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13: R1 Cover Page HTML 81K
14: R2 Consolidated Statements of Earnings HTML 82K
15: R3 Consolidated Statements of Comprehensive Income HTML 55K
16: R4 Consolidated Balance Sheets HTML 112K
17: R5 Consolidated Balance Sheets (Parenthetical) HTML 37K
18: R6 Consolidated Statements of Cash Flows HTML 103K
19: R7 Summary of Significant Accounting Policies HTML 83K
20: R8 Goodwill and Other Intangible Assets HTML 84K
21: R9 Charges Associated With Restructuring and Other HTML 152K
Activities
22: R10 Derivative Financial Instruments HTML 124K
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27: R15 Stock Programs HTML 30K
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Companies Inc. Per Common Share
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30: R18 Statement of Cash Flows HTML 37K
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32: R20 Summary of Significant Accounting Policies HTML 105K
(Policies)
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(Tables)
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Activities (Tables)
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37: R25 Fair Value Measurements (Tables) HTML 90K
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Companies Inc. Per Common Share (Tables)
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44: R32 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 30K
Currency Translation and Transactions (Details)
45: R33 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 45K
Concentration of Credit Risk (Details)
46: R34 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 36K
Inventory and Promotional Merchandise (Details)
47: R35 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 65K
Property, Plant and Equipment (Details)
48: R36 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 51K
Income Taxes (Details)
49: R37 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Other HTML 44K
Accrued Liabilities (Details)
50: R38 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Debt HTML 30K
(Details)
51: R39 GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill HTML 60K
(Details)
52: R40 GOODWILL AND OTHER INTANGIBLE ASSETS - Other HTML 62K
Intangible Assets (Details)
53: R41 CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER HTML 48K
ACTIVITIES - Charges Associated With Restructuring
Activities (Details)
54: R42 CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER HTML 67K
ACTIVITIES - Approved Restructuring Activities by
Major Cost Type (Details)
55: R43 CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER HTML 72K
ACTIVITIES - Cumulative Restructuring Charges by
Major Cost Type (Details)
56: R44 CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER HTML 64K
ACTIVITIES - Accrued Restructuring Charges
(Details)
57: R45 CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER HTML 42K
ACTIVITIES - Narrative (Details)
58: R46 DERIVATIVE FINANCIAL INSTRUMENTS - Derivative HTML 54K
Instruments Included in the Consolidated Balance
Sheets (Details)
59: R47 DERIVATIVE FINANCIAL INSTRUMENTS - Gain (Loss) on HTML 79K
Derivative Financial Instruments (Details)
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Hedges, Fair Value Hedges, Credit Risk (Details)
61: R49 FAIR VALUE MEASUREMENTS - Hierarchy For Financial HTML 55K
Assets and Liabilities Measured at Fair Value on a
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Financial Instruments (Details)
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Contracts Maturity and Additional Purchase Price
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Credit Losses (Details)
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(Details)
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68: R56 PENSION AND POST-RETIREMENT BENEFIT PLANS - HTML 56K
Components of Net Periodic Benefit Cost (Details)
69: R57 PENSION AND POST-RETIREMENT BENEFIT PLANS - HTML 39K
Amounts Recognized in the Consolidated Balance
Sheets (Details)
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Diluted EPS Computations (Details)
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(Exact name of registrant as specified in its charter)
iDelaware
i11-2408943
(State
or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
i767 Fifth Avenue, iNew
York, iNew York
i10153
(Address of principal executive offices)
(Zip
Code)
i212-i572-4200
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered
pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iClass A Common Stock, $.01 par value
iEL
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
At October 26, 2020, i226,538,215 shares
of the registrant’s Class A Common Stock, $.01 par value, and i135,067,429 shares of the registrant’s Class B Common Stock, $.01 par value, were outstanding.
NOTE 1 – iSUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
i
Basis of Presentation
The accompanying consolidated financial statements include the accounts of The Estée Lauder Companies Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated.
The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim consolidated financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2020.
Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to current year presentation.
i
Management Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses reported in those financial statements. Descriptions of the Company’s significant accounting policies are discussed in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020. Management evaluates the related estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment,
including those related to the impacts of the COVID-19 pandemic, will be reflected in the consolidated financial statements in future periods.
i
Currency Translation and Transactions
All assets and liabilities of foreign subsidiaries and affiliates are translated at period-end rates of exchange, while revenue and expenses are translated at monthly average rates of
exchange for the period. Unrealized translation gains (losses), net of tax, reported as translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc. were $i91 million and $(i72)
million, net of tax, during the three months ended September 30, 2020 and 2019, respectively. For the Company’s subsidiaries operating in highly inflationary economies, the U.S. dollar is the functional currency. Remeasurement adjustments in financial statements in a highly inflationary economy and other transactional gains and losses are reflected in earnings. These subsidiaries are not material to the Company’s consolidated financial statements or liquidity.
The
Company enters into foreign currency forward contracts and may enter into option contracts to hedge foreign currency transactions for periods consistent with its identified exposures. The Company also enters into foreign currency forward contracts to hedge a portion of its net investment in certain foreign operations, which are designated as net investment hedges. See Note 4 – Derivative Financial Instruments for further discussion.The
Company categorizes these instruments as entered into for purposes other than trading.
The accompanying consolidated statements of earnings include net exchange losses on foreign currency transactions of $i1 million and $i3
million during the three months ended September 30, 2020 and 2019, respectively.
The Company is a worldwide manufacturer, marketer and distributor of skin care, makeup, fragrance and hair care products. The Company’s sales subject to credit risk are made primarily to department stores, perfumeries, specialty multi-brand retailers and retailers in its travel retail business. The Company grants credit to qualified customers. As a result of the COVID-19 pandemic, the Company has enhanced its assessment of its customers' abilities to pay with a greater focus on factors affecting their liquidity and less on historical payment
performance. While the Company does not believe it is exposed significantly to any undue concentration of credit risk at this time, it continues to monitor the extent of the impact of the COVID-19 pandemic on its customers' abilities, individually and collectively, to make timely payments.
The Company’s largest customer during the quarter sells products primarily in China travel retail and accounted for $i554 million,
or i16%, and $i169 million, or i4%,
of the Company's consolidated net sales for the three months ended September 30, 2020 and 2019, respectively. This customer accounted for $i289 million, or i15%,
and $i297 million, or i24%, of the Company's accounts receivable at September
30, 2020 and June 30, 2020, respectively.
Another major customer of the Company during the quarter sells products primarily within the United States and accounted for $i215 million, or i11%,
and $i87 million, or i7%, of the Company’s accounts receivable at September
30, 2020 and June 30, 2020, respectively. This customer accounted for $i181 million, or i5%,
and $i279 million, or i7%, of the Company’s
consolidated net sales for the three months ended September 30, 2020 and 2019, respectively.
i
Inventory and Promotional Merchandise
i
Inventory
and promotional merchandise consists of the following:
(In millions)
September 30 2020
June 30 2020
Raw materials
$
i553
$
i542
Work
in process
i266
i305
Finished
goods
i1,126
i995
Promotional
merchandise
i259
i220
$
i2,204
$
i2,062
//i
Property,
Plant and Equipment
i
Property, plant and equipment consists of the following:
(In millions)
September 30 2020
June
30 2020
Assets (Useful Life)
Land
$
i34
$
i33
Buildings
and improvements (i10 to i40 years)
i419
i400
Machinery
and equipment (i3 to i10 years)
i913
i865
Computer
hardware and software (i4 to i10 years)
i1,374
i1,335
Furniture
and fixtures (i5 to i10 years)
i122
i120
Leasehold
improvements
i2,426
i2,381
i5,288
i5,134
Less
accumulated depreciation and amortization
(i3,211)
(i3,079)
$
i2,077
$
i2,055
/
The
cost of assets related to projects in progress of $i523 million and $i501 million as of September 30, 2020 and June 30,
2020, respectively, is included in their respective asset categories above. Depreciation and amortization of property, plant and equipment was $ii125/
million during the three months ended September 30, 2020 and 2019. Depreciation and amortization related to the Company’s manufacturing process is included in Cost of sales, and all other depreciation and amortization is included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings.
The effective rate for income taxes was i21.8%
and i21.3% for the three months ended September 30, 2020 and 2019, respectively. The increase in the effective tax rate of i50
basis points was primarily attributable to a higher effective tax rate on the Company's foreign operations.
The fiscal 2021 first quarter effective tax rate included a i130 basis point reduction to the current period effective tax rate due to the impact of the U.S. government issuance of final global intangible low-taxed income (“GILTI”) tax regulations in July 2020 under the Tax Cuts and
Jobs Act that provide for a high-tax exception to the current year GILTI tax. These newly-issued regulations are retroactive to the original enactment of the GILTI tax provision, which includes the Company's 2019 and 2020 fiscal years. The Company is currently evaluating the impact and ability to apply the GILTI regulations relating to fiscal 2019 and fiscal 2020.
The fiscal 2021 first quarter effective tax rate also included a i120
basis point increase to the current period effective tax rate due to the pending December 31, 2020 expiration of a tax law in China that expanded the corporate income tax deduction allowance for advertising and promotion expenses (“expiring China tax law”). The favorable impact from a possible re-enactment of the expiring China tax law would be recognized in the provision for income taxes in the period that includes the date of such re-enactment.
As of September 30, 2020 and June 30, 2020, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $i73
million and $i70 million, respectively. The total amount of unrecognized tax benefits at September 30, 2020 that, if recognized, would affect the effective tax rate was $i58
million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three months ended September 30, 2020 in the accompanying consolidated statements of earnings was $i1 million. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at September 30, 2020 and June 30, 2020,
was $i14 million and $i13
million, respectively. On the basis of the information available as of September 30, 2020, it is reasonably possible that the total amount of unrecognized tax benefits could decrease in a range of $i5 million to $i10 million
within the next twelve months as a result of projected resolutions of global tax examinations and controversies and a potential lapse of the applicable statutes of limitations.
/i
Other Accrued Liabilities
i
Other
accrued liabilities consist of the following:
(In millions)
September 30 2020
June 30 2020
Advertising, merchandising and sampling
$
i316
$
i256
Employee
compensation
i405
i424
Deferred
revenue
i353
i222
Payroll
and other taxes
i277
i250
Accrued
income taxes
i269
i208
Sales
return accrual
i253
i212
Other
i821
i833
$
i2,694
$
i2,405
//
Debt
In
August 2020, the Company repaid the remaining $i750 million borrowed under its $i1,500 million
revolving credit facility that was outstanding as of June 30, 2020.
Measurement of Credit Losses on Financial Instruments (ASC Topic 326 – Financial Instruments – Credit Losses) (“ASC 326”)
In June 2016, the FASB issued authoritative guidance that requires companies to utilize an impairment model for most financial assets measured at amortized cost and certain other financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses. In addition, this guidance changes the recognition method for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk, and requires additional disclosures. In general, modified retrospective adoption will be required for all outstanding instruments that fall under this guidance.
