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| EL > SEC Filings for EL > Form 10-Q on 7-May-2012 | All Recent SEC Filings |
7-May-2012
Quarterly Report
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 150 countries and territories. The following table is a comparative summary of operating results for the three and nine months ended March 31, 2012 and 2011, 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. 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 Nine Months Ended
March 31 March 31
(In millions) 2012 2011 2012 2011
NET SALES
By Region:
The Americas $ 974.3 $ 928.9 $ 3,151.0 $ 2,914.1
Europe, the Middle East &
Africa 823.6 794.7 2,728.1 2,468.9
Asia/Pacific 450.3 442.8 1,582.7 1,368.6
2,248.2 2,166.4 7,461.8 6,751.6
Returns associated with
restructuring activities - (0.7 ) 0.6 (2.2 )
Net Sales $ 2,248.2 $ 2,165.7 $ 7,462.4 $ 6,749.4
By Product Category:
Skin Care $ 1,019.0 $ 933.4 $ 3,257.8 $ 2,820.3
Makeup 877.0 878.2 2,789.4 2,554.6
Fragrance 231.3 232.0 1,029.2 1,014.1
Hair Care 110.1 110.0 335.3 316.1
Other 10.8 12.8 50.1 46.5
2,248.2 2,166.4 7,461.8 6,751.6
Returns associated with
restructuring activities - (0.7 ) 0.6 (2.2 )
Net Sales $ 2,248.2 $ 2,165.7 $ 7,462.4 $ 6,749.4
OPERATING INCOME (LOSS)
By Region:
The Americas $ 86.2 $ 54.7 $ 347.8 $ 256.7
Europe, the Middle East &
Africa 101.0 115.8 598.8 556.1
Asia/Pacific 53.1 62.1 330.9 259.4
240.3 232.6 1,277.5 1,072.2
Total charges associated with
restructuring activities (28.8 ) (23.5 ) (39.0 ) (47.4 )
Operating Income $ 211.5 $ 209.1 $ 1,238.5 $ 1,024.8
By Product Category:
Skin Care $ 156.3 $ 137.1 $ 692.2 $ 547.2
Makeup 90.2 128.3 458.3 423.4
Fragrance (8.5 ) (7.5 ) 113.0 115.7
Hair Care 7.4 (23.8 ) 25.0 (9.8 )
Other (5.1 ) (1.5 ) (11.0 ) (4.3 )
240.3 232.6 1,277.5 1,072.2
Total charges associated with
restructuring activities (28.8 ) (23.5 ) (39.0 ) (47.4 )
Operating Income $ 211.5 $ 209.1 $ 1,238.5 $ 1,024.8
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THE ESTÉE LAUDER COMPANIES INC.
The following table presents certain consolidated earnings data as a percentage
of net sales:
Three Months Ended Nine Months Ended
March 31 March 31
2012 2011 2012 2011
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 20.9 22.3 20.8 22.4
Gross profit 79.1 77.7 79.2 77.6
Operating expenses:
Selling, general and
administrative 68.4 65.4 62.0 61.3
Restructuring and other charges 1.3 1.0 0.5 0.6
Goodwill impairment - 1.4 - 0.4
Impairment of other intangible
assets - 0.3 0.1 0.1
Total operating expenses 69.7 68.1 62.6 62.4
Operating income 9.4 9.6 16.6 15.2
Interest expense, net 0.7 0.7 0.6 0.7
Other income - - 0.1 -
Earnings before income taxes 8.7 8.9 16.1 14.5
Provision for income taxes 2.9 3.1 5.3 4.7
Net earnings 5.8 5.8 10.8 9.8
Net earnings attributable to
noncontrolling interests - - - -
Net earnings attributable to The
Estée Lauder Companies Inc. 5.8 % 5.8 % 10.8 % 9.8 %
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In order to meet the demands of consumers, we continually introduce new products, support new and established products through advertising, merchandising and sampling and phase out existing products that no longer meet the needs of our consumers. The economics of developing, producing, launching, supporting and discontinuing products impact 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.
We operate on a global basis, with the majority of our net sales generated outside the United States. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations. Therefore, we present certain net sales information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of our underlying business outside the United States. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We calculate constant currency information by translating current-period results using prior-year period weighted-average foreign currency exchange rates.
Overview
We believe that the best way to continue to increase stockholder value is to provide our customers and consumers with the products and services that they have come to expect from us in the most efficient and profitable manner while recognizing consumers' changing shopping habits. To be the global leader in prestige beauty, we are continuing to implement a long-term strategy that is guiding us through fiscal 2014. The strategy has numerous initiatives across geographic regions, product categories, brands and functions that are designed to leverage our strengths, make us more productive and grow our sales.
