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 December 31, 2001
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number 1-14064
The Estee Lauder Companies Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-2408943
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
767 Fifth Avenue, New York, New York 10153
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-572-4200
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[ ]
At January 25, 2002, 129,425,544 shares of the registrant's Class A Common
Stock, $.01 par value, and 108,412,533 shares of the registrant's Class B Common
Stock, $.01 par value, were outstanding.
THE ESTEE LAUDER COMPANIES INC.
INDEX
Page
Part I. Financial Information
Consolidated Statements of Earnings --
Three Months and Six Months Ended December 31, 2001 and 2000 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations .............. 3
Consolidated Balance Sheets --
December 31, 2001 and June 30, 2001 ........................ 16
Consolidated Statements of Cash Flows --
Six Months Ended December 31, 2001 and 2000 ................ 17
Notes to Consolidated Financial Statements ...................... 18
Part II. Other Information ...................................... 25
THE ESTEE LAUDER COMPANIES INC.
PART I. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
-------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions, except per share data)
Net Sales........................................................ $1,257.4 $1,291.6 $2,445.1 $2,469.3
Cost of sales.................................................... 276.4 278.0 530.9 541.3
------- ------- ------- -------
Gross Profit..................................................... 981.0 1,013.6 1,914.2 1,928.0
------- ------- ------- -------
Operating expenses:
Selling, general and administrative........................... 832.7 803.0 1,609.0 1,555.9
Related party royalties....................................... 4.8 7.1 8.8 15.3
------- ------- ------- -------
837.5 810.1 1,617.8 1,571.2
------- ------- ------- -------
Operating Income................................................. 143.5 203.5 296.4 356.8
Interest expense, net............................................ 1.9 4.3 5.7 9.4
------- ------- ------- -------
Earnings before Income Taxes, Minority Interest
and Accounting Change........................................... 141.6 199.2 290.7 347.4
Provision for income taxes....................................... 48.9 71.7 100.3 125.1
Minority interest, net of tax.................................... (2.6) (0.2) (3.2) (0.4)
------- ------- ------- ------
Net Earnings before Accounting Change............................ 90.1 127.3 187.2 221.9
Cumulative effect of a change in accounting principle, net of tax - - (20.6) (2.2)
------- ------- ------- ------
Net Earnings .................................................... 90.1 127.3 166.6 219.7
Preferred stock dividends........................................ 5.8 5.8 11.7 11.7
------- ------- ------- ------
Net Earnings Attributable to Common Stock........................ $ 84.3 $ 121.5 $ 154.9 $ 208.0
======== ======== ======== =======
Basic net earnings per common share:
Net earnings attributable to common stock before
accounting change.......................................... $ .35 $ .51 $ .74 $ .88
Cumulative effect of a change in accounting principle, net of tax - - (.09) (.01)
-------- -------- -------- -------
Net earnings attributable to common stock................... $ .35 $ .51 $ .65 $ .87
======== ======== ======== =======
Diluted net earnings per common share:
Net earnings attributable to common stock before
accounting change.......................................... $ .35 $ .50 $ .73 $ .87
Cumulative effect of a change in accounting principle, net of tax - - (.09) (.01)
-------- -------- -------- -------
Net earnings attributable to common stock................... $ .35 $ .50 $ .64 $ .86
======== ======== ======== =======
Weighted average common shares outstanding:
Basic....................................................... 238.1 238.2 238.5 238.2
Diluted..................................................... 240.7 242.2 241.5 242.2
Cash dividends declared per common share......................... $ .05 $ .05 $ .10 $ .10
See notes to consolidated financial statements.
2
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
We manufacture, market and sell skin care, makeup, fragrance and hair care
products which are distributed in over 120 countries and territories. The
following is a comparative summary of operating results for the three and six
months ended December 31, 2001 and 2000, and reflects the basis of presentation
described in Note 1 to the consolidated financial statements 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 Six Months Ended
December 31 December 31
-------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions)
NET SALES
By Region:
The Americas............................................... $ 722.7 $ 747.1 $1,488.1 $1,530.2
Europe, the Middle East & Africa........................... 359.5 366.9 631.8 622.0
Asia/Pacific............................................... 175.2 177.6 325.2 317.1
--------- --------- -------- --------
$ 1,257.4 $ 1,291.6 $2,445.1 $2,469.3
========= ========= ======== ========
By Product Category:
Skin Care.................................................. $ 431.7 $ 423.2 $ 825.2 $ 818.4
Makeup..................................................... 416.1 420.5 863.6 851.8
Fragrance.................................................. 346.7 396.9 638.0 696.7
Hair Care.................................................. 58.4 43.0 108.4 88.6
Other...................................................... 4.5 8.0 9.9 13.8
--------- --------- -------- --------
$ 1,257.4 $ 1,291.6 $2,445.1 $2,469.3
========= ========= ======== ========
OPERATING INCOME
By Region:
The Americas............................................... $ 61.1 $ 106.4 $ 164.9 $ 217.5
Europe, the Middle East & Africa........................... 53.8 70.6 92.6 103.8
Asia/Pacific............................................... 28.6 26.5 38.9 35.5
--------- --------- -------- --------
$ 143.5 $ 203.5 $ 296.4 $ 356.8
========= ========= ======== ========
By Product Category:
Skin Care.................................................. $ 77.3 $ 85.5 $ 143.9 $ 152.3
Makeup..................................................... 45.1 64.6 99.2 118.4
Fragrance.................................................. 11.5 46.1 42.5 78.6
Hair Care.................................................. 10.0 6.2 11.7 6.4
Other...................................................... (0.4) 1.1 (0.9) 1.1
--------- --------- -------- --------
$ 143.5 $ 203.5 $ 296.4 $ 356.8
========= ========= ======== ========
3
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents certain consolidated earnings data as a percentage
of net sales:
Three Months Ended Six Months Ended
December 31 December 31
-------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales........................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................................... 22.0 21.5 21.7 21.9
------ ----- ------ ------
Gross profit..................................................... 78.0 78.5 78.3 78.1
------ ----- ------ ------
Operating expenses
Selling, general and administrative........................... 66.2 62.2 65.8 63.0
Related party royalties....................................... 0.4 0.5 0.4 0.6
------ ----- ------ ------
66.6 62.7 66.2 63.6
------ ----- ------ ------
Operating income................................................. 11.4 15.8 12.1 14.5
Interest expense, net............................................ 0.1 0.4 0.2 0.4
------ ----- ------ ------
Earnings before income taxes, minority interest and accounting
change........................................................ 11.3 15.4 11.9 14.1
Provision for income taxes....................................... 3.9 5.5 4.1 5.1
Minority interest, net of tax.................................... (0.2) - (0.1) -
------ ----- ------ ------
Net earnings before accounting change............................ 7.2 9.9 7.7 9.0
Cumulative effect of a change in accounting principle, net of tax - - (0.9) (0.1)
------ ----- ------ ------
Net earnings..................................................... 7.2% 9.9% 6.8% 8.9%
====== ===== ====== ======
Second Quarter Fiscal 2002 as Compared with Second Quarter Fiscal 2001
NET SALES
Net sales decreased 3% or $34.2 million to $1,257.4 million. The lower level of
net sales compared with the prior-year quarter resulted from continued weakness
and uncertainty of the economy, particularly in the United States, and a sharp
39% reduction in travel retail sales, which resulted from reduced worldwide
travel. Additionally, during the current quarter, U.S. retailers reduced their
inventory levels in response to lower consumer confidence and discretionary
spending. Despite these difficulties, we were able to generate growth in certain
newer brands.
Product Categories
Skin Care
Net sales of skin care products increased 2% or $8.5 million to $431.7 million.
Increases in net sales were primarily attributable to recently launched products
such as Total Turnaround Visible Skin Renewer, LightSource Transforming Moisture
Lotion and Cream and A Perfect World. Initial shipments of Moisture Surge Extra,
Moisture Surge Eye Gel and Advanced Night Repair Eye Recovery Complex also
contributed to additional sales during the current quarter. Partially offsetting
these increases were lower net sales of certain existing products such as
Turnaround Cream and Stop Signs. The very successful prior year launch of
Idealist Lotion and Anti-Gravity Firming Lift Cream created a difficult
comparison with the current-year quarter.
4
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Makeup
Makeup net sales decreased 1% or $4.4 million to $416.1 million, reflecting
lower net sales of existing products such as Long Last Soft Shine Lipstick, Pair
of Shades Eyeshadow Duo and Go Pout Lipstick. The decrease is partially offset
by recently launched products such as Gentle Light Makeup and Powder, High
Impact Eye Shadow Duos, Lash Doubling Mascara and Moisture Surge Lipstick.
