SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
----------------------
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
- Act of 1934
For the quarterly period ended March 31, 2002
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 April 26, 2002, 129,051,977 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 Nine Months Ended March 31,2002 and 2001......................2
Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................3
Consolidated Balance Sheets --
March 31,2002 and June 30,2001................................................17
Consolidated Statements of Cash Flows --
Nine Months Ended March 31, 2002 and 2001.....................................18
Notes to Consolidated Financial Statements....................................19
Part II. Other Information....................................................27
THE ESTEE LAUDER COMPANIES INC.
PART I. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
-------------------- -----------------
2002 2001 2002 2001
---- ---- ---- ----
(In millions, except per share data)
Net Sales........................................................ $1,121.7 $1,103.5 $3,614.7 $3,620.5
Cost of sales.................................................... 318.3 297.7 1,006.9 986.3
--------- --------- --------- -------
Gross Profit..................................................... 803.4 805.8 2,607.8 2,634.2
--------- --------- --------- -------
Operating expenses:
Selling, general and administrative........................... 719.4 696.9 2,218.5 2,153.2
Related party royalties....................................... 2.9 3.6 11.8 18.9
--------- --------- --------- -------
722.3 700.5 2,230.3 2,172.1
--------- --------- --------- -------
Operating Income................................................. 81.1 105.3 377.5 462.1
Interest expense, net............................................ 2.6 2.0 8.3 11.4
--------- --------- --------- -------
Earnings before Income Taxes, Minority Interest
and Accounting Change........................................... 78.5 103.3 369.2 450.7
Provision for income taxes....................................... 27.1 37.2 127.4 162.3
Minority interest, net of tax.................................... (0.7) (1.0) (3.9) (1.4)
--------- --------- --------- -------
Net Earnings before Accounting Change............................ 50.7 65.1 237.9 287.0
Cumulative effect of a change in accounting principle, net of tax - - (20.6) (2.2)
--------- --------- --------- --------
Net Earnings .................................................... 50.7 65.1 217.3 284.8
Preferred stock dividends........................................ 5.9 5.9 17.6 17.6
--------- --------- --------- -------
Net Earnings Attributable to Common Stock........................ $ 44.8 $ 59.2 $ 199.7 $ 267.2
========= ========= ========= =======
Basic net earnings per common share:
Net earnings attributable to common stock before
accounting change.......................................... $ .19 $ .25 $ .93 1.13
Cumulative effect of a change in accounting principle, net of tax - - (.09) (.01)
-------- --------- --------- -------
Net earnings attributable to common stock................... $ .19 $ .25 $ .84 $ 1.12
======== ======== ========= =======
Diluted net earnings per common share:
Net earnings attributable to common stock before
accounting change.......................................... $ .19 $ .24 $ .92 $ 1.11
Cumulative effect of a change in accounting principle, net of tax - - (.09) (.01)
-------- -------- --------- -------
Net earnings attributable to common stock................... $ .19 $ .24 $ .83 $ 1.10
======== ======== ========= =======
Weighted average common shares outstanding:
Basic....................................................... 237.9 238.4 238.3 238.3
Diluted..................................................... 240.4 242.0 241.1 242.2
Cash dividends declared per common share......................... $ .05 $ .05 $ .15 $ .15
See notes to consolidated financial statements.
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 nine
months ended March 31, 2002 and 2001, 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 Nine Months Ended
March 31 March 31
-------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
(In millions)
NET SALES
By Region:
The Americas............................................... $ 696.5 $ 686.6 $2,218.2 $2,251.9
Europe, the Middle East & Africa........................... 291.3 283.7 933.4 914.2
Asia/Pacific............................................... 133.9 133.2 463.1 454.4
--------- --------- --------- --------
$ 1,121.7 $ 1,103.5 $3,614.7 $3,620.5
========= ========= ======== ========
By Product Category:
Skin Care.................................................. $ 438.4 $ 419.6 $ 1,279.3 $ 1,253.3
Makeup..................................................... 470.5 464.5 1,348.5 1,330.2
Fragrance.................................................. 156.5 173.8 812.3 889.0
Hair Care.................................................. 49.6 39.9 158.0 128.5
Other...................................................... 6.7 5.7 16.6 19.5
--------- --------- --------- ---------
$ 1,121.7 $ 1,103.5 $3,614.7 $3,620.5
========= ========= ========= ========
OPERATING INCOME
By Region:
The Americas............................................... $ 37.7 $ 57.3 $ 202.6 $ 274.8
Europe, the Middle East & Africa........................... 37.3 39.6 129.9 143.4
Asia/Pacific............................................... 6.1 8.4 45.0 43.9
--------- --------- --------- ---------
$ 81.1 $ 105.3 $ 377.5 $ 462.1
========= ========= ========= =========
By Product Category:
Skin Care.................................................. $ 58.9 $ 56.7 $ 202.8 $ 209.0
Makeup..................................................... 41.5 52.1 140.7 170.5
Fragrance.................................................. (20.9) (6.1) 21.6 72.5
Hair Care.................................................. 0.6 2.1 12.3 8.5
Other...................................................... 1.0 0.5 0.1 1.6
--------- --------- -------- ---------
$ 81.1 $ 105.3 $ 377.5 $ 462.1
========= ========= ========= =========
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 Nine Months Ended
March 31 March 31
-------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales........................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................................... 28.4 27.0 27.9 27.2
------ ----- ------ ------
Gross profit..................................................... 71.6 73.0 72.1 72.8
------ ----- ------ ------
Operating expenses
Selling, general and administrative........................... 64.1 63.2 61.4 59.5
Related party royalties....................................... 0.3 0.3 0.3 0.5
------ ----- ------ ------
64.4 63.5 61.7 60.0
------ ----- ------ ------
Operating income................................................. 7.2 9.5 10.4 12.8
Interest expense, net............................................ 0.2 0.1 0.2 0.4
------ ----- ------ ------
Earnings before income taxes, minority interest and accounting
change........................................................ 7.0 9.4 10.2 12.4
Provision for income taxes....................................... 2.4 3.4 3.5 4.5
Minority interest, net of tax.................................... (0.1) (0.1) (0.1) -
------ ----- ------- ------
Net earnings before accounting change............................ 4.5 5.9 6.6 7.9
Cumulative effect of a change in accounting principle, net of tax - - (0.6) -
------ ----- ------- ------
Net earnings..................................................... 4.5% 5.9% 6.0% 7.9%
====== ===== ======= =======
Third Quarter Fiscal 2002 as Compared with Third Quarter Fiscal 2001
NET SALES
Net sales increased 2% or $18.2 million to $1.12 billion fueled by new product
introductions in all geographic regions and additional distribution points.
