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, 1998
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 20, 1999, 61,291,319 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.
<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, 1998 and 1997..... 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 3
Consolidated Balance Sheets --
December 31, 1998 and June 30, 1998.............................. 12
Consolidated Statements of Cash Flows --
Six Months Ended December 31, 1998 and 1997...................... 13
Notes to Consolidated Financial Statements............................ 14
Part II. Other Information............................................ 17
</TABLE>
<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
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
(In millions, except per share data)
<S> <C> <C> <C> <C>
Net Sales........................................................ $1,091.0 $1,000.9 $2,088.0 $1,901.5
Cost of sales.................................................... 249.8 229.3 479.4 433.7
--------- --------- --------- --------
Gross Profit..................................................... 841.2 771.6 1,608.6 1,467.8
--------- --------- --------- --------
Operating expenses:
Selling, general and administrative........................... 670.3 618.1 1,308.5 1,200.3
Related party royalties....................................... 9.1 8.6 16.7 16.6
--------- --------- --------- --------
679.4 626.7 1,325.2 1,216.9
--------- --------- --------- --------
Operating Income................................................. 161.8 144.9 283.4 250.9
Interest (expense) income, net................................... (4.8) (0.1) (10.9) 0.9
--------- --------- --------- --------
Earnings before Income Taxes and Minority Interest............... 157.0 144.8 272.5 251.8
Provision for income taxes....................................... 59.7 57.9 103.6 100.7
Minority interest................................................ - (1.6) - (4.0)
--------- --------- --------- --------
Net Earnings..................................................... 97.3 85.3 168.9 147.1
Preferred stock dividends........................................ 5.8 5.8 11.7 11.7
--------- --------- --------- --------
Net Earnings Attributable to Common Stock........................ $ 91.5 $ 79.5 $ 157.2 $ 135.4
========= ========= ========= ========
Net earnings per common share:
Basic........................................................ $ .77 $ .67 $ 1.33 $ 1.14
Diluted.......................................................... $ .76 $ .66 $ 1.31 $ 1.13
Weighted average common shares outstanding:
Basic........................................................ 118.3 118.4 118.4 118.4
Diluted...................................................... 120.1 119.5 120.1 119.4
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 month periods
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
---------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C>
NET SALES By Region:
The Americas............................................... $ 623.0 $ 584.6 $ 1,279.3 $1,147.0
Europe, the Middle East & Africa........................... 328.1 283.2 573.0 507.1
Asia/Pacific............................................... 139.9 133.1 235.7 247.4
-------- -------- --------- --------
$1,091.0 $1,000.9 $ 2,088.0 $1,901.5
======== ======== ========= ========
By Product Category:
Skin Care.................................................. $ 345.3 $ 308.2 $ 650.2 $ 607.4
Makeup..................................................... 353.6 330.1 724.8 657.1
Fragrance.................................................. 370.3 351.6 666.1 622.3
Hair Care.................................................. 21.8 11.0 46.9 14.7
--------- -------- --------- --------
$1,091.0 $1,000.9 $ 2,088.0 $1,901.5
========= ======== ========= ========
OPERATING INCOME
The Americas.................................................. $ 90.2 $ 84.4 $ 183.1 $ 165.0
Europe, the Middle East & Africa.............................. 50.3 44.7 75.5 67.6
Asia/Pacific.................................................. 21.3 15.8 24.8 18.3
--------- --------- --------- --------
$ 161.8 $ 144.9 $ 283.4 $ 250.9
========= ========= ========= ========
</TABLE>
The following table sets forth certain consolidated earnings data as a
percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
---------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales........................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................................... 22.9 22.9 23.0 22.8
----- ----- ----- -----
Gross profit..................................................... 77.1 77.1 77.0 77.2
----- ----- ----- -----
Operating expenses:
Selling, general and administrative........................... 58.8 59.4 59.8 60.8
Related party royalties....................................... 0.8 0.9 0.8 0.9
----- ----- ----- -----
59.6 60.3 60.6 61.7
----- ----- ----- -----
Earnings before interest, taxes, depreciation and amortization
("EBITDA")..................................................... 17.5 16.8 16.4 15.5
Depreciation and amortization.................................... 2.7 2.3 2.8 2.3
----- ----- ----- -----
Operating income................................................. 14.8 14.5 13.6 13.2
Interest expense, net............................................ 0.4 - 0.5 -
----- ----- ----- -----
Earnings before income taxes and minority interest............... 14.4 14.5 13.1 13.2
Provision for income taxes....................................... 5.5 5.8 5.0 5.3
Minority interest................................................ - (0.2) - (0.2)
----- ----- ----- -----
Net earnings ................................................... 8.9% 8.5% 8.1% 7.7%
===== ===== ===== =====
</TABLE>
-3-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Second Quarter Fiscal 1999 compared with the Second Quarter Fiscal 1998
NET SALES
Net sales increased 9% or $90.1 million to $1,091.0 million as compared with the
same prior-year quarter. The increase in net sales is primarily due to strong
sales of skin care products, both domestically and internationally, as well as
the global rollout of recently introduced products, particularly in the European
region. A weaker U.S. dollar had a favorable impact on net sales. Excluding the
impact of foreign currency translation, net sales increased 8% for the current
fiscal quarter.
