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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 DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14064
THE ESTEE LAUDER COMPANIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2408943
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
767 FIFTH AVENUE, NEW YORK, NEW YORK 10153
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-572-4200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At January 23, 1998, 61,438,082 shares of the registrant's Class A Common Stock,
$.01 par value, and 56,839,667 shares of the registrant's Class B Common Stock,
$.01 par value, were outstanding.
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<PAGE>
THE ESTEE LAUDER COMPANIES INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION
<S> <C>
Consolidated Statements of Earnings --
Three Months and Six Months Ended December 31, 1997 and 1996............................. 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................ 3
Consolidated Balance Sheets --
December 31, 1997 and June 30, 1997...................................................... 8
Consolidated Statements of Cash Flows --
Six Months Ended December 31, 1997 and 1996.............................................. 9
Notes to Consolidated Financial Statements.................................................... 10
PART II. OTHER INFORMATION............................................................................. 13
</TABLE>
1
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
PART I. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
----------- -----------
1997 1996 1997 1996
---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NET SALES........................................................ $1,000.9 $941.5 $1,901.5 $1,814.3
Cost of sales.................................................... 229.3 217.6 433.7 417.4
--------- ------- --------- --------
GROSS PROFIT..................................................... 771.6 723.9 1,467.8 1,396.9
Selling, general and administrative expenses:
Selling, general and administrative........................... 618.1 589.0 1,200.3 1,152.7
Related party royalties....................................... 8.6 9.0 16.6 17.0
--------- ------- ------- --------
626.7 598.0 1,216.9 1,169.7
--------- ------- ------- --------
OPERATING INCOME................................................. 144.9 125.9 250.9 227.2
Interest (expense) income, net................................... (0.1) 0.1 0.9 (1.1)
--------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST............... 144.8 126.0 251.8 226.1
Provision for income taxes....................................... 57.9 50.5 100.7 95.0
Minority interest................................................ (1.6) (5.6) (4.0) (8.5)
--------- ------- ------- --------
NET EARNINGS..................................................... 85.3 69.9 147.1 122.6
Preferred stock dividends........................................ 5.8 5.8 11.7 11.7
--------- ------- --------- --------
NET EARNINGS ATTRIBUTABLE TO COMMON STOCK (Note 1)............... $ 79.5 $ 64.1 $ 135.4 $ 110.9
========= ======= ========= ========
Net earnings per common share (Note 1):
Basic........................................................ $ .67 $ .54 $ 1.14 $ .94
Diluted...................................................... $ .66 $ .54 $ 1.13 $ .94
Weighted average common shares outstanding (Note 1):
Basic........................................................ 118.4 117.4 118.4 117.4
Diluted...................................................... 119.5 118.3 119.4 118.2
Cash dividends declared per common share......................... $ .085 $ .085 $ .17 $ .17
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Estee Lauder Companies Inc. and its subsidiaries (collectively, the
"Company") manufacture skin care, makeup, fragrance and hair care products which
are distributed in over 100 countries and territories. The following is a
comparative summary of operating results for the three and six months ended
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
---------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
NET SALES
BY REGION:
The Americas:
United States........................................... $ 548.1 $486.6 $ 1,074.2 $ 993.8
Other Americas.......................................... 36.5 38.8 72.8 70.8
--------- ------- --------- --------
Total Americas........................................ 584.6 525.4 1,147.0 1,064.6
Europe, the Middle East & Africa........................... 283.2 266.7 507.1 472.7
Asia/Pacific............................................... 133.1 149.4 247.4 277.0
--------- ------- --------- --------
$1,000.9 $941.5 $1,901.5 $1,814.3
======== ====== ======== ========
BY PRODUCT CATEGORY:
Skin Care.................................................. $308.2 $321.5 $ 607.4 $ 644.4
Makeup..................................................... 330.1 319.1 657.1 637.0
Fragrance.................................................. 351.6 296.7 622.3 524.7
Hair Care.................................................. 11.0 4.2 14.7 8.2
--------- ------- --------- --------
$1,000.9 $941.5 $ 1,901.5 $1,814.3
======== ====== ========= ========
OPERATING INCOME
The Americas:
