Estee Lauder 2014 Annual Report Download - page 50

48 THE EST{E LAUDER COMPANIES INC.
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 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 units, 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 mar-
ket multiples. The fiscal 2014 compound annual growth
rate of sales for the first eight years of our projections, as
considered appropriate for the individual reporting units,
ranged between 3% and 17% with the higher growth rates
in certain of the Company’s smaller reporting units that
are expected to continue the growth that they have exhib-
ited over the past several years. The following fiscal 2013
estimates and factors exclude those related to our
Darphin reporting unit, for which we recorded an impair-
ment charge of the remainder of its goodwill. The fiscal
Our post-retirement plans are comprised of health care
plans that could be impacted by health care cost trend
rates, which may have a significant effect on the amounts
reported. A one-percentage-point change in assumed
health care cost trend rates for fiscal 2014 would have had
the following effects:
One-Percentage- One-Percentage-
Point Increase Point Decrease
(In millions)
Effect on total service
and interest costs $ 1.3 $ (1.1)
Effect on post-retirement
benefit obligations $13.9 $(12.1)
To determine the fiscal 2015 net periodic benefit cost, we
are using discount rates of 4.30% and 3.60% for the U.S.
Qualified Plan and the non-qualified domestic non-
contributory pension plan, respectively, and varying rates
for our international plans of between .50% and 6.75%.
We are using an expected return on plan assets of 7.50%
for the U.S. Qualified Plan and varying rates for our inter-
national pension plans of between 2.00% and 6.75%. The
net change in these assumptions from those used in fiscal
2014 will result in an increase in pension expense of
approximately $3 million in fiscal 2015.
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
principally 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