Partially offsetting this increase in net sales was a 14% reduction in travel
retail net sales, which resulted from reduced worldwide travel, and continued
weakness in the Americas. Excluding the impact of foreign currency translation,
net sales increased 4%.
Product Categories
Skin Care
Net sales of skin care products increased 4% or $18.8 million to $438.4 million.
Increases in net sales were primarily attributable to recently launched products
such as Advanced Night Repair Eye Recovery Complex, Moisture Surge Extra, Total
Turnaround Visible Skin Renewer, A Perfect World, Moisture Surge Eye Gel and
LightSource Transforming Moisture Lotion and Cream. Partially offsetting these
increases were lower net sales of certain existing products such as Turnaround
Cream, Re-Nutriv Intensive Lift Serum, Ginger Souffle and Ginger Body Wash. In
addition, the prior-year included the very successful launch of Anti-Gravity
Firming Eye Lift Cream and Anti-Gravity Firming Lift Cream.
Makeup
Makeup net sales increased 1% or $6.0 million to $470.5 million. The increase in
net sales reflected the current-period launch of So Ingenious, Moisture Sheer
Lipstick and Illusionist Mascara as well as growth in sales from M.A.C and Bobbi
Brown products. Recently launched products such as Gentle Light Makeup and
Powder, Sumptuous Lipstick and High Impact Eye Shadow Duos also contributed to
the increase in makeup sales. Partially offsetting the increase in net sales
were lower sales of Two-in-one Eye Shadow and Long Last Soft Shine Lipstick.
Results for the prior-year quarter also include the launch of Moisture Surge
Lipstick and Lash Doubling Mascara.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fragrance
Net sales of fragrance products decreased 10% or $17.3 million to $156.5
million. This category continued to be impacted by the softness of the fragrance
business in the United States and the decline in our travel retail business,
which depends substantially on fragrance products. On a product basis, lower
sales of Beautiful, Estee Lauder pleasures, certain Tommy Hilfiger licensed
products and DKNY for Women were partially offset by sales of T, a new fragrance
in the Tommy Hilfiger line.
Hair Care
Hair care net sales increased 24% or $9.7 million to $49.6 million. This
increase was primarily related to new products such as Color Conserve Shampoo
and additional Company-owned retail stores and independent salons that carry our
product.
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 increased 1% or $9.9 million to $696.5 million. The
increase is primarily due to the success of new and certain existing products,
growth from most newer brands and higher results in Canada, partially offset by
the continued soft retail environment in the United States. Uncertain economic
conditions may persist into the next fiscal year and we are planning
accordingly. In Europe, the Middle East & Africa, net sales increased 3% or $7.6
million to $291.3 million. Excluding the impact of foreign currency translation,
net sales increased 6%. On a reported basis, this increase was primarily the
result of higher net sales in the United Kingdom, Spain and Greece, where we
recently formed a joint venture in which we own a controlling majority interest
that replaced the prior distributor. The increase was partially offset by
significantly lower net sales in our travel retail business, which has been
adversely affected by a decrease in worldwide travel. Continued weakness in
worldwide travel will adversely affect our travel retail business. Excluding the
impact of our travel retail business, Europe, the Middle East & Africa net sales
increased 8% or $16.6 million. Net sales in Asia/Pacific increased slightly to
$133.9 million primarily due to higher net sales in Korea and Thailand,
partially offset by lower net sales in Japan. Japan continues to remain a
difficult market due to local economic conditions and increasing competition.
The challenges are made more difficult by 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 8%.
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 28.4% as compared with
27.0% 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 volumes of products with a higher cost of goods, particularly in
travel retail and fragrance. 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.
OPERATING EXPENSES
Operating expenses increased to 64.4% of net sales as compared with 63.5% 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 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.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING INCOME
Operating income decreased 23% or $24.2 million to $81.1 million as compared
with the prior-year quarter. Operating margins were 7.2% of net sales in the
current period as compared with 9.5% in the prior-year quarter. The decrease in
operating margin was primarily due to lower than planned sales, higher than
planned cost of sales as well as 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".
Product Categories
Operating income increased 4% to $58.9 million in the skin care category,
primarily due to new and recently launched products. Operating income decreased
20% to $41.5 million in makeup which was primarily caused by lower than
anticipated sales levels, coupled with continued advertising and promotional
spending to promote new and recently launched products. We incurred an operating
loss in our fragrance business of $20.9 million, as compared to the prior-year
quarter operating loss of $6.1 million, reflecting lower net sales and increased
support spending versus the prior-year quarter. Hair care operating income
decreased 71%, from a smaller base, to $0.6 million primarily reflecting
incremental costs associated with refining Aveda salon distribution and
investing in new and recently launched product introductions.
Geographic Regions
Operating income in the Americas decreased 34% or $19.6 million to $37.7 million
primarily due to continued weakness in the U.S. economy and increased spending
in advertising, promotion and newer distribution channels. In Europe, the Middle
East & Africa, operating income decreased 6% or $2.3 million to $37.3 million
primarily due to the significant decrease in our travel retail business. Despite
the overall decrease, operating results improved in a number of markets led by
Spain and the United Kingdom. In Asia/Pacific, operating income decreased 27% or
$2.3 million to $6.1 million primarily due to lower operating income in China,
Hong Kong and Malaysia, partially offset by improved results in Japan reflecting
planned reductions in operating expenses as a percentage of net sales.
