Goodwill and Intangible Assets

The Company's goodwill and intangible assets relate primarily to the December 2005 acquisition of the direct-to-consumer businesses of Sara Lee Corporation, including the fair value of various trademarks and tradenames. Certain tradenames are allocated between multiple reporting units.

In the third quarters of 2014 and 2013, the Company completed the annual impairment assessments for all of its reporting units and indefinite-lived intangible assets, concluding there were no impairments. The Company only considers the goodwill balances of $103.7 million and $23.8 million associated with the Fuller Mexico and NaturCare reporting units, respectively, to be significant relative to total equity.

In 2014, the Company performed a Step 1 impairment test ("Step 1") for the goodwill associated with the Fuller Mexico reporting unit as prescribed under ASC 350, Intangibles - Goodwill and Other. The fair value analysis for Fuller Mexico was completed using a combination of the income and market approach with a 75 percent weighting on the income approach. The significant assumptions used in the income approach included estimates regarding future operations and the ability to generate cash flows, including projections of revenue, costs, utilization of assets and capital requirements. The income approach, or discounted cash flow approach, also requires an estimate as to the appropriate discount rate to be used. The most sensitive estimate in this valuation is the projection of operating cash flows, as these provide the basis for the fair market valuation. The Company’s cash flow model used a forecast period of 10 years and a terminal value. The significant assumptions for the forecast included annual revenue growth rates ranging from 2.0 to 4.0 percent with an average growth rate of 3.8 percent and a 3.0 percent growth rate used in calculating the terminal value. The growth rates were determined by reviewing historical results of the reporting unit and the historical results of the Company’s other similar reporting units, along with the expected contribution from growth strategies being implemented in the Fuller Mexico reporting unit. The discount rate used was 15.3 percent. The market approach relies on an analysis of publicly-traded companies similar to the Company and deriving a range of revenue and profit multiples. The publicly-traded companies used in the market approach were selected based on their having similar product lines of consumer goods, beauty products and/or companies using a direct-to-consumer distribution method. The resulting multiples were then applied to the reporting unit to determine fair value.

At the time the Step 1 test was performed, in light of year-to-date results of Fuller Mexico being below previous expectations and current expectations for future results, the amount by which the estimated fair value of the Fuller Mexico reporting unit exceeded its carrying value, at 24 percent, was smaller in 2014 than in previous assessments. This decrease was primarily due to lower than expected recruiting and retention of sales force members in light of the competitive and external environment in that market, as well as high field manager turnover. Field managers are those directly responsible for recruiting, motivating and training sales force members. This was partially offset by a lower entity carrying value from amortization of the definite-lived Fuller tradename asset that began in the third quarter of 2013. Despite the amount by which the estimated fair value of the reporting unit exceeded its carrying value resulting from the annual assessment, a smaller sales force size, operating performance significantly below current expectations, including changes in projected future revenue, profitability and cash flow, as well as higher interest rates or cost of capital, could have a further negative effect on the fair value of the reporting unit and therefore reduce the fair value below the carrying value. This would result in recording an impairment to the goodwill of Fuller Mexico.

Also in 2014, the Company performed a qualitative assessment for the goodwill associated with the NaturCare reporting unit and concluded it was more likely than not that the fair value of the reporting unit was greater than its carrying amount. The estimated fair value of the NaturCare reporting unit exceeded the carrying value by 29 percent as of June 2012, the date of its most recent Step 1 analysis of this reporting unit. Based on the Company's evaluation of the assumptions and sensitivities associated with the Step 1 analysis for NaturCare, the Company concluded that the fair value substantially exceeded its carrying value as of June 2012.

In August of 2013, the Company concluded it should reclassify its Fuller tradename from indefinite-lived to definite-lived. This conclusion was primarily reached in light of a long-term transition in the Fuller Mexico business to a new brand name. The reclassification of the Fuller tradename from an indefinite-lived to definite-lived asset triggered an impairment review similar to that performed during an annual assessment, as described above. The results of the impairment test demonstrated that the estimated fair value of the Fuller tradename exceeded its carrying value. As a result of this transition, the Company has estimated that the Fuller tradename has a 10 year useful life with amortization to be recorded on a straight-line basis. Amortization expense recorded in 2014 and 2013 related to the Fuller tradename was $10.2 million and $3.4 million, respectively.

