UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
______________________
FORM 10-Q/A
Amendment No.1
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- Exchange Act of 1934
For the quarterly period ended September 30, 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)
Registrant's telephone number, including area code 212-572-4200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
- -
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 October 20, 2006, 123,960,382 shares of the registrant's Class A Common
Stock, $.01 par value, and 84,805,915 shares of the registrant's Class B Common
Stock, $.01 par value, were outstanding.
THE ESTEE LAUDER COMPANIES INC.
EXPLANATORY NOTE
----------------
The Estee Lauder Companies Inc. filed its Quarterly Report on Form 10-Q for
the quarter ended September 30, 2006 on October 26, 2006. The single document
posted in the EDGAR system that day included the body of the Quarterly Report
and the five exhibits to the Quarterly Report (including the certifications
pursuant to sections 302 and 906 of the Sarbanes-Oxley Act of 2002 by the CEO
and CFO) that were not incorporated by reference. This amendment is being made
solely to post the body of the Quarterly Report and each of the five exhibits
separately.
THE ESTEE LAUDER COMPANIES INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Earnings --
Three Months Ended September 30, 2006 and 2005 2
Consolidated Balance Sheets --
September 30, 2006 and June 30, 2006 3
Consolidated Statements of Cash Flows --
Three Months Ended September 30, 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 26
Item 4. Controls and Procedures 26
Part II. Other Information
Item 1. Legal Proceedings 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 6. Exhibits 29
Signatures 30
THE ESTEE LAUDER COMPANIES INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended
September 30
--------------------------------------
2006 2005
------------ ------------
(In millions, except per share data)
Net Sales $ 1,593.5 $ 1,497.1
Cost of Sales 428.1 419.5
------------ ------------
Gross Profit 1,165.4 1,077.6
Operating expenses:
Selling, general and administrative 1,065.0 972.5
Special charges related to cost savings initiative 0.5 -
------------ ------------
1,065.5 972.5
------------ ------------
Operating Income 99.9 105.1
Interest expense, net 6.7 5.6
------------ ------------
Earnings before Income Taxes, Minority Interest and
Discontinued Operations 93.2 99.5
Provision for income taxes 33.4 35.8
Minority interest, net of tax (1.8) (1.9)
------------ ------------
Net Earnings from Continuing Operations 58.0 61.8
Discontinued operations, net of tax 0.3 (3.3)
------------ ------------
Net Earnings $ 58.3 $ 58.5
============ ============
Basic net earnings per common share:
Net earnings from continuing operations $ .28 $ .28
Discontinued operations, net of tax .00 (.02)
------------ ------------
Net earnings $ .28 $ .26
============ ============
Diluted net earnings per common share:
Net earnings from continuing operations $ .27 $ .28
Discontinued operations, net of tax .00 (.02)
------------ ------------
Net earnings $ .27 $ .26
============ ============
Weighted-average common shares outstanding:
Basic 211.1 220.6
Diluted 213.6 223.6
See notes to consolidated financial statements.
-2-
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
September 30 June 30
2006 2006
------------ ------------
(Unaudited)
($ in millions)
ASSETS
Current Assets
Cash and cash equivalents $ 180.7 $ 368.6
Accounts receivable, net 980.1 771.2
Inventory and promotional merchandise, net 834.0 766.3
Prepaid expenses and other current assets 276.6 270.8
------------ ------------
Total current assets 2,271.4 2,176.9
------------ ------------
Property, Plant and Equipment, net 775.8 758.0
------------ ------------
Other Assets
Investments, at cost or market value 21.7 13.4
Goodwill, net 682.6 635.8
Other intangible assets, net 80.2 77.0
Other assets, net 114.3 123.0
------------ ------------
Total other assets 898.8 849.2
------------ ------------
Total assets $ 3,946.0 $ 3,784.1
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 204.4 $ 89.7
Accounts payable 303.9 264.5
Accrued income taxes 149.1 135.5
Other accrued liabilities 983.0 948.5
------------ ------------
Total current liabilities 1,640.4 1,438.2
------------ ------------
Noncurrent Liabilities
Long-term debt 438.6 431.8
Other noncurrent liabilities 255.8 266.4
------------ ------------
Total noncurrent liabilities 694.4 698.2
------------ ------------
Minority Interest 22.5 25.4
------------ ------------
Stockholders' Equity
Common stock, $.01 par value; 650,000,000 shares Class A authorized;
shares issued:
165,508,239 at September 30, 2006 and 164,837,563 at June 30, 2006;
240,000,000 shares Class B authorized; shares issued and outstanding:
84,805,915 at September 30, 2006 and 85,305,915 at June 30, 2006 2.5 2.5
Paid-in capital 600.7 581.0
Retained earnings 2,420.2 2,361.9
Accumulated other comprehensive income 63.6 64.7
------------ ------------
3,087.0 3,010.1
Less: Treasury stock, at cost; 41,380,958 Class A shares at
September 30, 2006 and 38,382,458 Class A shares at June 30, 2006 (1,498.3) (1,387.8)
------------ ------------
Total stockholders' equity 1,588.7 1,622.3
------------ ------------
Total liabilities and stockholders' equity $ 3,946.0 $ 3,784.1
============ ============
See notes to consolidated financial statements.
