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, 2009

 

OR

 

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

 

For the transition period from               to              

 

Commission file number: 1-14064

 

The Estée Lauder Companies Inc.

(Exact name of registrant as specified in its charter)

 

Delaware (State or other jurisdiction of incorporation or organization)		11-2408943 (I.R.S. Employer Identification No.)
767 Fifth Avenue, New York, New York (Address of principal executive offices)		10153 (Zip Code)

 

212-572-4200

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o 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 23, 2009, 118,669,945 shares of the registrant’s Class A Common Stock, $.01 par value, and 78,067,261 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
Consolidated Statements of Earnings — Three Months Ended September 30, 2009 and 2008	2
Consolidated Balance Sheets — September 30, 2009 and June 30, 2009	3
Consolidated Statements of Cash Flows — Three Months Ended September 30, 2009 and 2008	4
Notes to Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	37
Item 4. Controls and Procedures	38
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
		2009			2008
		(In millions, except per share data)
Net Sales		$	1,833.4		$	1,903.5
Cost of sales		445.1			500.1
Gross Profit		1,388.3			1,403.4
Operating expenses:
Selling, general and administrative		1,149.7			1,310.8
Restructuring and other special charges		18.2			0.1
		1,167.9			1,310.9
Operating Income		220.4			92.5
Interest expense, net		19.6			15.3
Earnings before Income Taxes		200.8			77.2
Provision for income taxes		63.0			27.6
Net Earnings		137.8			49.6
Net loss attributable to noncontrolling interests		2.9			1.5
Net Earnings attributable to The Estée Lauder Companies Inc.		$	140.7		$	51.1
Net earnings attributable to The Estée Lauder Companies Inc. per common share:
Basic		$	.72		$	.26
Diluted		.71			.26
Weighted-average common shares outstanding:
Basic		196.7			195.3
Diluted		198.2			198.8

 

See notes to consolidated financial statements.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED BALANCE SHEETS

 

		September 30			June 30
		2009			2009
		(Unaudited)
		($ in millions)
ASSETS
Current Assets
Cash and cash equivalents		$	799.2		$	864.5
Accounts receivable, net		1,097.4			853.3
Inventory and promotional merchandise, net		844.2			795.0
Prepaid expenses and other current assets		422.2			399.7
Total current assets		3,163.0			2,912.5
Property, Plant and Equipment, net		1,017.9			1,026.7
Other Assets
Investments, at cost or market value		13.1			12.7
Goodwill		763.4			759.9
Other intangible assets, net		152.2			150.1
Other assets		357.2			314.7
Total other assets		1,285.9			1,237.4
Total assets		$	5,466.8		$	5,176.6
LIABILITIES AND EQUITY
Current Liabilities
Short-term debt		$	19.5		$	33.8
Accounts payable		342.6			329.8
Accrued income taxes		59.1			33.2
Other accrued liabilities		1,118.5			1,062.4
Total current liabilities		1,539.7			1,459.2
Noncurrent Liabilities
Long-term debt		1,389.4			1,387.6
Accrued income taxes		267.8			259.1
Other noncurrent liabilities		413.3			406.7
Total noncurrent liabilities		2,070.5			2,053.4
Contingencies (Note 7)
Equity
Common stock, $.01 par value; 650,000,000 shares Class A authorized; shares issued: 183,964,687 at September 30, 2009 and 183,921,350 at June 30, 2009; 240,000,000 shares Class B authorized; shares issued and outstanding: 78,067,261 at September 30, 2009 and June 30, 2009		2.6			2.6
Paid-in capital		1,166.3			1,145.6
Retained earnings		3,335.7			3,195.0
Accumulated other comprehensive loss		(83.5		)	(117.1		)
		4,421.1			4,226.1
Less: Treasury stock, at cost; 65,306,165 Class A shares at September 30, 2009 and 65,294,477 Class A shares at June 30, 2009		(2,586.5		)	(2,586.1		)
Total stockholders’ equity – The Estée Lauder Companies Inc.		1,834.6			1,640.0
Noncontrolling interests		22.0			24.0
Total equity		1,856.6			1,664.0
Total liabilities and equity		$	5,466.8		$	5,176.6

 