Fragrance
Net sales of fragrance products decreased 13% or $50.2 million to $346.7
million. This category continued to be impacted by the softness of the fragrance
business in the United States and was further affected by the reduction in
inventory levels at U.S. retailers discussed above. The decline in our travel
retail business, which depends substantially on fragrance products, also
negatively impacted this category. On a product basis, lower sales of Tommy
Hilfiger licensed products, Estee Lauder pleasures, Beautiful and DKNY for Women
were partially offset by sales of T, a new fragrance in the Tommy Hilfiger line,
which was launched in the current-period quarter.
Hair Care
Hair care net sales increased 36% or $15.4 million to $58.4 million. This
increase was primarily the result of sales growth from Aveda, Bumble and bumble
and Clinique products. We also increased the number of Company-owned Aveda
Environmental Lifestyle Stores.
The introduction of new products may have some cannibalizing effect on sales of
existing products, which we take into account in our business planning.
Geographic Regions
Net sales in the Americas decreased 3% or $24.4 million to $722.7 million. This
decrease was primarily due to continued weakness and uncertainty in the U.S.
economy, which has prompted inventory contraction by U.S. retailers, and reduced
replenishment orders for us. We expect these conditions to persist into the next
fiscal year and are planning accordingly. In Europe, the Middle East & Africa,
net sales decreased 2% or $7.4 million to $359.5 million. This decrease was
primarily the result of significantly lower net sales in our travel retail
business, which has been adversely affected by a decrease in worldwide travel.
Excluding the impact of our travel retail business, Europe, the Middle East &
Africa net sales increased 8% or $22.5 million. Net sales in the United Kingdom
and Spain increased double-digits. We also benefited from sales in Greece where
we recently formed a joint venture, in which we own a controlling majority
interest, to replace the prior distributor there. We expect our travel retail
business will continue to be adversely affected by a decrease in worldwide
travel. Net sales in Asia/Pacific decreased 1% or $2.4 million to $175.2 million
primarily due to lower net sales in Japan, partially offset by higher net sales
in Korea and Thailand. Japan continues to remain a difficult market due to local
economic conditions and increasing market share competition, coupled with the
weakening of the Japanese yen as compared with the U.S. dollar. Excluding the
impact of foreign currency translation, Asia/Pacific net sales increased 6%.
We strategically stagger our new product launches by geographic market, which
may contribute to differences in regional sales growth.
COST OF SALES
Cost of sales as a percentage of total net sales was 22.0% as compared with
21.5% in the prior-year quarter. The lower margin can be attributed in part to
production volume decreases resulting in under-absorption of overhead. In
addition, lower than planned raw material purchases reduced anticipated savings
from sourcing initiatives. Partially offsetting these negative factors were
lower sales volumns of products with a higher cost of goods, particularly in
travel retail and fragrance.
5
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING EXPENSES
Operating expenses increased to 66.6% of net sales as compared with 62.7% of net
sales in the prior-year quarter. The increase in operating expenses as a
percentage of net sales reflects a slower growth rate in sales than operating
expenses, primarily due to economic conditions in the United States as discussed
above. As part of our long-term strategies, we continued to emphasize the
building of "brand equities" through advertising and promotional spending and
retail store expansion despite difficult economic times. Changes in advertising
and promotional spending result from the type, timing and level of advertising
and promotional activities related to product launches and rollouts, as well as
the markets being emphasized.
OPERATING INCOME
Operating income decreased 30% or $60.0 million to $143.5 million as compared
with the prior-year quarter. Operating margins were 11.4% of net sales in the
current period as compared with 15.8% in the prior-year quarter. The decrease in
operating margin was primarily due to lower than planned sales coupled with
increased support spending and new distribution channel costs. This was
partially offset by the exclusion of amortization expense due to the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" and the November 2000 expiration of amortization
related to purchased royalty rights.
Product Categories
Operating income decreased 75% to $11.5 million in fragrance, 30% to $45.1
million in makeup and 10% to $77.3 million in skin care. These decreases were
primarily caused by lower than anticipated sales levels, coupled with continued
advertising and promotional spending to promote new and recently launched
products. Hair care operating income increased 61%, from a smaller base, to
$10.0 million primarily reflecting sales growth at Aveda and Bumble and bumble.
Geographic Regions
Operating income in the Americas decreased 43% or $45.3 million to $61.1 million
primarily due to continued weakness in the U.S. economy. In Europe, the Middle
East & Africa, operating income decreased 24% or $16.8 million to $53.8 million
primarily due to the significant decrease in our travel retail business.
Operating results improved in a number of markets led by Germany and the United
Kingdom, and we benefited from the inclusion of operating results from our joint
venture in Greece. In Asia/Pacific, operating income increased 8% or $2.1
million to $28.6 million due to improved results in Taiwan, Korea and Australia,
partially offset by lower operating income in Japan.
INTEREST EXPENSE, NET
Net interest expense was $1.9 million as compared with $4.3 million in the
prior-year quarter. The decrease in net interest expense resulted from a lower
effective interest rate than that in the prior-year quarter. This was primarily
due to our interest rate risk management strategy that relied on commercial
paper and variable-rate term loans. In January 2002, we took advantage of
prevailing market rates and issued fixed rate long-term notes to replace our
variable-rate debt. We believe this will mitigate future interest rate
volatility, but we expect it will result in a higher level of interest expense
in the near term.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate for income taxes for the three months ended
December 31, 2001 was 34.5% as compared with 36.0% in the prior-year quarter.
These rates reflect the effect of state and local taxes, tax rates in foreign
jurisdictions and certain nondeductible expenses.
6
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The decrease in the effective income tax rate was principally attributable to
ongoing tax planning initiatives. Also impacting the effective tax rate was a
decrease in non-deductible domestic royalty expense and the elimination of
certain non-deductible goodwill amortization resulting from the implementation
of SFAS No. 142, "Goodwill and Other Intangible Assets".
Six Months Fiscal 2002 as compared with Six Months Fiscal 2001
NET SALES
Net sales decreased 1% or $24.2 million to $2,445.1 million. Decreased net sales
resulted from the continued weakness and uncertainty of the economy,
particularly in the United States, and a sharp 22% reduction in travel retail
sales due to a decrease in worldwide travel. Additionally, U.S. retailers
reduced their inventory levels in response to lower consumer confidence and
discretionary spending. Sales growth from our newer brands partially offset
these decreases.
Product Categories
Skin Care
Net sales of skin care products increased 1% or $6.8 million to $825.2 million.
Excluding the impact of foreign currency translation, net sales increased 3%.
Increases in net sales were primarily attributable to recently launched products
such as Total Turnaround Visible Skin Renewer, LightSource Transforming Moisture
Lotion and Cream and A Perfect World. Initial shipments of Moisture Surge Extra,
Moisture Surge Eye Gel and Advanced Night Repair Eye Recovery Complex also
contributed to additional sales. Partially offsetting these increases were lower
net sales of certain existing products such as Turnaround Cream and Diminish.
Additionally, during the prior year, products such as Idealist Skin Refinisher
and Anti-Gravity Firming Lift Cream were launched, which creates a difficult
comparison with the current-year period.
Makeup
Makeup net sales increased 1% or $11.8 million to $863.6 million. Recently
launched products such as Gentle Light Makeup and Powder, Sumptuous Lipstick,
High Impact Eye Shadow Duos and Moisture Surge Lipstick contributed to the
increase in makeup sales. Increased sales of M.A.C products also contributed
to sales growth in this category. Partially offsetting the increase in net sales
were lower sales of Lucidity Makeup, Long Last Soft Shine Lipstick, Two-in-one
Eye Shadow and Color Options.
Fragrance
Net sales of fragrance products decreased 8% or $58.7 million to $638.0 million.
Fragrance sales continued to be impacted by softness of the fragrance business
in the United States that was further affected by the reduction in inventory
levels at U.S. retailers discussed above. The decline in our travel retail
business, which depends substantially on fragrance products, also negatively
impacted this category. If these trends persist, we expect full-year fragrance
sales to be below those achieved last year. Lower net sales of DKNY for Women,
Beautiful, Estee Lauder pleasures and existing Tommy Hilfiger licensed products
were partially offset by the current period launch of T, a new fragrance in the
Tommy Hilfiger line, and the domestic launch of Intuition.
Hair Care
Hair care net sales increased 22% or $19.8 million to $108.4 million. This
increase was primarily the result of sales growth from Aveda and Bumble and
bumble products. We also increased the number of Company-owned Aveda
Environmental Lifestyle Stores. This growth was partially offset by lower sales
from Clinique's Simple Hair Care System when compared with the prior year
launch.
