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, 2013

 

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)

 

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

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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, 2013, 238,887,088 shares of the registrant’s Class A Common Stock, $.01 par value, and 148,978,082 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, 2013 and 2012

2

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) —

 

 

Three and Nine Months Ended March 31, 2013 and 2012

3

 

 

 

 

Consolidated Balance Sheets —

 

 

March 31, 2013 and June 30, 2012 (Audited)

4

 

 

 

 

Consolidated Statements of Cash Flows —

 

 

Nine Months Ended March 31, 2013 and 2012

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

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

30

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

51

 

 

Item 4. Controls and Procedures

51

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

52

 

 

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

52

 

 

Item 6. Exhibits

54

 

 

Signatures

55

 



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

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

2,291.8

 

$

2,248.2

 

$

7,774.3

 

$

7,462.4

 

Cost of Sales

 

443.1

 

469.3

 

1,550.3

 

1,554.6

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

1,848.7

 

1,778.9

 

6,224.0

 

5,907.8

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

1,605.3

 

1,539.0

 

4,831.8

 

4,623.4

 

Restructuring and other charges

 

(1.7

)

28.4

 

12.0

 

39.2

 

Impairment of other intangible assets

 

 

 

 

6.7

 

Total operating expenses

 

1,603.6

 

1,567.4

 

4,843.8

 

4,669.3

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

245.1

 

211.5

 

1,380.2

 

1,238.5

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

12.6

 

14.5

 

41.8

 

47.1

 

Interest expense on debt extinguishment

 

 

 

19.1

 

 

Other income

 

 

 

23.1

 

10.5

 

Earnings before Income Taxes

 

232.5

 

197.0

 

1,342.4

 

1,201.9

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

53.6

 

65.7

 

414.5

 

393.6

 

Net Earnings

 

178.9

 

131.3

 

927.9

 

808.3

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to noncontrolling interests

 

(0.1

)

(0.9

)

(2.1

)

(2.6

)

Net Earnings Attributable to The Estée Lauder Companies Inc.

 

$

178.8

 

$

130.4

 

$

925.8

 

$

805.7

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

$

0.46

 

$

0.34

 

$

2.39

 

$

2.07

 

Diluted

 

0.45

 

0.33

 

2.35

 

2.03

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

387.2

 

388.2

 

387.5

 

388.5

 

Diluted

 

394.0

 

396.3

 

394.7

 

397.0

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

.18

 

$

 

$

.90

 

$

.525

 

 

See notes to consolidated financial statements.

 

2



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

Three Months Ended
March 31

 

Nine Months Ended
March 31

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

178.9

 

$

131.3

 

$

927.9

 

$

808.3

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized investment gain

 

0.3

 

0.3

 

0.5

 

0.1

 

Derivative instrument gain (loss)

 

11.9

 

(13.5

)

(6.2

)

16.3

 

Amounts included in net periodic benefit cost

 

8.2

 

4.8

 

25.2

 

14.4

 

Translation adjustments

 

(75.6

)

41.2

 

3.2

 

(86.6

)

Benefit (provision) for deferred income taxes on components of other comprehensive income

 

(9.5

)

3.4

 

(7.3

)

(11.6

)

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

(64.7

)

36.2

 

15.4

 

(67.4

)

Comprehensive income (loss)

 

114.2

 

167.5

 

943.3

 

740.9

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (income) loss attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

Net earnings

 

(0.1

)

(0.9

)

(2.1

)

(2.6

)

Translation adjustments

 

 

(0.9

)

(0.8

)

0.8

 

 

 

(0.1

)

(1.8

)

(2.9

)

(1.8

)

Comprehensive income (loss) attributable to The Estée Lauder Companies Inc.

 

$

114.1

 

$

165.7

 

$

940.4

 

$

739.1

 

 

See notes to consolidated financial statements.

 

3



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31

 

June 30

 

 

 

2013

 

2012

 

 

 

(Unaudited)

 

 

 

 

 

($ in millions)

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,438.6

 

$

1,347.7

 

Accounts receivable, net

 

1,361.9

 

1,060.3

 

Inventory and promotional merchandise, net

 

989.3

 

983.6

 

Prepaid expenses and other current assets

 

496.4

 

463.5

 

Total current assets

 

4,286.2

 

3,855.1

 

 

 

 

 

 

 

Property, Plant and Equipment, net

 

1,296.0

 

1,231.8

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Goodwill

 

890.3

 

882.6

 

Other intangible assets, net

 

181.2

 

190.1

 

Other assets

 

441.4

 

433.4

 

Total other assets

 

1,512.9

 

1,506.1

 

Total assets

 

$

7,095.1

 

$

6,593.0

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current debt

 

$

20.0

 

$

219.0

 

Accounts payable

 

388.2

 

493.8

 

Accrued income taxes

 