INTEREST EXPENSE, NET
Net interest expense was $2.6 million as compared with $2.0 million in the
prior-year quarter. The increase in net interest expense resulted from the
exchange of variable-rate debt to fixed-rate debt in January 2002. We believe
this change in our interest rate risk management strategy will mitigate future
interest rate volatility, but we expect it will continue to 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
March 31, 2002 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. 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".
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine Months Fiscal 2002 as compared with Nine Months Fiscal 2001
NET SALES
Net sales decreased 0.2% or $5.8 million to $3.61 billion. The unusual events
that occurred during the current year and their effect on the economy have
adversely impacted our business and the business of our retail customers. In
addition, a related decline in worldwide travel has resulted in a 20% reduction
in travel retail sales. Sales growth from certain newer brands and recently
launched products partially offset these decreases.
Product Categories
Skin Care
Net sales of skin care products increased 2% or $26.0 million to $1.28 billion.
The net sales increase is primarily attributable to recently launched products
such as Total Turnaround Visible Skin Renewer, Advanced Night Repair Eye
Recovery Complex, LightSource Transforming Moisture Lotion and Cream, Moisture
Surge Extra and A Perfect World. Partially offsetting these increases were lower
net sales of certain existing products such as Turnaround Cream, Fruition Extra
and Diminish. Additionally, successful launches of products, like Idealist Skin
Refinisher and Anti-Gravity Firming Lift Cream during the prior year created a
difficult comparison with the current-year period.
Makeup
Makeup net sales increased 1% or $18.3 million to $1.35 billion. Recently
launched products such as Gentle Light Makeup, Sumptuous Lipstick and High
Impact Eye Shadow Duos contributed to the increase in makeup sales. In addition,
newly launched products such as So Ingenious, Traceless and Moisture Sheer
Lipstick have also contributed to the increase in this category. Partially
offsetting the increase in net sales were lower sales of Two-in-one Eye Shadow,
Long Last Soft Shine Lipstick and Color Options.
Fragrance
Net sales of fragrance products decreased 9% or $76.7 million to $812.3 million.
This category continued to be impacted by the softness of the fragrance business
in the United States and the decline in our travel retail business, which
depends substantially on fragrance products. Based on the nine months ending
March 31, 2002 and these negative trends, we expect full-year fragrance sales to
be substantially below those achieved last year. Lower net sales of Beautiful,
DKNY for Women, Estee Lauder pleasures and certain existing Tommy Hilfiger
licensed products were partially offset by the recent launch of T, a new
fragrance in the Tommy Hilfiger line, and increased net sales of Intuition.
Hair Care
Hair care net sales increased 23% or $29.5 million to $158.0 million. This
increase was primarily the result of growth from Aveda, which combined recently
launched products such as Texture Lotions and Color Conserve Shampoo and an
increase in the number of Company-owned Aveda Environmental Lifestyle Stores,
and growth in sales of Bumble and bumble products. The results were partially
offset by lower sales from Clinique's Simple Hair Care System when compared with
the prior-year launch.
The introduction of new products may have some cannibalizing effect on sales of
existing products, which we take into account in our business planning.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Geographic Regions
Net sales in the Americas decreased 1% or $33.7 million to $2.22 billion. This
decrease was primarily due to continued weakness and uncertainty in the U.S.
economy. Uncertain economic conditions may persist into the next fiscal year and
we are planning accordingly. These sales decreases have been partially mitigated
by the growth of our newer brands, in particular Mo Ao C and Aveda. In Europe,
the Middle East & Africa, net sales increased 2% or $19.2 million to $933.4
million. Excluding the impact of our travel retail business, which was adversely
affected by a decrease in worldwide travel, net sales increased 9% or $61.7
million, reflecting increased sales in the United Kingdom, Spain and Greece,
where we recently formed a joint venture in which we own a controlling majority
interest that replaced the prior distributor. Continued weakness in worldwide
travel will adversely affect our travel retail business. Net sales in
Asia/Pacific increased 2% or $8.7 million to $463.1 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 competition. The challenges are
made more difficult by 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 10%.
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 27.9% as compared with
27.2% in the prior-year period. The lower margin can be attributed in part to
production volume decreases resulting in under-absorption of overhead. An
increase in promotional activities also impacted cost of sales. In addition,
lower than planned raw material purchases reduced anticipated savings from
sourcing initiatives. Partially offsetting these negative factors were lower
sales volumes of products with a higher cost of goods, particularly in travel
retail and fragrance. 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 period-by-period basis.
OPERATING EXPENSES
Operating expenses increased to 61.7% of net sales as compared with 60.0% 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 18% or $84.6 million to $377.5 million as compared
with the prior-year period. Operating margins were 10.4% of net sales in the
current period as compared with 12.8% 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.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Product Categories
Operating income decreased 70% to $21.6 million in fragrance, 17% to $140.7
million in makeup and 3% to $202.8 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 45%, from a smaller base, to $12.3 million, primarily
due to sales growth from Aveda and Bumble and bumble.
Geographic Regions
Operating income in the Americas decreased 26% or $72.2 million to $202.6
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 9% or $13.5 million to $129.9 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, the United Kingdom, Spain and
Germany. We also benefited from the inclusion of operating results from our
joint venture in Greece. In Asia/Pacific, operating income increased 3% or $1.1
million to $45.0 million due to improved results in Korea, Taiwan and Australia,
partially offset by lower income in Hong Kong and China.
INTEREST EXPENSE, NET
Net interest expense was $8.3 million as compared with $11.4 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 nine months ended
March 31, 2002 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 nine month period ended March 31, 2002 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 nine month period ended
March 31, 2001 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. In January 2002, we repaid
$200.0 million principal amount of bank borrowings with proceeds of a public
offering of 6% Senior Notes due 2012. At March 31, 2002, we had cash and cash
equivalents of $469.0 million compared with $346.7 million at June 30, 2001.