7
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The introduction of new products may have some cannibalizing effect on sales of
existing products, which we take into account in our business planning.
Geographic Regions
Net sales in the Americas decreased 3% or $42.1 million to $1,488.1 million.
This decrease was primarily due to continued weakness and uncertainty in the
U.S. economy that was further affected by the reduction in inventory levels at
U.S. retailers discussed above. We expect these conditions to persist into the
next fiscal year and are planning accordingly. Sales decreases have been
partially mitigated by the growth of our newer brands, in particular M.A.C and
Aveda. In Europe, the Middle East & Africa, net sales increased 2% or $9.8
million to $631.8 million. Excluding the impact of our travel retail business,
net sales increased 9% or $43.3 million, reflecting increased sales in the
United Kingdom, Spain and sales from Greece, where we recently formed a joint
venture, in which we own a controlling majority interest, to replace the prior
distributor there. Partially offsetting these increases were significantly lower
net sales in our travel retail business, which was adversely affected by a
decrease in worldwide travel. We expect that our travel retail business will
continue to be adversely affected by a decrease in worldwide travel. Net sales
in Asia/Pacific increased 3% or $8.1 million to $325.2 million primarily due to
higher net sales in Korea and Thailand, as well as in Australia where we
benefited from a change in retailer arrangements. This increase was partially
offset by lower net sales in Taiwan and Japan, which remains a difficult market
due to local economic conditions and increasing market share competition,
coupled with the weakening of the Japanese yen as compared with the U.S. dollar.
We strategically stagger our new product launches by geographic market, which
may contribute to differences in regional sales growth.
COST OF SALES
Cost of sales as a percentage of total net sales improved to 21.7% from 21.9%,
reflecting the impact of our manufacturing and sourcing initiatives, partially
offset by a reduced rate of overhead absorption related to decreased production
volumes in the second quarter. Also impacting our cost of sales are changes in
distribution and product mix, including the rollout of our own retail stores and
the acquisition of certain distributor operations, both of which contributed to
higher gross margins.
OPERATING EXPENSES
Operating expenses increased to 66.2% of net sales as compared with 63.6% of net
sales in the prior-year period. The increase in operating expenses primarily
related to continued advertising and promotional spending and the increased cost
of our retail store operations, which has a higher operating cost structure than
our traditional distribution channels. The increase in operating expenses as a
percentage of net sales reflects a slower growth rate in sales than operating
expenses, primarily due to economic conditions in the United States as discussed
above. As part of our long-term strategies, we continued to emphasize the
building of "brand equities" through advertising and promotional spending and
retail store expansion despite difficult economic times. Changes in advertising
and promotional spending result from the type, timing and level of advertising
and promotional activities related to product launches and rollouts, as well as
the markets being emphasized.
OPERATING INCOME
Operating income decreased 17% or $60.4 million to $296.4 million as compared
with the prior-year period. Operating margins were 12.1% of net sales in the
current period as compared with 14.5% in the prior-year period. The decrease in
operating margin was primarily due to lower sales levels, increased support
spending and new distribution channel costs. This was partially offset by the
exclusion of amortization expense due to the adoption of SFAS No. 142, "Goodwill
and Other Intangible Assets" and the November 2000 expiration of amortization
related to purchased royalty rights.
8
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Product Categories
Operating income decreased 46% to $42.5 million in fragrance, 16% to $99.2
million in makeup and 6% to $143.9 million in skin care, primarily due to lower
than anticipated sales levels, coupled with continued advertising and
promotional spending to promote new and recently launched products. Hair care
operating income increased 83%, from a smaller base, to $11.7 million, primarily
due to sales growth at Aveda and Bumble and bumble.
Geographic Regions
Operating income in the Americas decreased 24% or $52.6 million to $164.9
million, caused by lower sales attributable to weakness in the U.S. economy and
continued advertising and promotional spending. In Europe, the Middle East &
Africa, operating income decreased 11% or $11.2 million to $92.6 million
primarily due to the significant decrease in our travel retail business.
Excluding the impact of our travel retail business, operating income increased
due to improved operating results in Italy and Germany, and we benefited from
the inclusion of operating results from our joint venture in Greece. In
Asia/Pacific, operating income increased 10% or $3.4 million to $38.9 million
due to improved results in Korea, Taiwan and Australia, partially offset by
lower income in Japan.
INTEREST EXPENSE, NET
Net interest expense was $5.7 million as compared with $9.4 million in the
prior-year period. The decrease in net interest expense resulted from a lower
effective interest rate compared with the prior-year period. This was primarily
due to our interest rate risk management strategy that relied on commercial
paper and variable-rate term loans. In January 2002, we took advantage of
prevailing market rates and issued fixed rate long-term notes to replace our
variable-rate debt. We believe this will mitigate future interest rate
volatility, but we expect it will result in a higher level of interest expense
in the near term.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate for income taxes for the six months ended
December 31, 2001 was 34.5% as compared with 36.0% in the prior-year period.
These rates reflect the effect of state and local taxes, tax rates in foreign
jurisdictions and certain nondeductible expenses. The decrease in the effective
income tax rate was principally attributable to ongoing tax planning
initiatives. Also impacting the effective tax rate was a decrease in
non-deductible domestic royalty expense and the elimination of certain
non-deductible goodwill amortization resulting from the implementation of SFAS
No. 142, "Goodwill and Other Intangible Assets".
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
The six month period ended December 31, 2001 includes a one-time charge of $20.6
million, or $.09 per common share, attributable to the cumulative effect of
adopting SFAS No. 142, "Goodwill and Other Intangible Assets". For a discussion
of this charge, see "Accounting Standards" below. The six month period ended
December 31, 2000 includes a one-time charge of $2.2 million, after tax, or $.01
per common share, attributable to the cumulative effect of adopting SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds historically have been cash flows from operations
and borrowings under commercial paper and committed and uncommitted credit lines
provided by banks in the United States and abroad. At December 31, 2001, we had
cash and cash equivalents of $442.4 million compared with $346.7 million at June
30, 2001.
9
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We have a $750.0 million commercial paper program, under which we have issued,
and intend to issue, commercial paper in the United States. Our commercial paper
is currently rated A-1 by Standard & Poor's and P-1 by Moody's. Our long-term
credit ratings are A+ by Standard & Poor's and A1 by Moody's. At December 31,
2001, our outstanding long-term borrowings consisted of $181.0 million of
commercial paper; a $200.0 million term loan due in February 2005; a 350.0
million yen loan payable (approximately $2.7 million at current exchange rates),
which matures in April 2003; and a 3.0 billion yen term loan (approximately
$23.5 million at current exchange rates), which is due in March 2006. Commercial
paper is classified as long-term debt on our balance sheet based upon our intent
and ability to refinance maturing commercial paper on a long-term basis. It is
our policy to maintain backup facilities to support our commercial paper program
and its classification as long-term debt. As of December 31, 2001, we had an
unused $400.0 million revolving credit facility, expiring on June 28, 2006. We
also have an effective shelf registration statement covering the potential
issuance of up to $400.0 million in debt securities. In January 2002, we issued
and sold $250.0 million of 6% Senior Notes due 2012 ("Senior Notes") in a public
offering. The Senior Notes were priced at 99.538% with a yield of 6.062%.
Interest payments will be made semi-annually on January 15 and July 15 of each
year, commencing on July 15, 2002. The primary portion of the net proceeds of
the offering will be used to repay our $200.0 million term loan. The remainder
was used to repay a portion of the outstanding commercial paper. We issued these
fixed-rate notes in an attempt to mitigate future interest rate volatility and
capitalize on the prevailing market rates currently available for such
instruments. However, we do expect the recent refinancing to result in a higher
level of interest expense in the near term.
Our business is seasonal in nature and, accordingly, our working capital needs
vary. To meet these needs, we could issue up to an additional $569.0 million of
commercial paper under our program, issue long-term debt securities or borrow
under the revolving credit facility. As of December 31, 2001, we also had $29.5
million in uncommitted facilities, $6.0 million of which was used.
Total debt as a percent of total capitalization was 18% at December 31, 2001 and
20% at June 30, 2001.
Net cash provided by operating activities was $261.5 million during the six
months ended December 31, 2001 as compared with $235.7 million in the prior-year
period. The decrease in accounts payable primarily reflects a concerted effort
to reduce our inventory levels in response to lower than anticipated sales
growth. The decreased level of net sales, as compared with the prior-year
period, also resulted in a proportionately lower level of accounts receivable.
