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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2002 COMMISSION FILE NUMBER 1-14064
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
THE ESTEE LAUDER COMPANIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2408943
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
767 FIFTH AVENUE, NEW YORK, NEW YORK 10153
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 212-572-4200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Class A Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's voting common equity held by
non-affiliates of the registrant was approximately $3.34 billion at September
12, 2002. *
At September 12, 2002, 124,797,295 shares of the registrant's Class A Common
Stock, $.01 par value, and 108,412,533 shares of the registrant's Class B Common
Stock, $.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Proxy Statement for Annual Meeting of Part III
Stockholders to be held October 30, 2002
* Calculated by excluding all shares held by executive officers and directors of
registrant and certain trusts without conceding that all such persons are
"affiliates" of registrant for purposes of the Federal securities laws.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes "Forward-Looking Statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
include, without limitation, our expectations regarding sales, earnings or other
future financial performance and liquidity, product introductions, entry into
new geographic regions, information systems initiatives, new methods of sale and
future operations or operating results. Although we believe that our
expectations are based on reasonable assumptions within the bounds of our
knowledge of our business and operations, we cannot assure that actual results
will not differ materially from our expectations. Factors that could cause
actual results to differ from expectations are described herein; in particular,
see "Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Forward-Looking Information".
PART I
ITEM 1. BUSINESS.
The Estee Lauder Companies Inc., founded in 1946 by Estee and Joseph Lauder, is
one of the world's leading manufacturers and marketers of quality skin care,
makeup, fragrance and hair care products. Our products are sold in over 130
countries and territories under the following well-recognized brand names: Estee
Lauder, Clinique, Aramis, Prescriptives, Origins, M.A.C, Bobbi Brown, La Mer,
jane, Aveda, Stila, Jo Malone and Bumble and bumble. We are also the global
licensee for fragrances and cosmetics sold under the Tommy Hilfiger, Donna Karan
and Kate Spade brands. Each brand is distinctly positioned within the market for
beauty products.
We are a pioneer in the cosmetics industry and believe we are a leader in the
industry due to the global recognition of our brand names, our leadership in
product innovation, our strong market position in key geographic markets and the
consistently high quality of our products. We sell our prestige products
principally through limited distribution channels to complement the images
associated with our brands. These channels, encompassing over 13,500 points of
sale, consist primarily of upscale department stores, specialty retailers,
upscale perfumeries and pharmacies and, to a lesser extent, freestanding
company-owned stores and spas, our own and authorized retailer web sites, stores
on cruise ships and in-flight and duty-free shops. We believe that our strategy
of pursuing limited distribution strengthens our relationships with retailers,
enables our brands to be among the best selling product lines at the stores and
heightens the aspirational quality of our brands.
We also sell products at self-select outlets jane and prestige salons (Aveda
and Bumble and bumble).
We have been controlled by the Lauder family since the founding of our company.
Members of the Lauder family, some of whom are directors, executive officers
and/or employees, beneficially own, directly or indirectly, as of September 12,
2002, shares of Class A Common Stock and Class B Common Stock having
approximately 91.2% of the outstanding voting power of the Common Stock.
Unless the context requires otherwise, references to "we", "us", "our" and the
"Company" refer to The Estee Lauder Companies Inc. and its subsidiaries.
PRODUCTS
SKIN CARE - Our broad range of skin care products addresses various skin
care needs for women and men. These products include moisturizers, creams,
lotions, cleansers, sun screens and self-tanning products, a number of which are
developed for use on particular areas of the body, such as the face or the hands
or around the eyes. Skin care products accounted for approximately 36% of our
net sales in fiscal 2002.
MAKEUP - We manufacture, market and sell a full array of makeup products,
including lipsticks, mascaras, foundations, eyeshadows, nail polishes and
powders. Many of the products are offered in an extensive array of shades and
colors. We also sell related items such as compacts, brushes and other makeup
tools. Makeup products accounted for approximately 38% of our net sales in
fiscal 2002.
FRAGRANCE - We offer a variety of fragrance products for women and men. The
fragrances are sold in various forms, including eau de parfum sprays and
colognes, as well as lotions, powders, creams and soaps that are based on a
particular fragrance. Fragrance products accounted for approximately 21% of our
net sales in fiscal 2002.
-1-
HAIR CARE - Hair care products are offered mainly in salons and in
freestanding retail stores and include styling products, shampoos, conditioners
and finishing sprays. In fiscal 2002, hair care products accounted for
approximately 5% of our net sales.
Given the personal nature of our products and the wide array of consumer
preferences and tastes, as well as competition for the attention of consumers,
our strategy has been to market and promote our products through distinctive
brands seeking to address broad preferences and tastes. Each brand has a single
global image that is promoted with consistent logos, packaging and advertising
designed to enhance its image and differentiate it from other brands.
ESTEE LAUDER - Estee Lauder brand products, which have been sold since
1946, are positioned as luxurious, classic and aspirational. We believe that
Estee Lauder brand products are technologically advanced and innovative and have
a worldwide reputation for excellence. The broad product line principally
consists of skin care, makeup and fragrance products that are presented in high
quality packaging.
CLINIQUE - First introduced in 1968, Clinique skin care and makeup products
are all allergy tested and 100% fragrance free and have been designed to address
individual skin types and needs. The products are based on the research and
related expertise of leading dermatologists. Clinique skin care products are
generally marketed as part of the 3-Step System: Cleanse, Exfoliate, Moisturize.
Clinique also offers fragrances for men and women and a line of hair care
products.
ARAMIS - We pioneered the marketing of prestige men's grooming and skin
care products and fragrances with the introduction of Aramis products in 1964.
Aramis continues to offer one of the broadest lines of prestige men's products
and has extended the line to include fragrances for women.
PRESCRIPTIVES - We developed and introduced Prescriptives in 1979.
Prescriptives is positioned as a color authority with an advanced collection of
highly individualized products primarily addressing the makeup and skin care
needs of contemporary women with active lifestyles. The products are
characterized by simple concepts, minimalist design and an innovative image and,
through a system of color application and extensive range of makeup shades,
accommodate a diverse group of consumers.
ORIGINS - Origins, our most recent internally developed brand, was
introduced in 1990. It is positioned as a plant-based cosmetics line of skin
care, makeup and aromatherapy products that combine time-tested botanical
ingredients with modern science to promote total well-being. Origins sells its
products at our freestanding Origins stores and through stores-within-stores
(which are designed to replicate the Origins store environment within a
department store), at traditional retail counters, in perfumeries and directly
to consumers over the Internet.
TOMMY HILFIGER - We have an exclusive global license arrangement to develop
and market men's and women's fragrances and cosmetics under the Tommy Hilfiger
brand. We launched the line in 1995 with a men's fragrance, tommy. Today, we
manufacture and sell a variety of fragrances and ancillary products for men and
women.
M.A.C - M.A.C products comprise a broad line of color-oriented,
professional cosmetics and professional makeup tools targeting makeup artists
and fashion-conscious consumers. The products are sold through a limited number
of department and specialty stores, at freestanding M.A.C stores and directly
to consumers over the Internet. We acquired Make-Up Art Cosmetics Limited, the
manufacturer of M.A.C products, in three stages: in December 1994, March 1997
and February 1998.
BOBBI BROWN - In October 1995, we acquired the Bobbi Brown line of color
cosmetics, professional makeup brushes and skin care products. Bobbi Brown
products are manufactured to our specifications, primarily by third parties, and
sold through a limited number of department and specialty stores and directly to
consumers over the Internet.
LA MER - La Mer products primarily consist of moisturizing creams, lotions,
cleansers, toners and other skin care products. The line, which is available in
very limited distribution in the United States and certain other countries, is
an extension of the initial Creme de la Mer product that we acquired in 1995.
jane - In October 1997, we acquired Sassaby, Inc., the owner of the jane
brand of color cosmetics targeted to young consumers. jane products are
currently distributed only in the United States in the self-select distribution
channel.
-2-
DONNA KARAN COSMETICS - In November 1997, we obtained the exclusive global
license to develop, market and distribute a line of fragrances and other
cosmetics under the Donna Karan New York and DKNY trademarks, including certain
products that were originally sold by The Donna Karan Company. We launched the
first DKNY women's fragrance in fiscal 2000 and the first DKNY men's fragrance
in fiscal 2001. Under this license, fragrances have been expanded to include
extensive lines of companion bath and body products.
AVEDA - We acquired the Aveda business in December 1997 and have since
acquired selected Aveda distributors and retail stores. Aveda, a prestige hair
care leader, is a manufacturer and marketer of plant-based hair care, skin care,
makeup and fragrance products. We sell Aveda products to third-party
distributors and prestige salons and spas, specialty retailers, and directly to
consumers at our own freestanding Aveda Environmental Lifestyle Stores and Aveda
Institutes.
STILA - In August 1999, we acquired the business of Los Angeles-based Stila
Cosmetics, Inc. Stila is known for its stylish, wearable makeup products and
eco-friendly packaging and has developed a following among young,
fashion-forward consumers. Stila products are currently available at the brand's
flagship store in Los Angeles, California, and also in limited distribution in
the United States and certain other countries.
JO MALONE - We acquired London-based Jo Malone Limited in October 1999. Jo
Malone is known for its prestige skin care, fragrance and hair care products
showcased at its flagship store in London. Products are also available through a
company catalogue, at a very limited group of specialty stores in the United
States and Canada and at a freestanding store in New York City.
BUMBLE AND BUMBLE - In June 2000, we acquired a controlling majority equity
interest in Bumble and Bumble Products, LLC, a marketer and distributor of
quality hair care products, and Bumble and Bumble, LLC, the operator of a
premier hair salon in New York City. Bumble and bumble styling and other hair
care products are distributed to top-tier salons and select specialty stores.
The founder and two of his partners own the remaining equity interests and have
continued to manage the domestic operations.
KATE SPADE BEAUTY - In November 1999, we obtained exclusive worldwide
rights to the kate spade trademark and related trademarks for the manufacture,
marketing, distribution and sale of beauty products. During fiscal 2002, we
launched the first products, a distinctive and personal signature fragrance and
companion products.
In addition to the foregoing brands, we manufacture and sell Kiton and Toni Gard
products as a licensee.
DISTRIBUTION
We sell our products principally through limited distribution channels to
complement the images associated with our core brands. These channels include
more than 13,500 points of sale in over 130 countries and territories and
consist primarily of upscale department stores, specialty retailers, upscale
perfumeries and pharmacies and, to a lesser extent, freestanding company-owned
stores and spas, our own and authorized retailer web sites, stores on cruise
ships and in-flight and duty-free shops.
We maintain a dedicated sales force which sells to our retail accounts in North
America and in the major overseas markets, such as Western Europe and Japan. We
have wholly-owned operations in over 30 countries, and joint ventures in two
others, through which we market, sell and distribute our products. In certain
markets, we sell our products through selected local distributors under
contractual arrangements designed to protect the image and position of the
brands. In addition, we sell certain products in select domestic and
international military locations and over the Internet.
