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 September 30, 2013

 

OR

 

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

 

For the transition period from              to              

 

Commission file number: 1-14064

 

The Estée Lauder Companies Inc.

 (Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

11-2408943
(I.R.S. Employer Identification No.)

 

 

 

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

 

10153
(Zip Code)

 

212-572-4200

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o
(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 October 24, 2013, 239,225,209 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 Months Ended September 30, 2013 and 2012

2

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) —
Three Months Ended September 30, 2013 and 2012

3

 

 

 

 

Consolidated Balance Sheets —
September 30, 2013 and June 30, 2013 (Audited)

4

 

 

 

 

Consolidated Statements of Cash Flows —
Three Months Ended September 30, 2013 and 2012

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

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

25

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

37

 

 

Item 4. Controls and Procedures

37

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

38

 

 

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

38

 

 

Item 6. Exhibits

39

 

 

Signatures

40

 



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

 

 

Three Months Ended
September 30

 

 

 

2013

 

2012

 

 

 

(In millions, except per share data)

 

 

 

 

 

 

 

Net Sales

 

$

2,675.0

 

$

2,549.5

 

Cost of Sales

 

544.1

 

539.2

 

 

 

 

 

 

 

Gross Profit

 

2,130.9

 

2,010.3

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

Selling, general and administrative

 

1,680.2

 

1,527.9

 

Restructuring and other charges

 

1.2

 

0.4

 

Total operating expenses

 

1,681.4

 

1,528.3

 

 

 

 

 

 

 

Operating Income

 

449.5

 

482.0

 

 

 

 

 

 

 

Interest expense, net

 

13.5

 

15.8

 

Interest expense on debt extinguishment

 

 

19.1

 

Other income

 

 

1.8

 

Earnings before Income Taxes

 

436.0

 

448.9

 

 

 

 

 

 

 

Provision for income taxes

 

134.2

 

149.3

 

Net Earnings

 

301.8

 

299.6

 

 

 

 

 

 

 

Net earnings attributable to noncontrolling interests

 

(1.1

)

(0.1

)

Net Earnings Attributable to The Estée Lauder Companies Inc.

 

$

300.7

 

$

299.5

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

$

.78

 

$

.77

 

Diluted

 

$

.76

 

$

.76

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

387.8

 

387.8

 

Diluted

 

394.9

 

395.5

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

.18

 

$

 

 

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
September 30

 

 

 

2013

 

2012

 

 

 

(In millions)

 

 

 

 

 

 

 

Net earnings

 

$

301.8

 

$

299.6

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

Net unrealized investment gain (loss)

 

0.3

 

0.1

 

Net derivative instrument gain (loss)

 

(17.5

)

(15.9

)

Amounts included in net periodic benefit cost

 

5.4

 

8.8

 

Translation adjustments

 

67.7

 

72.1

 

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

 

5.9

 

4.3

 

Total other comprehensive income (loss)

 

61.8

 

69.4

 

Comprehensive income (loss)

 

363.6

 

369.0

 

 

 

 

 

 

 

Comprehensive (income) loss attributable to noncontrolling interests:

 

 

 

 

 

Net earnings

 

(1.1

)

(0.1

)

Translation adjustments

 

(0.6

)

(0.9

)

 

 

(1.7

)

(1.0

)

Comprehensive income attributable to The Estée Lauder Companies Inc.

 

$

361.9

 

$

368.0

 

 

See notes to consolidated financial statements.

 

3



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30

 

June 30

 

 

 

2013

 

2013

 

 

 

(Unaudited)

 

 

 

 

 

($ in millions)

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,322.2

 

$

1,495.7

 

Accounts receivable, net

 

1,566.7

 

1,171.7

 

Inventory and promotional merchandise, net

 

1,196.3

 

1,113.9

 

Prepaid expenses and other current assets

 

547.2

 

515.9

 

Total current assets

 

4,632.4

 

4,297.2

 

 

 

 

 

 

 

Property, Plant and Equipment, net

 

1,364.4

 

1,350.7

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Goodwill

 

885.4

 

881.5

 

Other intangible assets, net

 

166.5

 

169.6

 

Other assets

 

471.8

 

446.2

 

Total other assets

 

1,523.7

 

1,497.3

 

Total assets

 

$

7,520.5

 

$

7,145.2

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current debt

 

$

15.9

 

$

18.3

 

Accounts payable

 

461.9

 

481.7

 

Other accrued liabilities

 

1,509.8

 

1,434.6

 

Total current liabilities

 

1,987.6

 

1,934.6

 

 

 

 

 

 

 

Noncurrent Liabilities

 

 

 

 

 

Long-term debt

 

1,324.7

 

1,326.0

 

Other noncurrent liabilities

 

595.7

 

582.7

 

Total noncurrent liabilities

 

1,920.4

 

1,908.7

 

 

 

 

 

 

 

Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at September 30, 2013 and June 30, 2013; shares issued: 409,045,607 at September 30, 2013 and 407,988,891 at June 30, 2013; Class B shares authorized: 304,000,000 at September 30, 2013 and June 30, 2013; shares issued and outstanding: 148,728,082 at September 30, 2013 and 148,978,082 at June 30, 2013

 

5.6

 

5.6

 

Paid-in capital

 

2,365.9

 

2,289.9

 

Retained earnings

 

5,594.7

 

5,364.1

 

Accumulated other comprehensive loss

 

(96.3

)

(157.5

)

 

 

7,869.9

 

7,502.1

 

Less: Treasury stock, at cost; 169,834,647 Class A shares at September 30, 2013 and 168,972,698 Class A shares at June 30, 2013

 

(4,274.1

)

(4,215.2

)

Total stockholders’ equity — The Estée Lauder Companies Inc.

 

3,595.8

 

3,286.9

 

Noncontrolling interests

 

16.7

 

15.0

 

Total equity

 

3,612.5

 

3,301.9

 

Total liabilities and equity

 

$

7,520.5

 

$

7,145.2

 

 

See notes to consolidated financial statements.

 

4



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended
September 30

 

 

 

2013

 

2012

 

 

 

(In millions)

 

Cash Flows from Operating Activities

 

 

 

 

 

Net earnings

 

$

301.8

 

$

299.6

 

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

 

 

 

 

 

Depreciation and amortization

 

88.9

 

77.5

 

Deferred income taxes

 

(23.4

)

(18.8

)

Non-cash stock-based compensation

 

56.3

 

54.5

 

Excess tax benefits from stock-based compensation arrangements

 

(9.8

)

(15.6

)

Loss on disposal of property, plant and equipment

 

2.3

 

4.5

 

Pension and post-retirement benefit expense

 

17.4

 

20.9

 

Pension and post-retirement benefit contributions

 

(6.8

)

(5.9

)

Other non-cash items

 

 

(0.1

)

Changes in operating assets and liabilities:

 

 

 

 

 

Increase in accounts receivable, net

 

(375.1

)

(518.1

)

Increase in inventory and promotional merchandise, net

 

(58.1

)

(59.2

)

Increase in other assets, net

 

(37.6

)

(26.9

)

Decrease in accounts payable

 

(26.8

)

(79.3

)

Increase in other liabilities

 

100.8

 

141.7

 

Net cash flows provided by (used for) operating activities

 

29.9

 

(125.2

)

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures

 

(85.7

)

(95.5

)

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

 

(9.2

)

(8.7

)

Net cash flows used for investing activities

 

(94.9

)

(104.2

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Borrowings (repayments) of current debt, net

 

0.2

 

(195.4

)

Proceeds from issuance of long-term debt, net

 

 

498.7

 

Debt issuance costs

 

 

(4.1

)

Repayments and redemptions of long-term debt

 

(3.7

)

(235.9

)

Net proceeds from stock-based compensation transactions

 

8.1

 

16.2

 

Excess tax benefits from stock-based compensation arrangements

 

9.8

 

15.6

 

Payments to acquire treasury stock

 

(59.5

)

(165.4

)

Dividends paid to stockholders

 

(69.8

)

(0.5

)

Net cash flows used for financing activities

 

(114.9

)

(70.8

)

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

6.4

 

6.2

 

Net Decrease in Cash and Cash Equivalents

 

(173.5

)

(294.0

)

Cash and Cash Equivalents at Beginning of Period

 

1,495.7

 

1,347.7

 

Cash and Cash Equivalents at End of Period

 

$

1,322.2

 

$

1,053.7

 

 

See notes to consolidated financial statements.

 

5



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

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

 

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

 

The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included.  The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year.  For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 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 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 reported as cumulative translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc. amounted to $72.5 million and $76.5 million, net of tax, during the three months ended September 30, 2013 and 2012, respectively.  For the Company’s Venezuelan subsidiary operating in a highly inflationary economy, the U.S. dollar is the functional currency.  Remeasurement adjustments in financial statements in a highly inflationary economy and other transactional gains and losses are reflected in earnings.

 

The 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 on foreign currency transactions of $0.1 million and $0.9 million during the three months ended September 30, 2013 and 2012, respectively.

 

Accounts Receivable

 

Accounts receivable is stated net of the allowance for doubtful accounts and customer deductions totaling $23.5 million and $22.7 million as of September 30, 2013 and June 30, 2013, respectively.

 

6



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Concentration of Credit Risk

 

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

 

The Company’s largest customer sells products primarily within the United States and accounted for $341.6 million, or 13%, and $336.2 million, or 13%, of the Company’s consolidated net sales for the three months ended September 30, 2013 and 2012, respectively.  This customer accounted for $251.6 million, or 16%, and $113.7 million, or 10%, of the Company’s accounts receivable at September 30, 2013 and June 30, 2013, respectively.

