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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
---------------------------
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, 2000 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 Identification No.)
incorporation or organization)
767 Fifth Avenue, New York, New York 10153
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-572-4200
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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
------------------- -------------------
Class A Common Stock, $.01 ____________________ New York Stock Exchange
par value
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 $4.38 billion at September 15,
2000.*
At September 15, 2000, 124,241,335 shares of the registrant's Class A Common
Stock, $.01 par value, and 113,679,334 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 November 9, 2000
* 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
essentials, 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 10,000 points of sale, consist
primarily of upscale department stores, specialty retailers, upscale perfumeries
and pharmacies and, to a lesser extent, free-standing company stores, stores on
cruise ships, 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 essentials 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 Ltd., a London-based skin care and fragrance company, and a
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, initially featuring 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 15,
2000, shares of Class A Common Stock and Class B Common Stock having
approximately 92.1% 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.
-1-
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, the hands
or the eyes. Skin care products accounted for approximately 36% of our net sales
in fiscal 2000.
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 36% of our net sales
in fiscal 2000.
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 25% of our
net sales in fiscal 2000.
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 free-standing retail stores and include
styling products, shampoos, conditioners and finishing sprays. In fiscal 2000,
hair care products accounted for approximately 3% of 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.
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 through stand-alone Origins stores, 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.
-2-
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 stand-alone M.A.C stores and,
beginning in July 2000, 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 essentials - In October 1995, we acquired the Bobbi Brown
essentials 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 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. We recently launched
jane goodskin, a line of youth oriented skin care products. jane products are
currently distributed only in the United States through 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.
We launched the first DKNY women's fragrance under the license in fiscal 2000.
Aveda - We acquired the Aveda business in December 1997 and have since
acquired select distributors and retail stores. Aveda, a prestige hair care
leader, is a manufacturer and marketer of plant-based hair, skin, makeup and
body care products. Aveda products are available through third-party
distributors and directly to consumers at prestige salons and spas, stand-alone
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 in limited
distribution in the United States and certain foreign 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 and at a very limited group of specialty stores in the United
States and Canada.
Bumble and bumble - In June 2000, we acquired a majority equity
interest in Bumble and Bumble Products, LLC, a marketer and distributor of
quality hair care products, and Bumble and Bumble, LLC, 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 will
continue to manage the domestic operations.
In addition to the foregoing brands, we manufacture and sell Kiton fragrances as
a licensee. We recently became the global licensee for Kate Spade products, and
we expect the first products in the Kate Spade line to be launched in fiscal
2002. These products are marketed separately from our other brands.
-3-
Distribution
We sell our products principally through limited distribution channels to
complement the images associated with our core brands. These channels include
more than 10,000 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, free-standing company stores
and spas, stores on cruise ships, 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
selected 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 market. 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, 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
16,500 points of sale, including mass merchandise stores, drug stores and
specialty stores. We principally sell Aveda products to independent salons,
Aveda Environmental Lifestyle stores and to third-party distributors, which
resell such products mainly to independent salons. There are currently about
10,000 salons, primarily in the United States, that sell Aveda products.
As part of our strategy to diversify our distribution, primarily in the United
States, we have been expanding the number of single-brand, free-standing 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 240
single-brand, free-standing stores and expect that number to increase to 400 to
500 over the next several years.
Beginning with the launch of e-commerce capabilities in November 1998, we have
been selling products directly to consumers over the Internet. As of September
1, 2000, Clinique, M.A.C, Origins and Bobbi Brown essentials products are
being sold directly to consumers in the United States and Canada over the
Internet. For a summary of our Internet strategy, see "Internet" within "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 4.4% in fiscal 2000, 5.0% in fiscal 1999 and 4.4% in
fiscal 1998.
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%, 11% and
12% of net sales in each of the fiscal years ended June 30, 2000, 1999 and 1998,
respectively. For the same fiscal years, The May Department Stores Company
(e.g., Foley's, Lord & Taylor and Robinsons-May) accounted for 10%, 11% and 10%
of our net sales, respectively.
-4-
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. In recent
years, we have increased our emphasis on media advertising while decreasing the
level of promotional spending as a percentage of sales. 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 in selling products to 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 nine single-brand marketing sites, four 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 third quarter of fiscal
2001.
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 the brand. Total advertising and promotional
expenditures were $1,195.8 million, $1,100.8 million and $1,027.8 for fiscal
2000, 1999 and 1998, 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 provide order processing, production and
financial support for our business. We have a sales analysis system to track
weekly sales by stock keeping unit at retail sales locations (i.e., sell-through
data). The system is currently tracking sell-through data for almost all units
of Estee Lauder, Clinique, Aramis, Prescriptives, Origins, M.A.C, Bobbi
Brown essentials, Donna Karan, Tommy Hilfiger and La Mer products shipped to
customers 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 established automated replenishment arrangements with a number of our
key customers in the United States and Canada. 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 and Prescriptives products in the United States are placed through
automated replenishment systems.
We have a proprietary inventory management system which tracks inventory at the
stock keeping unit level in a significant number of our international locations.
This system results in improved inventory control and disposition for both
existing products and new product launches. We also have designed and
implemented a data warehouse for our domestic business that captures shipping,
sell-through and inventory data. This system has resulted in streamlined and
standardized reporting as well as timely and accurate retail sales and marketing
information.
The use of sell-through data combined with the implementation of automated
replenishment systems, inventory management 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.
-5-
We have developed a system that provides tools to plan, monitor, and analyze our
promotional business and its processes on both an individual brand and corporate
basis. Marketing and sales professionals currently utilize this system to
promote Estee Lauder, Clinique and Origins products in the United States and
Canada. The system helped us reduce costs, improve return on investment and
maximize the impact of our promotional activities. The system was the model for
an International Promotional System prototype, which we rolled out in fiscal
2000 for a test period in select markets. In fiscal 2001 we expect to roll the
system out to additional regions.
We recently have introduced our corporate Extranet which is designed to provide
our customers real-time order status throughout the procurement cycle. Customers
have begun to use this system to track their orders as they move through the
fulfillment process. The Extranet is viewed as a valued-added customer service
by these retailers and we expect to experience fewer billing discrepancies and
fewer customer deductions as a result.
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 within "Item 7. - Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Through the first half of fiscal 2000, we devoted resources to Year 2000 issues
including the review of, and, where necessary, the modification of, affected
information systems. Subsequent to January 1, 2000, we have been able to
redeploy these resources toward systems initiatives focused on business process
improvement.
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, 2000, we had approximately 395 employees engaged in
research and development. Research and development expenditures totaled $53.8
million, $48.0 million and $43.5 million for fiscal 2000, 1999 and 1998,
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 and, to a lesser
extent, in Australia. We continue to streamline our manufacturing processes and
identify sourcing opportunities to 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 are
undertaking significant ongoing productivity improvement programs. 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 our 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. 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.
-6-
As we integrate acquired brands we continually seek new ways to leverage our
production and sourcing efficiencies to improve their manufacturing performance.
Competition
The skin care, makeup, fragrance and hair care businesses are characterized by
vigorous competition throughout the world. Product 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 skincare, makeup,
fragrance and hair care products include L'Oreal S.A. (which markets Lancome,
Ralph Lauren, L'Oreal, Maybelline, Plenitude, Biotherm, Helena Rubinstein,
Matrix, Biolage, Kiehl's and other products), Unilever N.V. (which markets
Calvin Klein, Elizabeth Arden, Pond's and other products), The Procter & Gamble
Company (which markets Cover Girl, Oil of Olay, Giorgio fragrances, Max Factor,
Vidal Sassoon, Pantene and other products), LVMH Moet Hennessey Louis Vuitton
("LVMH") (which markets Christian Dior, Givenchy, Guerlain, Hard Candy, Bliss
World, Benefit, Make Up For Ever and other products), Shiseido Company, Ltd.
(which markets Shiseido, 5S and other products), Avon Products Inc., Wella Group
(which markets Wella, Gucci fragrance, Sebastian, Yardley, Anna Sui and other
products), Gucci N.V. (which markets Gucci, Yves St. Laurent, Van Cleef &
Arpels, Fendi and Krizia products), Revlon, Inc. (which markets Revlon, Almay
and Ultima products), Joh. A. Benckiser GmbH (which markets Coty, Lancaster,
Davidoff, Issabella Rosselini Manifesto Cosmetics, Jil Sander, Rimmel, Jovan,
and other products), Bristol-Myers Squibb Co. (which markets Clairol, Keri,
Aussi and other products), Chanel, Inc. (which markets Chanel and Bourjois
products) and Clarins (U.S.A.) Inc. (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) and Sephora, or have acquired brands, such as Neiman Marcus Group
(which acquired Laura Mercier). Some of our competitors also have interests in
retailers that are customers of ours. For example, LVMH has interests in Duty
Free Shoppers, Sephora, and Parfumeries Douglas.
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") and Donna Karan New York and DKNY, 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, M.A.C, Bobbi Brown
essentials, 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, 2000, we had approximately 18,000 full-time employees worldwide
(including sales representatives at points of sale who are employed by the
Company), of whom approximately 9,700 are employed in the United States and
Canada. None of our U.S. employees is covered by a collective bargaining
agreement. In certain foreign regions 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 and local and foreign 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 applicable federal, state, local and foreign 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 to 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 67 Chairman of the Board of Directors
Ronald S. Lauder 56 Chairman of Clinique Laboratories, Inc. and
Estee Lauder International, Inc. and a Director
Fred H. Langhammer 56 President and Chief Executive Officer and a Director
Robert J. Bigler 52 Senior Vice President and Chief Financial Officer
Patrick Bousquet-Chavanne 42 President of Estee Lauder International, Inc.
Daniel J. Brestle 55 President of Estee Lauder (U.S.A. & Canada)
Andrew J. Cavanaugh 53 Senior Vice President - Global Human Resources
Paul E. Konney 56 Senior Vice President, General Counsel and Secretary
Evelyn H. Lauder 64 Senior Corporate Vice President
William P. Lauder 40 President of Clinique Laboratories, Inc.
Edward M. Straw 61 President of Operations
Leonard A. Lauder has been Chairman of the Board of Directors since
1995. He was 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 served in 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, a Trustee of The Aspen Institute and a Director of
RSL Communications, Ltd. 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.
and is the co-founder, controlling investor and Chairman of the Board of
Directors of RSL Communications, Ltd. He is Chairman of the Board of Trustees of
the Museum of Modern Art.
-8-
Fred H. Langhammer has been Chief Executive Officer since January 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
Nabisco Holdings Corp., RSL Communications, Ltd., the Cosmetics, Toiletries and
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.
Robert J. Bigler is Senior Vice President and Chief Financial Officer
of the Company, a position he assumed in 1992. Before that, he had served as
Senior Vice President - Controller of Estee Lauder International, Inc. from
1986. He is a certified public accountant. Mr. Bigler is retiring from his
position, effective October 1, 2000. Richard W. Kunes has been named to succeed
him in this role.
