| 12. | Goodwill and Other Intangible Assets |
The change in the net carrying amount of goodwill during the years ended December 31, 2013 and 2012 is as follows (in millions):
| 2013 | 2012 | |||||||
|
Net book value — January 1 |
$ | 2,571.0 | $ | 2,103.9 | ||||
|
Acquisition-related adjustments |
4.0 | 441.6 | ||||||
|
Allocation to divested business |
(13.6 | ) | — | |||||
|
Translation adjustments |
(3.6 | ) | 25.5 | |||||
|
|
|
|
|
|||||
|
Net book value — December 31 |
$ | 2,557.8 | $ | 2,571.0 | ||||
|
|
|
|
|
|||||
Acquisition-related adjustments in 2013 relate to tax adjustments related to a prior-year acquisition. Acquisition-related adjustments in 2012 relate to the acquisition of the Pinnacle assets and the acquisition of Cooley. See Note 2, Acquisitions and Dispositions, for more information on these acquisitions.
Goodwill by reporting unit as of December 31, 2013 and 2012 is as follows (in millions):
| 2013 | 2012 | |||||||
|
North America |
$ | 1,933.1 | $ | 1,950.2 | ||||
|
EMEA |
515.5 | 497.9 | ||||||
|
APSA |
109.2 | 122.9 | ||||||
|
|
|
|
|
|||||
| $ | 2,557.8 | $ | 2,571.0 | |||||
|
|
|
|
|
|||||
Amortizable identifiable intangible assets, principally trade names and customer relationships, are subject to amortization over their estimated useful life, 5 to 40 years, based on the assessment of a number of factors that may impact useful life. These factors include historical and projected trade name performance with respect to consumer name recognition, geographic market presence, market share, plans for ongoing trade name support and promotion, and other relevant factors.
The gross carrying value and accumulated amortization by class of intangible assets as of December 31, 2013 and 2012 are as follows (in millions):
| 2013 | 2012 | |||||||||||||||||||||||
| Gross Carrying Amounts |
Accumulated Amortization |
Net Book Value |
Gross Carrying Amounts |
Accumulated Amortization |
Net Book Value |
|||||||||||||||||||
|
Amortizable intangible assets |
||||||||||||||||||||||||
|
Trade names |
$ | 554.2 | $ | (192.2 | ) | $ | 362.0 | $ | 554.3 | $ | (205.1 | ) | $ | 349.2 | ||||||||||
|
Customer and contractual relationships |
6.6 | (3.7 | ) | 2.9 | 6.6 | (3.1 | ) | 3.5 | ||||||||||||||||
|
Licenses and other |
17.5 | (8.7 | ) | 8.8 | 20.4 | (8.0 | ) | 12.4 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 578.3 | $ | (204.6 | ) | $ | 373.7 | $ | 581.3 | $ | (216.2 | ) | $ | 365.1 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Indefinite-lived intangible assets — Trade names |
n/a | n/a | $ | 1,850.7 | n/a | n/a | $ | 1,943.0 | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
|
Total intangibles |
$ | 2,224.4 | $ | 2,308.1 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
The carrying value of our trade names in 2013 was impacted primarily by the reclassification of the DYC trade name from an indefinite-lived trade name to an amortizable trade name (described below), the sale of certain non-strategic economy brands (Note 2, Acquisitions and Dispositions), foreign currency exchange rates, and impairment charges (described below).
The carrying value of our trade names in 2012 was impacted primarily by acquisitions (Note 2, Acquisitions and Dispositions), the reclassification of the Larios trade name from an indefinite-lived trade name to an amortizable trade name (described below), foreign currency exchange rates, and impairment charges (described below).
The Pinnacle trade name acquired in 2012 was estimated to have a fair value of $150 million and an indefinite useful life. The Calico Jack trade name acquired in 2012 was estimated to have a fair value of $6 million and a useful life of 15 years. The trade names acquired in the 2012 Cooley acquisition are primarily indefinite-lived intangible assets.
Expected amortization expense during the next five years for intangible assets recorded as of December 31, 2013 is as follows (in millions):
| 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||
|
Expected amortization expense for intangible assets |
$ | 19.6 | $ | 19.9 | $ | 18.9 | $ | 18.9 | $ | 18.9 | ||||||||||
We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill and indefinite-lived intangible assets. Such events may include, but are not limited to, the impact of the economic environment; a material negative change in relationships with significant customers; or strategic decisions made in response to economic and competitive conditions. In addition, certain assumptions and estimates used in determining the fair value of our goodwill and indefinite-lived trade names are outside the control of management, including interest rates (in the U.S. and abroad), exchange rates, the cost of capital, and tax rates. Due to the uncertainty of the aforementioned items, we cannot predict whether a future impairment will result. As of December 31, 2013, we had two indefinite-lived trade names (Pinnacle and Sauza) with an aggregate carrying value of approximately $692 million, for which a 10% reduction in fair value would trigger an impairment. Based on our estimates of fair value for each of our reporting units as of December 31, 2013, we believe there are no reporting units for which a decline in fair value of 10% could trigger an impairment of goodwill.
2013 Asset Impairment Charge
In connection with our annual indefinite-lived intangible asset impairment testing in the fourth quarter of 2013, we recorded an impairment charge of $49.5 million to reduce the DYC trade name to an estimated fair value of $44 million, considered a Level 3 fair value measure. Refer to Note 15, Fair Value Measurements, for more information on estimating the fair value of trade names. The impairment was primarily due to lower projected future revenues and profitability for this brand as compared to the projected revenues and profitability estimated during the impairment test conducted during the fourth quarter of 2012. Factors that contributed to lower revenue and profitability projections included 2013 actual results compared to our 2013 outlook, continued economic challenges in the Spanish market, and the competitive outlook within the spirits category in which the trade name competes, among other factors. We also reassessed the remaining life of the DYC trade name and concluded it was no longer indefinite. As of December 31, 2013, we reclassified the DYC trade name to a definite-lived asset with an estimated remaining life of 30 years, based on our expectations of the brand’s contributions to our future cash flows considering factors described above.
2012 Asset Impairment Charge
In connection with our annual indefinite-lived intangible asset impairment testing in the fourth quarter of 2012, we recorded an impairment charge of $15.6 million to reduce the Larios trade name to an estimated fair value of $54.7 million, considered a Level 3 fair value measure. Refer to Note 15, Fair Value Measurements, for more information on estimating the fair value of trade names. The impairment was primarily due to lower projected future revenue for this brand as compared to the projected revenues estimated during the impairment test conducted during the fourth quarter of 2011. Factors that contributed to lower revenue projections included 2012 actual results compared to our 2012 outlook, continued economic challenges in the Spanish market, and the competitive outlook within the spirits category in which the trade name competes, among other factors. We also reassessed the remaining life of the Larios trade name and concluded it was no longer indefinite. As of December 31, 2012, we reclassified the Larios trade name to a definite-lived asset with an estimated remaining life of 30 years, based on our expectations of the brand’s contributions to our future cash flows considering factors described above.