 

Inventory and Promotional Merchandise

 

Inventory and promotional merchandise, net consists of:

 

 

 

September 30

 

June 30

 

(In millions)

 

2013

 

2013

 

 

 

 

 

 

 

Raw materials

 

$

315.7

 

$

274.2

 

Work in process

 

139.5

 

116.8

 

Finished goods

 

568.8

 

510.9

 

Promotional merchandise

 

172.3

 

212.0

 

 

 

$

1,196.3

 

$

1,113.9

 

 

Property, Plant and Equipment

 

 

 

September 30

 

June 30

 

(In millions)

 

2013

 

2013

 

Assets (Useful Life)

 

 

 

 

 

Land

 

$

14.9

 

$

14.7

 

Buildings and improvements (10 to 40 years)

 

199.8

 

195.4

 

Machinery and equipment (3 to 10 years)

 

665.4

 

647.9

 

Computer hardware and software (4 to 10 years)

 

963.9

 

948.4

 

Furniture and fixtures (5 to 10 years)

 

72.2

 

71.6

 

Leasehold improvements

 

1,424.1

 

1,349.6

 

 

 

3,340.3

 

3,227.6

 

Less accumulated depreciation and amortization

 

1,975.9

 

1,876.9

 

 

 

$

1,364.4

 

$

1,350.7

 

 

The cost of assets related to projects in progress of $163.8 million and $178.7 million as of September 30, 2013 and June 30, 2013, respectively, is included in their respective asset categories above.  Depreciation and amortization of property, plant and equipment was $87.1 million and $75.3 million during the three months ended September 30, 2013 and 2012, respectively.  Depreciation and amortization related to the Company’s manufacturing process is included in Cost of Sales and all other depreciation and amortization is included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings.

 

7



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Other Accrued Liabilities

 

Other accrued liabilities consist of the following:

 

 

 

September 30

 

June 30

 

(In millions)

 

2013

 

2013

 

 

 

 

 

 

 

Advertising, merchandising and sampling

 

$

377.2

 

$

338.4

 

Employee compensation

 

328.7

 

433.3

 

Payroll and other taxes

 

167.4

 

135.7

 

Accrued income taxes

 

177.4

 

81.3

 

Other

 

459.1

 

445.9

 

 

 

$

1,509.8

 

$

1,434.6

 

 

Income Taxes

 

The effective rate for income taxes was 30.8% and 33.3% for the three months ended September 30, 2013 and 2012, respectively.  The decrease in the effective income tax rate was primarily attributable to income tax reserve adjustments and a lower effective tax rate on the Company’s foreign operations.

 

As of September 30, 2013 and June 30, 2013, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $63.5 million and $64.0 million, respectively.  The total amount of unrecognized tax benefits at September 30, 2013 that, if recognized, would affect the effective tax rate was $46.3 million.  The total gross interest and penalties accrued related to unrecognized tax benefits during the three months ended September 30, 2013 in the accompanying consolidated statement of earnings was $0.3 million.  The total gross accrued interest and penalties in the accompanying consolidated balance sheets at September 30, 2013 and June 30, 2013 was $17.7 million and $17.4 million, respectively.  On the basis of the information available as of September 30, 2013, it is reasonably possible that the total amount of unrecognized tax benefits could decrease in a range of $10 million to $15 million within 12 months as a result of projected resolutions of global tax examinations and controversies and a potential lapse of the applicable statutes of limitations.

 

As of September 30, 2013 and June 30, 2013, the Company had current net deferred tax assets of $306.3 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 $62.7 million and $50.3 million as of September 30, 2013 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.

 

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 and the adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

 

8



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In December 2011, the FASB issued authoritative guidance that creates new disclosure requirements about the nature of an entity’s rights of offset and related arrangements associated with its financial instruments and derivative instruments.  This revised guidance helps reconcile differences in the offsetting requirements under U.S. GAAP and International Financial Reporting Standards (“IFRS”).  These requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement.  In January 2013, the FASB issued an update that limits the scope of these disclosures to recognized derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions to the extent they are offset in the balance sheet or subject to an enforceable master netting arrangement or similar agreement.  This disclosure-only guidance 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 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 is currently evaluating the timing of adoption and the impact of this balance sheet presentation guidance but does not expect it to have a significant impact on the Company’s 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.

 

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Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 — GOODWILL AND OTHER INTANGIBLE ASSETS

 

The 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

 

 

3.0

 

 

 

3.0

 

Translation and other adjustments

 

0.1

 

0.1

 

 

0.7

 

0.9

 

 

 

0.1

 

3.1

 

 

0.7

 

3.9

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

68.7

 

433.5

 

54.8

 

402.9

 

959.9

 

Accumulated impairments

 

(33.4

)

 

 

(41.1

)

(74.5

)

 

 

$

35.3

 

$

433.5

 

$

54.8

 

$

361.8

 

$

885.4

 

 

Other intangible assets consist of the following:

 

 

 

September 30, 2013

 

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

 

$

268.2

 

$

207.4

 

$

60.8

 

$

268.0

 

$

204.1

 

$

63.9

 

License agreements

 

43.0

 

43.0

 

 

43.0

 

43.0

 

 

 

 

$

311.2

 

$

250.4

 

60.8

 

$

311.0

 

$

247.1

 

63.9

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and other

 

 

 

 

 

105.7

 

 

 

 

 

105.7

 

Total intangible assets

 

 

 

 

 

$

166.5

 

 

 

 

 

$

169.6

 

 

The aggregate amortization expense related to amortizable intangible assets was $3.2 million and $3.1 million for the three months ended September 30, 2013 and 2012, respectively.  The estimated aggregate amortization expense for the remainder of fiscal 2014 and for each of fiscal 2015 to 2018 is $9.3 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 $321.6 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 year ended June 30, 2013.

 

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Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Restructuring Charges

 

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

 

(In millions)

 

Employee-
Related

Costs

 

Asset
 Write-offs

 

Contract
Terminations

 

Other Exit
Costs

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2009

 

$

60.9

 

$

4.2

 

$

3.4

 

$

1.8

 

$

70.3

 

Fiscal 2010

 

29.3

 

11.0

 

2.3

 

6.2

 

48.8

 

Fiscal 2011

 

34.6

 

2.4

 

3.0

 

1.1

 

41.1

 

Fiscal 2012

 

37.1

 

1.7

 

12.6

 

2.2

 

53.6

 

Fiscal 2013

 

7.7

 

2.1

 

1.5

 

3.3

 

14.6

 

Three months ended September 30, 2013

 

0.1

 

 

1.1

 

 

1.2

 

Charges recorded through September 30, 2013

 

$

169.7

 

$

21.4

 

$

23.9

 

$

14.6

 

$

229.6

 

 

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

 

(In millions)

 

Employee-
Related

Costs

 

Asset
Write-offs

 

Contract
Terminations

 

Other Exit
Costs

 

Total

 

Balance at June 30, 2013

 

$

27.5

 

$

 

$

0.2

 

$

0.7

 

$

28.4

 

Charges

 

0.1

 

 

1.1

 

 

1.2

 

Cash payments

 

(5.7

)

 

(0.3

)

(0.3

)

(6.3

)

Translation adjustments

 

0.1

 

 

 

 

0.1

 

Balance at September 30, 2013

 

$

22.0

 

$

 

$

1.0

 

$

0.4

 

$

23.4

 

 

Accrued restructuring charges at September 30, 2013 are expected to result in cash expenditures funded from cash provided by operations of approximately $17 million for the remainder of fiscal 2014 and $6 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 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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Table of Contents

 

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)

 

 

 

September 30
2013

 

June 30
2013

 

 

 

September 30
2013

 

June 30
2013

 

Derivatives Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Prepaid expenses and other current assets

 

$

8.1

 

$

20.8

 

Other accrued liabilities

 

$

11.5

 

$

6.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Prepaid expenses and other current assets

 

4.4

 

0.9

 

Other accrued liabilities

 

3.2

 

2.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Derivatives

 

 

 

$

12.5

 

$

21.7

 

 

 

$

14.7

 

$

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 
from AOCI into
Earnings (Effective
Portion)

 

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

 

 

 

Three Months Ended
September 30

 

 

 

Three Months Ended
September 30

 

(In millions)

 

2013

 

2012

 

 

 

2013

 

2012

 

Derivatives in Cash Flow Hedging Relationships:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

(13.6

)

$

(13.5

)

Cost of sales

 

$

1.4

 

$

(0.1

)

 

 

 

 

 

 

Selling, general and administrative

 

2.4

 

2.5

 

Total derivatives

 

$

(13.6

)

$

(13.5

)

 

 

$

3.8

 

$

2.4

 

 


(1) The amount of net loss recognized in earnings related to the amount excluded from effectiveness testing was $0.1 million for the three months ended September 30, 2013 and 2012.  The net loss recognized in earnings related to the ineffective portion of the hedging relationships was $0.5 million for the three months ended September 30, 2013.  There was no gain (loss) recognized in earnings related to the ineffective portion of the hedging relationships for the three months ended September 30, 2012.

 

12



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

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

 

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

 

 

 

 

 

Three Months Ended
September 30

 

(In millions)

 

 

 

2013

 

2012

 

Derivatives Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Selling, general and administrative

 

$

3.0

 

$

2.1

 

 

Foreign Currency Cash-Flow Hedges

 

The Company enters into foreign currency forward contracts to hedge anticipated transactions, as well as receivables and payables denominated in foreign currencies, for periods consistent with the Company’s identified exposures.  The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on costs and on the cash flows that the Company receives from foreign subsidiaries.  The majority of foreign currency forward contracts are denominated in currencies of major industrial countries.  The Company may also enter into foreign currency option contracts to hedge anticipated transactions where there is a high probability that anticipated exposures will materialize.  The foreign currency forward contracts entered into to hedge anticipated transactions have been designated as foreign currency cash-flow hedges and have varying maturities through the end of December 2015.  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 September 30, 2013, the Company’s foreign currency cash-flow hedges were highly effective in all material respects.  The estimated net gain as of September 30, 2013 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $0.8 million.  The accumulated gain (loss) on foreign currency cash-flow hedges in AOCI was $(0.5) million and $16.9 million as of September 30, 2013 and June 30, 2013, respectively.

 

At September 30, 2013, the Company had foreign currency forward contracts in the amount of $1,763.6 million.  The foreign currencies included in foreign currency forward contracts (notional value stated in U.S. dollars) are principally the British pound ($420.8 million), Euro ($360.6 million), Canadian dollar ($229.4 million), Australian dollar ($94.2 million), Swiss franc ($91.3 million), Hong Kong dollar ($90.5 million) and Japanese yen ($88.4 million).

