Estee Lauder 2010 Annual Report Download - page 94

THE EST{E LAUDER COMPANIES INC. 93
COMPLIANCE ASSURANCE PROGRAM
During the third quarter of fiscal 2010, we accepted an
invitation from the U.S. Internal Revenue Service (the
“IRS”) to join the Compliance Assurance Program (“CAP”)
beginning with the fiscal year ending June 30, 2011. The
objective of CAP is to reduce taxpayer burden and uncer-
tainty while assuring the IRS of the accuracy of income
tax returns prior to filing, thereby reducing or eliminating
the need for post-filing examinations.
FISCAL 2010 AS COMPARED WITH FISCAL 2009
NET SALES
Net sales increased 6%, or $472.0 million, to $7,795.8
million, reflecting increases in Asia/Pacific and Europe,
the Middle East & Africa, and, to a lesser extent, the
Americas. Net sales increases in the skin care, makeup
and hair care product categories were partially offset by
declines in the fragrance category. Excluding the impact
of foreign currency translation, net sales increased
5%. The following discussions of Net Sales by Product
Categories and Geographic Regions exclude the impact of
returns associated with restructuring activities of $15.7
million recorded during the current year. We believe the
following analysis of net sales better reflects the manner in
which we conduct and view our business.
Product Categories
Skin Care Net sales of skin care products increased 12%,
or $341.1 million, to $3,227.1 million, primarily reflecting
our strategic focus on growing this category through
creativity and innovation, particularly high growth seg-
ments, such as products that address the visible signs of
aging. The recent launches of Advanced Night Repair
Synchronized Recovery Complex, Advanced Night
Repair Eye Synchronized Complex, and Hydrationist
Maximum Moisture Crème and Lotion from Estée Lauder
contributed incremental sales of approximately $247 mil-
lion, combined. Also contributing to the category were
the introductions of Even Better Clinical Dark Spot
Corrector, Youth Surge Night Age Decelerating Night
Moisturizer, and Even Better Skin Tone Correcting
Moisturizer SPF 20 from Clinique, and The Regenerating
Serum from La Mer, of approximately $88 million, com-
bined. Higher sales from existing products in Clinique’s
3-Step Skin Care System and the Re-Nutriv line of products
from Estée Lauder contributed approximately $31 million
to the increase. These increases were partially offset by
approximately $92 million of lower sales from existing
products in the Advanced Night Repair and Perfectionist
lines from Estée Lauder and in the Superdefense line from
determined by the Central Bank of Venezuela. In light
of the Venezuelan government’s recent actions, we
determined that the settlement of bolivar-denominated
transactions could only be achieved using the third
officially-sanctioned rate. Accordingly, beginning June 1,
2010, the bolivar-denominated monetary assets and liabil-
ities of our subsidiary in Venezuela were remeasured at
the third officially-sanctioned rate, which was 5.30 bolivars
per U.S. dollar at June 30, 2010. Concurrent with the
establishment of the third officially-sanctioned rate, the
Venezuelan government also instituted a cap on com-
panies exchanging bolivars for U.S. dollars of $350,000
per month. While these sanctions do not have an immedi-
ate significant impact on our ability to do business in
Venezuela, they may limit our growth opportunities there
in the future.
As a result of the change to highly inflationary account-
ing, the prior use of different translating and remeasuring
exchange rates for U.S. dollar-denominated net liabilities,
and the devaluation of the bolivar and remeasurement at
the third officially-sanctioned rate, we recorded higher
costs and net charges of approximately $9 million for the
year ended June 30, 2010. This amount includes increased
cost of sales associated with historical dollar costs of
inventory. As of June 30, 2010, our subsidiary in Venezuela
had approximately $4 million of net monetary assets
denominated in bolivars. We do not expect the change to
highly inflationary accounting to have a significant impact
on our ongoing future consolidated net sales or operating
income since we expect to derive less than 1% of our
future consolidated net sales and operating income from
our business in Venezuela.
IMPACT OF NEW FEDERAL LEGISLATION
The Patient Protection and Affordable Care Act (the
“PPACA”) became law on March 23, 2010, and on March
30, 2010 the Health Care and Education Reconciliation
Act of 2010 (“H.R. 4872”) became law, which makes vari-
ous amendments to certain aspects of the PPACA. Certain
of the provisions of this legislation that became effective
during fiscal 2010 did not have a material impact on our
consolidated financial statements. The potential impact of
other facets of the legislation that are not yet effective,
but applicable to our post-retirement benefit plans, was
evaluated and determined to not have a material impact
to our consolidated financial statements. We will continue
to monitor the issuance of further health care reform
guidance from regulators to determine the potential
impact on our business and consolidated financial state-
ments, if any.