The Estee Lauder Companies Inc.
767 Fifth Avenue
New York, NY 10153
212.572.4200
ESTEE
LAUDER
COMPANIES
November 19, 2004
Mr. Rufus Decker
Accounting Branch Chief
United States Securities and Exchange Commission
450 Fifth Street, N.W., Mail Stop 0510
Washington, D.C. 20549-0510
RE: The Estee Lauder Companies Inc.
Form 10-K for the fiscal year ended June 30, 2004
File No. 1-14962
Dear Mr. Decker:
This letter sets forth the responses of The Estee Lauder Companies Inc. (the
"Company" or "we" or "our") to the comments of the staff of the U.S. Securities
and Exchange Commission (the "Commission") contained in your letter dated
November 1, 2004. The Company's responses set forth below correspond to the
comments as numbered in the staff's letter.
General
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1. Where a comment below requests additional disclosures or other
revisions to be made, please show us in your supplemental response what
the revisions will look like. With the exception of the comments below
that specifically request an amendment, all other revisions may be
included in your future filings.
Company Response:
-----------------
We note the instructions regarding future filings. Our proposed
disclosures set forth in this letter are subject to change based on the
facts and circumstances at the time we make future filings. We also
note that we filed an amendment to our Annual Report on Form 10-K for
the fiscal year ended June 30, 2004 on November 5, 2004 to respond to
comment 23 of the staff's letter.
Page 1 of 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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Critical Accounting Policies and Estimates, page 17
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2. Please expand your discussion of critical accounting policies to
address the following:
o Types of assumptions underlying the most significant and
subjective estimates;
o Any known trends, demands, commitments, events or uncertainties
that are reasonably likely to occur and materially affect the
methodology or the assumptions described;
o A quantitative discussion of changes in overall financial
performance if you were to assume that the accounting estimate
were changed, either by using reasonably possible near-term
changes in the most material assumptions underlying the
accounting estimate or by using the reasonably possible range of
the accounting estimate.
o A quantitative and qualitative discussion of any material changes
made to the accounting estimate in the past three years, the
reasons for the changes, and the effect on your overall financial
performance;
Refer to SEC Releases 33-8098 and 33-8350.
Company Response:
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We noted the reference to the Commission's Proposed Rule, SEC Release
33-8098, and the Commission's Interpretation, SEC Release 33-8350. We
disclosed in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2004, that our critical accounting policies are revenue
recognition, concentration of credit risk, inventory, pension and other
postretirement benefit costs, goodwill and other intangible assets,
income taxes and derivatives. We also disclosed that those critical
accounting policies include three subjective critical estimates (i.e.,
sales return accrual, allowance for doubtful accounts and income tax
reserves). We will disclose additional information regarding these
accounting policies and subjective critical estimates in our Annual
Report on Form 10-K for the fiscal year ending June 30, 2005. The
following is an example of how we expect to provide these disclosures
in future filings:
Revenue Recognition
Revenues from merchandise sales are recognized upon transfer of
ownership, including passage of title to the customer and transfer
of the risk of loss related to those goods. In the Americas
region, sales are recognized at the time the product is shipped to
the customer and, in the Europe, Middle East & Africa and Asia/
Pacific regions, sales are recognized based upon the customer's
receipt. In certain circumstances, transfer of title takes place
at the point of sale (e.g., at our retail stores).
Page 2 of 18
Sales are reported on a net sales basis, which is computed by
deducting from gross sales the amount of actual product returns
received, discounts, incentive arrangements with retailers and an
amount established for anticipated product returns. The Company's
practice is to accept product returns from retailers only if
properly requested, authorized and approved. In accepting returns,
we typically provide a credit to the retailer against accounts
receivable from that retailer. As a percentage of gross sales,
returns were X%, 4.6% and 5.1% in fiscal 2005, 2004 and 2003,
respectively.
Our sales return accrual is a subjective critical estimate that
has a direct impact on reported net sales. This accrual is
calculated based on a history of actual returns by region,
estimated future returns and information provided by authorized
retailers regarding their inventory levels. Consideration of these
factors results in an accrual for anticipated sales returns that
reflects increases or decreases related to seasonal fluctuations.