In
November 2019, the FASB issued authoritative guidance (ASU 2019-11 – Codification Improvements to Topic 326, Financial Instruments – Credit Losses) that amends ASC Topic 326 to clarify, improve and amend certain aspects of this guidance, such as disclosures related to accrued interest receivables and the estimation of credit losses associated with financial assets secured by collateral.
In February 2020, the FASB issued authoritative guidance (ASU 2020-02 – Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842)) that amends and clarifies Topic 326 and Topic 842. For Topic 326, the codification was updated to include the Securities and Exchange Commission staff interpretations associated with registrants engaged in lending activities.
Effective for the
Company – Fiscal 2021 first quarter.
Impact on consolidated financial statements – On July 1, 2020, the Company adopted ASC 326. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. See Note 6 – Revenue Recognition for further discussion.
Goodwill and Other – Internal-Use Software (ASU 2018-15 – Intangibles – Goodwill and Other – Internal-Use
Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract)
In August 2018, the FASB issued authoritative guidance that permits companies to capitalize the costs incurred for setting up business systems that operate on cloud technology. The new guidance aligns the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance does not affect the accounting for the service element of a hosting arrangement that is a service contract.
Capitalized costs associated with a hosting arrangement that is a service contract must be amortized over the term of the hosting arrangement to the same line item in the income statement as the expense for fees for the hosting arrangement.
Effective for the Company– Fiscal 2021 first quarter, with early adoption permitted in any interim period. This guidance can be adopted either retrospectively, or prospectively to all implementation costs incurred after the date of adoption.
Impact on consolidated financial statements – On July 1, 2020, the
Company adopted this guidance prospectively to all implementation costs incurred after the date of adoption. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
Recently Issued Accounting Standards
Reference Rate Reform (ASC Topic 848) (Accounting Standards Update (“ASU”) 2020-04 - Facilitation of the Effects of Reference Rate Reform on Financial Reporting)
In March 2020, the FASB issued authoritative guidance to provide optional relief for companies preparing for the discontinuation of interest rates such as LIBOR, which is expected to be phased out at the end of calendar 2021, and applies to lease contracts,
hedging instruments, held-to-maturity debt securities and debt arrangements that have LIBOR as the benchmark rate.
Effective for the Company – This guidance can be applied for a limited time, as of the beginning of the interim period that includes March 12, 2020 or any date thereafter, through December 31, 2022.The guidance will no longer be available to apply after December 31, 2022.
Impact on consolidated financial statements – The Company is currently assessing the impact of applying this guidance on its existing derivative contracts, leases and other arrangements, as well as when to adopt this guidance.
Income Taxes (ASU 2019-12 – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes)
In December 2019, the FASB issued authoritative guidance that simplifies the accounting for income taxes by removing certain exceptions and making simplifications
in other areas.
Effective for the Company – Fiscal 2022 first quarter, with early adoption permitted in any interim period. If adopted early, the Company must adopt all the amendments in the same period. The amendments have differing adoption methods including retrospectively, prospectively and/or modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption, depending on the specific change.
Impact on consolidated financial statements – The Company is currently evaluating the impact of applying this
guidance and believes that it has transactions that may fall under the scope.
No other recently issued accounting pronouncements are expected to have a material impact on the Company’s consolidated financial statements.
NOTE 2 – iGOODWILL AND OTHER INTANGIBLE ASSETS
i
The
following table presents goodwill by product category and the related change in the carrying amount:
The aggregate amortization expense related to amortizable intangible assets was $i25 million and $i11
million for the three months ended September 30, 2020 and 2019, respectively. iThe estimated aggregate amortization expense for the remainder of fiscal 2021 and for each of the next four fiscal years is as follows:
Fiscal
(In
millions)
2021
2022
2023
2024
2025
Estimated aggregate amortization expense
$
i77
$
i102
$
i101
$
i100
$
i99
NOTE
3 – iCHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES
i
Charges associated with restructuring activities
for the three months ended September 30, 2020 were as follows:
Sales Returns (included
in Net Sales)
Cost of Sales
Operating Expenses
Total
(In millions)
Restructuring Charges
Other Charges
Leading Beauty Forward Program
$
i—
$
i3
$
(i8)
$
i2
$
(i3)
Post-COVID
Business Acceleration Program
i—
i—
i12
i—
i12
Total
$
i—
$
i3
$
i4
$
i2
$
i9
/
Charges
associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business.
Leading Beauty Forward Program
In May 2016, the Company announced a multi-year initiative (“Leading Beauty Forward Program” or “LBF Program”) to build on its strengths and better leverage its cost structure to free resources for investment to continue its growth momentum. The LBF Program is designed to enhance the
Company’s go-to-market capabilities, reinforce its leadership in global prestige beauty and continue creating sustainable value. As of June 30, 2019, the Company concluded the approvals of all major initiatives under the LBF Program related to the optimization of select corporate functions, supply chain activities, and corporate and regional market support structures, as well as the exit of underperforming businesses, and expects to substantially complete those initiatives through fiscal 2021.
LBF Program Approvals
i
The
LBF Program approved restructuring and other charges expected to be incurred were:
Employee-related
costs reflect adjustments to the accrual estimate for certain employees who either resigned or transferred to other existing positions within the Company.
i
Changes in accrued restructuring charges for the three months ended September 30, 2020 relating to the LBF Program were:
Accrued
restructuring charges at September 30, 2020 relating to the LBF Program are expected to result in cash expenditures funded from cash provided by operations of approximately $i56 million, $i20
million and $i5 million for the remainder of fiscal 2021 and for fiscal 2022 and 2023, respectively. The expected cash expenditures for fiscal 2024 are de minimis.
Additional information about the LBF Program is included in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020.
On August 20, 2020, the Company announced a itwo-year restructuring program, Post-COVID Business Acceleration Program (the “PCBA Program”), designed to resize the
Company's business against the dramatic shifts to its distribution landscape and consumer behaviors in the wake of the COVID-19 pandemic. The PCBA Program is designed to help improve efficiency and effectiveness by rebalancing resources to growth areas of prestige beauty. It is expected to further strengthen the Company by building upon the foundational capabilities in which the Company has invested.
The PCBA Program’s main areas of focus include accelerating the shift to online with the realignment of the Company’s distribution network reflecting freestanding store and certain department store closures, with a focus on North America and Europe,
the Middle East & Africa; the reduction in brick-and-mortar point of sale employees and related support staff; and the redesign of the Company’s regional branded marketing organizations, plus select opportunities in global brands and functions. This program is expected to position the Company to better execute its long-term strategy while strengthening its financial flexibility.
In connection with the PCBA Program, at this time the Company estimates a net reduction in the range of approximately i1,500
to i2,000 positions globally, which is about i3%
of its current workforce including temporary and part-time employees. This reduction takes into account the elimination of some positions, retraining and redeployment of certain employees and investment in new positions in key areas. The Company also estimates the closure of approximately i10% to i15%
of its freestanding stores globally, primarily in Europe, the Middle East & Africa and in North America.
The Company plans to approve specific initiatives under the PCBA Program through fiscal 2022 and expects to complete those initiatives through fiscal 2023. The Company expects that the PCBA Program will result in related restructuring and other charges totaling between $i400 million
and $i500 million, before taxes.
Included
in the above table, cumulative PCBA Program restructuring initiatives approved by the Company through September 30, 2020 by major cost type were:
Specific
actions taken since the PCBA Program inception include:
•Optimize Distribution Network – To help restore profitability to pre-COVID-19 pandemic levels and, as part of a broader initiative to be completed in phases, the Company has approved initiatives to close a number of underperforming freestanding stores and counters, mainly in the United Kingdom and certain affiliates in Europe, the Middle East & Africa. These anticipated closures reflect changing consumer behavior including higher demand for online and omnichannel capabilities. These activities will result in product returns, inventory write-offs, reduction of workforce, and termination of contracts.
•Optimize Digital Organization – The Company approved initiatives to enhance its go-to-market support structures and align more resources to support online and digital activities. These initiatives are primarily intended to shift certain areas of focus from traditional brick-and-mortar to social and digital strategies to provide enhanced consumer experience, as well as to support expanded omnichannel opportunities. These actions will result in a net reduction of the workforce, which includes position eliminations, the re-leveling of certain positions and an investment in new capabilities.
PCBA
Program Restructuring and Other Charges
Restructuring charges are comprised of the following:
Employee-Related Costs – Employee-related costs are primarily comprised of severance and other post-employment benefit costs, calculated based on salary levels, prior service and other statutory minimum benefits, if applicable.
Asset-Related Costs – Asset-related costs primarily consist of asset write-offs or accelerated depreciation related to long-lived assets (including operating lease right-of-use assets) that will be taken out of service prior to their existing useful life as a direct result of a restructuring initiative.
Contract
Terminations – Costs related to contract terminations include continuing payments to a third party after the Company has ceased benefiting from the rights conveyed in the contract, or a payment made to terminate a contract prior to its expiration.
Other Exit Costs – Other exit costs related to restructuring activities generally include costs to relocate facilities or employees, recruiting to fill positions as a result of relocation of operations, and employee outplacement for separated
employees.
Other charges associated with restructuring activities are comprised of the following:
Sales Returns and Cost of Sales – Product returns (offset by the related cost of sales) and inventory write-offs or write-downs as a direct result of an approved restructuring initiative to exit certain businesses or locations will be recorded as a component of Net sales and/or Cost of sales when estimable and reasonably assured.
Other Charges – The Company approved other charges relate to the design and implementation of approved initiatives, which are charged to Operating Expenses as incurred and primarily include the
following:
•Consulting and other professional services for organizational design of the future structures and processes as well as the implementation thereof,
•Temporary labor backfill,
•Costs to establish and maintain a Project Management Office (“PMO”) for the duration of the PCBA Program, including internal costs for employees dedicated solely to project management activities, and other PMO-related expenses incremental to the Company’s ongoing operations (e.g., rent and utilities), and
•Recruitment and training costs for new and reskilled employees to acquire and apply the capabilities needed to perform
responsibilities as a direct result of an approved restructuring initiative.
The Company records approved charges associated with restructuring and other activities once the relevant accounting criteria have been met. Total cumulative charges recorded associated with restructuring and other activities for the PCBA Program were:
Accrued
restructuring charges at September 30, 2020 relating to the PCBA Program are expected to result in cash expenditures funded from cash provided by operations of approximately $i9 million, $i2
million and $i1 million for the remainder of fiscal 2021 and for fiscal 2022 and 2023, respectively.
NOTE 4 – iDERIVATIVE
FINANCIAL INSTRUMENTS
The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The Company enters into foreign currency forward contracts, and may enter into option contracts, to reduce the effects of fluctuating foreign currency exchange rates. In addition, the Company enters into interest rate derivatives to manage the effects of interest rate movements on the
Company’s aggregate liability portfolio, including potential future debt issuances. The Company enters into the net investment hedges to offset the risk of changes in the U.S. dollar value of the Company’s investment in these foreign operations due to fluctuating foreign exchange rates. Time value is excluded from the effectiveness assessment and is recognized under a systematic and rational method over the life of the hedging instrument in Selling, general and administrative expenses. The net gain or loss on net investment hedges is recorded within translation adjustments, as a component of accumulated OCI (“AOCI”) on the Company’s consolidated balance sheets, until the sale or substantially complete
liquidation of the underlying assets of the Company’s investment. The Company also enters into foreign currency forward contracts, and may use option contracts, not designated as hedging instruments, to mitigate the change in fair value of specific assets and liabilities on the consolidated balance sheets. At September 30, 2020, the notional amount of derivatives not designated as hedging instruments was $i4,189 million.
