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12: R1 Cover Page HTML 84K
13: R2 Consolidated Statements of Earnings HTML 117K
14: R3 Consolidated Statements of Comprehensive Income HTML 88K
15: R4 Consolidated Balance Sheets HTML 157K
16: R5 Consolidated Balance Sheets (Parenthetical) HTML 40K
17: R6 Consolidated Statements of Cash Flows HTML 116K
18: R7 Summary of Significant Accounting Policies HTML 81K
19: R8 Acquisition of Businesses HTML 61K
20: R9 Goodwill and Other Intangible Assets HTML 88K
21: R10 Charges Associated With Restructuring and Other HTML 126K
Activities
22: R11 Derivative Financial Instruments HTML 125K
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24: R13 Revenue Recognition HTML 46K
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26: R15 Contingencies HTML 31K
27: R16 Stock Programs HTML 45K
28: R17 Net Earnings Attributable to the Estee Lauder HTML 51K
Companies Inc. Per Common Share
29: R18 Equity and Redeemable Noncontrolling Interest HTML 125K
30: R19 Statement of Cash Flows HTML 41K
31: R20 Segment Data and Related Information HTML 85K
32: R21 Subsequent Event HTML 31K
33: R22 Summary of Significant Accounting Policies HTML 76K
(Policies)
34: R23 Summary of Significant Accounting Policies HTML 66K
(Tables)
35: R24 Acquisition of Businesses (Tables) HTML 69K
36: R25 Goodwill and Other Intangible Assets (Tables) HTML 91K
37: R26 Charges Associated With Restructuring and Other HTML 120K
Activities (Tables)
38: R27 Derivative Financial Instruments (Tables) HTML 126K
39: R28 Fair Value Measurements (Tables) HTML 92K
40: R29 Revenue Recognition (Tables) HTML 43K
41: R30 Pension and Post-Retirement Benefit Plans (Tables) HTML 65K
42: R31 Stock Programs (Tables) HTML 44K
43: R32 Net Earnings Attributable to the Estee Lauder HTML 52K
Companies Inc. Per Common Share (Tables)
44: R33 Equity and Redeemable Noncontrolling Interest HTML 127K
(Tables)
45: R34 Statement of Cash Flows (Tables) HTML 40K
46: R35 Segment Data and Related Information (Tables) HTML 80K
47: R36 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 33K
Currency Translation and Transactions (Details)
48: R37 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 50K
Concentration of Credit Risk (Details)
49: R38 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 40K
Inventory and Promotional Merchandise (Details)
50: R39 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 69K
Property, Plant and Equipment (Details)
51: R40 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 47K
Income Taxes (Details)
52: R41 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 48K
Schedule of Other Accrued Liabilities (Details)
53: R42 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Other HTML 34K
Accrued Liabilities Narrative (Details)
54: R43 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 46K
Changes in Accounting Policies (Details)
55: R44 ACQUISITION OF BUSINESSES - Narrative (Details) HTML 75K
56: R45 ACQUISITION OF BUSINESSES - Summary of Total HTML 57K
Consideration Transferred (Details)
57: R46 ACQUISITION OF BUSINESSES - Schedule of Fair Value HTML 46K
Option-Pricing Assumptions (Details)
58: R47 ACQUISITION OF BUSINESSES - Preliminary Allocation HTML 67K
of Total Consideration Transferred (Details)
59: R48 GOODWILL AND OTHER INTANGIBLE ASSETS - Narrative HTML 43K
(Details)
60: R49 GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill HTML 64K
(Details)
61: R50 GOODWILL AND OTHER INTANGIBLE ASSETS - Other HTML 65K
Intangible Assets (Details)
62: R51 CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER HTML 42K
ACTIVITIES - Charges Associated With Restructuring
Activities (Details)
63: R52 CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER HTML 47K
ACTIVITIES - Narrative (Details)
64: R53 CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER HTML 55K
ACTIVITIES - Cumulative Charges Expected To Be
Incurred (Details)
65: R54 CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER HTML 56K
ACTIVITIES - Approved Restructuring Activities by
Major Cost Type (Details)
66: R55 CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER HTML 59K
ACTIVITIES - Cumulative Restructuring Charges by
Major Cost Type (Details)
67: R56 CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER HTML 60K
ACTIVITIES - Accrued Restructuring Charges
(Details)
68: R57 DERIVATIVE FINANCIAL INSTRUMENTS - Derivative HTML 58K
Instruments Included in the Consolidated Balance
Sheets (Details)
69: R58 DERIVATIVE FINANCIAL INSTRUMENTS - Gain (Loss) on HTML 83K
Derivative Financial Instruments (Details)
70: R59 DERIVATIVE FINANCIAL INSTRUMENTS - Cash Flow HTML 70K
Hedges, Fair Value Hedges, Credit Risk (Details)
71: R60 FAIR VALUE MEASUREMENTS - Hierarchy For Financial HTML 60K
Assets and Liabilities Measured at Fair Value on a
Recurring Basis (Details)
72: R61 FAIR VALUE MEASUREMENTS - Estimated Fair Values of HTML 53K
Financial Instruments (Details)
73: R62 FAIR VALUE MEASUREMENTS - Foreign Currency Forward HTML 35K
Contracts Maturity and Additional Purchase Price
Payable - Narrative (Details)
74: R63 REVENUE RECOGNITION - Narrative (Details) HTML 31K
75: R64 REVENUE RECOGNITION - Changes in Allowance for HTML 33K
Credit Losses (Details)
76: R65 REVENUE RECOGNITION - Changes in Deferred Revenue HTML 36K
(Details)
77: R66 REVENUE RECOGNITION - Transaction Price Allocated HTML 33K
to the Remaining Performance Obligations (Details)
78: R67 PENSION AND POST-RETIREMENT BENEFIT PLANS - HTML 62K
Components of Net Periodic Benefit Cost (Details)
79: R68 PENSION AND POST-RETIREMENT BENEFIT PLANS - HTML 44K
Amounts Recognized in the Consolidated Balance
Sheets (Details)
80: R69 STOCK PROGRAMS - Compensation Expense and Stock HTML 42K
Options (Details)
81: R70 STOCK PROGRAMS - Restricted Stock Units (Details) HTML 44K
82: R71 STOCK PROGRAMS - Performance Share Units (Details) HTML 42K
83: R72 STOCK PROGRAMS - DECIEM Stock Options (Details) HTML 36K
84: R73 STOCK PROGRAMS - Schedule of Key Assumptions Used HTML 46K
For Award (Details)
85: R74 NET EARNINGS ATTRIBUTABLE TO THE ESTEE LAUDER HTML 64K
COMPANIES INC. PER COMMON SHARE - Reconciliation
Between Numerator and Denominator of Basic and
Diluted EPS Computations (Details)
86: R75 NET EARNINGS ATTRIBUTABLE TO THE ESTEE LAUDER HTML 37K
COMPANIES INC. PER COMMON SHARE - Antidilutive
Securities Excluded from Computation of Earnings,
Per Share (Details)
87: R76 EQUITY AND REDEEMABLE NONCONTROLLING INTEREST - HTML 103K
Equity Roll forward (Details)
88: R77 EQUITY AND REDEEMABLE NONCONTROLLING INTEREST - HTML 48K
Class of Stock and Dividend Information (Details)
89: R78 EQUITY AND REDEEMABLE NONCONTROLLING INTEREST - HTML 53K
Changes in Accumulated Other Comprehensive Income
(Loss) (Details)
90: R79 EQUITY AND REDEEMABLE NONCONTROLLING INTEREST - HTML 70K
Reclassification Adjustments From Accumulated
Other Comprehensive Income (Loss) (Details)
91: R80 Statement of Cash Flows (Details) HTML 41K
92: R81 SEGMENT DATA AND RELATED INFORMATION - Narrative HTML 29K
(Details)
93: R82 SEGMENT DATA AND RELATED INFORMATION - Schedule of HTML 85K
Segment Data and Related Information (Details)
94: R83 Subsequent Event (Details) HTML 48K
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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, 2021, i231,705,365 shares
of the registrant’s Class A Common Stock, $.01 par value, and i128,242,029 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, 2021.
Certain prior year amounts in the notes to the consolidated financial statements 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, 2021. 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 $(i175) million and $i91
million, net of tax, during the three months ended September 30, 2021 and 2020, 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 5 – 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 $i12 million and $i1
million during the three months ended September 30, 2021 and 2020, respectively.
The Company is a worldwide manufacturer, marketer and seller 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 $i456 million,
or i10%, and $i554 million, or i16%,
of the Company's consolidated net sales for the three months ended September 30, 2021 and 2020, respectively. This customer accounted for $i301 million, or i13%,
and $i179 million, or i10%, of the Company's accounts receivable at September 30,
2021 and June 30, 2021, respectively.
