SEC Filing Summary: The Estée Lauder Companies Inc. Form 10-Q
Reporting period: Fiscal third quarter and nine months ended March 31, 2011, compared with the corresponding 2010 periods. The request metadata says “2010 Q3,” but the filing itself reports fiscal 2011 Q3.
Business context and results
The company manufactures, markets and distributes skin care, makeup, fragrance and hair care products in more than 150 countries and territories. Results improved year over year, supported by broad-based sales growth, product launches, favorable mix and cost controls. The July 2010 Smashbox acquisition also contributed to sales.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $2,165.7 million, up 16% from $1,860.0 million | $6,749.4 million, up 13% from $5,955.7 million |
| Gross margin | 77.7%, versus 76.1% | 77.6%, versus 76.2% |
| Operating income | $209.1 million, versus $126.3 million | $1,024.8 million, versus $746.3 million |
| Operating margin | 9.6%, versus 6.8% | 15.2%, versus 12.5% |
| Net earnings attributable to Estée Lauder | $124.7 million, versus $57.5 million | $659.7 million, versus $454.4 million |
| Diluted EPS | $0.62, versus $0.28 | $3.28, versus $2.27 |
Gross-margin improvement reflected product mix, manufacturing variances, lower obsolescence and foreign exchange. Operating-expense ratios also declined, principally from lower selling, shipping, general and administrative costs relative to sales; higher advertising investment, stock compensation and impairment charges partly offset the improvement.
Cash flow, balance sheet and liquidity
- Operating cash flow for the nine months was $727.6 million, down from $798.2 million. Management cited higher receivables—partly from order timing and retailer orders—and lower accounts payable, partly offset by higher earnings.
- Investing cash use was $479.8 million, versus $170.8 million, reflecting the Smashbox acquisition and increased capital expenditures of $223.9 million.
- Financing cash use was $288.8 million, versus $115.9 million, including $346.6 million of treasury-stock purchases and $148.0 million of dividends paid.
- Cash and equivalents were $1,099.0 million at March 31, 2011, compared with $1,120.7 million at June 30, 2010. Total debt was $1,227.5 million; debt to total capitalization declined to 33% from 39%.
- Current assets were $3,710.5 million and current liabilities $1,974.5 million. The company reported an undrawn $750 million revolving credit facility expiring April 26, 2012, and said available cash, operating cash flow, credit lines and capital-market access were expected to support planned needs.
Material changes and unusual items
- Quarterly sales included approximately $42 million of retailer orders pulled forward ahead of an SAP implementation; management said these orders likely would otherwise have occurred in fiscal Q4.
- The prior-year comparison benefited from approximately $31 million of charges for anticipated returns tied to the company’s perfumery strategy.
- Ojon-related revised plans and forecasts led to $29.3 million of goodwill impairment and $7.0 million of trademark impairment in fiscal 2011 Q3. The customer-list carrying value was determined recoverable.
- Smashbox was acquired on July 1, 2010. Acquisition-related cash outflows, including continuing earn-out obligations related to Bobbi Brown, totaled approximately $256 million net of cash acquired.
- The company terminated interest-rate swaps with a $250 million notional amount and received $47.4 million in cash settlement. The related debt fair-value adjustment will be amortized against interest expense over the debt’s remaining life.
Outlook, management commentary and risks
- Management said results exceeded expectations and described ongoing strategic emphasis on skin care, emerging markets, travel retail, digital channels and cost discipline. No specific consolidated sales or EPS guidance for the remainder of fiscal 2011 is provided in the filing text.
- The restructuring program was expected to generate total pre-tax charges of $350–$450 million over its life. Through March 31, 2011, cumulative charges were $227.4 million; identified and approved initiatives represented approximately $284–$289 million of expected charges. Estimated program savings were $625–$675 million through fiscal 2013, including $560–$580 million through fiscal 2011, relative to an assumed normalized spending pattern.
- Management said Japan’s disasters had not significantly affected results through March 31 but expected consequences to continue in the medium term; magnitude and duration were uncertain. Broader risks include economic uncertainty, retailer destocking and credit exposure, competition, foreign exchange, product-launch execution, oil and input costs, and SAP implementation or operational disruption.
- The filing notes potential future impairment risk for certain trademarks if distribution and market-expansion plans do not materialize. Management assessed current litigation as not expected to have a material adverse effect, while noting outcomes could differ.
- As of April 27, 2011, commercial paper ratings were A-1 by S&P and P-1 by Moody’s; long-term debt ratings were A and A2, respectively, with stable outlooks. The company reported covenant compliance and a 15-to-1 interest-coverage ratio against a minimum requirement above 3-to-1.
Key facts for investors to verify
- How much of reported sales growth and operating improvement was recurring, versus the $42 million order pull-forward, Smashbox contribution and favorable comparison with prior-year perfumery returns.
- Whether the projected restructuring savings are achieved and what further costs, reinvestments or execution impacts arise.
- Whether receivables and cash conversion normalize after the quarter-end retailer orders and collection timing effects.
- Progress, costs and any disruption associated with the SAP rollout, including implementation at additional affiliates through fiscal 2012.
- Developments in Japan and any resulting effects on demand, operations or travel retail, as well as the outlook for Ojon and other brands subject to impairment assumptions.