Edgar Filing: ESTEE LAUDER COMPANIES INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549-1004

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the quarterly period ended March 31, 2009

OR

o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the transition period from to

	Commission file number: 1-14064

The Estée Lauder Companies Inc.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

11-2408943

(I.R.S. Employer Identification No.)

767 Fifth Avenue, New York, New York

(Address of principal executive offices)

10153

(Zip Code)

212-572-4200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

At April 27, 2009, 118,623,473 shares of the registrant’s Class A Common Stock, $.01 par value, and 78,067,261 shares of the registrant’s Class B Common Stock, $.01 par value, were outstanding.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

INDEX

	Page

Part I. Financial Information

Item 1. Financial Statements

Consolidated Statements of Earnings — Three and Nine Months Ended March 31, 2009 and 2008	2

Consolidated Balance Sheets — March 31, 2009 and June 30, 2008	3

Consolidated Statements of Cash Flows — Nine Months Ended March 31, 2009 and 2008	4

Notes to Consolidated Financial Statements	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3. Quantitative and Qualitative Disclosures About Market Risk	45

Item 4. Controls and Procedures	45

Part II. Other Information

Item 1. Legal Proceedings	45

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 6. Exhibits	46

Signatures	47

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

	Three Months Ended March 31						Nine Months Ended March 31
	2009			2008			2009			2008
	(In millions, except per share data)

Net Sales	$	1,696.5		$	1,879.8		$	5,641.0		$	5,898.7
Cost of sales	446.4			471.9			1,454.5			1,506.2

Gross Profit	1,250.1			1,407.9			4,186.5			4,392.5

Operating expenses:
Selling, general and administrative	1,159.0			1,247.4			3,732.2			3,783.4
Restructuring and other special charges	6.2			(0.7		)	6.6			(0.5		)
Other intangible asset impairments	14.6			—			14.6			—
	1,179.8			1,246.7			3,753.4			3,782.9

Operating Income	70.3			161.2			433.1			609.6

Interest expense, net	20.6			16.1			55.5			52.8
Earnings before Income Taxes and Minority Interest	49.7			145.1			377.6			556.8

Provision for income taxes	21.4			53.7			138.4			197.7
Minority interest, net of tax	(1.1		)	(1.3		)	(2.9		)	(5.5		)
Net Earnings	$	27.2		$	90.1		$	236.3		$	353.6

Net earnings per common share:
Basic	$	.14		$	.47		$	1.20		$	1.83
Diluted	.14			.46			1.19			1.80

Weighted average common shares outstanding:
Basic	196.7			193.9			196.2			193.8
Diluted	197.2			196.6			197.8			196.8

Cash dividends declared per share	$	—		$	—		$	.55		$	.55

See notes to consolidated financial statements.

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THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED BALANCE SHEETS

	March 31			June 30
	2009			2008
	(Unaudited)
	($ in millions)
ASSETS
Current Assets
Cash and cash equivalents	$	640.6		$	401.7
Accounts receivable, net	1,031.6			1,038.8
Inventory and promotional merchandise, net	820.3			987.2
Prepaid expenses and other current assets	403.5			359.5
Total current assets	2,896.0			2,787.2

Property, Plant and Equipment, net	1,010.1			1,043.1

Other Assets
Investments, at cost or market value	20.6			24.1
Goodwill	735.5			708.9
Other intangible assets, net	172.9			191.9
Other assets	283.7			256.0
Total other assets	1,212.7			1,180.9
Total assets	$	5,118.8		$	5,011.2

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Short-term debt	$	140.7		$	118.7
Accounts payable	276.4			361.7
Accrued income taxes	10.7			151.2
Other accrued liabilities	1,014.7			1,067.6
Total current liabilities	1,442.5			1,699.2

Noncurrent Liabilities
Long-term debt	1,403.3			1,078.2
Other noncurrent liabilities	596.1			554.0
Total noncurrent liabilities	1,999.4			1,632.2

Contingencies (Note 9)

Minority Interest	25.6			26.6

Stockholders’ Equity
Common stock, $.01 par value; 650,000,000 shares Class A authorized; shares issued: 183,917,950 at March 31, 2009 and 180,754,534 at June 30, 2008; 240,000,000 shares Class B authorized; shares issued and outstanding: 78,067,261 at March 31, 2009 and June 30, 2008	2.6			2.6
Paid-in capital	1,136.7			979.0
Retained earnings	3,212.9			3,085.1
Accumulated other comprehensive income (loss)	(114.7		)	110.8
	4,237.5			4,177.5
Less: Treasury stock, at cost; 65,294,477 Class A shares at March 31, 2009 and 63,914,699 Class A shares at June 30, 2008	(2,586.2		)	(2,524.3		)
Total stockholders’ equity	1,651.3			1,653.2
Total liabilities and stockholders’ equity	$	5,118.8		$	5,011.2

See notes to consolidated financial statements.

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THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended March 31
	2009			2008
	(In millions)

Cash Flows from Operating Activities
Net earnings	$	236.3		$	353.6
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization	191.8			184.5
Deferred income taxes	(15.9		)	(80.1		)
Minority interest, net of tax	2.9			5.5
Non-cash stock-based compensation	42.6			40.8
Excess tax benefits from stock-based compensation arrangements	(1.4		)	(0.6		)
Loss on disposal of property, plant and equipment	8.1			5.3
Other intangible asset impairments	14.6			—
Other non-cash items	1.2			2.0
Changes in operating assets and liabilities:
Increase in accounts receivable, net	(113.0		)	(189.9		)
Decrease (increase) in inventory and promotional merchandise, net	76.6			(18.8		)
Increase in other assets, net	(69.5		)	(48.7		)
Decrease in accounts payable	(55.6		)	(1.7		)
Increase (decrease) in accrued income taxes	(37.4		)	128.1
Increase in other liabilities	25.4			138.5
Net cash flows provided by operating activities	306.7			518.5

Cash Flows from Investing Activities
Capital expenditures	(215.9		)	(250.3		)
Acquisition of businesses and other intangible assets, net of cash acquired	(64.5		)	(120.4		)
Proceeds from the disposition of long-term investments	0.9			—
Purchases of long-term investments	(0.4		)	(0.4		)
Net cash flows used for investing activities	(279.9		)	(371.1		)

Cash Flows from Financing Activities
Increase in short-term debt, net	15.7			131.0
Proceeds from issuance of long-term debt, net	297.7			—
Repayments and redemptions of long-term debt	(9.1		)	(4.3		)
Net proceeds from stock-based compensation transactions	109.5			70.9
Excess tax benefits from stock-based compensation arrangements	1.4			0.6
Payments to acquire treasury stock	(62.6		)	(93.6		)
Dividends paid to stockholders	(108.4		)	(106.6		)
Net cash flows provided by (used for) financing activities	244.2			(2.0		)

Effect of Exchange Rate Changes on Cash and Cash Equivalents	(32.1		)	10.9

Net Increase in Cash and Cash Equivalents	238.9			156.3
Cash and Cash Equivalents at Beginning of Period	401.7			253.7
Cash and Cash Equivalents at End of Period	$	640.6		$	410.0

See notes to consolidated financial statements.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of The Estée Lauder Companies Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated.

The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2008.

Certain amounts in the consolidated financial statements of prior periods have been reclassified to conform to current period presentation for comparative purposes.

Management Estimates

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses reported in those financial statements. Actual results could differ from those estimates and assumptions. Certain significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, concentration of credit risk, inventory, pension and other post-retirement benefit costs, goodwill and other intangible assets, income taxes and derivatives. Descriptions of these and other significant accounting policies are discussed in the Company’s Annual Report on Form 10-K for the year ended June 30, 2008.

