ANNUAL REPORT 2007

 

 

NOTE 2
ACQUISITIONS, OTHER INVESTMENTS, AND INTANGIBLES

 

 

Acquisitions

 

In order to support the continued growth of its North America operating segment, the Company completed

two separate business acquisitions in late 2007 for a total of approximately $123 million in cash, including related transaction costs. On November 1, 2007, a subsidiary of the Company acquired 100% of the equity interests in Bear Naked, Inc., a leading seller of premium-branded natural granola products. On November 5, 2007, the Company acquired certain assets and liabilities of the Wholesome & Hearty Foods Company, a U.S. manufacturer of veggie foods marketed under the Gardenburger^® brand. Assets, liabilities, and results of the acquired businesses have been included in the Company’s consolidated financial statements since the respective dates of acquisition; such results were insignificant for the Company’s fourth quarter of 2007. Similarly, management has estimated that the pro forma effect on the Company’s results of operations, as though these business combinations had been completed at the beginning of either 2007 or 2006, would have been immaterial. As of December 29, 2007, the purchase price allocation was substantially complete with the combined total allocated as follows (in millions): goodwill–$67; indefinite-lived trademark intangibles–$33; trademark intangibles with a 10-year expected useful life–$5; equipment–$7; working capital and other individually immaterial items-$11. The amount of tax-deductible goodwill is currently expected to approximate the carrying value recognized for financial reporting purposes.

 

Subsequent events

 

To expand the Company’s presence in Eastern Europe, on January 16, 2008, subsidiaries of the Company acquired substantially all of the equity interests in OJSC Kreker (doing business as “United Bakers”) and consolidated subsidiaries for approximately $117 million in cash, including transaction fees incurred to date, and $3 million in assumed debt. The Company expects to acquire the remaining minority interests through tender offers initiated during 2008. United Bakers is a leading producer of cereal, cookie, and cracker products in Russia, with 4,000 employees, six manufacturing facilities, and a broad distribution network. The business earned approximately $100 million of revenues in 2007. (Due to various factors including accounting principle conformity, these revenues are not necessarily indicative of the pro forma incremental effect on the Company’s 2007 consolidated net sales, assuming this business combination had been completed at the beginning of 2007.)

 

 

The purchase agreement between the Company and the seller provides for the payment of a currently undeterminable amount of contingent consideration at the end of three years, provided certain financial performance metrics are achieved. Such payment would be recognized as additional purchase price when the contingency is resolved.

 

 

As part of the aforementioned initial purchase price for this acquisition, the Company incurred approximately $5 million in transaction fees and cash advances during 2007, which have been classified as business acquisition-related investing cash outflows in the Consolidated Statement of Cash Flows for the year ended December 29, 2007.

 

Joint venture arrangement

 

In early 2006, a subsidiary of the Company formed a joint venture with a third-party company domiciled in Turkey, for the purpose of selling co-branded products in the surrounding region. During 2007, the Company contributed approximately $4 million in cash to its Turkish joint venture, in which it owns a 50% equity interest, bringing the total cumulative investment to approximately $7 million. The Turkish joint venture is reflected in the consolidated financial statements on the equity basis of accounting. Accordingly, the Company records its share of the earnings or loss from this arrangement as well as other direct transactions with or on behalf of the joint venture entity such as product sales and certain administrative expenses.

 

Goodwill and other intangible assets

 

For 2007, the Company recorded in selling, general, and administrative expense impairment losses of $7 million to write off the remaining carrying value of several individually insignificant trademarks, which were abandoned during the year. As presented in the following table, associated gross carrying amounts of $16 million and the related accumulated amortization were retired from the Company’s balance sheet.

 

 

For the periods presented, the Company’s intangible assets consisted of the following: