Estee Lauder 2004 Annual Report Download - page 64

THE EST{E LAUDER COMPANIES INC.
Of the $10.2 million, net of tax, derivative instrument gain
recorded in OCI at June 30, 2004, $9.1 million, net of tax,
related to the proceeds from the settlement of the treas-
ury lock agreements upon the issuance of the 5.75%
Senior Notes which will be reclassified to earnings as an
offset to interest expense over the 30-year life of the debt
and $1.1 million, net of tax, related to gains from forward
and option contracts which the Company will reclassify
to earnings during the next twelve months.
Revenue Recognition
Generally, revenues from merchandise sales are recorded
at the time the product is shipped to the customer. The
Company reports its sales levels on a net sales basis,
which is computed by deducting from gross sales the
amount of actual returns received and an amount estab-
lished for anticipated returns. As a percent of gross sales,
returns were 4.6%, 5.1% and 4.8% in fiscal 2004, 2003
and 2002, respectively.
Advertising and Promotion
Costs associated with advertising are expensed during the
year as incurred. Global advertising expenses, which pri-
marily include television, radio and print media, and pro-
motional expenses, such as products used as sales
incentives, were $1,612.0 million, $1,416.1 million and
$1,317.4 million in fiscal 2004, 2003 and 2002, respec-
tively. These amounts include expenses relating to
purchase with purchase and gift with purchase promo-
tions that are reflected in net sales and cost of sales.
Advertising and promotional expenses included in
operating expenses were $1,426.8 million, $1,217.8
million and $1,113.2 million in fiscal 2004, 2003 and
2002, respectively.
Research and Development
Research and development costs, which amounted
to $67.2 million, $60.8 million and $61.3 million in
fiscal 2004, 2003 and 2002, respectively, are expensed
as incurred.
Related Party Royalties and Trademarks
On April 24, 2004, Mrs. Estée Lauder passed away. As a
result, the royalty payments made to her since 1969
in connection with the Company’s purchase of the
“Estée Lauder” trademark outside the United States
ceased to accrue. Royalty payments totaling $18.8 mil-
lion, $20.3 million and $16.5 million have been charged to
expense in fiscal 2004, 2003 and 2002, respectively.
Stock Compensation
The Company observes the provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS
No. 123”), by continuing to apply the provisions of
Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB No. 25”).
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Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) (“OCI”) included in the accompanying consolidated
balance sheets consist of the following:
YEAR ENDED JUNE 30 2004 2003 2002
(In millions)
Net unrealized investment gains (losses), beginning of year $0.7 $ (0.1) $ 2.9
Unrealized investment gains (losses) (1.0) 1.4 (5.0)
Provision for deferred income taxes 0.4 (0.6) 2.0
Net unrealized investment gains (losses), end of year 0.1 0.7 (0.1)
Net derivative instruments, beginning of year (1.5) (9.1) (2.0)
Gain (loss) on derivative instruments 1.6 (1.6) (16.1)
Provision for deferred income taxes on derivative instruments (1.4) 0.5 5.5
Reclassification to earnings during the year 17.2 13.3 5.3
Provision for deferred income taxes on reclassification (5.7) (4.6) (1.8)
Net derivative instruments, end of year 10.2 (1.5) (9.1)
Net minimum pension liability adjustments, beginning of year (40.6) (20.3) (12.4)
Minimum pension liability adjustments 26.6 (30.8) (11.6)
Provision for deferred income taxes (10.6) 10.5 3.7
Net minimum pension liability adjustments, end of year (24.6) (40.6) (20.3)
Cumulative translation adjustments, beginning of year (11.7) (63.0) (109.0)
Translation adjustments 36.5 51.3 46.0
Cumulative translation adjustments, end of year 24.8 (11.7) (63.0)
Accumulated other comprehensive income (loss) $ 10.5 $(53.1) $ (92.5)