Patrick Bousquet-Chavanne rejoined the Company in September 1998 as
President of Estee Lauder International, Inc. ("ELII"). From June 1992 through
December 1996, Mr. Bousquet-Chavanne was Senior Vice President - General
Manager/Travel Retailing of ELII. From September 1989 through June 1992, he was
Vice President and General Manager of Aramis International, a division of ELII.
From December 1996 through March 1998, he was Executive Vice President/General
Manager International Operations of Parfums Christian Dior S.A., based in Paris.
Daniel J. Brestle is 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. Prior thereto, he was President of
Prescriptives U.S.A. since 1988. 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.
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 President of The Breast Cancer Research
Foundation.
William P. Lauder is President of Clinique Laboratories, Inc. Prior to
July 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 and the Educational Foundation for the
Fashion Industries.
Edward M. Straw is President of Operations responsible for Research and
Development, Procurement, Manufacturing, Packaging, Distribution, Quality
Assurance and Information Systems. Prior to joining the Company in March 2000,
Mr. Straw was Senior Vice President, Global Supply Chain and Manufacturing for
the Compaq Computer Corporation. From July 1997 to November 1998, he was
President of Ryder Global Logistics, Inc., and prior to joining Ryder, he served
35 years in the United States Navy, retiring in November 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.
Richard W. Kunes will become Senior Vice President and Chief Financial
Officer on October 1, 2000. Since January 1998, Mr. Kunes has been Vice
President - Financial Administration and Corporate Controller. 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. Prior to
joining the Company, he held finance and controller positions at the
Colgate-Palmolive Company.
-9-
Item 2. Properties.
The following table sets forth the principal owned and leased manufacturing and
research and development facilities as of September 15, 2000. 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
Rosebery, NSW, Australia (leased) Manufacturing 71,000
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. We operate free-standing retail stores, including 7
for the Estee Lauder brand, 4 for Clinique, 105 for Origins, 62 for M.A.C, 65
for Aveda, 1 for Bobbi Brown, 2 for Jo Malone and 1 for Bumble and bumble.
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 financial condition.
In February 2000, the Company and eight other manufacturers of cosmetics (the
"Manufacturer Defendants") were added as defendants in a consolidated class
action lawsuit that had been pending in the Superior Court of the State of
California in Marin County. The plaintiffs purport to represent a class of all
California residents who purchased prestige cosmetic products at retail for
personal use from a number of department stores that sold such products in
California (the "Department Store Defendants"). Plaintiffs filed their initial
actions against the Department Store Defendants in May 1998. In May 2000,
plaintiffs filed an amended complaint alleging that the Department Store
Defendants and the Manufacturer Defendants conspired to fix and maintain retail
prices and to limit the supply of prestige cosmetic products sold by the
Department Store Defendants in violation of California state law. The plaintiffs
are seeking, among other things, treble damages, equitable relief, attorneys'
fees, interest and costs. Pretrial motions and discovery are underway. 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 financial position.
-10-
In August 2000, an affiliate of Revlon, Inc. sued the Company and two of its
subsidiaries in the U.S. District Court, Southern District of New York, for
alleged patent infringement and related claims. Revlon claims that four Estee
Lauder foundations and one Origins foundation infringe its patent, and is
seeking, among other things, treble damages, punitive damages, equitable relief,
and attorneys' fees. At this time, no discovery has commenced. The Company and
its subsidiaries will vigorously defend themselves. 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 financial position.
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, 2000.
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 2000 and fiscal 1999.
Fiscal 2000 Fiscal 1999
---------------------------------- -----------------------------------
Cash Cash
High Low Dividends High Low Dividends
-------- -------- --------- ------- ---------- ----------
First Quarter $56 1/2 $ 38 1/4 $ .05 $35 1/8 $ 24 3/4 $ .0425
Second Quarter 51 7/16 37 1/4 .05 43 1/4 23 11/32 .0425
Third Quarter 55 7/8 38 1/8 .05 47 3/4 38 3/8 .0425
Fourth Quarter 54 5/16 41 1/8 .05 51 1/2 41 7/8 .0500
------ --------
Year 56 1/2 37 1/4 $ .20 51 1/2 23 11/32 $ .1775
====== ========
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 in this report and the consolidated financial
statements have been restated to reflect the effect of the two-for-one stock
split.
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 15, 2000, there were approximately 3,905 record holders of Class
A Common Stock and 13 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
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(In millions, except per share data)
Statement of Earnings Data:
Net sales ......................................... $ 4,366.8 $ 3,961.5 $ 3,618.0 $ 3,381.6 $ 3,194.5
Gross profit ...................................... 3,394.7 3,061.6 2,798.5 2,616.5 2,463.5
Operating income .................................. 515.8 456.9 409.1 359.1 310.3
Earnings before income taxes and minority interest 498.7 440.2 402.8 362.9 313.0
Net earnings ...................................... 314.1 272.9 236.8 197.6 160.4
Preferred stock dividends ......................... 23.4 23.4 23.4 23.4 57.5
Net earnings attributable to common stock ......... 290.7 249.5 213.4 174.2 102.9
Other Data:
Earnings before interest, taxes, depreciation
and amortization (EBITDA)(a) ................... $ 662.6 $ 574.2 $ 506.6 $ 435.1 $ 369.1
Per Share Data:
Net earnings per common share (b)(d):
Basic ........................................... $ 1.22 $ 1.05 $ .90 $ .74 $ .59(c)
Diluted ......................................... $ 1.20 $ 1.03 $ .89 $ .73 $ .59(c)
Weighted average common shares outstanding (b)(d):
Basic ........................................... 237.7 237.0 236.8 235.4 232.6(c)
Diluted ......................................... 242.5 241.2 239.5 237.1 233.2(c)
Cash dividends declared per common share (d) ...... $ .20 $ .1775 $ .17 $ .17 $ .085
Balance Sheet Data:
Working capital ................................... $ 716.7 $ 708.0 $ 617.2 $ 551.6 $ 467.5
Total assets ...................................... 3,043.3 2,746.7 2,512.8 1,873.1 1,779.4
Total debt ........................................ 425.4 429.1 436.5 31.1 127.5
Redeemable preferred stock ........................ 360.0 360.0 360.0 360.0 360.0
Stockholders' equity .............................. 1,160.3 924.5 696.4 547.7 394.2
- ----------------
(a) 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 our minority interest adjustment, all
depreciation charges related to property, plant and equipment and all
amortization charges including amortization of goodwill, purchased royalty
rights, leasehold improvements and other intangible assets. We consider EBITDA
useful in analyzing our results; however, 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.
(b) In December 1997, we adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share", which requires the
presentation of both basic and diluted earnings per common share. Consistent
with the requirements of SFAS No. 128, net earnings per common share and
weighted average common shares outstanding for all prior years presented have
been restated for purposes of comparability.
(c) Due to the change in the capital structure effected by our recapitalization
in connection with our initial public offering in fiscal 1996, net earnings per
common share and weighted average common shares outstanding for the year ended
June 30, 1996 are reflected on a pro forma basis as if the recapitalization had
been effected at the beginning of the fiscal year.
(d) 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 has been restated to reflect the stock split.
-12-
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 2000, 1999
and 1998 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. Prior-year information has
been restated to include the results of operations related to those products and
services.
Year Ended June 30
--------------------------------------------------------
2000 1999 1998
---------- ---------- ----------
(In millions)
NET SALES
By Region:
The Americas .......................................... $ 2,658.8 $ 2,397.9 $ 2,204.7
Europe, the Middle East & Africa ...................... 1,131.0 1,082.4 960.8
Asia/Pacific .......................................... 577.0 481.2 452.5
---------- ---------- ----------
$ 4,366.8 $ 3,961.5 $ 3,618.0
========== ========== ==========
By Product Category:
Skin Care ............................................. $ 1,552.4 $ 1,398.8 $ 1,248.3
Makeup ................................................ 1,579.5 1,412.8 1,317.7
Fragrance ............................................. 1,092.3 1,048.6 987.6
Hair Care ............................................. 113.9 82.4 52.4
Other ................................................. 28.7 18.9 12.0
---------- ---------- ----------
$ 4,366.8 $ 3,961.5 $ 3,618.0
========== ========== ==========
OPERATING INCOME
By Region:
The Americas .......................................... $ 287.9 $ 265.0 $ 248.0
Europe, the Middle East & Africa ...................... 168.9 145.5 131.3
Asia/Pacific .......................................... 59.0 46.4 29.8
---------- ---------- ----------
$ 515.8 $ 456.9 $ 409.1
========== ========== ==========
By Product Category:
Skin Care ............................................. $ 240.5 $ 205.9 $ 174.3
Makeup ................................................ 181.8 158.2 151.8
Fragrance ............................................. 80.6 79.7 75.5
Hair Care ............................................. 12.4 11.4 8.0
Other ................................................. 0.5 1.7 (0.5)
---------- ---------- ----------
$ 515.8 $ 456.9 $ 409.1
========== ========== ==========
-13-
The following table presents certain consolidated earnings data as a percentage
of net sales:
Year Ended June 30
-----------------------------------------
2000 1999 1998
----- ----- -----
Net sales ............................................................ 100.0% 100.0% 100.0%
Cost of sales ........................................................ 22.3 22.7 22.7
----- ----- -----
Gross profit ......................................................... 77.7 77.3 77.3
----- ----- -----
Operating expenses before depreciation and amortization:
Selling, general and administrative .............................. 61.7 62.0 62.4
Related party royalties .......................................... 0.8 0.8 0.9
----- ----- -----
62.5 62.8 63.3
----- ----- -----
Earnings before interest, taxes, depreciation
and amortization ("EBITDA") ...................................... 15.2 14.5 14.0
Depreciation and amortization ........................................ 3.4 3.0 2.7
----- ----- -----
Operating income ..................................................... 11.8 11.5 11.3
Interest expense, net ................................................ 0.4 0.4 0.2
----- ----- -----
Earnings before income taxes and minority interest ................... 11.4 11.1 11.1
Provision for income taxes ........................................... 4.2 4.2 4.5
Minority interest .................................................... -- -- (0.1)
----- ----- -----
Net earnings ......................................................... 7.2% 6.9% 6.5%
===== ===== =====
Fiscal 2000 as compared with Fiscal 1999
NET SALES
Net sales increased 10% or $405.3 million to $4,366.8 million, 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 relate 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. Before considering the effect of converting foreign
currencies, 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 $1,552.4 million,
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 $1,579.5
million 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 has been
achieved through growth in existing business and expansion of both traditional
and retail distribution. New products such as the recently launched *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.
-14-
Fragrance
Net sales of fragrance products increased 4% or $43.7 million to $1,092.3
million. For the year, sales of Tommy Hilfiger licensed products improved. Sales
of the recently launched Freedom for him and Freedom for her 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 have 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 this year.
