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 September 30, 1999
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 October 22, 1999, 123,282,804 shares of the registrant's Class A Common
Stock, $.01 par value, and 113,679,334 shares of the registrant's Class B Common
Stock, $.01 par value, were outstanding.
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
INDEX
<TABLE>
<CAPTION>
Page
Part I. Financial Information
<S> <C>
Consolidated Statements of Earnings --
Three Months Ended September 30, 1999 and 1998........................................... 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................ 3
Consolidated Balance Sheets --
September 30, 1999 and June 30, 1999..................................................... 11
Consolidated Statements of Cash Flows --
Three Months Ended September 30, 1999 and 1998........................................... 12
Notes to Consolidated Financial Statements.................................................... 13
Part II. Other Information............................................................................. 17
</TABLE>
-1-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
PART I. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30
1999 1998
---- ----
(In millions, except per share data)
<S> <C> <C>
Net Sales....................................................................... $ 1,093.7 $997.0
Cost of sales................................................................... 251.8 229.6
--------- ------
Gross Profit.................................................................... 841.9 767.4
--------- ------
Operating expenses:
Selling, general and administrative.......................................... 697.4 638.2
Related party royalties...................................................... 8.0 7.6
--------- ------
705.4 645.8
--------- ------
Operating Income................................................................ 136.5 121.6
Interest expense, net........................................................... 5.4 6.1
--------- ------
Earnings before Income Taxes.................................................... 131.1 115.5
Provision for income taxes...................................................... 48.5 43.9
--------- ------
Net Earnings.................................................................... 82.6 71.6
Preferred stock dividends....................................................... 5.9 5.9
--------- ------
Net Earnings Attributable to Common Stock....................................... $ 76.7 $ 65.7
========= ======
Net earnings per common share:
Basic......................................................................... $ .32 $ .28
Diluted....................................................................... .32 .27
Weighted average common shares outstanding:
Basic......................................................................... 237.5 237.0
Diluted....................................................................... 242.6 240.2
Cash dividends declared per common share........................................ $ .05 $.0425
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
We manufacture skin care, makeup, fragrance and hair care products which are
distributed in over 110 countries and territories. The following is a
comparative summary of operating results for the three months ended September
30, 1999 and 1998. Sales of products and services that do not meet our
definition of skin care, makeup, fragrance and hair care have been included in
the "other" category. Prior-year information has been restated to reflect the
results of operations related to those products and services.
<TABLE>
<CAPTION>
Three Months Ended
September 30
1999 1998
---- ----
(In millions)
<S> <C> <C>
NET SALES
By Region:
The Americas......................................................... $ 715.8 $ 656.3
Europe, the Middle East & Africa..................................... 257.1 244.9
Asia/Pacific......................................................... 120.8 95.8
--------- -------
$ 1,093.7 $ 997.0
========= =======
By Product Category:
Skin Care............................................................ $ 353.4 $ 303.1
Makeup............................................................... 403.9 370.2
Fragrance............................................................ 307.1 295.5
Hair Care............................................................ 23.1 22.1
Other................................................................ 6.2 6.1
--------- -------
$ 1,093.7 $ 997.0
========= =======
OPERATING INCOME
By Region:
The Americas......................................................... $ 100.4 $ 92.9
Europe, the Middle East & Africa..................................... 27.2 25.2
Asia/Pacific......................................................... 8.9 3.5
--------- -------
$ 136.5 $ 121.6
========= =======
By Product Category:
Skin Care............................................................ $ 54.1 $ 45.0
Makeup............................................................... 48.5 44.2
Fragrance............................................................ 31.3 29.5
Hair Care............................................................ 2.5 3.1
Other................................................................ 0.1 (0.2)
--------- -------
$ 136.5 $ 121.6
========= =======
</TABLE>
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<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain consolidated earnings data as a
percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended
September 30
1999 1998
---- ----
<S> <C> <C>
Net sales.................................................................. 100.0% 100.0%
Cost of sales.............................................................. 23.0 23.0
------ -----
Gross profit............................................................... 77.0 77.0
------ -----
Operating expenses before depreciation and amortization:
Selling, general and administrative..................................... 60.7 61.0
Related party royalties................................................. 0.7 0.8
------ -----
61.4 61.8
------ -----
Earnings before interest, taxes, depreciation and
amortization ("EBITDA").................................................. 15.6 15.2
Depreciation and amortization.............................................. 3.1 3.0
------ -----
Operating income........................................................... 12.5 12.2
Interest expense, net...................................................... 0.5 0.6
------ -----
Earnings before income taxes............................................... 12.0 11.6
Provision for income taxes................................................. 4.4 4.4
------ -----
Net earnings............................................................... 7.6% 7.2%
====== =====
</TABLE>
First Quarter Fiscal 2000 as compared with First Quarter Fiscal 1999
NET SALES
Net sales increased 10% or $96.7 million to $1,093.7 primarily due to increases
in all product categories, a strong domestic economy and continued recovery in
the Asia/Pacific region. Excluding the impact of foreign currency translation,
net sales increased 9% reflecting a weaker dollar against the Japanese yen
partially offset by weakness in certain European currencies.
