Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549-1004

 


 

FORM 10-Q

 

(Mark One)

x

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2012

 

OR

 

o

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from               to              

 

Commission file number: 1-14064

 

The Estée Lauder Companies Inc.

(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

11-2408943

(I.R.S. Employer Identification No.)

 

 

 

767 Fifth Avenue, New York, New York
(Address of principal executive offices)

 

10153
(Zip Code)

 

212-572-4200

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

At April 25, 2012, 236,954,415 shares of the registrant’s Class A Common Stock, $.01 par value, and 151,778,082 shares of the registrant’s Class B Common Stock, $.01 par value, were outstanding.

 

 

 



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

INDEX

 

 

 

 

Page

 

 

Part I. Financial Information

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Consolidated Statements of Earnings —
Three and Nine Months Ended March 31, 2012 and 2011

2

 

 

Consolidated Balance Sheets —
March 31, 2012 and June 30, 2011 (Audited)

3

 

 

Consolidated Statements of Cash Flows —
Nine Months Ended March 31, 2012 and 2011

4

 

 

Notes to Consolidated Financial Statements

5

 

 

Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations

27

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

47

 

 

Item 4. Controls and Procedures

47

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

48

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

48

 

 

Item 6. Exhibits

49

 

 

Signatures

50

 



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

 

 

Three Months Ended
March 31

 

Nine Months Ended
March 31

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

2,248.2

 

$

2,165.7

 

$

7,462.4

 

$

6,749.4

 

Cost of Sales

 

469.3

 

482.6

 

1,554.6

 

1,511.8

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

1,778.9

 

1,683.1

 

5,907.8

 

5,237.6

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

1,539.0

 

1,415.9

 

4,623.4

 

4,136.9

 

Restructuring and other charges

 

28.4

 

21.8

 

39.2

 

39.6

 

Goodwill impairment

 

 

29.3

 

 

29.3

 

Impairment of other intangible assets

 

 

7.0

 

6.7

 

7.0

 

Total operating expenses

 

1,567.4

 

1,474.0

 

4,669.3

 

4,212.8

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

211.5

 

209.1

 

1,238.5

 

1,024.8

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

14.5

 

15.8

 

47.1

 

48.0

 

Other income

 

 

 

10.5

 

 

Earnings before Income Taxes

 

197.0

 

193.3

 

1,201.9

 

976.8

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

65.7

 

68.2

 

393.6

 

316.2

 

Net Earnings

 

131.3

 

125.1

 

808.3

 

660.6

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to noncontrolling interests

 

(0.9

)

(0.4

)

(2.6

)

(0.9

)

Net Earnings Attributable to The Estée Lauder Companies Inc.

 

$

130.4

 

$

124.7

 

$

805.7

 

$

659.7

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Estée Lauder Companies Inc. per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

$

0.32

 

$

2.07

 

$

1.67

 

Diluted

 

0.33

 

0.31

 

2.03

 

1.64

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

388.2

 

395.3

 

388.5

 

394.0

 

Diluted

 

396.3

 

404.1

 

397.0

 

402.2

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

 

$

 

$

.525

 

$

.375

 

 

See notes to consolidated financial statements.

 

2



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31

 

June 30

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

 

 

($ in millions)

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,192.8

 

$

1,253.0

 

Accounts receivable, net

 

1,304.8

 

945.6

 

Inventory and promotional merchandise, net

 

898.7

 

995.6

 

Prepaid expenses and other current assets

 

503.6

 

492.3

 

Total current assets

 

3,899.9

 

3,686.5

 

 

 

 

 

 

 

Property, Plant and Equipment, net

 

1,181.8

 

1,143.1

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Goodwill

 

881.9

 

877.3

 

Other intangible assets, net

 

208.6

 

227.5

 

Other assets

 

429.3

 

339.5

 

Total other assets

 

1,519.8

 

1,444.3

 

Total assets

 

$

6,601.5

 

$

6,273.9

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current debt

 

$

144.0

 

$

138.0

 

Accounts payable

 

406.6

 

446.7

 

Accrued income taxes

 

180.4

 

62.3

 

Other accrued liabilities

 

1,327.2

 

1,296.3

 

Total current liabilities

 

2,058.2

 

1,943.3

 

 

 

 

 

 

 

Noncurrent Liabilities

 

 

 

 

 

Long-term debt

 

1,065.9

 

1,080.1

 

Accrued income taxes

 

141.2

 

130.0

 

Other noncurrent liabilities

 

480.7

 

473.5

 

Total noncurrent liabilities

 

1,687.8

 

1,683.6

 

 

 

 

 

 

 

Contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock, $.01 par value; 650,000,000 shares Class A authorized; shares issued: 398,562,903 at March 31, 2012 and 393,173,952 at June 30, 2011; 240,000,000 shares Class B authorized; shares issued and outstanding: 151,778,082 at March 31, 2012 and 151,964,082 at June 30, 2011

 

5.5

 

5.5

 

Paid-in capital

 

1,952.8

 

1,735.6

 

Retained earnings

 

4,715.3

 

4,113.7

 

Accumulated other comprehensive income (loss)

 

(48.9

)

17.7

 

 

 

6,624.7

 

5,872.5

 

Less: Treasury stock, at cost; 161,630,283 Class A shares at March 31, 2012 and 150,575,090 Class A shares at June 30, 2011

 

(3,788.8

)

(3,243.1

)

Total stockholders’ equity — The Estée Lauder Companies Inc.

 

2,835.9

 

2,629.4

 

Noncontrolling interests

 

19.6

 

17.6

 

Total equity

 

2,855.5

 

2,647.0

 

Total liabilities and equity

 

$

6,601.5

 

$

6,273.9

 

 

See notes to consolidated financial statements.

 

3



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended
March 31

 

 

 

2012

 

2011

 

 

 

(In millions)

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

Net earnings

 

$

808.3

 

$

660.6

 

Adjustments to reconcile net earnings to net cash flows from operating activities:

 

 

 

 

 

Depreciation and amortization

 

215.4

 

212.6

 

Deferred income taxes

 

(28.7

)

(8.1

)

Non-cash stock-based compensation

 

101.0

 

74.5

 

Excess tax benefits from stock-based compensation arrangements

 

(48.2

)

(38.1

)

Loss on disposal of property, plant and equipment

 

7.4

 

4.9

 

Non-cash charges associated with restructuring activities

 

1.3

 

7.8

 

Goodwill and other intangible asset impairments

 

6.7

 

36.3

 

Pension and post-retirement benefit expense

 

52.2

 

51.5

 

Pension and post-retirement benefit contributions

 

(57.1

)

(55.0

)

Other non-cash items

 

 

0.4

 

Changes in operating assets and liabilities:

 

 

 

 

 

Increase in accounts receivable, net

 

(397.0

)

(433.9

)

Decrease (increase) in inventory and promotional merchandise, net

 

66.0

 

(0.4

)

Increase in other assets, net

 

(100.8

)