168.8

 

97.2

 

Other accrued liabilities

 

1,338.9

 

1,315.8

 

Total current liabilities

 

1,915.9

 

2,125.8

 

 

 

 

 

 

 

Noncurrent Liabilities

 

 

 

 

 

Long-term debt

 

1,329.2

 

1,069.1

 

Accrued income taxes

 

88.2

 

106.3

 

Other noncurrent liabilities

 

555.0

 

544.3

 

Total noncurrent liabilities

 

1,972.4

 

1,719.7

 

 

 

 

 

 

 

Contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at March 31, 2013 and 650,000,000 at June 30, 2012; shares issued: 407,323,946 at March 31, 2013 and 399,491,292 at June 30, 2012; Class B shares authorized: 304,000,000 shares at March 31, 2013 and 240,000,000 at June 30, 2012; shares issued and outstanding: 148,978,082 at March 31, 2013 and 151,778,082 at June 30, 2012

 

5.6

 

5.5

 

Paid-in capital

 

2,237.2

 

2,006.1

 

Retained earnings

 

5,340.3

 

4,764.9

 

Accumulated other comprehensive income (loss)

 

(198.3

)

(212.9

)

 

 

7,384.8

 

6,563.6

 

Less: Treasury stock, at cost; 168,603,624 Class A shares at March 31, 2013 and 162,371,840 Class A shares at June 30, 2012

 

(4,191.0

)

(3,830.4

)

Total stockholders’ equity — The Estée Lauder Companies Inc.

 

3,193.8

 

2,733.2

 

Noncontrolling interests

 

13.0

 

14.3

 

Total equity

 

3,206.8

 

2,747.5

 

Total liabilities and equity

 

$

7,095.1

 

$

6,593.0

 

 

See notes to consolidated financial statements.

 

4



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended
March 31

 

 

 

2013

 

2012

 

 

 

(In millions)

 

Cash Flows from Operating Activities

 

 

 

 

 

Net earnings

 

$

927.9

 

$

808.3

 

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

 

 

 

 

 

Depreciation and amortization

 

247.2

 

215.4

 

Deferred income taxes

 

(43.3

)

(28.7

)

Non-cash stock-based compensation

 

118.4

 

101.0

 

Excess tax benefits from stock-based compensation arrangements

 

(47.7

)

(48.2

)

Loss on disposal of property, plant and equipment

 

9.7

 

7.4

 

Impairment of other intangible assets

 

 

6.7

 

Non-cash charges associated with restructuring activities

 

1.6

 

1.3

 

Pension and post-retirement benefit expense

 

61.3

 

52.2

 

Pension and post-retirement benefit contributions

 

(20.6

)

(57.1

)

Other non-cash items

 

(23.1

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Increase in accounts receivable, net

 

(297.0

)

(397.0

)

Decrease (increase) in inventory and promotional merchandise, net

 

(4.2

)

66.0

 

Increase in other assets, net

 

(24.0

)

(100.8

)

Decrease in accounts payable

 

(104.1

)

(26.9

)

Increase in accrued income taxes

 

124.3

 

201.9

 

Increase in other liabilities

 

7.8

 

68.2

 

Net cash flows provided by operating activities

 

934.2

 

869.7

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures

 

(305.5

)

(271.9

)

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

 

(8.7

)

(7.6

)

Proceeds from disposition of long-term investments

 

6.3

 

 

Purchases of long-term investments

 

(2.9

)

 

Net cash flows used for investing activities

 

(310.8

)

(279.5

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Borrowings (repayments) of current debt, net

 

(198.7

)

121.9

 

Proceeds from issuance of long-term debt, net

 

498.7

 

 

Debt issuance costs

 

(4.1

)

(1.1

)

Repayments and redemptions of long-term debt

 

(238.2

)

(127.6

)

Net proceeds from stock-based compensation transactions

 

71.3

 

71.9

 

Excess tax benefits from stock-based compensation arrangements

 

47.7

 

48.2

 

Payments to acquire treasury stock

 

(363.2

)

(550.0

)

Dividends paid to stockholders

 

(349.3

)

(204.0

)

Payments to noncontrolling interest holders for dividends

 

(0.7

)

 

Net cash flows used for financing activities

 

(536.5

)

(640.7

)

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

4.0

 

(9.7

)

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

90.9

 

(60.2

)

Cash and Cash Equivalents at Beginning of Period

 

1,347.7

 

1,253.0

 

Cash and Cash Equivalents at End of Period

 

$

1,438.6

 

$

1,192.8

 

 

See notes to consolidated financial statements.

 

5



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.

 

Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to current year presentation.

 

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, 2012.