-3-
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30
------------------------------------
2006 2005
------------- --------------
(In millions)
Revised
-------
Cash Flows from Operating Activities
Net earnings $ 58.3 $ 58.5
Adjustments to reconcile net earnings to net cash flows from operating
activities:
Depreciation and amortization 50.9 47.2
Deferred income taxes (6.0) (9.8)
Minority interest, net of tax 1.8 1.9
Non-cash stock compensation 14.8 13.2
Excess tax benefits from stock-based compensation arrangements (0.1) (4.2)
Loss on disposal of fixed assets 1.4 0.2
Discontinued operations, net of tax (0.3) 3.3
Other non-cash items 0.2 0.2
Changes in operating assets and liabilities
Increase in accounts receivable, net (209.2) (144.8)
Increase in inventory and promotional merchandise, net (68.8) (57.6)
Increase in other assets, net (13.8) (22.6)
Increase in accounts payable 39.9 5.8
Increase in accrued income taxes 13.6 19.1
Increase in other accrued liabilities 48.7 23.8
Increase (decrease) in other noncurrent liabilities (1.5) 4.2
------------- --------------
Net cash flows used for operating activities of continuing operations (70.1) (61.6)
Net cash flows used for operating activities of discontinued operations (1.2) (4.1)
------------- --------------
Net cash flows used for operating activities (71.3) (65.7)
------------- --------------
Cash Flows from Investing Activities
Capital expenditures (67.3) (45.9)
Capital expenditures of discontinued operations - (0.4)
Acquisition of businesses, net of cash acquired (56.7) -
Proceeds from disposition of long-term investments - 0.5
Purchases of long-term investments (0.3) -
------------- --------------
Net cash flows used for investing activities (124.3) (45.8)
------------- --------------
Cash Flows from Financing Activities
Increase (decrease) in short-term debt, net 115.3 (9.9)
Repayments and redemptions of long-term debt (0.4) (0.5)
Net proceeds from stock-based compensation transactions 3.6 24.9
Excess tax benefits from stock-based compensation arrangements 0.1 4.2
Payments to acquire treasury stock (110.5) (71.1)
Distributions made to minority holders of consolidated subsidiaries (1.4) (0.9)
------------- --------------
Net cash flows provided by (used for) financing activities 6.7 (53.3)
------------- --------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 1.0 1.0
------------- --------------
Net Decrease in Cash and Cash Equivalents (187.9) (163.8)
Cash and Cash Equivalents at Beginning of Period 368.6 553.3
------------- --------------
Cash and Cash Equivalents at End of Period $ 180.7 $ 389.5
============= ==============
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-month periods ended
September 30, 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 month periods ended September 30, 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
September 30
-------------------------------------------
2006 2005
-------------------- --------------------
(Unaudited)
(In millions, except per share data)
Numerator:
Net earnings from continuing operations $ 58.0 $ 61.8
Discontinued operations, net of tax 0.3 (3.3)
-------------------- --------------------
Net earnings $ 58.3 $ 58.5
==================== ====================
Denominator:
Weighted-average common shares outstanding - Basic 211.1 220.6
Effect of dilutive securities: Stock-based compensation 2.5 3.0
-------------------- --------------------
Weighted-average common shares outstanding - Diluted 213.6 223.6
==================== ====================
Basic net earnings per common share:
Net earnings from continuing operations $ .28 $ .28
Discontinued operations, net of tax .00 (.02)
-------------------- --------------------
Net earnings $ .28 $ .26
==================== ====================
Diluted net earnings per common share:
Net earnings from continuing operations $ .27 $ .28
Discontinued operations, net of tax .00 (.02)
-------------------- --------------------
Net earnings $ .27 $ .26
==================== ====================
-5-
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2006 and 2005, outstanding options to purchase 15.1
million and 14.9 million shares, respectively, of Class A Common Stock were not
included in the computation of diluted EPS because the exercise prices of those
options were greater than the average market price of the common stock and their
inclusion would be anti-dilutive.
Supplemental Disclosures of Cash Flow Information
Supplemental cash flow information for the three months ended September 30,
2006 and 2005 were as follows:
2006 2005
------------ ------------
(Unaudited)
(In millions)
Cash
Cash paid during the period for interest $ 10.1 $ 8.7
============ ============
Cash paid during the period for income taxes $ 30.0 $ 24.6
============ ============
Non-cash
Incremental tax benefit from the exercise of stock options $ 0.3 $ 2.6
============ ============
Capital lease obligations incurred $ 0.2 $ 0.2
============ ============
Accrued distributions to minority holders $ 0.6 $ -
============ ============
Interest rate swap derivative mark to market $ (6.9) $ 6.1
============ ============
Accounts Receivable
Accounts receivable is stated net of the allowance for doubtful accounts
and customer deductions of $29.8 million and $27.1 million as of September 30,
2006 and June 30, 2006, respectively.
