UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
----------------------
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- Exchange Act of 1934
For the quarterly period ended December 31, 2006
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities
_ Exchange Act of 1934
For the transition period from to
Commission file number: 1-14064
The Estee Lauder Companies Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-2408943
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
767 Fifth Avenue, New York, New York 10153
(Address of principal executive offices) (Zip Code)
212-572-4200
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer X Accelerated filer Non-accelerated filer
- - -
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
- -
At January 26, 2007, 124,209,228 shares of the registrant's Class A Common
Stock, $.01 par value, and 82,409,761 shares of the registrant's Class B
Common Stock, $.01 par value, were outstanding.
THE ESTEE LAUDER COMPANIES INC.
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Earnings --
Three and Six Months Ended December 31, 2006 and 2005 2
Consolidated Balance Sheets --
December 31, 2006 and June 30, 2006 3
Consolidated Statements of Cash Flows --
Six Months Ended December 31, 2006 and 2005 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 30
Part II. Other Information
Item 1. Legal Proceedings 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 6. Exhibits 34
Signatures 35
THE ESTEE LAUDER COMPANIES INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
----------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(In millions, except per share data)
Net Sales $ 1,991.1 $ 1,783.9 $ 3,584.6 $ 3,281.0
Cost of Sales 499.0 458.5 927.1 878.0
--------- --------- --------- ---------
Gross Profit 1,492.1 1,325.4 2,657.5 2,403.0
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative 1,159.7 1,073.1 2,224.7 2,045.6
Special charges related to cost savings
initiative -- 1.6 0.5 1.6
--------- --------- --------- ---------
1,159.7 1,074.7 2,225.2 2,047.2
--------- --------- --------- ---------
Operating Income 332.4 250.7 432.3 355.8
Interest expense, net 7.7 6.9 14.4 12.5
--------- --------- --------- ---------
Earnings before Income Taxes, Minority 324.7 243.8 417.9 343.3
Interest and Discontinued Operations
Provision for income taxes 113.3 90.2 146.7 126.0
Minority interest, net of tax (2.9) (3.2) (4.7) (5.1)
--------- --------- --------- ---------
Net Earnings from Continuing Operations 208.5 150.4 266.5 212.2
Discontinued operations, net of tax (0.1) (68.7) 0.2 (72.0)
--------- --------- --------- ---------
Net Earnings $ 208.4 $ 81.7 $ 266.7 $ 140.2
========= ========= ========= =========
Basic net earnings per common share:
Net earnings from continuing operations $ 1.00 $ .70 $ 1.27 $ .97
Discontinued operations, net of tax (.00) (.32) .00 (.33)
--------- --------- --------- ---------
Net earnings $ 1.00 $ .38 $ 1.27 $ .64
========= ========= ========= =========
Diluted net earnings per common share:
Net earnings from continuing operations $ .99 $ .70 $ 1.25 $ .97
Discontinued operations, net of tax (.00) (.32) .00 (.33)
--------- --------- --------- ---------
Net earnings $ .99 $ .38 $ 1.25 $ .64
========= ========= ========= =========
Weighted average common shares outstanding:
Basic 208.3 214.7 209.7 217.7
Diluted 211.4 216.6 212.5 220.1
Cash dividends declared per share $ .50 $ .40 $ .50 $ .40
See notes to consolidated financial statements.
2
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
December 31 June 30
2006 2006
--------------- --------------
(Unaudited)
($ in millions)
ASSETS
Current Assets
Cash and cash equivalents $ 251.8 $ 368.6
Accounts receivable, net 1,005.1 771.2
Inventory and promotional merchandise, net 783.0 766.3
Prepaid expenses and other current assets 287.1 270.8
--------------- --------------
Total current assets 2,327.0 2,176.9
--------------- --------------
Property, Plant and Equipment, net 807.5 758.0
--------------- --------------
Other Assets
Investments, at cost or market value 21.9 13.4
Goodwill, net 683.9 635.8
Other intangible assets, net 79.4 77.0
Other assets, net 122.2 123.0
--------------- --------------
Total other assets 907.4 849.2
--------------- --------------
Total assets $ 4,041.9 $ 3,784.1
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 189.9 $ 89.7
Accounts payable 287.4 264.5
Accrued income taxes 180.6 135.5
Other accrued liabilities 1,059.6 948.5
--------------- --------------
Total current liabilities 1,717.5 1,438.2
--------------- --------------
Noncurrent Liabilities
Long-term debt 439.3 431.8
Other noncurrent liabilities 251.0 266.4
--------------- --------------
Total noncurrent liabilities 690.3 698.2
--------------- --------------
Minority Interest 18.6 25.4
--------------- --------------
Stockholders' Equity
Common stock, $.01 par value; 650,000,000 shares Class A authorized; shares
issued: 169,074,012 at December 31, 2006 and 164,837,563 at June 30, 2006;
240,000,000 shares Class B authorized; shares issued and outstanding:
82,409,761 at December 31, 2006 and 85,305,915 at June 30, 2006 2.5 2.5
Paid-in capital 649.5 581.0
Retained earnings 2,524.8 2,361.9
Accumulated other comprehensive income 80.6 64.7
--------------- --------------
3,257.4 3,010.1
Less: Treasury stock, at cost; 44,893,732 Class A shares at December 31,
2006 and 38,382,458 Class A shares at June 30, 2006 (1,641.9) (1,387.8)
--------------- --------------
Total stockholders' equity 1,615.5 1,622.3
--------------- --------------
Total liabilities and stockholders' equity $ 4,041.9 $ 3,784.1
=============== ==============
See notes to consolidated financial statements.
3
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31
--------------------------------
2006 2005
---------- ----------
(In millions)
Revised
-------
Cash Flows from Operating Activities
Net earnings $ 266.7 $ 140.2
Adjustments to reconcile net earnings to net cash flows from operating
activities:
Depreciation and amortization 103.8 97.1
Deferred income taxes (12.4) (18.6)
Minority interest, net of tax 4.7 5.1
Non-cash stock compensation 26.6 23.7
Excess tax benefits from stock-based compensation arrangements (1.7) (4.9)
Loss on disposal of fixed assets 2.7 2.7
Discontinued operations, net of tax (0.2) 72.0
Other non-cash items 0.4 0.4
Changes in operating assets and liabilities
Increase in accounts receivable, net (212.5) (76.0)
Decrease (increase) in inventory and promotional merchandise, net (6.5) 23.8
Increase in other assets, net (26.1) (22.2)
Increase (decrease) in accounts payable 22.4 (1.1)
Increase in accrued income taxes 47.9 47.8
Increase in other accrued liabilities 101.3 85.6
Increase (decrease) in other noncurrent liabilities (4.4) 13.1
---------- ----------
Net cash flows provided by operating activities of continuing operations 312.7 388.7
Net cash flows used for operating activities of discontinued operations (5.7) (4.3)
---------- ----------
Net cash flows provided by operating activities 307.0 384.4
---------- ----------
Cash Flows from Investing Activities
Capital expenditures (140.5) (104.0)
Capital expenditures of discontinued operations -- (0.6)
Acquisition of businesses, net of cash acquired (56.7) (46.5)
Proceeds from disposition of long-term investments -- 0.5
Purchases of long-term investments (0.4) (0.1)
---------- ----------
Net cash flows used for investing activities (197.6) (150.7)
---------- ----------
Cash Flows from Financing Activities
Increase in short-term debt, net 99.6 16.0
Repayments and redemptions of long-term debt (1.2) (69.9)
Net proceeds from stock-based compensation transactions 37.1 27.1
Excess tax benefits from stock-based compensation arrangements 1.7 4.9
Payments to acquire treasury stock (254.3) (305.8)
Dividends paid to stockholders (103.6) (85.4)
Distributions made to minority holders of consolidated subsidiaries (9.5) (1.6)
---------- ----------
Net cash flows used for financing activities (230.2) (414.7)
---------- ----------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 4.0 (2.0)
---------- ----------
Net Decrease in Cash and Cash Equivalents (116.8) (183.0)
Cash and Cash Equivalents at Beginning of Period 368.6 553.3
---------- ----------
Cash and Cash Equivalents at End of Period $ 251.8 $ 370.3
========== ==========
See notes to consolidated financial statements.
4
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of The
Estee Lauder Companies Inc. and its subsidiaries (collectively, the "Company")
as continuing operations, with the exception of the operating results of its
reporting unit that marketed and sold Stila brand products, which have been
reflected as discontinued operations for the three and six-month periods ended
December 31, 2006 and 2005. All significant intercompany balances and
transactions have been eliminated.
The consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of management
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. The results of operations of any
interim period are not necessarily indicative of the results of operations to be
expected for the fiscal year. For further information, refer to the consolidated
financial statements and accompanying footnotes included in the Company's Annual
Report on Form 10-K for the year ended June 30, 2006.
Certain amounts in the consolidated financial statements of prior periods have
been reclassified to conform to current period presentation for comparative
purposes.
Net Earnings Per Common Share
For the three and six-month periods ended December 31, 2006 and 2005, net
earnings per common share ("basic EPS") is computed by dividing net earnings by
the weighted-average number of common shares outstanding and contingently
issuable shares (which satisfy certain conditions). Net earnings per common
share assuming dilution ("diluted EPS") is computed by reflecting potential
dilution from stock-based awards.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations is as follows:
Three Months Ended Six Months Ended
December 31 December 31
---------------------- ------------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(Unaudited)
(In millions,except per share data)
Numerator:
Net earnings from continuing operations $ 208.5 $ 150.4 $ 266.5 $ 212.2
Discontinued operations, net of tax (0.1) (68.7) 0.2 (72.0)
--------- --------- --------- ---------
Net earnings $ 208.4 $ 81.7 $ 266.7 $ 140.2
========= ========= ========= =========
Denominator:
Weighted average common shares outstanding - Basic 208.3 214.7 209.7 217.7
Effect of dilutive securities: Stock options and
restricted share units 3.1 1.9 2.8 2.4
--------- --------- --------- ---------
Weighted average common shares outstanding - Diluted 211.4 216.6 212.5 220.1
========= ========= ========= =========
Basic net earnings per common share:
Net earnings from continuing operations $ 1.00 $ .70 $ 1.27 $ .97
Discontinued operations, net of tax (.00) (.32) .00 (.33)
--------- --------- --------- ---------
Net earnings $ 1.00 $ .38 $ 1.27 $ .64
========= ========= ========= =========
Diluted net earnings per common share:
Net earnings from continuing operations $ .99 $ .70 $ 1.25 $ .97
Discontinued operations, net of tax (.00) (.32) .00 (.33)
--------- --------- --------- ---------
Net earnings $ .99 $ .38 $ 1.25 $ .64
========= ========= ========= =========
5
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2006 and 2005, outstanding options to purchase 13.3 million
and 17.1 million shares, respectively, of Class A Common Stock were not included
in the computation of diluted EPS because their inclusion would be anti-
dilutive. As of December 31, 2006 and 2005, 0.2 million and 0.1 million,
respectively, of Performance Share Units have been excluded from the calculation
of diluted EPS because the number of shares ultimately issued is contingent on
the achievement of certain performance targets of the Company, as discussed in
Note 3 - Stock Programs.
Supplemental Disclosures of Cash Flow Information
As of December 31, 2006, the Company has separately disclosed the operating and
investing portion of cash flows attributable to its discontinued operations,
which in the prior period was reported on a combined basis as a single amount.
The Company has conformed its statement of cash flows for the six months ended
December 31, 2005 to reflect the cash flows used for discontinued operations
from a single line below the financing activities category into the appropriate
operating activity and investing activity categories.
