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tests, which involve the use of estimates related to the fair
market values of the business operations with which goodwill
is associated, during our fourth fiscal quarter. Calculating the
fair market value of the reporting units requires significant
estimates and assumptions by management. We estimate the
fair value of our reporting units by applying third-party
market value indicators to the respective reporting unit’s
annual projected earnings before interest, taxes, depreciation
and amortization. In applying this methodology, we rely on
a number of factors, including future business plans, actual
operating results and market data. In the event that our
calculations indicate that goodwill is impaired, a fair value
estimate of each tangible and intangible asset would be
established. This process would require the application of
discounted cash flows expected to be generated by each asset
in addition to independent asset appraisals, as appropriate.
Cash flow estimates are based on our historical experience
and our internal business plans, and appropriate discount
rates are applied. Losses, if any, resulting from goodwill
impairment tests would be reflected in operating income in
our income statement.
We assess identifiable non-goodwill intangibles and other
long-lived assets for impairment whenever events or changes
in facts and circumstances indicate the possibility that the
carrying value may not be recoverable. Factors considered
important, which might trigger an impairment evaluation,
include the following:
- significant under-performance relative to historical or projected future operating results;
- significant changes in the manner of our use of the acquired assets;
- significant changes in the strategy for our overall business;
- and significant negative industry or economic trends.
Additionally, we test all indefinitely-lived intangible assets for
impairment annually. Measuring a potential impairment of
non-goodwill intangibles and other long-lived assets requires
various estimates and assumptions, including determining
which cash flows are directly related to the asset being
evaluated, the useful life over which those cash flows will
occur, their amount and the asset’s residual value, if any. If we
determine that the carrying value of these assets may not be
recoverable based upon the existence of one or more of the
above-described indicators, any impairment would be
measured based on projected net cash flows expected from
the asset(s), including eventual disposition. The determination
of impairment loss would be based on the best information
available, including internal discounted cash flows, quoted
market prices when available and independent appraisals as
appropriate to determine fair value. Cash flow estimates
would be based on our historical experience and our internal
business plans, with appropriate discount rates applied.
We have not incurred any such impairment loss to date.
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The provision for income taxes is calculated using the liability
method. Deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes and certain changes in
valuation allowances. We provide valuation allowances against
deferred tax assets if, based on available evidence, it is more
likely than not that some portion or all of the deferred tax
assets will not be realized.
In determining the adequacy of the valuation allowance,
management considers anticipated taxable income resulting
from the reversal of future taxable temporary differences,
cumulative and anticipated amounts of domestic and
international earnings or losses, and anticipated amounts of
foreign source income.
We intend to maintain the recorded valuation allowances until
sufficient positive evidence (for example, cumulative positive
foreign earnings or additional foreign source income) exists to
support a reversal of the tax valuation allowances.
We have not provided for U.S. income and foreign withholding
taxes on approximately $601.8 million of foreign subsidiaries’
undistributed earnings as of May 31, 2007, because such
earnings have been retained and reinvested by the
subsidiaries. Accordingly, no provision has been made for U.S.
or foreign withholding taxes which may become payable if
undistributed earnings of foreign subsidiaries were paid to us
as dividends. The additional income taxes and applicable
withholding taxes that would result had such earnings actually
been repatriated are not practically determinable.
We are party to claims and lawsuits arising in the normal
course of business, including the various asbestos-related suits
discussed herein and in Note I to our Consolidated Financial
Statements. Although we cannot precisely predict the amount
of any liability that may ultimately arise with respect to any of
these matters, we record provisions when we consider the
liability probable and reasonably estimable. The provisions are
based on historical experience and legal advice, are reviewed
quarterly and are adjusted according to developments.
Estimating probable losses requires analysis of multiple
forecasted factors that often depend on judgments about
potential actions by third parties such as regulators, courts,
and state and federal legislatures. Changes in the amount of
the provisions affect our Consolidated Statements of Income.
Due to the inherent uncertainties in the loss reserve estimation
process, we are unable to estimate an additional range of loss
in excess of our accruals. We may incur asbestos costs in
addition to any amounts reserved, which may have a material
adverse effect on our financial condition, results of operations
or cash flows.
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