Inventory and Promotional Merchandise
Inventory and promotional merchandise only 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.
September 30 June 30
2006 2006
------------ ------------
(Unaudited)
(In millions)
Inventory and promotional merchandise consists of:
Raw materials $ 157.7 $ 151.0
Work in process 41.3 44.2
Finished goods 456.8 407.1
Promotional merchandise 178.2 164.0
------------ ------------
$ 834.0 $ 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. 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.
September 30 June 30
2006 2006
--------------- ---------------
(Unaudited)
(In millions)
Assets (Useful Life)
Land $ 13.7 $ 13.7
Buildings and improvements (10 to 40 years) 160.1 161.7
Machinery and equipment (3 to 10 years) 843.4 803.0
Furniture and fixtures (5 to 10 years) 102.2 108.2
Leasehold improvements 817.6 790.8
--------------- ---------------
1,937.0 1,877.4
Less accumulated depreciation and amortization 1,161.2 1,119.4
--------------- ---------------
$ 775.8 $ 758.0
=============== ===============
Depreciation and amortization of property, plant and equipment was $48.7 million
and $45.3 million during the three months ended September 30, 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 three months ended September 30, 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 as well as completed the acquisition of an
international distributor all of which resulted in an increase to goodwill of
$46.5 million and other intangible assets of $4.6 million.
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. The Company also maintains a domestic post-retirement benefit plan
which provides certain medical and dental benefits to eligible employees.
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
September 30, 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 $ 3.9 $ 3.1 $ 1.2 $ 1.1
Interest cost 6.3 5.3 3.2 2.5 1.7 1.3
Expected return on plan assets (7.2) (6.2) (3.4) (2.9) - -
Amortization of:
Prior service cost 0.2 0.2 0.1 - - -
Actuarial loss 0.4 1.5 1.9 2.1 0.2 0.3
Settlements and
curtailments - - - 0.2 - -
---------- --------- --------- --------- --------- ----------
Net periodic benefit cost $ 4.3 $ 6.2 $ 5.7 $ 5.0 $ 3.1 $ 2.7
========== ========= ========== ========= ========= ==========
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 now expects to make a
discretionary contribution of $20.0 million to its trust-based, noncontributory
qualified defined benefit pension plan in fiscal 2007. As of September 30, 2006,
the Company's expected benefit payments to be made under its non-qualified
domestic noncontributory pension plan and expected contributions to its
international pension plans for the fiscal year ending June 30, 2007 are $10.3
million and $18.8 million, respectively, as previously disclosed.
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 discussed in the Company's
Annual Report on Form 10-K for the year ended June 30, 2006.
-8-
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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") to provide
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality
assessment. Under SAB No. 108, companies should evaluate a misstatement based on
its impact on the current year income statement, as well as the cumulative
effect of correcting such misstatements that existed in prior years existing 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
September 30
-------------------------
2006 2005
---------- ----------
(Unaudited)
(In millions)
Net earnings $ 58.3 $ 58.5
---------- ----------
Other comprehensive income (loss):
Net unrealized investment gain (loss) - -
Net derivative instruments gain (loss) (1.2) 0.7
Translation adjustments 0.1 7.8
---------- ----------
Other comprehensive income (loss) (1.1) 8.5
---------- ----------
Comprehensive income $ 57.2 $ 67.0
========== ==========
The accumulated net gain (loss) on derivative instruments consists of the
following:
Three Months Ended
September 30
-------------------------
2006 2005
---------- ----------
(Unaudited)
(In millions)
OCI-derivative instruments, beginning of period $ 10.3 $ 11.9
---------- ----------
Gain (loss) on derivative instruments (1.3) 1.2
Reclassification to earnings of net (gain) loss during the period (0.5) (0.7)
Benefit for deferred income taxes 0.6 0.2
---------- ----------
Net derivative instruments gain (loss) (1.2) 0.7
---------- ----------
OCI-derivative instruments, end of period $ 9.1 $ 12.6
========== ==========
The $9.1 million, net of tax, derivative instrument gain recorded in OCI at
the end of the current period substantially 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.
At the end of the prior period, the $12.6 million, net of tax, derivative
instrument gain recorded in OCI included $8.9 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 $3.7
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 September 30, 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 September 30, 2006,
approximately 8,371,200 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 September 30,
2006 include stock options, Performance Share Units ("PSU"), Restricted Stock
Units ("RSU") and share units.
