Estee Lauder 2013 Annual Report Download - page 119

THE EST{E LAUDER COMPANIES INC. 117
smaller reporting units that are expected to continue the
growth that they have exhibited over the past several
years. The fiscal 2012 compound annual growth rate of
sales for the first five to eight years of our projections
ranged between 5% and 18% with the higher growth
rates in those reporting units that start with the smallest
base in fiscal 2012. For reporting units with positive earn-
ings, growth in the corresponding earnings before interest
and taxes ranged from 7% to 49% in fiscal 2013 as com-
pared with 7% to 47% in fiscal 2012. The terminal growth
rates were projected at 3% after five to eight years in fiscal
2013 and fiscal 2012, 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 15% in fiscal 2013 as com-
pared with 8% to 16% in fiscal 2012. The range of market
multiples used in our fiscal 2013 impairment testing was
from 1.5 to 3.5 times trailing-twelve-month sales and 8.5
to 13.0 times trailing-twelve-month earnings before inter-
est, taxes and depreciation and amortization. The range of
market multiples used in our fiscal 2012 impairment test-
ing was from 1.7 to 3.3 times trailing-twelve-month sales
and between 10.0 to 12.5 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.
Changes in the valuation assumptions from those used in
the prior year primarily reflect the impact of the current
economic environment on the reporting units and their
projected future results of operations.
To determine fair value of other indefinite-lived intan-
gible assets, we use an income approach, the relief-from-
royalty method. This method assumes that, in lieu of
ownership, a third party would be willing to pay a royalty
in order to obtain the rights to use the comparable asset.
Other indefinite-lived intangible assets’ fair values require
significant judgments in determining both the assets’ esti-
mated cash flows as well as the appropriate discount and
royalty rates applied to those cash flows to determine fair
value. Changes in such estimates or the application of
alternative assumptions could produce significantly differ-
ent results. The following fiscal 2013 estimates exclude
those related to the Darphin trademark, for which
we recorded an impairment charge for its remaining
carrying value (see Goodwill and Other Intangible Asset
Impairments). The fiscal 2013 and fiscal 2012 terminal
growth rate applied to future cash flows was 3% and the
fiscal 2013 and fiscal 2012 discount rates ranged from
10% to 18%. The fiscal 2013 and fiscal 2012 royalty rates
ranged from 0.5% to 12%.
We review long-lived assets for impairment whenever
events or changes in circumstances indicate that the car-
rying amount may not be recoverable. When such events
or changes in circumstances occur, a recoverability test is
performed comparing projected undiscounted cash flows
from the use and eventual disposition of an asset or asset
group to its carrying value. If the projected undiscounted
cash flows are less than the carrying value, an impairment
would be recorded for the excess of the carrying value
over the fair value, which is determined by discounting
future cash flows.
INCOME TAXES
We account for income taxes using an asset and liability
approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax conse-
quences of events that have been recognized in our con-
solidated financial statements or tax returns. As of June
30, 2013, we have current net deferred tax assets of
$296.0 million and non-current net deferred tax assets of
$50.3 million. The net deferred tax assets assume suffi-
cient future earnings for their realization, as well as the
continued application of currently anticipated tax rates.
Included in net deferred tax assets is a valuation allow-
ance of $92.9 million for deferred tax assets, where man-
agement believes it is more-likely-than-not that the
deferred tax assets will not be realized in the relevant juris-
diction. Based on our assessments, no additional valua-
tion allowance is required. If we determine that a deferred
tax asset will not be realizable, an adjustment to the
deferred tax asset will result in a reduction of net earnings
at that time.
We provide tax reserves for U.S. federal, state, local
and foreign exposures relating to periods subject to audit.
The development of reserves for these exposures requires
judgments about tax issues, potential outcomes and tim-
ing, and is a subjective critical estimate. We assess our tax
positions and record tax benefits for all years subject to
examination based upon management’s evaluation of the
facts, circumstances, and information available at the
reporting dates. For those tax positions where it is more-
likely-than-not that a tax benefit will be sustained, we have
recorded the largest amount of tax benefit with a greater
than 50% likelihood of being realized upon settlement
with a tax authority that has full knowledge of all relevant