Estee Lauder 2005 Annual Report Download - page 67

THE EST{E LAUDER COMPANIES INC.
fiscal 2006, which includes $500 million of extraordinary
intercompany dividends under the provisions of the AJCA.
This action resulted in an aggregate tax charge of approxi-
mately $35 million, which included an incremental tax
charge of approximately $28 million in fiscal 2005. The
overall effective rate for income taxes increased from
37.7% for fiscal 2004 to 41.2% for fiscal 2005 primarily as
a result of the repatriation plan.
In December 2004, the FASB issued SFAS No. 123(R),
“Share-Based Payment” (“SFAS No. 123(R)”). This state-
ment replaces SFAS No. 123, “Accounting for Stock-Based
Compensation” and supersedes Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to
Employees.” SFAS No. 123(R) requires all stock-based com-
pensation to be recognized as an expense in the financial
statements and that such cost be measured according to
the fair value of the award. SFAS No. 123(R) will be effec-
tive for the Company’s first quarter of fiscal 2006. While
the Company currently provides the pro forma disclosures
required by SFAS No. 148, “Accounting for Stock-Based
Compensation — Transition and Disclosure,” on a quarterly
basis (see Note 2— Stock-Based Compensation), it is cur-
rently evaluating the impact this statement will have on its
consolidated financial statements. In March 2005, Staff
Accounting Bulletin No. 107 (“SAB No. 107”) was issued
to provide guidance from the Securities and Exchange
Commission to simplify some of the implementation
challenges of SFAS No. 123(R) as this statement relates to
the valuation of share-based payment arrangements for
public companies. The Company will apply the principles
of SAB No. 107 in connection with its adoption of SFAS
No. 123(R).
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs — an amendment of ARB No. 43, Chapter 4”
(“SFAS No. 151”). SFAS No. 151 requires all companies to
recognize a current-period charge for abnormal amounts
of idle facility expense, freight, handling costs and wasted
materials. This statement also requires that the allocation
of fixed production overhead to the costs of conversion be
based on the normal capacity of the production facilities.
SFAS No. 151 will be effective for fiscal years beginning
after June 15, 2005. The Company believes the adoption of
this statement will not have a material impact on its
consolidated financial statements.
NOTE 3 – PUBLIC OFFERINGS
In June 2004, three Lauder family trusts sold a total of
13,000,000 shares of Class A Common Stock in a regis-
tered public offering. The Company did not receive any
proceeds from the sales of these shares. The cost of this
offering was borne by the selling stockholders.
NOTE 4 – ACQUISITION AND DIVESTITURE OF
BUSINESSES AND LICENSE ARRANGEMENTS
As of June 30, 2005, the Company had a current liability
with an equal and offsetting increase in goodwill of $37.7
million related to an expected payment to be made in fiscal
2006 to satisfy an earn-out provision related to the
Company’s acquisition of Jo Malone Limited in October
1999, which payment may be satisfied by the issuance of a
note to the seller.
In July 2004, the Company acquired a majority equity
interest in its former distributor in Portugal. The aggregate
payments made through June 30, 2005 to acquire the dis-
tributor were funded by cash provided by operations and
did not have a material effect on the Company’s results of
operations or financial condition. In addition, the Company
assumed debt and other long-term obligations of 4.6 mil-
lion Euros associated with the acquisition (approximately
$5.6 million at acquisition date exchange rates). The debt is
payable semi-annually through February 2008 at a variable
interest rate.
In December 2003, the Company committed to a plan
to sell the assets and operations of its reporting unit that
sold jane brand products and sold them in February 2004.
At the time the decision was made, circumstances
warranted that the Company conduct an assessment of
the tangible and intangible assets of the jane business.
Based on this assessment, the Company determined that
the carrying amount of these assets as then reflected on
the Company’s consolidated balance sheet exceeded its
estimated fair value. In accordance with the assessment
and the closing of the sale, the Company recorded an
after-tax charge to discontinued operations of $33.3 mil-
lion for the fiscal year ended June 30, 2004. The charge
represents the impairment of goodwill in the amount of
$26.4 million; the reduction in value of other tangible
assets in the amount of $2.1 million, net of tax; and the
reporting unit’s operating loss of $4.8 million, net of tax.
Included in the operating loss of fiscal 2004 were addi-
tional costs associated with the sale and discontinuation
of the business. As a result, all consolidated statements of
earnings information in the consolidated financial state-
ments and footnotes for fiscal 2004 and fiscal 2003 have
been restated for comparative purposes to reflect that
reporting unit as discontinued operations, including
the restatement of the makeup product category and the
Americas region data presented in Note 17.
In July 2003, the Company acquired the Rodan + Fields
skin care line. The initial purchase price, paid at closing,
was funded by cash provided by operations, the payment
of which did not have a material effect on the Company’s
results of operations or financial condition. The Company
66