During the current period, approximately $20.0 million of tax payments scheduled
to be paid by December 31, 2001 were paid in January 2002. Federal tax payment
extensions were granted due to the events that occurred on September 11, 2001.
Net cash used for investing activities was $105.7 million during the six months
ended December 31, 2001, which primarily reflects capital expenditures. Net cash
used for financing activities of $70.2 million, during the six months ended
December 31, 2001, primarily relates to common stock repurchases and dividend
payments.
On October 31, 2001, the Board of Directors declared a quarterly dividend of
$.05 per share on our Class A and Class B Common Stock, payable on January 3,
2002 to stockholders of record at the close of business on December 14, 2001.
Total dividends declared, including dividends on the $6.50 Cumulative Redeemable
Preferred Stock, for the six months ended December 31, 2001 were $35.5 million.
We will be required to redeem the outstanding $6.50 Cumulative Redeemable
Preferred Stock on June 30, 2005. However, in the event that Mrs. Estee Lauder
were to pass away before such date, then we would have the right to redeem the
shares from the current holders, and the holders of such shares would have the
right to put the shares to us, at $100 per share (or an aggregate of $360.0
million). If shares of $6.50 Cumulative Redeemable Preferred Stock are to put to
us, we would have up to 120 days after notice to purchase such shares.
In September 1998, our Board of Directors authorized a share repurchase program.
We have purchased, and may continue to purchase, over an unspecified period of
time, a total of up to eight million shares of our Class A Common Stock in the
open market or in privately negotiated transactions, depending on market
conditions and other factors. During September 2001, we purchased an additional
one million shares for $34.2 million. To date, we have purchased approximately
2.1 million shares under this program.
10
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The effects of inflation have not been significant to our overall operating
results in recent years. Generally, we have been able to increase selling prices
sufficiently to offset cost increases, which have been moderate.
We believe that cash on hand, cash generated from operations, available credit
lines and access to credit markets will be adequate to support currently planned
business operations and capital expenditures on both a near-term and long-term
basis.
Derivative Financial Instruments
We address certain financial exposures through a controlled program of risk
management that includes the use of derivative financial instruments. We
primarily enter into foreign currency forward exchange contracts and foreign
currency options to reduce the effects of fluctuating foreign currency exchange
rates. We enter into interest rate swaps and options to manage the effects of
interest rate movements on our aggregate liability portfolio. We categorize
these instruments as entered into for purposes other than trading.
For each derivative contract we enter into, we formally document the
relationship between the hedging instrument and hedged item, as well as its
risk-management objective and strategy for undertaking the hedge. This process
includes linking all derivatives that are designated as fair-value, cash-flow,
or foreign-currency hedges to specific assets and liabilities on the balance
sheet or to specific firm commitments or forecasted transactions. We also
formally assess, 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, then we will be required
to discontinue hedge accounting with respect to that derivative prospectively.
Foreign Exchange Risk Management
We enter into forward exchange contracts to hedge purchases, receivables and
payables denominated in foreign currencies for periods consistent with our
identified exposures. The purpose of the hedging activities is to minimize the
effect of foreign exchange rate movements on our costs and on the cash flows
that we receive from foreign subsidiaries. Almost all foreign currency contracts
are denominated in currencies of major industrial countries and are with large
financial institutions rated as strong investment grade by a major rating
agency. We also enter into foreign currency options to hedge anticipated
transactions where there is a high probability that anticipated exposures will
materialize. The forward exchange contracts and foreign currency options have
been designated as cash-flow hedges. As of December 31, 2001, these cash-flow
hedges were highly effective, in all material respects.
As a matter of policy, we only enter into contracts with counterparties that
have at least an "A" (or equivalent) credit rating. The counterparties to these
contracts are major financial institutions. We do not have significant exposure
to any one counterparty. Our exposure to credit loss in the event of
nonperformance by any of the counterparties is limited to only the recognized,
but not realized gains attributable to the contracts. Management believes risk
of loss under these hedging contracts is remote and in any event would not be
material to the consolidated financial results. The contracts have varying
maturities through the end of August 2002. Costs associated with entering into
such contracts have not been material to our consolidated financial results. We
do not utilize derivative financial instruments for trading or speculative
purposes. At December 31, 2001, we had foreign currency contracts in the form of
forward exchange contracts and option contracts in the amount of $168.8 million
and $29.3 million, respectively. The foreign currencies included in the forward
exchange contracts (notional value stated in U.S. dollars) are principally the
Japanese yen ($41.1 million), Swiss franc ($28.9 million), Korean won ($18.0
million), Canadian dollar ($17.5 million), Danish krone ($13.9 million), British
pound ($10.4 million), and Mexican peso ($9.8 million). The foreign currencies
included in the option contracts (notional value stated in U.S. dollars) are
principally the Euro ($20.4 million) and Australian dollar ($5.3 million).
11
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest Rate Risk Management
We have entered into interest rate swaps to exchange floating rate for fixed
rate interest payments periodically over the life of the agreements. In
addition, we have purchased interest rate options that offer similar interest
rate protection. The interest rate swaps and options have been designated as
cash-flow hedges and were highly effective as of December 31, 2001. At December
31, 2001, we had interest rate swap and option agreements outstanding with
notional principal amounts of $67.0 million and $133.0 million, respectively.
For the six month period ended December 31, 2001, our interest rate swap carried
a weighted average pay rate of 6.14% and a receive rate of 5.05%. During the
period, we paid the market rate of interest, with an average rate of 4.89%, on
our interest rate option agreements. In conjunction with the planned payoff of
the outstanding term loan, with proceeds from our January 2002 offering of
Senior Notes, we will terminate the interest rate swaps and options and expect
that no material gain or loss will result.
Market Risk
Using the value-at-risk model, as discussed in our annual report on Form 10-K
for the fiscal year ended June 30, 2001, our average value-at-risk, calculated
for the most recent twelve months, is $3.0 million and $2.9 million related to
our foreign exchange contracts and interest rate contracts, respectively. There
have been no significant changes in market risk since June 30, 2001 that would
have a material effect on our calculated value-at-risk exposure, as disclosed in
the annual report on Form 10-K for the year ended June 30, 2001.
ACCOUNTING STANDARDS
Effective July 1, 2001, we adopted SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 141" and "SFAS
No. 142", respectively). These statements established 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. The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001. 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 intangibles with indefinite lives are no longer amortized.
In accordance with SFAS No. 142, we completed our transitional impairment
testing of intangible assets during the first quarter of fiscal 2002. That
effort, and preliminary assessments of our identifiable intangible assets,
indicated that little or no adjustment would be required upon adoption of this
pronouncement. The impairment testing is performed in two steps: (i) the
determination of impairment, based upon the fair value of a reporting unit as
compared to its carrying value, and (ii) if there is an impairment, this step
measures the amount of impairment loss by comparing the implied fair value of
goodwill with the carrying amount of that goodwill. Subsequent to the first
quarter of fiscal 2002, with the assistance of a third-party valuation firm, we
finalized the testing of goodwill. Using conservative, but realistic assumptions
to model our jane business, we determined that the carrying value of this unit
was slightly greater than the derived fair value, indicating an impairment in
the recorded goodwill. To determine fair value, we relied on three valuation
models; guideline public companies, acquisition analysis and discounted cash
flow. For goodwill valuation purposes only, the revised fair value of this unit
was allocated to the assets and liabilities of the business unit to arrive at an
implied fair value of goodwill, based upon known facts and circumstances, as if
the acquisition occurred currently. This allocation resulted in a write-down of
recorded goodwill in the amount of $20.6 million, which has been reported as the
cumulative effect of a change in accounting principle, as of July 1, 2001, in
the accompanying consolidated statements of earnings. On a product category
basis, this write-down would have primarily impacted our makeup category.
12
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents pro forma net earnings and earnings per share data
restated to include the retroactive impact of the adoption of SFAS No. 142.