See notes to consolidated financial statements.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Three Months Ended September 30
		2009			2008
		(In millions)
Cash Flows from Operating Activities
Net earnings		$	137.8		$	49.6
Adjustments to reconcile net earnings to net cash flows from operating   activities:
Depreciation and amortization		65.3			62.6
Deferred income taxes		(21.8		)	(7.1		)
Non-cash stock-based compensation		19.2			22.6
Excess tax benefits from stock-based compensation arrangements		—			(1.4		)
Loss on disposal of property, plant and equipment		5.4			4.0
Non-cash charges associated with restructuring activities		9.7			—
Other non-cash items		0.4			0.8
Changes in operating assets and liabilities:
Increase in accounts receivable, net		(218.7		)	(177.6		)
Increase in inventory and promotional merchandise, net		(42.6		)	(96.8		)
Increase in other assets, net		(24.5		)	(23.0		)
Increase (decrease) in accounts payable		6.1			(18.6		)
Increase (decrease) in accrued income taxes		36.0			(25.2		)
Increase in other liabilities		30.4			13.9
Net cash flows provided by (used for) operating activities		2.7			(196.2		)
Cash Flows from Investing Activities
Capital expenditures		(45.4		)	(75.9		)
Acquisition of businesses and other intangible assets, net of cash acquired		(9.3		)	(63.5		)
Proceeds from the disposition of long-term investments		—			0.9
Purchases of long-term investments		—			(0.4		)
Net cash flows used for investing activities		(54.7		)	(138.9		)
Cash Flows from Financing Activities
Increase (decrease) in short-term debt, net		(6.3		)	220.3
Repayments and redemptions of long-term debt		(13.9		)	(3.1		)
Net proceeds from stock-based compensation transactions		0.4			109.3
Excess tax benefits from stock-based compensation arrangements		—			1.4
Payments to acquire treasury stock		(0.4		)	(57.0		)
Dividends paid to stockholders		(0.1		)	(0.1		)
Net cash flows provided by (used for) financing activities		(20.3		)	270.8
Effect of Exchange Rate Changes on Cash and Cash Equivalents		7.0			(8.6		)
Net Decrease in Cash and Cash Equivalents		(65.3		)	(72.9		)
Cash and Cash Equivalents at Beginning of Period		864.5			401.7
Cash and Cash Equivalents at End of Period		$	799.2		$	328.8

 

See notes to consolidated financial statements.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 —SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

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

 

The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included.  The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year.  For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2009.

 

In accordance with recently adopted accounting guidance, net earnings attributable to The Estée Lauder Companies Inc. and net earnings attributable to noncontrolling interests are disclosed separately on the face of the accompanying consolidated statements of earnings.  In addition, noncontrolling interests are reported as a separate component of equity in the consolidated balance sheets.  Except as otherwise indicated, references to net earnings or components of stockholder’s equity in the notes to consolidated financial statements will represent amounts attributable to The Estée Lauder Companies Inc.  Accordingly, certain amounts in the consolidated financial statements of prior periods have been reclassified to conform to current period presentation.

 

In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through October 30, 2009, the date the consolidated financial statements were issued.

 

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, intangible assets and other long-lived assets, income taxes and derivatives.  Descriptions of these policies are discussed in the Company’s Annual Report on Form 10-K for the year ended June 30, 2009.  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.  Illiquid credit markets, volatile equity markets, changes in foreign currency exchange rates and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions.  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 resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

 

Currency Translation and Transactions

 

All assets and liabilities of foreign subsidiaries and affiliates are translated at period-end rates of exchange, while revenue and expenses are translated at weighted average rates of exchange for the period.  Unrealized translation gains or losses are reported as cumulative translation adjustments through other comprehensive income (loss).  Such adjustments amounted to $33.6 million of unrealized translation gains, net of tax, and $84.0 million of unrealized translation losses, net of tax, during the three months ended September 30, 2009 and 2008, respectively.  The accompanying consolidated statements of earnings include net exchange losses on foreign currency transactions of $0.4 million and $19.9 million during the three months ended September 30, 2009 and 2008, respectively.

 

Accounts Receivable

 

Accounts receivable is stated net of the allowance for doubtful accounts and customer deductions totaling $41.8 million and $41.4 million as of September 30, 2009 and June 30, 2009, respectively.

 

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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.  Domestic and international sales are made primarily to department stores, perfumeries and specialty retailers.  The Company grants credit to all qualified customers and does not believe it is exposed significantly to any undue concentration of credit risk.

 

The Company’s largest customer sells products primarily within the United States and accounted for $246.1 million, or 13% and $264.3 million, or 14%, of the Company’s consolidated net sales for the three months ended September 30, 2009 and 2008, respectively.  This customer accounted for $175.4 million, or 16%, and $97.1 million, or 11%, of the Company’s accounts receivable at September 30, 2009 and June 30, 2009, respectively.