 

Credit Risk

 

As a matter of policy, the Company only enters into derivative contracts with counterparties that have a long-term credit rating of at least A- or higher by at least two nationally recognized rating agencies.  The counterparties to these contracts are major financial institutions.  Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the gross fair value of contracts in asset positions, which totaled $12.5 million at September 30, 2013.  To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored.  Accordingly, management believes risk of loss under these hedging contracts is remote.

 

13



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Certain of the Company’s derivative financial instruments contain credit-risk-related contingent features.  At September 30, 2013, the Company was in a net liability position for certain derivative contracts that contain such features with two counterparties.  Such credit-risk-related contingent features would be triggered if (a) upon a merger involving the Company, the ratings of the surviving entity were materially weaker than prior to the merger or (b) the Company’s credit ratings fall below investment grade (rated below BBB-/Baa3) and the Company fails to enter into an International Swaps & Derivatives Association Credit Support Annex within 30 days of being requested by the counterparty.  The fair value of collateral required to settle the instruments immediately if a triggering event were to occur is estimated at approximately the fair value of the contracts.  The fair value of those contracts in a net liability position was approximately $0.8 million as of September 30, 2013 and 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 September 30, 2013:

 

(In millions)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

12.5

 

$

 

$

12.5

 

Available-for-sale securities

 

7.0

 

 

 

7.0

 

Total

 

$

7.0

 

$

12.5

 

$

 

$

19.5

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

14.7

 

$

 

$

14.7

 

 

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

 

 

14



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 6.6%.  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.

 

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

 

 

 

September 30
2013

 

June 30
2013

 

(In millions)

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

Nonderivatives

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,322.2

 

$

1,322.2

 

$

1,495.7

 

$

1,495.7

 

Available-for-sale securities

 

7.0

 

7.0

 

6.5

 

6.5

 

Note receivable

 

16.8

 

16.9

 

16.8

 

16.9

 

Current and long-term debt

 

1,340.6

 

1,377.4

 

1,344.3

 

1,387.8

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts — asset (liability)

 

(2.2

)

(2.2

)

12.6

 

12.6

 

 

15



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 year ended June 30, 2013.

 

The components of net periodic benefit cost for the three months ended September 30, 2013 and 2012 consisted of the following:

 

 

 

Pension Plans

 

Other than
Pension Plans

 

 

 

U.S.

 

International

 

Post-retirement

 

(In millions)

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

7.9

 

$

8.5

 

$

6.1

 

$

5.9

 

$

0.9

 

$

1.2

 

Interest cost

 

7.7

 

6.7

 

4.6

 

4.5

 

2.0

 

1.9

 

Expected return on plan assets

 

(11.7

)

(11.3

)

(5.0

)

(4.8

)

(0.5

)

(0.5

)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost

 

0.2

 

0.1

 

0.7

 

0.7

 

0.2

 

0.2

 

Actuarial loss

 

1.9

 

3.6

 

2.2

 

2.3

 

0.2

 

1.1

 

Settlements and curtailments

 

 

 

 

0.8

 

 

 

Net periodic benefit cost

 

$

6.0

 

$

7.6

 

$

8.6

 

$

9.4

 

$

2.8

 

$

3.9

 

 

During the three months ended September 30, 2013, the Company made contributions to its international pension plans totaling approximately $4 million.

 

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

 

 

 

September 30

 

June 30

 

(In millions)

 

2013

 

2013

 

Other assets

 

$

145.2

 

$

144.0

 

Other accrued liabilities

 

(23.2

)

(23.1

)

Other noncurrent liabilities

 

(358.4

)

(349.2

)

Funded status

 

(236.4

)

(228.3

)

Accumulated other comprehensive loss

 

315.0

 

315.0

 

Net amount recognized

 

$

78.6

 

$

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.

 

16



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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 ($81.2 million at the exchange rate at September 30, 2013) 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 ($31.0 million at the exchange rate at September 30, 2013) 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 ($34.2 million at the exchange rate at September 30, 2013) 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 September 30, 2013, approximately 14,859,200 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
September 30

 

(In millions)

 

2013

 

2012

 

 

 

 

 

 

 

Compensation expense

 

$

56.3

 

$

54.5

 

Income tax benefit

 

18.3

 

17.6

 

 

As of September 30, 2013, the total unrecognized compensation cost related to unvested stock-based awards was $188.2 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 September 30, 2013 and changes during the three 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

 

1,805.6

 

67.31

 

 

 

 

 

Exercised

 

(298.5

)

27.15

 

 

 

 

 

Expired

 

(4.5

)

24.35

 

 

 

 

 

Forfeited

 

(37.5

)

50.25

 

 

 

 

 

Outstanding at September 30, 2013

 

16,536.5

 

40.09

 

$

492.9

 

7.1

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest at September 30, 2013

 

16,346.0

 

39.85

 

$

491.3

 

7.0

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2013

 

8,286.2

 

26.77

 

$

357.4

 

5.7

 

 


(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.

 

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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
September 30

 

(In millions, except per share data)

 

2013

 

2012

 

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

 

$

23.03

 

$

20.36

 

 

 

 

 

 

 

Intrinsic value of stock options exercised

 

$

10.8

 

$

27.3

 

 

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
September 30

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Weighted-average expected stock-price volatility

 

33%

 

34%

 

Weighted-average expected option life

 

7 years

 

8 years

 

Average risk-free interest rate

 

2.5%

 

1.2%

 

Average dividend yield

 

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 three months ended September 30, 2013, the Company granted approximately 284,400 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 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 September 30, 2013 and activity during the three 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

 

284.4

 

67.31

 

Vested

 

 

 

Forfeited

 

 

 

Nonvested at September 30, 2013

 

795.3

 

58.59

 

 

18



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Restricted Stock Units

 

The Company granted approximately 1,281,000 RSUs during the three months ended September 30, 2013 which, at the time of grant, were scheduled to vest as follows: 469,300 in fiscal 2015, 480,900 in fiscal 2016, 327,800 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 September 30, 2013 and activity during the three 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

 

1,281.0

 

65.97

 

Vested

 

 

 

Forfeited

 

(23.1

)

55.27

 

Nonvested at September 30, 2013

 

3,480.7

 

57.55

 

 

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 September 30, 2013, 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, 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.

 

19



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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 September 30, 2013 and activity during the three 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

 

 

 

Dividend equivalents

 

0.2

 

71.11

 

Converted

 

 

 

Outstanding at September 30, 2013

 

87.5

 

33.36

 

 

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 $1.0 million and $1.6 million as compensation expense to reflect additional deferrals and the change in the market value for the three months ended September 30, 2013 and 2012, respectively.

 

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

 

Net earnings attributable to The Estée Lauder Companies Inc. per common share (“basic EPS”) is computed by dividing net earnings attributable to The Estée Lauder Companies Inc. by the weighted-average number of common shares outstanding and contingently issuable shares (which satisfy certain conditions).  Net earnings attributable to The Estée Lauder Companies Inc. per common share assuming dilution (“diluted EPS”) is computed by reflecting potential dilution from stock-based awards.

 

A reconciliation between the numerators and denominators of the basic and diluted EPS computations is as follows:

 

 

 

Three Months Ended
September 30

 

(In millions, except per share data)

 

2013

 

2012

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

Net earnings attributable to The Estée Lauder Companies Inc.

 

$

300.7

 

$

299.5

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted-average common shares outstanding — Basic

 

387.8

 

387.8

 

Effect of dilutive stock options

 

5.1

 

5.7

 

Effect of RSUs

 

1.6

 

1.7

 

Effect of PSUs based on TSR

 

0.1

 

 

Effect of MSU

 

0.3

 

0.3

 

Weighted-average common shares outstanding — Diluted

 

394.9

 

395.5

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

$

.78

 

$

.77

 

Diluted

 

.76

 

.76

 

 

20



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of September 30, 2013 and 2012, outstanding options to purchase 1.9 million and 3.2 million shares, respectively, of Class A Common Stock were not included in the computation of diluted EPS because their inclusion would be anti-dilutive.  As of September 30, 2013 and 2012, 0.8 million and 0.9 million of PSUs, respectively, have been excluded from the calculation of diluted EPS because the number of shares ultimately issued is contingent on the achievement of certain performance targets of the Company, as discussed in Note 8 — Stock-Based Compensation.

 

NOTE 10 — EQUITY

 

 

 

Total Stockholders’ Equity — The Estée Lauder Companies Inc.

 

Non-

 

 

 

(In millions)

 

Common
Stock

 

Paid-in
Capital

 

Retained
Earnings

 

AOCI

 

Treasury
Stock

 

Total

 

controlling
Interests

 

Total
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2013

 

$

5.6

 

$

2,289.9

 

$

5,364.1

 

$

(157.5

)

$

(4,215.2

)

$

3,286.9

 

$

15.0

 

$

3,301.9

 

Net earnings

 

 

 

300.7

 

 

 

300.7

 

1.1

 

301.8

 

Common stock dividends - cash

 

 

 

(70.1

)

 

 

(70.1

)

 

(70.1

)

Other comprehensive income

 

 

 

 

61.2

 

 

61.2

 

0.6

 

61.8

 

Acquisition of treasury stock

 

 

 

 

 

(41.8

)

(41.8

)

 

(41.8

)

Stock-based compensation

 

 

76.0

 

 

 

(17.1

)

58.9

 

 

58.9

 

Balance at September 30, 2013

 

$

5.6

 

$

2,365.9

 

$

5,594.7

 

$

(96.3

)

$

(4,274.1

)

$

3,595.8

 

$

16.7

 

$

3,612.5

 

 

The following is a summary of quarterly cash dividends declared per share on the Company’s Class A and Class B Common Stock during the three months ended September 30, 2013:

 

Date Declared

 

Record Date

 

Payable Date

 

Amount per Share

 

 

 

 

 

 

 

 

 

August 14, 2013

 

August 30, 2013

 

September 16, 2013

 

$

.18

 

 

On October 30, 2013, a quarterly dividend was declared in the amount of $.20 per share on the Company’s Class A and Class B Common Stock.  The dividend is payable in cash on December 16, 2013 to stockholders of record at the close of business on November 29, 2013.