(57.7

)

Decrease in accounts payable

 

(26.9

)

(81.2

)

Increase in accrued income taxes

 

201.9

 

163.9

 

Increase in other liabilities

 

68.2

 

189.5

 

Net cash flows provided by operating activities

 

869.7

 

727.6

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures

 

(271.9

)

(223.9

)

Acquisition of businesses and other intangible assets, net of cash acquired

 

(7.6

)

(256.1

)

Proceeds from disposition of long-term investments

 

 

0.2

 

Net cash flows used for investing activities

 

(279.5

)

(479.8

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Borrowings of current debt, net

 

121.9

 

6.7

 

Debt issuance costs

 

(1.1

)

 

Repayments and redemptions of long-term debt

 

(127.6

)

(15.1

)

Net settlement of interest rate derivatives

 

 

47.4

 

Net proceeds from stock-based compensation transactions

 

71.9

 

128.7

 

Excess tax benefits from stock-based compensation arrangements

 

48.2

 

38.1

 

Payments to acquire treasury stock

 

(550.0

)

(346.6

)

Dividends paid to stockholders

 

(204.0

)

(148.0

)

Net cash flows used for financing activities

 

(640.7

)

(288.8

)

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

(9.7

)

19.3

 

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

(60.2

)

(21.7

)

Cash and Cash Equivalents at Beginning of Period

 

1,253.0

 

1,120.7

 

Cash and Cash Equivalents at End of Period

 

$

1,192.8

 

$

1,099.0

 

 

See notes to consolidated financial statements.

 

4



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of The Estée Lauder Companies Inc. and its subsidiaries (collectively, the “Company”).  All significant intercompany balances and transactions have been eliminated.

 

The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included.  The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year.  For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2011.

 

All share (except par value per share), earnings per common share and cash dividends declared per common share information for all prior-year periods reflect the two-for-one stock split on the Company’s Class A and Class B Common Stock, which was effected in the form of a stock dividend for each share held by stockholders of record at the close of business on January 4, 2012.  The number of shares of the Company’s Class A Common Stock issuable upon exercise of outstanding stock options and vesting of other stock-based awards were proportionately increased in accordance with the terms of the respective plans.

 

Management Estimates

 

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses reported in those financial statements.  Certain significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, inventory, pension and other post-retirement benefit costs, goodwill, other intangible assets and long-lived assets, income taxes and derivatives.  Descriptions of these policies are discussed in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2011.  Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate.  As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions.  Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

 

Currency Translation and Transactions

 

All assets and liabilities of foreign subsidiaries and affiliates are translated at period-end rates of exchange, while revenue and expenses are translated at weighted average rates of exchange for the period.  Unrealized translation gains or losses are reported as cumulative translation adjustments through other comprehensive income (loss) (“OCI”).  Such adjustments, attributable to The Estée Lauder Companies Inc., amounted to $41.4 million and $69.9 million of unrealized translation gains, net of tax, during the three months ended March 31, 2012 and 2011, respectively, and $(90.0) million and $161.5 million of unrealized translation gains (losses), net of tax, during the nine months ended March 31, 2012 and 2011, respectively.  For the Company’s Venezuelan subsidiary operating in a highly inflationary economy, the U.S. dollar is the functional currency.  Remeasurement adjustments in financial statements in a highly inflationary economy and other transactional gains and losses are reflected in earnings.

 

The accompanying consolidated statements of earnings include net exchange losses on foreign currency transactions of $0.8 million and $5.7 million during the three months ended March 31, 2012 and 2011, respectively, and $3.9 million and $6.5 million during the nine months ended March 31, 2012 and 2011, respectively.

 

5



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Accounts Receivable

 

Accounts receivable is stated net of the allowance for doubtful accounts and customer deductions totaling $35.6 million and $33.9 million as of March 31, 2012 and June 30, 2011, respectively.

 

Concentration of Credit Risk

 

The Company is a worldwide manufacturer, marketer and distributor of skin care, makeup, fragrance and hair care products.  The Company’s sales are made primarily to department stores, perfumeries and specialty retailers.  The Company grants credit to all qualified customers and does not believe it is exposed significantly to any undue concentration of credit risk.

 

The Company’s largest customer sells products primarily within the United States and accounted for $265.1 million, or 12%, and $241.2 million, or 11%, of the Company’s consolidated net sales for the three months ended March 31, 2012 and 2011, respectively, and $840.1 million, or 11%, and $769.5 million, or 11%, of the Company’s consolidated net sales for the nine months ended March 31, 2012 and 2011, respectively.  This customer accounted for $108.7 million, or 8%, and $92.3 million, or 10%, of the Company’s accounts receivable at March 31, 2012 and June 30, 2011, respectively.

 

Inventory and Promotional Merchandise

 

 

 

March 31

 

June 30

 

(In millions)

 

2012

 

2011

 

 

 

 

 

 

 

Inventory and promotional merchandise, net consists of:

 

 

 

 

 

Raw materials

 

$

199.3

 

$

230.2

 

Work in process

 

79.3

 

93.6

 

Finished goods

 

481.8

 

475.4

 

Promotional merchandise

 

138.3

 

196.4

 

 

 

$

898.7

 

$

995.6

 

 

Property, Plant and Equipment

 

 

 

March 31

 

June 30

 

(In millions)

 

2012

 

2011

 

 

 

 

 

 

 

Assets (Useful Life)

 

 

 

 

 

Land

 

$

14.8

 

$

15.0

 

Buildings and improvements (10 to 40 years)

 

192.3

 

195.5

 

Machinery and equipment (3 to 10 years)

 

626.9

 

635.3

 

Computer hardware and software (4 to 10 years)

 

780.2

 

707.1

 

Furniture and fixtures (5 to 10 years)

 

95.3

 

93.9

 

Leasehold improvements

 

1,222.3

 

1,215.3

 

 

 

2,931.8

 

2,862.1

 

Less accumulated depreciation and amortization

 

1,750.0

 

1,719.0

 

 

 

$

1,181.8

 

$

1,143.1

 

 

The cost of assets related to projects in progress of $206.1 million and $183.5 million as of March 31, 2012 and June 30, 2011, respectively, is included in their respective asset categories above.  Depreciation and amortization of property, plant and equipment was $72.3 million and $74.8 million during the three months ended March 31, 2012 and 2011, respectively, and $208.7 million and $204.0 million during the nine months ended March 31, 2012 and 2011, respectively.  Depreciation and amortization related to the Company’s manufacturing process is included in cost of sales and all other depreciation and amortization is included in selling, general and administrative expenses in the accompanying consolidated statements of earnings.

 

6



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Income Taxes

 

The effective income tax rate was 33.4% and 35.3% for the three months ended March 31, 2012 and 2011, respectively.  The decrease in the effective income tax rate was principally due to a lower tax rate on the Company’s foreign operations.