Currency Translation and Transactions

All assets and liabilities of foreign subsidiaries and affiliates are translated at period-end rates of exchange, while revenue and expenses are translated at weighted-average rates of exchange for the period. Unrealized translation gains or losses are reported as cumulative translation adjustments through other comprehensive income (loss). Such adjustments amounted to $38.5 million of unrealized translation losses, net of tax, and $47.4 million of unrealized translation gains, net of tax, during the three months ended March 31, 2009 and 2008, respectively, and $247.2 million of unrealized translation losses, net of tax, and $95.2 million of unrealized translation gains, net of tax, during the nine months ended March 31, 2009 and 2008, respectively. The accompanying consolidated statements of earnings include net exchange (losses) gains on foreign currency transactions of $(5.2) million and $3.9 million during the three months ended March 31, 2009 and 2008, respectively, and $(31.3) million and $5.4 million during the nine months ended March 31, 2009 and 2008, respectively.

Accounts Receivable

Accounts receivable is stated net of the allowance for doubtful accounts and customer deductions of $39.5 million and $26.3 million as of March 31, 2009 and June 30, 2008, respectively.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventory and Promotional Merchandise

Inventory and promotional merchandise only includes inventory considered saleable or usable in future periods, and is stated at the lower of cost or fair-market value, with cost being determined on the first-in, first-out method. 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. Manufacturing overhead is allocated to the cost of inventory based on the normal production capacity. Unallocated overhead during periods of abnormally low production levels are recognized as cost of sales in the period in which they are incurred. Promotional merchandise is charged to expense at the time the merchandise is shipped to the Company’s customers. Included in inventory and promotional merchandise is an inventory obsolescence reserve, which represents the difference between the cost of the inventory and its estimated realizable value, based on various product sales projections. This reserve is calculated using an estimated obsolescence percentage applied to the inventory based on age, historical trends and requirements to support forecasted sales. In addition, and as necessary, specific reserves for future known or anticipated events may be established.

The components of inventory and promotional merchandise, net were as follows:

	March 31		June 30
	2009		2008
	(Unaudited)
	(In millions)

Raw materials	$	201.0	$	205.4
Work in process	34.4		56.8
Finished goods	404.9		494.7
Promotional merchandise	180.0		230.3
	$	820.3	$	987.2

Property, Plant and Equipment

Property, plant and equipment consists of:

	March 31		June 30
	2009		2008
	(Unaudited)
	(In millions)
Assets (Useful Life)
Land	$	14.2	$	14.9
Buildings and improvements (10 to 40 years)	177.3		183.5
Machinery and equipment (3 to 10 years)	1,038.2		1,008.9
Furniture and fixtures (5 to 10 years)	88.3		95.6
Leasehold improvements	1,091.9		1,090.7
	2,409.9		2,393.6
Less accumulated depreciation and amortization	1,399.8		1,350.5
	$	1,010.1	$	1,043.1

The cost of assets related to projects in progress of $129.2 million and $129.0 million as of March 31, 2009 and June 30, 2008, respectively, is included in their respective asset categories in the table above. Depreciation and amortization of property, plant and equipment was $61.7 million and $59.8 million during the three months ended March 31, 2009 and 2008, respectively, and $181.0 million and $171.2 million during the nine months ended March 31, 2009 and 2008, respectively.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes

As of March 31, 2009 and June 30, 2008, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $216.1 million and $199.0 million, respectively. The increase of $17.1 million principally resulted from tax positions taken during a prior period for which ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $122.7 million. The total interest and penalties accrued related to unrecognized tax benefits during the three and nine months ended March 31, 2009 in the accompanying consolidated statements of earnings was $7.1 million and $12.5 million, respectively. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at March 31, 2009 and June 30, 2008 was $63.2 million and $54.0 million, respectively. On the basis of the information available as of March 31, 2009, it is reasonably possible that a reduction in a range of $30 million to $60 million of unrecognized tax benefits may occur within 12 months as a result of projected resolutions of global tax examinations and controversies.

Recently Adopted Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), to clarify the definition of fair value, establish a framework for measuring fair value and expand the disclosures on fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). SFAS No. 157 also stipulates that, as a market-based measurement, fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability, and establishes a fair value hierarchy that distinguishes between (a) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (b) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).

In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13.” This FSP amends SFAS No. 157 to exclude certain leasing transactions accounted for under previously existing accounting guidance. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination, regardless of whether those assets and liabilities are related to leases.

In February 2008, the FASB issued FSP No. FAS 157-2, “Effective Date for FASB Statement No. 157” (“FSP No. FAS 157-2”). This FSP permits the delayed application of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, as defined in this FSP, except for those that are recognized or disclosed at fair value in the financial statements at least annually, until the beginning of the Company’s fiscal 2010. As of July 1, 2008, the Company adopted SFAS No. 157 (see Note 7), with the exception of its application to nonfinancial assets and nonfinancial liabilities, which the Company will defer in accordance with FSP No. FAS 157-2 until the beginning of fiscal 2010. Nonfinancial assets and nonfinancial liabilities principally consist of intangible assets acquired through business combinations, long-lived assets when assessing potential impairment, and liabilities associated with restructuring activities. The Company is currently evaluating the impact of the provisions for such nonfinancial assets and nonfinancial liabilities on its consolidated financial statements.

In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP No. FAS 157-3”), which clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application should be accounted for as a change in accounting estimate following the guidance in SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”). However, the disclosure provisions in SFAS No. 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The Company adopted SFAS No. 157 beginning in its fiscal 2009 first quarter. As part of this adoption, the Company evaluated the fair value measurements of its financial assets and liabilities and determined that these instruments are valued in active markets. As such, the guidance in this FSP did not impact the Company’s consolidated financial statements.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), to permit all entities to choose to elect, at specified election dates, to measure eligible financial instruments at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. SFAS No. 159 became effective for the Company as of July 1, 2008. As the Company did not elect the fair value option for its financial instruments (other than those already measured at fair value in accordance with SFAS No. 157), the adoption of this standard did not have an impact on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires companies to provide qualitative disclosures about their objectives and strategies for using derivative instruments, quantitative disclosures of the fair values of, and gains and losses on, these derivative instruments in a tabular format, as well as more information about liquidity by requiring disclosure of a derivative contract’s credit-risk-related contingent features. SFAS No. 161 also requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. The Company adopted this disclosure-only standard beginning in its fiscal 2009 third quarter (see Note 6).

Recently Issued Accounting Standards

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” principally to require publicly traded companies to provide disclosures about fair value of financial instruments in interim financial information. The adoption of this disclosure-only guidance will not have an impact on the Company’s consolidated financial results and is effective beginning with its fiscal 2010 interim period ending September 30, 2009.

In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. FAS 157-4”). This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157 when there has been a significant decrease in market activity for a financial asset. An entity is required to base its conclusion about whether a transaction was distressed on the weight of the evidence presented. This FSP also re-affirms that the objective of fair value, when the market for an asset is not active, is the price that would be received to sell the asset in an orderly market (as opposed to a distressed or forced transaction). Additional enhanced disclosures are also required in accordance with this FSP. FSP No. FAS 157-4 must be applied prospectively and is effective for interim and annual periods ending after June 15, 2009. The Company determined that its financial assets are currently valued in active markets. As such, the guidance in this FSP is not anticipated to impact the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies,” to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably determined. If the fair value of such assets or liabilities cannot be reasonably determined, then they would generally be recognized in accordance with SFAS No. 5, “Accounting for Contingencies” and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss — an interpretation of FASB Statement No. 5.” This FSP also amends the subsequent accounting for assets and liabilities arising from contingencies in a business combination and certain other disclosure requirements. This FSP is effective for assets or liabilities arising from contingencies in business combinations that are consummated on or after July 1, 2009.