Another major customer of the Company during the quarter sells products primarily within the United States and accounted for $i239 million, or i10%,
and $i133 million, or i8%, of the Company’s accounts receivable at September
30, 2021 and June 30, 2021, respectively. This customer accounted for $i253 million, or i6%,
and $i181 million, or i5%, of the Company’s consolidated
net sales for the three months ended September 30, 2021 and 2020, respectively.
Inventory and Promotional Merchandise
iInventory and promotional merchandise consists of the following:
(In
millions)
September 30 2021
June 30 2021
Raw materials
$
i697
$
i674
Work
in process
i290
i330
Finished
goods
i1,354
i1,213
Promotional
merchandise
i292
i288
$
i2,633
$
i2,505
/
i
Property,
Plant and Equipment
iProperty, plant and equipment consists of the following:
(In millions)
September 30 2021
June
30 2021
Assets (Useful Life)
Land
$
i53
$
i55
Buildings
and improvements (i10 to i40 years)
i257
i256
Machinery
and equipment (i3 to i10 years)
i916
i920
Computer
hardware and software (i4 to i10 years)
i1,375
i1,303
Furniture
and fixtures (i5 to i10 years)
i125
i125
Leasehold
improvements
i2,300
i2,312
Construction
in progress
i744
i647
i5,770
i5,618
Less
accumulated depreciation and amortization
(i3,412)
(i3,338)
$
i2,358
$
i2,280
/
Depreciation
and amortization of property, plant and equipment was $i130 million and $i125 million during the three months ended September 30,
2021 and 2020, respectively. 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 i22.5% and i21.8%
for the three months ended September 30, 2021 and 2020, respectively. The increase in the effective tax rate of i70 basis points was primarily attributable to a decrease in excess tax benefits associated with stock-based compensation arrangements and an increase in income tax reserve adjustments, partially offset by a lower effective tax rate on the
Company's foreign operations.
As of September 30, 2021 and June 30, 2021, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $i71 million and $i62
million, respectively. The total amount of unrecognized tax benefits at September 30, 2021 that, if recognized, would affect the effective tax rate was $i62 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three months ended September 30, 2021 in the accompanying consolidated statements of earnings was $i3
million. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at September 30, 2021 and June 30, 2021, was $i16 million and $i14
million, respectively. On the basis of the information available as of September 30, 2021, 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.
During the fiscal 2022 first quarter, the Company formally concluded the compliance process with respect to its fiscal 2020 income tax return under the U.S. Internal Revenue Service (“IRS”) Compliance Assurance Program (“CAP”), which had no impact on the Company’s consolidated financial statements for the three months ended September 30, 2021.
/
Other
Accrued and Noncurrent Liabilities
iOther accrued liabilities consist of the following:
(In millions)
September 30 2021
June
30 2021
Advertising, merchandising and sampling
$
i348
$
i294
Employee
compensation
i456
i670
Deferred
revenue
i379
i322
Payroll
and other non-income taxes
i311
i359
Accrued
income taxes
i336
i237
Sales
return accrual
i378
i369
Other
i974
i944
$
i3,182
$
i3,195
/
At
September 30, 2021 and June 30, 2021, total Other noncurrent liabilities of $i1,964 million and $i2,037 million
included $i805 million and $i849 million of deferred tax liabilities, respectively.
Income Taxes (ASU 2019-12 – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes)
In December 2019, the Financial Accounting Standards Board (“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.
Impact on consolidated financial statements – On July 1, 2021, the Company adopted this standard and recorded a cumulative adjustment of $i121 million
as an increase to its fiscal 2022 opening retained earnings balance to derecognize a deferred tax liability related to a previously held equity method investment that became a foreign subsidiary.
Recently Issued Accounting Standards
Reference Rate Reform (ASC Topic 848)
In March 2020, the FASB issued authoritative guidance to provide optional relief for companies preparing for the discontinuation of interest rates such as the London Interbank Offered Rate (“LIBOR”) and applies to lease contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that have LIBOR as the benchmark rate.
In January 2021, the
FASB issued authoritative guidance that makes amendments to the new rules on accounting for reference rate reform. The amendments clarify that for all derivative instruments affected by the changes to interest rates used for discounting, margining or contract price alignment, regardless of whether they reference LIBOR or another rate expected to be discontinued as a result of reference rate reform, an entity may apply certain practical expedients in ASC Topic 848.
Impact on consolidated financial statements – The Company currently has an implementation team in place that is performing a comprehensive evaluation and assessing the impact of applying this guidance on its existing derivative contracts, leases and other arrangements, as well as when to adopt this guidance.
No other recently issued accounting pronouncements are expected to have a material impact on the Company’s consolidated financial statements.
On May 18, 2021, the Company acquired additional shares in Deciem Beauty Group Inc. (“DECIEM”),
a Toronto-based skin care company, for $i1,092 million in cash, including proceeds from the issuance of debt. DECIEM is a multi-brand beauty company with a brand portfolio that includes The Ordinary and NIOD. This acquisition is expected to further strengthen the Company’s leadership position in prestige skin care, expand its global consumer reach and complement its business in the online and specialty-multi channels. The
Company originally acquired a minority interest in DECIEM in June 2017. The minority interest was accounted for as an equity method investment, which had a carrying value of $i65 million at the acquisition date. The acquisition of additional shares increased the Company's fully diluted equity interest from approximately i29%
to approximately i76% and was considered a step acquisition. On a fully diluted basis, the DECIEM stock options, discussed below, approximated i4%
of the total capital structure. Accordingly, for purposes of determining the consideration transferred, the Company excluded the DECIEM stock options, which resulted in an increase in the Company’s post-acquisition undiluted equity interest from approximately i30% to approximately i78%
and the post-acquisition undiluted equity interest of the remaining noncontrolling interest holders of approximately i22%. The Company remeasured the previously held equity method investment to its fair value of $i913 million,
resulting in the recognition of a gain of $i848 million. As part of the increase in the Company's investment, the Company was granted the right to purchase (“Call Option”), and granted the remaining investors a right to sell
to the Company (“Put Option”), the remaining interests after a ithree-year period, with a purchase price based on the future performance of DECIEM (the “net Put (Call) Option”). As a result of this redemption feature, the Company recorded redeemable noncontrolling interest, at its acquisition‑date fair value, that is classified as mezzanine equity in the consolidated balance sheets at June
30, 2021. As of September 30, 2021, the accounting for the DECIEM business combination is provisional pending the finalization of the opening balance sheet, the final valuation report, and allocation of the total consideration transferred.
i
A summary of the total consideration transferred, including immaterial measurement period adjustments as of September 30, 2021, is as follows:
Total
consideration for the acquired ownership interest (approximately i47.9%)
i1,432
Fair
value of previously held equity method investment (approximately i30.5%)
i913
Fair
value of redeemable noncontrolling interest (approximately i21.6%)
i648
Total
consideration transferred (i100%)
$
i2,993
/
As
part of the acquisition of additional shares, DECIEM stock options were issued in replacement of and exchange for certain vested and unvested stock options previously issued by DECIEM. The total fair value of the DECIEM stock options of $i295 million was recorded as part of the total consideration transferred, comprising of $i191 million
of Cash paid for vested options settled as of the acquisition date and $i104 million reported as a stock options liability on the Company's consolidated balance sheet as it is not an assumed liability of DECIEM and is expected to be settled in cash upon completion of the exercise of the Put (Call). The acquisition-date fair value of the DECIEM stock options liability was calculated by multiplying
the acquisition-date fair value by the number of DECIEM stock options replaced the day after the acquisition date. The stock options replaced consist of vested and partially vested stock options. See Note 10 – Stock Programs for information relating to the DECIEM stock options.
The acquisition-date fair value of the previously held equity method investment was calculated by multiplying the gross-up of the total consideration for the acquired ownership interest of $i2,993 million
by the related effective previously held equity interest of approximately i30.5%.
The acquisition-date fair value of the redeemable noncontrolling interest includes the acquisition-date fair value of the net Put (Call) Option of $i233 million.
The remaining acquisition-date fair value of the redeemable noncontrolling interest of $i648 million was calculated by multiplying the gross-up of the total consideration for the acquired ownership interest of $i2,993 million
by the related noncontrolling interest of approximately i21.6%.
