Snapple 2010 Annual Report Download - page 68

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)
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%
____________________________
(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.
A change in the critical assumptions detailed above would not result in a change to the impairment charge related to
distribution rights.
The results of our annual impairment tests indicated that the fair value of our indefinite lived intangible assets and
goodwill not discussed above exceeded their carrying values and, therefore, were not impaired.
Based on triggering events in the second and third quarters of 2008, we performed interim impairment analyses of the
Snapple Brand and the DSD reporting unit’s 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 DSD reporting unit’s goodwill, Snapple
brand and the DSD reporting unit’s distribution rights recorded in the fourth quarter. Indicative of the economic and market
conditions, our average stock price declined 19% in the fourth quarter as compared to the average stock price from May 7,
2008, the date of our 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.
Definite Lived Intangible Assets
Definite lived intangible assets are those assets deemed by the management to have determinable finite useful lives.
Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives as follows:
Type of Intangible Asset
Brands
Bottler agreements
Customer relationships and contracts
Useful Life
10 to 15 years
5 to 15 years
5 to 10 years
48