 

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, 2012.  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 $(75.6) million and $40.3 million of unrealized translation gains (losses), net of tax, during the three months ended March 31, 2013 and 2012, respectively, and $2.4 million and $(85.8) million of unrealized translation gains (losses), net of tax, during the nine months ended March 31, 2013 and 2012, 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 gains (losses) on foreign currency transactions of $0.4 million and $(0.8) million during the three months ended March 31, 2013 and 2012, respectively, and $1.8 million and $(3.9) million during the nine months ended March 31, 2013 and 2012, respectively.

 

Accounts Receivable

 

Accounts receivable is stated net of the allowance for doubtful accounts and customer deductions totaling $31.7 million and $31.1 million as of March 31, 2013 and June 30, 2012, respectively.

 

6



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 $253.0 million, or 11%, and $265.1 million, or 12%, of the Company’s consolidated net sales for the three months ended March 31, 2013 and 2012, respectively, and $859.2 million, or 11%, and $840.1 million, or 11%, of the Company’s consolidated net sales for the nine months ended March 31, 2013 and 2012, respectively.  This customer accounted for $194.4 million, or 14%, and $110.2 million, or 10%, of the Company’s accounts receivable at March 31, 2013 and June 30, 2012, respectively.

 

Inventory and Promotional Merchandise

 

 

 

March 31

 

June 30

 

(In millions)

 

2013

 

2012

 

Inventory and promotional merchandise, net consists of:

 

 

 

 

 

Raw materials

 

$

229.8

 

$

220.7

 

Work in process

 

98.5

 

98.0

 

Finished goods

 

515.0

 

473.9

 

Promotional merchandise

 

146.0

 

191.0

 

 

 

$

989.3

 

$

983.6

 

 

Property, Plant and Equipment

 

 

 

March 31

 

June 30

 

(In millions)

 

2013

 

2012

 

Assets (Useful Life)

 

 

 

 

 

Land

 

$

14.7

 

$

14.6

 

Buildings and improvements (10 to 40 years)

 

193.3

 

188.8

 

Machinery and equipment (3 to 10 years)

 

634.4

 

620.9

 

Computer hardware and software (4 to 10 years)

 

930.7

 

850.4

 

Furniture and fixtures (5 to 10 years)

 

70.0

 

66.4

 

Leasehold improvements

 

1,318.2

 

1,227.3

 

 

 

3,161.3

 

2,968.4

 

Less accumulated depreciation and amortization

 

1,865.3

 

1,736.6

 

 

 

$

1,296.0

 

$

1,231.8

 

 

The cost of assets related to projects in progress of $191.8 million and $231.6 million as of March 31, 2013 and June 30, 2012, respectively, is included in their respective asset categories above.  Depreciation and amortization of property, plant and equipment was $88.6 million and $72.3 million during the three months ended March 31, 2013 and 2012, respectively, and $241.8 million and $208.7 million during the nine months ended March 31, 2013 and 2012, 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.

 

7



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Income Taxes

 

The effective rate for income taxes was 23.0% and 33.4% for the three months ended March 31, 2013 and 2012, respectively.  The decrease in the effective income tax rate was primarily attributable to the reversal of income tax reserves, the reversal of a deferred tax asset valuation allowance on certain net operating loss carryforwards, and the retroactive reinstatement of the U.S. Federal research and development tax credit signed into law on January 2, 2013.

 

The effective income tax rate was 30.9% and 32.7% for the nine months ended March 31, 2013 and 2012, respectively.  The decrease in the effective income tax rate was primarily attributable to the reversal of income tax reserves.

 

As of March 31, 2013 and June 30, 2012, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $66.9 million and $78.5 million, respectively.  The total amount of unrecognized tax benefits at March 31, 2013 that, if recognized, would affect the effective tax rate was $48.9 million.  During the three and nine months ended March 31, 2013, the Company recognized a gross interest and penalty benefit in the consolidated statement of earnings of $3.1 million and $5.3 million, respectively.  The total gross accrued interest and penalties in the accompanying consolidated balance sheets at March 31, 2013 and June 30, 2012 was $21.9 million and $28.6 million, respectively.  On the basis of the information available as of March 31, 2013, it is reasonably possible that the total amount of unrecognized tax benefits could decrease in a range of $5 million to $10 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 first quarter of fiscal 2013, the Company formally concluded the compliance process with respect to fiscal 2011 under the U.S. Internal Revenue Service Compliance Assurance Program.  The conclusion of this process did not impact the Company’s consolidated financial statements.

