Estee Lauder 2007 Annual Report Download - page 68

In fi scal 2005, the Company acquired a majority equity
interest in its former distributor in Portugal. The aggregate
payments made to acquire the distributor were funded by
cash provided by operations and did not have a material
effect on the Company’s results of operations or fi nancial
condition. In addition, the Company assumed debt and
other long-term obligations of 4.6 million Euros associated
with the acquisition (approximately $5.6 million at
acquisition date exchange rates). The debt is payable
semi-annually through February 2008 at a variable
interest rate.
At various times during fi scal 2007, 2006 and 2005, the
Company also acquired businesses engaged in the whole-
sale distribution and retail sale of the Company’s products
in the United States and other countries.
The aggregate cost for these activities, which includes
purchase price, earn-out payments and acquisition costs,
was $61.2 million, $51.7 million, and $7.1 million in fi scal
2007, 2006 and 2005, respectively, and each transaction
was accounted for using the purchase method of account-
ing. Accordingly, the results of operations for each of the
acquired businesses are included in the accompanying
consolidated fi nancial statements commencing with its
date of original acquisition. Pro forma results of opera-
tions, as if each of such businesses had been acquired as
of the beginning of the year of acquisition, have not been
presented, as the impact on the Company’s consolidated
fi nancial results would not have been material.
In fi scal 2007, the Company signed an exclusive agree-
ment to create fragrances and related products to be sold
to Coach Inc., which are available at Coach retail stores in
the United States. In May 2007, the Company entered into
a license agreement with Ford Motor Company to create
a fragrance using the name Mustang. Since fi scal 2006,
the Company developed and sold fragrance products pur-
suant to a license agreement with Daisy Fuentes. Since
fi scal 2005, the Company developed and sold products
under license agreements for Sean John (announced in
May 2004), Tom Ford (announced in April 2005) and
Missoni (announced in May 2005) and an Origins license
agreement to develop and sell products using the name
of Dr. Andrew Weil (announced in October 2004).
Certain license agreements may require minimum
royalty payments, incremental royalties based on net sales
levels and minimum spending on advertising and promo-
tional activities. Royalty expenses are accrued in the
period in which net sales are earned while advertising and
promotional expenses are accrued at the time these costs
are incurred.
NOTE 5 — COST SAVINGS INITIATIVE
During fiscal 2006, the Company recorded special
charges associated with a cost savings initiative that was
designed to support its long-term fi nancial objectives.
As part of this multi-faceted initiative, the Company had
identifi ed savings opportunities that include streamlined
processes and organizational changes. The principal com-
ponent of the initiative was a voluntary separation
program offered primarily to North America-based
employees. During the fourth quarter of fi scal 2006,
involuntary separations were communicated to certain
employees. Under this initiative, the Company incurred
expenses related to one-time termination benefi ts for 494
employees, of which 28 were involuntary, which benefi ts
were based principally upon years of service. Employees
designated for separation under the cost savings initiative
have been separated as of June 30, 2007.
In addition, the Company identifi ed other cost savings
opportunities to improve effi ciencies in the Company’s
distribution network and product offerings and to elimi-
nate other nonessential costs. These charges primarily
related to employee severance for facilities that are
closing, contract cancellations, counter and door closings
and product returns.
For the years ended June 30, 2007 and 2006, aggre-
gate expenses of $1.1 million and $92.1 million, respec-
tively, were recorded as special charges related to the cost
savings initiative in the accompanying consolidated state-
ments of earnings. The fi scal 2007 charges were primarily
related to facility closings. At June 30, 2007 and 2006,
$15.4 million and $40.7 million, respectively, and $7.5
million and $28.2 million, respectively, related to the
cost savings initiative were recorded in other accrued
liabilities and other noncurrent liabilities, respectively, in
the accompanying consolidated balance sheet.
The following table summarizes the cost savings initia-
tive, which impacted the Company’s operating expenses
and cost of sales:
THE EST{E LAUDER COMPANIES INC. 67
Fiscal 2006 Fiscal 2006 Accrued at Fiscal 2007 Fiscal 2007 Accrued at
expense payments June 30, 2006 expense payments June 30, 2007
(In millions)
Employee separation expenses $75.9 $20.7 $55.2 $0.3 $34.2 $21.3
Facility closures and product/distribution
rationalization 12.5 — 12.5 0.8 11.7 1.6
Advertising and promotional effectiveness 3.7 2.5 1.2 — 1.2 —
$92.1 $23.2 $68.9 $1.1 $47.1 $22.9
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une 30, 2007
$
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$
22.9