Product Categories
Skin Care
Net sales of skin care products increased 17% or $50.3 million to $353.4
million, reflecting our ability to reach a diverse group of consumers in a wide
variety of regions. We continue to offer new, technologically-advanced products
in addition to the core products upon which we have built our reputation. This
quarter's results reflect the inclusion of sales of Stop Signs and Resilience
Lift, which appeal to our mature consumers, and our new Clinique Acne Solutions
line which brings a younger consumer to the counter. We also saw improvements in
existing products, such as Clinique All About Eyes, as well as certain core
product offerings, such as the Clinique 3-Step Skin Care System. Due to the
relatively high concentration of skin care products sold in the Far East, the
recent recovery of the Asia/Pacific marketplace has had a favorable effect on
sales in this segment.
Makeup
The combination of new product offerings from our core brands and strong growth
of our newer brands contributed to a net sales increase of 9% or $33.7 million
to $403.9 million. The first quarter launch of City Stick and Longstemmed
Lashes, as well as recently introduced products such as Superfit Makeup and
Liquid Lipstick by Clinique, provided increased sales despite difficult
comparisons to last year's first quarter which included the launch of Quickliner
for Eyes and strong sales of Smudgesicles. The August 1999 acquisition of the
business of Stila Cosmetics, Inc. ("Stila") and the launch of the Tommy Hilfiger
line of color cosmetics have also contributed to increased sales in the makeup
category.
-4-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fragrance
The launch of Clinique Happy for Men and the introduction of Freedom for her and
Freedom for him have contributed to a 4% increase in fragrance sales to $307.1
million from $295.5 million. Higher sales were also fueled by the ongoing
success of Clinique Happy and Donna Karan Cashmere Mist . This quarter marks the
anniversary of our Dazzling Gold and Dazzling Silver launches which contributes
to difficult comparisons. Sales of tommy girl and Hilfiger Athletics are lower
in fiscal 2000 as they were rolled out internationally in the first quarter of
fiscal 1999.
Hair Care
Net sales of hair care products increased 5% or $1.0 million to $23.1 million
partially due to new products such as Rosemary Mint Shampoo. In the latter part
of fiscal 1999 and into the first quarter of fiscal 2000, we saw comparative
hair care sales that were lower due to the higher degree of selectivity in
choosing salons that carry Aveda products. We believe this upgrading of the
distribution channel is being well received. Currently, we see an upward trend
where concept salons have recaptured the consumer base and new points of sale
are expected to help drive hair care sales higher going forward.
The introduction of new products may cannibalize sales of existing products
somewhat. We take this into account in our business planning. Quarterly net
sales are subject to seasonal fluctuations, particularly in the fragrance
category.
Geographic Regions
Net sales in the Americas increased 9% or $59.5 million to $715.8 million as
compared with the same prior-year period. Sales increases were related to the
strength of new and existing skin care products, the launch of several new
fragrances and increased makeup contributions by M.A.C, Bobbi Brown
essentials, jane and newly-acquired Stila. In Europe, the Middle East & Africa,
net sales increased 5% or $12.2 million to $257.1 million. The increase was
primarily the result of higher net sales in Spain, South Africa, Belgium, France
and the distributor and travel retail businesses, partially offset by lower
sales in the United Kingdom and Germany. Excluding the impact of foreign
currency translation, net sales increased 9%, reflecting a stronger dollar. Net
sales in Asia/Pacific increased 26% or $25.0 million to $120.8 million due to
improvements in virtually all markets, as the local economies recover, and the
favorable foreign currency translation impact of the weaker U.S. dollar,
particularly against the Japanese yen. Excluding the impact of foreign currency
translation, Asia/Pacific net sales increased 8%.
