10-Q 1 a16-5365_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, 2016

 

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 26, 2016, 222,579,072 shares of the registrant’s Class A Common Stock, $.01 par value, and 146,658,737 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, 2016 and 2015

2

 

 

Consolidated Statements of Comprehensive Income (Loss) — Three and Nine Months Ended March 31, 2016 and 2015

3

 

 

Consolidated Balance Sheets — March 31, 2016 and June 30, 2015 (Audited)

4

 

 

Consolidated Statements of Cash Flows — Nine Months Ended March 31, 2016 and 2015

5

 

 

Notes to Consolidated Financial Statements

6

 

 

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

29

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

48

 

 

Item 4. Controls and Procedures

48

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

48

 

 

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

49

 

 

Item 6. Exhibits

50

 

 

Signatures

51

 



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

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(In millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

2,656.5

 

$

2,580.5

 

$

8,616.0

 

$

8,256.0

 

Cost of Sales

 

504.2

 

502.9

 

1,670.4

 

1,612.6

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

2,152.3

 

2,077.6

 

6,945.6

 

6,643.4

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

1,753.1

 

1,680.4

 

5,445.3

 

5,265.4

 

Restructuring and other charges

 

15.2

 

 

33.7

 

 

Total operating expenses

 

1,768.3

 

1,680.4

 

5,479.0

 

5,265.4

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

384.0

 

397.2

 

1,466.6

 

1,378.0

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

18.0

 

15.2

 

52.1

 

45.0

 

Interest income and investment income, net

 

4.2

 

3.1

 

10.4

 

8.5

 

Earnings before Income Taxes

 

370.2

 

385.1

 

1,424.9

 

1,341.5

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

103.6

 

112.4

 

399.1

 

401.9

 

Net Earnings

 

266.6

 

272.7

 

1,025.8

 

939.6

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to noncontrolling interests

 

(1.0

)

(0.6

)

(4.7

)

(3.7

)

Net Earnings Attributable to The Estée Lauder Companies Inc.

 

$

265.6

 

$

272.1

 

$

1,021.1

 

$

935.9

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

$

0.72

 

$

0.72

 

$

2.76

 

$

2.46

 

Diluted

 

$

0.71

 

$

0.71

 

$

2.71

 

$

2.42

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

369.1

 

378.5

 

370.4

 

380.1

 

Diluted

 

375.6

 

384.7

 

376.9

 

386.3

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

.30

 

$

.24

 

$

.84

 

$

.68

 

 

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

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

266.6

 

$

272.7

 

$

1,025.8

 

$

939.6

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Net unrealized investment gain (loss)

 

6.6

 

2.1

 

3.2

 

(0.7

)

Net derivative instrument gain (loss)

 

(36.2

)

25.0

 

(32.0

)

80.3

 

Amounts included in net periodic benefit cost

 

6.3

 

10.1

 

19.1

 

23.0

 

Translation adjustments

 

71.1

 

(139.5

)

(51.6

)

(374.1

)

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

 

11.1

 

(13.4

)

3.6

 

(39.7

)

Total other comprehensive income (loss)

 

58.9

 

(115.7

)

(57.7

)

(311.2

)

Comprehensive income (loss)

 

325.5

 

157.0

 

968.1

 

628.4

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (income) loss attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

Net earnings

 

(1.0

)

(0.6

)

(4.7

)

(3.7

)

Translation adjustments

 

(1.0

)

2.1

 

(0.1

)

2.6

 

 

 

(2.0

)

1.5

 

(4.8

)

(1.1

)

Comprehensive income attributable to The Estée Lauder Companies Inc.

 

$

323.5

 

$

158.5

 

$

963.3

 

$

627.3

 

 

See notes to consolidated financial statements.

 

3



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31

 

June 30

 

 

 

2016

 

2015

 

 

 

(Unaudited)

 

 

 

 

 

($ in millions)

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

556.3

 

$

1,021.4

 

Short-term investments

 

517.5

 

503.7

 

Accounts receivable, net

 

1,416.6

 

1,174.5

 

Inventory and promotional merchandise, net

 

1,150.5

 

1,215.8

 

Prepaid expenses and other current assets

 

611.4

 

553.1

 

Total current assets

 

4,252.3

 

4,468.5

 

 

 

 

 

 

 

Property, Plant and Equipment, net

 

1,510.5

 

1,490.2

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Long-term investments

 

1,075.3

 

420.3

 

Goodwill

 

1,225.3

 

1,144.8

 

Other intangible assets, net

 

352.3

 

326.6

 

Other assets

 

400.6

 

388.8

 

Total other assets

 

3,053.5

 

2,280.5

 

Total assets

 

$

8,816.3

 

$

8,239.2

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current debt

 

$

312.8

 

$

29.8

 

Accounts payable

 

572.5

 

635.4

 

Other accrued liabilities

 

1,548.4

 

1,470.4

 

Total current liabilities

 

2,433.7

 

2,135.6

 

 

 

 

 

 

 

Noncurrent Liabilities

 

 

 

 

 

Long-term debt

 

1,612.5

 

1,607.5

 

Other noncurrent liabilities

 

947.7

 

841.8

 

Total noncurrent liabilities

 

2,560.2

 

2,449.3

 

 

 

 

 

 

 

Contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at March 31, 2016 and June 30, 2015; shares issued: 421,624,266 at March 31, 2016 and 418,530,857 at June 30, 2015; Class B shares authorized: 304,000,000 at March 31, 2016 and June 30, 2015; shares issued and outstanding: 146,658,737 at March 31, 2016 and 147,046,137 at June 30, 2015

 

5.7

 

5.7

 

Paid-in capital

 

3,090.4

 

2,871.6

 

Retained earnings

 

7,711.6

 

7,004.1

 

Accumulated other comprehensive loss

 

(439.3

)

(381.5

)

 

 

10,368.4

 

9,499.9

 

Less: Treasury stock, at cost; 199,110,967 Class A shares at March 31, 2016 and 190,694,630 Class A shares at June 30, 2015

 

(6,556.6

)

(5,856.7

)

Total stockholders’ equity — The Estée Lauder Companies Inc.