Total net stock-based compensation expense is attributable to the granting
of, and the remaining requisite service periods of, stock options, PSUs, RSUs
and share units. Compensation expense attributable to net stock-based
compensation during the three months ended September 30, 2006 and 2005 was $14.8
million and $13.2 million, respectively. As of September 30, 2006 and 2005, the
total unrecognized compensation cost related to nonvested stock-based awards was
$58.5 and $45.2 million, respectively and the related weighted-average period
over which it is expected to be recognized is approximately 2.3 and 2.5 years,
respectively.
Stock Options
A summary of the Company's stock option programs as of September 30, 2006
and changes during the three-month period then ended, is presented below:
>
Weighted- Aggregate Weighted-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 1,617.9 39.56
Exercised (172.0) 27.34
Expired (57.0) 40.26
Forfeited (22.5) 40.03
--------
Outstanding at September 30, 2006 27,582.1 39.60 $ 105.6 4.9
======== =============== ==================
Exercisable at September 30, 2006 21,872.7 39.84 $ 91.6 3.9
======== =============== ==================
_____________________________
(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 September 30, 2006 and 2005 was $13.64 and $11.64,
respectively. The total intrinsic value of stock options exercised during the
three months ended September 30, 2006 and 2005 was $1.9 million and $19.4
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
September 30
------------------------------------------
(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 and exercisable as of September 30, 2006 that will
expire in October 2007.
Performance Share Units
During the three months ended September 30, 2006, the Company issued
119,038 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. 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
compensation cost of the PSUs is subject to adjustment based upon the
attainability of the target goals.
The following is a summary of the status of the Company's PSUs as of
September 30, 2006 and activity during the three 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 September 30, 2006 230.1 $ 37.36
=================== =======================
Restricted Stock Units
The Company issued 593,443 RSUs during the three months ended September 30,
2006, of which 326,371 are scheduled to vest on October 31, 2007, 171,327 on
October 31, 2008 and 95,745 on November 2, 2009, all subject to the continued
employment of the grantee. 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.
-12-
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the status of the Company's RSUs as of
September 30, 2006 and activity during the three 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 - -
Forfeited 0.0 -
------------------- -----------------------
Nonvested at September 30, 2006 704.5 $ 38.45
=================== =======================
Share Units
Certain non-employee directors defer cash compensation in the form of share
units which are granted under the Non-Employee Director Share Incentive Plan and
will be converted 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 September 30, 2006
and activity during the fiscal year then ended:
Weighted-Average
Grant Date
(Unaudited) (Shares in thousands) Shares Fair Value
------------------------------------------------------- ------------------- -----------------------
Outstanding at June 30, 2006 13.1 $ 36.79
Granted - -
Dividend equivalents - -
Converted - -
------------------- -----------------------
Outstanding at September 30, 2006 13.1 $ 36.79
=================== =======================
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 September 30, 2006 and
2005, respectively.
-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, $0.3 million of
income and $3.3 million of loss, both net of tax, for the three months ended
September 30, 2006 and 2005, respectively, are reflected as discontinued
operations in the accompanying statements of earnings. The current year income
resulted from the Company providing certain transitional distribution and online
services as well as the manufacture and sale to the purchaser of a limited range
of products. In addition, the Company provided transitional services related to
certain information systems, accounting and other back office services 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.
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 has identified
savings opportunities that include streamlined processes and organizational
changes. As of September 30, 2006, substantially all employees have been
separated.
During the three months ended September 30, 2006, the Company incurred an
additional $0.5 million under this program primarily related to facility
closings. At September 30, 2006, the accrued liability related to the cost
savings initiative was $55.7 million of which $21.5 million and $34.2 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.
Three Months Ended
September 30
-------------------------------
2006 2005
----------- ------------
(Unaudited)
(In millions)
PRODUCT CATEGORY DATA
Net Sales:
Skin Care $ 567.0 $ 523.4
Makeup 646.8 604.9
Fragrance 289.3 293.2
Hair Care 82.4 70.4
Other 8.0 5.2
----------- ------------
$ 1,593.5 $ 1,497.1
=========== ============
Operating Income:
Skin Care $ 42.9 $ 38.8
Makeup 49.9 60.5
Fragrance 5.1 (1.0)
Hair Care 3.9 5.3
Other (1.4) 1.5
Special charges related to cost savings initiative (0.5) -
----------- ------------
99.9 105.1
Reconciliation:
Interest expense, net 6.7 5.6
----------- ------------
Earnings before income taxes, minority interest
and discontinued operations $ 93.2 $ 99.5
=========== ============
GEOGRAPHIC DATA
Net Sales:
The Americas $ 900.5 $ 881.0
Europe, the Middle East & Africa 471.9 417.5
Asia/Pacific 221.1 198.6
----------- ------------
$ 1,593.5 $ 1,497.1
=========== ============
Operating Income:
The Americas $ 73.1 $ 80.4
Europe, the Middle East & Africa 18.3 22.4
Asia/Pacific 9.0 2.3
Special charges related to cost savings initiative (0.5) -
----------- ------------
$ 99.9 $ 105.1
=========== ============
-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 months ended
September 30, 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.
