Estee Lauder 2004 Annual Report Download - page 65

THE EST{E LAUDER COMPANIES INC.
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 pro forma charge for
compensation cost related to stock options granted is rec-
ognized 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.). The following table illustrates the
effect on net earnings and earnings per common share
as if the fair value method had been applied to all out-
standing awards in each period presented.
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YEAR ENDED JUNE 30 2004
(i)
2003 2002
(In millions, except per share data)
Net earnings attributable to common stock, as reported $342.1 $296.4 $168.5
Deduct: Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax effects 31.4 22.9 2.7
Pro forma net earnings attributable to common stock $310.7 $273.5 $165.8
Earnings per common share:
Net earnings per common share — Basic, as reported $ 1.50 $ 1.27 $ .71
Net earnings per common share — Basic, pro forma $ 1.36 $ 1.18 $ .70
Net earnings per common share — Diluted, as reported $ 1.48 $ 1.26 $ .70
Net earnings per common share — Diluted, pro forma $ 1.34 $ 1.16 $ .68
(i) Fiscal 2004 pro forma compensation cost includes the acceleration of exercisability of options held by an executive who retired on June 30, 2004
based on the original terms of the option grant.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
YEAR ENDED JUNE 30 2004 2003 2002
Average expected volatility 31% 31% 31%
Average expected option life 7 years 7 years 7 years
Average risk-free interest rate 3.7% 4.2% 4.9%
Average dividend yield .6% .6% .5%
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 qualified cus-
tomers and does not believe it is exposed significantly to
any undue concentration of credit risk.
For the fiscal years ended June 30, 2004, 2003 and
2002, the Company’s three largest customers accounted
for an aggregate of 22%, 24% and 25%, respectively, of net
sales. No single customer accounted for more than 10% of
the Company’s net sales during fiscal 2004, 2003, or 2002.
Additionally, as of June 30, 2004 and 2003, the Com-
pany’s three largest customers accounted for an aggre-
gate of 25% and 28%, respectively, of its outstanding
accounts receivable.
Management Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues
and expenses reported in those financial statements.
Actual results could differ from those estimates and
assumptions.