Panera Bread 2012 Annual Report Download - page 58

PANERA BREAD COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
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including removal of certain long-lived assets the Company has installed at the end of the lease. A liability for the fair value of an
asset retirement obligation along with a corresponding increase to the carrying value of the related long-lived asset is recorded at
the time a lease agreement is executed. The Company amortizes the amount added to property and equipment, net and recognizes
accretion expense in connection with the discounted liability over the reasonably assured lease term. The estimated liability is
based on the Company’s historical experience in closing bakery-cafes, fresh dough facilities, and support centers and the related
external cost associated with these activities. Revisions to the liability could occur due to changes in estimated retirement costs
or changes in lease terms. As of December 25, 2012 and December 27, 2011, the Company's net ARO asset included in property
and equipment, net was $4.6 million and $2.4 million, respectively, and its net ARO liability included in other long-term liabilities
was $9.2 million and $5.9 million, respectively. ARO accretion expense was $0.4 million, $0.3 million, and $0.4 million for the
fiscal years ended December 25, 2012, December 27, 2011, and December 28, 2010, respectively.
Variable Interest Entities
The Company applies the guidance issued by the FASB on accounting for variable interest entities (“VIE”), which defines the
process for how an enterprise determines which party consolidates a VIE as primarily a qualitative analysis. The enterprise that
consolidates the VIE (the primary beneficiary) is defined as the enterprise with (1) the power to direct activities of the VIE that
most significantly affect the VIE’s economic performance and (2) the obligation to absorb losses of the VIE or the right to receive
benefits from the VIE. The Company does not possess any ownership interests in franchise entities or other affiliates. The franchise
agreements are designed to provide the franchisee with key decision-making ability to enable it to oversee its operations and to
have a significant impact on the success of the franchise, while the Company’s decision-making rights are related to protecting
its brand. Based upon its analysis of all the relevant facts and considerations of the franchise entities and other affiliates, the
Company has concluded that these entities are not variable interest entities and they have not been consolidated as of the fiscal
year ended December 25, 2012.
3. Business Combinations and Divestitures
North Carolina Franchisee Acquisition
On March 28, 2012, the Company acquired substantially all the assets and certain liabilities of 16 bakery-cafes and the related
area development rights from its Raleigh-Durham, North Carolina franchisee for a purchase price of $48.0 million. Approximately
$44.4 million of the purchase price was paid on March 27, 2012, with $3.6 million retained by the Company for certain holdbacks.
The holdbacks are primarily for certain indemnifications and expire on September 28, 2013, the 18 month anniversary of the
transaction closing date, with any remaining holdback amounts reverting to the prior franchisee. The Consolidated Statements of
Comprehensive Income include the results of operations from the operating bakery-cafes from the date of their acquisition.
The acquired business contributed revenues of $36.0 million and net income of approximately $2.9 million for the period from
March 28, 2012 through December 25, 2012. The supplemental pro forma information set forth in the following table has been
prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been
made on December 29, 2010, nor is it indicative of any future results (in thousands):
Pro Forma for the Fiscal Year Ended
December 25, 2012 December 27, 2011
Bakery-cafe sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,888,914 $ 1,632,295
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,763 137,297
The pro forma amounts included in the table above reflect the application of the Company’s accounting policies and adjustment
of the results of the Raleigh-Durham, North Carolina bakery-cafes to reflect the additional depreciation and amortization that
would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied
from December 29, 2010, together with the consequential tax impacts.
The Company allocated the purchase price to the tangible and intangible assets acquired in the acquisition at their estimated fair
values with the remainder allocated to tax deductible goodwill as follows: $0.1 million to accounts receivable; $0.3 million to
inventories; $6.4 million to property and equipment; $29.1 million to intangible assets, which represent the fair value of re-acquired
territory rights and favorable lease agreements that the Company estimated to have an average useful life of approximately 12
years; $1.4 million to liabilities; and $13.5 million to goodwill. The fair value measurement of tangible and intangible assets and
liabilities as of the acquisition date is based on significant inputs not observable in the market and thus represents a Level 3
measurement. In addition, the Company recorded a $0.1 million measurement period adjustment increasing goodwill for the fiscal
year ended December 25, 2012.