In December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP No. FAS 132(R)-1”) to require employers to provide additional disclosures about plan assets of a defined benefit pension or other post-retirement plan. These disclosures should principally include information detailing investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets and an understanding of significant concentrations of risk within plan assets. While earlier application of the provisions of this FSP is permitted, the disclosures required by this FSP shall be provided for fiscal years ending after December 15, 2009 (or the Company’s fiscal 2010, the anticipated period of adoption). Upon initial application, the provisions of this FSP are not required for earlier periods that are presented for comparative purposes.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In November 2008, the FASB ratified the consensus reached on Emerging Issues Task Force (“EITF”) Issue No. 08-7, “Accounting for Defensive Intangible Assets” (“EITF No. 08-7”). Defensive intangible assets are assets acquired in a business combination that the acquirer (a) does not intend to use or (b) intends to use in a way other than the assets’ highest and best use as determined by an evaluation of market participant assumptions. While defensive intangible assets are not being actively used, they are likely contributing to an increase in the value of other assets owned by the acquiring entity. EITF No. 08-7 will require defensive intangible assets to be accounted for as separate units of accounting at the time of acquisition and the useful life of such assets would be based on the period over which the assets will directly or indirectly affect the entity’s cash flows. This Issue would be applied prospectively for defensive intangible assets acquired on or after the beginning of the Company’s fiscal 2010, in order to coincide with the effective date of SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”).

In November 2008, the FASB ratified the consensus reached on EITF Issue No. 08-6, “Accounting for Equity Method Investment Considerations” (“EITF No. 08-6”). EITF No. 08-6 addresses questions about the potential effect of SFAS No. 141(R) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS No. 160”) on equity-method accounting. The primary issues include how the initial carrying value of an equity method investment should be determined, how to account for any subsequent purchases and sales of additional ownership interests, and whether the investor must separately assess its underlying share of the investee’s indefinite-lived intangible assets for impairment. The effective date of EITF No. 08-6 coincides with that of SFAS No. 141(R) and SFAS No. 160 and is to be applied on a prospective basis beginning in the Company’s fiscal 2010. Early adoption is not permitted for entities that previously adopted an alternate accounting policy.

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. FAS 142-3”). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). This FSP also adds certain disclosures to those already prescribed in SFAS No. 142. FSP No. FAS 142-3 becomes effective for fiscal years, and interim periods within those fiscal years, beginning in the Company’s fiscal 2010. The guidance for determining useful lives must be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements must be applied prospectively to all intangible assets recognized as of the effective date.

In December 2007, the FASB issued SFAS No. 141(R). SFAS No. 141(R) replaces SFAS No. 141, “Business Combinations,” however, it retains the fundamental requirements of the former Statement that the acquisition method of accounting (previously referred to as the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. Among other requirements, SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their acquisition-date fair values, with limited exceptions; acquisition-related costs generally will be expensed as incurred. SFAS No. 141(R) requires certain financial statement disclosures to enable users to evaluate and understand the nature and financial effects of the business combination. SFAS No. 141(R) must be applied prospectively to business combinations that are consummated on or after July 1, 2009.

In December 2007, the FASB issued SFAS No. 160 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Among other requirements, SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is to be reported as a separate component of equity in the consolidated financial statements. SFAS No. 160 also requires consolidated net income to include the amounts attributable to both the parent and the noncontrolling interest and to disclose those amounts on the face of the consolidated statement of income. SFAS No. 160 must be applied prospectively for fiscal years, and interim periods within those fiscal years, beginning in the Company’s fiscal 2010, except for the presentation and disclosure requirements, which will be applied retrospectively for all periods presented.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In December 2007, the FASB ratified the consensus reached on EITF Issue No. 07-1, “Collaborative Arrangements,” (“EITF No. 07-1”). This Issue addresses accounting for collaborative arrangement activities that are conducted without the creation of a separate legal entity for the arrangement. Revenues and costs incurred with third parties in connection with the collaborative arrangement should be presented gross or net by the collaborators pursuant to the guidance in EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” and other applicable accounting literature. Payments to or from collaborators should be presented in the income statement based on the nature of the arrangement, the nature of the company’s business and whether the payments are within the scope of other accounting literature. Other detailed information related to the collaborative arrangement is also required to be disclosed. The requirements under this Issue must be applied to collaborative arrangements in existence at the beginning of the Company’s fiscal 2010 using a modified version of retrospective application. The Company is currently not a party to significant collaborative arrangement activities, as defined by EITF No. 07-1.

NOTE 2 — GOODWILL AND OTHER INTANGIBLE ASSETS

The Company follows the provisions of SFAS No. 141, “Business Combinations” (“SFAS No. 141”) and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). These statements establish financial accounting and reporting standards for acquired goodwill and other intangible assets. Specifically, the standards address how acquired intangible assets should be accounted for both at the time of acquisition and after they have been recognized in the financial statements. In accordance with SFAS No. 142, intangible assets, including purchased goodwill, must be evaluated for impairment. Those intangible assets that will continue to be classified as goodwill or as other indefinite-lived intangibles are no longer amortized.

The Company tests goodwill for impairment at the reporting unit level, which is one level below its operating segments. The Company identifies its reporting units by assessing whether the components of its operating segments constitute businesses for which discrete financial information is available and management of each reporting unit regularly reviews the operating results of those components. In accordance with SFAS No. 142, the impairment testing is performed in two steps: (i) the Company determines impairment by comparing the fair value of a reporting unit with its carrying value, and (ii) if there is an impairment, the Company measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. The impairment test for indefinite-lived intangible assets encompasses calculating a fair value of an indefinite-lived intangible asset and comparing the fair value to its carrying value. If the carrying value exceeds the fair value, impairment is recorded.

To determine fair value of the reporting unit, the Company generally uses an equal weighting of the income and market approaches. The Company believes both approaches are equally relevant and the most reliable indications of fair value because the fair value of product or service companies is more dependent on the ability to generate earnings than on the value of the assets used in the production process. Under the market approach, the Company utilizes information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units, which creates valuation multiples that are applied to the operating performance of the reporting unit being tested, to value the reporting unit. Under the income approach, the Company determines fair value using a discounted cash flow method, estimating future cash flows of each reporting unit, as well as terminal value, and discounting such cash flows at a rate of return that reflects the relative risk of the cash flows. The key estimates and factors used in these two approaches include, but are not limited to, revenue growth rates and profit margins based on internal forecasts, terminal value, the weighted-average cost of capital used to discount future cash flows and comparable market multiples. To determine fair value of other indefinite-lived intangible assets, the Company uses an income approach, the relief-from-royalty method. This method assumes that, in lieu of ownership, a third party would be willing to a pay a royalty in order to obtain the rights to use the comparable asset. Other indefinite-lived intangible assets’ fair values require significant judgments in determining both the assets’ estimated cash flows as well as the appropriate discount and royalty rates applied to those cash flows to determine fair value. Changes in such estimates or the application of alternative assumptions could produce significantly different results.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company believes the recent decline in stock price, which impacts market capitalization, primarily reflects the reaction of the equity markets to the recessionary economy, rather than a fundamental change in the business operations. In light of the recent decline in stock price, the Company reviewed the impact of the aggregate change in market capitalization on the fair value of its reporting units with goodwill and such review indicated that all reporting units, except for the Darphin reporting unit, continued to have fair value in excess of carrying value.