United States.............................................. $ 72.1 $ 59.0 $ 142.4 $ 120.5
Other Americas............................................. 12.3 15.5 22.6 22.5
--------- ------- --------- --------
Total Americas.......................................... 84.4 74.5 165.0 143.0
Europe, the Middle East & Africa.............................. 44.7 35.4 67.6 59.3
Asia/Pacific.................................................. 15.8 16.0 18.3 24.9
--------- ------- --------- --------
$ 144.9 $125.9 $ 250.9 $ 227.2
========= ====== ========= ========
</TABLE>
The following table sets forth certain consolidated statement of earnings data
as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
---------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales........................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................................... 22.9 23.1 22.8 23.0
------ ---- ----- -----
Gross profit..................................................... 77.1 76.9 77.2 77.0
Selling, general and administrative expenses:
Selling, general and administrative........................... 61.7 62.5 63.1 63.5
Related party royalties....................................... 0.9 1.0 0.9 1.0
------ ------ ----- -----
62.6 63.5 64.0 64.5
------ ------ ----- -----
Operating income................................................. 14.5 13.4 13.2 12.5
Interest (expense) income, net................................... - - - -
------ ------ ----- -----
Earnings before income taxes and minority interest............... 14.5 13.4 13.2 12.5
Provision for income taxes....................................... 5.8 5.4 5.3 5.2
Minority interest................................................ (0.2) (0.6) (0.2) (0.5)
------ ------ ----- -----
Net earnings ................................................... 8.5% 7.4% 7.7% 6.8%
====== ====== ===== =====
</TABLE>
3
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET SALES
Net sales increased 6% or $59.4 million to $1,000.9 million, and 5% or $87.2
million to $1,901.5 million for the three and six months ended December 31,
1997, respectively, as compared with the same prior-year periods, on the
strength of new product launches, the global rollout of recent fragrance
introductions and the continued solid performance of existing key products. The
continuing strength of the U.S. dollar negatively impacted net sales for the
current three and six month periods by approximately $43.0 million and $75.0
million, respectively. This strengthening of the U.S. dollar continues to
negatively affect the net sales in each of the Company's regions and product
categories as compared to the same prior-year period. Excluding the impact of
foreign currency translation, net sales increased 11% and 9% for the three and
six months ended December 31, 1997, respectively. Net sales for the current-year
periods include the sales of Sassaby, Inc. ("Sassaby") and Aveda Corporation
("Aveda") from the dates of their acquisitions, which were acquired in October
1997 and December 1997, respectively.
Net sales of skin care products decreased 4% or $13.3 million to $308.2 million,
and 6% or $37.0 million to $607.4 million for the three and six months ended
December 31, 1997, respectively, as compared with the same prior-year periods.
The continued strengthening of the U.S. dollar versus the Asian and European
currencies affects skin care sales to a greater extent than makeup or fragrance
sales since skin care sales in the Asian and European markets represent a larger
portion of total sales than in the other markets. Excluding the impact of
foreign currency translation, skin care sales for the three and six months ended
December 31, 1997 increased 1% and decreased 1%, respectively, as compared to
the same prior-year periods. Skin care product sales were positively impacted by
the recent launch of Uncircle, Self-Action Sunless Supertan and Moisture
In-Control and the continued growth of existing products such as Moisture
On-Line and Verite. The comparison of the current year with the same prior-year
periods was unfavorably impacted by the successful introductions of Fruition
Extra, and Lip Zone in the prior year and lower sales of Turnaround Cream. Net
sales of makeup products rose 3% or $11.0 million to $330.1 million and 3% or
$20.1 million to $657.1 million for the current three and six-month periods,
respectively, compared with the same prior-year periods. Higher makeup product
sales were due to the successful introduction of Minute Makeup, as well as from
recent launches of Blush All Day, Superbalanced Makeup, Quickliner For Lips and
Double Wear Foundation and increased contributions from existing products such
as Chubby Sticks, Virtual Skin, and Futurist. These increases were partially
offset by lower sales of True Lipstick and Long Last Lipstick. In addition, the
current periods comparisons were unfavorably impacted by the launches of City
Base Compact Foundation, Long Last Soft Shine Lipstick and Natural Finish Powder
Makeup in the same prior-year period. Excluding the impact of foreign currency
translation, makeup sales for the three and six months ended December 31, 1997
increased 7% and 6%, respectively, as compared to the same prior-year periods.