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. Bumble and bumble offers an array of prestige
styling and other hair care products, which are sold to exclusive salons and
spas.
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 $2,658.8 million. 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 $1,131.0 million. The increase was primarily
the result of higher net sales in Spain, Italy, France and the travel retail
business, partially offset by lower sales in Germany. Also contributing to
regional sales growth 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 40
basis points 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 last year. Operating margins were 11.8% of net
sales in the current period as compared to 11.5%. The increase in operating
income and margins was due to higher net sales coupled with production
efficiencies achieved 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.
-15-
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
the year 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 supports 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, Italy and 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.
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, 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.
EBITDA increased 15% to $662.6 million or 15.2% of net sales as compared to
$574.2 million or 14.5% of net sales last year. The improvement in EBITDA is
primarily attributable to improvements in gross profit related to sales growth
and production efficiencies achieved.
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 reflects 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 are 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 is principally attributable to tax planning
initiatives and reduction of certain local market statutory tax rates.
-16-
Fiscal 1999 as compared with Fiscal 1998
NET SALES
Net sales increased in all product categories and all geographic segments
resulting in an increase in fiscal 1999 net sales of 9% to $3,961.5 million.
Hair care and makeup benefited from a full year of sales of Aveda and jane
products. New skin care products were well received driving growth in that
category. Internationally, the Europe, Middle East & Africa region contributed a
13% increase in net sales over the prior year. Foreign currency translation did
not significantly impact net sales.
Product Categories
Skin Care
Skin care sales increased 12% to $1,398.8 million, reflecting the launch of Stop
Signs and Resilience Lift and a full year of sales of Diminish internationally.
In addition to these increases, Clinique All About Eyes contributed to the
category's year over year improvement. The overall increase was partially offset
by lower net sales of Fruition Extra.
Makeup
Net sales of makeup products increased 7% to $1,412.8 million due in part to the
inclusion of a full year of sales of Aveda and jane products. The current year
launch of Quickliner for Eyes, Superfit Makeup and Sheer Powder Blusher
increased sales, and Two-In-One Eyeshadow, DoubleWear and Photochrome
experienced continued success. These increases were partially offset by the
anniversary of the fiscal 1998 launch of Superlast Cream Lipstick.
Fragrance
Fragrance sales increased 6% to $1,048.6 million. The increase was primarily
attributable to the worldwide success of Clinique Happy and the fiscal 1999
introduction of Dazzling Gold and Dazzling Silver. The rollout of Hilfiger
Athletics and "tommy girl" into remaining international markets contributed to
higher fragrance sales, offset in part by lower sales of "tommy".
Hair Care
Net sales of hair care products increased $30.0 million or 57% to $82.4 million.
This increase primarily reflected the inclusion of Aveda products for a full
year.
Geographic Regions
Sales in the Americas were $2,397.9 million representing a 9% increase. The
region benefited from the inclusion of a full year of sales of Aveda and jane
products as well as strong sales from new skin care products. Net sales in
Europe, the Middle East & Africa increased 13% to $1,082.4 million with
double-digit sales increases in the skin care and fragrance categories. Net
sales in Spain, the United Kingdom, Italy, Germany, France, Belgium and the
distributor and travel retail businesses all increased as we introduced new
products and rolled out products that were previously not available in the
region. In Asia/Pacific, net sales increased 6% to $481.2 million, primarily due
to higher net sales in Japan, Korea and Thailand, offset by slightly lower sales
in Australia and Hong Kong. Currency translation did not have a material impact
on any of these geographic segments.
COST OF SALES
Cost of sales as a percent of net sales was 22.7% in fiscal 1999 and 1998,
reflecting the integration of Aveda and jane products, which have higher product
cost structures than our other brands, offset by continued cost reduction
efforts and a shift in product mix for our core brands.
OPERATING EXPENSES
Operating expenses as a percent of net sales decreased to 65.8% in fiscal 1999
from 66.0% in fiscal 1998. The decrease was the result of productivity gains in
advertising and promotional spending and other cost controls, partially offset
by a full year of goodwill amortization and incremental spending related to our
Year 2000 remediation program. Shifts in product mix and the timing and type of
new product introductions affect our level of selling, advertising and
promotional spending. In addition to these market influences, our ratio of
operating expenses to net sales benefited from the integration of favorable
operating cost structures of acquired companies.
-17-
OPERATING INCOME
Operating income increased 12% to $456.9 million and operating margins increased
to 11.5% in fiscal 1999 from 11.3% in fiscal 1998. These increases were achieved
by maintaining our gross profit margins and controlling certain operating
expenses so they increased at a lower rate than net sales.
Product Categories
Operating income in the skin care category increased 18% to $205.9 million due
primarily to the launches of Stop Signs and Resilience Lift. Skin care products,
which are primarily marketed under our core brand names, typically have lower
cost of goods than our other products. Operating income for makeup increased 4%
to $158.2 million as a result of higher sales from new product introductions
including Quickliner for Eyes, Superfit Makeup and Sheer Powder Blusher.
Operating income for fragrance products was $79.7 million, an increase of $4.2
million or 6%. This increase was primarily attributable to increased sales from
the introduction of Dazzling Gold and Dazzling Silver and the continued success
of Clinique Happy. Operating income from fragrances as a percent of net sales is
typically lower than other product segments as fragrance products generally have
a higher cost of goods and are often supported by higher advertising and
promotional spending. The higher advertising and promotion for fragrance
indirectly supports other categories by generating increased traffic at points
of sale. Operating income from the hair care category increased 43% to $11.4
million primarily due to the inclusion of Aveda products for a full year.
Geographic Regions
Operating income in the Americas increased 7% to $265.0 million primarily due to
increased sales in the skin care and makeup segments, as well as a full year of
operating profits from Aveda. In Europe, the Middle East & Africa, operating
income increased 11% to $145.5 million as a result of a strong travel retail
business and better operating results in Spain, Germany, Italy and Belgium,
partially offset by lower results in the United Kingdom. In Asia/Pacific,
operating income increased $16.6 million or 56% to $46.4 million due to
increased sales and the implementation of planned operating expense efficiencies
in Japan, Australia, Taiwan and Thailand.
EBITDA
EBITDA increased by $67.6 million to $574.2 million or 14.5% of net sales as
compared to $506.6 million or 14.0% of net sales in fiscal 1998. Such
improvement was primarily attributable to higher net sales and operating expense
efficiencies achieved.
INTEREST EXPENSE, NET
Net interest expense increased $10.4 million to $16.7 million as borrowings
related to fiscal 1998 business acquisitions were outstanding for the full year.
PROVISION FOR INCOME TAXES
The provision for income taxes represents federal, foreign, state and local
income taxes. The effective rate for income taxes for fiscal 1999 was 38%
compared to 40% in the prior year. These rates are 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 the tax effect of foreign operations.
-18-
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, 2000, we had cash
and cash equivalents of $320.3 million compared with $347.5 million at June 30,
1999.
The Board of Directors has authorized 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. In May 1999, we issued $205.2 million of commercial paper and used the
proceeds to prepay a like amount of our $405.0 million term loan, due February
2005. There remains $200.0 million of the original term loan outstanding with an
effective interest rate of 6.28%. We also have an effective shelf registration
statement covering the potential issuance of up to $400.0 million in debt
securities. Commercial paper is classified as long-term debt in 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, 2000, we had an unused $400.0 million revolving credit facility,
expiring July 1, 2001.
Our business is seasonal in nature and, accordingly, our working capital needs
vary. To meet these needs, we could issue up to an additional $545.0 million of
commercial paper under our program. We also have $58.7 million in uncommitted
facilities. No borrowings were outstanding under these facilities as of June 30,
2000.
Total debt as a percent of total capitalization was 22% at June 30, 2000 as
compared to 25% at June 30, 1999, primarily as a result of higher total capital.
Net cash provided by operating activities was $442.5 million in fiscal 2000 as
compared to $352.3 million in fiscal 1999 and $258.2 million in fiscal 1998.
These increases primarily relate to increased earnings, particularly before
depreciation and amortization, as well as higher accrual balances, partially due
to business acquisitions. The increase in other noncurrent liabilities is
partially due to deferred compensation arrangements and pension obligations.
Net cash used for investing activities was $374.3 million in fiscal 2000,
compared with $200.3 million in fiscal 1999 and $577.2 million in fiscal 1998.
Investment spending in fiscal 2000 reflects capital expenditures and business
acquisitions including the purchase of the Stila, Jo Malone, gloss.com and
Bumble and bumble businesses, as well as certain Aveda distributors in the
United States and United Kingdom, and certain Aveda retail stores. Lower cash
used for investing activities in fiscal 1999 related primarily to lower spending
on acquisitions as compared to fiscal 1998, when we acquired Aveda, jane and the
remaining interest in M.A.C.
Cash used for financing activities was $87.9 million and $73.2 million in fiscal
2000 and 1999, respectively, as compared to $345.2 million provided in fiscal
1998. The increase in cash used in the most recent year primarily relates to
common stock repurchases and higher common stock dividends, primarily as a
result of a higher dividend per share. A significant portion of the funds
provided in fiscal 1998 pertained to the issuance of debt related to business
acquisitions.
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.
Capital expenditures amounted to $180.9 million, $117.9 million and $120.6
million in fiscal 2000, 1999 and 1998, respectively. Spending in all three years
primarily reflects 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.
-19-
Dividends declared were $70.9 million, $65.4 million and $63.6 million in fiscal
2000, 1999 and 1998, respectively. In fiscal 1998 and 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 approved a dividend of $.05 per share in the
fourth quarter of fiscal 1999 and in each quarter of fiscal 2000, thus
accounting for the difference in dividends declared. In fiscal 2000, 1999 and
1998, dividends declared on such common stock totaled $47.5 million, $42.0
million and $40.2 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.
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
which 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. Gains and losses related to qualifying hedges of these exposures
are deferred and recognized in operating income when the underlying hedged
transaction occurs. We also enter into foreign currency options to hedge
anticipated transactions where there is a high probability that anticipated
exposures will materialize. Any gains realized on such options that qualify as
hedges are deferred and recognized in operating income when the underlying
hedged transaction occurs. Premiums on foreign currency options are amortized
over the period being hedged. Foreign currency transactions which do not qualify
as hedges are marked to market on a current basis with gains and losses
recognized through income and reflected in operating expenses. In addition, any
previously deferred gains and losses on hedges which are terminated prior to the
transaction date are recognized in current income when the hedge is terminated.
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 is remote and in any event would not be material. The contracts have
varying maturities with none exceeding 24 months. Costs associated with entering
into such contracts have not been material to our financial results. We do not
utilize derivative financial instruments for trading or speculative purposes. At
June 30, 2000, we had foreign currency contracts in the form of forward exchange
contracts in the amount of $219.6 million. The foreign currencies included in
these contracts are principally the Euro, Japanese yen, Swiss franc and U.K.
pound.
