Estee Lauder 2015 Annual Report Download - page 105

102 THE EST{E LAUDER COMPANIES INC.
for time deposits, the carrying amount approximates
fair value. To determine fair value, the pricing services
use market prices or prices derived from other observ-
able market inputs such as benchmark curves, credit
spreads, broker/dealer quotes, and other industry and
economic factors.
Note receivable — During the second quarter of fiscal
2013, the Company amended the agreement related to
the August 2007 sale of Rodan + Fields (a brand then
owned by the Company) to receive a fixed amount in lieu
of future contingent consideration and other rights. The
fair value of the receivable under the amended agree-
ment was determined by discounting the future cash
flows using an implied market rate of 6.1%. This implied
market rate reflected the Company’s estimate of interest
rates prevailing in the market for notes with comparable
remaining maturities, the creditworthiness of the counter -
party, and an assessment of the ultimate collectability of
the instrument. The implied market rate was deemed to
be an unobservable input and as such the Company’s
note receivable was classified within Level 3 of the valua-
tion hierarchy as of June 30, 2014. The remaining $8.4
million principal amount was received in August 2014.
Foreign currency forward contracts — The fair values of
the Company’s foreign currency forward contracts were
determined using an industry-standard valuation model,
which is based on an income approach. The significant
observable inputs to the model, such as swap yield curves
and currency spot and forward rates, were obtained from
an independent pricing service. To determine the fair
value of contracts under the model, the difference
between the contract price and the current forward rate
was discounted using LIBOR for contracts with maturities
up to 12 months, and swap yield curves for contracts with
maturities greater than 12 months.
Interest rate swap contracts — The fair values of the
Company’s interest rate swap contracts were determined
using an industry-standard valuation model, which is
based on the income approach. The significant observ-
able inputs to the model, such as swap yield curves and
LIBOR forward rates, were obtained from independent
pricing services.
Current and long-term debt — The fair value of the
Company’s debt was estimated based on the current rates
offered to the Company for debt with the same remaining
maturities. To a lesser extent, debt also includes capital
lease obligations for which the carrying amount approxi-
mates the fair value. The Company’s debt is classified
within Level 2 of the valuation hierarchy.
Additional purchase price payable — The Company’s
additional purchase price payable represents fixed
minimum additional purchase price that was discounted
using the Company’s incremental borrowing rate, which
was approximately 1%. The additional purchase price pay-
able is classified within Level 2 of the valuation hierarchy.
Contingent Consideration — The fair value of the
Company’s contingent consideration obligations is mea-
sured using Level 3 inputs which include a probability
weighted-average cost of capital to discount estimated
future cash flows based upon the likelihood of achieving
certain future operating results. The fair value of the con-
tingent consideration related to the acquisition earn-outs
was determined by discounting the future cash flows
using discount rates ranging from 9% to 14%. These rates
reflect the relative risk and probability of achieving future
operating results with the potential earn-outs on the
individual acquisitions. These implied rates are deemed to
be unobservable inputs and as such the Company’s con-
tingent consideration is classified within Level 3 of the
valuation hierarchy. An increase or decrease in the risk
premium of 100 basis points would result in a value that is
approximately $6 million higher or lower than the current
liability recorded.
Changes in the fair value of the contingent consider-
ation obligations for the fiscal year ended June 30, 2015
were as follows:
Fair Value
(In millions)
Contingent consideration at June 30, 2014 $ —
Acquisitions 152.0
Change in fair value 7.3
Contingent consideration at June 30, 2015 $159.3
NOTE 13 — PENSION, DEFERRED COMPENSATION
AND POST-RETIREMENT BENEFIT PLANS
The Company maintains pension plans covering substan-
tially all of its full-time employees for its U.S. operations
and a majority of its international operations. Several
plans provide pension benefits based primarily on years
of service and employees’ earnings. In certain instances,
the Company adjusts benefits in connection with inter-
national employee transfers.
Retirement Growth Account Plan (U.S.)
The Retirement Growth Account Plan is a trust-based, non-
contributory qualified defined benefit pension plan. The
Company seeks to maintain appropriate funded percent-
ages. For contributions, the Company would seek to con-
tribute an amount or amounts that would not be less than
the minimum required by the Employee Retirement Income
Security Act of 1974 (“ERISA”), as amended, and subse-
quent pension legislation, and would not be more than
the maximum amount deductible for income tax purposes.