10-Q 1 a14-7129_110q.htm 10-Q

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, 2014

 

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 (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, 2014, 234,070,441 shares of the registrant’s Class A Common Stock, $.01 par value, and 148,728,082 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, 2014 and 2013

2

 

 

Consolidated Statements of Comprehensive Income (Loss) — Three and Nine Months Ended March 31, 2014 and 2013

3

 

 

Consolidated Balance Sheets — March 31, 2014 and June 30, 2013 (Audited)

4

 

 

Consolidated Statements of Cash Flows — Nine Months Ended March 31, 2014 and 2013

5

 

 

Notes to Consolidated Financial Statements

6

 

 

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

28

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

46

 

 

Item 4. Controls and Procedures

46

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

47

 

 

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

47

 

 

Item 6. Exhibits

48

 

 

Signatures

49

 



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

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

2,549.8

 

$

2,291.8

 

$

8,243.5

 

$

7,774.3

 

Cost of Sales

 

498.7

 

443.1

 

1,624.4

 

1,550.3

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

2,051.1

 

1,848.7

 

6,619.1

 

6,224.0

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

1,709.5

 

1,605.3

 

5,173.9

 

4,831.8

 

Restructuring and other charges

 

 

(1.7

)

(2.2

)

12.0

 

Total operating expenses

 

1,709.5

 

1,603.6

 

5,171.7

 

4,843.8

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

341.6

 

245.1

 

1,447.4

 

1,380.2

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

12.3

 

12.6

 

38.2

 

41.8

 

Interest expense on debt extinguishment

 

 

 

 

19.1

 

Other income

 

 

 

 

23.1

 

Earnings before Income Taxes

 

329.3

 

232.5

 

1,409.2

 

1,342.4

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

115.6

 

53.6

 

458.5

 

414.5

 

Net Earnings

 

213.7

 

178.9

 

950.7

 

927.9

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to noncontrolling interests

 

(0.5

)

(0.1

)

(4.3

)

(2.1

)

Net Earnings Attributable to The Estée Lauder Companies Inc.

 

$

213.2

 

$

178.8

 

$

946.4

 

$

925.8

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

$

0.55

 

$

0.46

 

$

2.44

 

$

2.39

 

Diluted

 

0.54

 

0.45

 

2.40

 

2.35

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

385.8

 

387.2

 

387.3

 

387.5

 

Diluted

 

392.1

 

394.0

 

394.1

 

394.7

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

.20

 

$

.18

 

$

.58

 

$

.90

 

 

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

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

213.7

 

$

178.9

 

$

950.7

 

$

927.9

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Net unrealized investment gain (loss)

 

0.2

 

0.3

 

0.6

 

0.5

 

Net derivative instrument gain (loss)

 

1.4

 

11.9

 

(14.2

)

(6.2

)

Amounts included in net periodic benefit cost

 

5.5

 

8.2

 

16.3

 

25.2

 

Translation adjustments

 

(8.2

)

(75.6

)

44.3

 

3.2

 

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

 

(2.0

)

(9.5

)

1.8

 

(7.3

)

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

(3.1

)

(64.7

)

48.8

 

15.4

 

Comprehensive income (loss)

 

210.6

 

114.2

 

999.5

 

943.3

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (income) loss attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

Net earnings

 

(0.5

)

(0.1

)

(4.3

)

(2.1

)

Translation adjustments

 

(0.1

)

 

(0.8

)

(0.8

)

 

 

(0.6

)

(0.1

)

(5.1

)

(2.9

)

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

 

$

210.0

 

$

114.1

 

$

994.4

 

$

940.4

 

 

See notes to consolidated financial statements.

 

3



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31

 

June 30

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

 

 

($ in millions)

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,530.2

 

$

1,495.7

 

Accounts receivable, net

 

1,399.0

 

1,171.7

 

Inventory and promotional merchandise, net

 

1,215.4

 

1,113.9

 

Prepaid expenses and other current assets

 

547.2

 

515.9

 

Total current assets

 

4,691.8

 

4,297.2

 

 

 

 

 

 

 

Property, Plant and Equipment, net

 

1,434.9

 

1,350.7

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Goodwill

 

891.5

 

881.5

 

Other intangible assets, net

 

160.2

 

169.6

 

Other assets

 

467.6

 

446.2

 

Total other assets

 

1,519.3

 

1,497.3

 

Total assets

 

$

7,646.0

 

$

7,145.2

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current debt

 

$

18.4

 

$

18.3

 

Accounts payable

 

512.5

 

481.7

 

Other accrued liabilities

 

1,508.4

 

1,434.6

 

Total current liabilities

 

2,039.3

 

1,934.6

 

 

 

 

 

 

 

Noncurrent Liabilities

 

 

 

 

 

Long-term debt

 

1,327.7

 

1,326.0

 

Other noncurrent liabilities

 

596.6

 

582.7

 

Total noncurrent liabilities

 

1,924.3

 

1,908.7

 

