Estee Lauder 2010 Annual Report Download - page 92

THE EST{E LAUDER COMPANIES INC. 91
need for an interim impairment review of its goodwill and
trademark. Additionally, these changes in circumstances
were also an indicator that the carrying amount of the
product formulation intangible asset and customer list
may not be recoverable. We performed an interim impair-
ment test for the trademark and a recoverability test for
the product formulation intangible asset and customer list
as of December 31, 2009. For the product formulation
intangible asset, we concluded that the carrying amount
of this asset was recoverable. However, for the Ojon
trademark and customer list, we concluded that the carry-
ing values exceeded their estimated fair values, which
were determined based on the application of a royalty
rate to discounted projected future cash flows (“relief-
from-royalty method”) for the trademark and discounted
projected future cash flows for the customer list. As a
result, we recognized asset impairment charges of $6.0
million for the trademark and $17.2 million for the cus-
tomer list, at the exchange rate in effect at that time. After
adjusting the carrying value of the trademark and cus-
tomer list, we completed an interim impairment test for
goodwill and recorded a goodwill impairment charge
related to the Ojon reporting unit of $16.6 million at the
exchange rate in effect at that time. The fair value of
the reporting unit was based upon weighting of the
income and market approaches, utilizing estimated cash
flows and a terminal value, discounted at a rate of return
that reflects the relative risk of the cash flows, as well as
valuation multiples derived from comparable publicly
traded companies that are applied to operating perfor-
mance of the reporting unit. These impairment charges
were reflected in the hair care and skin care product
categories and in the Americas region.
During the fourth quarter of fiscal 2010, we approved
a restructuring initiative that included the reformulation of
Ojon brand products. We concluded that this change in
the formulation was an indicator that the carrying amount
of the product formulation intangible asset may not be
recoverable. We performed an impairment test of the
product formulation intangible asset and concluded that
the carrying value of this intangible asset exceeded its
estimated fair value, which was determined based on
discounted projected future cash flows. As a result, we
recognized an asset impairment charge of $8.8 million,
which is included in Restructuring and other special
charges in the consolidated statement of earnings.
As of our annual step-one goodwill impairment test on
April 1, 2010, the closest margin for fair value exceeding
carrying value was approximately 1% for the Ojon report-
ing unit. As of June 30, 2010, the carrying value of good-
will related to the Ojon reporting unit was $28.0 million.
of other special charges expected to be incurred to imple-
ment these initiatives, including those recorded through
June 30, 2010 plus other initiatives approved through
August 17, 2010 is approximately $41 million. For the year
ended June 30, 2010, and primarily related to the exit
from the global wholesale distribution of Prescriptives
products, we recorded $15.7 million reflecting sales
returns (less a related cost of sales of $2.5 million) and a
write-off of inventory associated with exiting unprofitable
operations of $10.4 million. For the year ended June 30,
2009, we recorded $8.1 million reflecting sales returns
(less a related cost of sales of $1.2 million) and a write-off
of inventory of $8.0 million associated with exiting unprof-
itable operations. The total amounts expected to be
incurred, including those recorded through June 30, 2010
plus other initiatives approved through August 17, 2010 is
between $35 million and $39 million related to sales
returns and approximately $15 million related to inventory
write-offs.
Total charges associated with restructuring activities
included in operating income for the years ended June
30, 2010 and 2009 was $84.7 million and $91.7 million,
respectively.
GOODWILL, OTHER INTANGIBLE ASSET AND
LONG-LIVED ASSET IMPAIRMENTS
During the second quarter of fiscal 2010, the Darphin
reporting unit identified issues related to the planned
streamlining of its distribution process, resulting in revi-
sions to its internal forecasts. We concluded that these
changes in circumstances in the Darphin reporting unit
triggered the need for an interim impairment test of its
trademark and goodwill. We determined that the trade-
mark was impaired, with fair value estimated based upon
the relief-from-royalty method, and therefore recorded an
impairment charge of $5.8 million, at the exchange rate in
effect at that time, in the skin care product category and
in the Europe, the Middle East & Africa region. After
adjusting the carrying value of the trademark, we com-
pleted step one of the impairment test for goodwill and
concluded that the fair value of the Darphin reporting unit
was substantially in excess of its carrying value including
goodwill. The fair value of the reporting unit was based
upon the income approach, utilizing estimated cash flows
and a terminal value, discounted at a rate of return that
reflects the relative risk of the cash flows.
During the second quarter of fiscal 2010, the Ojon
reporting unit altered and delayed certain components of
its future expansion plans, resulting in revisions to its
internal forecasts. We concluded that these changes in
circumstances in the Ojon reporting unit triggered the