Three Months Ended
September 30
-------------------------------------
2006 2005
-------------- -------------
(In millions)
NET SALES
By Region:
The Americas $ 900.5 $ 881.0
Europe, the Middle East & Africa 471.9 417.5
Asia/Pacific 221.1 198.6
-------------- -------------
$ 1,593.5 $ 1,497.1
============== =============
By Product Category:
Skin Care $ 567.0 $ 523.4
Makeup 646.8 604.9
Fragrance 289.3 293.2
Hair Care 82.4 70.4
Other 8.0 5.2
-------------- -------------
$ 1,593.5 $ 1,497.1
============== =============
OPERATING INCOME (LOSS)
By Region:
The Americas $ 73.1 $ 80.4
Europe, the Middle East & Africa 18.3 22.4
Asia/Pacific 9.0 2.3
Special charges related to cost savings initiative (0.5) -
-------------- -------------
$ 99.9 $ 105.1
============== =============
By Product Category:
Skin Care $ 42.9 $ 38.8
Makeup 49.9 60.5
Fragrance 5.1 (1.0)
Hair Care 3.9 5.3
Other (1.4) 1.5
Special charges related to cost savings initiative (0.5) -
-------------- -------------
$ 99.9 $ 105.1
============== =============
-16-
THE ESTEE LAUDER COMPANIES INC.
The following table presents certain consolidated earnings data as a
percentage of net sales:
Three Months Ended
September 30
----------------------------
2006 2005
----------- ----------
Net sales 100.0% 100.0%
Cost of sales 26.9 28.0
---------- ----------
Gross profit 73.1 72.0
Operating expenses:
Selling, general and administrative 66.9 65.0
---------- ----------
Operating income 6.2 7.0
Interest expense, net 0.4 0.4
---------- ----------
Earnings before income taxes, minority interest and discontinued
operations 5.8 6.6
Provision for income taxes 2.1 2.4
Minority interest, net of tax (0.1) (0.1)
---------- ----------
Net earnings from continuing operations 3.6 4.1
Discontinued operations, net of tax 0.0 (0.2)
---------- ----------
Net earnings 3.6% 3.9%
========== ==========
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.
First Quarter Fiscal 2007 as Compared with First Quarter Fiscal 2006
Net Sales
Net sales increased 6% or $96.4 million to $1,593.5 million due to growth
in our hair care, skin care and make up product categories. The net increase
reflects sales growth in all geographic regions. The Americas region and the
skin care, makeup and fragrance categories were adversely impacted by fewer
department store doors during the current year quarter as compared to the prior
year quarter resulting from the merger of Federated Department Stores, Inc. and
The May Department Stores Company. Excluding the impact of foreign currency
translation, net sales increased 5%.
Product Categories
Skin Care
Net sales of skin care products increased 8% or $43.6 million to
$567.0 million. Approximately $59 million in net sales came from recently
launched products, such as Advanced Night Repair Concentrate Recovery Boosting
Treatment, and the growth in net sales of certain existing products, such as
Advanced Night Repair Eye Recovery Complex, Resilience Lift Extreme Ultra
Firming products and Re-Nutriv Ultimate Lifting Serum from Estee Lauder, as well
as products in the Clinique 3-Step System, Turnaround Concentrate Visible Skin
Renewer, Turnaround 15-Minute Facial, and the Repairwear line of products by
Clinique. These improvements were partially offset by approximately $25 million
of lower sales from the Resilience Lift, Idealist and Perfectionist lines of
products by Estee Lauder, as well as Total Turnaround Visible Skin Renewer
by Clinique. Excluding the impact of foreign currency translation, skin care net
sales increased 7%.
-17-
THE ESTEE LAUDER COMPANIES INC.
Makeup
Makeup net sales increased 7% or $41.9 million to $646.8 million reflecting
growth from our makeup artist brands of approximately $47 million. This increase
was supported by new product launches which included Plushglass lip gloss, as
well as M.A.C Viva Glam VI lip products, the proceeds of which are donated to
AIDS-related charities. The growth was partially offset by weaknesses in our
core brands and, as discussed above, the impact in the United States of fewer
doors due to retailer consolidation. Excluding the impact of foreign currency
translation, makeup net sales increased 6%.
Fragrance
Net sales of fragrance products decreased 1% or $3.9 million to $289.3 million
as we continue to be challenged in this product category, particularly in the
United States. Lower net sales volumes of True Star Men by Tommy Hilfiger, which
launched in the prior-year period, and Estee Lauder Beyond Paradise, True Star
by Tommy Hilfiger, Lauder Beyond Paradise Men, DKNY Be Delicious as well as
declines across various other fragrance franchises contributed to the decrease
of approximately $47 million. Substantially offsetting these decreases were the
recent launches of DKNY Red Delicious and DKNY Red Delicious Men, Pure White
Linen from Estee Lauder, Unforgivable by Sean John and Youth Dew Amber Nude from
Tom Ford for Estee Lauder, as well as the initial rollout of Donna Karan Gold of
approximately $43 million. Excluding the impact of foreign currency translation,
fragrance net sales decreased 3%.