Experience has shown a correlation between retailer inventory
levels and sales returns in the subsequent period, as well as a
consistent pattern of returns due to the cyclical nature of our
business. In addition, as necessary, specific accruals may be
established for future known or anticipated events. The types of
known or anticipated events that we have considered, and will
continue to consider, include, but are not limited to, solvency of
our customers, store closings by retailers, the economic retail
environment and our decision to continue or support new and
existing products.
Management of the Company has discussed the selection of
significant accounting policies and the effect of estimates with
the Audit Committee of the Company's Board of Directors.
We will expand our discussions, in our Annual Report on Form 10-K for
the fiscal year ending June 30, 2005, to note any:
o Significant known trends, demands, commitments, events or
uncertainties that were reasonably likely to occur and
materially affect the methodology or assumptions used for
our critical accounting policy estimates; and
o Specific accruals which may be necessary for future known or
anticipated events.
Page 3 of 18
We will provide in our Annual Report on Form 10-K for the fiscal year
ending June 30, 2005, a quantitative discussion of changes in overall
financial performance if we were to assume that our subjective critical
estimates were changed, (i.e., our sales return accrual, allowance for
doubtful accounts and income tax reserves) by using a reasonably
possible range of estimates or factors to derive these balances, as
follows:
While we believe that the estimates that we have made are proper
and the related results of operations for the period are presented
fairly in all material respects, other assumptions could
reasonably be justified that would change the amount of reported
net sales, cost of sales, selling, general and administrative
expenses or our provision for income taxes as they relate to the
provisions for anticipated sales returns, allowance for doubtful
accounts and income taxes. Had these estimates been changed by X%
in either direction, our reported net sales would have increased
or decreased by approximately $XX million, the related cost of
sales would have changed by approximately $XX million, selling,
general and administrative expenses would have changed by
approximately $XX million and the provision for income taxes would
have increased or decreased by approximately $XX million. Had
these changes occurred simultaneously, the impact of such changes
on operating income and net earnings per diluted common share
would have increased, or decreased, by approximately $XX million
or $XX per diluted common share.
We will expand our discussions, in our Annual Report on Form 10-K for
the fiscal year ending June 30, 2005, to provide additional disclosure
as follows:
During the three-year period ended June 30, 2005, there have not
been material changes in the assumptions underlying these critical
accounting policies, nor to the related significant estimates,
since the results of our business underlying these assumptions
have not differed significantly from our expectations.
Please note that if there are significant changes in our assumptions or
the results underlying those assumptions, we will then provide the
appropriate disclosure.
Reconciliations of Financial Results, page 21
---------------------------------------------
3. Your presentation of condensed statements of earnings described as
"Non-GAAP Results" gives too much prominence to amounts not calculated
and presented in accordance with GAAP. Given the guidance of Item 10(e)
(1)(i)(A) of Regulation S-K, please remove the non-GAAP statements of
earnings. Naturally, you may present specific non-GAAP measures, as
long as the requirements in Item 10(e) of Regulation S-K have been met.
Page 4 of 18
Company Response:
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We will exclude the fiscal 2003 table from our Annual Report on Form
10-K for the fiscal year ending June 30, 2005. In order to provide
necessary clarification, we will modify the paragraphs presently under
the heading "Reconciliation of Financial Results" and move that
discussion under the subheading "Operating Expenses" in order to
reconcile the GAAP and non-GAAP results as follows:
Our fiscal 2003 results, as reported in conformity with U.S.
generally accepted accounting principles ("GAAP"), include an
adjustment for a special pre-tax charge of $22.0 million, or $13.5
million after tax, equal to $.06 per diluted common share, in
connection with the proposed settlement of a class action lawsuit
brought against us and a number of other defendants. The amount of
the charge in this case is significantly larger than similar
charges we have incurred individually or in the aggregate for
legal proceedings in any prior year and we do not expect to take a
charge of a similar magnitude for a single matter like it in the
near future. In our discussions of "Operating Expenses" and
"Operating Results" we include the results as reported and the
non-GAAP results. We have presented the non-GAAP results because
of the special nature of the charge, which affects comparability
from period to period. We believe that such measures provide
investors with a view of our ongoing business trends and results
of continuing operations. This is consistent with the approach
used by management in its evaluation and monitoring of such trends
and results and provides investors with a base for evaluating
future periods. There were no events or transactions subsequent to
fiscal 2003 for which we believe such a presentation would be
relevant.
