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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
______________________
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934
Commission file number 1-14064
The Estee Lauder Companies Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-2408943
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
767 Fifth Avenue, New York, New York 10153
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-572-4200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At April 23, 2003, 122,155,958 shares of the registrant's Class A Common
Stock, $.01 par value, and 108,412,533 shares of the registrant's Class B
Common Stock, $.01 par value, were outstanding.
THE ESTEE LAUDER COMPANIES INC.
Index
Page
Part I. Financial Information
Consolidated Statements of Earnings --
Three Months and Nine Months Ended March 31, 2003 and 2002........ 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 3
Consolidated Balance Sheets --
March 31, 2003 and June 30, 2002.................................. 14
Consolidated Statements of Cash Flows --
Nine Months Ended March 31, 2003 and 2002......................... 15
Notes to Consolidated Financial Statements........................... 16
Controls and Procedures.............................................. 22
Part II. Other Information............................................. 23
THE ESTEE LAUDER COMPANIES INC.
PART I. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
(In millions, except per share data)
Net Sales........................................................ $1,239.4 $1,121.7 $3,894.6 $3,614.7
Cost of sales.................................................... 316.6 318.3 1,045.1 1,006.9
-------- -------- -------- --------
Gross Profit..................................................... 922.8 803.4 2,849.5 2,607.8
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative........................... 790.5 719.4 2,422.5 2,218.5
Related party royalties....................................... 4.5 2.9 14.8 11.8
-------- -------- -------- --------
795.0 722.3 2,437.3 2,230.3
-------- -------- -------- --------
Operating Income................................................. 127.8 81.1 412.2 377.5
Interest expense, net............................................ 1.9 2.6 7.0 8.3
-------- -------- -------- --------
Earnings before Income Taxes, Minority Interest
and Accounting Change........................................... 125.9 78.5 405.2 369.2
Provision for income taxes....................................... 41.0 27.1 134.5 127.4
Minority interest, net of tax.................................... (1.1) (0.7) (3.9) (3.9)
-------- -------- -------- --------
Net Earnings before Accounting Change............................ 83.8 50.7 266.8 237.9
Cumulative effect of a change in accounting principle............ - - - (20.6)
-------- -------- -------- --------
Net Earnings .................................................... 83.8 50.7 266.8 217.3
Preferred stock dividends........................................ 5.9 5.9 17.6 17.6
-------- -------- -------- --------
Net Earnings Attributable to Common Stock........................ $ 77.9 $ 44.8 $ 249.2 $ 199.7
======== ======== ======== ========
Basic net earnings per common share:
Net earnings attributable to common stock before
accounting change.......................................... $ .34 $ .19 $ 1.07 $ .93
Cumulative effect of a change in accounting principle....... - - - (.09)
-------- -------- -------- --------
Net earnings attributable to common stock................... $ .34 $ .19 $ 1.07 $ .84
======== ======== ======== ========
Diluted net earnings per common share:
Net earnings attributable to common stock before
accounting change.......................................... $ .33 $ .19 $ 1.06 $ .92
Cumulative effect of a change in accounting principle....... - - - (.09)
-------- -------- -------- --------
Net earnings attributable to common stock................... $ .33 $ .19 $ 1.06 $ .83
======== ======== ======== ========
Weighted average common shares outstanding:
Basic....................................................... 232.1 237.9 233.5 238.3
Diluted..................................................... 234.0 240.4 235.5 241.1
Cash dividends declared per common share......................... $ - $ .05 $ .20 $ .15
See notes to consolidated financial statements.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results Of Operations
We manufacture, market and sell beauty products including those in the skin
care, makeup, fragrance and hair care categories which are distributed in over
130 countries and territories. The following is a comparative summary of
operating results for the three and nine months ended March 31, 2003 and 2002,
and reflects the basis of presentation described in Note 1 to the consolidated
financial statements for all periods presented. Sales of products and services
that do not meet our definition of skin care, makeup, fragrance or hair care
have been included in the "other" category.
Three Months Ended Nine Months Ended
March 31 March 31
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
(In millions)
Net Sales
By Region:
The Americas............................................... $ 721.5 $ 696.5 $2,292.7 $2,218.2
Europe, the Middle East & Africa........................... 361.5 291.3 1,104.0 933.4
Asia/Pacific............................................... 156.4 133.9 497.9 463.1
-------- -------- -------- --------
$1,239.4 $1,121.7 $3,894.6 $3,614.7
======== ======== ======== ========
By Product Category:
Skin Care.................................................. $ 507.8 $ 438.4 $1,408.6 $1,279.3
Makeup..................................................... 491.4 470.5 1,436.2 1,348.5
Fragrance.................................................. 181.6 156.5 864.4 812.3
Hair Care.................................................. 53.2 49.6 163.8 158.0
Other...................................................... 5.4 6.7 21.6 16.6
-------- -------- -------- --------
$1,239.4 $1,121.7 $3,894.6 $3,614.7
======== ======== ======== ========
Operating Income
By Region:
The Americas............................................... $ 76.9 $ 37.7 $ 212.9 $ 202.6
Europe, the Middle East & Africa........................... 44.7 37.3 162.7 129.9
Asia/Pacific............................................... 6.2 6.1 36.6 45.0
-------- -------- -------- --------
$ 127.8 $ 81.1 $ 412.2 $ 377.5
======== ======== ======== ========
By Product Category:
Skin Care.................................................. $ 74.4 $ 58.9 $ 204.8 $ 202.8
Makeup..................................................... 59.5 41.5 154.6 140.7
Fragrance.................................................. (7.6) (20.9) 42.4 21.6
Hair Care.................................................. 1.8 0.6 10.4 12.3
Other...................................................... (0.3) 1.0 - 0.1
-------- -------- -------- --------
$ 127.8 $ 81.1 $ 412.2 $ 377.5
======== ======== ======== ========
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents certain consolidated earnings data as a percentage of net sales:
Three Months Ended Nine Months Ended
March 31 March 31
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales........................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................................... 25.6 28.4 26.8 27.9
---- ---- ---- ----
Gross profit..................................................... 74.4 71.6 73.2 72.1
---- ---- ---- ----
Operating expenses
Selling, general and administrative........................... 63.7 64.1 62.2 61.4
Related party royalties....................................... 0.4 0.3 0.4 0.3
---- ---- ---- ----
64.1 64.4 62.6 61.7
---- ---- ---- ----
Operating income................................................. 10.3 7.2 10.6 10.4
Interest expense, net............................................ 0.2 0.2 0.2 0.2
---- ---- ---- ----
Earnings before income taxes, minority interest and accounting
change........................................................ 10.1 7.0 10.4 10.2
Provision for income taxes....................................... 3.3 2.4 3.5 3.5
Minority interest, net of tax.................................... (0.1) (0.1) (0.1) (0.1)
---- ---- ---- ----
Net earnings before accounting change............................ 6.7 4.5 6.8 6.6
Cumulative effect of a change in accounting principle............ - - - (0.6)
---- ---- ---- ----
Net earnings..................................................... 6.7% 4.5% 6.8% 6.0%
==== ==== ==== ====
Third Quarter Fiscal 2003 as Compared with Third Quarter Fiscal 2002
Net Sales
Net sales increased 10% or $117.7 million to $1,239.4 million reflecting growth
in all major product categories and geographic regions. The increase is
partially due to new and recent product launches coupled with solid sales from
our core products. Geographically, net sales in Europe, the Middle East &
Africa were led by double-digit growth from the continued recovery of our travel
retail business as well as a double-digit increase in the United Kingdom.
Results also benefited from the favorable comparison to the prior-year period
which was adversely affected by the events of September 11, 2001 and, to a
lesser extent, by the inventory contraction by U.S. retailers. Net sales in the
current quarter were positively impacted by the weakening of the U.S. dollar.
Excluding the impact of foreign currency translation, net sales increased 5%.
