Red Lobster 2010 Annual Report Download - page 29

DARDEN RESTAURANTS, INC. | 2010 ANNUAL REPORT 27
Notes to Consolidated Financial Statements
Darden Restaurants
DARDEN RESTAURANTS, INC. | 2010 ANNUAL REPORT 27
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Darden
meet the requirements to be reported as discontinued operations. Principally,
if we discontinue cash flows and no longer have any significant continuing
involvement with respect to the operations of the assets, we classify the assets
and related results of operations as discontinued. We consider guest transfer
(an increase in guests at another location as a result of the closure of a location)
as continuing cash flows and evaluate the significance of expected guest
transfer when evaluating a restaurant for discontinued operations reporting.
To the extent we dispose of enough assets where classification between
continuing operations and discontinued operations would be material to our
consolidated financial statements, we utilize the reporting provisions for
discontinued operations. Assets whose disposal is not probable within one
year remain in land, buildings and equipment until their disposal within one
year is probable.
We account for exit or disposal activities, including restaurant closures,
in accordance with FASB Accounting Standards Codification (ASC) Topic 420,
Exit or Disposal Cost Obligations. Such costs include the cost of disposing of
the assets as well as other facility-related expenses from previously closed
restaurants. These costs are generally expensed as incurred. Additionally, at
the date we cease using a property under an operating lease, we record a liability
for the net present value of any remaining lease obligations, net of estimated
sublease income. Any subsequent adjustments to that liability as a result of
lease termination or changes in estimates of sublease income are recorded
in the period incurred. Upon disposal of the assets, primarily land, associated
with a closed restaurant, any gain or loss is recorded in the same caption
within our consolidated statements of earnings as the original impairment.
The judgments we make related to the expected useful lives of long-lived
assets and our ability to realize undiscounted cash flows in excess of the
carrying amounts of these assets are affected by factors such as the ongoing
maintenance and improvements of the assets, changes in economic conditions,
changes in usage or operating performance, desirability of the restaurant sites
and other factors, such as our ability to sell our assets held for sale. As we
assess the ongoing expected cash flows and carrying amounts of our long-
lived assets, significant adverse changes in these factors could cause us to
realize a material impairment loss. During fiscal 2010, we recognized asset
impairment losses of $6.2 million ($3.8 million after tax), primarily related to
the write-down of assets held for disposition based on updated valuations, the
permanent closure of three Red Lobsters and three LongHorn Steakhouses
and the write-down of two LongHorn Steakhouses and one Olive Garden based
on an evaluation of expected cash flows. During fiscal 2009, we recognized
asset impairment losses of $12.0 million ($7.4 million after tax), primarily
related to the write-down of assets held for disposition, the permanent closure
of one LongHorn Steakhouse and the write-down of another LongHorn
Steakhouse based on an evaluation of expected cash flows. Asset impairment
losses are included in asset impairment, net, on our consolidated statements
of earnings. During fiscal 2008 we recognized no asset impairment losses.
Valuation and Recoverability of Goodwill
and Indefinite-Lived Intangible Assets
We review our goodwill and other indefinite-lived intangible assets, primarily
our trademarks, for impairment annually, as of the first day of our fiscal fourth
quarter, or more frequently if indicators of impairment exist. Goodwill and
other indefinite-lived intangible assets not subject to amortization have been
assigned to reporting units for purposes of impairment testing. The reporting
units are our restaurant brands. At May 30, 2010 and May 31, 2009, we had
goodwill of $517.3 million and $518.7 million, respectively, and trademarks
of $454.0 million and $454.4 million, respectively.
A significant amount of judgment is involved in determining if an
indicator of impairment has occurred. Such indicators may include, among
others:฀a฀significant฀decline฀in฀our฀expected฀future฀cash฀flows;฀a฀sustained,฀
significant฀decline฀in฀our฀stock฀price฀and฀market฀capitalization;฀a฀significant฀
adverse฀change฀in฀legal฀factors฀or฀in฀the฀business฀climate;฀unanticipated฀
competition;฀the฀testing฀for฀recoverability฀of฀a฀significant฀asset฀group฀within฀a฀
reporting฀unit;฀and฀slower฀growth฀rates.฀Any฀adverse฀change฀in฀these฀factors฀
could have a significant impact on the recoverability of these assets and
could have a material impact on our consolidated financial statements.
The goodwill impairment test involves a two-step process. The first step
is a comparison of each reporting unit’s fair value to its carrying value. We
estimate fair value using the best information available, including market
information and discounted cash flow projections (also referred to as the
income approach). The income approach uses a reporting unit’s projection of
estimated operating results and cash flows that is discounted using a weighted-
average cost of capital that reflects current market conditions. The projection
uses management’s best estimates of economic and market conditions over
the projected period including growth rates in sales, costs and number of
units, estimates of future expected changes in operating margins and cash
expenditures. Other significant estimates and assumptions include terminal
value growth rates, future estimates of capital expenditures and changes in
future working capital requirements. We validate our estimates of fair value
under the income approach by comparing the values to fair value estimates
using a market approach. A market approach estimates fair value by applying
cash flow and sales multiples to the reporting unit’s operating performance.
The multiples are derived from comparable publicly traded companies with
similar operating and investment characteristics of the reporting units.
If the fair value of the reporting unit is higher than its carrying value,
goodwill is deemed not to be impaired, and no further testing is required. If
the carrying value of the reporting unit is higher than its fair value, there is an
indication that impairment may exist and the second step must be performed
to measure the amount of impairment loss. The amount of impairment is
determined by comparing the implied fair value of reporting unit goodwill to the
carrying value of the goodwill in the same manner as if the reporting unit was
being acquired in a business combination. Specifically, we would allocate the
fair value to all of the assets and liabilities of the reporting unit, including any
unrecognized intangible assets, in a hypothetical analysis that would calculate
the implied fair value of goodwill. If the implied fair value of goodwill is less than
the recorded goodwill, we would record an impairment loss for the difference.
Consistent with our accounting policy for goodwill and other indefinite-
lived intangibles, we performed our annual impairment test of our goodwill and
other indefinite-lived intangible assets as of the first day of our fiscal fourth
quarter. As of the beginning of our fiscal fourth quarter, we had six reporting
units: Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille,
Bahama Breeze and Seasons 52. Two of these reporting units, LongHorn
Steakhouse and The Capital Grille, have a significant amount of goodwill. As
part of our process for performing the step one impairment test of goodwill,
we estimated the fair value of our reporting units utilizing the income approach
described above to derive an enterprise value of the Company. We reconciled
the enterprise value to our overall estimated market capitalization. The
estimated market capitalization considers recent trends in our market
capitalization and an expected control premium, based on comparable recent