Product Categories
Skin Care
Net sales of skin care products increased 12% or $37.1 million to $345.3 million
as compared with the same prior-year quarter. The increase in sales primarily
related to a planned reemphasis on this core line of products and the success of
the recent launch of All About Eyes and the initial shipments of Stop Signs and
Resilience Lift, partially offset by lower sales of Fruition Extra.
Makeup
Net sales of makeup products increased 7% or $23.5 million to $353.6 million as
compared with the same prior-year quarter. Higher product sales partially relate
to the recent introductions of Two-In-One Eyeshadow, Quickliner For Eyes,
Photochrome, Smudgesicles and the ongoing success of Double Wear. The category's
net sales also benefited from the inclusion of a full quarter of Sassaby and
Aveda in the current year. Sassaby and Aveda were acquired in October and
December of 1997, respectively.
Fragrance
Net sales of fragrance products increased 5% or $18.7 million to $370.3 million
as compared to the same prior-year quarter. Fragrance products such as Clinique
Happy, Hilfiger Athletics and the recently introduced duo of Dazzling Gold and
Dazzling Silver contributed to the net sales improvement, while "tommy girl"
continued to be well received in Europe. Due to the success of these products
and the fragrance market overall being less buoyant than last year, certain
other fragrances were lower than the comparable prior-year quarter.
Hair Care
Net sales of hair care products increased significantly as compared with the
same prior-year quarter due to the inclusion of the Aveda hair care product
lines beginning in 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.
-4-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Geographic
Net sales in the Americas increased 7% or $38.4 million to $623.0 million as
compared with the same prior-year quarter. Sales increases were achieved
primarily from the strength of new and existing skin care products and the
inclusion of sales from Aveda and Sassaby. In Europe, the Middle East & Africa,
net sales increased 16% or $44.9 million to $328.1 million. The increase was
primarily the result of higher net sales in the United Kingdom, Spain, Germany,
Italy and the distributor and travel retail businesses. Excluding the impact of
foreign currency translation, net sales increased 12%, reflecting a weaker U.S.
dollar. Net sales in Asia/Pacific increased 5% or $6.8 million to $139.9 million
as compared with the same prior-year quarter. Sales increases in Thailand, Japan
and Taiwan were partially offset by lower sales in Korea and Hong Kong.
Excluding the impact of foreign currency translation, Asia/Pacific net sales
increased 4%, as compared to the same prior-year quarter. 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 months ended December 31, 1998 and 1997 was 22.9% of
net sales. The consistency of cost of sales relative to net sales on a quarter
over quarter basis reflects management's efforts to integrate recently acquired
companies, which have higher cost structures, offset by shifts in the product
mix as well as production efficiencies.
OPERATING EXPENSES
Total operating expenses were 62.3% of net sales compared with 62.6% of net
sales in the same prior-year quarter. The change in operating expenses as a
percent of net sales reflects operating improvements, as well as the favorable
integration of different cost structures of acquired companies. The Company's
quarterly operating expenses are subject to the timing of advertising and
promotional spending due to product launches and rollouts, as well as
incremental advertising in select markets.
OPERATING INCOME
Operating income increased 12% or $16.9 million to $161.8 million as compared to
the same prior-year quarter, which resulted in an operating margin of 14.8% in
the current quarter and 14.5% in the prior-year quarter. The increase in
operating income and margin was due to higher net sales coupled with operating
expense efficiencies achieved. Operating income in the Americas increased 7% or
$5.8 million to $90.2 million primarily due to higher net sales and operating
expense improvements. In Europe, the Middle East & Africa, operating income
increased 13% or $5.6 million to $50.3 million. Improved operating results in
Germany, Italy and the distributor and travel retail businesses, were partially
offset by lower results in France. In Asia/Pacific, operating income increased
35% or $5.5 million to $21.3 million as compared to the same prior-year quarter.
The combination of higher net sales and planned efficiencies in operating
expenses resulted in operating income improvements in the majority of the
Asia/Pacific Region.
-5-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EBITDA
Earnings before interest, taxes, depreciation and amortization is an additional
measure of operating performance used by management. While the components of
EBITDA may vary from company to company, the Company excludes its minority
interest adjustment, all depreciation charges related to property, plant and
equipment and all amortization charges including amortization of goodwill,
purchased royalty rights, leasehold improvements and other intangible assets.
The Company considers this measure useful in analyzing its 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 $190.8 million or 17.5% of net sales as compared to
$168.6 million or 16.8% of net sales in the same prior-year quarter. The
improvement in EBITDA is primarily attributable to sales growth and operating
expense efficiencies.
INTEREST EXPENSE, NET
Net interest expense was $4.8 million for the three months ended December 31,
1998, as compared with $0.1 million in the same prior-year quarter, primarily
due to increased borrowings related to recent acquisitions.
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
December 31, 1998 was 38.0% compared with 40.0% in the same prior-year quarter.
These rates are higher than the statutory Federal tax rate due to the effect of
state and local taxes, higher tax rates in certain foreign jurisdictions and
certain nondeductible expenses. The decrease in the effective income tax rate as
compared to the same prior-year quarter was principally attributable to tax
planning initiatives and a relative change in the mix of earnings from higher
tax countries to lower tax countries.
-6-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six Months Fiscal 1999 compared with Six Months Fiscal 1998
NET SALES
Net sales increased 10% or $186.5 million to $2,088.0 million for the six months
ended December 31, 1998 as compared with the same prior-year period. Such
increase in net sales is partially due to the domestic strength of makeup
product sales, which included sales by Sassaby and Aveda, acquired in October
and December of 1997, respectively. Further, double digit gains have been
achieved in each of the skin care, makeup and fragrance categories in the
European region. Foreign currency translation did not significantly impact net
sales in the current-year period as compared to the same prior-year period.