 

 

 

 

 

 

Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at March 31, 2014 and June 30, 2013; shares issued: 411,729,182 at March 31, 2014 and 407,988,891 at June 30, 2013; Class B shares authorized: 304,000,000 at March 31, 2014 and June 30, 2013; shares issued and outstanding: 148,728,082 at March 31, 2014 and 148,978,082 at June 30, 2013

 

5.6

 

5.6

 

Paid-in capital

 

2,498.2

 

2,289.9

 

Retained earnings

 

6,085.1

 

5,364.1

 

Accumulated other comprehensive loss

 

(109.5

)

(157.5

)

 

 

8,479.4

 

7,502.1

 

Less: Treasury stock, at cost; 177,528,817 Class A shares at March 31, 2014 and 168,972,698 Class A shares at June 30, 2013

 

(4,812.1

)

(4,215.2

)

Total stockholders’ equity — The Estée Lauder Companies Inc.

 

3,667.3

 

3,286.9

 

Noncontrolling interests

 

15.1

 

15.0

 

Total equity

 

3,682.4

 

3,301.9

 

Total liabilities and equity

 

$

7,646.0

 

$

7,145.2

 

 

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

 

 

 

2014

 

2013

 

 

 

(In millions)

 

Cash Flows from Operating Activities

 

 

 

 

 

Net earnings

 

$

950.7

 

$

927.9

 

Adjustments to reconcile net earnings to net cash flows from operatingactivities:

 

 

 

 

 

Depreciation and amortization

 

280.0

 

247.2

 

Deferred income taxes

 

(33.7

)

(43.3

)

Non-cash stock-based compensation

 

124.8

 

118.4

 

Excess tax benefits from stock-based compensation arrangements

 

(31.9

)

(47.7

)

Loss on disposal of property, plant and equipment

 

7.6

 

9.7

 

Non-cash charges associated with restructuring activities

 

0.1

 

1.6

 

Pension and post-retirement benefit expense

 

52.6

 

61.3

 

Pension and post-retirement benefit contributions

 

(22.7

)

(20.6

)

Loss on Venezuela remeasurement

 

38.3

 

2.8

 

Other non-cash items

 

(0.2

)

(25.9

)

Changes in operating assets and liabilities:

 

 

 

 

 

Increase in accounts receivable, net

 

(226.7

)

(297.0

)

Increase in inventory and promotional merchandise, net

 

(87.4

)

(4.2

)

Increase in other assets, net

 

(65.1

)

(24.0

)

Increase (decrease) in accounts payable

 

26.4

 

(104.1

)

Increase in other accrued and noncurrent liabilities

 

156.6

 

132.1

 

Net cash flows provided by operating activities

 

1,169.4

 

934.2

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures

 

(342.8

)

(305.5

)

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

 

(9.2

)

(8.7

)

Proceeds from disposition of long-term investments

 

8.4

 

6.3

 

Purchases of long-term investments

 

(0.6

)

(2.9

)

Net cash flows used for investing activities

 

(344.2

)

(310.8

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Borrowings (repayments) of current debt, net

 

5.3

 

(198.7

)

Proceeds from issuance of long-term debt, net

 

 

498.7

 

Debt issuance costs

 

 

(4.1

)

Repayments and redemptions of long-term debt

 

(9.1

)

(238.2

)

Net proceeds from stock-based compensation transactions

 

55.4

 

71.3

 

Excess tax benefits from stock-based compensation arrangements

 

31.9

 

47.7

 

Payments to acquire treasury stock

 

(600.3

)

(363.2

)

Dividends paid to stockholders

 

(225.2

)

(349.3

)

Payments to noncontrolling interest holders for dividends

 

(2.7

)

(0.7

)

Net cash flows used for financing activities

 

(744.7

)

(536.5

)

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

(46.0

)

4.0

 

Net Increase in Cash and Cash Equivalents

 

34.5

 

90.9

 

Cash and Cash Equivalents at Beginning of Period

 

1,495.7

 

1,347.7

 

Cash and Cash Equivalents at End of Period

 

$

1,530.2

 

$

1,438.6

 

 

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.  The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

 

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, and income taxes.  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 fiscal year ended June 30, 2013.  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 (losses) reported as cumulative translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc. amounted to $(7.6) million and $(83.7) million, net of tax, during the three months ended March 31, 2014 and 2013, respectively, and $50.4 million and $(1.1) million, net of tax, during the nine months ended March 31, 2014 and 2013, respectively.