There are risks inherent in foreign operations, including changes in social,
political and economic conditions. We are also exposed to risks associated with
changes in the laws and policies that govern foreign investment in countries
where we have operations as well as, to a lesser extent, changes in United
States laws and regulations relating to foreign trade and investment. In
addition, our results of operations and the value of our foreign assets are
affected by fluctuations in foreign currency exchange rates. Changes in such
rates also may affect the relative prices at which we and foreign competitors
sell products in the same markets. Similarly, the cost of certain items required
in our operations may be affected by changes in the value of the relevant
currencies.
-3-
With the acquisitions of jane and Aveda in fiscal 1998 and a controlling
majority equity interest in Bumble and bumble in fiscal 2000, we broadened our
distribution to include new channels, namely self-select outlets and salons.
jane products are currently sold only in the United States in approximately
12,600 points of sale, including mass merchandise stores, drug stores and
specialty stores. We principally sell Aveda products to third-party distributors
and prestige salons and spas, specialty retailers, and directly to consumers at
our own freestanding Aveda Environmental Lifestyle Stores and Aveda Institutes.
There are currently about 7,800 points of sale, primarily in the United States,
that sell Aveda products. Bumble and bumble products are principally sold to
approximately 1,400 independent salons, primarily in the United States.
As part of our strategy to diversify our distribution, primarily in the United
States, we have been expanding the number of single-brand, freestanding stores
that we own and operate. The Origins, Aveda and M.A.C brands are the primary
focus for this method of distribution. To date, we operate approximately 387
single-brand, freestanding stores worldwide and expect that number to increase
moderately over the next several years.
We sell some of our products directly to consumers over the Internet through our
own web sites (Estee Lauder, Clinique, Origins, Bobbi Brown and M.A.C), and
through Gloss.com (Estee Lauder, Clinique, Prescriptives, Origins, M.A.C,
Bobbi Brown and Stila). Gloss.com is currently a joint venture in which we own a
controlling majority interest. Chanel, Inc. and Clarins (U.S.A.) Inc. became
partners in the venture in August 2000 and Chanel and Clarins products are also
available on the web site.
As is customary in the cosmetics industry, our practice is to accept returns of
our products from retailers. In accepting returns, we typically provide a credit
to the retailer against sales and accounts receivable from that retailer on a
dollar-for-dollar basis. In recognition of this practice, and in accordance with
generally accepted accounting principles, we report sales levels on a net basis,
which is computed by deducting the amount of actual returns received and an
amount established for anticipated returns from gross sales. As a percent of
gross sales, returns were 4.9% in fiscal 2002, 4.9% in fiscal 2001 and 4.3% in
fiscal 2000.
CUSTOMERS
Our strategy has been to build strong strategic relationships with selected
retailers globally. Senior management works with executives of our major retail
accounts on a regular basis, and we believe we are viewed as an important
supplier to these customers.
For the fiscal year ended June 30, 2002, our three largest customers accounted
for 25% of our net sales. Individually no customer accounted for more than 10%
of our net sales during fiscal 2002. Customers affiliated with Federated
Department Stores, Inc. (e.g., Bloomingdale's, Burdines, Macy's and
Rich's/Lazarus) accounted for 11% of our net sales in fiscal 2001 and 2000,
respectively. The May Department Stores Company (e.g., Foley's, Lord & Taylor
and Robinsons-May) accounted for 10% of our net sales in fiscal 2001 and 2000.
MARKETING
Our marketing strategy is built around our vision statement: "Bringing the Best
to Everyone We Touch". Mrs. Estee Lauder formulated this marketing philosophy to
provide high-quality service and products as the foundation for a solid and
loyal consumer base.
Our marketing efforts focus principally on promoting the quality and benefits of
our products. Each of our brands is distinctively positioned, has a single
global image, and is promoted with consistent logos, packaging and advertising
designed to enhance its image and differentiate it from other brands. We
regularly advertise our products on television and radio, in upscale magazines
and prestigious newspapers and through direct mail and photo displays at
international airports. Promotional activities and in-store displays are
designed to introduce existing consumers to different products in the line and
to attract new consumers. Our marketing efforts also benefit from cooperative
advertising programs with retailers, some of which are supported by coordinated
promotions, such as purchase with purchase and gift with purchase. At in-store
counters, sales representatives offer personal demonstrations to market
individual products as well as to provide education on basic skin care and
makeup application. We conduct extensive sampling programs and we pioneered gift
with purchase as a sampling program. We believe that the quality and perceived
benefits of sample products have been effective inducements to purchases by new
and existing consumers.
Starting with the launch of the Clinique website in 1996, we have used the
Internet to educate and inform consumers about certain of our brands. Currently,
there are thirteen single-brand marketing sites, five of which have e-commerce
capabilities, and Gloss.com, the Company's majority-owned, multi-brand marketing
and e-commerce site.
-4-
Most of our creative marketing work is done by in-house creative teams. The
creative staff designs and produces the sales materials, advertisements and
packaging for all products in each brand. Total advertising and promotional
expenditures were $1,326.2 million, $1,255.3 million and $1,195.8 million for
fiscal 2002, 2001 and 2000, respectively. These amounts include expenses
relating to purchase with purchase and gift with purchase promotions that are
now reflected in net sales and cost of sales due to a change in generally
accepted accounting principles. In addition, our products receive extensive
editorial coverage in prestige publications and other media worldwide.
Our marketing and sales executives spend considerable time in the field meeting
with consumers and key retailers, checking activities of competitors and
consulting with sales representatives at the points of sale. These include Estee
Lauder Beauty Advisors, Clinique Consultants, Aramis Selling Specialists,
Prescriptives Analysts and Origins Guides.
MANAGEMENT INFORMATION SYSTEMS
Management information systems support automation of our business processes
including product development, marketing, sales, order processing, production,
distribution and finance.
We have deployed a product definition system that establishes and maintains a
centralized data repository of essential attributes for each of the products we
offer or plan to offer in the marketplace. Coupled with our product research and
development systems, we are able to globally manufacture and market products of
consistent quality.
Our sales analysis system tracks weekly sales at the stock keeping unit (SKU)
level at most retail sales locations (i.e. sell-through data). This system is
currently tracking sell-through data for almost all accounts of Estee Lauder,
Clinique, Aramis, Prescriptives, Origins, M.A.C, Bobbi Brown, Donna Karan,
Tommy Hilfiger, La Mer and Stila in the United States and Canada. The increased
understanding of consumer preferences gained from sell-through data enables us
to coordinate more effectively our product development, manufacturing and
marketing strategies. We have implemented similar systems in other countries.
We have negotiated automated replenishment arrangements with many of our key
domestic customers. These arrangements enable us to replenish inventories for
individual points of sale automatically, with minimal paperwork. Customer orders
for a substantial majority of sales of Estee Lauder, Clinique, Prescriptives,
Origins, M.A.C and Bobbi Brown products in the United States are generated by
automated replenishment systems.
Our data warehouse captures shipping, sell-through and inventory data for our
domestic business. This system has resulted in streamlined and standardized
reporting as well as timely and accurate retail sales and marketing information.
We have a system that provides tools to plan, monitor, and analyze our
promotional business and its processes on both an individual brand as well as a
corporate basis. Marketing and sales professionals currently utilize this system
to promote Estee Lauder, Clinique, M.A.C, Origins, and Bobbi Brown products in
the United States and Canada. This system helps us reduce costs, maintain
accountability, improve return on investment and maximize the impact of our
promotional activities. This system was the model for an international
promotional management system, which we started installing in fiscal 2001 in
some European markets and are continuing to roll out to additional international
markets.
At practically all of our international sales affiliates we have installed a
proprietary inventory management system, which provides us with a global view of
finished goods availability relative to actual requirements. This system has
resulted in improved inventory control and disposition for both existing product
lines and new product launches.
The use of sell-through data, combined with the implementation of automated
replenishment systems, data warehousing, promotional planning systems and the
inventory management system, has resulted in increased sales, fewer
out-of-stocks and reduced retail inventories. We expect that these systems will
continue to provide inventory and sales efficiencies.
We have refined the strategic direction of our supply chain systems and have
contracted with a third party to implement its fulfillment application software
for supply chain planning and execution. This software will replace our
internally developed systems on an enterprise basis. We expect that the new
software systems will lead to greater efficiency and consistency in the global
supply chain by the end of fiscal 2003. We are also evaluating expanding the use
of a third party's enterprise resource planning application software to replace
the current transaction application software for financial, production, and
order management in North America.
-5-
We continue to enhance our corporate Extranet, which is designed to provide
retailers with real-time order status throughout the procurement cycle.
Customers use this system to track their orders as they move through the
fulfillment process. As a result, we experience fewer billing discrepancies and
fewer customer deductions.
RESEARCH AND DEVELOPMENT
We believe that we are an industry leader in the development of new products.
Marketing, product development and packaging groups work with our research and
development group to identify shifts in consumer preferences, develop new
products and redesign or reformulate existing products. In addition, research
and development personnel work closely with quality assurance and manufacturing
personnel on a worldwide basis to ensure consistent global standards for our
products and to deliver products with attributes that fulfill consumer
expectations.
We maintain ongoing research and development programs at our facilities in
Melville, New York; Oevel, Belgium; Tokyo, Japan; Markham, Ontario; and Blaine,
Minnesota. As of June 30, 2002, we had approximately 400 employees engaged in
research and development. Research and development expenditures totaled $61.3
million, $57.3 million and $53.8 million for fiscal 2002, 2001 and 2000,
respectively. Our research and development group makes significant contributions
toward improving existing products and developing new products and provides
ongoing technical assistance and know-how to our manufacturing activities. The
research and development group has had long-standing working relationships with
several U.S. and international medical and educational facilities, which
supplement internal capabilities. We do not conduct animal testing of our
products.
MANUFACTURING AND RAW MATERIALS
We manufacture skin care, makeup, fragrance and hair care products in the United
States, Belgium, Switzerland, the United Kingdom and Canada. We continue to
streamline our manufacturing processes and identify sourcing opportunities to
improve innovation, increase efficiencies and reduce costs. Our major
manufacturing facilities operate as "focus" plants that primarily manufacture
one type of product (e.g., lipsticks) for all of the principal brands. Our
plants are modern and our manufacturing processes are substantially automated.
While we believe that our manufacturing facilities are sufficient to meet
current and reasonably anticipated manufacturing requirements, we continue to
identify opportunities to make significant improvements in capacity and
productivity. Some of our finished products are manufactured to our
specifications by third parties.
The principal raw materials used in the manufacture of our products are
essential oils, alcohol and specialty chemicals. We also purchase packaging
components, which are manufactured to our design specifications. Procurement of
materials for all manufacturing facilities is generally made on a global basis
through our centralized supplier relations department. A concentrated effort in
supplier rationalization has been made with the specific objective of reducing
costs, increasing innovation and improving quality. As a result of sourcing
initiatives, there is increased dependency on certain suppliers, but we believe
that these suppliers have adequate resources and facilities to overcome any
unforeseen interruption of supply. We are continually benchmarking the
performance of the supply chain and will add or delete suppliers based upon the
changing needs of the business. We have, in the past, been able to obtain an
adequate supply of essential raw materials and currently believe we have
adequate sources of supply for virtually all components of our products. As we
integrate acquired brands, we continually seek new ways to leverage our
production and sourcing capabilities to improve manufacturing performance.
