Sara Lee 2008 Annual Report Download - page 53

Bakery – were identified as reporting units where it was reasonably
likely that they might become impaired in future periods if operating
earnings for those two reporting units did not show continued improve-
ment. The potential for impairment was disclosed in the Form 10Q
for the second and third quarters of 2008. Weaker than previously
anticipated performance and a decline in forecasted financial per-
formance occurred in the second half of 2008, which compelled
management to re-perform the goodwill impairment test for these
two business units in the fourth quarter. As a part of the review
in the fourth quarter, the corporation concluded that the carrying
amounts of the North American Foodservice Bakery and Spanish
Bakery reporting units exceeded their respective fair values. Based
upon the results of a third-party appraisal of long-lived assets and
internal estimates of discounted cash flows, management compared
the implied fair value of the goodwill in each reporting unit with the
carrying value and concluded that a $782 goodwill impairment charge
needed to be recognized. Of this amount, $382 relates to the North
American Foodservice Bakery reporting unit and $400 relates to the
Spanish Bakery reporting unit. No tax benefit is recognized on the
goodwill impairments. After the recognition of the impairment losses,
the remaining goodwill in the North American Foodservice Bakery
and Spanish Bakery reporting units is $477 and $139, respectively.
Foodservice Property, Goodwill and Trademarks In 2008, steps were
taken to market and identify potential buyers for a business that is
part of the Foodservice segment. In June 2008, the corporation’s
board of directors authorized management to negotiate and sell the
business under certain criteria. As part of this process, the corporation
received a non-binding offer for the business which is less than
the carrying value. Utilizing the net purchase price, the corporation
conducted an impairment review of the business and recognized
a pretax impairment charge of $49 in the fourth quarter of 2008,
of which $36, $8 and $5 are related to property, goodwill and trade-
marks, respectively. The after tax impact of the impairment charge
is $33. The remaining assets of this reporting unit were classified
as held for sale at the end of 2008.
2007 Impairment Charges Recognized in Continuing Operations
North American Retail Meats Property During the second quarter
of 2007, management completed an analysis of the manufacturing
activities being conducted at a facility that is part of the North
American Retail Meats segment. As a result of this analysis, the
corporation concluded that operations at this facility would be
substantially reduced in order to improve efficiency and long-term
profitability. Certain of the activities performed at the location have
been transferred to more efficient third-party suppliers and others
have been eliminated as part of the shutdown of this plant. These
actions are consistent with the corporation’s previously announced
transformation plan. Based upon the results of a third-party appraisal
and internal estimates of cash flows to be generated through the date
of disposition, the corporation concluded that it was necessary to
recognize an impairment charge of $34 for this asset group in 2007.
The after tax impact of this impairment charge is $22.
North American Retail Bakery Trademarks In 2007, as part of the
corporation’s transformation plan to improve operating efficiency and
profitability, the North American Retail Bakery business continues
to focus its marketing, advertising and promotion spending on a
select number of brands. As a result of these plans, the company
assessed the recoverability of certain trademarks impacted by this
strategy. The company determined that the undiscounted cash flows
over the remaining lives of the trademarks did not recover the carrying
value of the assets. Therefore, the company calculated the estimated
fair value of the trademarks using the royalty savings method and
recorded an impairment charge of $16 for the difference between
fair value and carrying value. The after tax impact of the trademark
impairment charge is $10.
International Beverage Goodwill and Trademarks In 2007, the
corporation recognized a $118 pretax impairment charge in its
International Beverage operations to record the impairment of $92
of goodwill and $26 of trademarks. No tax benefit was recognized
on the goodwill impairment charge. The after tax impact of the
trademark impairment charge is $17.
Goodwill Impairment – In 2007, the corporation concluded that the
carrying amounts of its Brazilian and Austrian coffee reporting units
exceeded their respective fair values. As a result, the corporation
compared the implied fair value of the goodwill in each reporting
unit with the carrying value and concluded that a $92 impairment
loss needed to be recognized. Of this amount, $86 relates to the
Brazilian reporting unit and $6 relates to the Austrian reporting
unit. The impairment loss recognized equals the entire remaining
amount of goodwill in each reporting unit.
The Brazilian coffee operation had experienced a sustained
decline in profitability due to a highly competitive market in which the
business operates. As a result of the sustained underperformance
of this business, management revised its future cash flow expecta-
tions in the second quarter of 2007. These revised future cash flow
expectations, along with comparable fair value information from the
recent sale of a coffee business of comparable size and profitability,
resulted in the corporation lowering its estimate of fair value of
the business in the 2007 impairment review. Similarly, the under-
performance of the Austrian business in 2007 led the corporation
to lower its forecasted future cash flow expectations and resultant
estimate of fair value.
Trademark Impairment – In conjunction with the actions resulting
in the impairment of the Brazilian goodwill, the corporation assessed
the realization of its long-lived assets associated with this held-for-
use asset grouping. The primary asset in this asset group was
determined to be trademarks, which had a carrying value of $47
and are being amortized over 10 years. Using the anticipated undis-
counted cash flows of the asset group, the corporation concluded
that the asset group was not fully recoverable. As a result of this
evaluation, the corporation concluded that the carrying value of the
trademarks exceeded the fair value by $26. The fair value of the
trademarks was estimated using the royalty savings method.
After considering the lower future profit expectations for the
Brazilian operations, the corporation concluded that it was also nec-
essary to recognize a $27 valuation reserve on the net deferred tax
assets related to the Brazilian tax jurisdiction as the realization of
such tax assets was not reasonably assured. This charge is reported
as tax expense in the 2007 Consolidated Statement of Income.
Sara Lee Corporation and Subsidiaries 51