Estee Lauder 2002 Annual Report Download - page 45

THEEST{E LAUDER COMPANIES INC.
Specifically, the charge included the following:
• Internet. In an effort to achieve strategic objectives,
reduce costs and improve profitability, we outsourced
Gloss.com platform development and maintenance
efforts to a third-party provider. Additionally,Gloss.com
closed its San Francisco facility and consolidated
its operations in New York. As a result, included in
the charge was a $23.9 million provision for restruc-
turing the Gloss.com operations, including benefits
and severance packages for 36 employees as well as
asset write-offs. We also took a $20.1 million charge to
write-off the related Gloss.com acquisition goodwill.
• Supply Chain. Building on previously announced supply
chain initiatives, we have restructured certain manufac-
turing,distribution, research and development, informa-
tion systems and quality assurance operations in the
United States, Canada and Europe, which included
benefits and severance packages for 110 employees.
Acharge of $23.7 million was recorded related to
this effort.
• Globilization of Organization. We continue to imple-
ment our previously announced transition to a global
brand structure designed to streamline the decision-
making process and increase innovation and speed-to-
market. The next phase of this transition entailed
eliminating duplicate functions and responsibilities,
which resulted in charges for benefits and severance for
122 employees. We recorded a charge of $27.1 million
associated with these efforts.
• Distribution. We evaluated areas of distribution relative
to our financial targets and will focus our resources on
the most productive sales channels and markets. As a
result, we closed our operations in Argentina and the
remaining customers will be serviced by our Chilean
affiliate. We are also closing all remaining in-store
“tommy’s shops” and we are closing other select points
of distribution. We recorded a $22.6 million provision
related to these actions, which included benefits and
severance for 85 employees.
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Following is a summary of the charges as recorded in the consolidated statement of earnings for fiscal 2002:
Net Sales Cost of Sales Operating Expenses Total
(In millions)
Internet $ — $ — $ 44.0 $ 44.0
Supply Chain — — 23.7 23.7
Globalization of Organization — — 27.1 27.1
Distribution 6.2 0.8 15.6 22.6
Total charge $6.2 $0.8 $110.4 117.4
Tax effect (40.5)
Net charge $ 76.9
Restructuring
The restructuring charge was recorded in other accrued
liabilities or, where applicable, as a reduction of the
related asset. During fiscal 2002, $9.3 million related to
this restructuring was paid and approximately $5.6 million
of additional payments were made through August 31,
2002. We expect to settle a majority of the remaining
obligations by the end of fiscal 2003 with certain addi-
tional payments made ratably through fiscal 2006.
OPERATING RESULTS
Operating income decreased 31% or $154.2 million to
$341.4 million as compared with the prior year. Operating
margins were 7.2% of net sales in the current period as
compared with 10.6% in the prior year. The decrease in
operating margin was primarily due to restructuring
expenses, lower than expected sales levels, increased
support spending and new distribution channel costs.
This was partially offset by the exclusion of amortization
expense due to the adoption of SFAS No. 142, “Goodwill
and Other Intangible Assets” in fiscal 2002 and the
November 2000 expiration of amortization related to
purchased royalty rights. Operating income reflected
the inclusion of restructuring and other non-recurring
expenses of $117.4 million and $63.0 million in fiscal
2002 and 2001, respectively. Before consideration of
the restructuring and other non-recurring expenses,
operating income decreased 18% to $458.8 million
and operating margins were 9.7% in fiscal 2002 as com-
pared with 11.9% in fiscal 2001.
Net earnings and net earnings per diluted share
decreased approximately 37% and 39%, respectively. Net
earnings declined $113.3 million to $191.9 million and
net earnings per diluted share was lower by $.46 per
diluted share from $1.16 to $.70. On a comparable basis,
before restructuring and other non-recurring expenses,
before the cumulative effect of adopting a new account-