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 March 31, 2002,
our outstanding long-term borrowings consisted of $130.0 million of commercial
paper; $248.9 million, net of $1.1 unamortized debt discount, of 6% Senior Notes
due January 2012; 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 $22.8 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
March 31, 2002, we had an unused $400.0 million revolving credit facility,
expiring on June 28, 2006. 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 was 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. We
also have an effective shelf registration statement, under which $150.0 million
remains available for the public issuance of debt securities.
Our business is seasonal in nature and, accordingly, our working capital needs
vary. To meet these needs, we could issue up to an additional $620.0 million of
commercial paper under our program, issue long-term debt securities or borrow
under the revolving credit facility. As of March 31, 2002, we also had $29.8
million in unused uncommitted facilities.
Total debt as a percent of total capitalization was 18% at March 31, 2002 and
20% at June 30, 2001.
Net cash provided by operating activities was $365.6 million during the nine
months ended March 31, 2002 as compared with $244.5 million in the prior-year
period. This improvement in net cash flows provided by operating activities was
generated by a reduction of inventory, in response to lower than anticipated
sales growth, and a proportionately lower level of accounts receivable compared
with the prior-year period which resulted from a decreased level of net sales.
Net cash used for investing activities was $145.6 million during the nine months
ended March 31, 2002, which primarily reflects capital expenditures. Net cash
used for financing activities of $105.2 million, during the nine months ended
March 31, 2002, primarily relates to common stock repurchases and dividend
payments.
On February 26, 2002, the Board of Directors declared a quarterly dividend of
$.05 per share on our Class A and Class B Common Stock, payable on April 2, 2002
to stockholders of record at the close of business on March 15, 2002. Total
dividends declared for the nine months ended March 31, 2002, including dividends
on the $6.50 Cumulative Redeemable Preferred Stock, were $53.2 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 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 February 2002, we purchased 500,000 shares
for $15.5 million, and during September 2001, we purchased one million shares
for $34.2 million. To date, we have purchased approximately 2.6 million shares
under this program.
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 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 March 31, 2002, 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 June 2003. 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 March 31, 2002, we had foreign currency contracts in the form of
forward exchange contracts and option contracts in the amount of $234.3 million
and $12.5 million, respectively. The foreign currencies included in the forward
exchange contracts (notional value stated in U.S. dollars) are principally the
Japanese yen ($70.2 million), Euro ($29.4 million), Swiss franc ($25.1 million),
Australian dollar ($17.5 million), Korean won ($13.5 million), Danish krone
($12.0 million), British pound ($11.9 million), and Mexican peso ($10.6
million). The foreign currencies included in the option contracts (notional
value stated in U.S. dollars) are principally the Euro ($8.6 million) and
Australian dollar ($2.4 million).
Interest Rate Risk Management
In January 2002, we paid off our outstanding term loan, which had a floating
interest rate, with the proceeds from our January 2002 public debt offering of
6% Senior Notes. As a result, we terminated the interest rate swaps and options
that were previously outstanding to mitigate interest rate volatility. No
material gain or loss resulted from the termination of those contracts.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $3.8 million related to our foreign
exchange contracts. 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.
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 Nine Months Ended
March 31 March 31
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
(In millions, except per share data)
Reported Net Earnings before Accounting Change........................... $ 50.7 $ 65.1 $ 237.9 $ 287.0
Cumulative effect of a change in accounting principle, net of tax.... - - (20.6) (2.2)
------- ------- ------- --------
Net Earnings......................................................... 50.7 65.1 217.3 284.8
Preferred stock dividends............................................ 5.9 5.9 17.6 17.6
------- ------- ------- --------
Reported Net Earnings Attributable to Common Stock....................... 44.8 59.2 199.7 267.2
Add back:
Goodwill amortization, net of tax.................................... - 3.3 - 9.9
------- ------- -------- --------
Pro forma Net Earnings ................................................. $ 44.8 $ 62.5 $ 199.7 $ 277.1
======= ======= ======= ========
Basic net earnings per common share:
Reported net earnings attributable to
common stock before accounting change............................. $ .19 $ .25 $ .93 $ 1.13
Cumulative effect of a change in accounting principle, net of tax.... - - (.09) (.01)
------- ------- ------- --------
Net earnings attributable to common stock............................ .19 .25 .84 1.12
Goodwill amortization, net of tax.................................... - .01 - .04
------- ------- -------- --------
Pro forma net earnings attributable to common stock.................. $ .19 $ .26 $ .84 $ 1.16
======= ======= ======= ========
Diluted net earnings per common share:
Reported net earnings attributable to
common stock before accounting change............................. $ .19 $ .24 $ .92 $ 1.11
Cumulative effect of a change in accounting principle, net of tax.... - - (.09) (.01)
------- ------- ------- --------
Net earnings attributable to common stock............................ .19 .24 .83 1.10
Goodwill amortization, net of tax.................................... - .01 - .04
------- ------- ------- --------
Pro forma net earnings attributable to common stock.................. $ .19 $ .25 $ .83 $ 1.14
======= ======= ======= ========
Weighted average common shares outstanding:
Basic .............................................................. 237.9 238.4 238.3 238.3
Diluted.............................................................. 240.4 242.0 241.1 242.2
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Effective January 1, 2002, we adopted the Emerging Issues Task Force ("EITF")
Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer",
which codified and reconciled the following EITF Issues: Issue No. 00-14,
"Accounting for Certain Sales Incentives", Issue No. 00-22, "Accounting for
Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and
Offers for Free Products or Services to be Delivered in the Future" and Issue
No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products". Issue No. 00-14 addresses when sales
incentives and discounts should be recognized, as well as where the related
revenues and expenses should be classified in the financial statements. Upon
adoption of this Issue, we reclassified revenues generated from our
purchase-with-purchase activities as sales and costs of our
purchase-with-purchase and gift-with-purchase activities as cost of sales, which
were previously reported net as operating expenses. Operating income has
remained unchanged by this adoption. These reclassifications have been reported
in the accompanying consolidated statements of earnings retroactively for all
periods reported.