During the third quarter of fiscal 2009, the Company concluded that the Darphin reporting unit met certain indicators triggering an interim impairment review of goodwill and trademarks. Those indicators included a decline in recent operating activities, restructuring activities, revisions in internal forecasts and an application of the Company’s continued decline in market capitalization to this reporting unit. The Company performed an interim impairment test for goodwill and trademarks as of March 31, 2009 on this reporting unit. The Company concluded that the carrying value of the Darphin trademark exceeded its estimated fair value and as a result recognized an impairment charge of $12.3 million at the exchange rate at March 31, 2009. This charge was reflected in the skin care product category and in the Europe, the Middle East & Africa region. After adjusting the carrying value of the trademark, the Company completed step one of the impairment analysis for goodwill and concluded that the fair value of the Darphin reporting unit was in excess of its carrying value including goodwill.

During the third quarter of fiscal 2009, the Company reviewed its other intangible assets for events or changes in circumstances that indicate the carrying amount of such assets may not be recoverable. Pursuant to this review, the Company identified a fragrance license agreement intangible asset which was tested for impairment based upon a history of operating losses in excess of projections and revisions in internal forecasts. The Company determined that the intangible asset was impaired and therefore recorded an asset impairment charge of $2.3 million in the fragrance product category and in the Americas region.

As the duration and magnitude of the volatility of the current economic conditions remain uncertain, the Company will continue to monitor and evaluate the potential impact on the business and on the annual impairment testing in the fourth quarter of the current fiscal year. Accordingly, it is possible that the Company would recognize an impairment charge in the future with respect to goodwill and/or other intangible assets.

NOTE 3 — ACQUISITION OF BUSINESSES

During fiscal 2009, the Company acquired Applied Genetics Incorporated Dermatics, a manufacturer of cosmetics ingredients. The purchase price, paid at closing, was funded by cash provided by operations. In addition, the Company acquired businesses engaged in the wholesale distribution and retail sale of Aveda products. These activities were predominantly related to the Company’s skin care and hair care businesses and resulted in increases to goodwill of $36.4 million and other intangible assets of $17.9 million as of March 31, 2009, pending final valuation.

The aggregate purchase price for these transactions, net of acquired cash, which includes acquisition costs, was $58.4 million at March 31, 2009. The results of operations for each of the acquired businesses are included in the accompanying consolidated financial statements commencing with its date of original acquisition. Pro forma results of operations as if each of such businesses had been acquired as of the beginning of the year of acquisition and as of the prior-year period have not been presented as the impact on the Company’s consolidated financial results would not have been material.

NOTE 4 — RESTRUCTURING AND OTHER SPECIAL CHARGES

In February 2009, the Company announced the implementation of a multi-faceted cost savings program (the “Program”) to position it to achieve long-term profitable growth. The Company anticipates the Program will result in related restructuring and other special charges over the next few fiscal years totaling between $350 million and $450 million before taxes. The Program includes organizational resizing and regional realignments which principally reflects the reduction of the workforce by approximately 2,000 employees.

During fiscal 2009, the Company approved cost savings initiatives to resize the organization, reorganize certain functions, exit unprofitable operations and outsource certain services. For the three and nine months ended March 31, 2009, aggregate expenses of $7.0 million and $10.3 million, respectively, were recorded as Restructuring and other special charges related to the Program in the accompanying consolidated statements of earnings. These charges primarily reflected employee-related costs, asset write-offs, contract terminations and other special charges.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present the restructuring charges incurred for the three and nine months ended March 31, 2009 under the Program. Substantially all of these charges are expected to result in cash expenditures, with a majority of the cash payments expected to be made through fiscal 2010.

	Three Months Ended March 31, 2009		Nine Months Ended March 31, 2009
	(Unaudited) (In millions)

Employee-related costs	$	4.3	$	5.5
Asset write-offs	0.1		0.1
Contract terminations	0.1		0.1
Other exit costs	0.1		0.1
Total restructuring charges	$	4.6	$	5.8

The total amount of restructuring charges expected to be incurred in connection with these initiatives, plus other initiatives approved through April 16, 2009, include approximately $28 million for employee-related costs, approximately $4 million in asset write-offs and approximately $5 million of contract terminations and other exit costs.

The related liability balances and activity for these restructuring charges are shown below.

	Employee- Related Costs			Asset Write-offs			Contract Terminations			Other			Total
	(Unaudited) (In millions)

Charges	$	5.5		$	0.1		$	0.1		$	0.1		$	5.8
Cash payments	(1.3		)	—			(0.1		)	(0.1		)	(1.5		)
Non-cash write-offs	—			(0.1		)	—			—			(0.1		)
Adjustments	—			—			—			—			—
Balance at March 31, 2009	$	4.2		$	—		$	—		$	—		$	4.2

In addition to the charges included in the above tables, the Company incurred other special charges in connection with the Program for the three and nine months ended March 31, 2009 of $2.4 million and $4.5 million, respectively, related to consulting, other professional services, and accelerated depreciation. The total amount of other special charges expected to be incurred to implement these initiatives, plus other initiatives approved through April 16, 2009, is approximately $36 million.

During the three and nine months ended March 31, 2009, the Company recorded gains of $0.8 million and $3.7 million, respectively, related to adjustments to accruals that were recorded as other special charges in prior periods.

NOTE 5 — DEBT

In November 2008, the Company issued and sold $300.0 million of 7.75% Senior Notes due November 1, 2013 (“7.75% Senior Notes due 2013”) in a public offering. The 7.75% Senior Notes due 2013 were priced at 99.932% with a yield of 7.767%. Interest payments are required to be made semi-annually on May 1 and November 1, commencing May 1, 2009. The net proceeds of this offering were used to repay then-outstanding commercial paper balances upon their maturity.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s 3.0 billion Japanese yen revolving credit facility expired on March 24, 2009. This facility was replaced with a 1.5 billion Japanese yen ($15.3 million at the exchange rate at March 31, 2009) revolving credit facility that expires on March 31, 2010 and a 1.5 billion Japanese yen ($15.3 million at the exchange rate at March 31, 2009) revolving credit facility that expires on March 31, 2012. The interest rates on borrowings under these credit facilities are based on TIBOR (Tokyo Interbank Offered Rate) plus .45% and .75%, respectively and the facility fees incurred on undrawn balances are 15 basis points and 25 basis points, respectively. At March 31, 2009, no borrowings were outstanding under these facilities.

NOTE 6 — DERIVATIVE FINANCIAL INSTRUMENTS

The Company adopted SFAS No. 161 as of January 1, 2009, which did not have an impact on the Company’s consolidated financial statements as it is a disclosure-only standard. The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The Company primarily enters into foreign currency forward and option contracts to reduce the effects of fluctuating foreign currency exchange rates and interest rate derivatives to manage the effects of interest rate movements on the Company’s aggregate liability portfolio. The Company also enters into foreign currency forward and option contracts, not designated as hedging instruments, to mitigate the change in fair value of specific assets and liabilities on the balance sheet. The Company does not utilize derivative financial instruments for trading or speculative purposes. Costs associated with entering into these derivative financial instruments have not been material to the Company’s consolidated financial results.

For each derivative contract entered into where the Company looks to obtain special hedge accounting treatment, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking the hedge transaction, the nature of the risk being hedged, how the hedging instruments’ effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. If it is determined that a derivative is not highly effective, or that it has ceased to be a highly effective hedge, the Company will be required to discontinue hedge accounting with respect to that derivative prospectively.

