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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 2001 Commission file number 1-14064
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
The Estee Lauder Companies Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-2408943
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Class A Common Stock, $.01 par value New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's voting common equity held by
nonaffiliates of the registrant was approximately $4.20 billion at September 10,
2001. *
At September 10, 2001, 125,249,725 shares of the registrant's Class A Common
Stock, $.01 par value, and 113,490,293 shares of the registrant's Class B Common
Stock, $.01 par value, were outstanding.
Documents Incorporated by Reference
Document Where Incorporated
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Proxy Statement for Annual Meeting of Part III
Stockholders to be held October 31, 2001
* Calculated by excluding all shares held by executive officers and directors of
registrant and certain trusts without conceding that all such persons are
"affiliates" of registrant for purposes of the Federal securities laws.
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Forward-Looking Statements
This Annual Report on Form 10-K includes "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such 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, we cannot assure that actual results
will not differ materially from our expectations. Factors that could cause
actual results to differ from expectations are described herein; in particular,
see "Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Forward-Looking Information".
PART I
Item 1. Business.
The Estee Lauder Companies Inc., founded in 1946 by Estee and Joseph Lauder, is
one of the world's leading manufacturers and marketers of quality skin care,
makeup, fragrance and hair care products. Our products are sold in over 120
countries and territories under the following well-recognized brand names: Estee
Lauder, Clinique, Aramis, Prescriptives, Origins, M.A.C, Bobbi Brown, La Mer,
jane, Aveda, Stila, Jo Malone and Bumble and bumble. We are also the global
licensee for fragrances and cosmetics sold under the Tommy Hilfiger, Donna Karan
and Kate Spade brands. Each brand is distinctly positioned within the cosmetics
market.
We are a pioneer in the cosmetics industry and believe we are a leader in the
industry due to the global recognition of our brand names, our leadership in
product innovation, our strong market position in key geographic markets and the
consistently high quality of our products. We sell our products principally
through limited distribution channels to complement the images associated with
our brands. These channels, encompassing over 12,500 points of sale, consist
primarily of upscale department stores, specialty retailers, upscale perfumeries
and pharmacies and, to a lesser extent, freestanding company stores, stores on
cruise ships and in-flight and duty-free shops. We believe that our strategy of
pursuing limited distribution strengthens our relationships with retailers,
enables our brands to be among the best selling product lines at the stores and
heightens the aspirational quality of our brands. With the acquisitions of jane
and Aveda in fiscal 1998, we broadened our distribution to include new channels,
namely self-select outlets and salons. In November 1998, we began selling
products directly to consumers over the Internet. We now offer Clinique,
Origins, Bobbi Brown, Estee Lauder and M.A.C products on-line and we are
developing e-commerce capabilities for several of our other brands.
In fiscal 2000, we acquired Stila, principally a line of prestige makeup
products, Jo Malone Limited, a London-based skin care and fragrance company, and
a controlling majority equity interest in Bumble and bumble, a salon and hair
care products business. In addition, we obtained an exclusive worldwide license
to manufacture, market and sell Kate Spade beauty products. We also acquired
Gloss.com, an Internet beauty site, as part of our strategy to use the Internet
to benefit our overall business. In August 2000, we formed a joint venture with
Chanel, Inc. and Clarins (U.S.A.) Inc. to re-launch the Gloss.com website as a
multi-brand site. Upon re-launch, Gloss.com will feature select brands from each
of the participating companies.
We have been controlled by the Lauder family since the founding of our company.
Members of the Lauder family, some of whom are directors, executive officers
and/or employees, beneficially own, directly or indirectly, as of September 10,
2001, shares of Class A Common Stock and Class B Common Stock having
approximately 91.6% of the outstanding voting power of the Common Stock.
Unless the context requires otherwise, references to "we", "us", "our" and the
"Company" refer to The Estee Lauder Companies Inc. and its subsidiaries.
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Products
Skin Care - Our broad range of skin care products addresses various
skin care needs for women and men. These products include moisturizers, creams,
lotions, cleansers, sun screens and self-tanning products, a number of which are
developed for use on particular areas of the body, such as the face or the hands
or around the eyes. Skin care products accounted for approximately 36% of our
net sales in fiscal 2001.
Makeup - We manufacture, market and sell a full array of makeup
products including lipsticks, mascaras, foundations, eyeshadows, nail polishes
and powders. Many of the products are offered in an extensive array of shades
and colors. We also sell related items such as compacts, brushes and other
makeup tools. Makeup products accounted for approximately 37% of our net sales
in fiscal 2001.
Fragrance - We offer a variety of fragrance products for women and men.
The fragrances are sold in various forms, including eau de parfum sprays and
colognes, as well as lotions, powders, creams and soaps that are based on a
particular fragrance. Fragrance products accounted for approximately 23% of our
net sales in fiscal 2001.
Hair Care - We increased the range and depth of our hair care product
offerings with the acquisition of the Aveda business in December 1997 and a
majority equity interest in Bumble and bumble in June 2000. Hair care products
are offered mainly in salons and in freestanding retail stores and include
styling products, shampoos, conditioners and finishing sprays. In fiscal 2001,
hair care products accounted for approximately 4% of our net sales.
Given the personal nature of our products and the wide array of consumer
preferences and tastes, as well as competition for the attention of consumers,
our strategy has been to market and promote our products through distinctive
brands seeking to address broad preferences and tastes. Each brand has a single
global image that is promoted with consistent logos, packaging and advertising
designed to enhance its image and differentiate it from other brands.
Estee Lauder - Estee Lauder brand products, which have been sold since
1946, are positioned as luxurious, classic and aspirational. We believe that
Estee Lauder brand products are technologically advanced and innovative and have
a worldwide reputation for excellence. The broad product line principally
consists of skin care, makeup and fragrance products that are presented in high
quality packaging. Since September 2000, Estee Lauder products have also been
available through the brand's website, esteelauder.com.
Clinique - First introduced in 1968, Clinique skin care and makeup products
are all allergy tested and 100% fragrance free and have been designed to address
individual skin types and needs. The products are based on the research and
related expertise of leading dermatologists. Clinique skin care products are
generally marketed as part of the 3-Step System: Cleanse, Exfoliate, Moisturize.
Since autumn 1997, we have been broadening Clinique's product offerings by
adding new fragrances and hair care products. Since November 1998, we have been
selling Clinique products directly to consumers over the Internet.
Aramis - We pioneered the marketing of prestige men's grooming and skin
care products and fragrances with the introduction of Aramis products in 1964.
Aramis continues to offer one of the broadest lines of prestige men's products
and has extended the line to include fragrances for women.
Prescriptives - We developed and introduced Prescriptives in 1979.
Prescriptives is positioned as a color authority with an advanced collection of
highly individualized products primarily addressing the makeup and skin care
needs of contemporary women with active lifestyles. The products are
characterized by simple concepts, minimalist design and an innovative image and,
through a system of color application and extensive range of makeup shades,
accommodate a diverse group of consumers.
Origins - Origins, our most recent internally developed brand, was
introduced in 1990. It is positioned as a plant-based cosmetics line of skin
care, makeup and aromatherapy products that combine time-tested botanical
ingredients with modern science to promote total well-being. Origins sells its
products at our freestanding Origins stores and through stores-within-stores
(which are designed to replicate the Origins store environment within a
department store), at traditional retail counters and directly to consumers over
the Internet.
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Tommy Hilfiger - We have an exclusive global license arrangement to develop
and market men's and women's fragrances and cosmetics under the Tommy Hilfiger
brand. We launched the line in 1995 with a men's fragrance, "tommy". Today, we
manufacture and sell a variety of fragrances for men and women, as well as skin
care, makeup and hair care products under the license. These fragrances,
together with our complementary line of face, body and hair products, are
available at traditional department store counters as well as "tommy's shops",
separate areas within department stores dedicated to promoting all of our Tommy
Hilfiger licensed products.
M-A-C - M-A-C products comprise a broad line of color-oriented,
professional cosmetics and professional makeup tools targeting makeup artists
and fashion-conscious consumers. The products are sold through a limited number
of department and specialty stores, at freestanding M.A.C stores and directly
to consumers over the Internet. We acquired Make-Up Art Cosmetics Limited, the
manufacturer of M.A.C products, in three stages: in December 1994, March 1997
and February 1998.
Bobbi Brown - In October 1995, we acquired the Bobbi Brown line of color
cosmetics, professional makeup brushes and skin care products. Bobbi Brown
products are manufactured to our specifications, primarily by third parties, and
sold through a limited number of department and specialty stores and directly to
consumers over the Internet.
La Mer - La Mer products primarily consist of moisturizing creams, lotions,
cleansers, toners and other skin care products. The line, which is available in
very limited distribution in the United States and certain other countries, is
an extension of the initial Creme De La Mer product that we acquired in 1995.
jane - In October 1997, we acquired Sassaby, Inc., the owner of the jane
brand of color cosmetics targeted to young consumers. Since the acquisition, we
have added skin care products to jane. jane products are currently distributed
only in the United States in the self-select distribution channel.
Donna Karan Cosmetics - In November 1997, we obtained the exclusive global
license to develop and market a line of fragrances and other cosmetics under the
Donna Karan New York and DKNY trademarks. We are continuing to market and sell
certain products that were originally sold by The Donna Karan Company. Under the
license, we launched the first DKNY women's fragrance in fiscal 2000 and the
first DKNY men's fragrance in fiscal 2001.
Aveda - We acquired the Aveda business in December 1997 and have since
acquired selected Aveda distributors and retail stores. Aveda, a prestige hair
care leader, is a manufacturer and marketer of plant-based hair care, skin care,
makeup and fragrance products. We sell Aveda products to third-party
distributors and prestige salons and spas, and directly to consumers at our own
freestanding Aveda Environmental Lifestyle Stores and Aveda Institutes.
Stila - In August 1999, we acquired the business of Los Angeles-based Stila
Cosmetics, Inc. Stila is known for its stylish, wearable makeup products and
eco-friendly packaging and has developed a following among young,
fashion-forward consumers. Stila products are currently available at the brand's
flagship store in Los Angeles, California and also in limited distribution in
the United States and certain other countries.
Jo Malone - We acquired London-based Jo Malone Limited in October 1999. Jo
Malone is known for its prestige skin care, fragrance and hair care products
showcased at its flagship store in London. Products are also available through a
company catalogue, at a very limited group of specialty stores in the United
States and Canada and at a freestanding store in New York City.
Bumble and bumble - In June 2000, we acquired a controlling majority equity
interest in Bumble and Bumble Products, LLC, a marketer and distributor of
quality hair care products, and Bumble and Bumble, LLC, the operator of a
premier hair salon in New York City. Bumble and bumble styling and other hair
care products are distributed to top-tier salons and select specialty stores.
The founder and two of his partners own the remaining equity interests and have
continued to manage the domestic operations.
In addition to the foregoing brands, we manufacture and sell Kiton fragrances as
a licensee. We are also the global licensee for Kate Spade beauty products, and
we expect the first fragrance products in the Kate Spade line to be launched in
fiscal 2002. These products will be marketed separately from our other brands.
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Distribution
We sell our products principally through limited distribution channels to
complement the images associated with our core brands. These channels include
more than 12,500 points of sale in over 120 countries and territories and
consist primarily of upscale department stores, specialty retailers, upscale
perfumeries and pharmacies and, to a lesser extent, freestanding company stores
and spas, stores on cruise ships and in-flight and duty-free shops.
We maintain a dedicated sales force which sells to our retail accounts in North
America and in the major overseas markets, such as Western Europe and Japan. We
have wholly-owned operations in over 30 countries through which we market, sell
and distribute our products. In certain markets, we sell our products through
selected local distributors under contractual arrangements designed to protect
the image and position of the brands. In addition, we sell certain products in
select domestic and international military locations and over the Internet.
There are risks inherent in foreign operations, including changes in social,
political and economic conditions. We are also exposed to risks associated with
changes in the laws and policies that govern foreign investment in countries
where we have operations as well as, to a lesser extent, changes in United
States laws and regulations relating to foreign trade and investment. In
addition, our results of operations and the value of our foreign assets are
affected by fluctuations in foreign currency exchange rates. Changes in such
rates also may affect the relative prices at which we and foreign competitors
sell products in the same markets. Similarly, the cost of certain items required
in our operations may be affected by changes in the value of the relevant
currencies.
With the acquisitions of jane and Aveda in fiscal 1998 and a controlling
majority equity interest in Bumble and bumble in fiscal 2000, we broadened our
distribution to include new channels, namely self-select outlets and salons.
jane products are currently sold only in the United States in approximately
13,000 points of sale, including mass merchandise stores, drug stores and
specialty stores. We principally sell Aveda products to independent salons and
Aveda Environmental Lifestyle stores and to third-party distributors, which
resell such products mainly to independent salons. There are currently about
8,700 salons, primarily in the United States, that sell Aveda products. Bumble
and bumble products are principally sold to independent salons. There are
approximately 1,200 salons, primarily in the United States, that sell Bumble and
bumble products.
As part of our strategy to diversify our distribution, primarily in the United
States, we have been expanding the number of single-brand, freestanding stores
that we own and operate. The Origins, Aveda and M.A.C brands are the primary
focus for this method of distribution. To date, we operate approximately 347
single-brand, freestanding stores worldwide and expect that number to increase
to 400 to 500 over the next several years.
Beginning with the introduction of e-commerce capabilities to clinique.com in
November 1998, we have been selling products directly to consumers over the
Internet. As of September 1, 2001, Clinique, M.A.C, Origins, Estee Lauder and
Bobbi Brown products are being sold directly to consumers in the United States
and Canada over the Internet. For a summary of our Internet strategy, see the
"Internet" section in "Item 7. - Management's Discussion and Analysis of
Financial Condition and Results of Operations".
As is customary in the cosmetics industry, our practice is to accept returns of
our products from retailers. In accepting returns, we typically provide a credit
to the retailer against sales and accounts receivable from that retailer on a
dollar-for-dollar basis. In recognition of this practice, and in accordance with
generally accepted accounting principles, we report sales levels on a net basis,
which is computed by deducting the amount of actual returns received and an
amount established for anticipated returns from gross sales. As a percent of
gross sales, returns were 4.9% in fiscal 2001, 4.4% in fiscal 2000 and 5.0% in
fiscal 1999.
Customers
Our strategy has been to build strong strategic relationships with selected
retailers globally. Senior management works with executives of our major retail
accounts on a regular basis, and we believe we are viewed as an important
supplier to these customers.
Customers affiliated with Federated Department Stores, Inc. (e.g.,
Bloomingdale's, Burdines, Macy's and Rich's/Lazarus) accounted for 11% of our
net sales in each of the fiscal years ended June 30, 2001, 2000 and 1999. The
May Department Stores Company (e.g., Foley's, Lord & Taylor and Robinsons-May)
accounted for 10% of our net sales in fiscal 2001 and 2000 and 11% of our net
sales in fiscal 1999.
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Marketing
Our marketing strategy is built around our vision statement: "Bringing the Best
to Everyone We Touch". Mrs. Estee Lauder formulated this marketing philosophy to
provide high-quality service and products as the foundation for a solid and
loyal consumer base.
Our marketing efforts focus principally on promoting the quality and benefits of
our products. Each of our brands is distinctively positioned, has a single
global image, and is promoted with consistent logos, packaging and advertising
designed to enhance its image and differentiate it from other brands. We
regularly advertise our products on television and radio, in upscale magazines
and prestigious newspapers and through direct mail and photo displays at
international airports. Promotional activities and in-store displays are
designed to introduce existing consumers to different products in the line and
to attract new consumers. Our marketing efforts also benefit from cooperative
advertising programs with retailers, some of which are supported by coordinated
promotions, such as "gift with purchase" and "purchase with purchase". At
in-store counters, sales representatives offer personal demonstrations to market
individual products as well as to provide education on basic skin care and
makeup application. We conduct extensive sampling programs and we pioneered
"gift with purchase" as a sampling program. We believe that the quality and
perceived benefits of sample products have been effective inducements to
purchases by new and existing consumers.
Starting with the launch of the Clinique website in 1996, we have used the
Internet to educate and inform consumers about certain of our brands. Currently,
there are ten single-brand-marketing sites, five of which have e-commerce
capabilities. Gloss.com, the Company's majority-owned, multi-brand marketing and
e-commerce site, is expected to be re-launched in the first half of fiscal 2002,
see the "Internet" section in "Item 7. - Management's Discussion and Analysis of
Financial Condition and Results of Operations".
The majority of our creative marketing work is done by in-house creative teams.
The creative staff designs and produces the sales materials, advertisements and
packaging for all products in each brand. Total advertising and promotional
expenditures were $1,255.3 million, $1,195.8 million and $1,100.8 million for
fiscal 2001, 2000 and 1999, respectively. In addition, our products receive
extensive editorial coverage in prestige publications and other media worldwide.
Our marketing and sales executives spend considerable time in the field meeting
with consumers and key retailers, checking activities of competitors and
consulting with sales representatives at the points of sale. These include Estee
Lauder Beauty Advisors, Clinique Consultants, Aramis Selling Specialists,
Prescriptives Analysts and Origins Guides.
Management Information Systems
Management information systems support automation of our business processes
including product development, marketing, sales, order processing, production,
distribution and finance.
We have deployed a product definition system that establishes and maintains a
centralized data repository of essential attributes for each of the products we
offer or plan to offer in the marketplace. Coupled with our product research and
development systems, we are able to globally manufacture and market consistent
quality products.
Our sales analysis system tracks weekly sales at the stock keeping unit (SKU)
level at most retail sales locations (i.e., sell-through data). This system is
currently tracking sell-through data for almost all accounts of Estee Lauder,
Clinique, Aramis, Prescriptives, Origins, M.A.C, Bobbi Brown, Donna Karan, Tommy
Hilfiger, La Mer and Stila in the United States and Canada. The increased
understanding of consumer preferences gained from sell-through data enables us
to coordinate more effectively our product development, manufacturing and
marketing strategies. We have implemented similar systems in other countries.
We have negotiated automated replenishment arrangements with many of our key
domestic customers. These arrangements enable us to replenish inventories for
individual points of sale automatically, with minimal paperwork. Customer orders
for a substantial majority of sales of Estee Lauder, Clinique, Prescriptives,
Origins, M.A.C and Bobbi Brown products in the United States are generated by
automated replenishment systems.
Our data warehouse captures shipping, sell-through and inventory data for our
domestic business. This system has resulted in streamlined and standardized
reporting as well as timely and accurate retail sales and marketing information.
We have a system that provides tools to plan, monitor, and analyze our
promotional business and its processes on both an individual brand as well as a
corporate basis. Marketing and sales professionals currently utilize this system
to promote Estee Lauder, Clinique, M.A.C, Origins, and Bobbi Brown products in
the United States and Canada. This system helps us to
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reduce costs, maintain accountability, improve return on investment and maximize
the impact of our promotional activities. This system was the model for an
international promotional management system, which we installed in fiscal 2001
in some European markets. In fiscal 2002, we expect to roll this system out to
additional international markets.
At practically all of our international sales affiliates, we have installed a
proprietary inventory management system, which provides us with a global view of
finished goods availability relative to actual requirements. This system has
resulted in improved inventory control and disposition for both existing product
lines and new product launches.
The use of sell-through data, combined with the implementation of automated
replenishment systems, promotional planning systems, and data warehousing, has
resulted in increased sales, fewer out-of-stocks and reduced retail inventories.
We expect that these systems will continue to provide inventory and sales
efficiencies.
We have refined the strategic direction of our supply chain systems and have
decided to evaluate "best in class" supply chain planning and execution software
to replace our internally-developed systems on an enterprise basis. We expect
that the new systems we identify and install will lead to greater efficiency and
consistency in the global supply chain in the future.
We continue to enhance our corporate Extranet, which is designed to provide
retailers with real-time order status throughout the procurement cycle.
Customers use this system to track their orders as they move through the
fulfillment process. As a result, we experience fewer billing discrepancies and
fewer customer deductions.
For a discussion of our development of websites designed to market and sell our
products, in addition to a venture to develop a multi-brand site, refer to the
"Internet" section in "Item 7. - Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Research and Development
We believe that we are an industry leader in the development of new products.
Marketing, product development and packaging groups work with our research and
development group to identify shifts in consumer preferences, develop new
products and redesign or reformulate existing products. In addition, research
and development personnel work closely with quality assurance and manufacturing
personnel on a worldwide basis to ensure a consistent global standard for our
products and to deliver products with attributes that fulfill consumer
expectations.
We maintain ongoing research and development programs at our facilities in
Melville, New York; Oevel, Belgium; Tokyo, Japan; Markham, Ontario; and Blaine,
Minnesota. As of June 30, 2001, we had approximately 395 employees engaged in
research and development. Research and development expenditures totaled $62.2
million, $53.8 million and $48.0 million for fiscal 2001, 2000 and 1999,
respectively. Our research and development group makes significant contributions
toward improving existing products and developing new products and provides
ongoing technical assistance and know-how to our manufacturing activities. The
research and development group has had long-standing working relationships with
several U.S. and international medical and educational facilities, which
supplement internal capabilities. We do not conduct animal testing of our
products.