We expect that uncertainties associated with current international events,
including the lingering effects of the war in Iraq and the concerns associated
with severe acute respiratory syndrome ("SARS"), which began toward the end
of our fiscal third quarter, will adversely affect our future sales and
earnings.
Product Categories
Skin Care
Net sales of skin care products increased 16% or $69.4 million to $507.8
million. This increase in net sales was primarily attributable to the recent
launches of Perfectionist Correcting Serum for Lines and Wrinkles and the
Repairwear line of products. Additionally, the increase was supported by strong
sales of Advanced Stop Signs, Resilience Lift OverNight Face and Throat Creme
and A Perfect World Face and Body products. Partially offsetting this increase
were lower net sales of certain existing products such as Advanced Night Repair
Eye Recovery Complex, Stop Signs and Moisture Surge Extra. Excluding the impact
of foreign currency translation, net sales increased 9%.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Makeup
Makeup net sales increased 4% or $20.9 million to $491.4 million. In
addition to strong sales of certain makeup artist lines, the increase in net
sales reflected the current period launch of MagnaScopic Mascara and Colour
Surge Lipstick. Recently launched products such as So Ingenious Multi-Dimension
Liquid Makeup and Loose Powder and Dewy Smooth Anti-Aging Makeup, as well as new
and existing products in the Pure Color line, also contributed to increased net
sales. Offsetting this increase were lower net sales of certain existing
products such as Illusionist Mascara, Color Intensity Microfine Powder Eye
Shadow and Incredible Lip Color. Excluding the impact of foreign currency
translation, makeup net sales increased 1%.
Fragrance
Net sales of fragrance products increased 16% or $25.1 million to $181.6
million. In this quarter, our business continued to recover from last
year's deterioration in the travel retail business, which is substantially
fragrance driven. The increase in net sales also reflects the recent launch of
Clinique Happy Heart, Estee Lauder pleasures intense, T girl and Intuition for
Men as well as strong sales of Beautiful, Estee Lauder pleasures and Donna Karan
Cashmere Mist. The increase was partially offset by lower net sales of certain
other Tommy Hilfiger licensed products, Clinique Happy, Aromatics Elixir and
Intuition. The importance of the travel retail business to this category makes
it more susceptible to the current international uncertainties resulting from
the lingering effects of the war in Iraq and the concerns associated with SARS.
Excluding the impact of foreign currency translation, fragrance net sales
increased 9%.
Hair Care
Hair care net sales increased 7% or $3.6 million to $53.2 million. This increase
was primarily the result of sales growth from Aveda and Bumble and bumble
products, partially offset by lower sales from Clinique's Simple Hair Care
System. Growth in Aveda products reflects the launch of the new Light Elements
line of products and the opening of new Aveda Environmental Lifestyle Stores
(now known as Aveda Experience Centers), and was partially offset by a strategic
reduction in the number of salons that offer Aveda products. Bumble and bumble
product sales reflect increased distribution and the positive influence of
product education offered to salons in our network.
The introduction of new products may have some cannibalizing effect on sales of
existing products, which we take into account in our business planning.
Geographic Regions
Net sales in the Americas increased 4% or $25.0 million to $721.5 million,
reflecting the success of our newer brands and new and recent product launches.
Despite the increase, we continue to see a soft retail environment in the United
States.
In Europe, the Middle East & Africa, net sales increased 24% or $70.2 million to
$361.5 million. This increase was primarily the result of significantly higher
net sales in our worldwide travel retail business, as sales continue to recover
from the levels experienced after September 11, 2001. However, our travel retail
business will be adversely affected by uncertainties associated with current
world events including the lingering effects of the war in Iraq and the concerns
associated with SARS. Net sales in the United Kingdom, Spain, Greece and South
Africa experienced double-digit growth. Excluding the impact of foreign currency
translation, Europe, the Middle East & Africa net sales increased 8%.
Net sales in Asia/Pacific increased 17% or $22.5 million to $156.4 million
primarily due to strong net sales in Korea, China, Thailand and Australia.
Although net sales in Japan increased as a result of the weakness of the US
dollar compared to the Yen, Japan remains a difficult market due to local
economic conditions and competition. Additionally, future Asia/Pacific results
will reflect the impact of concerns associated with SARS. Excluding the impact
of foreign currency translation, Asia/Pacific net sales increased 7%.
We strategically stagger our new product launches by geographic market, which
may contribute to differences in regional sales growth.
Cost of Sales
Cost of sales as a percentage of total net sales improved to 25.6% as compared
with 28.4% in the prior-year quarter reflecting production and supply chain
efficiencies, inventory control initiatives, benefits from changes in foreign
exchange rates and lower promotional activities.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We continued to emphasize sourcing initiatives and overall supply chain
management resulting in lower production costs, whereas in the comparable prior
year quarter we experienced under-absorption of overhead as a result of the
impact of the events of September 11, 2001. Improved inventory controls and
management also favorably impacted gross margins. Additionally, we benefited in
the current-year quarter from the positive impact foreign exchange rate changes
had on our material purchases.
The cost of purchase with purchase and gift with purchase merchandise as a
component of cost of sales resulted from our adoption of EITF Issue No. 01-9.
Since the cost of these promotional activities is a component of cost of sales
and the timing and level of promotions vary with our promotional calendar, we
have experienced, and expect to continue to experience, fluctuations in the cost
of sales percentage. The inclusion of promotional merchandise as a component of
cost of sales results in lower margins. A strategic shift to reduce these
activities has contributed to the improvement in our gross profit margin for the
period.
Operating Expenses
Operating expenses decreased to 64.1% of net sales as compared with 64.4% of net
sales in the prior-year quarter. The decrease reflects the higher growth rate in
sales, restructuring benefits and other cost containment efforts including
improvements in productivity and reductions in selling expenses and other
non-business building activities. In the current period, we increased our
advertising, sampling and merchandising spending to support our overall business
initiatives. The costs of these activities partially offset the decrease.
Changes in advertising, sampling and merchandising spending result from the
type, timing and level of activities related to product launches and rollouts,
as well as the markets being emphasized.
Operating Income
Operating income increased 58% or $46.7 million to $127.8 million as compared
with the prior-year quarter. Operating margins were 10.3% of net sales in the
current period as compared with 7.2% in the prior-year quarter. As previously
discussed, the increase in operating margin reflects strong sales and gross
profit margin growth including the benefits of our prior restructurings and
ongoing cost containment efforts, particularly in the Americas region.
Product Categories
Operating income increased 43% to $59.5 million in makeup and increased 26% to
$74.4 million in skin care due primarily to the strength of new products and
lower manufacturing costs. Operating results improved 64% in fragrance primarily
reflecting improved results from our travel retail business, but, as described
elsewhere, continued improvement is likely to be adversely affected by current
international uncertainties. Operating income increased significantly, off a
smaller base, to $1.8 million in hair care, which reflects increased sales
resulting primarily from new product launches and depressed results in the
comparable prior-year period.
Geographic Regions
Operating income in the Americas increased more than 100% from $37.7 million to
$76.9 million. This improvement correlates with our strategic efforts related to
product support spending in the earlier part of this fiscal year as well as the
benefits of our prior restructurings, inventory control initiatives and ongoing
cost containment efforts, particularly as they relate to manufacturing and
distribution costs. In Europe, the Middle East & Africa, operating income
increased 20% or $7.4 million to $44.7 million primarily due to the significant
increase in our travel retail business, but, as described elsewhere, continued
improvement is likely to be adversely affected by current international
uncertainties. Operating results improved in a number of markets led by the
United Kingdom and Greece. In Asia/Pacific, operating income increased 2% or
$0.1 million to $6.2 million reflecting improved results in Korea and Australia,
which were offset by lower operating income in Japan.
Interest Expense, Net
Net interest expense was $1.9 million as compared with $2.6 million in the
prior-year quarter. The decrease in interest expense reflects lower outstanding
net borrowings, as a result of the partial repayment of commercial paper
borrowings. Partially offsetting the decrease was a higher effective interest
rate than that in the prior-year quarter.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for Income Taxes
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate for income taxes for the three months ended
March 31, 2003 was 32.6% as compared with 34.5% in the prior-year period. These
rates differ from statutory rates reflecting the effect of state and local
taxes, tax rates in foreign jurisdictions and certain nondeductible expenses.