We strategically stagger new product launches by geographic markets, which may
account for differences in regional sales growth.
COST OF SALES
Cost of sales for the three months ended September 30, 1999 and 1998 was 23.0%
of net sales. Although the cost of goods sold has not changed as a percent of
net sales, the components reflect lower costs resulting from continued
production efficiencies offset by growth of our newer brands, some of which have
a higher product cost structure than our core brands.
OPERATING EXPENSES
Operating expenses as a percent of net sales for the three months ended
September 30, 1999 were 64.5% of net sales compared with 64.8% of net sales in
the same prior-year period. Our newer brands spend proportionally less on
advertising and promotion than our core brands. Accordingly, as their sales
grow, advertising and promotional expenditures as a percent of net sales may
decline. The change in operating expenses as a percent of net sales reflects
this as well as advertising and promotional expense efficiencies achieved. The
timing and type of new product introductions also affects our level of selling,
advertising and promotional spending.
OPERATING INCOME
Operating income increased 12% or $14.9 million to $136.5 million and operating
margins increased to 12.5% from 12.2% in the comparable period. These increases
reflect sales growth, sustained gross profits and continued operating expense
efficiencies.
-5-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Product Categories
Operating income in the skin care category increased 20% or $9.1 million to
$54.1 million due to strong sales of core products which have been fueled by
recent introductions such as Stop Signs and Resilience Lift. Additionally, as a
result of a relatively higher concentration of skin care sales in the Asian
marketplace, operating income is higher as economic conditions there improve. In
the makeup segment, operating income increased 10% or $4.3 million to $48.5
million. This increase is due to increased distribution of newer brands as well
as traffic generated from new product introductions in the makeup, skin care and
fragrance segments. Operating income in the fragrance category grew 6% or $1.8
million to $31.3 million as a result of increased sales, as described above,
coupled with a consistent amount of advertising and promotional spending.
Advertising and promotional costs tend to shift from products launched in
previous periods to recently introduced products. As a result of our investment
in Aveda's distribution channel, including the addition of new retail locations
and additional spending to support those locations, we generated operating
income of $2.5 million in hair care as compared to $3.1 million in this quarter
last year. We expect growth in hair care operating income as a result of these
and other strategies.
Geographic Regions
Operating income in the Americas increased 8% or $7.5 million to $100.4 million
primarily due to higher net sales and operating expense improvements. In Europe,
the Middle East & Africa, operating income increased 8% or $2.0 million to $27.2
million as compared to the same prior-year period. Improved operating results in
Germany, Spain, South Africa and the distributor and travel retail businesses
were partially offset by lower profitability in the United Kingdom. In
Asia/Pacific, operating income increased in virtually all markets. Growth of
154% or $5.4 million to $8.9 million was led by Japan, Australia and Korea.
Quarterly operating results are subject to seasonal net sales fluctuations in
addition to the level, scope and timing of expenditures related to product
promotions and/or introductions.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA") is an
additional measure of operating performance used by management. While the
components of EBITDA may vary from company to company, we exclude all
depreciation charges related to property, plant and equipment and all
amortization charges including amortization of goodwill, purchased royalty
rights, leasehold improvements and other intangible assets. We consider EBITDA
useful in analyzing our results; however, it is not intended to replace, or act
as a substitute for, any presentation included in the consolidated financial
statements prepared in conformity with generally accepted accounting principles.
EBITDA increased 13% to $170.5 million or 15.6% of net sales for the three
months ended September 30, 1999 as compared to $151.3 million or 15.2% of net
sales in the same prior-year period.
INTEREST EXPENSE, NET
Net interest expense was $5.4 million for the three months ended September 30,
1999, as compared with $6.1 million in the prior year, primarily due to lower
interest rates on commercial paper outstanding as compared to the rates on term
loan debt outstanding in the prior-year quarter.
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
September 30, 1999 was 37.0% compared with 38.0% for the three months ended
September 30, 1998. These rates reflect the effect of state and local taxes, tax
rates in foreign jurisdictions and certain nondeductible expenses. The decrease
in the effective income tax rate was principally attributable to tax planning
initiatives.