All derivatives outstanding as of March 31, 2009 are (i) designated as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair-value” hedge), (ii) designated as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“foreign currency cash-flow” hedge), or (iii) not designated as a hedging instrument. Changes in the fair value of a derivative that is designated and qualifies as a fair-value hedge that is highly effective are recorded in current-period earnings, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments). Changes in the fair value of a derivative that is designated and qualifies as a foreign currency cash-flow hedge of a foreign-currency-denominated forecasted transaction that is highly effective are recorded in other comprehensive income (loss) (“OCI”). Gains and losses deferred in OCI are then recognized in current-period earnings when earnings are affected by the variability of cash flows of the hedged foreign-currency-denominated forecasted transaction (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). Changes in the fair value of derivative instruments not designated as hedging instruments are reported in current-period earnings.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair values of the Company’s derivative financial instruments included in the consolidated balance sheet as of March 31, 2009 are presented as follows:

	Asset Derivatives			Liability Derivatives
(Unaudited) (In millions)	Balance Sheet Location	Fair Value (1)		Balance Sheet Location	Fair Value (1)
Derivatives Designated as Hedging Instruments:
Foreign currency forward and option contracts	Prepaid expenses and other current assets	$	21.3	Other accrued liabilities	$	(12.2	)
Interest rate swap contracts	Prepaid expenses and other current assets	39.5		Not applicable	—

Total Derivatives Designated as Hedging Instruments		60.8			(12.2		)

Derivatives Not Designated as Hedging Instruments:
Foreign currency forward contracts	Prepaid expenses and other current assets	3.5		Other accrued liabilities	(2.9		)
Total Derivatives		$	64.3		$	(15.1	)

(1) See Note 7 — Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined.

The amounts of the gains and losses related to the Company’s derivative financial instruments designated as hedging instruments are presented as follows:

(Unaudited) (In millions)	Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion) (1)				Location of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) (1) (2)
	Three Months		Nine Months			Three Months		Nine Months
Derivatives in Cash Flow Hedging Relationships:	Ended March 31, 2009		Ended March 31, 2009			Ended March 31, 2009		Ended March 31, 2009

Foreign currency forward and option contracts	$	4.7	$	31.8	Cost of sales	$	1.8	$	6.2
					Selling, general and administrative	8.5		14.6
Total derivatives	$	4.7	$	31.8		$	10.3	$	20.8

(1) See Note 13 — Comprehensive Income (Loss) for additional information on changes to other accumulated comprehensive income (loss).

(2) The amount of gain (loss) recognized in earnings related to the ineffective portion of the hedging relationships and the amount excluded from effectiveness testing was $(0.2) million and $(1.1) million, respectively, for the three months ended March 31, 2009, and $0.4 million and $(0.3) million, respectively, for the nine months ended March 31, 2009.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (In millions)	Location of Gain or (Loss) Recognized in Earnings on Derivatives	Amount of Gain or (Loss) Recognized in Earnings on Derivatives (1)
		Three Months			Nine Months
Derivatives in Fair Value Hedging Relationships:		Ended March 31, 2009			Ended March 31, 2009

Interest rate swap contracts	Interest expense, net	$	(2.2	)	$	28.7

(1) The Company’s interest rate swap agreements meet the short-cut method requirements under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). Accordingly, changes in the fair values of the interest rate swap agreements are exactly offset by changes in the fair value of the underlying long-term debt.

The amounts of the gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments are presented as follows:

(Unaudited) (In millions)	Location of Gain or (Loss) Recognized in Earnings on Derivatives	Amount of Gain or (Loss) Recognized in Earnings on Derivatives
		Three Months		Nine Months
Derivatives Not Designated as Hedging Instruments:		Ended March 31, 2009		Ended March 31, 2009

Foreign currency forward and option contracts	Selling, general and administrative	$	—	$	1.6

Foreign Currency Cash-Flow Hedges

The Company enters into foreign currency forward contracts to hedge anticipated transactions, as well as receivables and payables denominated in foreign currencies, for periods consistent with the Company’s identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on costs and on the cash flows that the Company receives from foreign subsidiaries. The majority of foreign currency forward contracts are denominated in currencies of major industrial countries. The Company also enters into foreign currency option contracts to hedge anticipated transactions where there is a high probability that anticipated exposures will materialize. The foreign currency forward and option contracts entered into to hedge anticipated transactions have been designated as foreign currency cash-flow hedges and have varying maturities through the end of June 2010. Hedge effectiveness of foreign currency forward contracts is based on a hypothetical derivative methodology and excludes the portion of fair value attributable to the spot-forward difference which is recorded in current-period earnings. Hedge effectiveness of foreign currency option contracts is based on a dollar offset methodology. The ineffective portion of both foreign currency forward and option contracts is recorded in current-period earnings. For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses accumulated in other comprehensive income (loss) are reclassified to earnings when the underlying forecasted transaction occurs. If it is probable that the forecasted transaction will no longer occur, then any gains or losses in accumulated other comprehensive income (loss) are reclassified to current-period earnings. As of March 31, 2009, the Company’s foreign currency cash-flow hedges were highly effective, in all material respects. The estimated net gain (loss) as of March 31, 2009 that is expected to be reclassified from accumulated other comprehensive income (loss) into earnings within the next twelve months is $9.6 million.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At March 31, 2009, the Company had foreign currency forward and option contracts in the amount of $1,300.6 million and $16.2 million, respectively. The foreign currencies included in foreign currency forward contracts (notional value stated in U.S. dollars) are principally the Euro ($315.3 million), Swiss franc ($252.4 million), British pound ($195.5 million), Canadian dollar ($135.5 million), Japanese yen ($83.7 million), Hong Kong dollar ($76.0 million) and Australian dollar ($74.7 million). The foreign currencies included in the foreign currency option contracts (notional value stated in U.S. dollars) are principally the Canadian dollar ($9.2 million) and the South Korean won ($5.8 million).

Fair Value Hedges

The Company enters into interest rate derivative contracts to manage its exposure to interest rate fluctuations on its funded indebtedness and anticipated issuance of debt for periods consistent with the identified exposures. The Company has interest rate swap agreements, with a notional amount totaling $250.0 million, to effectively convert the fixed rate interest on its 2017 Senior Notes to variable interest rates based on six-month LIBOR. These interest rate swap agreements are designated as fair value hedges of the related long-term debt and meet the short-cut method requirements of SFAS No. 133. Accordingly, changes in the fair values of the interest rate swap agreements are exactly offset by changes in the fair value of the underlying long-term debt. As of March 31, 2009, these fair-value hedges were highly effective in all material respects.

Credit Risk

As a matter of policy, the Company only enters into derivative contracts with counterparties that have at least an “A” (or equivalent) credit rating. The counterparties to these contracts are major financial institutions. Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the gross fair value of contracts in asset positions, which totaled $64.3 million at March 31, 2009. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored and reported to management. Accordingly, management believes risk of loss under these hedging contracts is remote.

Certain of the Company’s derivative financial instruments contain credit-risk-related contingent features. As of March 31, 2009, the Company was in compliance with such features and there were no derivative financial instruments with credit-risk-related contingent features that were in a net liability position.