The
acquisition-date fair values of the DECIEM stock options and the net Put (Call) Option were calculated by incorporating significant assumptions including the starting equity value, revenue growth rates and EBITDA and the following key assumptions into the Monte Carlo Method:
The
Company recorded a preliminary allocation of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair value at the acquisition date. The total consideration transferred includes the cash paid at closing, the fair value of its previously held equity method investment, the fair value of the redeemable noncontrolling interest, including the fair value of the net Put (Call) Option, and the fair value of the DECIEM stock options liability. The excess of the total consideration transferred over the fair value of the net tangible and intangible assets acquired was recorded as goodwill. To determine the acquisition date estimated fair value of intangible assets acquired, the Company applied the income approach, specifically the multi-period excess earnings method for customer relationships and the relief-from-royalty
method for trademarks. The significant assumptions used in these approaches include revenue growth rates and profit margins, terminal values, weighted-average cost of capital used to discount future cash flows, and a customer attrition rate for customer relationships and royalty rates for trademarks. iThe preliminary allocation of the total consideration transferred, including immaterial measurement period adjustments as of September 30,
2021, has been recorded as follows:
The
results of operations for DECIEM and acquisition-related costs were not material to the Company's consolidated statements of earnings for the three months ended September 30, 2021. Pro forma results of operations reflecting the acquisition of DECIEM are not presented, as the impact on the Company’s consolidated financial results would not have been material.
As previously discussed in Note 2 – Acquisition of Business, in May 2021 the Company increased
its investment in DECIEM, which resulted in the inclusion of additional goodwill of $i1,297 million, amortizable intangible assets (customer lists) of $i701 million
with amortization periods of i7 years to i14 years, and non-amortizable intangible assets (trademarks) of $i1,216 million.
Goodwill associated with the acquisition is primarily attributable to the future revenue growth opportunities associated with sales growth in the skin care category, as well as the value associated with DECIEM's assembled workforce. As such, the goodwill has been allocated to the Company’s skin care product category. The goodwill recorded in connection with this acquisition will not be deductible for tax purposes. These amounts are provisional pending finalization of the opening balance sheet, the final valuation report, and allocation of the total consideration transferred.
Goodwill
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 $i45 million and $i25
million for the three months ended September 30, 2021 and 2020, respectively. iThe estimated aggregate amortization expense for the remainder of fiscal 2022 and for each of the next four fiscal years is as follows:
Fiscal
(In
millions)
2022
2023
2024
2025
2026
Estimated aggregate amortization expense
$
i116
$
i155
$
i154
$
i154
$
i154
NOTE
4 – iCHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES
i
Charges associated with the Post-COVID Business Acceleration
Program for the three months ended September 30, 2021 were as follows:
Sales Returns (included in Net Sales)
Cost
of Sales
Operating Expenses
Total
(In millions)
Restructuring Charges
Other Charges
Total
$
i1
$
(i1)
$
i—
$
i2
$
i2
/
Charges
associated with restructuring and other activities are not allocated to the Company's 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.
Post-COVID Business Acceleration Program
On August 20, 2020, the Company announced a itwo-year
restructuring program, Post-COVID Business Acceleration Program (the “PCBA Program”), designed to realign the Company's business to address 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.
As of September 30, 2021, the Company estimates a net reduction over the duration
of the PCBA Program in the range of i2,000 to i2,500
positions globally, 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 over the duration of the PCBA Program 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, 2021 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 in certain areas of its distribution network 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, counters and other retail locations, mainly in certain affiliates across all geographic regions, including the Company's travel retail network. These anticipated closures reflect changing consumer behaviors including higher demand for online and omnichannel capabilities. These activities will result in a net reduction in workforce,
inventory and other asset write-offs, product returns, and termination of contracts.
•Optimize Digital Organization and Other Go-To-Market Organizations – The Company approved initiatives to enhance its go-to-market capabilities and shift more resources to support online growth. 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.
•Optimize Select Marketing, Brand and Global Functions – The
Company has started to reduce its corporate office footprint and is moving toward the future of work in a post-COVID environment, by restructuring where and how its employees work and collaborate. These actions will result primarily in lease termination fees.
•Exit of the Global Distribution of BECCA Products – In reviewing the Company's brand portfolio to improve efficiency and the sustainability of long-term investments, the decision was made to exit the global distribution of BECCA products due to its limited distribution, the ongoing decline in product demand and the challenging environment caused by the COVID-19 pandemic. These activities resulted in charges for the impairment of goodwill and other intangible assets, product returns, termination of contracts,
and employee severance. The Company expects to substantially complete these initiatives during fiscal 2022.
•Exit of Certain Designer Fragrance Licenses – In reviewing the Company’s brand portfolio of fragrances and to focus on investing its resources on alternative opportunities for long-term growth and value creation globally, the Company announced that it is not renewing its existing license agreements for Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna when they expire in June 2023. The
Company expects to continue to sell products under these licenses through June 30, 2022. These actions resulted in, or are expected to result in, employee-related costs, asset write-offs, including charges for the impairment of goodwill, and consulting and legal fees.
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 in certain freestanding stores (including rights associated with commercial operating leases and 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. These costs also include goodwill and other intangible asset impairment charges relating to the exit of the global distribution of BECCA products.
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 related 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 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. iTotal cumulative charges recorded associated with restructuring and other activities
for the PCBA Program were:
Accrued
restructuring charges at September 30, 2021 relating to the PCBA Program are expected to result in cash expenditures funded from cash provided by operations of approximately $i46 million, $i20
million and $i3 million for the remainder of fiscal 2022 and for fiscal 2023 and 2024, respectively.
Leading Beauty Forward Program
The Company substantially completed initiatives approved under the Leading Beauty Program (the “LBF Program”) through fiscal 2021. 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, 2021.
NOTE 5 – 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 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. 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, 2021, the notional amount of derivatives not designated as hedging instruments
was $i3,946 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.
i
The
fair values of the Company’s derivative financial instruments included in the consolidated balance sheets are presented as follows:
Asset
Derivatives
Liability Derivatives
Fair Value (1)
Fair Value (1)
(In millions)
Balance Sheet Location
September 30 2021
June 30 2021
Balance
Sheet Location
September 30 2021
June 30 2021
Derivatives Designated as Hedging Instruments:
Foreign currency cash flow hedges
Prepaid expenses and other current assets
$
i21
$
i12
Other
accrued liabilities
$
i12
$
i20
Net
investment hedges
Prepaid expenses and other current assets
i12
i34
Other
accrued liabilities
i—
i—
Interest
rate-related derivatives
Prepaid expenses and other current assets
i9
i15
Other
accrued liabilities
i4
i—
Total
Derivatives Designated as Hedging Instruments
i42
i61
i16
i20
Derivatives
Not Designated as Hedging Instruments:
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 (Loss) Recognized in OCI on Derivatives
Location of Gain (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, 2021 and 2020, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $i2
million and $i5 million, respectively.
(3)Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets.
Amount
of Gain (Loss)
Recognized in Earnings on
Derivatives (1)
Location of Gain (Loss) Recognized in Earnings on Derivatives
(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
2021
2020
(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
$
i4,392
$
i42
$
i3,562
$
i45
The
effects of fair value and cash flow hedging relationships:
Gain (loss) on fair value hedge relationships – interest rate contracts:
Hedged item
Not applicable
i10
Not
applicable
i2
Derivatives designated as hedging instruments
Not applicable
(i10)
Not
applicable
(i2)
Gain (loss) on cash flow hedge relationships – interest rate contracts:
Amount
of loss reclassified from AOCI into earnings
Not applicable
i—
Not applicable
(i1)
Gain
(loss) on cash flow hedge relationships – foreign currency forward contracts:
Amount of gain reclassified from AOCI into earnings
(i6)
Not
applicable
i1
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 (Loss) Recognized
in Earnings on Derivatives
Location of Gain (Loss) Recognized in Earnings on Derivatives
Three Months Ended September 30
(In millions)
2021
2020
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 June 2023. 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, 2021, the Company
had cash flow hedges outstanding with a notional amount totaling $i1,066 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, 2021, the Company’s foreign currency cash flow hedges were highly effective.
The estimated net gain on the
Company’s derivative instruments designated as cash flow hedges as of September 30, 2021 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $i5 million. The accumulated net gain (loss) on derivative instruments in AOCI was $i20
million and $(i1) million as of September 30, 2021 and June 30, 2021, 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 $i250 million, $i700 million
and $i300 million to effectively convert the fixed rate interest on its 2022 Senior Notes, 2030 Senior Notes and 2031 Senior Notes, respectively, to variable interest rates based on iiithree-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 January 2022. Hedge effectiveness of the net investment hedge contracts is based on the spot method. At September 30, 2021, the Company had net investment hedges outstanding with a notional amount totaling $i1,419
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 $i70 million at September 30, 2021. 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,
2021:
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, 2021:
The
estimated fair values of the Company’s financial instruments are as follows:
September 30 2021
June 30 2021
(In
millions)
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Nonderivatives
Cash and cash equivalents
$
i3,995
$
i3,995
$
i4,958
$
i4,958
Current
and long-term debt
i5,548
i6,206
i5,569
i6,262
DECIEM
stock options
i137
i137
i141
i141
Derivatives
Foreign
currency forward contracts – asset (liability), net
i31
i31
(i4)
(i4)
Interest
rate-related derivatives – asset (liability), net
i5
i5
i15
i15
/
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.