 

3,811.8

 

3,643.2

 

Noncontrolling interests

 

10.6

 

11.1

 

Total equity

 

3,822.4

 

3,654.3

 

Total liabilities and equity

 

$

8,816.3

 

$

8,239.2

 

 

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

 

 

 

2016

 

2015

 

 

 

(In millions)

 

Cash Flows from Operating Activities

 

 

 

 

 

Net earnings

 

$

1,025.8

 

$

939.6

 

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

 

 

 

 

 

Depreciation and amortization

 

304.9

 

298.6

 

Deferred income taxes

 

(51.4

)

(56.2

)

Non-cash stock-based compensation

 

147.3

 

133.9

 

Excess tax benefits from stock-based compensation arrangements

 

(18.1

)

(40.7

)

Loss on disposal of property, plant and equipment

 

10.4

 

8.1

 

Non-cash restructuring and other charges

 

14.7

 

 

Pension and post-retirement benefit expense

 

52.6

 

48.3

 

Pension and post-retirement benefit contributions

 

(18.7

)

(18.5

)

Loss on Venezuela remeasurement

 

 

5.3

 

Change in fair value of contingent consideration

 

16.3

 

4.1

 

Other non-cash items

 

(2.1

)

(4.4

)

Changes in operating assets and liabilities:

 

 

 

 

 

Increase in accounts receivable, net

 

(251.1

)

(94.2

)

Decrease in inventory and promotional merchandise, net

 

52.9

 

104.9

 

Increase in other assets, net

 

(81.7

)

(14.4

)

Increase (decrease) in accounts payable

 

(45.6

)

14.8

 

Increase in other accrued and noncurrent liabilities

 

160.0

 

55.8

 

Net cash flows provided by operating activities

 

1,316.2

 

1,385.0

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures

 

(334.4

)

(279.8

)

Payments for acquired businesses, net of cash acquired

 

(101.2

)

(242.0

)

Proceeds from disposition of investments

 

925.2

 

181.3

 

Purchases of investments

 

(1,586.5

)

(691.7

)

Net cash flows used for investing activities

 

(1,096.9

)

(1,032.2

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Proceeds of current debt, net

 

285.8

 

118.7

 

Debt issuance costs

 

(0.1

)

(1.1

)

Repayments and redemptions of long-term debt

 

(5.9

)

(6.0

)

Net proceeds from stock-based compensation transactions

 

54.9

 

83.5

 

Excess tax benefits from stock-based compensation arrangements

 

18.1

 

40.7

 

Payments to acquire treasury stock

 

(703.1

)

(626.1

)

Dividends paid to stockholders

 

(311.9

)

(259.8

)

Payments to noncontrolling interest holders for dividends

 

(3.1

)

(4.3

)

Net cash flows used for financing activities

 

(665.3

)

(654.4

)

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

(19.1

)

(39.2

)

Net Decrease in Cash and Cash Equivalents

 

(465.1

)

(340.8

)

Cash and Cash Equivalents at Beginning of Period

 

1,021.4

 

1,629.1

 

Cash and Cash Equivalents at End of Period

 

$

556.3

 

$

1,288.3

 

 

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.

 

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, 2015.

 

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, 2015.  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 $71.5 million and $(144.4) million, net of tax, during the three months ended March 31, 2016 and 2015, respectively, and $(56.8) million and $(392.5) million, net of tax, during the nine months ended March 31, 2016 and 2015, respectively.

 

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 of $10.9 million and $7.2 million during the three months ended March 31, 2016 and 2015, respectively, and $16.4 million and $(9.2) million during the nine months ended March 31, 2016 and 2015, 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.  In February 2015, the Venezuelan government introduced an open market foreign exchange system (“SIMADI”).  As a result, the Company recorded a remeasurement charge of $5.3 million, on a before and after tax basis, for the three and nine months ended March 31, 2015.  In March 2016, the Venezuelan government made changes to certain of its foreign currency exchange systems.  As part of these changes, a new free-floating exchange rate mechanism (“DICOM”) replaced the SIMADI foreign exchange system and is the only mechanism legally available for the Company’s highest priority transactions, which are the import of goods.  This change had a de minimis impact on the Company’s consolidated statements of earnings.  The Company’s Venezuelan subsidiary is not material to the Company’s consolidated financial statements or liquidity at March 31, 2016.