 

Common Stock

 

During the three months ended September 30, 2013, the Company purchased approximately 0.9 million shares of its Class A Common Stock for $59.5 million.

 

During the three months ended September 30, 2013, approximately 0.3 million shares of the Company’s Class B Common Stock were converted into the Company’s Class A Common Stock.

 

Accumulated Other Comprehensive Income (Loss)

 

The following table represents changes in AOCI, net of tax, by component for the three months ended September 30, 2013:

 

(In millions)

 

Net
Unrealized
Investment
Gain (Loss)

 

Net
Derivative
Instrument
Gain (Loss)

 

Amounts
Included in
Net Periodic
Benefit Cost

 

Translation
Adjustments

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2013

 

$

0.8

 

$

18.3

 

$

(213.7

)

$

37.1

 

$

(157.5

)

OCI before reclassifications

 

0.2

 

(8.7

)

(4.1

)(1)

72.5

 

59.9

 

Amounts reclassified from AOCI

 

 

(2.5

)

3.8

 

 

1.3

 

Net current-period OCI

 

0.2

 

(11.2

)

(0.3

)

72.5

 

61.2

 

Balance at September 30, 2013

 

$

1.0

 

$

7.1

 

$

(214.0

)

$

109.6

 

$

(96.3

)

 


(1) Includes foreign currency translation losses of $5.4 million.

 

21



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table represents the effects of reclassification adjustments from AOCI into net earnings for the three months ended September 30, 2013:

 

 

 

Amount Reclassified
from AOCI

 

 

 

(In millions)

 

Three Months Ended
September 30, 2013

 

Affected Line Item in Consolidated
Statement of Earnings

 

 

 

 

 

 

 

Gain (Loss) on Cash-Flow Hedges

 

 

 

 

 

Foreign currency forward contracts

 

$

1.4

 

Cost of sales

 

Foreign currency forward contracts

 

2.4

 

Selling, general and administrative

 

 

 

3.8

 

Earnings before income taxes

 

Benefit (provision) for deferred taxes

 

(1.4

)

Provision for income taxes

 

 

 

$

2.4

 

Net earnings

 

 

 

 

 

 

 

Gain (Loss) on Fair-Value Hedges

 

 

 

 

 

Settled interest rate-related derivatives

 

$

0.1

 

Interest expense, net

 

Benefit (provision) for deferred taxes

 

 

Provision for income taxes

 

 

 

$

0.1

 

Net earnings

 

 

 

 

 

 

 

Amounts Included in Net Periodic Benefit Cost

 

 

 

 

 

Amortization of prior service cost

 

$

(1.1

)

(1)

 

Amortization of actuarial loss

 

(4.3

)

(1)

 

 

 

(5.4

)

Earnings before income taxes

 

Benefit (provision) for deferred taxes

 

1.6

 

Provision for income taxes

 

 

 

$

(3.8

)

Net earnings

 

Total reclassification adjustments, net

 

$

(1.3

)

Net earnings

 

 


(1) See Note 6 — Pension and Post-Retirement Benefit Plans for additional information.

 

NOTE 11 — STATEMENT OF CASH FLOWS

 

Supplemental cash flow information for the three months ended September 30, 2013 and 2012 is as follows:

 

(In millions)

 

2013

 

2012

 

 

 

 

 

 

 

Cash:

 

 

 

 

 

Cash paid during the period for interest

 

$

8.7

 

$

27.5

 

Cash paid during the period for income taxes

 

$

50.8

 

$

67.3

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

Incremental tax benefit from the exercise of stock options

 

$

(0.8

)

$

(1.8

)

Capital lease obligations incurred

 

$

1.7

 

$

0.6

 

 

22



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 — SEGMENT DATA AND RELATED INFORMATION

 

Reportable operating segments include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the “Chief Executive”) in deciding how to allocate resources and in assessing performance.  Although the Company operates in one business segment, beauty products, management also evaluates performance on a product category basis.  Product category performance is measured based upon net sales before returns associated with restructuring activities, and earnings before income taxes, net interest expense, interest expense on debt extinguishment, other income and total charges associated with restructuring activities.  Returns and charges associated with restructuring activities are not allocated to the product categories because they result from activities that are deemed part of a company-wide program to redesign the Company’s organizational structure.

 

The accounting policies for the Company’s reportable segments are substantially the same as those for the consolidated financial statements, as described in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2013.  The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; thus, no additional information is produced for the Chief Executive or included herein.  There has been no significant variance in the total or long-lived asset values associated with the Company’s segment data since June 30, 2013.

 

23



Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Three Months Ended
September 30

 

(In millions)

 

2013

 

2012

 

 

 

 

 

 

 

PRODUCT CATEGORY DATA

 

 

 

 

 

Net Sales:

 

 

 

 

 

Skin Care

 

$

1,171.0

 

$

1,113.5

 

Makeup

 

1,001.0

 

960.4

 

Fragrance

 

367.4

 

347.6

 

Hair Care

 

124.8

 

113.9

 

Other

 

10.8

 

14.1

 

Net Sales

 

$

2,675.0

 

$

2,549.5

 

 

 

 

 

 

 

Operating Income (Loss) before total charges associated with restructuring activities:

 

 

 

 

 

Skin Care

 

$

241.6

 

$

259.0

 

Makeup

 

166.3

 

161.3

 

Fragrance

 

36.9

 

53.4

 

Hair Care

 

8.4

 

10.7

 

Other

 

(2.5

)

(2.0

)

 

 

450.7

 

482.4

 

 

 

 

 

 

 

Reconciliation:

 

 

 

 

 

Total charges associated with restructuring activities

 

(1.2

)

(0.4

)

Interest expense, net

 

(13.5

)

(15.8

)

Interest expense on debt extinguishment

 

 

(19.1

)

Other income

 

 

1.8

 

Earnings before income taxes

 

$

436.0

 

$

448.9

 

 

 

 

 

 

 

GEOGRAPHIC DATA

 

 

 

 

 

Net Sales:

 

 

 

 

 

The Americas

 

$

1,202.4

 

$

1,182.1

 

Europe, the Middle East & Africa

 

891.2

 

824.9

 

Asia/Pacific

 

581.4

 

542.5

 

Net Sales

 

$

2,675.0

 

$

2,549.5

 

Operating Income (Loss):

 

 

 

 

 

The Americas

 

$

156.0

 

$

172.3

 

Europe, the Middle East & Africa

 

180.8

 

196.9

 

Asia/Pacific

 

113.9

 

113.2

 

 

 

450.7

 

482.4

 

Total charges associated with restructuring activities

 

(1.2

)

(0.4

)

Operating Income

 

$

449.5

 

$

482.0

 

 

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THE ESTÉE LAUDER COMPANIES INC.

 

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

 

RESULTS OF OPERATIONS

 

We manufacture, market and sell beauty products including those in the skin care, makeup, fragrance and hair care categories which are distributed in over 150 countries and territories.  The following table is a comparative summary of operating results for the three months ended September 30, 2013 and 2012, and reflects the basis of presentation described in Note 1 of Notes to Consolidated Financial Statements — Summary of Significant Accounting Policies for all periods presented.  Products and services that do not meet our definition of skin care, makeup, fragrance or hair care have been included in the “other” category.

 

 

 

Three Months Ended
September 30

 

(In millions)

 

2013

 

2012

 

 

 

 

 

 

 

NET SALES

 

 

 

 

 

By Region:

 

 

 

 

 

The Americas

 

$

1,202.4

 

$

1,182.1

 

Europe, the Middle East & Africa

 

891.2

 

824.9

 

Asia/Pacific

 

581.4

 

542.5

 

Net Sales

 

$

2,675.0

 

$

2,549.5

 

 

 

 

 

 

 

By Product Category:

 

 

 

 

 

Skin Care

 

$

1,171.0

 

$

1,113.5

 

Makeup

 

1,001.0

 

960.4

 

Fragrance

 

367.4

 

347.6

 

Hair Care

 

124.8

 

113.9

 

Other

 

10.8

 

14.1

 

Net Sales

 

$

2,675.0

 

$

2,549.5

 

 

 

 

 

 

 

OPERATING INCOME (LOSS)

 

 

 

 

 

By Region:

 

 

 

 

 

The Americas

 

$

156.0

 

$

172.3

 

Europe, the Middle East & Africa

 

180.8

 

196.9

 

Asia/Pacific

 

113.9

 

113.2

 

 

 

450.7

 

482.4

 

Total charges associated with restructuring activities

 

(1.2

)

(0.4

)

Operating Income

 

$

449.5

 

$

482.0

 

 

 

 

 

 

 

By Product Category:

 

 

 

 

 

Skin Care

 

$

241.6

 

$

259.0

 

Makeup

 

166.3

 

161.3

 

Fragrance

 

36.9

 

53.4

 

Hair Care

 

8.4

 

10.7

 

Other

 

(2.5

)

(2.0

)

 

 

450.7

 

482.4

 

Total charges associated with restructuring activities

 

(1.2

)

(0.4

)

Operating Income

 

$

449.5

 

$

482.0

 

 

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THE ESTÉE LAUDER COMPANIES INC.

 

The following table presents certain consolidated earnings data as a percentage of net sales:

 

 

 

Three Months Ended
September 30

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net sales

 

100.0

%

100.0

%

Cost of sales

 

20.3

 

21.1

 

Gross profit

 

79.7

 

78.9

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

62.8

 

60.0

 

Restructuring and other charges

 

0.1

 

 

Total operating expenses

 

62.9

 

60.0

 

 

 

 

 

 

 

Operating income

 

16.8

 

18.9

 

Interest expense, net

 

0.5

 

0.6

 

Interest expense on debt extinguishment

 

 

0.8

 

Other income

 

 

0.1

 

 

 

 

 

 

 

Earnings before income taxes

 

16.3

 

17.6

 

Provision for income taxes

 

5.0

 

5.9

 

 

 

 

 

 

 

Net earnings

 

11.3

 

11.7

 

Net earnings attributable to noncontrolling interests

 

0.1

 

 

 

 

 

 

 

 

Net earnings attributable to The Estée Lauder Companies Inc.