Supplemental cash flow information for the six months ended December 31, 2006
and 2005 were as follows:
2006 2005
------------- -------------
(Unaudited)
(In millions)
Cash
Cash paid during the period for interest $ 18.2 $ 17.9
============= =============
Cash paid during the period for income taxes $ 106.7 $ 86.6
============= =============
Non-cash
Incremental tax benefit from the exercise of stock options $ 3.6 $ 2.9
============= =============
Capital lease obligations incurred $ 1.4 $ 0.2
============= =============
Accrued dividend equivalents $ 0.2 $ 0.1
============= =============
Interest rate swap derivative mark to market $ (7.3) $ 8.4
============= =============
Accounts Receivable
Accounts receivable is stated net of the allowance for doubtful accounts and
customer deductions of $28.5 million and $27.1 million as of December 31, 2006
and June 30, 2006, respectively.
Inventory and Promotional Merchandise
Inventory and promotional merchandise includes inventory considered saleable or
usable in future periods, and is stated at the lower of cost or fair-market
value, with cost being determined on the first-in, first-out method. Cost
components include raw materials, componentry, direct labor and overhead (e.g.,
indirect labor, utilities, depreciation, purchasing, receiving, inspection and
warehousing) as well as inbound freight. Promotional merchandise is charged to
expense at the time the merchandise is shipped to the Company's customers.
December 31 June 30
2006 2006
------------- -------------
(Unaudited)
(In millions)
Inventory and promotional merchandise consists of:
Raw materials $ 159.5 $ 151.0
Work in process 40.1 44.2
Finished goods 413.3 407.1
Promotional merchandise 170.1 164.0
------------- -------------
$ 783.0 $ 766.3
============= =============
6
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Property, plant and equipment, including leasehold and other improvements that
extend an asset's useful life or productive capabilities, are carried at cost
less accumulated depreciation and amortization. The cost of assets related to
projects in progress of $116.0 million and $91.9 million as of December 31, 2006
and June 30, 2006, respectively, is included in their respective asset
categories in the table below. For financial statement purposes, depreciation is
provided principally on the straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized on a straight-line basis
over the shorter of the lives of the respective leases or the expected useful
life of those improvements.
December 31 June 30
2006 2006
------------- -------------
(Unaudited)
(In millions)
Assets (Useful Life)
Land $ 13.8 $ 13.7
Buildings and improvements (10 to 40 years) 163.6 161.7
Machinery and equipment (3 to 10 years) 882.8 803.0
Furniture and fixtures (5 to 10 years) 104.6 108.2
Leasehold improvements 856.3 790.8
------------- -------------
2,021.1 1,877.4
Less accumulated depreciation and amortization 1,213.6 1,119.4
------------- -------------
$ 807.5 $ 758.0
============= =============
Depreciation and amortization of property, plant and equipment was $50.4 million
and $47.4 million during the three months ended December 31, 2006 and 2005,
respectively, and $99.1 million and $92.7 million during the six months ended
December 31, 2006 and 2005, respectively. Depreciation and amortization related
to the Company's manufacturing process is included in cost of sales and all
other depreciation and amortization is included in selling, general and
administrative expenses in the accompanying consolidated statements of earnings.
Goodwill and Other Intangible Assets
During the six months ended December 31, 2006, the Company purchased the
remaining minority equity interest in Bumble and Bumble Products, LLC and Bumble
and Bumble, LLC, acquired a business engaged in the wholesale distribution and
retail sale of Aveda products and acquired an international distributor, all of
which resulted in an increase to goodwill of $46.5 million and other intangible
assets of $4.6 million.
Other Accrued Liabilities
Other accrued liabilities at December 31, 2006 and June 30, 2006 were $1,059.6
million and $948.5 million, respectively, of which $418.9 million and $334.5
million, respectively, represented accruals related to advertising,
merchandising and sampling.
Operating Leases
The Company recognizes rent expense from operating leases with periods of free
and scheduled rent increases on a straight-line basis over the applicable lease
term. The Company considers lease renewals in the useful life of its leasehold
improvements when such renewals are reasonably assured. From time to time, the
Company may receive capital improvement funding from its lessors. These amounts
are recorded as deferred liabilities and amortized over the remaining lease term
as a reduction of rent expense.
7
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pension and Post-retirement Benefit Plans
The Company maintains pension plans covering substantially all of its full-time
employees for its U.S. operations and a majority of its international
operations. Certain of the Company's employees are eligible to participate in a
post-retirement benefit plan which provides certain medical and dental benefits.
Descriptions of these plans are discussed in the Company's Annual Report on Form
10-K for the year ended June 30, 2006.
The components of net periodic benefit cost for the three months ended December
31, 2006 and 2005 consisted of the following:
Other than
Pension Plans Pension Plans
---------------------------------------------------- ----------------------
U.S. International Post-retirement
----------------------- ----------------------- ----------------------
2006 2005 2006 2005 2006 2005
-------- -------- -------- -------- -------- --------
(Unaudited) (In millions)
Service cost, net $ 4.6 $ 5.4 $ 4.0 $ 3.0 $ 1.2 $ 1.1
Interest cost 6.2 5.3 3.2 2.4 1.6 1.3
Expected return on plan assets (7.2) (6.2) (3.4) (2.8) -- --
Amortization of:
Prior service cost 0.2 0.2 0.1 0.1 -- --
Actuarial loss 0.5 1.5 1.9 2.0 0.2 0.3
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ 4.3 $ 6.2 $ 5.8 $ 4.7 $ 3.0 $ 2.7
======== ======== ======== ======== ======== ========
The components of net periodic benefit cost for the six months ended December
31, 2006 and 2005 consisted of the following:
Other than
Pension Plans Pension Plans
---------------------------------------------------- ----------------------
U.S. International Post-retirement
----------------------- ----------------------- ----------------------
2006 2005 2006 2005 2006 2005
-------- -------- -------- -------- -------- --------
(Unaudited) (In millions)
Service cost, net $ 9.2 $ 10.8 $ 7.9 $ 6.0 $ 2.4 $ 2.3
Interest cost 12.5 10.6 6.4 4.9 3.3 2.5
Expected return on plan assets (14.4) (12.4) (6.8) (5.7) -- --
Amortization of
Prior service cost 0.3 0.4 0.1 0.1 -- --
Actuarial loss 0.9 3.0 3.9 4.1 0.4 0.6
Settlements and
curtailments -- -- -- 0.2 -- --
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ 8.5 $ 12.4 $ 11.5 $ 9.6 $ 6.1 $ 5.4
======== ======== ======== ======== ======== ========
During the first quarter of fiscal 2007, the Pension Protection Act of 2006 was
adopted into law in the United States. Certain provisions of this Act changed
the calculation related to the maximum contribution amount deductible for income
tax purposes. As a result of these provisions, the Company made discretionary
contributions totaling $10.0 million to its trust-based, noncontributory
qualified defined benefit pension plan during the current quarter and expects to
contribute an additional $10.0 million during the remainder of fiscal 2007. As
of December 31, 2006, the Company expects to make benefit payments under its
non-qualified domestic noncontributory pension plan of $10.3 million and
contributions to its international pension plans of $18.8 million during the
fiscal year ending June 30, 2007, as previously disclosed.
8
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses reported in those financial
statements. These judgments can be subjective and complex, and consequently
actual results could differ from those estimates and assumptions. The Company's
most critical accounting policies relate to revenue recognition, concentration
of credit risk, inventory, pension and other postretirement benefit costs,
goodwill and other intangible assets, income taxes, derivatives and stock-based
compensation. Descriptions of these policies are set forth in the Company's
Annual Report on Form 10-K for the year ended June 30, 2006.
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 157, "Fair Value
Measurements" ("SFAS No. 157") to clarify the definition of fair value,
establish a framework for measuring fair value and expand the disclosures on
fair value measurements. SFAS No. 157 defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (an exit price).
SFAS No. 157 also stipulates that, as a market-based measurement, fair value
measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability, and establishes a fair
value hierarchy that distinguishes between (a) market participant assumptions
developed based on market data obtained from sources independent of the
reporting entity (observable inputs) and (b) the reporting entity's own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). SFAS No. 157
becomes effective for the Company in its fiscal year ending June 30, 2009. The
Company is currently evaluating the impact of the provisions of SFAS No. 157 on
its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 106, and 132(R)" ("SFAS No. 158"). SFAS No. 158 requires
employers to recognize a net liability or asset and an offsetting adjustment to
accumulated other comprehensive income to report the funded status of defined
benefit pension and other postretirement benefit plans. Previous standards
required employers to disclose the complete funded status of its plans only in
the notes to the financial statements. Additionally, SFAS No. 158 requires
employers to measure plan assets and obligations at their year-end balance sheet
date. The Company will adopt SFAS No. 158 prospectively, as of the end of the
current fiscal year, as required.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB No. 108"), which sets
forth the SEC Staff's views on the proper methods for quantifying errors when
there were uncorrected errors in a prior year. Under SAB No. 108, companies
should evaluate a misstatement that existed in prior years based on its impact
on the current year income statement, as well as the cumulative effect of
correcting such misstatements in the current year's ending balance sheet. SAB
No. 108 will become effective for the Company in its fiscal year ending
June 30, 2007. The Company is currently evaluating the impact of the provisions
of SAB No. 108 on its consolidated financial statements.
9
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Comprehensive Income
The components of accumulated other comprehensive income ("OCI") included in the
accompanying consolidated balance sheets consist of net unrealized investment
gain (loss), net gain (loss) on derivative instruments designated and qualifying
as cash-flow hedging instruments, net minimum pension liability adjustments and
cumulative translation adjustments as of the end of each period.
Comprehensive income and its components, net of tax, are as follows:
Three Months Ended Six Months Ended
December 31 December 31
--------------------- ---------------------
2006 2005 2006 2005
-------- -------- -------- --------
(Unaudited)
(In millions)
Net earnings $ 208.4 $ 81.7 $ 266.7 $ 140.2
-------- -------- -------- --------
Other comprehensive income (loss):
Net unrealized investment gain 0.1 -- 0.1 --
Net derivative instruments gain (loss) (2.0) (0.6) (3.2) 0.1
Translation adjustments 18.9 (20.9) 19.0 (13.1)
-------- -------- -------- --------
Other comprehensive income (loss) 17.0 (21.5) 15.9 (13.0)
-------- -------- -------- --------
Comprehensive income $ 225.4 $ 60.2 $ 282.6 $ 127.2
======== ======== ======== ========
The accumulated net gain (loss) on derivative instruments consists of the
following:
Three Months Ended Six Months Ended
December 31 December 31
--------------------- ---------------------
2006 2005 2006 2005
-------- -------- -------- --------
(Unaudited)
(In millions)
OCI-derivative instruments, beginning of period $ 9.1 $ 12.6 $ 10.3 $ 11.9
-------- -------- -------- --------
Gain (loss) on derivative instruments (4.9) 2.1 (6.2) 3.3
Reclassification to earnings of net (gain) loss
during the period 1.9 (4.8) 1.4 (5.5)
Benefit for deferred income taxes 1.0 2.1 1.6 2.3
-------- -------- -------- --------
Net derivative instruments gain (loss) (2.0) (0.6) (3.2) 0.1
-------- -------- -------- --------
OCI-derivative instruments, end of period $ 7.1 $ 12.0 $ 7.1 $ 12.0
======== ======== ======== ========
The $7.1 million, net of tax, derivative instrument gain recorded in OCI at the
end of the current period included $9.1 million, net of tax, related to the gain
on the settlement of treasury lock agreements upon issuance of the Company's
5.75% Senior Notes due October 2033, which will be reclassified to earnings as
an offset to interest expense over the life of the debt. Offsetting this gain
was $2.0 million, net of tax, related to the loss on forward and option
contracts, which the Company will reclassify to earnings during the next six
months.
At the end of the prior period, the $12.0 million, net of tax, derivative
instrument gain recorded in OCI included $9.3 million, net of tax, related to
the gain on the settlement of treasury lock agreements upon issuance of the
Company's 5.75% Senior Notes due October 2033, which will be reclassified to
earnings as an offset to interest expense over the life of the debt, and $2.7
million, net of tax, related to forward and option contracts which the Company
reclassified to earnings.