Hair Care
Hair care net sales increased 17% or $12.0 million to $82.4 million,
primarily due to growth from Bumble and bumble and Aveda products. Bumble and
bumble net sales benefited from growth in our existing salon distribution and
new points of distribution. Aveda net sales increases benefited from the recent
launch of Color Conserve Strengthening Treatment, strong demand for color
products and from the recent acquisition of a distributor. Excluding the impact
of foreign currency translation, hair care net sales increased 16%.
Geographic Regions
Net sales in the Americas increased 2% or $19.5 million to $900.5 million. The
increase was led by growth in the United States of approximately $44 million
from our makeup artist and hair care brands, our internet distribution, and the
recent launch of the Unforgivable fragrance by Sean John. Partially offsetting
this growth was approximately $24 million related to weaknesses in certain of
our core brands as a result of competitive pressures and retailer consolidation.
We expect these factors to continue to affect sales, with the impact of retailer
consolidations easing during the second half of fiscal 2007. The prior-year
period results were weakened by severe weather conditions, as well as rising gas
prices, which we believed adversely influenced consumer spending habits. Net
sales growth in Canada, Latin America and Mexico contributed an additional $4
million to the increase.
In Europe, the Middle East & Africa, net sales increased 13% or $54.4
million to $471.9 million, reflecting growth throughout the region led by the
United Kingdom, our travel retail business, Germany, Spain, Russia and Italy. 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 11% or $22.5 million to $221.1 million.
This increase reflected higher net sales of approximately $19 million in Korea,
China, Hong Kong and Australia. Korea and China benefited from increased points
of distribution as well as continued success of the makeup artist brands which
also contributed to the positive results in Hong Kong. Excluding the impact of
foreign currency translation, Asia/Pacific net sales increased 11%.
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 26.9% as
compared with 28.0% in the prior period. Cost of sales as a percentage of net
sales reflected a decrease in the level and timing of promotions of 50 basis
points, a decrease in obsolescence charges of approximately 40 basis points, a
favorable change in the mix of our business of approximately 30 basis points and
the effect of exchange rates of 20 basis points. Partially offsetting these
improvements by 40 basis points were unfavorable changes in manufacturing
variances.
-18-
THE ESTEE LAUDER COMPANIES INC.
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 increased to 66.9% of net sales as compared with 65.0% of net
sales in the prior period. The increase in operating expense margin reflected
our planned shift from promotional spending, which is captured in our cost of
sales, to advertising, merchandising and sampling. Higher levels of spending
provided support to the national nameplate change at Macy's in the United
States, new product launches and growing and developing brands. We also incurred
higher charitable contributions associated with the increased sales of our M.A.C
Viva Glam products. Collectively, these activities contributed approximately 90
basis points to the increase in our operating expense margin. An increase of
approximately 50 basis points in selling expenses reflected higher
demonstration, field selling and training costs in support of our business
endeavors, as well as investments in new channel initiatives. Approximately 40
basis points of the increase related to the combination of a charge incurred in
anticipation of the settlement of an employment matter, incremental spending
related to our strategic modernization initiative and stock-based compensation.
Changes in advertising, sampling and merchandising 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 of net sales, the decreases in our cost of sales and
the increase in operating expense margins as previously discussed, operating
income decreased 5%, or $5.2 million, to $99.9 million as compared with the
prior period. Operating margins were 6.0% of net sales in the current period as
compared with 7.0% in the prior period.
Product Categories
Fragrance operating results increased over 100%, or $6.1 million, reflecting our
ongoing effort to balance sales levels with continued spending in support of our
fragrances at the point of sale. Operating results increased 11% or $4.1 million
in skin care reflecting higher net sales, which outpaced the increase of our
spending in this category. Makeup results declined 18%, or $10.6 million,
reflecting challenges among certain core brands, the impact of retailer
consolidation, the increased cost associated with the M.A.C Viva Glam campaigns
and the charge incurred in anticipation of the settlement of an employment
matter. Hair care operating income decreased 26%, or $1.4 million, primarily
reflecting spending in support of new distribution points, product launches and
expenses related to our strategic modernization initiative.
Geographic Regions
Operating income in the Americas decreased 9% or $7.3 million to $73.1 million.
These results were impacted adversely by approximately $21 million,
collectively, due to the reduced sales levels attributable to retailer
consolidations coupled with our strategic investments to further build new and
existing brands, as well as the charge incurred in anticipation of the
settlement of an employment matter. Offsetting these declines was the combined
positive effect of continued growth from our makeup artist brands and internet
distribution as well as cost-control efforts from certain core brands of
approximately $20 million. The prior-year period results were weakened by severe
weather conditions, as well as rising gas prices, which we believed adversely
influenced consumer spending habits.