Three Months Ended Three Months Ended Six Months Ended
September 30 December 31 December 31
------------ ----------- -----------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
(Unaudited)
(In millions, except per share data)
Reported Net Earnings before
Accounting Change..................... $ 97.1 $ 94.6 $ 90.1 $ 127.3 $ 187.2 $ 221.9
Cumulative effect of a change
in accounting principle, net of tax (20.6) (2.2) - - (20.6) (2.2)
-------- ------- ------- ------- ------- ------
Net Earnings....................... 76.5 92.4 90.1 127.3 166.6 219.7
Preferred stock dividends.......... 5.9 5.9 5.8 5.8 11.7 11.7
-------- -------- ------- ------- ------- --------
Reported Net Earnings Attributable
to Common Stock....................... 70.6 86.5 84.3 121.5 154.9 208.0
Add back:
Goodwill amortization, net of tax. - 3.3 - 3.3 - 6.6
-------- -------- ------- ------- ------- --------
Pro forma Net Earnings................. $ 70.6 $ 89.8 $ 84.3 $ 124.8 $ 154.9 $ 214.6
======== ======== ======= ======= ======= ========
Basic net earnings per common share:
Reported net earnings attributable
to common stock before accounting
change $ .38 $ .37 $ .35 $ .51 $ .74 $ .88
Cumulative effect of a change in
accounting principle, net of tax.. (.09) (.01) - - (.09) (.01)
-------- -------- ------- ------- ------- -------
Net earnings attributable to
common stock...................... .29 .36 .35 .51 .65 .87
Goodwill amortization, net of tax.. - .01 - .01 - .03
-------- -------- ------- ------- ------- -------
Pro forma net earnings attributable
to common stock.................... $ .29 $ .37 $ .35 $ .52 $ .65 $ .90
======== ======== ======= ======= ======= ========
Diluted net earnings per common share:
Reported net earnings attributable
to common stock before accounting
change............................. $ .38 $ .37 $ .35 $ .50 $ .73 $ .87
Cumulative effect of a change in
accounting principle, net of tax.. (.09) (.01) - - (.09) (.01)
-------- -------- ------- ------- ------- -------
Net earnings attributable to
common stock...................... .29 .36 .35 .50 .64 .86
Goodwill amortization, net of tax.. - .01 - .01 - .03
-------- -------- ------- ------- ------ -------
Pro forma net earnings attributable
to common stock.................... $ .29 $ .37 $ .35 $ .51 $ .64 $ .89
======== ======== ======= ======= ======= ========
Weighted average common shares outstanding:
Basic.............................. 238.9 238.1 238.1 238.2 238.5 238.2
Diluted............................ 242.3 242.2 240.7 242.2 241.5 242.2
13
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Emerging Issues Task Force ("EITF") has reached consensus on Issue No.
00-14, "Accounting for Certain Sales Incentives". This consensus addresses when
sales incentives and discounts should be recognized, as well as where the
related revenues and expenses should be classified in a registrant's financial
statements. Currently, the cost of merchandise used in our gift-with-purchase
and purchase-with-purchase activities, as well as any related revenues, are
reported net, as operating expenses, in the accompanying consolidated statements
of earnings. Upon adoption, we will classify revenues generated by these
promotional activities as sales resulting in an increase of approximately 1.0%
to 2.0% of annual net sales. The cost of promotional merchandise will be
reclassified as a cost of sales. Although operating income will remain
unchanged, gross margins for the full fiscal year will decrease by approximately
5.0% to 6.0% of sales, offset by a corresponding decrease in operating expenses.
Due to variations in our launch calendar and the timing of promotions, we
anticipate greater fluctuations in our gross margins and operating expenses on a
quarter-by-quarter basis. Issue No. 00-14 became effective in our fiscal 2002
third quarter and will be applied retroactively for purposes of comparability.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". This statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 will be effective for financial statements of
fiscal years beginning after December 15, 2001. We expect to adopt this
statement for our fiscal year ending June 30, 2003, and do not anticipate that
it will have a material impact on our consolidated financial results.
FORWARD-LOOKING INFORMATION
We and our representatives from time to time make written or oral
forward-looking statements, including statements contained in this and other
filings with the Securities and Exchange Commission, in our press releases and
in our reports to stockholders. The words and phrases "will likely result,"
"expect," "believe," "planned," "will," "will continue," "is anticipated,"
"estimates," "projects" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include, without limitation, our
expectations regarding sales, earnings or other future financial performance and
liquidity, product introductions, entry into new geographic regions, information
systems initiatives, new methods of sale and future operations or operating
results. Although we believe that our expectations are based on reasonable
assumptions within the bounds of our knowledge of our business and operations,
actual results may differ materially from our expectations. Factors that could
cause actual results to differ from expectations include, without limitation:
(i) increased competitive activity from companies in the skin care,
makeup, fragrance and hair care businesses, some of which have greater
resources than we do;
(ii) our ability to develop, produce and market new products on which
future operating results may depend;
(iii) consolidations and restructurings in the retail industry causing
a decrease in the number of stores that sell our products, an increase
in the ownership concentration within the retail industry, ownership of
retailers by our competitors and ownership of competitors by our
customers that are retailers;
(iv) shifts in the preferences of consumers as to where and how they
shop for the types of products and services we sell;
(v) social, political and economic risks to our foreign or domestic
manufacturing, distribution and retail operations, including changes in
foreign investment and trade policies and regulations of the host
countries and of the United States;
(vi) changes in the laws, regulations and policies, including changes
in accounting standards and trade rules, and legal or regulatory
proceedings, that affect, or will affect, our business;
14
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(vii) foreign currency fluctuations affecting our results of operations
and the value of our foreign assets, the relative prices at which we
and our foreign competitors sell products in the same markets and our
operating and manufacturing costs outside of the United States;
(viii) changes in global or local economic conditions that could affect
consumer purchasing, the financial strength of our customers and the
cost and availability of capital, which we may need for new equipment,
facilities or acquisitions;
(ix) shipment delays, depletion of inventory and increased production
costs resulting from disruptions of operations at any of the facilities
which, due to consolidations in our manufacturing operations, now
manufacture nearly all of our supply of a particular type of product
(i.e., focus factories);
(x) real estate rates and availability, which may affect our ability to
increase the number of retail locations at which we sell our products;
(xi) changes in product mix to products which are less profitable;
(xii) our ability to develop e-commerce capabilities, and other new
information and distribution technologies, on a timely basis and within
our cost estimates;
(xiii) our ability to integrate acquired businesses and realize value
therefrom; and
(xiv) consequences attributable to the events that took place in New
York City and Washington, D.C. on September 11, 2001, including
further attacks, retaliation and the threat of further attacks or
retaliation.
We assume no responsibility to update forward-looking statements made herein or
otherwise.
15
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
December 31 June 30
2001 2001
---- ----
(Unaudited)
(In millions)
ASSETS
Current Assets
Cash and cash equivalents............................................................... $ 442.4 $ 346.7
Accounts receivable, net................................................................ 663.8 580.6
Inventory and promotional merchandise, net.............................................. 560.8 630.3
Prepaid expenses and other current assets............................................... 198.9 181.3
-------- --------
Total current assets............................................................... 1,865.9 1,738.9
-------- --------
Property, Plant and Equipment, net...................................................... 564.0 528.7
-------- --------
Other Assets
Investments, at cost or market value.................................................... 35.3 41.0
Deferred income taxes................................................................... 70.0 70.1
Goodwill, net .......................................................................... 687.7 699.7
Other intangible assets, net............................................................ 19.3 21.0
Other assets, net....................................................................... 114.7 119.4
-------- --------
Total other assets................................................................. 927.0 951.2
-------- --------
Total assets.............................................................. $3,356.9 $3,218.8
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt......................................................................... $ 5.5 $ 5.8
Accounts payable........................................................................ 153.4 239.8
Accrued income taxes.................................................................... 145.6 79.0
Other accrued liabilities............................................................... 564.3 532.1
-------- --------
Total current liabilities.......................................................... 868.8 856.7
-------- --------
Noncurrent Liabilities
Long-term debt.......................................................................... 407.2 410.9
Other noncurrent liabilities............................................................ 257.5 239.1
-------- --------
Total noncurrent liabilities....................................................... 664.7 650.0
-------- --------
$6.50 Cumulative Redeemable Preferred Stock, at redemption value........................ 360.0 360.0
-------- --------
Stockholders' Equity
Common stock, $.01 par value; 650,000,000 shares Class A authorized; shares
issued: 131,284,796 at December 31, 2001 and 126,053,825 at June 30, 2001;
240,000,000 shares Class B authorized; shares issued and outstanding:
108,412,533 at December 31, 2001 and 113,490,293 at June 30, 2001.................... 2.4 2.4
Paid-in capital......................................................................... 260.3 258.3
Retained earnings....................................................................... 1,373.8 1,242.7
Accumulated other comprehensive loss.................................................... (108.1) (120.5)
-------- --------
1,528.4 1,382.9
Less: Treasury stock, at cost; 1,877,860 Class A shares at December 31, 2001
and 877,860 Class A shares at June 30, 2001.......................................... (65.0) (30.8)
-------- --------
Total stockholders' equity......................................................... 1,463.4 1,352.1
-------- --------
Total liabilities and stockholders' equity................................ $3,356.9 $3,218.8
======== ========
See notes to consolidated financial statements.
