Goodwill and Intangible Assets

Goodwill:

Changes in the carrying amount of goodwill, by segment, were (in millions):



	United States			Canada			EMEA			Rest of World			Total
Balance at December 30, 2017 (As Restated)	$	33,701		$	5,246		$	3,238		$	2,640		$	44,825
Impairment losses	(4,104		)	(1,947		)	—			(957		)	(7,008		)
Reclassified to assets held for sale	—			(496		)	—			(173		)	(669		)
Acquisitions	—			16			—			25			41
Translation adjustments and other	—			(381		)	(164		)	(141		)	(686		)
Balance at December 29, 2018	$	29,597		$	2,438		$	3,074		$	1,394		$	36,503

Goodwill at December 30, 2017 reflects the restatements described in Note 2, Restatement of Previously Issued Consolidated Financial Statements.

In the first quarter of 2018, we reorganized our segment structure to move our Middle East and Africa businesses from the Rest of World segment to the EMEA reportable segment. We have reflected this change in all historical periods presented. Accordingly, the segment goodwill balances at December 30, 2017 reflect an increase of $179 million in EMEA and a corresponding decrease in Rest of World. This change did not have a material impact on our current or any prior period results. See Note 22, Segment Reporting, for additional information.

See Note 5, Acquisitions and Divestitures, for additional information related to our acquisitions in 2018, as well as assets held for sale at December 29, 2018 related to the Canada Natural Cheese Transaction and the Heinz India Transaction.

Our goodwill balance consists of 20 reporting units and had an aggregate carrying amount of $36.5 billion as of December 29, 2018. We test our reporting units for impairment annually as of the first day of our second quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We performed our 2018 annual impairment test as of April 1, 2018. We utilized the discounted cash flow method under the income approach to estimate the fair value of our reporting units. As a result of our 2018 annual impairment test, we recognized a non-cash impairment loss of $133 million in SG&A related to our Australia and New Zealand reporting unit within our Rest of World segment primarily due to anticipated and sustained margin declines in the region. The goodwill carrying amount of this reporting unit was $509 million prior to its impairment.

For the fourth quarter of 2018, in connection with the preparation of our year-end financial statements, we assessed the changes in circumstances that occurred during the quarter to determine if it was more likely than not that the fair values of any reporting units were below their carrying amounts. Although our annual impairment test is performed during the second quarter, we perform this qualitative assessment each interim reporting period.

While there was no single determinative event or factor, the consideration in totality of several factors that developed during the fourth quarter of 2018 led us to conclude that it was more likely than not that the fair values of seven of our 20 reporting units, including U.S. Grocery, U.S. Refrigerated, Canada Retail, Australia and New Zealand, Northeast Asia, Southeast Asia, and Other Latin America, were below their carrying amounts. These factors included: (i) a sustained decrease in our share price in November and December of 2018, which reduced our market capitalization below the book value of net assets; (ii) the completion of our fourth quarter results, which were below management’s expectations due to several factors such as higher than expected supply chain costs and increased competition; (iii) the development and approval of our 2019 annual operating plan in December 2018, which provided additional insights into expectations and priorities for the coming years, such as lower growth and margin expectations; (iv) the announcement in November 2018 to sell certain assets in our natural cheese portfolio in Canada, which changed the composition and use of the remaining assets and brands in the associated reporting unit; (v) fluctuations in foreign exchange rates in certain countries; (vi) increased interest rates in certain locations, including an increase in the United States in December 2018; and (vii) increased and prolonged economic and regulatory uncertainty in the United States and global economies as of the end of December 2018.

As we determined that it was more likely than not that the fair values of these seven reporting units were below their carrying amounts, we performed an interim impairment test on these reporting units as of December 29, 2018. After assessing the totality of circumstances, we determined that each of the remaining 13 reporting units was unlikely to have a fair value below carrying amount.

As a result of our interim test, we recognized a non-cash impairment loss of $6.9 billion in SG&A related to five reporting units, including U.S. Refrigerated, Canada Retail, Southeast Asia, Northeast Asia, and Other Latin America. The other two reporting units we tested were determined to not be impaired. We utilized the discounted cash flow method under the income approach to estimate the fair value of our reporting units. Drivers of these impairment losses, by reporting unit, were as follows:

•

We recognized a $4.1 billion impairment loss in our U.S. Refrigerated reporting unit within our United States segment due to revised 2019 base and future year margin expectations, primarily in the natural cheese and meats categories, and, to a lesser extent, expectations for lower long-term net sales growth in the natural and processed cheese categories. Changes in future year margin expectations were primarily driven by sustained increases in supply chain costs, expectations for lower pricing to maintain competitive positioning, and expectations for increased marketing investments, primarily in response to private label competition, as well as customer-driven packaging investments. Changes in expectations for lower long-term net sales growth were primarily due to sustained private label competition and anticipated trends in consumer preferences. Our revised expectations were based on the completion of our fourth quarter results, which were below management’s expectations, and the development of our 2019 annual operating plan in December 2018. Additionally, our revised expectations were based on the development of our global five-year operating plan, which commenced in November 2018 and we expect to be completed in 2019. The goodwill carrying amount of the U.S. Refrigerated reporting unit was $11.3 billion prior to its impairment.