10
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Stock Programs
As of December 31, 2006, the Company has three active equity compensation plans
which include the Amended and Restated Fiscal 2002 Share Incentive Plan, the
Fiscal 1999 Share Incentive Plan and the Non-Employee Director Share Incentive
Plan (collectively, the "Plans"). These Plans currently provide for the issuance
of 32,894,400 shares, which consist of shares originally provided for and shares
transferred to the Plans from a previous plan and employment agreement, to be
granted in the form of stock-based awards to key employees, consultants and
non-employee directors of the Company. As of December 31, 2006, approximately
8,428,200 shares of Class A Common Stock were reserved and available to be
granted pursuant to these Plans. The Company may satisfy the obligation of its
stock-based compensation awards with either new or treasury shares. The
Company's stock compensation awards outstanding at December 31, 2006 include
stock options, Performance Share Units ("PSU"), Restricted Stock Units ("RSU")
and share units.
Stock-based compensation expense is attributable to the granting of, and the
remaining requisite service periods of, stock options, PSUs, RSUs and share
units, net of estimated forfeitures. Compensation expense attributable to net
stock-based compensation during the three months ended December 31, 2006 and
2005 was $11.7 million and $10.4 million, respectively. Compensation expense
attributable to net stock-based compensation during the six months ended
December 31, 2006 and 2005 was $26.5 million and $23.6 million, respectively. As
of December 31, 2006 and 2005, the total unrecognized compensation cost related
to nonvested stock-based awards was $47.7 and $55.2 million, respectively and
the related weighted-average period over which it is expected to be recognized
is approximately 2.2 and 2.6 years, respectively.
Stock Options
A summary of the Company's stock option programs as of December 31, 2006 and
changes during the six-month period then ended, is presented below:
Weighted-
Weighted- Aggregate Average
Average Intrinsic Contractual Life
Exercise Value(1) Remaining in
(Unaudited) (Shares in thousands) Shares Price (in millions) Years
--------------------------------- ------------ ------------ ------------ ----------------
Outstanding at June 30, 2006 26,215.7 $ 39.53
Granted at fair value 1,659.8 39.58
Exercised (1,306.8) 28.42
Expired (117.7) 41.91
Forfeited (72.8) 39.16
------------
Outstanding at December 31, 2006 26,378.2 40.07 $ 99.3 4.7
============ ============ ================
Exercisable at December 31, 2006 20,736.1 40.44 $ 83.7 3.7
============ ============ ================
--------------------------------------
(1) The intrinsic value of a stock option is the amount by which the current
market value of the underlying stock exceeds the exercise price of the
option.
The exercise period for all stock options generally may not exceed ten years
from the date of grant. Stock option grants to individuals generally become
exercisable in three substantively equal tranches over a service period of up to
four years.
The weighted-average grant date fair value of stock options granted for the
three months ended December 31, 2006 and 2005 was $14.71 and $10.69,
respectively. The weighted-average grant date fair value of stock options
granted for the six months ended December 31, 2006 and 2005 was $13.67 and
$11.61, respectively. The total intrinsic value of stock options exercised
during the three months ended December 31, 2006 and 2005 was $14.0 million and
$3.0 million, respectively. The total intrinsic value of stock options exercised
during the six months ended December 31, 2006 and 2005 was $15.9 million and
$22.4 million, respectively.
11
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Three Months Ended
December 31
----------------------------------
(Unaudited) 2006 2005
------------------------------------------------------------ -------- --------
Weighted-average expected stock-price volatility 24% 23%
Weighted-average expected option life 9 years 7 years
Average risk-free interest rate 4.7% 4.2%
Average dividend yield 1.2% .9%
Six Months Ended
December 31
----------------------------------
(Unaudited) 2006 2005
------------------------------------------------------------ -------- --------
Weighted-average expected stock-price volatility 24% 23%
Weighted-average expected option life 8 years 8 years
Average risk-free interest rate 4.7% 4.2%
Average dividend yield 1.2% .9%
In addition to awards made by the Company, stock options were assumed as part of
the October 1997 acquisition of the companies that sold jane brand products.
There were 4,100 options to acquire shares of the Company's Class A Common Stock
outstanding as of June 30, 2006, all of which were exercised as of December 31,
2006.
Performance Share Units
During the six months ended December 31, 2006, the Company issued approximately
119,000 PSUs, which will be settled in stock subject to the achievement of the
Company's net sales and net earnings per share goals for the three years ending
June 30, 2009. Settlement will be made pursuant to a range of opportunities
relative to the net sales and earnings per share targets of the Company and, as
such, the compensation cost of the PSUs is subject to adjustment based upon the
attainability of these target goals. No settlement will occur for results below
the minimum threshold and additional shares shall be issued if performance
exceeds the targeted performance goals. PSUs are accompanied by dividend
equivalent rights that will be payable in cash upon settlement of the PSU. These
awards are subject to the provisions of the agreement under which the PSUs are
granted. The PSUs were valued at $39.56, representing the closing market value
of the Company's Class A Common Stock on the date of grant, and generally vest
at the end of the performance period.
The following is a summary of the status of the Company's PSUs as of December
31, 2006 and activity during the six months then ended:
Weighted-Average
Grant Date
(Unaudited) (Shares in thousands) Shares Fair Value
------------------------------------------------------- -------------------- -----------------------
Nonvested at June 30, 2006 111.1 $ 35.00
Granted 119.0 39.56
Vested -- --
Forfeited -- --
--------------------
Nonvested at December 31, 2006 230.1 37.36
====================
12
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Units
The Company granted approximately 593,400 RSUs during the six months ended
December 31, 2006, of which 326,400 are scheduled to vest on October 31, 2007,
171,300 on October 31, 2008 and 95,700 on November 2, 2009, all subject to the
continued employment or retirement of the grantees. Certain RSUs are accompanied
by dividend equivalent rights that will be payable in cash upon settlement of
the RSU and as such were valued at $39.56 representing the closing market value
of the Company's Class A Common Stock on the date of grant. Other RSUs are not
accompanied by dividend equivalent rights, and as such were valued at the
closing market value of the Company's Class A Common Stock on the date of grant
less the discounted present value of the dividends expected to be paid on the
shares during the vesting period.
The following is a summary of the status of the Company's RSUs as of December
31, 2006 and activity during the six months then ended:
Weighted-Average
Grant Date
(Unaudited) (Shares in thousands) Shares Fair Value
------------------------------------------------------- -------------------- -----------------------
Nonvested at June 30, 2006 111.1 $ 35.00
Granted 593.4 39.09
Vested (37.0) 35.00
Forfeited (4.1) 39.10
--------------------
Nonvested at December 31, 2006 663.4 38.64
====================
Share Units
The Company grants share units to certain non-employee directors under the
Non-Employee Director Share Incentive Plan. The share units are convertible into
shares of Class A Common Stock as provided for in that plan. Share units are
accompanied by dividend equivalent rights that are converted to additional share
units when such dividends are paid. The following is a summary of the status of
the Company's share units as of December 31, 2006 and activity during the six
months then ended:
Weighted-Average
Grant Date
(Unaudited) (Shares in thousands) Shares Fair Value
------------------------------------------------------- -------------------- -----------------------
Outstanding at June 30, 2006 13.1 $ 36.79
Granted 4.3 40.35
Dividend equivalents 0.2 41.25
Converted -- --
--------------------
Outstanding at December 31, 2006 17.6 37.72
====================
Cash Units
Certain non-employee directors defer cash compensation in the form of cash
payout share units, which are not subject to the Plans. These share units are
classified as liabilities and, as such, their fair value is adjusted to reflect
the current market value of the Company's Class A Common Stock. The Company
recorded $0.2 million and $0.1 million as compensation expense to reflect the
change in the market value for the three months ended December 31, 2006 and
2005, respectively. The Company recorded $0.4 million as compensation expense to
reflect the change in the market value for the six months ended December 31,
2006 while the same expense for the six months ended December 31, 2005 was de
minimis.
13
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Discontinued Operations
On September 30, 2005, the Company committed to a plan to sell and on April 10,
2006, completed the sale of certain assets and operations of the reporting unit
that marketed and sold Stila brand products. As such, $0.1 million of loss and
$0.2 million of income, both net of tax, for the three and six months ended
December 31, 2006, are reflected as discontinued operations in the accompanying
consolidated statements of earnings. The current year operating results included
income from providing certain transitional distribution and online services as
well as the manufacture and sale to the purchaser of a limited range of
products. Also included were charges for transitional services related to
certain information systems, accounting and other back office services provided
to the purchaser in exchange for monthly service fees designed to recover the
estimated costs of providing these transition services. Transitional services
are expected to conclude in fiscal 2007. During the prior year, the Company
recorded a charge of $68.7 million (net of $14.2 million tax benefit) and $72.0
million (net of $16.2 million tax benefit) as discontinued operations for the
three and six months ended December 31, 2005, respectively. The charge reflected
the anticipated loss on the sale of the business of $65.5 million, net of tax,
and the operating loss of $3.2 million, net of tax, and $6.5 million, net of
tax, for the three and six months ended December 31, 2005, respectively. Net
sales associated with the discontinued operations were $12.1 million and $25.7
million for the three and six months ended December 31, 2005, respectively.
Note 5 - Cost Savings Initiative
During fiscal 2006, the Company recorded special charges associated with a cost
savings initiative that was designed to support its long-term financial
objectives. As part of this multi-faceted initiative, the Company identified
savings opportunities that included streamlined processes and organizational
changes. Substantially all employees designated for separation under the cost
savings initiative have been separated as of December 31, 2006.
During the six months ended December 31, 2006, the Company incurred an
additional $0.5 million under this program primarily related to facility
closings. At December 31, 2006, the accrued liability related to the cost
savings initiative was $41.9 million of which $27.0 million and $14.9 million
was reflected as other accrued liabilities and other noncurrent liabilities,
respectively, in the accompanying consolidated balance sheet.
14
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Segment Data and Related Information
Reportable operating segments include components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker (the "Chief Executive") in deciding how to
allocate resources and in assessing performance. Although the Company does
business in one operating segment, beauty products, management also evaluates
performance on a product category basis. Performance is measured based upon net
sales and operating income. Operating income represents earnings before income
taxes, minority interest, net interest expense and discontinued operations. The
accounting policies for the Company's reportable segment are substantially the
same as those for the consolidated financial statements, as described in the
segment data and related information footnote included in the Company's Annual
Report on Form 10-K for the year ended June 30, 2006. The assets and liabilities
of the Company are managed centrally and are reported internally in the same
manner as the consolidated financial statements; thus, no additional information
is produced for the Chief Executive or included herein. There has been no
significant variance in the total or long-lived asset value associated with the
Company's segment data since June 30, 2006. Special charges related to the
Company's cost savings initiative of $1.6 million for the three and six months
ended December 31, 2005 have been reclassified to conform to current period
presentation for comparative purposes. These charges were previously reported in
the Americas region and in each of the product categories.