 

The effective income tax rate was 32.7% and 32.4% for the nine months ended March 31, 2012 and 2011, respectively.  The increase in the effective income tax rate was principally due to favorable income tax reserve adjustments booked in the prior-year period, including a tax and interest benefit of $11 million, net of tax, attributable to concluding the examination by the IRS of fiscal 2006 through 2008.  This increase was partially offset by a lower effective tax rate on the Company’s foreign operations.

 

As of March 31, 2012 and June 30, 2011, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $97.7 million and $104.8 million, respectively.  The total amount of unrecognized tax benefits at March 31, 2012 that, if recognized, would affect the effective tax rate was $62.3 million.  During the three months ended March 31, 2012, the Company recognized a gross interest and penalty benefit of $0.1 million related to unrecognized tax benefits in the accompanying consolidated statement of earnings.  During the nine months ended March 31, 2012, the Company accrued a gross interest and penalty expense related to unrecognized tax benefits in the accompanying consolidated statement of earnings of $9.1 million.  The total gross accrued interest and penalties in the accompanying consolidated balance sheets at March 31, 2012 and June 30, 2011 was $45.2 million and $37.7 million, respectively.  On the basis of the information available as of March 31, 2012, it is reasonably possible that the total amount of unrecognized tax benefits could decrease in a range of $25 million to $30 million within 12 months as a result of projected resolutions of global tax examinations and controversies and a potential lapse of the applicable statutes of limitations.

 

During the nine months ended March 31, 2012, the Company formally concluded the IRS examination of fiscal years 2009 and 2010.  The conclusion of this examination did not materially impact the Company’s consolidated financial statements.

 

Recently Adopted Accounting Standards

 

In May 2011, the Financial Accounting Standards Board (“FASB”) amended its authoritative guidance related to fair value measurements to provide a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards (“IFRS”).  This guidance clarifies the application of existing fair value measurement and expands the existing disclosure requirements.  This guidance became effective for the Company’s fiscal 2012 third quarter and was applied prospectively.  This guidance did not have an impact on the Company’s results of operations, financial position or cash flows.  As a result of the adoption of this guidance, the Company did not change its valuation techniques but made additional disclosures included in Note 6 — Fair Value Measurements.

 

In December 2010, the FASB amended its authoritative guidance related to Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more-likely-than-not that a goodwill impairment exists.  In determining whether it is more-likely-than-not that a goodwill impairment exists, consideration should be made as to whether there are any adverse qualitative factors indicating that an impairment may exist.  This guidance became effective for the Company’s fiscal 2012 first quarter.  The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

 

In December 2010, the FASB amended its authoritative guidance related to business combinations entered into by an entity that are material on an individual or aggregate basis.  These amendments clarify existing guidance that if an entity presents comparative financial statements that include a material business combination, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period.  The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.  This guidance became effective prospectively for business combinations for which the acquisition date was on or after the first day of the Company’s fiscal 2012.  The adoption of this disclosure-only guidance did not have an impact on the Company’s results of operations, financial position or cash flows.

 

7



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In January 2010, the FASB issued authoritative guidance that requires entities to make new disclosures about recurring or nonrecurring fair-value measurements of assets and liabilities.  The Company adopted the new guidance in its fiscal 2010 third quarter, except for certain detailed recurring Level 3 disclosures, which became effective for the Company’s fiscal 2012 first quarter.  The Company currently does not have any recurring Level 3 assets or liabilities.

 

Recently Issued Accounting Standards

 

In December 2011, the FASB issued authoritative guidance that creates new disclosure requirements about the nature of an entity’s rights of offset and related arrangements associated with its financial instruments and derivative instruments.  This revised guidance helps reconcile differences in the offsetting requirements under U.S. GAAP and IFRS.  These requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement.  This disclosure-only guidance becomes effective for the Company’s fiscal 2013 third quarter, with retrospective application required.  The Company currently does not hold any financial or derivative instruments that are subject to an enforceable master netting arrangement.  However, the Company currently utilizes the right of offset when netting certain negative cash balances in its consolidated balance sheets.  This guidance is not expected to have an impact on the Company’s results of operations, financial position or cash flows, but may require certain additional disclosures if such balances are material or if the Company enters into additional arrangements that fall under the provisions of this guidance.

 

In September 2011, the FASB amended its authoritative guidance related to testing goodwill for impairment.  Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before performing Step 1 of the goodwill impairment test.  If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more-likely-than-not less than the carrying amount, the two-step impairment test would be required.  This guidance becomes effective in the beginning of the Company’s fiscal 2013, with early adoption permitted.  The Company is not adopting this guidance early, and it does not expect the guidance to have an impact on the Company’s consolidated financial statements.

 

In September 2011, the FASB amended its authoritative guidance related to multiemployer benefit plans.  This revised guidance is intended to provide enhanced qualitative and quantitative disclosures about an employer’s significant financial obligations to a multiemployer pension plan and, therefore, help financial statement users better understand the financial health of all significant plans in which the employer participates.  To the extent the information required under the revised standard is not available in the public domain, as may be the case for some foreign plans, employers should include more qualitative information about the plan.  This disclosure-only guidance becomes effective for the Company’s fiscal 2012, with early adoption permitted and full retrospective application required.  One of the Company’s international affiliates participates in a multiemployer benefit plan, and the Company has concluded that its participation in this plan is not significant and does not require additional disclosure in the Company’s consolidated financial statements.

 

In June 2011, the FASB amended its authoritative guidance related to the presentation of comprehensive income, requiring entities to present items of net income and other comprehensive income either in one continuous statement or in two separate consecutive statements.  This guidance also required entities to present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements.  In December 2011, the FASB issued an update to this guidance deferring the requirement to present reclassification adjustments on the face of the financial statements.  However, the Company is still required to present reclassification adjustments on either the face of the financial statement where comprehensive income is reported or disclose the reclassification adjustments in the notes to the financial statements.  This guidance, including the deferral, becomes effective for the Company’s fiscal 2013 first quarter, with early adoption permitted and full retrospective application required.  The Company is currently evaluating the impact of adopting this guidance but believes that it will result only in changes in the presentation of its consolidated financial statements and will not have a material impact on the Company’s results of operations, financial position or cash flows.