 

6



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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.  During the third quarter of fiscal 2014, the Venezuelan government enacted changes to the foreign exchange controls that expanded the use of its existing exchange mechanisms and created another exchange control mechanism (“SICAD II”), which allows companies to apply for the purchase of foreign currency and foreign currency denominated securities for any legal use or purpose.  As a result, the Company considered its specific facts and circumstances in determining the appropriate remeasurment rate, principally assessing its legal eligibility to access the available foreign exchange mechanisms, the transactions that would be eligible, the Company’s past and expected future ability to transact through those mechanisms, and the Company’s intent to utilize a particular mechanism for particular purposes.  Although the SICAD II mechanism and its level and frequency of exchange continue to be regulated by the Venezuelan government, it offers the possibility of foreign exchange in a theoretically open market without restricted uses and in management’s opinion is the only mechanism legally available at this time for the Company’s highest priority transactions, which are the import of goods.  Therefore, the Company believes the SICAD II rate is the most appropriate rate that reflects the economics of its Venezuelan subsidiary’s business as of March 24, 2014, when the SICAD II mechanism became operational.  As a result, the Company changed the exchange rate used to remeasure the monetary assets and liabilities of its Venezuelan subsidiary from 6.3 to the SICAD II rate, which was 49.81 as of March 31, 2014.  Accordingly, a remeasurement charge of $38.3 million, on a before and after tax basis, was reflected in Selling, general and administrative expenses in the Company’s consolidated statements of earnings for the three and nine months ended March 31, 2014.

 

The Company enters into foreign currency forward contracts and may enter into option contracts to hedge foreign currency transactions for periods consistent with its identified exposures.  Accordingly, the Company categorizes these instruments as entered into for purposes other than trading.

 

The accompanying consolidated statements of earnings include net exchange gains (losses) on foreign currency transactions, including the effects of Venezuelan remeasurement charges, of $(41.7) million and $0.4 million during the three months ended March 31, 2014 and 2013, respectively, and $(48.1) million and $1.8 million during the nine months ended March 31, 2014 and 2013, respectively.

 

Accounts Receivable

 

Accounts receivable is stated net of the allowance for doubtful accounts and customer deductions totaling $26.0 million and $22.7 million as of March 31, 2014 and June 30, 2013, 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 subject to credit risk are made primarily to department stores, perfumeries, specialty multi-brand retailers and retailers in its travel retail business.  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 $284.0 million, or 11%, and $253.0 million, or 11%, of the Company’s consolidated net sales for the three months ended March 31, 2014 and 2013, respectively, and $907.0 million, or 11%, and $859.2 million, or 11%, of the Company’s consolidated net sales for the nine months ended March 31, 2014 and 2013, respectively.  This customer accounted for $206.0 million, or 15%, and $113.7 million, or 10%, of the Company’s accounts receivable at March 31, 2014 and June 30, 2013, respectively.

 

7



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Inventory and Promotional Merchandise

 

Inventory and promotional merchandise, net consists of:

 

 

 

March 31

 

June 30

 

(In millions)

 

2014

 

2013

 

 

 

 

 

 

 

Raw materials

 

$

326.0

 

$

274.2

 

Work in process

 

160.6

 

116.8

 

Finished goods

 

572.5

 

510.9

 

Promotional merchandise

 

156.3

 

212.0

 

 

 

$

1,215.4

 

$

1,113.9

 

 

Property, Plant and Equipment

 

 

 

March 31

 

June 30

 

(In millions)

 

2014

 

2013

 

Assets (Useful Life)

 

 

 

 

 

Land

 

$

15.2

 

$

14.7

 

Buildings and improvements (10 to 40 years)

 

202.3

 

195.4

 

Machinery and equipment (3 to 10 years)

 

654.1

 

647.9

 

Computer hardware and software (4 to 10 years)

 

975.1

 

948.4

 

Furniture and fixtures (5 to 10 years)

 

72.2

 

71.6

 

Leasehold improvements

 

1,496.5

 

1,349.6

 

 

 

3,415.4

 

3,227.6

 

Less accumulated depreciation and amortization

 

1,980.5

 

1,876.9

 

 

 

$

1,434.9

 

$

1,350.7

 

 

The cost of assets related to projects in progress of $219.5 million and $178.7 million as of March 31, 2014 and June 30, 2013, respectively, is included in their respective asset categories above.  Depreciation and amortization of property, plant and equipment was $94.0 million and $88.6 million during the three months ended March 31, 2014 and 2013, respectively, and $275.1 million and $241.8 million during the nine months ended March 31, 2014 and 2013, 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.

 

Other Accrued Liabilities

 

Other accrued liabilities consist of the following:

 

 

 

March 31

 

June 30

 

(In millions)

 

2014

 

2013

 

 

 

 

 

 

 

Advertising, merchandising and sampling

 

$

300.1

 

$

318.6

 

Employee compensation

 

420.1

 

433.3

 

Payroll and other taxes

 

157.1

 

135.7

 

Accrued income taxes

 

175.9

 

81.3

 

Other

 

455.2

 

465.7

 

 

 

$

1,508.4

 

$

1,434.6

 

 

8



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Income Taxes

 

The effective rate for income taxes was 35.1% and 23.0% for the three months ended March 31, 2014 and 2013, respectively.  The increase in the effective income tax rate was principally due to various discrete adjustments that were recognized in the prior-year period that resulted in a lower quarterly tax rate.  These prior-year period adjustments included 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.  Contributing to the higher quarterly effective tax rate in the current-year period was a higher effective tax rate related to the Company’s foreign operations, which included the impact of the Venezuelan remeasurement charge for which no tax benefit has been provided.