The Company does not utilize derivative financial instruments for trading or speculative purposes. Costs associated with entering into derivative financial instruments have not been material to the Company’s consolidated financial results.
For each derivative contract entered into, where the Company looks to obtain hedge accounting treatment, the Company formally and contemporaneously documents all relationships between hedging instruments and hedged items, as well as its risk-management objective
and strategy for undertaking the hedge transaction, the nature of the risk being hedged, and how the hedging instruments’ effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. At inception, the Company evaluates the effectiveness of hedge relationships quantitatively, and has elected to perform, after initial evaluation, qualitative effectiveness assessments of certain hedge relationships to support an ongoing expectation of high effectiveness, if effectiveness testing is required. If based on the qualitative assessment, it is determined that a derivative has ceased to be a highly effective hedge, the
Company will perform a quantitative assessment to determine whether to discontinue hedge accounting with respect to that derivative prospectively.
(1)See Note
5 – Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined.
/i
The amounts of the gains and losses related to the
Company’s derivative financial instruments designated as hedging instruments that are included in the assessment of effectiveness are as follows:
Amount
of Gain or (Loss) Recognized in OCI on Derivatives
Location of Gain or (Loss) Reclassified from AOCI into Earnings
(1)The
amount reclassified into earnings as a result of the discontinuance of cash flow hedges because probable forecasted transactions will no longer occur by the end of the original time period was not material.
(2)During the three months ended September 30, 2020, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $i5
million.
(3)Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets.
(1)Changes
in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt.
i
Additional information regarding the cumulative amount of fair value hedging gain (loss) recognized in earnings for items designated and qualifying as hedged items in fair value hedges is as follows:
(In
millions)
Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included
Carrying Amount of the Hedged Liabilities
Cumulative Amount of Fair Value Hedging Gain/(Loss) Included in the Carrying Amount of the Hedged Liability
Additional information regarding the effects of fair value and cash flow hedging relationships for derivatives designated and qualifying as hedging instruments is as follows:
Three
Months Ended September 30
2020
2019
(In millions)
Net Sales
Interest Expense
Net Sales
Interest Expense
Total amounts of income and expense line items presented in the consolidated statements of earnings in which the effects of fair value and cash flow hedges are recorded
$
i3,562
$
i45
$
i3,895
$
i32
The
effects of fair value and cash flow hedging relationships:
Gain (loss) on fair value hedge relationships – interest rate contracts:
Hedged item
Not applicable
i2
Not
applicable
(i2)
Derivatives designated as hedging instruments
Not applicable
(i2)
Not
applicable
i2
Gain (loss) on cash flow hedge relationships – interest rate contracts:
Amount
of loss reclassified from AOCI into earnings
Not applicable
(i1)
Not applicable
i—
Gain
(loss) on cash flow hedge relationships – foreign currency forward contracts:
Amount of gain reclassified from AOCI into earnings
i1
Not
applicable
i13
Not applicable
/
i
The
amount of gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments are presented as follows:
Amount
of Gain or (Loss) Recognized in Earnings on Derivatives
Location of Gain or (Loss) Recognized in Earnings on Derivatives
Three Months Ended September 30
(In millions)
2020
2019
Derivatives
Not Designated as Hedging Instruments:
The Company enters into foreign currency forward contracts, and may enter into foreign currency option contracts, to hedge anticipated transactions and receivables and payables denominated in foreign currencies, for periods consistent with the Company’s identified exposures. The purpose of the hedging activities is to minimize the
effect of foreign exchange rate movements on the cash flows that the Company receives from foreign subsidiaries. The foreign currency forward contracts entered into to hedge anticipated transactions have been designated as cash flow hedges and have varying maturities through the end of March 2022. Hedge effectiveness of the foreign currency forward contracts is based on the forward method, which includes time value in the effectiveness assessment. At September 30, 2020, the Company
had cash flow hedges outstanding with a notional amount totaling $i981 million.
The Company may enter into interest rate forward contracts to hedge anticipated issuance of debt for periods consistent with the Company’s identified exposures. The purpose of the
hedging activities is to minimize the effect of interest rate movements on the cost of debt issuance.
For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued, and gains and losses in AOCI are reclassified to sales when the underlying forecasted transaction occurs. If it is probable that the forecasted transaction will no longer occur, then any gains or losses in AOCI are reclassified to current-period sales. As of September 30, 2020, the Company’s foreign currency cash flow hedges were highly effective.
The estimated net loss on the
Company’s derivative instruments designated as cash flow hedges as of September 30, 2020 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $i6 million. The accumulated net gain (loss) on derivative instruments in AOCI was $(i11)
million and $i20 million as of September 30, 2020 and June 30, 2020, respectively.
Fair Value Hedges
The Company enters into interest rate derivative contracts
to manage the exposure to interest rate fluctuations on its funded indebtedness. The Company has interest rate swap agreements, with notional amounts totaling $i450 million and $i250
million to effectively convert the fixed rate interest on its 2021 Senior Notes and 2022 Senior Notes, respectively, to variable interest rates based on three-month LIBOR plus a margin. These interest rate swap agreements are designated as fair value hedges of the related long-term debt, and the changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt.
Net Investment Hedges
The Company enters into foreign currency forward contracts, designated as net investment hedges, to hedge a portion of its net investment in certain foreign operations. The net gain or loss on these contracts
is recorded within translation adjustments, as a component of AOCI on the Company’s consolidated balance sheets. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the Company’s net investment in these foreign operations. The net investment hedge contracts have varying maturities through the end of October 2020. Hedge effectiveness of the net investment hedge contracts is based on the spot method. At September 30, 2020, the Company
had net investment hedges outstanding with a notional amount totaling $i1,858 million.
Credit Risk
As a matter of policy, the Company enters into derivative contracts only with counterparties that have a long-term credit rating of at least A- or higher by at least itwo nationally
recognized rating agencies. The counterparties to these contracts are major financial institutions. Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the gross fair value of contracts in asset positions, which totaled $i35 million at September 30, 2020. To manage this
risk, the Company has strict counterparty credit guidelines that are continually monitored. Accordingly, management believes risk of loss under these hedging contracts is remote.
The Company records certain of its financial assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. The accounting for fair value measurements must be applied to nonfinancial assets and
nonfinancial liabilities that require initial measurement or remeasurement at fair value, which principally consist of assets and liabilities acquired through business combinations and goodwill, indefinite-lived intangible assets and long-lived assets for the purposes of calculating potential impairment. The Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:
Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets;
quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
i
The
following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2020:
The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2020:
The
estimated fair values of the Company’s financial instruments are as follows:
September 30 2020
June
30 2020
(In millions)
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Nonderivatives
Cash and cash equivalents
$
i4,267
$
i4,267
$
i5,022
$
i5,022
Current
and long-term debt
i5,386
i6,180
i6,136
i6,902
Contingent
consideration
i4
i4
i4
i4
Derivatives
Foreign
currency forward contracts – asset (liability), net
(i4)
(i4)
i7
i7
Interest
rate-related derivatives – asset (liability), net
i10
i10
i12
i12
/
The
following methods and assumptions were used to estimate the fair value of the Company’s financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents – Cash and all highly-liquid securities with original maturities of three months or less are classified as cash and cash equivalents, primarily consisting of cash deposits in interest bearing accounts, time deposits and money market funds (classified within Level 1 of the valuation hierarchy). Cash deposits in interest bearing accounts and time deposits are carried at cost, which approximates fair value due to the short maturity of cash equivalent instruments.
Foreign currency forward contracts– The
fair values of the Company’s foreign currency forward contracts were determined using an industry-standard valuation model, which is based on an income approach. The significant observable inputs to the model, such as swap yield curves and currency spot and forward rates, were obtained from an independent pricing service. To determine the fair value of contracts under the model, the difference between the contract price and the current forward rate was discounted using LIBOR for contracts with maturities up to i12
months, and swap yield curves for contracts with maturities greater than i12 months.
Interest rate contracts – The fair values of the Company’s interest rate contracts were determined
using an industry-standard valuation model, which is based on the income approach. The significant observable inputs to the model, such as treasury yield curves, swap yield curves and LIBOR forward rates, were obtained from independent pricing services.
Current and long-term debt –The fair value of the Company’s debt was
estimated based on the current rates offered to the Company for debt with the same remaining maturities. To a lesser extent, debt also includes finance lease obligations for which the carrying amount approximates the fair value. The Company’s debt is classified within Level 2 of the valuation hierarchy.
Contingent consideration – Contingent consideration obligations consist of potential obligations related to the Company’s acquisitions in previous years. The amounts to be paid under these obligations are contingent upon the achievement of stipulated financial targets by the business subsequent to acquisition. At September 30,
2020, the fair values of the contingent consideration related to certain acquisition earn-outs were based on the Company’s estimate of the applicable financial targets as per the terms of the agreements. Significant changes in the projected future operating results would result in a significantly higher or lower fair value measurement. As these are unobservable inputs, the Company’s contingent consideration is classified within Level 3 of the valuation hierarchy. There have been no changes in the fair value of contingent consideration obligations for the three months ended September 30, 2020.
NOTE
6 – iREVENUE RECOGNITION
The Company’s revenue recognition accounting policies are described in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020.
Accounts Receivable
Accounts
receivable, net is stated net of the allowance for doubtful accounts and customer deductions totaling $i76 million and $i63
million as of September 30, 2020 and June 30, 2020, respectively. During the first quarter of fiscal 2021, the Company adopted ASC 326 using the modified retrospective transition approach and, accordingly, the prior comparative period was not restated. Under this new standard, the Company is required to measure credit losses based on the Company’s estimate of expected losses rather than incurred losses, which generally results in earlier recognition of allowances for credit losses. In accordance with ASC 326, the Company evaluated
certain criteria, including aging and historical write-offs, current economic condition of specific customers and future economic conditions of countries utilizing a consumption index to determine the appropriate allowance for credit losses. The Company writes-off receivables once it is determined that the receivables are no longer collectible and as allowed by local laws. Payment terms are short-term in nature and are generally less than one year.
i
Changes
in the allowance for credit losses are as follows:
As
a result of the adoption of ASC 326, the Company recorded a cumulative adjustment of approximately $i3 million, net of tax, as a reduction to its fiscal 2021 opening balance of retained earnings relating to its trade receivables.
The remaining balance of the allowance for doubtful accounts of $i30 million,
as of September 30, 2020, relates to non-credit losses, which are primarily due to customer deductions.
Transaction Price Allocated to the Remaining Performance Obligations
At September 30, 2020,
the combined estimated revenue expected to be recognized in the next itwelve months related to performance obligations for customer loyalty programs, gift with purchase promotions, purchase with purchase promotions and gift card liabilities that are unsatisfied (or partially unsatisfied) is $i353
million, and the remaining balance will be recognized beyond the next twelve months.