 

Recently Adopted Accounting Standards

 

In September 2011, the Financial Accounting Standards Board (“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 became effective in the beginning of the Company’s fiscal 2013.  The adoption of this guidance did not have an impact on 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, became effective for the Company’s fiscal 2013 first quarter, with full retrospective application required.  The Company has elected to present the items of net income and other comprehensive income in two separate consecutive statements.  The adoption of this disclosure-only guidance did not have an impact on the Company’s results of operations, financial position or cash flows.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Recently Issued Accounting Standards

 

In March 2013, the FASB issued authoritative guidance to resolve the diversity in practice concerning the release of the cumulative translation adjustment (“CTA”) into net income (i) when a parent sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity, and (ii) in connection with a step acquisition of a foreign entity.  This amended guidance requires that CTA be released in net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided, and that a pro rata portion of the CTA be released into net income upon a partial sale of an equity method investment in a foreign entity only.  In addition, the amended guidance clarifies the definition of a sale of an investment in a foreign entity to include both, events that result in the loss of a controlling financial interest in a foreign entity and events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately prior to the date of acquisition.  The CTA should be released into net income upon the occurrence of such events.  This guidance becomes effective prospectively for the Company’s fiscal 2015 first quarter with early adoption permitted.  The Company will apply this new guidance when it becomes effective, and the adoption of this guidance is not expected to have a significant impact on its consolidated financial statements.

 

In February 2013, the FASB issued authoritative guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligations within the scope of this guidance is fixed at the reporting date.  It does not apply to certain obligations that are addressed within existing guidance in U.S. GAAP.  This guidance requires an entity to measure in-scope obligations with joint and several liability (e.g., debt arrangements, other contractual obligations, settled litigations, judicial rulings) as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount it expects to pay on behalf of its co-obligors.  In addition, an entity is required to disclose the nature and amount of the obligation.  This guidance should be applied retrospectively to all prior periods for those obligations resulting from joint and several liability arrangements within the scope of this guidance that exist at the beginning of the Company’s fiscal 2015 first quarter, with early adoption permitted.  The Company will apply this guidance when it becomes effective, and the adoption of this guidance is not expected to have a significant impact on its consolidated financial statements.

 

In February 2013, the FASB issued authoritative guidance requiring an entity to present, in a single location either parenthetically on the face of the financial statements or in a separate note, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification.  An entity is not permitted to provide this information parenthetically on the face of the income statement if it has items that are not required to be reclassified in their entirety to net income.  Instead of disclosing the income statement line affected, a cross reference to other disclosures that provide additional details on these items is required.  This guidance becomes effective prospectively for the Company’s fiscal 2014 first quarter, with early adoption permitted.  The Company will apply this new guidance when it becomes effective, and the adoption of this guidance is not expected to have a significant impact on its consolidated financial statements.

 

In July 2012, the FASB amended its authoritative guidance related to testing indefinite-lived intangible assets for impairment.  Under the revised guidance, entities testing their indefinite-lived intangible assets for impairment have the option of performing a qualitative assessment before performing further impairment testing.  If entities determine, on the basis of qualitative factors, that it is more-likely-than-not that the asset is impaired, a quantitative test is required.  The guidance becomes effective in the beginning of the Company’s fiscal 2014, with early adoption permitted.  The Company will apply this new guidance when it becomes effective, and the adoption of this guidance is not expected to have a significant impact on its consolidated financial statements.

 

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Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 International Financial Reporting Standards (“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.  In January 2013, the FASB issued an update that limits the scope of these disclosures to recognized derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions to the extent they are offset in the balance sheet or subject to an enforceable master netting arrangement or similar agreement.  This disclosure-only guidance becomes effective for the Company’s fiscal 2014 first quarter, with retrospective application required.  The Company currently does not hold any financial or derivative instruments within the scope of this guidance that are offset in its consolidated balance sheets or are subject to an enforceable master netting arrangement.  The adoption of 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 the Company enters into additional arrangements that fall under the scope of this guidance.

 

Out-of-period Adjustments

 

During the nine months ended March 31, 2013, the Company identified and recorded out-of-period adjustments related to the fiscal years ended June 30, 2008 through June 30, 2012.

 

During the three months ended September 30, 2012, these out-of-period adjustments resulted in a net decrease in earnings before taxes of $5.9 million, a decrease in net earnings of $7.4 million and a decrease in diluted net earnings per common share of $.02.  These out-of-period adjustments resulted from an understatement of foreign transactional taxes (no impact on the provision for income taxes), an overstatement of accounts payable balances and an overstatement of prepaid asset balances.

 

During the three months ended December 31, 2012, the Company recorded an additional out-of-period adjustment related to the overstatement of accounts payable balances.  This adjustment resulted in an increase in earnings before taxes of $13.6 million, an increase in net earnings of $9.1 million and an increase in diluted net earnings per common share of $.02 for the three months ended December 31, 2012.

 

The impact of these adjustments for the nine months ended March 31, 2013 is an increase in earnings before taxes of $7.7 million, an increase in net earnings of $1.7 million and no change in diluted net earnings per common share.

 

Individually and in the aggregate, these out-of-period adjustments did not have a material impact on the Company’s consolidated financial statements for the nine months ended March 31, 2013, and the related items were not material to any previously issued consolidated financial statements.