Product Categories
Skin Care
Net sales of skin care products increased 7% or $42.8 million to $650.2 million
for the six months ended December 31, 1998 as compared with the same prior-year
period. The comparison of the year-to-date period to the same prior-year period
reflects the initial shipments of Stop Signs and Resilience Lift in the most
recent quarter, as well as the continued success of new and existing products
such as All About Eyes and Diminish. These increases were partially offset by
lower sales of Fruition Extra. Sales of skin care products are impacted more
significantly by changes in Asian currency exchange rates due to a higher
concentration of these products sold in Asia. Excluding the effects of foreign
currency translation, skin care product sales increased 8%.
Makeup
Net sales of makeup products increased 10% or $67.7 million to $724.8 million as
compared with the same prior-year period. Higher makeup product sales were
primarily due to the recent introductions of Two-In-One Eyeshadow, Quickliner
For Eyes and Smudgesicles as well as increased contributions from existing
products such as Golden Angels Compacts and Double Wear. The category's net
sales also benefited from the inclusion of six months' sales by Sassaby and
Aveda. These increases were partially offset by lower sales of Virtual Skin and
Indelible Lipstick. In addition, the current period comparison was unfavorably
impacted by the launch of Superbalanced Makeup in the prior year.
Fragrance
Net sales of fragrance products increased 7% or $43.8 million to $666.1 million
for the six months ended December 31, 1998 as compared with the same prior-year
period. The increase is primarily attributable to the worldwide success of
Clinique Happy and the successful current year introduction of Dazzling Gold and
Dazzling Silver. Hilfiger Athletics and "tommy girl", which are marketed under a
licensing agreement, contributed significantly to the net sales increases,
offset in part by lower sales of "tommy". Due to the success of these products
and the fragrance market overall being less buoyant than last year, certain
other fragrances were lower than the comparable prior-year period.
Hair Care
Net sales of hair care products more than doubled as compared with the same
prior-year period. The increase reflects sales from the inclusion of Aveda
product lines beginning in December 1997.
-7-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Geographic
Sales in the Americas increased 12% or $132.3 million to $1,279.3 million for
the six months ended December 31, 1998 as compared with the same prior-year
period. This increase is driven by sales of new and existing products across all
categories and the inclusion of Aveda and Sassaby which were acquired in the
second quarter of fiscal 1998. In Europe, the Middle East & Africa, net sales
increased 13% or $65.9 million to $573.0 million compared with the same
prior-year period. The increase was primarily the result of higher net sales in
the United Kingdom, the distributor and travel retail businesses, Spain, Italy
and France. Excluding the impact of foreign currency translation, sales in
Europe, the Middle East &Africa increased 10%. Net sales in Asia/Pacific
decreased 5% or $11.7 million to $235.7 million for the six months ended
December 31, 1998 as compared with the same prior-year period. Lower sales in
Australia, Korea and Hong Kong were partially offset by higher net sales in
Japan and Thailand. Excluding the impact of foreign currency translation,
Asia/Pacific sales grew 3% over the prior-year period.
COST OF SALES
Cost of sales for the six months ended December 31, 1998 were 23.0% of net sales
compared with 22.8% of net sales in the prior-year period. The increase
principally reflects the integration of Sassaby and Aveda, which both have cost
structures higher than the Company's other brands. Such increase has been
substantially offset by a shift in product mix as well as production
efficiencies.
OPERATING EXPENSES
Total operating expenses decreased to 63.4% of net sales for the six months
ended December 31, 1998, compared with 64.0% of net sales in the same prior-year
period. The change in operating expenses primarily relates to operating
improvements and the favorable integration of the Aveda and Sassaby cost
structures. The Company's quarterly operating expenses are subject to the timing
of advertising and promotional spending due to product launches and rollouts as
well as incremental advertising in select markets.
OPERATING INCOME
Operating income increased 13% or $32.5 million to $283.4 million for the six
months ended December 31, 1998 as compared with the same prior-year period.
Operating margins were 13.6 % in the current period as compared to 13.2% in the
corresponding prior-year period. The increase in operating income and margins
was due to higher net sales coupled with operational efficiencies and the timing
of advertising and promotional spending. Operating income in the Americas
increased 11% or $18.1 million to $183.1 million for the six months ended
December 31, 1998 as compared with the same prior-year period, primarily due to
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 12% or $7.9 million to $75.5 million for the six months ended December
31, 1998. These increases were primarily due to improved operating results in
Spain, Germany and the travel retail business. In Asia/Pacific, operating income
increased 36% or $6.5 million to $24.8 million due to higher results in Japan,
Taiwan and Thailand, partially offset by lower results in Hong Kong.
-8-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EBITDA
EBITDA increased 16% to $342.1 million or 16.4% of net sales as compared to
$294.4 million or 15.5% of net sales in the same prior-year period. The
improvement in EBITDA is primarily attributable to sales growth and operating
expense efficiencies achieved.
INTEREST (EXPENSE) INCOME, NET
Net interest expense was $10.9 million and net interest income was $0.9 million
for the six months ended December 31, 1998 and 1997, respectively. The increase
in net interest expense for the six months ended December 31, 1998 is primarily
attributable to a higher level of borrowings during the current six month
period, as compared to the corresponding prior-year period. Increased borrowings
relate to business acquisitions consummated in the 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 for the six months ended
December 31, 1998 was 38.0% compared with 40.0% in the same prior-year period.