•

We recognized a $1.9 billion impairment loss in our Canada Retail reporting unit within our Canada segment due to lower positive net sales growth expectations and revised 2019 base and future year margin expectations, as well as the reassessment of our Canadian operations following the announcement in November to sell certain assets in our natural cheese portfolio in Canada. We revised our net sales growth expectations primarily due to our expected exit of the natural cheese category and expected declines in the coffee category (exclusive of our coffee business acquisition in Canada in 2018). Our revised expectations were based on the completion of our fourth quarter results, which were below management’s expectations, and the development of our 2019 annual operating plan in December 2018. Changes in future year margin expectations were primarily driven by sustained increases in supply chain costs and expectations for lower pricing to maintain competitive positioning. The goodwill carrying amount of the Canada Retail reporting unit was $4.0 billion prior to its impairment.

•

We recognized a $315 million impairment loss in our Southeast Asia reporting unit within our Rest of World segment due to margin and net sales declines in the seafood and seasonal cordials categories and foreign exchange rate declines in Indonesia and Papua New Guinea. Our revised expectations were based on the completion of our fourth quarter results, which were below management’s expectations, and the development of our 2019 annual operating plan in December 2018. This impairment represents all of the goodwill of the Southeast Asia reporting unit.

•

We recognized a $302 million impairment loss in our Northeast Asia reporting unit within our Rest of World segment due to margin and net sales declines as well as foreign exchange rate declines in Japan and Korea. Our revised expectations were based on the completion of our fourth quarter results, which were below management’s expectations, and the development of our 2019 annual operating plan in December 2018. The goodwill carrying amount of the Northeast Asia reporting unit was $391 million prior to its impairment.

•

We recognized a $207 million impairment loss in our Other Latin America reporting unit within our Rest of World segment due to net sales and margin declines in the region. Our revised expectations were based on the completion of our fourth quarter results, which were below management’s expectations, and the development of our 2019 annual operating plan in December 2018. This impairment represents all of the goodwill of the Other Latin America reporting unit.

The goodwill carrying amounts associated with an additional four reporting units, which each had excess fair value over its carrying amount of 20% or less, were $18.5 billion for U.S. Grocery, $424 million for Latin America Exports, $404 million for Southeast Europe, and $367 million for Australia and New Zealand as of December 29, 2018.

Accumulated impairment losses to goodwill were $7.0 billion at December 29, 2018.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax rates, discount rates, growth rates, and other market factors. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, change, or if management’s expectations or plans otherwise change, including as a result of the development of our global five-year operating plan, then one or more of our reporting units might become impaired in the future. Our reporting units that were impaired in 2018 were written down to their respective fair values resulting in zero excess fair value over carrying amount as of their latest 2018 impairment testing dates. Accordingly, these and other individual reporting units that have 20% or less excess fair value over carrying amount as of their latest testing date have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future. Reporting units with a heightened risk of future impairments had an aggregate goodwill carrying amount of $29.0 billion at December 29, 2018 and included: U.S. Grocery, U.S. Refrigerated, Canada Retail, Latin America Exports, Southeast Europe, Australia and New Zealand, and Northeast Asia. Of the $29.0 billion with a heightened risk of future impairments, $9.3 billion is attributable to reporting units with 0% excess fair value over carrying amount. Although the remaining reporting units have more than 20% excess fair value over carrying amount as of their latest 2018 impairment testing date, these amounts are also associated with the 2013 Heinz acquisition and the 2015 Merger and are recorded on the balance sheet at their estimated acquisition date fair values. Therefore, if any assumptions, estimates, or market factors change in the future, these amounts are also susceptible to impairments.