The decrease in the effective tax rate was principally attributable to ongoing
tax planning initiatives and the reduction of the overall tax rate relating to
the Company's foreign operations.
Nine Months Fiscal 2003 as compared with Nine Months Fiscal 2002
Net Sales
Net sales increased 8% or $279.9 million to $3,894.6 million, reflecting growth
in all product categories and all geographic regions. Product category results
were led by skin care, and our regions were led by Europe, the Middle East and
Africa, where results benefited from improvements in the travel retail business.
We expect that uncertainties associated with the current international events,
including the lingering effects of the war in Iraq and the concerns associated
with SARS, will adversely affect our future sales and earnings. Excluding the
impact of foreign currency translation, net sales increased 5%.
Product Categories
Skin Care
Net sales of skin care products increased 10% or $129.3 million to $1,408.6
million, which was primarily attributable to the recent launches of
Perfectionist Correcting Serum for Lines and Wrinkles, the Repairwear line of
products, Advanced Stop Signs and Resilience Lift OverNight Face and Throat
Creme. Additionally, the increase was supported by strong sales of Re-Nutriv
Ultimate Lifting Creme, A Perfect World line of products, Moisture Surge Extra
and Moisture Surge Eye Gel, and products in Clinque's 3-Step Skin Care System.
Partially offsetting this increase were lower net sales of certain existing
products such as Stop Signs and Idealist Skin Refinisher. Also affecting these
results was the successful prior year launch of Total Turnaround Cream.
Excluding the impact of foreign currency translation, net sales increased 6%.
Makeup
Makeup net sales increased 7% or $87.7 million to $1,436.2 million due to strong
sales of our makeup artist lines and current period launches of MagnaScopic
Mascara and Colour Surge Lipstick. Additionally, sales were generated from
recently launched products such as So Ingenious Multi-Dimension Liquid Makeup
and Loose Powder and Dewy Smooth Anti-Aging Makeup, as well as new and existing
products in the Pure Color line. Offsetting this increase were lower net sales
of certain existing products such as Sumptuous Lipstick, Gentle Light Makeup and
Powder and High Impact Eye Shadow Duos. Excluding the impact of foreign currency
translation, makeup net sales increased 4%.
Fragrance
Net sales of fragrance products increased 6% or $52.1 million to $864.4 million.
Although our business has been recovering from last year's deterioration in the
travel retail business, which is substantially fragrance driven, our current
forecasts are being reduced due to current international uncertainties. The
increase in net sales reflects the recent launch of Estee Lauder pleasures
intense, T girl, Intuition for Men, Donna Karan Black Cashmere and Clinique
Happy Heart. Furthermore, strong sales of Youth Dew supported the increase in
net sales. This net sales increase was partially offset by lower net sales of
certain Tommy Hilfiger licensed products, Intuition and Estee Lauder pleasures.
Excluding the impact of foreign currency translation, fragrance net sales
increased 3%.
Hair Care
Hair care net sales increased 4% or $5.8 million to $163.8 million. This
increase was primarily the result of sales growth from Aveda and Bumble and
bumble products. We also increased the number of Company-owned Aveda Experience
Centers and strategically decreased the number of salons that offer Aveda
products.
The introduction of new products may have some cannibalizing effect on sales of
existing products, which we take into account in our business planning.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Geographic Regions
Net sales in the Americas increased 3% or $74.5 million to $2,292.7 million
primarily reflecting growth from our newer brands as well as success of new and
recently launched products. Despite the increase, we continue to see a soft
retail environment in the United States.
In Europe, the Middle East & Africa, net sales increased 18% or $170.6 million
to $1,104.0 million. This increase was primarily the result of higher net sales
in our worldwide travel retail business, as sales continued to recover from the
levels experienced after September 11, 2001. However, our travel retail business
will be adversely affected by current world events including the lingering
effects of the war in Iraq and the concerns associated with SARS. Net sales in
the United Kingdom, Spain, Italy, Switzerland, France and Greece experienced
double-digit growth. Excluding the impact of foreign currency translation,
Europe, the Middle East & Africa net sales increased 8%.
Net sales in Asia/Pacific increased 8% or $34.8 million to $497.9 million
primarily due to higher net sales in Korea, Japan and Thailand. Despite
increased net sales in Japan, the country remains a difficult market due to
local economic conditions and competition. Excluding the impact of foreign
currency translation, Asia/Pacific net sales increased 2%.
We strategically stagger our new product launches by geographic market, which
may contribute to differences in regional sales growth.
Cost of Sales
Cost of sales as a percentage of total net sales improved to 26.8% from 27.9%,
reflecting production and supply chain efficiencies and lower costs from
promotional activities.
We continued to emphasize sourcing initiatives and overall supply chain
management which resulted in lower manufacturing costs, whereas in the prior
year we experienced under-absorption of overhead as a result of the impact of
the events of September 11, 2001.
The inclusion of the cost of purchase with purchase and gift with purchase
merchandise as a component of cost of sales resulted from our adoption of EITF
Issue No. 01-9. Since the cost of these promotional activities is a component of
cost of sales and the timing and level of promotions vary with our promotional
calendar, we have experienced, and expect to continue to experience,
fluctuations in the cost of sales percentage. The inclusion of promotional
merchandise as a component of cost of sales results in lower margins. A
strategic shift to reduce these activities has contributed to the improvement in
our gross profit margin for the year.
Operating Expenses
Operating expenses increased to 62.6% of net sales as compared with 61.7% of net
sales in the prior-year period. The increase in spending primarily related to
advertising, sampling and merchandising activities particularly during the early
portion of the current fiscal year (excluding purchase with purchase and gift
with purchase activities, discussed as a component of cost of sales) to support
our sales growth and build momentum going into the second half. Changes in
advertising, sampling and merchandising spending result from the type, timing
and level of activities related to product launches and rollouts, as well as the
markets being emphasized.
Operating Income
Operating income increased 9% or $34.7 million to $412.2 million as compared
with the prior-year period. Operating margins were 10.6% of net sales in the
current period as compared with 10.4% in the prior-year period. The increase in
operating income and operating margin was primarily due to sales growth,
strategically reduced promotional programs, benefits from our prior
restructurings and our continued cost containment efforts.
Product Categories
Operating income increased 96% to $42.4 million in fragrance due primarily to
improved results from our travel retail business. Operating income increased 10%
to $154.6 million in makeup and 1% to $204.8 million in skin care reflecting
higher net sales and continued spending, particularly in the earlier portion of
the current year, on advertising, sampling and merchandising. Operating income
decreased $1.9 million or 15% in hair care, which reflects continued spending to
build retail distribution and product infrastructure to support future growth.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Geographic Regions
Operating income in the Americas increased 5% or $10.3 million to $212.9 million
due to sales growth, the benefits of our prior restructurings and continued cost
containment efforts. Operating income also benefited from the results of
strategic efforts related to product support spending in the earlier part of the
year that led to increased net sales in the third quarter. In Europe, the Middle
East & Africa, operating income increased 25% or $32.8 million to $162.7 million
primarily due to the significantly increased results generated from our travel
retail business as well as improved operating results in the United Kingdom. As
described elsewhere, profitability in the region is likely to be adversely
affected by current international uncertainties. In Asia/Pacific, operating
income decreased 19% or $8.4 million to $36.6 million. This decrease reflects
improved results in Korea and Thailand, which were more than offset by a
decrease in Australia, which derived a benefit in the prior-year period from a
change in our retailer arrangements.
Interest Expense, Net
Net interest expense was $7.0 million as compared with $8.3 million in the
prior-year period. The decrease in net interest expense was primarily due to
higher interest income generated by higher invested cash balances and lower
outstanding net borrowings. This improvement was partially offset by a higher
effective interest rate, which resulted from the increased proportion of fixed
rate debt as compared with variable rate debt in the same period last year.