 

Inventory and Promotional Merchandise

 

		September 30			June 30
		2009			2009
		(In millions)
Inventory and promotional merchandise, net consists of:
Raw materials		$	188.2		$	188.5
Work in process		35.7			43.8
Finished goods		425.4			375.6
Promotional merchandise		194.9			187.1
		$	844.2		$	795.0

 

Property, Plant and Equipment

 

Property, plant and equipment consists of:

 

		September 30			June 30
		2009			2009
		(In millions)
Assets (Useful Life)
Land		$	14.6		$	14.5
Buildings and improvements (10 to 40 years)		186.7			183.2
Machinery and equipment (3 to 10 years)		1,106.1			1,080.2
Furniture and fixtures (5 to 10 years)		87.6			86.1
Leasehold improvements		1,141.7			1,112.8
		2,536.7			2,476.8
Less accumulated depreciation and amortization		1,518.8			1,450.1
		$	1,017.9		$	1,026.7

 

The cost of assets related to projects in progress of $138.3 million and $144.9 million as of September 30, 2009 and June 30, 2009, respectively, is included in their respective asset categories in the table above.  Depreciation and amortization of property, plant and equipment was $62.0 million and $59.3 million during the three months ended September 30 , 2009 and 2008, 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.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Income Taxes

 

The effective rate for income taxes was 31.4% and 35.8% for the three months ended September 30, 2009 and 2008, respectively.  The decrease in the effective income tax rate was primarily attributable to a lower effective tax rate relating to the Company’s foreign operations.

 

As of September 30, 2009 and June 30, 2009, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $266.1 million and $259.1 million, respectively.  The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $135.7 million.  The total gross interest and penalties accrued related to unrecognized tax benefits during the three months ended September 30, 2009 in the accompanying consolidated statement of earnings was $3.0 million.  The total gross accrued interest and penalties in the accompanying consolidated balance sheets at September 30, 2009 and June 30, 2009 was $71.7 million and $67.9 million, respectively.  On the basis of the information available as of September 30, 2009, it is reasonably possible that the total amount of unrecognized tax benefits could decrease in a range of $30 million to $60 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.

 

Recently Adopted Accounting Standards

 

In June 2009, the FASB established the FASB Accounting Standards Codification TM  (the “Codification”) as the single source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the United States Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants.  The Codification did not have a material impact on the Company’s consolidated financial statements upon adoption.  Accordingly, the Company’s notes to consolidated financial statements will explain accounting concepts rather than cite the topics of specific U.S. GAAP.

 

In April 2009, the FASB issued authoritative guidance that principally requires publicly traded companies to provide disclosures about fair value of financial instruments in interim financial information.  The adoption of this disclosure-only guidance for the Company’s September 30, 2009 interim consolidated financial statements is included in Note 5 — Fair Value Measurements and did not have an impact on the Company’s consolidated financial results.

 

In April 2009, the FASB issued authoritative guidance to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably determined.  If the fair value of such assets or liabilities cannot be reasonably determined, then they would generally be recognized in accordance with certain other pre-existing accounting standards.  This guidance also amends the subsequent accounting for assets and liabilities arising from contingencies in a business combination and certain other disclosure requirements.  This guidance became effective for assets or liabilities arising from contingencies in business combinations that are consummated during the Company’s fiscal 2010 and did not have an impact on the Company’s September 30, 2009 interim consolidated financial statements.

 

In November 2008, the FASB issued authoritative guidance regarding the accounting for defensive intangible assets.  Defensive intangible assets are assets acquired in a business combination that the acquirer (a) does not intend to use or (b) intends to use in a way other than the assets’ highest and best use as determined by an evaluation of market participant assumptions.  While defensive intangible assets are not being actively used, they are likely contributing to an increase in the value of other assets owned by the acquiring entity.  This guidance will require defensive intangible assets to be accounted for as separate units of accounting at the time of acquisition and the useful life of such assets would be based on the period over which the assets will directly or indirectly affect the entity’s cash flows.  This guidance is to be applied prospectively for defensive intangible assets acquired on or after the beginning of the Company’s fiscal 2010 and did not have an impact on the Company’s September 30, 2009 interim consolidated financial statements.