Manufacturing and Raw Materials
We manufacture skin care, makeup, fragrance and hair care products in the United
States, Belgium, Switzerland, the United Kingdom and Canada. We continue to
streamline our manufacturing processes and identify sourcing opportunities to
improve innovation, increase efficiencies and reduce costs. Our major
manufacturing facilities operate as "focus" plants that primarily manufacture
one type of product (e.g., lipsticks) for all of the principal brands. Our
plants are modern and our manufacturing processes are substantially automated.
While we believe that our manufacturing facilities are sufficient to meet
current and reasonably anticipated manufacturing requirements, we continue to
identify opportunities to make significant improvements in capacity and
productivity. Some of our finished products are manufactured to our
specifications by third parties.
The principal raw materials used in the manufacture of our products are
essential oils, alcohol and specialty chemicals. We also purchase packaging
components, which are manufactured to design specifications. Procurement of
materials for all manufacturing facilities is generally made on a global basis
through our centralized supplier relations department. A concentrated effort in
supplier rationalization has been made with the specific objective of reducing
costs, increasing innovation and improving quality. As a result of sourcing
initiatives, there is increased dependency on certain suppliers, but we believe
that these suppliers have adequate resources and facilities to overcome any
unforeseen interruption of supply. We have, in the past, been able to obtain an
adequate supply of essential raw materials and currently believe we have
adequate sources of supply for virtually all components of our products. As we
integrate acquired brands, we continually seek new ways to leverage our
production and sourcing capabilities to improve their manufacturing performance.
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Competition
The skin care, makeup, fragrance and hair care businesses are characterized by
vigorous competition throughout the world. Brand recognition, quality,
performance and price have a significant influence on consumers' choices among
competing products and brands. Advertising, promotion, merchandising, the pace
and timing of new product introductions, line extensions and the quality of
in-store sales staff also have a significant impact on consumer buying
decisions. We compete against a number of manufacturers and marketers of skin
care, makeup, fragrance and hair care products, some of which have substantially
greater resources than we do.
Our principal competitors among manufacturers and marketers of skin care,
makeup, fragrance and hair care products include L'Oreal S.A. (which markets
Lancome, Ralph Lauren, Giorgio Armani, Garnier, L'Oreal, Maybelline, Biotherm,
Helena Rubinstein, Redken, Kiehl's Since 1851, Shu Umuera and other products),
Unilever N.V. (which markets Calvin Klein, Valentino, Cerruti, Pond's,
Thermasilk, Vaseline Intensive Care and other products), The Procter & Gamble
Company (which markets Cover Girl, Olay, Giorgio Beverly Hills and Hugo Boss
fragrances, Max Factor, Vidal Sassoon, Pantene and other products), LVMH Moet
Hennessey Louis Vuitton ("LVMH") (which markets Christian Dior, Kenzo, Givenchy,
Guerlain, Hard Candy, Bliss, Benefit, Make Up For Ever, Urban Decay, Fresh and
other products), Shiseido Company, Ltd. (which markets Shiseido, 5S and other
products), Avon Products Inc., Wella Group (which markets Wella, Gucci
fragrance, Alfred Dunhill, Sebastian, Anna Sui and other products), Gucci N.V.
(which markets Yves St. Laurent Beaute), Revlon, Inc. (which markets Revlon,
Almay and Ultima II products), Joh. A. Benckiser GmbH (which markets Coty,
Lancaster, Davidoff, Issabella Rosselini Manifesto, Jil Sander, Rimmel, Jovan,
Yue-Sai Kan, Margaret Astor, Adidas, Calgon, The Healing Garden, Esprit, Chopard
and other products), Bristol-Myers Squibb Co. (which markets Clairol, Keri,
Aussi and other products), Elizabeth Arden, Inc., Chanel, Inc. and Clarins S.A.
(which markets Clarins products and Thierry Mugler fragrances). We also face
competition from retailers that have developed their own brands, such as Gap
Inc. (which markets The Gap and Banana Republic products), Intimate Brands
(which markets Victoria's Secret Beauty and Bath and Body Works products) and
Sephora, or have acquired brands, such as Neiman Marcus Group (which acquired
Laura Mercier). Some of our competitors also have ownership interests in
retailers that are customers of ours. For example, LVMH has interests in Duty
Free Shoppers and Sephora.
Trademarks, Patents and Copyrights
We own all of the material trademark rights used in connection with the
manufacturing, marketing and distribution of our major products both in the
United States and in the other countries where such products are principally
sold, except for the trademark rights relating to Tommy Hilfiger (including
tommy and tommy girl), Donna Karan New York, DKNY and Kate Spade, as to which we
are the exclusive worldwide licensee for fragrances, cosmetics and related
products. Trademarks for our principal products are registered in the United
States and in each of the countries in which such products are sold. The major
trademarks used in our business include the brand names Estee Lauder, Clinique,
Aramis, Prescriptives, Origins, Tommy Hilfiger, Donna Karan New York, DKNY,
M.A.C, Bobbi Brown, La Mer, jane, Aveda, Stila, Jo Malone and Bumble and bumble
and the names of many of the products sold under each of these brands. We
consider the protection of our trademarks to be important to our business.
A number of our products incorporate patented or patent-pending formulations. In
addition, several products are covered by design patents, patent applications or
copyrights. While we consider these patents and copyrights, and the protection
thereof, to be important, no single patent or copyright is considered material
to the conduct of our business.
Employees
At June 30, 2001, we had approximately 19,900 full-time employees worldwide
(including sales representatives at points of sale who are employed by the
Company), of whom approximately 10,200 are employed in the United States and
Canada. None of our employees in the United States is covered by a collective
bargaining agreement. In certain other countries a limited number of employees
are covered by a Works Council agreement or other labor contract. We believe
that relations with our employees are good. We have never encountered a material
strike or work stoppage in the United States or in any other country where we
have a significant number of employees.
-7-
Government Regulation
We and our products are subject to regulation by the Food and Drug
Administration and the Federal Trade Commission in the United States, as well as
various other Federal, state, local and international regulatory authorities.
Such regulations relate principally to the ingredients, labeling, packaging and
marketing of our products. We believe that we are in substantial compliance with
such regulations, as well as with applicable Federal, state, local and
international rules and regulations governing the discharge of materials
hazardous to the environment. There are no significant capital expenditures for
environmental control matters either planned in the current year or expected in
the near future.
Seasonality
Our results of operations in total, by region, and by product category are
subject to seasonal fluctuations, with net sales in the first and second fiscal
quarters typically being slightly higher than in the third and fourth fiscal
quarters. The higher net sales in the first two fiscal quarters are attributable
to the increased levels of purchasing by retailers for the Christmas selling
season and for fall fashion makeup introductions. Greater variation exists in
quarterly operating income and margin, which typically are lower in the second
half of the fiscal year than in the first half. In addition to the effect of
lower net sales on operating income in the third and fourth fiscal quarters, as
compared with the first and second fiscal quarters, operating income and
operating margin in the third and fourth fiscal quarters are negatively affected
by the relatively consistent dollar amount of advertising and promotional
spending in each fiscal quarter. In addition, fluctuations in net sales,
operating income and product category results in any fiscal quarter may be
attributable to the level and scope of new product introductions.
Executive Officers
The following table sets forth certain information with respect to our executive
officers.
Name Age Position(s) Held
---- --- ----------------
Leonard A. Lauder 68 Chairman of the Board of Directors
Ronald S. Lauder 57 Chairman of Clinique Laboratories, Inc. and
Estee Lauder International, Inc. and a Director
Fred H. Langhammer 57 President and Chief Executive Officer and a Director
Patrick Bousquet-Chavanne 43 Group President
Daniel J. Brestle 56 Group President
Andrew J. Cavanaugh 54 Senior Vice President - Global Human Resources
Paul E. Konney 57 Senior Vice President, General Counsel and Secretary
Richard W. Kunes 48 Senior Vice President and Chief Financial Officer
Evelyn H. Lauder 65 Senior Corporate Vice President
William P. Lauder 41 Group President
Philip Shearer 49 Group President, International
Edward M. Straw 62 President, Global Operations
Leonard A. Lauder has been Chairman of the Board of Directors since 1995.
He served as Chief Executive Officer of the Company from 1982 through 1999 and
President from 1972 until 1995. Mr. Lauder formally joined the Company in 1958
after serving as an officer in the United States Navy. Since joining the
Company, he has held various positions, including executive officer positions
other than those described above. He is Chairman of the Board of Trustees of the
Whitney Museum of American Art, a Charter Trustee of the University of
Pennsylvania and a Trustee of The Aspen Institute. He also served as a member of
the White House Advisory Committee on Trade Policy and Negotiations under
President Reagan.
Ronald S. Lauder has served as Chairman of Clinique Laboratories, Inc. and
Chairman of Estee Lauder International, Inc. since returning from government
service in 1987. Mr. Lauder joined the Company in 1964 and has held various
positions, including those described above, since then. From 1983 to 1986, Mr.
Lauder was Deputy Assistant Secretary of Defense for European and NATO Affairs.
From 1986 to 1987, he served as U.S. Ambassador to Austria. He is non-executive
Chairman of the Board of Directors of Central European Media Enterprises Ltd. He
is also Chairman of the Board of Trustees of the Museum of Modern Art.
Fred H. Langhammer has been Chief Executive Officer since 2000 and
President of the Company since 1995. He was Chief Operating Officer from 1985
through 1999. Mr. Langhammer joined the Company in 1975 as President of its
operations in Japan. In 1982, he was appointed Managing Director of the
Company's operations in Germany. He is a member of the Board of Directors of
Inditex, S.A. (an apparel manufacturer and retailer), the Cosmetics, Toiletries
and
-8-
Fragrance Association, the German American Chamber of Commerce, Inc., and the
American Institute for Contemporary German Studies at Johns Hopkins University.
He is also a Senior Fellow of the Foreign Policy Association.
Patrick Bousquet-Chavanne became Group President responsible for Estee Lauder,
M.A.C and our fragrance brands (principally Aramis, Tommy Hilfiger and Donna
Karan) on a worldwide basis in July 2001. From 1998 to 2001, he was the
President of Estee Lauder International, Inc. ("ELII"). From 1992 to 1996, Mr.
Bousquet-Chavanne was Senior Vice President - General Manager/Travel Retailing
of ELII. From 1989 to 1992, he was Vice President and General Manager of Aramis
International, a division of ELII. From 1996 to 1998, he was Executive Vice
President/General Manager International Operations of Parfums Christian Dior
S.A., based in Paris.
Daniel J. Brestle became Group President responsible for Aveda, Bobbi
Brown, Bumble and bumble, La Mer, Prescriptives, jane, Jo Malone, Kate Spade and
Stila on a worldwide basis in July 2001. From July 1998 through June 2001, he
was President of Estee Lauder (USA & Canada). Prior to July 1998, he was
President of Clinique Laboratories, Inc. and the senior officer of that division
since 1992. From 1988 through 1992, he was President of Prescriptives U.S.A. Mr.
Brestle joined the Company in 1978.
Andrew J. Cavanaugh has been Senior Vice President - Global Human Resources
since 1999. He was Senior Vice President - Corporate Human Resources from 1994
through 1999. Mr. Cavanaugh joined the Company in 1988 as Executive Director -
Human Resources.
Paul E. Konney is Senior Vice President, General Counsel and Secretary.
Prior to joining the Company in August 1999, Mr. Konney was Senior Vice
President, General Counsel and Secretary of Quaker State Corporation from 1994.
Prior to that, he was Senior Vice President, General Counsel and Secretary of
Tambrands Inc.
Richard W. Kunes became Senior Vice President and Chief Financial Officer
in October 2000. He joined the Company in 1986 and served in various
finance-related positions until November 1993, when he was named Vice President
- Operations Finance Worldwide. From January 1998 through September 2000, Mr.
Kunes was Vice President - Financial Administration and Corporate Controller.
Prior to joining the Company, he held finance and controller positions at the
Colgate-Palmolive Company.
Evelyn H. Lauder has been Senior Corporate Vice President of the Company
since 1989, and previously served as Vice President and in other executive
capacities since first joining the Company in 1959 as Education Director. She is
a member of the Board of Overseers, Memorial Sloan-Kettering Cancer Center, a
member of the Boards of Trustees of Central Park Conservancy, Inc. and The
Trinity School in New York City, a member of the Board of Directors of The Parks
Council and the Founder and Chairman of The Breast Cancer Research Foundation.
William P. Lauder became Group President in July 2001. He leads the
worldwide businesses of Clinique and Origins and our retail store and on-line
operations. From 1998 to 2001, he was President of Clinique Laboratories, Inc.
Prior to 1998, he was President of Origins Natural Resources Inc., and he had
been the senior officer of that division since its inception in 1990. Prior
thereto, he served in various positions since joining the Company in 1986. He is
a member of the Board of Trustees of The Trinity School in New York City and the
Boards of Directors of The Fragrance Foundation, The Fresh Air Fund and the 92nd
Street Y.
Philip Shearer joined the Company as Group President, International in
September 2001. Prior thereto, from 1998 to 2001, he was President of the Luxury
Products Division of L'Oreal U.S.A., which included Lancome, Helena Rubinstein,
Ralph Lauren fragrances, Giorgio Armani and Kiehl's Since 1851. He served in
various positions at L'Oreal from 1987, including management positions in the
United Kingdom and in Japan.
Edward M. Straw is President, Global Operations responsible for research
and development, procurement, manufacturing, packaging, distribution, quality
assurance, information systems and corporate sales. Prior to joining the Company
in 2000, Mr. Straw was Senior Vice President, Global Supply Chain and
Manufacturing for the Compaq Computer Corporation. From 1997 to 1998, he was
President of Ryder Global Logistics, Inc., and prior to joining Ryder, he served
for 35 years in the United States Navy, retiring in 1996 as a Vice Admiral and
Director of the Defense Logistics Agency.
Each executive officer serves for a one-year term ending at the next annual
meeting of the Board of Directors, subject to his or her applicable employment
agreement and his or her earlier death, resignation or removal.
-9-
Item 2. Properties.
The following table sets forth the principal owned and leased manufacturing and
research and development facilities as of September 10, 2001. The leases expire
at various times through 2015, subject to certain renewal options.
Approximate
Location Use Square Footage
-------- --- --------------
The Americas
Melville, New York (owned) Manufacturing 300,000
Melville, New York (owned) R&D 78,000
Blaine, Minnesota (owned) Manufacturing and R&D 275,000
Oakland, New Jersey (leased) Manufacturing 148,000
Bristol, Pennsylvania (leased) Manufacturing 67,000
Agincourt, Ontario, Canada (owned) Manufacturing 96,000
Markham, Ontario, Canada (leased) Manufacturing 58,000
Markham, Ontario, Canada (leased) R&D 26,000
Europe, the Middle East & Africa
Oevel, Belgium (owned) Manufacturing 113,000
Oevel, Belgium (owned) R&D 2,000
Petersfield, England (owned) Manufacturing 225,000
Lachen, Switzerland (owned) Manufacturing 53,000
Asia/Pacific
Tokyo, Japan (leased) R&D 4,000
We occupy numerous offices, assembly and distribution facilities and warehouses
in the United States and abroad. We consider our properties to be generally in
good condition and believe that our facilities are adequate for our operations
and provide sufficient capacity to meet anticipated requirements. We lease
approximately 300,000 square feet of rentable space for our principal offices in
New York, New York and own an office building of approximately 57,000 square
feet in Melville, New York. As of September 10, 2001, we operated 347
freestanding retail stores, including 13 for the Estee Lauder brand, 10 for
Clinique, 132 for Origins, 86 for M.A.C, 96 for Aveda, 2 for Bobbi Brown, 5 for
Jo Malone, 1 for Bumble and bumble and 2 for Stila.
Item 3. Legal Proceedings.
We are involved in various routine legal proceedings incident to the ordinary
course of business. In management's opinion, the outcome of pending legal
proceedings, separately or in the aggregate, will not have a material adverse
effect on our business or consolidated financial results.
In August 2000, an affiliate of Revlon, Inc. sued the Company and its
subsidiaries in the U.S. District Court, Southern District of New York, for
alleged patent infringement and related claims. Revlon currently claims that
five Estee Lauder products, two Origins foundations, a La Mer concealer and a
jane foundation infringe its patent. Revlon is seeking, among other things,
treble damages, punitive damages, equitable relief and attorneys' fees. The
Company has filed counterclaims which, among other things, challenge the
validity of the patent and allege violations of Federal antitrust laws.
Pre-trial proceedings and discovery are underway. Court-directed mediation took
place in August 2001. The Company intends to defend itself vigorously. Although
the final outcome of the lawsuit cannot be predicted with certainty, based on
preliminary investigation, management believes that the case will not have a
material adverse effect on the Company's consolidated financial results.
In February 2000, the Company and eight other manufacturers of cosmetics (the
"Manufacturer Defendants") were added as defendants in a consolidated class
action lawsuit that had been pending in the Superior Court of the State of
California in Marin County. The plaintiffs purport to represent a class of all
California residents who purchased prestige cosmetic products at retail for
personal use from a number of department stores that sold such products in
California (the "Department Store Defendants"). Plaintiffs filed their initial
actions against the Department Store Defendants in May 1998. In May 2000,
plaintiffs filed an amended complaint alleging that the Department Store
Defendants and the Manufacturer Defendants conspired to fix and maintain retail
prices and to limit the supply of prestige cosmetic products sold by the
Department Store Defendants in violation of California state law. The plaintiffs
are seeking, among other things, treble damages, equitable relief, attorneys'
fees, interest and costs. Pre-trial proceedings and discovery are underway.
Court-directed mediation started in May 2001 and is continuing. The Company
intends to defend itself vigorously. While no assurance can be given as to the
-10-
ultimate outcome of this lawsuit, based on preliminary investigation, management
believes that the case will not have a material adverse effect on the Company's
consolidated financial results.
In 1998, the Office of the Attorney General of the State of New York (the
"State") notified the Company and ten other entities that they are potentially
responsible parties ("PRPs") with respect to the Blydenburgh landfill in Islip,
New York. Each PRP may be jointly and severally liable for the costs of
investigation and cleanup, which the State estimates to be $16 million. While
the State has sued other PRPs in connection with the site, the State has not
sued the Company. The Company and some PRPs are in discussions with the State
regarding possible settlement of the matter. While no assurance can be given as
to the ultimate outcome, management believes that the matter will not have a
material adverse effect on the Company's consolidated financial results.
In 1998, the State notified the Company and fifteen other entities that they are
PRPs with respect to the Huntington/East Northport landfill. The cleanup costs
are estimated at $20 million. No litigation has commenced, and the Company,
along with other PRPs, is in discussions with the State regarding possible
settlement of the matter. While no assurance can be given as to the ultimate
outcome, management believes that the matter will not have a material adverse
effect on the Company's consolidated financial results.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter ended
June 30, 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our Class A Common Stock is publicly traded on the New York Stock Exchange under
the symbol "EL". The following table shows the high and low sales prices as
reported on the New York Stock Exchange Composite Tape and the cash dividends
per share declared in fiscal 2001 and fiscal 2000.
Fiscal 2001 Fiscal 2000
-------------------------------- --------------------------------
Cash Cash
High Low Dividends High Low Dividends
--------- --------- --------- --------- --------- ---------
First Quarter $ 49.75 $ 34.25 $ .05 $ 56.50 $ 38.25 $ .05
Second Quarter 47.25 33.75 .05 51.44 37.25 .05
Third Quarter 44.00 33.18 .05 55.88 38.13 .05
Fourth Quarter 44.35 35.85 .05 54.31 41.13 .05
------- -------
Year 49.75 33.18 $ .20 56.50 37.25 $ .20
======= =======
We expect to continue the payment of cash dividends in the future, but there can
be no assurance that the Board of Directors will continue to declare dividends.
As of September 10, 2001, there were approximately 4,087 record holders of Class
A Common Stock and 15 record holders of Class B Common Stock.
-11-
Item 6. Selected Financial Data.
The table below summarizes selected financial information. For further
information, refer to the audited consolidated financial statements and the
notes thereto beginning on page F-1 of this report.
