SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
______________________
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 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 January 24, 2003, 123,854,305 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
Part I. Financial Information Page
Consolidated Statements of Earnings --
Three Months and Six Months Ended December 31, 2002 and 2001.......... 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 3
Consolidated Balance Sheets --
December 31, 2002 and June 30, 2002.................................. 14
Consolidated Statements of Cash Flows --
Six Months Ended December 31, 2002 and 2001.......................... 15
Notes to Consolidated Financial Statements............................. 16
Controls and Procedures.............................................. 21
Part II. Other Information................................................. 22
THE ESTEE LAUDER COMPANIES INC.
PART I. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
(In millions, except per share data)
Net Sales........................................................ $1,412.7 $1,298.2 $2,655.2 $2,493.0
Cost of sales.................................................... 371.4 343.3 728.5 688.6
------- ------- ------- -------
Gross Profit..................................................... 1,041.3 954.9 1,926.7 1,804.4
------- ------- ------- -------
Operating expenses:
Selling, general and administrative........................... 865.5 806.6 1,631.9 1,499.2
Related party royalties....................................... 5.8 4.8 10.4 8.8
------- ------- ------- -------
871.3 811.4 1,642.3 1,508.0
------- ------- ------- -------
Operating Income................................................. 170.0 143.5 284.4 296.4
Interest expense, net............................................ 2.2 1.9 5.1 5.7
------- ------- ------- -------
Earnings before Income Taxes, Minority Interest
and Accounting Change........................................... 167.8 141.6 279.3 290.7
Provision for income taxes....................................... 56.1 48.9 93.5 100.3
Minority interest, net of tax.................................... (2.1) (2.6) (2.8) (3.2)
------- ------- ------- -------
Net Earnings before Accounting Change............................ 109.6 90.1 183.0 187.2
Cumulative effect of a change in accounting principle............ - - - (20.6)
------- ------- ------- -------
Net Earnings .................................................... 109.6 90.1 183.0 166.6
Preferred stock dividends........................................ 5.8 5.8 11.7 11.7
------- ------- ------- -------
Net Earnings Attributable to Common Stock........................ $ 103.8 $ 84.3 $ 171.3 $ 154.9
======= ======= ======= =======
Basic net earnings per common share:
Net earnings attributable to common stock before
accounting change.......................................... $ .45 $ .35 $ .73 $ .74
Cumulative effect of a change in accounting principle....... - - - (.09)
------- ------- -------- -------
Net earnings attributable to common stock................... $ .45 $ .35 $ .73 $ .65
======= ======= ======== =======
Diluted net earnings per common share:
Net earnings attributable to common stock before
accounting change.......................................... $ .44 $ .35 $ .73 $ .73
Cumulative effect of a change in accounting principle....... - - - (.09)
------- ------- -------- -------
Net earnings attributable to common stock................... $ .44 $ .35 $ .73 $ .64
======= ======= ======== =======
Weighted average common shares outstanding:
Basic....................................................... 233.1 238.1 234.2 238.5
Diluted..................................................... 235.0 240.7 236.2 241.5
Cash dividends declared per common share......................... $ .20 $ .05 $ .20 $ .10
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 beauty products including those in the skin
care, makeup, fragrance and hair care categories which are distributed in over
130 countries and territories. The following is a comparative summary of
operating results for the three and six months ended December 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 Six Months Ended
December 31 December 31
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
(In millions)
Net Sales (a)
By Region:
The Americas............................................... $ 783.5 $ 751.4 $1,571.2 $1,521.7
Europe, the Middle East & Africa........................... 438.0 368.3 742.5 642.1
Asia/Pacific............................................... 191.2 178.5 341.5 329.2
------- ------- ------- -------
$ 1,412.7 $1,298.2 $2,655.2 $2,493.0
======= ======= ======= =======
By Product Category:
Skin Care.................................................. $ 479.3 $ 444.8 $ 900.8 $ 840.9
Makeup..................................................... 476.8 428.1 944.8 878.0
Fragrance.................................................. 386.3 362.4 682.8 655.8
Hair Care.................................................. 60.2 58.4 110.6 108.4
Other...................................................... 10.1 4.5 16.2 9.9
------- ------- ------- -------
$ 1,412.7 $ 1,298.2 $2,655.2 $2,493.0
======= ======= ======= =======
Operating Income
By Region:
The Americas............................................... $ 70.9 $ 61.1 $ 136.0 $ 164.9
Europe, the Middle East & Africa........................... 73.4 53.8 118.0 92.6
Asia/Pacific............................................... 25.7 28.6 30.4 38.9
-------- -------- -------- --------
$ 170.0 $ 143.5 $ 284.4 $ 296.4
======== ======== ======== ========
By Product Category:
Skin Care.................................................. $ 84.4 $ 77.3 $ 130.4 $ 143.9
Makeup..................................................... 57.4 45.1 95.1 99.2
Fragrance.................................................. 21.3 11.5 50.0 42.5
Hair Care.................................................. 4.8 10.0 8.6 11.7
Other...................................................... 2.1 (0.4) 0.3 (0.9)
-------- -------- -------- --------
$ 170.0 $ 143.5 $ 284.4 $ 296.4
======== ======== ======== ========
(a) Effective January 1, 2002, we adopted Emerging Issues Task Force ("EITF")
Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer".
Upon adoption of this Issue, we reclassified revenues generated from our
purchase with purchase activities as sales, which were previously reported net
as operating expenses. Operating income has remained unchanged by this adoption.