NOTE 7 — FAIR VALUE MEASUREMENTS

The Company adopted the provisions of SFAS No. 157 for financial assets and liabilities as of July 1, 2008. The adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated financial statements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires the entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

SFAS No. 157 describes three levels of inputs that may be used to measure fair value:

Level 1:	Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

Level 2:	Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:	Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments valuation.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2009:

	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Unaudited) (In millions)	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Foreign currency forward and option contracts	$	—	$	24.8	$	—	$	24.8
Interest rate swap contracts	—		39.5		—		39.5
Available-for-sale securities	13.4		—		—		13.4
Total	$	13.4	$	64.3	$	—	$	77.7

Liabilities:
Foreign currency forward contracts	$	—	$	15.1	$	—	$	15.1

Foreign Currency Forward and Option Contracts - The fair values of the Company’s foreign currency forward and option contracts were valued using pricing models, with all significant inputs derived from or corroborated by observable market data such as yield curves, currency spot and forward rates and currency volatilities.

Interest Rate Swap Contracts - The fair values of the Company’s outstanding interest rate swap contracts were determined based on non-binding offers from the counterparties that are corroborated by observable market data.

Available-For-Sale Securities - Available-for-sale securities are generally comprised of mutual funds and are valued using quoted market prices on an active exchange. Available-for-sale securities are included in investments in the accompanying consolidated balance sheets.

NOTE 8 — PENSION AND POST-RETIREMENT BENEFIT PLANS

The Company maintains pension plans covering substantially all of its full-time employees for its U.S. operations and a majority of its international operations. The Company also maintains a domestic post-retirement benefit plan which provides certain medical and dental benefits to eligible employees. Descriptions of these plans are discussed in the Company’s Annual Report on Form 10-K for the year ended June 30, 2008.

The components of net periodic benefit cost for the three months ended March 31, 2009 and 2008 consisted of the following:

													Other than
	Pension Plans												Pension Plans
	U.S.						International						Post-retirement
(Unaudited) (In millions)	2009			2008			2009			2008			2009		2008

Service cost	$	5.2		$	4.9		$	3.9		$	4.1		$	0.9	$	1.0
Interest cost	7.0			6.6			4.3			3.7			1.9		1.6
Expected return on plan assets	(8.3		)	(7.9		)	(4.4		)	(3.8		)	—		—
Amortization of:
Prior service cost	0.2			0.2			0.5			0.1			—		—
Actuarial loss	0.4			0.4			0.1			1.5			0.1		0.1
Net periodic benefit cost	$	4.5		$	4.2		$	4.4		$	5.6		$	2.9	$	2.7

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The components of net periodic benefit cost for the nine months ended March 31, 2009 and 2008 consisted of the following:

													Other than
	Pension Plans												Pension Plans
	U.S.						International						Post-retirement
(Unaudited) (In millions)	2009			2008			2009			2008			2009		2008

Service cost	$	15.7		$	14.8		$	12.3		$	12.1		$	2.8	$	3.1
Interest cost	21.1			19.7			13.7			10.9			5.6		4.8
Expected return on plan assets	(25.1		)	(23.8		)	(14.2		)	(11.2		)	—		—
Amortization of:
Prior service cost	0.5			0.5			1.7			0.2			—		—
Actuarial loss	1.3			1.3			0.5			4.5			0.4		0.3
Net periodic benefit cost	$	13.5		$	12.5		$	14.0		$	16.5		$	8.8	$	8.2

The Company previously disclosed in its consolidated financial statements for the fiscal year ended June 30, 2008 that it expected to make cash contributions totaling approximately $15 million to its trust based, noncontributory qualified defined benefit pension plan (“U.S. Qualified Plan”) and approximately $46 million to its international defined benefit pension plans during the fiscal year ending June 30, 2009. During the nine months ended March 31, 2009, the Company made $7.0 million of discretionary contributions to the U.S. Qualified Plan. Additional discretionary contributions are being considered for the remainder of the fiscal year but are not expected to be material. In addition, as of March 31, 2009, the expected contributions to the international defined benefit pension plans are currently anticipated to be approximately $40 million for the fiscal year ending June 30, 2009.

NOTE 9 — CONTINGENCIES

Legal Proceedings

The Company is involved, from time to time, in litigation and other legal proceedings incidental to its business. Management believes that the outcome of current litigation and legal proceedings will not have a material adverse effect upon the Company’s results of operations or financial condition. However, management’s assessment of the Company’s current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against the Company not presently known to the Company or determinations by judges, juries or other finders of fact which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or proceedings.

In 1999, the Office of the Attorney General of the State of New York (the “State”) notified the Company and ten other entities that they had been identified as potentially responsible parties (“PRPs”) with respect to the Blydenburgh landfill in Islip, New York. Each PRP may be jointly and severally liable for the costs of investigation and cleanup, which the State estimated in 2006 to be approximately $19.7 million for all PRPs. In 2001, the State sued other PRPs (including Hickey’s Carting, Inc., Dennis C. Hickey and Maria Hickey, collectively the “Hickey Parties”), in the U.S. District Court for the Eastern District of New York to recover such costs in connection with the site, and in September 2002, the Hickey Parties brought contribution actions against the Company and other Blydenburgh PRPs. These contribution actions seek to recover, among other things, any damages for which the Hickey Parties are found liable in the State’s lawsuit against them, and related costs and expenses, including attorneys’ fees. In June 2004, the State added the Company and other PRPs as defendants in its pending case against the Hickey Parties. In April 2006, the Company and other defendants added numerous other parties to the case as third-party defendants. Settlement negotiations with the new third-party defendants, the State, the Company and other defendants began in July 2006 and have resulted in a proposed consent decree to resolve the case. The consent decree requires court approval, which the parties are seeking. The Company has accrued an amount which it believes would be necessary to resolve its share of this matter. If the settlement is not successfully completed, the Company intends to vigorously defend the pending claims. While no assurance can be given as to the ultimate outcome, management believes that the resolution of the Blydenburgh matters will not have a material adverse effect on the Company’s consolidated financial condition.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 — COMMON STOCK

During the nine months ended March 31, 2009, the Company purchased approximately 1.4 million shares of its Class A Common Stock for $62.6 million.

NOTE 11 — STOCK PROGRAMS

As of March 31, 2009, the Company has two active equity compensation plans which include the Amended and Restated Fiscal 2002 Share Incentive Plan and the Non-Employee Director Share Incentive Plan (collectively, the “Plans”). These Plans currently provide for the issuance of 24,423,700 shares of Class A Common Stock, which consist of shares originally provided for and shares transferred to the Plans from other inactive plans and employment agreements, to be granted in the form of stock-based awards to key employees, consultants and non-employee directors of the Company. As of March 31, 2009, approximately 4,997,900 shares of Class A Common Stock were reserved and available to be granted pursuant to these Plans. The Company may satisfy the obligation of its stock-based compensation awards with either new or treasury shares. The Company’s equity compensation awards outstanding at March 31, 2009 include stock options, performance share units (“PSU”), restricted stock units (“RSU”) and share units.

Total net stock-based compensation expense is attributable to the granting of, and the remaining requisite service periods of, stock options, PSUs, RSUs and share units. Compensation expense attributable to net stock-based compensation during the three months ended March 31, 2009 and 2008 was $10.5 million and $7.6 million, respectively. Compensation expense attributable to net stock-based compensation during the nine months ended March 31, 2009 and 2008 was $42.6 million and $40.8 million, respectively. As of March 31, 2009, the total unrecognized compensation cost related to nonvested stock-based awards was $45.7 million and the related weighted-average period over which it is expected to be recognized is approximately 1.9 years.