Three Months Ended Six Months Ended
December 31 December 31
---------------------- -----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(Unaudited)
(In millions)
PRODUCT CATEGORY DATA
Net Sales:
Skin Care $ 701.1 $ 644.1 $ 1,268.1 $ 1,167.5
Makeup 716.8 642.3 1,363.6 1,247.2
Fragrance 465.1 407.9 754.4 701.1
Hair Care 93.9 79.2 176.3 149.6
Other 14.2 10.4 22.2 15.6
--------- --------- --------- ---------
$ 1,991.1 $ 1,783.9 $ 3,584.6 $ 3,281.0
========= ========= ========= =========
Operating Income:
Skin Care $ 148.8 $ 133.3 $ 191.7 $ 172.1
Makeup 128.6 92.5 178.5 153.0
Fragrance 37.4 17.9 42.5 16.9
Hair Care 15.6 7.5 19.5 12.8
Other 2.0 1.1 0.6 2.6
Special charges related to cost savings
initiative -- (1.6) (0.5) (1.6)
--------- --------- --------- ---------
332.4 250.7 432.3 355.8
Reconciliation:
Interest expense, net 7.7 6.9 14.4 12.5
--------- --------- --------- ---------
Earnings before income taxes, minority
interest and discontinued operations $ 324.7 $ 243.8 $ 417.9 $ 343.3
========= ========= ========= =========
GEOGRAPHIC DATA
Net Sales:
The Americas $ 944.0 $ 878.8 $ 1,844.5 $ 1,759.8
Europe, the Middle East & Africa 761.7 658.9 1,233.6 1,076.4
Asia/Pacific 285.4 246.2 506.5 444.8
--------- --------- --------- ---------
$ 1,991.1 $ 1,783.9 $ 3,584.6 $ 3,281.0
========= ========= ========= =========
Operating Income:
The Americas $ 109.9 $ 79.6 $ 183.0 $ 160.0
Europe, the Middle East & Africa 170.8 132.0 189.1 154.4
Asia/Pacific 51.7 40.7 60.7 43.0
Special charges related to cost savings
initiative -- (1.6) (0.5) (1.6)
--------- --------- --------- ---------
$ 332.4 $ 250.7 $ 432.3 $ 355.8
========= ========= ========= =========
15
THE ESTEE LAUDER COMPANIES INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results Of Operations
---------------------
We manufacture, market and sell beauty products including those in the skin
care, makeup, fragrance and hair care categories which are distributed in over
130 countries and territories. The following is a comparative summary of
operating results from continuing operations for the three and six months ended
December 31, 2006 and 2005, and reflects the basis of presentation described in
Note 1 of Notes to Consolidated Financial Statements - Summary of Significant
Accounting Policies for all periods presented. Sales of products and services
that do not meet our definition of skin care, makeup, fragrance or hair care
have been included in the "other" category. Special charges related to our cost
savings initiative of $1.6 million for the three and six months ended December
31, 2005 have been reclassified to conform to current period presentation for
comparative purposes. These charges were previously reported in the Americas
region and in each of our product categories.
Three Months Ended Six Months Ended
December 31 December 31
------------------------ -----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(In millions)
NET SALES
By Region:
The Americas $ 944.0 $ 878.8 $ 1,844.5 $ 1,759.8
Europe, the Middle East & Africa 761.7 658.9 1,233.6 1,076.4
Asia/Pacific 285.4 246.2 506.5 444.8
--------- --------- --------- ---------
$ 1,991.1 $ 1,783.9 $ 3,584.6 $ 3,281.0
========= ========= ========= =========
By Product Category:
Skin Care $ 701.1 $ 644.1 $ 1,268.1 $ 1,167.5
Makeup 716.8 642.3 1,363.6 1,247.2
Fragrance 465.1 407.9 754.4 701.1
Hair Care 93.9 79.2 176.3 149.6
Other 14.2 10.4 22.2 15.6
--------- --------- --------- ---------
$ 1,991.1 $ 1,783.9 $ 3,584.6 $ 3,281.0
========= ========= ========= =========
OPERATING INCOME (LOSS)
By Region:
The Americas $ 109.9 $ 79.6 $ 183.0 $ 160.0
Europe, the Middle East & Africa 170.8 132.0 189.1 154.4
Asia/Pacific 51.7 40.7 60.7 43.0
Special charges related to cost
savings initiative -- (1.6) (0.5) (1.6)
--------- --------- --------- ---------
$ 332.4 $ 250.7 $ 432.3 $ 355.8
========= ========= ========== =========
By Product Category:
Skin Care $ 148.8 $ 133.3 $ 191.7 $ 172.1
Makeup 128.6 92.5 178.5 153.0
Fragrance 37.4 17.9 42.5 16.9
Hair Care 15.6 7.5 19.5 12.8
Other 2.0 1.1 0.6 2.6
Special charges related to cost
savings initiative -- (1.6) (0.5) (1.6)
--------- --------- --------- ---------
$ 332.4 $ 250.7 $ 432.3 $ 355.8
========= ========= ========= =========
16
THE ESTEE LAUDER COMPANIES INC.
The following table presents certain consolidated earnings data as a percentage
of net sales:
Three Months Ended Six Months Ended
December 31 December 31
----------------------- -----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 25.1 25.7 25.9 26.8
--------- --------- --------- ---------
Gross profit 74.9 74.3 74.1 73.2
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative 58.2 60.1 62.0 62.4
Special charges related to cost savings initiative -- 0.1 -- --
--------- --------- --------- ---------
58.2 60.2 62.0 62.4
--------- --------- --------- ---------
Operating income 16.7 14.1 12.1 10.8
Interest expense, net 0.4 0.4 0.4 0.4
--------- --------- --------- ---------
Earnings before income taxes, minority interest and 16.3 13.7 11.7 10.4
discontinued operations
Provision for income taxes 5.7 5.1 4.1 3.8
Minority interest, net of tax (0.1) (0.2) (0.1) (0.1)
--------- --------- --------- ---------
Net earnings from continuing operations 10.5 8.4 7.5 6.5
Discontinued operations, net of tax -- (3.8) -- (2.2)
--------- --------- --------- ---------
Net earnings 10.5% 4.6% 7.5% 4.3%
========= ========= ========= =========
In order to meet the demands of consumers, we continually introduce new
products, support new and established products through advertising, sampling and
merchandising and phase out existing products that no longer meet the needs of
our consumers. The economics of developing, producing and launching these new
products influence our sales and operating performance each period. The
introduction of new products may have some cannibalizing effect on sales of
existing products, which we take into account in our business planning.
Second Quarter Fiscal 2007 as Compared with Second Quarter Fiscal 2006
Net Sales
Net sales increased 12% or $207.2 million to $1,991.1 million, reflecting net
sales growth in all major product categories within each geographic region.
Europe, the Middle East & Africa led the growth in our fragrance and skin care
product categories, while hair care growth was primarily in the Americas. Makeup
product category growth was strong in all regions. The Americas region and the
skin care, makeup and fragrance categories were adversely impacted by fewer
department store doors resulting from the merger of Federated Department Stores,
Inc. ("Federated") and The May Department Stores Company (the "Federated/May
Merger"). We also experienced weakness in our business at those Federated doors
affected by the national nameplate change to Macy's in the United States.
Prior-year period net sales in the Americas reflected an incremental provision
of approximately $13 million for returns that were anticipated at that time as a
result of then-announced store closings related to these retailer
consolidations. Excluding the impact of foreign currency translation, net sales
increased 9%.
Product Categories
Skin Care
Net sales of skin care products increased 9% or $57.0 million to $701.1 million.
Most of this growth occurred outside of the United States. Net sales in the
United States were adversely impacted by retailer consolidation. The recent
launches of Repairwear Lift and All About Eyes Rich from Clinique and Advanced
Night Repair Concentrate Recovery Boosting Treatment and new Perfectionist
products from Estee Lauder contributed incremental sales of approximately $36
million, combined. Net sales increases of approximately $17 million from
Resilience Lift Extreme Ultra Firming products and Advanced Night Repair Eye
Recovery Complex by Estee Lauder also contributed to growth in this product
category. These improvements were partially offset by approximately $13 million
of lower sales of certain other Resilience Lift products from Estee Lauder and
Repairwear Deep Wrinkle Concentrate for Face and Eye by Clinique. Excluding the
impact of foreign currency translation, skin care net sales increased 6%.
17
THE ESTEE LAUDER COMPANIES INC.
Makeup
Makeup net sales increased 12% or $74.5 million to $716.8 million, primarily
reflecting growth from our makeup artist brands of approximately $57 million.
The recent launches of Resilience Lift Extreme Ultra Firming Makeup SPF 15 and
High Gloss Lip Gloss from Estee Lauder and High Definition Lashes from Clinique
contributed incremental sales of approximately $17 million, combined.
Approximately $21 million of higher sales of Double Wear Foundation and Pure
Color EyeShadow by Estee Lauder and Perfectly Real Makeup from Clinique was
offset by lower sales of existing makeup products. Excluding the impact of
foreign currency translation, makeup net sales increased 9%.
Fragrance
Net sales of fragrance products increased 14% or $57.2 million to $465.1
million, driven by the recent launches of DKNY Red Delicious, Sean John
Unforgivable, Pure White Linen from Estee Lauder, DKNY Red Delicious Men and
Youth Dew Amber Nude from Tom Ford for Estee Lauder, which collectively
contributed approximately $58 million to the category. Higher net sales of DKNY
Be Delicious Men, Tommy and Tommy Girl by Tommy Hilfiger and the Clinique
fragrance franchises contributed approximately $18 million, collectively, to the
growth in net sales. Partially offsetting these increases were lower sales of
True Star and True Star Men by Tommy Hilfiger, Estee Lauder Beyond Paradise and
DKNY Be Delicious of approximately $30 million, collectively. While current
period sales levels compared favorably to the prior-year period's lower launch
activity, we anticipate continued challenges in this product category,
particularly in the United States. Excluding the impact of foreign currency
translation, fragrance net sales increased 11%.
Hair Care
Hair care net sales increased 19% or $14.7 million to $93.9 million, primarily
due to growth from Aveda and Bumble and bumble products. Aveda net sales
increases benefited from the acquisition of an independent distributor, the
initial shipments of Be Curly Shampoo & Conditioner and the recent international
launches of Damage Remedy hair care products. Bumble and bumble net sales
benefited from growth in its existing salon distribution and new points of
distribution. Excluding the impact of foreign currency translation, hair care
net sales increased 17%.
Geographic Regions
Net sales in the Americas increased 7% or $65.2 million to $944.0 million. The
increase was led by growth in the United States of approximately $48 million
from our makeup artist brands, the recent launch of the Unforgivable fragrance
by Sean John, our hair care business and from our internet distribution.
Partially offsetting this growth was approximately $22 million related to
weaknesses in our core brands in the United States as a result of competitive
pressures and retailer consolidation. We expect these factors, including
weakness in our business at those Federated doors affected by the national
nameplate change to Macy's in the United States, to continue to affect sales,
with the impact of retailer consolidations easing during the second half of
fiscal 2007. Net sales growth in Canada, Latin America and Mexico contributed an
additional $13 million to the increase. In addition, the prior-year period
results reflected an incremental provision of approximately $13 million for
returns that were anticipated at that time as a result of then-announced store
closings related to retailer consolidations.
In Europe, the Middle East & Africa, net sales increased 16% or $102.8 million
to $761.7 million, including approximately $42 million in exchange rate benefit
due to the weakening of the U.S. dollar. Including the exchange rate benefit,
net sales growth throughout the region was led by the United Kingdom, our travel
retail business, Russia and Germany of approximately $70 million, collectively.
The balancing of inventory levels at certain retailers and changes in our
distribution policy in the Benelux countries (Belgium, the Netherlands and
Luxembourg), Austria and Spain had a negative impact on net sales. As a result,
net sales in those countries remained relatively flat as compared with the
prior-year period. On a local currency basis, net sales in Europe, the Middle
East & Africa increased 9%.
Net sales in Asia/Pacific increased 16% or $39.2 million to $285.4 million.
Higher net sales of approximately $27 million in Korea, China, Japan, Australia
and Hong Kong generally reflected a strong economic environment during this
period as well as new points of distribution. Excluding the impact of foreign
currency translation, Asia/Pacific net sales increased 13%.
We strategically stagger our new product launches by geographic market, which
may account for differences in regional sales growth.
18
THE ESTEE LAUDER COMPANIES INC.