 

6



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Accounts Receivable

 

Accounts receivable is stated net of the allowance for doubtful accounts and customer deductions totaling $20.4 million and $20.6 million as of March 31, 2016 and June 30, 2015, 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 $247.9 million, or 9%, and $268.6 million, or 10%, of the Company’s consolidated net sales for the three months ended March 31, 2016 and 2015, respectively, and $839.6 million, or 10%, and $827.4 million, or 10%, of the Company’s consolidated net sales for the nine months ended March 31, 2016 and 2015, respectively.  This customer accounted for $178.1 million, or 13%, and $139.1 million, or 12%, of the Company’s accounts receivable at March 31, 2016 and June 30, 2015, respectively.

 

Inventory and Promotional Merchandise

 

Inventory and promotional merchandise, net consists of:

 

 

 

March 31

 

June 30

 

(In millions)

 

2016

 

2015

 

 

 

 

 

 

 

Raw materials

 

$

269.9

 

$

306.9

 

Work in process

 

137.9

 

168.7

 

Finished goods

 

612.4

 

581.3

 

Promotional merchandise

 

130.3

 

158.9

 

 

 

$

1,150.5

 

$

1,215.8

 

 

Property, Plant and Equipment

 

 

 

March 31

 

June 30

 

(In millions)

 

2016

 

2015

 

Assets (Useful Life)

 

 

 

 

 

Land

 

$

15.2

 

$

15.4

 

Buildings and improvements (10 to 40 years)

 

184.6

 

184.9

 

Machinery and equipment (3 to 10 years)

 

670.0

 

671.3

 

Computer hardware and software (4 to 15 years)

 

1,041.5

 

1,012.4

 

Furniture and fixtures (5 to 10 years)

 

86.6

 

73.7

 

Leasehold improvements

 

1,743.5

 

1,621.9

 

 

 

3,741.4

 

3,579.6

 

Less accumulated depreciation and amortization

 

2,230.9

 

2,089.4

 

 

 

$

1,510.5

 

$

1,490.2

 

 

7



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The cost of assets related to projects in progress of $164.6 million and $192.0 million as of March 31, 2016 and June 30, 2015, respectively, is included in their respective asset categories above.  Depreciation and amortization of property, plant and equipment was $99.9 million and $97.2 million during the three months ended March 31, 2016 and 2015, respectively, and $295.3 million and $292.3 million during the nine months ended March 31, 2016 and 2015, 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)

 

2016

 

2015

 

 

 

 

 

 

 

Advertising, merchandising and sampling

 

$

287.0

 

$

293.8

 

Employee compensation

 

436.2

 

463.3

 

Payroll and other taxes

 

164.5

 

142.0

 

Accrued income taxes

 

139.2

 

96.9

 

Other

 

521.5

 

474.4

 

 

 

$

1,548.4

 

$

1,470.4

 

 

Income Taxes

 

The effective rate for income taxes was 28.0% and 29.2% for the three months ended March 31, 2016 and 2015, respectively. The decrease in the effective tax rate was attributable to a lower effective tax rate on the Company’s foreign operations.  The effective rate for income taxes was 28.0% and 30.0% for the nine months ended March 31, 2016 and 2015, respectively.  The decrease in the effective tax rate was attributable to a lower effective tax rate on the Company’s foreign operations and the reduced impact of income tax reserves as compared to the prior-year period.

 

As of March 31, 2016 and June 30, 2015, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $73.8 million and $77.8 million, respectively.  The total amount of unrecognized tax benefits at March 31, 2016 that, if recognized, would affect the effective tax rate was $49.1 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three and nine months ended March 31, 2016 in the accompanying consolidated statements of earnings was $0.5 million and $1.2 million, respectively.  The total gross accrued interest and penalties in the accompanying consolidated balance sheets at March 31, 2016 and June 30, 2015 was $16.6 million and $16.5 million, respectively.  On the basis of the information available as of March 31, 2016, it is reasonably possible that the total amount of unrecognized tax benefits could decrease in a range of $5 million to $10 million within the next twelve months as a result of projected resolutions of global tax examinations and controversies and a potential lapse of the applicable statutes of limitations.

 

As of March 31, 2016 and June 30, 2015, the Company had current net deferred tax assets of $294.0 million and $279.0 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 $59.3 million and $72.1 million as of March 31, 2016 and June 30, 2015, respectively, substantially all of which are included in Other assets in the accompanying consolidated balance sheets.

 

Debt

 

As of March 31, 2016, the Company had $285.3 million of commercial paper outstanding, maturing through April 2016, which the Company is refinancing on a periodic basis, at then-prevailing market interest rates, as it matures.

 

8



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Recently Issued Accounting Standards

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that changes the way companies account for certain aspects of share-based payments to employees. The most significant impact relates to the accounting for income tax effects of share-based compensation awards.  This new guidance is part of the FASB’s simplification initiative and requires that all excess tax benefits and tax deficiencies be recorded as income tax expense or benefit in the income statement. In addition, companies are required to treat the tax effects of exercised or vested awards as discrete items in the period that they occur.  Other updates include changing the threshold on tax withholding requirements.  Under this guidance, an employer can withhold up to the maximum statutory withholding rates in a jurisdiction without tainting the award classification.  Additionally, this guidance allows companies to elect a forfeiture recognition method whereby they account for forfeitures as they occur (actual) or they estimate the number of awards expected to be forfeited (current GAAP).  Lastly, as it relates to public entities, this guidance also provides requirements for the cash flow classification of cash paid by an employer when directly withholding shares for tax-withholding purposes and excess tax benefits.  This guidance becomes effective for the Company’s fiscal 2018 first quarter, with early adoption permitted, and the guidance prescribes different transition methods for the various provisions (i.e., retrospective, modified retrospective, or prospective).  The Company is currently evaluating the impact of applying this guidance on its consolidated financial statements.

