The Estée Lauder Companies Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the three months ended September 30, 2012. The company manufactures, markets and distributes prestige beauty products in more than 150 countries and territories. Financial amounts are in U.S. dollars; millions except per-share data.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $2,549.5 million | $2,476.7 million |
| Gross profit / margin | $2,010.3 million / 78.9% | $1,942.4 million / 78.4% |
| Operating income / margin | $482.0 million / 18.9% | $430.0 million / 17.4% |
| Net earnings attributable to the company | $299.5 million | $278.6 million |
| Diluted EPS | $0.76 | $0.70 |
| Operating cash flow | $(125.2) million | $(36.2) million |
- Sales increased 3% reported and 6% excluding foreign-exchange effects. Skin care and makeup led category growth; fragrance sales declined 3% reported. By region, the Americas rose 7%, Asia/Pacific rose 6%, and Europe, the Middle East and Africa declined 4% reported.
- Gross margin improved 0.5 percentage point, principally from product mix, pricing and currency effects. Operating margin rose 1.5 percentage points as operating expenses declined as a share of sales.
- Operating cash use widened, mainly from higher receivables, inventory and the timing of payments to suppliers. Investing cash use was $104.2 million, including $95.5 million of capital expenditures. Financing cash use was $70.8 million. Cash declined to $1,053.7 million from $1,347.7 million at June 30, 2012.
Balance sheet, debt and liquidity
- At September 30, 2012, total debt was $1,354.7 million, versus $1,288.1 million at June 30; cash was $1,053.7 million. Total debt was 31% of total capitalization, down from 32%.
- Current assets were $4,213.1 million and current liabilities $1,972.4 million. The company reported no commercial paper outstanding and no borrowings under its $1.0 billion revolving credit facility; it stated that available cash, operating cash flows and credit-market access should support planned needs.
- The company issued $500 million of 10- and 30-year senior notes and used offering proceeds to redeem $230.1 million of 7.75% notes due 2013. The redemption generated a $19.1 million pretax extinguishment charge. It also repaid $200 million of commercial paper outstanding at fiscal year-end.
Changes, outlook and material items
- Compared with the prior year, sales, operating income and attributable net earnings increased; diluted EPS rose 9%. The reported results include a $19.1 million pretax debt-extinguishment charge and $1.8 million of contingent consideration income from the sale of Rodan + Fields.
- Management identified economic weakness in parts of Western Europe and Korea, and slower travel-retail growth partly related to retailer destocking and tighter working-capital management. It expected travel-retail sales to improve during the rest of fiscal 2013, while remaining cautious about near-term European conditions. The filing does not provide a specific company-wide sales or EPS forecast.
- Management expects higher advertising, merchandising and sampling investment to continue through the remainder of fiscal 2013. Its long-running restructuring program is expected to generate approximately $760–$785 million of savings through fiscal 2013; estimated total program charges are $350–$450 million before tax.
- Out-of-period adjustments relating to fiscal 2008–2012 reduced current-quarter pretax earnings by $5.9 million, net earnings by $7.4 million and diluted EPS by $0.02. The company said the adjustments were not material to this quarter or previously issued statements.
- A former Darphin owner’s claim remains under appeal in France. The company paid €25.3 million under the judgment and received a bank guarantee; it maintains an accrual below the court’s award, based on its assessment of the likely appeal outcome.
- On November 1, 2012, the board declared a $0.72-per-share dividend and authorized repurchases of up to 40 million additional Class A shares. The company plans to move to quarterly dividend payments beginning in calendar 2013.
Important facts for investors to verify
- Whether receivables, inventory and supplier-payment timing normalize, given the quarter’s operating cash outflow.
- Whether growth in the Americas and Asia/Pacific offsets continued weakness in parts of Europe and Korea, and whether travel-retail sales recover as management expected.
- The effect of planned strategic investment, restructuring savings and remaining program charges on future margins and cash flow.
- Developments in the Darphin appeal and the company’s tax exposures, including $78.3 million of gross unrecognized tax benefits at quarter-end; management said $20–$25 million could reasonably possibly decrease within 12 months.
- Execution and operational risks from the continuing SAP modernization, which the company said would extend across most locations through 2014.