Estee Lauder 2010 Annual Report Download - page 85

84 THE EST{E LAUDER COMPANIES INC.
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, we utilize information
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 estimates and factors used in these two
approaches include, but are not limited to, revenue
growth rates and profit margins based on internal fore-
casts, terminal value, the weighted-average cost of capital
used to discount future cash flows and comparable market
multiples. The fiscal 2010 compound annual growth rate
of sales for the first four to eight years of our projections,
as considered appropriate for the individual reporting
units, ranged between 3% and 24% with the higher
growth rates in those reporting units that start with the
smallest base in fiscal 2010. The fiscal 2009 compound
annual growth rate of sales for the first eight years of our
projections ranged between 6% and 19% with the higher
growth rates in those reporting units that start with the
smallest base in fiscal 2009. For reporting units with posi-
tive earnings, growth in the corresponding earnings
before interest and taxes ranged from 9% to 161% in fiscal
2010 as compared with 6% to 46% in fiscal 2009. The
terminal growth rates were projected at 3% after four to
eight years in fiscal 2010 as compared with 3% after eight
years in fiscal 2009, which reflects our estimate of long
term market and gross domestic product growth. The
weighted-average cost of capital used to discount future
cash flows ranged from 9% to 17% in fiscal 2010 as com-
pared with 11% to 17% in fiscal 2009. The range of market
multiples used in our fiscal 2010 impairment testing was
from 0.5 to 3 times trailing-twelve-month sales and 9 to 12
times trailing-twelve-month earnings before interest, taxes
and depreciation and amortization. The range of market
multiples used in our fiscal 2009 impairment testing was
from 2 to 3 times trailing-twelve-month sales and 10 times
trailing-twelve-month earnings before interest, taxes and
depreciation and amortization. Future changes in these
estimates and assumptions could materially affect the
results of our reviews for impairment of goodwill. How-
ever, a decrease of 30 basis points in our terminal growth
rate or an increase of 30 basis points in our weighted-
average cost of capital would still result in a fair value
calculation exceeding our book value for each of our
reporting units, except for the Ojon reporting unit,
see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Goodwill, Other
GOODWILL, OTHER INTANGIBLE ASSETS AND
LONG-LIVED ASSETS
Goodwill is calculated as the excess of the cost of pur-
chased businesses over the fair value of their underlying
net assets. Other indefinite-lived intangible assets
principally consist of trademarks. Goodwill and other
indefinite-lived intangible assets are not amortized.
We assess goodwill and other indefinite-lived intangi-
bles at least annually for impairment as of the beginning
of the fiscal fourth quarter, or more frequently if certain
events or circumstances warrant. We test goodwill for
impairment at the reporting unit level, which is one level
below our operating segments. We identify our reporting
units by assessing whether the components of our operat-
ing segments constitute businesses for which discrete
financial information is available and management of each
reporting unit regularly reviews the operating results of
those components. We make certain judgments and
assumptions in allocating assets and liabilities to deter-
mine carrying values for our reporting units. Impairment
testing is performed in two steps: (i) we determine impair-
ment by comparing the fair value of a reporting unit with
its carrying value, and (ii) if there is an impairment, we
measure 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 us 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. We use indus-
try accepted valuation models and set criteria that are
reviewed and approved by various levels of management
and, in certain instances, we engage third-party valuation
specialists to advise us. To determine fair value of the
reporting unit, we generally use an equal weighting of
the income and market approaches. In certain circum-
stances, equal weighting will not be applied if one of these
methods may be less applicable (e.g., only the income
approach would be used for reporting units with existing
negative margins). We believe both approaches are
equally relevant 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 pro-
duction process.
Under the income approach, we determine fair value
using a discounted cash flow method, projecting future