For purposes of comparability, these reclassifications have been reflected
retroactively for all periods presented.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents certain consolidated earnings data as a percentage
of net sales:
Three Months Ended Six Months Ended
December 31 December 31
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Net sales........................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................................... 26.3 26.4 27.4 27.6
----- ----- ----- -----
Gross profit..................................................... 73.7 73.6 72.6 72.4
----- ----- ----- -----
Operating expenses
Selling, general and administrative........................... 61.3 62.1 61.5 60.1
Related party royalties....................................... 0.4 0.4 0.4 0.4
----- ----- ----- -----
61.7 62.5 61.9 60.5
----- ----- ----- -----
Operating income................................................. 12.0 11.1 10.7 11.9
Interest expense, net............................................ 0.1 0.2 0.2 0.2
----- ----- ----- -----
Earnings before income taxes, minority interest and accounting
change........................................................ 11.9 10.9 10.5 11.7
Provision for income taxes....................................... 4.0 3.8 3.5 4.1
Minority interest, net of tax.................................... (0.1) (0.2) (0.1) (0.1)
----- ----- ----- -----
Net earnings before accounting change............................ 7.8 6.9 6.9 7.5
Cumulative effect of a change in accounting principle............ - - - (0.8)
----- ----- ----- -----
Net earnings..................................................... 7.8% 6.9% 6.9% 6.7%
===== ===== ===== =====
Second Quarter Fiscal 2003 as Compared with Second Quarter Fiscal 2002
Net Sales
Net sales increased 9% or $114.5 million to $1,412.7 million reflecting growth
in all product categories and geographic regions. The increases in all product
categories resulted from new and recent product launches coupled with solid
sales from our core products. Geographically, net sales in Europe, the Middle
East & Africa were led by double-digit growth from the continued recovery of our
travel retail business as well as a double-digit increase in the United Kingdom.
Results also benefited from the difficulties we experienced in the prior-year
quarter attributable to the events of September 11, 2001 and inventory
contraction by U.S. retailers. In light of the current geo-political
uncertainty, future sales may be affected by unforeseen events. Net sales in the
current quarter were positively impacted by weakening of the U.S. dollar.
Excluding the impact of foreign currency translation, net sales increased 6%.
Product Categories
Skin Care
Net sales of skin care products increased 8% or $34.5 million to $479.3 million.
This increase in net sales was primarily attributable to the current period
launches of Perfectionist Correcting Serum for Lines and Wrinkles and the
Repairwear line of products, as well as recently launched products such as
Advanced Stop Signs and Resilience Lift OverNight Face and Throat Creme.
Additionally, the increase was supported by strong sales of Moisture Surge
Extra, Re-Nutriv Ultimate Lifting Creme and A Perfect World Face and Body
products. Partially offsetting these increases were lower net sales of certain
existing products such as Turnaround Cream, Stop Signs and Idealist Skin
Refinisher, as well as LightSource Transforming Moisture Lotion and Cream,
which was launched in the first quarter last fiscal year. Excluding the impact
of foreign currency translation, net sales increased 5%.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Makeup
Makeup net sales increased 11% or $48.7 million to $476.8 million. In addition
to strong sales of our makeup artist lines, the increase in net sales reflected
the current period launch of Eye Defining Duo and Virtual Youth. Recently
launched products such as So Ingenious Multi-Dimension Liquid Foundation and
Loose Powder, Dewy Smooth Anti-Aging Makeup and Moisture Sheer Lipstick, as well
as new and existing products in the Pure Color line, also contributed to
increased net sales. Offsetting these increases were lower net sales of certain
existing products such as Gentle Light Makeup and Powder, Sumptuous Lipstick and
High Impact Eye Shadow Duos. Excluding the impact of foreign currency
translation, makeup net sales increased 9%.
Fragrance
Net sales of fragrance products increased 7% or $23.9 million to $386.3 million.
Our business has begun to recover from last year's deterioration in the travel
retail business, which is substantially fragrance driven. In addition, the
increase in net sales reflects the recent launch of Estee Lauder pleasures
intense, Intuition for Men, T girl and Donna Karan Black Cashmere. Additionally,
strong sales of Beautiful, Lauder Pleasures for Men, as well as a resurgence of
the Aromatics Elixir line of products contributed to the increase in net sales.
These net sales increases were partially offset by the overall softness in the
fragrance business in the 2002 holiday season and lower net sales of certain
other Tommy Hilfiger licensed products, Estee Lauder pleasures and Intuition.
Excluding the impact of foreign currency translation, fragrance net sales
increased 3%.
Hair Care
Hair care net sales increased 3% or $1.8 million to $60.2 million. This increase
was primarily the result of sales growth from Aveda and Bumble and bumble
products. Off a smaller base, Bumble and bumble product sales have outpaced the
category increase reflecting increased distribution and the positive influence
of product education offered to salons in our network. Growth in Aveda products
reflects the launch of the new Light Elements line of products and new Aveda
Environmental Lifestyle Stores, partially offset by a strategic reduction in the
number of salons that offer our products.
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 4% or $32.1 million to $783.5 million,
reflecting the success of our newer brands and new and recent product launches.
Partially offsetting these results was the continued soft retail environment in
the United States. In Europe, the Middle East & Africa, net sales increased 19%
or $69.7 million to $438.0 million. This increase was primarily the result of
significantly higher net sales in our worldwide travel retail business, as sales
continue to recover from the levels experienced after September 11, 2001.
However, our travel retail business could be impacted again by unforeseen world
events. Net sales in the United Kingdom, France, Spain and Switzerland
experienced double-digit growth. Excluding the impact of foreign currency
translation, Europe, the Middle East & Africa net sales increased 10%. Net sales
in Asia/Pacific increased 7% or $12.7 million to $191.2 million primarily due to
strong net sales in Korea and Thailand. Although Japan remains a difficult
market due to local economic conditions and increasing competition, we
experienced a modest increase in sales. Excluding the impact of foreign currency
translation, Asia/Pacific net sales increased 5%.
We strategically stagger our new product launches by geographic market, which
may contribute to differences in regional sales growth.