In fiscal 2003, operating expenses and operating income in
accordance with GAAP were $3,267.9 million or 64.1% of net sales
and $503.7 million or 9.9% of net sales, respectively. Before the
charge (non-GAAP results) operating expenses would have been
$3,245.9 million or 63.7% of net sales and operating income would
have been $525.7 million or 10.3% of net sales.
While we consider the non-GAAP financial measures useful in
analyzing our results, it is not intended to replace, or act as a
substitute for, any presentation included in the consolidated
financial statements prepared in conformity with GAAP.
4. You have presented the 2003 reconciliation as the special pre-tax
charge of $22.0 million in connection with the proposed settlement of a
class action lawsuit is significantly larger than similar charges
incurred individually or in the aggregate. It appears that costs of a
similar nature would have been incurred within the prior two years or
are likely to recur within the subsequent two years. Please tell us how
you considered the requirements in Item l0(e)(l)(ii)(B) of Regulation
S-K.
Page 5 of 18
Company Response:
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In providing this disclosure we did consider the requirements of Item
10(e)(1)(ii)(B) of Regulation S-K and other guidance regarding the use
of non-GAAP financial measures.
We used the non-GAAP measure in our MD&A to explain the impact that the
charge had on our operating expenses, operating margin and diluted net
earnings per common share for our fiscal year ended June 30, 2003 to
help investors more easily view and compare our ongoing business trends
and results of continuing operations.
The legal matter underlying the charge was a unique class action
lawsuit. We were never involved in any cases like it before we took the
charge and, given our long history and the way we operate our business,
did not believe it was reasonably likely that there would be a charge
of this nature or of a similar magnitude for a single matter like it
within the next two years. The reference to "similar charges" was only
meant to recognize that we have taken charges relating to legal matters
in the past, but no charge of an amount or of a similar nature to the
one we took at the end of fiscal 2003.
Fiscal 2004 as Compared with Fiscal 2003, page 23
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5. Please quantify the impact of each factor when multiple factors
contribute to material fluctuations. For example, the decrease in
operating expenses as a percentage of net sales for the year ended June
30, 2004 compared to the year ended June 30, 2003 was due to higher
growth in net sales, ongoing cost containment efforts, partially offset
by operating expenses related to BeautyBank, higher operating costs
associated with newly acquired brands, and expenses related to
compliance with regulatory requirements. Refer to Item 303(a)(3)(i) of
Regulation S-K and Financial Reporting Codification 501.04.
Company Response:
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Beginning with our Quarterly Report on Form 10-Q for the three-month
period ended September 30, 2004, as filed with the Securities and
Exchange Commission on Tuesday, November 9, 2004, we have provided
additional quantification of the factors that contributed to changes in
our reported results of operations (see pages 12 to 15).
Page 6 of 18
Product Categories, page 26
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6. Where there is more than one reason for a change between periods, please
revise your segment MD&A for the annual periods to quantify the extent
to which each reason contributed to the overall change in the segment
line item. For example, net sales of skin care products increased due to
the recent launches of certain products, full year of the Darphin line
of products, partially offset by lower net sales of certain existing
products. Refer to Item 303(a)(3) of Regulation S-K.
Company Response:
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Beginning with our Quarterly Report on Form 10-Q for the three-month
period ended September 30, 2004, as filed with the Securities and
Exchange Commission on Tuesday, November 9, 2004, we have provided
additional quantification of the factors that contributed to changes in
our product category results (see pages 12 to 14).
Liquidity and Capital Resources, page 28
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7. Please disclose your material commitments for capital expenditures, the
general purpose of those commitments and the anticipated source of
funds needed to fulfill those commitments. See Item 303(a)(2) of
Regulation S-K.
Company Response:
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Anticipated capital expenditures related to fiscal 2005 do not include
a material amount of purchase commitments. Capital expenditures are
funded using cash from operations and typically we do not have
significant purchase commitments.
Further, we note that our capital improvement commitments have been
included in the table of contractual obligations on page 31, and
specifically in footnote (3).