Indefinite-lived intangible assets:

Changes in the carrying amount of indefinite-lived intangible assets, which primarily consisted of trademarks, were (in millions):



Balance at December 30, 2017	$	53,655
Impairment losses	(8,925		)
Reclassified to assets held for sale	(341		)
Transfers to definite-lived intangible assets	(72		)
Translation adjustments	(351		)
Balance at December 29, 2018	$	43,966

Indefinite-lived intangible assets reclassified to assets held for sale included the Cracker Barrel trademark in Canada and Complan and Glucon-D trademarks in India. See Note 5, Acquisitions and Divestitures, for additional information on assets held for sale at December 29, 2018 related to the Canada Natural Cheese Transaction and the Heinz India Transaction.

Our indefinite-lived intangible asset balance primarily consists of a number of individual brands, which had an aggregate carrying amount of $44.0 billion as of December 29, 2018. We test our brands for impairment annually as of the first day of our second quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a brand is less than its carrying amount. We performed our 2018 annual impairment test as of April 1, 2018. As a result of our 2018 annual impairment test, we recognized a non-cash impairment loss of $101 million in SG&A in the second quarter of 2018. This impairment loss was due to net sales and margin declines related to the Quero brand in Brazil, which was valued using the relief from royalty method. The impairment loss was recorded in our Rest of World segment, consistent with the ownership of the trademark.

In the third quarter of 2018, we recognized a non-cash impairment loss of $215 million in SG&A related to the Smart Ones brand, which was valued using the relief from royalty method. This impairment loss was primarily due to reduced future investment expectations and continued sales declines in the third quarter of 2018. The impairment loss was recorded in our United States segment, consistent with the ownership of the trademark. We transferred the remaining carrying amount of Smart Ones to definite-lived intangible assets due to a shift in future investments to other brands in the frozen and chilled foods category.

For the fourth quarter of 2018, in connection with the preparation of our year-end financial statements, we assessed the changes in circumstances that occurred during the quarter to determine if it was more likely than not that the fair values of any brands were below their carrying amounts. Although our annual impairment test is performed during the second quarter, we perform this qualitative assessment each interim reporting period.

While there was no single determinative event or factor, the consideration in totality of several factors that developed during the fourth quarter of 2018 led us to conclude that it was more likely than not that the fair values of six of our brands, including Kraft, Philadelphia, Oscar Mayer, Velveeta, Cool Whip, and ABC, were below their carrying amounts. These factors were the same fourth quarter circumstances outlined in the goodwill impairment discussion above. As we determined that it was more likely than not that the fair values of these six brands were below their carrying amounts, we performed an interim impairment test on these brands as of December 29, 2018. After assessing the totality of circumstances, we determined that each of the remaining brands was unlikely to have a fair value below its carrying amount.

As a result of our interim test, we recognized a non-cash impairment loss of $8.6 billion in SG&A related to five brands, including three that were valued using the excess earnings method (Kraft, Oscar Mayer, and Philadelphia) and two that were valued using the relief from royalty method (Velveeta and ABC). The other brand we tested was determined to not be impaired. The impairment losses for Kraft, Oscar Mayer, Philadelphia, and Velveeta were recorded in our United States segment, and the ABC impairment loss was recorded in our Rest of World segment, consistent with the ownership of each trademark. Drivers of these impairment losses, by brand, were as follows:

•

We recognized a $4.3 billion impairment loss related to the Kraft brand, primarily due to lower long-term net sales growth expectations in the natural cheese category in the United States, lower net sales growth expectations in the processed cheese category in the United States and Canada, and the exit of the natural cheese category in Canada announced in November 2018. Changes in expectations for lower net sales growth were primarily due to distribution losses driven by sustained private label competition and anticipated trends in consumer preferences. Our revised expectations were based on the completion of our fourth quarter results, which were below management’s expectations, and the development of our 2019 annual operating plan in December 2018. Additionally, our revised expectations were based on the development of our global five-year operating plan, which commenced in November 2018 and we expect to be completed in 2019. The carrying amount of the Kraft brand was $15.9 billion prior to its impairment.

•

We recognized a $3.3 billion impairment loss related to the Oscar Mayer brand, primarily due to revised 2019 annual and future margin expectations in the United States. Changes in future year margin expectations were primarily driven by sustained increases in supply chain costs, expectations for lower pricing to maintain competitive positioning, and expectations for increased marketing investments and customer-driven packaging investments. Our revised expectations were based on the completion of our fourth quarter results, which were below management’s expectations, and the development of our 2019 annual operating plan in December 2018. Additionally, our revised expectations were based on the development of our global five-year operating plan, which commenced in November 2018 and we expect to be completed in 2019. The carrying amount of the Oscar Mayer brand was $6.6 billion prior to its impairment.