NOTE 7 – iPENSION AND POST-RETIREMENT BENEFIT PLANS
The Company maintains pension plans covering substantially all
of its full-time employees for its U.S. operations and a majority of its international operations. The Company also maintains post-retirement benefit plans that provide certain medical and dental benefits to eligible employees. Descriptions of these plans are included in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020.
i
The
components of net periodic benefit cost for the three months ended September 30, 2020 and 2019 consisted of the following:
Pension
Plans
Other than Pension Plans
U.S.
International
Post-retirement
(In millions)
2020
2019
2020
2019
2020
2019
Service
cost
$
i11
$
i10
$
i9
$
i9
$
i—
$
i1
Interest
cost
i8
i8
i2
i3
i1
i2
Expected
return on plan assets
(i13)
(i13)
(i3)
(i3)
i—
(i1)
Amortization
of:
Actuarial loss
i5
i4
i1
i1
i—
i—
Special
termination benefits
i—
i—
i2
i—
i—
i—
Net
periodic benefit cost
$
i11
$
i9
$
i11
$
i10
$
i1
$
i2
/
During
the three months ended September 30, 2020, the Company made contributions to its international pension plans totaling $i2 million.
i
The
amounts recognized in the consolidated balance sheets related to the Company’s pension and post-retirement benefit plans consist of the following:
The
Company is involved, from time to time, in litigation and other legal proceedings incidental to its business, including employment, intellectual property, real estate, environmental, regulatory, advertising, trade relations, tax, privacy, and product liability matters (including asbestos-related claims). Management believes that the outcome of current litigation and legal proceedings will not have a material adverse effect upon the Company’s business, results of operations, financial condition or cash flows. However, management’s assessment of the Company’s current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against the
Company not presently known to the Company or determinations by judges, juries or other finders of fact which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or proceedings. Reasonably possible losses in addition to the amounts accrued for such litigation and legal proceedings are not material to the Company’s consolidated financial statements.
NOTE 9 – iSTOCK
PROGRAMS
Total net stock-based compensation expense is attributable to the granting of, and the remaining requisite service periods of stock options, restricted stock units (“RSUs”), performance share units (“PSUs”), long-term PSUs, and share units. Compensation expense attributable to net stock-based compensation was $i64 million and $i56
million for the three months ended September 30, 2020 and 2019, respectively.
Stock Options
During the three months ended September 30, 2020, the Company granted stock options in respect of approximately i1.5
million shares of Class A Common Stock with an exercise price per share of $i218.06 and a weighted-average grant date fair value per share of $i54.49.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The aggregate intrinsic value of stock options exercised during the three months ended September 30, 2020 was $i122 million.
Restricted Stock Units
The
Company granted RSUs in respect of approximately i0.9 million shares of Class A Common Stock during the three months ended September 30, 2020 with a weighted-average grant date fair value per share of $i218.06 that,
at the time of grant, are scheduled to vest at iii0.3//
million shares per year, in fiscal 2022, fiscal 2023 and fiscal 2024. Vesting of RSUs is generally subject to the continued employment or the retirement of the grantees. The RSUs are accompanied by dividend equivalent rights, payable upon settlement of the RSUs either in cash or shares (based on the terms of the particular award) and, as such, were valued at the closing market price of the Company’s Class A Common Stock on the date of grant.
Performance Share Units
During the three months ended September 30, 2020, the Company granted PSUs with a target payout of approximately i0.1
million shares of Class A Common Stock with a grant date fair value per share of $i218.06, which will be settled in stock subject to the achievement of the Company’s net sales and diluted net earnings per common share for the three fiscal years ending
June 30, 2023, all subject to continued employment or the retirement of the grantees. For PSUs granted, no settlement will occur for results below the applicable minimum threshold. PSUs are accompanied by dividend equivalent rights that will be payable in cash upon settlement of the PSUs and, as such, were valued at the closing market value of the Company’s Class A Common Stock on the date of grant.
In September 2020, approximately i0.2
million shares of the Company’s Class A Common Stock were issued, and related accrued dividends were paid, relative to the target goals set at the time of the issuance, in settlement of i0.5 million PSUs which vested as of June 30, 2020.
NOTE 10 – iNET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. PER COMMON SHARE
Net earnings attributable to The Estée Lauder Companies Inc. per common share (“basic EPS”) is computed by dividing net earnings attributable to The Estée Lauder Companies Inc. by the weighted-average number of common shares
outstanding and shares underlying PSUs and RSUs where the vesting conditions have been met. Net earnings attributable to The Estée Lauder Companies Inc. per common share assuming dilution (“diluted EPS”) is computed by reflecting potential dilution from stock-based awards.
i
A reconciliation between the numerator and denominator of the basic and diluted EPS computations is as follows:
Three
Months Ended September 30
(In millions, except per share data)
2020
2019
Numerator:
Net earnings attributable to The Estée Lauder Companies Inc.
$
i523
$
i595
Denominator:
Weighted-average
common shares outstanding – Basic
i362.1
i361.4
Effect
of dilutive stock options
i3.8
i4.9
Effect
of PSUs
i0.2
i0.3
Effect
of RSUs
i1.1
i2.0
Weighted-average
common shares outstanding – Diluted
i367.2
i368.6
Net
earnings attributable to The Estée Lauder Companies Inc. per common share:
Basic
$
i1.44
$
i1.65
Diluted
$
i1.42
$
i1.61
/
As
of September 30, 2020 and 2019, the number of shares of Class A Common Stock underlying options that were excluded in the computation of diluted EPS because their inclusion would be anti-dilutive was ii1.3/ million
shares. As of September 30, 2020, the number of shares of Class A Common Stock underlying RSUs that were excluded in the computation of diluted EPS because their inclusion would be anti-dilutive was i0.2 million shares. As of September 30, 2019, there were ino
shares of Class A Common Stock underlying RSUs excluded in the computation of diluted EPS because their inclusion would be anti-dilutive. As of September 30, 2020 and 2019, i0.8 million and i1.1
million shares, respectively, of Class A Common Stock underlying PSUs have been excluded from the calculation of diluted EPS because the number of shares ultimately issued is contingent on the achievement of certain performance targets of the Company, as discussed in Note 9 – Stock Programs.
Total Stockholders’ Equity – The Estée Lauder Companies Inc.
Three
Months Ended September 30
(In millions)
2020
2019
Common stock, beginning of the period
$
i6
$
i6
Stock-based
compensation
—
—
Common stock, end of the period
i6
i6
Paid-in
capital, beginning of the period
i4,790
i4,403
Common
stock dividends
i1
i1
Stock-based
compensation
i122
i110
Paid-in
capital, end of the period
i4,913
i4,514
Retained
earnings, beginning of the period
i10,134
i9,984
Common
stock dividends
(i174)
(i157)
Net
earnings attributable to The Estée Lauder Companies Inc.
i523
i595
Cumulative
effect of adoption of new accounting standards
(i3)
(i29)
Retained
earnings, end of the period
i10,480
i10,393
Accumulated
other comprehensive loss, beginning of the period
(i665)
(i563)
Other
comprehensive income (loss)
i71
(i64)
Accumulated
other comprehensive loss, end of the period
(i594)
(i627)
Treasury
stock, beginning of the period
(i10,330)
(i9,444)
Acquisition
of treasury stock
i—
(i277)
Stock-based
compensation
(i23)
(i35)
Treasury
stock, end of the period
(i10,353)
(i9,756)
Total
stockholders’ equity – The Estée Lauder Companies Inc.
i4,452
i4,530
Noncontrolling
interests, beginning of the period
i27
i25
Net
earnings attributable to noncontrolling interests
i2
i3
Noncontrolling
interests, end of the period
i29
i28
Total
equity
$
i4,481
$
i4,558
Cash
dividends declared per common share
$
i.48
$
i.43
/
i
The
following is a summary of quarterly cash dividends declared per share on the Company’s Class A and Class B Common Stock during the three months ended September 30, 2020:
On October 30, 2020, a dividend was declared in the amount of $ii.53/
per share on the Company’s Class A and Class B Common Stock. The dividend is payable in cash on December 15, 2020 to stockholders of record at the close of business on November 30, 2020.
Common Stock
Beginning in early February 2020, the Company temporarily suspended its repurchase of shares of the Company's Class A Common Stock. The Company may resume repurchases in the future.
During
the three months ended September 30, 2020, approximately i0.2 million shares of the Company’s Class B Common Stock were converted into the same amount of shares of the Company’s Class A Common Stock.
Accumulated Other Comprehensive Income
i
The
following table represents changes in AOCI, net of tax, by component for the three months ended September 30, 2020:
The
following table represents the effects of reclassification adjustments from AOCI into net earnings for the three months ended September 30, 2020 and 2019:
Amount
Reclassified from AOCI
Affected Line Item in Consolidated Statements of Earnings
Reportable operating segments include components of an enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision maker (the “Chief Executive”) in deciding how to allocate resources and in assessing performance. Although the Company operates in ione business segment, beauty products, management also evaluates performance on a product category basis. Product category performance is measured based upon net sales before returns associated with restructuring and other activities, and earnings before income taxes, other components
of net periodic benefit cost, interest expense, interest income and investment income, net, other income, net, and charges associated with restructuring and other activities. Returns and charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business.
The accounting policies for the Company’s reportable segments are substantially the same as those for the consolidated financial statements, as described in the notes to consolidated financial statements in the
Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020. The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; thus, no additional information is produced for the Chief Executive or included herein. There has been no significant variance in the total or long-lived asset values associated with the Company’s segment data since June 30, 2020.
Operating
income (loss) before charges associated with restructuring and other activities:
Skin Care
$
i721
$
i632
Makeup
(i71)
i104
Fragrance
i60
i66
Hair
Care
i3
i—
Other
i1
i2
i714
i804
Reconciliation:
Charges
associated with restructuring and other activities
(i9)
(i25)
Interest
expense
(i45)
(i32)
Interest
income and investment income, net
i14
i14
Other
components of net periodic benefit cost
(i3)
(i1)
Earnings
before income taxes
$
i671
$
i760
GEOGRAPHIC
DATA(1)
Net sales:
The Americas
$
i873
$
i1,160
Europe,
the Middle East & Africa
i1,540
i1,677
Asia/Pacific
i1,149
i1,058
Net
sales
$
i3,562
$
i3,895
Operating
income (loss):
The Americas
$
i65
$
i175
Europe,
the Middle East & Africa
i411
i377
Asia/Pacific
i238
i252
i714
i804
Charges
associated with restructuring and other activities
(i9)
(i25)
Operating
income
$
i705
$
i779
(1)
The net sales from the Company’s travel retail business are included in the Europe, the Middle East & Africa region, with the exception of the net sales of Dr. Jart+ in the travel retail channel that are reflected in Korea in the Asia/Pacific region. Operating income attributable to the travel retail sales included in Europe, the Middle East & Africa is included in that region and in The Americas.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 approximately 150 countries and territories. The following table is a comparative summary of operating results for the three months ended September 30, 2020 and 2019, and reflects the basis of presentation described in Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies for all periods presented.
