Estee Lauder 2012 Annual Report Download - page 104

102 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 exist. We test goodwill for impair-
ment 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 operating
segments constitute businesses for which discrete finan-
cial 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 impair-
ment loss by comparing the implied fair value of goodwill
with the carrying amount of that goodwill. The impair-
ment test for indefinite-lived intangible assets encom-
passes 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
industry accepted valuation models and set criteria that
are reviewed and approved by various levels of manage-
ment 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 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
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 2012 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 5% and 18% with the
higher growth rates in those reporting units that start with
the smallest base in fiscal 2012. The fiscal 2011 com-
pound annual growth rate of sales for the first five to eight
years of our projections ranged between 3% and 19%
with the higher growth rates in those reporting units that
start with the smallest base in fiscal 2011. For reporting
units with positive earnings, growth in the corresponding
earnings before interest and taxes ranged from 7% to 47%
in fiscal 2012 as compared with 6% to 109% in fiscal 2011.
The terminal growth rates were projected at 3% after five
to eight years in fiscal 2012 and fiscal 2011, 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 8%
to 16% in fiscal 2012 as compared with 7.5% to 16% in
fiscal 2011. The range of market multiples used in our fis-
cal 2012 impairment testing was from 1.7 to 3.3 times
trailing-twelve-month sales and 10.0 to 12.5 times trailing-
twelve-month earnings before interest, taxes and depre-
ciation and amortization. The range of market multiples
used in our fiscal 2011 impairment testing was from 1.5 to
3 times trailing-twelve-month sales and between 11 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 Darphin reporting unit,