•

We recognized a $797 million impairment loss related to the Philadelphia brand, primarily due to revised 2019 annual and future margin expectations, and to a lesser extent, lower future positive net sales growth expectations in the United States. Changes in future year margin expectations were primarily driven by sustained increases in supply chain costs and expectations for lower pricing to maintain competitive positioning, as well as unfavorable changes in product mix and customer-driven packaging investments. Our revised expectations were based on the completion of our fourth quarter results, which were below management’s expectations, and the development of our 2019 annual operating plan in December 2018. Additionally, our revised expectations were based on the development of our global five-year operating plan, which commenced in November 2018 and we expect to be completed in 2019. The carrying amount of the Philadelphia brand was $6.7 billion prior to its impairment.


•	We recognized a $168 million impairment loss related to the Velveeta brand, primarily due to expectations for lower long-term net sales growth due to anticipated trends in consumer preferences. The carrying amount of the Velveeta brand was $2.5 billion prior to its impairment.


•	We recognized an $84 million impairment loss related to the ABC brand, primarily due to revised expectations of future net sales growth and margins in the seafood and seasonal cordials categories in Southeast Asia as well as foreign exchange rates in the regions in which this brand is sold. The carrying amount of the ABC brand was $357 million prior to its impairment.

The aggregate carrying amount associated with an additional six brands (Miracle Whip, Planters, A1, Cool Whip, Stove Top, and Quero), which each had excess fair value over its carrying amount of 20% or less, was $5.8 billion as of December 29, 2018.

As a result of our 2017 annual impairment testing, we recognized a non-cash impairment loss of $49 million in SG&A in the second quarter of 2017. This loss was due to continued declines in nutritional beverages in India. The loss was recorded in our EMEA segment as the related trademark is owned by an Italian subsidiary.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual brands requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax considerations, discount rates, growth rates, royalty rates, contributory asset charges, and other market factors. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, change, or if management’s expectations or plans otherwise change, including as a result of the development of our global five-year operating plan, then one or more of our brands might become impaired in the future. Our brands that were impaired in 2018 were written down to their respective fair values resulting in zero excess fair value over carrying amount as of their latest 2018 impairment testing dates. Accordingly, these and other individual brands that have 20% or less excess fair value over carrying amount as of their latest testing date have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future. Brands with a heightened risk of future impairments had an aggregate carrying amount of $29.3 billion at December 29, 2018 and included: Kraft, Philadelphia, Oscar Mayer, Velveeta, Miracle Whip, Planters, A1, Cool Whip, Stove Top, ABC, and Quero. Of the $29.3 billion with a heightened risk of future impairments, $24.0 billion is attributable to brands with 0% excess fair value over carrying amount. Although the remaining brands have more than 20% excess fair value over carrying amount as of their latest 2018 impairment testing date, these amounts are also associated with the 2013 Heinz acquisition and the 2015 Merger and are recorded on the balance sheet at their estimated acquisition date fair values. Therefore, if any assumptions, estimates, or market factors change in the future, these amounts are also susceptible to impairments.

Definite-lived intangible assets:

Definite-lived intangible assets were (in millions):



								As Restated
	December 29, 2018							December 30, 2017
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Trademarks	$	2,474	$	(402	)	$	2,072	$	2,368	$	(287	)	$	2,081
Customer-related assets	4,097		(681		)	3,416		4,231		(544		)	3,687
Other	18		(4		)	14		14		(5		)	9
	$	6,589	$	(1,087	)	$	5,502	$	6,613	$	(836	)	$	5,777

Definite-lived intangible asset balances at December 30, 2017 reflect the restatements described in Note 2, Restatement of Previously Issued Consolidated Financial Statements.

Amortization expense for definite-lived intangible assets was $290 million in 2018, $278 million in 2017, and $267 million in 2016. Aside from amortization expense, the changes in definite-lived intangible assets from December 30, 2017 to December 29, 2018 primarily reflect the reclassification to assets held for sale of $96 million, additions of $100 million related to purchase accounting for Cerebos, transfers of $72 million from indefinite-lived intangible assets, impairment losses of $3 million, and foreign currency. The impairment of definite-lived intangible assets in 2018 related to a trademark which had a carrying amount that was deemed not to be recoverable. This non-cash impairment loss was recognized in SG&A. Definite-lived intangible assets reclassified to assets held for sale included customer-related assets in Canada and India and certain trademarks, including P’Tit Quebec in Canada. See Note 5, Acquisitions and Divestitures, for additional information related to our acquisition of Cerebos in 2018, as well as our assets held for sale at December 29, 2018.

We estimate that amortization expense related to definite-lived intangible assets will be approximately $284 million in 2019 and approximately $274 million in each of the four fiscal years thereafter.