During the second quarter of 2012, the Company completed its annual impairment test of the BeautiControl reporting units, resulting in an impairment charge of $38.9 million, equal to the entire carrying value of the goodwill in the BeautiControl United States and Canada business. This was a result of the year-over-year comparisons of sales, profit and cash flow and expectations for future performance that were below the Company's previous projections. Also in the second quarter, the financial performance of the Nutrimetics reporting units fell below their previous trend line and it became apparent that they would fall significantly short of previous expectations for the year. Additionally, reductions in the forecasted operating trends of NaturCare relating to declines in the rates of growth of sales, profit and cash flows in the Japanese market led to interim impairment testing in both these businesses, as of the end of May and June 2012, respectively. The result of these tests was to record tradename impairments of $13.8 million for Nutrimetics and $9.0 million for NaturCare, primarily due to the use of lower estimated royalty rates, 1.5 percent in 2012 versus 3.0 percent in 2011 for Nutrimetics and 3.75 percent in 2012 versus 4.75 percent in 2011 for NaturCare, in light of lower sales and profit forecasts for these units, as well as macroeconomic factors that increased the discount rates used in the valuations versus those used previously. In estimating the fair value of the tradenames, the Company applied discount rates of 15.2 percent and 13.5 percent, respectively, and annual revenue growth ranging from negative 7.0 percent to positive 7.0 percent, with an average growth rate of positive 2.0 percent, and a long-term terminal growth rate of 3.0 percent. As a result, the tradename intangibles for both Nutrimetics and NaturCare were written down to their implied fair values, totaling $23.0 million, which was considered a Level 3 measurement within the fair value hierarchy.

In addition, the Company wrote off the $7.2 million and $7.7 million carrying values of the goodwill of the Nutrimetics Asia Pacific and Nutrimetics Europe reporting units, respectively, in light of then current operating trends and expected future results, as well as the macroeconomic factors that increased the discount rates used in the valuations.

The following table reflects gross goodwill and accumulated impairments allocated to each reporting segment at December 27, 2014, December 28, 2013 and December 29, 2012:



(In millions)	Europe			Asia Pacific			TW North America		Beauty North America			South America			Total
Gross goodwill balance at December 29, 2012	$	32.3		$	86.4		$	16.3	$	156.2		$	6.4		$	297.6
Effect of changes in exchange rates	(1.3		)	(7.4		)	—		(1.8		)	(0.9		)	(11.4		)
Gross goodwill balance at December 28, 2013	31.0			79.0			16.3		154.4			5.5			286.2
Effect of changes in exchange rates	(0.7		)	(3.6		)	—		(11.8		)	(0.7		)	(16.8		)
Gross goodwill balance at December 27, 2014	$	30.3		$	75.4		$	16.3	$	142.6		$	4.8		$	269.4



(In millions)	Europe		Asia Pacific		TW North America		Beauty North America		South America		Total
Accumulated impairment balance at December 29, 2012	$	24.5	$	41.3	$	—	$	38.9	$	—	$	104.7
Goodwill impairment	—		—		—		—		—		—
Accumulated impairment balance at December 28, 2013	24.5		41.3		—		38.9		—		104.7
Goodwill impairment	—		—		—		—		—		—
Accumulated impairment balance at December 27, 2014	$	24.5	$	41.3	$	—	$	38.9	$	—	$	104.7

The gross carrying amount and accumulated amortization of the Company's intangible assets, other than goodwill, were as follows:



	December 27, 2014
(In millions)	Gross Carrying Value		Accumulated Amortization		Net
Indefinite-lived trademarks and tradenames	$	22.2	$	—	$	22.2
Definite-lived trademarks and tradenames	94.6		12.6		82.0
Sales force relationships	49.6		48.1		1.5
Total intangible assets	$	166.4	$	60.7	$	105.7



	December 28, 2013
(In millions)	Gross Carrying Value		Accumulated Amortization		Net
Indefinite-lived trademarks and tradenames	$	25.0	$	—	$	25.0
Definite-lived trademarks and tradenames	104.1		3.4		100.7
Sales force relationships	55.3		52.1		3.2
Total intangible assets	$	184.4	$	55.5	$	128.9

A summary of the identifiable intangible asset account activity is as follows:



	Year Ended
(In millions)	December 27, 2014			December 28, 2013
Beginning balance	$	184.4		$	199.3
Effect of changes in exchange rates	(18.0		)	(14.9		)
Ending balance	$	166.4		$	184.4

Amortization expense was $11.8 million, $4.8 million and $2.0 million in 2014, 2013 and 2012, respectively. The estimated annual amortization expense associated with the above intangibles for each of the five succeeding years is $10.9 million, $9.5 million, $9.5 million, $9.5 million and $9.5 million, respectively.