Year Ended or at June 30
----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(In millions, except per share data)
Statement of Earnings Data:
Net sales ......................................... $ 4,608.1 $ 4,366.8 $ 3,961.5 $ 3,618.0 $ 3,381.6
Gross profit ...................................... 3,635.8 3,394.7 3,061.6 2,798.5 2,616.5
Operating income .................................. 495.6 515.8 456.9 409.1 359.1
Earnings before income taxes, minority interest and
accounting change ............................... 483.3 498.7 440.2 402.8 362.9
Net earnings ...................................... 305.2(a) 314.1 272.9 236.8 197.6
Preferred stock dividends ......................... 23.4 23.4 23.4 23.4 23.4
Net earnings attributable to common stock ......... 281.8(a) 290.7 249.5 213.4 174.2
Cash Flow Data:
Net cash flows provided by operating activities ... $ 305.4 $ 442.5 $ 352.3 $ 258.2 $ 253.1
Net cash flows used for investing activities ...... (206.3) (374.3) (200.3) (577.2) (130.7)
Net cash flows (used for) provided by financing
activities ...................................... (63.5) (87.9) (73.2) 345.2 (116.8)
Other Data:
Earnings before interest, taxes, depreciation
and amortization (EBITDA) (b) .................. $ 658.5 $ 662.6 $ 574.2 $ 506.6 $ 435.1
Per Share Data:
Net earnings per common share (c):
Basic ........................................... $ 1.18(a) $ 1.22 $ 1.05 $ .90 $ .74
Diluted ......................................... $ 1.16(a) $ 1.20 $ 1.03 $ .89 $ .73
Weighted average common shares outstanding (c):
Basic ........................................... 238.4 237.7 237.0 236.8 235.4
Diluted ......................................... 242.2 242.5 241.2 239.5 237.1
Cash dividends declared per common share (c) ...... $ .20 $ .20 $ .1775 $ .17 $ .17
Balance Sheet Data:
Working capital ................................... $ 882.2 $ 716.7 $ 708.0 $ 617.2 $ 551.6
Total assets ...................................... 3,218.8 3,043.3 2,746.7 2,512.8 1,873.1
Total debt ........................................ 416.7 425.4 429.1 436.5 31.1
Redeemable preferred stock ........................ 360.0 360.0 360.0 360.0 360.0
Stockholders' equity .............................. 1,352.1 1,160.3 924.5 696.4 547.7
---------------------
(a) Net earnings, net earnings attributable to common stock and net earnings per
common share for the year ended June 30, 2001 include restructuring and other
non-recurring charges of $40.3 million, after tax, or $.17 per common share, and
a one-time charge of $2.2 million, after tax, or $.01 per common share,
attributable to the cumulative effect of adopting Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities".
(b) EBITDA is an additional measure of operating performance used by management.
While the components of EBITDA may vary from company to company, we exclude
minority interest adjustments, all depreciation charges related to property,
plant and equipment and all amortization charges, including amortization of
goodwill, purchased royalty rights (fully amortized in November 2000), leasehold
improvements and other intangible assets. While we consider EBITDA useful in
analyzing our operating results, it is not intended to replace, or act as a
substitute for, any presentation included in the consolidated financial
statements prepared in conformity with generally accepted accounting principles.
Excluding restructuring and other non-recurring expenses, EBITDA was $721.5
million for the year ended June 30, 2001.
(c) On April 26, 1999, the Board of Directors approved a two-for-one stock split
in the form of a 100% stock dividend on all of our outstanding Class A and Class
B Common Stock. The stock dividend was paid on June 2, 1999 to all holders of
record of shares of our Common Stock at the close of business on May 10, 1999.
All share and per share data prior thereto have been restated to reflect the
stock split.
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Item 7. 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 fiscal 2001, 2000
and 1999 and reflects the basis of presentation described in Note 2 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 and
hair care have been included in the "other" category.
Year Ended June 30
-------------------------------------
2001 2000 1999
---------- ---------- ----------
(In millions)
NET SALES
By Region:
The Americas ................................... $ 2,815.3 $ 2,658.8 $ 2,397.9
Europe, the Middle East & Africa ............... 1,210.2 1,131.0 1,082.4
Asia/Pacific ................................... 590.6 577.0 481.2
---------- ---------- ----------
4,616.1 4,366.8 3,961.5
Restructuring * ................................ (8.0) - -
---------- ---------- ----------
$ 4,608.1 $ 4,366.8 $ 3,961.5
========== ========== ==========
By Product Category:
Skin Care ...................................... $ 1,641.5 $ 1,552.4 $ 1,398.8
Makeup ......................................... 1,704.4 1,579.5 1,412.8
Fragrance ...................................... 1,061.9 1,092.3 1,048.6
Hair Care ...................................... 180.7 113.9 82.4
Other .......................................... 27.6 28.7 18.9
---------- ---------- ----------
4,616.1 4,366.8 3,961.5
Restructuring * ................................ (8.0) - -
---------- ---------- ----------
$ 4,608.1 $ 4,366.8 $ 3,961.5
========== ========== ==========
OPERATING INCOME
By Region:
The Americas ................................... $ 299.9 $ 287.9 $ 265.0
Europe, the Middle East & Africa ............... 201.8 168.9 145.5
Asia/Pacific ................................... 56.9 59.0 46.4
---------- ---------- ----------
558.6 515.8 456.9
Restructuring and other non-recurring expenses * (63.0) - -
---------- ---------- ----------
$ 495.6 $ 515.8 $ 456.9
========== ========== ==========
By Product Category:
Skin Care ...................................... $ 266.9 $ 240.5 $ 205.9
Makeup ......................................... 212.5 181.8 158.2
Fragrance ...................................... 63.6 80.6 79.7
Hair Care ...................................... 13.1 12.4 11.4
Other .......................................... 2.5 0.5 1.7
---------- ---------- ----------
558.6 515.8 456.9
Restructuring and other non-recurring expenses * (63.0) - -
---------- ---------- ----------
$ 495.6 $ 515.8 $ 456.9
========== ========== ==========
* For a discussion of the fiscal 2001 restructuring and other non-recurring
expenses, see "Fiscal 2001 as Compared with Fiscal 2000 - Operating Expense -
Restructuring and Other Non-Recurring Expenses" in this section.
-13-
The following table presents certain consolidated earnings data as a percentage
of net sales:
Year Ended June 30
--------------------------------
2001 2000 1999
----- ----- -----
Net sales ....................................................... 100.0% 100.0% 100.0%
Cost of sales ................................................... 21.1 22.3 22.7
----- ----- -----
Gross profit .................................................... 78.9 77.7 77.3
----- ----- -----
Operating expenses:
Selling, general and administrative ......................... 66.4 65.1 65.0
Restructuring ............................................... 0.8 - -
Other non-recurring ......................................... 0.4 - -
Related party royalties ..................................... 0.5 0.8 0.8
----- ----- -----
68.1 65.9 65.8
----- ----- -----
Operating income ................................................ 10.8 11.8 11.5
Interest expense, net ........................................... 0.3 0.4 0.4
----- ----- -----
Earnings before income taxes, minority interest and accounting
change ........................................................ 10.5 11.4 11.1
Provision for income taxes ...................................... 3.8 4.2 4.2
Minority interest, net of tax ................................... - - -
----- ----- -----
Net earnings before accounting change ........................... 6.7 7.2 6.9
Cumulative effect of a change in accounting principle, net of tax (0.1) - -
----- ----- -----
Net earnings .................................................... 6.6% 7.2% 6.9%
===== ===== =====
Earnings before interest, taxes, depreciation
and amortization ("EBITDA") ................................. 14.3% 15.2% 14.5%
Fiscal 2001 as Compared with Fiscal 2000
NET SALES
Net sales increased 6% or $241.3 million to $4.61 billion reflecting continued
growth in the makeup, skin care and hair care categories, partially offset by a
decline in fragrance net sales. The United States retail business has
demonstrated continued softness particularly in the fragrance category. Growth
on a reported basis reflects the impact of a stronger U.S. dollar relative to
other currencies in virtually all markets in which we do business. Net sales
growth is primarily attributable to a combination of new and recently launched
products, the inclusion of newer brands such as Bumble and bumble and changes in
distribution, including additional retail locations. Excluding the impact of
foreign currency translation, net sales increased 9%, with double-digit
contributions from each of Europe, the Middle East & Africa and Asia/Pacific.
The following discussions of Net Sales by "Product Categories" and "Geographic
Regions" exclude the impact of the fiscal 2001 restructuring and other
non-recurring expenses, which were not material to our net sales, and represent
the manner in which we conduct and view our business. For a discussion of the
restructuring and other non-recurring expenses, see "Operating Expenses -
Restructuring and Other Non-Recurring Expenses" in this section.
Product Categories
Skin Care Net sales of skin care products increased 6% or $89.1 million to $1.64
billion. This increase was primarily attributable to newer products such as
Idealist Skin Refinisher, Anti-Gravity Firming Lift Cream, Anti-Gravity Firming
Eye Lift Cream and Pro-Preferred Skincare products, the first skin care line for
our M.A.C brand. By introducing new products into lines such as Renutriv, the
Origins Ginger Bath and Body Collection and Acne Solutions, we have continued to
attract consumers to the lines and maintain sales momentum. White Light
Brightening System and Active White continue to be popular whitening products
particularly in the Asia/Pacific region. Newly launched products such as Private
Spa Collection, Origins' facial skin products and initial shipments of
LightSource have contributed to increased sales. Partially offsetting these
increases were lower sales of certain existing products such as Fruition Extra
and Diminish.
-14-
Makeup
Makeup net sales increased 8% or $124.9 million to $1.70 billion. Significant
contributors were recently launched products such as High Impact Eye Shadow,
Moisture Surge Lipstick, Equalizer Smart Makeup, Lash Doubling Mascara,
Glossware, Pure Color Lip Gloss, Luxe Makeup and Automatic Pencil Duo. In
addition, established products such as Pure Color Lipstick, Quickliner For Lips,
Quickliner For Eyes and Sheer Powder Blusher added to increased sales. M.A.C
products have also contributed to increased sales with the Eden Rocks, M.A.C
Paints and Heat product lines.
Fragrance
Net sales of fragrance products decreased 3% or $30.4 million to $1.06 billion,
but increased 1% on a comparable currency basis. The decrease in net sales is
attributable to a continued decline in sales of Tommy Hilfiger licensed
products, as well as to lower sales of Estee Lauder pleasures, Clinique Happy
and Clinique Happy for Men. The continued softness of the fragrance business in
the United States and difficult comparisons to last year contributed to the
decline in this category. Contributing positively to the category were new
products, such as Intuition, Ginger Essence and DKNY for Men, as well as the
international rollout of DKNY for women.
Hair Care
Hair care net sales increased 59% or $66.8 million to $180.7 million. The
increase in sales is attributable to the inclusion of Bumble and bumble, in
which we acquired a controlling majority equity interest in June 2000, and the
launch of Clinique's Simple Hair Care System. In addition, sales growth was
generated by Aveda shampoo and conditioner products, such as the Sap Moss and
Brilliant product groups, and an increase in the number of Company-owned Aveda
Environmental Lifestyle Stores.
The introduction of new products may have some cannibalizing effect on sales of
existing products, which we take into account in our business planning.
Geographic Regions
Sales in the Americas increased 6% or $156.5 million to $2.82 billion. This
increase was driven by sales growth in the makeup, skin care, and hair care
categories, particularly with the success of new and recently launched products
and the growth of our newer brands. The increase was partially offset by a
decline in fragrance sales due to the softness in this category in the United
States. In Europe, the Middle East & Africa, net sales increased 7% or $79.2
million to $1.21 billion. The increase was primarily the result of higher net
sales in the United Kingdom, Spain and France and in our distributor and travel
retail businesses. This increase was partially offset by decreased sales in
Germany and South Africa. Net sales in Asia/Pacific increased 2% or $13.6
million to $590.6 million primarily due to higher net sales in Korea, Hong Kong,
Malaysia and Thailand, partially offset by lower sales in Japan and Australia.
Excluding the impact of foreign currency translation, sales grew in each country
in Europe, the Middle East & Africa and in Asia/Pacific, accounting for growth
of 17% and 10%, respectively.
We strategically stagger our new product launches by geographic market, which
may account for differences in regional sales growth.
COST OF SALES
Cost of sales as a percentage of total net sales improved to 21.1% from 22.3%,
reflecting the impact of our manufacturing and sourcing initiatives as well as
changes in distribution and product mix. Changes in distribution include the
rollout of our own retail stores and the acquisition of certain distributor
operations, both of which contributed to higher gross margins. In addition, the
synergies achieved by incorporating recently acquired businesses into our
existing manufacturing and sourcing infrastructures had a favorable impact on
gross margins.
OPERATING EXPENSES
Operating Expenses
Operating expenses increased to 68.1% of net sales as compared with 65.9% of net
sales in the prior year. Excluding the impact of restructuring and other
non-recurring expenses, operating expenses were 66.9% of net sales. This change
primarily relates to the increased cost of our retail store and Internet
operations, which have higher operating cost structures than our traditional
distribution channels. Additionally, depreciation and amortization charges have
increased compared with the prior year, reflecting increased goodwill
amortization from acquisitions and depreciation related to capital investments
partially offset by the November 2000 expiration of amortization related to
purchased royalty rights. 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.
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Restructuring and Other Non-Recurring Expenses
During the fourth quarter of fiscal 2001, we recorded one-time charges for
restructuring and other non-recurring expenses related to repositioning certain
businesses as part of our ongoing efforts to drive long-term growth and increase
profitability. The restructuring and other non-recurring expenses focused on
four areas: product fixtures for the jane brand; in-store "tommy's shops";
information systems and other assets; and global brand reorganization. We have
committed to a defined plan of action, which resulted in an aggregate pre-tax
charge of $63.0 million, of which $35.9 million is cash related. On an after-tax
basis, the aggregate charge was $40.3 million, equal to $.17 per diluted share.
Specifically, the charge included the following:
1. jane. To bring product innovation rapidly to the market and drive growth,
jane is switching from its traditional wall displays to a carded program. We
believe this change will lead to increases in sales and improvements in
profitability. The charge included a $16.1 million write-down of existing jane
product fixtures and the return of uncarded product from virtually all of the
13,000 distribution outlets in the United States.
2. "tommy's shops". We are also restructuring the in-store "tommy's shops" to
focus on our most productive locations and have decided to close certain shops
that have underperformed relative to expectations. As a result, we have recorded
a $6.3 million provision for the closing of 86 under-performing in-store
"tommy's shops", located in the United States, and for related product returns.
3. Information systems and other assets. In response to changing technology and
our new strategic direction, the charge included a $16.2 million provision for
costs associated with the reevaluation of supply chain systems that we will no
longer utilize and with the elimination of unproductive assets related to the
change to standard financial systems. We expect that these changes will enhance
efficiency and consistency throughout our global operations.
4. Global brand reorganization. We recorded $20.8 million related to benefits
and severance packages for 75 management employees who were affected by the
reconfiguration to a global brand structure and another $3.6 million related to
infrastructure costs. We expect that the global brand structure will improve
decision-making processes, thereby increasing innovation and speed to market.
Following is a summary of the charges as recorded in the consolidated statement
of earnings for fiscal 2001:
Restructuring
-----------------------------
Other
(In millions) Net Cost of Operating Non-Recurring
Sales Sales Expenses Expenses Total
------- ------ -------- -------- -------
jane ............................... $ 5.7 $ 1.5 $ 4.8 $ 4.1 $ 16.1
tommy's shops ...................... 2.3 (0.4) 4.4 - 6.3
Information systems and other assets - - 4.6 11.6 16.2
Global brand reorganization ........ - - 23.8 0.6 24.4
------- ------ ------- ------- -------
Total charge ....................... $ 8.0 $ 1.1 $ 37.6 $ 16.3 63.0
======= ====== ======= =======
Tax effect ......................... (22.7)
-------
Net charge ......................... $ 40.3
=======
The restructuring charge was recorded in other accrued liabilities or as a
reduction of fixed assets. During fiscal 2001, $0.7 million was paid and through
August 31, 2001 an additional $3.0 million was paid. We expect to settle a
majority of the remaining obligations by the end of fiscal 2002 with certain
additional payments made ratably through fiscal 2004.
OPERATING RESULTS
Operating income decreased 4% or $20.2 million to $495.6 million as compared
with the prior year. Operating margins were 10.8% of net sales in fiscal 2001 as
compared with 11.8% in the prior year. Operating income reflected the inclusion
of restructuring and other non-recurring expenses of $46.7 million and $16.3
million, respectively. Before consideration of
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these one-time charges, operating income increased 8% to $558.6 million and
operating margins were 12.1%. The increase in operating income was primarily due
to higher net sales and an improved gross margin percentage, partially offset by
increased operating expenses reflecting increased sales support spending and new
distribution channel costs.
Net earnings and net earnings per diluted share decreased approximately 3%. Net
earnings declined $8.9 million to $305.2 million and net earnings per diluted
share was lower by $.04 per diluted share from $1.20 to $1.16. Net earnings
before restructuring and other non-recurring expenses and before the cumulative
effect of adopting a new accounting principle was $347.7 million, representing
an increase of 11% over the prior year; diluted earnings per common share
increased 12% to $1.34 from $1.20 in the prior year.
The following discussions of Operating Income by "Product Categories" and
"Geographic Regions" exclude the impact of restructuring and other non-recurring
expenses and represents the manner in which we conduct and view our business.
Product Categories
Operating income increased 17% to $212.5 million and 11% to $266.9 million in
makeup and skin care, respectively, due primarily to the strength of recently
launched products. The strong growth of our M.A.C business, which includes
retail store expansion, also contributed to the increase in makeup operating
income. Operating income from our fragrance business declined by $17.0 million
reflecting lower sales and increased support spending versus the prior year. The
nominal increase in hair care operating income was a result of the inclusion of
Bumble and bumble and sales from recent launches, partially offset by costs
associated with refining Aveda's salon distribution, opening new Aveda
Environmental Lifestyle Stores and investing in new product introductions.
Geographic Regions
Operating income in the Americas increased 4% or $12.0 million to $299.9 million
as compared with the prior year, primarily due to net sales increases related to
new and recently launched products, strong growth in our M.A.C business and
the inclusion of Bumble and bumble, partially offset by a decline in fragrance
net sales. In Europe, the Middle East & Africa, operating income increased 19%
or $32.9 million to $201.8 million primarily due to improved operating results
in the United Kingdom and Spain and in the travel retail business, partially
offset by lower operating income in South Africa. In Asia/Pacific, operating
income decreased slightly to $56.9 million due to higher results in Korea and
Hong Kong offset by lower income in Japan and Australia.
INTEREST EXPENSE, NET
Net interest expense was $12.3 million as compared with $17.1 million in the
prior year. As a result of an increase in average available cash during the
period, we had higher interest income on invested funds and lower interest
expense due to reduced short-term borrowings. Additionally, we benefited from a
lower effective interest rate on our long-term borrowings resulting from our
interest rate risk management strategy.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate for income taxes for fiscal 2001 was 36%
compared with 37% in the prior year. 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.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA") is an
additional measure of operating performance used by management. EBITDA, like
operating income, does not include the effects of interest and taxes and
additionally excludes the "non-cash" effects of depreciation and amortization on
current earnings. While the components of EBITDA may vary from company to
company, we exclude minority interest adjustments, all depreciation charges
related to property, plant and equipment and all amortization charges, including
amortization of goodwill, purchased royalty rights (fully amortized in November
2000), leasehold improvements and other intangible assets. These components of
operating income do not necessarily result in a capital requirement in the
current period, and, in the opinion of management, many of the underlying
assets, both tangible and intangible, create value by supporting the global
recognition of brand names and product innovation and by consistently producing
quality products for our customers and consumers. While we consider EBITDA
useful in analyzing our results, it is not intended to replace, or act as a
substitute for, any presentation included in the consolidated financial
statements prepared in conformity with generally accepted accounting principles.
-17-
EBITDA decreased slightly to $658.5 million or 14.3% of net sales in fiscal 2001
as compared with $662.6 million or 15.2% of net sales in fiscal 2000. Excluding
restructuring and other non-recurring expenses, EBITDA increased 8.9% to $721.5
million or 15.6% of net sales in fiscal 2001 as compared with fiscal 2000. The
improvement in EBITDA was primarily attributable to improvements in gross profit
related to sales growth and production efficiencies.
Fiscal 2000 as Compared with Fiscal 1999
NET SALES
Net sales increased 10% or $405.3 million to $4.37 billion, reflecting
improvements in each product category and each geographic region. We achieved
double-digit growth in net sales of our makeup products, both domestically and
abroad, on the strength of new and existing products, expanded distribution of
M.A.C products and the addition of Stila. Improvements in sales of skin care
products primarily related to new products targeting diverse groups of
consumers. Growth of hair care sales was fueled by new product introductions and
changes in our lines of distribution. Excluding the impact of foreign currency
translation, total net sales grew 11%, with double-digit contributions from each
region.
Product Categories
Skin Care
Skin care product sales increased 11% or $153.6 million to $1.55 billion,
partially reflecting our ability to capitalize on the success of Resilience Lift
by rolling it out internationally and our introduction of a complementary
product, Resilience Lift Eye Creme. Initial shipments of Idealist Skin
Refinisher as well as sales of other new products, such as Body Clinique,
Clinique Acne Solutions and Spotlight Skin Tone Perfector, contributed to
improvements in the category, as did a line of Origins brand ginger-based
products, including Ginger Souffle and Ginger Body Wash. Sales of certain
existing products, such as those in the Clinique 3-Step Skin Care System, were
consistently strong, while others such as Diminish and Turnaround Cream were
lower.