We will discuss in future filings the material commitments, if any,
related to capital improvements.
Table of Contractual Obligations, page 31
-----------------------------------------
8. Please consider revising your table of contractual cash obligations to
include the following:
(a) Estimated interest payments on your debt;
(b) Estimated payments under interest rate swap agreements; and
(c) Planned funding of pension and other postretirement benefit
obligations.
Page 7 of 18
Because the table is aimed at increasing transparency of cash flow, we
believe these payments should be included in the table. Please also
disclose any assumptions you made to derive these amounts.
Company Response:
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We will incorporate such additional disclosures, to the extent that
they continue to be applicable as of those dates, in the table of
contractual obligations in future filings beginning with our Annual
Report on Form 10-K for the fiscal year ending June 30, 2005. We note
that debt interest, derivative and pension information is available
elsewhere within our Annual Report on Form 10-K for the fiscal year
ended June 30, 2004 on pages 30 and 31 "Pension Plan Funding and
Expense," page 32 "Interest Rate Risk Management" and pages F-19 and
F-20 "Note 8 - Debt."
Forward-Looking Information, page 34
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9. Your statement that words such as "will" and "will continue" are used
to identify forward-looking statements is confusing, since these terms
generally imply more certainty. Please revise or advise.
Company Response:
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Beginning with our Quarterly Report on Form 10-Q for the three-month
period ended September 30, 2004, as filed with the Securities and
Exchange Commission on Tuesday, November 9, 2004, the words "will" and
"will continue" have been removed as expressions that are intended to
identify forward-looking statements (see page 19).
Financial Statements
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Note 2. Summary of Significant Accounting Policies
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General
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10. Please disclose the types of expenses that you include in the cost of
sales line item and the types of expenses that you include in the
selling, general and administrative expenses line item. Please tell us
whether you include inbound freight charges, purchasing and receiving
costs, inspection costs, warehousing costs, internal transfer costs,
and the other costs of your distribution network in the cost of sales
line item. With the exception of warehousing costs, if you currently
exclude a portion of these costs from cost of sales, please disclose:
o in a footnote the line items that these excluded costs are
included in and the amounts included in each line item for each
period presented, and
Page 8 of 18
o in MD&A that your gross margins may not be comparable to those of
other entities, since some entities include all of the costs
related to their distribution network in cost of sales and others
like you exclude a portion of them from gross margin, including
them instead in a line item, such as selling, general and
administrative expenses.
Company Response:
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Beginning with our Quarterly Report on Form 10-Q for the three-month
period ended September 30, 2004, as filed with the Securities and
Exchange Commission on Tuesday, November 9, 2004, we have included the
following additional language in Note 1 of the Notes to Consolidated
Financial Statements under the caption "Inventory and Promotional
Merchandise."
"Cost components include raw materials, componentry, direct labor
and overhead (e.g., indirect labor, utilities, depreciation,
purchasing, receiving, inspection and warehousing) as well as
inbound freight."
In addition, we are supplementally advising you that we do not exclude
these routine manufacturing costs from our inventory, or related cost
of sales, and thus we believe additional MD&A disclosures are not
necessary.
Property, Plant and Equipment, page F-9
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11. Please clarify which line item includes depreciation and amortization
of property, plant and equipment. In addition, refer to the disclosure
requirements of SAB Topic 11:B.
Company Response:
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Beginning with our Quarterly Report on Form 10-Q for the three-month
period ended September 30, 2004, as filed with the Securities and
Exchange Commission on Tuesday, November 9, 2004, we have included the
following additional language in Note 1 of the Notes to Consolidated
Financial Statements under the caption "Property, Plant and Equipment."
"Depreciation and amortization related to our manufacturing
process is included in cost of sales and all other depreciation
and amortization is included in selling, general and
administrative expenses in the accompanying consolidated
statements of earnings."
12. Please separately disclose the range of useful lives for each category
presented. For categories that still have very broad useful lives, you
should separately discuss the types of assets that fall in each part of
the range.
Page 9 of 18
Company Response:
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Beginning with our Quarterly Report on Form 10-Q for the three-month
period ended September 30, 2004, as filed with the Securities and
Exchange Commission on Tuesday, November 9, 2004, we have included a
range of asset lives, by asset class, in Note 1 of the Notes to
Consolidated Financial Statements under the caption "Property, Plant
and Equipment."