These rates are higher than the statutory Federal tax rate due to the effect of
state and local taxes, higher tax rates in certain foreign jurisdictions and
certain nondeductible expenses. The decrease in the effective income tax rate as
compared to the same prior-year period was principally attributable to tax
planning initiatives and a relative change in the mix of earnings from higher
tax countries to lower tax countries.
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, 1998, the Company had cash and cash equivalents of
$402.7 million compared with $277.5 million at June 30, 1998.
Uncommitted lines of credit amounted to $251.1 million at December 31, 1998, of
which none were used. Unused committed lines of credit available to the Company
at December 31, 1998 amounted to $400.0 million. Total debt as a percentage of
total capitalization (including short-term debt) was 26% at December 31, 1998
and 29% at June 30, 1998. This decrease is primarily due to higher total
capital.
Net cash provided by operating activities increased to $219.1 million in the six
months ended December 31, 1998 from $181.9 million in the prior-year six-month
period. This increase primarily reflects the Company's increased profitability
and decreased inventories partially offset by higher accounts receivable related
to higher net sales. Net cash used for investing activities decreased to $48.3
million in the six months ended December 31, 1998 from $400.0 million in the
prior six-month period due to the Company's prior-year business acquisitions.
Financing activities reflect dividends paid, purchases of treasury stock and
repayment of debt. Dividend payments were $31.8 million and $21.7 million for
the six months ended December 31, 1998 and 1997, respectively.
On September 18, 1998, the Company's Board of Directors authorized a share
repurchase program. The Company has purchased and may continue to purchase, over
an undefined period of time, a total of up to four million shares of Class A
Common Stock in the open market or in privately negotiated transactions,
depending on market conditions and other factors.
-9-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company expects to make a contingent earn-out payment in March 1999 relating
to the acquisition of Bobbi Brown, the amount of which will be dependent upon
the audited results of operations of Bobbi Brown for the 1998 and 1997 calendar
years.
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 have on the Company's costs and on
the cash flows which it receives from its foreign subsidiaries. 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 uses derivative
financial instruments for the purpose of managing its 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.
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.
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, 1998, the Company had contracts to
exchange foreign currencies in the form of purchased currency options and
forward exchange contracts in the amount of $25.6 million and $156.3 million,
respectively. Foreign currencies exchanged under these contracts are principally
the Belgian franc, Japanese yen, German mark, Swiss franc, U.K. pound, Spanish
peseta and Italian lira. In addition, the Company had interest rate swap
agreements outstanding with a notional principal amount of $405.0 million. There
have been no significant changes in market risk since June 30, 1998 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, 1998.
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.
YEAR 2000
The Company has developed a comprehensive plan to address Year 2000 issues. The
plan addresses three main areas: (a) information systems; (b) embedded chips;
and, (c) supply chain readiness. To oversee the process, the Company has
established a Steering Committee comprised of senior executives from its various
business units around the world, which reports regularly to the Board of
Directors and the Audit Committee.
-10-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has identified potential deficiencies related to Year 2000 in its
information systems and is in the process of addressing them through upgrades
and other remediation. Completion of the remediation and testing is expected in
the summer of 1999. The Company has identified other equipment with date
sensitive operating controls and is in the process of assessing whether they are
Year 2000 compliant. The Company anticipates completion of critical embedded
chip remediation by the summer of 1999. To mitigate the risk of Year 2000
non-compliance by third parties, the Company has identified, contacted and met
with critical inventory suppliers. The Company is also in the process of
communicating with its larger customers about their year 2000 readiness.
Further, the Company has been identifying and contacting other suppliers and
customers. These meetings and communications are ongoing and the Company is
assessing the state of readiness of the various suppliers and customers.
The Company believes it is difficult to specifically identify the cause of the
most reasonable worst case Year 2000 scenario, however, based upon its work to
date, the Company believes it would likely be the result of the failure of third
parties to be Year 2000 compliant. Accordingly, the Company has formulated
contingency plans to limit, to the extent possible, lost revenues and other
adverse effects arising from third party failures. Such plans would necessarily
be limited to matters over which the Company can reasonably control and may
require the acceleration of certain shipments which may necessitate adjustments
to the production and procurement schedules. The Company is in the process of
implementing these plans and is determining the potential impact of these plans
on its quarterly results of operations and financial condition in fiscal 2000.
Incremental out-of-pocket costs incurred through December 31, 1998 have not been
significant and, based upon the Company's current estimates, the costs of its
Year 2000 program are expected to be immaterial. Such costs do not include
internal employee costs and costs related to the deferral of other information
technology projects. While the Company does not have a system to track internal
employee costs specifically related to the Year 2000, those costs are not
expected to be material to the Company's results of operations or financial
condition.
The Company's Year 2000 efforts are ongoing and its overall plan, as well as the
implementation of contingency plans, will continue to evolve as new information
becomes available. While the Company anticipates continuity of its business
activities, that continuity will be dependent upon its ability, and the ability
of third parties with whom the Company relies on directly, or indirectly, to be
Year 2000 compliant.
