Estee Lauder 2010 Annual Report Download - page 117

116 THE EST{E LAUDER COMPANIES INC.
Research and Development
Research and development costs amounted to $79.5
million, $81.6 million and $80.9 million in fiscal 2010,
2009 and 2008, respectively. Research and development
costs are expensed as incurred.
Shipping and Handling
Shipping and handling expenses of $263.3 million, $268.6
million and $284.4 million in fiscal 2010, 2009 and 2008,
respectively, are recorded in Selling, general and adminis-
trative expenses in the accompanying consolidated
statements of earnings and include distribution center
costs, third-party logistics costs and outbound freight.
Operating Leases
The Company recognizes rent expense from operating
leases with periods of free and scheduled rent increases
on a straight-line basis over the applicable lease term. The
Company considers lease renewals in the useful life of its
leasehold improvements when such renewals are reason-
ably assured. From time to time, the Company may
receive capital improvement funding from its lessors.
These amounts are recorded as deferred liabilities and
amortized over the remaining lease term as a reduction of
rent expense.
License Arrangements
The Company’s license agreements provide the Company
with worldwide rights to manufacture, market and sell
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
compli ance with the license agreement provisions.
The remaining terms, including the potential renewal peri-
ods, range from approximately 2 years to 20 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, other intangible assets
are capitalized and amortized over their useful lives.
Certain license agreements may require minimum roy-
alty 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 recognized while advertising
and promotional expenses are accrued at the time these
costs are incurred.
years. As a result, the retail quarter-end and the fiscal
quarter-end may be different by up to six days.
Revenues are reported on a net sales basis, which is
computed by deducting from gross sales the amount of
actual product returns received, discounts, incentive
arrangements with retailers and an amount established for
anticipated product returns. The Company’s practice is to
accept product returns from retailers only if properly
requested, authorized and approved. In accepting returns,
the Company typically provides a credit to the retailer
against accounts receivable from that retailer. As a per-
centage of gross sales, returns were 4.3%, 4.4% and 4.4%
in fiscal 2010, 2009 and 2008, respectively.
Payments to Customers
The Company records revenues generated from purchase
with purchase promotions as sales and the costs of its pur-
chase with purchase and gift with purchase promotions as
cost of sales. Certain other incentive arrangements require
the payment of a fee to customers based on their attain-
ment of pre-established sales levels. These fees have been
recorded as a reduction of Net sales in the accompanying
consolidated statements of earnings and were not mate-
rial to the results of operations in any period presented.
The Company enters into transactions related to adver-
tising, product promotions and demonstrations, some of
which involve cooperative relationships with customers.
These activities may be arranged either with unrelated
third parties or in conjunction with the customer. The
Company’s share of the cost of these transactions (regard-
less of to whom they were paid) are reflected in Selling,
general and administrative expenses in the accompanying
consolidated statements of earnings and were approxi-
mately $1,070 million, $1,074 million and $1,098 million
in fiscal 2010, 2009 and 2008, respectively.
Advertising and Promotion
Global net expenses for advertising, merchandising,
sampling, promotion and product development costs
were $2,015.9 million, $1,878.8 million and $2,034.6 mil-
lion in fiscal 2010, 2009 and 2008, respectively, and are
expensed as incurred. These amounts include activities
relating to purchase with purchase and gift with purchase
promotions that are reflected in Net sales and Cost
of sales. Excluding the impact of purchase with purchase
and gift with purchase promotions, advertising, merchan-
dising, sampling and promotion expenses included
in operating expenses were $1,818.5 million, $1,693.1
million and $1,836.1 million in fiscal 2010, 2009 and
2008, respectively.