Provision for Income Taxes
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate for income taxes for the nine months ended
March 31, 2003 was 33.2% as compared with 34.5% in the prior-year period. These
rates differ from statutory rates reflecting the effect of state and local
taxes, tax rates in foreign jurisdictions and certain nondeductible expenses.
The decrease in the effective tax rate was principally attributable to ongoing
tax planning initiatives and the reduction of the overall tax rate relating to
the Company's foreign operations.
Accounting Change
Effective July 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No 142, "Goodwill and Other Intangible Assets". In accordance
with SFAS No. 142, intangible assets, including purchased goodwill, must be
evaluated for impairment. Based upon initial impairment testing we recorded a
write down of goodwill in the amount of $20.6 million. This write down was
reported as a cumulative effect of a change in accounting principle, as of
July 1, 2001, in the accompanying consolidated statements of earnings.
Financial Condition
- -------------------
Liquidity and Capital Resources
Our principal sources of funds historically have been cash flows from operations
and borrowings under commercial paper, borrowings from the issuance of long-term
debt and committed and uncommitted credit lines provided by banks in the United
States and abroad. At March 31, 2003, we had cash and cash equivalents of $528.0
million compared with $546.9 million at June 30, 2002.
We have a $750.0 million commercial paper program, under which we have issued,
and may issue, commercial paper in the United States. Our commercial paper is
currently rated A-1 by Standard & Poor's and P-1 by Moody's. Our long-term
credit ratings are A+ by Standard & Poor's and A1 by Moody's. At March 31, 2003,
our outstanding borrowings included $90.0 million of commercial paper; $249.0
million, net of $1.0 million of unamortized debt discount, of 6% Senior Notes
due January 2012; a 350.0 million yen loan payable (approximately $2.9 million
at current exchange rates), which was due in April 2003 (and has been repaid);
and a 3.0 billion yen term loan (approximately $25.2 million at current exchange
rates), which is due in March 2006. At March 31, 2003, the $90.0 million
outstanding commercial paper has been characterized as short-term borrowings
based on our intent to repay, and not refinance, that amount over the course of
the next twelve months. As of March 31, 2003, we had an unused $400.0 million
revolving credit facility, expiring on June 28, 2006. We also have an effective
shelf registration statement covering the potential issuance of up to $500.0
million in debt securities.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our business is seasonal in nature and, accordingly, our working capital needs
vary. From time to time, the Company may enter into investing and financing
transactions that require additional funding. To the extent that these needs
exceed cash from operations, we could, subject to market conditions, issue up to
an additional $660.0 million of commercial paper under our program, issue
long-term debt securities or borrow under the revolving credit facility. As of
March 31, 2003, we also had $82.6 million in additional credit facilities, of
which $1.4 million was used.
Total debt as a percent of total capitalization was 17% at March 31, 2003 as
compared with 18% at June 30, 2002.
The effects of inflation have not been significant to our overall operating
results in recent years. Generally, we have been able to increase selling prices
sufficiently and price new products appropriately, to offset cost increases,
which have been moderate.
We believe that cash on hand, cash generated from operations, available credit
lines and access to credit markets will be adequate to support currently planned
business operations and capital expenditures on both a near-term and long-term
basis.
Cash Flows
Net cash provided by operating activities was $415.9 million during the nine
months ended March 31, 2003 as compared with net cash provided by operating
activities of $365.6 million in the prior-year period. The improved operating
cash flow primarily reflects increased earnings and increased advertising,
sampling and merchandising accruals, which correspond to a higher level of
spending and the type and timing of those activities. Partially offsetting this
improvement was slower inventory reductions relative to the balances reported at
June 30, 2002 and 2001, a lower increase in the level of accrued income taxes
and a reduction in other noncurrent liabilities which reflected contributions
related to pension obligations. We may make comparable additional
pension contributions prior to the end of the fiscal year provided they qualify
for a fall tax deduction.
Net cash used for investing activities was $110.2 million during the nine months
ended March 31, 2003 compared with $145.6 million in the prior-year period. For
both periods the use of cash primarily reflects capital expenditures, which were
higher during the prior-year period.
The net cash used for financing activities in the current period primarily
relates to common stock repurchases, dividend payments and the repayment of
long-term debt. The net cash used for financing activities in the prior-year
period reflects common stock repurchases and dividend payments. Net cash used
for financing activities was $331.5 million during the nine months ended March
31, 2003 compared with $105.2 million in the prior-year period primarily
reflecting an increase in the amount of common stock repurchases.
Dividends
On October 30, 2002, the Board of Directors declared an annual dividend of $.20
per share on our Class A and Class B Common Stock, payable on January 3, 2003 to
stockholders of record at the close of business on December 12, 2002. Total
dividends declared, including dividends on the $6.50 Cumulative Redeemable
Preferred Stock, for the nine months ended March 31, 2003 were $64.0 million. As
previously disclosed, the Board of Directors determined that it would pay
dividends on the Company's common stock annually rather than quarterly.
Share Repurchase Program
In October 2002, the Board of Directors authorized the repurchase of up to 10.0
million additional shares of Class A Common Stock increasing the total
authorization under the share repurchase program to 18.0 million shares. We have
purchased, and may continue to purchase, over an unspecified period of time,
shares of our Class A Common Stock in the open market or in privately negotiated
transactions, depending on market conditions and other factors. During the first
nine months of fiscal 2003, we purchased an additional 7.2 million shares for
$215.5 million, bringing the cumulative total of acquired shares to 9.7 million.
The repurchase of shares of Class A Common Stock had an accretive effect on our
earnings per share.
Commitments and Contingencies
We will be required to redeem the outstanding $6.50 Cumulative Redeemable
Preferred Stock on June 30, 2005. However, in the event that Mrs. Estee Lauder
were to pass away before such date, then we would have the right to redeem the
shares from the current holders, and the holders of such shares would have the
right to put the shares to us, at $100 per share (or an aggregate of $360.0
million). If shares of $6.50 Cumulative Redeemable Preferred Stock are put to
us, we would have up to 120 days after notice to purchase such shares.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain of our business acquisition agreements include "earn-out" provisions.
These provisions generally require that we pay to the seller or sellers of the
business additional amounts based on the performance of the acquired business.
The payments typically are made after a certain period of time and our next
"earn-out" payment is expected to be made after the end of fiscal 2005. Since
the size of each payment depends upon performance of the acquired business, we
do not expect that such payments will have a material adverse impact on our
future results of operations or financial condition.
In addition we are currently exploring alternatives for rental obligations
associated with our executive offices in New York. Our current lease term
expires in fiscal 2005, and our commitments under that agreement are included in
the amounts reported in Note 15 "Commitments and Contingencies" as disclosed in
the annual report on Form 10-K for the fiscal year ended June 30, 2002.
Business Acquisitions
On April 30, 2003, we completed the acquisition of the Paris-based Darphin
group of companies that develops, manufactures and markets the "Darphin" brand
of skin care products. The initial purchase price, paid at closing, was funded
by cash provided by operations, the payment of which will not have a material
effect on our results of operations or financial condition. An additional
payment is expected to be made soon after our fiscal year ending June 30, 2008,
the amount of which will depend on future net sales and earnings of the
"Darphin" business.
Derivative Financial Instruments and Hedging Activities
We address certain financial exposures through a controlled program of risk
management that includes the use of derivative financial instruments. We enter
into foreign currency forward exchange contracts and foreign currency options to
reduce the effects of fluctuating foreign currency exchange rates. From time to
time we also enter into interest rate contracts to manage interest rate risk. We
categorize these instruments as entered into for purposes other than trading.