 

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Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – GOODWILL AND OTHER INTANGIBLE ASSETS

 

The Company assigns goodwill of a reporting unit to the product category in which that reporting unit predominantly operates at the time of its acquisition.  The following table presents goodwill by product category and the related change in the carrying amount:

 

(In millions)

 

Skin Care

 

Makeup

 

Fragrance

 

Hair Care

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

70.4

 

$

412.6

 

$

55.0

 

$

406.9

 

$

944.9

 

Accumulated impairments

 

(24.4

)

 

 

(43.2

)

(67.6

)

 

 

46.0

 

412.6

 

55.0

 

363.7

 

877.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill acquired during the period

 

 

6.8

 

 

 

6.8

 

Translation and other adjustments

 

(1.0

)

(0.2

)

(0.2

)

(0.8

)

(2.2

)

 

 

(1.0

)

6.6

 

(0.2

)

(0.8

)

4.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March  31, 2012

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

68.9

 

419.2

 

54.8

 

404.9

 

947.8

 

Accumulated impairments

 

(23.9

)

 

 

(42.0

)

(65.9

)

 

 

$

45.0

 

$

419.2

 

$

54.8

 

$

362.9

 

$

881.9

 

 

Other intangible assets consist of the following:

 

 

 

March 31, 2012

 

June 30, 2011

 

(In millions)

 

Gross
Carrying
Value

 

Accumulated
Amortization

 

Total Net
Book
Value

 

Gross
Carrying
Value

 

Accumulated
Amortization

 

Total Net
Book
Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer lists and other

 

$

267.8

 

$

176.8

 

$

91.0

 

$

270.9

 

$

168.5

 

$

102.4

 

License agreements

 

43.0

 

43.0

 

 

43.0

 

43.0

 

 

 

 

$

310.8

 

$

219.8

 

91.0

 

$

313.9

 

$

211.5

 

102.4

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and other

 

 

 

 

 

117.6

 

 

 

 

 

125.1

 

Total intangible assets

 

 

 

 

 

$

208.6

 

 

 

 

 

$

227.5

 

 

The aggregate amortization expense related to amortizable intangible assets for the three months ended March 31, 2012 and 2011 was $3.5 million and $3.7 million, respectively, and for the nine months ended March 31, 2012 and 2011 was $10.4 million and $11.2 million, respectively.  The estimated aggregate amortization expense for the remainder of fiscal 2012 and for each of fiscal 2013 to 2016 is $3.2 million, $13.6 million, $13.5 million, $13.4 million and $13.3 million, respectively.

 

The Company assesses goodwill and other indefinite-lived intangible assets at least annually for impairment as of the beginning of the fiscal fourth quarter, or more frequently if certain events or circumstances exist.

 

Impairment Testing During the Nine Months Ended March 31, 2012

 

During the second quarter of fiscal 2012, the Ojon reporting unit identified a potential decline in its projected results of operations, primarily resulting from a softness in the direct response television channel, which caused the Company to review and revise Ojon’s long-term forecast.  The Company concluded that these changes in the business of the Ojon reporting unit triggered the need for an interim impairment test of its trademarks as of December 31, 2011.  These changes in circumstances were also an indicator that the carrying amount of the customer list may not be recoverable.  The Company performed an interim impairment test for the trademarks and a recoverability test for the customer list as of December 31, 2011.  For the trademarks, the Company concluded that the carrying value exceeded its estimated fair value, which was based on the use of a royalty rate to determine discounted projected future cash flows (“relief-from-royalty method”).  As a result, the Company recognized an impairment charge of $6.7 million.  This charge was reflected in the hair care product category in the Americas region.  The Company concluded that the carrying value of the customer list is recoverable.

 

9



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Impairment Testing During the Nine Months Ended March 31, 2011

 

During the third quarter of fiscal 2011, the Ojon reporting unit reassessed and subsequently altered the timing of new market initiatives, including the rollout of reformulated product lines and certain components of its future international expansion plans, resulting in revisions to its internal forecasts.  The Company concluded that these changes in circumstances in the Ojon reporting unit triggered the need for an interim impairment test of its trademark and goodwill.  Additionally, these changes in circumstances were also an indicator that the carrying amount of the customer list may not be recoverable.  The Company performed an interim impairment test for the trademark and a recoverability test for the customer list as of February 28, 2011.  For the customer list, the Company concluded that the carrying amount of this asset was recoverable.  However, for the Ojon trademark, the Company concluded that the carrying value exceeded its estimated fair value, which was based on the relief-from-royalty method.  As a result, the Company recognized an impairment charge of $7.0 million.  After adjusting the carrying value of the trademark, the Company completed an interim impairment test for goodwill and recorded an impairment charge for the remaining goodwill related to the Ojon reporting unit of $29.3 million, at the exchange rate in effect at that time.  The fair value of the reporting unit was based upon the income approach, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows.  These impairment charges were reflected in the hair care and skin care product categories and in the Americas region.

 

NOTE 3 — RETURNS AND CHARGES ASSOCIATED WITH RESTRUCTURING ACTIVITIES

 

In an effort to drive down costs and achieve synergies within the organization, in February 2009, the Company announced the implementation of a multi-faceted cost savings program (the “Program”) to position itself to achieve long-term profitable growth.  The Company anticipates the Program will result in related restructuring and other charges, inclusive of cumulative charges recorded to date and through the remainder of the Program, totaling between $350 million and $450 million before taxes.  While the Company will continue to seek cost savings opportunities, the Company’s current plans are to identify and approve specific initiatives under the Program through fiscal 2012 and execute those initiatives through fiscal 2013.  The total amount of charges (pre-tax) associated with the Program, recorded, plus other initiatives approved through March 31, 2012, is approximately $343 million to $348 million, of which approximately $234 million to $236 million relates to restructuring charges, approximately $50 million of other costs to implement the initiatives, approximately $42 million to $45 million in sales returns and approximately $17 million in inventory write-offs.  The restructuring charges are comprised of approximately $173 million to $175 million of employee-related costs, approximately $39 million of other exit costs and contract terminations (substantially all of which have resulted in or will result in cash expenditures), and approximately $22 million in non-cash asset write-offs.  The total amount of cumulative charges (pre-tax) associated with the Program recorded from inception through March 31, 2012 was $278.4 million.

 

The Program focuses on a redesign of the Company’s organizational structure in order to integrate it in a more cohesive way and operate more globally across brands and functions.  The principal aspect of the Program was the reduction of the workforce by approximately 2,000 employees.  Specific actions taken since the inception of the Program included:

 

·                  Resize and Reorganize the Organization — The Company continued the realignment and optimization of its organization to better leverage scale, improve productivity, reduce complexity and achieve cost savings in each region and across various functions.  This included reduction of the workforce which occurred through the consolidation of certain functions, which the Company achieved through a combination of normal attrition and job eliminations, and the closure and consolidation of certain distribution and office facilities.

 

·                  Turnaround or Exit Unprofitable Operations — To improve the profitability in certain of the Company’s brands and regions, the Company has selectively exited certain channels of distribution, categories and markets, and has made changes to turnaround others.  This included the exit from the global wholesale distribution of the Company’s Prescriptives brand and the reformulation of Ojon brand products.  In connection with these activities, the Company incurred charges related to product returns, inventory write-offs, reduction of workforce and termination of contracts.

 

·                  Outsourcing — In order to balance the growing need for information technology support with the Company’s efforts to provide the most efficient and cost effective solutions, the Company continued the outsourcing of certain information technology processes.  The Company incurred costs to transition services to outsource providers and employee-related termination costs.