 

The effective income tax rate was 32.5% and 30.9% for the nine months ended March 31, 2014 and 2013, respectively.  The increase in the effective income tax rate was attributable to a higher effective tax rate on the Company’s foreign operations, including the impact of the Venezuelan remeasurement charge for which no tax benefit has been provided, as well as the prior-year period impact of income tax reserve reversals and the retroactive reinstatement of the U.S. Federal research and development tax credit signed into law on January 2, 2013.

 

As of March 31, 2014 and June 30, 2013, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $56.7 million and $64.0 million, respectively.  The total amount of unrecognized tax benefits at March 31, 2014 that, if recognized, would affect the effective tax rate was $40.5 million.  During the three and nine months ended March 31, 2014, the Company recognized a gross interest and penalty benefit in the accompanying consolidated statements of earnings of $0.7 million and $0.3 million, respectively.  The total gross accrued interest and penalties in the accompanying consolidated balance sheets at March 31, 2014 and June 30, 2013 was $14.0 million and $17.4 million, respectively.  On the basis of the information available as of March 31, 2014, the Company does not expect any significant changes to the total amount of unrecognized tax benefits within the next 12 months.

 

During the second quarter of fiscal 2014, the Spain Supreme Court notified the Company that its appeal with respect to the disallowance of tax deductions claimed by its Spanish subsidiary for fiscal years 1999 through 2002 was denied.  This decision represents the final outcome of the matter, which did not have a material impact on the Company’s consolidated financial statements.  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 fiscal year ended June 30, 2013.

 

As of March 31, 2014 and June 30, 2013, the Company had current net deferred tax assets of $294.8 million and $296.0 million, respectively, substantially all of which are included in Prepaid expenses and other current assets in the accompanying consolidated balance sheets.  In addition, the Company had noncurrent net deferred tax assets of $55.4 million and $50.3 million as of March 31, 2014 and June 30, 2013, respectively, substantially all of which are included in Other assets in the accompanying consolidated balance sheets.

 

Recently Adopted Accounting Standards

 

In February 2013, the Financial Accounting Standards Board (“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 (loss) (“AOCI”) 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 became effective prospectively for the Company’s fiscal 2014 first quarter and the adoption of this disclosure-only guidance did not have a significant impact on the Company’s consolidated financial statements.

 

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Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO 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.  This guidance became effective in the beginning of the Company’s fiscal 2014 first quarter and the adoption of this guidance did not have an impact on the Company’s 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 became 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 did not have an impact on the Company’s results of operations, financial position or cash flows.

 

Recently Issued Accounting Standards

 

In April 2014, the FASB issued authoritative guidance which changes the criteria for a disposal to qualify as a discontinued operation.  This revised standard defines a discontinued operation as (i) a component of an entity or group of components that has been disposed of or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (ii) an acquired business or nonprofit activity that is classified as held for sale on the date of acquisition.  The standard also requires expanded disclosures related to discontinued operations and added disclosure requirements for individually material disposal transactions that do not meet the discontinued operations criteria.  This guidance becomes effective prospectively for the Company’s fiscal 2016 first quarter, with early adoption permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available to be issued.  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 2013, the FASB issued authoritative guidance that requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward.  If either (i) an NOL carryforward, a similar tax loss, or tax credit carryforward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position or (ii) the entity does not intend to use the deferred tax asset for this purpose (provided that the tax law permits a choice), an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset.  This guidance becomes effective prospectively for unrecognized tax benefits that exist as of the Company’s fiscal 2015 first quarter, with retrospective application and early adoption permitted.  The Company will apply this new guidance prospectively 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 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.

 

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, 2013

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

67.7

 

$

430.4

 

$

54.8

 

$

401.6

 

$

954.5

 

Accumulated impairments

 

(32.5

)

 

 

(40.5

)

(73.0

)

 

 

35.2

 

430.4

 

54.8

 

361.1

 

881.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill acquired during the period

 

 

9.4

 

 

 

9.4

 

Translation adjustments

 

 

 

 

0.6

 

0.6

 

 

 

 

9.4

 

 

0.6

 

10.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

69.0

 

439.8

 

54.8

 

400.1

 

963.7

 

Accumulated impairments

 

(33.8

)

 

 

(38.4

)

(72.2

)

 

 

$

35.2

 

$

439.8

 

$

54.8

 

$

361.7

 

$

891.5

 

 

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Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Other intangible assets consist of the following:

 

 

 

March 31, 2014

 

June 30, 2013

 

(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

 

$

268.0

 

$

213.5

 

$

54.5

 

$

268.0

 

$

204.1

 

$

63.9

 

License agreements

 

43.0

 

43.0

 

 

43.0

 