Cost of Sales
Cost of sales as a percentage of total net sales improved to 26.3% as compared
with 26.4% in the prior-year quarter reflecting the impact of our manufacturing
and sourcing initiatives combined with lower costs from promotional activities
(including the cost of purchase with purchase and gift with purchase merchandise
as a component of cost of sales resulted from our adoption of EITF Issue
No. 01-9). Since the cost of these promotional activities is a component of cost
of sales and the timing and level of promotions vary with our promotional
calendar, we have experienced and expect to continue to experience, fluctuations
in the cost of sales percentage.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Expenses
Operating expenses decreased to 61.7% of net sales as compared with 62.5% of net
sales in the prior-year quarter. The decrease in operating expenses as a
percentage of net sales reflects the higher growth rate in sales, restructuring
benefits and other cost containment efforts. Higher levels of advertising,
sampling and merchandising in the first quarter have contributed to the sales
growth in this quarter. Advertising, sampling and merchandising spending also
increased in the current period in support of our overall business and our
second-half initiatives. Changes in advertising, sampling and merchandising
spending result from the type, timing and level of activities related to product
launches and rollouts, as well as the markets being emphasized.
Operating Income
Operating income increased 19% or $26.5 million to $170.0 million as compared
with the prior-year quarter. Operating margins were 12.0% of net sales in the
current period as compared with 11.1% in the prior-year quarter. As previously
discussed, the increase in operating margin reflects strong sales growth coupled
with the benefits of our prior restructurings and ongoing cost containment
efforts, particularly in the Americas region.
Product Categories
Operating income increased 85% to $21.3 million in fragrance primarily
reflecting improved results from our travel retail business. Operating income
increased 27% to $57.4 million in makeup and increased 9% to $84.4 million in
skin care due primarily to the strength of new and recently launched products.
Operating income decreased $5.2 million or 52% in hair care, which reflects
planned spending to build our retail distribution and product infrastructure to
support future growth as well as advanced costs of developing certain
international markets.
Geographic Regions
Operating income in the Americas increased 16% or $9.8 million to $70.9 million
reflecting success of our newer brands and the strength of our new and recent
product launches. In Europe, the Middle East & Africa, operating income
increased 36% or $19.6 million to $73.4 million primarily due to the significant
increase in our travel retail business. Operating results improved in a number
of markets led by the United Kingdom and France. In Asia/Pacific, operating
income decreased 10% or $2.9 million to $25.7 million reflecting improved
results in Australia, Korea and Thailand, which were offset by lower operating
income in Taiwan.
Interest Expense, Net
Net interest expense was $2.2 million as compared with $1.9 million in the
prior-year quarter. The increase in net interest expense resulted from a higher
effective interest rate than that in the prior-year quarter, reflecting the
conversion of variable rate debt to fixed rate debt in January 2002. In the
prior-year quarter, our interest rate risk management strategy relied on
commercial paper and variable-rate term loans. Partially offsetting the higher
effective rate was increased interest income generated from higher worldwide
cash balances.
Provision for Income Taxes
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate for income taxes for the three months ended
December 31, 2002 was 33.5% as compared with 34.5% in the prior-year period.
These rates differ from statutory rates reflecting 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.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six Months Fiscal 2003 as compared with Six Months Fiscal 2002
Net Sales
Net sales increased 7% or $162.2 million to $2,655.2 million, reflecting growth
in all product categories and all geographic regions. Product category results
were led by makeup, particularly our make up artist brands, and our regions were
led by Europe, the Middle East and Africa, primarily reflecting improvements in
the travel retail business. In light of the current geo-political uncertainty,
future sales may be affected by unforeseen events. Excluding the impact of
foreign currency translation, net sales increased 4%.
Product Categories
Skin Care
Net sales of skin care products increased 7% or $59.9 million to $900.8 million,
which was primarily attributable to the current period launches of Perfectionist
Correcting Serum for Lines and Wrinkles and the Repairwear line of products, as
well as the recently launched products such as Advanced Stop Signs and
Resilience Lift OverNight Face and Throat Creme. Additionally, the increase was
supported by strong sales of Moisture Surge Extra and Moisture Surge Eye Gel,
Re-Nutriv Ultimate Lifting Creme and products in Clinque's 3-Step Skin Care
System. Partially offsetting these increases were lower net sales of certain
existing products such as Turnaround Cream, Stop Signs and Idealist Skin
Refinisher, as well as LightSource Transforming Moisture Lotion and Cream, which
was launched in the first quarter last fiscal year. Excluding the impact of
foreign currency translation, net sales increased 4%.
Makeup
Makeup net sales increased 8% or $66.8 million to $944.8 million due to strong
sales of our makeup artist lines and sales generated from recently launched
products such as So Ingenious Multi-Dimension Liquid Foundation and Loose
Powder, Dewy Smooth Anti-Aging Makeup and Moisture Sheer Lipstick, as well as
new and existing products in the Pure Color line. Offsetting these increases
were lower net sales of certain existing products such as Gentle Light Makeup
and Powder, Sumptuous Lipstick and High Impact Eye Shadow Duos. Excluding the
impact of foreign currency translation, makeup net sales increased 6%.
Fragrance
Net sales of fragrance products increased 4% or $27.0 million to $682.8 million.
Our business has begun to recover from last year's deterioration in the travel
retail business, which is substantially fragrance driven. In addition, the
increase in net sales reflects the recent launch of Estee Lauder pleasures
intense, Intuition for Men, T girl, Donna Karan Black Cashmere and the launch of
the kate spade line of products. Additionally, strong sales of Youth Dew, as
well as a resurgence of the Aromatics Elixir line of products supported the
increase in net sales. These net sales increases were partially offset by the
overall softness in the fragrance business in the 2002 holiday season and lower
net sales of certain Tommy Hilfiger licensed products, Estee Lauder pleasures
and Intuition. Excluding the impact of foreign currency translation, fragrance
net sales increased 1%.
Hair Care
Hair care net sales increased 2% or $2.2 million to $110.6 million. This
increase was primarily the result of sales growth from Aveda and Bumble and
bumble products. We also increased the number of Company-owned Aveda
Environmental Lifestyle Stores and strategically decreased the number of salons
that offer our products.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The introduction of new products may have some cannibalizing effect on sales of
existing products, which we take into account in our business planning.