 

10



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Restructuring Charges

 

The following table presents restructuring charges related to the Program as follows:

 

 

 

Three Months Ended
March 31

 

Nine Months Ended
March 31

 

(In millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Employee-related costs

 

$

19.1

 

$

18.8

 

$

23.4

 

$

28.3

 

Asset write-offs

 

0.4

 

0.8

 

0.9

 

1.4

 

Contract terminations

 

7.1

 

0.2

 

8.4

 

2.0

 

Other exit costs

 

0.7

 

0.5

 

1.5

 

1.0

 

Total restructuring charges

 

$

27.3

 

$

20.3

 

$

34.2

 

$

32.7

 

 

The following table presents aggregate restructuring charges related to the Program:

 

(In millions)

 

Employee-
Related

Costs

 

Asset
Write-offs

 

Contract
Terminations

 

Other Exit
Costs

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2009

 

$

60.9

 

$

4.2

 

$

3.4

 

$

1.8

 

$

70.3

 

Fiscal 2010

 

29.3

 

11.0

 

2.3

 

6.2

 

48.8

 

Fiscal 2011

 

34.6

 

2.4

 

3.0

 

1.1

 

41.1

 

Nine months ended March 31, 2012

 

23.4

 

0.9

 

8.4

 

1.5

 

34.2

 

Charges recorded through March 31, 2012

 

$

148.2

 

$

18.5

 

$

17.1

 

$

10.6

 

$

194.4

 

 

The following table presents accrued restructuring charges and the related activities under the Program:

 

(In millions)

 

Employee-
Related
Costs

 

Asset
Write-offs

 

Contract
Terminations

 

Other Exit
Costs

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Charges

 

$

60.9

 

$

4.2

 

$

3.4

 

$

1.8

 

$

70.3

 

Cash payments

 

(7.5

)

 

(0.5

)

(1.6

)

(9.6

)

Non-cash write-offs

 

 

(4.2

)

 

 

(4.2

)

Translation adjustments

 

0.6

 

 

 

 

0.6

 

Other adjustments

 

(2.4

)

 

 

 

(2.4

)

Balance at June 30, 2009

 

51.6

 

 

2.9

 

0.2

 

54.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Charges

 

29.3

 

11.0

 

2.3

 

6.2

 

48.8

 

Cash payments

 

(49.5

)

 

(5.1

)

(6.0

)

(60.6

)

Non-cash write-offs

 

 

(11.0

)

 

 

(11.0

)

Translation adjustments

 

(0.8

)

 

 

 

(0.8

)

Balance at June 30, 2010

 

30.6

 

 

0.1

 

0.4

 

31.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Charges

 

34.6

 

2.4

 

3.0

 

1.1

 

41.1

 

Cash payments

 

(30.6

)

 

(2.4

)

(1.4

)

(34.4

)

Non-cash write-offs

 

 

(2.4

)

 

 

(2.4

)

Translation adjustments

 

1.2

 

 

(0.1

)

0.1

 

1.2

 

Balance at June 30, 2011

 

35.8

 

 

0.6

 

0.2

 

36.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Charges

 

23.4

 

0.9

 

8.4

 

1.5

 

34.2

 

Cash payments

 

(20.4

)

 

(2.1

)

(1.3

)

(23.8

)

Non-cash write-offs

 

 

(0.9

)

 

 

(0.9

)

Translation adjustments

 

(0.8

)

 

 

0.1

 

(0.7

)

Balance at March 31, 2012

 

$

38.0

 

$

 

$

6.9

 

$

0.5

 

$

45.4

 

 

11



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Accrued restructuring charges at March 31, 2012 are expected to result in cash expenditures funded from cash provided by operations of approximately $18 million, $17 million, $9 million and $1 million in fiscal 2012, 2013, 2014 and 2015, respectively.

 

Total Returns and Other Charges Associated with Restructuring Activities

 

The following table presents total charges associated with restructuring and other activities related to the Program:

 

 

 

Three Months Ended
March 31

 

Nine Months Ended
March 31

 

(In millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Sales returns (included in Net Sales)

 

$

 

$

0.7

 

$

(0.6

)

$

2.2

 

Cost of sales

 

0.4

 

1.0

 

0.4

 

5.6

 

Restructuring charges

 

27.3

 

20.3

 

34.2

 

32.7

 

Other charges

 

1.1

 

1.5

 

5.0

 

6.9

 

Total charges associated with restructuring activities

 

$

28.8

 

$

23.5

 

$

39.0

 

$

47.4

 

 

During the nine months ended March 31, 2012, the Company recorded adjustments to reflect revised estimates of sales returns associated with prior initiatives.  During the three and nine months ended March 31, 2012, the Company recorded a write-off of inventory of $0.4 million associated with the exit of unprofitable operations.  During the three months ended March 31, 2011, the Company recorded $0.7 million reflecting sales returns (less a related cost of sales of $0.3 million) and a write-off of inventory of $1.3 million associated with turnaround operations, primarily related to the reformulation of Ojon brand products.  During the nine months ended March 31, 2011, the Company recorded $2.2 million reflecting sales returns (less a related cost of sales of $0.8 million) and a write-off of inventory of $6.4 million associated with turnaround operations, primarily related to the reformulation of Ojon brand products.

 

NOTE 4 — DEBT

 

On January 15, 2012, the Company repaid the outstanding principal of its $120.0 million 6.00% Senior Notes with cash from operations.

 

During the third quarter of fiscal 2012, the Company issued $120 million of short-term commercial paper, which is being used for general corporate purposes.  As of March 31, 2012, the Company had $120 million of short-term commercial paper outstanding, due at various dates through April 2012 at an average interest rate of 0.16%, which may be refinanced on a periodic basis as it matures at then-prevailing market rates.

 

NOTE 5 — DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments.  The Company enters into foreign currency forward contracts and may enter into option contracts to reduce the effects of fluctuating foreign currency exchange rates and interest rate derivatives to manage the effects of interest rate movements on the Company’s aggregate liability portfolio.  The Company also enters into foreign currency forward contracts and may use option contracts, not designated as hedging instruments, to mitigate the change in fair value of specific assets and liabilities on the balance sheet.  The Company does not utilize derivative financial instruments for trading or speculative purposes.  Costs associated with entering into these derivative financial instruments have not been material to the Company’s consolidated financial results.

 

12



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

For each derivative contract entered into where the Company looks to obtain hedge accounting treatment, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking the hedge transaction, the nature of the risk being hedged, how the hedging instruments’ effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness.  This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions.  The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.  If it is determined that a derivative is not highly effective, or that it has ceased to be a highly effective hedge, the Company will be required to discontinue hedge accounting with respect to that derivative prospectively.

 

The fair values of the Company’s derivative financial instruments included in the consolidated balance sheets are presented as follows:

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

 

 

Fair Value (1)

 

 

 

Fair Value (1)

 

(In millions)

 

Balance Sheet
Location

 

March 31
2012

 

June 30
2011

 

Balance Sheet
Location

 

March 31
2012

 

June 30
2011

 

Derivatives Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Prepaid expenses and other current assets

 

$

11.3

 

$

11.9

 

Other accrued liabilities

 

$

14.2

 

$

28.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Prepaid expenses and other current assets

 

1.4

 

3.1

 

Other accrued liabilities

 

1.2

 

2.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Derivatives

 

 

 

$

12.7

 

$

15.0

 

 

 

$

15.4

 

$

30.9

 

 


(1)             See Note 6 — Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined.