43.0

 

 

 

 

$

311.0

 

$

256.5

 

54.5

 

$

311.0

 

$

247.1

 

63.9

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and other

 

 

 

 

 

105.7

 

 

 

 

 

105.7

 

Total intangible assets

 

 

 

 

 

$

160.2

 

 

 

 

 

$

169.6

 

 

The aggregate amortization expense related to amortizable intangible assets was $3.0 million and $3.2 million for the three months ended March 31, 2014 and 2013, respectively, and was $9.3 million and $9.4 million for the nine months ended March 31, 2014 and 2013, respectively.  The estimated aggregate amortization expense for the remainder of fiscal 2014 and for each of fiscal 2015 to 2018 is $3.1 million, $12.1 million, $12.0 million, $9.9 million and $8.4 million, respectively.

 

NOTE 3 — RETURNS AND CHARGES ASSOCIATED WITH RESTRUCTURING ACTIVITIES

 

During the second quarter of fiscal 2013, the Company closed its multi-faceted costs savings program implemented in February 2009 (the “Program”) and will continue to execute all remaining initiatives through fiscal 2014.  Total cumulative restructuring charges and other costs to implement those initiatives from inception of the Program to date are $318.1 million.  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 fiscal year ended June 30, 2013.

 

Restructuring Charges (Adjustments)

 

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

 

 

 

Three Months Ended
March 31

 

Nine Months Ended
March 31

 

(In millions)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Employee-related costs

 

$

(0.2

)

$

(3.4

)

$

(3.7

)

$

10.2

 

Asset write-offs

 

 

0.3

 

 

0.4

 

Contract terminations

 

0.2

 

0.3

 

1.2

 

0.3

 

Other exit costs

 

 

0.8

 

0.2

 

0.7

 

Total restructuring charges (adjustments)

 

$

 

$

(2.0

)

$

(2.3

)

$

11.6

 

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents aggregate restructuring charges (adjustments) 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

 

Fiscal 2013

 

7.7

 

2.1

 

1.5

 

3.3

 

14.6

 

Nine months ended March 31, 2014

 

(3.7

)

 

1.2

 

0.2

 

(2.3

)

Charges recorded through March 31, 2014

 

$

165.9

 

$

21.4

 

$

24.0

 

$

14.8

 

$

226.1

 

 

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

 

(In millions)

 

Employee-
Related

Costs

 

Asset
Write-offs

 

Contract
Terminations

 

Other Exit
Costs

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2013

 

$

27.5

 

$

 

$

0.2

 

$

0.7

 

$

28.4

 

Charges (adjustments)

 

(3.7

)

 

1.2

 

0.2

 

(2.3

)

Cash payments

 

(14.1

)

 

(0.7

)

(0.5

)

(15.3

)

Translation adjustments

 

0.4

 

 

 

(0.1

)

0.3

 

Balance at March 31, 2014

 

$

10.1

 

$

 

$

0.7

 

$

0.3

 

$

11.1

 

 

Accrued restructuring charges at March 31, 2014 are expected to result in cash expenditures funded from cash provided by operations of approximately $4 million for the remainder of fiscal 2014 and $7 million in fiscal 2015.

 

NOTE 4 — 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.  The Company 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.

 

For each derivative contract entered into where the Company looks to obtain hedge accounting treatment, the Company formally and contemporaneously 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.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet
Location

 

Fair Value (1)

 

Balance Sheet
Location

 

Fair Value (1)

 

(In millions)

 

 

 

March 31
2014

 

June 30
2013

 

 

 

March 31
2014

 

June 30
2013

 

Derivatives Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Prepaid expenses and other current assets

 

$

14.6

 

$

20.8

 

Other accrued liabilities

 

$

13.5

 

$

6.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Prepaid expenses and other current assets

 

2.2

 

0.9

 

Other accrued liabilities

 

5.0

 

2.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Derivatives

 

 

 

$

16.8

 

$

21.7

 

 

 

$

18.5

 

$

9.1

 

 


(1) See Note 5 — Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined.

 

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 AOCI into
Earnings
(Effective Portion) 
(1)

 

 

 

Three Months Ended

 

from AOCI into

 

Three Months Ended

 

 

 

March 31

 

Earnings (Effective

 

March 31

 

(In millions)

 

2014

 

2013

 

Portion)

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

3.2

 

$

13.5

 

Cost of sales

 

$

1.1

 

$

(0.9

)

 

 

 

 

 

 

Selling, general and administrative

 

0.6

 

2.4

 

Total derivatives

 

$

3.2

 

$

13.5

 

 

 

$

1.7

 

$

1.5

 

 


(1)             The amount of gain recognized in earnings related to the amount excluded from effectiveness testing was $0.3 million and $1.1 million for the three months ended March 31, 2014 and 2013, 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, 2014.  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.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

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

 

Location of Gain
or (Loss)
Reclassified from

 

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

 

 

 

Nine Months Ended
March 31

 