We believe we have a strong, diverse brand portfolio with global reach and potential, and we plan to continue building upon and leveraging our history of outstanding creativity, innovation and entrepreneurship. We have succeeded in expanding our "High-Touch" service model and will continue to look for ways to expand it in newer channels and within geographic regions. As an example, we are developing capabilities to deliver superior retailing experiences, particularly in freestanding retail stores. We are expanding our efforts to evolve our e-commerce-based online strategy into a multi-pronged digital strategy encompassing e-commerce, as well as digital and social media. We are leveraging our regional organization in an effort to assure that we are locally relevant in each market.
As part of our strategy, we are continuing to shift our category mix towards higher margin categories with greater global growth potential. Skin care, our most profitable product category, is a strategic priority for our innovation and investment spending, particularly in the Asia/Pacific region. We also focused our attention on luxury consumers across all categories and have seen an improvement in the net sales of many of our higher-end prestige products, due to an improvement in the luxury retail environment. We will also continue to build our makeup category through the introduction of new product offerings, continue expanding our hair care brands both in the salon and in other retail channels and focus our efforts to strengthen our fragrance business model.
We are strengthening our geographic presence by seeking share growth in large, image-building cities within core markets such as the United States, the United Kingdom, France, Italy and Japan. In addition, we continue to prioritize efforts to expand our presence and accelerate share growth in emerging markets such as China, Russia, the Middle East, Eastern Europe and Brazil. We continue to expand our digital presence, which has resulted in growth in net sales of our products sold over the Internet. In North America, we continue to recognize the need to drive profitable growth in our traditional department store channel and see many benefits from the changes we have previously implemented and continue to reshape our organization to meet the needs of the changing retail landscape. Internationally, we continue to take actions to grow profitability in European perfumeries and pharmacies and in department stores in Asia, while emphasizing our skin care and makeup initiatives to boost our travel retail business and continuing efforts to grow our online, specialty retailer and prestige salon businesses. The travel retail business continues to be a source of sales growth and profitability. Our business in this channel is benefiting from the implementation of programs we designed to enhance consumers' "High-Touch" experiences and convert travelers into purchasers. In addition, we see travel retail as another way to capture the attention of travelers from emerging markets, who either buy in the channel, in stores at their destinations or when they return to their homes.
While our overall business is performing well, we continue to see softening due to ongoing global economic uncertainties and volatility in financial markets, particularly in certain European countries, Japan and Australia. Our business in some countries has experienced slower than anticipated net sales growth. We believe we have been able to offset to some extent the impact of these events as a result of our strategy to mitigate weaknesses we find in certain areas with strengths in others. However, if the degree of uncertainty or volatility worsens or is further prolonged, then we expect there to be a further negative effect on ongoing consumer confidence, demand and spending and, as a result, our business. We will continue to monitor these and other risks that may affect our business.
We plan on continuing to invest in the significant modernization of our global information systems, which includes the Strategic Modernization Initiative ("SMI") as well as other initiatives, and shift our focus from gift with purchase activities to advertising, merchandising and sampling initiatives. We expect these strategies will help improve our cost of sales margin but will increase our operating expense margin.
As part of SMI, we anticipate the continued migration of our operations to SAP-based technologies, with the majority of our locations being enabled through 2014. As a result, we have experienced, and may continue to experience, fluctuations in our net sales and operating results resulting from accelerated orders from certain of our retailers to provide adequate safety stock to mitigate any potential short-term business interruption associated with the SAP rollout. In particular, approximately $30 million of accelerated orders were recorded as net sales in the fiscal 2012 second quarter that likely would have occurred in the fiscal 2012 third quarter. In addition, approximately $42 million of accelerated orders were recorded as net sales in the fiscal 2011 third quarter that would have occurred in the fiscal 2011 fourth quarter. The impact on net sales and operating results by product category and geographic region is as follows:
Three Months Ended Three Months Ended
March 31, 2012 March 31, 2011
Operating Operating
(In millions) Net Sales Results Net Sales Results
Product Category:
Skin Care $ 16 $ 13 $ 16 $ 11
Makeup 9 6 17 13
Fragrance 2 2 6 4
Hair Care 3 2 2 2
Other - - 1 1
Total $ 30 $ 23 $ 42 $ 31
Region:
The Americas $ 2 $ 1 $ - $ -
Europe, the Middle East & Africa 3 3 36 26
Asia/Pacific 25 19 6 5
Total $ 30 $ 23 $ 42 $ 31
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Combined, these actions created a difficult comparison between the fiscal 2012 third quarter and the fiscal 2011 third quarter of approximately $72 million in net sales and approximately $54 million in operating results and impacted our operating margin comparisons. We believe the presentation of certain quarter and year-to-date comparative information in the following discussions that exclude the impact of the timing of these orders is useful in analyzing the net sales and operating results of our business.