Cost of Sales
Cost of sales as a percentage of total net sales decreased to 25.1% as compared
with 25.7% in the prior period. Cost of sales as a percentage of net sales
reflected a decrease in the level and timing of promotions of approximately 40
basis points. Also contributing to the favorability was a decrease in
obsolescence charges, a change in the mix of our business, improvement in the
gross margin of our travel retail and distributor businesses and the effect of
exchange rate translation of approximately 10 basis points each. Partially
offsetting these improvements by approximately 20 basis points were unfavorable
changes in manufacturing variances. Overall cost of sales reflected savings
achieved during the current period from our cost savings initiative, which
commenced during fiscal 2006.
Since certain promotional activities are a component of sales or cost of sales
and the timing and level of promotions vary with our promotional calendar, we
have experienced, and expect to continue to experience, fluctuations in the cost
of sales percentage. In addition, future cost of sales mix may be impacted by
the inclusion of new brands which have margin and product cost structures
different from those of our existing brands.
Operating Expenses
Operating expenses improved to 58.2% of net sales as compared with 60.2% of net
sales in the prior-year period. Although we have increased the total dollars
spent on advertising, merchandising and sampling, we have generated an
improvement of approximately 200 basis points related to net sales growth from
businesses with a lower mix of advertising, merchandising and sampling and
disciplined spending at our core brands. An improvement of approximately 40
basis points was attributable to the prior-year period's incremental provision
for sales returns that were anticipated at that time as a result of
then-announced store closings related to retailer consolidations. Partially
offsetting these improvements was an increase of approximately 20 basis points
in selling expenses reflecting higher demonstration, field selling and training
costs in support of our business, as well as investments in new channel
initiatives. Overall operating expenses reflected savings achieved during the
current period from our cost savings initiative, which commenced during fiscal
2006.
Changes in advertising, merchandising and sampling spending result from the
type, timing and level of activities related to product launches and rollouts,
as well as the markets being emphasized.
Operating Results
Based on the growth in net sales and the decreases in our cost of sales and
operating expense margins as previously discussed, operating income increased
33%, or $81.7 million, to $332.4 million as compared with the prior-year period.
Operating margins improved to 16.7% of net sales as compared with 14.1% in the
prior-year period.
Product Categories
Fragrance operating results increased over 100%, or $19.5 million to $37.4
million, reflecting our ongoing effort to rationalize continued spending in
support of our fragrances at the point of sale. Hair care operating results also
increased over 100% or $8.1 million to $15.6 million as the increase in sales
outpaced increased spending in support of new distribution points and product
launches. Operating results increased 39% or $36.1 million to $128.6 million in
makeup, primarily as a result of higher net sales from our makeup artist brands,
which more than offset challenges among certain core brands and the impact of
retailer consolidation in the United States. Skin care operating results
increased 12% or $15.5 million to $148.8 million, also reflecting higher net
sales fueled by recent product launches.
Geographic Regions
Operating income in the Americas increased 38% or $30.3 million to $109.9
million. Our efforts to balance advertising, merchandising and sampling spending
with our net sales levels related to our core brands, as well as other planned
company-wide cost containment efforts, resulted in the improvement in operating
income in this region. Net sales growth from our hair care business and our
internet distribution also contributed improved results during the current-year
period. Operating income in this region was negatively impacted in the
prior-year period by $10 million as a result of an incremental provision for
then-anticipated returns as a result of retailer consolidations. Investment
spending behind new and developing brands partially offset these improvements.
In Europe, the Middle East & Africa, operating income increased 29% or $38.8
million to $170.8 million primarily due to improved results in the United
Kingdom, our travel retail business and Russia of approximately $30 million,
collectively. Slightly offsetting these increases were lower results in the
Benelux countries, France and Italy of approximately $1 million, collectively.
19
THE ESTEE LAUDER COMPANIES INC.
In Asia/Pacific, operating income increased 27% or $11.0 million to $51.7
million. Improved results in Hong Kong, China, Australia and Taiwan contributed
approximately $9 million, collectively. Slightly offsetting the increase were
lower contributions of approximately $1 million, combined, from Japan and New
Zealand.
Interest Expense, Net
Net interest expense was $7.7 million as compared with $6.9 million in the prior
period. This change primarily resulted from reduced interest income generated
from lower average investment balances, partially offset by lower interest
expense reflecting lower average debt balances and the capitalization of
interest expenses on internally developed software in connection with the
upgrade of our information systems.
Provision for Income Taxes
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate differs from statutory rates due to the effect
of state and local taxes, tax rates in foreign jurisdictions and certain
nondeductible expenses. Our effective tax rate will change from quarter to
quarter based on non-recurring and recurring factors including, but not limited
to, the geographical mix of earnings, the timing and amount of foreign
dividends, enacted tax legislation, state and local taxes, tax audit settlements
and the interaction of various global tax strategies. The effective rate for
income taxes for the three months ended December 31, 2006 was 34.9% as compared
with 37.0% in the prior period. The decrease in the effective income tax rate of
210 basis points primarily reflected the positive impact attributable to the tax
effect of our foreign operations (150 basis points) and an increase in tax
credits (60 basis points).
Discontinued Operations
On September 30, 2005, we committed to a plan to sell and on April 10, 2006, we
completed the sale of certain assets and operations of our reporting unit that
marketed and sold Stila brand products. As such, $0.1 million and $68.7 million
of operating losses, both net of tax, for the three months ended December 31,
2006 and 2005, respectively, are reflected as discontinued operations in the
accompanying consolidated statements of earnings. The prior period charge
reflected the anticipated loss on the sale of the business of $65.5 million, net
of tax, and the operating loss of $3.2 million, net of tax. Current period
operating results reflected transitional services related to certain information
systems, accounting and other back office services provided to the purchaser in
exchange for monthly service fees designed to recover the estimated costs of
providing these transition services. Partially offsetting these costs was
operating income generated from providing certain transitional distribution and
online services as well as the manufacture and sale to the purchaser of a
limited range of products. Transitional services are expected to conclude in
fiscal 2007.
20
THE ESTEE LAUDER COMPANIES INC.
Six Months Fiscal 2007 as Compared with Six Months Fiscal 2006
Net Sales
Net sales increased 9% or $303.6 million to $3,584.6 million reflecting net
sales growth in all major product categories within each geographic region. The
increases in our skin care, makeup and fragrance product categories were led by
Europe, the Middle East & Africa while the increase in hair care net sales was
predominantly in the Americas. The Americas region and the skin care, makeup and
fragrance categories were adversely impacted by fewer department store doors
resulting from the Federated/May Merger. We also experienced weakness in our
business at those Federated doors affected by the national nameplate change to
Macy's in the United States. Prior-year period net sales in the Americas
reflected an incremental provision of approximately $13 million for returns that
were anticipated at that time as a result of then-announced store closings
related to these retailer consolidations. Excluding the impact of foreign
currency translation, net sales increased 7%.
Product Categories
Skin Care
Net sales of skin care products increased 9% or $100.6 million to $1,268.1
million. Most of this growth occurred outside of the United States. Net sales in
the United States were adversely impacted by retailer consolidation. The recent
launches of Advanced Night Repair Concentrate Recovery Boosting Treatment and
new Perfectionist products from Estee Lauder and Repairwear Lift and All About
Eyes Rich from Clinique contributed incremental sales of approximately $61
million, combined. Net sales increases from Resilience Lift Extreme Ultra
Firming products and Advanced Night Repair Eye Recovery Complex from Estee
Lauder, along with products in the Clinique 3-Step System, totaled approximately
$51 million. These improvements were partially offset by approximately $27
million of lower sales from certain other Resilience Lift products and
Perfectionist [CP+] from Estee Lauder. Excluding the impact of foreign currency
translation, skin care net sales increased 6%.
Makeup
Makeup net sales increased 9% or $116.4 million to $1,363.6 million reflecting
growth from our makeup artist brands of approximately $104 million. This
increase was supported by sales from new points of distribution and new product
launches as well as M.A.C Viva Glam lip products, the proceeds of which are
donated to AIDS-related charities. Higher sales of approximately $35 million of
Double Wear Foundation by Estee Lauder and Perfectly Real Makeup by Clinique was
substantially offset by lower sales of approximately $25 million of
Individualist Finish Makeup and Pure Color Lip Gloss by Estee Lauder and
Repairwear Anti-Aging Makeup SPF 15 by Clinique. Excluding the impact of foreign
currency translation, makeup net sales increased 8%.
Fragrance
Net sales of fragrance products increased 8% or $53.3 million to $754.4 million
primarily driven by the recent launches of DKNY Red Delicious, Sean John
Unforgivable, Pure White Linen from Estee Lauder, DKNY Red Delicious Men,
Youth Dew Amber Nude from Tom Ford for Estee Lauder and Donna Karan Gold which
collectively contributed approximately $104 million to the category. Lower sales
of approximately $51 million of True Star Men and True Star by Tommy Hilfiger,
Estee Lauder Beyond Paradise and DKNY Be Delicious partially offset the growth
in this product category. While current period sales levels compared favorably
to the prior-year period's lower launch activity, we anticipate continued
challenges in this product category, particularly in the United States.
Excluding the impact of foreign currency translation, fragrance net sales
increased 5%.
Hair Care
Hair care net sales increased 18% or $26.7 million to $176.3 million, primarily
due to sales growth from Aveda and Bumble and bumble products. Bumble and bumble
sales benefited from sales growth in its existing salon distribution and new
points of distribution. Aveda net sales increased as a result of the acquisition
of an independent distributor, sales of professional color products, the initial
shipments of Be Curly Shampoo & Conditioner and the recent international launch
of Damage Remedy hair care products. Excluding the impact of foreign currency
translation, hair care net sales increased 17%.
21
THE ESTEE LAUDER COMPANIES INC.
Geographic Regions
Net sales in the Americas increased 5% or $84.7 million to $1,844.5 million. The
increase was led by growth in the United States of approximately $91 million
from our makeup artist brands, our hair care business, the recent launch of the
Unforgivable fragrance by Sean John and from our internet distribution.
Partially offsetting this growth was approximately $44 million related to
weaknesses in certain of our core brands as a result of competitive pressures
and retailer consolidation. We expect these factors, including weakness in our
business at those Federated doors affected by the national nameplate change to
Macy's in the United States, to continue to affect sales, with the impact of
retailer consolidations easing during the second half of fiscal 2007. Net sales
growth in Canada, Latin America and Mexico contributed an additional $17 million
to the increase. The prior-year period results reflected an incremental
provision of approximately $13 million for returns that were anticipated at that
time as a result of then-announced store closings from retailer consolidations.
In Europe, the Middle East & Africa, net sales increased 15% or $157.2 million
to $1,233.6 million, including approximately $54 million in exchange rate
benefit due to the weakening of the U.S. dollar. Including the exchange rate
benefit, this increase reflected higher net sales of approximately $104 million
in the United Kingdom, our travel retail business, Russia and Germany. In the
prior-year period, net sales in certain markets were adversely impacted by
temporary disruptions due to the transition to a new regional inventory center
in Belgium. On a local currency basis, net sales in Europe, the Middle East &
Africa increased 10%.
Net sales in Asia/Pacific increased 14% or $61.7 million to $506.5 million.
Higher net sales of approximately $41 million in Korea, China, Hong Kong and
Australia generally reflected an improved economy across the region. We also
experienced modest sales growth in Japan, our largest market in this region.
Excluding the impact of foreign currency translation, Asia/Pacific net sales
increased 12%.
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 decreased to 25.9% as compared
with 26.8% in the prior period. Cost of sales as a percentage of net sales
reflected a decrease in the level and timing of promotions of approximately 50
basis points, a favorable change in the mix of our business of approximately 40
basis points, a decrease in obsolescence charges of approximately 20 basis
points and the effect of exchange rate translation of approximately 10 basis
points. Partially offsetting these improvements by approximately 30 basis points
were unfavorable changes in manufacturing variances. Overall cost of sales
reflected savings achieved during the current period from our cost savings
initiative, which commenced during fiscal 2006.