AOCI into

Earnings

 

Nine Months Ended
March 31

 

(In millions)

 

2014

 

2013

 

(Effective Portion)

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

(7.1

)

$

(0.2

)

Cost of sales

 

$

3.6

 

$

(1.3

)

 

 

 

 

 

 

Selling, general and administrative

 

3.3

 

7.0

 

Total derivatives

 

$

(7.1

)

$

(0.2

)

 

 

$

6.9

 

$

5.7

 

 


(1)             The amount of gain recognized in earnings related to the amount excluded from effectiveness testing was $0.9 million and $1.5 million for the nine months ended March 31, 2014 and 2013, respectively.  There was a $0.5 million and $0.2 million net loss recognized in earnings related to the ineffective portion of the hedging relationships for the nine months ended March 31, 2014 and 2013, respectively.

 

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)
Recognized in Earnings on

 

Three Months Ended
March 31

 

Nine Months Ended
March 31

 

(In millions)

 

Derivatives

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Selling, general and administrative

 

$

(2.3

)

$

2.0

 

$

(0.9

)

$

1.8

 

 

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 March 2016.  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 in AOCI 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 AOCI are reclassified to current-period earnings.  As of March 31, 2014, the Company’s foreign currency cash-flow hedges were highly effective in all material respects.  The estimated net gain as of March 31, 2014 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $1.8 million.  The accumulated gain on foreign currency cash-flow hedges in AOCI was $2.9 million and $16.9 million as of March 31, 2014 and June 30, 2013, respectively.

 

15



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

At March 31, 2014, the Company had foreign currency forward contracts in the amount of $1,792.5 million.  The foreign currencies included in foreign currency forward contracts (notional value stated in U.S. dollars) are principally the British pound ($399.2 million), Euro ($332.6 million), Swiss franc ($165.9 million), Canadian dollar ($164.2 million), Australian dollar ($116.2 million), Thailand baht ($88.5 million) and Japanese yen ($84.7 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 $16.8 million at March 31, 2014.  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, with two counterparties, contain credit-risk-related contingent features.  At March 31, 2014, the Company was in a net asset position for these derivative contracts that contain such features.  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.  The fair value of those contracts as of March 31, 2014 was $4.5 million.  As of March 31, 2014, the Company was in compliance with such credit-risk-related contingent features.

 

NOTE 5 — 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, 2014:

 

(In millions)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

16.8

 

$

 

$

16.8

 

Available-for-sale securities

 

7.4

 

 

 

7.4

 

Total

 

$

7.4

 

$

16.8

 

$

 

$

24.2

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

18.5

 

$

 

$

18.5

 

 

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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, 2013:

 

(In millions) 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

21.7

 

$

 

$

21.7

 

Available-for-sale securities

 

6.5

 

 

 

6.5

 

Total

 

$

6.5

 

$

21.7

 

$

 

$

28.2

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

9.1

 

$

 

$

9.1

 

 

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 6.1%.  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.

 

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.

 

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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
2014

 

June 30
2013

 

(In millions)

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

Nonderivatives

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,530.2

 

$

1,530.2

 

$

1,495.7

 

$

1,495.7

 

Available-for-sale securities

 

7.4

 

7.4

 

6.5

 

6.5

 

Note receivable

 

8.4

 

8.5

 

16.8

 

16.9

 

Current and long-term debt

 

1,346.1

 

1,402.6

 

1,344.3

 

1,387.8

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts — asset (liability)

 

(1.7

)

(1.7

)

12.6

 

12.6

 

 

NOTE 6 — 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 fiscal year ended June 30, 2013.

 

The components of net periodic benefit cost for the three months ended March 31, 2014 and 2013 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

Other than

 

 

 

Pension Plans

 

Pension Plans

 

 

 

U.S.

 

International

 

Post-retirement

 

(In millions)

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

7.9

 

$

8.5

 

$

6.2

 

$

6.0

 

$

0.8

 

$

0.9

 

Interest cost

 

7.8

 

6.6

 

4.8

 

4.5

 

2.0

 

2.0

 

Expected return on plan assets

 

(11.7

)

(11.3

)

(5.2

)

(4.8

)

(0.5

)

(0.4

)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost

 

0.1

 

0.2

 

0.7

 

0.7

 

0.3

 

0.2

 

Actuarial loss

 

1.8

 

3.7

 

2.4

 

2.3

 

0.2

 

1.1

 

Net periodic benefit cost

 

$

5.9

 

$

7.7

 

$

8.9

 

$

8.7

 

$

2.8

 

$

3.8

 

 

18



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, 2014 and 2013 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

Other than

 

 

 

Pension Plans

 

Pension Plans

 

 

 

U.S.