For each derivative contract we enter into, we formally document the
relationship between the hedging instrument and hedged item, as well as its
risk-management objective and strategy for undertaking the hedge. This process
includes linking all derivatives that are designated as fair-value, cash-flow,
or foreign-currency hedges to specific assets and liabilities on the balance
sheet or to specific firm commitments or forecasted transactions. We also
formally assess, both at the hedge's inception and on an ongoing basis, whether
the derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. If it is
determined that a derivative is not highly effective, then we will be required
to discontinue hedge accounting with respect to that derivative prospectively.
Foreign Exchange Risk Management
We enter into forward exchange contracts to hedge anticipated transactions as
well as receivables and payables denominated in foreign currencies for periods
consistent with our identified exposures. The purpose of the hedging activities
is to minimize the effect of foreign exchange rate movements on our costs and on
the cash flows that we receive from foreign subsidiaries. Almost all foreign
currency contracts are denominated in currencies of major industrial countries
and are with large financial institutions rated as strong investment grade by a
major rating agency. We also enter into foreign currency options to hedge
anticipated transactions where there is a high probability that anticipated
exposures will materialize. The forward exchange contracts and foreign currency
options have been designated as cash-flow hedges. As a result of hedge
effectiveness testing in the fiscal third quarter, certain contracts were
de-designated as cash-flow hedges and the loss on those contracts was charged
against current earnings. These amounts were not material to our consolidated
results. As of March 31, 2003, the remaining outstanding cash-flow hedges were
highly effective, in all material respects.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As a matter of policy, we only enter into contracts with counterparties that
have at least an "A" (or equivalent) credit rating. The counterparties to these
contracts are major financial institutions. We do not have significant exposure
to any one counterparty. Our exposure to credit loss in the event of
nonperformance by any of the counterparties is limited to only the recognized,
but not realized, gains attributable to the contracts. Management believes risk
of loss under these hedging contracts is remote and in any event would not be
material to the consolidated financial results. The contracts have varying
maturities through the end of June 2004. Costs associated with entering into
such contracts have not been material to our consolidated financial results. We
do not utilize derivative financial instruments for trading or speculative
purposes. At March 31, 2003, we had foreign currency contracts in the form of
forward exchange contracts and option contracts in the amount of $531.8 million
and $57.7 million, respectively. The foreign currencies included in the forward
exchange contracts (notional value stated in U.S. dollars) are principally the
Euro ($143.8 million), Swiss franc ($82.4 million), Japanese yen ($60.5
million), Canadian dollar ($44.1 million), South Korean won ($43.2 million),
British pound ($33.1 million) and Australian dollar ($27.1 million). The foreign
currencies included in the option contracts (notional value stated in U.S.
dollars) are principally the Swiss franc ($21.9 million), Canadian dollar ($21.0
million) and Euro ($11.7 million).
Market Risk
Using the value-at-risk model, as discussed in our annual report on Form 10-K
for the fiscal year ended June 30, 2002, our average value-at-risk, calculated
for the most recent twelve months, is $7.0 million related to our foreign
exchange contracts. There have been no significant changes in market risk since
June 30, 2002 that would have a material effect on our calculated value-at-risk
exposure, as disclosed in the annual report on Form 10-K for the fiscal year
ended June 30, 2002.
Critical Accounting Policies
As disclosed in the annual report on Form 10-K for the fiscal year ended June
30, 2002, the discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in conformity with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgments can be subjective and complex, and consequently actual results could
differ from those estimates. Our most critical accounting policies relate to
revenue recognition; concentration of credit risk; inventory; pension and other
postretirement benefits costs; goodwill and other intangible assets; income
taxes; and derivatives. Based on the recent performance of the equity markets,
we adjusted the expected rate of return on plan assets for our noncontributory
defined benefit pension plan from 9.0% in fiscal 2002 to 8.5% for fiscal 2003
which will result in a higher calculated pension expense. Since June 30, 2002,
there have been no changes in our critical accounting policies and no other
significant changes to the assumptions and estimates related to them.
Recently Issued Accounting Standards
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" ("SFAS 148"). SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation as originally provided by SFAS No. 123
"Accounting for Stock-Based Compensation". Additionally, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosure in both the
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The transitional requirements of SFAS 148 are effective for all financial
statements for fiscal years ending after December 15, 2002. We adopted the
disclosure portion of this statement for the current fiscal quarter ended March
31, 2003. The application of the disclosure portion of this standard will have
no impact on our consolidated financial position or results of operations. The
Financial Accounting Standards Board recently indicated that they will require
stock-based employee compensation to be recorded as a charge to earnings
pursuant to a standard they are currently deliberating, which they believe will
become effective on January 1, 2004. We will continue to monitor their progress
on the issuance of this standard as well as evaluate our position with respect
to current guidance.
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
We and our representatives from time to time make written or oral
forward-looking statements, including statements contained in this and other
filings with the Securities and Exchange Commission, in our press releases and
in our reports to stockholders. The words and phrases "will likely result,"
"expect," "believe," "planned," "will," "will continue," "is anticipated,"
"estimates," "projects" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include, without limitation, our
expectations regarding sales, earnings or other future financial performance and
liquidity, product introductions, entry into new geographic regions, information
systems initiatives, new methods of sale and future operations or operating
results. Although we believe that our expectations are based on reasonable
assumptions within the bounds of our knowledge of our business and operations,
actual results may differ materially from our expectations. Factors that could
cause actual results to differ from expectations include, without limitation:
(i) increased competitive activity from companies in the skin care,
makeup, fragrance and hair care businesses, some of which have greater
resources than we do;
(ii) our ability to develop, produce and market new products on which
future operating results may depend;
(iii) consolidations, restructurings, bankruptcies and reorganizations
in the retail industry causing a decrease in the number of stores that
sell our products, an increase in the ownership concentration within
the retail industry, ownership of retailers by our competitors and
ownership of competitors by our customers that are retailers;
(iv) shifts in the preferences of consumers as to where and how they
shop for the types of products and services we sell;
(v) social, political and economic risks to our foreign or domestic
manufacturing, distribution and retail operations, including changes in
foreign investment and trade policies and regulations of the host
countries and of the United States;
(vi) changes in the laws, regulations and policies, including changes
in accounting standards, tax laws and regulations, trade rules and
customs regulations, and the outcome and expense of legal or regulatory
proceedings, that affect, or will affect, our business;
(vii) foreign currency fluctuations affecting our results of operations
and the value of our foreign assets, the relative prices at which we
and our foreign competitors sell products in the same markets and our
operating and manufacturing costs outside of the United States;
(viii) changes in global or local economic or other conditions that
could affect consumer purchasing, the willingness of people to travel,
the financial strength of our customers, the cost and availability
of capital, which we may need for new equipment, facilities or
acquisitions, and the assumptions underlying our critical accounting
policies and estimates;
(ix) shipment delays, depletion of inventory and increased production
costs resulting from disruptions of operations at any of the facilities
which, due to consolidations in our manufacturing operations, now
manufacture nearly all of our supply of a particular type of product
(i.e. focus factories);
(x) real estate rates and availability, which may affect our ability to
increase the number of retail locations at which we sell our products
and the costs associated with our executive offices;
(xi) changes in product mix to products which are less profitable;
(xii) our ability to acquire or develop e-commerce capabilities, and
other new information and distribution technologies, on a timely basis
and within our cost estimates;
(xiii) our ability to capitalize on opportunities for improved
efficiency, such as globalization, and to integrate acquired businesses
and realize value therefrom; and
(xiv) consequences attributable to the events that are currently taking
place in Iraq and that took place in New York City and Washington, D.C.
on September 11, 2001, including further attacks, retaliation and the
threat of further attacks or retaliation.
We assume no responsibility to update forward-looking statements made herein or
otherwise.
