Financial Reporting re-sit coursework
Estee Lauder Companies Inc. – case study
Formed in 1946 by Estée Lauder and her husband Joseph Lauder as a small family operated cosmetics firm in New York City, the Estee Lauder Companies Inc. (ELC) first carried only four products. ELC is now a leading consumer products company with over $12 billion in revenues, 46 thousand employees and products sold in more than 150 countries. ELC operates in beauty products segment, manufactures and markets skin care, makeup, fragrance and hair care products. ELC’s products are sold under brand names including Estee Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, Tommy Hilfiger, MAC, Kiton, La Mer, Bobbi Brown, Donna Karan New York, DKNY, Aveda, Jo Malone London, Bumble and bumble, Michael Kors, Darphin, Tom Ford, Smashbox, Ermenegildo Zegna, AERIN, Tory Burch, RODIN olio lusso, Le Labo, Editions de Parfums Frederic Malle, GLAMGLOW, By Kilian, BECCA and Too Faced. Its skin care products include moisturizers, serums, cleansers, toners, body care, exfoliators, acne and oil correctors, facial masks, cleansing devices and sun care products. The maintenance of firm’s brands along with new product development and effective advertising is critical to the success of the company’s operations. Marketing and product innovations along with streamlined production and distribution, have contributed to growth, but the firm has also purchased brands through acquisition of other companies. In fiscal 2016, the company acquired Becca Cosmetics, their first colour cosmetic group acquisition since Smashbox in 2010. In November 2016, the company made its largest acquisition to date by acquiring Californiabased cosmetics company Too Faced for $1.45 billion.
The branded consumer products business is very competitive, and ELC battles the likes of Avon, Kimberly-Clark, L’Oreal, Colgate-Palmolive and Procter & Gamble. Like these companies, continual innovation is essential to the firm’s continuing profitability, so the firm maintains an extensive research and development operation, including marketing research and spends considerable amounts on advertising and promoting its brands. 2 The annual reports for ELC are available online as a PDF file on the company’s web site at www.elcompanies.com. Go the Investors page (top right hand corner of the screen) then to the Annual Reports tab (under Earnings & Financials heading on the left of the screen) and download the firm’s annual report for 2017. Read the management letters and the Management Discussion and Analysis. Management communications are helpful in understanding the strategy and how the management is executing on that strategy. The stress on brand innovation and research is evident from ELC’s management letters.
After understanding the company, go to the financial statements, which along with the footnotes to the statements are our main focus. Additional information after the statements will aid you.
1. On the basis of the information supplied in this annual report prepare a brief discussion and analysis of ELC’s performance and financial position.
2. In particular, you should address the following points:
a. What is the ELC’s core operating activity through which it generates revenues? When does ELC recognize its revenues from this core operating activity? Discuss the treatment of payment discounts and product returns.
b. Discuss the accounting treatment of inventories and its implications on the balance sheet and income statement numbers.
c. Which types of intangible assets are included in the “other indefinite lived intangible assets”? Discuss the firm’s policy on amortization and/or impairment of intangible assets and its implications on numbers in the financial statements. Provide examples to illustrate your points.
d. Discuss the treatment of goodwill and other intangible assets and explain why they increased in 2017.
e. How much did ELC originally pay for all the Machinery and Equipment that it owned as of June 30th 2017?
f. Assume that capital expenditure and recorded depreciation expense for 2017 relate exclusively to the Machinery and Equipment. Assume that the firm has purchased Machinery costing $334 million during 2017. Assume that the only thing that the firm sold was one machine for cash. How much did the firm receive in proceeds from the sale? How much did the firm originally pay for the machine that was sold? At the time of the sale, what was the accumulated depreciation on the machine that was sold? Did ELC record a gain or a loss on the sale of the machine?
g. Did ELC have capital or/and operating leases? Discuss the treatment of the leases and its implications on the numbers in the financial statements.
h. Explain which transactions during 2017 affected Total equity. Which particular accounts reflected these changes in total equity?
i. Did ELC have share buybacks and share issues during 2017? Discuss the implication of these activities on its accounts.
j. What were the key components of comprehensive income for 2017? What events caused currency translation gains/losses during 2017?
k. Did ELC issue any shares as a part of stock option compensation plan in 2017? Discuss the implication on the shareholders wealth of the shares issued under the stock option plan? Estimate ELC’s stock option overhang at the end of fiscal 2017. Explain your findings.