DECIEM stock options – The stock option liability represents the employee stock options issued by DECIEM in replacement and exchange for certain vested and unvested DECIEM employee stock options previously issued by DECIEM, in connection with the Company's acquisition of DECIEM. The DECIEM stock options are subject to the terms and conditions
of DECIEM's 2021 Stock Option Plan. The initial fair value of the DECIEM stock option liability was calculated using the acquisition date fair value multiplied by the number of options replaced (consisting of vested and partially vested stock options) on the day following the acquisition date. The acquisition date fair value was calculated using the Monte Carlo Method, which requires certain assumptions. These inputs are categorized as Level 3 of the valuation hierarchy. The DECIEM stock options will be remeasured to fair value at each reporting date through settlement, with the offsetting entry to compensation expense, through the period when the options are exercised or repurchased. See Note 2 – Acquisition of Business and Note 10 – Stock Programs for discussion.
NOTE
7 – 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, 2021.
Accounts
Receivable
Accounts receivable, net is stated net of the allowance for doubtful accounts and customer deductions totaling $ii40/
million as of September 30, 2021 and June 30, 2021. 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:
The remaining balance of the allowance for doubtful accounts of $i19 million,
as of September 30, 2021, relates to non-credit losses, which are primarily due to customer deductions.
Deferred Revenue
iChanges in deferred revenue during the period are as follows:
Three
Months Ended September 30
(In millions)
2021
2020
Deferred revenue, beginning of period
$
i371
$
i279
Revenue
recognized that was included in the deferred revenue balance at the beginning of the period
(i170)
(i90)
Revenue
deferred during the period
i223
i216
Other
i2
i4
Deferred
revenue, end of period
$
i426
$
i409
/
Transaction
Price Allocated to the Remaining Performance Obligations
At September 30, 2021, 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 $i379
million. The remaining balance of deferred revenue at September 30, 2021 will be recognized beyond the next twelve months.
NOTE 8 – 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, 2021.
i
The
components of net periodic benefit cost for the three months ended September 30, 2021 and 2020 consisted of the following:
Pension
Plans
Other than Pension Plans
U.S.
International
Post-retirement
(In millions)
2021
2020
2021
2020
2021
2020
Service
cost
$
i12
$
i11
$
i8
$
i9
$
i1
$
i—
Interest
cost
i8
i8
i3
i2
i1
i1
Expected
return on plan assets
(i14)
(i13)
(i4)
(i3)
i—
i—
Amortization
of:
Actuarial loss
i4
i5
i—
i1
i—
i—
Special
termination benefits
i—
i—
i2
i2
i—
i—
Net
periodic benefit cost
$
i10
$
i11
$
i9
$
i11
$
i2
$
i1
/
During
the three months ended September 30, 2021, the Company made contributions to its international pension plans totaling $i6 million.
iThe
amounts recognized in the consolidated balance sheets related to the Company’s pension and post-retirement benefit plans consist of the following:
(In millions)
September 30 2021
June 30 2021
Other assets
$
i152
$
i162
Other
accrued liabilities
(i28)
(i28)
Other
noncurrent liabilities
(i424)
(i432)
Funded
status
(i300)
(i298)
Accumulated
other comprehensive loss
i237
i242
Net
amount recognized
$
(i63)
$
(i56)
/
NOTE
9 – iCONTINGENCIES
Legal Proceedings
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.
Additional information relating to the Company's stock programs and the DECIEM stock options 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, 2021.
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, including long-term price-vested units and share units. Compensation expense attributable to net stock-based compensation was $i79 million and $i64
million for the three months ended September 30, 2021 and 2020, respectively.
Stock Options
During the three months ended September 30, 2021, the Company granted stock options in respect of approximately i1.1
million shares of Class A Common Stock with an exercise price per share of $i344.06 and a weighted-average grant date fair value per share of $i85.49.
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, 2021 was $i89 million.
Restricted Stock Units
The
Company granted RSUs in respect of approximately i0.7 million shares of Class A Common Stock during the three months ended September 30, 2021 with a weighted-average grant date fair value per share of $i343.90 that,
at the time of grant, are scheduled to vest at i0.3 million, i0.2 million,
and i0.2 million shares per year, in fiscal 2023, fiscal 2024 and fiscal 2025, respectively. 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, 2021, 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 $i344.06, 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, 2024, 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 2021, 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 i0.2 million PSUs with a performance period ended June 30, 2021.
DECIEM
Stock Options
The DECIEM stock options are liability-classified awards as they are expected to be settled in cash and will be remeasured to fair value at each reporting date through date of settlement. Total stock-based compensation expense is attributable to the exchange or replacement of and the remaining requisite service period of stock options. The total stock option expense for the three months ended September 30, 2021 was not material. There were no stock options exercised during the three months ended September 30, 2021.
The initial fair value of the DECIEM stock option liability was calculated using the acquisition date fair value multiplied by the number of options replaced (consisting of vested and partially vested stock options) on the day following the acquisition date. As discussed in Note 2 – Acquisition of Business, DECIEM stock options, with total fair value of $i295 million,
were reported as part of the total consideration transferred. The DECIEM stock options are reported as a stock option liability of $i137 million and $i141 million
in Other noncurrent liabilities in the accompanying consolidated balance sheets at September 30, 2021 and June 30, 2021, respectively. The fair value of the stock options were calculated using the following key assumptions into the Monte Carlo Method:
NOTE
11 – 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)
2021
2020
Numerator:
Net earnings attributable to The Estée Lauder Companies Inc.
$
i692
$
i523
Denominator:
Weighted-average
common shares outstanding – Basic
i362.2
i362.1
Effect
of dilutive stock options
i4.2
i3.8
Effect
of PSUs
i0.2
i0.2
Effect
of RSUs
i1.3
i1.1
Weighted-average
common shares outstanding – Diluted
i367.9
i367.2
Net
earnings attributable to The Estée Lauder Companies Inc. per common share:
The shares of Class A Common Stock underlying stock options, RSUs and PSUs that were excluded in the computation of diluted EPS because their inclusion would be anti-dilutive were as follows:
Three
Months Ended September 30
(In millions)
2021
2020
Stock options
i0.3
i1.3
RSUs
and PSUs
i0.2
i0.2
/
As
of September 30, 2021 and 2020, i0.7 million and i0.8
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 10 – Stock Programs.
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, 2021:
On
November 1, 2021, a dividend was declared in the amount of $ii.60/
per share on the Company’s Class A and Class B Common Stock. The dividend is payable in cash on December 15, 2021 to stockholders of record at the close of business on November 30, 2021.
Common Stock
During the three months ended September 30, 2021, the Company purchased approximately i1.7 million
shares of its Class A Common Stock for $i557 million.
Accumulated Other Comprehensive Income
i
The
following table represents changes in AOCI, net of tax, by component for the three months ended September 30, 2021:
The
following table represents the effects of reclassification adjustments from AOCI into net earnings for the three months ended September 30, 2021 and 2020:
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, and charges associated with restructuring and
other activities. Returns and charges associated with restructuring and other activities are not allocated to the Company's 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, 2021. 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, 2021.
Returns
associated with restructuring and other activities
(i1)
i—
Net
sales
$
i4,392
$
i3,562
Operating
income (loss) before charges associated with restructuring and other activities:
Skin Care
$
i717
$
i721
Makeup
i91
(i71)
Fragrance
i131
i60
Hair
Care
i2
i3
Other
i—
i1
i941
i714
Reconciliation:
Charges
associated with restructuring and other activities
(i6)
(i9)
Interest
expense
(i42)
(i45)
Interest
income and investment income, net
i4
i14
Other
components of net periodic benefit cost
(i1)
(i3)
Other
income
i1
i—
Earnings
before income taxes
$
i897
$
i671
GEOGRAPHIC
DATA(1)
Net sales:
The Americas
$
i1,194
$
i873
Europe,
the Middle East & Africa
i1,873
i1,540
Asia/Pacific
i1,326
i1,149
i4,393
i3,562
Returns
associated with restructuring and other activities
(i1)
i—
Net
sales
$
i4,392
$
i3,562
Operating
income:
The Americas
$
i254
$
i65
Europe,
the Middle East & Africa
i465
i411
Asia/Pacific
i222
i238
i941
i714
Charges
associated with restructuring and other activities
(i6)
(i9)
Operating
income
$
i935
$
i705
/
(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.
