Snapple 2009 Annual Report Download - page 71

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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 DSD reporting unit’s goodwill.
The Step 2 analysis in 2008 resulted in non-cash charges of $1,039 million, 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 for 2008 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
Goodwill(3) ................................... 180 (11) 169
Total ....................................... $ 1,039 $ (343) $ 696
(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 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.
(3) Represents a charge as a percent of revenues to the estimated future cash flows attributable to our distribution
rights for the estimated required economic returns on investments in property, plant, and equipment, net
working capital, customer relationships, and assembled workforce.
For the DSD reporting unit’s goodwill, keeping the residual operating income growth rate constant but
changing the discount rate downward by 0.50% would indicate less of an impairment charge of approximately
$60 million. Keeping the discount rate constant and increasing the residual operating income growth rate by 0.50%
would indicate less of an impairment charge of approximately $10 million. An increase of 0.50% in the estimated
operating income growth rate would reduce the goodwill impairment charge by approximately $75 million.
For the Snapple brand, keeping the residual operating income growth rate constant but changing the discount
rate by 0.50% would result in a $45 million to $50 million change in the impairment charge. Keeping the discount
rate constant but changing the residual operating income growth rate by 0.50% would result in a $30 million to
$35 million change in the impairment charge of the Snapple brand. A change of 0.25% in the estimated operating
income growth rate would change the impairment charge by approximately $25 million.
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