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, 2011

 

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		11-2408943
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
767 Fifth Avenue, New York, New York		10153
(Address of principal executive offices)		(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 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 25, 2011, 116,596,817 shares of the registrant’s Class A Common Stock, $.01 par value, and 75,982,041 shares of the registrant’s Class B Common Stock, $.01 par value, were outstanding.

 

 

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THE ESTÉE LAUDER COMPANIES INC.

 

INDEX

 

		Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Earnings – Three Months Ended September 30, 2011 and 2010		2
Consolidated Balance Sheets – September 30, 2011 and June 30, 2011		3
Consolidated Statements of Cash Flows – Three Months Ended September 30, 2011 and 2010		4
Notes to Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		39
Item 4. Controls and Procedures		39
Part II. Other Information
Item 1. Legal Proceedings		40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 6. Exhibits		41
Signatures		42

 

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
		2011			2010
		(In millions, except per share data)
Net Sales		$	2,476.7		$	2,091.7
Cost of sales		534.3			488.1
Gross Profit		1,942.4			1,603.6
Operating expenses
Selling, general and administrative		1,507.7			1,301.8
Restructuring and other charges		4.7			3.8
Total operating expenses		1,512.4			1,305.6
Operating Income		430.0			298.0
Interest expense, net		16.0			16.1
Earnings before Income Taxes		414.0			281.9
Provision for income taxes		135.4			92.3
Net Earnings		278.6			189.6
Net loss attributable to noncontrolling interests		—			1.5
Net Earnings Attributable to The Estée Lauder Companies Inc.		$	278.6		$	191.1
Net earnings attributable to The Estée Lauder Companies Inc. per common share
Basic		$	1.43		$	.97
Diluted		$	1.40		$	.95
Weighted-average common shares outstanding
Basic		195.3			196.7
Diluted		199.6			200.4

 

See notes to consolidated financial statements.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED BALANCE SHEETS

 

		September 30			June 30
		2011			2011
		(Unaudited)
		($ in millions)
ASSETS
Current Assets
Cash and cash equivalents		$	719.5		$	1,253.0
Accounts receivable, net		1,378.5			945.6
Inventory and promotional merchandise, net		982.2			995.6
Prepaid expenses and other current assets		481.9			492.3
Total current assets		3,562.1			3,686.5
Property, Plant and Equipment, net		1,125.1			1,143.1
Other Assets
Goodwill		876.7			877.3
Other intangible assets, net		222.1			227.5
Other assets		349.4			339.5
Total other assets		1,448.2			1,444.3
Total assets		$	6,135.4		$	6,273.9
LIABILITIES AND EQUITY
Current Liabilities
Current debt		$	141.8		$	138.0
Accounts payable		424.2			446.7
Accrued income taxes		163.9			62.3
Other accrued liabilities		1,239.7			1,296.3
Total current liabilities		1,969.6			1,943.3
Noncurrent Liabilities
Long-term debt		1,072.8			1,080.1
Accrued income taxes		131.6			130.0
Other noncurrent liabilities		469.4			473.5
Total noncurrent liabilities		1,673.8			1,683.6
Contingencies (Note 7)
Equity
Common stock, $.01 par value; 650,000,000 shares Class A authorized; shares issued: 196,850,606 at September 30, 2011 and 196,586,976 at June 30, 2011; 240,000,000 shares Class B authorized; shares issued and outstanding: 75,982,041 at September 30, 2011 and June 30, 2011		2.7			2.7
Paid-in capital		1,789.2			1,735.6
Retained earnings		4,395.1			4,116.5
Accumulated other comprehensive income (loss)		(66.2		)	17.7
		6,120.8			5,872.5
Less: Treasury stock, at cost; 79,332,335 Class A shares at September 30, 2011 and 75,287,545 Class A shares at June 30, 2011		(3,645.5		)	(3,243.1		)
Total stockholders’ equity — The Estée Lauder Companies Inc.		2,475.3			2,629.4
Noncontrolling interests		16.7			17.6
Total equity		2,492.0			2,647.0
Total liabilities and equity		$	6,135.4		$	6,273.9

 