-6-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds are cash flow from operations, issuance of
commercial paper, long-term borrowings and borrowings under uncommitted and
committed credit lines provided by banks in the United States and abroad. We
believe that these sources of funds will be adequate to support currently
planned business operations, acquisitions and capital expenditures on both a
near-term and long-term basis. At September 30, 1999, the Company had cash and
cash equivalents of $250.2 million as compared to $347.5 million at June 30,
1999.
Commercial paper borrowings increased $105.0 million in the first quarter to
$310.0 million. These incremental borrowings were used in the acquisition of
businesses and for operating activities and are not expected to be refinanced on
a long-term basis. Therefore, as of September 30, 1999, $105.0 million of
commercial paper outstanding is classified as short-term debt and $205.0 million
is classified as long-term debt. The classification of commercial paper as
long-term debt in our balance sheet is based upon our intent and ability to
refinance maturing commercial paper on a long-term basis. That ability is
supported by committed credit facilities in the amount of $750.0 million, all of
which were unused. We also have uncommitted credit facilities in the amount of
$160.7 million, of which none were used. Total debt as a percentage of total
capitalization (including short-term debt) was 28% at September 30, 1999 and 25%
at June 30, 1999.
On August 26, 1999, we filed a "shelf registration" statement with the SEC
covering the potential issuance of up to $400.0 million in debt securities.
Net cash used for operating activities was $48.9 million in the three months
ended September 30, 1999 as compared to $58.9 million in the same prior-year
period. This favorable change in net cash used for operating activities
primarily reflects increased profitability. These outflows reflect seasonal
working capital levels and generally will reverse in the next three-month
period.
Net cash used for investing activities of $132.5 million during the three months
ended September 30, 1999 reflects capital expenditures, the Stila acquisition
and the ongoing acquisition of certain Aveda distributors in the United States
and the United Kingdom as well as Aveda retail outlets.
Net cash provided by financing activities of $78.0 million principally reflects
borrowings related to the issuance of commercial paper and payments to acquire
treasury stock. The proceeds from such commercial paper issuances were used for
business acquisitions and operations.
In October 1999, we acquired Jo Malone Limited, a London-based marketer of
prestige skin care and fragrance products, for cash.
Derivative Financial Instruments
We conduct business in many foreign currencies. As a result, we are subject to
foreign currency exchange rate risk due to the effects that foreign exchange
rate movements of these currencies have on our costs and cash flows which we
receive from our foreign subsidiaries. We address our 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. We
use derivative financial instruments for the purpose of managing our exposure to
adverse fluctuations in foreign currency exchange rates and interest rates. The
Company does not utilize derivative financial instruments for trading or other
speculative purposes.
-7-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Foreign Exchange Risk Management
We enter into forward exchange contracts to hedge purchases, receivables and
payables denominated in foreign currencies for periods consistent with our
identified exposures. Gains and losses related to qualifying hedges of these
exposures are deferred and recognized in operating income when the underlying
hedged transaction occurs. We also enter into 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.
As a matter of policy, we only enter into contracts with counterparties that
have at least an "A" (or equivalent) credit rating. The counterparties to these
contracts are major financial institutions. We do not have significant exposure
to any one counterparty. Our exposure to credit loss in the event of
nonperformance by any of the counterparties is limited to only the recognized,
but not realized, gains attributable to the contracts. Management believes risk
of loss is remote and in any event would not be material. Costs associated with
entering into such contracts have not been material to our financial results. At
September 30, 1999, we had contracts to exchange foreign currencies in the form
of purchased currency options and forward exchange contracts in the amount of
$38.3 million and $239.1 million, respectively. Foreign currencies exchanged
under these contracts are principally the Euro, Japanese yen, Swiss franc and
U.K. pound.
Interest Rate Risk Management
We have entered into interest rate swaps to 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. As of September 30, 1999 we
had interest rate swap agreements outstanding with a notional principal amount
of $200.0 million.
There have been no significant changes in market risk since June 30, 1999 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 year ended June 30, 1999.
YEAR 2000
We have a comprehensive program to address Year 2000 issues and are in the final
stages of implementing all aspects. The program addresses three main areas: (a)
information systems; (b) embedded chips; and (c) supply chain readiness, as well
as contingency planning related thereto. A Steering Committee, comprised of
senior executives representing our various business units around the world,
meets periodically to oversee the program, and its representatives report
regularly to the Audit Committee of the Board of Directors.