Interest Rate Risk Management
We have entered into interest rate swaps to convert floating interest rate debt
to fixed rate debt. These swap agreements are contracts to exchange floating
rate for fixed rate interest payments periodically over the life of the
agreements. Amounts currently due to or from interest swap counterparties are
recorded in interest expense in the period in which they accrue. The related
amounts payable to, or receivable from, the counterparties are included in other
accrued liabilities. At June 30, 2000 we had interest rate swap agreements
outstanding with a notional principal amount of $67.0 million. In February 2000
and April 2000, we terminated interest rate swaps at a gain under contracts with
notional values of $66.0 million and $67.0 million, respectively. In order to
maintain interest rate protection, we used a portion of the proceeds to purchase
interest rate options set at the same rate, and at the same aggregate notional
value, as the previously terminated interest rate swaps.
-20-
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
from holding such derivative instruments, using a variance/co-variance model
with a 95 percent confidence level, assuming normal market conditions at June
30, 2000, was not material.
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
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for our fiscal
quarter beginning July 1, 2000 (date of transition) and will not require
retroactive restatement of prior period financial statements. This statement
requires the recognition of all derivative instruments as either assets or
liabilities in the statement of financial position measured at fair value.
Generally, increases or decreases in the fair value of derivative instruments
will be recognized as gains or losses in earnings in the period of change. If
certain conditions are met, where the derivative instrument has been designated
as a fair value hedge, the hedged item may also be marked to market through
earnings thus creating an offset. If the derivative is designated and qualifies
as a cash flow hedge, the changes in fair value of the derivative instrument may
be recorded on the balance sheet as other comprehensive income.
The new accounting standard has not significantly changed our approach to
managing foreign currency or interest rate risks, as discussed in the preceding
paragraphs. We principally hedge against these exposures using forward exchange
contracts, foreign currency options and interest rate swaps and options. These
contracts have been designated as hedges of anticipated future cash flows and,
accordingly, will be marked to market through other comprehensive income
(balance sheet adjustments) until such time as the related forecasted
transactions affect earnings.
Although we expect future gains and losses to be effectively matched, there is a
change associated with SFAS No. 133 that may accelerate certain other charges to
earnings. Under this new guidance, the time-value component of a derivative's
fair value is charged to earnings based upon the change in its relative
proportion to the contract's total value. To reflect the change in time-value
from the date of the contracts' inception through the date of transition we will
record an earnings charge of $2.2 million, after tax, in our fiscal 2001 first
quarter consolidated statement of earnings. This charge will be reflected as the
cumulative effect of a change in accounting principle. Additionally, on the date
of transition, a comparable amount of deferred unrealized gains on these
instruments will be recorded in accumulated other comprehensive income that we
expect to accrete into earnings over the remaining life of the derivatives
(through February 2005).
In May 2000, the Emerging Issues Task Force (the "EITF") reached a 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. If the EITF's consensus is unchanged, Issue No. 00-14 will
become effective in the fourth quarter of the fiscal year beginning after
December 15, 1999, and would be applied retroactively for purposes of
comparability. Therefore, beginning in the fourth quarter of fiscal 2001, we may
be required to reclassify certain revenues and expenses related to our
promotional programs out of operating expenses and into sales and cost of sales.
We have not yet fully quantified the reclassification; however, by its nature, a
reclassification will not affect our operating income or net earnings.
-21-
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 through our traditional retailers. The strategy includes
a planned launch of a multi-brand website offering products from our portfolio,
specially designed sites which will be available through the e-commerce sites of
retailers who meet specific requirements and individual sites for our brands. We
currently have nine individual brand websites that educate and inform consumers
about specific brands, with more in development. Four of the existing sites -
clinique.com, origins.com, bobbibrown.com and maccosmetics.com - have e-commerce
capabilities. We are currently re-developing the gloss.com multi-brand site we
acquired in May 2000 and expect to re-launch it in the third quarter of fiscal
2001. The site initially will feature Estee Lauder, Clinique, Origins, Bobbi
Brown essentials, and M.A.C 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. Our Internet sales, which were not significant during
fiscal 2000, are currently limited to consumers in the United States and Canada.
The initial impact of our overall Internet strategy on earnings is expected to
be immaterially dilutive, particularly as we re-develop the multi-brand site,
and accretive some time after the re-launch.
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 the 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,"
"expects," "believes," "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, 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:
(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 or 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;
-22-
(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, 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 market and our operating and manufacturing costs outside of
the United States;
(viii) changes in global economic conditions that could affect the cost
and availability of capital to the Company, which may be needed 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 technologies, timely and within our cost estimates; and,
(xiii) our ability to integrate acquired businesses and realize value
therefrom.
We assume no responsibility to update forward-looking statements made herein or
otherwise.
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 2000 Annual Meeting of Stockholders, which will be filed within 120 days
after the close of the fiscal year ended June 30, 2000, and such information is
incorporated herein by reference.
-23-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports of Form 8-K.
(a) 1, 2. Financial Statements and Schedules - See index on Page F-1.
3. 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.
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).*
10.3 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) 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 FY1999 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 10.8 to
the S-1).* +
10.10 Employment Agreement with Fred H. Langhammer.+
10.11 Employment Agreement with Daniel J. Brestle (filed as Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarter ended September 30,
1998).* +
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 (filed as Exhibit 10.1 to the FY 1997 Q2 10-Q).* +
10.15 Form of Deferred Compensation Agreement (stock-based) with Outside
Directors. +
21.1 List of significant subsidiaries.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
(b) Registrant filed no reports on Form 8-K during the last quarter of the
period covered by this report.
- ----------
* Incorporated herein by reference.
+ Exhibit is a management contract or compensatory plan or arrangement.
-24-
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/ ROBERT J. BIGLER
--------------------------------------
Robert J. Bigler
Senior Vice President
and Chief Financial Officer
Date: September 18, 2000
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
--------- -------- ----
LEONARD A. LAUDER* Chairman of the Board of September 18, 2000
- -------------------------- Directors
Leonard A. Lauder
RONALD S. LAUDER* Director September 18, 2000
- --------------------------
Ronald S. Lauder
WILLIAM P. LAUDER* Director September 18, 2000
- --------------------------
William P. Lauder
FRED H. LANGHAMMER* Chief Executive Officer September 18, 2000
- -------------------------- and a Director
Fred H. Langhammer (Principal Executive Officer)
RICHARD D. PARSONS* Director September 18, 2000
- --------------------------
Richard D. Parsons
MARSHALL ROSE* Director September 18, 2000
- --------------------------
Marshall Rose
P. ROY VAGELOS* Director September 18, 2000
- --------------------------
P. Roy Vagelos
FAYE WATTLETON* Director September 18, 2000
- --------------------------
Faye Wattleton
/s/ ROBERT J. BIGLER Senior Vice President and September 18, 2000
- -------------------------- Chief Financial Officer
Robert J. Bigler (Principal Financial and
Accounting Officer)
- ----------
* By signing his name hereto, Robert J. Bigler 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/ ROBERT J. BIGLER
---------------------------
Robert J. Bigler
(Attorney-in-Fact)
-25-
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, 2000 and
1999, 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, 2000. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2000 in conformity with accounting principles generally accepted in the
United States.
ARTHUR ANDERSEN LLP
New York, New York
August 10, 2000
F-2
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended June 30
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
(In millions, except per share data)
Net Sales ......................................... $ 4,366.8 $ 3,961.5 $ 3,618.0
Cost of sales ..................................... 972.1 899.9 819.5
----------- ----------- -----------
Gross Profit ...................................... 3,394.7 3,061.6 2,798.5
----------- ----------- -----------
Operating expenses:
Selling, general and administrative ........... 2,845.7 2,572.1 2,357.6
Related party royalties ....................... 33.2 32.6 31.8
----------- ----------- -----------
2,878.9 2,604.7 2,389.4
----------- ----------- -----------
Operating Income .................................. 515.8 456.9 409.1
Interest expense, net ............................. 17.1 16.7 6.3
----------- ----------- -----------
Earnings before Income Taxes and Minority Interest 498.7 440.2 402.8
Provision for income taxes ........................ 184.6 167.3 161.1
Minority interest ................................. -- -- (4.9)
----------- ----------- -----------
Net Earnings ...................................... 314.1 272.9 236.8
Preferred stock dividends ......................... 23.4 23.4 23.4
----------- ----------- -----------
Net Earnings Attributable to Common Stock ......... $ 290.7 $ 249.5 $ 213.4
=========== =========== ===========
Net earnings per common share:
Basic ......................................... $ 1.22 $ 1.05 $ .90
Diluted ....................................... $ 1.20 $ 1.03 $ .89
Weighted average common shares outstanding:
Basic ......................................... 237.7 237.0 236.8
Diluted ....................................... 242.5 241.2 239.5
See notes to consolidated financial statements.