Products and services that do not meet our definition of skin care, makeup, fragrance and hair care have been included in the “other” category.
Three Months Ended September 30
(In millions)
2020
2019
NET
SALES
By Product Category:
Skin Care
$
2,035
$
1,842
Makeup
978
1,443
Fragrance
406
462
Hair
Care
136
136
Other
7
12
Net
sales
$
3,562
$
3,895
By Region(1):
The
Americas
$
873
$
1,160
Europe, the Middle East & Africa
1,540
1,677
Asia/Pacific
1,149
1,058
Net
sales
$
3,562
$
3,895
OPERATING INCOME (LOSS)
By
Product Category:
Skin Care
$
721
$
632
Makeup
(71)
104
Fragrance
60
66
Hair
Care
3
—
Other
1
2
714
804
Charges
associated with restructuring and other activities
(9)
(25)
Operating income
$
705
$
779
By
Region(1):
The Americas
$
65
$
175
Europe, the Middle East & Africa
411
377
Asia/Pacific
238
252
714
804
Charges
associated with restructuring and other activities
(9)
(25)
Operating income
$
705
$
779
(1)
The net sales from our travel retail business are included in the Europe, the Middle East & Africa region, with the exception of the net sales of Dr. Jart+ in the travel retail channel that are reflected in Korea in the Asia/Pacific region. Operating income attributable to the travel retail sales included in Europe, the Middle East & Africa is included in that region and in The Americas.
The following table presents certain consolidated earnings data as a percentage of net sales:
Three
Months Ended September 30
2020
2019
Net sales
100.0
%
100.0
%
Cost of sales
23.2
23.3
Gross
profit
76.8
76.7
Operating expenses:
Selling,
general and administrative
56.9
56.1
Restructuring and other charges
0.2
0.6
Total
operating expenses
57.0
56.7
Operating income
19.8
20.0
Interest
expense
1.3
0.8
Interest income and investment income, net
0.4
0.3
Other components of net periodic benefit cost
0.1
—
Earnings
before income taxes
18.8
19.5
Provision for income taxes
(4.1)
(4.1)
Net
earnings
14.7
15.4
Net earnings attributable to noncontrolling interests
(0.1)
(0.1)
Net
earnings attributable to The Estée Lauder Companies Inc.
14.7
%
15.3
%
Not adjusted for differences caused by rounding
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 or our objectives. 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.
Non-GAAP Financial Measures
We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period helps investors and others compare operating performance between periods. While we consider the non-GAAP measures useful in analyzing our results, they are not
intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. See Reconciliations of Non-GAAP Financial Measures beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
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, operating results and diluted net earnings per common share 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 and adjusting for the period-over-period impact of foreign currency cash flow hedging activities.
The
COVID-19 pandemic continues to cause significant disruption to our operating environment, temporarily impacting our retail footprint and consumer preferences. During the three months ended September 30, 2020, countries around the world continued to be challenged by the pandemic with different levels of recovery from temporary business closures and other restrictions.
Retail impact
Many brick-and-mortar retail stores globally that sell our products, whether operated by us or our customers, were closed for some period of time during the fiscal 2021 first quarter, and consumer traffic declined significantly.
•In The Americas, approximately 20% of the stores were closed at the beginning of July 2020, and by the end of September 2020,
nearly all retail stores had re-opened.
•In Europe, the Middle East & Africa, approximately 15% of stores were closed at the beginning of July 2020, and by the end of September 2020, nearly all retail stores had re-opened.
•In Asia/Pacific, nearly all retail stores were open during the entire first quarter of fiscal 2021.
•In addition, international travel has remained largely curtailed globally due to both government restrictions and consumer health concerns, which continues to adversely impact consumer traffic in most travel retail locations.
Somewhat offsetting the significant declines in brick-and-mortar channels, net sales growth of our products online (through our own websites,
third-party platforms and websites of our retailers) has remained strong in every region during the first quarter of fiscal 2021.
The resurgence of COVID-19 cases in various parts of the world, including the United Kingdom, Ireland and other countries in Europe, has caused the re-implementation of government restrictions to prevent further spread of the virus. These restrictions include the temporary closure of businesses deemed “non-essential”, travel bans and restrictions, social distancing and quarantines. We will continue to monitor the impacts of the COVID-19 pandemic and adjust our action plans accordingly as the situation progresses.
Consumer Preferences
The
COVID-19 pandemic related closures of offices, retail stores and other businesses and the significant decline in social gatherings have also influenced consumer preferences and practices. Demand for skin care and hair care products has been more resilient than the demand for makeup and fragrance products.
Manufacturing and Distribution
By the end of the fiscal 2021 first quarter, all of our manufacturing and distribution facilities were operating at sufficient levels.
Cost Controls
In response to the ongoing impacts from the COVID-19 pandemic, we continued to implement cost control actions to effectively manage the changing business environment. Areas where we took actions included advertising and promotion activities,
travel, meetings, consulting, and certain employee costs, including implementing furloughs and similar unpaid temporary leaves of absence for many point of sale employees, temporary salary reductions for senior executives and other management employees, and a temporary elimination of cash retainers for the Board of Directors.
We are a leader in prestige beauty, which combines the repeat purchase and relative affordability of consumer goods with the
high quality products and services of luxury goods. Within prestige beauty, we are well diversified by brand, product category, product sub-category, geography, channel, consumer segment and price point. This diversity allows us to leverage consumer analytics and insights with agility by deploying our brands to fast growing and profitable opportunities. These analytics and insights, combined with our creativity, inform our innovation to provide a broad, locally-relevant and inclusive range of prestige products allowing us to compete effectively for a greater share of a consumer's beauty routine. Elements of our strategy are described in the Overview on pages 28-31 of our Annual Report on Form 10-K for the year ended June 30, 2020, as well as below.
During the first quarter of fiscal 2021, net sales declined 9%,
reflecting the impacts of the COVID-19 pandemic, including retail store closures and reduced consumer foot traffic in brick-and mortar retail. Declines in brick-and-mortar retail were partially offset by strong growth online and the incremental net sales from our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter.
•Our skin care net sales benefited from the launch of the new Estée Lauder Advanced Night Repair Synchronized Multi-Recovery Complex and the launch of the new The Concentrate from La Mer. Both new products support high-loyalty hero franchises. Skin care net sales grew internationally, reflecting the renewed consumer focus on self-care during the COVID-19 pandemic.
•The COVID-19 pandemic limited social and business activities and consumers wore less makeup. Demand for lipstick
and foundation were most acutely impacted, contributing to lower makeup net sales from M·A·C, Estée Lauder, Clinique and Bobbi Brown. During the first quarter of fiscal 2021, our brands generated interest in makeup through virtual marketing efforts such as classes, virtual try on technology and greater emphasis on social media platforms, as well as a focus on subcategories that continue to resonate with consumers.
•Our fragrance net sales also declined, as consumers continued to gravitate to bath, body and home fragrances. KILIAN PARIS and Frédéric Malle launched in mainland China, aiding their growth in the first quarter of fiscal 2021. Le Labo grew double-digits globally, primarily on the strength of its online efforts. Most other brands reported declines in fragrance net sales.
•Our hair care net sales were flat, reflecting growth
from Aveda, partially offset by declines at Bumble and bumble. The COVID-19 pandemic related salon closures and limited capacity re-openings were offset by strong double-digit online growth at Aveda as well as its launch of Botanical Repair in August 2020.
We continue to strengthen our presence in large, image building core markets, while broadening our presence in emerging markets. Our net sales growth by geographic region in the first quarter of fiscal 2021 reflects, in part, the cadence of post-COVID-19 pandemic re-openings around the world.
•Net sales growth declined the most in The Americas, where COVID-19 cases continue to rise across much of the region and strong online net sales were not enough to offset the decline of brick-and-mortar distribution.
•The
Europe, the Middle East & Africa region net sales declined overall, while robust online net sales growth continued.
•The Asia/Pacific region grew, reflecting good momentum in mainland China, Korea and several smaller markets.
Outlook
While we continue to face strong competition and economic challenges globally, the COVID-19 pandemic has caused a more significant disruption to our business and the retail industry generally. We have seen, and believe there may be more impairments, restructurings and bankruptcies in the retail industry, including among our customers; destocking and tighter working capital management by retailers; challenges for suppliers; and an acceleration in the shifts in consumer preferences as to where and how they shop, as well as changes in their preferences
for certain products. The severe decline in international travel is also affecting our travel retail business, which had been historically one of our most profitable channels. In addition to impacting net sales and profitability, these and other challenges may impact our ability to collect receivables and our operating cash flows generally and may adversely impact the goodwill, other intangibles and long-lived assets associated with our acquired brands.
We continue to monitor the geopolitical tensions between the United States and China and the uncertainties caused by the evolving trade policy dispute, which could increase our cost of sales and negatively impact our overall net sales, or otherwise have a material adverse effect on our business. We also continue to monitor the potential implications of the ongoing economic and political uncertainties stemming from the United Kingdom’s exit and transition
from the European Union (i.e. “Brexit”) and have developed our risk mitigation strategies to address such uncertainties. These strategies include changes related to regulatory and legislative compliance, assessing alternatives to supply chain routing, revising customer arrangements and analyzing inventory levels. Additionally, we continue to monitor the effects of the global macroeconomic environment; social and political issues; regulatory matters, including the imposition of tariffs; geopolitical tensions; and global security issues.
The uncertainty
around the timing, speed and duration of the recovery from the adverse impacts of the COVID-19 pandemic will continue to affect our ability to grow sales profitably. We believe we can, to some extent, offset the impact of more ordinary challenges by continually developing and pursuing a diversified strategy with multiple engines of growth and by accelerating initiatives focused on areas of strength, discipline and agility, and by implementing our Post-COVID Business Acceleration Program. As the current situation progresses, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, there could be a further negative effect on consumer confidence, demand, spending and willingness or ability to travel and, as a result, on our business. We are continuing to monitor these and other risks that may affect our business.
Leading
Beauty Forward Program and Post-COVID Business Acceleration Program
Information about our restructuring initiatives, the Leading Beauty Forward Program and the Post-COVID Business Acceleration Program, are described in Notes to Consolidated Financial Statements, Note 3 – Charges Associated with Restructuring and Other Activities herein, as well as, in Notes to Consolidated Financial Statements, Note 8 – Charges Associated with Restructuring and Other Activities and in the Overview on page 30 of our Annual Report on Form 10-K for the year ended June 30, 2020.
NET
SALES
Three Months Ended September 30
($ in millions)
2020
2019
As
Reported:
Net sales
$
3,562
$
3,895
$ Change from prior-year period
(333)
%
Change from prior-year period
(9)
%
Non-GAAP Financial Measure(1):
%
Change from prior-year period in constant currency
(9)
%
(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported
net sales decreased, primarily reflecting lower net sales in all product categories, except skin care, and all geographic regions, except for Asia/Pacific, due to the continued challenges of the COVID-19 pandemic, including retail store closures and reduced consumer foot traffic in brick-and-mortar retail, the continued curtailment of international travel, and continued social distancing and quarantines. Despite the overall decrease, net sales grew in our skin care category and in our Asia/Pacific region. Direct-to-consumer online net sales continued to have strong growth, representing approximately 13% of fiscal 2021 first quarter net sales compared to approximately 8% in the prior-year period. Skin care net sales increased, primarily due to the success of hero product franchises and new product launches from Estée Lauder and La Mer. Net sales in Asia/Pacific increased, reflecting higher net sales in mainland China and Korea, as well as growth in all product categories,
except makeup. The incremental net sales from our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter benefited both the skin care category and Asia/Pacific.
