Estee Lauder 2011 Annual Report Download - page 127

THE EST{E LAUDER COMPANIES INC. 125
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 $1,152 million, $1,070 million and $1,074 million in
fiscal 2011, 2010 and 2009, respectively.
Advertising and Promotion
Global net expenses for advertising, merchandising, sam-
pling, promotion and product development costs were
$2,345.8 million, $2,015.9 million and $1,878.8 million in
fiscal 2011, 2010 and 2009, respectively, and are
expensed as incurred. Excluding the impact of purchase
with purchase and gift with purchase promotions, adver-
tising, merchandising, sampling and promotion expenses
included in operating expenses were $2,160.7 million,
$1,818.5 million and $1,693.1 million in fiscal 2011, 2010
and 2009, respectively.
Research and Development
Research and development costs amounted to $85.7 mil-
lion, $79.5 million and $81.6 million in fiscal 2011, 2010
and 2009, respectively. Research and development costs
are expensed as incurred.
Shipping and Handling
Shipping and handling expenses of $289.7 million, $263.3
million and $268.6 million in fiscal 2011, 2010 and 2009,
respectively, are recorded in Selling, general and adminis-
trative expenses in the accompanying consolidated state-
ments 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 when such renewals
are reasonably 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 1 year to
19 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 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
royalty payments, incremental royalties based on net
sales levels and minimum spending on advertising and
promotional activities. Royalty expenses are accrued in
the period in which net sales are recognized while adver-
tising and promotional expenses are accrued at the time
these costs are incurred.
Stock-Based Compensation
The Company records stock-based compensation, mea-
sured at the fair value of the award, as an expense in the
consolidated financial statements. Upon the exercise of
stock options or the vesting of restricted stock units, per-
formance share units and the market share unit, the result-
ing excess tax benefits, if any, are credited to additional
paid-in capital. Any resulting tax deficiencies will first be
offset against those cumulative credits to additional paid-
in capital. If the cumulative credits to additional paid-in
capital are exhausted, tax deficiencies will be recorded to
the provision for income taxes. Excess tax benefits are
required to be reflected as financing cash inflows in the
accompanying consolidated statements of cash flows.
Income Taxes
The Company accounts for income taxes using an asset
and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in
its consolidated financial statements or tax returns. The
net deferred tax assets assume sufficient future earnings
for their realization, as well as the continued application
of currently anticipated tax rates. Included in net deferred
tax assets is a valuation allowance for deferred tax assets,
where management believes it is more-likely-than-not that
the deferred tax assets will not be realized in the relevant
jurisdiction. Based on the Company’s assessments, no
additional valuation allowance is required. If the Company
determines that a deferred tax asset will not be realizable,
an adjustment to the deferred tax asset will result in a
reduction of net earnings at that time.