests, we also reassessed each brand's indefinite-life classification and determined that the indefinite life classification could no longer be supported for the Ostravar brand. The Ostravar brand has therefore been reclassified as a definite-lived intangible asset and the remaining fair value of the asset will be amortized over its estimated remaining life of approximately 29 years.
Separately, our Molson core brand intangible continues to be at risk of future impairment with a fair value estimated at approximately 10% in excess of its carrying value, as of the impairment testing date, as the Molson core brands have continued to face significant competitive pressures and challenging macroeconomic conditions in the Canada market. These challenges have been partially offset by anticipated cost savings initiatives. As of December 31, 2013 the Molson core brand intangible had a carrying value of $2,857.9 million. The value of the Coors Light brand distribution rights and our other indefinite-lived intangibles in Canada continue to be substantially in excess of their carrying values.
We utilized Level 3 fair value measurements in our impairment analysis of our indefinite-lived intangible assets, which utilizes an excess earnings approach to determine the fair values of the assets as of the testing date. The future cash flows used in the analysis are based on internal cash flow projections based on our long range plans and include significant assumptions by management as noted below.
Key Assumptions
The Europe and Canada reporting units' goodwill, the Molson core brand intangible, and certain indefinite-lived brand intangibles within Europe are at risk of future impairment in the event of significant unfavorable changes in the forecasted cash flows (including significant delays in projected macroeconomic recovery or prolonged adverse economic conditions), terminal growth rates, market transaction multiples and/or weighted-average cost of capital utilized in the discounted cash flow analysis. For testing purposes, management's best estimates of the expected future results are the primary driver in determining the fair value. Current projections used for our Europe reporting unit and indefinite-lived intangible testing reflect continued challenging environments in the near and medium term followed by growth resulting from a longer term recovery of the macroeconomic environment, as well as the benefit of anticipated cost savings and specific brand-building and innovation activities. Our Canada reporting unit and Molson core brand projections also reflect a continued challenging environment that has been adversely impacted by a weak economy across all industries, as well as weakened consumer demand, partially offset by anticipated cost savings and specific brand-building and innovation activities. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill and indefinite-lived intangible impairment test will prove to be an accurate prediction of the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our Europe reporting unit, Molson core brand, and the at-risk European brands may include such items as: (i) a decrease in expected future cash flows, specifically, an increase in required pension contributions, a decrease in sales volume driven by a prolonged weakness in consumer demand or other competitive pressures adversely affecting our long term volume trends, unfavorable working capital changes and an inability to successfully achieve our cost savings targets, (ii) an economic recovery that significantly differs from our assumptions in timing and/or degree, (iii) volatility in the equity and debt markets or other country specific factors which could result in a higher discount rate; and (iv) sensitivity to market transaction multiples.
While historical performance and current expectations have resulted in fair values of our reporting units in excess of carrying values, if our assumptions are not realized, it is possible that an impairment charge may need to be recorded in the future.
Regarding definite-lived intangibles, we continuously monitor the performance of the underlying asset for potential triggering events suggesting an impairment review should be performed. No such triggering events were identified in 2013, with the exception of litigation discussions with Miller in Canada in December 2013, which resulted in a $17.9 million impairment charge of our definite-lived intangible asset related to our licensing agreement. As of December 31, 2013, the intangible has a remaining carrying value of $38.6 million (CAD 41.0 million) with an estimated remaining life of approximately three years. The outcome of any future settlement discussions with Miller could result in additional impairments. We utilized Level 3 fair value measurements in our impairment analysis of this definite-lived intangible asset, which include significant assumptions by management. See Note 19, "Commitments and Contingencies" for further discussion.
