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Note 7 - Goodwill and Other Identifiable Intangible Assets

12 Months Ended

May 28, 2023

Goodwill and Intangible Assets Disclosure [Text Block]

7. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS

The change in the carrying amount of goodwill for fiscal 2023 and 2022 was as follows:

	*Grocery & Snacks*		*Refrigerated & Frozen*			*International*			*Foodservice*		*Total*
Balance as of May 30, 2021	$	4,692.4	$	5,611.2		$	302.5		$	732.8	$	11,338.9
Currency translation		—		—			(9.7	)		—		(9.7	)
Balance as of May 29, 2022	$	4,692.4	$	5,611.2		$	292.8		$	732.8	$	11,329.2
Currency translation		—		—			(9.3	)		—		(9.3	)
Impairment		—		(141.7	)		—			—		(141.7	)
Balance as of May 28, 2023	$	4,692.4	$	5,469.5		$	283.5		$	732.8	$	11,178.2

Other identifiable intangible assets were as follows:

	*2023*				*2022*
	*Gross Carrying Amount*		*Accumulated Amortization*		*Gross Carrying Amount*		*Accumulated Amortization*
Non-amortizing intangible assets
Brands and trademarks	$	2,470.6	$	—	$	3,061.6	$	—
Amortizing intangible assets
Customer relationships and intellectual property		1,232.2		496.9		1,233.9		437.7
	$	3,702.8	$	496.9	$	4,295.5	$	437.7

During the first quarter of fiscal 2023, management reorganized its reporting structure for certain brands within two reporting units in our Refrigerated & Frozen segment. The change in management reporting required us to reassign assets and liabilities, including goodwill, between the reporting units, complete a goodwill impairment test both prior to and subsequent to the change, and evaluate other assets in the reporting units for impairment, including indefinite-lived intangibles (brand names and trademarks). The fair value of our reporting units is estimated using a discounted cash flow analysis and the fair value of our indefinite-lived intangibles are determined using the "relief from royalty" methodology.

Both the "relief from royalty" methodology used to value our indefinite-lived intangible assets and the discounted cash flow analysis require us to estimate the future cash flows as well as to select a risk-adjusted discount rate to measure the present value of the anticipated cash flows. When determining future cash flow estimates, we consider historical results adjusted to reflect current and anticipated operating conditions. We estimate cash flows for a reporting unit over a discrete period (typically five years) and a terminal period (considering expected long-term growth rates and trends). Estimating the fair value of individual reporting units and our indefinite-lived intangible assets requires us to make assumptions and estimates in areas such as future economic conditions, industry-specific conditions, product pricing, and necessary capital expenditures. The use of different assumptions or estimates for future cash flows, discount rates, or terminal growth rates could produce substantially different estimates of the fair value.

We used a discount rate of 7.75% and a terminal growth rate that approximated 1% in estimating the fair value of our Sides, Components, Enhancers reporting unit during our impairment testing in the first quarter of fiscal 2023. As a result of our impairment tests, we recognized goodwill impairment charges within SG&A expenses of $141.7 million within our Sides, Components, Enhancers reporting unit. In addition, we recognized an impairment charge within SG&A expenses of $244.0 million related to our Birds Eye® brand name in the first quarter of fiscal 2023. The impairments were largely due to the 125 basis point increase in the discount rate as a result of current economic conditions, including a significant increase in interest rates since our last quantitative impairment tests, as well as a downward revision to our sales forecasts.

In the fourth quarter of fiscal 2023, we performed our annual goodwill impairment assessment on all of our reporting units and found no indicators of impairment. We completed a qualitative assessment on all of our reporting units with the exception of our Foodservice and Sides, Components, Enhancers reporting units. Our qualitative assessment considered, among other things, an increase in our market capitalization from our previous testing date, continued sales growth, and improvement in our operating margins which all had a positive impact on our financial results. We will continue to evaluate the impact of any significant changes in consumer purchasing behaviors, government restrictions, input cost inflation, or other macroeconomic conditions that could change certain assumptions and result in future impairments. We completed a quantitative impairment test for our Foodservice and Sides, Components, Enhancers reporting units. We used a discount rate of 7.75% and a terminal growth rate that approximated 1% in estimating the fair value of both of these reporting units. Based upon our quantitative impairment tests, the excess fair value over the carrying value for our Foodservice reporting unit was greater than 30%. The excess fair value over the carrying value for our Sides, Components, Enhancers reporting unit was less than 10%, and fair value remained relatively consistent to our quantitative impairment test performed in the first quarter of fiscal 2023.

Amortizing intangible assets, carrying a remaining weighted-average life of approximately 18 years, are principally composed of customer relationships and acquired intellectual property. For fiscal 2023, 2022, and 2021, we recognized amortization expense of $56.8 million, $59.3 million, and $59.7 million, respectively. Based on amortizing assets recognized in our Consolidated Balance Sheet as of May 28, 2023, amortization expense for the next five years is estimated to be as follows:

2024	$	53.6
2025		53.5
2026		43.5
2027		43.3
2028		40.8

For our non-amortizing intangible assets, which are comprised of brands and trademarks, we use a "relief from royalty" methodology in estimating fair value. In the fourth quarter of fiscal 2023, as a result of our annual impairment test for indefinite lived intangibles, we recognized impairment charges in SG&A expenses of $345.2 million, primarily within our Grocery & Snacks and Refrigerated & Frozen segments. The most notable brands with impairments included Gardein^®,Birds Eye®, Hungry Man®, Vlasic®, Van De Kamps®, Earth Balance®, and Comstock®. These brands were negatively impacted by an increase in our discount rate in response to the current economic environment (including an increase in interest rates) since our last annual impairment test. Our two largest impairments were related to Gardein® and Birds Eye® in the amount of $91.5 million and $78.3 million, respectively. Both of these brands were negatively impacted by lower than expected profit margins which resulted in a reduction to our assumed royalty rates in addition to revised sales growth expectations to be consistent with recent industry trends. Including the Birds Eye® brand impairment recognized in the first quarter of fiscal 2023, discussed above, our total brand impairment charges recognized in fiscal 2023 were $589.2 million.

During fiscal 2022, as a result of our annual impairment test for indefinite lived intangibles, we recognized impairment charges in SG&A expenses of $209.0 million, primarily within our Grocery & Snacks and Refrigerated & Frozen segments. Duncan Hines^® and Gardein^® were the most notable brands with impairments largely due to lower than expected profit margins which resulted in a reduction to our assumed royalty rates along with increases in our discount rate.

During fiscal 2021, as a result of our annual impairment test for indefinite lived intangibles, we recognized impairment charges in SG&A expenses of $90.9 million, primarily within our Grocery & Snacks and Refrigerated & Frozen segments. Udi’s® was the most notable brand with impairment in fiscal 2021 largely due to lower than expected sales and profit margins which resulted in a reduction to our assumed royalty rate.