COMPETITION
The skin care, makeup, fragrance and hair care businesses are characterized by
vigorous competition throughout the world. Brand recognition, quality,
performance and price have a significant influence on consumers' choices among
competing products and brands. Advertising, promotion, merchandising, the pace
and timing of new product introductions, line extensions and the quality of
in-store sales staff also have a significant impact on consumers' buying
decisions. We compete against a number of manufacturers and marketers of skin
care, makeup, fragrance and hair care products, some of which have substantially
greater resources than we do.
-6-
Our principal competitors among manufacturers and marketers of skin care,
makeup, fragrance and hair care products include L'Oreal S.A. (which markets
Lancome, Ralph Lauren, Giorgio Armani, Garnier, L'Oreal, Maybelline, Biotherm,
Helena Rubinstein, Redken, Matrix, Kiehl's Since 1851, Shu Umuera and other
products), Unilever N.V. (which markets Calvin Klein, Valentino, Cerruti,
Pond's, Thermasilk, Vaseline Intensive Care and other products), The Procter &
Gamble Company (which markets Cover Girl, Olay, Giorgio Beverly Hills and Hugo
Boss fragrances, Max Factor, Vidal Sassoon, Pantene, Clairol, Aussi and other
products), LVMH Moet Hennessey Louis Vuitton ("LVMH") (which markets Christian
Dior, Kenzo, Givenchy, Guerlain, Hard Candy, Bliss, Benefit, Make Up For Ever,
Urban Decay, Fresh and other products), Shiseido Company, Ltd. (which markets
Shiseido, Zirh, Nars, Decleor and other products), Avon Products Inc., Wella
Group (which markets Wella, Graham Webb, Gucci, Alfred Dunhill, Sebastian, Anna
Sui and other products), Gucci N.V. (which markets Yves St. Laurent Beaute
products), Revlon, Inc. (which markets Revlon, Almay and Ultima II products),
Joh. A. Benckiser GmbH (which markets Coty, Lancaster, Davidoff, Pierre Cardin,
Manifesto, Jil Sander, Rimmel, Jovan, Yue-Sai Kan, Margaret Astor, Adidas,
Calgon, The Healing Garden, Esprit, Chopard and other products), Bristol-Myers
Squibb Co. (which markets Keri and other products), Elizabeth Arden, Inc.,
Chanel, Inc. and Clarins S.A. (which markets Clarins and Thierry Mugler
products). We also face competition from retailers that have developed their own
brands, such as Gap Inc. (which markets The Gap and Banana Republic products),
Intimate Brands (which markets Victoria's Secret Beauty and Bath and Body Works
products) and Sephora, or have acquired brands, such as Neiman Marcus Group
(which acquired Laura Mercier). Some of our competitors also have ownership
interests in retailers that are customers of ours. For example, LVMH has
interests in Duty Free Shoppers and Sephora.
TRADEMARKS, PATENTS AND COPYRIGHTS
We own all of the material trademark rights used in connection with the
manufacturing, marketing and distribution of our major products both in the
United States and in the other principal countries where such products are sold,
except for the trademark rights relating to Tommy Hilfiger (including tommy and
tommy girl), Donna Karan New York, DKNY and Kate Spade, as to which we are the
exclusive worldwide licensee for fragrances, cosmetics and related products.
Trademarks for our principal products are registered in the United States and in
each of the countries in which such products are sold. The major trademarks used
in our business include the brand names Estee Lauder, Clinique, Aramis,
Prescriptives, Origins, Tommy Hilfiger, Donna Karan New York, DKNY, M.A.C,
Bobbi Brown, La Mer, jane, Aveda, Stila, Jo Malone, Bumble and bumble and Kate
Spade and the names of many of the products sold under each of these brands. We
consider the protection of our trademarks to be important to our business.
A number of our products incorporate patented or patent-pending formulations. In
addition, several products are covered by design patents, patent applications or
copyrights. While we consider these patents and copyrights, and the protection
thereof, to be important, no single patent or copyright is considered material
to the conduct of our business.
EMPLOYEES
At June 30, 2002, we had approximately 20,400 full-time employees worldwide
(including sales representatives at points of sale who are employed by the
Company), of whom approximately 10,200 are employed in the United States and
Canada. None of our employees in the United States is covered by a collective
bargaining agreement. In certain other countries a limited number of employees
are covered by a works council agreement or other syndicate arrangements. We
believe that relations with our employees are good. We have never encountered a
material strike or work stoppage in the United States or in any other country
where we have a significant number of employees.
GOVERNMENT REGULATION
We and our products are subject to regulation by the Food and Drug
Administration and the Federal Trade Commission in the United States, as well as
various other Federal, state, local and international regulatory authorities.
Such regulations relate principally to the ingredients, labeling, packaging and
marketing of our products. We believe that we are in substantial compliance with
such regulations, as well as with applicable Federal, state, local and
international rules and regulations governing the discharge of materials
hazardous to the environment. There are no significant capital expenditures for
environmental control matters either planned in the current year or expected in
the near future.
-7-
SEASONALITY
Our results of operations in total, by region, and by product category are
subject to seasonal fluctuations, with net sales in the first and second fiscal
quarters typically being slightly higher than in the third and fourth fiscal
quarters. The higher net sales in the first two fiscal quarters are attributable
to the increased levels of purchasing by retailers for the Christmas selling
season and for fall fashion makeup introductions. In addition, fluctuations in
net sales, operating income and product category results in any fiscal quarter
may be attributable to the level and scope of new product introductions.
Additionally, gross margins and operating expenses are impacted on a
quarter-by-quarter basis by variations in our launch calendar and the timing of
promotions, including purchase with purchase and gift with purchase promotions.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our executive
officers.
NAME AGE POSITION(S) HELD
- ---- --- ----------------
Leonard A. Lauder 69 Chairman of the Board of Directors
Ronald S. Lauder 58 Chairman of Clinique Laboratories, Inc.
and a Director
Fred H. Langhammer 58 President and Chief Executive Officer
and a Director
Patrick Bousquet-Chavanne 44 Group President
Daniel J. Brestle 57 Group President
Andrew J. Cavanaugh 55 Senior Vice President - Global Human Resources
Paul E. Konney 58 Senior Vice President, General Counsel
and Secretary
Richard W. Kunes 49 Senior Vice President and Chief Financial
Officer
Evelyn H. Lauder 66 Senior Corporate Vice President
William P. Lauder 42 Group President and a Director
Philip Shearer 49 Group President, International
Edward M. Straw 63 President, Global Operations
LEONARD A. LAUDER has been Chairman of the Board of Directors since 1995.
He served as Chief Executive Officer of the Company from 1982 through 1999 and
President from 1972 until 1995. Mr. Lauder formally joined the Company in 1958
after serving as an officer in the United States Navy. Since joining the
Company, he has held various positions, including executive officer positions
other than those described above. He is Chairman of the Board of Trustees of the
Whitney Museum of American Art, a Charter Trustee of the University of
Pennsylvania and a Trustee of The Aspen Institute. He also served as a member of
the White House Advisory Committee on Trade Policy and Negotiations under
President Reagan.
RONALD S. LAUDER has served as Chairman of Clinique Laboratories, Inc.
since returning from government service in 1987. He was Chairman of Estee Lauder
International, Inc. from 1987 through 2002. Mr. Lauder joined the Company in
1964 and has held various positions, including those described above, since
then. From 1983 to 1986, Mr. Lauder was Deputy Assistant Secretary of Defense
for European and NATO Affairs. From 1986 to 1987, he served as U.S. Ambassador
to Austria. He is non-executive Chairman of the Board of Directors of Central
European Media Enterprises Ltd. He is also Chairman of the Board of Trustees of
the Museum of Modern Art.
FRED H. LANGHAMMER has been Chief Executive Officer since 2000 and
President of the Company since 1995. He was Chief Operating Officer from 1985
through 1999. Mr. Langhammer joined the Company in 1975 as President of its
operations in Japan. In 1982, he was appointed Managing Director of the
Company's operations in Germany. He is a member of the Board of Directors of
Inditex, S.A. (an apparel manufacturer and retailer), the Cosmetics, Toiletries
and Fragrance Association, the German American Chamber of Commerce, Inc., and
Chairman of the American Institute for Contemporary German Studies at Johns
Hopkins University. He is also a Senior Fellow of the Foreign Policy Association
and a Director of the Japan Society.
PATRICK BOUSQUET-CHAVANNE became Group President responsible for Estee
Lauder, M.A.C and our fragrance brands (principally Aramis, Tommy Hilfiger and
Donna Karan) on a worldwide basis in July 2001. From 1998 to 2001, he was the
President of Estee Lauder International, Inc. ("ELII"). From 1992 to 1996, Mr.
Bousquet-Chavanne was Senior Vice President - General Manager/Travel Retailing
of ELII. From 1989 to 1992, he was Vice President and General Manager of Aramis
International, a division of ELII. From 1996 to 1998, he was Executive Vice
President/General Manager International Operations of Parfums Christian Dior
S.A., based in Paris.
-8-
DANIEL J. BRESTLE became Group President responsible for Aveda, Bobbi
Brown, Bumble and bumble, La Mer, Prescriptives, jane, Jo Malone, Kate Spade and
Stila on a worldwide basis in July 2001. From July 1998 through June 2001, he
was President of Estee Lauder (USA & Canada). Prior to July 1998, he was
President of Clinique Laboratories, Inc. and the senior officer of that division
since 1992. From 1988 through 1992, he was President of Prescriptives U.S.A. Mr.
Brestle joined the Company in 1978.
ANDREW J. CAVANAUGH has been Senior Vice President - Global Human Resources
since 1999. He was Senior Vice President - Corporate Human Resources from 1994
through 1999. Mr. Cavanaugh joined the Company in 1988 as Executive Director -
Human Resources.
PAUL E. KONNEY is Senior Vice President, General Counsel and Secretary.
Prior to joining the Company in August 1999, Mr. Konney was Senior Vice
President, General Counsel and Secretary of Quaker State Corporation from 1994.
Prior to that, he was Senior Vice President, General Counsel and Secretary of
Tambrands Inc.
RICHARD W. KUNES became Senior Vice President and Chief Financial Officer
in October 2000. He joined the Company in 1986 and served in various
finance-related positions until November 1993, when he was named Vice President
- - Operations Finance Worldwide. From January 1998 through September 2000, Mr.
Kunes was Vice President - Financial Administration and Corporate Controller.
Prior to joining the Company, he held finance and controller positions at the
Colgate-Palmolive Company.
EVELYN H. LAUDER has been Senior Corporate Vice President of the Company
since 1989, and previously served as Vice President and in other executive
capacities since first joining the Company in 1959 as Education Director. She is
a member of the Board of Overseers, Memorial Sloan-Kettering Cancer Center, a
member of the Boards of Trustees of Central Park Conservancy, Inc. and The
Trinity School in New York City, a member of the Board of Directors of The Parks
Council and the Founder and Chairman of The Breast Cancer Research Foundation.
WILLIAM P. LAUDER became Group President in July 2001. He leads the
worldwide businesses of Clinique and Origins and our retail store and on-line
operations. From 1998 to 2001, he was President of Clinique Laboratories, Inc.
Prior to 1998, he was President of Origins Natural Resources Inc., and he had
been the senior officer of that division since its inception in 1990. Prior
thereto, he served in various positions since joining the Company in 1986. He is
a member of the Board of Trustees of The Trinity School in New York City and the
Boards of Directors of The Fragrance Foundation, The Fresh Air Fund and the 92nd
Street Y.
