Estee Lauder 2009 Annual Report Download - page 95

94 THE EST{E LAUDER COMPANIES INC.
Under the income approach, we determine fair value
using a discounted cash fl ow method, estimating future
cash fl ows of each reporting unit, as well as terminal value,
and discounting such cash fl ows at a rate of return that
refl ects the relative risk of the cash fl ows.
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 profi t margins based on internal fore-
casts, terminal value, the weighted-average cost of capital
used to discount future cash fl ows and comparable mar-
ket multiples. The fi scal 2009 compound annual growth
rate of sales for the fi rst 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
fi scal 2009. The fi scal 2008 compound annual growth rate
of sales for the fi rst fi ve years of our projections ranged
between 10% and 21% with the higher growth rates in
those reporting units that start with the smallest base in
fi scal 2008. For reporting units with positive earnings,
growth in the corresponding earnings before interest and
taxes ranged from 6% to 46% in fi scal 2009 as compared
with 10% to 31% in fi scal 2008. The terminal growth rates
were projected at 3% after eight years in fi scal 2009 as
compared with 3% after fi ve years in fi scal 2008, which
reflects our estimate of long term market and gross
domestic product growth. The weighted-average cost of
capital used to discount future cash fl ows ranged from
11% to 17% in fi scal 2009 as compared with 10% to 15%
in fi scal 2008. The range of market multiples used in our
fi scal 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. The range of market multiples used in
our fi scal 2008 impairment testing was from 2 to 3 times
trailing-twelve-month sales and 11 to 14 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 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. Changes in the valuation assump-
tions from those used in the prior year primarily refl ect
the impact of the current economic environment on
in these assumptions from those used in fi scal 2009 will
result in an increase in pension expense of approximately
$1.5 million in fi scal 2010. We will continue to monitor
the market conditions relative to these assumptions and
adjust them accordingly.
GOODWILL, INTANGIBLE ASSETS AND OTHER
LONG-LIVED ASSETS
Goodwill is calculated as the excess of the cost of
purchased businesses over the fair value of their under-
lying net assets. Other indefi nite-lived intangible assets
principally consist of trademarks. Goodwill and other
indefi nite-lived intangible assets are not amortized.
We assess goodwill and other indefi nite-lived intangi-
bles at least annually for impairment as of the beginning
of the fi scal 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
fi nancial information is available and management of each
reporting unit regularly reviews the operating results of
those components. Impairment testing is performed in
two steps: (i) we determine impairment 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 indefi nite-lived
intangible asset and comparing the fair value to its carry-
ing 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 signifi cant 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 circumstances,
equal weighting will not be applied if one of these meth-
ods may be less reliable (e.g., only the income approach
would be used for reporting units with existing negative
margins). We believe 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.