Geographic Regions
Net sales in the Americas increased 3% or $49.5 million to $1,571.2 million
primarily reflecting growth from our newer brands as well as success of new and
recently launched products. Partially offsetting these results was the continued
soft retail environment in the United States. In Europe, the Middle East &
Africa, net sales increased 16% or $100.4 million to $742.5 million. This
increase was primarily the result of higher net sales in our worldwide travel
retail business, as sales continue to recover from the levels experienced after
September 11, 2001. However, our travel retail business could be impacted again
by unforeseen world events. Net sales in the United Kingdom, Spain, France,
Switzerland, Italy and Greece experienced double-digit growth. Excluding the
impact of foreign currency translation, Europe, the Middle East & Africa net
sales increased 8%. Net sales in Asia/Pacific increased 4% or $12.3 million to
$341.5 million primarily due to higher net sales in Korea and Thailand.
Asia/Pacific net sales were not materially impacted by foreign currency
translation.
We strategically stagger our new product launches by geographic market, which
may contribute to differences in regional sales growth.
Cost of Sales
Cost of sales as a percentage of total net sales improved to 27.4% from 27.6%,
primarily reflecting lower costs from promotional activities (including the cost
of purchase with purchase and gift with purchase merchandise as a component of
cost of sales resulted from our adoption of EITF Issue No. 01-9). Since the cost
of these promotional activities is a component of cost of sales and the timing
and level of promotions vary with our promotional calendar, we have experienced
and expect to continue to experience, fluctuations in the cost of sales
percentage. Also contributing to the improved cost of sales percentage are our
ongoing efforts relative to manufacturing and global sourcing initiatives.
Operating Expenses
Operating expenses increased to 61.9% of net sales as compared with 60.5% of net
sales in the prior-year period. The increase in spending primarily related to
advertising, sampling and merchandising activities during the first fiscal
quarter of 2003 (excluding purchase with purchase and gift with purchase
activities, discussed as a component of cost of sales) to support our sales
growth and build momentum into the holiday selling season. Changes in
advertising, sampling and merchandising spending result from the type, timing
and level of activities related to product launches and rollouts, as well as the
markets being emphasized.
Operating Income
Operating income decreased 4% or $12.0 million to $284.4 million as compared
with the prior-year period. Operating margins were 10.7% of net sales in the
current period as compared with 11.9% in the prior-year period. The decrease in
operating income and operating margin was primarily due to slow sales growth in
the first fiscal quarter and increased sales support spending.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Product Categories
Operating income increased 17% to $50.0 million in fragrance due primarily to
improved results from our travel retail business. Operating income decreased 9%
to $130.4 million in skin care and 4% to $95.1 million in makeup reflecting
advertising, sampling and merchandising spending during the first fiscal quarter
of 2003 to support new and recently launched products which was partially offset
by increased sales during the second quarter of 2003. Operating income decreased
$3.1 million or 27% in hair care, which reflects planned spending to build
retail distribution and product infrastructure to support future growth.
Geographic Regions
Operating income in the Americas decreased 18% or $28.9 million to $136.0
million due to increased sales support spending on advertising, sampling and
merchandising activities. In Europe, the Middle East & Africa, operating income
increased 27% or $25.4 million to $118.0 million primarily due to the
significantly increased results generated from our travel retail business as
well as improved operating results in the United Kingdom. In Asia/Pacific,
operating income decreased 22% or $8.5 million to $30.4 million. This decrease
reflects improved results in Korea, Japan, and Thailand, which was more than
offset by a decrease in Australia, which derived a benefit in the prior-year
period from a change in our retailer arrangements.
Interest Expense, Net
Net interest expense was $5.1 million as compared with $5.7 million in the
prior-year period. The decrease in net interest expense was primarily due to
higher interest income generated by higher invested cash balances and lower
outstanding net borrowings. This improvement was partially offset by a higher
effective interest rate, which resulted from the increased proportion of fixed
rate debt as compared with variable rate debt in the same period last year.
Provision for Income Taxes
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate for income taxes for the six months ended
December 31, 2002 was 33.5% as compared with 34.5% in the prior-year period.
These rates differ from statutory rates reflecting 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.
Accounting Change
Effective July 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No 142, "Goodwill and Other Intangible Assets". In accordance
with SFAS No. 142, intangible assets, including purchased goodwill, must be
evaluated for impairment. Based upon initial impairment testing which was
completed during the second quarter of fiscal 2002, the Company recorded
a write down of goodwill in the amount of $20.6 million. This write down was
reported as a cumulative effect of a change in accounting principle, as of
July 1, 2001, in the accompanying consolidated statements of earnings.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Liquidity and Capital Resources
Our principal sources of funds historically have been cash flows from operations
and borrowings under commercial paper and committed and uncommitted credit lines
provided by banks in the United States and abroad. At December 31, 2002, we had
cash and cash equivalents of $654.8 million compared with $546.9 million at
June 30, 2002.
We have a $750.0 million commercial paper program, under which we have issued,
and intend to issue, commercial paper in the United States. Our commercial paper
is currently rated A-1 by Standard & Poor's and P-1 by Moody's. Our long-term
credit ratings are A+ by Standard & Poor's and A1 by Moody's. At December 31,
2002, our outstanding borrowings included $130.0 million of commercial paper;
$249.0 million, net of $1.0 million of unamortized debt discount, of 6% Senior
Notes due January 2012; a 350.0 million yen loan payable (approximately $2.9
million at current exchange rates), which is due in April 2003; and a 3.0
billion yen term loan (approximately $24.7 million at current exchange rates),
which is due in March 2006. Customarily, 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. At December 31, 2002, $80.0 million of the
$130.0 million outstanding commercial paper has been characterized as short-term
borrowings based on our intent to repay, and not refinance, that amount during
the remainder of the fiscal year as such commercial paper matures. As of
December 31, 2002, we had an unused $400.0 million revolving credit facility,
expiring on June 28, 2006. We also have an effective shelf registration
statement covering the potential issuance of up to $150.0 million in 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 December 31, 2002, we also had $70.6
million in additional credit facilities, of which $1.1 million was used.