FORWARD-LOOKING INFORMATION
The Company and its representatives from time to time make written or verbal
forward looking statements, including statements contained in this and other
filings with the Securities and Exchange Commission and in the Company's 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, the Company's expectations regarding
sales, earnings or other future financial performance and liquidity, product
introductions, entry into new geographic regions and general optimism about
future operations or operating results. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its 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
the Company; (ii) consolidations and restructurings in the retail industry
causing a decrease in the number of stores that sell the Company's products, an
increase in the ownership concentration within the retail industry or ownership
of retailers by the Company's competitors; (iii) social, political and economic
risks to the Company's foreign manufacturing and retail operations, including
changes in foreign investment and trade policies and regulations of the host
countries and of the United States; (iv) changes in the laws, regulations and
policies, including changes in accounting standards, that affect, or will
affect, the Company in the United States and abroad; (v) foreign currency
fluctuations affecting the Company's results of operations and value of its
foreign assets, the relative prices at which the Company and foreign competitors
sell their products in the same market and the Company's operating and
manufacturing costs outside of the United States; (vi) shipment delays,
depletion of inventory and increased production costs resulting from disruptions
of operations at any of the facilities which, due to consolidations in the
Company's manufacturing operations, now manufacture nearly all of the Company's
supply of a particular type of product (i.e., focus factories); (vii) changes in
product mix to ones which are less profitable; and (viii) the ability of the
Company and third parties, including customers or suppliers, to adequately
address Year 2000 issues. The Company assumes no responsibility to update
forward-looking statements made herein or otherwise.
-11-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 June 30
1998 1998
---- ----
(Unaudited)
(In millions)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents............................................................... $ 402.7 $ 277.5
Accounts receivable, net................................................................ 649.0 497.8
Inventory and promotional merchandise, net.............................................. 449.9 513.2
Prepaid expenses and other current assets............................................... 181.2 166.1
-------- --------
Total current assets............................................................... 1,682.8 1,454.6
-------- --------
Property, Plant and Equipment, net...................................................... 354.3 335.8
-------- --------
Other Assets
Investments, at cost or market value.................................................... 27.9 27.7
Deferred taxes.......................................................................... 62.8 59.6
Goodwill, net .......................................................................... 489.8 496.2
Other intangible assets, net............................................................ 57.9 67.1
Other assets, net....................................................................... 75.8 71.8
-------- --------
714.2 722.4
-------- --------
$2,751.3 $2,512.8
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt......................................................................... $ 6.1 $ 11.5
Accounts payable........................................................................ 182.5 209.1
Accrued income taxes.................................................................... 116.4 79.4
Other accrued liabilities............................................................... 599.4 537.4
-------- --------
Total current liabilities.......................................................... 904.4 837.4
-------- --------
Noncurrent Liabilities
Long-term debt.......................................................................... 426.1 425.0
Other noncurrent liabilities............................................................ 213.7 194.0
-------- --------
639.8 619.0
-------- --------
$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 61,482,568 at December 31, 1998 and 61,467,934 at June 30, 1998;
120,000,000 shares Class B authorized, shares issued 56,839,667...................... 1.2 1.2
Paid-in capital......................................................................... 169.9 169.8
Retained earnings....................................................................... 695.9 559.6
Accumulated other comprehensive income.................................................. (8.4) (34.2)
-------- --------
858.6 696.4
Less: Treasury stock, at cost; 229,817 Class A shares at December 31, 1998.............. (11.5) -
-------- --------
847.1 696.4
-------- --------
$2,751.3 $2,512.8
======== ========
</TABLE>
See notes to consolidated financial statements.
-12-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31
1998 1997
---- ----
(In millions)
<S> <C> <C>
Cash Flows from Operating Activities
Net earnings............................................................................... $ 168.9 $ 147.1
Adjustments to reconcile net earnings to net cash
flows provided by operating activities:
Depreciation and amortization.......................................................... 49.8 34.6
Amortization of purchased royalty rights............................................... 8.9 8.9
Deferred income taxes.................................................................. (8.0) (9.0)
Minority interest...................................................................... - 4.0
Changes in operating assets and liabilities:
Increase in accounts receivable, net................................................... (124.8) (95.8)
Decrease in inventory and promotional merchandise...................................... 73.1 25.7
Increase in other assets............................................................... (14.5) (52.4)
Decrease in accounts payable........................................................... (32.7) (12.4)
Increase in accrued income taxes....................................................... 33.8 23.0
Increase in other accrued liabilities.................................................. 51.4 104.3
Increase in other noncurrent liabilities............................................... 13.2 3.9
--------- --------
Net cash flows provided by operating activities...................................... 219.1 181.9
--------- --------
Cash Flows from Investing Activities
Acquisition of businesses, net of cash acquired............................................ - (350.3)
Capital expenditures....................................................................... (47.6) (50.1)
Purchase of long-term investments.......................................................... (0.7) (1.3)
Proceeds from the disposition of long-term investments..................................... - 1.7
--------- --------
Net cash flows used for investing activities......................................... (48.3) (400.0)
--------- --------
Cash Flows from Financing Activities
(Decrease) increase in short-term debt, net................................................ (6.5) 292.8
Repayments of long-term debt............................................................... (3.0) (21.9)
Proceeds from exercise of stock options.................................................... 0.5 -
Payments to acquire treasury stock......................................................... (12.7) -
Dividends paid............................................................................. (31.8) (21.7)
--------- --------
Net cash flows (used for) provided by financing activities........................... (53.5) 249.2
--------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents.................................. 7.9 5.9
--------- --------
Net Increase in Cash and Cash Equivalents.................................................. 125.2 37.0
Cash and Cash Equivalents at Beginning of Period........................................... 277.5 255.6
--------- --------
Cash and Cash Equivalents at End of Period................................................. $ 402.7 $ 292.6
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .............................................................................. $ 14.9 $ 2.0
========= ========
Income taxes........................................................................... $ 75.3 $ 72.0
========= ========
Non cash items:
Exchange of stock options in conjunction with acquisition.............................. $ - $ 4.3
========= ========
</TABLE>
See notes to consolidated financial statements.