F-3
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
June 30
----------------------
2000 1999
---------- ----------
(In millions)
ASSETS
Current Assets
Cash and cash equivalents ......................................................... $ 320.3 $ 347.5
Accounts receivable, net .......................................................... 550.2 533.7
Inventory and promotional merchandise, net ........................................ 546.3 513.0
Prepaid expenses and other current assets ......................................... 201.7 176.0
---------- ----------
Total current assets .......................................................... 1,618.5 1,570.2
---------- ----------
Property, Plant and Equipment, net ................................................ 480.3 383.6
---------- ----------
Other Assets
Investments, at cost or market value .............................................. 61.4 35.5
Deferred taxes .................................................................... 48.9 63.6
Goodwill, net ..................................................................... 708.1 557.9
Other intangible assets, net ...................................................... 31.1 50.6
Other assets, net ................................................................. 95.0 85.3
---------- ----------
Total other assets ............................................................ 944.5 792.9
---------- ----------
Total assets ........................................................... $ 3,043.3 $ 2,746.7
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt ................................................................... $ 7.0 $ 6.6
Accounts payable .................................................................. 236.5 223.1
Accrued income taxes .............................................................. 84.2 87.6
Other accrued liabilities ......................................................... 574.1 544.9
---------- ----------
Total current liabilities ..................................................... 901.8 862.2
---------- ----------
Noncurrent Liabilities
Long-term debt .................................................................... 418.4 422.5
Other noncurrent liabilities ...................................................... 202.8 177.5
---------- ----------
Total noncurrent liabilities .................................................. 621.2 600.0
---------- ----------
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: 125,058,658 in 2000 and 123,936,464 in 1999; 240,000,000 shares
Class B authorized; shares issued and outstanding: 113,679,334 in 2000 and 1999 2.4 2.4
Paid-in capital ................................................................... 237.1 211.6
Retained earnings ................................................................. 1,008.6 766.2
Accumulated other comprehensive income ............................................ (57.1) (44.3)
---------- ----------
1,191.0 935.9
Less: Treasury stock, at cost; 876,980 Class A shares at June 30, 2000 and
455,306 at June 30, 1999 ...................................................... (30.7) (11.4)
---------- ----------
Total stockholders' equity .................................................... 1,160.3 924.5
---------- ----------
Total liabilities and stockholders' equity ............................. $ 3,043.3 $ 2,746.7
========== ==========
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
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
(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 ...................... 211.6 168.6 164.1
Stock compensation programs ............................. 25.5 43.0 4.5
----------- ----------- -----------
Paid-in capital, end of year ............................ 237.1 211.6 168.6
----------- ----------- -----------
Retained earnings, beginning of year .................... 766.2 559.6 386.4
Preferred stock dividends ............................... (23.4) (23.4) (23.4)
Common stock dividends .................................. (47.5) (42.0) (40.2)
Issuance of treasury stock .............................. (0.8) (0.9) --
Net earnings for the year ............................... 314.1 272.9 236.8
----------- ----------- -----------
Retained earnings, end of year .......................... 1,008.6 766.2 559.6
----------- ----------- -----------
Accumulated other comprehensive income, beginning of year (44.3) (34.2) (5.2)
Other comprehensive income .............................. (12.8) (10.1) (29.0)
----------- ----------- -----------
Accumulated other comprehensive income, end of year ..... (57.1) (44.3) (34.2)
----------- ----------- -----------
Treasury stock, beginning of year ....................... (11.4) -- --
Acquisition of treasury stock ........................... (23.6) (12.7) --
Issuance of treasury stock .............................. 4.3 1.3 --
----------- ----------- -----------
Treasury stock, end of year ............................. (30.7) (11.4) --
----------- ----------- -----------
Total stockholders' equity .......................... $ 1,160.3 $ 924.5 $ 696.4
=========== =========== ===========
COMPREHENSIVE INCOME
Net earnings ............................................ $ 314.1 $ 272.9 $ 236.8
----------- ----------- -----------
Other comprehensive income:
Net unrealized investment gains ..................... 7.8 0.3 2.9
Translation adjustments ............................. (20.6) (10.4) (31.9)
----------- ----------- -----------
Other comprehensive income .......................... (12.8) (10.1) (29.0)
----------- ----------- -----------
Total comprehensive income .......................... $ 301.3 $ 262.8 $ 207.8
=========== =========== ===========
See notes to consolidated financial statements.
F-5
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30
----------------------------------
2000 1999 1998
-------- -------- --------
(In millions)
Cash Flows from Operating Activities
Net earnings ...................................................... $ 314.1 $ 272.9 $ 236.8
Adjustments to reconcile net earnings to net cash flows provided by
operating activities:
Depreciation and amortization .............................. 129.1 99.6 79.8
Amortization of purchased royalty rights ................... 17.7 17.7 17.7
Deferred income taxes ...................................... (5.5) (4.2) (12.2)
Minority interest .......................................... -- -- 4.9
Non-cash stock compensation ................................ 1.7 8.3 --
Changes in operating assets and liabilities:
Increase in accounts receivable, net ....................... (24.4) (38.0) (31.9)
Increase in inventory and promotional merchandise, net ..... (31.3) -- (71.8)
Increase in other assets ................................... (39.8) (39.9) (72.4)
Increase in accounts payable ............................... 12.2 14.0 40.7
Increase in accrued income taxes ........................... 10.9 21.2 25.0
Increase in other accrued liabilities ...................... 35.1 7.8 17.6
Increase (decrease) in other noncurrent liabilities ........ 22.7 (7.1) 24.0
-------- -------- --------
Net cash flows provided by operating activities .......... 442.5 352.3 258.2
-------- -------- --------
Cash Flows from Investing Activities
Capital expenditures .............................................. (180.9) (117.9) (120.6)
Acquisition of businesses, net of acquired cash ................... (180.5) (75.0) (459.9)
Purchases of long-term investments ................................ (15.9) (8.4) (1.8)
Proceeds from disposition of long-term investments ................ 3.0 1.0 5.1
-------- -------- --------
Net cash flows used for investing activities ............. (374.3) (200.3) (577.2)
-------- -------- --------
Cash Flows from Financing Activities
Decrease in short-term debt, net .................................. (0.6) (5.8) (10.7)
Proceeds from long-term debt ...................................... -- 205.2 431.2
Repayments of long-term debt ...................................... (6.8) (210.9) (21.9)
Net proceeds from employee stock transactions ..................... 14.0 14.6 0.2
Payments to acquire treasury stock ................................ (23.6) (12.7) --
Dividends paid .................................................... (70.9) (63.6) (53.6)
-------- -------- --------
Net cash flows (used for) provided by
financing activities .................................. (87.9) (73.2) 345.2
-------- -------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents .......... (7.5) (8.8) (4.3)
-------- -------- --------
Net (Decrease) Increase in Cash and Cash Equivalents .............. (27.2) 70.0 21.9
Cash and Cash Equivalents at Beginning of Year .................... 347.5 277.5 255.6
-------- -------- --------
Cash and Cash Equivalents at End of Year .......................... $ 320.3 $ 347.5 $ 277.5
======== ======== ========
Supplemental disclosures of cash flow information (see also Note 17)
Cash paid during the year for:
Interest ................................................... $ 29.2 $ 31.2 $ 13.0
======== ======== ========
Income Taxes ............................................... $ 163.8 $ 157.3 $ 145.5
======== ======== ========
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 essentials, 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 and Donna Karan 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
-------------------------------------
2000 1999 1998
--------- --------- ---------
(In millions, except per share data)
Numerator:
Net earnings ....................................... $ 314.1 $ 272.9 $ 236.8
Preferred stock dividends .......................... (23.4) (23.4) (23.4)
--------- --------- ---------
Net earnings attributable to common stock .......... $ 290.7 $ 249.5 $ 213.4
========= ========= =========
Denominator:
Weighted average common shares outstanding - Basic . 237.7 237.0 236.8
Effect of dilutive securities: Stock options ....... 4.8 4.2 2.7
--------- --------- ---------
Weighted average common shares outstanding - Diluted 242.5 241.2 239.5
========= ========= =========
Net earnings per common share:
Basic .............................................. $ 1.22 $ 1.05 $ .90
========= ========= =========
Diluted ............................................ $ 1.20 $ 1.03 $ .89
========= ========= =========
F-7
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Split
These consolidated financial statements have been restated to reflect the
effects of a two-for-one common stock split declared April 26, 1999 and
distributed on June 2, 1999 to stockholders of record on May 10, 1999.
Cash and Cash Equivalents
Cash and cash equivalents include $169.8 million and $208.5 million of
short-term time deposits at June 30, 2000 and 1999, 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
retail customer deductions of $31.7 million and $36.0 million as of June 30,
2000 and 1999, 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 $20.6 million and $10.4
million of unrealized translation losses in fiscal 2000 and 1999, 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 on a straight-line basis over the option period being
hedged.
The accompanying consolidated statements of earnings include net exchange losses
of $4.3 million and $1.8 million in fiscal 2000 and 1999, respectively and gains
of $9.1 million in fiscal 1998, see Note 9.
Inventory and Promotional Merchandise
Inventory and promotional merchandise only include inventory considered saleable
or usable in future periods, and are stated at the lower of cost or market, with
cost being determined on the first-in, first-out method. Promotional merchandise
is charged to expense at the time the merchandise is shipped to the Company's
customers.
June 30
---------------------
2000 1999
-------- --------
(In millions)
Inventory and promotional merchandise consists of:
Raw materials .................................... $ 140.9 $ 128.3
Work in process .................................. 21.5 22.6
Finished goods ................................... 271.2 238.7
Promotional merchandise .......................... 112.7 123.4
-------- --------
$ 546.3 $ 513.0
======== ========
F-8
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation
and amortization. For financial statement purposes, depreciation is provided
principally on the straight-line method over the estimated useful lives of the
assets ranging from 3 to 40 years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lives of the respective leases or
the expected useful lives of those improvements.
June 30
----------------------
2000 1999
-------- --------
(In millions)
Land ............................................... $ 13.0 $ 13.0
Buildings and improvements ......................... 134.9 129.9
Machinery and equipment ............................ 490.1 432.0
Furniture and fixtures ............................. 95.8 71.7
Leasehold improvements ............................. 240.4 153.2
-------- --------
974.2 799.8
Less accumulated depreciation and amortization ..... 493.9 416.2
-------- --------
$ 480.3 $ 383.6
======== ========
Depreciation and amortization of property, plant and equipment was $90.3
million, $68.5 million and $56.8 million in fiscal 2000, 1999 and 1998,
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 $42.8 million and $25.2
million at June 30, 2000 and 1999, respectively.
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 $90.8 million and $70.1 million at June 30,
2000 and 1999, respectively.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("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 included in the
accompanying consolidated balance sheets consist of the following:
Year Ended June 30
-------------------------------
2000 1999 1998
------- ------- -------
(In millions)
Net unrealized investment gains, beginning of year .. $ 6.1 $ 5.8 $ 2.9
Unrealized investment gains ......................... 13.0 0.5 4.8
Deferred tax expense ................................ (5.2) (0.2) (1.9)
------- ------- -------
Net unrealized investment gains, end of year ........ 13.9 6.1 5.8
------- ------- -------
Cumulative translation adjustments, beginning of year (50.4) (40.0) (8.1)
Translation adjustments ............................. (20.6) (10.4) (31.9)
------- ------- -------
Cumulative translation adjustments, end of year ..... (71.0) (50.4) (40.0)
------- ------- -------
Accumulated other comprehensive income .............. ($ 57.1) ($ 44.3) ($ 34.2)
======= ======= =======
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.
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
$1,195.8 million, $1,100.8 million and $1,027.8 million in fiscal 2000, 1999 and
1998, respectively.
Research and Development
Research and development costs, which amounted to $53.8 million, $48.0 million
and $43.5 million in fiscal 2000, 1999 and 1998, 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 $15.5 million, $14.9 million and
$14.1 million in fiscal 2000, 1999 and 1998, respectively, have been charged to
income. Such payments are 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 amount is being amortized over a five-year
period. In fiscal 2000, 1999 and 1998, $17.7 million was amortized as a charge
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.
F-10
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 fiscal 2000, 1999 and 1998, a department store group accounted for 11%, 11%
and 12% of the Company's net sales, respectively. In those same years, another
department store group accounted for 10%, 11% and 10%, respectively.