Total debt as a percent of total capitalization was 19% at December 31, 2002 as
compared with 18% at June 30, 2002.
Net cash provided by operating activities was $370.0 million during the six
months ended December 31, 2002 as compared with net cash provided by operating
activities of $261.5 million in the prior-year period. The improved operating
cash position primarily corresponds to increased advertising, sampling and
merchandising accruals, which correspond to a higher level of spending and the
type and timing of those activities. Additionally, certain other business and
employee related accruals were lower in the prior year period following a
downturn in our business. Partially offsetting this improvement was a reduction
in the level of accrued income taxes, which was higher in the prior year period
due to tax payment deferrals granted subsequent to September 11, 2001. In
addition, our inventory control initiatives continue to result in lower
inventory and accounts payable levels relative to the balances reported at
June 30, 2002 and 2001. Net cash used for investing activities was $69.9
million during the six months ended December 31, 2002, which primarily reflects
capital expenditures. Net cash used for financing activities of $190.8 million
primarily relates to common stock repurchases.
On October 30, 2002, the Board of Directors declared an annual dividend of $.20
per share on our Class A and Class B Common Stock, payable on January 3, 2003 to
stockholders of record at the close of business on December 12, 2002. Total
dividends declared, including dividends on the $6.50 Cumulative Redeemable
Preferred Stock, for the six months ended December 31, 2002 were $58.2 million.
As previously disclosed, the Board of Directors determined that it would pay
dividends on the Company's common stock annually rather than quarterly.
In October 2002, the Board of Directors authorized the repurchase of up to 10.0
million additional shares of Class A Common Stock increasing the total
authorization under the share repurchase program to 18.0 million shares. We have
purchased, and may continue to purchase, over an unspecified period of time,
shares of our Class A Common Stock in the open market or in privately negotiated
transactions, depending on market conditions and other factors. During the
first six months of fiscal 2003, we purchased an additional 5.4 million shares
for $165.9 million, bringing the cumulative total of acquired shares to 8.0
million. The repurchase of shares of Class A Common Stock had an accretive
effect on our earnings per share.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Subsequent to December 31, 2002, we entered into an agreement to acquire the
Paris-based Darphin group of companies that develops, manufactures and markets
the "Darphin" brand of skin care products. The transaction is subject to certain
significant conditions and is not expected to be completed until later in the
fiscal year. This transaction will be funded by cash provided by operations and
will not have a material effect on our results of operations or financial
condition.
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 and price new products appropriately, 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 and Hedging Activities
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 effectsof 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 anticipated transactions as
well as 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. While there are no foreign currency options outstanding in
fiscal 2003, we may enter into these agreements to hedge anticipated
transactions where there is a high probability that anticipated exposures will
materialize. The forward exchange contracts have been designated as cash-flow
hedges. As of December 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 2004. Costs associated with entering into
such contracts have not been material to our consolidated financial results. We
do not utilize derivative financial instruments for trading or speculative
purposes. At December 31, 2002, we had foreign currency contracts in the form of
forward exchange contracts in the amount of $424.8 million. The foreign
currencies included in the forward exchange contracts (notional value stated in
U.S. dollars) are principally the Euro ($134.9 million), Swiss franc
($76.2 million), Japanese yen ($53.3 million), British pound ($45.4 million) and
Canadian dollar ($39.6 million).
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, 2002, our average value-at-risk, calculated
for the most recent twelve months, is $6.1 million related to our foreign
exchange contracts. There have been no significant changes in market risk since
June 30, 2002 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 fiscal year
ended June 30, 2002.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies
As disclosed in the annual report on Form 10-K for the fiscal year ended
June 30, 2002, the discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in conformity with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses reported in those financial
statements. These judgements can be subjective and complex, and consequently
actual results could differ from those estimates. Our most critical accounting
policies relate to revenue recognition; concentration of credit risk; inventory;
pension and other postretirement benefit costs; goodwill and other intangible
assets; income taxes; and derivatives. Based on the recent performance of the
equity markets, we adjusted the expected rate of return on plan assets for our
noncontributory defined benefit pension plan to 8.5% for fiscal 2003 which will
result in a higher calculated pension expense. Since June 30, 2002, there have
been no changes in our critical accounting policies and no other significant
changes to the assumptions and estimates related to them.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, restructurings, bankruptcies and reorganizations
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, tax laws and regulations, trade rules and
customs regulations, and the outcome and expense of 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, the cost
and availability of capital, which we may need for new equipment,
facilities or acquisitions, and the assumptions underlying our critical
accounting policies and estimates;
(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
December 31 June 30
2002 2002
---- ----
(Unaudited)
(In millions)
ASSETS
Current Assets
Cash and cash equivalents............................................................... $ 654.8 $ 546.9
Accounts receivable, net................................................................ 694.8 624.8
Inventory and promotional merchandise, net.............................................. 534.6 544.5
Prepaid expenses and other current assets............................................... 201.0 211.4
------- -------
Total current assets............................................................... 2,085.2 1,927.6
------- -------
Property, Plant and Equipment, net...................................................... 581.2 580.7
------- -------
Other Assets
Investments, at cost or market value.................................................... 30.0 30.3
Deferred income taxes................................................................... 73.4 72.7
Goodwill, net .......................................................................... 676.1 675.6
Other intangible assets, net............................................................ 17.6 18.4
Other assets, net....................................................................... 102.1 111.2
------- -------
Total other assets................................................................. 899.2 908.2
------- -------
Total assets.............................................................. $3,565.6 $3,416.5
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt......................................................................... $ 84.0 $ 6.6
Accounts payable........................................................................ 202.5 216.4
Accrued income taxes.................................................................... 127.5 110.0
Other accrued liabilities............................................................... 780.1 626.6
------- -------
Total current liabilities.......................................................... 1,194.1 959.6
------- -------
Noncurrent Liabilities
Long-term debt.......................................................................... 323.7 403.9
Other noncurrent liabilities............................................................ 255.1 231.1
------- -------
Total noncurrent liabilities....................................................... 578.8 635.0
------- -------
$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: 131,634,610 at December 31, 2002 and 131,567,986 at June 30, 2002;
240,000,000 shares Class B authorized; shares issued and outstanding: 108,412,533
at December 31, 2002 and June 30, 2002............................................... 2.4 2.4
Paid-in capital......................................................................... 267.6 268.8
Retained earnings....................................................................... 1,488.5 1,363.7
Accumulated other comprehensive loss.................................................... (79.3) (92.5)
------- -------
1,679.2 1,542.4
Less: Treasury stock, at cost; 7,783,560 Class A shares at December 31, 2002
and 2,377,860 Class A shares at June 30, 2002........................................ (246.5) (80.5)
------- -------
Total stockholders' equity......................................................... 1,432.7 1,461.9
------- -------
Total liabilities and stockholders' equity................................ $3,565.6 $3,416.5
======= =======
See notes to consolidated financial statements.