On October 22, 2021, the Company replaced its $i1.5 billion
senior unsecured revolving credit facility that was set to expire on October 26, 2023 (the “Prior Facility”) with a new $i2.5 billion senior unsecured revolving credit facility that expires on October 22, 2026 (the “New Facility”) unless extended for up to two additional years in accordance with the terms set forth in the agreement. Up to the equivalent of $i750 million
of the New Facility is available for multi-currency loans. At September 30, 2021 and through October 22, 2021, ino borrowings were outstanding under the Prior Facility. The New Facility may be used for general corporate purposes. Interest rates on borrowings under the New Facility will be based on prevailing market interest rates in accordance with the agreement. The costs incurred to establish the New Facility were not material. The New Facility has an annual fee of approximately $i1 million,
payable quarterly, based on the Company’s current credit ratings. The New Facility contains a cross-default provision whereby a failure to pay other material financial obligations in excess of $i175 million (after grace periods and absent a waiver from the lenders) would result in an event of default and the acceleration of the maturity of any outstanding debt under this facility.
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, 2021 and 2020, 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)
2021
2020
NET SALES
By Product Category:
Skin
Care
$
2,449
$
2,035
Makeup
1,174
978
Fragrance
609
406
Hair
Care
148
136
Other
13
7
4,393
3,562
Returns
associated with restructuring and other activities
(1)
—
Net sales
$
4,392
$
3,562
By
Region(1):
The Americas
$
1,194
$
873
Europe, the Middle East & Africa
1,873
1,540
Asia/Pacific
1,326
1,149
4,393
3,562
Returns
associated with restructuring and other activities
(1)
—
Net sales
$
4,392
$
3,562
OPERATING
INCOME (LOSS)
By Product Category:
Skin Care
$
717
$
721
Makeup
91
(71)
Fragrance
131
60
Hair
Care
2
3
Other
—
1
941
714
Charges
associated with restructuring and other activities
(6)
(9)
Operating income
$
935
$
705
By
Region(1):
The Americas
$
254
$
65
Europe, the Middle East & Africa
465
411
Asia/Pacific
222
238
941
714
Charges
associated with restructuring and other activities
(6)
(9)
Operating income
$
935
$
705
(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
2021
2020
Net sales
100.0
%
100.0
%
Cost of sales
24.1
23.2
Gross
profit
75.9
76.8
Operating expenses:
Selling,
general and administrative
54.5
56.9
Restructuring and other charges
0.1
0.2
Total
operating expenses
54.6
57.0
Operating income
21.3
19.8
Interest
expense
1.0
1.3
Interest income and investment income, net
0.1
0.4
Other components of net periodic benefit cost
—
0.1
Other
income
—
—
Earnings before income taxes
20.4
18.8
Provision
for income taxes
(4.6)
(4.1)
Net earnings
15.8
14.7
Net
earnings attributable to noncontrolling interests
—
(0.1)
Net earnings attributable to redeemable noncontrolling interest
—
—
Net
earnings attributable to The Estée Lauder Companies Inc.
15.8
%
14.7
%
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 48 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 monthly average foreign currency exchange rates and adjusting for the period-over-period impact of foreign currency cash flow hedging activities.
Overview
COVID-19
Business Update
The COVID-19 pandemic continued to disrupt our operating environment, impacting retail traffic and certain consumer preferences during the three months ended September 30, 2021. The resurgence of COVID-19 cases and the rapid spread of the Delta variant in most parts of the world led to government restrictions to prevent further spread of the virus. These restrictions included the intermittent closure of businesses deemed non-essential, curtailment of travel, social distancing and quarantines.
Retail Impact
While most brick-and-mortar retail stores globally that sell our products, whether operated by us or our customers, were open during much of the fiscal 2022 first quarter there were intermittent closures throughout
the world. More specifically, in Continental Europe, much of Latin America and most of the Asia/Pacific region, many retail stores were temporarily closed for some period during the quarter due to the resurgence of COVID-19 cases. In much of Continental Europe and parts of the Asia/Pacific region retail locations gradually reopened later in the quarter with capacity and other safety restrictions in place. Globally, in areas where stores were open, consumer traffic has not recovered to the pre-COVID-19 pandemic levels.
While international passenger traffic remained largely curtailed globally, passenger traffic in Europe, the Middle East & Africa and The Americas was somewhat improved, albeit significantly below pre-COVID-19 pandemic levels. The improvement was due, in part, to an increase in summer holiday travel as government restrictions were lifted, most notably in the United Kingdom, the United States,
the Caribbean and Mexico. In Asia/Pacific, a surge in COVID-19 cases led to increased travel restrictions during much of the quarter.
Net sales growth of our products online (through our own websites, third-party platforms and websites of our retailers) remained strong in Asia/Pacific and Europe, the Middle East & Africa where many retail stores were temporarily closed. Excluding incremental online net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter, online net sales declined in The Americas reflecting the developing brick-and-mortar recovery.
Consumer Preferences
The
COVID-19 pandemic-related closures of offices, retail stores and other businesses and the significant decline in social gatherings have influenced consumer preferences and practices. While the demand for makeup improved significantly versus the prior year, it continues to be the only category that remains below the pre-COVID-19 pandemic period, given fewer makeup usage occasions and ongoing mask wearing, while skin care, fragrance and hair care have all grown from pre-pandemic levels.
Supply Chain
The COVID-19 pandemic has contributed to global transportation delays due to port congestion, labor and container shortages, and shipment delays. Higher transportation and logistics costs are expected to negatively impact cost of sales and operating expenses in the remainder of fiscal 2022. We expect to mitigate most of the impact to our business and
our costs through strategic price increases, product mix, timing of shipments, use of air freight and less congested ports, and cost savings in other areas.
We are a leader in prestige beauty, which combines the repeat purchase and relative affordability of consumer goods with high quality products and services. Within prestige beauty, we are well diversified by product category, geography, brand, product sub-category, 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 31-34 of our Annual Report on Form 10-K for the year ended June 30, 2021, as well as below.
During the first quarter of fiscal 2022, net sales increased 23%, reflecting a nascent recovery in The Americas and in Europe, the Middle East & Africa compared to a more difficult environment in the prior-year period. The net sales increase includes incremental net sales attributable to the increase in our
ownership of DECIEM in the fiscal 2021 fourth quarter.
•Our skin care net sales benefited from the launch of The Hydrating Infused Emulsion from La Mer, as well as continued strength in the brand’s core moisturizers. Incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter contributed to growth, Dr.Jart+ saw strong gains in travel retail, and Clinique’s hero franchises resonated well in The Americas and in Europe, the Middle East & Africa.
•The COVID-19 pandemic has generally resulted in more limited social and business activities and consumers overall wore less makeup. As restrictions lift in particular locations, we generally see demand for makeup products increasing. During the first quarter of fiscal 2022, net sales in makeup grew in part
to this, and was also driven by increases in Estée Lauder foundation products, as well as strong activations and expanded consumer reach from M·A·C. Our brands generated interest in makeup through virtual marketing efforts such as classes, virtual try on technology and greater emphasis on social media platforms.
•Our fragrance net sales rose sharply as consumers gravitated to high-end and artisanal offerings from Tom Ford Beauty, Jo Malone London, and Le Labo.
•Our hair care net sales grew, reflecting increases from both Bumble and bumble and Aveda as brick-and-mortar channels gradually reopened.
In September 2021, we announced that we are not renewing our existing license agreements for Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna when
they expire in June 2023. We expect to continue to sell products under these licenses through June 30, 2022.
Our global distribution capability and operations allow us to focus on targeted expanded consumer reach wherever consumer demographics and trends are the most attractive. Our regional organizations, and the expertise of our people there, enable our brands to be more locally and culturally relevant in both product assortment and communications. We are evolving the way we connect with our consumers in stores, online and where they travel, including by expanding our digital and social media presence and the engagement of global and local influencers to amplify brand or product stories. We tailor implementation of our strategy by market to drive consumer engagement and embrace cultural diversity. We continuously strengthen our presence in large, image-building
core markets, while broadening our presence in emerging markets.
•The increase in net sales during the fiscal 2022 first quarter was led by The Americas, primarily reflecting the reopening of brick-and-mortar stores, targeted expanded consumer reach and incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter.
•Net sales in Europe, the Middle East & Africa grew as brick-and-mortar retail reopened across the region, and robust online net sales growth continued.
•Net sales increased in Asia/Pacific, reflecting higher net sales in Greater China, Korea and several smaller markets despite COVID-19 related restrictions throughout the region during the quarter.
