Snapple 2010 Annual Report Download - page 92

DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2008 Impairment of Goodwill and Intangible Assets
The results of the Step 1 analysis performed as of December 31, 2008, indicated there was a potential impairment of goodwill
in the DSD reporting unit as the carrying value exceeded the estimated fair value. As a result, 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, the Company impaired the entire DSD reporting unit's goodwill.
DPS’ annual impairment analysis, performed as of December 31, 2008, resulted in non-cash charges of $1,039 million for the
year ended December 31, 2008, which are reported in the line item impairment of goodwill and intangible assets in the Consolidated
Statements of Operations. A summary of the impairment charges is provided below (in millions):
Snapple brand(1)
Distribution rights(2)
Goodwill(3)
Total
For the Year Ended December 31, 2008
Impairment
Charge
$ 278
581
180
$ 1,039
Income Tax
Benefit
$(112)
(220)
(11)
$(343)
Impact on
Net Income
$ 166
361
169
$ 696
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(1) Included within the WD reporting unit.
(2) Includes the DSD reporting unit's distribution rights, brand franchise rights, and bottler agreements which convey certain
rights to DPS, including the rights to manufacture, distribute and sell products of the licensor within specified territories.
(3) Includes all goodwill recorded in the DSD reporting unit which related to our bottler acquisitions in 2006 and 2007.
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)
Projected long-term operating income growth(1)
Weighted average discount rate(2)
Capital charge for distribution rights(3)
3.2%
2.5%
8.9%
2.1%
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(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 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 equipment, net working capital,
customer relationships, and assembled workforce.
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