The total net sales decrease was impacted by approximately $15 million of favorable foreign currency translation.
% Change from prior-year period in constant currency
10
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported skin care net sales increased, reflecting higher net sales from Estée Lauder and La Mer of approximately $226 million, combined, and strong growth internationally, as well as incremental net sales of $109 million attributable to our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter. Net sales from Estée Lauder increased, led by our travel retail business and mainland China, primarily due to the continued success of existing product franchises, such as Advanced Night Repair, Perfectionist and Micro Essence, and new product launches, such as the new Advanced Night Repair Synchronized Multi-Recovery Complex. The increase in net sales from La Mer was primarily driven by new product launches, such as the launch of
the new The Concentrate, successful holiday and promotional events in mainland China and targeted expanded consumer reach.
Partially offsetting these increases were lower net sales from Clinique and Origins of approximately $46 million, combined. Net sales from these brands declined, reflecting lower net sales in all geographic regions, with the exception of Clinique in Asia/Pacific, due to the challenging environment as a result of the COVID-19 pandemic. Despite the overall declines in net sales, direct-to-consumer online net sales from both of these brands increased, particularly at Clinique, which represented approximately 14% of Clinique's fiscal 2021 first quarter skin care net sales compared to approximately 7% in the prior-year period.
The skin care net sales increase was impacted by approximately $11 million of favorable foreign currency translation.
Makeup
Three
Months Ended September 30
($ in millions)
2020
2019
As Reported:
Net sales
$
978
$
1,443
$
Change from prior-year period
(465)
% Change from prior-year period
(32)
%
Non-GAAP
Financial Measure(1):
% Change from prior-year period in constant currency
(32)
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported makeup net sales decreased, primarily driven by lower net sales from M·A·C, Estée Lauder and Clinique of approximately $340 million, combined. Net sales decreased from these brands in all geographic regions, reflecting the challenging environment, especially in brick-and-mortar retail locations, and the shift in consumer preference
to skin care products due to the COVID-19 pandemic. The continued decline in prestige makeup and ongoing competitive activity in North America also contributed to the decline in net sales from these brands. Despite the challenging environment, our direct-to-consumer online net sales from Estée Lauder and Clinique grew double digits and grew single digits from M·A·C, which represented approximately 18%, combined, of their fiscal 2021 first quarter makeup net sales compared to approximately 11% in the prior-year period.
The makeup net sales decrease was impacted by approximately $2 million of favorable foreign currency translation.
Fragrance
Three
Months Ended September 30
($ in millions)
2020
2019
As Reported:
Net sales
$
406
$
462
$
Change from prior-year period
(56)
% Change from prior-year period
(12)
%
Non-GAAP
Financial Measure(1):
% Change from prior-year period in constant currency
(13)
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported fragrance net sales decreased, reflecting lower net sales primarily from Estée Lauder, Clinique and certain of our designer fragrances of approximately $40 million, combined. The decrease in net sales from Estée Lauder and Clinique reflected lower net sales in all geographic regions, driven by North America, and our travel retail business, due to the challenging environment as a result of the COVID-19 pandemic. The decline in net sales from Clinique also reflected a decrease in North America, primarily due to holiday shipments scheduled later in the fiscal year as compared to the prior-year period. Net sales declined from certain of our designer fragrances, primarily driven by lower net sales in our travel retail
business due to the curtailment of international travel and the shift in consumer preferences as a result of the COVID-19 pandemic.
The fragrance net sales decrease was impacted by approximately $2 million of favorable foreign currency translation.
Hair Care
Three
Months Ended September 30
($ in millions)
2020
2019
As Reported:
Net sales
$
136
$
136
$
Change from prior-year period
—
% Change from prior-year period
—
%
Non-GAAP
Financial Measure(1):
% Change from prior-year period in constant currency
(1)
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported hair care net sales was flat to the prior year, reflecting increased net sales from Aveda, partially offset by lower net sales from Bumble and bumble. The increase in net sales from Aveda was driven by the success of existing product franchises, such as Nutriplenish, and the launch of Botanical Repair, which led to growth in all
geographic regions and very high double-digit growth from our online channel. Direct-to-consumer online net sales of Aveda products represented approximately 24% of Aveda's fiscal 2021 first quarter hair care net sales compared to approximately 14% in the prior-year period. Net sales declined from Bumble and bumble primarily driven by lower net sales in North America due to salon and freestanding store closures as a result of the COVID-19 pandemic.
Geographic Regions
The Americas
Three
Months Ended September 30
($ in millions)
2020
2019
As Reported:
Net sales
$
873
$
1,160
$
Change from prior-year period
(287)
% Change from prior-year period
(25)
%
Non-GAAP
Financial Measure(1):
% Change from prior-year period in constant currency
(24)
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported net sales in The Americas decreased in nearly all countries, led by the United States of approximately $257 million, primarily from M·A·C, Clinique and Estée Lauder due to the challenging environment caused by the COVID-19 pandemic, including store closures, reduced consumer traffic with the gradual re-opening of brick-and-mortar stores and continued social distancing and quarantines. The decline in North America prestige beauty, primarily makeup, and the ongoing competitive activity also contributed to the decline in net sales. Despite the overall decrease in net sales, direct-to-consumer online net sales in The Americas grew strong double digits, with growth from virtually all brands, which represented approximately
19% of the region's fiscal 2021 first quarter net sales compared to approximately 10% in the prior-year period.
Net sales in The Americas were impacted by approximately $14 million of unfavorable foreign currency translation.
Europe, the Middle East & Africa
Three
Months Ended September 30
($ in millions)
2020
2019
As Reported:
Net sales
$
1,540
$
1,677
$
Change from prior-year period
(137)
% Change from prior-year period
(8)
%
Non-GAAP
Financial Measure(1):
% Change from prior-year period in constant currency
(9)
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported net sales decreased in virtually all markets in Europe, the Middle East & Africa, primarily led by the Middle East and the United Kingdom, as well as and our travel retail business, due to the continued challenges across the region from the COVID-19 pandemic, including reduced consumer traffic with the gradual re-opening of brick-and-mortar
stores, the continued curtailment of international travel, and continued social distancing and quarantines. The adverse macroeconomic conditions also contributed to the decrease in net sales in the United Kingdom. Net sales decreased in our travel retail business, driven by limited international travel as a result of the COVID-19 pandemic, mostly offset by an increase in net sales in China travel retail (primarily Hainan). Despite the challenges in brick-and-mortar retail stores, direct-to-consumer online net sales more than doubled and represented approximately 3% of the region's fiscal 2021 first quarter net sales compared to approximately 1% in the prior-year period.
Net sales in Europe, the Middle East & Africa were impacted by approximately $10 million of favorable foreign currency translation.
Asia/Pacific
Three
Months Ended September 30
($ in millions)
2020
2019
As Reported:
Net sales
$
1,149
$
1,058
$
Change from prior-year period
91
% Change from prior-year period
9
%
Non-GAAP
Financial Measure(1):
% Change from prior-year period in constant currency
7
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported net sales increased in Asia/Pacific, reflecting higher net sales in mainland China and Korea of approximately $182 million, combined, including incremental net sales of $105 million from our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter. Net sales increased in mainland China, primarily due to the continued success of hero product franchises and new product launches from La Mer and Estée Lauder, as well as incremental net sales attributable to our acquisition of Dr. Jart+. Net sales increased in mainland China across virtually all channels. Online net sales increased due to successful holiday events and campaigns. The increase in net sales in Korea reflected growth from virtually all brands,
as well as incremental net sales from our acquisition of Dr. Jart+, and direct-to-consumer online net sales grew strong double digits, which represented approximately 21% of the region's fiscal 2021 first quarter net sales compared to approximately 17% in the prior-year period.
Partially offsetting these increases were lower net sales in Hong Kong and Japan of approximately $77 million, combined, primarily due to the ongoing challenges stemming from the COVID-19 pandemic, including the resurgence of COVID-19 during the period (July 2020 in Hong Kong and August 2020 in Japan) and reduced consumer traffic with the gradual re-opening of brick-and-mortar stores, as well as the continued curtailment of international travel, social distancing and quarantines and border closures in Hong Kong. In addition, net sales in Japan decreased as a result of the unfavorable comparison to higher levels of purchasing in the
prior-year period in anticipation of a value-added tax increase.
Net sales in Asia/Pacific were impacted by approximately $19 million of favorable foreign currency translation.
We strategically stagger our new product launches by geographic market, which may account for differences in regional sales growth.
Charges
associated with restructuring and other activities
(10)
Total
10
The favorable impact from our mix of business was primarily due to lower costs from product sets, the favorable change in product category mix (i.e. a decline in our lower margin makeup category, primarily in Asia/Pacific), and lower costs of promotional items as a percentage of net sales. These favorable impacts to our mix of business were partially offset by the impact of our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter.
OPERATING
EXPENSES
Operating expenses as a percentage of net sales was 57.0% for the three months ended September 30, 2020 as compared with 56.7% in the prior-year period.
Advertising, merchandising, sampling and product development
(20)
Selling
230
Stock-based compensation
(30)
Store
operating costs
10
Shipping
(30)
Foreign exchange transactions
40
Subtotal
(80)
Charges
associated with restructuring and other activities
50
Total
(30)
The increase in operating expense margin reflected higher general and administrative expenses, primarily due to increased employee incentive compensation,
reflecting bonuses paid to non-executive employees in recognition of their ongoing resilience during the COVID-19 pandemic, incremental costs attributable to our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter and the decrease in net sales. Partially offsetting this increase was a decrease in selling expense, primarily driven by the reduction in employee costs as a result of the COVID-19 pandemic.
% Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities
(11)
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
The decrease in reported operating margin for the three months ended September 30, 2020 from the prior-year period was primarily driven by the decrease in net sales, partially offset by disciplined expense management throughout the business.
Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business. Accordingly,
the following discussions of Operating income by Product Categories and Geographic Regions exclude the impact of charges associated with restructuring and other activities.
Product Categories
Skin Care
Three
Months Ended September 30
($ in millions)
2020
2019
As Reported:
Operating income
$
721
$
632
$
Change from prior-year period
89
% Change from prior-year period
14
%
Reported
skin care operating income increased, primarily driven by higher results from Estée Lauder, Clinique and La Mer of approximately $183 million, combined. The increases in operating income from Estée Lauder and La Mer reflected higher net sales, partially offset by increased advertising and promotional activities primarily to support new product launches. The higher results from Clinique reflected disciplined expense management, primarily advertising and promotional activities, and the decrease in selling expense due to the reduction in employee costs as a result the COVID-19 pandemic.