Returns and Charges Associated with Restructuring Activities
In an effort to drive down costs and achieve synergies within our organization, in February 2009, we announced the implementation of a multi-faceted cost savings program (the "Program") to position the company to achieve long-term profitable growth. We anticipate the Program will result in related restructuring and other charges, inclusive of cumulative charges recorded to date and through the remainder of the Program, totaling between $350 million and $450 million before taxes. While we will continue to seek cost savings opportunities, our current plans are to identify and approve specific initiatives under the Program through fiscal 2012 and execute those initiatives through fiscal 2013. The total amount of charges (pre-tax) associated with the Program recorded, plus other initiatives approved through March 31, 2012, is approximately $343 million to $348 million, of which approximately $234 million to $236 million relates to restructuring charges, approximately $50 million of other costs to implement the initiatives, approximately $42 million to $45 million in sales returns and approximately $17 million in inventory write-offs. The restructuring charges are comprised of approximately $173 million to $175 million of employee-related costs, approximately $39 million of other exit costs and contract terminations (substantially all of which have resulted in or will result in cash expenditures), and approximately $22 million in non-cash asset write-offs. The total amount of cumulative charges (pre-tax) associated with the Program recorded from inception through March 31, 2012 was $278.4 million.
We expect that the implementation of this Program, combined with other on-going cost savings efforts, will result in savings of approximately $700 million to $750 million (Program inception through the end of fiscal 2012 is estimated to be approximately $700 million to $720 million) including the reduction of certain costs relative to an assumed normalized spending pattern. Our long-range forecast for operating margin reflects these anticipated savings, net of strategic reinvestments.
The Program focuses on a redesign of our organizational structure in order to integrate the company in a more cohesive way and operate more globally across brands and functions. The principal aspect of the Program was the reduction of the workforce by approximately 2,000 employees. Specific actions taken since Program inception included:
† Resize and Reorganize the Organization - We continued the realignment and optimization of our organization to better leverage scale, improve productivity, reduce complexity and achieve cost savings in each region and across various functions. This included reduction of the workforce which occurred through the consolidation of certain functions, which we achieved through a combination of normal attrition and job eliminations, and the closure and consolidation of certain distribution and office facilities.
† Turnaround or Exit Unprofitable Operations - To improve the profitability in certain of our brands and regions, we have selectively exited certain channels of distribution, categories and markets, and have made changes to turnaround others. This included the exit from the global wholesale distribution of our Prescriptives brand and the reformulation of Ojon brand products. In connection with these activities, we incurred charges for product returns, inventory write-offs, reduction of workforce and termination of contracts.
† Outsourcing - In order to balance the growing need for information technology support with our efforts to provide the most efficient and cost effective solutions, we continued the outsourcing of certain information technology processes. We incurred costs to transition services to outsource providers and employee-related termination costs.
Restructuring Charges
The following table presents restructuring charges related to the Program as
follows:
Three Months Ended Nine Months Ended
March 31 March 31
(In millions) 2012 2011 2012 2011
Employee-related costs $ 19.1 $ 18.8 $ 23.4 $ 28.3
Asset write-offs 0.4 0.8 0.9 1.4
Contract terminations 7.1 0.2 8.4 2.0
Other exit costs 0.7 0.5 1.5 1.0
Total restructuring charges $ 27.3 $ 20.3 $ 34.2 $ 32.7
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The following table presents aggregate restructuring charges related to the Program:
Employee-
Related Asset Contract Other Exit
(In millions) Costs Write-offs Terminations Costs Total
Fiscal 2009 $ 60.9 $ 4.2 $ 3.4 $ 1.8 $ 70.3
Fiscal 2010 29.3 11.0 2.3 6.2 48.8
Fiscal 2011 34.6 2.4 3.0 1.1 41.1
Nine months ended March 31,
2012 23.4 0.9 8.4 1.5 34.2
Charges recorded through
March 31, 2012 $ 148.2 $ 18.5 $ 17.1 $ 10.6 $ 194.4
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THE ESTÉE LAUDER COMPANIES INC.