Net sales of fragrance products increased 19% or $54.9 million to $351.6
million, and 19% or $97.6 million to $622.3 million for the three and six months
ended December 31, 1997, respectively, compared with the same prior-year
periods. The increase is primarily attributable to the continued highly
successful Americas launch of Lauder Pleasures For Men, the domestic success and
United Kingdom launch of Clinique Happy, and the ongoing worldwide success of
"tommy" and "tommy girl". These increases were partially offset by the impact of
the successful European launch of Kiton in the same prior-year period, along
with lower sales of Havana Pour Elle, White Linen, and Knowing. In addition, the
current quarter benefited from increased sales of Estee Lauder pleasures.
Excluding the impact of foreign currency translation, fragrance sales for the
three and six months ended December 31, 1997 increased 23%, as compared to the
same prior-year periods. Net sales of hair care products approximately doubled,
as compared with the same prior-year periods. The increase reflects sales from
the inclusion of Aveda product lines beginning December 1997. The introduction
of new products may have some cannibalization effect on sales of existing
products, which is taken into account by the Company in its business planning.
The Company's quarterly net sales are subject to seasonal fluctuations,
particularly in the fragrance category.
Sales in the Americas increased 11% or $59.2 million to $584.6 million, and 8%
or $82.4 million to $1,147.0 million for the three and six months ended December
31, 1997, respectively, compared with the same prior-year periods. This increase
is driven by sales of new products across all categories and sales growth of
existing fragrance and makeup products particularly in the United States
partially offset by lower sales in Canada. In Europe, the Middle East & Africa,
net sales increased 6% or $16.5 million to $283.2 million, and 7% or $34.4
million to $507.1 million for the current three and six month periods ended
December 31, 1997, respectively, compared with the same prior-year periods. The
increase was primarily the result of higher net sales in the United Kingdom, the
travel retail business, South Africa, Belgium, and the inclusion of sales from
the Company's European fragrance development and distribution joint venture.
These increases were partially offset by lower
4
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
sales in Germany, France, Italy and Switzerland for the three and six months
ended December 31, 1997, as a result of the continued unfavorable impact of
foreign currency translation. Excluding the impact of foreign currency
translation, Europe, the Middle East and Africa sales would have increased 14%
and 16% over the prior-year three and six month periods, respectively. Net sales
in Asia/Pacific decreased 11% or $16.3 million to $133.1 million, and 11% or
$29.6 million to $247.4 million for the three and six months ended December 31,
1997, respectively, compared with the same prior-year periods. Lower sales
primarily in Japan, Hong Kong and Taiwan due to difficult retail environments
combined with the continued decline in Southeast Asian currencies against the
U.S. dollar, particularly the Japanese yen, Thailand baht and Korean won
resulted in the unfavorable comparisons with the prior-year periods. Excluding
the impact of foreign currency translation, Asia/Pacific sales would have grown
2% over the prior-year three month period and been level with the prior-year six
month period. The Company strategically staggers its new product launches by
geographic markets, which may account for differences in regional sales growth.
COST OF SALES
Cost of sales for the three and six months ended December 31, 1997 were 22.9%
and 22.8%, respectively, of net sales compared with 23.1% and 23.0% of net sales
in the prior-year periods. The improvements principally reflect the efficiencies
achieved as a result of the Company's continuing efforts to globalize its
sourcing and manufacturing activities, as well as shifts in product mix. Sassaby
and Aveda both have cost structures higher than the Company's other brands. As a
result, on an ongoing basis, as the Company integrates these recent
acquisitions, cost of sales as a percent of net sales may be different from
historical results.
SELLING, GENERAL AND ADMINISTRATIVE
Total selling, general and administrative expenses decreased to 62.6% and 64.0%
of net sales for the three and six months ended December 31, 1997, respectively,
compared with 63.5% and 64.5% of net sales in the same prior-year periods. The
Company's quarterly operating expenses are subject to the timing of advertising
and promotional spending, due to product launches and rollouts and incremental
advertising in selective markets. The Company's recent acquisitions' operating
expenses as a percent of net sales are lower, as compared to the Company's
corporate average. As such, total selling, general and administrative expenses
as a percent of net sales may change in the future, as compared to prior
periods.