16
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31
----------------
2001 2000
---- ----
(In millions)
Cash Flows from Operating Activities
Net earnings............................................................................... $ 166.6 $ 219.7
Adjustments to reconcile net earnings to net cash
flows provided by operating activities:
Depreciation and amortization.......................................................... 77.4 74.2
Amortization of purchased royalty rights............................................... - 6.6
Deferred income taxes.................................................................. 10.0 (2.0)
Minority interest...................................................................... 3.2 0.4
Cumulative effect of a change in accounting principle.................................. 20.6 2.2
Non-cash stock compensation............................................................ (1.8) (0.1)
Changes in operating assets and liabilities:
Increase in accounts receivable, net................................................... (75.7) (125.5)
Decrease in inventory and promotional merchandise, net................................. 74.5 37.4
Increase in other assets, net.......................................................... (30.1) (34.1)
Decrease in accounts payable........................................................... (87.6) (7.7)
Increase in accrued income taxes....................................................... 66.2 12.7
Increase in other accrued liabilities.................................................. 24.6 29.6
Increase in other noncurrent liabilities............................................... 13.6 22.3
--------- --------
Net cash flows provided by operating activities...................................... 261.5 235.7
--------- --------
Cash Flows from Investing Activities
Capital expenditures....................................................................... (98.1) (87.9)
Acquisition of businesses, net of cash acquired............................................ (10.3) (6.4)
Purchase of long-term investments.......................................................... - (0.3)
Proceeds from the disposition of long-term investments..................................... 2.7 0.2
--------- --------
Net cash flows used for investing activities......................................... (105.7) (94.4)
--------- --------
Cash Flows from Financing Activities
Increase (decrease) in short-term debt, net................................................ (0.2) 0.4
Repayments of long-term debt............................................................... (2.9) (3.2)
Net proceeds from employee stock transactions.............................................. 2.7 3.5
Payments to acquire treasury stock......................................................... (34.2) -
Dividends paid............................................................................. (35.6) (35.5)
--------- --------
Net cash flows used for financing activities......................................... (70.2) (34.8)
--------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents.................................. 10.1 (2.8)
--------- --------
Net Increase in Cash and Cash Equivalents.................................................. 95.7 103.7
Cash and Cash Equivalents at Beginning of Period........................................... 346.7 320.3
--------- --------
Cash and Cash Equivalents at End of Period................................................. $ 442.4 $ 424.0
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .............................................................................. $ 9.6 $ 14.3
========= ========
Income taxes........................................................................... $ 35.3 $ 100.8
========= ========
Non-cash items:
Tax benefit from exercise of stock options............................................. $ 1.0 $ 2.4
========= ========
See notes to consolidated financial statements.
17
THE ESTEE 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
Estee 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
generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements.
In the opinion of management all adjustments (consisting of normal recurring
accruals) 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 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, 2001.
Net Earnings Per Common Share
For the three month and six month periods ended December 31, 2001, net earnings
per common share ("basic EPS") is computed by dividing net earnings, after
deducting preferred stock dividends on the Company's $6.50 Cumulative Redeemable
Preferred Stock, 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 the exercise of stock options.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations is as follows:
Three Months Ended Six Months Ended
December 31 December 31
-------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited)
(In millions,except per share data)
Numerator:
Net earnings before accounting change................................. $ 90.1 $ 127.3 $ 187.2 $ 221.9
Preferred stock dividends............................................. 5.8 5.8 11.7 11.7
--------- --------- --------- ---------
Net earnings attributable to common stock before accounting change.... 84.3 121.5 175.5 210.2
Cumulative effect of a change in accounting principle, net of tax..... - - (20.6) (2.2)
--------- --------- --------- ---------
Net earnings attributable to common stock............................. $ 84.3 $ 121.5 $ 154.9 $ 208.0
========= ========= ========= =========
Denominator:
Weighted average common shares outstanding - Basic.................... 238.1 238.2 238.5 238.2
Effect of dilutive securities: Stock options.......................... 2.6 4.0 3.0 4.0
--------- --------- --------- ---------
Weighted average common shares outstanding - Diluted.................. 240.7 242.2 241.5 242.2
========= ========= ========= =========
Basic net earnings per common share:
Net earnings before accounting change................................. $ .35 $ .51 $ .74 $ .88
Cumulative effect of a change in accounting principle, net of tax..... - - (.09) (.01)
--------- --------- --------- ---------
Net earnings.......................................................... $ .35 $ .51 $ .65 $ .87
========= ========= ========= =========
Diluted net earnings per common share:
Net earnings before accounting change................................. $ .35 $ .50 $ .73 $ .87
Cumulative effect of a change in accounting principle, net of tax..... - - (.09) (.01)
--------- --------- --------- ---------
Net earnings.......................................................... $ .35 $ .50 $ .64 $ .86
========= ========= ========= =========
18
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2001 and 2000, options to purchase 14.5 million and 10.3
million shares, respectively, of common stock were not included in the
computation of diluted EPS because the exercise prices of those options were
greater than the average market price of the common stock. The options were
still outstanding at the end of the applicable period.
Accounts Receivable
Accounts receivable is stated net of the allowance for doubtful accounts and
retail customer deductions of $28.3 million and $26.8 million as of December 31,
2001 and June 30, 2001, respectively.
Inventory and Promotional Merchandise
Inventory and promotional merchandise only include inventory considered saleable
or usable in future periods, and are stated at the lower of cost or market, with
cost being determined on the first-in, first-out method. Promotional merchandise
is charged to expense at the time the merchandise is shipped to the Company's
customers.
December 31 June 30
2001 2001
---- ----
(Unaudited)
(In millions)
Inventory and promotional merchandise consists of:
Raw materials......................................... $ 117.8 $ 172.9
Work in process....................................... 22.9 24.4
Finished goods........................................ 307.1 308.0
Promotional merchandise............................... 113.0 125.0
-------- -------
$ 560.8 $ 630.3
======== =======
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation
and amortization. For financial statement purposes, depreciation is provided
principally on the straight-line method over the estimated useful lives of the
assets ranging from 3 to 40 years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or the expected useful
life of those improvements.
December 31 June 30
2001 2001
---- ----
(Unaudited)
(In millions)
Land ................................................... $ 12.9 $ 12.7
Buildings and improvements.............................. 141.2 135.7
Machinery and equipment................................. 594.5 563.2
Furniture and fixtures.................................. 79.0 77.5
Leasehold improvements.................................. 377.8 311.2
-------- --------
1,205.4 1,100.3
Less accumulated depreciation and amortization.......... 641.4 571.6
-------- --------
$ 564.0 $ 528.7
======== ========
Depreciation and amortization of property, plant and equipment was $33.9 million
and $28.1 million during the three months ended December 31, 2001 and 2000,
respectively, and $65.3 million and $52.8 million during the six months ended
December 31, 2001 and 2000, respectively.
19
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and Other Intangible Assets
Effective July 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets". These statements established 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. The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001. 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 intangibles with indefinite lives are no longer amortized.
In accordance with SFAS No. 142, the Company completed its transitional
impairment testing of intangible assets during the first quarter of fiscal 2002.
That effort, and preliminary assessments of the Company's identifiable
intangible assets, indicated that little or no adjustment would be required upon
adoption of this pronouncement. The impairment testing is performed in two
steps: (i) the determination of impairment, based upon the fair value of a
reporting unit as compared to its carrying value, and (ii) if there is an
impairment, this step measures the amount of impairment loss by comparing the
implied fair value of goodwill with the carrying amount of that goodwill.
Subsequent to the first quarter of fiscal 2002, with the assistance of a
third-party valuation firm, the Company finalized the testing of goodwill. Using
conservative, but realistic assumptions to model the Company's jane business,
the Company determined that the carrying value of this unit was slightly greater
than the derived fair value, indicating an impairment in the recorded goodwill.
To determine fair value, the Company relied on three valuation models; guideline
public companies, acquisition analysis and discounted cash flow. For goodwill
valuation purposes only, the revised fair value of this unit was allocated to
the assets and liabilities of the business unit to arrive at an implied fair
value of goodwill, based upon known facts and circumstances, as if the
acquisition occurred currently. This allocation resulted in a write-down of
recorded goodwill in the amount of $20.6 million, which has been reported as the
cumulative effect of a change in accounting principle, as of July 1, 2001, in
the accompanying consolidated statements of earnings. On a product category
basis, this write-down would have primarily impacted the Company's makeup
category.