 

11.2

%

11.7

%

 

In order to meet the demands of consumers, we continually introduce new products, support new and established products through advertising, merchandising and sampling and phase out existing products that no longer meet the needs of our consumers or our objectives.  The economics of developing, producing, launching, supporting and discontinuing products impact our sales and operating performance each period.  The introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning.

 

We operate on a global basis, with the majority of our net sales generated outside the United States.  Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations.  Therefore, we present certain net sales information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of our underlying business outside the United States.  Constant currency information compares results between periods as if exchange rates had remained constant period-over-period.  We calculate constant currency information by translating current-period results using prior-year period weighted-average foreign currency exchange rates.

 

Overview

 

We believe that the best way to continue to increase stockholder value is to provide our customers and consumers with the products and services that they have come to expect from us in the most efficient and profitable manner while recognizing consumers’ changing shopping habits.  To be the global leader in prestige beauty, we continued to implement a long-term strategy that is guiding us through fiscal 2016.  The strategy has numerous initiatives across geographic regions, product categories, brands and functions that are designed to leverage our strengths, make us more productive and grow our sales.

 

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We have a strong, diverse and highly valuable brand portfolio with global reach and potential, and we plan to continue building upon and leveraging our history of outstanding creativity, innovation and entrepreneurship.  We have succeeded in expanding our distinctive “High-Touch” service model and will continue to look for ways to further evolve it within our channels of distribution and geographic regions.  As an example, we continue to develop capabilities to deliver superior retailing experiences, particularly in freestanding retail stores.  We continue to increase brand awareness by expanding our efforts to evolve our online strategy into a multi-pronged digital strategy encompassing e-commerce and m-commerce, as well as digital and social media.  We are leveraging our regional organization in an effort to assure that we are locally relevant with our products, services, marketing and visual merchandising.

 

As part of our strategy, we are positioning ourselves to capitalize on opportunities in the fastest-growing areas in prestige beauty.  Skin care, our most profitable product category, continues to be a strategic priority for our innovation and investment spending, particularly in the Asia/Pacific region.  We are also focusing our attention on luxury consumers across all product categories and have seen continued strength in the net sales of many of our higher-end prestige products.  We will also continue to build our makeup product category through the introduction of new product offerings, re-emphasize our focus on fragrance innovation to drive profitable growth and expand our hair care brands both in salons and in other retail channels.

 

We are strengthening our geographic presence by seeking share growth in large, image-building cities within core markets such as the United States, the United Kingdom, France, Italy and Japan.  In addition, we continue to prioritize efforts to expand our presence and accelerate share growth in emerging markets such as China, the Middle East, Eastern Europe and Brazil and focus on consumers who purchase in the travel retail channel, in stores at their travel destinations or when they return to their home market.  We also continue to expand our digital presence which has resulted in growth in the net sales of our products sold online.  In North America, we continue to implement programs to drive profitable growth in our traditional department store channel.  At the same time, we are also expanding our presence in other channels, such as specialty multi-brand retailers, freestanding retail stores and online.  Internationally, we continue to take actions to grow in European perfumeries and pharmacies and in department stores, particularly in Asia and the United Kingdom.  In addition, we are emphasizing our skin care and makeup initiatives to boost our travel retail business and continuing efforts to grow our freestanding retail store, online, specialty multi-brand retailer and prestige salon businesses.  The travel retail business continues to be an important source of sales growth and profitability.  Our business in this channel has benefited from the implementation of programs we designed to target consumers in distinct travel corridors, enhance consumers’ “High-Touch” experiences and convert travelers into purchasers.

 

While our overall business is performing well, we are seeing continued weakness in certain Southern European countries and Korea due to challenging economic environments.  In Korea, we are continuing to see competitive pressures in prestige beauty.  Elsewhere, we are cautious of an uncertain retail environment in the United States in the short term, and a slowing of the future growth trend in China.  We believe we have and will continue to offset to some extent the impact of these challenges as a result of our strategy to mitigate weaknesses we find in certain areas with strengths in others.  However, if economic conditions or the degree of uncertainty or volatility worsen or the adverse conditions previously discussed are further prolonged, then we expect there to be a negative effect on ongoing consumer confidence, demand and spending and, as a result, our business.  We will continue to monitor these and other risks that may affect our business.

 

We plan to continue to invest in the significant modernization of our global information systems, which includes the Strategic Modernization Initiative (“SMI”) as well as other initiatives.  We plan to roll out the last major wave of SMI in July 2014 in certain of our locations.  As a result, some retailers may accelerate their sales orders that we believe would normally occur in our fiscal 2015 first quarter into our fiscal 2014 fourth quarter in advance of this implementation to provide adequate safety stock to mitigate any potential short-term business interruption associated with the SMI rollout.  We expect these initiatives should over time provide for overall profitability improvements by enhancing gross margin and supporting efficiencies in select operating expenses, which should enable us to strategically reinvest our savings in activities that will support our future growth.

 

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During fiscal 2014, we plan to continue building on our strengths and our heritage of innovation to bring unique and high-performance products with long-term appeal and enduring quality to our consumers.  We expect our strategy will enable us to continue to succeed in high growth channels, benefit from regional opportunities, focus on emerging market consumers and enhance our local relevance.  We plan on continuing to bring highly innovative products to consumers and elevating our personalized “High-Touch” philosophy through customization with key retailers, expansion in freestanding retail stores and extending it to fast-growing digital platforms.  We remain dedicated to investing in select areas to improve our capabilities or develop new ones.  Our main focuses are accelerating our digital capabilities, research and development, product innovation, consumer insight and local relevance.

 

Returns and Charges Associated with Restructuring Activities

 

During the second quarter of fiscal 2013, we closed our multi-faceted cost savings program implemented in February 2009 (the “Program”) and we 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 $321.6 million.  For further information, refer to the consolidated financial statements and accompanying footnotes included in our Annual Report on Form 10-K for the year ended June 30, 2013.

 

Restructuring Charges

 

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

 

(In millions)

 

Employee-
Related
Costs

 

Asset
Write-offs

 

Contract
Terminations

 

Other Exit
Costs

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2009

 

$

60.9

 

$

4.2

 

$

3.4

 

$

1.8

 

$

70.3

 

Fiscal 2010

 

29.3

 

11.0

 

2.3

 

6.2

 

48.8

 

Fiscal 2011

 

34.6

 

2.4

 

3.0

 

1.1

 

41.1

 

Fiscal 2012

 

37.1

 

1.7

 

12.6

 

2.2

 

53.6

 

Fiscal 2013

 

7.7

 

2.1

 

1.5

 

3.3

 

14.6

 

Three months ended September 30, 2013

 

0.1

 

 

1.1

 

 

1.2

 

Charges recorded through September 30, 2013

 

$

169.7

 

$

21.4

 

$

23.9

 

$

14.6

 

$

229.6

 

 

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

 

(In millions)

 

Employee-
Related
Costs

 

Asset
Write-offs

 

Contract
Terminations

 

Other Exit
Costs

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2013

 

$

27.5

 

$

 

$

0.2

 

$

0.7

 

$

28.4

 

Charges

 

0.1

 

 

1.1

 

 

1.2

 

Cash payments

 

(5.7

)

 

(0.3

)

(0.3

)

(6.3

)

Translation adjustments

 

0.1

 

 

 

 

0.1

 

Balance at September 30, 2013

 

$

22.0

 

$

 

$

1.0

 

$

0.4

 

$

23.4

 

 

Accrued restructuring charges at September 30, 2013 are expected to result in cash expenditures funded from cash provided by operations of approximately $17 million for the remainder of fiscal 2014 and $6 million in fiscal 2015.

 

First Quarter Fiscal 2014 as Compared with First Quarter Fiscal 2013

 

NET SALES

 

Net sales increased 5%, or $125.5 million, to $2,675.0 million, primarily reflecting growth in each of our major product categories and regions.  Excluding the impact of foreign currency translation, net sales increased 6%.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

Product Categories

 

Skin Care

 

Net sales of skin care products increased 5%, or $57.5 million, to $1,171.0 million.  The recent launches of Advanced Night Repair Synchronized Recovery Complex II and Advanced Night Repair Eye Serum Infusion from Estée Lauder and Dramatically Different Moisturizing Lotion + from Clinique contributed approximately $208 million, combined, to the increase.  These launches resulted in lower sales of certain existing Advanced Night Repair products from Estée Lauder and Dramatically Different Moisturizing Lotion from Clinique of approximately $119 million, combined.  Also partially offsetting the net sales increase were lower sales of Perfectionist CP+R Serum from Estée Lauder and Even Better Eyes Dark Circle Corrector from Clinique, both of which were new launches in the prior-year period, of approximately $42 million, combined.  Excluding the impact of foreign currency translation, skin care net sales increased 6%.

 

Makeup

 

Makeup net sales increased 4%, or $40.6 million, to $1,001.0 million, primarily reflecting higher net sales from our makeup artist brands and the recent launch of All About Shadow from Clinique of approximately $73 million, combined.  Partially offsetting these increases were lower sales of Chubby Stick Moisturizing Lip Colour Balm from Clinique and the prior-year period launches of Pure Color Vivid Shine Lipstick and Pure Color Gelee Powder Eyeshadow from Estée Lauder, and Pore Refining Solutions Makeup and High Impact Extreme Volume Mascara from Clinique of approximately $30 million, combined.  Excluding the impact of foreign currency translation, makeup net sales increased 5%.