 

NOTE 2 — GOODWILL AND OTHER INTANGIBLE ASSETS

 

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, 2012

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

68.1

 

$

421.1

 

$

54.8

 

$

403.4

 

$

947.4

 

Accumulated impairments

 

(23.6

)

 

 

(41.2

)

(64.8

)

 

 

44.5

 

421.1

 

54.8

 

362.2

 

882.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill acquired during the period

 

 

7.0

 

 

 

7.0

 

Translation and other adjustments

 

0.3

 

0.1

 

 

0.3

 

0.7

 

 

 

0.3

 

7.1

 

 

0.3

 

7.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

68.6

 

428.2

 

54.8

 

403.7

 

955.3

 

Accumulated impairments

 

(23.8

)

 

 

(41.2

)

(65.0

)

 

 

$

44.8

 

$

428.2

 

$

54.8

 

$

362.5

 

$

890.3

 

 

10



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Other intangible assets consist of the following:

 

 

 

March 31, 2013

 

June 30, 2012

 

(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

 

$

271.4

 

$

204.0

 

$

67.4

 

$

268.4

 

$

191.9

 

$

76.5

 

License agreements

 

43.0

 

43.0

 

 

43.0

 

43.0

 

 

 

 

$

314.4

 

$

247.0

 

67.4

 

$

311.4

 

$

234.9

 

76.5

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and other

 

 

 

 

 

113.8

 

 

 

 

 

113.6

 

Total intangible assets

 

 

 

 

 

$

181.2

 

 

 

 

 

$

190.1

 

 

The aggregate amortization expense related to amortizable intangible assets was $3.2 million and $3.5 million for the three months ended March 31, 2013 and 2012, respectively, and $9.4 million and $10.4 million for the nine months ended March 31, 2013 and 2012, respectively.  The estimated aggregate amortization expense for the remainder of fiscal 2013 and for each of fiscal 2014 to 2017 is $3.1 million, $12.3 million, $12.1 million, $12.0 million and $9.9 million, respectively.

 

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 the Company to achieve long-term profitable growth.  The Company anticipated the Program would result in total cumulative restructuring charges and other costs to implement those initiatives of between $350 million and $450 million before taxes.  During the second quarter of fiscal 2013, the Company closed the Program.  The Company concluded the approval of all initiatives under the Program and anticipates commencing the execution of those initiatives through fiscal 2014.  As a result of the closure of the Program and evaluation of the initiatives that have been implemented, as of March 31, 2013, the Company anticipates total cumulative restructuring charges and other costs to implement those initiatives to total between $325 million and $350 million and that such charges will be substantially recorded through fiscal 2013.  The Company will continue to monitor the progress of these initiatives and revise estimates as appropriate.

 

The following is a reconciliation of cumulative approved charges under the Program as compared with the revised estimated charges related to initiatives under the Program and total cumulative charges incurred through March 31, 2013:

 

 

 

Restructuring Charges

 

 

 

 

 

 

 

 

 

Total

 

(In millions)

 

Employee-
Related

Costs

 

Asset
Write-offs

 

Contract
Terminations
and Other
Exit Costs

 

Total
Restructuring

 

Returns

 

Inventory
Write-offs

 

Other
Charges

 

Restructuring
Charges and
Other Costs to
Implement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Approved charges from inception through December 31, 2012

 

$

205.5

 

$

23.5

 

$

43.5

 

$

272.5

 

$

43.0

 

$

20.0

 

$

50.0

 

$

385.5

 

Adjustments of estimated costs over (under)

 

(32.0

)

(2.0

)

(2.0

)

(36.0

)

(10.0

)

5.0

 

(13.0

)

(54.0

)

Revised estimated charges as of March 31, 2013

 

$

173.5

 

$

21.5

 

$

41.5

 

$

236.5

 

$

33.0

 

$

25.0

 

$

37.0

 

$

331.5

 

Cumulative charges incurred through March 31, 2013

 

$

172.1

 

$

19.7

 

$

33.6

 

$

225.4

 

$

30.6

 

$

23.2

 

$

36.7

 

$

315.9

 

 

11



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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Program focused 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 Program inception 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 it achieved through a combination of normal attrition and job eliminations, and the closure and consolidation of certain distribution and office facilities.  As of March 31, 2013, the Company identified approximately $10 million of previously-approved restructuring costs that will not be incurred related to these activities, primarily as a result of certain employees relocating to other available positions within the Company.

 

·                  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 turn around others.  This included the exit from the global wholesale distribution of its Prescriptives brand, the reformulation of Ojon brand products and the exit from the global distribution of Sean John products.  In connection with these activities, the Company incurred charges for product returns, inventory write-offs, reduction of workforce and termination of contracts.  As of March 31, 2013, the Company identified approximately $21 million of previously-approved returns and other costs related to these activities that will not be incurred, primarily as a result of better-than-expected sales of products prior to the exit of the operations, as well as lower employee-related and store closure costs than originally estimated.