 

13



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The amounts of the gains and losses related to the Company’s derivative financial instruments designated as hedging instruments are presented as follows:

 

 

 

Amount of Gain or (Loss)
Recognized in OCI on Derivatives
(Effective Portion)

 

Location of Gain or
(Loss) Reclassified

 

Amount of Gain or (Loss)
Reclassified from Accumulated
OCI into Earnings
(Effective Portion) 
(2)

 

 

 

Three Months Ended
March 31

 

from Accumulated
OCI into Earnings

 

Three Months Ended
March 31

 

(In millions)

 

2012

 

2011

 

(Effective Portion)

 

2012

 

2011

 

Derivatives in Cash Flow Hedging Relationships:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

(12.3

)

$

(14.2

)

Cost of sales

 

$

0.2

 

$

(0.5

)

 

 

 

 

 

 

Selling, general and administrative

 

1.0

 

(2.6

)

Total derivatives

 

$

(12.3

)

$

(14.2

)

 

 

$

1.2

 

$

(3.1

)

 


(2)   The amount of gain (loss) recognized in earnings related to the amount excluded from effectiveness testing was $(0.9) million and $0.8 million for the three months ended March 31, 2012 and 2011, respectively.  There was no gain (loss) recognized in earnings related to the ineffective portion of the hedging relationships for the three months ended March 31, 2012 and 2011.

 

 

 

Amount of Gain or (Loss)
Recognized in OCI on Derivatives
(Effective Portion)

 

Location of Gain or
(Loss) Reclassified

 

Amount of Gain or (Loss)
Reclassified from Accumulated
OCI into Earnings
(Effective Portion) 
(3)

 

 

 

Nine Months Ended
March 31

 

from Accumulated
OCI into Earnings

 

Nine Months Ended
March 31

 

(In millions)

 

2012

 

2011

 

(Effective Portion)

 

2012

 

2011

 

Derivatives in Cash Flow Hedging Relationships:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

22.0

 

$

(29.3

)

Cost of sales

 

$

2.6

 

$

(1.5

)

 

 

 

 

 

 

Selling, general and administrative

 

2.9

 

(4.7

)

Total derivatives

 

$

22.0

 

$

(29.3

)

 

 

$

5.5

 

$

(6.2

)

 


(3)   The amount of gain (loss) recognized in earnings related to the amount excluded from effectiveness testing was $(3.0) million and $0.9 million for the nine months ended March 31, 2012 and 2011, respectively.  There was no gain (loss) recognized in earnings related to the ineffective portion of the hedging relationships for the nine months ended March 31, 2012.  There was a net $0.5 million loss recognized in earnings related to the ineffective portion of the hedging relationships for the nine months ended March 31, 2011.

 

 

 

 

 

Amount of Gain or (Loss)
Recognized in Earnings on Derivatives 
(4)

 

 

 

Location of Gain or (Loss)
Recognized in Earnings on

 

Three Months Ended
March 31

 

Nine Months Ended
March 31

 

(In millions)

 

Derivatives

 

2012

 

2011

 

2012

 

2011

 

Derivatives in Fair Value Hedging Relationships:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

Interest expense, net

 

$

 

$

 

$

 

$

8.7

 

 


(4)             Changes in the fair values of the interest rate swap agreements are exactly offset by changes in the fair value of the underlying long-term debt.

 

14



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The amounts of the gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments are presented as follows:

 

 

 

 

 

Amount of Gain or (Loss)
Recognized in Earnings on Derivatives

 

 

 

Location of Gain or (Loss)

 

Three Months Ended

 

Nine Months Ended

 

 

 

Recognized in Earnings on

 

March 31

 

March 31

 

(In millions)

 

Derivatives

 

2012

 

2011

 

2012

 

2011

 

Derivatives Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Selling, general and administrative

 

$

1.6

 

$

(4.1

)

$

(0.4

)

$

(7.1

)

 

Foreign Currency Cash-Flow Hedges

 

The Company enters into foreign currency forward contracts to hedge anticipated transactions, as well as receivables and payables denominated in foreign currencies, for periods consistent with the Company’s identified exposures.  The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on costs and on the cash flows that the Company receives from foreign subsidiaries.  The majority of foreign currency forward contracts are denominated in currencies of major industrial countries.  The foreign currency forward contracts entered into to hedge anticipated transactions have been designated as foreign currency cash-flow hedges and have varying maturities through the end of December 2013.  Hedge effectiveness of foreign currency forward contracts is based on a hypothetical derivative methodology and excludes the portion of fair value attributable to the spot-forward difference which is recorded in current-period earnings.

 

The ineffective portion of foreign currency forward contracts is recorded in current-period earnings.  For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses accumulated in OCI are reclassified to earnings when the underlying forecasted transaction occurs.  If it is probable that the forecasted transaction will no longer occur, then any gains or losses in accumulated OCI are reclassified to current-period earnings.  As of March 31, 2012, the Company’s foreign currency cash-flow hedges were highly effective in all material respects.  The estimated net gain as of March 31, 2012 that is expected to be reclassified from accumulated OCI into earnings, net of tax, within the next twelve months is $2.0 million.  The accumulated gain (loss) on derivative instruments in accumulated OCI was $3.4 million and $(13.2) million as of March 31, 2012 and June 30, 2011, respectively.

 

At March 31, 2012, the Company had foreign currency forward contracts in the amount of $1,770.5 million.  The foreign currencies included in foreign currency forward contracts (notional value stated in U.S. dollars) are principally the British pound ($350.9 million), Swiss franc ($324.8 million), Euro ($217.4 million), Canadian dollar ($196.9 million), Australian dollar ($122.5 million), South Korean won ($94.8 million) and Russian ruble ($59.0 million).

 

Credit Risk

 

As a matter of policy, the Company only enters into derivative contracts with counterparties that have a long-term credit rating of at least A- or higher by at least two nationally recognized rating agencies.  The counterparties to these contracts are major financial institutions.  Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the gross fair value of contracts in asset positions, which totaled $12.7 million at March 31, 2012.  To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored.  Accordingly, management believes risk of loss under these hedging contracts is remote.

 

Certain of the Company’s derivative financial instruments contain credit-risk-related contingent features.  At March 31, 2012, the Company was in a net liability position for certain derivative contracts that contain such features with two counterparties.  The fair value of those contracts as of March 31, 2012 was approximately $0.9 million.  Such credit-risk-related contingent features would be triggered if (a) upon a merger involving the Company, the ratings of the surviving entity were materially weaker than prior to the merger or (b) the Company’s credit ratings fall below investment grade (rated below BBB-/Baa3) and the Company fails to enter into an International Swaps & Derivatives Association Credit Support Annex within 30 days of being requested by the counterparty.  The fair value of collateral required to settle the instruments immediately if a triggering event were to occur, is estimated at approximately the fair value of the contracts.  As of March 31, 2012, the Company was in compliance with such credit-risk-related contingent features.

