Estee Lauder 2007 Annual Report Download - page 65

beauty and beauty-related products (or particular catego-
ries thereof) using the licensors’ trademarks. The licenses
typically have an initial term of approximately 3 years to
11 years, and are renewable subject to the Company’s
compliance with the license agreement provisions. The
remaining terms, including the potential renewal
periods, range from approximately 1 year to 23 years.
Under each license, the Company is required to pay
royalties to the licensor, at least annually, based on net
sales to third parties.
Most of the Company’s licenses were entered into to
create new business. In some cases, the Company
acquired, or entered into, a license where the licensor or
another licensee was operating a pre-existing beauty
products business. In those cases, intangible assets are
capitalized and amortized over their useful lives based on
the terms of the agreement and are subject to impairment
testing if certain events or circumstances indicate a poten-
tial impairment.
Stock-Based Compensation
As of June 30, 2007, the Company had established a num-
ber of share incentive programs as discussed in more
detail in Note 13 — Stock Programs. Prior to fi scal 2006, the
Company applied the intrinsic value method as outlined
in Accounting Principles Board Opinion No. 25, “Account-
ing for Stock Issued to Employees” (“APB No. 25”), and
related interpretations in accounting for stock options and
share units granted under these programs. Under the
intrinsic value method, no compensation expense was
recognized if the exercise price of the Company’s
employee stock options equaled the market price of the
underlying stock on the date of the grant. Accordingly, no
compensation cost was recognized in the accompanying
consolidated statements of earnings prior to fi scal year
2006 on stock options granted to employees, since all
options granted under the Company’s share incentive
programs had an exercise price equal to the market value
of the underlying common stock on the date of grant.
Effective July 1, 2005, the Company adopted SFAS
No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”).
This statement replaced SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS No. 123”) and super-
seded APB No. 25. SFAS No. 123(R) requires that all
stock-based compensation be recognized as an expense
in the fi nancial statements and that such cost be measured
at the fair value of the award. This statement was adopted
using the modifi ed prospective method of application,
which requires the Company to recognize compensation
expense on a prospective basis. Therefore, prior years’
fi nancial statements have not been restated. Under this
method, in addition to refl ecting compensation expense
for new share-based awards, expense is also recognized
to refl ect the remaining service period of awards that had
been included in pro-forma disclosures in prior years.
SFAS No. 123(R) also requires that excess tax benefi ts
related to stock option exercises be refl ected as fi nancing
cash infl ows instead of operating cash infl ows.
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 pri-
marily to department stores, perfumeries and specialty
retailers. The Company grants credit to all qualifi ed cus-
tomers and does not believe it is exposed signifi cantly to
any undue concentration of credit risk.
During fi scal 2006, Federated Department Stores, Inc.
acquired The May Department Stores Company, resulting
in the merger of the Company’s previous two largest cus-
tomers (collectively “Macy’s, Inc.”). This customer sells
products primarily within North America and accounted
for $958.8 million, or 14%, and $1,005.8 million, or 16%,
of the Company’s consolidated net sales in fi scal 2007
and 2006, respectively. This customer accounted for
$105.3 million, or 12%, and $105.4 million, or 14%, of the
Company’s accounts receivable at June 30, 2007 and
2006, respectively. No single customer accounted for
more than 10% of the Company’s net sales or accounts
receivable during fi scal 2005.
Management Estimates
The preparation of fi nancial statements and related disclo-
sures in conformity with U.S. generally accepted account-
ing principles requires management to make estimates
and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses reported in those
fi nancial statements. Actual results could differ from
those estimates and assumptions.
Derivative Financial Instruments
The Company accounts for derivative fi nancial instru-
ments in accordance with SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” (“SFAS
No. 133”) as amended, which establishes accounting and
reporting standards for derivative instruments, including
certain derivative instruments embedded in other con-
tracts, and for hedging activities. SFAS No. 133 also
requires the recognition of all derivative instruments as
either assets or liabilities on the balance sheet and that
they be measured at fair value.
Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board
(“FASB”) issued FASB Interpretation Number (“FIN”) 48,
64 THE EST{E LAUDER COMPANIES INC.