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
March 31 June 30
2003 2002
---- ----
(Unaudited)
(In millions)
ASSETS
Current Assets
Cash and cash equivalents............................................................... $ 528.0 $ 546.9
Accounts receivable, net................................................................ 733.1 624.8
Inventory and promotional merchandise, net.............................................. 532.4 544.5
Prepaid expenses and other current assets............................................... 200.4 211.4
-------- --------
Total current assets............................................................... 1,993.9 1,927.6
-------- --------
Property, Plant and Equipment, net...................................................... 581.2 580.7
-------- --------
Other Assets
Investments, at cost or market value.................................................... 29.7 30.3
Deferred income taxes................................................................... 64.6 72.7
Goodwill, net .......................................................................... 679.7 675.6
Other intangible assets, net............................................................ 19.4 18.4
Other assets, net....................................................................... 99.5 111.2
-------- --------
Total other assets................................................................. 892.9 908.2
-------- --------
Total assets.............................................................. $3,468.0 $3,416.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt......................................................................... $ 94.4 $ 6.6
Accounts payable........................................................................ 185.5 216.4
Accrued income taxes.................................................................... 118.6 110.0
Other accrued liabilities............................................................... 747.0 626.6
-------- --------
Total current liabilities.......................................................... 1,145.5 959.6
-------- --------
Noncurrent Liabilities
Long-term debt.......................................................................... 274.2 403.9
Other noncurrent liabilities............................................................ 212.0 231.1
-------- --------
Total noncurrent liabilities....................................................... 486.2 635.0
-------- --------
$6.50 Cumulative Redeemable Preferred Stock, at redemption value........................ 360.0 360.0
-------- --------
Stockholders' Equity
Common stock, $.01 par value; 650,000,000 shares Class A authorized; shares
issued: 131,680,518 at March 31, 2003 and 131,567,986 at June 30, 2002;
240,000,000 shares Class B authorized; shares issued and outstanding: 108,412,533
at March 31, 2003 and June 30, 2002.................................................. 2.4 2.4
Paid-in capital......................................................................... 270.2 268.8
Retained earnings....................................................................... 1,566.5 1,363.7
Accumulated other comprehensive loss.................................................... (66.8) (92.5)
-------- --------
1,772.3 1,542.4
Less: Treasury stock, at cost; 9,533,560 Class A shares at March 31, 2003
and 2,377,860 Class A shares at June 30, 2002........................................ (296.0) (80.5)
-------- --------
Total stockholders' equity......................................................... 1,476.3 1,461.9
-------- --------
Total liabilities and stockholders' equity................................ $3,468.0 $3,416.5
======== ========
See notes to consolidated financial statements.
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31
-----------------
2003 2002
---- ----
(In millions)
Cash Flows from Operating Activities
Net earnings............................................................................... $ 266.8 $ 217.3
Adjustments to reconcile net earnings to net cash
flows provided by operating activities:
Depreciation and amortization.......................................................... 127.8 117.6
Deferred income taxes.................................................................. 25.8 20.0
Minority interest...................................................................... 3.9 3.9
Cumulative effect of a change in accounting principle.................................. - 20.6
Non-cash stock compensation............................................................ 0.1 (0.8)
Changes in operating assets and liabilities:
Increase in accounts receivable, net................................................... (88.6) (96.2)
Decrease in inventory and promotional merchandise, net................................. 23.0 115.8
Increase in other assets, net.......................................................... (8.9) (42.1)
Decrease in accounts payable........................................................... (36.6) (47.4)
Increase in accrued income taxes....................................................... 6.7 34.7
Increase in other accrued liabilities.................................................. 125.7 17.2
Increase (decrease) in other noncurrent liabilities.................................... (29.8) 5.0
------- -------
Net cash flows provided by operating activities...................................... 415.9 365.6
------- -------
Cash Flows from Investing Activities
Capital expenditures....................................................................... (107.1) (139.9)
Acquisition of businesses, net of cash acquired............................................ (7.1) (10.2)
Proceeds from the disposition of long-term investments..................................... 4.0 4.5
------- -------
Net cash flows used for investing activities......................................... (110.2) (145.6)
------- -------
Cash Flows from Financing Activities
Increase (decrease) in short-term debt, net................................................ 0.7 (0.2)
Proceeds from issuance of long-term debt, net.............................................. - 247.2
Repayments of long-term debt............................................................... (42.8) (253.9)
Net proceeds from employee stock transactions.............................................. 2.0 4.8
Payments to acquire treasury stock......................................................... (215.5) (49.8)
Dividends paid............................................................................. (75.9) (53.3)
------- -------
Net cash flows used for financing activities......................................... (331.5) (105.2)
------- -------
Effect of Exchange Rate Changes on Cash and Cash Equivalents.................................. 6.9 7.5
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents....................................... (18.9) 122.3
Cash and Cash Equivalents at Beginning of Period........................................... 546.9 346.7
------- -------
Cash and Cash Equivalents at End of Period................................................. $ 528.0 $ 469.0
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .............................................................................. $ 17.2 $ 11.2
======= =======
Income taxes........................................................................... $ 95.3 $ 85.8
======= =======
Non-cash items:
Tax benefit from exercise of stock options............................................. $ 0.5 $ 1.6
======= =======
See notes to consolidated financial statements.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of The
Estee Lauder Companies Inc. and its subsidiaries (collectively, the "Company").
All significant intercompany balances and transactions have been eliminated.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results of operations of any interim period are not necessarily indicative of
the results of operations to be expected for the fiscal year. For further
information, refer to the consolidated financial statements and accompanying
footnotes included in the Company's annual report on Form 10-K for the year
ended June 30, 2002.
Net Earnings Per Common Share
For the three month and nine month periods ended March 31, 2003, net earnings
per common share ("basic EPS") is computed by dividing net earnings, after
deducting preferred stock dividends on the Company's $6.50 Cumulative Redeemable
Preferred Stock, by the weighted average number of common shares outstanding and
contingently issuable shares (which satisfy certain conditions). Net earnings
per common share assuming dilution ("diluted EPS") is computed by reflecting
potential dilution from the exercise of stock options.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations is as follows:
Three Months Ended Nine Months Ended
March 31 March 31
----------------- -----------------
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
(In millions, except per share data)
Numerator:
Net earnings before accounting change................................. $ 83.8 $ 50.7 $ 266.8 $ 237.9
Preferred stock dividends............................................. 5.9 5.9 17.6 17.6
-------- -------- -------- --------
Net earnings attributable to common stock before accounting change.... 77.9 44.8 249.2 220.3
Cumulative effect of a change in accounting principle................. - - - (20.6)
-------- -------- -------- --------
Net earnings attributable to common stock............................. $ 77.9 $ 44.8 $ 249.2 $ 199.7
======== ======== ======== ========
Denominator:
Weighted average common shares outstanding - Basic.................... 232.1 237.9 233.5 238.3
Effect of dilutive securities: Stock options.......................... 1.9 2.5 2.0 2.8
-------- -------- -------- --------
Weighted average common shares outstanding - Diluted.................. 234.0 240.4 235.5 241.1
======== ======== ======== ========
Basic net earnings per common share:
Net earnings attributable to common stock before accounting change.... $ .34 $ .19 $ 1.07 $ .93
Cumulative effect of a change in accounting principle................. - - - (.09)
-------- -------- -------- --------
Net earnings.......................................................... $ .34 $ .19 $ 1.07 $ .84
======== ======== ======== ========
Diluted net earnings per common share:
Net earnings attributable to common stock before accounting change.... $ .33 $ .19 $ 1.06 $ .92
Cumulative effect of a change in accounting principle................. - - - (.09)
-------- -------- ------- --------
Net earnings.......................................................... $ .33 $ .19 $ 1.06 $ .83
======== ======== ======= ========
As of March 31, 2003 and 2002, options to purchase 21.8 million and 14.4 million
shares, respectively, of common stock were not included in the computation of
diluted EPS because the exercise prices of those options were greater than the
average market price of the common stock. The options were still outstanding at
the end of the applicable period.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock-Based Compensation
As of March 31, 2003, the Company had established a number of share incentive
programs as discussed in more detail in our annual report on Form 10-K for the
year ended June 30, 2002. The Company applies the intrinsic value method as
outlined in Accounting Principles Board 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 the intrinsic value
method, 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.
