2013 Annual Report - Investor Relations - Darden Restaurants

Notes to Consolidated Financial StatementsDardenAmortization expense associated with capitalized software and otherdefinite-lived intangibles included in depreciation and amortization in ouraccompanying consolidated statements of earnings was as follows:Fiscal Year(in millions) 2013 2012 2011Amortization expense –capitalized software $6.4 $7.8 $7.7Amortization expense –other definite-lived intangibles 1.2 0.7 0.4Amortization expense associated with above- and-below-market leasesincluded in restaurant expenses as a component of rent expense in our consolidatedstatements of earnings was as follows:Fiscal Year(in millions) 2013 2012 2011Restaurant expense –below-market leases $ 1.8 $ 1.8 $ 2.2Restaurant expense –above-market leases (1.2) (0.5) (0.5)Amortization of capitalized software and other definite-lived intangibleassets will be approximately $10.4 million annually for fiscal 2014 through 2018.Trust-Owned Life InsuranceWe have a trust that purchased life insurance policies covering certain of ourofficers and other key employees (trust-owned life insurance or TOLI). Thetrust is the owner and sole beneficiary of the TOLI policies. The policies werepurchased to offset a portion of our obligations under our non-qualifieddeferred compensation plan. The cash surrender value for each policy isincluded in other assets while changes in cash surrender values are includedin selling, general and administrative expenses.Liquor LicensesThe costs of obtaining non-transferable liquor licenses that are directly issuedby local government agencies for nominal fees are expensed as incurred. Thecosts of purchasing transferable liquor licenses through open markets in jurisdictionswith a limited number of authorized liquor licenses are capitalized asindefinite-lived intangible assets and included in other assets. Liquor licensesare reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount may not be recoverable. Annual liquor licenserenewal fees are expensed over the renewal term.Goodwill and TrademarksWe review our goodwill and trademarks for impairment annually, as of the firstday of our fourth fiscal quarter or more frequently if indicators of impairmentexist. Goodwill and trademarks are not subject to amortization and have beenassigned to reporting units for purposes of impairment testing. The reportingunits are our restaurant brands. Our goodwill and trademark balances areallocated as follows:(in millions) May 26, 2013 May 27, 2012Goodwill:The Capital Grille $401.7 $401.8LongHorn Steakhouse 49.5 49.5Olive Garden (1) 30.2 30.2Red Lobster (1) 35.0 35.0Eddie V’s 22.1 22.1Yard House 369.8 –Total Goodwill $908.3 $538.6Trademarks:The Capital Grille $147.0 $147.0LongHorn Steakhouse 307.0 307.0Eddie V’s 10.5 10.9Yard House 109.3 –Total Trademarks $573.8 $464.9(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.A significant amount of judgment is involved in determining if an indicator ofimpairment has occurred. Such indicators may include, among others: a significantdecline in our expected future cash flows; a sustained, significant decline inour stock price and market capitalization; a significant adverse change in legalfactors or in the business climate; unanticipated competition; the testing forrecoverability of a significant asset group within a reporting unit; and slowergrowth rates. Any adverse change in these factors could have a significantimpact on the recoverability of these assets and could have a material impact onour consolidated financial statements.The goodwill impairment test involves a two-step process. The first step is acomparison of each reporting unit’s fair value to its carrying value. We estimatefair value using the best information available, including market informationand discounted cash flow projections (also referred to as the income approach).The income approach uses a reporting unit’s projection of estimated operatingresults and cash flows that is discounted using a weighted-average cost of capitalthat reflects current market conditions. The projection uses management’s bestestimates of economic and market conditions over the projected period includinggrowth rates in sales, costs and number of units, estimates of future expectedchanges in operating margins and cash expenditures. Other significant estimatesand assumptions include terminal value growth rates, future estimates of capitalexpenditures and changes in future working capital requirements. We validateour estimates of fair value under the income approach by comparing the valuesto fair value estimates using a market approach. A market approach estimatesfair value by applying cash flow and sales multiples to the reporting unit’s operatingperformance. The multiples are derived from comparable publicly tradedDarden Restaurants, Inc. 2013 Annual Report 41