Sara Lee 2008 Annual Report Download - page 54

Notes to financial statements
Dollars in millions except per share data
Household and Body Care The corporation owns and operates a
manufacturing plant in Zimbabwe. In 2007, changes in local govern-
mental regulations in Zimbabwe included severe foreign exchange
restrictions which inhibit the corporation from declaring dividends and
repatriating earnings from the local operation. Based on these severe
foreign exchange restrictions and general economic uncertainty in
this economy, the corporation has considered the investment in the
local business impaired, recognized a pretax and after tax impairment
charge in the third quarter of 2007 for $4, and deconsolidated the
business at the end of the third quarter of 2007. The remaining
investment in these operations will be recorded as a cost basis
investment and has a value of less than $1.
In conjunction with the 2007 annual impairment review of goodwill
and indefinite lived intangible assets, the corporation concluded
that the fair value of certain Household and Body Care trademarks
exceeded their carrying value. However, sales for these trademarks,
having a carrying value of $99, had been declining. Based on these
sales declines, the corporation decided to begin amortizing these
trademarks over periods ranging from 5 to 20 years.
2006 Impairment Charges Recognized in Continuing Operations
North American Retail and International Bakery Trademarks As part
of the transformation plan, the operating management of the bakery
business was changed at the start of 2006 and new long-range plans
were developed for the U.S. and European businesses in preparation
for the start of 2007. In order to improve the efficiency and profitabil-
ity of the U.S. operations, it was decided to eliminate certain regional
brands, reduce the marketing, advertising and promotion spending
behind other regional brands, and place more resources behind those
brands with greater penetration of the domestic market. A greater
portion of future research and development spending would also
be focused on these larger brands. Similar decisions were made
regarding the European business. These decisions impacted the
anticipated future sales and cash flows of certain brands. All trade-
marks of the corporation’s bakery operations have been subject to
amortization and the corporation conducted an impairment review of
the trademarks impacted by these decisions. A third-party appraisal
was used to determine the fair value of the trademarks considered
to be impaired. The fair value of the trademarks was determined using
the royalty savings method and pretax impairment charges of $179
and $14 were recognized in 2006 in the North American Retail Bakery
and International Bakery segments, respectively. The after tax impact
of these impairment charges is $111 and $9, respectively.
Impairment Charges Recognized in Discontinued Operations
After announcing its intent to dispose of certain businesses, the
corporation assessed the reporting and recoverability of these oper-
ations in each quarter through the date of sale. Several significant
charges were recognized in 2006 and reported on the line labeled
“Net (loss) income from discontinued operations, net of tax (benefit)
expense” of the Consolidated Statements of Income. Note 2 to the
Consolidated Financial Statements describes the accounting policies
and significant judgments related to planned business dispositions.
The following is a description of the discontinued operations that
incurred impairment charges.
European Branded Apparel This business was initially marketed for
sale in 2005 and, as part of this process, the corporation recognized a
pretax impairment charge of $305 in 2005 related to goodwill ($182)
and indefinite-lived trademarks ($123). In 2006, the corporation’s
board of directors authorized management to negotiate and enter
into a definitive agreement to sell this business, and the corporation
entered into an exclusive negotiating period with a prospective buyer.
Utilizing the agreed upon sale price, the corporation conducted an
impairment review of the business and recognized an additional pretax
impairment charge of $179 in the first quarter of 2006 within dis-
continued operations. The after tax impact of the impairment charge
was $132. The sale of this business closed in the third quarter
of 2006.
U.S. Retail Coffee In 2005, the corporation initiated steps to dispose
of certain assets used to manufacture and market roast and ground
coffee products in the U.S. retail coffee channel and recognized a
pretax impairment charge of $45 related to manufacturing assets
($13) and trademarks ($32). In 2006, the corporation announced
that it had entered into an agreement to sell the U.S. Retail Coffee
business for $83. As a result of allocating the goodwill to the U.S.
Retail Coffee business to be sold, and utilizing the agreed upon selling
price of the business, the corporation recognized an impairment charge
of $44 in 2006 to record the impairment of $29 of goodwill and $15
of other long-lived assets. No tax benefit was recognized on the
goodwill impairment and a $5 tax benefit was recognized on the other
long-lived assets. The U.S. Retail Coffee business was sold in
December 2005.
U.K. Apparel In 2006, the corporation classified as held for disposal
the U.K. Apparel business, which was comprised of the Courtaulds
operations and several Sri Lankan ventures that supplied a portion
of the Courtaulds inventory needs. The corporation recognized a $34
impairment charge to write down the value of the Courtaulds business
to its fair value after discussions with potential buyers indicated that
the fair value of the Courtalds business was less than its carrying
value. There was no tax benefit associated with the impairment. In
June 2006, the corporation closed on the sales of the Courtaulds
business and the Sri Lankan ventures.
U.S. Meat Snacks In 2006, the U.S. Meat Snacks business was
marketed for sale and a sale agreement was entered into which indi-
cated that the fair value of the business was less than the carrying
value of the business. Goodwill associated with this business was
evaluated for impairment in accordance with SFAS No. 142 and
the corporation recognized a goodwill impairment charge of $12
pretax and $8 after tax. In June 2006, the sale of this business
was completed.
European Meats During 2006, the corporation marketed its European
Meats business for sale and received several non-binding offers
from prospective buyers. Based on indications of fair value from
these offers, the carrying value of the business, including the related
portion of the cumulative translation adjustment, was determined to
exceed its fair value and the corporation evaluated the recoverability
of the long-lived assets. The measurement process utilized the
52 Sara Lee Corporation and Subsidiaries