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", requires that the Company 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. The Company adopted
the disclosure portion of SFAS No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" requiring quarterly SFAS No. 123 pro forma
disclosure. The following table illustrates the effect on net income and
earnings per share as if the fair value method had been applied to all
outstanding and unvested awards in each period presented.
Three Months Ended Nine Months Ended
March 31 March 31
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
(In millions, except per share data)
Net earnings attributable to common stock, as reported................ $ 77.9 $ 44.8 $ 249.2 $ 199.7
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects................................... (6.1) (0.7) (16.9) (1.8)
------- ------- ------- -------
Pro forma net earnings, attributable to common stock.................. $ 71.8 $ 44.1 $ 232.3 $ 197.9
======= ======= ======= =======
Earnings per common share:
Basic - as reported................................................ $ .34 $ .19 $ 1.07 $ .84
======= ======= ======= ========
Basic - pro forma.................................................. $ .31 $ .19 $ .99 $ .83
======= ======= ======= ========
Diluted - as reported.............................................. $ .33 $ .19 $ 1.06 $ .83
======= ======= ======= ========
Diluted - pro forma................................................ $ .31 $ .18 $ .98 $ .82
======= ======= ======= ========
Dividends
In May 2002, the Board of Directors determined that it would pay future cash
dividends on the common stock annually rather than quarterly. The first annual
dividend was declared October 30, 2002 in the amount of $.20 per share, and was
paid on January 3, 2003 to stockholders of record at the close of business on
December 12, 2002.
Accounts Receivable
Accounts receivable is stated net of the allowance for doubtful accounts and
retail customer deductions of $35.7 million and $30.6 million as of March 31,
2003 and June 30, 2002, respectively.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventory and Promotional Merchandise
Inventory and promotional merchandise only include inventory considered saleable
or usable in future periods, and are stated at the lower of cost or market, with
cost being determined on the first-in, first-out method. Promotional merchandise
is charged to expense at the time the merchandise is shipped to the Company's
customers.
March 31 June 30
2003 2002
---- ----
(Unaudited)
(In millions)
Inventory and promotional merchandise consists of:
Raw materials......................................... $ 119.1 $ 117.5
Work in process....................................... 28.5 27.0
Finished goods........................................ 292.7 272.2
Promotional merchandise............................... 92.1 127.8
-------- -------
$ 532.4 $ 544.5
======== =======
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation
and amortization. For financial statement purposes, depreciation is provided
principally on the straight-line method over the estimated useful lives of the
assets ranging from 3 to 40 years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the relevant lease term or the expected
useful life of the improvement.
March 31 June 30
2003 2002
---- ----
(Unaudited)
(In millions)
Land ................................................... $ 13.2 $ 13.0
Buildings and improvements.............................. 148.6 144.0
Machinery and equipment................................. 638.3 611.7
Furniture and fixtures.................................. 94.8 86.1
Leasehold improvements.................................. 508.7 447.2
-------- -------
1,403.6 1,302.0
Less accumulated depreciation and amortization.......... 822.4 721.3
-------- -------
$ 581.2 $ 580.7
======== ========
Depreciation and amortization of property, plant and equipment was $38.9 million
and $33.8 million during the three months ended March 31, 2003 and 2002,
respectively, and $114.1 million and $99.1 million during the nine months ended
March 31, 2003 and 2002, respectively.
Restructuring Accrual
During the nine-month period ended March 31, 2003, the Company charged $28.8
million against its restructuring accrual, of which $25.0 million related to the
fiscal 2002 charges and $3.8 million related to the fiscal 2001 charges,
bringing the restructuring accrual balance at March 31, 2003 to $32.5 million.
Approximately $18.6 million of this amount related to severance payments to 331
employees. There have been no material changes to the restructuring plans since
June 30, 2002.
Debt
At March 31, 2003, the Company's debt included $90.0 million of outstanding
commercial paper which has been characterized as short-term borrowings based
upon our current intent to repay, rather than refinance, that amount over the
course of the next twelve months. Previously commercial paper had been
classified as long-term based upon the Company's intent and ability to refinance
maturing instruments on a long-term basis.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses
reported in those financial statements. These judgments can be subjective and
complex, and consequently actual results could differ from those estimates and
assumptions. The Company's most critical accounting policies relate to revenue
recognition; concentration of credit risk; inventory; pension and other
postretirement benefit costs; goodwill and other intangible assets; income
taxes; and derivatives.
Recently Issued Accounting Standards
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" ("SFAS 148"). SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation as originally provided by SFAS No. 123
"Accounting for Stock-Based Compensation". Additionally, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosure in both the
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The transitional requirements of SFAS 148 are effective for all financial
statements for fiscal years ending after December 15, 2002. The Company adopted
the disclosure portion of this statement for the current fiscal quarter ended
March 31, 2003. The application of the disclosure portion of this standard will
have no impact on the Company's consolidated financial position or results of
operations. The Financial Accounting Standards Board recently indicated that
they will require stock-based employee compensation to be recorded as a charge
to earnings pursuant to a standard they are currently deliberating, which they
believe will become effective January 1, 2004. The Company will continue to
monitor their progress on the issuance of this standard as well as evaluate its
position with respect to current guidance.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Comprehensive Income
The components of accumulated other comprehensive income ("OCI") included in the
accompanying consolidated balance sheets consist of net unrealized investment
gain (loss), net gain or (loss) on derivative instruments designated and
qualifying as cash-flow hedging instruments, net minimum pension liability
adjustments and cumulative translation adjustments as of the end of each period.
Comprehensive income and its components, net of tax, are as follows:
Three Months Ended Nine Months Ended
March 31 March 31
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
(In millions)
Net earnings..................................................... $ 83.8 $ 50.7 $ 266.8 $ 217.3
--------- --------- --------- --------
Other comprehensive income:
Net unrealized investment gain (loss)....................... 1.2 (0.1) (0.3) (1.9)
Net derivative instruments gain (loss)...................... 3.5 1.8 7.5 1.8
Net minimum pension liability adjustments................... - - (0.3) (0.3)
Translation adjustments..................................... 7.8 (12.5) 18.8 2.0
--------- --------- --------- --------
Other comprehensive income (loss)........................... 12.5 (10.8) 25.7 1.6
--------- --------- --------- --------
Comprehensive income............................................. $ 96.3 $ 39.9 $ 292.5 $ 218.9
========= ========= ========= ========
The accumulated net loss on derivative instruments consists of the following:
Three Months Ended Nine Months Ended
March 31 March 31
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
(In millions)
OCI - derivative instruments, beginning of period................ $ (5.1) $ (2.0) $ (9.1) $ (2.0)
--------- --------- --------- --------
Gain (loss) on derivative instruments....................... 2.2 (0.7) 2.5 (1.4)
Reclassification to earnings of net loss during the period.. 2.9 3.5 8.9 4.3
Provision for deferred income taxes......................... (1.6) (1.0) (3.9) (1.1)
--------- --------- --------- --------
Net derivative instruments gain (loss)...................... 3.5 1.8 7.5 1.8
--------- --------- --------- --------
OCI - derivative instruments, end of period...................... $ (1.6) $ (0.2) $ (1.6) $ (0.2)
========= ========= ========= ========
The $1.6 million, net of tax, derivative instrument loss recorded in OCI at
March 31, 2003 related to foreign currency forward and option contracts that the
Company estimates will be recognized through earnings during the next fifteen
months. The $0.2 million net derivative instruments loss recorded in OCI at the
end of the prior-year period related to foreign currency forward and option
contracts.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Segment Data and Related Information
Reportable operating segments include components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker (the "Chief Executive") in deciding how to
allocate resources and in assessing performance. Although the Company operates
in one business segment, beauty products, management also evaluates performance
on a product category basis. Performance is measured based upon net sales and
operating income. Operating income represents earnings before income taxes and
net interest expense. The accounting policies for each of the categories
presented are substantially the same as those for the consolidated financial
statements and the reportable segment included in the annual report on Form 10-K
for the year ended June 30, 2002. The assets and liabilities of the Company are
managed centrally and are reported internally in the same manner as the
consolidated financial statements, thus no additional information is produced
for the Chief Executive or included herein. There has been no significant
variance in the total or long-lived asset value associated with each segment
since June 30, 2002.
