Estee Lauder 2011 Annual Report Download - page 96

94 THE EST{E LAUDER COMPANIES INC.
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 princi-
pally 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 if
an indication of impairment exists 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 carry-
ing value. If the carrying value exceeds the fair value an
impairment charge 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 for advice. To determine fair value of the
reporting unit, we generally use 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 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 depen-
dent on the ability to generate earnings than on the value
of the assets used in the production process.
Under the income approach, we determine fair value
using a discounted cash flow method, projecting future
cash flows of each reporting unit, as well as a 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 operat-
ing 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 2011 compound annual
growth rate of sales for the first five to eight years of our
projections, as considered appropriate for the individual
reporting units, ranged between 3% and 19% with the
higher growth rates in those reporting units that start with
the smallest base in fiscal 2011. The fiscal 2010 com-
pound annual growth rate of sales for the first four to
eight years of our projections ranged between 3% and
24% with the higher growth rates in those reporting units
that start with the smallest base in fiscal 2010. For report-
ing units with positive earnings, growth in the correspond-
ing earnings before interest and taxes ranged from 6% to
109% in fiscal 2011 as compared with 9% to 161% in
fiscal 2010. The terminal growth rates were projected at
3% after four to eight years in fiscal 2011 and fiscal 2010,
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
7.5% to 16% in fiscal 2011 as compared with 9% to 17% in
fiscal 2010. The range of market multiples used in our
fiscal 2011 impairment testing was from 1.5 to 3 times
trailing-twelve-month sales and 11 to 12 times trailing-
twelve-month earnings before interest, taxes and depre-
ciation and amortization. The range of market multiples
used in our fiscal 2010 impairment testing was from 0.5 to
3 times trailing-twelve-month sales and between 9 to 12
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.
However, a decrease of 100 basis points in our terminal
growth rate or an increase of 100 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 and Other