OPERATING INCOME
Operating income increased 15% or $19.0 million to $144.9 million, and 10% or
$23.7 million to $250.9 million for the three and six months ended December 31,
1997, respectively, compared with the same prior-year periods. Operating margins
were 14.5% and 13.2% in the current periods as compared to 13.4% and 12.5% in
the corresponding prior-year periods. The increase in operating income and
margins was due to higher net sales coupled with cost of sales and operational
efficiencies and the timing of advertising and promotional spending. Operating
income in the Americas increased 13% or $9.9 million to $84.4 million, and 15%
or $22.0 million to $165.0 million for the three and six months ended December
31, 1997, respectively, compared with the same prior-year periods, primarily due
to the net sales increases in the United States and the inclusion of operating
results from recent acquisitions. In Europe, the Middle East & Africa, operating
income increased 26% or $9.3 million to $44.7 million and 14% or $8.3 million to
$67.6 million for the three and six months ended December 31, 1997,
respectively. These increases were primarily due to improved operating results
in the United Kingdom, France, Switzerland, Italy, Belgium and the travel retail
business. In Asia/Pacific, operating income decreased 1% or $0.2 million to
$15.8 million and 27% or $6.6 million to $18.3 million for the three and six
months ended December 31, 1997, respectively, compared with the same prior-year
periods, due to lower results in Taiwan and Hong Kong, partially offset by
higher results in Singapore. In addition, Japan's results for the quarter ended
December 31, 1997 were higher than the prior-year quarter, although for the six
month period were below the same prior-year period. The Company's quarterly
operating results are subject to seasonal net sales fluctuations in addition to
the level, scope and timing of expenditures related to product promotions or
introductions.
5
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST (EXPENSE) INCOME, NET
Net interest expense was $0.1 million and net interest income was $0.9 million
for the three and six months ended December 31, 1997, respectively, as compared
with net interest income of $0.1 million and net interest expense of $1.1
million, respectively, in the same prior-year periods. The increase in net
interest expense for the three months ended December 31, 1997 is primarily due
to higher borrowings associated with the Company's recent acquisitions. The
increase in net interest income for the six months ended December 31, 1997 is
primarily attributable to decreased interest expense as a result of lower
average debt levels during the current six month period, as compared to the same
corresponding prior-year period.
PROVISION FOR INCOME TAXES
The provision for income taxes represents federal, foreign, state and local
income taxes. The effective rate for income taxes in the three and six months
ended December 31, 1997 was 40.0% compared with 40.1% and 42.0% for the three
and six months ended December 31, 1996. These rates reflect the effect of state
and local taxes, higher tax rates in certain foreign jurisdictions and certain
nondeductible expenses. The decrease in the effective income tax rate was
principally attributable to a relative change in the mix of earnings from higher
tax countries such as Japan to lower tax countries, the effects of a lower
statutory tax rate in the United Kingdom and the effect of recent federal tax
regulations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds have historically been, and are
expected to continue to be, cash flow from operations and borrowings under
uncommitted and committed credit lines provided by banks in the United States
and abroad. At December 31, 1997, the Company had cash and cash equivalents of
$292.6 million compared with $255.6 million at June 30, 1997.
Uncommitted lines of credit amounted to $321.2 million at December 31, 1997, of
which $9.2 million were used. Unused committed lines of credit available to the
Company at December 31, 1997 amounted to $101.2 million. Total debt as a
percentage of total capitalization (including short-term debt) was 23% at
December 31, 1997 and 3% at June 30, 1997. This increase is due to an increased
level of borrowings as a result of the Company's recent acquisitions. The
Company anticipates refinancing the borrowings under the revolving
credit-facility to long-term debt during the third quarter of fiscal 1998.