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
		2011			2010
		(In millions)
Cash Flows from Operating Activities
Net earnings		$	278.6		$	189.6
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization		69.6			68.8
Deferred income taxes		(9.6		)	6.1
Non-cash stock-based compensation		45.4			30.6
Excess tax benefits from stock-based compensation arrangements		(11.0		)	(0.9		)
Loss on disposal of property, plant and equipment		3.0			0.4
Non-cash charges associated with restructuring activities		0.1			0.9
Pension and post-retirement benefit expense		17.6			16.9
Pension and post-retirement benefit contributions		(7.8		)	(8.7		)
Other non-cash items		—			0.4
Changes in operating assets and liabilities:
Increase in accounts receivable, net		(482.1		)	(369.2		)
Increase in inventory and promotional merchandise, net		(21.4		)	(34.6		)
Increase in other assets, net		(9.1		)	(12.9		)
Decrease in accounts payable		(10.6		)	(63.8		)
Increase in accrued income taxes		113.0			71.5
Increase (decrease) in other liabilities		(11.9		)	65.8
Net cash flows used for operating activities		(36.2		)	(39.1		)
Cash Flows from Investing Activities
Capital expenditures		(80.8		)	(57.7		)
Acquisition of businesses and other intangible assets, net of cash acquired		(7.7		)	(258.5		)
Net cash flows used for investing activities		(88.5		)	(316.2		)
Cash Flows from Financing Activities
Borrowings of current debt, net		1.2			7.1
Debt issuance costs		(1.1		)	—
Repayments and redemptions of long-term debt, net		(2.4		)	(9.5		)
Net settlement of interest rate derivatives		—			47.4
Net proceeds from stock-based compensation transactions		3.6			14.6
Excess tax benefits from stock-based compensation arrangements		11.0			0.9
Payments to acquire treasury stock		(402.9		)	(143.8		)
Dividends paid to stockholders		(0.3		)	(0.1		)
Net cash flows used for financing activities		(390.9		)	(83.4		)
Effect of Exchange Rate Changes on Cash and Cash Equivalents		(17.9		)	11.5
Net Decrease in Cash and Cash Equivalents		(533.5		)	(427.2		)
Cash and Cash Equivalents at Beginning of Period		1,253.0			1,120.7
Cash and Cash Equivalents at End of Period		$	719.5		$	693.5

 

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, 2011.

 

Management Estimates

 

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses reported in those financial statements.  Certain significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, inventory, pension and other post-retirement benefit costs, goodwill, other intangible assets and long-lived assets, income taxes and derivatives.  Descriptions of these policies are discussed in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2011.  Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate.  As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions.  Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

 

Currency Translation and Transactions

 

All assets and liabilities of foreign subsidiaries and affiliates are translated at period-end rates of exchange, while revenue and expenses are translated at weighted average rates of exchange for the period.  Unrealized translation gains or losses are reported as cumulative translation adjustments through other comprehensive income (loss) (“OCI”).  Such adjustments, attributable to The Estée Lauder Companies Inc., amounted to $113.3 million of unrealized translation losses, net of tax, and $86.7 million of unrealized translation gains, net of tax, during the three months ended September 30, 2011 and 2010, respectively.  For the Company’s Venezuelan subsidiary operating in a highly inflationary economy, the U.S. dollar is the functional currency.  Remeasurement adjustments in financial statements in a highly inflationary economy and other transactional gains and losses are reflected in earnings.

 

The accompanying consolidated statements of earnings include net exchange gains (losses) on foreign currency transactions of $(9.8) million and $2.8 million during the three months ended September 30, 2011 and 2010, respectively.

 

Accounts Receivable

 

Accounts receivable is stated net of the allowance for doubtful accounts and customer deductions totaling $33.9 million as of September 30, 2011 and June 30, 2011.

 

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

 

The Company’s largest customer sells products primarily within the United States and accounted for $313.3 million, or 13%, and $282.0 million, or 13%, of the Company’s consolidated net sales for the three months ended September 30, 2011 and 2010, respectively.  This customer accounted for $202.6 million, or 15%, and $92.3 million, or 10%, of the Company’s accounts receivable at September 30, 2011 and June 30, 2011, respectively.

