Estee Lauder 2013 Annual Report Download - page 148

146 THE EST{E LAUDER COMPANIES INC.
on a straight-line basis over the applicable lease term.
The Company considers lease renewals when such
renewals are reasonably assured. From time to time, the
Company may receive capital improvement funding from
its lessors. These amounts are recorded as deferred liabili-
ties and amortized over the remaining lease term as a
reduction of rent expense.
License Arrangements
The Company’s license agreements provide the Company
with worldwide rights to manufacture, market and sell
beauty and beauty-related products (or particular catego-
ries thereof) using the licensors’ trademarks. The licenses
typically have an initial term of approximately 5 years to
11 years, and are renewable subject to the Company’s
compliance with the license agreement provisions.
The remaining terms, including the potential renewal
periods, range from approximately 7 years to 28 years.
Under each license, the Company is required to pay royal-
ties to the licensor, at least annually, based on net sales to
third parties.
Most of the Company’s licenses were entered into to
create new business. In some cases, the Company
acquired, or entered into, a license where the licensor or
another licensee was operating a pre-existing beauty
products business. In those cases, other intangible assets
are capitalized and amortized over their useful lives.
Certain license agreements may require minimum roy-
alty payments, incremental royalties based on net sales
levels and minimum spending on advertising and promo-
tional activities. Royalty expenses are accrued in the
period in which net sales are recognized while advertising
and promotional expenses are accrued at the time these
costs are incurred.
Stock-Based Compensation
The Company records stock-based compensation, mea-
sured at the fair value of the award, as an expense in the
consolidated financial statements. Upon the exercise of
stock options or the vesting of restricted stock units, per-
formance share units, performance share units based on
total stockholder return and market share units, the result-
ing excess tax benefits, if any, are credited to additional
paid-in capital. Any resulting tax deficiencies will first be
offset against those cumulative credits to additional paid-
in capital. If the cumulative credits to additional paid-in
capital are exhausted, tax deficiencies will be recorded to
the provision for income taxes. Excess tax benefits are
required to be reflected as financing cash inflows in the
accompanying consolidated statements of cash flows.
against accounts receivable from that retailer. As a per-
centage of gross sales, returns were 3.3% in 2013 and
3.5% in fiscal 2012 and 2011.
Payments to Customers
Certain incentive arrangements require the payment of
a fee to customers based on their attainment of pre-
established sales levels. These fees have been recorded as
a reduction of Net Sales in the accompanying consoli-
dated statements of earnings and were not material to the
results of operations in any period presented.
The Company enters into transactions related to adver-
tising, product promotions and demonstrations, some of
which involve cooperative relationships with customers.
These activities may be arranged either with unrelated
third parties or in conjunction with the customer. The
Company’s share of the cost of these transactions (regard-
less of to whom they were paid) are reflected in Selling,
general and administrative expenses in the accompanying
consolidated statements of earnings and were approxi-
mately $1,412 million, $1,343 million and $1,152 million in
fiscal 2013, 2012 and 2011, respectively.
Advertising and Promotion
Global net expenses for advertising, merchandising, sam-
pling, promotion and product development costs were
$2,798.0 million, $2,655.7 million and $2,345.8 million in
fiscal 2013, 2012 and 2011, respectively, and are expensed
as incurred. Excluding the impact of purchase with pur-
chase and gift with purchase promotions, advertising,
merchandising, sampling and promotion expenses
included in operating expenses were $2,584.2 million,
$2,458.9 million and $2,160.7 million in fiscal 2013, 2012
and 2011, respectively.
Research and Development
Research and development costs amounted to $103.6
million, $96.5 million and $85.7 million in fiscal 2013,
2012 and 2011, respectively. Research and development
costs are expensed as incurred.
Shipping and Handling
Shipping and handling expenses of $337.9 million, $312.4
million and $289.7 million in fiscal 2013, 2012 and 2011,
respectively, are recorded in Selling, general and adminis-
trative expenses in the accompanying consolidated state-
ments of earnings and include distribution center costs,
third-party logistics costs and outbound freight.
Operating Leases
The Company recognizes rent expense from operating
leases with periods of free and scheduled rent increases