Stock Options

A summary of the Company’s stock option programs as of March 31, 2009 and changes during the nine-month period then ended, is presented below:

(Unaudited) (Shares in thousands)	Shares		Weighted- Average Exercise Price Per Share		Aggregate Intrinsic Value(1) (in millions)		Weighted- Average Contractual Life Remaining in Years

Outstanding at June 30, 2008	20,307.2		$	42.53
Granted at fair value	1,793.4		52.30
Exercised	(2,627.2	)	41.69
Expired	(222.0	)	43.48
Forfeited	(45.5	)	43.48
Outstanding at March 31, 2009	19,205.9		43.54		$	4.2	4.0

Exercisable at March 31, 2009	15,919.3		42.76		$	—	3.0

(1) The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

The exercise period for all stock options generally may not exceed ten years from the date of grant. Stock option grants to individuals generally become exercisable in three substantively equal tranches over a service period of up to four years. The Company attributes the value of option awards on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The per-share weighted-average grant date fair value of stock options granted during the three months ended March 31, 2009 and 2008 was $7.08 and $13.52, respectively. The per-share weighted-average grant date fair value of stock options granted during the nine months ended March 31, 2009 and 2008 was $17.30 and $14.36, respectively. The total intrinsic value of stock options exercised during the three months ended March 31, 2008 was $11.0 million. The total intrinsic value of stock options exercised during the nine months ended March 31, 2009 and 2008 was $24.7 million and $18.1 million, respectively.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended March 31
(Unaudited)	2009	2008
Weighted-average expected stock-price volatility	31%	26%
Weighted-average expected option life	8 years	8 years
Average risk-free interest rate	2.7%	3.3%
Average dividend yield	1.9%	1.3%

	Nine Months Ended March 31
(Unaudited)	2009	2008
Weighted-average expected stock-price volatility	28%	25%
Weighted-average expected option life	8 years	8 years
Average risk-free interest rate	3.4%	4.5%
Average dividend yield	1.2%	1.2%

Performance Share Units

During the nine months ended March 31, 2009, the Company granted 131,000 PSUs, which will be settled in stock subject to the achievement of the Company’s net sales and net earnings per share goals for the three years ending June 30, 2011 and subject to the continued employment of the grantees. Settlement will be made pursuant to a range of opportunities relative to the net sales and diluted net earnings per common share targets of the Company and, as such, the compensation cost of the PSU is subject to adjustment based upon the attainability of these target goals. No settlement will occur for results below the applicable minimum threshold and additional shares shall be issued if performance exceeds the targeted performance goals. PSUs are accompanied by dividend equivalent rights that will be payable in cash upon settlement of the PSU. These awards are subject to the provisions of the agreement under which the PSUs are granted. The PSUs were valued at the closing market value of the Company’s Class A Common Stock on the date of grant and generally vest at the end of the performance period. In September 2008, 78,400 shares of the Company’s Class A Common Stock were issued and related accrued dividends were paid, relative to the target goals set at the time of issuance, in settlement of 96,600 PSUs which vested as of June 30, 2008.

The following is a summary of the status of the Company’s PSUs as of March 31, 2009 and activity during the nine months then ended:

		Weighted-Average
		Grant Date
(Unaudited) (Shares in thousands)	Shares	Fair Value Per Share
Nonvested at June 30, 2008	189.3	$	41.05
Granted	131.0	52.83
Vested	—	—
Forfeited	—	—
Nonvested at March 31, 2009	320.3	45.87

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Units

The Company granted approximately 618,500 RSUs during the nine months ended March 31, 2009. At the time of grant, 344,200 were scheduled to vest on November 2, 2009, 178,900 on November 1, 2010 and 95,400 on October 31, 2011, all subject to the continued employment or retirement of the grantees. Certain RSUs granted in fiscal 2009 are accompanied by dividend equivalent rights that will be payable in cash upon settlement of the RSU and, as such, were valued at the closing market value of the Company’s Class A Common Stock on the date of grant. Other RSUs granted in fiscal 2009 are not accompanied by dividend equivalent rights and, as such, were valued at the closing market value of the Company’s Class A Common Stock on the date of grant less the discounted present value of the dividends expected to be paid on the shares during the vesting period.

The following is a summary of the status of the Company’s RSUs as of March 31, 2009 and activity during the nine months then ended:

			Weighted-Average
			Grant Date
(Unaudited) (Shares in thousands)	Shares		Fair Value Per Share
Nonvested at June 30, 2008	814.0		$	40.85
Granted	618.5		52.13
Vested	(479.3	)	40.72
Forfeited	(26.5	)	45.40
Nonvested at March 31, 2009	926.7		48.31

Share Units

The Company grants share units to certain non-employee directors under the Non-Employee Director Share Incentive Plan. The share units are convertible into shares of Class A Common Stock as provided for in that plan. Share units are accompanied by dividend equivalent rights that are converted to additional share units when such dividends are declared. The following is a summary of the status of the Company’s share units as of March 31, 2009 and activity during the nine months then ended:

		Weighted-Average
		Grant Date
(Unaudited) (Shares in thousands)	Shares	Fair Value Per Share
Outstanding at June 30, 2008	18.1	$	39.21
Granted	4.1	33.62
Dividend equivalents	0.4	30.25
Converted	—	—
Outstanding at March 31, 2009	22.6	38.02

Cash Units

Certain non-employee directors defer cash compensation in the form of cash payout share units, which are not subject to the Plans. These share units are classified as liabilities and, as such, their fair value is adjusted to reflect the current market value of the Company’s Class A Common Stock. The Company recorded a $0.3 million reduction in compensation expense and $0.2 million as compensation expense to reflect additional deferrals and the change in the market value for the three months ended March 31, 2009 and 2008, respectively. The Company recorded a $1.0 million reduction in compensation expense and $0.4 million as compensation expense to reflect additional deferrals and the change in the market value for the nine months ended March 31, 2009 and 2008, respectively.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 – NET EARNINGS PER COMMON SHARE

Net earnings per common share (“basic EPS”) is computed by dividing net earnings by the weighted average number of common shares outstanding and contingently issuable shares (which satisfy certain conditions). Net earnings per common share assuming dilution (“diluted EPS”) is computed by reflecting potential dilution from stock-based awards.

A reconciliation between the numerators and denominators of the basic and diluted EPS computations is as follows:

	Three Months Ended March 31				Nine Months Ended March 31
	2009		2008		2009		2008
	(Unaudited)
	(In millions, except per share data)

Numerator:
Net earnings	$	27.2	$	90.1	$	236.3	$	353.6

Denominator:
Weighted average common shares outstanding – Basic	196.7		193.9		196.2		193.8
Effect of dilutive stock options	—		2.2		1.1		2.5
Effect of restricted stock units	0.5		0.5		0.5		0.5
Weighted average common shares outstanding – Diluted	197.2		196.6		197.8		196.8

Net earnings per common share:
Basic	$	.14	$	.47	$	1.20	$	1.83
Diluted	.14		.46		1.19		1.80

As of March 31, 2009 and 2008, outstanding options to purchase 19.2 million and 11.5 million shares, respectively, of Class A Common Stock were not included in the computation of diluted EPS because their inclusion would be anti-dilutive. As of March 31, 2009 and 2008, 0.3 million of PSUs have been excluded from the calculation of diluted EPS because the number of shares ultimately issued is contingent on the achievement of certain performance targets of the Company, as discussed in Note 11.

NOTE 13 – COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) (“AOCI”) included in the accompanying consolidated balance sheets consist of net unrealized investment gain (loss), net gain (loss) on derivative instruments designated and qualifying as cash-flow hedging instruments, net actuarial gain (loss) and prior service costs or credits associated with pension and other post-retirement benefits, and cumulative translation adjustments as of the end of each period.