Goodwill and Other Intangible Assets, page F-9
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13. Please disclose the estimated useful life of each class of intangibles.
Please also disclose the estimated aggregate amortization expense for
each of the next five years. Refer to paragraph 45(a)(3) of SFAS 142.
Company Response:
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We will provide the following disclosure in our Annual Report on Form
10-K for the fiscal year ending June 30, 2005 which will include the
estimated useful life of each class of intangible asset and the
estimated aggregate amortization expense for each of the next five
fiscal years, as follows:
Other intangible assets include trademarks and patents, as well as
license agreements and other intangible assets resulting from or
related to businesses we purchased. Indefinite lived assets (e.g.,
trademarks) are not subject to amortization and are evaluated
periodically for impairment or sooner if certain events or
circumstances indicate a potential impairment. Patents are
amortized on a straight-line basis over the shorter of the legal
term or the useful life of the patent, X years to Y years. Other
intangible assets (e.g., noncompete agreements, customer lists)
are amortized on a straight-line basis over their expected period
of benefit, X years to Y years. Intangible assets related to
license agreements are amortized on a straight-line basis over the
initial term of the agreement, currently X years to Y years. The
aggregate amortization expenses related to amortizable intangible
assets for the years ended June 30, 2005, 2004 and 2003 were $X
million, $4.0 million and $1.9 million, respectively. The
estimated aggregate amortization expense for each of the next five
fiscal years is $X million, $X million, $X million, $X million and
$X million.
Accumulated Other Comprehensive Income (Loss), page F-11
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14. As discussed on page F-17, you closed your operations in Argentina.
Please present the reclassification adjustments related to your foreign
currency translation adjustments. See paragraph 19 of SFAS 130.
Page 10 of 18
Company Response:
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We are supplementally advising you that $3.4 million of the $46.0
million reported as translation adjustments in fiscal 2002 was related
to our decision to close operations in Argentina. We note your
reference to SFAS 130 and will consider such in future filings.
However, please be aware that the Argentina closure occurred in fiscal
2002, which will no longer be presented in our Annual Report on Form
10-K for the fiscal year ending June 30, 2005.
Revenue Recognition, page F-11
------------------------------
15. You disclose that revenues are generally recorded when products are
shipped. Please disclose in your revenue reconciliation policy:
o Whether your stated shipping terms are FOB shipping point or FOB
destination pursuant to your sales agreements;
o Your customers' rights of inspection, acceptance, and return; and
o When title passes from you to your customer.
Unless obvious, please explain to us why sales recognition is
appropriate upon shipment, rather than upon delivery to and acceptance
by the customer. Note that even if your sales agreements state that
title passes upon shipment, customer acceptance provisions or a history
of your replacing goods damaged or lost in transit may make the
recognition of revenue upon delivery to and acceptance by the customer
GAAP. See the Interpretive Response to Question 3 of SAB Topic
13:A.3.b.
Company Response:
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See our response to comment 16.
16. You state that generally revenues from merchandise sales are recorded
at the time the product is shipped to the customer. Expand your
disclosure to state what you mean by "generally." For those sales which
you do not record sales at the time of shipment, state when you do
record these sales.
Company Response:
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In response to comments 15 and 16, we will provide the following
disclosure about our revenue recognition policy in our Form 10-K for
the fiscal year ending June 30, 2005 as follows:
Revenues from merchandise sales are recognized upon transfer of
ownership, including passage of title to the customer and transfer
of the risk of loss related to those goods. In the Americas
region, sales are recognized at the time the product is shipped to
the customer and, in the Europe, Middle East & Africa and
Asia/Pacific regions, sales are recognized based upon the
customer's receipt. In certain circumstances, transfer of title
takes place at the point of sale (e.g., at our retail stores).
Page 11 of 18
Sales are reported on a net sales basis, which is computed by
deducting from gross sales the amount of actual product returns
received, discounts, incentive arrangements with retailers and an
amount established for anticipated product returns. The Company's
practice is to accept product returns from retailers only if
properly requested, authorized and approved. In accepting returns,
the Company typically provides a credit to the retailer against
accounts receivable from that retailer. As a percentage of gross
sales, returns were X%, 4.6% and 5.1% in fiscal 2005, 2004 and
2003, respectively.
