What drove the decline in operating income in fiscal 2001?

Operating income fell 4% to $495.6 million, which the filing attributes to $63.0 million of restructuring and other non-recurring charges recorded in the fourth quarter. These charges related to jane fixtures, closing 86 in-store tommy's shops, information systems and other assets, and a global brand reorganization. Excluding these charges, operating income rose 8% to $558.6 million.

How did the company's sales perform across product categories and regions?

Makeup net sales increased 8% to $1.70 billion and skin care increased 6% to $1.64 billion, while hair care rose 59% to $180.7 million, largely due to Bumble and bumble. Fragrance declined 3% to $1.06 billion, reflecting softness in the United States and lower Tommy Hilfiger licensed sales. By region, the Americas grew 6%, Europe, the Middle East & Africa grew 7%, and Asia/Pacific grew 2%.

What legal proceedings could affect the company?

A Revlon affiliate sued in August 2000 claiming that several Estee Lauder, Origins, La Mer and jane products infringe its patent, seeking treble and punitive damages. A separate California class action alleges retail price-fixing with department stores. Management believes neither case will have a material adverse effect on consolidated financial results, though the outcome cannot be predicted with certainty.

What accounting changes will affect future reported results?

The company adopted SFAS No. 133 in fiscal 2001, resulting in a $2.2 million after-tax charge. It also adopted SFAS No. 142 effective July 1, 2001, which could exclude approximately $21 million of goodwill and intangible amortization in fiscal 2002. The EITF Issue No. 00-14 will reclassify some promotional revenue as sales and move merchandise costs to cost of sales, lowering gross margins by about 5.0% to 6.0% of sales while leaving operating income unchanged.

EL 10-K FY2001 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed September 17, 2001. Cited figures are marked; the original filing is the authoritative source.

The Estee Lauder Companies Inc. reported net sales of $4.61 billion^a for fiscal year ended June 30, 2001, up from $4.37 billion in fiscal 2000, with net sales growth of 6% on a reported basis and 9% excluding the impact of foreign currency translation.

Operating income declined to $495.6 million^b from $515.8 million, reflecting $63.0 million of pre-tax restructuring and other non-recurring charges recorded in the fourth quarter. Before these charges, operating income rose 8% to $558.6 million, with operating margins of 12.1%. Net earnings were $305.2 million, or $1.16 per diluted share, versus $314.1 million and $1.20 a year earlier; the filing states that net earnings before restructuring and the accounting change were $347.7 million, up 11%.

Cash flow from operations fell to $305.4 million^c from $442.5 million, driven by higher inventory and reduced accrued liabilities. The company ended the year with $346.7 million in cash and total debt of $416.7 million, and total debt was 20% of total capitalization versus 22% a year earlier. Growth was led by makeup and skin care, with makeup operating income up 17% and skin care up 11%, while fragrance sales declined 3% amid U.S. softness and the Tommy Hilfiger licensed line.

Hair care sales rose 59%, largely from the consolidation of Bumble and bumble. The filing also flags ongoing litigation, including a Revlon patent infringement suit and a California class action over prestige cosmetic pricing, both of which management believes will not have a material adverse effect on consolidated results. Management expects the Euro transition and SFAS No. 142 adoption (about $21 million^d of amortization excluded in fiscal 2002) to affect reporting going forward.

02—Key points

Key Highlights

Net sales rose to $4,608.1 million from $4,366.8 million; growth was 9% excluding currency translation.
Operating income fell to $495.6 million, but was up 8% to $558.6 million before $63.0 million in restructuring and other non-recurring charges.
Net earnings were $305.2 million, or $1.16 per diluted share, compared with $314.1 million, or $1.20, in fiscal 2000.
Makeup net sales increased 8% to $1.70 billion, and skin care net sales increased 6% to $1.64 billion; fragrance net sales declined 3% to $1.06 billion.
Operating cash flow decreased to $305.4 million from $442.5 million, while cash and cash equivalents rose to $346.7 million.
Total debt was $416.7 million, 20% of total capitalization at June 30, 2001, down from 22%; the company held a $400.0 million revolving credit facility.
The Lauder family controls approximately 91.6% of the outstanding voting power, and the company is pursuing an Internet strategy that is expected to be initially dilutive.

03—Questions

Frequently Asked Questions

What drove the decline in operating income in fiscal 2001?
Operating income fell 4% to $495.6 million, which the filing attributes to $63.0 million of restructuring and other non-recurring charges recorded in the fourth quarter. These charges related to jane fixtures, closing 86 in-store tommy's shops, information systems and other assets, and a global brand reorganization. Excluding these charges, operating income rose 8% to $558.6 million.
How did the company's sales perform across product categories and regions?
Makeup net sales increased 8% to $1.70 billion and skin care increased 6% to $1.64 billion, while hair care rose 59% to $180.7 million, largely due to Bumble and bumble. Fragrance declined 3% to $1.06 billion, reflecting softness in the United States and lower Tommy Hilfiger licensed sales. By region, the Americas grew 6%, Europe, the Middle East & Africa grew 7%, and Asia/Pacific grew 2%.
What legal proceedings could affect the company?
A Revlon affiliate sued in August 2000 claiming that several Estee Lauder, Origins, La Mer and jane products infringe its patent, seeking treble and punitive damages. A separate California class action alleges retail price-fixing with department stores. Management believes neither case will have a material adverse effect on consolidated financial results, though the outcome cannot be predicted with certainty.
What accounting changes will affect future reported results?
The company adopted SFAS No. 133 in fiscal 2001, resulting in a $2.2 million after-tax charge. It also adopted SFAS No. 142 effective July 1, 2001, which could exclude approximately $21 million of goodwill and intangible amortization in fiscal 2002. The EITF Issue No. 00-14 will reclassify some promotional revenue as sales and move merchandise costs to cost of sales, lowering gross margins by about 5.0% to 6.0% of sales while leaving operating income unchanged.

04—Continue

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