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31
-----------
2002 2001
---- ----
(In millions)
Cash Flows from Operating Activities
Net earnings............................................................................... $ 183.0 $ 166.6
Adjustments to reconcile net earnings to net cash
flows provided by operating activities:
Depreciation and amortization.......................................................... 85.1 77.4
Deferred income taxes.................................................................. 17.8 10.0
Minority interest...................................................................... 2.8 3.2
Cumulative effect of a change in accounting principle.................................. - 20.6
Non-cash stock compensation............................................................ (1.6) (1.8)
Changes in operating assets and liabilities:
Increase in accounts receivable, net................................................... (56.9) (75.7)
Decrease in inventory and promotional merchandise, net................................. 17.0 74.5
Increase in other assets, net.......................................................... (6.9) (30.1)
Decrease in accounts payable........................................................... (17.3) (87.6)
Increase in accrued income taxes....................................................... 15.7 66.2
Increase in other accrued liabilities.................................................. 116.4 24.6
Increase in other noncurrent liabilities............................................... 14.9 13.6
----- -----
Net cash flows provided by operating activities...................................... 370.0 261.5
----- -----
Cash Flows from Investing Activities
Capital expenditures....................................................................... (71.1) (98.1)
Acquisition of businesses, net of cash acquired............................................ (0.4) (10.3)
Proceeds from the disposition of long-term investments..................................... 1.6 2.7
----- -----
Net cash flows used for investing activities......................................... (69.9) (105.7)
----- -----
Cash Flows from Financing Activities
Increase (decrease) in short-term debt, net................................................ 0.3 (0.2)
Repayments of long-term debt............................................................... (2.8) (2.9)
Net proceeds from employee stock transactions.............................................. 1.2 2.7
Payments to acquire treasury stock......................................................... (165.9) (34.2)
Dividends paid............................................................................. (23.6) (35.6)
----- -----
Net cash flows used for financing activities......................................... (190.8) (70.2)
----- -----
Effect of Exchange Rate Changes on Cash and Cash Equivalents.................................. (1.4) 10.1
----- -----
Net Increase in Cash and Cash Equivalents.................................................. 107.9 95.7
Cash and Cash Equivalents at Beginning of Period........................................... 546.9 346.7
----- -----
Cash and Cash Equivalents at End of Period................................................. $ 654.8 $ 442.4
===== =====
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .............................................................................. $ 9.2 $ 9.6
===== =====
Income taxes........................................................................... $ 58.8 $ 35.3
===== =====
Non-cash items:
Tax benefit from exercise of stock options............................................. $ 0.3 $ 1.0
===== =====
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, 2002.
Net Earnings Per Common Share
For the three month and six month periods ended December 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 Six Months Ended
December 31 December 31
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
(In millions, except per share data)
Numerator:
Net earnings before accounting change................................. $ 109.6 $ 90.1 $ 183.0 $ 187.2
Preferred stock dividends............................................. 5.8 5.8 11.7 11.7
------- ------- ------ -------
Net earnings attributable to common stock before accounting change.... 103.8 84.3 171.3 175.5
Cumulative effect of a change in accounting principle, net of tax..... - - - (20.6)
------- ------- ------- -------
Net earnings attributable to common stock............................. $ 103.8 $ 84.3 $ 171.3 $ 154.9
======= ======= ======= =======
Denominator:
Weighted average common shares outstanding - Basic.................... 233.1 238.1 234.2 238.5
Effect of dilutive securities: Stock options.......................... 1.9 2.6 2.0 3.0
------- ------- ------- -------
Weighted average common shares outstanding - Diluted.................. 235.0 240.7 236.2 241.5
======= ======= ======= =======
Basic net earnings per common share:
Net earnings before accounting change................................. $ .45 $ .35 $ .73 $ .74
Cumulative effect of a change in accounting principle, net of tax..... - - - (.09)
------- ------- ------- -------
Net earnings.......................................................... $ .45 $ .35 $ .73 $ .65
======= ======= ======= =======
Diluted net earnings per common share:
Net earnings before accounting change................................. $ .44 $ .35 $ .73 $ .73
Cumulative effect of a change in accounting principle, net of tax..... - - - (.09)
-------- ------- ------- --------
Net earnings.......................................................... $ .44 $ .35 $ .73 $ .64
======== ======= ======= ========
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2002 and 2001, options to purchase 21.7 million and 14.5
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.
Dividends
In May 2002, the Board of Directors determined that it would pay future cash
dividends on the common stock annually rather than quarterly. The first annual
dividend was declared October 30, 2002 in the amount of $.20 per share, payable
on January 3, 2003 to stockholders of record at the close of business on
December 12, 2002 and is included in accrued liabilities at December 31, 2002.
Accounts Receivable
Accounts receivable is stated net of the allowance for doubtful accounts and
retail customer deductions of $35.4 million and $30.6 million as of December 31,
2002 and June 30, 2002, respectively.