 

In November 2008, the FASB issued authoritative guidance to address questions about equity-method accounting.  The primary issues include how the initial carrying value of an equity method investment should be determined, how to account for any subsequent purchases and sales of additional ownership interests, and whether the investor must separately assess its underlying share of the investee’s indefinite-lived intangible assets for impairment.  This guidance became effective beginning in the Company’s fiscal 2010 and did not have an impact on the Company’s September 30, 2009 interim consolidated financial statements.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In April 2008, the FASB issued authoritative guidance to amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset and to require additional disclosures.  The guidance for determining useful lives must be applied prospectively to intangible assets acquired after the effective date.  The disclosure requirements must be applied prospectively to all intangible assets recognized as of the effective date.  This guidance became effective for fiscal years, and interim periods within those fiscal years, beginning in the Company’s fiscal 2010 and did not have a material impact on the Company’s consolidated financial statements.

 

In February 2008, the FASB issued authoritative guidance that permitted the delayed application of fair value measurement accounting to nonrecurring nonfinancial assets and nonfinancial liabilities.  The Company’s nonfinancial assets and nonfinancial liabilities principally consist of intangible assets acquired through business combinations, long-lived assets when assessing potential impairment, and liabilities associated with restructuring activities.  This guidance became effective beginning in the Company’s fiscal 2010.  During the three months ended September 30, 2009, the Company did not have significant measurements of nonfinancial assets or nonfinancial liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

 

In December 2007, the FASB issued authoritative guidance to affirm that the acquisition method of accounting (previously referred to as the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination.  This guidance defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control.  Among other requirements, this guidance requires the acquiring entity in a business combination to recognize the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their acquisition-date fair values, with limited exceptions; acquisition-related costs generally will be expensed as incurred.  This guidance requires certain financial statement disclosures to enable users to evaluate and understand the nature and financial effects of the business combination.  This guidance must be applied prospectively to business combinations that are consummated on or after July 1, 2009.  During the three months ended September 30, 2009, the Company did not have significant business combinations.  Accordingly, the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In December 2007, the FASB issued authoritative guidance to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  Among other requirements, this guidance clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is to be reported as a separate component of equity in the consolidated financial statements.  This guidance also requires consolidated net income to include the amounts attributable to both the parent and the noncontrolling interest and to disclose those amounts on the face of the consolidated statement of earnings.  This guidance must be applied prospectively for fiscal years, and interim periods within those fiscal years, beginning in the Company’s fiscal 2010, except for the presentation and disclosure requirements, which will be applied retrospectively for all periods presented.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In December 2007, the FASB issued authoritative guidance to address accounting for collaborative arrangement activities that are conducted without the creation of a separate legal entity for the arrangement.  Revenues and costs incurred with third parties in connection with the collaborative arrangement should be presented gross or net by the collaborators pursuant to pre-existing accounting standards.  Payments to or from collaborators should be presented in the income statement based on the nature of the arrangement, the nature of the company’s business and whether the payments are within the scope of other accounting literature.  Other detailed information related to the collaborative arrangement is also required to be disclosed.  The requirements under this guidance must be applied to collaborative arrangements in existence at the beginning of the Company’s fiscal 2010 using a modified version of retrospective application.  The Company is currently not a party to significant collaborative arrangement activities, as defined by this guidance, and therefore the adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Recently Issued Accounting Standards

 

In August 2009, the FASB issued authoritative guidance to provide clarification on measuring liabilities at fair value when a quoted price in an active market is not available.  In these circumstances, a valuation technique should be applied that uses either the quote of the liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique consistent with existing fair value measurement guidance, such as an income approach or a market approach.  The new guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  This guidance is effective for the first reporting period beginning after issuance (the Company’s fiscal 2010 second quarter).  The Company does not anticipate this guidance will have a material impact on the Company’s consolidated financial statements.

 

In June 2009, the FASB issued authoritative guidance to eliminate the exception to consolidate a qualifying special-purpose entity, change the approach to determining the primary beneficiary of a variable interest entity and require companies to more frequently re-assess whether they must consolidate variable interest entities.  Under the new guidance, the primary beneficiary of a variable interest entity is identified qualitatively as the enterprise that has both (a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.  This guidance becomes effective for the Company’s fiscal 2011 year-end and interim reporting periods thereafter.  The Company does not expect this guidance to have a material impact on its consolidated financial statements.

 

In December 2008, the FASB issued authoritative guidance to require employers to provide additional disclosures about plan assets of a defined benefit pension or other post-retirement plan.  These disclosures should principally include information detailing investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets and an understanding of significant concentrations of risk within plan assets.  While earlier application of this guidance is permitted, the required disclosures shall be provided for fiscal years ending after December 15, 2009 (the Company’s fiscal 2010, the anticipated period of adoption).  Upon initial application, this guidance is not required to be applied to earlier periods that are presented for comparative purposes.  The Company does not expect this guidance to have a material impact on its consolidated financial statements.