Outlook
The
COVID-19 pandemic continues to disrupt business for us, retailers and other companies with which we do business. There have been, and are likely to continue to be, intermittent store closures and supply chain disruptions. We are mindful that these trends may continue to impact the pace of recovery. The continued curtailment in international travel is also affecting our travel retail business in most of the world, which had been historically one of our fastest growth areas. In addition to impacting net sales and profitability, these and other challenges may adversely impact the goodwill and other intangible assets associated with our brands, as well as long-lived assets (i.e. potentially resulting in impairments).
We believe that the best way to increase long-term stockholder value is to continue providing superior products and services in the most efficient and effective manner while recognizing shifts in consumers’ behaviors and shopping practices. Accordingly, our long-term strategy has numerous initiatives across geographic regions, product categories, brands, channels of distribution and functions designed to grow our sales, provide cost efficiencies, leverage our strengths and make us more productive and profitable. We plan to build upon and leverage our history of outstanding creativity and innovation, high quality products and services, and engaging communications while investing for long-term sustainable growth.
We continue to monitor the effects of the global macroeconomic environment,
including inflationary pressures; supply chain disruptions; social and political issues; regulatory matters, including the imposition of tariffs; geopolitical tensions; and global security issues. For example, we continue to monitor the geopolitical tensions between the United States and China, which could have a material adverse effect on our business.
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 executing upon 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.
Post-COVID Business Acceleration Program
Information about our restructuring initiative, the Post-COVID Business Acceleration Program, is described in Notes to Consolidated Financial Statements, Note 4 – 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 33 of our Annual Report on Form 10-K for the year ended June 30, 2021.
NET SALES
Three
Months Ended September 30
($ in millions)
2021
2020
As Reported:
Net sales
$
4,392
$
3,562
$
Change from prior-year period
830
% Change from prior-year period
23
%
Non-GAAP
Financial Measure(1):
% Change from prior-year period in constant currency
21
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 48 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported net sales increased, driven by higher net
sales from every product category and in every geographic region primarily reflecting (i) brick-and-mortar and travel recovery from the prior-year challenges, which included widespread store closures, lower retail traffic, travel restrictions and quarantines, stemming from the COVID-19 pandemic; (ii) the continued success of hero product franchises; (iii) new product launches; and (iv) targeted expanded consumer reach. Net sales from our skin care, makeup and fragrance product categories each grew double digits and hair care net sales grew high single digits. Skin care net sales increased, primarily reflecting higher net sales from La Mer and Clinique, as well as incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter. The makeup increase in net sales was led by higher net sales from Estée Lauder and M·A·C. Fragrance net sales growth primarily reflected higher net sales from Tom Ford Beauty, Jo Malone London, certain
of our designer fragrances and Le Labo. Hair care net sales increased, due to higher net sales from Bumble and bumble and Aveda. Net sales in every geographic region grew double-digits and benefited from incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter. The increase in net sales in The Americas reflected higher net sales throughout the region. Net sales increased in Europe, the Middle East & Africa, led by our travel retail business, the United Kingdom and Russia. The increase in net sales in mainland China, Korea and Hong Kong drove growth in Asia/Pacific, however, many countries in the region were negatively impacted by the resurgence of COVID-19 cases and the spread of the Delta variant, which led to government restrictions that were implemented to prevent further spread of the virus.
The total net sales increase was impacted by approximately
$77 million of favorable foreign currency translation.
Returns associated with restructuring and other activities are not allocated to our product categories or geographic regions because they result from activities that are deemed a Company-wide initiative to redesign, resize and reorganize select corporate functions and go-to-market structures. Accordingly, the following discussions of Net sales by Product Categories and Geographic Regions exclude the fiscal 2022 first quarter impact of returns associated with restructuring and other activities of $1 million.
Product Categories
Skin Care
Three
Months Ended September 30
($ in millions)
2021
2020
As Reported:
Net sales
$
2,449
$
2,035
$
Change from prior-year period
414
% Change from prior-year period
20
%
Non-GAAP
Financial Measure(1):
% Change from prior-year period in constant currency
18
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 48 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 La Mer, incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter and Clinique, of approximately $315 million, combined. Net sales from La Mer increased, led by our travel retail business and mainland China, primarily due to the continued success of hero products, such as Crème de la Mer, The Moisturizing Soft Cream and The Treatment Lotion, new product launches, such as The Hydrating Infused Emulsion, successful holiday events in mainland China, and targeted expanded consumer reach. The increase in net sales from Clinique, led by our travel retail business and North America, was primarily driven by the continued
success of existing products, such as Even Better Clinical Radical Dark Spot Corrector + Interrupter and Moisture Surge 100H Auto-Replenishing Hydrator, new product launches, such as Smart Clinical Repair Wrinkle Correcting Serum, and targeted expanded consumer reach.
The skin care net sales increase was impacted by approximately $48 million of favorable foreign currency translation.
% Change from prior-year period in constant currency
18
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 48 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported makeup net sales increased, primarily driven by higher net sales from Estée Lauder and M·A·C of approximately $131 million, combined. The nascent recovery in makeup compared to the prior-year challenges stemming from the COVID-19 pandemic led to the increase in makeup net sales in The Americas and Europe, the Middle East & Africa. Makeup net sales in Asia/Pacific declined, as many countries in the region were negatively impacted by the resurgence of COVID-19 cases and the spread of variants, including the Delta variant, which led to government restrictions implemented to prevent further spread of the virus. Net sales from Estée Lauder increased, primarily reflecting the continued success of existing products,
such as the Double Wear franchise and Futurist line of products; new product launches, such as Double Wear Sheer Long-Wear Foundation and Pure Color Whipped Matte Lip Color; successful holiday events and a new online platform launch in mainland China; recovery from the prior-year challenges, discussed above, and new product launches in North America. The increase in net sales from M·A·C was primarily due to brick-and-mortar recovery in North America and travel recovery in Europe, the Middle East & Africa and The Americas compared to the prior-year challenges, as discussed above, as well as new product launches, such as Love Me Liquid Lipcolour and Lustreglass Lipstick and the timing of shipments, including holiday shipments, compared to the prior-year period.
The makeup net sales increase was impacted by approximately $17 million of favorable foreign currency translation.
Fragrance
Three
Months Ended September 30
($ in millions)
2021
2020
As Reported:
Net sales
$
609
$
406
$
Change from prior-year period
203
% Change from prior-year period
50
%
Non-GAAP
Financial Measure(1):
% Change from prior-year period in constant currency
48
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 48 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported fragrance net sales increased, primarily driven by Tom Ford Beauty, Jo Malone London, certain of our designer fragrances and Le Labo of approximately $159 million,
combined. The higher fragrance net sales partially reflected a brick-and-mortar and travel recovery in various parts of the world compared to the prior-year challenges stemming from the COVID-19 pandemic and the timing of shipments, including holiday shipments, compared to the prior-year period. Our fragrance brands were well positioned to capture consumers through the continued success of our hero products, such as Wood Sage & Sea Salt, Peony & Blush Suede and English Pear & Freesia from Jo Malone London. The increase in fragrance net sales also reflected higher net sales from certain Private Blend fragrances from Tom Ford Beauty, targeted expanded consumer reach from Jo Malone London and new product launches from certain of our designer fragrances, such as Michael Kors Super Gorgeous!.
The fragrance net sales increase was impacted by approximately $10 million of favorable foreign currency translation.
Hair
Care
Three Months Ended September 30
($ in millions)
2021
2020
As
Reported:
Net sales
$
148
$
136
$ Change from prior-year period
12
%
Change from prior-year period
9
%
Non-GAAP Financial Measure(1):
%
Change from prior-year period in constant currency
8
%
(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 48 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported
hair care net sales increased, reflecting higher net sales from Bumble and bumble and Aveda primarily due to salon and retail store recovery in North America compared to the prior-year challenges stemming from the COVID-19 pandemic. The increase in net sales from Bumble and bumble also reflected the success of hero products, such as Hairdresser's Invisible Oil Primer, and new product launches, such Hairdresser's Invisible Oil Ultra Rich and Bb. Illuminated Blonde, and targeted expanded consumer reach. Net sales from Aveda increased, also benefiting from the success of existing product franchises, such as Nutriplenish and Botanical Repair.
Geographic Regions
We strategically time our new product launches by geographic market, which may account for differences in regional sales growth.