Inventory and Promotional Merchandise
Inventory and promotional merchandise only include inventory considered saleable
or usable in future periods, and are stated at the lower of cost or market, with
cost being determined on the first-in, first-out method. Promotional merchandise
is charged to expense at the time the merchandise is shipped to the Company's
customers.
December 31 June 30
2002 2002
---- ----
(Unaudited)
(In millions)
Inventory and promotional merchandise consists of:
Raw materials......................................... $ 121.6 $ 117.5
Work in process....................................... 27.8 27.0
Finished goods........................................ 273.2 272.2
Promotional merchandise............................... 112.0 127.8
------- ------
$ 534.6 $ 544.5
====== ======
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation
and amortization. For financial statement purposes, depreciation is provided
principally on the straight-line method over the estimated useful lives of the
assets ranging from 3 to 40 years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or the expected useful
life of those improvements.
December 31 June 30
2002 2002
---- ----
(Unaudited)
(In millions)
Land ................................................... $ 13.1 $ 13.0
Buildings and improvements.............................. 147.4 144.0
Machinery and equipment................................. 635.4 611.7
Furniture and fixtures.................................. 92.0 86.1
Leasehold improvements.................................. 486.3 447.2
------- -------
1,374.2 1,302.0
Less accumulated depreciation and amortization.......... 793.0 721.3
------- -------
$ 581.2 $ 580.7
======= =======
Depreciation and amortization of property, plant and equipment was $38.8 million
and $33.9 million during the three months ended December 31, 2002 and 2001,
respectively, and $75.2 million and $65.3 million during the six months ended
December 31, 2002 and 2001, respectively.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring Accrual
During the six-month period ended December 31, 2002, the Company paid $20.0
million against its restructuring accrual of which $16.1 million related to the
fiscal 2002 charges and $3.9 million related to the fiscal 2001 charges,
bringing the restructuring accrual balance at December 31, 2002 to $41.2
million. Approximately $13.0 million of this amount related to severance
payments to 224 employees. There have been no material changes to the
restructuring plans since June 30, 2002.
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. These judgements can be subjective and
complex, and consequently actual results could differ from those estimates and
assumptions. The Company's most critical accounting policies relate to revenue
recognition; concentration of credit risk; inventory; pension and other
postretirement benefit costs; goodwill and other intangible assets; income
taxes; and derivatives.
Recently Issued Accounting Standards
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as originally
provided by SFAS No. 123 "Accounting for Stock-Based Compensation".
Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosure in both the annual and interim financial statements about
the method of accounting for stock-based compensation and the effect of the
method used on reported results. The transitional requirements of SFAS 148 will
be effective for all financial statements for fiscal years ending after
December 15, 2002. The disclosure requirements shall be effective for financial
reports containing condensed financial statements for interim periods beginning
after December 31, 2002. The Company expects to adopt the disclosure portion of
this statement for the fiscal quarter ending March 31, 2003. The application of
this standard will have no impact on the Company's consolidated financial
position or results of operations.
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 or (loss) on derivative instruments designated and
qualifying as cash-flow hedging instruments, net minimum pension liability
adjustments and cumulative translation adjustments as of the end of each period.
Comprehensive income and its components, net of tax, are as follows:
Three Months Ended Six Months Ended
December 31 December 31
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
(In millions)
Net earnings..................................................... $ 109.6 $ 90.1 $ 183.0 $ 166.6
-------- -------- -------- -------
Other comprehensive income:
Net unrealized investment gain (loss)....................... (0.2) 1.1 (1.5) (1.8)
Net derivative instruments gain (loss)...................... 0.4 0.6 4.0 -
Net minimum pension liability adjustments................... - - (0.3) (0.3)
Translation adjustments..................................... 17.4 (8.0) 11.0 14.5
-------- -------- -------- -------
Other comprehensive income (loss)........................... 17.6 (6.3) 13.2 12.4
-------- -------- -------- -------
Comprehensive income............................................. $ 127.2 $ 83.8 $ 196.2 $ 179.0
======== ======== ========= =======
The accumulated net loss on derivative instruments consists of the following:
Three Months Ended Six Months Ended
December 31 December 31
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
(In millions)
OCI - derivative instruments, beginning of period................ $ (5.5) $ (2.6) $ (9.1) $ (2.0)
-------- -------- -------- -------
Gain (loss) on derivative instruments....................... (1.9) 0.5 0.3 (0.7)
Reclassification to earnings of net loss during the period.. 2.6 0.4 6.0 0.8
Provision for deferred income taxes......................... (0.3) (0.3) (2.3) (0.1)
-------- -------- -------- -------
Net derivative instruments gain (loss)...................... 0.4 0.6 4.0 -
-------- -------- -------- -------
OCI - derivative instruments, end of period...................... $ (5.1) $ (2.0) $ (5.1) $ (2.0)
======== ======== ========= =======
The $5.1 million, net of tax, derivative instrument loss recorded in OCI at
December 31, 2002 related to forward contracts that the Company estimates will
be recognized through earnings during the next eighteen months. Of the $2.0
million net derivative instruments loss recorded in OCI at the end of the
prior-year period, $2.6 million, net of tax, related to interest rate swaps and
options. Offsetting the net loss was $0.6 million, net of tax, related to
forward contracts and foreign currency options that the Company recognized
through earnings as gains during fiscal 2002. OCI losses relating to interest
rate swaps or options were recognized through earnings in fiscal 2002 upon
repayment of the term loan in February 2002.
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 categories
presented are substantially the same as those for the consolidated financial
statements and the reportable segment included in the annual report on Form 10-K
for the year ended June 30, 2002. 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, 2002.