 

Inventory and Promotional Merchandise

 

		September 30			June 30
(In millions)		2011			2011
Inventory and promotional merchandise, net consists of:
Raw materials		$	226.8		$	230.2
Work in process		74.2			93.6
Finished goods		494.4			475.4
Promotional merchandise		186.8			196.4
		$	982.2		$	995.6

 

Property, Plant and Equipment

 

		September 30			June 30
(In millions)		2011			2011
Assets (Useful Life)
Land		$	14.7		$	15.0
Buildings and improvements (10 to 40 years)		189.9			195.5
Machinery and equipment (3 to 10 years)		623.8			635.3
Computer hardware and software (4 to 10 years)		715.9			707.1
Furniture and fixtures (5 to 10 years)		98.1			93.9
Leasehold improvements		1,197.7			1,215.3
		2,840.1			2,862.1
Less accumulated depreciation and amortization		1,715.0			1,719.0
		$	1,125.1		$	1,143.1

 

The cost of assets related to projects in progress of $208.8 million and $183.5 million as of September 30, 2011 and June 30, 2011, respectively, is included in their respective asset categories above.  Depreciation and amortization of property, plant and equipment was $67.3 million and $65.4 million during the three months ended September 30, 2011 and 2010, 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 32.7% for the three months ended September 30, 2011 and 2010.

 

As of September 30, 2011 and June 30, 2011, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $105.8 million and $104.8 million, respectively.  The total amount of unrecognized tax benefits at September 30, 2011 that, if recognized, would affect the effective tax rate was $62.2 million.  The total gross interest and penalties accrued related to unrecognized tax benefits during the three months ended September 30, 2011 in the accompanying consolidated statement of earnings was $3.1 million.  The total gross accrued interest and penalties in the accompanying consolidated balance sheets at September 30, 2011 and June 30, 2011 was $39.0 million and $37.7 million, respectively.  On the basis of the information available as of September 30, 2011, it is reasonably possible that the total amount of unrecognized tax benefits could decrease in a range of $15 million to $25 million within 12 months as a result of projected resolutions of global tax examinations and controversies and a potential lapse of the applicable statutes of limitations.

 

During the three months ended September 30, 2011, the Company was notified that an appeal for judicial review by the National Appellate Court of Spain of a disallowance of tax deductions claimed by its subsidiary in Spain for fiscal years 1999 through 2002 has been denied.  The Company has been assessed corporate income tax and interest of $4.1 million, net of tax, at current exchange rates.  On July 21, 2011, the Company filed an appeal with the Spain Supreme Court.  While no assurance can be given as to the outcome in respect of this assessment and pending appeal in the Spanish courts, based on the decision of the National Appellate Court, management believes it is not more-likely-than-not that the subsidiary will be successful in its appeal to the Spain Supreme Court.  Accordingly, the Company established a reserve which resulted in an increase to the provision for income taxes equal to the $4.1 million exposure, net of tax.  Separately, during the fiscal 2012 first quarter the Company’s subsidiary in Spain made a cash payment of $3.7 million, at current exchange rates, to the Spain tax authority as an advance deposit to limit the additional interest that would be due to the Spain tax authority should it receive an unfavorable decision from the Spain Supreme Court.

 

Recently Adopted Accounting Standards

 

In December 2010, the Financial Accounting Standards Board (“FASB”) amended its authoritative guidance related to Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more-likely-than-not that a goodwill impairment exists.  In determining whether it is more-likely-than-not that a goodwill impairment exists, consideration should be made as to whether there are any adverse qualitative factors indicating that an impairment may exist.  This guidance became effective for the Company’s fiscal 2012 first quarter.  The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

 

In December 2010, the FASB amended its authoritative guidance related to business combinations entered into by an entity that are material on an individual or aggregate basis.  These amendments clarify existing guidance that if an entity presents comparative financial statements that include a material business combination, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period.  The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.  This guidance became effective prospectively for business combinations for which the acquisition date was on or after the first day of the Company’s fiscal 2012.  This disclosure-only guidance did not have an impact on the Company’s results of operations, financial position or cash flows.

 

In January 2010, the FASB issued authoritative guidance that will require entities to make new disclosures about recurring or nonrecurring fair-value measurements of assets and liabilities.  The Company adopted the new guidance in its fiscal 2010 third quarter, except for certain detailed recurring Level 3 disclosures, which became effective for the Company’s fiscal 2012 first quarter.  The Company currently does not have any recurring Level 3 assets or liabilities.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Recently Issued Accounting Standards

 

In September 2011, the FASB amended its authoritative guidance related to testing goodwill for impairment.  Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before performing Step 1 of the goodwill impairment test.  If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more-likely-than-not less than the carrying amount, the two-step impairment test would be required.  This guidance becomes effective in the beginning of the Company’s fiscal 2013, with early adoption permitted.  The Company is currently evaluating the timing of adopting this guidance which will not have an impact on the Company’s consolidated financial statements.