The Americas
Three
Months Ended September 30
($ in millions)
2021
2020
As Reported:
Net sales
$
1,194
$
873
$
Change from prior-year period
321
% Change from prior-year period
37
%
Non-GAAP
Financial Measure(1):
% Change from prior-year period in constant currency
36
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 48 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported net sales in The Americas increased in every country, reflecting brick-and-mortar and makeup recovery from the prior-year challenges, including store closures, lower retail traffic and quarantines, stemming from the COVID-19 pandemic, as well as the timing of shipments, including holiday shipments, compared to the prior-year period in North America. The increase
in net sales in The Americas was led by North America of approximately $299 million, primarily benefiting from incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter and higher net sales from M·A·C, Clinique, Tom Ford Beauty, Jo Malone London and Le Labo. The increase in net sales in Latin America reflected growth in every country and every product category.
Net sales in The Americas were impacted by approximately $6 million of favorable foreign currency translation.
Europe, the Middle East & Africa
Three
Months Ended September 30
($ in millions)
2021
2020
As Reported:
Net sales
$
1,873
$
1,540
$
Change from prior-year period
333
% Change from prior-year period
22
%
Non-GAAP
Financial Measure(1):
% Change from prior-year period in constant currency
21
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 48 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported net sales increased in Europe, the Middle East & Africa, reflecting nascent recovery across the region compared to the prior-year challenges stemming from the COVID-19 pandemic, led by our travel retail business, the United Kingdom and Russia of approximately $259 million, combined. Net sales increased in our travel retail business, reflecting strength of our brands with the Chinese consumer, the easing of travel restrictions, which drove increased traffic levels, and continued success of hero product franchises from La Mer, Origins, Clinique and Tom Ford. These benefits were partially offset by lower net sales from Estée Lauder products, primarily reflecting a decrease in promotional activity and lower net
sales from the Advanced Night Repair product franchise primarily due to the prior-period launch of Advanced Night Repair Synchronized Multi-Recovery Complex. Net sales in the United Kingdom and Russia increased, primarily reflecting brick-and-mortar recovery, as noted above. The increase in net sales in the United Kingdom also reflected incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter.
Net sales in Europe, the Middle East & Africa were impacted by approximately $15 million of favorable foreign currency translation.
Asia/Pacific
Three
Months Ended September 30
($ in millions)
2021
2020
As Reported:
Net sales
$
1,326
$
1,149
$
Change from prior-year period
177
% Change from prior-year period
15
%
Non-GAAP
Financial Measure(1):
% Change from prior-year period in constant currency
11
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” beginning on page 48 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 $180 million, combined. The increase in net sales in mainland China was primarily due to the continued success of hero products franchises from La Mer and Estée Lauder, new product launches, successful holiday events and a new online platform launch. Net sales increased in Korea,
despite the challenging brick-and-mortar retail environment, primarily reflecting the continued success of hero product franchises from Dr.Jart+, Jo Malone London and Estée Lauder and continued growth from online net sales.
Net sales in Asia/Pacific were impacted by approximately $56 million of favorable foreign currency translation.
GROSS MARGIN
Gross margin decreased to 75.9% for the three months ended September 30, 2021 as compared with 76.8% in the prior-year period.
Charges associated with restructuring and other activities
10
Total
(90)
The unfavorable impact from our mix of business was primarily due to higher
costs from product sets and the impact of the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter. These unfavorable impacts were partially offset by strategic price increases.
OPERATING EXPENSES
Operating expenses as a percentage of net sales was 54.6% for the three months ended September 30, 2021 as compared with 57.0% in the prior-year period.
The favorable change in operating expense margin was driven by the increase in net sales, primarily due to the brick-and-mortar and travel recovery in various parts of the world compared to the prior-year challenges stemming from the COVID-19 pandemic, as discussed above. Partially offsetting the impact of the increase in net sales were higher advertising and promotional activities to support hero products, new product launches, strategic investments in fragrances and to support the makeup recovery, and digital advertising and social media spending. The increase in selling expenses due to the brick-and-mortar recovery, incremental expenses attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter and higher employee incentive compensation compared to the prior-year period, which reflected lower accrued employee
incentive compensation attributable to the impacts of the COVID-19 pandemic, further offset the impact of the increase in net sales.
OPERATING RESULTS
Three Months Ended September 30
($
in millions)
2021
2020
As Reported:
Operating income
$
935
$
705
$
Change from prior-year period
230
% Change from prior-year period
33
%
Operating
margin
21.3
%
19.8
%
Non-GAAP Financial Measure(1):
%
Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities
32
%
(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 48 for reconciliations between non-GAAP
financial measures and the most directly comparable U.S. GAAP measures.
The increase in reported operating margin for the three months ended September 30, 2021 from the prior-year period was primarily driven by the increase in net sales, partially offset by higher cost of sales and the increase in operating expenses, discussed above.
Charges associated with restructuring and other activities are not allocated to the 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)
2021
2020
As
Reported:
Operating income
$
717
$
721
$ Change from prior-year period
(4)
%
Change from prior-year period
(1)
%
Reported
skin care operating income decreased, reflecting lower results from Estée Lauder primarily due to the decrease in skin care net sales, primarily related to our travel retail business, higher advertising and promotional activities to support hero products and new product launches, and the increase in cost of sales primarily due to higher costs for promotional items. The decrease in skin care operating income was also attributable to higher employee incentive compensation compared to the prior-year period, which reflected lower accrued employee incentive compensation attributable to the impacts of the COVID-19 pandemic.
Partially
offsetting these decreases was higher results from La Mer, primarily reflecting the increase in net sales, partially offset by higher advertising and promotional activities primarily to support promotional events and new product launches.
Makeup
Three Months Ended September 30
($
in millions)
2021
2020
As Reported:
Operating income (loss)
$
91
$
(71)
$
Change from prior-year period
162
% Change from prior-year period
100+%
Reported
makeup operating results increased, primarily driven by higher results from Estée Lauder, M·A·C, and to a lesser extent Clinique and Tom Ford Beauty of approximately $148 million, combined. The higher results from Estée Lauder, Tom Ford Beauty and Clinique were primarily due to the increases in net sales. Operating results from M·A·C increased, primarily reflecting higher net sales, partially offset by the increase in advertising and promotional activities relating to strategic investments to support the makeup recovery, digital advertising and social media spending, as well as higher selling expenses and store operating costs due to the brick-and-mortar recovery from the prior-year challenges stemming from the COVID-19 pandemic, including store closures.
Fragrance
Three
Months Ended September 30
($ in millions)
2021
2020
As Reported:
Operating income
$
131
$
60
$
Change from prior-year period
71
% Change from prior-year period
100+%
Reported fragrance operating income increased, primarily driven by higher results from Tom Ford Beauty, Jo Malone London, certain of our designer fragrances and Le Labo of approximately $80 million, combined. Operating results from Tom Ford Beauty
increased, primarily due to higher net sales, partially offset by the increase in advertising and promotional activities relating to strategic investments in digital advertising and social media spending (including costs associated with influencers), as well as higher selling expenses due to the brick-and-mortar recovery from the prior-year challenges stemming from the COVID-19 pandemic, including store closures. The higher results from Jo Malone London primarily reflected the increase in net sales, partially offset by higher cost of sales given the growth of the home subcategory and the increase in advertising and promotional activities primarily to support holiday and promotional events and new product launches. Operating results from certain of our designer fragrances and Le Labo increased, primarily driven by the increases in net sales.
Partially offsetting these increases in fragrance operating income was higher employee
incentive compensation compared to the prior-year period, which reflected lower accrued employee incentive compensation attributable to the impacts of the COVID-19 pandemic.
Reported hair care operating results decreased, due to higher employee incentive compensation compared to the prior-year period, which reflected lower accrued employee incentive compensation attributable
to the impacts of the COVID-19 pandemic, as well as strategic investments in advertising and promotional activity to support the salon and retail store recovery. These increases in expenses were partially offset by higher operating results from Bumble and bumble and Aveda, primarily driven by higher net sales as previously discussed.
Geographic Regions
The Americas
Three
Months Ended September 30
($ in millions)
2021
2020
As Reported:
Operating income
$
254
$
65
$
Change from prior-year period
189
% Change from prior-year period
100+%
Reported
operating results increased in The Americas, primarily reflecting higher operating results in the United States of approximately $179 million, primarily due to the increase in net sales and higher intercompany royalty income primarily from growth in our travel retail business. Partially offsetting these increases in operating results in the United States were the increase in advertising and promotional activities, as discussed above; higher selling expenses and store operating costs due to the brick-and-mortar recovery from the prior-year challenges stemming from the COVID-19 pandemic, including store closures; and higher employee incentive compensation compared to the prior-year period, which reflected lower accrued employee incentive compensation attributable to the impacts of the COVID-19 pandemic.