-13-
<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 consolidated financial statements of the prior period
have been reclassified to conform to the current period presentation 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, 1998.
Net Earnings Per Common Share
In accordance with the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share", 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 consolidated statement of earnings.
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 December 31
---------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited)
(In millions, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Net earnings.................................................. $ 97.3 $ 85.3 $ 168.9 $ 147.1
Preferred stock dividends..................................... 5.8 5.8 11.7 11.7
------ ------ ------- -------
Net earnings attributable to common stock..................... $ 91.5 $ 79.5 $ 157.2 $ 135.4
====== ====== ======= =======
Denominator:
Weighted average common shares outstanding - Basic............ 118.3 118.4 118.4 118.4
Effect of dilutive securities: Stock options.................. 1.8 1.1 1.7 1.0
------ ------ ------ ------
Weighted average common shares outstanding - Diluted.......... 120.1 119.5 120.1 119.4
====== ====== ====== ======
Net earnings per common share:
Basic EPS..................................................... $ .77 $ .67 $ 1.33 $ 1.14
====== ====== ======= =======
Diluted EPS................................................... $ .76 $ .66 $ 1.31 $ 1.13
====== ====== ======= =======
</TABLE>
Options to purchase 0.9 million and 1.1 million shares of common stock at
December 31, 1998 and 1997, respectively, were not included in the computation
of diluted EPS because the exercise price of those options was greater than the
average market price of common shares. The options were still outstanding at the
end of the respective period.
-14-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable is stated net of the allowance for doubtful accounts of
$49.2 million and $43.6 million as of December 31 and June 30, 1998,
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>
December 31 June 30
1998 1998
---- ----
(Unaudited)
(In millions)
<S> <C> <C>
Inventory and promotional merchandise consists of:
Raw materials......................................... $ 116.0 $ 143.6
Work in process....................................... 21.4 26.7
Finished goods........................................ 210.3 227.8
Promotional merchandise............................... 102.2 115.1
-------- -------
$ 449.9 $ 513.2
======== =======
</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 the improvements.
<TABLE>
<CAPTION>
December 31 June 30
1998 1998
---- ----
(Unaudited)
(In millions)
<S> <C> <C>
Land ................................................. $ 13.1 $ 13.0
Buildings and improvements.............................. 131.4 124.0
Machinery and equipment................................. 395.3 367.8
Furniture and fixtures.................................. 84.5 78.6
Leasehold improvements.................................. 132.9 117.3
-------- -------
757.2 700.7
Less accumulated depreciation and amortization.......... 402.9 364.9
-------- -------
$ 354.3 $ 335.8
======== =======
</TABLE>
Share Repurchase Program
On September 18, 1998, the Company's Board of Directors authorized a share
repurchase program. The Company has purchased and may continue to purchase, over
an undefined period of time, a total of up to four million shares of Class A
Common Stock in the open market or in privately negotiated transactions,
depending on market conditions and other factors.
-15-
<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
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income" which
establishes guidance for the reporting and display of comprehensive income and
its components. The purpose of reporting comprehensive income is to report a
measure of all changes in equity that resulted from recognized transactions and
other economic events of the period other than transactions with stockholders.
Adoption of SFAS No. 130 had no economic impact on the Company's consolidated
financial position, net earnings, stockholders' equity or cash flows, although
the presentation of certain items has changed. 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 each period.
Comprehensive income and its components, net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
------------------------ ---------------------
1998 1997 1998 1997
------- -------- -------- ------
(Unaudited)
(In millions)
<S> <C> <C> <C> <C>
Net earnings.............................................. $ 97.3 $ 85.3 $ 168.9 $147.1
------ ------- ------- ------
Other comprehensive income:
Net unrealized investment gains (losses)............. 2.7 (1.6) (0.3) (0.2)
Translation adjustments.............................. 7.3 (0.2) 26.1 (15.2)
------ ------- ------- ------
Other comprehensive income........................... 10.0 (1.8) 25.8 (15.4)
------ ------- ------- ------
Comprehensive income...................................... $107.3 $ 83.5 $ 194.7 $131.7
====== ======= ======= ======
</TABLE>
-16-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
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 Stockholders of the Company was held on November 5,
1998.
(b) The following directors were elected at the Annual Meeting of the
Stockholders: William P. Lauder and P. Roy Vagelos M.D., as Class II
Directors for a term expiring at the 2001 Annual Meeting. The Class I
directors, whose terms expire at the 2000 Annual Meeting, are Fred H.
Langhammer and Faye Wattleton. The Class III directors, whose terms
expire at the 1999 Annual Meeting, are Leonard A. Lauder, Ronald S.
Lauder and Marshall Rose.