Makeup
Our net sales of makeup products increased 12% or $166.7 million to $1.58
billion supported by new and existing products, the addition of Stila and
increased sales of M.A.C products. Sales growth of our M.A.C lines was achieved
through growth in existing business and expansion of both traditional and retail
distribution. New products launched in fiscal 2000, such as *magic by
Prescriptives, City Stick and Longstemmed Lashes, contributed to improvements in
the category, as did existing products such as Long Last Lipstick and Liquid
Lipstick. Our makeup business also benefited from the domestic launch of Go Pout
Lipstick and the rollout of Superfit Makeup and Pure Color Lipstick
internationally. Improvements were partially offset by lower sales of Indelible
Lipstick and Smudgesicles.
Fragrance
Net sales of fragrance products increased 4% or $43.7 million to $1.09 billion.
For the year, sales of Tommy Hilfiger licensed products improved. Sales of
Freedom for him and Freedom for her, which were launched in fiscal 2000,
outpaced decreased sales of existing Tommy Hilfiger fragrances. DKNY for women
was launched domestically and Donna Karan Cashmere Mist was rolled out
internationally. Both of these products added to growth in the category. In its
second full fiscal year, sales of Clinique Happy continued to improve and during
fiscal 2000 we completed the master brand with the launch of Clinique Happy for
Men. Dazzling Gold and Dazzling Silver, which were rolled out in the prior year,
caused difficult comparisons for the fragrance category in fiscal 2000.
Hair Care
Sales of hair care products increased 38% or $31.5 million to $113.9 million
primarily due to Aveda, driven by an increase in the number of company-owned
retail stores, the successful introduction of new products and the effect of the
acquisitions of third-party distributors. In June 2000, we acquired a majority
interest in Bumble and bumble.
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
Sales in the Americas increased 11% or $260.9 million to $2.66 billion. This
increase was driven by sales of new and existing products across all categories
and growth in our newer brands. In Europe, the Middle East & Africa, net sales
increased 4% or $48.6 million to $1.13 billion. The increase was primarily the
result of higher net sales in Spain, Italy and France and in the travel retail
business, partially offset by lower sales in Germany. Also contributing to
regional sales growth
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were sales by Jo Malone, which was acquired in October 1999. Excluding the
impact of foreign currency translation, sales in Europe, the Middle East &
Africa increased 12%. Net sales in Asia/Pacific increased 20% or $95.8 million
to $577.0 million, reflecting increases in all regions, particularly Japan,
Korea, Taiwan and Australia. Excluding the impact of foreign currency
translation, Asia/Pacific sales grew 10% over the prior-year period.
We strategically stagger our new product launches by geographic market, which
may account for differences in regional sales growth.
COST OF SALES
Cost of sales increased $72.2 million or 8% to $972.1 million from $899.9
million last year. Cost of sales as a percentage of total net sales decreased to
22.3% from 22.7%, reflecting changes in product distribution, as well as the
impact of our production and sourcing initiatives. Changes in product
distribution include the rollout of our own retail stores and the acquisition of
certain distributor operations, both of which contributed to higher gross
margins. In addition, our cost of sales reduction program had a favorable impact
on gross margins of products offered by our newer acquisitions.
OPERATING EXPENSES
Total operating expenses increased to 65.9% of net sales as compared with 65.8%
of net sales in the prior year. This change primarily relates to increased costs
of new/modified channels of distribution, which have higher operating cost
structures than our traditional channels, as well as higher depreciation and
amortization. Operating expenses are subject to the timing of advertising and
promotional spending due to product launches and rollouts as well as incremental
advertising in select markets.
OPERATING INCOME
Operating income increased 13% or $58.9 million to $515.8 million as compared
with 12% growth to $456.9 million in the prior year. Operating margins were
11.8% of net sales in fiscal 2000 as compared with 11.5% in fiscal 1999. The
increase in operating income and margins was due to higher net sales coupled
with production efficiencies and changes in distribution, partially offset by
planned increases in selling, general and administrative spending related to
businesses acquired and new/modified channels of distribution.
Product Categories
Operating income increased in the skin care, makeup and hair care categories by
17%, 15% and 9%, respectively, primarily due to sales growth. Fragrance
operating income increased 1% as strong sales increases in the early portion of
fiscal 2000 gave way to softer sales in the latter half, while planned
advertising and promotional spending was relatively constant throughout the
year. The advertising and promotion for fragrance indirectly supported other
categories by generating increased traffic at points of sale.
Geographic Regions
Operating income in the Americas increased 9% or $22.9 million to $287.9 million
primarily due to increases in skin care product sales, as well as the inclusion
of operating results from recent acquisitions. In Europe, the Middle East &
Africa, operating income increased 16% or $23.4 million to $168.9 million
reflecting improved operating results in Spain and Italy and in the travel
retail business. In Asia/Pacific, operating income increased 27% or $12.6
million to $59.0 million due to improved results in Taiwan, Japan, Korea and
Australia.
INTEREST EXPENSE, NET
Net interest expense was $17.1 million and $16.7 million for the years ended
June 30, 2000 and 1999, respectively. This net increase reflected lower interest
income from investments, related to lower average cash balances, partially
offset by lower interest expense resulting from our management of interest rates
and short-term borrowings.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate for income taxes for fiscal 2000 was 37%
compared with 38% in the prior year. These rates were higher than the statutory
Federal tax rate due to the effect of state and local taxes, higher tax rates in
certain foreign jurisdictions and certain nondeductible expenses. The decrease
in the effective income tax rate was principally attributable to tax planning
initiatives and reduction of certain local statutory tax rates.
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EBITDA
EBITDA increased 15% to $662.6 million or 15.2% of net sales in fiscal 2000 as
compared with $574.2 million or 14.5% of net sales in fiscal 1999. The
improvement in EBITDA was primarily attributable to improvements in gross profit
related to sales growth and production efficiencies.
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 June 30, 2001, we had cash
and cash equivalents of $346.7 million compared with $320.3 million at June 30,
2000.
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 June 30, 2001,
our outstanding long-term borrowings consisted of $181.0 million of commercial
paper; a $200.0 million term loan, which is due in February 2005; a 700.0
million yen loan payable (approximately $5.7 million at current exchange rates),
which is due in April 2003; and a 3.0 billion yen term loan (approximately $24.2
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 June 30, 2001, we had an unused
$400.0 million revolving credit facility, expiring on June 28, 2006. We also
have an effective shelf registration statement covering the potential issuance
of up to $400.0 million in debt securities.
Our business is seasonal in nature and, accordingly, our working capital needs
vary. To meet these needs, we could issue up to an additional $569.0 million of
commercial paper under our program, issue long-term debt securities or borrow
under the revolving credit facility. As of June 30, 2001, we also had $30.4
million in uncommitted facilities, $0.2 million of which was used.
Total debt as a percent of total capitalization was 20% at June 30, 2001 as
compared with 22% at June 30, 2000, primarily as a result of higher total
capital.
Net cash provided by operating activities was $305.4 million in fiscal 2001 as
compared with $442.5 million in fiscal 2000 and $352.3 million in fiscal 1999.
The decrease in fiscal 2001 cash provided by operating activities reflected an
increase in inventory primarily due to: accelerated growth both in new
distribution channels and in the rollout of new brands; a shift in the timing of
Christmas production at the end of fiscal 2001 as compared with the prior year;
reconfiguration of some of our distribution to improve service levels; and
softer retail sales than projected in the Americas. Accounts receivable
increased due to sales growth, particularly outside the United States, and the
timing of shipments as compared with fiscal 2000. The decrease in other accrued
liabilities reflected the type and timing of various expenditures and the
tightening of spending, particularly in the Americas, due to the difficult
retail environment, partially offset by a $35.2 million accrual for
restructuring and other non-recurring expenses. The fiscal 2000 and 1999
increases in cash provided by operating activities were primarily related to
increased earnings, particularly before depreciation and amortization, as well
as to higher accrual balances related to acquired businesses.
Net cash used for investing activities was $206.3 million in fiscal 2001,
compared with $374.3 million in fiscal 2000 and $200.3 million in fiscal 1999.
During fiscal 2001, investment spending related primarily to capital
expenditures and the acquisition of a number of third-party distributors.
Investment spending in fiscal 2000 reflected capital expenditures and the
acquisitions of Stila, Jo Malone, Gloss.com and Bumble and bumble, as well as
certain Aveda distributors in the United States and United Kingdom, and certain
Aveda retail stores.
Cash used for financing activities was $63.5 million, $87.9 million and $73.2
million in fiscal 2001, 2000 and 1999, respectively. The cash used in fiscal
2001 was primarily related to dividend payments. The increase in cash used in
fiscal 2000 related to common stock repurchases.
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 Class A Common Stock in the open
market or in privately negotiated transactions, depending on market conditions
and other factors. To date, we have purchased approximately 1.1 million shares
under this program.
-20-
Capital expenditures amounted to $192.2 million, $180.9 million and $117.9
million in fiscal 2001, 2000 and 1999, respectively. Spending in all three years
primarily reflected the continued upgrade of manufacturing equipment, dies and
molds, new store openings, store improvements, counter construction and
information technology enhancements, as well as incremental capital spending by
acquired companies.
Dividends declared were $71.1 million, $70.9 million and $65.4 million in fiscal
2001, 2000 and 1999, respectively. In the first three quarters of fiscal 1999,
the Board of Directors declared, and we paid, quarterly dividends on our Class A
and Class B Common Stock at the rate of $.0425 per share. The Board of Directors
increased the common stock dividend to $.05 per share in the fourth quarter of
fiscal 1999 and declared a $.05 per share dividend in each quarter of fiscal
2000 and 2001. In fiscal 2001, 2000 and 1999, dividends declared on our common
stock totaled $47.7 million, $47.5 million and $42.0 million, respectively.
The effects of inflation have not been significant to our overall operating
results in recent years. Generally, we have been able to increase selling prices
sufficiently to offset cost increases, which have been moderate.
We believe that cash on hand, cash generated from operations, available credit
lines and access to credit markets will be adequate to support currently planned
business operations and capital expenditures on both a near-term and long-term
basis.
Derivative Financial Instruments
We address certain financial exposures through a controlled program of risk
management that includes the use of derivative financial instruments. We
primarily enter into foreign currency forward exchange contracts and foreign
currency options to reduce the effects of fluctuating foreign currency exchange
rates. We enter into interest rate swaps and options to manage the effects of
interest rate movements on our aggregate liability portfolio. We categorize
these instruments as entered into for purposes other than trading.
For each derivative contract we enter into, we formally document the
relationship between the hedging instrument and hedged item, as well as its
risk-management objective and strategy for undertaking the hedge. This process
includes linking all derivatives that are designated as fair-value, cash-flow,
or foreign-currency hedges to specific assets and liabilities on the balance
sheet or to specific firm commitments or forecasted transactions. We also
formally assess, both at the hedge's inception and on an ongoing basis, whether
the derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. If it is
determined that a derivative is not highly effective, then we will be required
to discontinue hedge accounting with respect to that derivative prospectively.
Foreign Exchange Risk Management
We enter into forward exchange contracts to hedge purchases, receivables and
payables denominated in foreign currencies for periods consistent with our
identified exposures. The purpose of the hedging activities is to minimize the
effect of foreign exchange rate movements on our costs and on the cash flows
that we receive from foreign subsidiaries. Almost all foreign currency contracts
are denominated in currencies of major industrial countries and are with large
financial institutions rated as strong investment grade by a major rating
agency. We also enter into foreign currency options to hedge anticipated
transactions where there is a high probability that anticipated exposures will
materialize. The forward exchange contracts and foreign currency options have
been designated as cash-flow hedges. As of June 30, 2001, these cash-flow hedges
were highly effective, in all material respects.
As a matter of policy, we only enter into contracts with counterparties that
have at least an "A" (or equivalent) credit rating. The counterparties to these
contracts are major financial institutions. We do not have significant exposure
to any one counterparty. Our exposure to credit loss in the event of
nonperformance by any of the counterparties is limited to only the recognized,
but not realized, gains attributable to the contracts. Management believes risk
of loss under these hedging contracts is remote and in any event would not be
material to the consolidated financial results. The contracts have varying
maturities through the end of August 2002. Costs associated with entering into
such contracts have not been material to our consolidated financial results. We
do not utilize derivative financial instruments for trading or speculative
purposes. At June 30, 2001, we had foreign currency contracts in the form of
forward exchange contracts in the amount of $148.2 million. The foreign
currencies included in these contracts (notional value stated in U.S. dollars)
are principally the Japanese yen ($53.9 million), Swiss franc ($28.8 million),
Korean won ($18.5 million), Taiwan dollar ($13.7 million), British pound ($13.2
million), Euro ($8.5 million) and Mexican peso ($6.8 million).
Interest Rate Risk Management
We have entered into an interest rate swap agreement to exchange floating rate
for fixed rate interest payments periodically over the life of the agreement. In
addition, we have purchased interest rate options that offer similar interest
rate protection. The interest rate swap and options have been designated as
cash-flow hedges and were highly effective as of June 30, 2001.
-21-
At June 30, 2001, we had an interest rate swap and option agreements outstanding
with notional principal amounts of $67.0 million and $133.0 million,
respectively. For the twelve month period ended June 30, 2001, our interest rate
swap carried a weighted average pay rate of 6.14% and a receive rate of 6.32%.
The interest rate option agreements carried a weighted average pay rate of 6.14%
and a receive rate of 6.62%.
Market Risk
We use a value-at-risk model to assess the market risk of our derivative
financial instruments. Value-at-risk represents the potential losses for an
instrument or portfolio from adverse changes in market factors for a specified
time period and confidence level. We estimate value-at-risk across all of our
derivative financial instruments using a model with historical volatilities and
correlations calculated over the past 250 day period. The measured
value-at-risk, calculated as an average, for the twelve months ended June 30,
2001 related to our foreign exchange contracts and interest rate contracts,
using a variance/co-variance model with a 95 percent confidence level and
assuming normal market conditions, was $2.9 million and $3.0 million,
respectively.
Our calculated value-at-risk exposure represents an estimate of reasonably
possible net losses that would be recognized on our portfolio of derivative
financial instruments assuming hypothetical movements in future market rates and
is not necessarily indicative of actual results, which may or may not occur. It
does not represent the maximum possible loss nor any expected loss that may
occur, since actual future gains and losses will differ from those estimated,
based upon actual fluctuations in market rates, operating exposures, and the
timing thereof, and changes in the portfolio of derivative financial instruments
during the year.
We believe, however, that any loss incurred would be offset by the effects of
market rate movements on the respective underlying transactions for which the
hedge is intended.
Accounting Standards
Effective July 1, 2000, we adopted Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities". These Statements established
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended, requires the recognition of all derivative instruments
as either assets or liabilities in the statement of financial position measured
at fair value.
In accordance with the provisions of SFAS No. 133, as amended, we recorded a
non-cash charge to earnings of $2.2 million, after tax, to reflect the change in
time-value from the dates of the derivative instruments' inception through the
date of transition (July 1, 2000). This charge is reflected as the cumulative
effect of a change in accounting principle in the accompanying consolidated
statements of earnings.
The Emerging Issues Task Force ("EITF") has reached consensus on Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs". This consensus
addresses how shipping and handling costs that are billed to a customer in a
sales transaction should be recognized. This guidance became effective for our
fiscal 2001 fourth quarter. Generally, we do not charge for shipping to our
customers that are retailers and, accordingly, the adoption of this rule did not
have a material impact on our consolidated financial results.
The EITF has reached consensus on Issue No. 00-14, "Accounting for Certain Sales
Incentives". This consensus addresses when sales incentives and discounts should
be recognized, as well as where the related revenues and expenses should be
classified in a registrant's financial statements. Currently, the cost of
merchandise used in our gift-with-purchase and purchase-with-purchase
activities, as well as any related revenues, are reported net, as operating
expenses, in the accompanying consolidated statements of earnings. Upon
adoption, we will classify revenues generated by these promotional activities as
sales resulting in an increase of approximately 1.0% to 2.0% in net sales. The
cost of promotional merchandise will be reclassified as a cost of sales.
Although operating income will remain unchanged, gross margins will decrease by
approximately 5.0% to 6.0% of sales, offset by a corresponding decrease in
operating expenses. Due to variations in our launch calendar and the timing of
promotions, we anticipate greater fluctuations in our gross margins and
operating expenses on a quarter-by-quarter basis. Issue No. 00-14 will become
effective in our fiscal 2002 third quarter and will be applied retroactively for
purposes of comparability.
The EITF has reached a consensus on Issue No. 00-25, "Accounting for
Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products". The consensus provides guidance on the
income statement classification of consideration from a vendor to a retailer in
connection with the retailer's purchase of the vendor's products or to promote
sales of the vendor's products. Issue No. 00-25 becomes effective for quarters
beginning after
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December 15, 2001. We currently account for transactions (e.g., certain of our
promotional allowances to retailers) in accordance with Issue No. 00-25 and,
thus, this consensus will not have an impact on our consolidated financial
results.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". These Statements establish financial accounting and reporting standards
for acquired goodwill and other intangible assets. Specifically, the standards
address how acquired intangible assets should be accounted for both at the time
of acquisition and after they have been recognized in the financial statements.
The provisions of SFAS No. 141 apply to all business combinations initiated
after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001; however, early application is permitted for entities with
fiscal years beginning after March 15, 2001. We have adopted this standard
effective July 1, 2001 and, accordingly, those intangible assets that will
continue to be classified as goodwill or as other intangibles with indefinite
lives will no longer be amortized. This could result in the exclusion of
approximately $21 million in amortization expense for the fiscal year ending
June 30, 2002. In accordance with SFAS No. 142, intangible assets, including
purchased goodwill, will be evaluated periodically for impairment. Our initial
evaluations are expected to be completed by September 30, 2001.
INTERNET
Our strategic goals for the Internet are to enhance our brand equities, to reach
new consumers, to forge deeper relationships with existing consumers and to
strengthen our business with our traditional retailers. The strategy includes
individual sites for our brands, a planned launch of a multi-brand website
offering products from our portfolio and specially designed sites which will be
available through the e-commerce sites of retailers who meet specific
requirements. We currently have ten individual brand websites that educate and
inform consumers about specific brands, with more in development. Five of the
existing sites - esteelauder.com, clinique.com, origins.com, bobbibrown.com and
maccosmetics.com - have e-commerce capabilities. Our Internet sales are
currently limited to consumers in the United States and Canada. We are currently
re-developing the Gloss.com multi-brand site we acquired in May 2000 and expect
to re-launch it in the first half of fiscal 2002. Initially, the site will
feature Estee Lauder, Clinique, Prescriptives, Origins, Bobbi Brown, M.A.C and
Stila products. The site also will feature products from Chanel, Inc. and
Clarins (U.S.A.) Inc. which became co-venturers in Gloss.com in August 2000. The
impact of our overall Internet strategy on earnings is expected to be initially
dilutive, particularly as we re-develop the multi-brand site.
EURO CONVERSION
Under the direction of the European Economic and Monetary Union (EMU), a single
currency (the "Euro") will replace the national currencies of most of the
European countries in which we conduct business. The conversion rates between
the Euro and the participating nations' currencies were fixed irrevocably as of
January 1, 1999, with the participating national currencies to be removed from
circulation between January 1 and June 30, 2002 and replaced by Euro notes and
coinage. During the "transition period" from January 1, 1999 through December
31, 2001, public and private entities, as well as individuals, may pay for goods
and services using either checks, drafts, or wire transfers denominated in Euros
or a participating country's national currency.
Under the regulations governing the transition to a single currency, there is a
"no compulsion, no prohibition" rule which states that no one is obliged to use
the Euro until the notes and coinage have been introduced on January 1, 2002. In
keeping with this rule, we were Euro "compliant" (able to receive
Euro-denominated payments and able to invoice in Euros as requested) as of
January 1, 1999 in the affected countries. Full conversion of all affected
country operations to the Euro is expected to be completed by the time national
currencies are removed from circulation. Phased conversion to the Euro is
currently underway and the effects on revenues, costs and various business
strategies continue to be assessed. The cost of software and business process
conversion is not expected to be material.
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,
we cannot assure that actual results will not differ materially from our
expectations. Factors that could cause actual results to differ from
expectations include, without limitation:
-23-
(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 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, us in the United States and
abroad;
(vii) foreign currency fluctuations affecting our results of operations
and the value of our foreign assets, the relative prices at which we
sell our products and our foreign competitors sell their 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 and the cost and availability of capital, which we
may need for new equipment, facilities or acquisitions;
(ix) shipment delays, depletion of inventory and increased production
costs resulting from disruptions of operations at any of the facilities
which, due to consolidations in our manufacturing operations, now
manufacture nearly all of our supply of a particular type of product
(i.e., focus factories);
(x) real estate rates and availability, which may affect our ability to
increase the number of retail locations at which we sell our products;
(xi) changes in product mix to products which are less profitable;
(xii) our ability to develop e-commerce capabilities, and other new
information and distribution technologies, on a timely basis and within
our cost estimates;
(xiii) our ability to integrate acquired businesses and realize value
therefrom; and
(xiv) consequences attributable to the events that took place in New
York City and Washington, D.C. on September 11, 2001.
