Red Lobster 2012 Annual Report Download - page 45

Notes to Consolidated Financial Statements
Darden
Darden Restaurants, Inc. 2012 Annual Report 41
Amortization expense associated with capitalized software and other
definite-lived intangibles included in depreciation and amortization in our
accompanying consolidated statements of earnings was as follows:
Fiscal Year
(in millions) 2012 2011 2010
Amortization฀expense฀–฀
capitalized software $7.8 $7.7 $7.3
Amortization฀expense฀–฀
other definite-lived intangibles 0.7 0.4 0.4
Amortization expense associated with above- and-below-market leases
included in restaurant expenses as a component of rent expense on our
consolidated statements of earnings was as follows:
Fiscal Year
(in millions) 2012 2011 2010
Restaurant฀expense฀–฀
below-market leases $ 1.8 $ 2.2 $ 2.6
Restaurant฀expense฀–฀
above-market leases (0.5) (0.5) (0.5)
Amortization of capitalized software and other definite-lived intangible
assets will be approximately $10.0 million annually for fiscal 2013 through 2017.
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 compen-
sation 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 27, 2012 May 29, 2011
Goodwill:
The Capital Grille $401.8 $402.1
LongHorn Steakhouse 49.5 49.8
Olive Garden (1) 30.2 30.2
Red Lobster (1) 35.0 35.0
Eddie V’s 22.1 —
Total Goodwill $538.6 $517.1
Trademarks:
The Capital Grille $147.0 $147.0
LongHorn Steakhouse 307.0 307.0
Eddie V’s Prime Seafood and
Wildfish Seafood Grille 10.9 —
Total Trademarks $464.9 $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 esti-
mates 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 compa-
nies with similar operating and investment characteristics of the reporting units.