Reported
makeup operating results decreased, primarily driven by lower results from M·A·C due to the decrease in net sales, partially offset by lower selling expenses and store operating costs due to the effects of the COVID-19 pandemic, including store closures.
Fragrance
Three Months Ended September 30
($
in millions)
2020
2019
As Reported:
Operating income
$
60
$
66
$
Change from prior-year period
(6)
% Change from prior-year period
(9)
%
Reported fragrance operating income decreased, driven by lower net sales, as previously noted.
Partially offsetting the decrease in net sales was higher operating
results from certain of our designer fragrances primarily driven by disciplined expense management and lower selling expenses due to the effects of the COVID-19 pandemic.
Hair Care
Three Months Ended September 30
($ in millions)
2020
2019
As
Reported:
Operating income
$
3
$
—
$ Change from prior-year period
3
%
Change from prior-year period
—
%
Reported hair care operating results increased, reflecting higher results from Aveda primarily due to the increase in net sales and lower selling expenses due to the reduction in employee costs as a result of the COVID-19 pandemic.
Reported operating results decreased in The Americas, primarily reflecting lower operating results in the United States of approximately $109 million, due to the decline in net sales, partially offset by lower selling expense due to the reduction in employee costs as a result of store closures in response to the COVID-19 pandemic.
Europe, the Middle East & Africa
Three
Months Ended September 30
($ in millions)
2020
2019
As Reported:
Operating income
$
411
$
377
$
Change from prior-year period
34
% Change from prior-year period
9
%
Reported operating income increased in Europe, the Middle East & Africa, primarily driven by higher results from our travel retail business due to lower selling expenses, as a result of limited international
travel, and disciplined expense management.
Asia/Pacific
Three Months Ended September 30
($ in millions)
2020
2019
As
Reported:
Operating income
$
238
$
252
$ Change from prior-year period
(14)
%
Change from prior-year period
(6)
%
Reported operating income decreased in Asia/Pacific, led by Japan and Hong Kong of approximately $27 million, combined. The lower operating results in both Japan and Hong Kong were primarily due to the decrease in net sales, partially offset by lower selling expenses due to the effects of the COVID-19 pandemic, including store closures, and a reduction in advertising and promotional activities.
Partially offsetting these decreases was higher operating results from mainland China, reflecting the increase in net sales, partially offset
by an increase in advertising and promotional activities to support holiday events and campaigns, new product launches, and digital advertising and social media spending.
INTEREST AND INVESTMENT INCOME
Three
Months Ended September 30
(In millions)
2020
2019
Interest expense
$
45
$
32
Interest income and investment income, net
$
14
$
14
Interest
expense increased from the prior-year period primarily due to the issuance of additional long-term debt in November 2019 and April 2020.
The
provision for income taxes represents U.S. federal, foreign, state and local income taxes. The effective rate differs from the federal statutory rate primarily due to the effect of state and local income taxes, the tax impact of share-based compensation, the taxation of foreign income and income tax reserve adjustments, which represent changes in our net liability for unrecognized tax benefits including tax settlements and lapses of the applicable statutes of limitations. Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the tax impact of share-based compensation and the interaction of various global tax strategies. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period
are recognized separately in the quarter of change.
Three Months Ended September 30
2020
2019
Effective
rate for income taxes
21.8
%
21.3
%
Basis-point change from the prior-year period
50
The effective rate for income taxes was 21.8% and 21.3% for the three months ended September 30, 2020 and 2019,
respectively. The increase in the effective tax rate of 50 basis points was primarily attributable to a higher effective tax rate on our foreign operations.
The fiscal 2021 first quarter effective tax rate included a 130 basis point reduction to the current period effective tax rate due to the impact of the U.S. government issuance of final global intangible low-taxed income (“GILTI”) tax regulations in July 2020 under the Tax Cuts and Jobs Act (the “TCJA”) that provide for a high-tax exception to the current year GILTI tax. These newly-issued regulations are retroactive to the original enactment of the GILTI tax provision, which includes our 2019 and 2020 fiscal years. We are currently evaluating the impact and ability to apply the GILTI regulations relating to fiscal 2019 and fiscal 2020.
The fiscal 2021 first quarter effective
tax rate also included a 120 basis point increase to the current period effective tax rate due to the pending December 31, 2020 expiration of a tax law in China that expanded the corporate income tax deduction allowance for advertising and promotion expenses (“expiring China tax law”). The favorable impact from a possible re-enactment of the expiring China tax law would be recognized in the provision for income taxes in the period that includes the date of such re-enactment.
NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC.
Three
Months Ended September 30
($ in millions, except per share data)
2020
2019
As Reported:
Net earnings attributable to The Estée Lauder Companies Inc.
$
523
$
595
$
Change from prior-year period
(72)
% Change from prior-year period
(12)
%
Diluted net earnings per common share
$
1.42
$
1.61
%
Change from prior-year period
(12)
%
Non-GAAP Financial Measure(1):
%
Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities
(14)
%
(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 45 for reconciliations
between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and
view our business. Management believes that excluding certain items that are not comparable from period to period, or do not reflect the Company’s underlying ongoing business, provides transparency for such items and helps investors and others compare and analyze our operating performance from period to period. In the future, we expect to incur charges or adjustments similar in nature to those presented below; however, the impact to the Company’s results in a given period may be highly variable and difficult to predict. Our non-GAAP financial measures may not be comparable to similarly titled measures used by, or determined in a manner consistent with, other companies. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute
for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. The following tables present Net sales, Operating income and Diluted net earnings per common share adjusted to exclude the impact of charges associated with restructuring and other activities.
The following tables provide reconciliations between these non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
($
in millions, except per share data)
Three Months Ended September 30
Variance
% Change
% Change
in
constant currency
2020
2019
Net sales, as reported
$
3,562
$
3,895
$
(333)
(9)
%
(9)
%
Returns
associated with restructuring and other activities
—
—
—
Net sales, as adjusted
$
3,562
$
3,895
$
(333)
(9)
%
(9)
%
Operating
income, as reported
$
705
$
779
$
(74)
(9)
%
(9)
%
Charges associated with restructuring and other activities
9
25
(16)
Operating
income, as adjusted
$
714
$
804
$
(90)
(11)
%
(11)
%
Diluted
net earnings per common share, as reported
$
1.42
$
1.61
$
(.19)
(12)
%
(12)
%
Charges associated with restructuring and other activities
.02
.06
(.04)
Diluted
net earnings per common share, as adjusted
$
1.44
$
1.67
$
(.23)
(14)
%
(14)
%
As diluted net earnings per common share, as adjusted, is used as a measure of the
Company’s performance, we consider the impact of current and deferred income taxes when calculating the per-share impact of each of the reconciling items.
The following tables reconcile the change in net sales by product category and geographic region, as reported, to the change in net sales excluding the effects of foreign currency translation:
Returns
associated with restructuring and other activities
—
—
—
—
—
Total
$
3,562
$
3,895
$
(333)
$
(15)
$
(348)
(9)
%
(9)
%
By
Region:
The Americas
$
873
$
1,160
$
(287)
$
14
$
(273)
(25)
%
(24)
%
Europe,
the Middle East & Africa
1,540
1,677
(137)
(10)
(147)
(8)
(9)
Asia/Pacific
1,149
1,058
91
(19)
72
9
7
3,562
3,895
(333)
(15)
(348)
(9)
(9)
Returns
associated with restructuring and other activities
—
—
—
—
—
Total
$
3,562
$
3,895
$
(333)
$
(15)
$
(348)
(9)
%
(9)
%
FINANCIAL
CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal sources of funds historically have been cash flows from operations, borrowings pursuant to our commercial paper program, borrowings from the issuance of long-term debt and committed and uncommitted credit lines provided by banks and other lenders in the United States and abroad. At September 30, 2020, we had cash and cash equivalents of $4,267 million compared with $5,022 million at June 30, 2020. Our cash and cash equivalents are maintained at a number of financial institutions. To mitigate the risk of uninsured balances, we select financial institutions based on their
credit ratings and financial strength, and we perform ongoing evaluations of these institutions to limit our concentration risk exposure.
Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support seasonal working capital needs, currently planned business operations, information technology enhancements, capital expenditures, acquisitions, dividends, stock repurchases, restructuring initiatives, commitments and other contractual obligations on both a near-term and long-term basis. See Overview – COVID-19 Business Update for actions taken by us, in response to the impact of the COVID-19 pandemic on our business, which helped to mitigate the then expected loss of sales and to control costs.
The TCJA resulted in the Transition Tax on unrepatriated earnings of our foreign subsidiaries and changed the tax law in ways that present opportunities to repatriate cash without additional U.S. federal income tax. As a result, we changed our indefinite reinvestment assertion related to certain foreign earnings, and we continue to analyze the indefinite reinvestment assertion on our remaining applicable foreign earnings. The issuance of guidance subsequent to the enactment of the TCJA has enabled us to access a substantial portion of the cash in offshore jurisdictions associated with our permanently reinvested earnings without significant cost. We do not believe that continuing to reinvest our foreign earnings impairs our ability to meet our domestic
debt or working capital obligations. If these reinvested earnings were repatriated into the United States as dividends, we would be subject to state income taxes and applicable foreign taxes in certain jurisdictions.
The effects of inflation have not been significant to our overall operating results in recent years. Generally, we have been able to introduce new products at higher prices, increase prices and implement other operating efficiencies to sufficiently offset cost increases, which have been moderate.
Credit Ratings
Changes in our credit ratings will likely result in changes in our borrowing costs. Our credit ratings also impact the cost of our revolving credit facility. Downgrades in our credit ratings may reduce our ability to issue commercial paper and/or long-term debt and would likely increase the relative costs of borrowing. A credit
rating is not a recommendation to buy, sell, or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization, and should be evaluated independently of any other rating. As of October 26, 2020, our long-term debt is rated A+ with a negative outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s.
3.125% Senior Notes, due December 1, 2049 (“2049
Senior Notes”) (1), (13)
$
635
$
—
$
635
4.15% Senior Notes, due March 15, 2047 (“2047 Senior Notes”) (2), (13)
494
—
494
4.375%
Senior Notes, due June 15, 2045 (“2045 Senior Notes”) (3), (13)
456
—
456
3.70% Senior Notes, due August 15, 2042 (“2042 Senior Notes”) (4), (13)
247
—
247
6.00%
Senior Notes, due May 15, 2037 (“2037 Senior Notes”) (5), (13)
294
—
294
5.75% Senior Notes, due October 15, 2033 (“2033 Senior Notes”) (6)
197
—
197
2.600%
Senior Notes, due April 15, 2030 ("2030 Senior Notes") (7)
694
—
694
2.375% Senior Notes, due December 1, 2029 (“2029 Senior Notes”) (8), (13)
640
—
640
3.15%
Senior Notes, due March 15, 2027 (“2027 Senior Notes”) (9), (13)
498
—
498
2.00% Senior Notes, due December 1, 2024 (“2024 Senior Notes”) (10), (13)
495
—
495
2.35%
Senior Notes, due August 15, 2022 (“2022 Senior Notes”) (11), (13)
259
—
259
1.70% Senior Notes, due May 10, 2021 (“2021 Senior Notes”) (12), (13)
—
453
453
Other
long-term borrowings
4
—
4
Other current borrowings
—
20
20
$
4,913
$
473
$
5,386
______________________________________________
(1)Consists
of $650 million principal, unamortized debt discount of $8 million and debt issuance costs of $7 million.