In Europe, the Middle East & Africa, operating income decreased 18% or $4.1
million to $18.3 million primarily due to lower results in France, the United
Kingdom, our distributor business and Switzerland of approximately $9 million,
collectively. Improved results in Germany and Italy of approximately $6 million
partially offset those decreases. Although sales increased throughout the
region, particularly in the United Kingdom and from our travel retail business,
the decreases in profitability reflected our continuing efforts to support our
brands through advertising, merchandising and sampling as well as higher selling
expenses.
In Asia/Pacific, operating income increased over 200% or $6.7 million to
$9.0 million. Improved results in China coupled with positive results from
Australia and Korea contributed approximately $7 million, collectively. Slightly
offsetting the increase were lower contributions of approximately $1 million
from Taiwan and Japan.
-19-
THE ESTEE LAUDER COMPANIES INC.
Interest Expense, Net
Net interest expense was $6.7 million as compared with $5.6 million in the prior
period. The increase in net interest expense was primarily due to reduced
interest income generated from lower cash balances partially offset by 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 September 30, 2006 was 35.9% as compared
with 36.0% in the prior period. The change in the effective income tax rate of
10 basis points primarily reflects the positive impact attributable to the tax
effect of our foreign operations (40 basis points) partially offset by a
decrease in tax credits (20 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, $0.3 million of operating
income and $3.3 million of operating loss, both net of tax, for the three months
ended September 30, 2006 and 2005, respectively, are reflected as discontinued
operations in the accompanying statements of earnings. 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. In addition, we provided transitional services
related to certain information systems, accounting and other back office
services 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 September 30, 2006, we had cash and
cash equivalents of $180.7 million compared with $368.6 million at June 30,
2006.
At September 30, 2006, our outstanding borrowings of $643.0 million included:
(i) $236.9 million of 6% Senior Notes due January 2012 consisting of $250.0
million principal, unamortized debt discount of $0.6 million and a $12.5 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) $152.3
million of outstanding short-term commercial paper payable through November 2006
at an average interest rate of 5.26%; (iv) a 3.0 billion yen short-term
borrowing under a revolving credit facility (approximately $25.5 million at the
exchange rate at September 30, 2006); (v) $6.8 million of capital lease
obligations and (vi) $24.1 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 September 30, 2006, we had $152.3 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 $151.8 million in additional uncommitted credit
facilities, of which $22.1 million was used as of September 30, 2006.
-20-
THE ESTEE LAUDER COMPANIES INC.
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 September 30,
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 September 30, 2006,
no borrowings were outstanding under this agreement. Debt issuance costs
incurred related to this agreement were de minimis.
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 September 30, 2006
($25.5 million at the exchange rate at September 30, 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 29% at September 30, 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 used for operating activities from continuing operations was
$70.1 million during the three months ended September 30, 2006 as compared with
net cash used of $61.6 million in the prior period. The net cash flows used for
operating activities held steady during the three-month period reflecting our
efforts to balance our working capital components, specifically accounts
receivable, accounts payable and other accrued liabilities.
Net cash used for investing activities was $124.3 million during the three
months ended September 30, 2006 compared with $45.8 million in the prior period.
The increase in cash flows used for investing activities during the fiscal 2007
quarter primarily reflected the cash payment related to the acquisition of the
remaining minority equity interest in the Bumble & bumble business, and to a
lesser extent, Aveda distributor acquisitions. Capital expenditures also
increased in the fiscal 2007 quarter primarily reflecting our continuing
company-wide initiative to upgrade our information systems, which was initiated
in fiscal 2005. For the fiscal 2006 quarter, the use of cash primarily reflected
capital expenditures.
Net cash provided by financing activities was $6.7 million during the three
months ended September 30, 2006 compared to net cash used for financing
activities of $53.3 million in the prior period. This change from the prior
period primarily reflected an increase in commercial paper borrowings, and to a
lesser extent, a decrease in proceeds from the exercise of stock options and
more cash used for share repurchases than in the same period a year ago.
-21-
THE ESTEE LAUDER COMPANIES INC.
Dividends
Total dividends declared for the three months ended September 30, 2005
represented dividends on the 2015 Preferred Stock of $0.4 million. These
dividends were characterized as interest expense in the accompanying
consolidated statements of earnings for the three months ended September 30,
2005. The 2015 Preferred Stock was redeemed in October 2005.
On October 25, 2006, the Board of Directors declared an annual dividend of $.50
per share on our Class A and Class B Common Stock. The dividend will be paid on
December 27, 2006 to stockholders of record at the close of business on December
8, 2006.