We assume no responsibility to update forward-looking statements made herein or
otherwise.
-24-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is set forth in Item 7 of this Annual
Report on Form 10-K under the captions "Liquidity and Capital Resources - Market
Risk" and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The information required by this item appears beginning on page F-1 of this
Annual Report on Form 10-K and is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
The information required by Item 10 (Directors and Executive Officers of the
Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of
Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and
Related Transactions) of Form 10-K, and not already provided herein under "Item
1. Business - Executive Officers", will be included in our Proxy Statement for
the 2001 Annual Meeting of Stockholders, which will be filed within 120 days
after the close of the fiscal year ended June 30, 2001, and such information is
incorporated herein by reference.
-25-
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1, 2. Financial Statements and Schedules - See index on Page F-1.
3. Exhibits -
Exhibit Description
Number -----------
------
3.1 Form of Restated Certificate of Incorporation (filed as
Exhibit 3.1 to Amendment No. 3 to our Registration Statement
on Form S-1 (No. 33-97180) on November 13, 1995 (the "S-1")).*
3.2 Certificate of Amendment to Restated Certificate of
Incorporation (filed as Exhibit 3.1 to our Quarterly Report on
Form 10-Q for the quarter ended December 31, 1999).*
3.3 Amended and Restated By-laws (filed as Exhibit 3.2 to our
Quarterly Report on Form 10-Q for the quarter ended December
31, 1999).*
10.1 Form of Stockholders' Agreement (filed as Exhibit 10.1 to the
S-1).*
10.1a Amendment No. 1 to Stockholders' Agreement (filed as Exhibit
10.1 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996).*
10.1b Amendment No. 2 to Stockholders' Agreement (filed as Exhibit
10.2 to our Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996 (the "FY 1997 Q2 10-Q")).*
10.1c Amendment No. 3 to Stockholder's Agreement (filed as Exhibit
10.2 to our Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997 (the "FY 1997 Q3 10-Q")).*
10.1d Amendment No. 4 to Stockholders' Agreement (filed as Exhibit
10.1d to our Annual Report on Form 10-K for the year ended
June 30, 2000 ("FY 2000 10-K)).*
10.2 Form of Registration Rights Agreement (filed as Exhibit 10.2
to the S-1).*
10.2a First Amendment to Registration Rights Agreement (filed as
Exhibit 10.3 to our Annual Report on Form 10-K for the fiscal
year ended June 30, 1996).*
10.2b Second Amendment to Registration Rights Agreement (filed as
Exhibit 10.1 to the FY 1997 Q3 10-Q).*
10.2c Third Amendment to Registration Rights Agreement.
10.3 Fiscal 1996 Share Incentive Plan (filed as Exhibit 10.3 to the
S-1).* +
10.4 Fiscal 1999 Share Incentive Plan (filed as Exhibit 4(c) to our
Registration Statement on Form S-8 (No. 333-66851) on November
5, 1998).* +
10.5 The Estee Lauder Inc. Retirement Growth Account Plan (filed as
Exhibit 10.5 to our Annual Report on Form 10-K for the fiscal
year ended June 30, 1999 (the "FY 1999 10-K")).* +
10.6 The Estee Lauder Inc. Retirement Benefits Restoration Plan
(filed as Exhibit 10.6 to the FY 1999 10-K).* +
10.7 Executive Annual Incentive Plan (filed as Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the quarter ended December
31, 1998).* +
10.8 Employment Agreement with Leonard A. Lauder. +
10.9 Employment Agreement with Ronald S. Lauder (filed as Exhibit
10.1 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000).* +
10.10 Employment Agreement with Fred H. Langhammer (filed as Exhibit
10.10 to the FY 2000 10-K)."+
10.10a Amendment to Employment Agreement with Fred H. Langhammer. +
10.11 Employment Agreement with Daniel J. Brestle. +
10.12 Employment Agreement with William P. Lauder (filed as Exhibit
10.1 to Amendment No. 2 to our Registration Statement on Form
S-3 (No. 333-77977) on May 19, 1999).* +
10.13 Employment Agreement with Patrick Bousquet-Chavanne (filed as
Exhibit 10.13 to the FY 1999 10-K).* +
10.14 Form of Deferred Compensation Agreement (interest-based) with
Outside Directors. +
10.15 Form of Deferred Compensation Agreement (stock-based) with
Outside Directors. +
10.16 Non-Employee Director Share Incentive Plan (filed as Exhibit
4(d) to our Registration Statement on Form S-8 (No. 333-49606)
filed on November 9, 2000).* +
21.1 List of significant subsidiaries.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney.
-26-
(b) Reports on Form 8-K.
On April 24, 2001, we filed a Current Report on Form 8-K. Pursuant to Item 5 of
Form 8-K, we reported the results of the quarter ended March 31, 2001 and we
updated our then existing estimates of anticipated sales growth and earnings per
share for fiscal 2001.
On June 28, 2001, we filed a Current Report on Form 8-K. Pursuant to Item 5 of
Form 8-K, we reported our then anticipated full year earnings per share range
for fiscal 2001, restructuring and other non-recurring expenses related to
certain operations and our then existing estimate of anticipated net sales and
earnings per share for fiscal 2002.
-----------
* Incorporated herein by reference.
+ Exhibit is a management contract or compensatory plan or arrangement.
-27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ RICHARD W. KUNES
-------------------------------
Richard W. Kunes
Senior Vice President
and Chief Financial Officer
Date: September 17, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title(s) Date
--------- -------- ----
FRED H. LANGHAMMER* Chief Executive Officer September 17, 2001
------------------------------------ and a Director
Fred H. Langhammer (Principal Executive Officer)
LEONARD A. LAUDER* Chairman of the Board of September 17, 2001
------------------------------------ Directors
Leonard A. Lauder
CHARLENE BARSHEFSKY * Director September 17, 2001
------------------------------------
Charlene Barshefsky
LYNN FORESTER* Director September 17, 2001
------------------------------------
Lynn Forester
IRVINE O. HOCKADAY, JR.* Director September 17, 2001
------------------------------------
Irvine O. Hockaday, Jr.
RONALD S. LAUDER* Director September 17, 2001
------------------------------------
Ronald S. Lauder
WILLIAM P. LAUDER* Director September 17, 2001
------------------------------------
William P. Lauder
RICHARD D. PARSONS* Director September 17, 2001
------------------------------------
Richard D. Parsons
MARSHALL ROSE* Director September 17, 2001
------------------------------------
Marshall Rose
FAYE WATTLETON* Director September 17, 2001
------------------------------------
Faye Wattleton
/s/ RICHARD W. KUNES Senior Vice President and September 17, 2001
------------------------------------ Chief Financial Officer
Richard W. Kunes (Principal Financial and
Accounting Officer)
-----------------
* By signing his name hereto, Richard W. Kunes signs this document in the
capacities indicated above and on behalf of the persons indicated above pursuant
to powers of attorney duly executed by such persons and filed herewith.
By /s/ RICHARD W. KUNES
--------------------------
Richard W. Kunes
(Attorney-in-Fact)
-28-
THE ESTEE LAUDER COMPANIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Financial Statements:
Report of Independent Public Accountants................................. F-2
Consolidated Statements of Earnings...................................... F-3
Consolidated Balance Sheets.............................................. F-4
Consolidated Statements of Stockholders' Equity and Comprehensive
Income................................................................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Financial Statement Schedule:
Report of Independent Public Accountants on Schedule..................... S-1
Schedule II - Valuation and Qualifying Accounts.......................... S-2
All other schedules are omitted because they are not applicable or the required
information is included in the consolidated financial statements or notes
thereto.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Estee Lauder Companies Inc.:
We have audited the accompanying consolidated balance sheets of The Estee Lauder
Companies Inc. (a Delaware corporation) and subsidiaries as of June 30, 2001 and
2000, and the related consolidated statements of earnings, stockholders' equity
and comprehensive income and cash flows for each of the three years in the
period ended June 30, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Estee Lauder Companies Inc.
and subsidiaries as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2001 in conformity with accounting principles generally accepted in the
United States.
ARTHUR ANDERSEN LLP
New York, New York
August 10, 2001
F-2
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended June 30
-------------------------------------
2001 2000 1999
----------- ----------- -----------
(In millions, except per share data)
Net Sales ............................................... $ 4,608.1 $ 4,366.8 $ 3,961.5
Cost of sales ........................................... 972.3 972.1 899.9
----------- ----------- -----------
Gross Profit ............................................ 3,635.8 3,394.7 3,061.6
----------- ----------- -----------
Operating expenses:
Selling, general and administrative .................. 3,063.7 2,845.7 2,572.1
Restructuring ........................................ 37.6 - -
Other non-recurring .................................. 16.3 - -
Related party royalties .............................. 22.6 33.2 32.6
----------- ----------- -----------
3,140.2 2,878.9 2,604.7
----------- ----------- -----------
Operating Income ........................................ 495.6 515.8 456.9
Interest expense, net ................................... 12.3 17.1 16.7
----------- ----------- -----------
Earnings before Income Taxes, Minority Interest
and Accounting Change .................................. 483.3 498.7 440.2
Provision for income taxes .............................. 174.0 184.6 167.3
Minority interest, net of tax ........................... (1.9) - -
----------- ----------- -----------
Net Earnings before Accounting Change ................... 307.4 314.1 272.9
Cumulative effect of a change in accounting principle,
net of tax ............................................. (2.2) - -
----------- ----------- -----------
Net Earnings ............................................ 305.2 314.1 272.9
Preferred stock dividends ............................... 23.4 23.4 23.4
----------- ----------- -----------
Net Earnings Attributable to Common Stock ............... $ 281.8 $ 290.7 $ 249.5
=========== =========== ===========
Basic net earnings per common share:
Net earnings attributable to common stock before
accounting change ................................... $ 1.19 $ 1.22 $ 1.05
Cumulative effect of a change in accounting principle,
net of tax .......................................... (.01) - -
----------- ----------- -----------
Net earnings attributable to common stock ............ $ 1.18 $ 1.22 $ 1.05
=========== =========== ===========
Diluted net earnings per common share:
Net earnings attributable to common stock before
accounting change ................................... $ 1.17 $ 1.20 $ 1.03
Cumulative effect of a change in accounting principle,
net of tax .......................................... (.01) - -
----------- ----------- -----------
Net earnings attributable to common stock ............ $ 1.16 $ 1.20 $ 1.03
=========== =========== ===========
Weighted average common shares outstanding:
Basic ................................................ 238.4 237.7 237.0
Diluted .............................................. 242.2 242.5 241.2
See notes to consolidated financial statements.
F-3
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
June 30
-----------------------
2001 2000
---------- ----------
(In millions)
ASSETS
Current Assets
Cash and cash equivalents ...................................................... $ 346.7 $ 320.3
Accounts receivable, net ....................................................... 580.6 550.2
Inventory and promotional merchandise, net ..................................... 630.3 546.3
Prepaid expenses and other current assets ...................................... 181.3 201.7
---------- ----------
Total current assets ...................................................... 1,738.9 1,618.5
---------- ----------
Property, Plant and Equipment, net ............................................. 528.7 480.3
---------- ----------
Other Assets
Investments, at cost or market value ........................................... 41.0 61.4
Deferred income taxes .......................................................... 70.1 48.9
Goodwill, net .................................................................. 699.7 708.1
Other intangible assets, net ................................................... 21.0 31.1
Other assets, net .............................................................. 119.4 95.0
---------- ----------
Total other assets ........................................................ 951.2 944.5
---------- ----------
Total assets .......................................................... $ 3,218.8 $ 3,043.3
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt ................................................................ $ 5.8 $ 7.0
Accounts payable ............................................................... 239.8 236.5
Accrued income taxes ........................................................... 79.0 84.2
Other accrued liabilities ...................................................... 532.1 574.1
---------- ----------
Total current liabilities ................................................. 856.7 901.8
---------- ----------
Noncurrent Liabilities
Long-term debt ................................................................. 410.9 418.4
Other noncurrent liabilities ................................................... 239.1 202.8
---------- ----------
Total noncurrent liabilities .............................................. 650.0 621.2
---------- ----------
Commitments and Contingencies (Note 15)
$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: 126,053,825 in 2001 and 125,058,658 in 2000; 240,000,000 shares
Class B authorized; shares issued and outstanding: 113,490,293 in 2001
and 113,679,334 in 2000 ................................................... 2.4 2.4
Paid-in capital ................................................................ 258.3 237.1
Retained earnings .............................................................. 1,242.7 1,008.6
Accumulated other comprehensive income (loss) .................................. (120.5) (57.1)
---------- ----------
1,382.9 1,191.0
Less: Treasury stock, at cost; 877,860 Class A shares at June 30, 2001 and
876,980 Class A shares at June 30, 2000 ................................... (30.8) (30.7)
---------- ----------
Total stockholders' equity ................................................ 1,352.1 1,160.3
---------- ----------
Total liabilities and stockholders' equity ............................ $ 3,218.8 $ 3,043.3
========== ==========
See notes to consolidated financial statements.
F-4
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Year Ended June 30
--------------------------------
2001 2000 1999
-------- -------- --------
(In millions)
STOCKHOLDERS' EQUITY
Common stock, beginning of year ................................ $ 2.4 $ 2.4 $ 2.4
-------- -------- --------
Common stock, end of year ...................................... 2.4 2.4 2.4
-------- -------- --------
Paid-in capital, beginning of year ............................. 237.1 211.6 168.6
Stock compensation programs .................................... 21.2 25.5 43.0
-------- -------- --------
Paid-in capital, end of year ................................... 258.3 237.1 211.6
-------- -------- --------
Retained earnings, beginning of year ........................... 1,008.6 766.2 559.6
Preferred stock dividends ...................................... (23.4) (23.4) (23.4)
Common stock dividends ......................................... (47.7) (47.5) (42.0)
Issuance of treasury stock ..................................... - (0.8) (0.9)
Net earnings for the year ...................................... 305.2 314.1 272.9
-------- -------- --------
Retained earnings, end of year ................................. 1,242.7 1,008.6 766.2
-------- -------- --------
Accumulated other comprehensive income (loss), beginning of year (57.1) (44.3) (34.2)
Other comprehensive income (loss) .............................. (63.4) (12.8) (10.1)
-------- -------- --------
Accumulated other comprehensive income (loss), end of year ..... (120.5) (57.1) (44.3)
-------- -------- --------
Treasury stock, beginning of year .............................. (30.7) (11.4) -
Acquisition of treasury stock .................................. (0.1) (23.6) (12.7)
Issuance of treasury stock ..................................... - 4.3 1.3
-------- -------- --------
Treasury stock, end of year .................................... (30.8) (30.7) (11.4)
-------- -------- --------
Total stockholders' equity ............................ $1,352.1 $1,160.3 $ 924.5
======== ======== ========
COMPREHENSIVE INCOME
Net earnings ................................................... $ 305.2 $ 314.1 $ 272.9
-------- -------- --------
Other comprehensive income:
Net unrealized investment gains (losses) .................. (11.0) 7.8 0.3
Net derivative instrument losses .......................... (2.0) - -
Net minimum pension liability adjustments ................. (12.4) - -
Translation adjustments ................................... (38.0) (20.6) (10.4)
-------- -------- --------
Other comprehensive income (loss) ......................... (63.4) (12.8) (10.1)
-------- -------- --------
Total comprehensive income ............................ $ 241.8 $ 301.3 $ 262.8
======== ======== ========
See notes to consolidated financial statements.
F-5
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30
----------------------------
2001 2000 1999
-------- -------- --------
(In millions)
Cash Flows from Operating Activities
Net earnings .......................................................... $ 305.2 $ 314.1 $ 272.9
Adjustments to reconcile net earnings to net cash flows provided by
operating activities:
Depreciation and amortization ..................................... 156.3 129.1 99.6
Amortization of purchased royalty rights .......................... 6.6 17.7 17.7
Deferred income taxes ............................................. 4.7 (5.5) (4.2)
Minority interest ................................................. 1.9 - -
Non-cash stock compensation ....................................... 0.7 1.7 8.3
Cumulative effect of a change in accounting principle ............. 2.2 - -
Non-cash portion of restructuring and other non-recurring expenses. 27.1 - -
Changes in operating assets and liabilities:
Increase in accounts receivable, net .............................. (57.3) (24.4) (38.0)
Increase in inventory and promotional merchandise, net ............ (102.1) (31.3) -
Increase in other assets .......................................... (53.6) (39.8) (39.9)
Increase in accounts payable ...................................... 14.2 12.2 14.0
Increase in accrued income taxes .................................. 5.9 10.9 21.2
Increase (decrease) in other accrued liabilities .................. (23.4) 35.1 7.8
Increase (decrease) in other noncurrent liabilities ............... 17.0 22.7 (7.1)
-------- -------- --------
Net cash flows provided by operating activities ................ 305.4 442.5 352.3
-------- -------- --------
Cash Flows from Investing Activities
Capital expenditures .................................................. (192.2) (180.9) (117.9)
Acquisition of businesses, net of acquired cash ....................... (16.0) (180.5) (75.0)
Purchases of long-term investments .................................... - (15.9) (8.4)
Proceeds from disposition of long-term investments .................... 1.9 3.0 1.0
-------- -------- --------
Net cash flows used for investing activities ................... (206.3) (374.3) (200.3)
-------- -------- --------
Cash Flows from Financing Activities
Decrease in short-term debt, net ...................................... (0.1) (0.6) (5.8)
Proceeds from long-term debt .......................................... 24.5 - 205.2
Repayments of long-term debt .......................................... (30.1) (6.8) (210.9)
Net proceeds from employee stock transactions ......................... 13.3 14.0 14.6
Payments to acquire treasury stock .................................... (0.1) (23.6) (12.7)
Dividends paid ........................................................ (71.0) (70.9) (63.6)
-------- -------- --------
Net cash flows used for financing activities ................... (63.5) (87.9) (73.2)
-------- -------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents ............... (9.2) (7.5) (8.8)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents .................. 26.4 (27.2) 70.0
Cash and Cash Equivalents at Beginning of Year ........................ 320.3 347.5 277.5
-------- -------- --------
Cash and Cash Equivalents at End of Year .............................. $ 346.7 $ 320.3 $ 347.5
======== ======== ========
Supplemental disclosures of cash flow information (see also Note 17)
Cash paid during the year for:
Interest .......................................................... $ 26.7 $ 29.2 $ 31.2
======== ======== ========
Income Taxes ...................................................... $ 176.6 $ 163.8 $ 157.3
======== ======== ========
See notes to consolidated financial statements.
F-6
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
The Estee Lauder Companies Inc. manufactures, markets and sells skin care,
makeup, fragrance and hair care products around the world. Products are marketed
under the following brand names: Estee Lauder, Clinique, Aramis, Prescriptives,
Origins, M.A.C, Bobbi Brown, La Mer, jane, Aveda, Stila, Jo Malone and Bumble
and bumble. The Estee Lauder Companies Inc. is also the global licensee of the
Tommy Hilfiger, Donna Karan and Kate Spade brands for fragrances and cosmetics.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
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.
Net Earnings Per Common Share
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:
Year Ended June 30
-------------------------------
2001 2000 1999
--------- --------- ---------
(In millions, except per share data)
Numerator:
Net earnings before accounting change ............................... $ 307.4 $ 314.1 $ 272.9
Preferred stock dividends ........................................... (23.4) (23.4) (23.4)
--------- --------- ---------
Net earnings attributable to common stock before accounting change .. 284.0 290.7 249.5
Cumulative effect of a change in accounting principle, net of tax ... (2.2) - -
--------- --------- ---------
Net earnings attributable to common stock ........................... $ 281.8 $ 290.7 $ 249.5
========= ========= =========
Denominator:
Weighted average common shares outstanding - Basic .................. 238.4 237.7 237.0
Effect of dilutive securities: Stock options ........................ 3.8 4.8 4.2
--------- --------- ---------
Weighted average common shares outstanding - Diluted ................ 242.2 242.5 241.2
========= ========= =========
Basic net earnings per common share:
Net earnings before accounting change ............................... $ 1.19 $ 1.22 $ 1.05
Cumulative effect of a change in accounting principle, net of tax ... (.01) - -
--------- --------- ---------
Net earnings ........................................................ $ 1.18 $ 1.22 $ 1.05
========= ========= =========
Diluted net earnings per common share:
Net earnings before accounting change ............................... $ 1.17 $ 1.20 $ 1.03
Cumulative effect of a change in accounting principle, net of tax ... (.01) - -
--------- --------- ---------
Net earnings ........................................................ $ 1.16 $ 1.20 $ 1.03
========= ========= =========
F-7
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
Cash and cash equivalents include $232.2 million and $169.8 million of
short-term time deposits at June 30, 2001 and 2000, respectively. The Company
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.