 

International

 

Post-retirement

 

(In millions)

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

23.7

 

$

25.4

 

$

18.5

 

$

18.0

 

$

2.5

 

$

3.2

 

Interest cost

 

23.4

 

20.0

 

14.2

 

13.5

 

6.0

 

5.8

 

Expected return on plan assets

 

(35.1

)

(33.9

)

(15.4

)

(14.5

)

(1.5

)

(1.4

)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost

 

0.5

 

0.5

 

2.1

 

2.1

 

0.7

 

0.6

 

Actuarial loss

 

5.5

 

10.9

 

6.9

 

7.0

 

0.6

 

3.3

 

Settlements and curtailments

 

 

 

 

0.8

 

 

 

Net periodic benefit cost

 

$

18.0

 

$

22.9

 

$

26.3

 

$

26.9

 

$

8.3

 

$

11.5

 

 

During the nine months ended March 31, 2014, the Company made contributions to its international pension plans totaling approximately $11.9 million.

 

The amounts recognized in the consolidated balance sheets related to the Company’s pension and post-retirement benefit plans consist of the following:

 

 

 

March 31

 

June 30

 

(In millions)

 

2014

 

2013

 

Other assets

 

$

144.7

 

$

144.0

 

Other accrued liabilities

 

(23.1

)

(23.1

)

Other noncurrent liabilities

 

(365.5

)

(349.2

)

Funded status

 

(243.9

)

(228.3

)

Accumulated other comprehensive loss

 

305.6

 

315.0

 

Net amount recognized

 

$

61.7

 

$

86.7

 

 

NOTE 7 — 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.

 

19



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO 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 ($82.7 million at the exchange rate at March 31, 2014) 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 ($31.6 million at the exchange rate at March 31, 2014) plus interest from 2007.  The Company has filed its appeal with the Paris Court of Appeal and oral arguments for the appeal are scheduled for June 2014.  In accordance with the judgment, in January 2012, the Company paid €25.3 million ($34.9 million at the exchange rate at March 31, 2014) 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.

 

NOTE 8 — 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”), market share units (“MSU”), performance share units based on total stockholder return, and share units, may be granted.  As of March 31, 2014, approximately 14,858,300 shares of the Company’s Class A Common Stock were reserved and available to be granted pursuant to these Plans.

 

Total net stock-based compensation expense is attributable to the granting of, and the remaining requisite service periods of stock options, PSUs, RSUs, MSUs, performance share units based on total stockholder return, 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)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Compensation expense

 

$

29.9

 

$

29.6

 

$

124.8

 

$

118.4

 

Income tax benefit

 

9.9

 

9.7

 

41.0

 

38.6

 

 

As of March 31, 2014, the total unrecognized compensation cost related to unvested stock-based awards was $131.0 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, 2014 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, 2013

 

15,071.4

 

$

36.60

 

 

 

 

 

Granted at fair value

 

1,864.9

 

67.42

 

 

 

 

 

Exercised

 

(1,833.0

)

30.25

 

 

 

 

 

Expired

 

(7.9

)

32.00

 

 

 

 

 

Forfeited

 

(83.0

)

53.83

 

 

 

 

 

Outstanding at March 31, 2014

 

15,012.4

 

41.11

 

$

387.9

 

6.7

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest at March 31, 2014

 

14,864.4

 

40.90

 

$

387.2

 

6.7

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2014

 

10,103.0

 

31.94

 

$

353.0

 

5.9

 

 


(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.

 

20



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

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

 

$

23.58

 

$

19.94

 

$

23.13

 

$

20.30

 

 

 

 

 

 

 

 

 

 

 

Intrinsic value of stock options exercised

 

$

21.7

 

$

53.8

 

$

69.8

 

$

119.1

 

 

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

 

 

 

2014

 

2013

 

2014

 

2013

 

Weighted-average expected stock-price volatility

 

32%

 

34%

 

33%

 

34%

 

Weighted-average expected option life

 

7 years

 

7 years

 

7 years

 

8 years

 

Average risk-free interest rate

 

2.2%

 

1.3%

 

2.5%

 

1.2%

 

Average dividend yield

 

1.1%

 

1.2%

 

1.1%

 

1.0%

 

 

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, 2014, the Company granted approximately 291,000 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, 2016, all subject to the continued employment or retirement of the grantees.  PSUs granted in fiscal 2014 are accompanied by dividend equivalent rights that will be payable in cash upon settlement of the PSU.  In September 2013, approximately 548,800 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 approximately 365,900 PSUs that vested as of June 30, 2013.