 

In September 2011, the FASB amended its authoritative guidance related to multiemployer benefit plans.  This revised disclosure-only guidance is intended to provide enhanced qualitative and quantitative disclosures about an employer’s significant financial obligations to a multiemployer pension plan and, therefore, help financial statement users better understand the financial health of all significant plans in which the employer participates.  To the extent the information required under the revised standard is not available in the public domain, as may be the case for some foreign plans, employers should include more qualitative information about the plan.  This disclosure-only guidance becomes effective for the Company’s fiscal year ending June 30, 2013, with early adoption permitted and full retrospective application required.  The Company is currently evaluating the timing of adopting and the impact of this guidance on the Company’s consolidated financial statements.

 

In June 2011, the FASB amended its authoritative guidance related to the presentation of comprehensive income, requiring entities to present items of net income and other comprehensive income either in one continuous statement or in two separate consecutive statements.  This guidance becomes effective for the Company’s fiscal 2013 first quarter.  The Company is currently evaluating the impact of adopting this guidance but believes that it will result only in changes in the presentation of its consolidated financial statements and will not have a material impact on the Company’s results of operations, financial position or cash flows.

 

In May 2011, the FASB amended its authoritative guidance related to fair value measurements to provide a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards.  This guidance clarifies the application of existing fair value measurement and expands the existing disclosure requirements.  This guidance becomes effective for the Company’s fiscal 2012 third quarter.  This guidance is not expected to have a material impact on the Company’s results of operations, financial position or cash flows, but may require certain additional disclosures.

 

NOTE 2 — GOODWILL AND OTHER INTANGIBLE ASSETS

 

The Company assigns goodwill of a reporting unit to the product category in which that reporting unit predominantly operates at the time of its acquisition.  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, 2011
Goodwill		$	70.4		$	412.6		$	55.0		$	406.9		$	944.9
Accumulated impairments		(24.4		)	—			—			(43.2		)	(67.6		)
		46.0			412.6			55.0			363.7			877.3
Goodwill acquired during the period		—			2.2			—			—			2.2
Translation and other adjustments		(0.7		)	(0.2		)	(0.1		)	(1.8		)	(2.8		)
		(0.7		)	2.0			(0.1		)	(1.8		)	(0.6		)
Balance as of September 30, 2011
Goodwill		69.7			414.6			54.9			405.1			944.3
Accumulated impairments		(24.4		)	—			—			(43.2		)	(67.6		)
		$	45.3		$	414.6		$	54.9		$	361.9		$	876.7

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Other intangible assets consist of the following:

 

		September 30, 2011									June 30, 2011
(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		$	267.6		$	170.0		$	97.6		$	270.9		$	168.5		$	102.4
License agreements		43.0			43.0			—			43.0			43.0			—
		$	310.6		$	213.0		97.6			$	313.9		$	211.5		102.4
Non-amortizable intangible assets:
Trademarks and other								124.5									125.1
Total intangible assets								$	222.1								$	227.5

 

The aggregate amortization expense related to amortizable intangible assets for the three months ended September 30, 2011 and 2010 was $3.5 million and $3.6 million, respectively.  The estimated aggregate amortization expense for the remainder of fiscal 2012 and for each of fiscal 2013 to 2016 is $10.1 million, $13.6 million, $13.5 million, $13.5 million and $13.3 million, respectively.

 

NOTE 3 — RETURNS AND CHARGES ASSOCIATED WITH RESTRUCTURING ACTIVITIES

 

In an effort to drive down costs and achieve synergies within the organization, in February 2009, the Company announced the implementation of a multi-faceted cost savings program (the “Program”) to position itself to achieve long-term profitable growth.  The Company anticipates the Program will result in related restructuring and other charges, inclusive of cumulative charges recorded to date and through the remainder of the Program, totaling between $350 million and $450 million before taxes.  While the Company will continue to seek cost savings opportunities, the Company’s current plans are to identify and approve specific initiatives under the Program through fiscal 2012 and execute those initiatives through fiscal 2013.  The total amount of charges (pre-tax) associated with the Program, recorded, plus other initiatives approved through September 30, 2011, is approximately $305 million to $310 million, of which approximately $200 million to $202 million relates to restructuring charges, approximately $50 million of other costs to implement the initiatives, approximately $39 million to $42 million in sales returns and approximately $16 million in inventory write-offs.  The restructuring charges are comprised of approximately $153 million to $155 million of employee-related costs, approximately $27 million of other exit costs and contract terminations (substantially all of which have resulted in or will result in cash expenditures), and approximately $20 million in non-cash asset write-offs.  The total amount of cumulative charges (pre-tax) associated with the Program recorded from inception through September 30, 2011 was $243.5 million.