We supplementally advise the staff that our practice of recognizing
revenue has not been contradicted by disagreements or exceptions with
regard to our customers' right of inspection and/or acceptance of
product.
Advertising and Promotion, page F-12
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17. Since you engage in co-op advertising arrangements, please disclose
your accounting policy for them, including the statement of earnings
line item in which they are included. If you pay slotting fees, have
buydown programs, and/or make other payments to resellers, please
provide similar disclosures regarding each of these types of
arrangements as well. For each expense line item that includes these
types of arrangements, please disclose the related amounts included in
that line item. For each type of arrangement treated as an expense,
rather than as a reduction of revenues, please tell us how the
arrangement meets the requirements of EITF 01-9. Please also discuss in
MD&A any significant estimates resulting from these arrangements.
Company Response:
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Effective January 1, 2002, we adopted the provisions of EITF 01-9. At
that time we evaluated the types of activities that we enter into with
our customers that are resellers of our products.
a. We evaluated promotional activities that are directly
linked with an exchange transaction (e.g., purchase with
purchase, gift with purchase and bonification, which is
offered outside the United States and is similar to a
volume based discount), and have deemed them to be "sales
incentives" within the meaning of EITF 01-9. Accordingly,
we have categorized the elements of those transactions as
sales, sales reductions (in accordance with paragraph 11)
or cost of sales (in accordance with paragraph 10), as
applicable, in the consolidated statements of earnings.
Page 12 of 18
b. We evaluated promotional activities related to the
demonstration of our products (e.g., beauty advisors,
retail sales counters) and concluded that these promotional
costs satisfy the conditions of paragraph 9a and 9b of the
EITF and the related examples in the EITF consensus in that
we receive an identifiable benefit in exchange for the
consideration, we can sufficiently separate those costs
from the sale of our products, and we can determine the
value of the benefit received. Accordingly, the related
costs are recorded as a component of selling, general and
administrative expenses in the consolidated statements of
earnings.
c. We evaluated our advertising activities (e.g., co-op
advertising), and concluded that where a cost sharing
arrangement was made we were able to satisfy the conditions
of paragraph 9a and 9b of the EITF in that we receive an
identifiable benefit in exchange for the consideration, we
can sufficiently separate those costs from the sale of our
products, and we can determine the value of the benefit
received. Accordingly, these costs are recorded as a
component of selling, general and administrative expenses
in the consolidated statements of earnings. As it relates
to co-op advertising, our ability to identify the benefit
received is supported by our involvement in the type and
timing of the advertisement and our engagement of an
independent third-party to verify and report to us the
execution and cost of the advertisement.
We will add in Note 2 of our Notes to Consolidated Financial Statements
within our Annual Report on Form 10-K for the fiscal year ending June
30, 2005 the following:
Payments to Customers
The Company is subject to the provisions of EITF Issue No. 01-9,
"Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)." In accordance
with this guidance, the Company has recorded the revenues
generated from purchase with purchase promotions as sales and the
costs of our purchase with purchase and gift with purchase
promotions as cost of sales. Certain other 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
consolidated statements of earnings and were not material to the
results of operations in any period presented.
Page 13 of 18
We make payments to customers related to cooperative advertising,
product promotions and demonstrations. These costs are included in
selling, general and administrative expenses in the accompanying
consolidated statements of earnings and were $XX million, $XX
million and $XX million in fiscal 2005, 2004 and 2003,
respectively.
We are also supplementally advising you that there are no significant
estimates or assumptions underlying the accounting for arrangements
with our customers that are within the scope of EITF Issue 01-9 and
accordingly we do not believe any additional disclosure in MD&A is
necessary.
Note 4. Acquisition and Divestiture of Businesses and License Arrangements,
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page F-15
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18. You have various license arrangements to develop and market products
under brand names such as Tommy Hilfiger, DKNY, Kate Spade, and Michael
Kors. Please disclose the basic terms and duration of these and other
license arrangements. Please disclose your responsibilities under these
arrangements including whether amounts are owed during the term of the
license agreements or whether all required payments are made upon
initiation of the contract. In addition, please disclose how you
account for these arrangements on an ongoing basis. We note the
intangible assets recorded.