Since certain promotional activities are a component of sales or cost of sales
and the timing and level of promotions vary with our promotional calendar, we
have experienced, and expect to continue to experience, fluctuations in the cost
of sales percentage. In addition, future cost of sales mix may be impacted by
the inclusion of new brands which have margin and product cost structures
different from those of our existing brands.
Operating Expenses
Operating expenses improved to 62.0% of net sales as compared with 62.4% of net
sales in the prior-year period. Although we have increased the total dollars
spent on advertising, merchandising and sampling, we have generated an
improvement of approximately 50 basis points related to growth in brands from
businesses with a lower mix of advertising, merchandising and sampling and
disciplined spending at our core brands. An improvement of approximately 30
basis points was attributable to the prior-year period's incremental provision
for sales returns that were anticipated at that time as a result of
then-announced store closings related to retailer consolidations. Partially
offsetting these improvements was an increase of approximately 30 basis points
in selling expenses reflecting higher demonstration, field selling and training
costs in support of our business, as well as investments in new channel
initiatives. Also offsetting operating expense margin improvements was
approximately 20 basis points attributable to the combination of a charge
related to the settlement of an employment matter, incremental spending related
to our strategic modernization initiative and stock-based compensation. Overall
operating expenses reflected savings achieved during the current period from our
cost savings initiative, which commenced during fiscal 2006.
Changes in advertising, merchandising and sampling spending result from the
type, timing and level of activities related to product launches and rollouts,
as well as the markets being emphasized.
22
THE ESTEE LAUDER COMPANIES INC.
Operating Results
Due to the growth in net sales and the decreases in our cost of sales and
operating expense margins as previously discussed, operating income increased
22%, or $76.5 million, to $432.3 million as compared with the prior-year period.
Operating margins improved to 12.1% of net sales as compared with 10.8% in the
prior-year period.
Product Categories
Fragrance operating results increased over 100% or $25.6 million to $42.5
million, reflecting our ongoing effort to rationalize continued spending in
support of our fragrances at the point of sale. Hair care operating results
increased 52% or $6.7 million to $19.5 million as the increase in sales outpaced
increased spending in support of new distribution points and product launches.
Operating results increased 17% or $25.5 million to $178.5 million in makeup,
primarily as a result of higher net sales from our makeup artist brands, which
more than offset challenges among certain core brands and the impact of retailer
consolidation in the United States. Skin care operating results increased 11% or
$19.6 million to $191.7 million, also reflecting higher net sales fueled by
recent product launches.
Geographic Regions
Operating income in the Americas increased 14% or $23.0 million to $183.0
million. Our efforts to balance advertising, merchandising and sampling spending
with our net sales levels related to our core brands, as well as other planned
company-wide cost containment efforts, resulted in the improvement in operating
income in this region. Operating income in this region was negatively impacted
in the prior-year period by approximately $10 million as a result of an
incremental provision for then-anticipated returns as a result of retailer
consolidations. Investment spending behind new and developing brands partially
offset these improvements.
In Europe, the Middle East & Africa, operating income increased 22% or $34.7
million to $189.1 million primarily due to higher results of approximately $35
million in the United Kingdom, our travel retail business, Russia and Germany.
Lower results in France, the Benelux countries and Switzerland partially offset
these improvements by approximately $5 million, combined. Operating results in
the prior-year period were tempered in continental Europe due to disruptions
resulting from the transition to a new regional inventory center in Belgium.
In Asia/Pacific, operating income increased 41% or $17.7 million to $60.7
million. This increase reflected improved results of approximately $15 million
in China, Australia, Hong Kong and Korea, partially offset by lower results in
Japan and New Zealand of approximately $1 million, combined.
Interest Expense, Net
Net interest expense was $14.4 million as compared with $12.5 million in the
prior period. This change primarily resulted from reduced interest income
generated from lower average investment balances, partially offset by lower
interest expense reflecting lower average debt balances and the capitalization
of interest expenses on internally developed software in connection with the
upgrade of our information systems.
Provision for Income Taxes
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate differs from statutory rates due to the effect
of state and local taxes, tax rates in foreign jurisdictions and certain
nondeductible expenses. Our effective tax rate will change from quarter to
quarter based on non-recurring and recurring factors including, but not limited
to, the geographical mix of earnings, the timing and amount of foreign
dividends, enacted tax legislation, state and local taxes, tax audit settlements
and the interaction of various global tax strategies. The effective rate for
income taxes for the six months ended December 31, 2006 was 35.1% as compared
with 36.7% in the prior period. The decrease in the effective income tax rate of
160 basis points primarily reflected the positive impact attributable to the tax
effect of our foreign operations (130 basis points) and an increase in tax
credits (30 basis points).
23
THE ESTEE LAUDER COMPANIES INC.
Discontinued Operations
On September 30, 2005, we committed to a plan to sell and on April 10, 2006, we
completed the sale of certain assets and operations of our reporting unit that
marketed and sold Stila brand products. As such, $0.2 million of operating
income and $72.0 million of operating loss, both net of tax, for the six months
ended December 31, 2006 and 2005, respectively, are reflected as discontinued
operations in the accompanying consolidated statements of earnings. The
prior-year charge reflected the anticipated loss on the sale of the business of
$65.5 million, net of tax, and the operating loss of $6.5 million, net of tax.
The current year operating income resulted from us providing certain
transitional distribution and online services as well as the manufacture and
sale to the purchaser of a limited range of products. Partially offsetting this
income were costs incurred from transitional services related to certain
information systems, accounting and other back office services provided to the
purchaser in exchange for monthly service fees designed to recover the estimated
costs of providing these transition services. Transitional services are expected
to conclude in fiscal 2007.
Financial Condition
-------------------
Liquidity and Capital Resources
Our principal sources of funds historically have been cash flows from operations
and borrowings under commercial paper, borrowings from the issuance of long-term
debt and committed and uncommitted credit lines provided by banks and other
lenders in the United States and abroad. At December 31, 2006, we had cash and
cash equivalents of $251.8 million compared with $368.6 million at June 30,
2006.
At December 31, 2006, our outstanding borrowings of $629.2 million included: (i)
$237.4 million of 6% Senior Notes due January 2012 consisting of $250.0 million
principal, unamortized debt discount of $0.6 million and a $12.0 million
adjustment to reflect the fair value of an outstanding interest rate swap; (ii)
$197.4 million of 5.75% Senior Notes due October 2033 consisting of $200.0
million principal and unamortized debt discount of $2.6 million; (iii) $147.2
million of outstanding short-term commercial paper payable through January 2007
at an average interest rate of 5.27%; (iv) a 0.8 billion yen short-term
borrowing under a revolving credit facility (approximately $6.8 million at the
exchange rate at December 31, 2006); (v) a 15.2 million Turkish lira borrowing
under an overdraft borrowing facility (approximately $10.6 million at the
exchange rate at December 31, 2006); (vi) $7.4 million of capital lease
obligations and (vii) $22.4 million of other short-term and long-term
borrowings.
We have a $750.0 million commercial paper program under which we may issue
commercial paper in the United States. Our commercial paper is currently rated
A-1 by Standard & Poor's and P-1 by Moody's. Our long-term credit ratings are A+
with a stable outlook by Standard & Poor's and A1 with a stable outlook by
Moody's. At December 31, 2006, we had $147.2 million of commercial paper
outstanding, which we may refinance on a periodic basis as it matures at then
prevailing market interest rates. We also have an effective shelf registration
statement covering the potential issuance of up to an additional $300.0 million
in debt securities and $169.2 million in additional uncommitted credit
facilities, of which $31.0 million was used as of December 31, 2006.
We have an unused $600.0 million senior revolving credit facility that expires
on May 27, 2010. The facility may be used for general corporate purposes,
including financing working capital, and also as credit support for our
commercial paper program. Up to the equivalent of $250 million of the facility
is available for multi-currency loans. The interest rate on borrowings under the
credit facility is based on LIBOR or on the higher of prime, which is the rate
of interest publicly announced by the administrative agent, or 1/2% plus the
Federal funds rate. The credit facility has an annual fee of $0.4 million,
payable quarterly, based on our current credit ratings. As of December 31, 2006,
we were in compliance with all related financial and other restrictive
covenants, including limitations on indebtedness and liens.
We have a fixed rate promissory note agreement with a financial institution
pursuant to which we may borrow up to $150.0 million in the form of loan
participation notes through one of our subsidiaries in Europe. The interest rate
on borrowings under this agreement is at an all-in fixed rate determined by the
lender and agreed to by us at the date of each borrowing. At December 31, 2006,
no borrowings were outstanding under this agreement. Debt issuance costs
incurred related to this agreement were de minimis.
24
THE ESTEE LAUDER COMPANIES INC.
We have an overdraft borrowing agreement with a financial institution pursuant
to which our subsidiary in Turkey may be credited to satisfy outstanding
negative daily balances arising from its business operations. The total balance
outstanding at any time shall not exceed 20.0 million Turkish lira. The interest
rate applicable to each such credit shall be 40 basis points per annum above the
spot rate charged by the lender or the lender's floating call rate agreed to by
us at each borrowing. There were no debt issuance costs incurred related to this
agreement. The outstanding balance at December 31, 2006 ($10.6 million at the
exchange rate at December 31, 2006) is classified as short-term debt on our
consolidated balance sheet.
We have a 3.0 billion yen revolving credit facility that expires on March 24,
2009. The interest rate on borrowings under the credit facility is based on
TIBOR (Tokyo Interbank Offered Rate) and a 10 basis point facility fee is
incurred on the undrawn balance. The outstanding balance at December 31, 2006
($6.8 million at the exchange rate at December 31, 2006) is classified as
short-term debt on our consolidated balance sheet.
Our business is seasonal in nature and, accordingly, our working capital needs
vary. From time to time, we may enter into investing and financing transactions
that require additional funding. To the extent that these needs exceed cash from
operations, we could, subject to market conditions, issue commercial paper,
issue long-term debt securities or borrow under the revolving credit facility.
Total debt as a percent of total capitalization was 28% at December 31, 2006 and
24% at June 30, 2006.
The effects of inflation have not been significant to our overall operating
results in recent years. Generally, we have been able to introduce new products
at higher selling prices or increase selling prices sufficiently to offset cost
increases, which have been moderate.
We believe that cash on hand, cash generated from operations, available credit
lines and access to credit markets will be adequate to support currently planned
business operations and capital expenditures on both a near-term and long-term
basis.
Cash Flows
Net cash provided by operating activities from continuing operations was $312.7
million during the six months ended December 31, 2006 compared with $388.7
million in the prior period. The net decrease in operating cash flows reflected
higher accounts receivable balances, primarily related to significant sales
growth from our international operations, which generally carry longer payment
terms, coupled with the extension of credit to some international customers
resulting from our efforts to strategically expand our business in certain
markets. Partially offsetting this deterioration was an improvement in net
earnings from continuing operations.
Net cash used for investing activities was $197.6 million during the six months
ended December 31, 2006 compared with $150.7 million in the prior period. The
change in cash flows used for investing activities during the fiscal 2007
quarter primarily reflected increases in capital expenditures related to our
continuing company-wide initiative to upgrade our information systems. Current
period investing activities also reflected the cash payment related to the
acquisition of the remaining minority equity interest in the Bumble & bumble
business, and to a lesser extent, distributor acquisitions. Prior period
investing activities reflected the earn-out payment related to the fiscal 2000
acquisition of Jo Malone Limited.
Net cash used for financing activities was $230.2 million during the six months
ended December 31, 2006 compared with $414.7 million in the prior period.
Increases in short-term debt primarily reflected an increase in commercial paper
borrowings during the current period and, to a lesser extent, drawings under the
20.0 million Turkish lira overdraft borrowing facility, partially offset by
payments of outstanding loan participation notes and payments of short-term
borrowings under the 3.0 billion yen revolving credit facility. The improvement
in cash used for financing activities also reflected the October 2005 redemption
of the 2015 Preferred Stock and less cash used for share repurchases. The
improvement was partially offset by the increase in dividends paid to common
stockholders.