The following table presents pro forma net earnings and earnings per share data
restated to include the retroactive impact of the adoption of SFAS No. 142.
Three Months Ended Three Months Ended Six Months Ended
September 30 December 31 December 31
------------ ----------- -----------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
(Unaudited)
(In millions, except per share data)
Reported Net Earnings before
Accounting Change..................... $ 97.1 $ 94.6 $ 90.1 $ 127.3 $ 187.2 $ 221.9
Cumulative effect of a change
in accounting principle, net of tax (20.6) (2.2) - - (20.6) (2.2)
------- ------- ------ ------ ------ -------
Net Earnings....................... 76.5 92.4 90.1 127.3 166.6 219.7
Preferred stock dividends.......... 5.9 5.9 5.8 5.8 11.7 11.7
------- ------- ------ ------ ------ -------
Reported Net Earnings Attributable
to Common Stock....................... 70.6 86.5 84.3 121.5 154.9 208.0
Add back:
Goodwill amortization, net of tax. - 3.3 - 3.3 - 6.6
------- ------- ------ ------ ------ ------
Pro forma Net Earnings................. $ 70.6 $ 89.8 $ 84.3 $ 124.8 $ 154.9 $ 214.6
======= ======= ====== ====== ====== =======
20
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended Three Months Ended Six Months Ended
September 30 December 31 December 31
------------ ----------- -----------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
(Unaudited)
(In millions, except per share data)
Basic net earnings per common share:
Reported net earnings attributable
to common stock before accounting
change $ .38 $ .37 $ .35 $ .51 $ .74 $ .88
Cumulative effect of a change in
accounting principle, net of tax.. (.09) (.01) - - (.09) (.01)
------ ------ ----- ----- ----- -----
Net earnings attributable to
common stock...................... .29 .36 .35 .51 .65 .87
Goodwill amortization, net of tax.. - .01 - .01 - .03
------ ------ ----- ----- ----- -----
Pro forma net earnings attributable
to common stock.................... $ .29 $ .37 $ .35 $ .52 $ .65 $ .90
====== ====== ====== ====== ====== ======
Diluted net earnings per common share:
Reported net earnings attributable
to common stock before accounting
change............................. $ .38 $ .37 $ .35 $ .50 $ .73 $ .87
Cumulative effect of a change in
accounting principle, net of tax.. (.09) (.01) - - (.09) (.01)
------ ------ ------ ------ ------ ------
Net earnings attributable to
common stock...................... .29 .36 .35 .50 .64 .86
Goodwill amortization, net of tax.. - .01 - .01 - .03
------ ------ ------ ------ ------ ------
Pro forma net earnings attributable
to common stock.................... $ .29 $ .37 $ .35 $ .51 $ .64 $ .89
======= ======= ======= ======= ======= ======
Weighted average common shares outstanding:
Basic.............................. 238.9 238.1 238.1 238.2 238.5 238.2
Diluted............................ 242.3 242.2 240.7 242.2 241.5 242.2
Goodwill
The change in the carrying amount of goodwill for the six months ended December
31, 2001 is as follows:
Six Months Ended
December 31, 2001
-----------------
(Unaudited)
(In millions)
Net balance as of June 30, 2001...................................................... $ 699.7
Goodwill impairment loss.......................................................... (20.6)
Goodwill acquired during the period............................................... 8.6
--------
Net balance as of December 31, 2001.................................................. $ 687.7
========
21
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Intangible Assets
The components of other intangible assets as of December 31, 2001 consist of the
following:
December 31, 2001
-----------------
(Unaudited)
(In millions)
Gross Carrying Accumulated Total Net
Intangible assets consist of: Value Amortization Book Value
-------------- ------------ ----------
Estee Lauder royalty rights...................................... $ 88.5 $ 88.5 $ -
Licensing agreements............................................. 15.0 5.5 9.5
Trademarks....................................................... 15.9 7.2 8.7
Patents.......................................................... 1.6 0.5 1.1
------- ------- -------
Total............................................................... $ 121.0 $ 101.7 $ 19.3
======= ======= =======
The aggregate amortization expense related to intangible assets for the six
months ended December 31, 2001 was $1.3 million. The aggregate amortization
expense for the fiscal years ending June 30, 2002 through 2006 is estimated to
be $3.0 million each fiscal year.
Restructuring Accrual
During the six month period ending December 31, 2001, the Company made payments
of $12.0 million , which reduced the restructuring liability that had been
established in June of fiscal 2001. Approximately $6.4 million of this amount
related to a portion of the severance payments to 49 employees. As of December
31, 2001, there have been no material changes to the plan.
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses
reported in those financial statements. Actual results could differ from those
estimates and assumptions.
Recently Issued Accounting Standards
The Emerging Issues Task Force ("EITF") has reached consensus on Issue No.
00-14, "Accounting for Certain Sales Incentives". This consensus addresses when
sales incentives and discounts should be recognized, as well as where the
related revenues and expenses should be classified in a registrant's financial
statements. Currently, the cost of merchandise used in the Company's
gift-with-purchase and purchase-with-purchase activities, as well as any related
revenues, are reported net, as operating expenses, in the accompanying
consolidated statements of earnings. Upon adoption, revenues generated by these
promotional activities will be classified as sales resulting in an increase of
approximately 1.0% to 2.0% of annual net sales. The cost of promotional
merchandise will be reclassified as a cost of sales. Although operating income
remains unchanged, gross margins for the full fiscal year will decrease by
approximately 5.0% to 6.0% of sales, offset by a corresponding decrease in
operating expenses. Due to variations in the Company's launch calendar and the
timing of promotions, the Company anticipates greater fluctuations in gross
margins and operating expenses on a quarter-by-quarter basis. Issue No. 00-14
became effective for the Company's fiscal 2002 third quarter and will be applied
retroactively for purposes of comparability.
22
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". This statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 will be effective for financial statements of
fiscal years beginning after December 15, 2001. The Company expects to adopt
this statement for the fiscal year ending June 30, 2003, and does not anticipate
that it will have a material impact on the Company's consolidated financial
results.
NOTE 2 - COMPREHENSIVE INCOME
The components of accumulated other comprehensive income ("OCI") included in the
accompanying consolidated balance sheets consist of net unrealized investment
gain (loss), net gain or (loss) on derivative instruments designated and
qualifying as cash-flow hedging instruments, net minimum pension liability
adjustments and cumulative translation adjustments as of the end of each period.
Comprehensive income and its components, net of tax, are as follows:
Three Months Ended Six Months Ended
December 31 December 31
-------------------- ---------------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited)
(In millions)
Net earnings..................................................... $ 90.1 $ 127.3 $ 166.6 $ 219.7
--------- --------- --------- --------
Other comprehensive income:
Net unrealized investment gain (loss)....................... 1.1 (9.0) (1.8) (8.0)
Net derivative instruments gain (loss)...................... 0.6 (2.2) - 3.0
Net minimum pension liability adjustments................... - - (0.3) -
Translation adjustments..................................... (8.0) 3.4 14.5 (16.6)
---------- --------- --------- --------
Other comprehensive income (loss)........................... (6.3) (7.8) 12.4 (21.6)
---------- --------- --------- --------
Comprehensive income............................................. $ 83.8 $ 119.5 $ 179.0 $ 198.1
========= ========= ========= ========
The accumulated net loss on derivative instruments for the three and six month
periods ended December 31, 2001 consists of the following:
Three Months Ended Six Months Ended
December 31, 2001 December 31, 2001
------------------ -----------------
(Unaudited)
(In millions)
OCI - derivative instruments, beginning of period........... $ (2.6) $ (2.0)
--------- ---------
Gain (loss) on derivative instruments.................... 0.5 (0.7)
Reclassification to earnings of net loss during the period 0.4 0.8
Provision for deferred income taxes...................... (0.3) (0.1)
--------- ---------
Net derivative instruments gain (loss)................ 0.6 -
--------- ---------
OCI - derivative instruments, end of period................. $ (2.0) $ (2.0)
========= =========
Of the $2.0 million net derivative instruments loss recorded in OCI at the end
of the period, $2.6 million, net of tax, related to interest rate swaps and
options. Offsetting the net loss was $0.6 million, net of tax, related to
forward contracts and foreign currency options that the Company estimates will
be reclassified to earnings as gains during the next nine months. Upon repayment
of the term loan in February 2002, losses deferred in OCI will be reclassified
to earnings. These losses will be substantially offset by deferred gains from
previously terminated interest rate swaps.