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses
reported in those financial statements. Actual results could differ from those
estimates and assumptions.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for the
Company's fiscal quarter beginning July 1, 2000 (date of transition) and will
not require retroactive restatement of prior period financial statements. This
statement requires the recognition of all derivative instruments as either
assets or liabilities in the statement of financial position measured at fair
value. Generally, increases or decreases in the fair value of derivative
instruments will be recognized as gains or losses in earnings in the period of
change. If certain conditions are met, where the derivative instrument has been
designated as a fair value hedge, the hedged item may also be marked to market
through earnings thus creating an offset. If the derivative is designated and
qualifies as a cash flow hedge, the changes in fair value of the derivative
instrument may be recorded on the balance sheet as other comprehensive income.
The Company principally hedges against these exposures using forward exchange
contracts, foreign currency options and interest rate swaps and options. These
contracts have been designated as hedges of anticipated future cash flows and,
accordingly, will be marked to market through other comprehensive income
(balance sheet adjustments) until such time as the related forecasted
transactions affect earnings.
In accordance with SFAS No. 133, certain costs may be accelerated and charged to
earnings. Under this new guidance, the time-value component of a derivative's
fair value is charged to earnings based upon the change in its relative
proportion to the contract's total value. To reflect the change in time-value
from the date of the contracts' inception through the date of transition the
Company will record an earnings charge of $2.2 million, after tax, in the fiscal
2001 first quarter consolidated statement of earnings. This charge will be
reflected as the cumulative effect of a change in accounting principle.
Additionally, on the date of transition, a comparable amount of deferred
unrealized gains on these instruments will be recorded in accumulated other
comprehensive income.
F-11
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2000, the Emerging Issues Task Force (the "EITF") reached a 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. If the EITF's consensus is unchanged, Issue No. 00-14 will
become effective in the fourth quarter of the fiscal year beginning after
December 15, 1999, and would be applied retroactively for purposes of
comparability. Therefore, beginning in the fourth quarter of fiscal 2001, the
Company may be required to reclassify certain revenues and expenses related to
the Company's promotional programs out of operating expenses and into sales and
cost of sales. The Company has not yet fully quantified the reclassification,
although, by its nature a reclassification will not affect operating income or
net earnings.
NOTE 3 -- PUBLIC OFFERINGS
During May and June 2000, members of the Lauder family sold 8,482,000 shares of
Class A Common Stock. 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. The Company did not receive any proceeds from the sale of
these shares.
During June 1998, members of the Lauder family sold 9,271,300 shares of Class A
Common Stock. The Company did not receive any proceeds from the sale of these
shares.
NOTE 4 -- ACQUISITION OF BUSINESSES
At various times during fiscal 2000, the Company acquired businesses engaged in
the 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 five 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 $186.6 million and each transaction was accounted for
using the purchase method of accounting. Accordingly, the results of operations
are included in the accompanying consolidated financial statements since the
dates of original acquisition. Pro forma results of operations as if the
acquired businesses had been completed as of the beginning of the year of
acquisition have not been presented, as the impact on the Company's results of
operations would not have been material.
In February 1998, the Company exercised its right to acquire the remaining
equity interest in M.A.C for cash.
In December 1997, the Company acquired, for cash, the business of Aveda and
certain of its affiliates ("Aveda"), a manufacturer and marketer of plant-based
hair, skin, makeup and body care products. The purchase of Aveda was financed
with proceeds received from borrowings.
F-12
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 1997, the Company acquired Sassaby, Inc. ("Sassaby"), the marketer
and distributor of jane cosmetics for young consumers, for cash and the
assumption of employee stock options. The stock options were valued as of the
date of acquisition and accounted for as part of the consideration given.
NOTE 5 -- SHORT-TERM DEBT
Short-term debt consists of the following:
June 30
----------------------
2000 1999
------ ------
(In millions)
Current portion of long-term debt ....... $ 6.7 $ 5.8
Other notes payable ..................... 0.3 0.8
------ ------
$ 7.0 $ 6.6
====== ======
The Company uses commercial paper and uncommitted lines of credit for short-term
financing requirements. As of June 30, 2000 and 1999, the Company had $603.7
million and $764.1 million, respectively, available under these facilities, of
which $603.7 million and $763.3 million was unused, respectively. The Company
maintains 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 2000 and 1999, the
monthly average amount outstanding was approximately $32.3 million and $12.4
million, respectively, and the annualized monthly weighted average interest rate
incurred was approximately 5.4% and 7.5%, respectively. The lower interest rate
in fiscal 2000 represents borrowings primarily in the United States.
In July 1996, the Company entered into a five-year $400.0 million committed
revolving credit facility, which includes an annual fee of .06% on the total
commitment. At June 30, 2000 and 1999, the Company was in compliance with all
related financial and other restrictive covenants, including limitations on
indebtedness and liens.
NOTE 6 -- INCOME TAXES
The provision for income taxes is comprised of the following:
Year Ended June 30
----------------------------------------
2000 1999 1998
-------- -------- --------
(In millions)
Current:
Federal ................... $ 93.9 $ 88.6 $ 97.7
Foreign ................... 82.4 68.8 60.3
State and local ........... 13.8 14.1 15.3
-------- -------- --------
190.1 171.5 173.3
-------- -------- --------
Deferred:
Federal ................... (0.2) (4.3) (12.9)
Foreign ................... (4.1) 0.9 1.8
State and local ........... (1.2) (0.8) (1.1)
-------- -------- --------
(5.5) (4.2) (12.2)
-------- -------- --------
$ 184.6 $ 167.3 $ 161.1
======== ======== ========
F-13
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
------------------------------------
2000 1999 1998
-------- -------- --------
(In millions)
Provision for income taxes at
statutory rate ........................... $ 174.5 $ 154.1 $ 141.0
Increase (decrease) due to:
State and local income taxes, net of
federal tax benefit ................. 8.2 8.6 9.2
Effect of foreign operations .......... (11.7) (4.1) (2.7)
Domestic royalty expense not
deductible for U.S. tax purposes .... 4.0 4.0 4.0
Other nondeductible expenses .......... 3.8 2.0 5.9
Other, net ............................ 5.8 2.7 3.7
-------- -------- --------
Provision for income taxes ................. $ 184.6 $ 167.3 $ 161.1
======== ======== ========
Effective tax rate ......................... 37.0% 38.0% 40.0%
======== ======== ========
Significant components of the Company's deferred income tax assets and
liabilities as of June 30, 2000 and 1999 were as follows:
2000 1999
-------- --------
(In millions)
Deferred tax assets:
Deferred compensation and other payroll related expenses ... $ 44.2 $ 45.0
Inventory obsolescence and other inventory related reserves 54.8 46.5
Pension plan reserves ...................................... 13.1 20.5
Postretirement benefit obligations ......................... 19.7 17.9
Various accruals not currently deductible .................. 50.1 40.3
Net operating loss carryforwards ........................... 5.6 6.9
Other differences between tax and financial statement values 7.2 7.4
-------- --------
194.7 184.5
Valuation allowance for deferred tax assets ................ (5.6) (6.9)
-------- --------
Total deferred tax assets ............................... 189.1 177.6
-------- --------
Deferred tax liabilities:
Depreciation ............................................... (36.4) (27.2)
Domestic royalty expense ................................... (1.1) (4.3)
Other differences between tax and financial statement values (9.2) (4.0)
-------- --------
Total deferred tax liabilities .......................... (46.7) (35.5)
-------- --------
Total net deferred tax assets ....................... $ 142.4 $ 142.1
======== ========
F-14
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2000 and 1999, the Company had current net deferred tax assets of
$93.5 million and $78.5 million, which are included in prepaid expenses and
other current assets in the accompanying consolidated balance sheets, and
noncurrent net deferred tax assets of $48.9 million and $63.6 million,
respectively.
Federal income and foreign withholding taxes have not been provided on $442.2
million, $412.0 million and $398.0 million of undistributed earnings of
international subsidiaries at June 30, 2000, 1999 and 1998, 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, 2000 and 1999, certain international subsidiaries had tax loss
carryforwards for local tax purposes of approximately $26.4 million and $24.3
million, respectively. With the exception of $8.9 million of losses with an
indefinite carryforward period as of June 30, 2000, these losses expire at
various dates through fiscal 2009. The gross deferred tax assets recognized in
connection with these tax loss carryforwards have been reduced to the extent to
which benefit has been taken. A full valuation allowance has been provided
against the remaining deferred tax assets relating to tax loss carryforwards.
Earnings before income taxes and minority interest include amounts contributed
by the Company's international operations of $281.2 million, $277.2 million and
$250.8 million for fiscal 2000, 1999 and 1998, respectively.
NOTE 7 -- OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
June 30
--------------------
2000 1999
-------- --------
(In millions)
Advertising and promotional accruals .................... $ 190.5 $ 186.9
Employee compensation ................................... 178.4 175.9
Other ................................................... 205.2 182.1
-------- --------
$ 574.1 $ 544.9
======== ========
NOTE 8 -- LONG-TERM DEBT
Long-term debt consists of the following:
June 30
--------------------
2000 1999
-------- --------
(In millions)
Commercial paper with an average interest rate of
6.68% and 5.17%, respectively .......................... $ 205.0 $ 205.2
Unsecured notes payable, due February 1, 2005, with
an effective interest rate of 6.28% and 6.69%,
respectively ........................................... 200.0 200.0
2% loan payable, due in installments through 2003 ....... 20.1 23.1
-------- --------
425.1 428.3
Less current maturities ................................. 6.7 5.8
-------- --------
$ 418.4 $ 422.5
======== ========
F-15
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial paper is classified as long-term debt based upon the Company's intent
and ability to refinance on a long-term basis.
During fiscal 1998, the Company entered into a 2% loan payable in Japan.
Principal repayments of 350 million yen, approximately $3.3 million at current
rates, will be made semi-annually through 2003.
NOTE 9 -- FINANCIAL INSTRUMENTS
Derivative Financial Instrument Risk
The Company selectively uses a combination of derivative financial instruments
to maintain the value-at-risk inherent in its foreign currency and interest rate
exposures within acceptable parameters, as determined by senior management. The
purpose of this approach is to reduce the Company's exposure to market risk
resulting from fluctuations in market rates. Derivative financial instruments
utilized by the Company include forward exchange contracts, foreign currency
options and interest rate swaps and options. Currency hedges are executed
centrally to facilitate the netting of offsetting exposures, to improve control
over the use of derivative financial instruments and to minimize transaction
costs. The Company does not hold or enter into derivative financial instruments
for trading or speculative purposes.
The Company has a policy of only entering into contracts with counterparties
that have at least an "A" (or equivalent) credit rating. The counterparties to
these contracts are major financial institutions and the Company does not have
significant exposure to any one counterparty. Management believes that risk of
loss is remote and in any event would be immaterial.
