Snapple 2008 Annual Report Download - page 91

Download and view the complete annual report

Please find page 91 of the 2008 Snapple annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 150

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150

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, the Company impaired the entire Bottling Group goodwill.
The following table summarizes the critical assumptions that were used in estimating fair value for DPS’
annual impairment tests of goodwill and intangible assets 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 the Company’s 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 DPS’ 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 the Company’s marketplace pricing
actions. Factors inherent in determining DPS’ weighted average discount rate are: (1) the volatility of DPS’
common stock; (2) expected interest costs on debt and debt market conditions; and (3) the amounts and
relationships of targeted debt and equity capital.
(3) Represents a charge as a percent of revenues to the estimated future cash flows attributable to the Company’s
distribution rights for the estimated required economic returns on investments in property, plant, and equip-
ment, net working capital, customer relationships, and assembled workforce.
Based on triggering events in the second and third quarters of 2008, the Company performed interim
impairment analyses of the Snapple brand and the Bottling Group goodwill and concluded there was no impairment
as of June 30 and September 30, 2008, respectively. However, deteriorating economic and market conditions in the
fourth quarter triggered higher discount rates as well as lower volume and growth projections which drove the
impairments of the Bottling Group goodwill, Snapple brand and the Bottling Group’s distribution rights recorded in
the fourth quarter. Indicative of the economic and market conditions, the Company’s average stock price declined
19% in the fourth quarter as compared to the average stock price from May 7, 2008, the date of DPS’ separation
from Cadbury, through September 30, 2008. The impairment of the distribution rights was attributed to insufficient
net economic returns above working capital, fixed assets and assembled workforce.
The results of DPS’ annual impairment tests indicated that the fair value of the Company’s indefinite lived
intangible assets and goodwill not discussed above exceeded their carrying values and, therefore, are not impaired.
See Note 9 for further information on goodwill and other intangible assets.
4. Accounting for the Separation from Cadbury
Upon separation, effective May 7, 2008, DPS became an independent company, which established a new
consolidated reporting structure. For the periods prior to May 7, 2008, the Company’s consolidated financial
information has been prepared on a “carve-out” basis from Cadbury’s consolidated financial statements using the
historical results of operations, assets and liabilities, attributable to Cadbury’s Americas Beverages business and
including allocations of expenses from Cadbury. The results may not be indicative of the Company’s future
performance and may not reflect DPS’ financial performance had DPS been an independent publicly-traded
company during those prior periods.
In connection with the separation from Cadbury, the Company entered into a Separation and Distribution
Agreement, Transition Services Agreement, Tax Sharing and Indemnification Agreement (“Tax Indemnity
Agreement”) and Employee Matters Agreement with Cadbury, each dated as of May 1, 2008.
67
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)