Company Response:
-----------------
We will provide the following disclosure in our Annual Report on Form
10-K for the fiscal year ending June 30, 2005:
Our license agreements provide us with worldwide rights to
manufacture, market and sell beauty and beauty-related products
(or particular categories thereof) using the licensors'
trademarks. The licenses typically have an initial term of X years
to Y years, and are renewable subject to the Company's compliance
with the license agreement provisions. The remaining terms,
including all of our existing licenses, range from X years to Y
years and certain agreements can be renewed perpetually. Under
each license, we are required to pay royalties to the licensor, at
least annually, based on net sales to third parties.
Most of our licenses were entered into to create new business. In
some cases, we acquired, or entered into, a license where the
licensor or another licensee was operating a pre-existing beauty
products business. In those cases intangible assets are
capitalized and amortized over the initial term of the agreement
and are subject to periodic impairment testing.
Page 14 of 18
Certain license agreements may require minimum royalty payments,
incremental royalties based on net sales levels and minimum
spending on advertising and promotional activities. Royalty
expenses are accrued in the period in which net sales are earned
while advertising and promotional expenses are accrued at the time
these costs are incurred.
Please note, the aforementioned minimum royalty payments and
advertising activities have been forecasted and included in our
"Contractual Obligations" table within the MD&A in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2004.
Note 6. Income Taxes, page F-17
--------------------------------
19. You provide tax reserves for federal, state and international exposures
relating to audit results, planning initiatives and compliance
responsibilities. If material, provide the disclosures required by
paragraphs 9 and 10 of SFAS 5.
Company Response:
-----------------
Pursuant to paragraph 9 of SFAS No. 5, we will provide the following
additional information regarding the "nature of the accrual" in Note 6
- Income Taxes of the Notes to Consolidated Financial Statements in our
Annual Report on Form 10-K for the fiscal year ending June 30, 2005. We
do not believe that it is necessary to disclose the amount accrued in
order for the consolidated financial statements not to be misleading.
Earnings from the Company's global operations are subject to tax
in various jurisdictions both within and outside the United
States. The Company is routinely audited in these jurisdictions
and these reviews can involve complex issues that may require an
extended period of time for resolution. The Company's U.S. Federal
income tax returns have been examined and settled through fiscal
1997. The Company is currently under examination by the Internal
Revenue Service for fiscal years 1998 through 2001. In addition,
the Company has ongoing audits in various state and local
jurisdictions, as well as audits in various foreign jurisdictions.
The Company provides tax reserves for Federal, state and local and
international exposures relating to audit results, tax planning
initiatives and compliance responsibilities. The development of
these reserves requires judgments about tax issues, potential
outcomes and timing, and is a subjective critical estimate.
Although the outcome of these tax audits is uncertain, in
management's opinion, adequate provisions for income taxes have
been made for potential liabilities emanating from these reviews.
If actual outcomes differ materially from these estimates, they
could have a material impact on the Company's results of
operations.
Page 15 of 18
Note 8. Debt, page F-19
------------------------
20. During fiscal 2004, you and the holders of the $6.50 Cumulative
Redeemable Preferred Stock exchanged all of the outstanding shares due
June 30, 2005 for a newly issued series of cumulative redeemable
preferred stock with a mandatory redemption date of June 30, 2015 with
a variable dividend rate. This exchange transaction was accounted for
as a modification of the terms of the cumulative redeemable preferred
stock, and accordingly, the effects of this transaction were limited to
the prospective change in dividend rates. Tell us how you determined it
was appropriate to treat this exchange transaction as a modification
based on the requirements of EITF 96-19 or other applicable literature.