23
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - 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. The Company evaluates segment
performance based upon net sales and operating income. Operating income
represents earnings before income taxes and net interest expense. The accounting
policies for each of the 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 June 30, 2001 annual report on
Form 10-K. 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 each segment since June 30, 2001.
Three Months Ended Six Months Ended
December 31 December 31
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited)
(In millions)
SEGMENT DATA
Net Sales:
Skin Care........................................................ $ 431.7 $ 423.2 $ 825.2 $ 818.4
Makeup........................................................... 416.1 420.5 863.6 851.8
Fragrance........................................................ 346.7 396.9 638.0 696.7
Hair Care........................................................ 58.4 43.0 108.4 88.6
Other............................................................ 4.5 8.0 9.9 13.8
--------- --------- --------- ---------
$ 1,257.4 $ 1,291.6 $ 2,445.1 $ 2,469.3
========= ========= ========= =========
Operating Income:
Skin Care........................................................ $ 77.3 $ 85.5 $ 143.9 $ 152.3
Makeup........................................................... 45.1 64.6 99.2 118.4
Fragrance........................................................ 11.5 46.1 42.5 78.6
Hair Care........................................................ 10.0 6.2 11.7 6.4
Other............................................................ (0.4) 1.1 (0.9) 1.1
--------- --------- --------- ---------
143.5 203.5 296.4 356.8
Reconciliation:
Interest expense, net......................................... 1.9 4.3 5.7 9.4
--------- --------- --------- ---------
Earnings before income taxes, minority interest and
accounting change............................................. $ 141.6 $ 199.2 $ 290.7 $ 347.4
========= ========= ========= =========
REGIONAL DATA
Net Sales:
The Americas..................................................... $ 722.7 $ 747.1 $ 1,488.1 $ 1,530.2
Europe, the Middle East & Africa................................. 359.5 366.9 631.8 622.0
Asia/Pacific..................................................... 175.2 177.6 325.2 317.1
--------- --------- --------- ---------
$ 1,257.4 $ 1,291.6 $ 2,445.1 $ 2,469.3
========= ========= ========= =========
Operating Income:
The Americas..................................................... $ 61.1 $ 106.4 $ 164.9 $ 217.5
Europe, the Middle East & Africa................................. 53.8 70.6 92.6 103.8
Asia/Pacific..................................................... 28.6 26.5 38.9 35.5
--------- --------- --------- ---------
$ 143.5 $ 203.5 $ 296.4 $ 356.8
========= ========= ========= =========
24
THE ESTEE LAUDER COMPANIES INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various routine legal proceedings incident to the ordinary
course of business. In management's opinion, the outcome of pending legal
proceedings, separately or in the aggregate, will not have a material adverse
effect on our business or consolidated financial results.
In August 2000, an affiliate of Revlon, Inc. sued the Company and its
subsidiaries in the U.S. District Court, Southern District of New York, for
alleged patent infringement and related claims. Revlon claims that five Estee
Lauder products, two Origins foundations, a La Mer concealer and a jane
foundation infringe its patent. Revlon is seeking, among other things, treble
damages, punitive damages, equitable relief and attorneys' fees. The Company has
filed counterclaims, which, among other things, challenge the validity of the
patent. Mediation directed by the Court took place in August 2001 and in January
2002, but did not result in resolution of the litigation. In January 2002, the
Court indefinitely postponed the trial date (then set for February 2002) and
established a schedule for pretrial motions. The Company intends to defend
itself vigorously. Although the final outcome of the lawsuit cannot be predicted
with certainty, based on legal analysis and the discovery proceedings in the
litigation, management believes that the case will not have a material adverse
effect on the Company's consolidated financial results.
In February 2000, the Company and eight other manufacturers of cosmetics (the
"Manufacturer Defendants") were added as defendants in a consolidated class
action lawsuit that had been pending in the Superior Court of the State of
California in Marin County. The plaintiffs purport to represent a class of all
California residents who purchased prestige cosmetic products at retail for
personal use from a number of department stores that sold such products in
California (the "Department Store Defendants"). Plaintiffs filed their initial
actions against the Department Store Defendants in May 1998. In May 2000,
plaintiffs filed an amended complaint alleging that the Department Store
Defendants and the Manufacturer Defendants conspired to fix and maintain retail
prices and to limit the supply of prestige cosmetic products sold by the
Department Store Defendants in violation of California state law. The plaintiffs
are seeking, among other things, treble damages, equitable relief, attorneys'
fees, interest and costs. Pre-trial proceedings and discovery have commenced.
Court-directed mediation and related settlement discussions are continuing. The
Company intends to defend itself vigorously. While no assurance can be given as
to the ultimate outcome of this lawsuit, based on preliminary investigation,
management believes that the case will not have a material adverse effect on the
Company's consolidated financial results.
In 1998, the Office of the Attorney General of the State of New York (the
"State") notified the Company and ten other entities that they are 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 estimates to be $16 million. While
the State has sued other PRPs in connection with the site, the State has not
sued the Company. The Company and certain other PRPs are in discussions with the
State regarding possible settlement of the matter. While no assurance can be
given as to the ultimate outcome, management believes that the matter will not
have a material adverse effect on the Company's consolidated financial results.
In 1998, the State notified the Company and fifteen other entities that they are
PRPs with respect to the Huntington/East Northport landfill. The cleanup costs
are estimated at $20 million. No litigation has commenced. The Company and other
PRPs are in discussions with the State regarding possible settlement of the
matter. While no assurance can be given as to the ultimate outcome, management
believes that the matter will not have a material adverse effect on the
Company's consolidated financial results.
25
THE ESTEE LAUDER COMPANIES INC.
PART II. OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders
(a) The Annual Meeting of Stockholders of the Company was held on
October 31, 2001.
(b) The following directors were elected at the Annual Meeting of
Stockholders: Lynn Forester, William P. Lauder and Richard D. Parsons,
as Class II Directors for a term expiring at the 2004 Annual Meeting.
The Class III Directors, whose terms expire at the 2002 Annual Meeting,
are Charlene Barshefsky, Leonard A. Lauder, Ronald S. Lauder and
Marshall Rose. The Class I Directors, whose terms expire at the 2003
Annual Meeting, are Irvine O. Hockaday, Jr., Fred H. Langhammer and
Faye Wattleton.
(c) (i) Each person elected as a director at the Annual Meeting
received the number of votes (shares of Class B Common Stock are
entitled to ten votes per share) indicated beside his or her name:
Name Votes For Votes Withheld
---- --------- --------------
Lynn Forester 1,234,159,630 1,175,041
William P. Lauder 1,233,537,427 1,797,244
Richard D. Parsons 1,234,162,549 1,172,122
(ii) The Fiscal 2002 Share Incentive Plan was approved as indicated
below.
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
Total 1,199,171,642 16,331,000 241,489 19,590,540
(iii)1,334,657,961 votes were cast for and 128,206 votes were cast
against the ratification of the appointment of Arthur Andersen LLP
as independent auditors of the Company for the 2002 fiscal year.
There were 36,821 abstentions and no broker nonvotes.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits --
Exhibit
Number Description
4.1 Indenture, dated as of November 5, 1999, between the Company and
State Street Bank and Trust Company, N.A. (filed as Exhibit 4 to
Amendment No. 1 to our Registration Statement on Form S-3
(No. 333-85947) on November 5, 1999).
4.2 Officers' Certificate, dated January 10, 2002, defining certain terms
of the 6% Senior Notes due 2012.
4.3 Global Note for the 6% Senior Notes due 2012.
10.17 Fiscal 2002 Share Incentive Plan (filed as Exhibit 4(d) to our
Registration Statement on Form S-8 (No.333-72684) on
November 1, 2001). *
* Exhibit is a management contract or compensatory plan or arrangement.
26
THE ESTEE LAUDER COMPANIES INC.
PART II. OTHER INFORMATION
(b) Reports on Form 8-K --
On October 25, 2001, we filed a Current Report on Form 8-K. Pursuant to Item 5
of Form 8-K, we reported our fiscal 2002 first-quarter results and our
expectations regarding fiscal 2002 second-quarter and full-year results.
On December 20, 2001, we filed a Current Report on Form 8-K. Pursuant to Item 5
of Form 8-K, we revised our expectations regarding fiscal 2002 second-quarter
and full-year financial results.
On January 31, 2002, we filed a Current Report on Form 8-K. Pursuant to Item 5
of Form 8-K, we reported our fiscal 2002 second-quarter results.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE ESTEE LAUDER COMPANIES INC.
Date: January 31, 2002 By: /s/Richard W. Kunes
-------------------------
Richard W. Kunes
Senior Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
28