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.
SUBSEQUENT EVENTS
Strategic Initiatives / Special Charges
---------------------------------------
We continue to be committed to top-line growth. At the same time we are focused
on achieving efficiencies through specific processes, systems and initiatives to
drive growth and improve profitability. As a result of this ongoing effort, in
the fiscal 2002 fourth quarter, we will take a special charge for restructuring
and repositioning certain businesses. The restructuring focuses on cost
reduction opportunities related to the Internet, supply chain, globalization of
the organization and distribution channel refinements. The pre-tax charge will
be approximately $108 million. On an after-tax basis, the charge will be
approximately $78 million, equal to $0.32 per diluted share. These after tax
charges will result in a full year effective tax rate of approximately 36%.
About $45 million of the charges are cash related and are expected to generate
annual ongoing savings of approximately $43 million, beginning in fiscal 2003.
Specifically, the charge will include the following:
o Internet
--------
We remain committed to achieving our overall Internet objectives of
building a powerful customer database and creating attractive marketing
opportunities for our brands. Continuing to operate Gloss.com as the
premiere beauty site is an integral part of this effort. To achieve the
objectives, reduce costs and improve profitability, we will outsource
future Gloss.com platform development and maintenance efforts to one or
more third party providers. Outsourcing will allow us to cut
information technology costs and free up internal resources while
retaining control of marketing and creative efforts. Additionally,
Gloss will close its San Francisco facility and consolidate its
operations in New York. As a result, included in the charge is a $24
million provision for restructuring the Gloss.com operations, including
benefits and severance packages for 33 employees as well as asset
write-offs. We will also take a $20 million charge to
write-off the related Gloss.com acquisition goodwill.
o Supply Chain
------------
Building on previously announced chain initiatives, we will
restructure certain manufacturing, distribution, research and
development, information systems and quality assurance operations in
the United States, Canada and Europe. The related charge will be $16
million. These actions along with future globaldistribution, supply
chain optimization and system initiatives will drive our gross margin
improvement.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
o Globalization of Organization
-----------------------------
We continue to implement the previously announced transition to a
global brand structure, streamlining the decision making process and
increasing innovation and speed-to-market. The next phase of this
transition entails eliminating duplicate functions and
responsibilities. Future programs will focus on aligning our processes
and systems with the new global organization to drive down operating
expenses. We will record a charge of $23 million associated with these
efforts.
o Distribution
------------
We have evaluated areas of distribution relative to their financial
target and will focus our resources on the most productive sales
channels. As a result, we will reconfigure our Argentina affiliate and
will close certain points of distribution, including our remaining
in-store tommy's shops. We will record a $25 million provision
related to these actions.
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;
(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;
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(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 acquire or develop e-commerce capabilities, and
other new information and distribution technologies, on a timely basis
and within our cost estimates;
(xiii) our ability to capitalize on opportunities for improved
efficiency, such as globalization, and 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.
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
March 31 June 30
2002 2001
---- ----
(Unaudited)
(In millions)
ASSETS
Current Assets
Cash and cash equivalents............................................................... $ 469.0 $ 346.7
Accounts receivable, net................................................................ 677.1 580.6
Inventory and promotional merchandise, net.............................................. 514.9 630.3
Prepaid expenses and other current assets............................................... 192.6 181.3
-------- --------
Total current assets............................................................... 1,853.6 1,738.9
-------- --------
Property, Plant and Equipment, net...................................................... 570.0 528.7
-------- --------
Other Assets
Investments, at cost or market value.................................................... 33.2 41.0
Deferred income taxes................................................................... 67.1 70.1
Goodwill, net .......................................................................... 687.4 699.7
Other intangible assets, net............................................................ 18.5 21.0
Other assets, net....................................................................... 119.7 119.4
-------- --------
Total other assets................................................................. 925.9 951.2
-------- --------
Total assets.............................................................. $3,349.5 $3,218.8
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt......................................................................... $ 5.3 $ 5.8
Accounts payable........................................................................ 191.6 239.8
Accrued income taxes.................................................................... 113.6 79.0
Other accrued liabilities............................................................... 552.5 532.1
-------- --------
Total current liabilities.......................................................... 863.0 856.7
-------- --------
Noncurrent Liabilities
Long-term debt.......................................................................... 404.4 410.9
Other noncurrent liabilities............................................................ 248.6 239.1
-------- --------
Total noncurrent liabilities....................................................... 653.0 650.0
-------- --------
$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: 131,390,302 at March 31, 2002 and 126,053,825 at June 30, 2001;
240,000,000 shares Class B authorized; shares issued and outstanding:
108,412,533 at March 31, 2002 and 113,490,293 at June 30, 2001....................... 2.4 2.4
Paid-in capital......................................................................... 263.7 258.3
Retained earnings....................................................................... 1,406.8 1,242.7
Accumulated other comprehensive loss.................................................... (118.9) (120.5)
-------- --------
1,554.0 1,382.9
Less: Treasury stock, at cost; 2,377,860 Class A shares at March 31, 2002
and 877,860 Class A shares at June 30, 2001.......................................... (80.5) (30.8)
-------- --------
Total stockholders' equity......................................................... 1,473.5 1,352.1
-------- --------
Total liabilities and stockholders' equity................................ $3,349.5 $3,218.8
======== ========
See notes to consolidated financial statements.