 

NOTE  2 — OTHER INTANGIBLE ASSETS

 

Other intangible assets consists of the following:

 

		September 30, 2009									June 30, 2009
(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		$	198.6		$	113.8		$	84.8		$	199.2		$	115.9		$	83.3
License agreements		43.2			43.0			0.2			43.2			43.0			0.2
		$	241.8		$	156.8		85.0			$	242.4		$	158.9		83.5
Non-amortizable intangible assets:
Trademarks and other								67.2									66.6
Total intangible assets								$	152.2								$	150.1

 

The aggregate amortization expense related to amortizable intangible assets for the three months ended September 30, 2009 and 2008 was $2.5 million and $2.8 million, respectively.  The estimated aggregate amortization expense for the remainder of fiscal 2010 and each of fiscal years ending June 30, 2011 to 2014 is $7.4 million, $9.7 million, $9.3 million, $8.9 million and $6.6 million, respectively.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 — CHARGES ASSOCIATED WITH RESTRUCTURING ACTIVITIES

 

In an effort to drive down costs and achieve synergies within the organization, in February 2009, the Company announced the implementation of a multi-faceted cost savings program (the “Program”) to position itself to achieve long-term profitable growth.  The Company anticipates the Program will result in related restructuring and other special charges, inclusive of cumulative charges recorded to date and over the next few fiscal years, totaling between $350 million and $450 million before taxes.

 

The Program focuses on a redesign of the Company’s organizational structure in order to integrate it in a more cohesive way and operate more globally across brands and functions.  The principal aspect of the Program is the reduction of the workforce by approximately 2,000 employees.  Specific actions taken during the three months ended September 30, 2009 included:

 

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

 

·                   Exit Unprofitable Operations — To improve the profitability in certain of the Company’s brands and regions, the Company has selectively exited certain channels of distribution, categories and markets.  During the first quarter of fiscal 2010, the Company approved the exit from the global wholesale distribution of its Prescriptives brand by January 31, 2010.  In connection with these activities, the Company recorded a reserve for anticipated product returns, wrote off inventory and incurred costs to reduce workforce and terminate contracts.

 

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

 

For the three months ended September 30, 2009, aggregate restructuring charges of $14.7 million were recorded in the accompanying consolidated statements of earnings related to the Program.  These charges reflected employee-related costs, asset write-offs, contract terminations and other exit costs.

 

The following table presents accrued restructuring and the related activity as of and for the three months ended September 30, 2009 under the Program:

 

( In millions)		Employee- Related  Costs			Asset  Write-offs			Contract Terminations			Other Exit Costs			Total
Balance at June 30, 2009		$	51.6		$	—		$	2.9		$	0.2		$	54.7
Charges		13.4			0.2			0.6			0.5			14.7
Cash payments		(14.8		)	—			(0.8		)	(0.7		)	(16.3		)
Non-cash write-offs		—			(0.2		)	—			—			(0.2		)
Translation adjustments		0.5			—			—			—			0.5
Balance at September 30, 2009		$	50.7		$	—		$	2.7		$	—		$	53.4

 

Accrued restructuring charges at September 30, 2009 are expected to result in cash expenditures funded from cash provided by operations of approximately $37 million, $14 million and $2 million in fiscal 2010, 2011 and 2012, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Cumulative restructuring charges related to the Program as of September 30, 2009 were as follows:

 

		September 30
( In millions)		2009
Employee-related costs		$	74.3
Asset write-offs		4.4
Contract terminations		4.0
Other exit costs		2.3
Total		$	85.0

 

The total amount of restructuring charges incurred, plus other initiatives approved through September 30, 2009, include approximately $90 million for employee-related costs, approximately $7 million in asset write-offs and approximately $12 million of contract terminations and other exit costs.

 

The Company incurred other special charges in connection with the implementation of the Program for the three months ended September 30, 2009 of $3.5 million related to consulting, other professional services, and accelerated depreciation.  The total amount of other special charges expected to be incurred to implement these initiatives, including those incurred through September 30, 2009, is approximately $38 million.  In addition to the other special charges, and predominantly related to the exit from the global wholesale distribution of the Prescriptives brand, the Company recorded $18.5 million reflecting anticipated sales returns (less a related cost of sales of $3.9 million) and a write-off of inventory associated with exiting unprofitable operations of $9.5 million.  The total amounts expected to be incurred, including those incurred through September 30, 2009, related to sales returns is between $29 million to $33 million and approximately $10 million related to inventory write-offs.

