Red Lobster 2011 Annual Report Download - page 51

Notes to Consolidated Financial Statements
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2011 Annual Report 49
TRUST-OWNED LIFE INSURANCE
We have a trust that purchased life insurance policies covering certain of our
officers and other key employees (trust-owned life insurance or TOLI). The trust
is the owner and sole beneficiary of the TOLI policies. The policies were purchased
to offset a portion of our obligations under our non-qualified deferred compensa-
tion plan. The cash surrender value for each policy is included in other assets
while changes in cash surrender values are included in selling, general and
administrative expenses.
LIQUOR LICENSES
The costs of obtaining non-transferable liquor licenses that are directly issued by
local government agencies for nominal fees are expensed as incurred. The costs
of purchasing transferable liquor licenses through open markets in jurisdictions
with a limited number of authorized liquor licenses are capitalized as indefinite-
lived intangible assets and included in other assets. Liquor licenses are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Annual liquor license renewal fees are
expensed over the renewal term.
GOODWILL AND TRADEMARKS
We review our goodwill and trademarks for impairment annually, as of the first
day of our fourth fiscal quarter or more frequently if indicators of impairment
exist. Goodwill and trademarks are not subject to amortization and have been
assigned to reporting units for purposes of impairment testing. The reporting units
are our restaurant brands. Our goodwill and trademark balances are allocated
as follows:
(in millions)
May 29, 2011 May 30, 2010
Goodwill:
The Capital Grille $402.1 $402.2
LongHorn Steakhouse 49.8 49.9
Olive Garden(1) 30.2 30.2
Red Lobster(1) 35.0 35.0
Total Goodwill $ 517.1 $ 517.3
Trademarks:
The Capital Grille $ 147.0 $ 147.0
LongHorn Steakhouse 307.0 307.0
Total Trademarks $454.0 $454.0
(1) Goodwill related to Olive Garden and Red Lobster is associated with the RARE acquisition and the direct benefits derived
by Olive Garden and Red Lobster as a result of the RARE acquisition.
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, fair value is allocated 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 trademarks we
performed our annual impairment test of our goodwill and trademarks as of the
first day of our fiscal 2011 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 and market
approaches 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 and historical
transactions. Based on the results of the step one impairment test, no impairment
of goodwill was indicated.
The fair value of trademarks are estimated and compared to the carrying
value. We estimate the fair value of trademarks using the relief-from-royalty
method, which requires assumptions related to projected sales from our annual
long-range฀plan;฀assumed฀royalty฀rates฀that฀could฀be฀payable฀if฀we฀did฀not฀own฀
the฀trademarks;฀and฀a฀discount฀rate.฀We฀recognize฀an฀impairment฀loss฀when฀the฀
estimated fair value of the trademarks is less than its carrying value. We completed
our impairment test and concluded as of the date of the test, there was no
impairment of the trademarks for LongHorn Steakhouse and The Capital Grille.