Accounts Receivable
Accounts receivable is stated net of the allowance for doubtful accounts and
customer deductions of $26.8 million and $31.7 million as of June 30, 2001 and
2000, respectively.
Currency Translation and Transactions
All assets and liabilities of foreign subsidiaries and affiliates are translated
at year-end rates of exchange, while revenue and expenses are translated at
weighted average rates of exchange for the year. Unrealized translation gains or
losses are reported as cumulative translation adjustments through other
comprehensive income. Such adjustments amounted to $38.0 million and $20.6
million of unrealized translation losses in fiscal 2001 and 2000, respectively.
The Company enters into forward foreign exchange contracts and foreign currency
options to hedge foreign currency transactions for periods consistent with its
identified exposures. Accordingly, the Company categorizes these instruments as
entered into for purposes other than trading. Premiums on foreign currency
options are amortized based on changes in the time-value of the options for the
reporting period.
The accompanying consolidated statements of earnings include net exchange gains
of $9.2 million and net exchange losses of $4.3 million and $1.8 million in
fiscal 2001, 2000 and 1999, respectively. See Note 9.
Inventory and Promotional Merchandise
Inventory and promotional merchandise only includes inventory considered
saleable or usable in future periods, and is stated at the lower of cost or
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.
June 30
--------------------
2001 2000
-------- --------
(In millions)
Inventory and promotional merchandise consists of:
Raw materials ................................... $ 172.9 $ 140.9
Work in process ................................. 24.4 21.5
Finished goods .................................. 308.0 271.2
Promotional merchandise ......................... 125.0 112.7
-------- --------
$ 630.3 $ 546.3
======== ========
F-8
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Property, plant and equipment is 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 lives of the respective leases or
the expected useful lives of those improvements.
June 30
----------------------
2001 2000
-------- --------
(In millions)
Land ............................................. $ 12.7 $ 13.0
Buildings and improvements ....................... 135.7 134.9
Machinery and equipment .......................... 563.2 490.1
Furniture and fixtures ........................... 77.5 95.8
Leasehold improvements ........................... 311.2 240.4
-------- --------
1,100.3 974.2
Less accumulated depreciation and amortization ... 571.6 493.9
-------- --------
$ 528.7 $ 480.3
======== ========
Depreciation and amortization of property, plant and equipment was $112.1
million, $90.3 million and $68.5 million in fiscal 2001, 2000 and 1999,
respectively.
Goodwill
Goodwill is calculated as the excess of the cost of purchased businesses over
the value of their underlying net assets and is amortized on a straight-line
basis over the estimated period of benefit, currently between 20 and 40 years.
Goodwill is reported net of accumulated amortization of $63.7 million and $42.8
million at June 30, 2001 and 2000, respectively. See the "Recently Issued
Accounting Standards" section for a discussion of Statement of Financial
Accounting Standards ("SFAS") Nos. 141 and 142.
Other Intangible Assets
Other intangible assets principally consist of purchased royalty rights and
trademarks. The cost of other intangible assets is amortized on a straight-line
basis over their estimated useful lives. Other intangible assets are reported
net of accumulated amortization of $100.4 million and $90.8 million at June 30,
2001 and 2000, respectively. See the "Recently Issued Accounting Standards"
section for a discussion of SFAS Nos. 141 and 142.
Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets in question may not be recoverable. An
impairment would be recorded in circumstances where undiscounted cash flows
expected to be generated by an asset are less than the carrying value of that
asset.
F-9
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income (loss) ("OCI") included
in the accompanying consolidated balance sheets consist of the following:
Year Ended June 30
------------------------------
2001 2000 1999
-------- -------- --------
(In millions)
Net unrealized investment gains, beginning of year ............ $ 13.9 $ 6.1 $ 5.8
Unrealized investment gains (losses) .......................... (18.3) 13.0 0.5
Provision for deferred income taxes ........................... 7.3 (5.2) (0.2)
-------- -------- --------
Net unrealized investment gains, end of year .................. 2.9 13.9 6.1
-------- -------- --------
Net derivative instruments, beginning of year ................. - - -
Gain on derivative instruments ................................ 8.8 - -
Provision for deferred income taxes on gain ................... (3.1) - -
Reclassification to earnings of net gains during the year ..... (12.0) - -
Provision for deferred income taxes on reclassification ....... 4.3 - -
-------- -------- --------
Net derivative instruments, end of year ....................... (2.0) - -
-------- -------- --------
Net minimum pension liability adjustments, beginning of year .. - - -
Minimum pension liability adjustments ......................... (19.4) - -
Provision for deferred income taxes ........................... 7.0 - -
-------- -------- --------
Net minimum pension liability adjustments, end of year ........ (12.4) - -
-------- -------- --------
Cumulative translation adjustments, beginning of year ......... (71.0) (50.4) (40.0)
Translation adjustments ....................................... (38.0) (20.6) (10.4)
-------- -------- --------
Cumulative translation adjustments, end of year ............... (109.0) (71.0) (50.4)
-------- -------- --------
Accumulated other comprehensive income (loss) ................. ($ 120.5) ($ 57.1) ($ 44.3)
======== ======== ========
Of the $2.0 million net derivative instruments loss recorded in OCI at June 30,
2001, $0.7 million, net of tax, relates to forward contracts that the Company
estimates will be reclassified to earnings as losses during the next twelve
months. The remaining $1.3 million, net of tax, relates to interest rate swaps
and options. OCI gains or losses relating to interest rate swaps or options will
be charged to earnings over the remaining life of the debt instruments (through
February 2005).
Revenue Recognition
Revenues from merchandise sales are recorded at the time the product is shipped
to the customer. The Company reports its sales levels on a net sales basis,
which is computed by deducting from gross sales the amount of actual returns
received and an amount established for anticipated returns. As a percent of
gross sales, returns were 4.9% in fiscal 2001, 4.4% in fiscal 2000 and 5.0% in
fiscal 1999.
Advertising and Promotion
Costs associated with advertising are expensed during the year as incurred.
Global advertising expenses, which primarily include television, radio and print
media, and promotional expenses, such as products used as sales incentives, were
$1,255.3 million, $1,195.8 million and $1,100.8 million in fiscal 2001, 2000 and
1999, respectively.
F-10
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research and Development
Research and development costs, which amounted to $62.2 million, $53.8 million
and $48.0 million in fiscal 2001, 2000 and 1999, respectively, are expensed as
incurred.
Related Party Royalties and Trademarks
Under agreements covering the Company's purchase of trademarks for a percentage
of related sales, royalty payments totaling $16.0 million, $15.5 million and
$14.9 million in fiscal 2001, 2000 and 1999, respectively, have been charged to
income. Such payments were made to Mrs. Estee Lauder. During fiscal 1996, the
Company purchased a stockholder's rights to receive certain U.S. royalty
payments for $88.5 million, which was fully amortized in November 2000. In
fiscal 2001, 2000 and 1999, $6.6 million, $17.7 million and $17.7 million,
respectively, were amortized as charges against income.
Stock Compensation
The Company observes the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", by continuing to apply the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", while
providing the required pro forma disclosures as if the fair value method had
been applied. See Note 14.
Concentration of Credit Risk
The Company is a worldwide manufacturer, marketer and distributor of skin care,
makeup, fragrance and hair care products. Domestic and international sales are
made primarily to department stores, specialty retailers, perfumeries and
pharmacies. The Company grants credit to all qualified customers, and does not
believe it is exposed significantly to any undue concentration of credit risk.
In each of fiscal 2001, 2000 and 1999, one department store group accounted for
11% of the Company's net sales. In those same years, another department store
group accounted for 10%, 10% and 11%, respectively, of the Company's net sales.
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.
Derivative Financial Instruments
Effective July 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities".
These Statements established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended, requires the
recognition of all derivative instruments as either assets or liabilities in the
statement of financial position measured at fair value.
In accordance with the provisions of SFAS No. 133, as amended, the Company
recorded a non-cash charge to earnings of $2.2 million, after tax, to reflect
the change in time-value from the dates of the derivative instruments' inception
through the date of transition (July 1, 2000). This charge is reflected as the
cumulative effect of a change in accounting principle in the accompanying
consolidated statements of earnings.
F-11
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Standards
The Emerging Issues Task Force ("EITF") has reached consensus on Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs". This consensus
addresses how shipping and handling costs that are billed to a customer in a
sales transaction should be recognized. This guidance became effective for the
Company's fiscal 2001 fourth quarter. Generally, the Company does not charge for
shipping to its customers that are retailers and, accordingly, the adoption of
this rule did not have a material impact on the Company's consolidated financial
results.
The EITF has reached consensus on Issue No. 00-14, "Accounting for Certain Sales
Incentives". This consensus addresses when sales incentives and discounts should
be recognized, as well as where the related revenues and expenses should be
classified in the financial statements. Currently, the cost of merchandise used
in the Company's gift-with-purchase and purchase-with-purchase activities, as
well as any related revenues, are reported net, as operating expenses, in the
accompanying consolidated statements of earnings. Upon adoption, the Company
will classify revenues generated by these promotional activities as sales
resulting in an increase of approximately 1.0% to 2.0% in net sales. The cost of
promotional merchandise will be reclassified as a cost of sales. Although
operating income will remain unchanged, gross margins will decrease by
approximately 5.0% to 6.0% of sales, offset by a corresponding decrease in
operating expenses. Due to variations in the Company's launch calendar and the
timing of promotions, the Company anticipates greater fluctuations in its gross
margins and operating expenses on a quarter-by-quarter basis. Issue No. 00-14
will become effective in the Company's fiscal 2002 third quarter and will be
applied retroactively for purposes of comparability.
The EITF has reached a consensus on Issue No. 00-25, "Accounting for
Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products". The consensus provides guidance on the
income statement classification of consideration from a vendor to a retailer in
connection with the retailer's purchase of the vendor's products or to promote
sales of the vendor's products. Issue No. 00-25 becomes effective for quarters
beginning after December 15, 2001. The Company currently accounts for
transactions (e.g., certain promotional allowances to retailers) in accordance
with Issue No. 00-25 and, thus, this consensus will not have an impact on the
Company's consolidated financial results.
In June 2001, SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets" were issued. These Statements establish financial
accounting and reporting standards for acquired goodwill and other intangible
assets. Specifically, the standards address how acquired intangible assets
should be accounted for both at the time of acquisition and after they have been
recognized in the financial statements. The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001; however, early
application is permitted for entities with fiscal years beginning after March
15, 2001. The Company has adopted this standard effective July 1, 2001 and,
accordingly, those intangible assets that will continue to be classified as
goodwill or as other intangibles with indefinite lives will no longer be
amortized. This could result in the exclusion of approximately $21 million in
amortization expense for the fiscal year ending June 30, 2002. In accordance
with SFAS No. 142, intangible assets, including purchased goodwill, will be
evaluated periodically for impairment. The Company's initial evaluations are
expected to be completed by September 30, 2001.
NOTE 3 -- PUBLIC OFFERINGS
During May and June 2000, members of the Lauder family sold 8,482,000 shares of
Class A Common Stock in a registered public offering. The Company did not
receive any proceeds from the sale of these shares.
During May and June 1999, members of the Lauder family sold 7,386,000 shares of
Class A Common Stock in a registered public offering. The Company did not
receive any proceeds from the sale of these shares.
F-12
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 -- ACQUISITION OF BUSINESSES
At various times during fiscal 2001, the Company acquired businesses engaged in
the wholesale distribution and retail sale of Aveda and Stila products, as well
as other products, in the United States and other countries. Additionally, the
Company entered into purchase transactions to acquire wholesale distributor
businesses in Chile and Israel.
At various times during fiscal 2000, the Company acquired businesses engaged in
the wholesale distribution and retail sale of Aveda products in the United
States and the United Kingdom.
In June 2000, the Company acquired, for cash, a majority equity interest in
Bumble and Bumble Products, LLC, a marketer and distributor of hair care
products, and Bumble and Bumble, LLC, which operates a salon in New York City.
In April 2000, the Company acquired, for cash, the business of Gloss.com, Inc. a
multi-brand Internet beauty site. The Gloss.com website has been taken down, and
will be re-launched as a multi-brand e-commerce site carrying several of the
Company's brands and two brands of other companies.
In October 1999, the Company acquired Jo Malone Limited, a London-based marketer
of prestige skin care and fragrance products, for cash.
In August 1999, the Company acquired the business of Stila Cosmetics, Inc., a
manufacturer and marketer of makeup products, for cash.
The aggregate purchase price for these transactions, which includes acquisition
costs, was approximately $16.0 million in fiscal 2001 and $186.6 million in
fiscal 2000 and each transaction was accounted for using the purchase method of
accounting. Accordingly, the results of operations for each of the acquired
businesses are included in the accompanying consolidated financial statements
commencing with its date of original acquisition. Pro forma results of
operations, as if each of such businesses had been acquired as of the beginning
of the year of acquisition, have not been presented, as the impact on the
Company's consolidated financial results would not have been material.
NOTE 5 -- RESTRUCTURING AND OTHER NON-RECURRING EXPENSES
During the fourth quarter of fiscal 2001, the Company recorded one-time charges
for restructuring and other non-recurring expenses related to repositioning
certain businesses as part of the Company's ongoing efforts to drive long-term
growth and increase profitability. The restructuring and other non-recurring
expenses focused on four areas: product fixtures for the jane brand; in-store
"tommy's shops"; information systems and other assets; and global brand
reorganization. The Company has committed to a defined plan of action, which
resulted in an aggregate pre-tax charge of $63.0 million, of which $35.9 million
is cash related. On an after-tax basis, the aggregate charge was $40.3 million,
equal to $.17 per diluted share.
Specifically, the charge included the following:
1. jane. jane is switching from its traditional wall displays to a carded
program. The charge included a $16.1 million write-down of existing jane product
fixtures and the return of uncarded product from virtually all of the 13,000
distribution outlets in the United States.
2. "tommy's shops". The Company is also restructuring the in-store "tommy's
shops" to focus on the most productive locations and has decided to close
certain shops that have underperformed relative to expectations. As a result,
the Company has recorded a $6.3 million provision for the closing of 86
under-performing in-store "tommy's shops", located in the United States, and for
related product returns.
3. Information systems and other assets. In response to changing technology and
the Company's new strategic direction, the charge included a $16.2 million
provision for costs associated with the reevaluation of supply chain systems
that the Company will no longer utilize and with the elimination of unproductive
assets related to the change to standard financial systems.
F-13
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Global brand reorganization. The Company recorded $20.8 million related to
benefits and severance packages for 75 management employees who were affected by
the reconfiguration to a global brand structure and another $3.6 million related
to infrastructure costs.
Following is a summary of the charges as recorded in the consolidated statement
of earnings for fiscal 2001:
Restructuring
----------------------------
Other
(In millions) Net Cost of Operating Non-Recurring
Sales Sales Expenses Expenses Total
------ ------- --------- ------------- ------
jane ................................... $ 5.7 $ 1.5 $ 4.8 $ 4.1 $ 16.1
tommy's shops .......................... 2.3 (0.4) 4.4 - 6.3
Information systems and other assets ... - - 4.6 11.6 16.2
Global brand reorganization ............ - - 23.8 0.6 24.4
------ ------ ------- ------- ------
Total charge ........................... $ 8.0 $ 1.1 $ 37.6 $ 16.3 63.0
====== ====== ======= =======
Tax effect ............................. (22.7)
------
Net charge ............................. $ 40.3
======
The restructuring charge was recorded in other accrued liabilities or as a
reduction of fixed assets. During fiscal 2001, $0.7 million was paid and through
August 31, 2001 an additional $3.0 million was paid. The Company expects to
settle a majority of the remaining obligations by the end of fiscal 2002 with
certain severance payments made ratably through fiscal 2004.
NOTE 6 -- INCOME TAXES
The provision for income taxes is comprised of the following:
Year Ended June 30
----------------------------------
2001 2000 1999
-------- -------- --------
(In millions)
Current:
Federal .................. $ 74.0 $ 93.9 $ 88.6
Foreign .................. 87.6 82.4 68.8
State and local .......... 7.7 13.8 14.1
-------- -------- --------
169.3 190.1 171.5
-------- -------- --------
Deferred:
Federal .................. 3.7 (0.2) (4.3)
Foreign .................. 0.5 (4.1) 0.9
State and local .......... 0.5 (1.2) (0.8)
-------- -------- --------
4.7 (5.5) (4.2)
-------- -------- --------
$ 174.0 $ 184.6 $ 167.3
======== ======== ========
F-14
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the provision for income taxes computed by applying the
statutory Federal income tax rate to earnings before income taxes and minority
interest and the actual provision for income taxes is as follows:
Year Ended June 30
------------------------------
2001 2000 1999
-------- -------- --------
(In millions)
Provision for income taxes at statutory rate ... $ 169.2 $ 174.5 $ 154.1
Increase (decrease) due to:
State and local income taxes, net of
Federal tax benefit ..................... 5.3 8.2 8.6
Effect of foreign operations .............. (2.9) (11.7) (4.1)
Domestic royalty expense not
deductible for U.S. tax purposes ........ 1.6 4.0 4.0
Other nondeductible expenses .............. 3.8 3.8 2.0
Other, net ................................ (3.0) 5.8 2.7
-------- -------- --------
Provision for income taxes ..................... $ 174.0 $ 184.6 $ 167.3
======== ======== ========
Effective tax rate ............................. 36.0% 37.0% 38.0%
======== ======== ========
Significant components of the Company's deferred income tax assets and
liabilities as of June 30, 2001 and 2000 were as follows:
2001 2000
-------- --------
(In millions)
Deferred tax assets:
Deferred compensation and other payroll related expenses ...... $ 47.7 $ 44.2
Inventory obsolescence and other inventory related reserves ... 54.1 54.8
Pension plan reserves ......................................... 22.5 13.1
Postretirement benefit obligations ............................ 21.7 19.7
Various accruals not currently deductible ..................... 57.6 50.1
Net operating loss carryforwards .............................. 3.8 5.6
Other differences between tax and financial statement values .. 5.7 7.2
-------- --------
213.1 194.7
Valuation allowance for deferred tax assets ................... (3.8) (5.6)
-------- --------
Total deferred tax assets ................................. 209.3 189.1
-------- --------
Deferred tax liabilities:
Depreciation .................................................. (54.1) (36.4)
Domestic royalty expense ...................................... - (1.1)
Other differences between tax and financial statement values .. (2.0) (9.2)
-------- --------
Total deferred tax liabilities ............................ (56.1) (46.7)
-------- --------
Total net deferred tax assets .......................... $ 153.2 $ 142.4
======== ========
F-15
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2001 and 2000, the Company had current net deferred tax assets of
$83.1 million and $93.5 million, respectively, which are included in prepaid
expenses and other current assets in the accompanying consolidated balance
sheets, and noncurrent net deferred tax assets of $70.1 million and $48.9
million, respectively.
Federal income and foreign withholding taxes have not been provided on $476.4
million, $442.2 million and $412.0 million of undistributed earnings of
international subsidiaries at June 30, 2001, 2000 and 1999, respectively. The
Company intends to permanently reinvest these earnings in its foreign
operations, except where it is able to repatriate these earnings to the United
States without any material incremental tax provision.
As of June 30, 2001 and 2000, certain international subsidiaries had tax loss
carryforwards for local tax purposes of approximately $21.4 million and $26.4
million, respectively. With the exception of $10.6 million of losses with an
indefinite carryforward period as of June 30, 2001, these losses expire at
various dates through fiscal 2005. Deferred tax assets in the amount of $3.8
million and $5.6 million as of June 30, 2001 and 2000, respectively, have been
recorded to reflect the tax benefits of the losses not utilized to date. A full
valuation allowance has been provided since, in the opinion of management, it is
more likely than not that the deferred tax assets will not be realized.
Earnings before income taxes and minority interest include amounts contributed
by the Company's international operations of $307.2 million, $281.2 million and
$277.2 million for fiscal 2001, 2000 and 1999, respectively.
NOTE 7 -- OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
June 30
--------------------
2001 2000
-------- --------
(In millions)
Advertising and promotional accruals ......... $ 157.0 $ 190.5
Employee compensation ........................ 182.6 178.4
Other ........................................ 192.5 205.2
-------- --------
$ 532.1 $ 574.1
======== ========
F-16
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 -- DEBT
The Company's short-term and long-term debt and available financing consist of
the following:
Debt at Available financing at
June 30 June 30
------------------ --------------------------------------
Committed Uncommitted
--------- -----------
2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- --------
(In millions) (In millions)
Commercial paper with an average
interest rate of 3.96% and 6.68%,
respectively ............................ $ 181.0 $ 205.0 $ - $ - $ 569.0 $ 545.0
Unsecured notes payable, due
February 1, 2005, with an effective
interest rate of 5.13% and 6.28%,
respectively ............................ 200.0 200.0 - - - -
2% Japan loan payable, due in
installments through 2003 ............... 11.3 20.1 - - - -
1.45% Japan loan payable, due on
March 28, 2006 .......................... 24.2 - - - - -
Other short-term borrowings .............. 0.2 0.3 - - 30.4 58.7
Revolving credit facility ................ - - 400.0 400.0 - -
Shelf registration for debt securities ... - - - - 400.0 400.0
-------- -------- -------- -------- -------- --------
416.7 425.4 $ 400.0 $ 400.0 $ 999.4 $1,003.7
======== ======== ======== ========
Less current maturities................... 5.8 7.0
-------- --------
$ 410.9 $ 418.4
======== ========
The Company maintains uncommitted credit facilities in various regions
throughout the world. Interest rate terms for these facilities vary by region
and reflect prevailing market rates for companies with strong credit ratings.