 

Total charges associated with restructuring activities included in operating income for the three months ended September 30, 2009 were $42.3 million.

 

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 primarily enters into foreign currency forward and 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 and 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 special 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The fair values of the Company’s derivative financial instruments included in the consolidated balance sheets as of September 30, 2009 and June 30, 2009 are presented as follows:

 

		Asset Derivatives								Liability Derivatives
(In millions)		Balance Sheet Location		Fair Value (1)						Balance Sheet Location		Fair Value (1)
				September 30			June 30					September 30			June 30
				2009			2009					2009			2009
Derivatives Designated as Hedging Instruments:
Foreign currency forward contracts		Prepaid expenses and other current assets		$	13.2		$	13.9		Other accrued liabilities		$	(27.1	)	$	(24.9	)
Interest rate swap contracts		Other assets		30.5			24.5			Not applicable		—			—
Total Derivatives Designated as Hedging Instruments				43.7			38.4					(27.1		)	(24.9		)
Derivatives Not Designated as Hedging Instruments:
Foreign currency forward contracts		Prepaid expenses and other current assets		3.8			2.8			Other accrued liabilities		(6.4		)	(1.3		)
Total Derivatives				$	47.5		$	41.2				$	(33.5	)	$	(26.2	)

 

(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 for the three months ended September 30, 2009 are presented as follows:

 

(In millions)		Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)			Location of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)   (1)
Derivatives in Cash Flow Hedging Relationships:
Foreign currency forward contracts		$	(4.9	)	Selling, general and administrative		$	(2.3	)

 

(1)      The amount of loss recognized in earnings related to the amount excluded from effectiveness testing was $0.3 million for the three months ended September 30, 2009.  There was no gain (loss) recognized in earnings related to the ineffective portion of the hedging relationships for the three months ended September 30, 2009.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(In millions)		Location of Gain or (Loss) Recognized in Earnings on Derivatives		Amount of Gain or (Loss)  Recognized in Earnings on Derivatives (1)
Derivatives in Fair Value Hedging Relationships:
Interest rate swap contracts		Interest expense, net		$	6.0

 

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

 

The amounts of the gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments for the three months ended September 30, 2009 are presented as follows:

 

(In millions)		Location of Gain or (Loss) Recognized in Earnings on Derivatives		Amount of Gain or (Loss) Recognized in Earnings on Derivatives
Derivatives Not Designated as Hedging Instruments:
Foreign currency forward contracts		Selling, general and administrative		$	(4.2	)

 

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 June 2010.  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, 2009, the Company’s foreign currency cash-flow hedges were highly effective, in all material respects.  The estimated net loss as of September 30, 2009 that is expected to be reclassified from accumulated other comprehensive income (loss) into earnings within the next nine months is $13.0 million.

 

At September 30, 2009, the Company had foreign currency forward contracts in the amount of $1,138.7 million.  The foreign currencies included in foreign currency forward contracts (notional value stated in U.S. dollars) are principally the British pound ($198.6 million), Euro ($197.7 million), Swiss franc ($173.8 million), Canadian dollar ($160.3 million), Hong Kong dollar ($80.6 million), Australian dollar ($74.1 million) and Japanese yen ($56.6 million).

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Fair Value Hedges

 

The Company enters into interest rate derivative contracts to manage its exposure to interest rate fluctuations on its funded indebtedness and anticipated issuance of debt for periods consistent with the identified exposures.  The Company has interest rate swap agreements, with a notional amount totaling $250.0 million, to effectively convert the fixed rate interest on its 2017 Senior Notes to variable interest rates based on six-month LIBOR.  These interest rate swap agreements are designated as fair value hedges of the related long-term debt and the changes in the fair values of the interest rate swap agreements are exactly offset by changes in the fair value of the underlying long-term debt.  As of September 30, 2009, these fair-value hedges were highly effective in all material respects.

 

Credit Risk

 

As a matter of policy, the Company only enters into derivative contracts with counterparties that have at least an “A” (or equivalent) credit rating.  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 $47.5 million at September 30, 2009, of which 84% were attributable to two counterparties.  To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored and reported to management.  Accordingly, management believes risk of loss under these hedging contracts is remote.

 

Certain of the Company’s derivative financial instruments contain credit-risk-related contingent features.  As of September 30, 2009, the Company was in compliance with such features and there were no derivative financial instruments with credit-risk-related contingent features that were in a net liability position.