(c) (i) Each person elected as a director at the Annual Meeting
received the number of votes (shares of Class B Common Stock are
entitled to ten votes per share) indicated beside his name:
Name Votes For Votes Withheld
William P. Lauder 623,023,345 605,698
P. Roy Vagelos, M.D. 623,217,354 411,689
(ii) 615,288,848 votes were cast for and 1,802,144 votes were cast
against the approval of the Fiscal 1999 Share Incentive Plan.
There were 58,887 abstentions and 6,479,164 broker nonvotes.
(iii)622,859,265 votes were cast for and 697,140 votes were cast
against the approval of the Executive Annual Incentive Plan. There
were 72,638 abstentions and no broker nonvotes.
(iv) 623,579,064 votes were cast for and 18,211 votes were cast against
the ratification of the appointment of Arthur Andersen LLP as
independent auditors of the Company for the 1999 fiscal year.
There were 31,768 abstentions and no broker nonvotes.
(d) Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits--
10.1 Fiscal 1999 Share Incentive Plan (filed as Exhibit 4(c) to the
Company's Registration statement on Form S-8
(No. 333-66851) on November 5, 1998). *
10.2 Executive Annual Incentive Plan
27.1 Financial Data Schedule
- ---------------------------------------
* Incorporated herein by Reference
(b) Reports on Form 8-K -- There were no reports on Form 8-K for the
three months ended December 31, 1998.
-17-
<PAGE>
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 26, 1999 by:/s/Robert J. Bigler
---------------------------
Robert J. Bigler
Senior Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
-18-
THE ESTEE LAUDER COMPANIES INC.
EXECUTIVE ANNUAL INCENTIVE PLAN
1. Purpose.
The principal purposes of The Estee Lauder Companies Inc. Executive
Annual Incentive Plan (the "Plan") are to provide incentives and rewards to the
Executive Officers of The Estee Lauder Companies Inc. (the "Company"), including
those who may be employed by any of the Company's subsidiaries and affiliates,
and to assist the Company in motivating them to achieve the Company's annual
performance goals.
2. Administration of the Plan.
The Plan will be administered by a committee (the "Committee") appointed
by the Board of Directors of the Company from among its members (which may be
the Compensation Committee) and shall be comprised, unless otherwise determined
by the Board of Directors, solely of not less then two members who shall be
"outside directors" within the meaning of Treasury Regulation Section
1.162-27(e)(3) under Section 162 (m) of the Internal Revenue Code of 1986, as
amended (the "Code").
The Committee shall have all the powers vested in it by the terms of this
Plan, such powers to include authority (within the limitations described herein)
to select the persons to be granted opportunities under the Plan, to determine
the time when opportunities will be granted, to determine whether objectives and
conditions for achieving an opportunity have been met, to determine whether
opportunities will be paid out at the end of the opportunity period or deferred,
and to determine whether an opportunity or payout of an opportunity should be
reduced or eliminated.
The Committee shall have full power and authority to administer and
interpret the Plan and to adopt such rules, regulations, agreements, guidelines
and instruments for the administration of the Plan and for the conduct of its
business as the Committee deems necessary or advisable. The Committee's
interpretations of the Plan, and all actions taken and determinations made by
the Committee pursuant to the powers vested in it hereunder, shall be conclusive
and binding on all parties concerned, including the Company, its stockholders
and any person granted an opportunity under the Plan.
The Committee may delegate all or a portion of its administrative duties
under the Plan to such officers or other employees of the Company as it shall
determine; provided, however, that no delegation shall be made regarding the
selection of Executive Officers of the Company who shall be granted
opportunities under the Plan, the amount and timing thereof, or the objectives
and conditions pertaining thereto.
3. Eligibility.
The Committee, in its discretion, may grant opportunities to Executive
Officers for each fiscal year of the Company as it shall determine. For purposes
of the Plan, Executive Officers shall be defined as those persons who shall be
denoted as such from time to time by the Company in the Company's filings with
the Securities and Exchange Commission and those other persons as may be
designated as such from time to time by the Compensation Committee. Executive
Officers granted opportunities for a fiscal year of the Company are referred to
as "participants" for such fiscal year.
<PAGE>
4. Opportunities.
(a) Setting of Opportunities. For each fiscal year of the Company commencing
with the fiscal year beginning July 1, 1998, each participant shall be granted
an opportunity (or opportunities) under the Plan as soon as practicable after
the start of such fiscal year and no later than 90 days after the commencement
of such fiscal year; provided, however, that if an individual becomes eligible
to participate during a fiscal year and after such 90 day period the individual
may be granted an opportunity (or opportunities) for a portion of such fiscal
year ending on the last day of such fiscal year if such opportunity (or
opportunities) is granted after no more than 25% of the period of service to
which the opportunity (or opportunities) relates has elapsed. The aggregate of
opportunities shall be limited to 200% of the annual base salary of the
participant (except in the case of the Chief Executive Officer of the Company to
whom such limitation shall not apply) and shall not exceed the amount provided
for in Section 4(f) hereof.