Net cash provided by operating activities increased to $181.9 million in the six
months ended December 31, 1997 from $154.5 million in the prior year six-month
period. This increase primarily reflects the Company's increased profitability,
lesser increases in accounts receivable and increases in accrued liabilities
partially offset by an increase in other assets. Net cash used for investing
activities increased to $400.0 million in the six months ended December 31, 1997
from $30.7 million in the prior six-month period due to the Company's recent
acquisitions and higher capital expenditures. Financing activities reflect
dividends paid, short-term borrowings and repayment of long-term debt. Net cash
provided by financing activities increased for the six months ended December 31,
1997, as compared to the same prior-year period, primarily due to an increase in
short-term bank borrowings used to finance the Company's recent acquisitions.
The Company owns a majority equity interest in M.A.C., and through contractual
agreement, the Company has the right to acquire the remaining interest in M.A.C.
at certain times between February 1998 and February 1999. The Company
anticipates exercising this right during the third quarter of fiscal 1998.
The Company is in the process of constructing a state-of-the-art warehouse and
distribution center in Lachen, Switzerland, which has been designed to
accommodate the company's projected future growth. The Company to date has spent
approximately $17.2 million at current exchange rates. The total cost of the new
distribution center is estimated to be approximately $18.2 million at current
exchange rates, and the Company anticipates operations to commence by the end of
fiscal 1998.
Dividend payments were $21.7 million for the six months ended December 31, 1997
and 1996, respectively.
6
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company uses derivative financial instruments for the purpose of managing
its exposure to adverse fluctuations in foreign currency exchange rates and
interest rates. The Company addresses its risks through a controlled program of
risk management, the principal objective of which is to minimize the risks
and/or costs associated with financial and global operating activities. The
Company does not utilize derivative financial instruments for trading or other
speculative purposes. The Company conducts business in many foreign currencies.
As a result, it is subject to foreign currency exchange rate risk due to the
effects that foreign exchange rate movements of these currencies, principally
against the Belgian franc, U.K. pound, and Swiss franc, have on the Company's
costs and on the cash flows which it receives from its foreign subsidiaries.
The Company enters into forward exchange contracts to hedge purchases,
receivables and payables denominated in foreign currencies for periods
consistent with its identified exposures. Gains and losses related to qualifying
hedges of these exposures are deferred and recognized in operating income when
the underlying hedged transaction occurs. The Company also enters into purchased
foreign currency options to hedge anticipated transactions where there is a high
probability that anticipated exposures will materialize. Any gains realized on
such options that qualify as hedges are deferred and recognized in operating
income when the underlying hedged transaction occurs. Premiums on foreign
currency options are amortized over the period being hedged. Foreign currency
transactions which do not qualify as hedges are marked-to-market on a current
basis with gains and losses recognized through income and reflected in operating
expenses. In addition, any previously deferred gains and losses on hedges which
are terminated prior to the transaction date are recognized in current income
when the hedge is terminated. The contracts have varying maturities with none
exceeding 24 months.
The Company enters into interest rate swaps to convert floating interest rate
debt to fixed rate debt. These swap agreements are contracts to exchange
floating rate for fixed rate interest payments periodically over the life of the
agreements. Amounts currently due to or from interest rate swap counterparties
are recorded in interest expense in the period in which they accrue. The related
amounts payable to, or receivable from, the counterparties are included in other
accrued liabilities.
As a matter of policy, the Company only enters into contracts with parties that
have at least an "A" (or equivalent) credit rating. The counterparties to these
contracts are major financial institutions and the Company does not have
significant exposure to any one counterparty. The Company's exposure to credit
loss in the event of nonperformance by any of the counterparties is limited to
only the recognized, but not realized, gains attributable to the contracts.
Management believes risk of loss is remote and in any event would be immaterial.
Costs associated with entering into such contracts have not been material to the
Company's financial results. At December 31, 1997, the Company had contracts to
exchange foreign currencies in the form of purchased currency options and
forward exchange contracts in the amount of $44.9 million and $264.3 million,
respectively. Foreign currencies exchanged under these contracts are principally
the Belgian franc, U.K. pound, and Swiss franc. In addition, the Company had
interest rate swap agreements outstanding in the amount of $405.0 million. There
have been no significant changes in market risk since June 30, 1997 that would
have a material effect on the Company's calculated value-at-risk exposure, as
disclosed in its annual report on Form 10-K for the year ended June 30, 1997.