Europe, the Middle East & Africa
Three
Months Ended September 30
($ in millions)
2021
2020
As Reported:
Operating income
$
465
$
411
$
Change from prior-year period
54
% Change from prior-year period
13
%
Reported operating income increased in Europe, the Middle East & Africa, primarily driven by higher results from our travel retail business, Russia and the United Kingdom of approximately $38 million,
combined. Operating income increased from our travel retail business primarily due to the increase in net sales, partially offset by the increase in intercompany royalty expense to The Americas primarily due to the growth of our travel retail business. The higher results from Russia primarily reflected the increase in net sales. Operating income in the United Kingdom increased, primarily driven by the increase in net sales, partially offset by the increase in advertising and promotional activity to support strategic investments across the brands.
Reported operating income decreased in Asia/Pacific, led by Japan and Thailand of approximately $21 million, combined, primarily driven by the decrease in net sales due the challenging retail environment
that continues to be negatively impacted by the resurgence of COVID-19 cases and the spread of the Delta variant. Partially offsetting these decreases was higher results from Korea, primarily reflecting higher net sales, partially offset by the increase in advertising and promotional activity to support hero products and new product launches.
INTEREST AND INVESTMENT INCOME
Three
Months Ended September 30
(In millions)
2021
2020
Interest expense
$
42
$
45
Interest income and investment income, net
$
4
$
14
Interest
income and investment income, net decreased due to equity method investment income recognized in the prior-year period relating to our previously held equity method investment in DECIEM.
PROVISION FOR INCOME TAXES
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, the interaction of various global tax strategies and the impact from certain acquisitions. 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
2021
2020
Effective rate for income taxes
22.5
%
21.8
%
Basis-point change from the prior-year period
70
The
effective rate for income taxes was 22.5% and 21.8% for the three months ended September 30, 2021 and 2020, respectively. The increase in the effective tax rate of 70 basis points was primarily attributable to a decrease in excess tax benefits associated with stock-based compensation arrangements and an increase in income tax reserve adjustments, partially offset by a lower effective tax rate on our foreign operations.
NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC.
Three Months Ended September 30
($ in millions, except per share data)
2021
2020
As
Reported:
Net earnings attributable to The Estée Lauder Companies Inc.
$
692
$
523
$ Change from prior-year period
169
%
Change from prior-year period
32
%
Diluted net earnings per common share
$
1.88
$
1.42
% Change from prior-year period
32
%
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
31
%
(1)See “Reconciliations
of Non-GAAP Financial Measures” below for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
RECONCILIATIONS OF 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, 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
2021
2020
Net sales, as reported
$
4,392
$
3,562
$
830
23
%
21
%
Returns
associated with restructuring and other activities
1
—
1
Net sales, as adjusted
$
4,393
$
3,562
$
831
23
%
21
%
Operating
income, as reported
$
935
$
705
$
230
33
%
30
%
Charges associated with restructuring and other activities
6
9
(3)
Operating
income, as adjusted
$
941
$
714
$
227
32
%
29
%
Diluted
net earnings per common share, as reported
$
1.88
$
1.42
$
.46
32
%
30
%
Charges associated with restructuring and other activities
.01
.02
(.01)
Diluted
net earnings per common share, as adjusted
$
1.89
$
1.44
$
.45
31
%
29
%
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:
As
Reported
Impact of foreign currency translation
Variance, in constant currency
% Change, as reported
% Change, in constant currency
Three Months Ended September 30
($ in millions)
2021
2020
Variance
By
Product Category:
Skin Care
$
2,449
$
2,035
$
414
$
(48)
$
366
20
%
18
%
Makeup
1,174
978
196
(17)
179
20
18
Fragrance
609
406
203
(10)
193
50
48
Hair
Care
148
136
12
(1)
11
9
8
Other
13
7
6
(1)
5
86
71
4,393
3,562
831
(77)
754
23
21
Returns
associated with restructuring and other activities
(1)
—
(1)
—
(1)
Total
$
4,392
$
3,562
$
830
$
(77)
$
753
23
%
21
%
By
Region:
The Americas
$
1,194
$
873
$
321
$
(6)
$
315
37
%
36
%
Europe,
the Middle East & Africa
1,873
1,540
333
(15)
318
22
21
Asia/Pacific
1,326
1,149
177
(56)
121
15
11
4,393
3,562
831
(77)
754
23
21
Returns
associated with restructuring and other activities
(1)
—
(1)
—
(1)
Total
$
4,392
$
3,562
$
830
$
(77)
$
753
23
%
21
%
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, 2021, we had cash and cash equivalents of $3,995 million compared with $4,958 million at June 30, 2021. 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.
The Tax Cuts and Jobs Act (“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. 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, however we are mindful of emerging inflationary pressures. 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, 2021, our long-term debt is rated A+ with a stable 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)
$
636
$
—
$
636
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)
455
—
455
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
1.950% Senior Notes, due March 15, 2031 ("2031 Senior Notes") (7), (13)
597
—
597
2.600%
Senior Notes, due April 15, 2030 ("2030 Senior Notes") (8), (13)
691
—
691
2.375% Senior Notes, due December 1, 2029 (“2029 Senior Notes”) (9), (13)
642
—
642
3.15%
Senior Notes, due March 15, 2027 (“2027 Senior Notes”) (10), (13)
498
—
498
2.00% Senior Notes, due December 1, 2024 (“2024 Senior Notes”) (11), (13)
496
—
496
2.35%
Senior Notes, due August 15, 2022 (“2022 Senior Notes”) (12), (13)
—
254
254
Other long-term borrowings
20
—
20
Other
current borrowings
—
27
27
$
5,267
$
281
$
5,548
(1)Consists
of $650 million principal, unamortized debt discount of $7 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 $9 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 $600 million, principal, unamortized debt discount of $4 million, debt issuance costs of $4 million and a $5 million gain to reflect the fair value of interest rate swaps.
(8)Consists of $700 million principal, unamortized debt discount of $1 million, debt issuance costs of $4 million and a $4 million loss to reflect the fair value of interest rate swaps.
(9)Consists of $650 million principal, unamortized debt discount of $5 million and debt issuance costs of $3 million.
(10)Consists of $500 million principal and debt issuance costs of $2 million.
(11)Consists
of $500 million principal, unamortized debt discount of $2 million and debt issuance costs of $2 million.
(12)Consists of $250 million principal and a $4 million gain 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.
Total debt as a percent of total capitalization (excluding noncontrolling interests) was 48% at September 30, 2021 and June 30, 2021.
See Note 15 – Subsequent Event for further information relating to the
Company's revolving credit facility.
Net
cash provided by (used for) operating activities
$
(81)
$
358
Net cash used for investing activities
$
(153)
$
(242)
Net cash used for financing activities
$
(714)
$
(890)
The
change in net cash flows from operations primarily reflected the unfavorable net change in working capital as working capital needs returned to a more normalized level compared to the prior-year period. In particular, other accrued liabilities, including the settlement of foreign currency forward contracts and accounts payable. These changes were partially offset by higher earnings before taxes, excluding non-cash items.
The change in net cash flows used for investing activities primarily reflected a favorable impact from the settlement of net investment hedges, which is offset by the unfavorable change in other accrued liabilities discussed above, partially offset by the increase in capital expenditures.
The change in net cash flows used for financing
activities primarily reflected a decrease relating to the repayment of borrowings under our revolving credit facility made in the prior-year period, partially offset by higher 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, 2021, see Notes to Consolidated Financial Statements, Note 12 – Equity and Redeemable Noncontrolling Interest.
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,
2021.
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, 2021. For a discussion of contingencies, see Notes to Consolidated Financial Statements, Note 9 – 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 5 – Derivative Financial Instruments.
Foreign Exchange Risk Management
For
a discussion of foreign exchange risk management, see Notes to Consolidated Financial Statements, Note 5 – Derivative Financial Instruments (Cash Flow Hedges, Net Investment Hedges).
Credit Risk
For a discussion of credit risk, see Notes to Consolidated Financial Statements, Note 5 – 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 $210 million and $218 million as of September 30, 2021 and June 30, 2021, 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 decrease by approximately $79 million and $83 million as of September 30, 2021 and June 30, 2021, 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, 2021, 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, 2021, 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, 2021.
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 as of September 30, 2021 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, including from the impacts of COVID-19, 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 2022 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 9 – 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
2021
436,600
$
321.27
436,600
32,266,939
August 2021
353,202
328.44
353,202
31,913,737
September 2021
910,205
330.71
800,000
31,113,737
1,700,007
327.81
1,589,802
(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.
Subsequent to September 30, 2021 and as of October 26, 2021, we purchased approximately 0.8 million additional shares of our Class A Common Stock for $253 million pursuant to our share repurchase program.
The following materials from The Estée Lauder Companies Inc.’s
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021 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, 2021 is formatted in iXBRL
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.
