Red Lobster 2014 Annual Report Download - page 31

Notes to Consolidated Financial Statements
Darden
2014 Annual Report 29
TRUST-OWNED LIFE INSURANCE
We have a trust that purchased life insurance policies covering certain of
our officers and other key employees (trust-owned life insurance or TOLI).
The trust is the owner and sole beneficiary of the TOLI policies. The policies
were purchased to offset a portion of our obligations under our non-qualified
deferred compensation plan. The cash surrender value for each policy is
included in other assets while changes in cash surrender values are included
in selling, general and administrative expenses.
LIQUOR LICENSES
The costs of obtaining non-transferable liquor licenses that are directly
issued by local government agencies for nominal fees are expensed as
incurred. The costs of purchasing transferable liquor licenses through open
markets in jurisdictions with a limited number of authorized liquor licenses
are capitalized as indefinite-lived intangible assets and included in other
assets. Liquor licenses are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not
be recoverable. Annual liquor license renewal fees are expensed over the
renewal term.
GOODWILL AND TRADEMARKS
We review our goodwill and trademarks for impairment annually, as of the
first day of our fourth fiscal quarter or more frequently if indicators of impair-
ment exist. Goodwill and trademarks are not subject to amortization and
have been assigned to reporting units for purposes of impairment testing.
The reporting units are our restaurant brands. Our goodwill and trademark
balances are allocated as follows:
May 25, May 26,
(in millions) 2014 2013
Goodwill:
The Capital Grille $401.7 $401.7
LongHorn Steakhouse 49.4 49.5
Olive Garden (1) 30.2 30.2
Red Lobster (1) (2) – 35.0
Eddie V’s 22.0 22.1
Yard House 369.2 369.8
Total Goodwill $872.5 $908.3
Trademarks:
The Capital Grille $147.0 $147.0
LongHorn Steakhouse 307.8 307.0
Eddie V’s 10.5 10.5
Yard House 109.3 109.3
Total Trademarks $574.6 $573.8
(1) Goodwill related to Olive Garden and Red Lobster is associated with the RARE Hospitality
International, Inc. (RARE) acquisition and the direct benefits derived by Olive Garden and
Red Lobster as a result of the RARE acquisition.
(2) Goodwill related to Red Lobster was reclassified as assets held for sale on our consolidated
balance sheet as of May 25, 2014. Based on a comparison of the expected sale proceeds
of $2.11 billion and the net book value of the related assets and liabilities held for sale of
$1.17 billion, there was no indication of impairment of goodwill related to Red Lobster.
See Note 2 – Discontinued Operations for additional information.
A significant amount of judgment is involved in determining if an
indicator of impairment has occurred. Such indicators may include, among
others: a significant decline in our expected future cash flows; a sustained,
significant decline in our stock price and market capitalization; a significant
adverse change in legal factors or in the business climate; unanticipated
competition; the testing for recoverability of a significant asset group within a
reporting unit; and slower growth rates. Any adverse change in these factors
could have a significant impact on the recoverability of these assets and
could have a material impact on our consolidated financial statements.
The goodwill impairment test involves a two-step process. The first
step is a comparison of each reporting unit’s fair value to its carrying value.
We estimate fair value using the best information available, including market
information and discounted cash flow projections (also referred to as the
income approach). The income approach uses a reporting unit’s projection
of estimated operating results and cash flows that is discounted using a
weighted-average cost of capital that reflects current market conditions. The
projection uses management’s best estimates of economic and market con-
ditions over the projected period including growth rates in sales, costs and
number of units, estimates of future expected changes in operating margins
and cash expenditures. Other significant estimates and assumptions include
terminal value growth rates, future estimates of capital expenditures and
changes in future working capital requirements. We validate our estimates of
fair value under the income approach by comparing the values to fair value
estimates using a market approach. A market approach estimates fair value
by applying cash flow and sales multiples to the reporting unit’s operating
performance. The multiples are derived from comparable publicly traded
companies with similar operating and investment characteristics of the
reporting units. If the fair value of the reporting unit is higher than its carrying
value, goodwill is deemed not to be impaired, and no further testing is
required. If the carrying value of the reporting unit is higher than its fair
value, there is an indication that impairment may exist and the second step
must be performed to measure the amount of impairment loss. The amount
of impairment is determined by comparing the implied fair value of reporting
unit goodwill to the carrying value of the goodwill in the same manner as if
the reporting unit was being acquired in a business combination. Specifically,
fair value is allocated to all of the assets and liabilities of the reporting unit,
including any unrecognized intangible assets, in a hypothetical analysis that
would calculate the implied fair value of goodwill. If the implied fair value of
goodwill is less than the recorded goodwill, we would record an impairment
loss for the difference.
Consistent with our accounting policy for goodwill and trademarks we
performed our annual impairment test of our goodwill and trademarks as
of the first day of our fiscal 2014 fourth quarter. As of the beginning of our
fiscal fourth quarter, we had eight reporting units, six of which had goodwill:
Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Eddie V’s
and Yard House. As part of our process for performing the step one impair-
ment test of goodwill, we estimated the fair value of our reporting units
utilizing the income and market approaches described above to derive an
enterprise value of the Company. We reconciled the enterprise value to our
overall estimated market capitalization. The estimated market capitalization
considers recent trends in our market capitalization and an expected control
premium, based on comparable recent and historical transactions. Based
on the results of the step one impairment test, no impairment of goodwill
was indicated for any of our brands.