 

15



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6 — FAIR VALUE MEASUREMENTS

 

The Company records its financial assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date.  The accounting for fair value measurements must be applied to nonfinancial assets and nonfinancial liabilities, which principally consist of assets and liabilities acquired through business combinations, goodwill, indefinite-lived intangible assets and long-lived assets for the purposes of calculating potential impairment, and liabilities associated with restructuring activities.  The Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The three levels of inputs that may be used to measure fair value are as follows:

 

Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

 

Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  The inputs are unobservable in the market and significant to the instrument’s valuation.

 

The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2012:

 

(In millions) 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

12.7

 

$

 

$

12.7

 

Available-for-sale securities

 

6.3

 

 

 

6.3

 

Total

 

$

6.3

 

$

12.7

 

$

 

$

19.0

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

15.4

 

$

 

$

15.4

 

 

The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2011:

 

(In millions) 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

15.0

 

$

 

$

15.0

 

Available-for-sale securities

 

6.6

 

 

 

6.6

 

Total

 

$

6.6

 

$

15.0

 

$

 

$

21.6

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

30.9

 

$

 

$

30.9

 

 

16



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the Company’s hierarchy and impairment charges for certain of its nonfinancial assets measured at fair value on a nonrecurring basis, due to a change in circumstances that triggered an interim impairment test:

 

 

 

Impairment Charges

 

 

 

Level 3
Fair Value

 

(In millions) 

 

Three Months 
Ended
March 31, 2012

 

Nine Months 
Ended
March 31, 2012

 

Carrying Value
December 31, 
2011

 

Measurement
December 31, 
2011

 

 

 

 

 

 

 

 

 

 

 

Other intangible assets, net

 

$

 

$

6.7

 

$

3.3

 

$

3.3

 

 

To determine fair value of the above other indefinite-lived intangible assets, the Company used the relief-from-royalty method.  This method, which is an income approach, assumed 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.  The calculation of fair value requires significant judgment in determining both the assets’ estimated cash flows as well as the appropriate discount and royalty rates applied to those cash flows to determine fair value.  As these inputs are unobservable in the market and significant to the fair value calculation, the other indefinite-lived intangible assets are classified as Level 3.  In determining the fair value of the above, a terminal growth rate of 3% was applied to future cash flows, and was used in conjunction with a 1.5% royalty rate discounted to present value at a 17% rate.  See Note 2 — Goodwill and Other Intangible Assets for further discussion of the Company’s impairment testing.

 

Fair Value of Financial Instruments

 

The following methods and assumptions were used to estimate the fair value of the Company’s other classes of financial instruments for which it is practicable to estimate that value:

 

Cash and cash equivalents — The carrying amount approximates fair value, primarily because of the short maturity of cash equivalent instruments.

 

Available-for-sale securities — Available-for-sale securities are generally comprised of mutual funds and are valued using quoted market prices on an active exchange.  Available-for-sale securities are included in Other assets in the accompanying consolidated balance sheets.

 

Foreign currency forward contracts — The fair values of the Company’s foreign currency forward contracts were determined using an industry-standard valuation model, which is based on an income approach.  The significant observable inputs to the model, such as swap yield curves and currency spot and forward rates, were obtained from an independent pricing service.  To determine the fair value of contracts under the model, the difference between the contract price and the current forward rate was discounted using LIBOR for contracts with maturities up to 12 months, and swap yield curves for contracts with maturities greater than 12 months.

 

Current and long-term debt — The fair value of the Company’s debt was estimated based on the current rates offered to the Company for debt with the same remaining maturities.  To a lesser extent, debt also includes capital lease obligations for which the carrying amount approximates the fair value.  The Company’s debt is classified within Level 2 of the valuation hierarchy.

 

17



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The estimated fair values of the Company’s financial instruments are as follows:

 

 

 

March 31

 

June 30

 

 

 

2012

 

2011

 

(In millions)

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Nonderivatives

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,192.8

 

$

1,192.8

 

$

1,253.0

 

$

1,253.0

 

Available-for-sale securities

 

6.3

 

6.3

 

6.6

 

6.6

 

Current and long-term debt

 

1,209.9

 

1,357.7

 

1,218.1

 

1,293.5

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts – asset (liability)

 

(2.7

)

(2.7

)

(15.9

)

(15.9

)

 

NOTE 7 — PENSION AND POST-RETIREMENT BENEFIT PLANS

 

The Company maintains pension plans covering substantially all of its full-time employees for its U.S. operations and a majority of its international operations.  The Company also maintains post-retirement benefit plans which provide certain medical and dental benefits to eligible employees.  Descriptions of these plans are discussed in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2011.

 

The components of net periodic benefit cost for the three months ended March 31, 2012 and 2011 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

Other than

 

 

 

Pension Plans

 

Pension Plans

 

 

 

U.S.

 

International

 

Post-retirement

 

(In millions)

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

6.9

 

$

6.4

 

$

5.7

 

$

5.4

 

$

0.9

 

$

0.9

 

Interest cost

 

7.4

 

7.0

 

4.8

 

5.0

 

2.1

 

1.9

 

Expected return on plan assets

 

(9.7

)

(8.7

)

(5.3

)

(5.6

)

(0.3

)

(0.1

)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost

 

0.2

 

0.2

 

1.0

 

0.5

 

 

 

Actuarial loss

 

2.0

 

2.4

 

1.2

 

1.5

 

0.5

 

0.5

 

Net periodic benefit cost

 

$

6.8

 

$

7.3

 

$

7.4

 

$

6.8

 

$

3.2

 

$

3.2

 

 

The components of net periodic benefit cost for the nine months ended March 31, 2012 and 2011 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

Other than

 

 

 

Pension Plans

 

Pension Plans

 

 

 

U.S.

 

International

 

Post-retirement

 

(In millions)

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

20.7

 

$

19.2

 

$

17.3

 

$

15.9

 

$

2.8

 

$

2.8

 

Interest cost

 

22.3

 

21.0

 

14.5

 

14.7

 

6.3

 

5.8

 

Expected return on plan assets

 

(29.1

)

(26.1

)

(16.1

)

(16.5

)

(0.9

)

(0.3

)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost

 

0.5

 

0.6

 

2.9

 

1.5

 

 

 

Actuarial loss

 

6.0

 

7.2

 

3.7

 

4.4

 

1.3

 

1.3

 

Net periodic benefit cost

 

$

20.4

 

$

21.9

 

$

22.3

 

$

20.0

 

$

9.5

 

$

9.6

 

 

18



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company disclosed in its consolidated financial statements for the fiscal year ended June 30, 2011 that it did not expect to make cash contributions to its U.S. pension plans or its post-retirement benefit plans, and intended to make $16 million of cash contributions to its international defined benefit plans during the fiscal year ending June 30, 2012.  The Company continues to evaluate funding opportunities for the U.S. trust based, noncontributory qualified defined benefit pension plan and accordingly made a discretionary contribution of $25.0 million during the fiscal 2012 third quarter.  The Company may decide to make additional discretionary contributions to these plans during the remainder of fiscal 2012.  The expected contributions to the international defined benefit pension plans increased to approximately $29 million for the fiscal year ending June 30, 2012, primarily due to an updated funding strategy for a particular plan.  During the nine months ended March 31, 2012, contributions to the Company’s international plans were approximately $23 million.