 

The following is a summary of the status of the Company’s PSUs as of March 31, 2014 and activity during the nine months then ended:

 

 

 

 

 

Weighted-Average

 

 

 

 

 

Grant Date

 

(Shares in thousands)

 

Shares

 

Fair Value Per
Share

 

 

 

 

 

 

 

Nonvested at June 30, 2013

 

510.9

 

$

53.73

 

Granted

 

291.0

 

67.38

 

Vested

 

 

 

Forfeited

 

(3.6

)

63.17

 

Nonvested at March 31, 2014

 

798.3

 

58.66

 

 

21



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Restricted Stock Units

 

The Company granted approximately 1,313,100 RSUs during the nine months ended March 31, 2014 which, at the time of grant, were scheduled to vest as follows: 300 in fiscal 2014, 478,400 in fiscal 2015, 494,600 in fiscal 2016, 336,800 in fiscal 2017 and 3,000 in fiscal 2018.  All RSUs are subject to the continued employment or retirement of the grantees.  Certain RSUs granted in fiscal 2014 are accompanied by dividend equivalent rights that will be payable in cash upon settlement of the RSU and, as such, were valued at the closing market value of the Company’s Class A Common Stock on the date of grant.  Other RSUs granted in fiscal 2014 are not accompanied by dividend equivalent rights and, as such, were valued at the closing market value of the Company’s Class A Common Stock on the date of grant less the discounted present value of the dividends expected to be paid on the shares during the vesting period.

 

The following is a summary of the status of the Company’s RSUs as of March 31, 2014 and activity during the nine months then ended:

 

 

 

 

 

Weighted-Average

 

 

 

 

 

Grant Date

 

(Shares in thousands)

 

Shares

 

Fair Value Per Share

 

 

 

 

 

 

 

Nonvested at June 30, 2013

 

2,222.8

 

$

52.68

 

Granted

 

1,313.1

 

66.04

 

Vested

 

(1,244.4

)

49.34

 

Forfeited

 

(51.8

)

59.20

 

Nonvested at March 31, 2014

 

2,239.7

 

62.21

 

 

Performance Share Units Based on Total Stockholder Return

 

During fiscal 2013, the Company granted PSUs to an executive of the Company with an aggregate target payout of 162,760 shares of the Company’s Class A Common Stock, subject to continued employment through the end of the relative performance periods, which end June 30, 2015, 2016 and 2017.  Such PSUs will be settled based upon the Company’s relative total stockholder return (“TSR”) over the relevant performance period as compared to companies in the S&P 500 on July 1, 2012.  No settlement will occur if the Company’s TSR falls below a minimum threshold, and up to an aggregate of 260,416 shares of the Company’s Class A Common Stock will be issued depending on the extent to which the Company’s TSR equals or exceeds the minimum threshold.  The PSUs are accompanied by dividend equivalent rights that will be payable in cash upon settlement of the PSUs.

 

The grant date fair value of the PSUs of $11.0 million was estimated using a lattice model with a Monte Carlo simulation and the following assumptions for each performance period, respectively: contractual life of 33, 45 and 57 months, average risk-free interest rate of 0.3%, 0.5% and 0.7% and a dividend yield of 1.0%.  Using the historical stock prices and dividends from public sources, the Company estimated the covariance structure of the returns on S&P 500 stocks.  The volatility for the Company’s stock produced by this estimation was 32%.  The average risk-free interest rate is based on the U.S. Treasury strip rates over the contractual term of the grant and the dividend yield is based on historical experience.

 

Market Share Unit

 

As of March 31, 2014, the Company had one outstanding market share unit with a grant date fair value of $10.6 million that was estimated using a lattice model with a Monte Carlo simulation and the following assumptions: contractual life of 41 months (ending June 2014), a weighted-average expected volatility of 29%, a weighted-average risk-free interest rate of 1.6% and a weighted-average dividend yield of 1.0%.  The Company used an expected stock-price volatility assumption that is a combination of both current and historical implied volatilities from options on the underlying stock.  The implied volatilities were obtained from publicly available data sources.  The expected life is equal to the contractual term of the grant.  The average risk-free interest rate is based on the U.S. Treasury strip rates over the contractual term of the grant and the average dividend yield is based on historical experience.

 

22



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Share Units

 

The Company grants share units to certain non-employee directors under the Non-Employee Director Share Incentive Plan.  The following is a summary of the status of the Company’s share units as of March 31, 2014 and activity during the nine months then ended:

 

 

 

 

 

Weighted-Average

 

 

 

 

 

Grant Date

 

(Shares in thousands)

 

Shares

 

Fair Value Per Share

 

 

 

 

 

 

 

Outstanding at June 30, 2013

 

87.3

 

$

33.27

 

Granted

 

10.5

 

70.68

 

Dividend equivalents

 

0.8

 

71.40

 

Converted

 

 

 

Outstanding at March 31, 2014

 

98.6

 

37.57

 

 

Cash Units

 

Certain non-employee directors defer cash compensation in the form of cash payout share units, which are not subject to the Plans.  These share units are classified as liabilities and, as such, their fair value is adjusted to reflect the current market value of the Company’s Class A Common Stock.  The Company recorded $(1.6) million and $1.0 million as compensation expense (income) to reflect additional deferrals and the change in the market value for the three months ended March 31, 2014 and 2013, respectively.  The Company recorded $0.7 million and $2.5 million as compensation expense to reflect additional deferrals and the change in the market value for the nine months ended March 31, 2014 and 2013, respectively.

 

NOTE 9 — NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. PER COMMON SHARE

 

Net earnings attributab