Company Response:
-----------------
In contemplating the modification of terms as it related to our
outstanding redeemable preferred stock we considered the guidance set
forth in EITF Issue 96-19 as follows:
o If the new instrument was considered "substantially different"
it would be treated as an extinguishment and reissuance of the
instrument.
o A substantial modification is measured by determining "if the
present value of the cash flows under the terms of the new
instrument is at least 10 percent different from the present
value of the remaining cash flows under the terms of the
original instrument."
o We modeled the prior and current transactions to determine the
potential range of differences utilizing different put/call
scenarios.
o The guidance indicates that the "cash flow assumptions that
generate the smaller change are to be used in the 10% test."
o Mortality and other put/call timing factors underlying the
instrument resulted in a fair value scenario that would be
unchanged after modification.
o Accordingly, we concluded that a substantial modification had
not taken place and, therefore, the accounting would follow as
a modification of terms.
Note 15. Commitments and Contingencies, page F-30
--------------------------------------------------
21. Please expand your disclosure related to the consolidated class action
lawsuit to specifically address the following:
o Clarify whether you are still awaiting Court approval for the
settlement agreement.
Page 16 of 18
o Clarify whether the $22 million charge recorded in 2003 is also the
total amount accrued as of the latest balance sheet date related to
this matter. If not, disclose the total amount accrued as of the
latest balance sheet date. In addition, if it is reasonably possible
that a material loss may have been incurred in excess of the amount
accrued, disclose an estimate of the possible loss or range of loss
or state that such an estimate cannot be made. Refer to paragraphs 9
and 10 of SFAS 5.
o Clarify whether the settlement agreement for which you recorded the
$22 million also relates to the Federal Action. If the Federal
Action is independent, provide the disclosures required by
paragraphs 9 and 10 of SFAS 5.
Company Response:
-----------------
Our Quarterly Report on Form 10-Q for the three-month period ended
September 30, 2004, as filed with the Securities and Exchange
Commission on Tuesday, November 9, 2004, includes revisions to our
disclosures in Part II, Item 1. "Legal Proceedings" that clarify
matters relating to the proposed settlement of the class action lawsuit
and the related reserves.
22. With respect to the Blydenburgh landfill and the Huntington/East
Northport landfill, disclose whether the $16 million and $20 million
represent the estimated investigation and cleanup costs for all
potentially responsible parties or whether these are your estimated
liability amounts. In addition, disclose whether any amounts have been
accrued. If it is reasonably possible that a material loss may have
been incurred in excess of the amount accrued, disclose an estimate of
the possible loss or range of loss or state that such an estimate
cannot be made. Refer to paragraphs 9 and 10 of SFAS 5.
Company Response:
-----------------
Our Quarterly Report on Form 10-Q for the three-month period ended
September 30, 2004, as filed with the Securities and Exchange
Commission on Tuesday, November 9, 2004, includes revisions to our
disclosures in Part II, Item 1. "Legal Proceedings" that clarify
matters relating to the environmental matters.
Exhibits 31.1 and 31.2
----------------------
23. Disclosure controls and procedures are now defined in Exchange Act
Rules l3a-15(e) and 15d-15(e). See SEC Release 33-8238, which became
effective August 14, 2003. Please file an amendment to your Form 10-K
to include certifications that conform to the format provided in item
60l(b)(31) of Regulation S-K and refer to the appropriate locations for
the definitions. In doing so, please refile the Form 10-K in its
entirety.
Page 17 of 18
Company Response:
-----------------
We have made the changes to the Section 302 certifications to conform
to the format provided in 601(b)(31) of Regulation S-K and filed them
as exhibits to our Annual Report on Form 10-K/A refiled in its entirety
on November 5, 2004.
* * * *
Based upon the responses provided and the incorporation of certain additional
disclosure items in our Quarterly Report on Form 10-Q for the three-month period
ended September 30, 2004, as filed with the Commission on November 9, 2004 and
prospectively, I believe the Company has satisfied the staff's request.
Additionally, the Company acknowledges that: the Company is responsible for the
adequacy and accuracy of the disclosure in its filings; staff comments or
changes to disclosure in response to staff comments do not foreclose the
Commission from taking any action with respect to the filing; and the Company
may not assert staff comments as a defense in any proceeding initiated by the
Commission or any person under Federal securities laws of the United States.
Please direct any additional questions or comments to me at (212) 572-4429. My
fax number is (212) 572-6787.
Very truly yours,
/s/ Richard W. Kunes
Richard W. Kunes
Executive Vice President and
Chief Financial Officer
cc: Nudrat Salik
Page 18 of 18