We identified potential deficiencies related to Year 2000 in our information
systems and have finalized our upgrades and other remediations. Testing has been
completed. We had an independent third party validate our information systems
remediation processes and the validation has been completed. We identified other
equipment with date sensitive operating controls and have completed the
assessment, remediation and testing of critical embedded chips. We had another
independent third party validate our embedded chip procedures and the validation
has been completed. To mitigate the risk of Year 2000 non-compliance by third
parties, we have identified, contacted and met with critical inventory
suppliers, our larger customers, and critical non-inventory suppliers and have
finalized the assessment of their Year 2000 readiness and have developed our
contingency plans accordingly.
-8-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We believe it is difficult to specifically identify the cause of the most
reasonable worst case Year 2000 scenario. As with all manufacturers and
distributors of products such as ours and based upon our work to date, a
reasonable worst case scenario would be the result of the failure of third
parties to be Year 2000 compliant. Such failures may include, without
limitation, failures by governmental entities and entities with which we have no
direct involvement that continue for more than several days in various
geographic areas where our products are sold at retail, or areas from which our
raw materials are sourced. Accordingly, we have finalized contingency plans to
limit, to the extent reasonably possible, lost revenues and other adverse
effects arising from third party failures. In addition, each of our principal
business units has identified its critical processes and has developed
contingency plans accordingly. All of our plans are necessarily limited to
matters which we can reasonably control and include the acceleration of certain
shipments, which impacted our production and procurement schedules. In order to
support ongoing global operations on or about January 1, 2000, we have
established a Y2K Communications Center which will expedite the implementation
of certain contingency plans, if necessary. We are implementing our overall
contingency plans and estimate an immaterial shift of net sales and related
expenses from the third fiscal quarter to the second fiscal quarter.
Notwithstanding the impact on any given quarter, incremental out-of-pocket costs
incurred through September 30, 1999 have not been significant and, based upon
current estimates, the costs of our Year 2000 program are not expected to be
material. Such costs do not include internal employee costs and costs related to
the deferral of other information technology projects. While we do not have a
system to track internal employee costs specifically related to the Year 2000,
those costs are not expected to be material to our consolidated results of
operations or financial condition.
Our Year 2000 efforts are ongoing and our overall program, as well as the
implementation of contingency plans, will continue to evolve as new information
becomes available. While we anticipate continuity of our business activities,
that continuity will be dependent upon our ability, and the ability of third
parties on whom we rely directly or indirectly to be Year 2000 compliant.
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 and in our reports to stockholders.
The words and phrases "will likely result," "expects," "believes," "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. Such statements include,
without limitation, our expectations regarding sales, earnings or other future
financial performance and liquidity, product introductions, entry into new
geographic regions and future operations or operating results. Although we
believe that our expectations are based on reasonable assumptions within the
bounds of our knowledge of our business and operations, we cannot assure that
actual results will not differ materially from our expectations. Factors that
could cause actual results to differ from expectations include, without
limitation:
(i) increased competitive activity from companies in the skin care,
makeup, fragrance and hair care businesses, some of which have
greater resources than we do;
(ii) our ability to develop, produce and market new products on which
future operating results may depend;
(iii) consolidations and restructurings in the retail industry
causing a decrease in the number of stores that sell our products, an
increase in the ownership concentration within the retail industry or
ownership of retailers by our competitors or ownership of competitors
by our customers that are retailers;
(iv) shifts in the preferences of consumers as to where and how they
shop for beauty and related products;
(v) social, political and economic risks to our foreign
manufacturing, distribution and retail operations, including changes
in foreign investment and trade policies and regulations of the host
countries and of the United States;
(vi) changes in the laws, regulations and policies, including changes
in accounting standards, that affect, or will affect, us in the
United States and abroad;
-9-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(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 our products in the same
market and our operating and manufacturing costs outside of the
United States;
(viii) changes in global economic conditions that could affect the
cost and availability of capital to the Company, which may be needed
for new equipment, facilities or acquisitions;
(ix) shipment delays, depletion of inventory and increased production
costs resulting from disruptions of operations at any of the
facilities which, due to consolidations in our manufacturing
operations, now manufacture nearly all of our supply of a particular
type of product (i.e., focus factories);
(x) real estate rates and availability, which may affect our ability
to increase the number of retail locations at which we sell our
products;
(xi) changes in product mix to products which are less profitable;
(xii) our ability and the ability of third parties, including
customers, suppliers and governmental entities, to adequately address
Year 2000 issues; and
(xiii) our ability to integrate acquired businesses and realize value
therefrom.