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31
--------
2002 2001
---- ----
(In millions)
Cash Flows from Operating Activities
Net earnings............................................................................... $ 217.3 $ 284.8
Adjustments to reconcile net earnings to net cash
flows provided by operating activities:
Depreciation and amortization.......................................................... 117.6 113.0
Amortization of purchased royalty rights............................................... - 6.6
Deferred income taxes.................................................................. 20.0 (3.0)
Minority interest...................................................................... 3.9 1.4
Cumulative effect of a change in accounting principle.................................. 20.6 2.2
Non-cash stock compensation............................................................ (0.8) (1.3)
Changes in operating assets and liabilities:
Increase in accounts receivable, net................................................... (96.2) (153.0)
Decrease in inventory and promotional merchandise, net................................. 115.8 40.7
Increase in other assets, net.......................................................... (42.1) (50.2)
Decrease in accounts payable........................................................... (47.4) (40.6)
Increase in accrued income taxes....................................................... 34.7 30.3
Increase in other accrued liabilities.................................................. 17.2 0.5
Increase in other noncurrent liabilities............................................... 5.0 13.1
--------- --------
Net cash flows provided by operating activities...................................... 365.6 244.5
--------- --------
Cash Flows from Investing Activities
Capital expenditures....................................................................... (139.9) (133.5)
Acquisition of businesses, net of cash acquired............................................ (10.2) (6.0)
Purchase of long-term investments.......................................................... - (0.3)
Proceeds from the disposition of long-term investments..................................... 4.5 3.4
--------- --------
Net cash flows used for investing activities......................................... (145.6) (136.4)
--------- --------
Cash Flows from Financing Activities
Increase (decrease) in short-term debt, net................................................ (0.2) 0.1
Proceeds from issuance of long-term debt, net.............................................. 247.2 24.5
Repayments of long-term debt............................................................... (253.9) (27.3)
Net proceeds from employee stock transactions.............................................. 4.8 7.6
Payments to acquire treasury stock......................................................... (49.8) -
Dividends paid............................................................................. (53.3) (53.2)
--------- --------
Net cash flows used for financing activities......................................... (105.2) (48.3)
--------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents.................................. 7.5 3.4
--------- --------
Net Increase in Cash and Cash Equivalents.................................................. 122.3 63.2
Cash and Cash Equivalents at Beginning of Period........................................... 346.7 320.3
--------- --------
Cash and Cash Equivalents at End of Period................................................. $ 469.0 $ 383.5
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .............................................................................. $ 11.2 $ 21.2
========= ========
Income taxes........................................................................... $ 85.8 $ 132.1
========= ========
Non-cash items:
Tax benefit from exercise of stock options............................................. $ 1.6 $ 4.3
========= ========
See notes to consolidated financial statements.
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 nine month periods ended March 31, 2002, 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 Nine Months Ended
March 31 March 31
-------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
(In millions, except per share data)
Numerator:
Net earnings before accounting change................................. $ 50.7 $ 65.1 $ 237.9 $ 287.0
Preferred stock dividends............................................. 5.9 5.9 17.6 17.6
--------- --------- --------- ---------
Net earnings attributable to common stock before accounting change.... 44.8 59.2 220.3 269.4
Cumulative effect of a change in accounting principle, net of tax..... - - (20.6) (2.2)
========= ========= ========= =========
Net earnings attributable to common stock............................. $ 44.8 $ 59.2 $ 199.7 $ 267.2
========= ========= ========= =========
Denominator:
Weighted average common shares outstanding - Basic.................... 237.9 238.4 238.3 238.3
Effect of dilutive securities: Stock options.......................... 2.5 3.6 2.8 3.9
--------- --------- --------- ---------
Weighted average common shares outstanding - Diluted.................. 240.4 242.0 241.1 242.2
========= ========= ========= =========
Basic net earnings per common share:
Net earnings before accounting change................................. $ .19 $ .25 $ .93 $ 1.13
Cumulative effect of a change in accounting principle, net of tax..... - - (.09) (.01)
--------- -------- --------- ---------
Net earnings.......................................................... $ .19 $ .25 $ .84 $ 1.12
========= ======== ========= =========
Diluted net earnings per common share:
Net earnings before accounting change................................. $ .19 $ .24 $ .92 $ 1.11
Cumulative effect of a change in accounting principle, net of tax..... - - (.09) (.01)
-------- -------- --------- ---------
Net earnings.......................................................... $ .19 $ .24 $ .83 $ 1.10
========= ======== ========= =========
As of March 31, 2002 and 2001, options to purchase 14.4 million and 10.1 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.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable is stated net of the allowance for doubtful accounts and
retail customer deductions of $29.6 million and $26.8 million as of March 31,
2002 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.
March 31 June 30
2002 2001
---- ----
(Unaudited)
(In millions)
Inventory and promotional merchandise consists of:
Raw materials......................................... $ 128.7 $ 172.9
Work in process....................................... 18.7 24.4
Finished goods........................................ 296.1 308.0
Promotional merchandise............................... 71.4 125.0
-------- -------
$ 514.9 $ 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.
March 31 June 30
2002 2001
---- ----
(Unaudited)
(In millions)
Land ................................................... $ 12.8 $ 12.7
Buildings and improvements.............................. 140.5 135.7
Machinery and equipment................................. 607.5 563.2
Furniture and fixtures.................................. 79.5 77.5
Leasehold improvements.................................. 400.5 311.2
-------- -------
1,240.8 1,100.3
Less accumulated depreciation and amortization.......... 670.8 571.6
-------- -------
$ 570.0 $ 528.7
======== ========
Depreciation and amortization of property, plant and equipment was $33.8 million
and $27.0 million during the three months ended March 31, 2002 and 2001,
respectively, and $99.1 million and $79.8 million during the nine months ended
March 31, 2002 and 2001, respectively.