 

In February 2016, the FASB issued authoritative guidance that requires lessees to account for most leases on their balance sheets with the liability being equal to the present value of the lease payments.  The right-of-use asset will be based on the lease liability adjusted for certain costs such as direct costs.  Lease expense will be recognized similar to current accounting guidance with operating leases resulting in a straight-line expense and financing leases resulting in a front-loaded expense similar to the current accounting for capital leases.  This guidance becomes effective for the Company’s fiscal 2020 first quarter, with early adoption permitted.  This guidance must be adopted using a modified retrospective transition approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, and provides for certain practical expedients.  The Company is currently evaluating the timing, impact and method of applying this guidance on its consolidated financial statements.

 

In November 2015, the FASB issued authoritative guidance that requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet.  Under current guidance, deferred taxes for each jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability, requiring an in-depth analysis by jurisdiction to allocate between current and noncurrent.  The updated guidance simplifies a company’s analysis by eliminating the requirement to allocate between current and noncurrent deferred taxes by jurisdiction.  This guidance becomes effective for the Company’s fiscal 2018 first quarter, with early adoption permitted.  The Company plans to early adopt this guidance retrospectively in the fourth quarter of fiscal 2016, and this reclassification is not expected to have a material impact on its consolidated balance sheets.

 

In May 2014, the FASB issued authoritative guidance that defines how companies should report revenues from contracts with customers.  The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  It provides companies with a single comprehensive five-step principles-based model to use in accounting for revenue and supersedes current revenue recognition requirements, including most industry-specific and transaction-specific revenue guidance.  In August 2015, the FASB deferred the effective date of the new revenue standard by one year.  As a result, the new standard is not effective for the Company until fiscal 2019, with early adoption permitted.  The guidance permits an entity to apply the standard retrospectively to all prior periods presented, with certain practical expedients, or apply the requirements in the year of adoption, through a cumulative adjustment.  In March 2016, the FASB issued authoritative guidance that amended the principal versus agent guidance in its new revenue recognition standard.  These amendments do not change the key aspects of the principal versus agent guidance, including the definition that an entity is a principal if it controls the good or service prior to it being transferred to a customer, but the amendments clarify the implementation guidance related to the considerations that must be made during the contract evaluation process.  In April 2016, the FASB issued further authoritative guidance that amended the new standard to clarify the guidance on identifying performance obligations and accounting for licenses of intellectual property.  The Company will apply all of this new guidance when it becomes effective in fiscal 2019 and has not yet selected a transition method.  The Company currently has an implementation team in place that is performing a comprehensive evaluation of the impact of adoption on its consolidated financial statements.

 

No other recently issued accounting pronouncements are expected to have a material impact on the Company’s consolidated financial statements.

 

9



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 — INVESTMENTS

 

Gains and losses recorded in accumulated OCI (“AOCI”) related to the Company’s available-for-sale investments as of March 31, 2016 were as follows:

 

(In millions) 

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

U.S. government and agency securities

 

$

631.1

 

$

1.6

 

$

(0.1

)

$

632.6

 

Foreign government and agency securities

 

53.0

 

0.1

 

 

53.1

 

Corporate notes and bonds

 

396.3

 

1.7

 

(0.3

)

397.7

 

Time deposits

 

416.8

 

 

 

416.8

 

Other securities

 

23.9

 

0.1

 

 

24.0

 

Total

 

$

1,521.1

 

$

3.5

 

$

(0.4

)

$

1,524.2

 

 

Gains and losses recorded in AOCI related to the Company’s available-for-sale investments as of June 30, 2015 were as follows:

 

(In millions) 

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

U.S. government and agency securities

 

$

265.8

 

$

0.1

 

$

(0.1

)

$

265.8

 

Foreign government and agency securities

 

23.9

 

 

 

23.9

 

Corporate notes and bonds

 

182.7

 

0.1

 

(0.4

)

182.4

 

Time deposits

 

410.8

 

 

 

410.8

 

Other securities

 

34.8

 

0.1

 

 

34.9

 

Total

 

$

918.0

 

$

0.3

 

$

(0.5

)

$

917.8

 

 

The following table presents the Company’s available-for-sale securities by contractual maturity as of March 31, 2016:

 

(In millions)

 

Cost

 

Fair Value

 

Due within one year

 

$

517.5

 

$

517.5

 

Due after one through five years

 

1,003.6

 

1,006.7

 

 

 

$

1,521.1

 

$

1,524.2

 

 

The following table presents the fair market value of the Company’s investments with gross unrealized losses that are not deemed to be other-than temporarily impaired as of March 31, 2016:

 

 

 

In a Loss Position for Less Than 12
Months

 

In a Loss Position for More Than 12
Months

 

(In millions)

 

Fair Value

 

Gross
Unrealized
Losses

 

Fair Value

 

Gross
Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

$

267.1

 

$

(0.3

)

$

53.3

 

$

(0.1

)

 

10



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Gross gains and losses realized on sales of investments included in the consolidated statements of earnings were as follows:

 

 

 

Three Months Ended March 31

 

Nine Months Ended March 31

 

(In millions)

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

$

0.1

 

$

0.1

 

$

0.4

 

$

1.6

 

Gross realized losses

 

(0.2

)

(0.1

)

(0.6

)

(0.1

)

Total

 

$

(0.1

)

$

 

$

(0.2

)

$

1.5

 

 

The Company utilizes the first-in, first-out method to determine the cost of the security sold.  Sales proceeds from investments classified as available-for-sale were $120.1 million and $133.0 million for the three months ended March 31, 2016 and 2015, respectively, and $501.5 million and $185.9 million for the nine months ended March 31, 2016 and 2015, respectively.