(b) Performance Targets. For each fiscal year of the Company commencing with the
fiscal year beginning July 1, 1998, the annual performance target for each
opportunity shall be determined by the Committee in writing, by resolution of
the Committee or other appropriate action, not later than 90 days after the
commencement of such fiscal year, and each such performance target shall state,
in terms of an objective formula or standard, the method for computing the
amount of compensation payable to the applicable participant if such performance
target is attained; provided, however, that if an individual becomes eligible to
participate during a fiscal year and after such 90 day period that individual's
performance target (or targets) may be determined by the Committee in writing,
by resolution of the Committee or other appropriate action, after no more than
25% of the period of service to which the performance target (or targets)
relates has elapsed. The annual performance target for each opportunity shall be
based on achievement of hurdle rates and/or growth in one or more business
criteria that apply to the individual participant, one or more business units or
the Company as a whole. The business criteria shall be as follows, individually
or in combination: (i) net earnings; (ii) earnings per share; (iii) net sales
growth; (iv) market share; (v) net operating profit; (vi) expense targets; (vii)
working capital targets relating to inventory and/or accounts receivable; (viii)
operating margin; (ix) return on equity; (x) return on assets; (xi) planning
accuracy (as measured by comparing planned results to actual results); (xii)
market price per share; and (xiii) total return to stockholders. In addition,
the annual performance targets may include comparisons to performance at other
companies, such performance to be measured by one or more of the foregoing
business criteria.
(c) Payout of Opportunities. As a condition to the right of a participant to
receive cash payout of an opportunity granted under this Plan, the Committee
shall first be required to certify in writing, by resolution of the Committee or
other appropriate action, that the achievement of the opportunity has been
accurately determined in accordance with the provisions of this Plan.
Opportunities for a fiscal year shall be payable as soon as practicable
following the certification thereof by the Committee for such fiscal year.
(d) Discretion. After an opportunity has been granted, the Committee shall not
increase such opportunity, and after a performance target has been determined,
the Committee shall not revise such performance target. Notwithstanding the
attainment by the Company and a participant of the applicable targets, the
Committee has the discretion, by participant, to reduce, prior to the
certification of the opportunity, some or all of an opportunity that otherwise
would be paid.
(e) Deferral. The Committee may determine that the payout of an opportunity or a
portion of an opportunity shall be deferred, the periods of such deferrals and
any interest, not to exceed a reasonable rate, to be paid in respect of deferred
payments. The Committee may also define such other conditions of payouts of
opportunities as it may deem desirable in carrying out the purposes of the Plan.
(f) Maximum Payout per Fiscal Year. No individual participant may receive
aggregate opportunities or a payout under the Plan which are more than $10
million on account of any fiscal year.
5. Miscellaneous Provisions.
(a) Guidelines. The Committee may adopt from time to time written policies for
its implementation of the Plan.
(b) Withholding Taxes. The Company (or the relevant subsidiary or affiliate)
shall have the right to deduct from all payouts of opportunities hereunder any
federal, state, local or foreign taxes required by law to be withheld with
respect to such payouts.
<PAGE>
(c) No Rights to Opportunities. Except as set forth herein, no Executive Officer
shall have any claim or right to be granted an opportunity under the Plan.
Neither the Plan nor any action taken hereunder shall be construed as giving any
Executive Officer any right to be retained in the employ of the Company or any
of its subsidiaries, divisions or affiliates.
(d) Costs and Expenses. The cost and expenses of administering the Plan shall be
borne by the Company and not charged to any opportunity or payout nor to any
Executive Officer receiving an opportunity or a payout.
(e) Funding of Plan. The Plan shall be unfunded. The Company shall not be
required to establish any special or separate fund or to make any other
segregation of assets to assure the payout of any opportunity under the Plan.
6. Effective Date, Amendments and Termination.
(a) Effective Date. The Plan shall be effective as of July 21, 1998, the date on
which the Plan was adopted by the Committee (the "Effective Date"), provided
that the Plan is approved by the stockholders of the Company at an annual
meeting or any special meeting of stockholders of the Company within 12 months
of the Effective Date, and such approval of stockholders shall be a condition to
the right of each participant to receive any opportunities or payouts hereunder.
Any opportunities granted under the Plan prior to such approval of stockholders
shall be effective as of the date of grant (unless, with respect to any
opportunity, the Committee specifies otherwise at the time of grant), but no
such opportunity may be paid out prior to such stockholder approval, and if
stockholders fail to approve the Plan as specified hereunder, any such
opportunity shall be cancelled.
(b) Amendments. The Committee may at any time terminate of from time to time
amend the Plan in whole or in part, but no such action shall adversely affect
any rights or obligations with respect to any opportunities theretofore granted
under the Plan.
Unless the stockholders of the Company shall have first approved thereof,
no amendment of the Plan shall be effective which would: (i) increase the
maximum amount which can be paid to any participant under the Plan; (ii) change
the types of business criteria on which performance targets are to be based
under the Plan; or (iii) modify the requirements as to eligibility for
participation in the Plan.
(c) Termination. No opportunities shall be granted under the Plan after
ten (10) years after the Effective Date.
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, 1998
(In Thousands, except per share data)
<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> 6-Mos
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 402,700
<SECURITIES> 0
<RECEIVABLES> 698,200
<ALLOWANCES> 49,200
<INVENTORY> 449,900
<CURRENT-ASSETS> 1,682,800
<PP&E> 757,200
<DEPRECIATION> 402,900
<TOTAL-ASSETS> 2,751,300
<CURRENT-LIABILITIES> 904,400
<BONDS> 426,100
360,000
0
<COMMON> 1,200
<OTHER-SE> 845,900
<TOTAL-LIABILITY-AND-EQUITY> 2,751,300
<SALES> 2,088,000
<TOTAL-REVENUES> 2,088,000
<CGS> 479,400
<TOTAL-COSTS> 479,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 272,500
<INCOME-TAX> 103,600
<INCOME-CONTINUING> 168,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 168,900
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.31
</TABLE>
