Note 3 — Intangible Assets
The changes in the carrying amounts of goodwill by segment were as follows:
| RJR Tobacco |
American Snuff |
Santa Fe | All Other | Consolidated | ||||||||||||||||
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Goodwill |
$ | 9,065 | $ | 2,501 | $ | 197 | $ | 38 | $ | 11,801 | ||||||||||
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Less: Accumulated impairment charges |
(3,763 | ) | (28 | ) | — | — | (3,791 | ) | ||||||||||||
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Net goodwill balance as of December 31, 2010 and 2011 |
5,302 | 2,473 | 197 | 38 | 8,010 | |||||||||||||||
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2012 Activity |
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Foreign currency translation |
— | — | — | 1 | 1 | |||||||||||||||
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Net goodwill balance as of December 31, 2012 and 2013 |
$ | 5,302 | $ | 2,473 | $ | 197 | $ | 39 | $ | 8,011 | ||||||||||
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The changes in the carrying amounts of indefinite-lived intangible assets by segment not subject to amortization were as follows:
| RJR Tobacco | American Snuff |
Santa Fe | All Other | Consolidated | ||||||||||||||||||||||||
| Trademarks | Other | Trademarks | Trademarks | Other | Trademarks | Other | ||||||||||||||||||||||
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Balance as of December 31, 2010 |
$ | 1,152 | $ | 99 | $ | 1,136 | $ | 155 | $ | 50 | $ | 2,443 | $ | 149 | ||||||||||||||
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Impairment charge |
(43 | ) | — | — | — | — | (43 | ) | — | |||||||||||||||||||
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Foreign currency translation |
— | — | — | — | (1 | ) | — | (1 | ) | |||||||||||||||||||
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Balance as of December 31, 2011 |
1,109 | 99 | 1,136 | 155 | 49 | 2,400 | 148 | |||||||||||||||||||||
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Impairment charge |
(82 | ) | — | — | — | (47 | ) | (82 | ) | (47 | ) | |||||||||||||||||
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Foreign currency translation |
— | — | — | — | 3 | — | 3 | |||||||||||||||||||||
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Balance as of December 31, 2012 |
1,027 | 99 | 1,136 | 155 | 5 | 2,318 | 104 | |||||||||||||||||||||
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Impairment charge |
(32 | ) | — | — | — | — | (32 | ) | — | |||||||||||||||||||
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Foreign currency translation |
— | — | — | — | (1 | ) | — | (1 | ) | |||||||||||||||||||
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Reclassified to finite-lived |
(18 | ) | — | — | — | — | (18 | ) | — | |||||||||||||||||||
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Balance as of December 31, 2013 |
$ | 977 | $ | 99 | $ | 1,136 | $ | 155 | $ | 4 | $ | 2,268 | $ | 103 | ||||||||||||||
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The changes in the carrying amounts of finite-lived intangible assets by segment subject to amortization were as follows:
| RJR Tobacco | American Snuff |
Consolidated | ||||||||||||||||||
| Trademarks | Other | Trademarks | Trademarks | Other | ||||||||||||||||
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Balance as of December 31, 2010 |
$ | 11 | $ | 54 | $ | 18 | $ | 29 | $ | 54 | ||||||||||
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Amortization |
(7 | ) | (15 | ) | (2 | ) | (9 | ) | (15 | ) | ||||||||||
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Impairment charge |
— | — | (5 | ) | (5 | ) | — | |||||||||||||
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Balance as of December 31, 2011 |
4 | 39 | 11 | 15 | 39 | |||||||||||||||
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Amortization |
(4 | ) | (15 | ) | (2 | ) | (6 | ) | (15 | ) | ||||||||||
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Balance as of December 31, 2012 |
— | 24 | 9 | 9 | 24 | |||||||||||||||
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Amortization |
— | (4 | ) | (1 | ) | (1 | ) | (4 | ) | |||||||||||
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Reclassified from indefinite-lived |
18 | — | — | 18 | — | |||||||||||||||
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Balance as of December 31, 2013 |
$ | 18 | $ | 20 | $ | 8 | $ | 26 | $ | 20 | ||||||||||
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Details of finite-lived intangible assets were as follows:
| December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
| Gross | Accumulated Amortization |
Net | Gross | Accumulated Amortization |
Net | |||||||||||||||||||
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Contract manufacturing agreements |
$ | 151 | $ | 131 | $ | 20 | $ | 151 | $ | 127 | $ | 24 | ||||||||||||
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Trademarks |
114 | 88 | 26 | 96 | 87 | 9 | ||||||||||||||||||
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| $ | 265 | $ | 219 | $ | 46 | $ | 247 | $ | 214 | $ | 33 | |||||||||||||
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The estimated remaining amortization associated with finite-lived intangible assets is expected to be expensed as follows:
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Amount | |||
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2014 |
$ | 11 | ||
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2015 |
9 | |||
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2016 |
8 | |||
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2017 |
7 | |||
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2018 |
6 | |||
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Thereafter |
5 | |||
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| $ | 46 | |||
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The impairment testing of trademarks in the fourth quarters of 2013, 2012 and 2011 assumed an increased rate of decline in projected net sales of certain brands, compared with that assumed in the prior year strategic plan. As a result of annual impairment testing, during 2013, impairment was indicated on four of RJR Tobacco’s brands. Additionally, one trademark brand was reclassified from indefinite-lived to finite-lived. During 2012, impairment was indicated primarily on four of RJR Tobacco’s brands. During 2011, impairment was indicated primarily on one of RJR Tobacco’s brands and several loose leaf brands at American Snuff.
The analysis of the fair value of trademarks was based on estimates of fair value on an income approach using a discounted cash flow valuation model under a relief from royalty methodology. The relief-from-royalty model includes the estimates of the royalty rate that a market participant might assume, projected revenues and judgment regarding the discount rate applied to those estimated cash flows, with that discount rate being 10.0% during 2013 and 2012, and 10.5% during 2011. The determination of the discount rate was based on a cost of equity model, using a risk-free rate, adjusted by a stock beta-adjusted risk premium and a size premium.
As a result of these analyses, RJR Tobacco and American Snuff recorded trademark impairment charges based on the excess of certain brands’ carrying values over their estimated fair values. These trademark impairment charges are reflected as decreases in the carrying value of the trademarks in the consolidated balance sheets as of December 31, 2013 and 2012, as trademark and other intangible asset impairment charges in the consolidated statements of income for the years ended December 31, 2013, 2012 and 2011, and had no impact on cash flows. Certain brands are being amortized over their remaining lives, which range from 1 to 15 years, consistent with the pattern of economic benefits estimated to be received.
During the fourth quarter of 2012, a change in the use of an other intangible asset within the All Other segment was determined. As a result, the $47 million carrying value of the other intangible asset was fully impaired.
For the annual impairment testing of the goodwill of RAI’s reporting units, each reporting unit’s estimated fair value was compared with its carrying value. A reporting unit is an operating segment or one level below an operating segment. The determination of estimated fair value of each reporting unit was calculated primarily utilizing an income approach model, based on the present value of the estimated future cash flows of the reporting unit assuming a discount rate during 2013 of 9.75% for each of RJR Tobacco and American Snuff and 10.25% for Santa Fe. The determination of the discount rate was based on a weighted average cost of capital. Additionally, the aggregate estimated fair value of the reporting units, determined with the use of the income approach model, was compared with RAI’s market capitalization. The estimated fair value of each reporting unit was substantially greater than its respective carrying value.