The Company believes that cash on hand, internally generated cash flow,
available credit lines and access to capital markets will be adequate to support
currently planned business operations, acquisitions and capital expenditures
both on a near-term and long-term basis.
7
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1997
---- ----
(UNAUDITED)
(IN MILLIONS)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................................................... $ 292.6 $ 255.6
Accounts receivable, net................................................................ 569.7 471.7
Inventory and promotional merchandise (Note 1).......................................... 421.9 440.6
Prepaid expenses and other current assets............................................... 164.6 143.2
-------- --------
TOTAL CURRENT ASSETS............................................................... 1,448.8 1,311.1
PROPERTY, PLANT AND EQUIPMENT, NET (Note 1)............................................. 298.7 265.0
OTHER ASSETS
Investments, at cost or market value.................................................... 25.5 25.9
Deferred taxes.......................................................................... 62.6 59.9
Goodwill, net (Note 1).................................................................. 418.9 91.7
Other intangibles, net (Note 1)......................................................... 75.4 69.6
Other assets............................................................................ 60.0 49.9
-------- --------
642.4 297.0
-------- --------
$2,389.9 $1,873.1
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings.............................................................. $ 300.0 $ -
Notes payable and current maturities of long-term debt.................................. 10.2 31.1
Accounts payable........................................................................ 160.9 165.8
Accrued income taxes.................................................................... 78.3 57.4
Other accrued liabilities............................................................... 616.1 505.2
-------- --------
TOTAL CURRENT LIABILITIES.......................................................... 1,165.5 759.5
NONCURRENT LIABILITIES.................................................................. 212.5 205.9
$6.50 CUMULATIVE REDEEMABLE PREFERRED STOCK, AT REDEMPTION VALUE........................ 360.0 360.0
STOCKHOLDERS' EQUITY
Capital stock, $.01 par value; 300,000,000 shares Class A authorized, shares
outstanding 61,438,082 at December 31, 1997 and 61,436,663 at June 30, 1997;
120,000,000 shares Class B authorized, shares outstanding 56,839,667................. 1.2 1.2
Paid-in capital......................................................................... 169.6 165.3
Retained earnings....................................................................... 501.7 386.4
Unrealized investment gains, net........................................................ 2.7 2.9
Cumulative translation adjustments...................................................... (23.3) (8.1)
--------- --------
651.9 547.7
-------- --------
$2,389.9 $1,873.1
======== ========
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
-----------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings............................................................................... $ 147.1 $ 122.6
Adjustments to reconcile net earnings to net cash
flows provided by operating activities:
Depreciation and amortization.......................................................... 34.6 27.5
Amortization of purchased royalty rights............................................... 8.9 8.9
Deferred income taxes.................................................................. (9.0) (10.6)
Minority interest...................................................................... 4.0 8.5
Changes in operating assets and liabilities:
Increase in accounts receivable, net................................................... (95.8) (115.9)
Decrease in inventory and promotional merchandise...................................... 25.7 62.3
Increase in other assets............................................................... (52.4) (11.3)
Decrease in accounts payable........................................................... (12.4) (27.1)
Increase in accrued income taxes....................................................... 23.0 27.3
Increase in other accrued liabilities.................................................. 104.3 51.1
Increase in noncurrent liabilities..................................................... 3.9 11.2
--------- --------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES...................................... 181.9 154.5
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired............................................ (350.3) -
Capital expenditures....................................................................... (50.1) (30.7)
Purchase of long-term investments.......................................................... (1.3) (0.3)
Proceeds from disposition of long-term investments......................................... 1.7 0.3
--------- --------
NET CASH FLOWS USED FOR INVESTING ACTIVITIES......................................... (400.0) (30.7)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term bank borrowings................................................... 300.0 -
Decrease in notes payable.................................................................. (7.2) (49.5)
Repayments and redemptions of long-term debt............................................... (21.9) (21.9)
Proceeds from exercise of stock options.................................................... - 0.7
Dividends paid............................................................................. (21.7) (21.7)
--------- --------
NET CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES........................... 249.2 (92.4)
Effect of Exchange Rate Changes on Cash and Cash Equivalents.................................. 5.9 2.3
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................................................... 37.0 33.7
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.............................................. 255.6 254.8
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................................... $ 292.6 $ 288.5
========= ========
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
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 in
consolidation.