We assume no responsibility to update forward-looking statements made herein or
otherwise.
-10-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 June 30
1999 1999
---- ----
(Unaudited)
(In millions)
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents............................................................... $ 250.2 $ 347.5
Accounts receivable, net................................................................ 699.0 533.7
Inventory and promotional merchandise, net.............................................. 510.4 513.0
Prepaid expenses and other current assets............................................... 189.0 176.0
-------- --------
Total current assets............................................................... 1,648.6 1,570.2
--------- --------
Property, Plant and Equipment, net...................................................... 399.4 383.6
-------- --------
Other Assets
Investments, at cost or market value.................................................... 33.4 35.5
Deferred taxes.......................................................................... 65.8 63.6
Goodwill, net .......................................................................... 648.0 557.9
Other intangible assets, net............................................................ 45.3 50.6
Other assets, net....................................................................... 86.1 85.3
-------- --------
Total other assets................................................................. 878.6 792.9
-------- --------
Total assets................................................................... $2,926.6 $2,746.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt......................................................................... $ 111.7 $ 6.6
Accounts payable........................................................................ 214.8 223.1
Accrued income taxes.................................................................... 102.8 87.6
Other accrued liabilities............................................................... 538.9 544.9
-------- --------
Total current liabilities.......................................................... 968.2 862.2
-------- --------
Noncurrent Liabilities
Long-term debt.......................................................................... 425.1 422.5
Other noncurrent liabilities............................................................ 184.3 177.5
-------- --------
Total nuncurrent liabilities....................................................... 609.4 600.0
-------- --------
$6.50 Cumulative Redeemable Preferred Stock, at redemption value........................ 360.0 360.0
-------- --------
Stockholders' Equity
Common stock, $.01 par value; 300,000,000 shares Class A authorized, shares
issued 123,971,340 at September 30, 1999 and 123,936,464 at June 30, 1999;
120,000,000 shares Class B authorized, shares issued and outstanding 113,679,334..... 2.4 2.4
Paid-in capital......................................................................... 208.9 211.6
Retained earnings....................................................................... 831.1 766.2
Accumulated other comprehensive income.................................................. (33.3) (44.3)
-------- --------
1,009.1 935.9
Less: Treasury stock, at cost; 665,306 Class A shares at September 30, 1999
and 455,306 at June 30, 1999......................................................... (20.1) (11.4)
-------- --------
Total stockholders' equity......................................................... 989.0 924.5
-------- --------
Total liabilities and stockholders' equity..................................... $2,926.6 $2,746.7
======== ========
</TABLE>
See notes to consolidated financial statements.
-11-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30
1999 1998
---- ----
(In millions)
Cash Flows from Operating Activities
<S> <C> <C>
Net earnings............................................................................... $ 82.6 $ 71.6
Adjustments to reconcile net earnings to net cash
flows used for operating activities:
Depreciation and amortization.......................................................... 29.6 25.3
Amortization of purchased royalty rights............................................... 4.4 4.4
Deferred income taxes.................................................................. (4.0) (4.0)
Non-cash stock compensation............................................................ (3.5) -
Changes in operating assets and liabilities:
Increase in accounts receivable, net................................................... (155.4) (175.9)
Decrease in inventory and promotional merchandise, net................................. 10.9 19.4
(Increase) decrease in other assets.................................................... (11.9) 5.6
Decrease in accounts payable........................................................... (12.8) (45.2)
Increase in accrued income taxes....................................................... 14.8 29.8
(Decrease) increase in other accrued liabilities....................................... (9.3) 33.7
Increase (decrease) in other noncurrent liabilities.................................... 5.7 (23.6)
--------- --------
Net cash flows used for operating activities......................................... (48.9) (58.9)
--------- --------
Cash Flows from Investing Activities
Capital expenditures....................................................................... (33.1) (19.1)
Acquisition of businesses, net of cash acquired............................................ (100.9) -
Proceeds from disposition of long-term investments......................................... 3.0 -
Purchases of long-term investments......................................................... (1.5) (2.3)
--------- --------
Net cash flows used for investing activities......................................... (132.5) (21.4)
--------- --------
Cash Flows from Financing Activities
Increase in short-term debt, net........................................................... 104.2 17.3
Repayments of long-term debt............................................................... (0.2) -
Proceeds from exercise of stock options.................................................... 0.4 0.2
Payments to acquire treasury stock......................................................... (8.7) (2.8)
Dividends paid............................................................................. (17.7) (15.9)
--------- --------
Net cash flows provided by (used for) financing activities........................... 78.0 (1.2)
--------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents.................................. 6.1 8.4
--------- --------
Net Decrease in Cash and Cash Equivalents..................................................... (97.3) (73.1)
Cash and Cash Equivalents at Beginning of Period.............................................. 347.5 277.5
--------- --------
Cash and Cash Equivalents at End of Period.................................................... $ 250.2 $ 204.4
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .............................................................................. $ 8.2 $ 7.4
========= ========
Income taxes........................................................................... $ 34.9 $ 12.0
========= ========
Non cash item:
Tax benefit from exercise of stock options............................................. $ 0.3 $ -
========= ========
</TABLE>
See notes to consolidated financial statements.
