Estee Lauder 2005 Annual Report Download - page 65

THE EST{E LAUDER COMPANIES INC.
these programs. Under the intrinsic value method, no com-
pensation 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 pro-
grams had been determined in accordance 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 recognized over the service period. The
service period represents the period of time between
the date of grant and the date each option becomes exer-
cisable 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 outstanding awards in each period presented.
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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
primarily to department stores, perfumeries and specialty
retailers. The Company grants credit to all qualified
customers and does not believe it is exposed significantly
to any undue concentration of credit risk.
For the fiscal years ended June 30, 2005, 2004 and 2003,
the Company’s three largest customers accounted for an
aggregate of 22%, 22% and 24%, respectively, of net sales.
No single customer accounted for more than 10% of the
Company’s net sales during fiscal 2005, 2004, or 2003. The
Company’s two largest customers, Federated Department
Stores, Inc. and The May Department Stores Company, are
in the process of merging and have stated that they expect
the merger to be completed in calendar 2005.
Additionally, as of June 30, 2005 and 2004, the Company’s
three largest customers accounted for an aggregate of
24% and 25%, 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.
YEAR ENDED JUNE 30 2005 2004
(i)
2003
(In millions, except per share data)
Net earnings attributable to common stock, as reported $406.1 $342.1 $296.4
Deduct: Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax effects 21.8 31.4 22.9
Pro forma net earnings attributable to common stock $384.3 $310.7 $273.5
Earnings per common share:
Net earnings per common share— Basic, as reported $ 1.80 $ 1.50 $ 1.27
Net earnings per common share— Basic, pro forma $ 1.71 $ 1.36 $ 1.18
Net earnings per common share— Diluted, as reported $ 1.78 $ 1.48 $ 1.26
Net earnings per common share— Diluted, pro forma $ 1.67 $ 1.34 $ 1.16
(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 grants.
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 2005 2004 2003
Average expected volatility 32% 31% 31%
Average expected option life 7 years 7 years 7 years
Average risk-free interest rate 3.9% 3.7% 4.2%
Average dividend yield .7% .6% .6%