 

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 was the reduction of the workforce by approximately 2,000 employees.  Specific actions taken since the inception of the Program included:

 

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

 

·                   Turnaround or Exit Unprofitable Operations — To improve the profitability in certain of the Company’s brands and regions, the Company has selectively exited certain channels of distribution, categories and markets, and has made changes to turnaround others.  This included the exit from the global wholesale distribution of the Company’s Prescriptives brand and the reformulation of Ojon brand products.  In connection with these activities, the Company incurred charges related to product returns, inventory write-offs, reduction of workforce and termination of 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 outsource providers and employee-related termination costs.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Restructuring Charges

 

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

 

		Three Months Ended September 30
(In millions)		2011			2010
Employee-related costs		$	2.2		$	0.7
Asset write-offs		0.1			0.1
Contract terminations		0.1			0.3
Other exit costs		0.6			0.6
Total restructuring charges		$	3.0		$	1.7

 

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

 

( 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
Three months ended September 30, 2011		2.2			0.1			0.1			0.6			3.0
Charges recorded through September 30, 2011		$	127.0		$	17.7		$	8.8		$	9.7		$	163.2

 

The following table presents accrued restructuring charges and the related activity as of and for the three months ended September 30, 2011 under the Program:

 

( In millions)		Employee- Related  Costs			Asset Write-offs			Contract Terminations			Other Exit Costs			Total
Charges		$	60.9		$	4.2		$	3.4		$	1.8		$	70.3
Cash payments		(7.5		)	—			(0.5		)	(1.6		)	(9.6		)
Non-cash write-offs		—			(4.2		)	—			—			(4.2		)
Translation adjustments		0.6			—			—			—			0.6
Other adjustments		(2.4		)	—			—			—			(2.4		)
Balance at June 30, 2009		51.6			—			2.9			0.2			54.7
Charges		29.3			11.0			2.3			6.2			48.8
Cash payments		(49.5		)	—			(5.1		)	(6.0		)	(60.6		)
Non-cash write-offs		—			(11.0		)	—			—			(11.0		)
Translation adjustments		(0.8		)	—			—			—			(0.8		)
Balance at June 30, 2010		30.6			—			0.1			0.4			31.1
Charges		34.6			2.4			3.0			1.1			41.1
Cash payments		(30.6		)	—			(2.4		)	(1.4		)	(34.4		)
Non-cash write-offs		—			(2.4		)	—			—			(2.4		)
Translation adjustments		1.2			—			(0.1		)	0.1			1.2
Balance at June 30, 2011		35.8			—			0.6			0.2			36.6
Charges		2.2			0.1			0.1			0.6			3.0
Cash payments		(6.9		)	—			(0.2		)	(0.3		)	(7.4		)
Non-cash write-offs		—			(0.1		)	—			—			(0.1		)
Translation adjustments		(0.7		)	—			—			—			(0.7		)
Balance at September 30, 2011		$	30.4		$	—		$	0.5		$	0.5		$	31.4

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Accrued restructuring charges at September 30, 2011 are expected to result in cash expenditures funded from cash provided by operations of approximately $22 million, $7 million and $2 million in fiscal 2012, 2013 and 2014, respectively.

 

Total Returns and Charges Associated with Restructuring Activities

 

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

 

		Three Months Ended September 30
(In millions)		2011			2010
Sales returns (included in Net sales)		$	(0.7	)	$	—
Cost of sales		0.1			0.8
Restructuring charges		3.0			1.7
Other charges		1.7			2.1
Total returns and charges associated with restructuring activities		$	4.1		$	4.6

 

During the three months ended September 30, 2011, the Company recorded adjustments to reflect revised estimates of anticipated sales returns associated with prior initiatives.  During the three months ended September 30, 2010, the cost of sales adjustment primarily related to inventory write-offs associated with turnaround operations of $0.8 million.  Other charges in connection with the implementation of the Program primarily relate to consulting and other professional services.

