Estee Lauder 2011 Annual Report Download - page 103

THE EST{E LAUDER COMPANIES INC. 101
Total Returns and Charges Associated with
Restructuring Activities
The following table presents total returns and charges asso-
ciated with restructuring activities related to the Program:
YEAR ENDED JUNE 30 2011 2010 2009
(In millions)
Sales returns (included in
Net Sales) $ 4.6 $15.7 $ 8.1
Cost of sales 5.8 7.9 6.8
Restructuring charges 41.1 48.8 70.3
Other special charges 7.9 12.3 6.5
Total returns and charges
associated with
restructuring activities $59.4 $84.7 $91.7
During fiscal 2011, we recorded $4.6 million reflecting
sales returns (less related cost of sales of $1.2 million) and
a write-off of inventory of $7.0 million associated with
turnaround operations, primarily related to the reformula-
tion of Ojon brand products.
During fiscal 2010, we recorded $15.7 million reflect-
ing sales returns (less related cost of sales of $2.5 million)
and $10.4 million for the write-off of inventory associated
with exiting unprofitable operations, primarily related to
the exit from the global wholesale distribution of the
Prescriptives brand.
During fiscal 2009, we recorded $8.1 million reflecting
sales returns (less related cost of sales of $1.2 million) and
a write-off of inventory of $8.0 million associated with
exiting unprofitable operations.
Other special charges in connection with the imple-
mentation of actions taken under this Program primarily
relate to consulting and other professional services.
GOODWILL AND OTHER INTANGIBLE
ASSET IMPAIRMENTS
As of our annual step-one goodwill impairment test on
April 1, 2011, all reporting units’ fair values substantially
exceeded their respective carrying values. As of our
annual indefinite-lived asset impairment test on April 1,
2011, we determined, as a result of a planned discontinu-
ation, that the carrying values of two brand trademarks
exceeded their estimated fair values, which were based
on the use of a royalty rate to determine discounted
projected future cash flows (“relief-from-royalty method”).
As a result, we recognized an impairment charge of $1.7
million for the carrying values of the related trademarks.
These impairment charges were reflected in the makeup
and skin care product categories and in the Americas
region. We also determined that the trademark related to
the Darphin reporting unit had an estimated fair value
exceeding its carrying value by approximately 13% and
the trademark related to the Ojon reporting unit had an
estimated fair value that equals its carrying value. As of
June 30, 2011, the carrying values of the trademarks were
$9.0 million and $10.0 million, respectively. The estimated
fair values of the trademarks were based upon the relief-
from-royalty method. The key assumptions that were used
to determine the estimated fair value of the Darphin
trademark were predicated on new market initiatives
including expanded international distribution. The key
assumptions that were used to determine the estimated
fair value of the Ojon trademark were predicated on new
market initiatives including expanded international
distribution and consumer reception to the reformulated
product line. If such plans do not materialize, if there is a
delay in new market initiatives, or if there is a decline in
the business environment, a resulting change in the key
assumptions could have a negative impact on the esti-
mated fair value of these trademarks and it is possible we
could recognize an impairment charge in the future. The
fair values of all other indefinite-lived intangible assets
substantially exceeded their respective carrying values.
During the third quarter of fiscal 2011, the Ojon report-
ing unit reassessed and subsequently altered the timing of
new market initiatives, including the rollout of reformu-
lated product lines and certain components of its future
international expansion plans, resulting in revisions to its
internal forecasts. We concluded that these changes in
circumstances in the Ojon reporting unit triggered the
need for an interim impairment review of its trademark
and goodwill. Additionally, these changes in circum-
stances were also an indicator that the carrying amount of
the customer list may not be recoverable. We performed
an interim impairment test for the trademark and a recov-
erability test for the customer list as of February 28, 2011.
For the customer list, we concluded that the carrying
amount of this asset was recoverable. However, for the
Ojon trademark, we concluded that the carrying value
exceeded its estimated fair value, which was based on the
relief-from-royalty method. As a result, we recognized an
impairment charge of $7.0 million. After adjusting the car-
rying value of the trademark, we completed an interim
impairment test for goodwill and recorded an impairment
charge for the remaining goodwill related to the Ojon
reporting unit of $29.3 million, at the exchange rate in
effect at that time. 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. In
fiscal 2010, the income approach was used in conjunction
with the market approach but due to the reporting unit’s