PHILIP SHEARER joined the Company as Group President, International in
September 2001. Prior thereto, from 1998 to 2001, he was President of the Luxury
Products Division of L'Oreal U.S.A., which included Lancome, Helena Rubinstein,
Ralph Lauren fragrances, Giorgio Armani and Kiehl's Since 1851. He served in
various positions at L'Oreal from 1987, including management positions in the
United Kingdom and in Japan.
EDWARD M. STRAW is President, Global Operations responsible for research
and development, procurement, manufacturing, packaging, distribution, quality
assurance, information systems, corporate sales, security, environmental affairs
and safety, and corporate security and trademark protection. Prior to joining
the Company in 2000, Mr. Straw was Senior Vice President, Global Supply Chain
and Manufacturing for the Compaq Computer Corporation. From 1997 to 1998, he was
President of Ryder Global Logistics, Inc., and prior to joining Ryder, he served
for 35 years in the United States Navy, retiring in 1996 as a Vice Admiral and
Director of the Defense Logistics Agency.
Each executive officer serves for a one-year term ending at the next annual
meeting of the Board of Directors, subject to his or her applicable employment
agreement and his or her earlier death, resignation or removal.
-9-
ITEM 2. PROPERTIES.
The following table sets forth the principal owned and leased manufacturing and
research and development facilities as of September 12, 2002. The leases expire
at various times through 2015, subject to certain renewal options.
APPROXIMATE
LOCATION USE SQUARE FOOTAGE
-------- --- --------------
THE AMERICAS
Melville, New York (owned) Manufacturing 300,000
Melville, New York (owned) R&D 78,000
Blaine, Minnesota (owned) Manufacturing and R&D 275,000
Oakland, New Jersey (leased) Manufacturing 148,000
Bristol, Pennsylvania (leased) Manufacturing 67,000
Agincourt, Ontario, Canada (owned) Manufacturing 96,000
Markham, Ontario, Canada (leased) Manufacturing 58,000
Markham, Ontario, Canada (leased) R&D 26,000
EUROPE, THE MIDDLE EAST & AFRICA
Oevel, Belgium (owned) Manufacturing 113,000
Oevel, Belgium (owned) R&D 2,000
Petersfield, England (owned) Manufacturing 225,000
Lachen, Switzerland (owned) Manufacturing 53,000
ASIA/PACIFIC
Tokyo, Japan (leased) R&D 4,000
We occupy numerous offices, assembly and distribution facilities and warehouses
in the United States and abroad. We consider our properties to be generally in
good condition and believe that our facilities are adequate for our operations
and provide sufficient capacity to meet anticipated requirements. We lease
approximately 300,000 square feet of rentable space for our principal offices in
New York, New York and own an office building of approximately 57,000 square
feet in Melville, New York. As of September 12, 2002, we operated 461
freestanding retail stores, including 14 for the Estee Lauder brand, 12 for
Clinique, 141 for Origins, 95 for M.A.C, 114 for Aveda, 2 for Bobbi Brown, 6
for Jo Malone, 1 for Bumble and bumble, 2 for Stila and 74 multi-brand stores.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in various routine legal proceedings incident to the ordinary
course of business. In management's opinion, the outcome of pending legal
proceedings, separately and in the aggregate, will not have a material adverse
effect on our business or consolidated financial condition.
In August 2000, an affiliate of Revlon, Inc. sued the Company and its
subsidiaries in the U.S. District Court, Southern District of New York, for
alleged patent infringement and related claims. Revlon alleges that five Estee
Lauder products, two Origins foundations, a La Mer concealer and a jane
foundation infringe its patent. Revlon is seeking, among other things, treble
damages, punitive damages, equitable relief and attorneys' fees. The Company
filed counterclaims, which, among other things, challenge the validity of the
patent. Mediation directed by the Court took place in August 2001 and in January
2002, but did not result in resolution of the litigation. In January 2002, the
Court indefinitely postponed the trial date (then set for February 2002) and
established a schedule for pretrial motions. Both parties have filed summary
judgment motions, and the Court is expected to schedule oral argument on the
motions. The Company intends to defend the lawsuit vigorously. Although the
final outcome cannot be predicted with certainty, based on legal analysis and
the discovery proceedings in the litigation, management believes that the case
will not have a material adverse effect on the Company's consolidated financial
condition.
-10-
In February 2000, the Company and eight other manufacturers of cosmetics (the
"Manufacturer Defendants") were added as defendants in a consolidated class
action lawsuit that had been pending in the Superior Court of the State of
California in Marin County. The plaintiffs purport to represent a class of all
California residents who purchased prestige cosmetic products at retail for
personal use from a number of department stores that sold such products in
California (the "Department Store Defendants"). Plaintiffs filed their initial
actions against the Department Store Defendants in May 1998. In May 2000,
plaintiffs filed an amended complaint alleging that the Department Store
Defendants and the Manufacturer Defendants conspired to fix and maintain retail
prices and to limit the supply of prestige cosmetic products sold by the
Department Store Defendants in violation of California state law. The plaintiffs
are seeking, among other things, treble damages, equitable relief, attorneys'
fees, interest and costs. Pre-trial proceedings and discovery have commenced.
Court-directed mediation and related settlement discussions are continuing. The
Company intends to defend the lawsuit vigorously. While no assurance can be
given as to the ultimate outcome, based on preliminary investigation, management
believes that the case will not have a material adverse effect on the Company's
consolidated financial condition.
In 1998, the Office of the Attorney General of the State of New York (the
"State") notified the Company and ten other entities that they are potentially
responsible parties ("PRPs") with respect to the Blydenburgh landfill in Islip,
New York. Each PRP may be jointly and severally liable for the costs of
investigation and cleanup, which the State estimates to be $16 million. While
the State has sued other PRPs in connection with the site (including Hickey's
Carting, Inc., Dennis C. Hickey and Maria Hickey, collectively the "Hickey
Parties"), the State has not sued the Company. The Company and certain other
PRPs are in discussions with the State regarding possible settlement of the
matter. On September 9, 2002, the Hickey Parties brought contribution actions
against the Company and other Blydenburgh PRPs in the State's lawsuit against
the Hickey Parties in the U.S. District Court for the Eastern District of New
York. These actions seek to recover, among other things, any damages for which
the Hickey Parties are found liable in the State's lawsuit against them, and
related costs and expenses, including attorneys' fees. The Company intends to
defend the contribution claim vigorously. While no assurance can be given as to
the ultimate outcome, management believes that the Blydenburgh matters will not
have a material adverse effect on the Company's consolidated financial
condition.
In 1998, the State notified the Company and fifteen other entities that they are
PRPs with respect to the Huntington/East Northport landfill. The cleanup costs
are estimated at $20 million. No litigation has commenced. The Company and other
PRPs are in discussions with the State regarding possible settlement of the
matter. While no assurance can be given as to the ultimate outcome, management
believes that the matter will not have a material adverse effect on the
Company's consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter ended
June 30, 2002.
-11-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
EQUITY COMPENSATION PLAN INFORMATION.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A Common Stock is publicly traded on the New York Stock Exchange under
the symbol "EL". The following table shows the high and low sales prices as
reported on the New York Stock Exchange Composite Tape and the cash dividends
per share declared in fiscal 2002 and fiscal 2001.
FISCAL 2002 FISCAL 2001
---------------------------- ---------------------------
CASH CASH
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
---- --- --------- ---- --- ---------
First Quarter $43.55 $30.30 $.05 $49.75 $34.25 $.05
Second Quarter 34.90 29.25 .05 47.25 33.75 .05
Third Quarter 35.75 29.25 .05 44.00 33.18 .05
Fourth Quarter 38.80 33.50 .05 44.35 35.85 .05
---- ----
Year 43.55 29.25 $.20 49.75 33.18 $.20
==== ====
We expect to continue the payment of cash dividends in the future, but there can
be no assurance that the Board of Directors will continue to declare dividends.
In May 2002, after declaring the $.05 per share dividend that was paid in July
2002, the Board of Directors determined that it would pay future cash dividends
on its common stock annually rather than quarterly. We expect that the Board of
Directors will declare the first annual dividend of $.20 per share in the second
quarter of fiscal 2003, and that it will be payable in January 2003.
As of September 12, 2002, there were approximately 4,177 record holders of Class
A Common Stock and 17 record holders of Class B Common Stock.
-12-
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes the equity compensation plans under which our
securities may be issued as of June 30, 2002. The securities that may be issued
consist solely of shares of our Class A Common Stock and, except as disclosed in
note b to the table, all plans were approved by stockholders of the Company.
EQUITY COMPENSATION PLAN INFORMATION AS OF JUNE 30, 2002
Weighted- Number of securities
Number of average remaining available
securities to exercise for future issuance
be issued upon price of under equity
exercise of outstanding compensation plans
outstanding options, (excluding securities
options, warrants warrants reflected in the
Plan Category and rights and rights first column)
- ----------------------- ----------------- ----------- --------------------
Equity compensation
plans approved by
security holders(a).... 24,843,499(b)(c) $35.10 12,974,443(d)
(a) Includes the Fiscal 1996 Share Incentive Plan (the "1996 Plan"), Fiscal
1999 Share Incentive Plan (the "1999 Plan"), Fiscal 2002 Share Incentive
Plan (the "2002 Plan"), Non-Employee Director Share Incentive Plan (the
"Director Plan"), two Sassaby stock option plans (see note b) and five
employment agreements entered into in 1995 prior to the initial public
offering.
(b) Includes outstanding options in respect of 15,104 shares of Class A Common
Stock that were granted under two stock option plans assumed by the Company
when it acquired Sassaby, Inc. in 1997. The Company never granted any
additional options under the plans.
(c) Excludes stock units in respect of 248,463 shares of Class A Common Stock.
(d) The 1996 Plan, the 1999 Plan and the 2002 Plan are similar omnibus plans.
Each provides the Stock Plan Subcommittee of the Board of Directors
authority to grant shares and benefits other than stock options. As of June
30, 2002, there were 247,752, 14,870 and 11,811,680 shares of Class A
Common Stock available for issuance under each plan, respectively. Shares
underlying benefits cancelled or forfeited under the 1996 Plan and the 1995
employment agreements may be used for grants under the 1999 Plan or the
2002 Plan. Shares underlying benefits cancelled or forfeited under the 1999
Plan may be used for grants under the 2002 Plan. The Director Plan provides
for an annual grant of options and a grant of either options or stock units
to non-employee directors. As of June 30, 2002, there were 237,184 shares
available pursuant to the Director Plan. Additionally, there were 662,957
shares available for issuance pursuant to one employment agreement at June
30, 2002. However, under the terms of that employment agreement no
additional grants may be made, other than dividend equivalent stock units.
In fiscal 2002, the dividend equivalent units granted under that employment
agreement were in respect of 875 shares.