 

NOTE 3 — GOODWILL AND OTHER INTANGIBLE ASSETS

 

During the nine months ended March 31, 2016, the Company acquired By Kilian, a Paris-based prestige fragrance brand, which included the addition of goodwill of $73.6 million, amortizable intangible assets of $6.5 million (with a weighted-average amortization period of approximately 7 years) and non-amortizable intangible assets of $31.9 million related to the Company’s fragrance product category. These amounts are provisional pending final working capital adjustments and completion of the final valuations. In addition, during this period, the Company recognized $8.0 million of goodwill associated with the continuing earn-out obligations related to the acquisition of the Bobbi Brown brand.

 

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, 2015

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

183.9

 

$

449.7

 

$

181.3

 

$

394.7

 

$

1,209.6

 

Accumulated impairments

 

(29.1

)

 

 

(35.7

)

(64.8

)

 

 

154.8

 

449.7

 

181.3

 

359.0

 

1,144.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill acquired during the period

 

 

8.0

 

73.6

 

 

81.6

 

Translation adjustments

 

0.2

 

 

(0.6

)

(0.7

)

(1.1

)

 

 

0.2

 

8.0

 

73.0

 

(0.7

)

80.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

184.5

 

457.7

 

254.3

 

392.9

 

1,289.4

 

Accumulated impairments

 

(29.5

)

 

 

(34.6

)

(64.1

)

 

 

$

155.0

 

$

457.7

 

$

254.3

 

$

358.3

 

$

1,225.3

 

 

Other intangible assets consist of the following:

 

 

 

March 31, 2016

 

June 30, 2015

 

(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

 

$

300.8

 

$

240.4

 

$

60.4

 

$

294.4

 

$

228.7

 

$

65.7

 

License agreements

 

43.0

 

43.0

 

 

43.0

 

43.0

 

 

 

 

$

343.8

 

$

283.4

 

60.4

 

$

337.4

 

$

271.7

 

65.7

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and other

 

 

 

 

 

291.9

 

 

 

 

 

260.9

 

Total intangible assets

 

 

 

 

 

$

352.3

 

 

 

 

 

$

326.6

 

 

11



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The aggregate amortization expense related to amortizable intangible assets was $3.9 million and $3.6 million for the three months ended March 31, 2016 and 2015, respectively, and was $11.6 million and $9.7 million for the nine months ended March 31, 2016 and 2015, respectively.  The estimated aggregate amortization expense for the remainder of fiscal 2016 and for each of fiscal 2017 to 2020 is $3.9 million, $13.9 million, $13.0 million, $12.3 million and $5.3 million, respectively.

 

NOTE 4 — CHARGES ASSOCIATED WITH RESTRUCTURING ACTIVITIES

 

In October 2015, officers authorized by the Company’s Board of Directors approved plans to transform and modernize the Company’s global technology infrastructure (“GTI”) to fundamentally change the way it delivers information technology services internally (such initiative, the “GTI Restructuring”).  As part of the GTI Restructuring, the Company is transitioning its GTI from Company-owned assets to a primarily vendor-owned model where it will pay for services as they are used.  This model, with a different third-party provider, is expected to provide an enhanced scalable platform to better support current and future requirements, help the Company achieve key strategic opportunities and improve the Company’s agility and flexibility to respond to the demands of the business by leveraging more advanced technologies.  This transition is expected to result in operational efficiencies and reduce the Company’s information technology service and infrastructure costs in the future.  The Company anticipates the GTI Restructuring will result in related restructuring and other charges of approximately $40 million to $50 million, consisting of non-cash asset write-offs, as well as employee-related and other implementation costs.  The Company expects the implementation of the GTI Restructuring, and the related charges, will continue through calendar year 2016.

 

The following table presents GTI Restructuring charges and the related activities under this initiative to date:

 

(In millions)

 

Employee-Related
Costs

 

Asset
Write-offs

 

Contract
Terminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

Charges

 

$

2.7

 

$

14.7

 

$

11.7

 

$

29.1

 

Cash payments

 

(0.6

)

 

(9.7

)

(10.3

)

Non-cash asset write-offs

 

 

(14.7

)

 

(14.7

)

Accrued GTI Restructuring balance at March 31, 2016

 

$

2.1

 

$

 

$

2.0

 

$

4.1

 

 

Accrued GTI Restructuring charges at March 31, 2016 are expected to result in cash expenditures funded from cash provided by operations in fiscal 2016.

 

Other charges in connection with the implementation of this initiative were $2.6 million and $4.6 million for the three and nine months ended March 31, 2016, respectively and primarily relate to consulting services.  These charges are included in Restructuring and other charges in the accompanying consolidated statements of earnings.

 

On May 3, 2016, the Company announced a multi-year initiative (“Leading Beauty Forward”) to build on its strengths and better leverage its cost structure to free resources for investment to continue its growth momentum.  Leading Beauty Forward is designed to enhance the Company’s go-to-market capabilities, reinforce its leadership in global prestige beauty and continue creating sustainable value.