The following table presents accrued restructuring charges and the related
activities under the Program:
Employee-
Related Asset Contract Other Exit
(In millions) Costs Write-offs Terminations Costs Total
Charges $ 60.9 $ 4.2 $ 3.4 $ 1.8 $ 70.3
Cash payments (7.5 ) - (0.5 ) (1.6 ) (9.6 )
Non-cash write-offs - (4.2 ) - - (4.2 )
Translation adjustments 0.6 - - - 0.6
Other adjustments (2.4 ) - - - (2.4 )
Balance at June 30, 2009 51.6 - 2.9 0.2 54.7
Charges 29.3 11.0 2.3 6.2 48.8
Cash payments (49.5 ) - (5.1 ) (6.0 ) (60.6 )
Non-cash write-offs - (11.0 ) - - (11.0 )
Translation adjustments (0.8 ) - - - (0.8 )
Balance at June 30, 2010 30.6 - 0.1 0.4 31.1
Charges 34.6 2.4 3.0 1.1 41.1
Cash payments (30.6 ) - (2.4 ) (1.4 ) (34.4 )
Non-cash write-offs - (2.4 ) - - (2.4 )
Translation adjustments 1.2 - (0.1 ) 0.1 1.2
Balance at June 30, 2011 35.8 - 0.6 0.2 36.6
Charges 23.4 0.9 8.4 1.5 34.2
Cash payments (20.4 ) - (2.1 ) (1.3 ) (23.8 )
Non-cash write-offs - (0.9 ) - - (0.9 )
Translation adjustments (0.8 ) - - 0.1 (0.7 )
Balance at March 31, 2012 $ 38.0 $ - $ 6.9 $ 0.5 $ 45.4
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Accrued restructuring charges at March 31, 2012 are expected to result in cash expenditures funded from cash provided by operations of approximately $18 million, $17 million, $9 million and $1 million in fiscal 2012, 2013, 2014 and 2015, respectively.
Total Returns and Other Charges Associated with Restructuring Activities
The following table presents total charges associated with restructuring and
other activities related to the Program:
Three Months Ended Nine Months Ended
March 31 March 31
(In millions) 2012 2011 2012 2011
Sales returns (included in Net
Sales) $ - $ 0.7 $ (0.6 ) $ 2.2
Cost of sales 0.4 1.0 0.4 5.6
Restructuring charges 27.3 20.3 34.2 32.7
Other charges 1.1 1.5 5.0 6.9
Total returns and charges
associated with restructuring
activities $ 28.8 $ 23.5 $ 39.0 $ 47.4
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During the nine months ended March 31, 2012, we recorded adjustments to reflect revised estimates of sales returns associated with prior initiatives. During the three and nine months ended March 31, 2012, we recorded a write-off of inventory of $0.4 million associated with the exit of unprofitable operations. During the three months ended March 31, 2011, we recorded $0.7 million reflecting sales returns (less a related cost of sales of $0.3 million) and a write-off of inventory of $1.3 million associated with turnaround operations, primarily related to the reformulation of Ojon brand products. During the nine months ended March 31, 2011, we recorded $2.2 million reflecting sales returns (less a related cost of sales of $0.8 million) and a write-off of inventory of $6.4 million associated with turnaround operations, primarily related to the reformulation of Ojon brand products.
Other Intangible Asset Impairments
During the second quarter of fiscal 2012, the Ojon reporting unit identified a potential decline in its projected results of operations, primarily resulting from a softness in the direct response television channel, which caused us to review and revise Ojon's long-term forecast. We concluded that these changes in the business of the Ojon reporting unit triggered the need for an interim impairment test of its trademarks as of December 31, 2011. These changes in circumstances were also an indicator that the carrying amount of the customer list may not be recoverable. We performed an interim impairment test for the trademarks and a recoverability test for the customer list as of December 31, 2011. For the trademarks, we concluded that the carrying value exceeded its estimated fair value, which was based on the use of a royalty rate to determine discounted projected future cash flows ("relief-from-royalty method"). As a result, we recognized an impairment charge of $6.7 million. This charge was reflected in the hair care product category in the Americas region. We concluded that the carrying value of the customer list is recoverable. The excess of the undiscounted cash flows associated with this customer list exceeded the carrying value by approximately 8%. The key assumptions used in the determination of estimated future cash flows were predicated on the effect of marketing initiatives and new product launches, which have a material impact on these estimates. If such plans do not materialize, or if there is a decline in the business environment, we could recognize an impairment charge in the future. As of March 31, 2012, the carrying value of the customer list was $12.1 million.
As of our latest annual indefinite-lived asset impairment test on April 1, 2011, we determined that the trademarks related to the Darphin reporting unit had an estimated fair value exceeding its carrying value by approximately 13%. As of . . .
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