 

·                  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, it continued the outsourcing of certain information technology processes.  The Company incurred costs to transition services to outsource providers and employee-related termination costs.  As of March 31, 2013, the Company identified approximately $23 million of previously-approved outsourcing initiatives for information technology services stemming from the decision not to implement certain aspects of these initiatives, as well as lower costs than originally anticipated to transition services on initiatives that were implemented.

 

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)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Employee-related costs

 

$

(3.4

)

$

19.1

 

$

10.2

 

$

23.4

 

Asset write-offs

 

0.3

 

0.4

 

0.4

 

0.9

 

Contract terminations

 

0.3

 

7.1

 

0.3

 

8.4

 

Other exit costs

 

0.8

 

0.7

 

0.7

 

1.5

 

Total restructuring charges

 

$

(2.0

)

$

27.3

 

$

11.6

 

$

34.2

 

 

12



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(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

 

Fiscal 2012

 

37.1

 

1.7

 

12.6

 

2.2

 

53.6

 

Nine months ended March 31, 2013

 

10.2

 

0.4

 

0.3

 

0.7

 

11.6

 

Charges recorded through March 31, 2013

 

$

172.1

 

$

19.7

 

$

21.6

 

$

12.0

 

$

225.4

 

 

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

 

(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

 

37.1

 

1.7

 

12.6

 

2.2

 

53.6

 

Cash payments

 

(23.6

)

 

(12.4

)

(2.0

)

(38.0

)

Non-cash write-offs

 

 

(1.7

)

 

 

(1.7

)

Translation adjustments

 

(1.4

)

 

 

0.1

 

(1.3

)

Balance at June 30, 2012

 

47.9

 

 

0.8

 

0.5

 

49.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Charges

 

10.2

 

0.4

 

0.3

 

0.7

 

11.6

 

Cash payments

 

(20.4

)

 

(0.9

)

(1.0

)

(22.3

)

Non-cash write-offs

 

 

(0.4

)

 

 

(0.4

)

Translation adjustments

 

(0.2

)

 

 

0.1

 

(0.1

)

Balance at March 31, 2013

 

$

37.5

 

$

 

$

0.2

 

$

0.3

 

$

38.0

 

 

Accrued restructuring charges at March 31, 2013 are expected to result in cash expenditures funded from cash provided by operations of approximately $16 million, $17 million and $5 million for the remainder of fiscal 2013 and in fiscal 2014 and 2015, respectively.

 

13



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Total Returns and Other Charges Associated with Restructuring Activities

 

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

 

 

 

Three Months Ended
March 31

 

Nine Months Ended
March 31

 

(In millions)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Sales returns (included in Net Sales)

 

$

 

$

 

$

0.1

 

$

(0.6

)

Cost of sales

 

 

0.4

 

1.2

 

0.4

 

Restructuring charges

 

(2.0

)

27.3

 

11.6

 

34.2

 

Other charges

 

0.3

 

1.1

 

0.4

 

5.0

 

Total charges associated with restructuring activities

 

$

(1.7

)

$

28.8

 

$

13.3

 

$

39.0

 

 

During the nine months ended March 31, 2013 and 2012, the Company recorded adjustments to reflect revised estimates of then-anticipated sales returns associated with prior initiatives.  During the three and nine months ended March 31, 2013 and 2012, the Company recorded inventory write-offs associated with exiting unprofitable operations.  Other charges in connection with the implementation of the Program primarily relate to consulting and other professional services.

 

NOTE 4 — DEBT

 

In August 2012, the Company issued $250.0 million of 2.35% Senior Notes due August 15, 2022 (“2022 Senior Notes”) and $250.0 million of 3.70% Senior Notes due August 15, 2042 (“2042 Senior Notes”) in a public offering.  The 2022 Senior Notes were priced at 99.911% with a yield of 2.360%.  The 2042 Senior Notes were priced at 99.567% with a yield of 3.724%.  Interest payments on both notes are required to be made semi-annually on February 15 and August 15, commencing February 15, 2013.  In September 2012, the Company used the net proceeds of the offering to redeem the $230.1 million principal amount of its 7.75% Senior Notes due November 1, 2013 at a price of 108% of the principal amount and recorded a pre-tax expense on the extinguishment of debt of $19.1 million representing the call premium of $18.6 million and the pro-rata write-off of $0.5 million of issuance costs and debt discount.  The Company used the remaining net proceeds of the offering for general corporate purposes.

 

During the second quarter of fiscal 2013, the Company increased the limit of its commercial paper program from $750.0 million to $1.0 billion.  During the first quarter of fiscal 2013, the Company had repaid, using cash on hand, $200.0 million of commercial paper that was outstanding at June 30, 2012.