If all of the outstanding options, warrants and rights and stock units, as well
as the securities available for future issuance, included in the table above
were converted to shares of Class A Common Stock as of June 30, 2002, the total
shares of Common Stock outstanding (i.e. Class A plus Class B) would increase
16% to 275,669,064. Of the outstanding options to purchase 24,843,499 shares of
Class A Common Stock, options in respect of 12,594,732 shares are exercisable at
a price less than $35.20, the closing price on June 28, 2002 (the last trading
day of fiscal 2002). Assuming the exercise of in-the-money options, the total
shares outstanding would increase by 5% to 250,197,391.
Subsequent to June 30, 2002, we (i) made additional stock option and unit grants
as discussed in Note 14 to the Notes to Consolidated Financial Statements, and
(ii) purchased additional shares of Class A Common Stock as discussed in Note 20
to the Notes to Consolidated Financial Statements.
-13-
ITEM 6. SELECTED FINANCIAL DATA.
The table below summarizes selected financial information. For further
information, refer to the audited consolidated financial statements and the
notes thereto beginning on page F-1 of this report.
YEAR ENDED OR AT JUNE 30
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF EARNINGS DATA:
Net sales (a) ..................................... $4,743.7 $4,667.7 $4,440.3 $4,040.3 $3,688.7
Gross profit (a) .................................. 3,470.3 3,441.3 3,202.3 2,877.5 2,609.6
Operating income .................................. 341.4 495.6 515.8 456.9 409.1
Earnings before income taxes, minority
interest and accounting change .................. 331.6 483.3 498.7 440.2 402.8
Net earnings ...................................... 191.9(b) 305.2(c) 314.1 272.9 236.8
Preferred stock dividends ......................... 23.4 23.4 23.4 23.4 23.4
Net earnings attributable to common stock ......... 168.5(b) 281.8(c) 290.7 249.5 213.4
CASH FLOW DATA:
Net cash flows provided by operating activities ... $ 518.0 $ 305.4 $ 442.5 $ 352.3 $ 258.2
Net cash flows used for investing activities ...... (217.0) (206.3) (374.3) (200.3) (577.2)
Net cash flows (used for) provided by
financing activities ............................ (121.8) (63.5) (87.9) (73.2) 345.2
PER SHARE DATA:
Net earnings per common share (d):
Basic ........................................... $ .71(b) $ 1.18(c) $ 1.22 $ 1.05 $ .90
Diluted ......................................... $ .70(b) $ 1.16(c) $ 1.20 $ 1.03 $ .89
Weighted average common shares outstanding (d):
Basic ........................................... 238.2 238.4 237.7 237.0 236.8
Diluted ......................................... 241.1 242.2 242.5 241.2 239.5
Cash dividends declared per common share (d) ...... $ .20 $ .20 $ .20 $ .1775 $ .17
BALANCE SHEET DATA:
Working capital ................................... $ 968.0 $ 882.2 $ 716.7 $ 708.0 $ 617.2
Total assets ...................................... 3,416.5 3,218.8 3,043.3 2,746.7 2,512.8
Total debt ........................................ 410.5 416.7 425.4 429.1 436.5
Redeemable preferred stock ........................ 360.0 360.0 360.0 360.0 360.0
Stockholders' equity .............................. 1,461.9 1,352.1 1,160.3 924.5 696.4
- ----------
(a) Effective January 1, 2002, we adopted Emerging Issues Task Force ("EITF")
Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a
Customer". Upon adoption of this Issue, we reclassified revenues generated
from our purchase with purchase activities as sales and the costs of our
purchase with purchase and gift with purchase activities as cost of sales,
which were previously reported net as operating expenses. Operating income
has remained unchanged by this adoption. For purposes of comparability,
these reclassifications have been reflected retroactively for all periods
presented.
(b) Net earnings, net earnings attributable to common stock and net earnings
per common share for the year ended June 30, 2002 included a restructuring
charge of $76.9 million, after tax, or $.32 per common share, and a
one-time charge of $20.6 million, or $.08 per common share, attributable to
the cumulative effect of adopting Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
(c) Net earnings, net earnings attributable to common stock and net earnings
per common share for the year ended June 30, 2001 included restructuring
and other non-recurring charges of $40.3 million, after tax, or $.17 per
common share, and a one-time charge of $2.2 million, after tax, or $.01 per
common share, attributable to the cumulative effect of adopting SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".
(d) On April 26, 1999, the Board of Directors approved a two-for-one stock
split in the form of a 100% stock dividend on all of our outstanding Class
A and Class B Common Stock. The stock dividend was paid on June 2, 1999 to
all holders of record of shares of our Common Stock at the close of
business on May 10, 1999. All share and per share data prior thereto have
been restated to reflect the stock split.
-14-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in conformity with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgements can be subjective and complex, and consequently actual results could
differ from those estimates. Our most critical accounting policies relate to
revenue recognition; concentration of credit risk; inventory; pension and other
postretirement benefit costs; goodwill and other intangible assets; income
taxes; and derivatives.
REVENUE RECOGNITION
Generally, revenues from merchandise sales are recorded at the time the product
is shipped to the customer. We report our sales levels on a net sales basis,
which is computed by deducting from gross sales the amount of actual returns
received and an amount established for anticipated returns.
As is customary in the cosmetics industry, our practice is to accept returns of
our products from retailers if properly requested, authorized and approved. In
accepting returns, we typically provide a credit to the retailer against sales
and accounts receivable from that retailer on a dollar-for-dollar basis.
Our sales return accrual is a subjective critical estimate that has a direct
impact on reported net sales. This accrual is calculated based on a history of
gross sales and actual returns by region and product category. In addition, as
necessary, specific accruals may be established for future known or anticipated
events. As a percentage of gross sales, sales returns were 4.9%, 4.9% and 4.3%
in fiscal 2002, 2001 and 2000, respectively.
CONCENTRATION OF CREDIT RISK
An entity is more vulnerable to concentrations of credit risk if it is exposed
to risk of loss greater than it would have had it mitigated its risk through
diversification of customers. Such risks of loss manifest themselves
differently, depending on the nature of the concentration, and vary in
significance.
We have three major customers that owned and operated retail stores that in the
aggregate accounted for approximately $1.20 billion, or 25%, of our consolidated
net sales in fiscal 2002 and $177.8 million, or 28%, of our accounts receivable
at June 30, 2002. These groups sell products primarily within North America.
Although management believes that these customers are sound and creditworthy, a
severe adverse impact on their business operations could have a corresponding
material adverse effect on our net sales, cash flows, and/or financial
condition.
In the ordinary course of business, we have established an allowance for
doubtful accounts and customer deductions in the amount of $30.6 million and
$26.8 million as of June 30, 2002 and 2001, respectively. Our allowance for
doubtful accounts is a subjective critical estimate that has a direct impact on
reported net earnings. This reserve is based upon the evaluation of accounts
receivable aging, specific exposures and historical trends.
INVENTORY
We state our inventory at the lower of cost or fair market value, with cost
being determined on the first-in, first-out (FIFO) method. We believe FIFO most
closely matches the flow of our products from manufacture through sale. The
reported net value of our inventory includes saleable products, promotional
products, raw materials and componentry that will be sold or used in future
periods. Inventory cost includes raw materials, direct labor and overhead.
We also record an inventory obsolescence reserve, which represents the
difference between the cost of the inventory and its estimated market value,
based on various product sales projections. This reserve is calculated using an
estimated obsolescence percentage applied to the inventory based on age,
historical trends and requirements to support forecasted sales. In addition, and
as necessary, we may establish specific reserves for future known or anticipated
events.
PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS
We offer the following benefits to some or all of our employees: a
noncontributory defined benefit pension plan; an unfunded, nonqualified domestic
benefit pension plan to provide benefits in excess of statutory limitations; a
contributory defined contribution plan; international pension plans, which vary
by country, the most significant of which are defined benefit pension plans;
deferred compensation; and certain other postretirement benefits.
-15-
The amounts necessary to fund future payouts under these plans are subject to
numerous assumptions and variables. Certain significant variables require us to
make assumptions that are within our control such as an anticipated discount
rate, expected rate of return on plan assets and future compensation levels. We
evaluate these assumptions with our actuarial advisors and we believe they are
within accepted industry ranges, although an increase or decrease in the
assumptions or economic events outside our control could have a direct impact on
reported net earnings.
For fiscal 2003, we will use a pre-retirement discount rate of 7.0% and
anticipate using an expected return on plan assets of 8.75%, both of which will
result in a higher calculated pension expense.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is calculated as the excess of the cost of purchased businesses over
the value of their underlying net assets. Other intangible assets principally
consist of purchased royalty rights and trademarks. Goodwill and other
intangible assets that have an indefinite life are not amortized.
On an annual basis, we test goodwill and other intangible assets for impairment.
To determine the fair value of these intangible assets, there are many
assumptions and estimates used that directly impact the results of the testing.
We have the ability to influence the outcome and ultimate results based on the
assumptions and estimates we choose. To mitigate undue influence, we use
industry accepted valuation models and set criteria that are reviewed and
approved by various levels of management. Additionally, we evaluated our
recorded goodwill with the assistance of a third-party valuation firm.
INCOME TAXES
We have accounted for, and currently account for, income taxes in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes." This Statement establishes financial accounting and reporting
standards for the effects of income taxes that result from an enterprise's
activities during the current and preceding years. It requires an asset and
liability approach for financial accounting and reporting of income taxes.
As of June 30, 2002, we have current net deferred tax assets of $112.4 million
and non-current net deferred tax assets of $72.7 million. These net deferred tax
assets assume sufficient future earnings for their realization, as well as the
continued application of current tax rates. Included in net deferred tax assets
is a valuation allowance of approximately $1.5 million for deferred tax assets,
which relates to foreign tax loss carryforwards not utilized to date, where
management believes it is more likely than not that the deferred tax assets will
not be realized in the relevant jurisdiction. Based on our assessments, no
additional valuation allowance is required. If we determine that a deferred tax
asset will not be realizable, an adjustment to the deferred tax asset will
result in a reduction of earnings at that time.
Furthermore, the Company provides tax reserves for Federal, state and
international exposures relating to audit results, planning initiatives and
compliance responsibilities. The development of these reserves requires
judgements about tax issues, potential outcomes and timing, and is a subjective
critical estimate.
DERIVATIVES
We currently account for derivative financial instruments in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended, which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This Statement also requires the
recognition of all derivative instruments as either assets or liabilities on the
balance sheet and that they be measured at fair value.
We currently use derivative financial instruments to hedge certain anticipated
transactions as well as receivables and payables denominated in foreign
currencies. We do not utilize derivatives for trading or speculative purposes.
Hedge effectiveness is documented, assessed and monitored by our employees who
are qualified to make such assessments and monitor the instruments. Variables
that are external to the Company such as social, political and economic risks
may have an impact on our hedging program and the results thereon.
-16-
RESULTS OF OPERATIONS
- ---------------------
We manufacture, market and sell skin care, makeup, fragrance and hair care
products which are distributed in over 130 countries and territories. The
following is a comparative summary of operating results for fiscal 2002, 2001
and 2000 and reflects the basis of presentation described in Note 2 to the Notes
to Consolidated Financial Statements for all periods presented. Sales of
products and services that do not meet our definition of skin care, makeup,
fragrance and hair care have been included in the "other" category.