-12-
<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.
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, 1999.
Net Earnings Per Common Share
For the period ended September 30, 1999 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.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations is as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30
1999 1998
---- ----
(Unaudited)
(In millions, except per share data)
Numerator:
<S> <C> <C>
Net earnings.................................................. $ 82.6 $ 71.6
Preferred stock dividends..................................... (5.9) (5.9)
------ ------
Net earnings attributable to common stock..................... $ 76.7 $ 65.7
====== ======
Denominator:
Weighted average common shares outstanding - Basic............ 237.5 237.0
Effect of dilutive securities: Stock options.................. 5.1 3.2
------ ------
Weighted average common shares outstanding - Diluted.......... 242.6 240.2
====== ======
Net earnings per common share:
Basic......................................................... $ .32 $ .28
====== ======
Diluted....................................................... $ .32 $ .27
====== ======
</TABLE>
-13-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 1999 options to purchase 5.7 million 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.
Accounts Receivable
Accounts receivable is stated net of the allowance for doubtful accounts and
retail customer deductions of $36.9 million and $36.0 million as of September
30, and June 30, 1999, respectively.
Inventory and Promotional Merchandise
Inventory and promotional merchandise only include inventory considered saleable
or usable in future periods, and are stated at the lower of cost or market, with
cost being determined on the first-in, first-out method. Promotional merchandise
is charged to expense at the time the merchandise is shipped to the Company's
customers.
<TABLE>
<CAPTION>
September 30 June 30
1999 1999
---- ----
(Unaudited)
(In millions)
Inventory and promotional merchandise consists of:
<S> <C> <C>
Raw materials......................................... $ 106.3 $ 128.3
Work in process....................................... 25.1 22.6
Finished goods........................................ 281.5 238.7
Promotional merchandise............................... 97.5 123.4
-------- -------
$ 510.4 $ 513.0
======== =======
</TABLE>
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation.
For financial statement purposes, depreciation is provided principally on the
straight-line method over the estimated useful lives of the assets ranging from
3 to 40 years. Leasehold improvements are amortized on a straight-line basis
over the shorter of the lives of the respective leases or the expected useful
lives of those improvements.
<TABLE>
<CAPTION>
September 30 June 30
1999 1999
---- ----
(Unaudited)
(In millions)
<S> <C> <C>
Land.................................................... $ 13.0 $ 13.0
Buildings and improvements.............................. 130.2 129.9
Machinery and equipment................................. 442.6 432.0
Furniture and fixtures.................................. 80.0 71.7
Leasehold improvements.................................. 171.8 153.2
------- -------
837.6 799.8
Less accumulated depreciation and amortization.......... 438.2 416.2
------- -------
$ 399.4 $ 383.6
======= =======
</TABLE>
-14-
<PAGE>
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. Actual results could differ from those
estimates and assumptions.
NOTE 2 - COMPREHENSIVE INCOME
Comprehensive income and its components, net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30
1999 1998
---- ----
(Unaudited)
(In millions)
<S> <C> <C>
Net earnings.................................................................... $82.6 $71.6
----- -----
Other comprehensive income:
Net unrealized investment losses........................................... (0.3) (3.0)
Translation adjustments.................................................... 11.3 18.8
----- -----
Other comprehensive income................................................. 11.0 15.8
----- -----
Comprehensive income............................................................ $93.6 $87.4
===== =====
</TABLE>
The components of accumulated other comprehensive income included in the
accompanying consolidated balance sheets consist of net unrealized investment
gains and cumulative translation adjustments as of the end of the period.