 

Fragrance

 

Net sales of fragrance products increased 6%, or $19.8 million, to $367.4 million.  Incremental sales from the recent launches of Estée Lauder Modern Muse, Zegna Uomo, Michael Kors Sexy Amber and Jo Malone Peony and Blush Suede contributed approximately $39 million to the category, combined.  These increases were partially offset by lower sales of DKNY Be Delicious and Estée Lauder pleasures, as well as the prior-year period launches of DKNY Be Delicious So Intense and Estée Lauder pleasures Eau Fraiche of approximately $22 million, combined.  The impact of foreign currency translation on fragrance net sales was de minimis.

 

Hair Care

 

Hair care net sales increased 10%, or $10.9 million, to $124.8 million, primarily reflecting the continued success and growth of the Invati line of products from Aveda and the recent launch of Dryspun Finish from Bumble and bumble.  The category also benefited from sales generated from expanded global distribution, in particular to salons and specialty multi-brand retailers.  Partially offsetting these increases were lower sales of Ojon brand products due, in part, to the exit of that business from the direct response television channel, which we expect to be completed by the second quarter of fiscal 2014.  The impact of foreign currency translation on hair care net sales was de minimis.

 

Geographic Regions

 

Net sales in the Americas increased 2%, or $20.3 million, to $1,202.4 million.  Net sales in the United States increased approximately $10 million, primarily due to higher sales from certain of our makeup artist, luxury and hair care brands, and designer fragrances, partially offset by lower net sales from certain of our heritage brands.  Net sales in Latin America increased approximately $8 million, led by Venezuela and Argentina.  Net sales in Canada increased approximately $2 million.  The impact of foreign currency translation on the Americas net sales was de minimis.

 

In Europe, the Middle East & Africa, net sales increased 8%, or $66.3 million, to $891.2 million, primarily reflecting higher sales from our travel retail business, the United Kingdom, Germany and France of approximately $54 million, combined.  The net sales increase in our travel retail business primarily reflected a stronger retail environment for our products, in particular our luxury brands, and to a lesser extent, an increase in global airline passenger traffic.  Higher sales in the United Kingdom, Germany and France were primarily driven by our makeup artist and luxury brands.  Excluding the impact of foreign currency translation, Europe, the Middle East & Africa net sales increased 7%.

 

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Net sales in Asia/Pacific increased 7%, or $38.9 million, to $581.4 million, primarily reflecting higher sales from China and Hong Kong of approximately $54 million, combined.  The net sales growth in China was primarily due to expanded distribution and the previously-mentioned skin care launches from Estée Lauder and Clinique.  Higher sales in Hong Kong were primarily driven by such skin care launches from our heritage brands and higher-end prestige skin care products.  These increases were partially offset by lower net sales in Japan and Australia of approximately $22 million, combined.  The declines in Japan and Australia were driven by the weakening of their respective currencies.  Excluding the impact of foreign currency translation, Asia/Pacific net sales increased 11%.

 

We strategically stagger our new product launches by geographic market, which may account for differences in regional sales growth.

 

COST OF SALES

 

Cost of sales as a percentage of total net sales decreased to 20.3% as compared with 21.1% in the prior-year period.  This improvement reflected strategic changes in the mix of our business and pricing of approximately 50 basis points, combined.  Also contributing to the improvement was a decrease in obsolescence charges and a favorable comparison to the prior-year period which included a provision for foreign transactional taxes, of approximately 70 basis points, combined.  These improvements were partially offset by unfavorable manufacturing variances of approximately 30 basis points.

 

Since certain promotional activities are a component of sales or cost of sales and the timing and level of promotions vary with our promotional calendar, we have experienced, and expect to continue to experience, fluctuations in the cost of sales percentage.  In addition, future cost of sales mix may be impacted by the inclusion of potential new brands or channels of distribution which have margin and product cost structures different from those of our current mix of business.

 

OPERATING EXPENSES

 

Operating expenses as a percentage of net sales increased to 62.9% as compared with 60.0% in the prior-year period.  This increase primarily reflected higher spending on advertising, merchandising and sampling in line with our strategy and in support of our major launches of approximately 180 basis points.  The increase also reflected higher general and administrative costs, and the impact of an adjustment made in the prior-year period related to the overstatement of accounts payable balances of approximately 30 basis points each.  Also contributing to the increase were higher costs related to freestanding retail store expansion, and selling and shipping costs of approximately 20 basis points each, as well as unfavorable changes in foreign exchange transactions of approximately 10 basis points.

 

Changes in advertising, merchandising and sampling spending result from the type, timing and level of activities related to product launches and rollouts, as well as the markets being emphasized.

 

OPERATING RESULTS

 

Operating income decreased 7%, or $32.5 million, to $449.5 million.  Operating margin declined to 16.8% of net sales as compared with 18.9% in the prior-year period, primarily reflecting our increase in investment spending in line with our strategy, partially offset by our higher gross margin.  The following discussions of Operating Results by Product Categories and Geographic Regions exclude the impact of total charges associated with restructuring activities of $1.2 million, or less than 1% of net sales, for the three months ended September 30, 2013 and $0.4 million, or less than 1% of net sales, for the three months ended September 30, 2012.  We believe the following analysis of operating results better reflects the manner in which we conduct and view our business.

 

Product Categories

 

Skin care operating income decreased 7%, or $17.4 million, to $241.6 million, primarily reflecting lower results from certain of our heritage brands, due to an increase in investment spending for recent major launches in line with our strategy.  Makeup operating income increased 3%, or $5.0 million, to $166.3 million, primarily reflecting improved results from MžAžC, partially offset by lower results from our heritage brands.  Fragrance operating income decreased 31%, or $16.5 million, to $36.9 million, primarily reflecting higher investment spending behind recent major launches.  Hair care operating results decreased 21%, or $2.3 million, to $8.4 million, due in part to additional investments related to expanded distribution and an increase in advertising expenses during the current-year period.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

Geographic Regions

 

Operating income in the Americas decreased 9%, or $16.3 million, to $156.0 million, primarily reflecting lower sales from certain of our heritage brands, partially offset by improved results from certain of our makeup artist, luxury and hair care brands.  The decrease also reflected higher investment spending to support our major launches during the current-year period in the region, which is in line with our strategy, as well as an adjustment made in the prior-year period related to the overstatement of accounts payable balances.

 

In Europe, the Middle East & Africa, operating income decreased 8%, or $16.1 million, to $180.8 million.  Higher results from our travel retail business and the Balkans totaled approximately $9 million, combined.  These improvements were more than offset by lower operating results in most other countries in the region, primarily due to increases in investment spending for recent major launches and costs associated with freestanding retail store expansion, which were in line with our strategy.

 

In Asia/Pacific, operating income increased 1%, or $0.7 million, to $113.9 million.  Higher results from China and Taiwan totaled approximately $8 million, combined.  These higher results were mostly offset by lower operating results of approximately $8 million in Japan and Vietnam, combined.

 

INTEREST EXPENSE, NET

 

Net interest expense was $13.5 million as compared with $15.8 million in the prior-year period.  Interest expense decreased primarily due to the refinancing of debt at lower rates during fiscal 2013.

 

INTEREST EXPENSE ON DEBT EXTINGUISHMENT

 

During the first quarter of fiscal 2013, we redeemed the $230.1 million principal amount of our 7.75% Senior Notes due 2013 at a price of 108% of the principal amount.  We recorded a pre-tax expense on the extinguishment of debt of $19.1 million representing the call premium of $18.6 million and the pro-rata write-off of $0.5 million of issuance costs and debt discount.

 

PROVISION FOR INCOME TAXES

 

The provision for income taxes represents U.S. federal, foreign, state and local income taxes.  The effective rate differs from the federal statutory rate primarily due to the effect of state and local income taxes, the taxation of foreign income and income tax reserve adjustments, which represent changes in our net liability for unrecognized tax benefits including tax settlements and lapses of the applicable statutes of limitations.  Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the ultimate disposition of deferred tax assets relating to stock-based compensation and the interaction of various global tax strategies.  In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of change.

 

The effective rate for income taxes was 30.8% for the three months ended September 30, 2013 and 33.3% for the three months ended September 30, 2012.  The decrease in the effective income tax rate was principally due to income tax reserve adjustments and a lower effective tax rate on our foreign operations.

 

NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC.

 

Net earnings attributable to The Estée Lauder Companies Inc. as compared with the prior-year period increased less than 1%, or $1.2 million, to $300.7 million and diluted net earnings per common share of $.76 were unchanged as compared with the prior-year period.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

FINANCIAL CONDITION

 

LIQUIDITY AND CAPITAL RESOURCES

 

Overview

 

Our principal sources of funds historically have been cash flows from operations, borrowings pursuant to our commercial paper program, borrowings from the issuance of long-term debt and committed and uncommitted credit lines provided by banks and other lenders in the United States and abroad.  At September 30, 2013, we had cash and cash equivalents of $1,322.2 million compared with $1,495.7 million at June 30, 2013.  Our cash and cash equivalents are maintained at a number of financial institutions.  As of September 30, 2013, less than 1% of the total balance was insured by governmental agencies.  To mitigate the risk of uninsured balances, we select financial institutions based on their credit ratings and financial strength and perform ongoing evaluations of these institutions to limit our concentration risk exposure.

 

Our business is seasonal in nature and, accordingly, our working capital needs vary.  From time to time, we may enter into investing and financing transactions that require additional funding.  To the extent that these needs exceed cash from operations, we could, subject to market conditions, issue commercial paper, issue long-term debt securities or borrow under our revolving credit facilities.

 

Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support currently planned business operations, information systems enhancements, capital expenditures, potential stock repurchases, commitments and other contractual obligations on both a near-term and long-term basis.  Our cash and cash equivalents balance at September 30, 2013 includes cash in offshore jurisdictions associated with our permanent reinvestment strategy.  We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic debt or working capital obligations.  If these indefinitely reinvested earnings were repatriated into the United States as dividends, we would be subject to additional taxes.

 

The effects of inflation have not been significant to our overall operating results in recent years.  Generally, we have been able to introduce new products at higher prices, increase prices and implement other operating efficiencies to sufficiently offset cost increases, which have been moderate.

