Snapple 2008 Annual Report Download - page 70

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asset impairment charges (“Step 1”). If the carrying value exceeds the estimated fair value, impairment is indicated
and a second step analysis must be performed.
The tests for impairment include significant judgment in estimating the fair value of intangible assets primarily
by analyzing future revenues and profit performance. Fair value is based on what the intangible asset would be
worth to a third party market participant. Discount rates are based on a weighted average cost of equity and cost of
debt, adjusted with various risk premiums. These assumptions could be negatively impacted by various of the risks
discussed in “Risk Factors” in this Annual Report on Form 10-K.
Our annual impairment analysis, performed as of December 31, 2008, resulted in non-cash charges of
$1,039 million for 2008 which are reported in the line item impairment of goodwill and intangible assets in our
consolidated statement of operations. A summary of the impairment charges is provided below (in millions):
Impairment
Charge
Income Tax
Benefit
Impact on Net
Income
For the Year Ended December 31, 2008
Snapple brand(1) ................................ $ 278 $(112) $166
Distribution rights(2) ............................. 581 (220) 361
Bottling Group goodwill .......................... 180 (11) 169
Total ....................................... $1,039 $(343) $696
(1) The Snapple brand related to our Finished Goods segment.
(2) Includes the Bottling Group’s distribution rights, brand franchise rights, and bottler agreements which convey
certain rights to us, including the rights to manufacture, distribute and sell products of the licensor within
specified territories.
For our annual impairment analysis performed as of December 31, 2008, methodologies used to determine the
fair values of the assets included a combination of the income based approach and market based approach, as well as
an overall consideration of market capitalization and our enterprise value.
The results of the Step 1 analyses performed as of December 31, 2008, indicated there was a potential
impairment of goodwill in the Bottling Group reporting unit as the book value exceeded the estimated fair value. As
a result, the second step (“Step 2”) of the goodwill impairment test was performed for the reporting unit. The
implied fair value of goodwill determined in the Step 2 analysis was determined by allocating the fair value of the
reporting unit to all the assets and liabilities of the applicable reporting unit (including any unrecognized intangible
assets and related deferred taxes) as if the reporting unit had been acquired in a business combination. As a result of
the Step 2 analysis, we impaired the entire Bottling Group goodwill.
The following table summarizes the critical assumptions that were used in estimating fair value for our annual
impairment tests performed as of December 31, 2008:
Estimated average operating income growth (2009 to 2018) ........................... 3.2%
Projected long-term operating income growth(1).................................... 2.5%
Weighted average discount rate(2) .............................................. 8.9%
Capital charge for distribution rights(3) .......................................... 2.1%
(1) Represents the operating income growth rate used to determine terminal value.
(2) Represents our targeted weighted average discount rate of 7.0% plus the impact of a specific reporting unit risk
premiums to account for the estimated additional uncertainty associated with our future cash flows. The risk
premium primarily reflects the uncertainty related to: (1) the continued impact of the challenging marketplace
and difficult macroeconomic conditions; (2) the volatility related to key input costs; and (3) the consumer,
customer, competitor, and supplier reaction to our marketplace pricing actions. Factors inherent in determining
our weighted average discount rate are: (1) the volatility of our common stock; (2) expected interest costs on
debt and debt market conditions; and (3) the amounts and relationships of targeted debt and equity capital.
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