 

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 and may enter into option contracts to reduce the effects of fluctuating foreign currency exchange rates and interest rate derivatives to manage the effects of interest rate movements on the Company’s aggregate liability portfolio.  The Company also enters into foreign currency forward contracts and may use option contracts, not designated as hedging instruments, to mitigate the change in fair value of specific assets and liabilities on the balance sheet.  The Company does not utilize derivative financial instruments for trading or speculative purposes.  Costs associated with entering into these derivative financial instruments have not been material to the Company’s consolidated financial results.

 

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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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
				Fair Value  (1)								Fair Value  (1)
(In millions)		Balance Sheet Location		September 30 2011			June 30 2011			Balance Sheet Location		September 30 2011			June 30 2011
Derivatives Designated as Hedging Instruments:
Foreign currency forward contracts		Prepaid expenses and other current assets		$	21.4		$	11.9		Other accrued liabilities		$	5.5		$	28.4
Derivatives Not Designated as Hedging Instruments:
Foreign currency forward contracts		Prepaid expenses and other current assets		3.8			3.1			Other accrued liabilities		7.8			2.5
Total Derivatives				$	25.2		$	15.0				$	13.3		$	30.9

 

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

 

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

 

		Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)						Location of Gain or (Loss) Reclassified		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)  (2)
		Three Months Ended						from Accumulated		Three Months Ended
		September 30						OCI into Earnings		September 30
(In millions)		2011			2010			(Effective Portion)		2011			2010
Derivatives in Cash Flow Hedging Relationships:
Foreign currency forward contracts		$	33.3		$	(13.9	)	Cost of sales		$	0.6		$	(0.3	)
								Selling, general and administrative		(2.1		)	—
Total derivatives		$	33.3		$	(13.9	)			$	(1.5	)	$	(0.3	)

 

(2)              The amount of gain (loss) recognized in earnings related to the amount excluded from effectiveness testing was $(2.4) million and $0.3 million for the three months ended September 30, 2011 and 2010, respectively.  There was a de minimis gain recognized in earnings related to the ineffective portion of the hedging relationships for the three months ended September 30, 2011.  There was no gain (loss) recognized in earnings related to the ineffective portion of the hedging relationships for the three months ended September 30, 2010.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

				Amount of Gain or (Loss) Recognized in Earnings on Derivatives  (3)
		Location of Gain or (Loss)		Three Months Ended
		Recognized in Earnings on		September 30
(In millions)		Derivatives		2011			2010
Derivatives in Fair Value Hedging Relationships:
Interest rate swap contracts		Interest expense, net		$	—		$	8.7

 

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(3)              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 are presented as follows:

 

				Amount of Gain or (Loss) Recognized in Earnings on Derivatives
		Location of Gain or (Loss)		Three Months Ended
		Recognized in Earnings on		September 30
(In millions)		Derivatives		2011			2010
Derivatives Not Designated as Hedging Instruments:
Foreign currency forward contracts		Selling, general and administrative		$	(4.5	)	$	0.4

 

Foreign Currency Cash-Flow Hedges

 

The Company enters into foreign currency forward contracts to hedge anticipated transactions, as well as receivables and payables denominated in foreign currencies, for periods consistent with the Company’s identified exposures.  The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on costs and on the cash flows that the Company receives from foreign subsidiaries.  The majority of foreign currency forward contracts are denominated in currencies of major industrial countries.  The 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 2013.  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.

 

The ineffective portion of foreign currency forward contracts is recorded in current-period earnings.  For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses accumulated in OCI are reclassified to earnings when the underlying forecasted transaction occurs.  If it is probable that the forecasted transaction will no longer occur, then any gains or losses in accumulated OCI are reclassified to current-period earnings.  As of September 30, 2011, the Company’s foreign currency cash-flow hedges were highly effective in all material respects.  The estimated net loss as of September 30, 2011 that is expected to be reclassified from accumulated OCI into earnings, net of tax, within the next twelve months is $11.0 million.  The accumulated gain (loss) on derivative instruments in accumulated OCI was $21.6 million and $(13.2) million as of September 30, 2011 and June 30, 2011, respectively.

 

At September 30, 2011, the Company had foreign currency forward contracts in the amount of $1,580.1 million.  The foreign currencies included in foreign currency forward contracts (notional value stated in U.S. dollars) are principally the British pound ($311.0 million), Swiss franc ($264.9 million), Euro ($241.2 million), Canadian dollar ($191.5 million), Australian dollar ($109.3 million), Japanese yen ($75.6 million) and South Korean won ($71.7 million).

 

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