During fiscal 2001 and 2000, the monthly average amount outstanding was
approximately $18.6 million and $32.3 million, respectively, and the annualized
monthly weighted average interest rate incurred was approximately 6.5% and 5.4%,
respectively.
During fiscal 1998, the Company entered into a 2% loan payable in Japan.
Principal repayments of 350.0 million yen, approximately $2.8 million at current
rates, will be made semi-annually through 2003.
Effective June 28, 2001, the Company entered into a new five-year $400.0 million
revolving credit facility, expiring on June 28, 2006, which includes an annual
fee of .07% on the total commitment. The new facility replaced a five-year
$400.0 million revolving credit facility entered into in July 1996. The 1996
facility had an annual fee of .06% on the total commitment. At June 30, 2001 and
2000, the Company was in compliance with all related financial and other
restrictive covenants, including limitations on indebtedness and liens.
Commercial paper is classified as long-term debt based upon the Company's intent
and ability to refinance on a long-term basis.
F-17
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 -- FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company addresses certain financial exposures through a controlled program
of risk management that includes the use of derivative financial instruments.
The Company primarily enters into foreign currency forward exchange contracts
and foreign currency options to reduce the effects of fluctuating foreign
currency exchange rates. The Company enters into interest rate swaps and options
to manage the effects of interest rate movements on the Company's aggregate
liability portfolio. The Company categorizes these instruments as entered into
for purposes other than trading.
All derivatives are recognized on the balance sheet at their fair value. On the
date the derivative contract is entered into, the Company designates the
derivative as (i) a hedge of the fair value of a recognized asset or liability
or of an unrecognized firm commitment ("fair value" hedge), (ii) a hedge of a
forecasted transaction or of the variability of cash flows to be received or
paid related to a recognized asset or liability ("cash flow" hedge), (iii) a
foreign-currency fair-value or cash-flow hedge ("foreign currency" hedge), (iv)
a hedge of a net investment in a foreign operation, or (v) "held for trading"
("trading" instruments). Changes in the fair value of a derivative that is
highly effective as (and that is designated and qualifies as) a fair-value
hedge, along with the loss or gain on the hedged asset or liability that is
attributable to the hedged risk (including losses or gains on firm commitments),
are recorded in current-period earnings. Changes in the fair value of a
derivative that is highly effective as (and that is designated and qualifies as)
a cash-flow hedge are recorded in other comprehensive income, until earnings are
affected by the variability of cash flows (e.g., when periodic settlements on a
variable-rate asset or liability are recorded in earnings). Changes in the fair
value of derivatives that are highly effective as (and that are designated and
qualify as) foreign-currency hedges are recorded in either current-period
earnings or other comprehensive income, depending on whether the hedge
transaction is a fair-value hedge (e.g., a hedge of a firm commitment that is to
be settled in a foreign currency) or a cash-flow hedge (e.g., a
foreign-currency-denominated forecasted transaction). If, however, a derivative
is used as a hedge of a net investment in a foreign operation, its changes in
fair value, to the extent effective as a hedge, are recorded in accumulated
other comprehensive income within equity. Furthermore, changes in the fair value
of derivative trading instruments are reported in current-period earnings.
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. 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. The Company also formally assesses,
both at the hedge's inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items. If it is determined that a
derivative is not highly effective, or that it has ceased to be a highly
effective hedge, the Company will be required to discontinue hedge accounting
with respect to that derivative prospectively.
Foreign Exchange Risk Management
The Company enters into forward exchange contracts to hedge purchases,
receivables and payables denominated in foreign currencies for periods
consistent with the Company's identified exposures. The purpose of the hedging
activities is to minimize the effect of foreign exchange rate movements on costs
and on the cash flows that the Company receives from foreign subsidiaries.
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. The Company also enters 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 June 30, 2001, these cash-flow hedges were highly effective, in all
material respects.
As a matter of policy, the Company only enters into contracts with
counterparties that have at least an "A" (or equivalent) credit rating. The
counterparties to these contracts are major financial institutions. The Company
does not have significant exposure to any one counterparty. Exposure to credit
loss in the event of nonperformance by any of the counterparties is
F-18
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Company's consolidated
financial results. The contracts have varying maturities through the end of
August 2002. Costs associated with entering into such contracts have not been
material to the Company's consolidated financial results. The Company does not
utilize derivative financial instruments for trading or speculative purposes. At
June 30, 2001, we had foreign currency contracts in the form of forward exchange
contracts in the amount of $148.2 million. The foreign currencies included in
these contracts (notional value stated in U.S. dollars) are principally the
Japanese yen ($53.9 million), Swiss franc ($28.8 million), Korean won ($18.5
million), Taiwan dollar ($13.7 million), British pound ($13.2 million), Euro
($8.5 million) and Mexican peso ($6.8 million). At June 30, 2000, the Company
had foreign currency contracts in the form of forward exchange contracts in the
amount of $219.6 million and deferred unrealized gains and losses of $1.3
million and $1.4 million, respectively. The foreign currencies included in these
contracts (notional value stated in U.S. dollars) are principally the Japanese
yen ($80.2 million), Swiss franc ($65.9 million), British pound ($17.1 million),
Euro ($9.5 million), Danish krone ($8.0 million) and Mexican peso ($7.1
million).
Interest Rate Risk Management
The Company has entered into an interest rate swap agreement to exchange
floating rate for fixed rate interest payments periodically over the life of the
agreement. In addition, the Company has purchased interest rate options that
offer similar interest rate protection. The interest rate swap and options have
been designated as cash-flow hedges and were highly effective as of June 30,
2001. At June 30, 2000, deferred unrealized gains from the interest rate swap
and options were $2.4 million and $2.6 million, respectively.
Information regarding the interest rate swap and options is presented in the
following table:
Year Ended or at June 30
-----------------------------------------------------------------------------
2001 2000
------------------------------------- -------------------------------------
Weighted Average Weighted Average
Notional ----------------------- Notional -----------------------
(In millions) Amounts Pay Rate Receive Rate Amounts Pay Rate Receive Rate
---------------------------------------------------------------------- -------------------------------------
Interest rate swap $ 67.0 6.14% 6.32% $ 67.0 6.14% 5.64%
Interest rate options 133.0 6.14 6.62 133.0 6.14 -
--------------------------------------------------------------------------------------------------------------
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents:
The carrying amount approximates fair value, primarily because of the
short maturity of cash equivalent instruments.
Long-term debt:
The fair value of the Company's long-term debt was estimated based on
the current rates offered to the Company for debt with the same
remaining maturities. Included in such amount is the fair value of
the Company's commercial paper and interest rate swap and option
agreements. Such fair value has been determined based upon estimated
termination costs.
Cumulative redeemable preferred stock:
The fair value of the cumulative redeemable preferred stock is
estimated utilizing a cash flow analysis at a discount rate equal to
rates available for debt with terms similar to the preferred stock.
Forward exchange contracts:
The fair value of forward exchange contracts is the estimated amount
the Company would receive or pay to terminate the agreements.
F-19
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Company's financial instruments are as
follows:
June 30
--------------------------------------------
2001 2000
--------------------- ---------------------
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
----------------------------------------------------------------- ---------------------
Nonderivatives
Cash and cash equivalents .................. $ 346.7 $ 346.7 $ 320.3 $ 320.3
Long-term debt, including current portion .. 416.5 418.1 425.1 421.0
Cumulative redeemable preferred stock ...... 360.0 362.6 360.0 345.0
Derivatives
Forward exchange contracts ................. (1.2) (1.2) - (0.1)
NOTE 10 -- PENSION, DEFERRED COMPENSATION AND POSTRETIREMENT BENEFIT PLANS
The Company maintains pension plans covering substantially all of its full-time
employees for its U.S. operations and a majority of its international
operations. Most plans provide pension benefits based primarily on years of
service and employees' earnings.
Retirement Growth Account Plan (U.S.)
The Retirement Growth Account Plan is a trust-based, noncontributory defined
benefit pension plan. The Company's funding policy consists of an annual
contribution at a rate that matches pension costs accrued, if any. Such
contribution is not less than the minimum required by the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") and subsequent pension
legislation and is not more than the maximum amount deductible for income tax
purposes.
Restoration Plan (U.S.)
The Company also has an unfunded, nonqualified domestic benefit Restoration Plan
to provide benefits in excess of Internal Revenue Code limitations.
International Pension Plans
The Company maintains International Pension Plans, the most significant of which
are defined benefit pension plans. The Company's funding policies for these
plans are determined by local tax laws and regulations.
Postretirement Benefits
The Company maintains a contributory postretirement benefit plan which provides
certain medical and dental benefits to eligible employees. Retired employees who
are receiving monthly pension benefits are eligible for participation in the
plan. Contributions required and benefits received by retirees and eligible
family members are dependent on the age of the retiree. It is the Company's
practice to fund these benefits as incurred. Certain of the Company's
international subsidiaries and affiliates have postretirement plans, although
most participants are covered by government-sponsored or administered programs.
The cost of the Company-sponsored programs is not significant.
F-20
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The significant components of the above mentioned plans as of and for the year
ended June 30 are summarized as follows:
Other than
Pension Plans Pension Plans
-------------------------------------- ------------------
U.S. International Postretirement
------------------ ------------------ ------------------
(In millions) 2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- --------
Change in benefit obligation:
Benefit obligation at beginning of year ......... $ 256.2 $ 229.6 $ 132.6 $ 125.3 $ 41.2 $ 36.9
Service cost ............................... 12.3 10.8 8.0 8.6 1.9 1.9
Interest cost .............................. 19.7 16.9 6.7 6.3 3.0 2.8
Plan participant contributions ............. - - 0.9 1.0 0.1 0.1
Actuarial loss (gain) ...................... 5.0 10.5 4.8 (0.8) (1.0) -
Foreign currency exchange rate impact ...... - - (14.5) (1.8) - -
Benefits paid .............................. (12.9) (12.4) (7.0) (6.0) (2.0) (1.3)
Plan amendments ............................ 0.1 - - - - 0.5
Other ...................................... - 0.8 - - - 0.3
-------- -------- -------- -------- -------- --------
Benefit obligation at end of year ............... 280.4 256.2 131.5 132.6 43.2 41.2
-------- -------- -------- -------- -------- --------
Change in plan assets:
Fair value of plan assets at beginning of year .. 192.1 153.7 117.7 102.0 - -
Actual return on plan assets ............... (17.3) 35.1 (6.5) 12.9 - -
Foreign currency exchange rate impact ...... - - (11.6) (1.2) - -
Employer contributions ..................... 17.8 15.7 10.6 9.0 1.9 1.3
Plan participant contributions ............. - - 0.9 1.0 0.1 0.1
Benefits paid from plan assets ............. (12.9) (12.4) (6.5) (6.0) (2.0) (1.4)
-------- -------- -------- -------- -------- --------
Fair value of plan assets at end of year ........ 179.7 192.1 104.6 117.7 - -
-------- -------- -------- -------- -------- --------
Funded status ................................... (100.7) (64.1) (26.9) (14.9) (43.2) (41.2)
Unrecognized net actuarial loss (gain) .......... 69.6 32.2 24.3 9.0 (6.6) (5.9)
Unrecognized prior service cost ................. 4.3 4.6 2.4 3.0 0.2 0.3
Unrecognized net transition (asset) obligation .. (3.0) (4.4) 0.8 1.2 - -
-------- -------- -------- -------- -------- --------
Accrued benefit cost ............................ ($29.8) ($31.7) $ 0.6 ($ 1.7) ($49.6) ($46.8)
======== ======== ======== ======== ======== ========
Amounts recognized in the Balance
Sheets consist of:
Prepaid benefit cost ....................... $ 6.2 - $ 8.1 $ 21.1 - -
Accrued benefit liability .................. (46.1) ($43.0) (28.0) (23.1) ($49.6) ($46.8)
Intangible asset ........................... 3.7 4.2 1.1 0.3 - -
Other ...................................... 6.4 7.1 19.4 - - -
-------- -------- -------- -------- -------- --------
Net amount recognized ...................... ($29.8) ($31.7) $ 0.6 ($ 1.7) ($49.6) ($46.8)
======== ======== ======== ======== ======== ========
F-21
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other than
Pension Plans Pension Plans
--------------------------------------------------------------- ------------------------------
U.S. International Postretirement
------------------------------ ------------------------------ ------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
Weighted-average assumptions
Pre-retirement discount rate .... 7.50% 7.85% 7.50% 3.0- 3.0- 3.0- 7.50% 7.85% 7.50%
7.25% 7.50% 7.50%
Postretirement discount rate .... 6.00% 6.25% 6.50% - - - - - -
Expected return on assets ....... 9.00% 9.00% 9.00% 5.00- 5.00- 3.75- N/A N/A N/A
8.50% 8.25% 8.25%
Rate of compensation ............ 5.00- 5.50- 5.50- 2.0- 2.0- 2.0- N/A N/A N/A
increase ....................... 11.50% 12.00% 11.50% 5.50% 6.50% 6.50%
Components of net periodic
benefit cost (In millions)
Service cost, net ............... $ 12.3 $ 10.8 $ 9.4 $ 8.0 $ 8.6 $ 7.0 $ 1.9 $ 1.9 $ 1.8
Interest cost ................... 19.7 16.9 14.6 6.7 6.3 5.5 3.0 2.8 2.3
Expected return on assets ....... (16.2) (13.5) (11.6) (7.4) (6.6) (6.1) - - -
Amortization of:
Transition (asset) obligation .. (1.4) (1.4) (1.4) 0.2 0.3 0.3 - - -
Prior service cost ............. 0.4 0.4 0.3 0.2 0.3 0.1 - - -
Actuarial loss ................. 1.1 1.3 1.0 0.9 1.2 0.5 (0.2) - -
Other .......................... - 0.8 - - - - - - -
-------- -------- -------- -------- -------- -------- -------- -------- -------
Net periodic benefit cost ....... $ 15.9 $ 15.3 $ 12.3 $ 8.6 $ 10.1 $ 7.3 $ 4.7 $ 4.7 $ 4.1
======== ======== ======== ======== ======== ======== ======== ======== =======
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates for fiscal 2001 would have had the following
effects:
One-Percentage-Point One-Percentage-Point
(In millions) Increase Decrease
-------------------- --------------------
Effect on total service and interest costs $0.5 ($0.5)
---- ----
Effect on postretirement benefit obligations $4.2 ($4.2)
---- ----
F-22
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for certain U.S. and international pension plans with accumulated
benefit obligations in excess of the plans' assets at June 30 are as follows:
Pension Plans
-----------------------------------
U.S. International
--------------- -----------------
(In millions) 2001 2000 2001 2000
---- ---- ---- ----
Projected benefit obligation ........... $ 63.8 $ 58.3 $ 92.9 $ 20.0
Accumulated benefit obligation ......... 46.0 42.2 79.0 16.0
Fair value of plan assets .............. - - - -
Incentive Thrift Plan (U.S.)
The Company's Incentive Thrift Plan ("Thrift Plan") is a contributory defined
contribution plan covering substantially all regular full-time U.S. employees
who have completed one year of service, as defined by the plan document. The
Thrift Plan is subject to the applicable provisions of ERISA. The Company
matches a portion of the participant's contributions under a predetermined
formula based on the participant's contribution level and years of service. The
Company's contributions were approximately $6.7 million for the fiscal year
ended June 30, 2001 and $5.8 million and $4.8 million in fiscal 2000 and 1999,
respectively.
Deferred Compensation
The Company accrues for deferred compensation and interest thereon and for the
increase in the value of share units pursuant to agreements with certain key
executives and outside directors. The amounts included in the accompanying
consolidated balance sheets under these plans were $87.3 million and $79.4
million as of June 30, 2001 and 2000, respectively. The expense for fiscal 2001,
2000 and 1999 was $11.6 million, $12.3 million and $15.3 million, respectively.
NOTE 11 -- POSTEMPLOYMENT BENEFITS OTHER THAN TO RETIREES
The Company provides certain postemployment benefits to eligible former or
inactive employees and their dependents during the period subsequent to
employment but prior to retirement. These benefits include certain disability
and health care coverage and severance benefits. Generally, the cost of
providing these benefits is accrued and any incremental benefits were not
material to the Company's consolidated financial results.
NOTE 12 -- $6.50 CUMULATIVE REDEEMABLE PREFERRED STOCK, AT REDEMPTION VALUE
As of June 30, 2001, the Company's authorized capital stock included 23.6
million shares of preferred stock, par value $.01 per share, of which 3.6
million shares are outstanding and designated as $6.50 Cumulative Redeemable
Preferred Stock. The outstanding preferred stock was issued in June 1995 in
exchange for nonvoting common stock of the Company owned by The Estee Lauder
1994 Trust.
Holders of the $6.50 Cumulative Redeemable Preferred Stock are entitled to
receive cumulative cash dividends at a rate of $6.50 per annum per share payable
in quarterly installments. Such dividends have preference over all other
dividends of stock issued by the Company. Shares are subject to mandatory
redemption on June 30, 2005 at a redemption price of $100 per share. Following
such date and so long as such mandatory redemption obligations have not been
discharged in full, no dividends may be paid or
F-23
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
declared upon the Class A or Class B Common Stock, or on any other capital stock
ranking junior to or in parity with such $6.50 Cumulative Redeemable Preferred
Stock and no shares of Class A or Class B Common Stock or such junior or parity
stock may be redeemed or acquired for any consideration by the Company. Under
certain circumstances, the Company may redeem the stock, in whole or in part,
prior to the mandatory redemption date. Holders of such stock may put such
shares to the Company at a price of $100 per share upon the occurrence of
certain events.
The Company recorded the $6.50 Cumulative Redeemable Preferred Stock at its
redemption value of $360.0 million and charged this amount, net of the par value
of the shares of nonvoting common stock exchanged, to stockholders' equity in
fiscal 1995.
NOTE 13 -- COMMON STOCK
As of June 30, 2001, the Company's authorized common stock consists of 650
million shares of Class A Common Stock, par value $.01 per share, and 240
million shares of Class B Common Stock, par value $.01 per share. Class B Common
Stock is convertible into Class A Common Stock, in whole or in part, at any time
and from time to time at the option of the holder, on the basis of one share of
Class A Common Stock for each share of Class B Common Stock converted. Holders
of the Company's Class A Common Stock are entitled to one vote per share and
holders of the Company's Class B Common Stock are entitled to ten votes per
share. On April 26, 1999, the Company's Board of Directors approved a
two-for-one stock split in the form of a 100% stock dividend on all of the
Company's outstanding Class A and Class B Common Stock. All share data prior
thereto has been restated to reflect the stock split.
Information about the Company's common stock outstanding is as follows:
Class A Class B
--------- ---------
(Shares in thousands)
Balance at June 30, 1998 ........... 122,935.9 113,679.3
Acquisition of treasury stock ...... (504.8) -
Share grants ....................... 1.0 -
Stock option programs .............. 1,049.1 -
--------- ---------
Balance at June 30, 1999 ........... 123,481.2 113,679.3
Acquisition of treasury stock ...... (589.5) -
Share grants ....................... 2.9 -
Share units converted .............. 100.0 -
Stock option programs .............. 1,187.1 -
--------- ---------
Balance at June 30, 2000 ........... 124,181.7 113,679.3
Acquisition of treasury stock ...... (0.9) -
Conversion of Class B to Class A ... 189.0 (189.0)
Stock option programs .............. 806.2 -
--------- ---------
Balance at June 30, 2001 ........... 125,176.0 113,490.3
========= =========
On September 18, 1998, the Company's Board of Directors authorized a share
repurchase program. The Company has purchased, and may continue to purchase,
over an unspecified period of time, a total of up to eight million shares of
Class A Common Stock in the open market or in privately negotiated transactions,
depending on market conditions and other factors.
NOTE 14 -- STOCK PROGRAMS
The Company has established the Fiscal 1999 Share Incentive Plan, the Fiscal
1996 Share Incentive Plan and the Non-Employee Director Share Incentive Plan
(collectively, the "Plans") and, additionally, has made available stock options
and share units that were, or will be, granted pursuant to these Plans and
certain employment agreements. These stock-based compensation programs are
described below.
F-24
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total net compensation expense attributable to the granting of share units and
the increase in value of existing share units was $0.7 million, $1.6 million and
$8.9 million in fiscal 2001, 2000 and 1999, respectively.