YEAR ENDED JUNE 30
--------------------------------
2002 2001 2000
-------- -------- --------
(IN MILLIONS)
NET SALES
BY REGION:
The Americas .......................... $2,878.2 $2,857.8 $2,714.0
Europe, the Middle East & Africa ...... 1,261.1 1,221.8 1,142.2
Asia/Pacific .......................... 610.6 596.1 584.1
-------- -------- --------
4,749.9 4,675.7 4,440.3
Restructuring * ....................... (6.2) (8.0) --
-------- -------- --------
$4,743.7 $4,667.7 $4,440.3
======== ======== ========
BY PRODUCT CATEGORY:
Skin Care ............................. $1,703.3 $1,660.7 $1,577.0
Makeup ................................ 1,790.5 1,721.6 1,603.5
Fragrance ............................. 1,017.3 1,085.1 1,117.2
Hair Care ............................. 215.8 180.7 113.9
Other ................................. 23.0 27.6 28.7
-------- -------- --------
4,749.9 4,675.7 4,440.3
Restructuring * ....................... (6.2) (8.0) --
-------- -------- --------
$4,743.7 $4,667.7 $4,440.3
======== ======== ========
OPERATING INCOME
BY REGION:
The Americas .......................... $ 222.9 $ 299.9 $ 287.9
Europe, the Middle East & Africa ...... 179.9 201.8 168.9
Asia/Pacific .......................... 56.0 56.9 59.0
-------- -------- --------
458.8 558.6 515.8
Restructuring and other
non-recurring expenses * ............ (117.4) (63.0) --
-------- -------- --------
$ 341.4 $ 495.6 $ 515.8
======== ======== ========
BY PRODUCT CATEGORY:
Skin Care ............................. $ 248.4 $ 266.9 $ 240.5
Makeup ................................ 183.2 212.5 181.8
Fragrance ............................. 13.4 63.6 80.6
Hair Care ............................. 13.7 13.1 12.4
Other ................................. 0.1 2.5 0.5
-------- -------- --------
458.8 558.6 515.8
Restructuring and other
non-recurring expenses * ............ (117.4) (63.0) --
-------- -------- --------
$ 341.4 $ 495.6 $ 515.8
======== ======== ========
* Refer to the two "Restructuring and Other Non-Recurring Expenses" sections of
this Management's Discussion and Analysis of Financial Condition and Results
of Operations for further information about these charges.
-17-
The following table presents certain consolidated earnings data as a percentage
of net sales:
YEAR ENDED JUNE 30
-------------------------------
2002 2001 2000
------- ------- -------
Net sales ................................... 100.0% 100.0% 100.0%
Cost of sales ............................... 26.8 26.3 27.9
------- ------- -------
Gross profit ................................ 73.2 73.7 72.1
------- ------- -------
Operating expenses:
Selling, general and administrative ..... 63.3 61.5 59.8
Restructuring ........................... 2.3 0.8 --
Other non-recurring ..................... -- 0.3 --
Related party royalties ................. 0.4 0.5 0.7
------- ------- -------
66.0 63.1 60.5
------- ------- -------
Operating income ............................ 7.2 10.6 11.6
Interest expense, net ....................... 0.2 0.2 0.4
------- ------- -------
Earnings before income taxes, minority
interest and accounting change ............ 7.0 10.4 11.2
Provision for income taxes .................. 2.4 3.7 4.1
Minority interest, net of tax ............... (0.1) (0.1) --
------- ------- -------
Net earnings before accounting change ....... 4.5 6.6 7.1
Cumulative effect of a change in
accounting principle, net of tax .......... (0.4) (0.1) --
------- ------- -------
Net earnings ................................ 4.1% 6.5% 7.1%
======= ======= =======
FISCAL 2002 AS COMPARED WITH FISCAL 2001
NET SALES
Net sales increased 2% or $76.0 million to $4.74 billion reflecting continued
growth in the makeup, skin care and hair care categories, partially offset by a
decline in fragrance net sales. Excluding the impact of foreign currency
translation, net sales increased 3%. The unusual events that occurred during the
current fiscal year and their effect on the economy, particularly in the United
States, have adversely impacted our business. In addition, the decline in
worldwide travel during most of fiscal 2002 led to a 13% reduction in our travel
retail sales. Sales growth from certain newer brands and recently launched
products partially offset these decreases.
The following discussions of Net Sales by Product Categories and Geographic
Regions exclude the impact of the restructurings in fiscal 2002 and fiscal 2001.
Neither restructuring was material to our net sales, and the discussions
represent the manner in which we conduct and view our business. For a discussion
of the restructurings, see "Operating Expenses - Restructuring and Other
Non-Recurring Expenses" in this section and under the same heading under "Fiscal
2001 as compared with Fiscal 2000".
PRODUCT CATEGORIES
SKIN CARE
Net sales of skin care products increased 3% or $42.6 million to $1.70 billion.
The net sales increase is primarily attributable to recently launched products
such as Total Turnaround Visible Skin Renewer, Advanced Night Repair Eye
Recovery Complex, Moisture Surge Extra and Moisture Surge Eye Gel, A Perfect
World, LightSource Transforming Moisture Lotion and Cream, and Re-Nutriv
Ultimate Lifting Creme. Partially offsetting these increases were lower net
sales of certain existing products such as Turnaround Cream and Resilience Lift,
as well as products in Clinique's 3-Step Skin Care System.
-18-
MAKEUP
Makeup net sales increased 4% or $68.9 million to $1.79 billion. Newer brands
such as M.A.C, Bobbi Brown and Stila, which are primarily makeup products,
contributed through growth at existing doors and increased distribution. In
addition, strong sales of the Pure Color Line of products, the worldwide launch
of Gentle Light Makeup and Illusionist Mascara contributed positively to net
sales growth. Partially offsetting the increase in net sales were lower sales of
Two-in-One Eye Shadow, Lucidity Makeup, and Long Last Soft Shine Lipstick.
FRAGRANCE
Net sales of fragrance products decreased 6% or $67.8 million to $1.02 billion.
This category continued to be impacted by the softness of the fragrance business
in the United States and the decline in our travel retail business, which
depends substantially on fragrance products. Lower net sales of Beautiful, Estee
Lauder pleasures, DKNY for Women and certain existing Tommy Hilfiger licensed
products were partially offset by the recent launch of T, a new fragrance in the
Tommy Hilfiger line, and Intuition for Men, as well as strong sales of Donna
Karan Cashmere Mist.
HAIR CARE
Hair care net sales increased 19% or $35.1 million to $215.8 million. This
increase was primarily the result of growth from Aveda, which benefited from
recently launched texture lotion products and Color Conserve Shampoo and an
increase in the number of Company-owned Aveda Environmental Lifestyle Stores.
Sales of Bumble and bumble products increased due to an expanded product line
and an increase in the number of points of sale. The results were partially
offset by lower sales from Clinique's Simple Hair Care System when compared with
the prior-year launch.
The introduction of new products may have some cannibalizing effect on sales of
existing products, which we take into account in our business planning.
GEOGRAPHIC REGIONS
Net sales in the Americas increased 1% or $20.4 million to $2.88 billion. The
increase is primarily due to the success of most newer brands, partially offset
by economic weakness and uncertainty in the United States during most of the
fiscal year. We expect uncertain economic conditions to persist into fiscal 2003
and we are planning accordingly. In Europe, the Middle East & Africa, net sales
increased 3% or $39.3 million to $1.26 billion. This increase was primarily the
result of higher net sales in the United Kingdom, Spain and Greece, where in
fiscal 2002 we formed a joint venture in which we own a controlling majority
interest with our former distributor. The increase was partially offset by lower
net sales in our travel retail business, which has been adversely affected by a
decrease in worldwide travel. Excluding the impact of our travel retail
business, net sales in Europe, the Middle East & Africa increased 8% or $77.8
million. Net sales in Asia/Pacific increased 2% or $14.5 million to $610.6
million primarily due to higher net sales in Korea and Thailand, as well as in
Australia where we benefited from a change in retailer arrangements. The
increased sales were partially offset by lower net sales in Japan. Japan
continues to remain a difficult market due to local economic conditions and
increasing competition. The challenges were made more difficult by the weakness
of the Japanese yen during fiscal 2002 as compared with the U.S. dollar.
Excluding the impact of foreign currency translation, Asia/Pacific net sales
increased 9%.
We strategically stagger our new product launches by geographic market, which
may account for differences in regional sales growth.
COST OF SALES
Cost of sales as a percentage of total net sales was 26.8% as compared with
26.3% in the prior year. The lower margin can be attributed in part to
production volume decreases resulting in under-absorption of overhead, as well
as lower than planned raw material purchases that reduced anticipated savings
from sourcing initiatives. Partially offsetting these negative factors were
lower sales volumes of products with a higher cost of goods, particularly in
travel retail and fragrance. Due to variations in our launch calendar and the
timing of promotions, we anticipate greater fluctuations in our gross margins
and operating expenses on a period-by-period basis.
-19-
OPERATING EXPENSES
OPERATING EXPENSES
Operating expenses increased to 66.0% of net sales as compared with 63.1% of net
sales in the prior year. The increase in operating expenses primarily related to
restructuring expenses, continued advertising and promotional spending and the
cost to expand and operate our retail stores. The increase in operating expenses
as a percentage of net sales reflects a slower growth rate in sales than
operating expenses, primarily due to economic conditions in the United States as
discussed above. As part of our long-term strategies, we continued to emphasize
the building of "brand equities" through advertising and promotional spending
and retail store expansion despite difficult economic times. Changes in
advertising and promotional spending result from the type, timing and level of
advertising and promotional activities related to product launches and rollouts,
as well as the markets being emphasized. Excluding the impact of restructuring
and other non-recurring expenses, operating expenses were 63.5% and 61.9% of net
sales for the fiscal years ended 2002 and 2001, respectively.
RESTRUCTURING AND OTHER NON-RECURRING EXPENSES
During the fourth quarter of fiscal 2002, we recorded special charges for a
restructuring related to repositioning certain businesses as part of our ongoing
efforts to drive long-term growth and increase profitability. The restructuring
focused on cost reduction opportunities related to the Internet, our supply
chain, globalization of the organization and distribution channel refinements.
We have committed to a defined plan of action, which resulted in an aggregate
pre-tax charge of $117.4 million, of which $59.4 million is cash related. On an
after-tax basis, the aggregate charge was $76.9 million, equal to $.32 per
diluted share. As these initiatives are fully implemented, we expect to generate
annual ongoing savings of about $46 million, of which a portion will be
reinvested.
Specifically, the charge included the following:
o INTERNET. In an effort to achieve strategic objectives, reduce costs and
improve profitability, we outsourced Gloss.com platform development and
maintenance efforts to a third-party provider. Additionally, Gloss.com closed
its San Francisco facility and consolidated its operations in New York. As a
result, included in the charge was a $23.9 million provision for
restructuring the Gloss.com operations, including benefits and severance
packages for 36 employees as well as asset write-offs. We also took a $20.1
million charge to write-off the related Gloss.com acquisition goodwill.
o SUPPLY CHAIN. Building on previously announced supply chain initiatives, we
have restructured certain manufacturing, distribution, research and
development, information systems and quality assurance operations in the
United States, Canada and Europe, which included benefits and severance
packages for 110 employees. A charge of $23.7 million was recorded related to
this effort.
o GLOBALIZATION OF ORGANIZATION. We continue to implement our previously
announced transition to a global brand structure designed to streamline the
decision-making process and increase innovation and speed-to-market. The next
phase of this transition entailed eliminating duplicate functions and
responsibilities, which resulted in charges for benefits and severance for
122 employees. We recorded a charge of $27.1 million associated with these
efforts.
o DISTRIBUTION. We evaluated areas of distribution relative to our financial
targets and will focus our resources on the most productive sales channels
and markets. As a result, we closed our operations in Argentina and the
remaining customers will be serviced by our Chilean affiliate. We are also
closing all remaining in-store "tommy's shops" and we are closing other
select points of distribution. We recorded a $22.6 million provision related
to these actions, which included benefits and severance for 85 employees.
