EL

Business Context and Reporting Period

This Form 8-K, filed on May 17, 2004, by The Estee Lauder Companies Inc. (EL), primarily addresses the restatement of audited consolidated financial statements for fiscal years ended June 30, 2003, and 2002. The restatement was necessitated by the sale of the "jane" brand reporting unit in February 2004, which required reclassifying its results as discontinued operations. The filing also includes restated data for the makeup product category and the Americas region to align with this change.

Key Financial Metrics (Fiscal Year Ended June 30, 2003)

Material Changes and Discontinued Operations

• Discontinued Operations: The sale of the "jane" brand resulted in a restatement of prior periods. Discontinued operations contributed a net loss of $5.8 million in 2003 and $21.0 million in 2002 (net of tax).
• Revenue Growth: Net sales increased 8.2% year-over-year to $5.096 billion, driven by growth in Skin Care (+11.2%) and Makeup (+7.4%) segments.
• Profitability: Operating income improved significantly to $503.7 million in 2003 compared to $342.1 million in 2002, aided by the absence of the $117.4 million restructuring charge recorded in 2002.
• Debt Reduction: Total debt decreased by approximately $119 million, as the company repaid all outstanding commercial paper obligations during fiscal 2003.
• Special Charges: A $22.0 million pre-tax special charge was recorded in Q4 2003 related to a legal settlement (class action lawsuit), compared to no special charges in 2002 (restructuring was separate).

Outlook, Risks, and Management Commentary

• Legal Contingencies: The company settled a consolidated class action lawsuit regarding prestige cosmetics in July 2003, resulting in the $22.0 million charge. Other pending matters include patent infringement claims by Revlon (summary judgment recommended in EL's favor, but appeal possible) and environmental liability discussions regarding landfills in New York.
• Accounting Changes: The company adopted SFAS No. 150, which will reclassify $6.50 Cumulative Redeemable Preferred Stock as a liability starting in fiscal 2004. This will recharacterize preferred dividends as interest expense, increasing the effective tax rate, though net earnings attributable to common stock will remain unaffected.
• Subsequent Events: Following the fiscal year-end, the company acquired the Rodan & Fields skin care line and continued share repurchases under its authorized program.
• Segment Performance: The Americas region remains the largest contributor to sales ($2.93 billion) and operating income ($255.3 million). Europe, Middle East & Africa showed strong operating income growth to $227.7 million.

Investor Verification Checklist

• Restatement Impact: Verify the specific impact of the "jane" brand discontinuation on the Makeup category and Americas region historical data for trend analysis.
• Legal Exposure: Monitor the status of the Revlon patent infringement appeal and the final court approval of the class action settlement.
• Debt Structure: Confirm the impact of the SFAS No. 150 adoption on the balance sheet classification of preferred stock and the resulting interest expense in the upcoming fiscal year.
• Cash Flow Utilization: Review the $352.5 million used for treasury stock acquisitions in 2003 and the subsequent $12.3 million repurchase post-year-end to assess capital allocation priorities.
• Goodwill Impairment: Note the $20.6 million goodwill write-down related to the "jane" unit recorded in 2001 and the $20.1 million write-off for Gloss.com in 2002 to understand historical asset valuation adjustments.