Share Incentive Plans
The Plans provide for the issuance of 18,750,000 shares to be awarded in the
form of stock options, stock appreciation rights and other stock awards to key
employees and stock options, stock awards and stock units to non-employee
directors of the Company. As of June 30, 2001, 2,146,400 shares of Class A
Common Stock were reserved and were available to be granted pursuant to the
Plans. The exercise period for all stock options generally may not exceed ten
years from the date of grant. Pursuant to the Plans, stock option awards in
respect of 2,709,500, 6,252,300 and 2,303,000 shares were granted in fiscal
2001, 2000 and 1999, respectively, and share units in respect of 43,100 and
40,000 shares were granted in fiscal 2001 and 1999, respectively. Generally, the
stock option awards become exercisable at various times through January 2005,
while the share units will be paid out in shares of Class A Common Stock at a
time to be determined by the Company.
Executive Employment Agreements
The executive employment agreements provide for the issuance of 11,400,000
shares to be awarded in the form of stock options and other stock awards to
certain key executives. The Company has reserved 664,200 shares of its Class A
Common Stock pursuant to such agreements as of June 30, 2001. In accordance with
such employment agreements, stock option awards in respect of 1,650,000 shares
were granted in each of fiscal 2000 and 1999, and approximately 900, 33,700 and
48,000 share units were granted in fiscal 2001, 2000 and 1999, respectively. The
stock options may be exercised in installments at various times through July
2009, while the share units will be paid out in shares of Class A Common Stock
at a time to be determined by the Company, but no later than 90 days subsequent
to the termination of employment of the executive.
A summary of the Company's stock option programs as of June 30, 2001, 2000 and
1999, and changes during the years then ended, is presented below:
2001 2000 1999
--------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
---------------------------------------------------------------- --------------------- ---------------------
Outstanding at beginning of year ....... 21,914.1 $ 33.14 15,439.1 $ 22.80 12,977.0 $ 18.20
Granted at fair value ............. 2,709.5 42.80 7,902.2 50.88 3,953.0 35.34
Exercised ......................... (806.0) 16.50 (1,188.5) 15.28 (1,049.1) 13.94
Cancelled or Expired .............. (424.4) 48.19 (238.7) 41.06 (441.8) 20.83
--------- --------- ---------
Outstanding at end of year ............. 23,393.2 34.55 21,914.1 33.14 15,439.1 22.80
========= ========= =========
Options exercisable at year-end ........ 8,497.6 21.69 4,252.4 18.86 1,191.8 13.24
--------- --------- ---------
Weighted-average fair value of
options granted during the year ... $ 17.01 $ 20.14 $ 12.21
========= ========= =========
F-25
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations in accounting for stock options and
share units granted under these programs. Under APB Opinion No. 25, no
compensation expense is recognized if the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant. Accordingly, no compensation cost has been recognized. SFAS
No. 123, "Accounting for Stock-Based Compensation", requires the Company to
provide pro forma information regarding net earnings and net earnings per common
share as if compensation cost for the Company's stock option programs had been
determined in accordance with the fair value method prescribed therein.
Had compensation cost for these programs been determined based upon the fair
value at the grant dates consistent with SFAS No. 123, the Company's pro forma
net earnings and net earnings per common share would have been as follows:
Year Ended June 30
-------------------------------
2001 2000 1999
------- ------- -------
(In millions, except per share data)
Net earnings.................................. As reported $ 305.2 $ 314.1 $ 272.9
Pro forma 280.8 216.5 246.2
Net earnings per common share - Basic......... As reported $ 1.18 $ 1.22 $ 1.05
Pro forma 1.08 .81 .94
Net earnings per common share - Diluted....... As reported $ 1.16 $ 1.20 $ 1.03
Pro forma 1.06 .79 .92
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Year Ended June 30
-------------------------------
2001 2000 1999
------- ------- -------
Expected volatility......................... 31% 30% 27%
Average expected option life................ 7 years 7 years 7 years
Average risk-free interest rate............. 5.9% 6.1% 5.3%
Dividend yield.............................. .50% .50% .75%
Summarized information about the Company's stock options outstanding and
exercisable at June 30, 2001 is as follows:
Outstanding Exercisable
-------------------------------- -----------------------
Exercise Average Average Average
Price Range Options (a) Life (b) Price (c) Options (a) Price (c)
------------------------------------------------------ -----------------------
$2.065 to $ 3.10 16.1 5.9 $ 3.02 16.1 $ 3.02
$13.00 to $20.813 3,772.4 4.4 13.07 3,761.1 13.05
$21.313 to $29.813 5,918.7 5.5 23.39 3,270.4 23.10
$31.875 to $47.625 7,025.5 8.2 39.18 1,129.5 37.61
$48.125 to $53.50 6,660.5 8.1 51.84 320.5 53.47
-------- -------
$2.065 to $53.50 23,393.2 34.55 8,497.6 21.69
======== =======
---------------
(a) Shares in thousands.
(b) Weighted average contractual life remaining in years.
(c) Weighted average exercise price.
F-26
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to June 30, 2001, the Company granted options under the terms of the
Plans described above to purchase an additional 1,893,500 of the Company's Class
A Common Stock with an exercise price equal to fair market value on the date of
grant. In addition, subsequent to June 30, 2001 the Company granted
approximately 48,200 share units to a key executive pursuant to the terms of the
Fiscal 1999 Share Incentive Plan. In July 2001, the Company's Board of Directors
adopted the Fiscal 2002 Share Incentive Plan which provides for the issuance of
12 million shares to be awarded in the form of stock options, stock appreciation
rights and other stock awards to key employees of the Company.
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
Total rental expense included in the accompanying consolidated statements of
earnings was $120.9 million in fiscal 2001, $100.7 million in fiscal 2000 and
$86.4 million in fiscal 1999. At June 30, 2001, the future minimum rental
commitments under long-term operating leases are as follows:
Year Ending June 30 (In millions)
-------------------
2002 ..................... $ 84.6
2003 ..................... 77.0
2004 ..................... 69.8
2005 ..................... 58.5
2006 ..................... 39.0
Thereafter ............... 150.4
--------
$ 479.3
========
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 currently claims that
five Estee Lauder products, two Origins foundations, a La Mer concealer and a
jane foundation infringe its patent. Revlon is seeking, among other things,
treble damages, punitive damages, equitable relief and attorneys' fees. The
Company has filed counterclaims which, among other things, challenge the
validity of the patent and allege violations of Federal antitrust laws.
Pre-trial proceedings and discovery are underway. Court-directed mediation took
place in August 2001. The Company intends to defend itself vigorously. Although
the final outcome of the lawsuit cannot be predicted with certainty, based on
preliminary investigation, management believes that the case will not have a
material adverse effect on the Company's consolidated financial results.
In February 2000, the Company and eight other manufacturers of cosmetics (the
"Manufacturer Defendants") were added as defendants in a consolidated class
action lawsuit that had been pending in the Superior Court of the State of
California in Marin County. The plaintiffs purport to represent a class of all
California residents who purchased prestige cosmetic products at retail for
personal use from a number of department stores that sold such products in
California (the "Department Store Defendants"). Plaintiffs filed their initial
actions against the Department Store Defendants in May 1998. In May 2000,
plaintiffs filed an amended complaint alleging that the Department Store
Defendants and the Manufacturer Defendants conspired to fix and maintain retail
prices and to limit the supply of prestige cosmetic products sold by the
Department Store Defendants in violation of California state law. The plaintiffs
are seeking, among other things, treble damages, equitable relief, attorneys'
fees, interest and costs. Pre-trial proceedings and discovery are underway.
Court-directed mediation started in May 2001 and is continuing. The Company
intends to defend itself vigorously. While no assurance can be given as to the
ultimate outcome of this lawsuit, based on preliminary investigation, management
believes that the case will not have a material adverse effect on the Company's
consolidated financial results.
In 1998, the Office of the Attorney General of the State of New York (the
"State") notified the Company and ten other entities that they are potentially
responsible parties ("PRPs") with respect to the Blydenburgh landfill in Islip,
New York. Each PRP may be jointly and severally liable for the costs of
investigation and cleanup, which the State estimates to be $16 million. While
the State has sued other PRPs in connection with the site, the State has not
sued the Company. The Company and some PRPs are in discussions with the State
regarding possible settlement of the matter. While no assurance can be given as
to the ultimate outcome, management believes that the matter will not have a
material adverse effect on the Company's consolidated financial results.
F-27
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, and the Company,
along with other PRPs, is in discussions with the State regarding possible
settlement of the matter. While no assurance can be given as to the ultimate
outcome, management believes that the matter will not have a material adverse
effect on the Company's consolidated financial results.
The Company is involved in various routine legal proceedings incident to the
ordinary course of its business. In management's opinion, the outcome of pending
legal proceedings, separately or in the aggregate, will not have a material
adverse effect on the Company's business or consolidated financial results.
NOTE 16 -- NET UNREALIZED INVESTMENT GAINS
Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", available-for-sale securities are recorded at market value.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
component of stockholders' equity until realized. The Company's investments
subject to the provisions of SFAS No. 115 are treated as available-for-sale and,
accordingly, the applicable investments have been adjusted to market value with
a corresponding adjustment, net of tax, to net unrealized investment gains in
accumulated other comprehensive income. Unrealized investment gains (net of
deferred taxes) included in accumulated other comprehensive income amounted to
$2.9 million and $13.9 million at June 30, 2001 and 2000, respectively.
NOTE 17 -- STATEMENT OF CASH FLOWS
Supplemental disclosure of significant non-cash transactions
As a result of stock option exercises, the Company recorded a tax benefit of
$7.2 million, $13.4 million and $11.8 million during fiscal 2001, 2000 and 1999,
respectively.
NOTE 18 -- SEGMENT DATA AND RELATED INFORMATION
Reportable operating segments, as defined by SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", 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.
As a result of the similarities in the manufacturing, marketing and distribution
processes for all of the Company's products, much of the information provided in
the consolidated financial statements is similar to, or the same as, that
reviewed on a regular basis by the Chief Executive.
While the Company's results of operations are also reviewed on a consolidated
basis, the Chief Executive reviews data segmented on a basis that facilitates
comparison to industry statistics. Accordingly, net sales, depreciation and
amortization, and operating income are available with respect to the manufacture
and distribution of skin care, makeup, fragrance, hair care and other products.
These product categories meet the FASB's definition of operating segments and
therefore, additional financial data are provided below. The "other" segment
includes the sales and related results of ancillary products and services that
do not fit the definition of skin care, makeup, fragrance and hair care.
The Company evaluates segment performance based upon operating income, which
represents earnings before income taxes, minority interest and net interest
income or expense. The accounting policies for each of the reportable segments
are the same as those described in the summary of significant accounting
policies, except for depreciation and amortization charges, which are allocated,
primarily, based upon net sales. 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.
F-28
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended June 30
----------------------------------
2001 2000 1999
---------- ---------- ----------
(In millions)
SEGMENT DATA
Net Sales:
Skin Care ....................................... $ 1,641.5 $ 1,552.4 $ 1,398.8
Makeup .......................................... 1,704.4 1,579.5 1,412.8
Fragrance ....................................... 1,061.9 1,092.3 1,048.6
Hair Care ....................................... 180.7 113.9 82.4
Other ........................................... 27.6 28.7 18.9
---------- ---------- ----------
4,616.1 4,366.8 3,961.5
Restructuring ................................... (8.0) - -
---------- ---------- ----------
$ 4,608.1 $ 4,366.8 $ 3,961.5
========== ========== ==========
Depreciation and Amortization:
Skin Care ....................................... $ 48.6 $ 39.4 $ 29.9
Makeup .......................................... 64.1 52.7 39.2
Fragrance ....................................... 32.6 28.8 23.9
Hair Care ....................................... 9.6 6.9 5.6
Other ........................................... 1.4 1.3 1.0
---------- ---------- ----------
$ 156.3 $ 129.1 $ 99.6
========== ========== ==========
Operating Income:
Skin Care ....................................... $ 266.9 $ 240.5 $ 205.9
Makeup .......................................... 212.5 181.8 158.2
Fragrance ....................................... 63.6 80.6 79.7
Hair Care ....................................... 13.1 12.4 11.4
Other ........................................... 2.5 0.5 1.7
---------- ---------- ----------
558.6 515.8 456.9
Reconciliation:
Restructuring and other non-recurring expenses .. (63.0) - -
Interest expense, net ........................... (12.3) (17.1) (16.7)
---------- ---------- ----------
Earnings before Income Taxes, Minority Interest
and Accounting Change ........................ $ 483.3 $ 498.7 $ 440.2
========== ========== ==========
GEOGRAPHIC DATA
Net Sales:
The Americas .................................... $ 2,815.3 $ 2,658.8 $ 2,397.9
Europe, the Middle East & Africa ................ 1,210.2 1,131.0 1,082.4
Asia/Pacific .................................... 590.6 577.0 481.2
---------- ---------- ----------
4,616.1 4,366.8 3,961.5
Restructuring ................................... (8.0) - -
---------- ---------- ----------
$ 4,608.1 $ 4,366.8 $ 3,961.5
========== ========== ==========
Operating Income:
The Americas .................................... $ 299.9 $ 287.9 $ 265.0
Europe, the Middle East & Africa ................ 201.8 168.9 145.5
Asia/Pacific .................................... 56.9 59.0 46.4
---------- ---------- ----------
558.6 515.8 456.9
Restructuring and other non-recurring expenses .. (63.0) - -
---------- ---------- ----------
$ 495.6 $ 515.8 $ 456.9
========== ========== ==========
F-29
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30
----------------------------------
2001 2000 1999
---------- ---------- ----------
(In millions)
Total Assets:
The Americas .................................. $ 2,379.9 $ 2,187.8 $ 1,954.1
Europe, the Middle East & Africa .............. 610.3 606.8 587.9
Asia/Pacific .................................. 228.6 248.7 204.7
---------- ---------- ----------
$ 3,218.8 $ 3,043.3 $ 2,746.7
========== ========== ==========
Long-Lived Assets (property, plant and equipment):
The Americas .................................. $ 445.2 $ 393.6 $ 304.4
Europe, the Middle East & Africa .............. 70.5 72.6 69.5
Asia/Pacific .................................. 13.0 14.1 9.7
---------- ---------- ----------
$ 528.7 $ 480.3 $ 383.6
========== ========== ==========
NOTE 19 -- UNAUDITED QUARTERLY FINANCIAL DATA
The following summarizes the unaudited quarterly operating results of the
Company for the years ended June 30, 2001 and 2000:
Quarter Ended
-------------------------------------------------------
September 30 December 31 March 31 June 30 Total Year
------------ ----------- -------- ------- ----------
(In millions, except per share data)
Fiscal 2001
Net sales ......... $ 1,177.7 $ 1,291.6 $ 1,101.7 $ 1,037.1 $ 4,608.1
Gross profit ...... 914.4 1,013.6 875.6 832.2 3,635.8
Operating income .. 153.3 203.5 105.3 33.5 495.6
Net earnings ...... 92.4(a) 127.3 65.1 20.4 305.2(a)
Basic EPS ......... .36(a) .51 .25 .06 1.18(a)
Diluted EPS ....... .36(a) .50 .24 .06 1.16(a)
Fiscal 2000
Net sales ......... $ 1,093.7 $ 1,235.1 $ 1,039.1 $ 998.9 $ 4,366.8
Gross profit ...... 841.9 952.0 808.4 792.4 3,394.7
Operating income .. 136.5 186.1 99.4 93.8 515.8
Net earnings ...... 82.6 113.9 60.4 57.2 314.1
Basic EPS ......... .32 .46 .23 .22 1.22
Diluted EPS ....... .32 .45 .22 .21 1.20
(a) Net earnings for the Quarter ended September 30, 2000 include 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".
F-30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To The Estee Lauder Companies Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the financial statements of The Estee Lauder Companies Inc. and
subsidiaries included in this Annual Report on Form 10-K and have issued our
report thereon dated August 10, 2001. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. This
schedule (Schedule II - Valuation and Qualifying Accounts) is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in our audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
New York, New York
August 10, 2001
S-1
THE ESTEE LAUDER COMPANIES INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended June 30, 2001
(In millions)
---------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
---------------------------------------------------------------------------------------------------------------------
Additions
-----------------------
(1) (2)
Balance Charged to Charged to Balance
at Beginning Costs and Other at End of
Description of Period Expenses Accounts Deductions Period
---------------------------------------------------------------------------------------------------------------------
Reserves deducted in the balance sheet
from the assets to which they apply:
Allowance for doubtful accounts:
Year ended June 30, 2001 $ 31.7 $ 20.7 - $ 25.6(a) $ 26.8
======= ======= ======= =======
Year ended June 30, 2000 $ 36.0 $ 31.0 - $ 35.3(a) $ 31.7
======= ======= ======= =======
Year ended June 30, 1999 $ 43.6 $ 27.8 - $ 35.4(a) $ 36.0
======= ======= ======= =======
Accrued restructuring and other non-recurring charges:
Year ended June 30, 2001 (b) - $ 35.9 - $ 0.7 $ 35.2
======= ======= ======= =======
---------------
(a) Includes amounts written-off, net of recoveries.
(b) Included in other accrued liabilities.
S-2
THE ESTEE LAUDER COMPANIES INC.
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1 Form of Restated Certificate of Incorporation (filed as Exhibit 3.1
to Amendment No. 3 to our Registration Statement on Form S-1 (No.
33-97180) on November 13, 1995 (the "S-1")).*
3.2 Certificate of Amendment to Restated Certificate of Incorporation
(filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999).*
3.3 Amended and Restated By-laws (filed as Exhibit 3.2 to our Quarterly
Report on Form 10-Q for the quarter ended December 31, 1999).*
10.1 Form of Stockholders' Agreement (filed as Exhibit 10.1 to the S-1).*
10.1a Amendment No. 1 to Stockholders' Agreement (filed as Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarter ended September
30, 1996).*
10.1b Amendment No. 2 to Stockholders' Agreement (filed as Exhibit 10.2 to
our Quarterly Report on Form 10-Q for the quarter ended December 31,
1996 (the "FY 1997 Q2 10-Q")).*
10.1c Amendment No. 3 to Stockholder's Agreement (filed as Exhibit 10.2 to
our Quarterly Report on Form 10-Q for the quarter ended March 31,
1997 (the "FY 1997 Q3 10-Q")).*
10.1d Amendment No. 4 to Stockholders' Agreement (filed as Exhibit 10.1d
to our Annual Report on Form 10-K for the year ended June 30, 2000
("FY 2000 10-K)).*
10.2 Form of Registration Rights Agreement (filed as Exhibit 10.2 to the
S-1).*
10.2a First Amendment to Registration Rights Agreement (filed as Exhibit
10.3 to our Annual Report on Form 10-K for the fiscal year ended
June 30, 1996).*
10.2b Second Amendment to Registration Rights Agreement (filed as Exhibit
10.1 to the FY 1997 Q3 10-Q).*
10.2c Third Amendment to Registration Rights Agreement.
10.3 Fiscal 1996 Share Incentive Plan (filed as Exhibit 10.3 to the
S-1).* +
10.4 Fiscal 1999 Share Incentive Plan (filed as Exhibit 4(c) to our
Registration Statement on Form S-8 (No. 333-66851) on November 5,
1998).* +
10.5 The Estee Lauder Inc. Retirement Growth Account Plan (filed as
Exhibit 10.5 to our Annual Report on Form 10-K for the fiscal year
ended June 30, 1999 (the "FY 1999 10-K")).* +
10.6 The Estee Lauder Inc. Retirement Benefits Restoration Plan (filed as
Exhibit 10.6 to the FY 1999 10-K).* +
10.7 Executive Annual Incentive Plan (filed as Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the quarter ended December 31,
1998).* +
10.8 Employment Agreement with Leonard A. Lauder. +
10.9 Employment Agreement with Ronald S. Lauder (filed as Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarter ended September
30, 2000).* +
10.10 Employment Agreement with Fred H. Langhammer (filed as Exhibit 10.10
to the FY 2000 10-K).* +
10.10a Amendment to Employment Agreement with Fred H. Langhammer. +
10.11 Employment Agreement with Daniel J. Brestle. +
10.12 Employment Agreement with William P. Lauder (filed as Exhibit 10.1
to Amendment No. 2 to our Registration Statement on Form S-3 (No.
333-77977) on May 19, 1999).* +
10.13 Employment Agreement with Patrick Bousquet-Chavanne (filed as
Exhibit 10.13 to the FY 1999 10-K).* +
10.14 Form of Deferred Compensation Agreement (interest-based) with
Outside Directors. +
10.15 Form of Deferred Compensation Agreement (stock-based) with Outside
Directors. +
10.16 Non-Employee Director Share Incentive Plan (filed as Exhibit 4(d) to
our Registration Statement on Form S-8 (No. 333-49606) filed on
November 9, 2000).* +
21.1 List of significant subsidiaries.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney.
---------------
* Incorporated herein by reference.
+ Exhibit is a management contract or compensatory plan or arrangement.