 

Credit Ratings

 

Changes in our credit ratings will likely result in changes in our borrowing costs.  Our credit ratings also impact the cost of our revolving credit facility as discussed below.  Downgrades in our credit ratings may reduce our ability to issue commercial paper and/or long-term debt and would likely increase the relative costs of borrowing.  A credit rating is not a recommendation to buy, sell, or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization, and should be evaluated independently of any other rating.  As of October 24, 2013, our commercial paper is rated A-1 by Standard & Poor’s and P-1 by Moody’s and our long-term debt is rated A with a stable outlook by Standard & Poor’s and A2 with a stable outlook by Moody’s.

 

Debt

 

At September 30, 2013, our outstanding borrowings were as follows:

 

($ in millions)

 

Long-term
Debt

 

Current
Debt

 

Total Debt

 

3.70% Senior Notes, due August 15, 2042 (“2042 Senior Notes”) (1), (6)

 

$

248.9

 

$

 

$

248.9

 

6.00% Senior Notes, due May 15, 2037 (“2037 Senior Notes”) (2), (6)

 

296.5

 

 

296.5

 

5.75% Senior Notes, due October 15, 2033 (“2033 Senior Notes”) (3)

 

197.8

 

 

197.8

 

2.35% Senior Notes, due August 15, 2022 (“2022 Senior Notes”) (4), (6)

 

249.8

 

 

249.8

 

5.55% Senior Notes, due May 15, 2017 (“2017 Senior Notes”) (5), (6)

 

326.3

 

 

326.3

 

Other borrowings

 

5.4

 

15.9

 

21.3

 

 

 

$

1,324.7

 

$

15.9

 

$

1,340.6

 

 


(1)             Consists of $250.0 million principal and unamortized debt discount of $1.1 million.

(2)             Consists of $300.0 million principal and unamortized debt discount of $3.5 million.

(3)             Consists of $200.0 million principal and unamortized debt discount of $2.2 million.

(4)             Consists of $250.0 million principal and unamortized debt discount of $0.2 million.

(5)             Consists of $300.0 million principal, unamortized debt discount of $0.2 million and a $26.5 million adjustment to reflect the termination value of interest rate swaps.

(6)             As of September 30, 2013, we were in compliance with all restrictive covenants, including limitations on indebtedness and liens, and expect continued compliance.

 

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We have a $1.0 billion commercial paper program under which we may issue commercial paper in the United States.  As of September 30, 2013, we had no commercial paper outstanding.

 

We have a $1.0 billion senior unsecured revolving credit facility that expires on July 14, 2015 (the “Facility”).  The Facility may be used to provide credit support for our commercial paper program and for general corporate purposes.  Up to the equivalent of $250 million of the Facility is available for multi-currency loans.  The interest rate on borrowings under the Facility is based on LIBOR or on the higher of prime, which is the rate of interest publicly announced by the administrative agent, or ½% plus the Federal funds rate.  We incurred costs of approximately $1 million to establish the Facility which are being amortized over the term of the Facility.  The Facility has an annual fee of $0.7 million, payable quarterly, based on our current credit ratings.  The Facility also contains a cross-default provision whereby a failure to pay other material financial obligations in excess of $100.0 million (after grace periods and absent a waiver from the lenders) would result in an event of default and the acceleration of the maturity of any outstanding debt under this facility.  At September 30, 2013, no borrowings were outstanding under this agreement.

 

We have a fixed rate promissory note agreement with a financial institution pursuant to which we may borrow up to $150.0 million in the form of loan participation notes through one of our subsidiaries in Europe.  The interest rate on borrowings under this agreement is at an all-in fixed rate determined by the lender and agreed to by us at the date of each borrowing.  At September 30, 2013, no borrowings were outstanding under this agreement.  Debt issuance costs incurred related to this agreement were de minimis.

 

We have borrowing agreements with two financial institutions pursuant to which our subsidiary in Turkey may borrow up to 50.0 million Turkish lira ($25.4 million at the exchange rate at September 30, 2013).  The interest rate on borrowings under these agreements was approximately 8.4%.  There were no debt issuance costs incurred related to these agreements.  The outstanding balance at September 30, 2013 was 15.7 million Turkish lira ($8.0 million at the exchange rate at September 30, 2013) and is classified as current debt in our consolidated balance sheet.

 

Total debt as a percent of total capitalization (excluding noncontrolling interests) decreased to 27% at September 30, 2013 from 29% at June 30, 2013.

 

Cash Flows

 

Net cash provided by operating activities was $29.9 million during the three months ended September 30, 2013 as compared with cash used for operating activities of $125.2 million in the prior-year period.  The change in cash flows provided by operating activities primarily reflected a favorable change in accounts receivable due to the timing of shipments and timing of collections.  Also contributing to the increase in cash provided by operating activities were favorable changes in the levels and timing of accounts payable.  Partially offsetting these changes were lower advertising, merchandising and sampling accruals and accrued payroll and other taxes, primarily due to the timing of payments.

 

Net cash used for investing activities was $94.9 million during the three months ended September 30, 2013 as compared with $104.2 million in the prior-year period.  The decrease primarily reflected lower capital expenditure activity in the current-year period related to computer hardware and software.

 

Net cash used for financing activities was $114.9 million during the three months ended September 30, 2013 as compared with $70.8 million in the prior-year period.  The increase in cash used for financing activities as compared with the prior-year period reflected higher dividend payments as a result of our transition to a quarterly dividend.  In addition, the prior-year period reflected the proceeds from the issuance of the 2022 Senior Notes and 2042 Senior Notes, which was more than offset by the redemption of the 2013 Senior Notes, repayment of commercial paper, and additional cash used to acquire treasury stock.

 

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Dividends

 

The following is a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the three months ended September 30, 2013:

 

Date Declared

 

Record Date

 

Payable Date

 

Amount per Share

 

 

 

 

 

 

 

 

 

August 14, 2013

 

August 30, 2013

 

September 16, 2013

 

$

.18

 

 

On October 30, 2013, a quarterly dividend was declared in the amount of $.20 per share on our Class A and Class B Common Stock.  The dividend is payable in cash on December 16, 2013 to stockholders of record at the close of business on November 29, 2013.

 

Pension and Post-retirement Plan Funding

 

There have been no significant changes to our pension and post-retirement funding as discussed in our Annual Report on Form 10-K for the year ended June 30, 2013.

 

Commitments, Contractual Obligations and Contingencies

 

There have been no significant changes to our commitments and contractual obligations as discussed in our Annual Report on Form 10-K for the year ended June 30, 2013.  For a discussion of contingencies, see Notes to Consolidated Financial Statements, Note 7 — Contingencies.

 

Derivative Financial Instruments and Hedging Activities

 

There have been no significant changes to our derivative financial instruments and hedging activities as discussed in our Annual Report on Form 10-K for the year ended June 30, 2013.

 

Foreign Exchange Risk Management

 

We enter into foreign currency forward contracts to hedge anticipated transactions, as well as receivables and payables denominated in foreign currencies, for periods consistent with our 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 we receive from foreign subsidiaries.  The majority of foreign currency forward contracts are denominated in currencies of major industrial countries.  We may also enter into foreign currency option contracts to hedge anticipated transactions where there is a high probability that anticipated exposures will materialize.  The foreign currency forward contracts entered into to hedge anticipated transactions have been designated as foreign currency cash-flow hedges and have varying maturities through the end of December 2015.  Hedge effectiveness of foreign currency forward contracts is based on a hypothetical derivative methodology and excludes the portion of fair value attributable to the spot-forward difference which is recorded in current-period earnings.  Hedge effectiveness of foreign currency option contracts is based on a dollar offset methodology.  The ineffective portion of both foreign currency forward and option contracts is recorded in current-period earnings.  For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses accumulated in other comprehensive income (loss) are reclassified to earnings when the underlying forecasted transaction occurs.  If it is probable that the forecasted transaction will no longer occur, then any gains or losses in accumulated other comprehensive income (loss) are reclassified to current-period earnings.  As of September 30, 2013, these foreign currency cash-flow hedges were highly effective in all material respects.

 

At September 30, 2013, we had foreign currency forward contracts in the amount of $1,763.6 million.  The foreign currencies included in foreign currency forward contracts (notional value stated in U.S. dollars) are principally the British pound ($420.8 million), Euro ($360.6 million), Canadian dollar ($229.4 million), Australian dollar ($94.2 million), Swiss franc ($91.3 million), Hong Kong dollar ($90.5 million) and Japanese yen ($88.4 million).

 

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Credit Risk

 

As a matter of policy, we only enter into derivative contracts with counterparties that have a long-term credit rating of at least A- or higher by at least two nationally recognized rating agencies.  The counterparties to these contracts are major financial institutions.  Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the gross fair value of contracts in asset positions, which totaled $12.5 million at September 30, 2013.  To manage this risk, we established strict counterparty credit guidelines that are continually monitored.  Accordingly, management believes risk of loss under these hedging contracts is remote.

 

Certain of our derivative financial instruments contain credit-risk-related contingent features.  At September 30, 2013, we were in a net liability position for certain derivative contracts that contain such features with two counterparties.  Such credit-risk-related contingent features would be triggered if (a) upon a merger involving the Company, the ratings of the surviving entity were materially weaker than prior to the merger or (b) the Company’s credit ratings fall below investment grade (rated below BBB-/Baa3) and the Company fails to enter into an International Swaps & Derivatives Association Credit Support Annex within 30 days of being requested by the counterparty.  The fair value of collateral required to settle the instruments immediately if a triggering event were to occur is estimated at approximately the fair value of the contracts.  The fair value of those contracts in a net liability position was approximately $0.8 million as of September 30, 2013 and the Company was in compliance with such credit-risk-related contingent features.

 

Market Risk

 

Using the value-at-risk model, as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013, the high, low and average measured value-at-risk for the twelve months ended September 30, 2013 related to our foreign exchange contracts are as follows:

 

(In millions)

 

High

 

Low

 

Average

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

27.4

 

$

19.1

 

$

22.7

 

 

The change in the value-at-risk measures from June 30, 2013 related to our foreign exchange contracts reflected an increase in foreign exchange volatilities and a different portfolio mix.  We believe that any resulting loss incurred would be offset by the effects of market rate movements on the respective underlying transactions for which the derivative financial instrument was intended.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities, other than operating leases, that would be expected to have a material current or future effect upon our financial condition or results of operations.

