Estee Lauder 2003 Annual Report Download - page 64

THEEST{E LAUDER COMPANIES INC.
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 5.2% in fiscal 2003 and 4.9% in each of fiscal
2002 and 2001.
Advertising and Promotion
Costs associated with advertising are expensed during the
year as incurred. Global advertising expenses, which
primarily include television, radio and print media, and
promotional expenses, such as products used as sales
incentives, were $1,425.6 million, $1,326.2 million and
$1,255.3 million in fiscal 2003, 2002 and 2001, respec-
tively. These amounts include expenses relating to pur-
chase with purchase and gift with purchase promotions
that are reflected in net sales and cost of sales. Advertising
and promotional expenses included in operating expenses
were $1,227.3 million, $1,122.0 million and $1,060.8
million in fiscal 2003, 2002 and 2001, respectively.
Research and Development
Research and development costs, which amounted to
$60.8 million, $61.3 million and $57.3 million in fiscal 2003,
2002 and 2001, respectively, are expensed as incurred.
Related Party Royalties and Trademarks
Under agreements covering the Company’s purchase of
trademarks for a percentage of related sales, royalty
payments totaling $20.3 million, $16.5 million and $16.0
million in fiscal 2003, 2002 and 2001, respectively, have
been charged to expense. Such payments were made to
Mrs. Estée Lauder. During fiscal 1996, the Company
purchased a stockholder’s rights to receive certain U.S.
royaltypayments for $88.5 million, which was fully amor-
tized by November 2000. In fiscal 2001, $6.6 million was
amortized as a charge to expense.
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”).
The Company applies the intrinsic value method as
outlined in 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 is recognized if the exercise
price of the Company’s employee stock options equals
the market price of the underlying stock on the date of
the grant. Accordingly, no compensation cost has been
recognized on options granted to employees. SFAS
No. 123 requires that the Company provide pro forma
information regarding net earnings and net earnings per
common share as if compensation cost for the Company’s
stock option programs had been determined in accor-
dance with the fair value method prescribed therein. The
Company adopted the disclosure portion of SFAS
No. 148, “Accounting for Stock-Based Compensation —
Transition and Disclosure” requiring quarterly SFAS
No.123 pro forma disclosure. The following table illus-
trates the effect on net earnings and earnings per com-
mon share as if the fair value method had been applied to
all outstanding awards in each period presented.
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YEAR ENDED JUNE 30 2003 2002
(i)
2001
(ii)
(In millions, except per share data)
Net earnings attributed to common stock, as reported $296.4 $168.5 $281.8
Deduct: Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax effects 22.9 2.7 24.4
Pro forma net earnings, attributable to common stock $273.5 $165.8 $257.4
Earnings per common share:
Net earnings per common share — Basic, as reported $1.27 $ .71 $ 1.18
Net earnings per common share — Basic, pro forma $ 1.18 $ .70 $ 1.08
Net earnings per common share — Diluted, as reported $1.26 $ .70 $ 1.16
Net earnings per common share — Diluted, pro forma $1.16 $ .68 $ 1.06
(i) Beginning in fiscal 2002, the pro forma charge for compensation cost related to stock options granted will be recognized over the service period.
The service period represents the period of time between the date of grant and the date each option becomes exercisable without consideration of
acceleration provisions (e.g. retirement, change of control, etc.).
(ii) In fiscal 2001, the Company determined the pro forma charge for compensation cost assuming all options were immediately vested upon the
date of grant.