NOTE 3 - ACQUISITION OF BUSINESSES
In August 1999, the Company acquired the business of Stila Cosmetics, Inc., a
manufacturer and marketer of prestige makeup products, for cash.
At various times during the first quarter of fiscal 2000 we acquired businesses
engaged in the distribution and retail sale of Aveda products in the United
States and the United Kingdom.
The aggregate purchase price for these transactions, which includes acquisition
costs, was approximately $101.3 million and each transaction has been accounted
for using the purchase method of accounting. Accordingly, the results of
operations of these acquired businesses are included in the accompanying
consolidated financial statements since their respective dates of acquisition.
Pro-forma results of operations as if these acquisitions had been completed as
of July 1, 1999 have not been presented as the impact on the Company's results
of operations would not have been material.
In October 1999, the Company acquired Jo Malone Limited, a London-based marketer
of prestige skin care and fragrance products, for cash.
-15-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - 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 in deciding how to allocate resources and in
assessing performance. The Company evaluates segment performance based upon
operating income, which represents earnings before income taxes and net interest
expense. The accounting policies for each of the reportable segments are
substantially the same as those for the consolidated financial statements, as
described in the summary of significant accounting policies. There has been no
significant variance in the total or long-lived asset values associated with
each segment since June 30, 1999.
<TABLE>
<CAPTION>
Three Months Ended
September 30
1999 1998
---- ----
(Unaudited)
(In millions)
SEGMENT DATA
Net Sales:
<S> <C> <C>
Skin Care............................................................ $ 353.4 $ 303.1
Makeup............................................................... 403.9 370.2
Fragrance............................................................ 307.1 295.5
Hair Care............................................................ 23.1 22.1
Other................................................................ 6.2 6.1
--------- --------
$ 1,093.7 $ 997.0
========= ========
Operating Income:
Skin Care............................................................ $ 54.1 $ 45.0
Makeup............................................................... 48.5 44.2
Fragrance............................................................ 31.3 29.5
Hair Care............................................................ 2.5 3.1
Other................................................................ 0.1 (0.2)
--------- --------
136.5 121.6
Reconciliation:
Interest expense, net............................................. 5.4 6.1
--------- --------
Earnings before income taxes......................................... $ 131.1 $ 115.5
========= ========
REGIONAL DATA
Net Sales:
The Americas......................................................... $ 715.8 $ 656.3
Europe, the Middle East & Africa..................................... 257.1 244.9
Asia/Pacific......................................................... 120.8 95.8
--------- --------
$ 1,093.7 $ 997.0
========= ========
Operating Income:
The Americas......................................................... $ 100.4 $ 92.9
Europe, the Middle East & Africa..................................... 27.2 25.2
Asia/Pacific......................................................... 8.9 3.5
--------- --------
$ 136.5 $ 121.6
========= ========
</TABLE>
-16-
<PAGE>
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 or in the aggregate, will not have a material adverse
effect on our business or financial condition.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits--
27.1 Financial Data Schedule
(b) Reports on Form 8-K -- There were no reports on Form 8-K for the
three months ended September 30, 1999.
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: October 26, 1999 /s/ Robert J. Bigler
--------------------------
Robert J. Bigler
Senior Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
-17-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
EXHIBIT INDEX
Exhibit No. Description
27.1 Financial Data Schedule
<TABLE> <S> <C>
<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
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Jun-30-2000
<PERIOD-END> Sep-30-1999
<CASH> 250,200
<SECURITIES> 0
<RECEIVABLES> 735,900
<ALLOWANCES> 36,900
<INVENTORY> 510,400
<CURRENT-ASSETS> 1,648,600
<PP&E> 837,600
<DEPRECIATION> 438,200
<TOTAL-ASSETS> 2,926,600
<CURRENT-LIABILITIES> 968,200
<BONDS> 425,100
360,000
0
<COMMON> 2,400
<OTHER-SE> 986,600
<TOTAL-LIABILITY-AND-EQUITY> 2,926,600
<SALES> 1,093,700
<TOTAL-REVENUES> 1,093,700
<CGS> 251,800
<TOTAL-COSTS> 251,800
<OTHER-EXPENSES> 705,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 131,100
<INCOME-TAX> 48,500
<INCOME-CONTINUING> 82,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,600
<EPS-BASIC> .32
<EPS-DILUTED> .32
</TABLE>