 

CRITICAL ACCOUNTING POLICIES

 

As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles.  The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements.  These judgments can be subjective and complex, and consequently actual results could differ from those estimates and assumptions.  Our most critical accounting policies relate to revenue recognition, inventory, pension and other post-retirement benefit costs, goodwill, other intangible assets and long-lived assets, and income taxes.  Since June 30, 2013, there have been no significant changes to the assumptions and estimates related to our critical accounting policies.

 

RECENTLY ISSUED ACCOUNTING STANDARDS

 

For a discussion regarding the impact of accounting standards that were recently issued but not yet effective, on the Company’s consolidated financial statements, see Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies.

 

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FORWARD-LOOKING INFORMATION

 

We and our representatives from time to time make written or oral forward-looking statements, including statements contained in this and other filings with the Securities and Exchange Commission, in our press releases and in our reports to stockholders.  The words and phrases “will likely result,” “expect,” “believe,” “planned,” “may,” “should,” “could,” “anticipate,” “estimate,” “project,” “intend,” “forecast” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements include, without limitation, our expectations regarding sales, earnings or other future financial performance and liquidity, product introductions, entry into new geographic regions, information systems initiatives, new methods of sale, our long-term strategy, restructuring and other charges and resulting cost savings, and future operations or operating results.  Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, actual results may differ materially from our expectations.  Factors that could cause actual results to differ from expectations include, without limitation:

 

(1) increased competitive activity from companies in the skin care, makeup, fragrance and hair care businesses, some of which have greater resources than we do;

 

(2) our ability to develop, produce and market new products on which future operating results may depend and to successfully address challenges in our business;

 

(3) consolidations, restructurings, bankruptcies and reorganizations in the retail industry causing a decrease in the number of stores that sell our products, an increase in the ownership concentration within the retail industry, ownership of retailers by our competitors or ownership of competitors by our customers that are retailers and our inability to collect receivables;

 

(4) destocking and tighter working capital management by retailers;

 

(5) the success, or changes in timing or scope, of new product launches and the success, or changes in the timing or the scope, of advertising, sampling and merchandising programs;

 

(6) shifts in the preferences of consumers as to where and how they shop for the types of products and services we sell;

 

(7) social, political and economic risks to our foreign or domestic manufacturing, distribution and retail operations, including changes in foreign investment and trade policies and regulations of the host countries and of the United States;

 

(8) changes in the laws, regulations and policies (including the interpretations and enforcement thereof) that affect, or will affect, our business, including those relating to our products or distribution networks, changes in accounting standards, tax laws and regulations, environmental or climate change laws, regulations or accords, trade rules and customs regulations, and the outcome and expense of legal or regulatory proceedings, and any action we may take as a result;

 

(9) foreign currency fluctuations affecting our results of operations and the value of our foreign assets, the relative prices at which we and our foreign competitors sell products in the same markets and our operating and manufacturing costs outside of the United States;

 

(10) changes in global or local conditions, including those due to the volatility in the global credit and equity markets, natural or man-made disasters, real or perceived epidemics, or energy costs, that could affect consumer purchasing, the willingness or ability of consumers to travel and/or purchase our products while traveling, the financial strength of our customers, suppliers or other contract counterparties, our operations, the cost and availability of capital which we may need for new equipment, facilities or acquisitions, the returns that we are able to generate on our pension assets and the resulting impact on funding obligations, the cost and availability of raw materials and the assumptions underlying our critical accounting estimates;

 

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(11) shipment delays, commodity pricing, depletion of inventory and increased production costs resulting from disruptions of operations at any of the facilities that manufacture nearly all of our supply of a particular type of product (i.e. focus factories) or at our distribution or inventory centers, including disruptions that may be caused by the implementation of SAP as part of our Strategic Modernization Initiative or by restructurings;

 

(12) real estate rates and availability, which may affect our ability to increase or maintain the number of retail locations at which we sell our products and the costs associated with our other facilities;

 

(13) changes in product mix to products which are less profitable;

 

(14) our ability to acquire, develop or implement new information and distribution technologies and initiatives on a timely basis and within our cost estimates and our ability to maintain continuous operations of such systems and the security of data and other information that may be stored in such systems or other systems or media;

 

(15) our ability to capitalize on opportunities for improved efficiency, such as publicly-announced strategies and restructuring and cost-savings initiatives, and to integrate acquired businesses and realize value therefrom;

 

(16) consequences attributable to local or international conflicts around the world, as well as from any terrorist action, retaliation and the threat of further action or retaliation;

 

(17) the timing and impact of acquisitions and divestitures, which depend on willing sellers and buyers, respectively; and

 

(18) additional factors as described in our filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

 

We assume no responsibility to update forward-looking statements made herein or otherwise.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

The information required by this item is set forth in Item 2 of this Quarterly Report on Form 10-Q under the caption “Liquidity and Capital Resources - Market Risk” and is incorporated herein by reference.

 

Item 4. Controls and Procedures.

 

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure.  The Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of September 30, 2013 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.

 

As part of our Strategic Modernization Initiative, we anticipate the continued migration of our operations to SAP-based technologies with the majority of our locations being enabled through calendar 2014.

 

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the first quarter of fiscal 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

For a discussion of legal proceedings, see Notes to Consolidated Financial Statements,  Note 7 — Contingencies.

 

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

 

Sales of Unregistered Securities

 

Shares of Class B Common Stock may be converted immediately into Class A Common Stock on a one-for-one basis by the holder and are automatically converted into Class A Common Stock on a one-for-one basis upon transfer to a person or entity that is not a “Permitted Transferee” or soon after a record date for a meeting of stockholders where the outstanding Class B Common Stock constitutes less than 10% of the outstanding shares of Common Stock of the Company.  There is no cash or other consideration paid by the holder converting the shares and, accordingly, there is no cash or other consideration received by the Company.  The shares of Class A Common Stock issued by the Company in such conversions are exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) thereof.

 

During the three months ended September 30, 2013, the stockholder set forth in the table below converted shares of Class B Common Stock into Class A Common Stock on the date set forth below:

 

Stockholder That Converted
Class B Common Stock to
Class A Common Stock

 

Date of Conversion

 

Number of Shares
Converted/
Received

 

The 4202 Corporation

 

August 26, 2013

 

250,000

 

 

Share Repurchase Program

 

We are authorized by the Board of Directors to repurchase up to 216.0 million shares of our Class A Common Stock in the open market or in privately negotiated transactions, depending on market conditions and other factors.  As of September 30, 2013, the cumulative total of acquired shares pursuant to the authorization was 167.7 million, reducing the remaining authorized share repurchase balance to 48.3 million.  During the three months ended September 30, 2013, we purchased approximately 0.6 million shares pursuant to the authorization for $41.8 million as outlined in the following table:

 

Period

 

Total Number
of Shares
Purchased

 

Average
Price Paid
Per Share

 

Total Number of
Shares Purchased
as Part of Publicly
Announced
Program

 

Maximum
Number of Shares
that May Yet Be
Purchased Under
the Program
(1)

 

July 2013

 

358,900

 

$

65.36

 

358,900

 

48,583,218

 

August 2013

 

279,200

 

65.68

 

279,200

 

48,304,018

 

September 2013

 

264,386

(2)

66.76

 

 

48,304,018

 

 

 

902,486

 

$

65.87

 

638,100

 

48,304,018

 

 


(1)             The initial program covering the repurchase of 16.0 million shares was announced in September 1998 and increased by 40.0 million shares each in November 2012, November 2007, February 2007 and May 2005 and 20.0 million shares in both May 2004 and October 2002.

(2)             Includes shares that were repurchased by the Company in connection with shares withheld to satisfy tax obligations upon the vesting of performance share units.

 

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Item 6. Exhibits.

 

Exhibit
Number

 

Description

10.

1

 

Form of Performance Share Unit Award Agreement under the The Estée Lauder Companies Inc. Amended and Restated Fiscal 2002 Share Incentive Plan for Executive Officers and Other Employees (including Form of Notice of Grant). †

10.

2

 

Summary of Compensation For Non-Employee Directors of the Company. †

31.

1

 

Certification pursuant to Rule 13a-14(a) (CEO).

31.

2

 

Certification pursuant to Rule 13a-14(a) (CFO).

32.

1

 

Certification pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO). (furnished)

32.

2

 

Certification pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO). (furnished)

101.

INS

 

XBRL Instance Document

101.

SCH

 

XBRL Taxonomy Extension Schema Document

101.

CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.

LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.

PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

101.

DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 


† Exhibit is a management contract or compensatory plan or arrangement.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

THE ESTÉE LAUDER COMPANIES INC.

 

 

 

Date: November 1, 2013

 

By:

/s/TRACEY T. TRAVIS

 

 

 

Tracey T. Travis

 

 

 

Executive Vice President

 

 

 

and Chief Financial Officer

 

 

 

(Principal Financial and

 

 

 

Accounting Officer)

 

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INDEX TO EXHIBITS

 

Exhibit
Number

 

Description

10.

1

 

Form of Performance Share Unit Award Agreement under the The Estée Lauder Companies Inc. Amended and Restated Fiscal 2002 Share Incentive Plan for Executive Officers and Other Employees (including Form of Notice of Grant). †

10.

2

 

Summary of Compensation For Non-Employee Directors of the Company. †

31.

1

 

Certification pursuant to Rule 13a-14(a) (CEO).

31.

2

 

Certification pursuant to Rule 13a-14(a) (CFO).

32.

1

 

Certification pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO). (furnished)

32.

2

 

Certification pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO). (furnished)

101.

INS

 

XBRL Instance Document

101.

SCH

 

XBRL Taxonomy Extension Schema Document

101.

CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.

LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.

PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

101.

DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 


† Exhibit is a management contract or compensatory plan or arrangement.

 

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