Three Months Ended Six Months Ended
December 31 December 31
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
(In millions)
SEGMENT DATA
Net Sales:
Skin Care........................................................ $ 479.3 $ 444.8 $ 900.8 $ 840.9
Makeup........................................................... 476.8 428.1 944.8 878.0
Fragrance........................................................ 386.3 362.4 682.8 655.8
Hair Care........................................................ 60.2 58.4 110.6 108.4
Other............................................................ 10.1 4.5 16.2 9.9
------- ------- -------- --------
$ 1,412.7 $ 1,298.2 $ 2,655.2 $ 2,493.0
======== ======== ======== ========
Operating Income:
Skin Care........................................................ $ 84.4 $ 77.3 $ 130.4 $ 143.9
Makeup........................................................... 57.4 45.1 95.1 99.2
Fragrance........................................................ 21.3 11.5 50.0 42.5
Hair Care........................................................ 4.8 10.0 8.6 11.7
Other............................................................ 2.1 (0.4) 0.3 (0.9)
-------- -------- -------- --------
170.0 143.5 284.4 296.4
Reconciliation:
Interest expense, net......................................... 2.2 1.9 5.1 5.7
-------- -------- -------- --------
Earnings before income taxes, minority interest and
accounting change............................................. $ 167.8 $ 141.6 $ 279.3 $ 290.7
======== ======== ======== ========
REGIONAL DATA
Net Sales:
The Americas..................................................... $ 783.5 $ 751.4 $ 1,571.2 $ 1,521.7
Europe, the Middle East & Africa................................. 438.0 368.3 742.5 642.1
Asia/Pacific..................................................... 191.2 178.5 341.5 329.2
-------- -------- -------- --------
$ 1,412.7 $ 1,298.2 $ 2,655.2 $ 2,493.0
======== ======== ======== ========
Operating Income:
The Americas..................................................... $ 70.9 $ 61.1 $ 136.0 $ 164.9
Europe, the Middle East & Africa................................. 73.4 53.8 118.0 92.6
Asia/Pacific..................................................... 25.7 28.6 30.4 38.9
-------- -------- -------- --------
$ 170.0 $ 143.5 $ 284.4 $ 296.4
======== ======== ======== ========
THE ESTEE LAUDER COMPANIES INC.
CONTROLS AND PROCEDURES
Item 4. Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information
required to be disclosed in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. The Chief Executive Officer and the Chief Financial Officer have
reviewed the effectiveness of our disclosure controls and procedures within the
last ninety days and have concluded that the disclosure controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
last day they were evaluated by our Chief Executive Officer and Chief Financial
Officer.
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 and 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 filed summary
judgment motions, and the judge has referred the motions to a magistrate. The
magistrate 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 (including Hickey's
Carting, Inc., Dennis C. Hickey and Maria Hickey, collectively the "Hickey
Parties"), the State has not sued the Company. The Company and certain otherPRPs
are in discussions with the State regarding possible settlement of the matter.
On September 9, 2002, the Hickey Parties brought contribution actions against
the Company and other Blydenburgh PRPs in the State's lawsuit against the Hickey
Parties in the U.S. District Court for the Eastern District of New York. These
actions seek to recover, among other things, any damages for which the Hickey
parties are found liable in the State's lawsuit against them, and related costs
and expenses, including attorneys' fees. The Company intends to defend the
contribution claim vigorously. While no assurance can be given as to the
ultimate outcome, management believes that the Blydenburgh matters 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 4. Submission of matters to a vote of security holders
(a) The Annual Meeting of Stockholders of the Company was held on
October 30, 2002.
(b) The following directors were elected at the Annual Meeting of
Stockholders: Charlene Barshefsky, Leonard A. Lauder, Ronald S. Lauder
and Marshall Rose, as Class III Directors for a term expiring at the
2005 Annual Meeting. The Class I Directors, whose terms expire at the
2003 Annual Meeting, are Irvine O. Hockaday, Jr. and Fred H.Langhammer.
The Class II Directors, whose terms expire at the 2004 Annual Meeting,
are Lynn Forester de Rothschild, William P. Lauder and Richard D.
Parsons.
(c) (i) Each person elected as a director at the Annual Meeting received
the number of votes (shares of Class B Common Stock are entitled to ten
votes per share) indicated beside his or her name:
Name Votes For Votes Withheld
---- --------- --------------
Charlene Barshefsky 1,179,484,364 3,065,531
Leonard A. Lauder 1,160,812,325 21,737,620
Ronald S. Lauder 1,180,138,696 2,411,249
Marshall Rose 1,180,531,215 2,018,730
(ii) 1,182,363,227 votes (shares of Class B Common Stock are entitled
to ten votes per share) were cast for and 117,214 votes were cast
against the ratification of the appointment of KPMG LLP as independent
auditors of the Company for the 2003 fiscal year. There were 69,504
abstentions and 186,718 broker nonvotes.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits --
None.
(b) Reports on Form 8-K --
On October 1, 2002, we filed a Current Report on Form 8-K. Pursuant to Item 5
of Form 8-K, we reaffirmed our expectations for sales growth and earnings per
share for the first fiscal quarter ended September 30, 2002.
On October 29, 2002, we filed a Current Report on Form 8-K. Pursuant to Item 5
of Form 8-K, we reported our fiscal 2003 first-quarter results.
On October 30, 2002, we filed a Current Report on Form 8-K. Pursuant to Item 5
of Form 8-K, we reported matters approved by the Board of Directors and the
stockholders.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE ESTEE LAUDER COMPANIES INC.
Date: January 30, 2003 By: : /s/Richard W. Kunes
----------------------
Richard W. Kunes
Senior Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
CERTIFICATIONS
I, Fred H. Langhammer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Estee Lauder
Companies Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and
we have:
a)designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report ("Evaluation Date"); and
c)presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b)any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 30, 2003
/s/ Fred H. Langhammer
----------------------
Fred H. Langhammer
President and Chief Executive Officer
I, Richard W. Kunes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Estee Lauder
Companies Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a)designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report ("Evaluation Date"); and
c)presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b)any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 30, 2003
/s/ Richard W. Kunes
--------------------
Richard W. Kunes
Senior Vice President and Chief Financial Officer