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 its identified exposures. Gains and losses related to qualifying
hedges of these exposures are deferred and recognized in operating income when
the underlying hedged transaction occurs. The Company has previously entered
into foreign currency options to hedge anticipated transactions where there is a
high probability that anticipated exposures will materialize. Any gains realized
on such options that qualify as hedges were deferred and recognized in operating
income when the underlying hedged transaction occurs. Foreign currency
transactions which do not qualify as hedges are marked to market on a current
basis with associated gains and losses reflected in operating income. In
addition, any previously deferred gains and losses on hedges which are
terminated prior to the transaction date are recognized in current income when
the hedge is terminated. The contracts have varying maturities with none
exceeding 24 months. Foreign currencies exchanged under these contracts are
principally the Euro, Japanese yen, Swiss franc and U.K. pound.
Deferred unrealized gains and losses from derivative financial instruments are
presented in the following table:
June 30
-----------------------------------------------------------------------------------
2000 1999
-------------------------------------- ---------------------------------------
Notional Notional
(In millions) Amounts Gains Losses Amounts Gains Losses
- ------------------------------------------------------------------------- ---------------------------------------
Forward exchange contracts $ 219.6 $ 1.3 $ 1.4 $ 191.5 $ 4.4 $ 2.3
Foreign currency options -- -- -- 57.2 0.1 --
- ---------------------------------------------------------------------------------------------------------------------
F-16
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest Rate Risk Management
The Company has entered into interest rate swaps to convert floating interest
rate debt to fixed rate debt. These swap agreements are contracts to exchange
floating rate for fixed rate interest payments periodically over the life of the
agreements. Amounts currently due to or from interest swap counterparties are
recorded in interest expense in the period in which they accrue. The related
amounts payable to, or receivable from, the counterparties are included in other
accrued liabilities. In February 2000 and April 2000, the Company terminated
$66.0 million and $67.0 million, respectively, of notional value of interest
rate swaps at a gain. In order to maintain interest rate protection, the Company
used a portion of the proceeds to purchase interest rate options set at the same
rate, and at the same aggregate notional value, as the previously terminated
interest rate swaps.
Deferred unrealized gains and losses from derivative financial instruments are
presented in the following table:
June 30
-----------------------------------------------------------------------------------
2000 1999
-------------------------------------- ---------------------------------------
Notional Notional
(In millions) Amounts Gains Losses Amounts Gains Losses
- ------------------------------------------------------------------------- ---------------------------------------
Interest rate swaps $ 67.0 $ 2.4 $ -- $ 200.0 $ -- $ 0.6
Interest rate options 133.0 2.6 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
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.
Foreign currency options and forward exchange contracts:
The fair value of foreign currency options and forward exchange
contracts is the estimated amount the Company would receive or pay to
terminate the agreements.
F-17
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
---------------------------------------------
2000 1999
-------------------- --------------------
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------
Nonderivatives
Cash and cash equivalents ..................................... $ 320.3 $ 320.3 $ 347.5 $ 347.5
Long-term debt, including current portion ..................... 425.1 421.0 428.3 427.3
Cumulative redeemable preferred stock ......................... 360.0 345.0 360.0 353.0
Derivatives
Foreign currency options ...................................... -- -- 1.5 1.6
Forward exchange contracts .................................... -- (0.1) -- 2.1
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, but is not
less than the minimum required by the Employee Retirement Income Security Act of
1974, as amended, and subsequent pension legislation ("ERISA") 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-18
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) 2000 1999 2000 1999 2000 1999
--------- --------- --------- ---------- -------- --------
Change in benefit obligation:
Benefit obligation at beginning of year ........ $ 229.6 $ 212.6 $ 125.3 $ 97.3 $ 36.9 $ 39.0
Service cost ................................ 10.8 9.4 8.6 7.0 1.9 1.8
Interest cost ............................... 16.9 14.6 6.3 5.5 2.8 2.3
Plan participant contributions .............. -- -- 1.0 2.2 0.1 0.2
Actuarial loss/(gain) ....................... 10.5 9.2 (0.8) 19.3 -- (5.2)
Foreign currency exchange rate impact ....... -- -- (1.8) -- -- --
Benefits paid ............................... (12.4) (17.0) (6.0) (7.7) (1.3) (1.2)
Plan amendments ............................. -- 0.8 -- 2.3 0.5 --
Other ....................................... 0.8 -- -- (0.6) 0.3 --
-------- --------- -------- --------- ------- --------
Benefit obligation at end of year .............. 256.2 229.6 132.6 125.3 41.2 36.9
-------- --------- -------- --------- ------- --------
Change in plan assets:
Fair value of plan assets at beginning of year . 153.7 128.2 102.0 98.9 -- --
Actual return on plan assets ................ 35.1 10.8 12.9 1.9 -- --
Foreign currency exchange rate impact ....... -- -- (1.2) 0.1 -- --
Employer contributions ...................... 15.7 31.7 9.0 6.9 1.3 1.0
Plan participant contributions .............. -- -- 1.0 2.2 0.1 0.2
Benefits paid from plan assets .............. (12.4) (17.0) (6.0) (7.7) (1.4) (1.2)
Other ....................................... -- -- -- (0.3) -- --
-------- -------- -------- --------- ------- --------
Fair value of plan assets at end of year ....... 192.1 153.7 117.7 102.0 -- --
-------- --------- -------- --------- ------- --------
Funded status .................................. (64.1) (75.9) (14.9) (23.3) (41.2) (36.9)
Unrecognized net actuarial loss/(gain) ......... 32.2 44.7 9.0 16.8 (5.9) (5.9)
Unrecognized prior service cost ................ 4.6 4.9 3.0 3.4 0.3 (0.2)
Unrecognized net transition (asset)/obligation . (4.4) (5.8) 1.2 1.3 -- --
-------- --------- -------- -------- ------- --------
Accrued benefit cost ........................... ($ 31.7) ($ 32.1) ($ 1.7) ($ 1.8) ($ 46.8) ($ 43.0)
======== ========= ======== ========= ====== ======
Amounts recognized in the Balance
Sheets consist of:
Prepaid benefit cost ........................ -- -- $ 21.1 $ 19.8 -- --
Accrued benefit liability ................... ($ 43.0) ($ 39.1) (23.1) (22.3) ($ 46.8) ($ 43.0)
Intangible asset ............................ 4.2 5.1 0.3 0.7 -- --
Other ....................................... 7.1 1.9 -- -- -- --
-------- --------- -------- --------- ------- --------
Net amount recognized ....................... ($ 31.7) ($ 32.1) ($ 1.7) ($ 1.8) ($ 46.8) ($ 43.0)
======== ========= ======== ========= ======= ========
F-19
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other than
Pension Plans Pension Plans
----------------------------------------------------------- ------------------------
U.S. International Postretirement
---------------------------- -------------------------- ------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------ ------ ------ ------ ------ ------ ------ ------ ------
Weighted-average assumptions
Pre-retirement discount rate 7.85% 7.50% 6.75% 3.0 - 3.0 - 3.0 - 7.85% 7.50% 6.75%
7.50% 7.50% 12.0%
Post-retirement discount rate 6.25% 6.50% 6.75% -- -- -- -- -- --
Expected return on assets 9.00% 9.00% 9.00% 5.00 - 3.75 - 3.75 - N/A N/A N/A
8.25% 8.25% 12.0%
Rate of compensation 5.50 - 5.50 - 4.75 - 2.0 - 2.0 - 2.0 - N/A N/A N/A
increase 12.00% 11.50% 10.75% 6.5% 6.5% 9.5%
Components of net periodic
benefit cost (In millions)
Service cost, net ............. $ 10.8 $ 9.4 $ 8.6 $ 8.6 $ 7.0 $ 5.6 $ 1.9 $ 1.8 $ 1.8
Interest cost ................. 16.9 14.6 13.6 6.3 5.5 5.2 2.8 2.3 2.7
Expected return on assets ..... (13.5) (11.6) (9.8) (6.6) (6.1) (5.3) -- -- --
Amortization of:
Transition (asset)/obligation (1.4) (1.4) (1.4) 0.3 0.3 0.2 -- -- --
Prior service cost ........... 0.4 0.3 0.3 0.3 0.1 0.1 -- -- --
Actuarial loss ............... 1.3 1.0 0.1 1.2 0.5 -- -- -- --
Other ........................ 0.8 -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net periodic benefit cost ..... $ 15.3 $ 12.3 $ 11.4 $ 10.1 $ 7.3 $ 5.8 $ 4.7 $ 4.1 $ 4.5
====== ====== ====== ====== ====== ====== ====== ====== ======
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 2000 would have the following effects:
One-Percentage-Point One-Percentage-Point
(In millions) Increase Decrease
-------------------- --------------------
Effect on total service and interest cost comparison $0.5 ($0.5)
---- -----
Effect on postretirement benefit obligation $3.9 ($3.9)
---- -----
F-20
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:
Other than
Pension Plans Pension Plans
------------------------------------- -----------------
U.S. International Postretirement
----------------- ----------------- -----------------
(In millions) 2000 1999 2000 1999 2000 1999
------- ------- ------- ------- ------- -------
Projected benefit obligation . $ 58.3 $ 46.2 $ 20.0 $ 23.8 -- --
Accumulated benefit obligation 42.2 33.6 16.0 19.4 -- --
Fair value of plan assets .... -- -- -- -- -- --
The unfunded Restoration Plan's accumulated benefit obligation was $42.2 million
and $33.6 million as of June 30, 2000 and 1999, respectively.
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 $5.8 million for the fiscal year
ended June 30, 2000 and $4.8 million and $4.6 million in fiscal 1999 and 1998,
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. The amounts included in the accompanying consolidated balance sheets
under these plans were $79.4 million and $77.0 million as of June 30, 2000 and
1999, respectively. The expense for fiscal 2000, 1999 and 1998 was $12.3
million, $15.3 million and $11.6 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. The cost of providing these
benefits was not material to the Company's consolidated financial position or
results of operations.
NOTE 12 -- $6.50 CUMULATIVE REDEEMABLE PREFERRED STOCK, AT REDEMPTION VALUE
As of June 30, 2000, 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 declared upon the Class A or
Class B Common Stock, or on any other capital stock ranking junior to or in
F-21
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 circumstances.
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, 2000, 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.
Information about the Company's common stock outstanding is as follows:
Class A Class B
--------- ---------
(Shares in thousands)
Balance at June 30, 1997 .................... 122,873.4 113,679.3
Share grants ................................ 1.3 --
Stock option programs ....................... 61.2 --
--------- ---------
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
========= =========
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 and the Fiscal
1996 Share Incentive Plan (collectively, the "Plans") and, additionally, has
made available stock options and share units that were, or will be, granted
pursuant to certain employment agreements. These stock-based compensation
programs are described below.
Total compensation expense attributable to the granting of share units and the
increase in value of existing share units was $1.6 million, $8.9 million and
$5.5 million in fiscal 2000, 1999 and 1998, respectively.