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 Nine Months Ended
March 31 March 31
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
(In millions, except per share data)
Reported Net Earnings before Accounting Change.......................... $ 50.7 $ 65.1 $ 237.9 $ 287.0
Cumulative effect of a change in accounting principle, net of tax... - - (20.6) (2.2)
------- ------- ------- --------
Net Earnings......................................................... 50.7 65.1 217.3 284.8
Preferred stock dividends............................................ 5.9 5.9 17.6 17.6
------- ------- ------- --------
Reported Net Earnings Attributable to Common Stock...................... 44.8 59.2 199.7 267.2
Add back:
Goodwill amortization, net of tax................................... - 3.3 - 9.9
------- ------- ------- --------
Pro forma Net Earnings ................................................. $ 44.8 $ 62.5 $ 199.7 $ 277.1
======= ======= ======= ========
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended Nine Months Ended
March 31 March 31
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
(In millions, except per share data)
Basic net earnings per common share:
Reported net earnings attributable to
common stock before accounting change............................. $ .19 $ .25 $ .93 $ 1.13
Cumulative effect of a change in accounting principle, net of tax.... - - (.09) (.01)
------- ------- ------- --------
Net earnings attributable to common stock............................ .19 .25 .84 1.12
Goodwill amortization, net of tax.................................... - .01 - .04
------- -------- ------- --------
Pro forma net earnings attributable to common stock.................. $ .19 $ .26 $ .84 $ 1.16
======= ======= ======= ========
Diluted net earnings per common share:
Reported net earnings attributable to
common stock before accounting change............................. $ .19 $ .24 $ .92 $ 1.11
Cumulative effect of a change in accounting principle, net of tax.... - - (.09) (.01)
------- ------- ------- --------
Net earnings attributable to common stock............................ .19 .24 .83 1.10
Goodwill amortization, net of tax.................................... - .01 - .04
------- ------- ------- --------
Pro forma net earnings attributable to common stock.................. $ .19 $ .25 $ .83 $ 1.14
======= ======= ======= ========
Weighted average common shares outstanding:
Basic .............................................................. 237.9 238.4 238.3 238.3
Diluted.............................................................. 240.4 242.0 241.1 242.2
Goodwill
The change in the carrying amount of goodwill for the nine months ended March
31, 2002 is as follows:
Nine Months Ended
March 31, 2002
--------------
(Unaudited)
(In millions)
Net balance as of June 30, 2001...................................... $ 699.7
Goodwill impairment loss.......................................... (20.6)
Goodwill acquired during the period............................... 8.3
--------
Net balance as of March 31, 2002..................................... $ 687.4
========
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Intangible Assets
The components of other intangible assets as of March 31, 2002 consist of the
following:
March 31, 2002
----------------------------------------
(Unaudited)
(In millions)
Gross Carrying Accumulated Total Net
Intangible assets consist of: Value Amortization Book Value
---------- ------------ -----------
Licensing agreements........ $ 15.0 $ 6.0 $ 9.0
Trademarks.................. 15.9 7.5 8.4
Patents..................... 1.6 0.5 1.1
-------- ------- -------
Total....................... $ 32.5 $ 14.0 $ 18.5
======== ======= =======
The aggregate amortization expense related to intangible assets for the nine
months ended March 31, 2002 was $2.1 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 nine-month period ending March 31, 2002, the Company made payments of
$19.4 million, which reduced the restructuring liability that had been
established in June of fiscal 2001. Approximately $12.0 million of this amount
related to a portion of the severance payments to 52 employees. As of March 31,
2002, 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
Effective January 1, 2002, the Company adopted the Emerging Issues Task Force
("EITF") Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a
Customer", which codified and reconciled the following EITF Issues: Issue No.
00-14, "Accounting for Certain Sales Incentives", Issue No. 00-22, "Accounting
for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers,
and Offers for Free Products or Services to be Delivered in the Future" and
Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid
to a Reseller of the Vendor's Products". Issue No. 00-14 addresses when sales
incentives and discounts should be recognized, as well as where the related
revenues and expenses should be classified in the financial statements. Upon
adoption of this Issue, the Company reclassified revenues generated from
purchase-with-purchase activities as sales and costs of purchase-with-purchase
and gift-with-purchase activities as cost of sales, which were previously
reported net as operating expenses. Operating income has remained unchanged by
this adoption. These reclassifications have been reported in the accompanying
consolidated statements of earnings retroactively for all periods reported.
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.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (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 Nine Months Ended
March 31 March 31
-------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
(In millions)
Net earnings..................................................... $ 50.7 $ 65.1 $ 217.3 $ 284.8
--------- --------- --------- --------
Other comprehensive income:
Net unrealized investment (loss)............................ (0.1) (2.7) (1.9) (10.7)
Net derivative instruments gain (loss)...................... 1.8 (1.9) 1.8 1.1
Net minimum pension liability adjustments................... - - (0.3) -
Translation adjustments..................................... (12.5) (4.6) 2.0 (21.2)
---------- ---------- --------- --------
Other comprehensive income (loss)........................... (10.8) (9.2) 1.6 (30.8)
---------- ---------- --------- --------
Comprehensive income............................................. $ 39.9 $ 55.9 $ 218.9 $ 254.0
========= ========= ========== ========
The accumulated net loss on derivative instruments for the three and nine month
periods ended March 31, 2002 consists of the following:
Three Months Ended Nine Months Ended
March 31, 2002 March 31, 2002
-------------------- ------------------
(Unaudited)
(In millions)
OCI - derivative instruments, beginning of period........... $ (2.0) $ (2.0)
--------- ---------
Gain (loss) on derivative instruments.................... (0.7) (1.4)
Reclassification to earnings of net loss during the period 3.5 4.3
Provision for deferred income taxes...................... (1.0) (1.1)
--------- ---------
Net derivative instruments gain....................... 1.8 1.8
--------- ---------
OCI - derivative instruments, end of period................. $ (0.2) $ (0.2)
========= =========
The $0.2 million, net of tax, derivative instrument loss recorded in OCI at the
end of the period related to forward contracts and foreign currency options.
With regard to interest rate contracts, upon repayment of the term loan in
February 2002 and the termination of interest rate swaps and options, losses
deferred in OCI were reclassified to earnings. Those losses were substantially
offset by deferred gains from previously terminated interest rate swaps.