 

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.

 

14



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

 

(In millions)

 

Balance Sheet
Location

 

Fair Value (1)

 

Balance Sheet
Location

 

Fair Value (1)

 

 

 

 

 

March 31
2013

 

June 30
2012

 

 

 

March 31
2013

 

June 30
2012

 

Derivatives Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Prepaid expenses and other current assets

 

$

16.9

 

$

16.1

 

Other accrued liabilities

 

$

13.4

 

$

4.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Prepaid expenses and other current assets

 

4.1

 

1.6

 

Other accrued liabilities

 

2.1

 

1.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Derivatives

 

 

 

$

21.0

 

$

17.7

 

 

 

$

15.5

 

$

6.2

 

 


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

 

15



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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
from Accumulated
OCI into Earnings
(Effective Portion)

 

Amount of Gain or (Loss)
Reclassified from
Accumulated OCI into
Earnings
(Effective Portion) 
(1)

 

 

 

Three Months Ended

 

 

 

Three Months Ended

 

 

 

March 31

 

 

 

March 31

 

(In millions)

 

2013

 

2012

 

 

 

2013

 

2012

 

Derivatives in Cash Flow Hedging Relationships:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts(2)

 

$

13.5

 

$

(12.3

)

Cost of sales

 

$

(0.9

)

$

0.2

 

 

 

 

 

 

 

Selling, general and administrative

 

2.4

 

1.0

 

Total derivatives

 

$

13.5

 

$

(12.3

)

 

 

$

1.5

 

$

1.2

 

 


(1)             The amount of gain (loss) recognized in earnings related to the amount excluded from effectiveness testing was $1.1 million and $(0.9) million for the three months ended March 31, 2013 and 2012, respectively.  The amount of gain (loss) recognized in earnings related to the ineffective portion of the hedging relationships for the three months ended March 31, 2013 was de minimis.  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.

(2)             The benefit (provision) for deferred income taxes on the amount of gain (loss) recognized in OCI was $(4.9) million and $4.3 million for the three months ended March 31, 2013 and 2012, respectively.  The (benefit) provision for deferred income taxes on the amount of gain (loss) reclassified from accumulated OCI into earnings was $0.6 million and $0.4 million for the three months ended March 31, 2013 and 2012, respectively.

 

 

 

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

 

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

 

Amount of Gain or (Loss)
Reclassified from
Accumulated OCI into
Earnings
(Effective Portion) 
(1)

 

 

 

Nine Months Ended

 

 

 

Nine Months Ended

 

 

 

March 31

 

 

 

March 31

 

(In millions)

 

2013

 

2012

 

 

 

2013

 

2012

 

Derivatives in Cash Flow Hedging Relationships:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts(2)

 

$

(0.2

)

$

22.0

 

Cost of sales

 

$

(1.3

)

$

2.6

 

 

 

 

 

 

 

Selling, general and administrative

 

7.0

 

2.9

 

Total derivatives

 

$

(0.2

)

$

22.0

 

 

 

$

5.7

 

$

5.5

 

 


(1)             The amount of gain (loss) recognized in earnings related to the amount excluded from effectiveness testing was $1.5 million and $(3.0) million for the nine months ended March 31, 2013 and 2012, respectively.  There was a $0.2 million net loss recognized in earnings related to the ineffective portion of the hedging relationships for the nine months ended March 31, 2013.  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.

(2)             The benefit (provision) for deferred income taxes on the amount of gain (loss) recognized in OCI was de minimis and $(7.9) million for the nine months ended March 31, 2013 and 2012, respectively.  The (benefit) provision for deferred income taxes on the amount of gain (loss) reclassified from accumulated OCI into earnings was $2.1 million and $1.9 million for the nine months ended March 31, 2013 and 2012, respectively.

 

16



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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:

 

(In millions)

 

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

 

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

 

 

 

 

 

Three Months Ended
March 31

 

Nine Months Ended
March 31

 

 

 

 

 

2013

 

2012

 

2013

 

2012

 

Derivatives Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Selling, general and administrative

 

$

2.0

 

$

1.6

 

$

1.8

 

$

(0.4

)

 

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 Company may also enter into foreign currency option contracts to hedge anticipated transactions where there is a high probability that anticipated exposures will materialize.  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 2014.  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.  Hedge effectiveness of foreign currency option contracts is based on a dollar offset methodology.

 

The ineffective portion of both foreign currency forward and option 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, 2013, the Company’s foreign currency cash-flow hedges were highly effective in all material respects.  The estimated net gain as of March 31, 2013 that is expected to be reclassified from accumulated OCI into earnings, net of tax, within the next twelve months is $4.0 million.  The accumulated gain on derivative instruments in accumulated OCI was $9.4 million and $15.3 million as of March 31, 2013 and June 30, 2012, respectively.