 

The Company plans to approve specific initiatives under Leading Beauty Forward through fiscal 2019 and expects to complete those initiatives through fiscal 2021.  The Company expects that Leading Beauty Forward will result in related restructuring and other charges totaling between $600 million and $700 million before taxes, consisting of employee-related costs, asset write-offs and other costs to implement these initiatives.

 

12



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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.  In addition, the Company enters into interest rate derivatives to manage the effects of interest rate movements on the Company’s aggregate liability portfolio, including potential future debt issuances.  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 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 inception of the hedges and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.  If it is determined that a derivative is not highly effective, or that it has ceased to be a highly effective hedge, the Company will be required to discontinue hedge accounting with respect to that derivative prospectively.

 

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

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

 

 

Fair Value (1)

 

 

 

Fair Value (1)

 

(In millions)

 

Balance Sheet
Location

 

March 31
2016

 

June 30
2015

 

Balance Sheet
Location

 

March 31
2016

 

June 30
2015

 

Derivatives Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Prepaid expenses and other current assets

 

$

27.1

 

$

41.1

 

Other accrued liabilities

 

$

23.1

 

$

4.2

 

Interest rate swap contracts

 

Prepaid expenses and other current assets

 

12.9

 

 

Other accrued liabilities

 

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Derivatives Designated as Hedging Instruments

 

 

 

40.0

 

41.1

 

 

 

23.1

 

4.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Prepaid expenses and other current assets

 

26.0

 

2.0

 

Other accrued liabilities

 

7.0

 

4.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Derivatives

 

 

 

$

66.0

 

$

43.1

 

 

 

$

30.1

 

$

8.5

 

 


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

 

13



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

presented as follows:

 

 

 

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

 

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

 

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

 

 

 

Three Months Ended
March 31

 

 

 

Three Months Ended
March 31

 

(In millions)

 

2016

 

2015

 

 

 

2016

 

2015

 

Derivatives in Cash Flow Hedging Relationships:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

(16.0

)

$

39.1

 

Cost of sales

 

$

6.0

 

$

3.6

 

 

 

 

 

 

 

Selling, general and administrative

 

14.0

 

10.5

 

Settled interest rate-related derivatives

 

 

 

Interest expense

 

0.2

 

 

Total derivatives

 

$

(16.0

)

$

39.1

 

 

 

$

20.2

 

$

14.1

 

 


(1)             The amount of loss recognized in earnings related to the amount excluded from effectiveness testing was $(3.0) million and $(0.2) million for the three months ended March 31, 2016 and 2015, 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, 2016 and 2015.

 

 

 

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

 

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

 

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

 

 

 

Nine Months Ended
March 31

 

 

 

Nine Months Ended
March 31

 

(In millions)

 

2016

 

2015

 

 

 

2016

 

2015

 

Derivatives in Cash Flow Hedging Relationships:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

19.9

 

$

103.2

 

Cost of sales

 

$

13.4

 

$

5.4

 

 

 

 

 

 

 

Selling, general and administrative

 

38.0

 

17.3

 

Settled interest rate-related derivatives

 

 

 

Interest expense

 

0.5

 

0.1

 

Total derivatives

 

$

19.9

 

$

103.2

 

 

 

$

51.9

 

$

22.8

 

 


(1)             The amount of loss recognized in earnings related to the amount excluded from effectiveness testing was $(1.5) million and $(1.0) million for the nine months ended March 31, 2016 and 2015, respectively.  The amount of gain recognized in earnings related to the ineffective portion of the hedging relationships was $0.1 million and $0.6 million for the nine months ended March 31, 2016 and 2015, respectively.

 

14



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Amount of Gain or (Loss)
Recognized in Earnings on Derivatives 
(1)

 

 

 

Location of Gain or (Loss)
Recognized in Earnings on

 

Three Months Ended
March 31

 

Nine Months Ended
March 31

 

(In millions)

 

Derivatives

 

2016

 

2015

 

2016

 

2015

 

Derivatives in Fair Value Hedging Relationships:

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

Interest expense

 

$

7.3

 

$

 

$

13.1

 

$

 

 


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

 

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

 

2016

 

2015

 

2016

 

2015

 

Derivatives Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Selling, general and administrative

 

$

20.0

 

$

(9.8

)

$

21.0

 

$

(9.7

)

 

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 cash-flow hedges and have varying maturities through the end of March 2018.

 

The Company enters into interest rate forward contracts to hedge anticipated issuance of debt for periods consistent with the Company’s identified exposures.  The purpose of the hedging activities is to minimize the effect of interest rate movements on cost of debt issuance.

 

The ineffective portion of both foreign currency forward and interest rate derivatives 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, 2016, the Company’s foreign currency cash-flow hedges were highly effective.

 

At March 31, 2016, the Company had foreign currency forward contracts in the amount of $2,933.1 million.  The foreign currencies included in foreign currency forward contracts (notional value stated in U.S. dollars) are principally the Euro ($671.0 million), British pound ($429.8 million), Chinese yuan ($316.2 million), Hong Kong dollar ($264.2 million), Swiss franc ($206.4 million), Australian dollar ($173.9 million) and Taiwan dollar ($135.6 million).

 

The estimated net gain on foreign currency forward contracts and settled interest rate-related derivatives as of March 31, 2016 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $7.9 million.  The accumulated gain on these derivative instruments in AOCI was $36.4 million and $68.4 million as of March 31, 2016 and June 30, 2015, respectively.