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. Although the Company operates
in one business segment, beauty products, management also evaluates performance
on a product category basis. Performance is measured based upon net sales and
operating income. Operating income represents earnings before income taxes 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 Nine Months Ended
March 31 March 31
------------------- -----------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
(In millions)
SEGMENT DATA
Net Sales:
Skin Care........................................................ $ 438.4 $ 419.6 $ 1,279.3 $ 1,253.3
Makeup........................................................... 470.5 464.5 1,348.5 1,330.2
Fragrance........................................................ 156.5 173.8 812.3 889.0
Hair Care........................................................ 49.6 39.9 158.0 128.5
Other............................................................ 6.7 5.7 16.6 19.5
--------- --------- --------- ---------
$ 1,121.7 $ 1,103.5 $3,614.7 $ 3,620.5
========= ========= ======== =========
Operating Income:
Skin Care........................................................ $ 58.9 $ 56.7 $ 202.8 $ 209.0
Makeup........................................................... 41.5 52.1 140.7 170.5
Fragrance........................................................ (20.9) (6.1) 21.6 72.5
Hair Care........................................................ 0.6 2.1 12.3 8.5
Other............................................................ 1.0 0.5 0.1 1.6
--------- --------- --------- ---------
81.1 105.3 377.5 462.1
Reconciliation:
Interest expense, net......................................... 2.6 2.0 8.3 11.4
--------- --------- --------- ---------
Earnings before income taxes, minority interest and
accounting change............................................. $ 78.5 $ 103.3 $ 369.2 $ 450.7
========= ========= ========= =========
REGIONAL DATA
Net Sales:
The Americas..................................................... $ 696.5 $ 686.6 $ 2,218.2 $ 2,251.9
Europe, the Middle East & Africa................................. 291.3 283.7 933.4 914.2
Asia/Pacific..................................................... 133.9 133.2 463.1 454.4
--------- --------- --------- ---------
$ 1,121.7 $ 1,103.5 $3,614.7 $3,620.5
========= ========= ========= =========
Operating Income:
The Americas..................................................... $ 37.7 $ 57.3 $ 202.6 $ 274.8
Europe, the Middle East & Africa................................. 37.3 39.6 129.9 143.4
Asia/Pacific..................................................... 6.1 8.4 45.0 43.9
--------- --------- --------- ---------
$ 81.1 $ 105.3 $ 377.5 $ 462.1
========= ========= ========= =========
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SUBSEQUENT EVENTS
Strategic Initiatives / Special Charges
---------------------------------------
The Company will take a special charge for restructuring and repositioning
certain businesses in the fiscal 2002 fourth quarter. The restructuring
focuses on cost reduction opportunities related to the Internet, supply chain,
globalization of the organization and distribution channel refinements. The
pre-tax charge will be approximately $108 million. On an after-tax basis, the
charge will be approximately $78 million, equal to $0.32 per diluted share.
These after tax charges will result in a full year effective tax rate of
approximately 36%. About $45 million of the charges are cash related and are
expected to generate annual ongoing savings of approximately $43 million,
beginning in fiscal 2003.
Specifically, the charge will include the following:
o Internet
--------
In an effort to achieve strategic objectives, reduce costs and improve
profitability, the Company will outsource future Gloss.com platform
development and maintenance efforts to one or more third party
providers. Additionally, Gloss will close its San Francisco facility
and consolidate its operations in New York. As a result, included in
the charge is a $24 million provision for restructuring the Gloss.com
operations, including benefits and severance packages for 33 employees
as well as asset write-offs. The Company will also take a $20
million charge to write-off the related Gloss.com acquisition goodwill.
o Supply Chain
------------
Building on previously announced chain initiatives, the Company
will restructure certain manufacturing, distribution, research and
development, information systems and quality assurance operations
in the United States, Canada and Europe. The related charge will be $16
million.
o Globalization of Organization
-----------------------------
The Company continues to implement its previously announced transition
to a global brand structure designed to streamline the decision making
process and increase innovation and speed-to-market. The next phase
of this transition entails eliminating duplicate functions and
responsibilities. The Company will record a charge of $23 million
associated with these efforts.
o Distribution
------------
The Company has evaluated areas of distribution relative to their
financial target and will focus its resources on the most
productive sales channels. As a result, the Company will reconfigure
its Argentina affiliate and will close certain points of distribution,
including its remaining in-store tommy's shops. The Company will record
a $25 million provision related to these actions.
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 condition.
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 alleges 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
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. Both parties have now filed summary
judgment motions, and the court is expected to schedule oral argument on the
motions. The Company intends to defend the lawsuit vigorously. Although the
final outcome 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
condition.
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 the lawsuit vigorously. While no assurance can be
given as to the ultimate outcome, based on preliminary investigation, management
believes that the case will not have a material adverse effect on the Company's
consolidated financial condition.
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
condition.
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 condition.
THE ESTEE LAUDER COMPANIES INC.
PART II. OTHER INFORMATION
Item 5. Other Events
Change in Registrant's Certifying Accountant
With the filing of this quarterly report on Form 10-Q, Arthur Andersen LLP is
no longer the Company's independent accountants. As reported in the Company's
interim report on Form 8-K, filed April 16, 2002, KPMG LLP has been engaged as
the Company's independent accountants.
Earnings Release
On April 30, 2002, the Company issued a press release reporting its earnings and
updating its outlook for the remainder of the fiscal year. The press release is
filed as Exhibit 99.1 hereto and is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits --
Exhibit
Number Description
------ -----------
99.1 Press release dated April 30, 2002 of The Estee Lauder
Companies Inc.
(b) Reports on Form 8-K --
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.
On March 19, 2002, we filed a Current Report on Form 8-K. Pursuant to Item 5 of
Form 8-K, we revised our expectations regarding fiscal 2002 third-quarter and
full-year financial results.
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: April 30, 2002 By: /s/Richard W. Kunes
-----------------------
Richard W. Kunes
Senior Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)