 

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.  Effective beginning in the Company’s fiscal 2010, the accounting for fair value measurements must be applied to nonrecurring nonfinancial assets and nonfinancial liabilities, which principally consist of intangible assets acquired through business combinations, long-lived assets when assessing potential impairment, and liabilities associated with restructuring activities.  During the three months ended September 30, 2009, the Company did not have significant measurements of nonfinancial assets or nonfinancial liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.  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.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2009:

 

		Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
(In millions)		(Level 1)			(Level 2)			(Level 3)			Total
Assets:
Foreign currency forward contracts		$	—		$	17.0		$	—		$	17.0
Interest rate swap contracts		—			30.5			—			30.5
Available-for-sale securities		6.0			—			—			6.0
Total		$	6.0		$	47.5		$	—		$	53.5
Liabilities:
Foreign currency forward contracts		$	—		$	33.5		$	—		$	33.5

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

Foreign currency forward contracts - The fair values of the Company’s foreign currency forward contracts were valued using pricing models, with all significant inputs derived from or corroborated by observable market data such as yield curves, currency spot and forward rates and currency volatilities.

 

Interest rate swap contracts - The fair values of the Company’s outstanding interest rate swap contracts were determined based on non-binding offers from the counterparties that are corroborated by observable market data.

 

Short-term 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 estimated fair values of the Company’s financial instruments at September 30, 2009 are as follows:

 

(In millions)		Carrying Amount			Fair Value
Nonderivatives
Cash and cash equivalents		$	799.2		$	799.2
Available-for-sale securities		6.0			6.0
Short-term and long-term debt		1,408.9			1,461.1
Derivatives
Foreign currency forward contracts — asset (liability)		(16.5		)	(16.5		)
Interest rate swap contracts — asset (liability)		30.5			30.5

 

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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 a domestic post-retirement benefit plan which provides certain medical and dental benefits to eligible employees.  Descriptions of these plans are discussed in the Company’s Annual Report on Form 10-K for the year ended June 30, 2009.

 

The components of net periodic benefit cost for the three months ended September 30, 2009 and 2008 consisted of the following:

 

														Other than
		Pension Plans												Pension Plans
		U.S.						International						Post-retirement
(In millions)		2009			2008			2009			2008			2009			2008
Service cost		$	5.6		$	5.2		$	4.4		$	4.4		$	0.8		$	1.0
Interest cost		7.3			7.0			4.9			5.1			2.0			1.8
Expected return on plan assets		(8.0		)	(8.3		)	(5.0		)	(5.3		)	—			—
Amortization of:
Prior service cost		0.2			0.2			0.6			0.7			—			—
Actuarial loss		1.0			0.4			0.4			0.2			0.1			—
Net periodic benefit cost		$	6.1		$	4.5		$	5.3		$	5.1		$	2.9		$	2.8

 

During the three months ended September 30, 2009, the Company made contributions to its international pension plans totaling approximately $14 million.

 

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 or financial condition.  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.

 

In 1999, the Office of the Attorney General of the State of New York (the “State”) notified the Company and ten other entities that they had been identified as potentially responsible parties (“PRPs”) with respect to the Blydenburgh landfill in Islip, New York.  Each PRP may be jointly and severally liable for the costs of investigation and cleanup, which the State estimated in 2006 to be approximately $19.7 million for all PRPs.  In 2001, the State sued other PRPs (including Hickey’s Carting, Inc., Dennis C. Hickey and Maria Hickey, collectively the “Hickey Parties”), in the U.S. District Court for the Eastern District of New York to recover such costs in connection with the site, and in September 2002, the Hickey Parties brought contribution actions against the Company and other Blydenburgh PRPs.  These contribution actions seek to recover, among other things, any damages for which the Hickey Parties are found liable in the State’s lawsuit against them, and related costs and expenses, including attorneys’ fees.  In June 2004, the State added the Company and other PRPs as defendants in its pending case against the Hickey Parties.  In April 2006, the Company and other defendants added numerous other parties to the case as third-party defendants.  Settlement negotiations with the new third-party defendants, the State, the Company and other defendants began in July 2006 and have resulted in a proposed consent decree to resolve the case.  The consent decree requires court approval, which the parties are seeking.  The Company has accrued an amount which it believes would be necessary to resolve its share of this matter.  If the settlement is not successfully completed, the Company intends to vigorously defend the pending claims.  While no assurance can be given as to the ultimate outcome, management believes that the resolution of the Blydenburgh matters will not have a material adverse effect on the Company’s consolidated financial condition.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 — STOCK PROGRAMS

 

