Estee Lauder 2010 Annual Report Download - page 116

THE EST{E LAUDER COMPANIES INC. 115
asset. Other indefinite-lived intangible assets’ fair values
require significant judgments in determining both the
assets’ estimated cash flows as well as the appropriate dis-
count and royalty rates applied to those cash flows to
determine fair value. Changes in such estimates or the
application of alternative assumptions could produce
significantly different results.
Long-Lived Assets
The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.
When such events or changes in circumstances occur, a
recoverability test is performed comparing projected
undiscounted cash flows from the use and eventual dispo-
sition of an asset or asset group to its carrying value. If the
projected undiscounted cash flows are less than the
carrying value, an impairment would be recorded for
the excess of the carrying value over the fair value, which
is determined by discounting future cash flows.
Concentration of Credit Risk
The Company is a worldwide manufacturer, marketer and
distributor of skin care, makeup, fragrance and hair care
products. Domestic and international sales are made pri-
marily to department stores, perfumeries and specialty
retailers. The Company grants credit to all qualified cus-
tomers and does not believe it is exposed significantly to
any undue concentration of credit risk.
The Company’s largest customer sells products primar-
ily within the United States and accounted for $876.3 mil-
lion or 11%, $907.3 million, or 12%, and $951.4 million, or
12%, of the Company’s consolidated net sales in fiscal
2010, 2009 and 2008, respectively. This customer
accounted for $84.3 million and $97.1 million, or 11%, of
the Company’s accounts receivable at June 30, 2010 and
2009, respectively.
Revenue Recognition
Revenues from merchandise sales are recognized upon
transfer of ownership, including passage of title to the cus-
tomer and transfer of the risk of loss related to those
goods. In the Americas region, sales are generally recog-
nized at the time the product is shipped to the customer
and in the Europe, the Middle East & Africa and Asia/
Pacific regions, sales are generally recognized based upon
the customer’s receipt. In certain circumstances, transfer
of title takes place at the point of sale, for example, at the
Company’s retail stores. Sales at the Company’s retail
stores and online are recognized in accordance with a
traditional 4-4-5 retail calendar, where each fiscal quarter
is comprised of two 4-week periods and one 5-week
period, with one extra week in one quarter every seven
components. Impairment testing is performed in two
steps: (i) the Company determines impairment by com-
paring the fair value of a reporting unit with its carrying
value, and (ii) if there is an impairment, the Company
measures the amount of impairment loss by comparing
the implied fair value of goodwill with the carrying amount
of that goodwill. The impairment test for indefinite-lived
intangible assets encompasses calculating a fair value of
an indefinite-lived intangible asset and comparing the fair
value to its carrying value. If the carrying value exceeds
the fair value, impairment is recorded.
Testing goodwill for impairment requires the Company
to estimate fair values of reporting units using significant
estimates and assumptions. The assumptions made will
impact the outcome and ultimate results of the testing.
The Company uses industry accepted valuation models
and set criteria that are reviewed and approved by various
levels of management and, in certain instances, the
Company engages third-party valuation specialists for
advice. To determine fair value of the reporting unit, the
Company generally uses an equal weighting of the income
and market approaches. In certain circumstances, equal
weighting will not be applied if one of these methods may
be less reliable (e.g., only the income approach would be
used for reporting units with existing negative margins).
The Company believes both approaches are equally rele-
vant and the most reliable indications of fair value because
the fair value of product or service companies is more
dependent on the ability to generate earnings than on the
value of the assets used in the production process.
Under the income approach, the Company determines
fair value using a discounted cash flow method, project-
ing future cash flows of each reporting unit, as well as
terminal value, and discounting such cash flows at a rate
of return that reflects the relative risk of the cash flows.
Under the market approach, the Company utilizes infor-
mation from comparable publicly traded companies with
similar operating and investment characteristics as the
reporting units, which creates valuation multiples that are
applied to the operating performance of the reporting
unit being tested, to value the reporting unit. The key esti-
mates and factors used in these two approaches include,
but are not limited to, revenue growth rates and profit
margins based on internal forecasts, terminal value, the
weighted-average cost of capital used to discount future
cash flows and comparable market multiples.
To determine fair value of other indefinite-lived intan-
gible assets, the Company uses an income approach, the
relief-from-royalty method. This method assumes that, in
lieu of ownership, a third party would be willing to pay a
royalty in order to obtain the rights to use the comparable