Certain amounts in the financial statements for prior years have been
reclassified to conform to the current year presentations for comparative
purposes.
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, 1997.
NET EARNINGS PER COMMON SHARE
For the periods ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." In
accordance with the requirements of SFAS No. 128, net earnings per common share
amounts ("basic EPS") were 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) and excluded any
potential dilution. Net earnings per common share amounts -- assuming dilution
("diluted EPS") were computed by reflecting potential dilution from the exercise
of stock options. SFAS No. 128 requires the presentation of both basic EPS and
diluted EPS on the face of the income statement. Earnings per share amounts for
the same prior-year periods have been restated to conform with the provisions of
SFAS No. 128.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net earnings is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997
------------------------------------------- ---------------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS (NUMERATOR) (DENOMINATOR) AMOUNTS
-------------- ---------------- ----------- -------------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER
SHARE DATA)
Net earnings $85.3 $147.1
Preferred stock dividends (5.8) (11.7)
-------- ---------
BASIC EPS
Net earnings attributable
to common stock 79.5 118.4 $.67 135.4 118.4 $1.14
==== =====
EFFECT OF DILUTIVE
SECURITIES
Stock options - 1.1 - 1.0
--------- ----- -------- ------
DILUTED EPS
Net earnings attributable
to common stock and
assumed option exercises $79.5 119.5 $.66 $135.4 119.4 $1.13
===== ===== ==== ====== ===== =====
</TABLE>
10
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996
------------------------------------------ ------------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS (NUMERATOR) (DENOMINATOR) AMOUNTS
--------------- -------------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER
SHARE DATA)
Net earnings $69.9 $122.6
Preferred stock dividends (5.8) (11.7)
------- --------
BASIC EPS
Net earnings attributable
to common stock 64.1 117.4 $.54 110.9 117.4 $.94
==== ====
EFFECT OF DILUTIVE
SECURITIES
Stock options - .9 - .8
------ ------ ------ -----
DILUTED EPS
Net earnings attributable
to common stock and
assumed option exercises $64.1 118.3 $.54 $110.9 118.2 $.94
===== ===== ==== ====== ===== ====
</TABLE>
Options to purchase 1,057,500 shares of common stock were not included in the
computation of diluted EPS because the exercise price of those options was
greater than the average market price of the common shares. The options were
still outstanding at the end of the period.
INVENTORY AND PROMOTIONAL MERCHANDISE
Inventory and promotional merchandise include only items saleable or usable in
future periods and are stated at the lower of first-in, first-out cost or
market. Promotional merchandise is charged to expense at the time the
merchandise is shipped to the Company's customers.
Inventory and promotional merchandise consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
Raw materials............................. $112.6 $119.3
Work in process........................... 24.7 23.5
Finished goods............................ 181.0 193.8
Promotional merchandise................... 103.6 104.0
------- -------
$421.9 $440.6
====== ======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. For financial statement
purposes, depreciation is provided principally on the straight-line method over
the estimated useful lives of the assets ranging from 3 to 40 years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lives of the respective leases or the expected useful lives.
11
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
Land............................................... $ 11.8 $ 11.8
Buildings and improvements......................... 95.9 91.9
Machinery and equipment............................ 400.0 355.8
Furniture and fixtures............................. 67.7 56.9
Leasehold improvements............................. 99.7 86.6
-------- --------
675.1 603.0
Less accumulated depreciation and amortization..... 376.4 338.0
------- -------
$298.7 $265.0
====== ======
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist of goodwill, purchased royalty rights, patents and
trademarks. Goodwill represents the excess of the cost of purchased businesses
over the value of their underlying net assets and is amortized on a
straight-line basis over 40 years. The cost of all other intangibles is
amortized on a straight-line basis over their estimated useful lives. The
carrying amounts of intangible assets are assessed for impairment when changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses
reported in those financial statements. Actual results could differ from those
based upon such estimates and assumptions.