Comprehensive income (loss) and its components, net of tax, are as follows:

	Three Months Ended March 31					Nine Months Ended March 31
	2009			2008		2009			2008
	(Unaudited) (In millions)

Net earnings	$	27.2		$	90.1	$	236.3		$	353.6
Other comprehensive income (loss):
Net unrealized investment gain (loss)	(0.1		)	—		(0.7		)	(0.3		)
Net derivative instruments gain (loss)	(3.7		)	2.1		7.0			1.2
Amounts included in net periodic benefit cost, net	2.4			1.6		15.4			4.9
Translation adjustments	(38.5		)	47.4		(247.2		)	95.2

Other comprehensive income (loss)	(39.9		)	51.1		(225.5		)	101.0

Comprehensive income (loss)	$	(12.7	)	$	141.2	$	10.8		$	454.6

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accumulated net gain (loss) on derivative instruments, net of tax, consists of the following:

	Three Months Ended March 31						Nine Months Ended March 31
	2009			2008			2009			2008
	(Unaudited) (In millions)

AOCI-derivative instruments, beginning of period	$	18.6		$	7.3		$	7.9		$	8.2
Gain (loss) on derivative instruments	4.7			1.4			31.8			(0.6		)
Reclassification to earnings of net (gain) loss during the period:
Foreign currency forward and option contracts	(10.3		)	1.7			(20.8		)	2.4
Settled interest rate-related derivatives	(0.1		)	—			(0.2		)	(0.1		)
Adjustment for deferred income taxes	2.0			(1.0		)	(3.8		)	(0.5		)

Net derivative instruments gain (loss)	(3.7		)	2.1			7.0			1.2

AOCI-derivative instruments, end of period	$	14.9		$	9.4		$	14.9		$	9.4

Of the $14.9 million, net of tax, derivative instrument gain recorded in AOCI at March 31, 2009, $8.8 million, net of tax, related to the October 2003 gain from the settlement of the treasury lock agreements upon the issuance of the Company’s 5.75% Senior Notes due October 2033, which will be reclassified to earnings as an offset to interest expense over the life of the debt. Also included in the net derivative instrument gain recorded in AOCI was $6.7 million in gains, net of tax, related to foreign currency forward and option contracts, which the Company will reclassify to earnings during the next fifteen months. Partially offsetting these gains was $0.6 million, net of tax, related to a loss from the settlement of a series of forward-starting interest rate swap agreements upon the issuance of the Company’s 6.00% Senior Notes due May 2037, which will be reclassified to earnings as an addition to interest expense over the life of the debt.

At the end of the prior-year period, the $9.4 million, net of tax, derivative instrument gain recorded in AOCI included $9.0 million, net of tax, related to the October 2003 gain from the settlement of the treasury lock agreements upon the issuance of the Company’s 5.75% Senior Notes due October 2033, which will be reclassified to earnings as an offset to interest expense over the life of the debt. The net derivative instrument gain recorded in AOCI also reflected $1.0 million in gains, net of tax, related to foreign currency forward contracts, which were subsequently reclassified to earnings. These gains were partially offset by $0.6 million, net of tax, related to a loss from the settlement of a series of forward-starting interest rate swap agreements upon the issuance of the Company’s 6.00% Senior Notes due May 2037, which will be reclassified to earnings as an addition to interest expense over the life of the debt.

NOTE 14 – STATEMENT OF CASH FLOWS

Supplemental cash flow information for the nine months ended March 31, 2009 and 2008 were as follows:

	2009			2008
	(Unaudited) (In millions)
Cash:
Cash paid during the period for interest	$	44.5		$	49.8
Cash paid during the period for income taxes	$	187.8		$	149.4

Non-cash investing and financing activities:
Long-term debt issued upon acquisition of business	$	—		$	23.9
Liabilities incurred for acquisitions	$	4.5		$	6.8
Incremental tax benefit from the exercise of stock options	$	(7.8	)	$	6.2
Capital lease obligations incurred	$	15.0		$	1.1
Interest rate swap derivative mark to market	$	28.7		$	31.6

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 – SEGMENT DATA AND RELATED INFORMATION

Reportable operating segments include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the “Chief Executive”) in deciding how to allocate resources and in assessing performance. Although the Company operates in one business segment, beauty products, management also evaluates performance on a product category basis. Performance is measured based upon net sales and operating income. Operating income represents earnings before income taxes, minority interest and net interest expense. The accounting policies for the Company’s reportable segments are substantially the same as those for the consolidated financial statements, as described in the segment data and related information footnote included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2008. The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; thus, no additional information is produced for the Chief Executive or included herein. There has been no significant variance in the total or long-lived asset value associated with the Company’s segment data since June 30, 2008.

	Three Months Ended March 31						Nine Months Ended March 31
	2009			2008			2009			2008
	(Unaudited) (In millions)

PRODUCT CATEGORY DATA
Net Sales:
Skin Care	$	709.0		$	756.8		$	2,198.2		$	2,207.5
Makeup	694.5			755.7			2,165.7			2,246.1
Fragrance	187.7			259.1			930.5			1,092.6
Hair Care	90.6			98.2			297.9			311.2
Other	14.7			10.0			48.7			41.3
	$	1,696.5		$	1,879.8		$	5,641.0		$	5,898.7
Operating Income (Loss):
Skin Care	$	61.2		$	96.0		$	241.6		$	298.3
Makeup	63.7			93.2			226.3			283.7
Fragrance	(45.0		)	(28.2		)	(37.0		)	15.0
Hair Care	(3.3		)	(0.8		)	10.1			12.9
Other	(0.1		)	0.3			(1.3		)	(0.8		)
Restructuring and other special charges	(6.2		)	0.7			(6.6		)	0.5
	70.3			161.2			433.1			609.6

Reconciliation:
Interest expense, net	20.6			16.1			55.5			52.8
Earnings before income taxes and minority interest	$	49.7		$	145.1		$	377.6		$	556.8

GEOGRAPHIC DATA
Net Sales:
The Americas	$	804.4		$	880.9		$	2,647.2		$	2,808.0
Europe, the Middle East & Africa	583.5			701.5			1,987.3			2,185.9
Asia/Pacific	308.6			297.4			1,006.5			904.8
	$	1,696.5		$	1,879.8		$	5,641.0		$	5,898.7
Operating Income (Loss):
The Americas	$	13.3		$	50.4		$	124.2		$	193.8
Europe, the Middle East & Africa	28.0			77.3			165.2			293.3
Asia/Pacific	35.2			32.8			150.3			122.0
Restructuring and other special charges	(6.2		)	0.7			(6.6		)	0.5
	$	70.3		$	161.2		$	433.1		$	609.6

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THE ESTÉE LAUDER COMPANIES INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS

We manufacture, market and sell beauty products including those in the skin care, makeup, fragrance and hair care categories which are distributed in over 140 countries and territories. The following is a comparative summary of operating results for the three and nine months ended March 31, 2009 and 2008, and reflects the basis of presentation described in Note 1 of Notes to Consolidated Financial Statements – Summary of Significant Accounting Policies for all periods presented. Sales of products and services that do not meet our definition of skin care, makeup, fragrance or hair care have been included in the “other” category.

	Three Months Ended March 31				Nine Months Ended March 31
	2009		2008		2009		2008
	(In millions)
NET SALES
By Region:
The Americas	$	804.4	$	880.9	$	2,647.2	$	2,808.0
Europe, the Middle East & Africa	583.5		701.5		1,987.3		2,185.9
Asia/Pacific	308.6		297.4		1,006.5		904.8
	$	1,696.5	$	1,879.8	$	5,641.0	$	5,898.7

By Product Category:
Skin Care	$	709.0	$	756.8	$	2,198.2	$	2,207.5
Makeup	694.5		755.7		2,165.7		2,246.1
Fragrance	187.7		259.1		930.5		1,092.6