Following is a summary of the charges as recorded in the consolidated statement
of earnings for fiscal 2002:
RESTRUCTURING
-------------------------------
(IN MILLIONS) NET COST OF OPERATING
SALES SALES EXPENSES TOTAL
----- ------- --------- ------
Internet ......................... $ -- $ -- $ 44.0 $ 44.0
Supply Chain ..................... -- -- 23.7 23.7
Globalization of Organization .... -- -- 27.1 27.1
Distribution ..................... 6.2 0.8 15.6 22.6
----- ------ ------ ------
TOTAL CHARGE ..................... $ 6.2 $ 0.8 $110.4 117.4
===== ====== ======
Tax effect ....................... (40.5)
------
NET CHARGE ....................... $ 76.9
======
-20-
The restructuring charge was recorded in other accrued liabilities or, where
applicable, as a reduction of the related asset. During fiscal 2002, $9.3
million related to this restructuring was paid and approximately $5.6 million of
additional payments were made through August 31, 2002. We expect to settle a
majority of the remaining obligations by the end of fiscal 2003 with certain
additional payments made ratably through fiscal 2006.
OPERATING RESULTS
Operating income decreased 31% or $154.2 million to $341.4 million as compared
with the prior year. Operating margins were 7.2% of net sales in the current
period as compared with 10.6% in the prior year. The decrease in operating
margin was primarily due to restructuring expenses, lower than expected sales
levels, increased support spending and new distribution channel costs. This was
partially offset by the exclusion of amortization expense due to the adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets", in fiscal 2002 and the
November 2000 expiration of amortization related to purchased royalty rights.
Operating income reflected the inclusion of restructuring and other
non-recurring expenses of $117.4 million and $63.0 million in fiscal 2002 and
2001, respectively. Before consideration of the restructuring and other
non-recurring expenses, operating income decreased 18% to $458.8 million and
operating margins were 9.7% in fiscal 2002 as compared with 11.9% in fiscal
2001.
Net earnings and net earnings per diluted share decreased approximately 37% and
39%, respectively. Net earnings declined $113.3 million to $191.9 million and
net earnings per diluted share was lower by $.46 per diluted share from $1.16 to
$.70. On a comparable basis, before restructuring and other non-recurring
expenses, before the cumulative effect of adopting a new accounting principle,
and excluding goodwill amortization in fiscal 2001, net earnings were $289.4
million, representing a decrease of 20% over the prior year, and diluted
earnings per common share decreased 21% to $1.10 from $1.39 in the prior year.
The following discussions of Operating Income by Product Categories and
Geographic Regions exclude the impact of restructuring and other non-recurring
expenses and represent the manner in which we conduct and view our business.
PRODUCT CATEGORIES
Operating income decreased 79% to $13.4 million in fragrance, 14% to $183.2
million in makeup and 7% to $248.4 million in skin care, primarily due to lower
than anticipated sales levels, coupled with continued advertising and
promotional spending to promote new and recently launched products. Hair care
operating income increased 5%, from a smaller base, to $13.7 million, primarily
due to sales growth from Aveda and Bumble and bumble.
GEOGRAPHIC REGIONS
Operating income in the Americas decreased 26% or $77.0 million to $222.9
million, primarily due to lower sales attributable to weakness in the U.S.
economy and continued advertising and promotional spending. In Europe, the
Middle East & Africa, operating income decreased 11% or $21.9 million to $179.9
million, primarily due to the significant decrease in our travel retail
business. Partially offsetting the decrease were improved operating results in
Italy, the United Kingdom, Spain and Germany. We also benefited from the
inclusion of operating results from our majority-owned joint venture in Greece.
In Asia/Pacific, operating income decreased slightly to $56.0 million due to
lower income in China and Hong Kong offset by higher results in Korea, in
Australia, where we benefited from a change in retailer arrangements, and in
Japan, where we were able to reduce operating expenses.
INTEREST EXPENSE, NET
Net interest expense was $9.8 million as compared with $12.3 million in the
prior year. The decrease in net interest expense resulted from a lower effective
interest rate compared with the prior year. This was primarily due to our
interest rate risk management strategy that relied on commercial paper and
variable-rate term loans. In January 2002, we took advantage of prevailing
market rates and issued fixed rate long-term notes to replace our variable-rate
debt. We believe this will mitigate future interest rate volatility, but we
expect it will result in a higher level of interest expense in the near term.
PROVISION FOR INCOME TAXES
The Company's effective tax rate will change from year to year based on
non-recurring and recurring factors including, but not limited to, the
geographical mix of earnings, the timing and amount of foreign dividends, state
and local taxes, tax audit settlements and interaction of various global tax
strategies.
-21-
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate for income taxes for fiscal 2002 was 34.5%
compared with 36% in the prior year. These rates reflect the effect of state and
local taxes, changes in tax rates in foreign jurisdictions, tax credits and
certain non-deductible expenses. The decrease in the effective income tax rate
was attributable to ongoing tax planning initiatives, as well as a decrease in
non-deductible domestic royalty expense and the elimination of certain
non-deductible goodwill amortization resulting from the implementation of SFAS
No. 142, "Goodwill and Other Intangible Assets".
FISCAL 2001 AS COMPARED WITH FISCAL 2000
NET SALES
Net sales increased 5% or $227.4 million to $4.67 billion reflecting continued
growth in the makeup, skin care and hair care categories, partially offset by a
decline in fragrance net sales. The United States retail business demonstrated
continued softness particularly in the fragrance category. Growth on a reported
basis reflected the impact of a stronger U.S. dollar relative to other
currencies in virtually all markets in which we do business. Net sales growth
was primarily attributable to a combination of new and recently launched
products, the inclusion of newer brands such as Bumble and bumble and changes in
distribution, including additional retail locations. Excluding the impact of
foreign currency translation, net sales increased 9%, with double-digit
contributions from each of Europe, the Middle East & Africa and Asia/Pacific.
The following discussions of Net Sales by Product Categories and Geographic
Regions exclude the impact of the fiscal 2001 restructuring and other
non-recurring expenses, which were not material to our net sales, and represent
the manner in which we conduct and view our business. For a discussion of the
restructuring and other non-recurring expenses, see "Operating Expenses -
Restructuring and Other Non-Recurring Expenses" in this section.
PRODUCT CATEGORIES
SKIN CARE
Net sales of skin care products increased 5% or $83.7 million to $1.66 billion.
This increase was primarily attributable to newer products such as Idealist Skin
Refinisher, Anti-Gravity Firming Lift Cream, Anti-Gravity Firming Eye Lift Cream
and Pro-Preferred Skincare products, the first skin care line for our M.A.C
brand. By introducing new products into lines such as Re-Nutriv, the Origins
Ginger Bath and Body Collection and Acne Solutions, we continued to attract
consumers to the lines and maintain sales momentum. White Light Brightening
System and Active White continued to be popular whitening products particularly
in the Asia/Pacific region. Newly launched products such as Private Spa
Collection, Origins' facial skin products and initial shipments of LightSource
contributed to increased sales. Partially offsetting these increases were lower
sales of certain existing products such as Fruition Extra and Diminish.
MAKEUP
Makeup net sales increased 7% or $118.1 million to $1.72 billion. Significant
contributors were recently launched products such as High Impact Eye Shadow,
Moisture Surge Lipstick, Equalizer Smart Makeup, Lash Doubling Mascara,
Glossware, Pure Color Lip Gloss, Luxe Makeup and Automatic Pencil Duo. In
addition, established products such as Pure Color Lipstick, Quickliner For Lips,
Quickliner For Eyes and Sheer Powder Blusher added to increased sales. M.A.C
products also contributed to increased sales with the Eden Rocks, M.A.C Paints
and Heat product lines.
FRAGRANCE
Net sales of fragrance products decreased 3% or $32.1 million to $1.09 billion,
but increased 1% on a comparable currency basis. The decrease in net sales was
attributable to a continued decline in sales of Tommy Hilfiger licensed
products, as well as to lower sales of Estee Lauder pleasures, Clinique Happy
and Clinique Happy for Men. The continued softness of the fragrance business in
the United States in fiscal 2001 and difficult comparisons to the prior year
contributed to the decline in this category. Contributing positively to the
category were new products, such as Intuition, Ginger Essence and DKNY for Men,
as well as the international rollout of DKNY for Women.
HAIR CARE
Hair care net sales increased 59% or $66.8 million to $180.7 million. The
increase in sales is attributable to the inclusion of Bumble and bumble, in
which we acquired a controlling majority equity interest in June 2000, and the
launch of Clinique's Simple Hair Care System. In addition, sales growth was
generated by Aveda shampoo and conditioner products, such as the Sap Moss and
Brilliant product groups, and an increase in the number of Company-owned Aveda
Environmental Lifestyle Stores.
-22-
The introduction of new products may have some cannibalizing effect on sales of
existing products, which we take into account in our business planning.
GEOGRAPHIC REGIONS
Sales in the Americas increased 5% or $143.8 million to $2.86 billion. This
increase was driven by sales growth in the makeup, skin care, and hair care
categories, particularly with the success of new and recently launched products
and the growth of our newer brands. The increase was partially offset by a
decline in fragrance sales due to the softness in this category in the United
States. In Europe, the Middle East & Africa, net sales increased 7% or $79.6
million to $1.22 billion. The increase was primarily the result of higher net
sales in the United Kingdom, Spain and France and in our distributor and travel
retail businesses. This increase was partially offset by decreased sales in
Germany and South Africa. Net sales in Asia/Pacific increased 2% or $12.0
million to $596.1 million primarily due to higher net sales in Korea, Hong Kong,
Malaysia and Thailand, partially offset by lower sales in Japan and Australia.
Excluding the impact of foreign currency translation, sales grew in each country
in Europe, the Middle East & Africa and in Asia/Pacific, accounting for growth
of 17% and 10%, respectively.
We strategically stagger our new product launches by geographic market, which
may account for differences in regional sales growth.
COST OF SALES
Cost of sales as a percentage of total net sales improved to 26.3% from 27.9%,
reflecting the impact of our manufacturing and sourcing initiatives as well as
changes in distribution and product mix. Changes in distribution include the
rollout of our own retail stores and the acquisition of certain distributor
operations, both of which contributed to higher gross margins. In addition, the
synergies achieved by incorporating recently acquired businesses into our
existing manufacturing and sourcing infrastructures had a favorable impact on
gross margins.