NOTE 2 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND
NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31
----------------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Cash paid during the period for:
Interest............................................. $ 2.0 $ 4.2
Income taxes......................................... $ 72.0 $ 69.6
Non-Cash items:
Exchange of stock options in conjunction
with acquisition..................................... $ 4.3 $ -
</TABLE>
NOTE 3 - ACQUISITION OF BUSINESSES
In October 1997, the Company acquired Sassaby, Inc. ("Sassaby"), a marketer and
distributor of youthful cosmetics, for cash and the exchange of employee stock
options. The stock options were valued as of the date of acquisition and
accounted for as part of the consideration given.
12
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 1997, the Company acquired the business of Aveda Corporation and
certain of its affiliates ("Aveda"), a premium manufacturer and marketer of
plant-based hair, skin, makeup and body care products for cash. The purchase of
Aveda was financed with proceeds received from borrowings under the Company's
revolving credit facility, bearing interest at 5.92% as of December 31, 1997.
The Company anticipates refinancing the borrowings under the revolving
credit-facility to long-term debt during the third quarter of fiscal 1998.
The aggregate purchase price for these transactions, which includes acquisition
costs, was approximately $356.7 million and both transactions have been
accounted for using the purchase method of accounting. Accordingly, the results
of operations of Sassaby and Aveda are included in the accompanying consolidated
financial statements since the dates of acquisition. Pro-forma results of
operations as if these acquisitions had been completed as of July 1, 1997 have
not been presented, as the impact on the Company's results of operations would
not have been material.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in various routine legal proceedings incident to the
ordinary course of its business. The Company believes that the outcome of all
pending legal proceedings in the aggregate will not have a material adverse
effect on its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of the Stockholders of the Company was held on November
12, 1997.
(b) The following directors were elected at the Annual Meeting of Stockholders:
Fred H. Langhammer and Faye Wattleton, as Class I Directors for a term
expiring at the 2000 Annual Meeting.
(c) (i) Each person elected as a director received the number of votes (shares
of Class B Common Stock are entitled to ten votes per share) indicated
beside his or her name:
Name Votes For Votes Withheld
---- --------- --------------
Fred H. Langhammer 626,254,049 88,763
Faye Wattleton 626,255,652 87,160
(ii) 626,286,218 votes were cast for and 14,965 votes were cast against the
ratification of the selection of Arthur Andersen LLP as auditors for
the Company. Abstentions totaled 41,629; there were no broker
nonvotes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits--
27.1 Financial Data Schedule.
(b) Reports on Form 8-K --
On November 19, 1997, the Company filed a current Report on Form 8-K
pursuant to Item 5 thereof, reporting that the Company had entered into
an agreement to purchase Aveda.
On December 1, 1997, the Company filed a current Report on Form 8-K
pursuant to Item 2 thereof, reporting that the Company had completed
its acquisition of Aveda.
13
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE ESTEE LAUDER COMPANIES INC.
Date: January 27, 1998 By: /s/ Robert J. Bigler
-----------------------------
Robert J. Bigler
Senior Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
14
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule.
15
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
THE ESTEE LAUDER COMPANIES INC.
FINANCIAL DATA SCHEDULE
FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 1997
(IN MILLIONS)
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ESTEE
LAUDER COMPANIES INC. FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 292,6
<SECURITIES> 0
<RECEIVABLES> 569,7
<ALLOWANCES> 0
<INVENTORY> 421,9
<CURRENT-ASSETS> 1,448,8
<PP&E> 675,1
<DEPRECIATION> 376,4
<TOTAL-ASSETS> 2,389,9
<CURRENT-LIABILITIES> 1,165,5
<BONDS> 0
360,0
0
<COMMON> 1,2
<OTHER-SE> 650,7
<TOTAL-LIABILITY-AND-EQUITY> 2,389,9
<SALES> 1,901,5
<TOTAL-REVENUES> 1,901,5
<CGS> 433,7
<TOTAL-COSTS> 433,7
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX>(A) 251,8
<INCOME-TAX> 100,7
<INCOME-CONTINUING> 147,1
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 147,1
<EPS-PRIMARY> 1,14
<EPS-DILUTED> 1,13
(A) Income before taxes and minority interest of $4.0.
</TABLE>