Dividends
During the current period, we paid dividends on the Class A and Class B Common
Stock of $.50 per share (or an aggregate of $103.6 million) as compared with
$.40 per share (or an aggregate of $85.4 million) in the prior-year period. For
the six months ended December 31, 2005, dividends on the 2015 Preferred Stock
were $0.4 million and were characterized as interest expense in the accompanying
consolidated statements of earnings. The 2015 Preferred Stock was redeemed in
October 2005.
25
THE ESTEE LAUDER COMPANIES INC.
Share Repurchase Program
We are authorized by the Board of Directors to repurchase up to 48.0 million
shares of Class A Common Stock in the open market or in privately negotiated
transactions, depending on market conditions and other factors. As of December
31, 2006, the cumulative total of acquired shares pursuant to the authorization
was 45.1 million, reducing the remaining authorized share repurchase balance to
2.9 million. During the first six months of fiscal 2007, we purchased
approximately 6.5 million shares for $254.3 million as outlined in the following
table:
Total Number of Maximum Number of
Shares Purchased as Shares that May
Total Number of Average Price Part of Publicly Yet Be Purchased
Period Shares Purchased Paid Per Share Announced Program(1) Under the Program
------------------- ------------------ ---------------- ----------------------- --------------------
July 2006 -- -- -- 9,391,600
August 2006 1,655,000 35.83 1,655,000 7,736,600
September 2006 1,344,800 38.11 1,344,800 6,391,800
October 2006 266,974(2) 39.93 251,000 6,140,800
November 2006 1,752,000 40.73 1,752,000 4,388,800
December 2006 1,498,000 41.22 1,498,000 2,890,800
------------------ -----------------------
Year-to-date 6,516,774 39.02 6,500,800 2,890,800
================== =======================
(1) The publicly announced repurchase program was last increased by 20.0
million shares on May 18, 2005. The initial program covering the repurchase
of 8.0 million shares was announced in September 1998 and increased by 10.0
million shares on both May 11, 2004 and October 30, 2002.
(2) Includes 15,974 shares that were repurchased by the Company in connection
with shares withheld to satisfy tax obligations upon the vesting of
restricted stock units.
Commitments and Contingencies
During the first quarter of fiscal 2007, we purchased the remaining minority
equity interest in Bumble and Bumble Products, LLC and Bumble and Bumble, LLC.
Contractual Obligations
Since June 30, 2006, we made additional commitments pursuant to employment
agreements of approximately $29 million, which are expected to be paid through
fiscal 2010.
Pension Plan Funding
During the first quarter of fiscal 2007, the Pension Protection Act of 2006 was
adopted into law in the United States. Certain provisions of this Act changed
the calculation related to the maximum contribution amount deductible for income
tax purposes. As a result of these provisions, we made discretionary
contributions totaling $10.0 million to our trust-based, noncontributory
qualified defined benefit pension plan during the current quarter and expect to
contribute an additional $10.0 million during the remainder of fiscal 2007. We
previously disclosed in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2006, that we did not expect to make any contributions to this plan
during fiscal 2007.
Derivative Financial Instruments and Hedging Activities
There have been no significant changes to our derivative financial instruments
and hedging activities as discussed in our Annual Report on Form 10-K for the
year ended June 30, 2006.
26
THE ESTEE LAUDER COMPANIES INC.
Foreign Exchange Risk Management
We enter into forward exchange contracts to hedge anticipated transactions, as
well as receivables and payables denominated in foreign currencies, for periods
consistent with our identified exposures. The purpose of the hedging activities
is to minimize the effect of foreign exchange rate movements on our costs and on
the cash flows that we receive from foreign subsidiaries. Almost all foreign
currency contracts are denominated in currencies of major industrial countries
and are with large financial institutions rated as strong investment grade by a
major rating agency. We also enter into foreign currency options to hedge
anticipated transactions where there is a high probability that anticipated
exposures will materialize. The forward exchange contracts and foreign currency
options entered into to hedge anticipated transactions have been designated as
cash-flow hedges. Hedge effectiveness of forward exchange contracts is based on
a hypothetical derivative methodology and excludes the portion of fair value
attributable to the spot-forward difference which is recorded in current-period
earnings. Hedge effectiveness of foreign currency option contracts is based on a
dollar offset methodology. The ineffective portion of both forward exchange and
foreign currency option contracts is recorded in current-period earnings. For
hedge contracts that are no longer deemed highly effective, hedge accounting is
discontinued and gains and losses accumulated in other comprehensive income are
reclassified to earnings when the underlying forecasted transaction occurs. If
it is probable that the forecasted transaction will no longer occur, then any
gains or losses accumulated in other comprehensive income are reclassified to
current-period earnings. As of December 31, 2006, these cash-flow hedges were
highly effective, in all material respects.
As a matter of policy, we only enter into contracts with counterparties that
have at least an "A" (or equivalent) credit rating. The counterparties to these
contracts are major financial institutions. We do not have significant exposure
to any one counterparty. Our exposure to credit loss in the event of
nonperformance by any of the counterparties is limited to only the recognized,
but not realized, gains attributable to the contracts. Management believes risk
of loss under these hedging contracts is remote and in any event would not be
material to the consolidated financial results. The contracts have varying
maturities through the end of June 2007. Costs associated with entering into
such contracts have not been material to our consolidated financial results. We
do not utilize derivative financial instruments for trading or speculative
purposes. At December 31, 2006, we had foreign currency contracts in the form of
forward exchange contracts and option contracts in the amount of $682.6 million
and $36.0 million, respectively. The foreign currencies included in forward
exchange contracts (notional value stated in U.S. dollars) are principally the
Euro ($202.4 million), British pound ($90.2 million), Swiss franc ($84.6
million), Japanese yen ($62.4 million), Australian dollar ($50.0 million) and
Canadian dollar ($46.9 million). The foreign currencies included in the option
contracts (notional value stated in U.S. dollars) are principally the Canadian
dollar ($13.5 million), Euro ($11.8 million), Japanese yen ($7.2 million) and
British pound ($3.5 million).
Interest Rate Risk Management
We enter into interest rate derivative contracts to manage the exposure to
fluctuations of interest rates on our funded indebtedness and anticipated
issuance of debt, as well as cash investments, for periods consistent with the
identified exposures. All interest rate derivative contracts are with large
financial institutions rated as strong investment grade by a major rating
agency.
We have an interest rate swap agreement with a notional amount of $250.0 million
to effectively convert fixed interest on the existing $250.0 million 6% Senior
Notes to variable interest rates based on LIBOR. We designated the swap as a
fair-value hedge. As of December 31, 2006, the fair-value hedge was highly
effective, in all material respects.
Market Risk
Using the value-at-risk model, as discussed in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2006, our average value-at-risk, calculated
for the most recent twelve months, is $11.1 million related to our foreign
exchange contracts. As of December 31, 2006, our average value-at-risk related
to our interest rate contracts for the twelve month period for which these
contracts were outstanding was $6.6 million. There have been no significant
changes in market risk since June 30, 2006 that would have a material effect on
our calculated value-at-risk exposure, as disclosed in our Annual Report on Form
10-K for the fiscal year ended June 30, 2006.
27
THE ESTEE LAUDER COMPANIES INC.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations
or other relationships with unconsolidated entities that would be expected to
have a material current or future effect upon our financial condition or results
of operations.
Critical Accounting Policies
----------------------------
As disclosed in our Annual Report on Form 10-K for the fiscal year ended June
30, 2006, 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 U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses reported in those financial statements. These judgments can be
subjective and complex, and consequently actual results could differ from those
estimates and assumptions. 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, derivatives and stock-based compensation. Since June 30, 2006, there have
been no significant changes to the assumptions and estimates related to those
critical accounting policies.
Recently Issued Accounting Standards
------------------------------------
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 157, "Fair Value
Measurements" ("SFAS No. 157") to clarify the definition of fair value,
establish a framework for measuring fair value and expand the disclosures on
fair value measurements. SFAS No. 157 defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (an exit price).
SFAS No. 157 also stipulates that, as a market-based measurement, fair value
measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability, and establishes a fair
value hierarchy that distinguishes between (a) market participant assumptions
developed based on market data obtained from sources independent of the
reporting entity (observable inputs) and (b) the reporting entity's own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). SFAS No. 157
becomes effective for us in our fiscal year ending June 30, 2009. We are
currently evaluating the impact of the provisions of SFAS No. 157 on our
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 106, and 132(R)" ("SFAS No. 158"). SFAS No. 158 requires
employers to recognize a net liability or asset and an offsetting adjustment to
accumulated other comprehensive income to report the funded status of defined
benefit pension and other postretirement benefit plans. Previous standards
required employers to disclose the complete funded status of its plans only in
the notes to the financial statements. Additionally, SFAS No. 158 requires
employers to measure plan assets and obligations at their year-end balance sheet
date. We will adopt SFAS No. 158 prospectively, as of the end of our current
fiscal year, as required.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB No. 108"), which sets
forth the SEC Staff's views on the proper methods for quantifying errors when
there were uncorrected errors in a prior year. Under SAB No. 108, companies
should evaluate a misstatement that existed in prior years based on its impact
on the current year income statement, as well as the cumulative effect of
correcting such misstatements in the current year's ending balance sheet. SAB
No. 108 will become effective for us in our fiscal year ending June 30, 2007. We
are currently evaluating the impact of the provisions of SAB No. 108 on our
consolidated financial statements.
28
THE ESTEE LAUDER COMPANIES INC.
Forward-Looking Information
---------------------------
We and our representatives from time to time make written or oral
forward-looking statements, including statements contained in this and other
filings with the Securities and Exchange Commission, in our press releases and
in our reports to stockholders. The words and phrases "will likely result,"
"expect," "believe," "planned," "may," "should," "could," "anticipate,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include, without limitation, our
expectations regarding sales, earnings or other future financial performance and
liquidity, product introductions, entry into new geographic regions, information
systems initiatives, new methods of sale and future operations or operating
results. Although we believe that our expectations are based on reasonable
assumptions within the bounds of our knowledge of our business and operations,
actual results may differ materially from our expectations. Factors that could
cause actual results to differ from expectations include, without limitation:
(1) increased competitive activity from companies in the skin care,
makeup, fragrance and hair care businesses, some of which have greater
resources than we do;
(2) our ability to develop, produce and market new products on which
future operating results may depend and to successfully address
challenges in our core brands, including gift with purchase, and in our
fragrance business;
(3) consolidations, restructurings, bankruptcies and reorganizations in
the retail industry causing a decrease in the number of stores that
sell our products, an increase in the ownership concentration within
the retail industry, ownership of retailers by our competitors or
ownership of competitors by our customers that are retailers;
(4) destocking by retailers;
(5) the success, or changes in timing or scope, of new product launches
and the success, or changes in the timing or the scope, of advertising,
sampling and merchandising programs;
(6) shifts in the preferences of consumers as to where and how they
shop for the types of products and services we sell;
(7) social, political and economic risks to our foreign or domestic
manufacturing, distribution and retail operations, including changes in
foreign investment and trade policies and regulations of the host
countries and of the United States;
(8) changes in the laws, regulations and policies (including the
interpretations and enforcement thereof) that affect, or will affect,
our business, including those relating to our products, changes in
accounting standards, tax laws and regulations, trade rules and customs
regulations, and the outcome and expense of legal or regulatory
proceedings, and any action we may take as a result;
(9) foreign currency fluctuations affecting our results of operations
and the value of our foreign assets, the relative prices at which we
and our foreign competitors sell products in the same markets and our
operating and manufacturing costs outside of the United States;
(10) changes in global or local conditions, including those due to
natural or man-made disasters, real or perceived epidemics, or energy
costs, that could affect consumer purchasing, the willingness or
ability of consumers to travel and/or purchase our products while
traveling, the financial strength of our customers or suppliers, our
operations, the cost and availability of capital which we may need for
new equipment, facilities or acquisitions, the cost and availability of
raw materials and the assumptions underlying our critical accounting
estimates;
(11) shipment delays, depletion of inventory and increased production
costs resulting from disruptions of operations at any of the facilities
that manufacture nearly all of our supply of a particular type of
product (i.e., focus factories) or at our distribution or inventory
centers;
(12) real estate rates and availability, which may affect our ability
to increase the number of retail locations at which we sell our
products and the costs associated with our other facilities;
29
THE ESTEE LAUDER COMPANIES INC.