F-22
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share Incentive Plans
The Plans provide for the issuance of 18,450,000 shares to be awarded in the
form of stock options, stock appreciation rights and other stock awards to key
employees and non-employee directors of the Company. As of June 30, 2000,
4,204,300 shares of Class A Common Stock were reserved and are 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 6,252,300, 2,303,000 and 1,375,000
shares were granted in fiscal 2000, 1999 and 1998, respectively, and share units
in respect of 40,000 shares were granted in fiscal 1999. Generally, these awards
become exercisable at various times through January 2004.
In addition to awards made by the Company, certain outstanding stock options
were assumed as part of the October 1997 acquisition of Sassaby. These options
were converted into options to acquire an aggregate of approximately 221,200
shares of the Company's Class A Common Stock carrying an exercise price
corresponding to the value that existed in the Sassaby options. As of June 30,
2000, 31,700 of these options were outstanding, all of which were exercisable
and will expire through May 2007.
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 624,000 shares of its Class A
Common Stock pursuant to such agreements as of June 30, 2000. In accordance with
such employment agreements, stock option awards in respect of 1,650,000,
1,650,000 and 1,975,000 shares were granted in fiscal 2000, 1999 and 1998, and
approximately 33,700, 48,000 and 61,000 share units were granted in fiscal 2000,
1999 and 1998, 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, 2000, 1999 and
1998 and changes during the years then ended, is presented below:
2000 1999 1998
----------------------------- --------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------- --------------------------- --------------------------
Outstanding at beginning of year......... 15,439.1 $ 22.80 12,977.0 $ 18.20 9,467.0 $ 15.99
Granted at fair value................. 7,902.2 50.88 3,953.0 35.34 3,350.0 25.17
Assumed............................... - - - - 221.2 2.91
Exercised............................. (1,188.5) 15.28 (1,049.1) 13.94 (61.2) 3.51
Cancelled or Expired.................. (238.7) 41.06 (441.8) 20.83 - -
--------- --------- --------
Outstanding at end of year............... 21,914.1 33.14 15,439.1 22.80 12,977.0 18.20
========= ========= ========
Options exercisable at year-end.......... 4,252.4 18.86 1,191.8 13.24 61.8 3.84
========= ========= =========
Weighted-average fair value of
options granted during the year....... $ 20.14 $ 12.21 $ 8.81
========= ========= =========
Weighted-average fair value of
options assumed during the year....... $ - $ - $ 18.94
========= ========= =========
F-23
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
---------------------------------------------
2000 1999 1998
---------- ---------- ----------
(In millions, except per share data)
Net earnings............................................. As reported $ 314.1 $ 272.9 $ 236.8
Pro forma 216.5 246.2 219.1
Net earnings per common share - Basic.................... As reported $ 1.22 $ 1.05 $ .90
Pro forma .81 .94 .83
Net earnings per common share - Diluted.................. As reported $ 1.20 $ 1.03 $ .89
Pro forma .79 .92 .81
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
----------------------------------------------
2000 1999 1998
---------- -------- ---------
Expected volatility.............................. 30% 27% 26%
Average expected option life..................... 7 years 7 years 7 years
Average risk-free interest rate.................. 6.1% 5.3% 6.3%
Dividend yield................................... .50% .75% 1.0%
Summarized information about the Company's stock options outstanding and
exercisable at June 30, 2000 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 31.7 6.9 $ 3.04 31.7 $ 3.04
$13.00 to $20.813 4,308.7 5.4 13.06 2,399.6 13.04
$21.313 to $29.813 6,147.5 6.5 23.41 1,459.1 22.77
$31.875 to $47.625 4,547.2 8.5 37.13 228.4 37.01
$49.75 to $53.50 6,879.0 9.2 51.89 133.6 53.50
--------- --------
$2.065 to $53.50 21,914.1 33.14 4,252.4 18.86
========= ========
- ---------------------
(a) Shares in thousands.
(b) Weighted average contractual life remaining in years.
(c) Weighted average exercise price.
F-24
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to June 30, 2000, the Company granted options under the terms of the
Plans described above to purchase an additional 2,097,500 of the Company's Class
A Common Stock with an exercise price equal to fair market value on the date of
grant. In addition, the Company granted approximately 43,000 share units to a
key executive pursuant to the terms of the Fiscal 1999 Share Incentive Plan
subsequent to June 30, 2000.
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
Total rental expense included in the accompanying consolidated statements of
earnings was $100.7 million in fiscal 2000, $86.4 million in fiscal 1999 and
$79.6 million in fiscal 1998. At June 30, 2000, the future minimum rental
commitments under long-term operating leases are as follows:
Year Ending June 30 (In millions)
-------------------
2001........................... $ 76.7
2002........................... 71.1
2003........................... 63.3
2004........................... 55.8
2005........................... 47.3
Thereafter..................... 138.0
--------
$ 452.2
========
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. Pretrial motions and discovery are underway. 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 financial position.
In August 2000, an affiliate of Revlon, Inc. sued the Company and two of its
subsidiaries in the U.S. District Court, Southern District of New York, for
alleged patent infringement and related claims. Revlon claims that four Estee
Lauder foundations and one Origins foundation infringe its patent, and is
seeking, among other things, treble damages, punitive damages, equitable relief,
and attorneys' fees. At this time, no discovery has commenced. The Company and
its subsidiaries will vigorously defend themselves. 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 financial position.
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 results of operations or financial condition.
F-25
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
$13.9 million and $6.1 million at June 30, 2000 and 1999, 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
$13.4 million and $11.8 million during fiscal 2000 and 1999, respectively.
Consideration for the October 1997 acquisition of Sassaby included $4.3 million
representing the value of stock options assumed. Such amount was calculated as
the aggregate difference between the exercise prices of the options and the fair
market value of the Sassaby stock on the date of acquisition.
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-26
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended or at June 30
------------------------------------------------
2000 1999 1998
---------- ---------- ---------
(In millions)
SEGMENT DATA
Net Sales:
Skin Care...................................................... $ 1,552.4 $ 1,398.8 $ 1,248.3
Makeup......................................................... 1,579.5 1,412.8 1,317.7
Fragrance...................................................... 1,092.3 1,048.6 987.6
Hair Care...................................................... 113.9 82.4 52.4
Other.......................................................... 28.7 18.9 12.0
---------- ---------- ---------
$ 4,366.8 $ 3,961.5 $ 3,618.0
========== ========== =========
Depreciation and Amortization:
Skin Care...................................................... $ 39.4 $ 29.9 $ 23.7
Makeup......................................................... 52.7 39.2 32.4
Fragrance...................................................... 28.8 23.9 19.6
Hair Care...................................................... 6.9 5.6 3.4
Other.......................................................... 1.3 1.0 0.7
---------- ---------- ---------
$ 129.1 $ 99.6 $ 79.8
========== ========== =========
Operating Income:
Skin Care...................................................... $ 240.5 $ 205.9 $ 174.3
Makeup......................................................... 181.8 158.2 151.8
Fragrance...................................................... 80.6 79.7 75.5
Hair Care...................................................... 12.4 11.4 8.0
Other.......................................................... 0.5 1.7 (0.5)
---------- ---------- ---------
515.8 456.9 409.1
Reconciliation:
Interest expense, net.......................................... (17.1) (16.7) (6.3)
---------- ---------- ---------
Earnings before Income Taxes and Minority Interest................ $ 498.7 $ 440.2 $ 402.8
========== ========== =========
GEOGRAPHIC DATA
Net Sales:
The Americas................................................... $ 2,658.8 $ 2,397.9 $ 2,204.7
Europe, the Middle East & Africa............................... 1,131.0 1,082.4 960.8
Asia/Pacific................................................... 577.0 481.2 452.5
---------- ---------- ---------
$ 4,366.8 $ 3,961.5 $ 3,618.0
========== ========== =========
Operating Income:
The Americas................................................... $ 287.9 $ 265.0 $ 248.0
Europe, the Middle East & Africa............................... 168.9 145.5 131.3
Asia/Pacific................................................... 59.0 46.4 29.8
---------- ---------- ---------
$ 515.8 $ 456.9 $ 409.1
========== ========== =========
Total Assets:
The Americas................................................... $ 2,187.8 $ 1,954.1 $ 1,803.9
Europe, the Middle East & Africa............................... 606.8 587.9 541.2
Asia/Pacific................................................... 248.7 204.7 167.7
---------- ---------- ---------
$ 3,043.3 $ 2,746.7 $ 2,512.8
========== ========== =========
Long-Lived Assets (property, plant and equipment):
The Americas................................................... $ 393.6 $ 304.4 $ 256.2
Europe, the Middle East & Africa............................... 72.6 69.5 71.0
Asia/Pacific................................................... 14.1 9.7 8.6
---------- ---------- ---------
$ 480.3 $ 383.6 $ 335.8
========== ========== =========
F-27
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 -- UNAUDITED QUARTERLY FINANCIAL DATA
The following summarizes the unaudited quarterly operating results of the
Company for the years ended June 30, 2000 and 1999:
Quarter Ended
-----------------------------------------------------------------------
September 30 December 31 March 31 June 30 Total Year
------------ ----------- -------- ------- ----------
(In millions, except per share data)
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
Fiscal 1999
Net sales..................... $ 997.0 $ 1,091.0 $ 964.8 $ 908.7 $ 3,961.5
Gross profit.................. 767.4 841.2 748.7 704.3 3,061.6
Operating income.............. 121.6 161.8 90.3 83.2 456.9
Net earnings.................. 71.6 97.3 53.6 50.4 272.9
Basic EPS..................... .28 .39 .20 .19 1.05
Diluted EPS................... .27 .38 .20 .18 1.03
F-28
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, 2000. 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.
New York, New York Arthur Andersen LLP
August 10, 2000
S-1
THE ESTEE LAUDER COMPANIES INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended June 30, 2000
(In millions)
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
-------------------------
(2)
(1) Charged to
Balance Charged to Other Balance
at Beginning Costs and Accounts - Deductions -- at End of
Description of Period Expenses Describe Describe Period
- ------------------------------------------------------------------------------------------------------------------------------------
Reserves deducted in the balance sheet
From the assets to which they apply:
Allowance for doubtful accounts:
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
====== ====== ====== =======
Year ended June 30, 1998 $ 36.4 $ 25.4 --- $ 18.2(a) $ 43.6
====== ====== ====== =======
- ----------------
(a) Includes amounts written-off, net of recoveries.
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.
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).*
10.3 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) 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 FY1999 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
10.8 to the S-1).* +
10.10 Employment Agreement with Fred H. Langhammer. +
10.11 Employment Agreement with Daniel J. Brestle (filed as Exhibit
10.1 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998).* +
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 (filed as Exhibit 10.1 to the FY 1997 Q2
10-Q).* +
10.15 Form of Deferred Compensation Agreement (stock-based) with
Outside Directors. +
21.1 List of significant subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
- ----------
* Incorporated herein by reference.
+ Exhibit is a management contract or compensatory plan or arrangement.