As of September 30, 2009, the Company has two active equity compensation plans which include the Amended and Restated Fiscal 2002 Share Incentive Plan (the “Fiscal 2002 Plan”) and the Non-Employee Director Share Incentive Plan (collectively, the “Plans”).  These Plans currently provide for the issuance of 23,653,440 shares of Class A Common Stock, which consist of shares originally provided for and shares transferred to the Fiscal 2002 Plan from other inactive plans and employment agreements, to be granted in the form of stock-based awards to key employees, consultants and non-employee directors of the Company.  As of September 30, 2009, approximately 6,732,100 shares of Class A Common Stock were reserved and available to be granted pursuant to these Plans.  The Company may satisfy the obligation of its stock-based compensation awards with either new or treasury shares.  The Company’s equity compensation awards outstanding at September 30, 2009 include stock options, performance share units (“PSU”), restricted stock units (“RSU”) and share units.

 

Total net stock-based compensation expense is attributable to the granting of, and the remaining requisite service periods of, stock options, PSUs, RSUs and share units.  Compensation expense attributable to net stock-based compensation during the three months ended September 30, 2009 and 2008 was $19.2 million and $22.6 million, respectively.  As of September 30, 2009, the total unrecognized compensation cost related to nonvested stock-based awards was $75.6 million and the related weighted-average period over which it is expected to be recognized is approximately 2.0 years.

 

Stock Options

 

A summary of the Company’s stock option programs as of September 30, 2009 and changes during the three months then ended, is presented below:

 

(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, 2009		18,914.7		$	43.50
Granted at fair value		2,122.8		34.01
Exercised		(12.2	)	32.03
Expired		(4,455.8	)	51.89
Forfeited		(8.1	)	45.26
Outstanding at September 30, 2009		16,561.4		40.04			$	26.6		5.3
Exercisable at September 30, 2009		11,222.0		39.07			$	19.9		3.6

 

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

 

The exercise period for all stock options generally may not exceed ten years from the date of grant.  Stock option grants to individuals generally become exercisable in three substantively equal tranches over a service period of up to four years.  The Company attributes the value of option awards on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.

 

The per-share weighted-average grant date fair value of stock options granted during the three months ended September 30, 2009 and 2008 was $10.53 and $17.47, respectively.  The total intrinsic value of stock options exercised during the three months ended September 30, 2009 and 2008 was $0.1 million and $24.7 million, respectively.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

		Three Months Ended September 30
		2009		2008
Weighted-average expected stock-price volatility		30%		28%
Weighted-average expected option life		8 years		8 years
Average risk-free interest rate		3.1%		3.4%
Average dividend yield		2.0%		1.2%

 

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 which are obtained from public 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, 2009, the Company granted 165,300 PSUs, which will be settled in stock subject to the achievement of the Company’s net sales, net earnings per share and return on invested capital goals for the three fiscal years ending June 30, 2012.  Settlement will be made pursuant to a range of opportunities relative to the net sales and diluted net earnings per common share targets of the Company and, as such, the compensation cost of the PSU is subject to adjustment based upon the attainability of these target goals.  No settlement will occur for results below the applicable minimum threshold and additional shares shall be issued if performance exceeds the targeted performance goals.  Certain PSUs are accompanied by dividend equivalent rights that will be payable in cash upon settlement of the PSU.  Other PSUs granted in fiscal 2010 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.  These awards are subject to the provisions of the agreement under which the PSUs are granted.  The PSUs were valued at the closing market value of the Company’s Class A Common Stock on the date of grant and generally vest at the end of the performance period.  In September 2009, 31,100 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 96,100 PSUs which vested as of June 30, 2009.

 

The following is a summary of the status of the Company’s PSUs as of September 30, 2009 and activity during the three months then ended:

 

				Weighted-Average
				Grant Date
(Shares in thousands)		Shares		Fair Value Per Share
Nonvested at June 30, 2009		224.2		$	48.57
Granted		165.3		33.42
Vested		—		—
Forfeited		—		—
Nonvested at September 30, 2009		389.5		42.14

 

Restricted Stock Units

 

The Company granted approximately 974,800 RSUs during the three months ended September 30, 2009 which, at the time of grant, were scheduled to vest as follows: 39,800 on July 1, 2010, 484,300 on November 1, 2010, 39,800 on July 2, 2011, 271,300 on October 31, 2011, 39,800 on July 2, 2012 and 99,800 on October 31, 2012, all subject to the continued employment or retirement of the grantees.  Certain RSUs granted in fiscal 2010 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 2010 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.

 

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