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 September
30, 2006, the cumulative total of acquired shares pursuant to the authorization
was 41.6 million, reducing the remaining authorized share repurchase balance to
6.4 million. During the first three months of fiscal 2007, we purchased
approximately 3.0 million shares for $110.5 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
------------------ -----------------------
2,999,800 $36.85 2,999,800 6,391,800
================== =======================
(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. As of October 20, 2006, we
puchased an additional 0.2 million shares for $8.0 million, bringing the
cumulative total of acquired shares to 41.8 million.
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 $24 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 now expect to make
discretionary contributions of $20.0 million to our trust-based noncontributory
qualified defined benefit pension plan in 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.
-22-
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 June 30, 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 September 30, 2006, we had foreign currency contracts in the form
of forward exchange contracts and option contracts in the amount of $684.4
million and $52.9 million, respectively. The foreign currencies included in
forward exchange contracts (notional value stated in U.S. dollars) are
principally the Euro ($196.7 million), Swiss franc ($96.2 million), British
pound ($78.0 million), Japanese yen ($55.3 million), Canadian dollar ($53.6
million), Australian dollar ($49.8 million) and South Korean won ($24.6
million). The foreign currencies included in the option contracts (notional
value stated in U.S. dollars) are principally the Canadian dollar ($17.7
million), Euro ($15.9 million), Japanese yen ($10.4 million) and British pound
($8.9 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 September 30, 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 $11.4 million related to our foreign
exchange contracts. As of September 30, 2006, our average value-at-risk related
to our interest rate contracts for the twelve month period for which these
contracts were outstanding was $6.9 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.
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.
-23-
THE ESTEE LAUDER COMPANIES INC.
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 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") to provide
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality
assessment. Under SAB No. 108, companies should evaluate a misstatement based on
its impact on the current year income statement, as well as the cumulative
effect of correcting such misstatements that existed in prior years existing 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.
-24-
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;
-25-
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 September 30, 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 first quarter of fiscal 2007 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
-26-
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 September 30, 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.
-27-
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 plan to file a
motion to dismiss the amended complaint on or before November 7, 2006. 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 and are awaiting a response by the plaintiff. The defendants
believe that this complaint is without merit and intend to defend the action
vigorously.
-28-
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 September 30, 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
------------------------------- --------------------- ------------------
Ronald S. Lauder September 29, 2006 500,000
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 6. Exhibits.
Exhibit
Number Description
------ -----------
10.1 Form of Performance Share Unit Award Agreement under The Estee Lauder
Companies Inc. Amended and Restated Fiscal 2002 Share Incentive Plan
(including Form of Notice of Grant) (attached as Exhibit 10.4 to the
Company's Current Report on Form 8-K filed on September 25, 2006). *+
10.2 Form of Restricted Stock Unit Agreement under The Estee Lauder
Companies Inc. Amended and Restated Fiscal 2002 Share Incentive Plan
for Executive Officers (including Form of Notice of Grant) (attached
as Exhibit 10.5 to the Company's Current Report on Form 8-K filed on
September 25, 2006). *+
10.3 Form of Restricted Stock Unit Agreement under The Estee Lauder
Companies Inc. Amended and Restated Fiscal 2002 Share Incentive Plan
for Employees other than Executive Officers (including Form of Notice
of Grant) (attached as Exhibit 10.6 to the Company's Current Report on
Form 8-K filed on September 25, 2006). *+
10.4 Employment Agreement with Richard W. Kunes. +
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)
_________________
* Incorporated herein by reference.
+ Exhibit is a management contract or compensatory plan or arrangement.
-29-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ESTEE LAUDER COMPANIES INC.
Date: October 25, 2006 By: /s/Richard W. Kunes
---------------------------
Richard W. Kunes
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
-30-
THE ESTEE LAUDER COMPANIES INC.
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
10.1 Form of Performance Share Unit Award Agreement under The Estee Lauder
Companies Inc. Amended and Restated Fiscal 2002 Share Incentive Plan
(including Form of Notice of Grant) (attached as Exhibit 10.4 to the
Company's Current Report on Form 8-K filed on September 25, 2006). *+
10.2 Form of Restricted Stock Unit Agreement under The Estee Lauder
Companies Inc. Amended and Restated Fiscal 2002 Share Incentive Plan
for Executive Officers (including Form of Notice of Grant) (attached
as Exhibit 10.5 to the Company's Current Report on Form 8-K filed on
September 25, 2006). *+
10.3 Form of Restricted Stock Unit Agreement under The Estee Lauder
Companies Inc. Amended and Restated Fiscal 2002 Share Incentive Plan
for Employees other than Executive Officers (including Form of Notice
of Grant) (attached as Exhibit 10.6 to the Company's Current Report on
Form 8-K filed on September 25, 2006). *+
10.4 Employment Agreement with Richard W. Kunes. +
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)
_________________
* Incorporated herein by reference.
+ Exhibit is a management contract or compensatory plan or arrangement.