 

15



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Fair-Value Hedges

 

The Company enters into interest rate derivative contracts to manage the exposure to interest rate fluctuations on its funded indebtedness. The Company has interest rate swap agreements, with a notional amount totaling $250.0 million, to effectively convert the fixed rate interest on its 2.35% Senior Notes due August 15, 2022 to variable interest rates based on three-month LIBOR plus a margin.  These interest rate swap agreements are designated as fair-value hedges of the related long-term debt, and the changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt.

 

Credit Risk

 

As a matter of policy, the Company enters into derivative contracts only 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 $66.0 million at March 31, 2016.  To manage this risk, the Company has strict counterparty credit guidelines that are continually monitored.  Accordingly, management believes risk of loss under these hedging contracts is remote.

 

NOTE 6 — FAIR VALUE MEASUREMENTS

 

The Company records certain of 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 that require initial measurement or remeasurement at fair value, which principally consist of assets and liabilities acquired through business combinations and goodwill, indefinite-lived intangible assets and long-lived assets for the purposes of calculating potential impairment.  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, 2016:

 

(In millions) 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

53.1

 

$

 

$

53.1

 

Interest rate swap contracts

 

 

12.9

 

 

12.9

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

632.6

 

 

632.6

 

Foreign government and agency securities

 

 

53.1

 

 

53.1

 

Corporate notes and bonds

 

 

397.7

 

 

397.7

 

Time deposits

 

 

416.8

 

 

416.8

 

Other securities

 

 

24.0

 

 

24.0

 

Total

 

$

 

$

1,590.2

 

$

 

$

1,590.2

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

30.1

 

$

 

$

30.1

 

Contingent consideration

 

 

 

205.3

 

205.3

 

Total

 

$

 

$

30.1

 

$

205.3

 

$

235.4

 

 

16



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, 2015:

 

(In millions) 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

43.1

 

$

 

$

43.1

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

265.8

 

 

265.8

 

Foreign government and agency securities

 

 

23.9

 

 

23.9

 

Corporate notes and bonds

 

 

182.4

 

 

182.4

 

Time deposits

 

 

410.8

 

 

410.8

 

Other securities

 

 

34.9

 

 

34.9

 

Total

 

$

 

$

960.9

 

$

 

$

960.9

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

8.3

 

$

 

$

8.3

 

Interest rate swap contracts

 

 

0.2

 

 

0.2

 

Contingent consideration

 

 

 

159.3

 

159.3

 

Total

 

$

 

$

8.5

 

$

159.3

 

$

167.8

 

 

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

 

 

 

March 31
2016

 

June 30
2015

 

(In millions)

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

Nonderivatives

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

556.3

 

$

556.3

 

$

1,021.4

 

$

1,021.4

 

Available-for-sale securities

 

1,524.2

 

1,524.2

 

917.8

 

917.8

 

Current and long-term debt

 

1,925.3

 

2,065.6

 

1,637.3

 

1,697.5

 

Additional purchase price payable

 

37.4

 

37.4

 

37.0

 

37.0

 

Contingent consideration

 

205.3

 

205.3

 

159.3

 

159.3

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts — asset (liability), net

 

23.0

 

23.0

 

34.8

 

34.8

 

Interest rate swap contracts — asset (liability)

 

12.9

 

12.9

 

(0.2

)

(0.2

)

 

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

 

Cash and cash equivalents — Cash and all highly-liquid securities with original maturities of three months or less are classified as cash and cash equivalents, primarily consisting of cash deposits in interest bearing accounts, money market funds and time deposits. 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 classified within Level 2 of the valuation hierarchy and are valued using third-party pricing services, and for time deposits, the carrying amount approximates fair value. To determine fair value, the pricing services use market prices or prices derived from other observable market inputs such as benchmark curves, credit spreads, broker/dealer quotes, and other industry and economic factors.

 

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.

 

17



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Interest rate swap contracts — The fair values of the Company’s interest rate swap contracts were determined using an industry-standard valuation model, which is based on the income approach.  The significant observable inputs to the model, such as swap yield curves and LIBOR forward rates, were obtained from independent pricing services.

 

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.

 

Additional purchase price payable — The Company’s additional purchase price payable represents fixed minimum additional purchase price that was discounted using the Company’s incremental borrowing rate, which was approximately 1%.  The additional purchase price payable is classified within Level 2 of the valuation hierarchy.

 

Contingent Consideration — Contingent consideration obligations consist of potential obligations related to our acquisitions. The amounts to be paid under these obligations are contingent upon the achievement of stipulated financial targets by the business subsequent to acquisition. The fair value of the contingent consideration related to certain acquisition earn-outs were based on either a discounting of future cash flows using risk-adjusted discount rates (“DCF Method”), or by estimating the fair value using a probability-weighted discount model that considers the achievement of the conditions upon which the respective contingent obligation is dependent (“Monte Carlo Method”).  The contingencies that use the DCF Method were calculated based on risk-adjusted discounted future cash flows using rates ranging from 8% to 13.5%.  An increase or decrease in the risk premium of 100 basis points would result in a value that is approximately $5 million higher or lower than the current liability recorded.  Significant changes in the projected future operating results would result in a significantly higher or lower fair value measurement.  The contingency that uses the Monte Carlo Method has various inputs into the valuation model that include the risk-adjusted projected future operating results of the acquired entity, a risk-adjusted discount rate of 2.1%, a measure of revenue volatility of 4.5%, an asset volatility of 26.5% and a revenue/earnings before income tax, depreciation and amortization correlation factor of 80%.  Significant changes in the projected future operating results would result in a significantly higher or lower fair value measurement.  Changes to the discount rate, volatility or correlation factors would have a lesser effect.  In both methods, the implied rates are deemed to be unobservable inputs and, as such, the Company’s contingent consideration is classified within Level 3 of the valuation hierarchy.