 

At March 31, 2013, the Company had foreign currency forward contracts in the amount of $1,650.9 million.  The foreign currencies included in foreign currency forward contracts (notional value stated in U.S. dollars) are principally the British pound ($417.2 million), Euro ($244.6 million), Canadian dollar ($210.0 million), Swiss franc ($121.6 million), Australian dollar ($116.1 million), Thailand baht ($77.0 million) and South Korean won ($68.7 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 $21.0 million at March 31, 2013.  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.

 

17



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Certain of the Company’s derivative financial instruments contain credit-risk-related contingent features.  At March 31, 2013, the Company was in a net asset position for certain derivative contracts that contain such features with two counterparties.  The fair value of those contracts as of March 31, 2013 was approximately $2.5 million.  As of March 31, 2013, the Company was in compliance with such credit-risk-related contingent features.

 

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, 2013:

 

 

(In millions) 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

21.0

 

$

 

$

21.0

 

Available-for-sale securities

 

6.5

 

 

 

6.5

 

Total

 

$

6.5

 

$

21.0

 

$

 

$

27.5

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

15.5

 

$

 

$

15.5

 

 

18



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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, 2012:

 

(In millions) 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

17.7

 

$

 

$

17.7

 

Available-for-sale securities

 

5.9

 

 

 

5.9

 

Total

 

$

5.9

 

$

17.7

 

$

 

$

23.6

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

6.2

 

$

 

$

6.2

 

 

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.

 

Note receivable — During the second quarter of fiscal 2013, the Company amended the agreement related to the August 2007 sale of Rodan + Fields (a brand then owned by the Company) to receive a fixed amount in lieu of future contingent consideration and other rights.  The fair value of the receivable under the amended agreement was determined by discounting the future cash flows using an implied market rate of 6.7%.  This implied market rate reflects the Company’s estimate of interest rates prevailing in the market for notes with comparable remaining maturities, the creditworthiness of the counterparty, and an assessment of the ultimate collectability of the instrument.  The implied market rate is deemed to be an unobservable input and as such the Company’s note receivable is classified within Level 3 of the valuation hierarchy.  An increase or decrease in the risk premium of 100 basis points would not result in a significant change to the fair value of the receivable.  See Note 8 — Contingencies for further discussion on the amended agreement.

 

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.

 

19



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
2013

 

June 30
2012

 

(In millions)

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Nonderivatives

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,438.6

 

$

1,438.6

 

$

1,347.7

 

$

1,347.7

 

Available-for-sale securities

 

6.5

 

6.5

 

5.9

 

5.9

 

Note receivable

 

16.8

 

16.9

 

 

 

Current and long-term debt

 

1,349.2

 

1,469.0

 

1,288.1

 

1,478.9

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts — asset (liability)

 

5.5

 

5.5

 

11.5

 

11.5

 

 

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, 2012.

 

The components of net periodic benefit cost for the three months ended March 31, 2013 and 2012 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other than

 

 

 

Pension Plans

 

Pension Plans

 

 

 

U.S.

 

International

 

Post-retirement

 

(In millions)

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

8.5

 

$

6.9

 

$

6.0

 

$

5.7

 

$

0.9

 

$

0.9

 

Interest cost

 

6.6

 

7.5

 

4.5

 

4.8

 

2.0

 

2.1

 

Expected return on plan assets

 

(11.3

)

(9.7

)

(4.8

)

(5.3

)

(0.4

)

(0.3

)

Amortization of (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost

 

0.2

 

0.1

 

0.7

 

1.0

 

0.2

 

 

Actuarial loss

 

3.7

 

2.0

 

2.3

 

1.2

 

1.1

 

0.5

 

Net periodic benefit cost

 

$

7.7

 

$

6.8

 

$

8.7

 

$

7.4

 

$

3.8

 

$

3.2

 

 


(1) The benefit (provision) for deferred income taxes on the amount of net periodic benefit cost amortized from accumulated OCI related to the Company’s pension and post-retirement plans was $5.0 million and $1.2 million for the three months ended March 31, 2013 and 2012, respectively.

 

20



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The components of net periodic benefit cost for the nine months ended March 31, 2013 and 2012 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other than

 

 

 

Pension Plans

 

Pension Plans

 

 

 

U.S.

 

International

 

Post-retirement

 

(In millions)

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

25.4

 

$

20.7

 

$

18.0

 

$

17.3

 

$

3.2

 

$

2.8

 

Interest cost

 

20.0

 

22.3

 

13.5

 

14.5

 

5.8

 

6.3

 

Expected return on plan assets

 

(33.9

)

(29.1

)

(14.5

)

(16.1

)

(1.4

)

(0.9

)

Amortization of (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost

 

0.5

 

0.5

 

2.1

 

2.9