 

NOTE 8 — CONTINGENCIES

 

Legal Proceedings

 

The Company is involved, from time to time, in litigation and other legal proceedings incidental to its business.  Management believes that the outcome of current litigation and legal proceedings will not have a material adverse effect upon the Company’s results of operations, financial condition or cash flows.  However, management’s assessment of the Company’s current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against the Company, not presently known to the Company or determinations by judges, juries or other finders of fact which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or proceedings.  Except as disclosed below, reasonably possible losses in addition to the amounts accrued for litigation and other legal proceedings are not material to the Company’s consolidated financial statements.

 

During the fiscal 2007 fourth quarter, the former owner of the Darphin brand initiated litigation in the Paris Commercial Court against the Company and one of its subsidiaries seeking to recover €60.0 million ($79.6 million at the exchange rate at March 31, 2012) that he claims he was owed as additional consideration for the sale of Darphin to the Company in April 2003.  On December 23, 2011, the Paris Commercial Court issued its judgment, awarding the former owner €22.9 million ($30.4 million at the exchange rate at March 31, 2012) plus interest from 2007.  The Company has filed its appeal with the Paris Court of Appeal.  In accordance with the judgment, in January 2012, the Company paid €25.3 million ($33.6 million at the exchange rate at March 31, 2012) to the former owner and received from him a bank guarantee to assure repayment to the Company of such sum (or any part thereof) in the event that the judgment is reversed by the Paris Court of Appeal.  Based upon its assessment of the case, as well as the advice of external counsel, the Company is maintaining the amount it previously accrued as an amount that it believes will ultimately be paid based on the probable outcome of the appeal.  Such amount is less than the Paris Commercial Court’s award.

 

Other Income

 

In November 2011, the Company settled a commercial dispute with third parties that was outside its normal operations.  In connection therewith, the Company received a $10.5 million cash payment, which has been classified as other income in its consolidated statement of earnings.

 

NOTE 9 — STOCK-BASED COMPENSATION

 

The Company has various stock-based compensation programs (the “Plans”) under which awards, including stock options, performance share units (“PSU”), restricted stock units (“RSU”), share units and market share units (“MSU”), may be granted.  As of March 31, 2012, approximately 23,381,300 shares of the Company’s Class A Common Stock were reserved and available to be granted pursuant to these Plans.

 

19


 


Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Total net stock-based compensation expense is attributable to the granting of, and the remaining requisite service periods of stock options, PSUs, RSUs, MSU and share units.  Compensation expense attributable to net stock-based compensation is as follows:

 

 

 

Three Months Ended
March 31

 

Nine Months Ended
March 31

 

(In millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Compensation expense

 

$

24.4

 

$

20.1

 

$

101.0

 

$

74.5

 

Income tax benefit

 

8.1

 

6.7

 

33.3

 

24.8

 

 

As of March 31, 2012, the total unrecognized compensation cost related to unvested stock-based awards was $101.9 million and the related weighted-average period over which it is expected to be recognized is approximately 2 years.

 

Stock Options

 

The following is a summary of the Company’s stock option programs as of March 31, 2012 and changes during the nine months then ended:

 

(Shares in thousands)

 

Shares

 

Weighted
Average
Exercise
Price Per
Share

 

Aggregate
Intrinsic
Value 
(1)
(in millions)

 

Weighted
Average
Contractual Life
Remaining in
Years

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2011

 

16,972.5

 

$

22.87

 

 

 

 

 

Granted at fair value

 

3,349.6

 

49.22

 

 

 

 

 

Exercised

 

(3,353.1

)

21.84

 

 

 

 

 

Expired

 

(13.7

)

20.56

 

 

 

 

 

Forfeited

 

(157.4

)

30.84

 

 

 

 

 

Outstanding at March 31, 2012

 

16,797.9

 

28.33

 

$

564.6

 

7.1

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest at March 31, 2012

 

16,627.0

 

28.18

 

$

561.3

 

7.1

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2012

 

8,959.6

 

22.06

 

$

357.3

 

5.8

 

 


(1)         The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

 

The following is a summary of the per-share weighted average grant date fair value of stock options granted and total intrinsic value of stock options exercised:

 

 

 

Three Months Ended
March 31

 

Nine Months Ended
March 31

 

(In millions, except per share data)

 

2012

 

2011

 

2012

 

2011

 

Per-share weighted average grant date fair value of stock options granted

 

$

19.42

 

$

14.62

 

$

17.41

 

$

9.47

 

 

 

 

 

 

 

 

 

 

 

Intrinsic value of stock options exercised

 

$

52.6

 

$

41.3

 

$

118.4

 

$

66.9

 

 

20



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

 

 

Three Months Ended
March 31

 

Nine Months Ended
March 31

 

 

 

2012

 

2011

 

2012

 

2011

 

Weighted average expected stock-price volatility

 

34

%

29

%

35

%

31

%

Weighted average expected option life

 

7 years

 

7 years

 

8 years

 

8 years

 

Average risk-free interest rate

 

1.4

%

2.9

%

1.7

%

2.2

%

Average dividend yield

 

1.0

%

1.0

%

1.0

%

1.1

%

 

The Company uses a weighted-average expected stock-price volatility assumption that is a combination of both current and historical implied volatilities of the underlying stock.  The implied volatilities were obtained from publicly available data sources.  For the weighted-average expected option life assumption, the Company considers the exercise behavior of past grants and models the pattern of aggregate exercises.  The average risk-free interest rate is based on the U.S. Treasury strip rate for the expected term of the options and the average dividend yield is based on historical experience.

 

Performance Share Units

 

During the nine months ended March 31, 2012, the Company granted 260,000 PSUs, which will be settled in stock subject to the achievement of the Company’s net sales, diluted net earnings per common share and return on invested capital goals for the three fiscal years ending June 30, 2014.  In September 2011, approximately 275,200 shares of the Company’s Class A Common Stock were issued and related accrued dividends were paid, relative to the target goals set at the time of issuance, in settlement of 262,000 PSUs which vested as of June 30, 2011.

 

The following is a summary of the status of the Company’s PSUs as of March 31, 2012 and activity during the nine months then ended:

 

<

 

 

 

 

Weighted-Average

 

 

 

 

 

Grant Date

 

(Shares in thousands)

 

Shares