Three Months Ended Nine Months Ended
March 31 March 31
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
(In millions)
SEGMENT DATA
Net Sales:
Skin Care........................................................ $ 507.8 $ 438.4 $ 1,408.6 $ 1,279.3
Makeup........................................................... 491.4 470.5 1,436.2 1,348.5
Fragrance........................................................ 181.6 156.5 864.4 812.3
Hair Care........................................................ 53.2 49.6 163.8 158.0
Other............................................................ 5.4 6.7 21.6 16.6
--------- --------- --------- ---------
$ 1,239.4 $ 1,121.7 $ 3,894.6 $ 3,614.7
========= ========= ========= =========
Operating Income:
Skin Care........................................................ $ 74.4 $ 58.9 $ 204.8 $ 202.8
Makeup........................................................... 59.5 41.5 154.6 140.7
Fragrance........................................................ (7.6) (20.9) 42.4 21.6
Hair Care........................................................ 1.8 0.6 10.4 12.3
Other............................................................ (0.3) 1.0 - 0.1
--------- --------- --------- ---------
127.8 81.1 412.2 377.5
Reconciliation:
Interest expense, net......................................... 1.9 2.6 7.0 8.3
--------- --------- --------- ---------
Earnings before income taxes, minority interest and
accounting change............................................. $ 125.9 $ 78.5 $ 405.2 $ 369.2
========= ========= ========= =========
REGIONAL DATA
Net Sales:
The Americas..................................................... $ 721.5 $ 696.5 $ 2,292.7 $ 2,218.2
Europe, the Middle East & Africa................................. 361.5 291.3 1,104.0 933.4
Asia/Pacific..................................................... 156.4 133.9 497.9 463.1
--------- --------- --------- ---------
$ 1,239.4 $ 1,121.7 $ 3,894.6 $ 3,614.7
========= ========= ========= =========
Operating Income:
The Americas..................................................... $ 76.9 $ 37.7 $ 212.9 $ 202.6
Europe, the Middle East & Africa................................. 44.7 37.3 162.7 129.9
Asia/Pacific..................................................... 6.2 6.1 36.6 45.0
--------- --------- --------- ---------
$ 127.8 $ 81.1 $ 412.2 $ 377.5
========= ========= ========= =========
THE ESTEE LAUDER COMPANIES INC.
CONTROLS AND PROCEDURES
Item 4. Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information
required to be disclosed in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. The Chief Executive Officer and the Chief Financial Officer have
reviewed the effectiveness of our disclosure controls and procedures within the
last ninety days and have concluded that the disclosure controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
last day they were evaluated by our Chief Executive Officer and Chief Financial
Officer.
THE ESTEE LAUDER COMPANIES INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various routine legal proceedings incident to the ordinary
course of business. In management's opinion, the outcome of pending legal
proceedings, separately and in the aggregate, will not have a material adverse
effect on our business or consolidated financial condition.
In August 2000, an affiliate of Revlon, Inc. sued the Company and its
subsidiaries in the U.S. District Court, Southern District of New York, for
alleged patent infringement and related claims. Revlon alleges that five Estee
Lauder products, two Origins foundations, a La Mer concealer and a jane
foundation infringe its patent. Revlon is seeking, among other things, treble
damages, punitive damages, equitable relief and attorneys' fees. The Company
filed counterclaims, which, among other things, challenge the validity of the
patent. Mediation directed by the Court took place in August 2001 and in January
2002, but did not result in resolution of the litigation. In January 2002, the
Court indefinitely postponed the trial date (then set for February 2002) and
established a schedule for pretrial motions. Both parties have filed summary
judgment motions, and the judge has referred the motions to a magistrate. The
magistrate is expected to schedule oral argument on the motions. The Company
intends to defend itself vigorously. Although the final outcome cannot be
predicted with certainty, based on legal analysis and the discovery proceedings
in the litigation, management believes that the case will not have a material
adverse effect on the Company's consolidated financial condition.
In February 2000, the Company and eight other manufacturers of cosmetics (the
"Manufacturer Defendants") were added as defendants in a consolidated class
action lawsuit that had been pending in the Superior Court of the State of
California in Marin County. The plaintiffs purport to represent a class of all
California residents who purchased prestige cosmetic products at retail for
personal use from a number of department stores that sold such products in
California (the "Department Store Defendants"). Plaintiffs filed their initial
actions against the Department Store Defendants in May 1998. In May 2000,
plaintiffs filed an amended complaint alleging that the Department Store
Defendants and the Manufacturer Defendants conspired to fix and maintain retail
prices and to limit the supply of prestige cosmetic products sold by the
Department Store Defendants in violation of California state law. The plaintiffs
are seeking, among other things, treble damages, equitable relief, attorneys'
fees, interest and costs. Pre-trial proceedings and discovery have commenced.
Court-directed mediation and related settlement discussions are progressing. In
the event that the lawsuit is not settled, the Company intends to defend itself
vigorously. While no assurance can be given as to the ultimate outcome, based on
preliminary investigation, management believes that the case will not have a
material adverse effect on the Company's consolidated financial condition.
In 1998, the Office of the Attorney General of the State of New York (the
"State") notified the Company and ten other entities that they are potentially
responsible parties ("PRPs") with respect to the Blydenburgh landfill in Islip,
New York. Each PRP may be jointly and severally liable for the costs of
investigation and cleanup, which the State estimates to be $16 million. While
the State has sued other PRPs in connection with the site (including Hickey's
Carting, Inc., Dennis C. Hickey and Maria Hickey, collectively the "Hickey
Parties"), the State has not sued the Company. The Company and certain other
PRPs are in discussions with the State regarding possible settlement of the
matter. On September 9, 2002, the Hickey Parties brought contribution actions
against the Company and other Blydenburgh PRPs in the State's lawsuit against
the Hickey Parties in the U.S. District Court for the Eastern District of New
York. These actions seek to recover, among other things, any damages for which
the Hickey Parties are found liable in the State's lawsuit against them, and
related costs and expenses, including attorneys' fees. The Company intends to
defend the contribution claim vigorously. While no assurance can be given as to
the ultimate outcome, management believes that the Blydenburgh matters will not
have a material adverse effect on the Company's consolidated financial
condition.
In 1998, the State notified the Company and fifteen other entities that they are
PRPs with respect to the Huntington/East Northport landfill. The cleanup costs
are estimated at $20 million. No litigation has commenced. The Company and other
PRPs are in discussions with the State regarding possible settlement of the
matter. While no assurance can be given as to the ultimate outcome, management
believes that the matter will not have a material adverse effect on the
Company's consolidated financial condition.
THE ESTEE LAUDER COMPANIES INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits --
10.1 Employment Agreement with William P. Lauder*
99.1 Section 906 Certifications
* Exhibit is a management contract or compensatory plan or agreement.
(b) Reports on Form 8-K --
On January 13, 2003, we filed a Current Report on Form 8-K. Pursuant to Item 9
of Form 8-K, we reported that we had entered into an agreement to acquire the
Darphin group of companies.
On January 30, 2003, we filed a Current Report on Form 8-K. Pursuant to Item 5
of Form 8-K, we reported our fiscal 2003 second-quarter results.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE ESTEE LAUDER COMPANIES INC.
Date: May 1, 2003 By: /s/Richard W. Kunes
-------------------
Richard W. Kunes
Senior Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
CERTIFICATIONS
I, Fred H. Langhammer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Estee
Lauder Companies Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report ("Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 1, 2003
/s/ Fred H. Langhammer
----------------------
Fred H. Langhammer
President and Chief Executive Officer
I, Richard W. Kunes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Estee Lauder
Companies Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report ("Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 1, 2003
/s/ Richard W. Kunes
--------------------
Richard W. Kunes
Senior Vice President
and Chief Financial Officer