 

Changes in the fair value of the contingent consideration obligations for the nine months ended March 31, 2016 are included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings and were as follows:

 

(In millions)

 

Fair Value

 

 

 

 

 

Contingent consideration at June 30, 2015

 

$

159.3

 

Acquisitions

 

29.7

 

Change in fair value

 

16.3

 

Contingent consideration at March 31, 2016

 

$

205.3

 

 

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 fiscal year ended June 30, 2015.

 

18



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The components of net periodic benefit cost for the three months ended March 31, 2016 and 2015 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

Other than

 

 

 

Pension Plans

 

Pension Plans

 

 

 

U.S.

 

International

 

Post-retirement

 

(In millions)

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

8.0

 

$

8.0

 

$

6.2

 

$

5.7

 

$

0.7

 

$

0.8

 

Interest cost

 

8.2

 

7.6

 

3.6

 

4.1

 

1.9

 

1.9

 

Expected return on plan assets

 

(12.2

)

(12.5

)

(4.7

)

(5.3

)

(0.6

)

(0.6

)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost

 

0.2

 

0.1

 

0.4

 

0.5

 

0.2

 

0.2

 

Actuarial loss

 

2.8

 

2.4

 

2.6

 

2.4

 

0.1

 

0.4

 

Settlement

 

 

 

 

(1.1

)

 

 

Net periodic benefit cost

 

$

7.0

 

$

5.6

 

$

8.1

 

$

6.3

 

$

2.3

 

$

2.7

 

 

The components of net periodic benefit cost for the nine months ended March 31, 2016 and 2015 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

Other than

 

 

 

Pension Plans

 

Pension Plans

 

 

 

U.S.

 

International

 

Post-retirement

 

(In millions)

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

24.2

 

$

23.8

 

$

18.7

 

$

18.2

 

$

2.1

 

$

2.5

 

Interest cost

 

24.6

 

22.8

 

11.2

 

13.1

 

5.6

 

5.7

 

Expected return on plan assets

 

(36.6

)

(37.5

)

(14.6

)

(16.3

)

(1.7

)

(1.8

)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost

 

0.5

 

0.4

 

1.4

 

1.6

 

0.6

 

0.6

 

Actuarial loss

 

8.4

 

7.3

 

7.8

 

7.8

 

0.3

 

1.2

 

Settlement

 

 

 

0.1

 

(1.1

)

 

 

Net periodic benefit cost

 

$

21.1

 

$

16.8

 

$

24.6

 

$

23.3

 

$

6.9

 

$

8.2

 

 

During the nine months ended March 31, 2016, the Company made contributions to its international pension plans totaling approximately $9 million.

 

As part of its ongoing review of funded levels, the Company made a discretionary contribution of $30.0 million to its domestic trust based, noncontributory qualified defined benefit pension plan in April 2016.

 

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)

 

2016

 

2015

 

Other assets

 

$

107.1

 

$

113.1

 

Other accrued liabilities

 

(23.8

)

(23.8

)

Other noncurrent liabilities

 

(383.3

)

(373.0

)

Funded status

 

(300.0

)

(283.7

)

Accumulated other comprehensive loss

 

322.0

 

346.2

 

Net amount recognized

 

$

22.0

 

$

62.5

 

 

19



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 — CONTINGENCIES

 

Legal Proceedings

 

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

 

NOTE 9 — STOCK-BASED COMPENSATION

 

The Company has various stock-based compensation programs (the “Plans”) under which awards, including stock options, restricted stock units (“RSUs”), performance share units (“PSUs”), PSUs based on total stockholder return, long-term PSUs and share units, may be granted.  During the second quarter of fiscal 2016, the amount of shares of the Company’s Class A Common Stock that was reserved and available to be granted pursuant to these Plans was increased by 10,600,000 to approximately 17,092,300 shares as of March 31, 2016.

 

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

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Compensation expense

 

$

36.1

 

$

33.0

 

$

147.3

 

$

133.9

 

Income tax benefit

 

11.9

 

10.9

 

48.4

 

43.9

 

 

As of March 31, 2016, the total unrecognized compensation cost related to unvested stock-based awards was $179.7 million and the related weighted-average period over which it is expected to be recognized is approximately two years.

 

Stock Options

 

The following is a summary of the Company’s stock option programs as of March 31, 2016 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, 2015

 

13,437.1

 

$

47.73

 

 

 

 

 

Granted at fair value

 

2,506.9

 

77.48

 

 

 

 

 

Exercised

 

(1,235.2

)

44.44

 

 

 

 

 

Expired

 

(11.7

)

48.41

 

 

 

 

 

Forfeited

 

(114.0

)

71.21

 

 

 

 

 

Outstanding at March 31, 2016

 

14,583.1

 

52.94

 

$

603.3

 

6.2

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest at March 31, 2016

 

14,455.0

 

52.72

 

$

601.2

 

6.0

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2016

 

10,153.9

 

43.09