(2)Consists of $500 million principal, unamortized debt discount of $1 million and debt issuance costs of $5 million.
(3)Consists of $450 million principal, net unamortized debt premium of $10 million and debt issuance costs of $4 million.
(4)Consists of $250 million principal, unamortized debt discount of $1 million and debt issuance costs of $2 million.
(5)Consists of $300 million principal, unamortized debt discount of $3 million and debt issuance costs of $3 million.
(6)Consists of $200 million principal, unamortized debt
discount of $2 million and debt issuance costs of $1 million.
(7)Consists of $700 million principal, unamortized debt discount of $1 million and debt issuance costs of $5 million.
(8)Consists of $650 million principal, unamortized debt discount of $6 million and debt issuance costs of $4 million.
(9)Consists of $500 million principal and debt issuance costs of $2 million.
(10)Consists of $500 million principal, unamortized debt discount of $3 million and debt issuance costs of $2 million.
(11)Consists of $250 million principal and a $9 million adjustment to reflect the fair value of interest rate swaps.
(12)Consists
of $450 million principal and a $3 million adjustment to reflect the fair value of interest rate swaps.
(13)The Senior Notes contain certain customary incurrence–based covenants, including limitations on indebtedness secured by liens.
In August 2020, we repaid the remaining $750 million borrowed under our $1,500 million revolving credit facility that was outstanding as of June 30, 2020.
Total debt as a percent of total capitalization (excluding noncontrolling interests) was 55% and 61% at September 30, 2020 and June 30, 2020, respectively.
Net cash provided by (used
for) operating activities
$
358
$
(170)
Net cash used for investing activities
$
(242)
$
(128)
Net cash used for financing activities
$
(890)
$
(416)
The
change in net cash flows from operations primarily reflected the favorable net change in working capital, in particular, accounts payable and accrued liabilities, including the settlement of foreign currency forward contracts. These changes were partially offset by the unfavorable change in accounts receivable due to the timing of shipments.
The change in net cash flows used for investing activities primarily reflected the settlement of net investment hedges and purchases of investments, partially offset by the receipt of the purchase price refund relating to the fiscal 2020 second quarter acquisition of Have&Be Co. Ltd.
The change in net cash flows used for financing activities primarily reflected the repayment of borrowings under our revolving credit facility, partially offset by lower
treasury stock repurchases.
Dividends
For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the three months ended September 30, 2020, see Notes to Consolidated Financial Statements, Note 11 – Equity.
Pension and Post-retirement Plan Funding
There have been no significant changes to our pension and post-retirement funding as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.
Commitments, Contractual Obligations and Contingencies
There have been no significant changes to our commitments and contractual
obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. For a discussion of contingencies, see Notes to Consolidated Financial Statements, Note 8 – Contingencies.
Derivative Financial Instruments and Hedging Activities
For a discussion of our derivative financial instruments and hedging activities, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments.
Foreign Exchange Risk Management
For a discussion of foreign exchange risk management, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Cash Flow Hedges, Net Investment Hedges).
Credit
Risk
For a discussion of credit risk, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Credit Risk).
Market Risk
We address certain financial exposures through a controlled program of market risk management that includes the use of foreign currency forward contracts to reduce the effects of fluctuating foreign currency exchange rates and to mitigate the change in fair value of specific assets and liabilities on the balance sheet. To perform a sensitivity analysis of our foreign currency forward contracts, we assess the change in fair values from the impact of hypothetical changes in foreign
currency exchange rates. A hypothetical 10% weakening of the U.S. dollar against the foreign exchange rates for the currencies in our portfolio would have resulted in a net decrease in the fair value of our portfolio of approximately $176 million and $222 million as of September 30, 2020 and June 30, 2020, respectively. This potential change does not consider our underlying foreign currency exposures.
In addition, we enter into interest rate derivatives to manage the effects
of interest rate movements on our aggregate liability portfolio, including future debt issuances. Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would increase by approximately $11 million and $9 million as of September 30, 2020 and June 30, 2020, respectively.
Our sensitivity analysis represents an estimate of reasonably possible net losses that would be recognized on our portfolio of derivative financial instruments assuming hypothetical movements in future market rates and is not necessarily indicative of actual results, which may or may not occur. It does not represent the maximum possible loss or any expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon actual fluctuations in market rates,
operating exposures, and the timing thereof, and changes in our portfolio of derivative financial instruments during the year. We believe, however, that any such loss incurred would be offset by the effects of market rate movements on the respective underlying transactions for which the derivative financial instrument was intended.
OFF-BALANCE SHEET ARRANGEMENTS
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.
CRITICAL
ACCOUNTING POLICIES
As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those financial statements. These estimates and assumptions can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies relate to goodwill, other intangible assets and long-lived assets, income taxes and business combinations. Since June 30, 2020, there
have been no significant changes to the assumptions and estimates related to our critical accounting policies.
RECENTLY ISSUED ACCOUNTING STANDARDS
For a discussion regarding the impact of accounting standards that were recently issued but not yet effective, on the Company’s consolidated financial statements, see Notes to Consolidated Financial Statements, Note 1 –Summary of Significant Accounting Policies.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION
We and our representatives from time to time make written or oral forward-looking statements, including in this and other filings with the Securities and Exchange Commission, in our press releases and in our reports to stockholders, which may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may address our expectations regarding sales, earnings or other future financial performance and liquidity, other performance measures, product introductions, entry into new geographic regions, information technology initiatives, new methods of sale, our long-term
strategy, restructuring and other charges and resulting cost savings, and future operations or operating results. These statements may contain words like “expect,”“will,”“will likely result,”“would,”“believe,”“estimate,”“planned,”“plans,”“intends,”“may,”“should,”“could,”“anticipate,”“estimate,”“project,”“projected,”“forecast,” and “forecasted” or similar expressions. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, actual results may differ materially from our expectations. Factors that could cause actual results to differ from expectations include, without limitation:
(1)increased competitive activity from companies in the skin care, makeup, fragrance and hair care
businesses;
(2)our ability to develop, produce and market new products on which future operating results may depend and to successfully address challenges in our business;
(3)consolidations, restructurings, bankruptcies and reorganizations in the retail industry causing a decrease in the number of stores that sell our products, an increase in the ownership concentration within the retail industry, ownership of retailers by our competitors or ownership of competitors by our customers that are retailers and our inability to collect receivables;
(4)destocking and tighter working capital management by retailers;
(5)the success, or changes in timing or scope, of new product launches and the success, or
changes in timing or scope, of advertising, sampling and merchandising programs;
(6)shifts in the preferences of consumers as to where and how they shop;
(7)social, political and economic risks to our foreign or domestic manufacturing, distribution and retail operations, including changes in foreign investment and trade policies and regulations of the host countries and of the United States;
(8)changes in the laws, regulations and policies (including the interpretations and enforcement thereof) that affect, or will affect, our business, including those relating to our products or distribution networks, changes in accounting standards, tax laws and regulations, environmental or climate change laws, regulations or accords, trade rules and customs regulations, and the
outcome and expense of legal or regulatory proceedings, and any action we may take as a result;
(9)foreign currency fluctuations affecting our results of operations and the value of our foreign assets, the relative prices at which we and our foreign competitors sell products in the same markets and our operating and manufacturing costs outside of the United States;
(10)changes in global or local conditions, including those due to the volatility in the global credit and equity markets, natural or man-made disasters, real or perceived epidemics, or energy costs, that could affect consumer purchasing, the willingness or ability of consumers to travel and/or purchase our products while traveling, the financial strength of our customers, suppliers or other contract
counterparties, our operations, the cost and availability of capital which we may need for new equipment, facilities or acquisitions, the returns that we are able to generate on our pension assets and the resulting impact on funding obligations, the cost and availability of raw materials and the assumptions underlying our critical accounting estimates;
(11)impacts attributable to the COVID-19 pandemic, including disruptions to our global business;
(12)shipment delays, commodity pricing, depletion of inventory and increased production costs resulting from disruptions of operations at any of the facilities that manufacture our products or at our distribution or inventory centers, including disruptions that may be caused by the implementation of information technology initiatives, or by restructurings;
(13)real estate rates and availability, which may affect our ability to increase or maintain the number of retail locations at which we sell our products and the costs associated with our other facilities;
(14)changes in product mix to products which are less profitable;
(15)our ability to acquire, develop or implement new information and distribution technologies and initiatives on a timely basis and within our cost estimates and our ability to maintain continuous operations of such systems and the security of data and other information that may be stored in such systems or other systems or media;
(16)our
ability to capitalize on opportunities for improved efficiency, such as publicly-announced strategies and restructuring and cost-savings initiatives, and to integrate acquired businesses and realize value therefrom;
(17)consequences attributable to local or international conflicts around the world, as well as from any terrorist action, retaliation and the threat of further action or retaliation;
(18)the timing and impact of acquisitions, investments and divestitures; and
(19)additional factors as described in our filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended June 30, 2020.
We assume no responsibility
to update forward-looking statements made herein or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is set forth in Item 2 of this Quarterly Report on Form 10-Q under the caption Liquidity and Capital Resources - Market Risk and is incorporated herein by reference.
Item 4. Controls and Procedures.
Our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures, including impacts of COVID-19, as of September 30, 2020 and, based on their evaluation, have concluded
that the disclosure controls and procedures were effective as of such date.
As part of our review of internal control over financial reporting, we make changes to systems and processes to improve such controls and increase efficiencies, while ensuring that we maintain an effective internal control environment. There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the first quarter of fiscal 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item
1. Legal Proceedings.
For a discussion of legal proceedings, see Notes to Consolidated Financial Statements, Note 8 – Contingencies.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds.
Share Repurchase Program
We are authorized by the Board of Directors to repurchase shares of our Class A Common Stock in the open market or in privately negotiated transactions, depending on market conditions and other factors. The following table provides information relating to our repurchase of Class A Common Stock during the referenced periods:
Period
Total Number
of Shares
Purchased(1)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Program
Maximum
Number of Shares
that May Yet Be
Purchased Under
the Program(2)
July
2020
369
$
190.81
—
34,741,624
August 2020
—
—
—
34,741,624
September 2020
114,053
219.79
—
34,741,624
114,422
219.70
—
(1)Relates
to shares that were repurchased by the Company to satisfy tax withholding obligations upon the payout of certain stock-based compensation arrangements.
(2)The Board of Directors has authorized the current repurchase program for up to 80.0 million shares. The total amount was last increased by the Board on October 31, 2018. Our repurchase program does not have an expiration date.
Beginning in early February 2020, we temporarily suspended the repurchase of shares of our Class A Common Stock. We may resume repurchases in the future.
The following materials from The Estée Lauder Companies Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Statements of Earnings, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements
104
The
cover page from The Estée Lauder Companies Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 is formatted in iXBRL
† Exhibit is a management contract or compensatory plan or arrangement.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