OPERATING EXPENSES
OPERATING EXPENSES
Operating expenses increased to 63.1% of net sales as compared with 60.5% of net
sales in the prior year. Excluding the impact of restructuring and other
non-recurring expenses, operating expenses were 61.9% of net sales. This change
primarily related to the increased cost of our retail store and Internet
operations, which have higher operating cost structures than our traditional
distribution channels. Additionally, depreciation and amortization charges
increased compared with the prior year, reflecting increased goodwill
amortization from acquisitions and depreciation related to capital investments,
partially offset by the November 2000 expiration of amortization related to
purchased royalty rights. Changes in advertising and promotional spending result
from the type, timing and level of advertising and promotional activities
related to product launches and rollouts, as well as from the markets being
emphasized.
RESTRUCTURING AND OTHER NON-RECURRING EXPENSES
During the fourth quarter of fiscal 2001, we recorded one-time charges for
restructuring and other non-recurring expenses related to repositioning certain
businesses as part of our ongoing efforts to drive long-term growth and increase
profitability. The restructuring and other non-recurring expenses focused on
four areas: product fixtures for the jane brand; in-store "tommy's shops";
information systems and other assets; and global brand reorganization. We
committed to a defined plan of action, which resulted in an aggregate pre-tax
charge of $63.0 million, of which $35.9 million is cash related. On an after-tax
basis, the aggregate charge was $40.3 million, equal to $.17 per diluted share.
Specifically, the charge included the following:
o jane. To bring product innovation rapidly to the market and drive growth,
jane switched from its traditional wall displays to a carded program. We
believed this change would lead to increased sales and improvements in
profitability. The positive effects on sales and improved profitability of
this initiative were offset by the reduction in the number of points of sale
during fiscal 2002. The charge included a $16.1 million write-down of
existing jane product fixtures and the return of uncarded product from
virtually all of the 13,000 distribution outlets in the United States.
o "tommy's shops". We also restructured the in-store "tommy's shops" to focus
on our most productive locations and decided to close certain shops that
underperformed relative to expectations. As a result, we recorded a $6.3
million provision for the closing of 86 under-performing in-store "tommy's
shops", located in the United States, and for related product returns.
-23-
o INFORMATION SYSTEMS AND OTHER ASSETS. In response to changing technology and
our new strategic direction, the charge included a $16.2 million provision
for costs associated with the reevaluation of supply chain systems that we
will no longer utilize and with the elimination of unproductive assets
related to the change to standard financial systems.
o GLOBAL BRAND REORGANIZATION. We recorded $20.8 million related to benefits
and severance packages for 75 management employees who were affected by the
reconfiguration to a global brand structure and another $3.6 million related
to infrastructure costs. As of June 30, 2002, none of the 75 management
employees identified in the reorganization was still an employee. We believe
that the global brand structure is improving decision-making processes,
thereby increasing innovation and speed to market.
Following is a summary of the charges as recorded in the consolidated statement
of earnings for fiscal 2001:
RESTRUCTURING
--------------------------- OTHER
NON-
(IN MILLIONS) NET COST OF OPERATING RECURRING
SALES SALES EXPENSES EXPENSES TOTAL
----- ----- --------- --------- -----
jane .......................... $ 5.7 $ 1.5 $ 4.8 $ 4.1 $16.1
"tommy's shops" ............... 2.3 (0.4) 4.4 -- 6.3
Information systems and
other assets ................ -- -- 4.6 11.6 16.2
Global brand reorganization ... -- -- 23.8 0.6 24.4
----- ----- ----- ----- -----
TOTAL CHARGE .................. $ 8.0 $ 1.1 $37.6 $16.3 63.0
===== ===== ===== =====
Tax effect .................... (22.7)
-----
NET CHARGE .................... $40.3
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The restructuring charge was recorded in other accrued liabilities or as a
reduction of fixed assets. During fiscal 2001, $0.7 million was paid and through
June 30, 2002, an additional $26.7 million was paid. As of June 30, 2002, the
remaining obligation was $7.1 million, the majority of which we expect to settle
by the end of fiscal 2003 with remaining payments made ratably through fiscal
2004.
OPERATING RESULTS
Operating income decreased 4% or $20.2 million to $495.6 million as compared
with the prior year. Operating margins were 10.6% of net sales in fiscal 2001 as
compared with 11.6% in the prior year. Operating income reflected the inclusion
of restructuring and other non-recurring expenses of $46.7 million and $16.3
million, respectively. Before consideration of these one-time charges, operating
income increased 8% to $558.6 million and operating margins were 11.9%. The
increase in operating income was primarily due to higher net sales and an
improved gross margin percentage, partially offset by increased operating
expenses reflecting increased sales support spending and new distribution
channel costs.
Net earnings and net earnings per diluted share decreased approximately 3%. Net
earnings declined $8.9 million to $305.2 million and net earnings per diluted
share was lower by $.04 per diluted share from $1.20 to $1.16. Net earnings
before restructuring and other non-recurring expenses and before the cumulative
effect of adopting a new accounting principle was $347.7 million, representing
an increase of 11% over the prior year; diluted earnings per common share
increased 12% to $1.34 from $1.20 in the prior year.
The following discussions of Operating Income by Product Categories and
Geographic Regions exclude the impact of restructuring and other non-recurring
expenses and represent the manner in which we conduct and view our business.
PRODUCT CATEGORIES
Operating income increased 17% to $212.5 million and 11% to $266.9 million in
makeup and skin care, respectively, due primarily to the strength of recently
launched products. The strong growth of our M.A.C business, which includes
retail store expansion, also contributed to the increase in makeup operating
income. Operating income from our fragrance business declined by $17.0 million
reflecting lower sales and increased support spending versus the prior year. The
nominal increase in hair care operating income was a result of the inclusion of
Bumble and bumble and sales from recent launches, partially offset by costs
associated with refining Aveda's salon distribution, opening new Aveda
Environmental Lifestyle Stores and investing in new product introductions.
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GEOGRAPHIC REGIONS
Operating income in the Americas increased 4% or $12.0 million to $299.9 million
as compared with the prior year, primarily due to net sales increases related to
new and recently launched products, strong growth in our M.A.C business and
the inclusion of Bumble and bumble, partially offset by a decline in fragrance
net sales. In Europe, the Middle East & Africa, operating income increased 19%
or $32.9 million to $201.8 million primarily due to improved operating results
in the United Kingdom and Spain and in the travel retail business, partially
offset by lower operating income in South Africa. In Asia/Pacific, operating
income decreased slightly to $56.9 million due to higher results in Korea and
Hong Kong offset by lower operating income in Japan and Australia.
INTEREST EXPENSE, NET
Net interest expense was $12.3 million as compared with $17.1 million in the
prior year. As a result of an increase in average available cash during the
period, we had higher interest income on invested funds and lower interest
expense due to reduced short-term borrowings. Additionally, we benefited from a
lower effective interest rate on our long-term borrowings resulting from our
interest rate risk management strategy.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate for income taxes for fiscal 2001 was 36%
compared with 37% in the prior year. These rates reflect the effect of state and
local taxes, tax rates in foreign jurisdictions and certain non-deductible
expenses. The decrease in the effective income tax rate was principally
attributable to ongoing tax planning initiatives.
FINANCIAL CONDITION
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LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds historically have been cash flows from operations
and borrowings under commercial paper and committed and uncommitted credit lines
provided by banks in the United States and abroad. In February 2002, we repaid
$200.0 million principal amount of bank borrowings with proceeds of a public
offering of 6% Senior Notes due 2012 ("6% Senior Notes"). At June 30, 2002, we
had cash and cash equivalents of $546.9 million compared with $346.7 million at
June 30, 2001.
We have a $750.0 million commercial paper program, under which we have issued,
and intend to issue, commercial paper in the United States. Our commercial paper
is currently rated A-1 by Standard & Poor's and P-1 by Moody's. Our long-term
credit ratings are A+ by Standard & Poor's and A1 by Moody's. At June 30, 2002,
our outstanding borrowings consisted of $130.0 million of commercial paper;
$248.9 million, net of $1.1 million unamortized debt discount, of 6% Senior
Notes due January 2012; a 700.0 million yen loan payable (approximately $5.8
million at current exchange rates), which is due in April 2003; and a 3.0
billion yen term loan (approximately $25.0 million at current exchange rates),
which is due in March 2006. Commercial paper is classified as long-term debt on
our balance sheet based upon our intent and ability to refinance maturing
commercial paper on a long-term basis. It is our policy to maintain backup
facilities to support our commercial paper program and its classification as
long-term debt. As of June 30, 2002, we had an unused $400.0 million revolving
credit facility, expiring on June 28, 2006. We also have an effective shelf
registration statement covering the potential issuance of up to $150.0 million
in debt securities.
In January 2002, we issued and sold $250.0 million of 6% Senior Notes due 2012
in a public offering. The 6% Senior Notes were priced at 99.538% with a yield of
6.062%. Interest payments are required to be made semi-annually on January 15
and July 15 of each year. We made the first payment on July 15, 2002. The
primary portion of the net proceeds of the offering was used to repay a $200.0
million term loan. The remainder was used to repay a portion of the outstanding
commercial paper. We issued these fixed-rate notes in an attempt to mitigate
future interest rate volatility and capitalize on the prevailing market interest
rates then available for such long-term instruments. However, we do expect the
refinancing to result in a higher level of interest expense in the near term.
Our business is seasonal in nature and, accordingly, our working capital needs
vary. To meet these needs, we could issue up to an additional $620.0 million of
commercial paper under our program, issue long-term debt securities or borrow
under the revolving credit facility. As of June 30, 2002, we also had $22.9
million in unused uncommitted facilities.
Total debt as a percent of total capitalization was 18% at June 30, 2002 as
compared with 20% at June 30, 2001, primarily as a result of higher total
capital.
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Net cash provided by operating activities was $518.0 million in fiscal 2002 as
compared with $305.4 million in fiscal 2001 and $442.5 million in fiscal 2000.
This improvement in net cash flows was generated primarily by a reduction of
inventory. Inventory levels were unseasonably high at the end of fiscal 2001 and
were lowered during the current fiscal year as part of our ongoing effort to
keep inventory levels in line with forecasted sales. Operating cash flows were
generally not impacted by the fiscal 2002 restructuring as lower net earnings
were offset by the non-cash portion of the charge and the increase in other
accrued liabilities. We expect the settlement of these accrued charges to result
in a lower level of cash flow provided by operating activities in fiscal 2003.
The decrease in cash provided by operating activities in fiscal 2001 as compared
to fiscal 2000 reflected an increase in inventory primarily due to accelerated
growth both in new distribution channels and in the rollout of new brands; a
shift in the timing of Christmas production at the end of fiscal 2001 as
compared with the prior year; reconfiguration of some of our distribution to
improve service levels; and softer retail sales than projected in the Americas.
Accounts receivable increased due to sales growth, particularly outside the
United States, and the timing of shipments as compared with fiscal 2000. The
decrease in other accrued liabilities in fiscal 2001 reflected the type and
timing of various expenditures and the tightening of spending, particularly in
the Americas, due to the difficult retail environment, partially offset by a
$35.2 million accrual for restructuring and other non-recurring expenses.
Net cash used for investing activities was $217.0 million in fiscal 2002,
compared with $206.3 million in fiscal 2001 and $374.3 million in fiscal 2000.
Net cash used in investing activities during fiscal 2002 is comparable to fiscal
2001 and relates primarily