(13) changes in product mix to products which are less profitable;
(14) our ability to acquire, develop or implement new information and
distribution technologies, on a timely basis and within our cost
estimates;
(15) our ability to capitalize on opportunities for improved
efficiency, such as publicly-announced cost-savings initiatives and the
success of Stila under new ownership, and to integrate acquired
businesses and realize value therefrom;
(16) consequences attributable to the events that are currently taking
place in the Middle East, including terrorist attacks, retaliation and
the threat of further attacks or retaliation;
(17) the timing and impact of acquisitions and divestitures, which
depend on willing sellers and buyers, respectively; and
(18) additional factors as described in our filings with the Securities
and Exchange Commission, including our Annual Report on Form 10-K for
the fiscal year ended June 30, 2006.
We assume no responsibility to update forward-looking statements made herein or
otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is set forth in Item 2 of this Quarterly
Report on Form 10-Q under the caption "Liquidity and Capital Resources - Market
Risk" and is incorporated herein by reference.
Item 4. Controls and Procedures.
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) are designed to ensure that information required to be disclosed in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. The Chief Executive Officer and the
Chief Financial Officer, with assistance from other members of management, have
reviewed the effectiveness of our disclosure controls and procedures as of
December 31, 2006 and, based on their evaluation, have concluded that the
disclosure controls and procedures were effective as of such date.
There have been no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred
during the second quarter of fiscal 2007 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
30
THE ESTEE LAUDER COMPANIES INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved, from time to time, in litigation and other legal proceedings
incidental to our business. Management believes that the outcome of current
litigation and legal proceedings will not have a material adverse effect upon
our results of operations or financial condition. However, management's
assessment of our current litigation and other legal proceedings could change in
light of the discovery of facts with respect to legal actions or other
proceedings pending against us not presently known to us or determinations by
judges, juries or other finders of fact which are not in accord with
management's evaluation of the possible liability or outcome of such litigation
or proceedings.
On March 30, 2005, the United States District Court for the Northern District of
California entered into a Final Judgment approving the settlement agreement we
entered into in July 2003 with the plaintiffs, the other Manufacturer Defendants
(as defined below) and the Department Store Defendants (as defined below) in a
consolidated class action lawsuit that had been pending in the Superior Court of
the State of California in Marin County since 1998. On April 29, 2005, notices
of appeal were filed by representatives of two members of the purported class of
consumers. One of those appeals has since been withdrawn. If the appeal is
resolved satisfactorily, the Final Judgment will result in the plaintiffs'
claims being dismissed, with prejudice, in their entirety in both the Federal
and California actions. There has been no finding or admission of any wrongdoing
by us in this lawsuit. We entered into the settlement agreement solely to avoid
protracted and costly litigation. In connection with the settlement agreement,
the defendants, including the Company, will provide consumers with certain free
products and pay the plaintiffs' attorneys' fees. To meet its obligations under
the settlement, we took a special pre-tax charge of $22.0 million, or $13.5
million after-tax, equal to $.06 per diluted common share in the fourth quarter
of fiscal 2003. At December 31, 2006, the remaining accrual balance was $16.3
million. The charge did not have a material adverse effect on our consolidated
financial condition. In the Federal action, the plaintiffs, purporting to
represent a class of all U.S. residents who purchased prestige cosmetics
products at retail for personal use from eight department stores groups that
sold such products in the United States (the "Department Store Defendants"),
alleged that the Department Store Defendants, the Company and eight other
manufacturers of cosmetics (the "Manufacturer Defendants") conspired to fix and
maintain retail prices and to limit the supply of prestige cosmetics products
sold by the Department Store Defendants in violation of state and Federal laws.
The plaintiffs sought, among other things, treble damages, equitable relief,
attorneys' fees, interest and costs.
In 1999, the Office of the Attorney General of the State of New York (the
"State") notified the Company and ten other entities that they had been
identified as 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 estimated in
2006 to be approximately $19.7 million for all PRPs. In 2001, the State sued
other PRPs (including Hickey's Carting, Inc., Dennis C. Hickey and Maria Hickey,
collectively the "Hickey Parties"), in the U.S. District Court for the Eastern
District of New York to recover such costs in connection with the site, and in
September 2002, the Hickey Parties brought contribution actions against the
Company and other Blydenburgh PRPs. These contribution 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. In June 2004, the State added the Company and other PRPs as
defendants in its pending case against the Hickey Parties. In April 2006, the
Company and other defendants added numerous other parties to the case as
third-party defendants. The Company and certain other PRPs have engaged in
settlement discussions which to date have been unsuccessful. Settlement
negotiations with the new third-party defendants, the State, the Company and
other defendants began in July 2006. We have accrued an amount which we believe
would be necessary to resolve our share of this matter. If settlement
discussions are not successful, we intend to vigorously defend the pending
claims. While no assurance can be given as to the ultimate outcome, management
believes that the resolution of the Blydenburgh matters will not have a material
adverse effect on our consolidated financial condition.
31
THE ESTEE LAUDER COMPANIES INC.
PART II. OTHER INFORMATION
On March 30, 2006, a purported securities class action complaint captioned
Thomas S. Shin, et al. v. The Estee Lauder Companies Inc., et al., was filed
against the Company and certain of our officers and directors (collectively the
"Defendants") in the United States District Court for the Southern District of
New York. The complaint alleged that the Defendants made statements during the
period April 28, 2005 to October 25, 2005 in press releases, the Company's
public filings and during conference calls with analysts that were materially
false and misleading and that artificially inflated the price of the Company's
stock. The complaint alleged claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The complaint also asserted that during the
class period, certain executive officers and the trust for the benefit of a
director sold shares of our Class A Common Stock at artificially inflated
prices. Three additional purported securities class action complaints were
subsequently filed in the United States District Court for the Southern District
of New York containing similar allegations. On July 10, 2006, the Court
consolidated these actions under the caption In re: Estee Lauder Companies
Securities Litigation, appointed lead plaintiff, and approved the selection of
lead counsel. A consolidated amended complaint addressing the same issues as the
original complaint was filed on September 8, 2006. The Defendants filed a motion
to dismiss the amended complaint on November 7, 2006 and the plaintiff responded
to the motion on January 5, 2007. Defendants plan to reply to plaintiff's
response on or before February 5, 2007. The Defendants believe that the claims
asserted in the consolidated amended complaint are without merit and they intend
to defend the consolidated action vigorously.
On April 10, 2006, a shareholder derivative action complaint captioned Miriam
Loveman v. Leonard A. Lauder, et al., was filed against certain of our officers
and all of our directors as of that date (collectively the "Derivative Action
Defendants") in the United States District Court for the Southern District of
New York. The complaint alleges that the Derivative Action Defendants breached
their fiduciary duties to the Company based on the same alleged course of
conduct identified in the complaint described above. On May 4, 2006, the
derivative action was reassigned to the judge assigned to the consolidated
securities action. On September 1, 2006, the Derivative Action Defendants filed
a motion to dismiss. The plaintiff responded to the Derivative Action
Defendants' motion to dismiss on December 11, 2006. The Derivative Action
Defendants replied to plaintiff's response on January 29, 2007. The defendants
believe that this complaint is without merit and intend to defend the action
vigorously.
32
THE ESTEE LAUDER COMPANIES INC.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Sales of Unregistered Securities
Shares of Class B Common Stock may be converted immediately into Class A Common
Stock on a one-for-one basis by the holder and are automatically converted into
Class A Common Stock on a one-for-one basis upon transfer to a person or entity
that is not a "Permitted Transferee" or soon after a record date for a meeting
of stockholders where the outstanding Class B Common Stock constitutes less than
10% of the outstanding shares of Common Stock of the Company. There is no cash
or other consideration paid by the holder converting the shares and,
accordingly, there is no cash or other consideration received by the Company.
The shares of Class A Common Stock issued by the Company in such conversions are
exempt from registration under the Securities Act of 1933, as amended, pursuant
to Section 3(a)(9) thereof.
During the three months ended December 31, 2006, the holders set forth in the
table converted shares of Class B Common Stock into Class A Common Stock on the
dates set forth in the table below:
Stockholder That Converted Number of Shares
Class B Common Stock to Class Converted/
A Common Stock Date of Conversion Received
----------------------------- ------------------ ----------------
Lauder & Sons LP October 27, 2006 1,896,154
Trust f/b/o Aerin and Jane October 31, 2006 500,000
Lauder u/a/d 12/15/76 by
Estee and Joseph Lauder,
grantors
Share Repurchase Program
Information required by this item is set forth in Part I Item 2 of this
Quarterly Report on Form 10-Q under the caption "Liquidity and Capital Resources
- Share Repurchase Program" and is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of the Company was held on October 31,
2006.
(b) The following directors were re-elected at the Annual Meeting of
Stockholders: Rose Marie Bravo, CBE, Paul J. Fribourg, Mellody Hobson,
Irvine O. Hockaday, Jr., and Barry S. Sternlicht as Class I Directors for
a term expiring at the 2009 Annual Meeting. The Class II Directors, whose
terms expire at the 2007 Annual Meeting, are Aerin Lauder, William P.
Lauder, Richard D. Parsons and Lynn Forester de Rothschild. The Class III
Directors, whose terms expire at the 2008 Annual Meeting are Charlene
Barshefsky, Leonard A. Lauder and Ronald S. Lauder.
(c) (i) Each person re-elected as a director at the Annual Meeting received
the number of votes (shares Class B Common Stock are entitled to ten
votes per share) indicated beside his or her name:
Name Votes For Votes Withheld
----------------------- ----------- --------------
Rose Marie Bravo, CBE 959,104,967 2,304,245
Paul J. Fribourg 958,773,137 2,636,075
Mellody Hobson 958,908,379 2,500,833
Irvine O. Hockaday, Jr. 958,525,900 2,888,312
Barry S. Sternlicht 909,114,910 52,294,302
(ii) 960,495,914 votes (shares of Class B Common Stock are entitled to
ten votes per share) were cast for and 209,344 votes were cast against
the ratification of the appointment of KPMG LLP as independent auditors
of the Company for the 2007 fiscal year. There were 703,954 abstentions
and no broker nonvotes.
(d) Not applicable
33
THE ESTEE LAUDER COMPANIES INC.
PART II. OTHER INFORMATION
Item 6. Exhibits.
Exhibit
Number Description
------ -----------
31.1 Certification pursuant to Rule 13a-14(a) (CEO).
31.2 Certification pursuant to Rule 13a-14(a) (CFO).
32.1 Certification pursuant to Rule 13a-14(b) and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (CEO).(furnished)
32.2 Certification pursuant to Rule 13a-14(b) and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (CFO). (furnished)
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THE ESTEE LAUDER COMPANIES INC.
Date: January 31, 2007 By: /s/ RICHARD W. KUNES
--------------------------
Richard W. Kunes
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
35
THE ESTEE LAUDER COMPANIES INC.
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
31.1 Certification pursuant to Rule 13a-14(a) (CEO).
31.2 Certification pursuant to Rule 13a-14(a) (CFO).
32.1 Certification pursuant to Rule 13a-14(b) and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (CEO). (furnished)
32.2 Certification pursuant to Rule 13a-14(b) and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (CFO). (furnished)