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The Estee Lauder Companies Inc. Reports Operating Results (10-K)
Posted by: gurufocus (IP Logged)
Date: August 17, 2012 04:22PM
The Estee Lauder Companies Inc. (EL) filed Annual Report for the period ended 2012-06-30.
Highlight of Business Operations:In the ordinary course of business, we have established an allowance for doubtful accounts and customer deductions based upon the evaluation of accounts receivable aging, specific exposures and historical trends. Our allowance for doubtful accounts and customer deductions is a subjective critical estimate that has a direct impact on reported net earnings. The allowance for doubtful accounts was $31.1 million and $33.9 million as of June 30, 2012 and 2011, respectively. The allowance for doubtful accounts was reduced by $13.8 million, $9.9 million and $15.8 million for customer deductions and write-offs in fiscal 2012, 2011 and 2010, respectively, and increased by $11.0 million, $9.5 million and $8.7 million for additional provisions in fiscal 2012, 2011 and 2010, respectively.
The key estimates and factors used in these two approaches include, but are not limited to, revenue growth rates and profit margins based on internal forecasts, terminal value, the weighted-average cost of capital used to discount future cash flows and comparable market multiples. The fiscal 2012 compound annual growth rate of sales for the first five to eight years of our projections, as considered appropriate for the individual reporting units, ranged between 5% and 18% with the higher growth rates in those reporting units that start with the smallest base in fiscal 2012. The fiscal 2011 compound annual growth rate of sales for the first five to eight years of our projections ranged between 3% and 19% with the higher growth rates in those reporting units that start with the smallest base in fiscal 2011. For reporting units with positive earnings, growth in the corresponding earnings before interest and taxes ranged from 7% to 47% in fiscal 2012 as compared with 6% to 109% in fiscal 2011. The terminal growth rates were projected at 3% after five to eight years in fiscal 2012 and fiscal 2011, which reflects our estimate of long term market and gross domestic product growth. The weighted-average cost of capital used to discount future cash flows ranged from 8% to 16% in fiscal 2012 as compared with 7.5% to 16% in fiscal 2011. The range of market multiples used in our fiscal 2012 impairment testing was from 1.7 to 3.3 times trailing-twelve-month sales and 10.0 to 12.5 times trailing-twelve-month earnings before interest, taxes and depreciation and amortization. The range of market multiples used in our fiscal 2011 impairment testing was from 1.5 to 3 times trailing-twelve-month sales and between 11 to 12 times trailing-twelve-month earnings before interest, taxes and depreciation and amortization. Future changes in these estimates and assumptions could materially affect the results of our reviews for impairment of goodwill. However, a decrease of 100 basis points in our terminal growth rate or an increase of 100 basis points in our weighted-average cost of capital would still result in a fair value calculation exceeding our book value for each of our reporting units, except for the Darphin reporting unit, for which a decrease of 75 basis points in our terminal growth rate would still result in a fair value calculation exceeding its book value. Changes in the valuation assumptions from those used in the prior year primarily reflect the impact of the current economic environment on the reporting units and their projected future results of operations.
While we believe that the estimates that we have made are proper and the related results of operations for the period are presented fairly in all material respects, other assumptions could reasonably be justified that would change the amount of reported net sales, cost of sales, operating expenses or our provision for income taxes as they relate to the provisions for anticipated sales returns, allowance for doubtful accounts, inventory obsolescence reserve and income taxes. For fiscal 2012, had these estimates been changed simultaneously by 2.5% in either direction, our reported gross profit would have increased or decreased by approximately $4.8 million, operating expenses would have changed by approximately $0.8 million and the provision for income taxes would have remained unchanged. The collective impact of these changes on operating income, net earnings attributable to The Estée Lauder Companies Inc., and net earnings attributable to The Estée Lauder Companies Inc. per diluted common share would be an increase or decrease of approximately $5.6 million, $5.6 million and $.01, respectively.
Net sales in Asia/Pacific increased 14%, or $250.7 million, to $2,011.4 million, reflecting growth in each major product category and from most countries in the region, several of which had a significant favorable impact of foreign currency translation. Net sales of approximately $193 million were driven by China, Hong Kong and Thailand, combined, primarily reflecting strong sales of skin care and makeup products. While we gained share in the prestige business in China, we are cautious that macroeconomic factors may temper the future growth trend of the Chinese economy. Our businesses in Japan, Korea and Australia continued to be challenged due to difficult economic conditions, but we reported net sales gains of approximately $37 million, combined, which for both Japan and Australia were generated predominantly from the strengthening of their respective currencies. Excluding the impact of foreign currency translation, Asia/Pacific net sales increased 11%.
Net sales in Asia/Pacific increased 17%, or $250.6 million, to $1,760.7 million, reflecting growth from all countries in the region and each product category. This reflected our strategy to strengthen and expand our geographic presence in Asia, particularly in China. Approximately $181 million of this increase was generated in China, Hong Kong, Korea and Taiwan primarily reflecting strong sales of skin care products. Our businesses in Japan and Australia continued to be challenged due to difficult economic conditions, but they reported net sales gains of approximately $33 million, which were generated from the strengthening of their respective currencies. The region also benefited from the favorable impact of foreign currency translation. Excluding the impact of foreign currency translation, Asia/Pacific net sales increased 10%.
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