Nike 2011 Annual Report Download - page 44

44 NIKE,INC.-Form10-K
PARTII
Note4Identifi able Intangible Assets, Goodwill and Umbro Impairment
NOTE4 Identifi able Intangible Assets, Goodwill and Umbro Impairment
Identifi ed Intangible Assets and Goodwill
The following table summarizes the Company’s identifi able intangible asset balances as of May31,2011 and 2010:
(Inmillions)
May31,2011 May31,2010
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Amortized intangible assets:
Patents $ 80 $ (24) $ 56 $ 69 $ (21) $ 48
Trademarks 44 (25) 19 40 (18) 22
Other 47 (22) 25 32 (18) 14
TOTAL $ 171 $ (71)$ 100 $ 141 $ (57)$84
Unamortized intangible assets—
Trademarks 387 383
IDENTIFIABLE INTANGIBLE
ASSETS, NET $ 487 $ 467
The effect of foreign exchange fl uctuations for the year ended May31,2011 increased unamortized intangible assets by approximately $4million.
Amortization expense, which is included in selling and administrative
expense, was $16million, $14million, and $12million fortheyears ended
May31,2011,2010, and 2009, respectively. The estimated amortization
expense for intangible assets subject to amortization for each of theyears
ending May31,2012 through May31,2016 are as follows:2012: $16million;
2013: $14million; 2014: $12million; 2015: $8million; 2016: $7million.
All goodwill balances are included in the Company’s “Other” category for segment reporting purposes. The following table summarizes the Company’s goodwill
balance as of May31,2011 and 2010:
(Inmillions) Goodwill
Accumulated
Impairment Goodwill,net
May31,2009 $ 393 $ (199) $ 194
Other(1) (6) — (6)
May31,2010 387 (199) 188
Umbro France(2) 10 — 10
Other(1) 7 — 7
MAY31,2011 $ 404 $ (199) $ 205
(1) Other consists of foreign currency translation adjustments on Umbro goodwill.
(2) In March2011, Umbro acquired the remaining 51% of the exclusive licensee and distributor of the Umbro brand in France for approximately $15million.
Umbro Impairment in Fiscal 2009
The Company performs annual impairment tests on goodwill and intangible
assets with indefi nite lives in the fourth quarter of each fi scal year, or when events
occur or circumstances change that would, more likely than not, reduce the
fair value of a reporting unit or intangible assets with an indefi nite life below its
carrying value. As a result of a signifi cant decline in global consumer demand and
continued weakness in the macroeconomic environment, as well as decisions
by Company management to adjust planned investment in the Umbro brand,
the Company concluded suffi cient indicators of impairment existed to require the
performance of an interim assessment of Umbro’s goodwill and indefi nite lived
intangible assets as of February1,2009. Accordingly, the Company performed
the fi rst step of the goodwill impairment assessment for Umbro by comparing
the estimated fair value of Umbro to its carrying amount, and determined there
was a potential impairment of goodwill as the carrying amount exceeded the
estimated fair value. Therefore, the Company performed the second step of
the assessment which compared the implied fair value of Umbro’s goodwill to
the book value of goodwill. The implied fair value of goodwill is determined by
allocating the estimated fair value of Umbro to all of its assets and liabilities,
including both recognized and unrecognized intangibles, in the same manner
as goodwill was determined in the original business combination.
The Company measured the fair value of Umbro by using an equal weighting of
the fair value implied by a discounted cash fl ow analysis and by comparisons with
the market values of similar publicly traded companies. The Company believes the
blended use of both models compensates for the inherent risk associated with
either model if used on a stand-alone basis, and this combination is indicative
of the factors a market participant would consider when performing a similar
valuation. The fair value of Umbro’s indefi nite-lived trademark was estimated
using the relief from royalty method, which assumes that the trademark has
value to the extent that Umbro is relieved of the obligation to pay royalties for
the benefi ts received from the trademark. The assessments of the Company
resulted in the recognition of impairment charges of $199million and $181million
related to Umbro’s goodwill and trademark, respectively, for the year ended
May31,2009. A tax benefi t of $55million was recognized as a result of the
trademark impairment charge. In addition to the above impairment analysis, the
Company determined an equity investment held by Umbro was impaired, and
recognized a charge of $21million related to the impairment of this investment.
These charges are included in the Company’s “Other” category for segment
reporting purposes.
The discounted cash fl ow analysis calculated the fair value of Umbro using
management’s business plans and projections as the basis for expected cash
fl ows for the next 12years and a 3% residual growth rate thereafter. TheCompany
used a weighted average discount rate of 14% in its analysis, which was derived
primarily from published sources as well as our adjustment for increased
market risk given current market conditions. Other signifi cant estimates used
in the discounted cash fl ow analysis include the rates of projected growth and
profi tability of Umbro’s business and working capital effects. The market valuation
approach indicates the fair value of Umbro based on a comparison of Umbro
to publicly traded companies in similar lines of business. Signifi cant estimates
in the market valuation approach include identifying similar companies with
comparable business factors such as size, growth, profi tability, mix of revenue
generated from licensed and direct distribution, and risk of return on investment.
Holding all other assumptions constant at the test date, a 100 basis point increase
in the discount rate would reduce the adjusted carrying value of Umbro’s net
assets by an additional 12%.