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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to
Commission file number 1-14064
The Estée Lauder Companies Inc.
(Exact name of registrant as specified in its charter)
Delaware
11-2408943
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
767 Fifth Avenue, New York, New York
10153
(Address of principal executive offices)
(Zip Code)
212-572-4200
(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
Class A Common Stock, $.01 par value
EL
New 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.  Yes  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).  Yes  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.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
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  No 
At October 26, 2020, 226,538,215 shares of the registrant’s Class A Common Stock, $.01 par value, and 135,067,429 shares of the registrant’s Class B Common Stock, $.01 par value, were outstanding.



Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
INDEX
Page
Consolidated Statements of Earnings Three Months Ended September 30, 2020 and 2019
Consolidated Statements of Comprehensive IncomeThree Months Ended September 30, 2020 and 2019
Consolidated Balance Sheets — September 30, 2020 and June 30, 2020 (Audited)
Consolidated Statements of Cash Flows — Three Months Ended September 30, 2020 and 2019



Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended
September 30
(In millions, except per share data)20202019
Net sales
$3,562 $3,895 
Cost of sales
825 908 
Gross profit
2,737 2,987 
Operating expenses
Selling, general and administrative
2,026 2,185 
Restructuring and other charges
6 23 
Total operating expenses
2,032 2,208 
Operating income
705 779 
Interest expense
45 32 
Interest income and investment income, net
14 14 
Other components of net periodic benefit cost
3 1 
Earnings before income taxes
671 760 
Provision for income taxes
146 162 
Net earnings525 598 
Net earnings attributable to noncontrolling interests(2)(3)
Net earnings attributable to The Estée Lauder Companies Inc.$523 $595 
Net earnings attributable to The Estée Lauder Companies Inc. per common share
Basic
$1.44 $1.65 
Diluted
$1.42 $1.61 
Weighted-average common shares outstanding
Basic
362.1 361.4 
Diluted
367.2 368.6 
See notes to consolidated financial statements.
2

Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
September 30
(In millions)20202019
Net earnings$525 $598 
Other comprehensive income (loss):
Net cash flow hedge loss(31)(2)
Amounts included in net periodic benefit cost6 5 
Translation adjustments78 (70)
Benefit for deferred income taxes on components of other comprehensive income18 3 
Total other comprehensive gain (loss)71 (64)
Comprehensive income596 534 
Comprehensive income attributable to noncontrolling interests:
Net earnings(2)(3)
Comprehensive income attributable to The Estée Lauder Companies Inc.$594 $531 
See notes to consolidated financial statements.
3

Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)September 30
2020
June 30
2020
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents
$4,267 $5,022 
Accounts receivable, net
1,812 1,194 
Inventory and promotional merchandise
2,204 2,062 
Prepaid expenses and other current assets
512 614 
Total current assets
8,795 8,892 
Property, plant and equipment, net
2,077 2,055 
Other assets
Operating lease right-of-use assets
2,322 2,282 
Goodwill
1,421 1,401 
Other intangible assets, net
2,358 2,338 
Other assets
930 813 
Total other assets
7,031 6,834 
Total assets
$17,903 $17,781 
LIABILITIES AND EQUITY
Current liabilities
Current debt
$473 $1,222 
Accounts payable
1,178 1,177 
Operating lease liabilities
399 375 
Other accrued liabilities
2,694 2,405 
Total current liabilities
4,744 5,179 
Noncurrent liabilities
Long-term debt
4,913 4,914 
Long-term operating lease liabilities
2,309 2,278 
Other noncurrent liabilities
1,456 1,448 
Total noncurrent liabilities
8,678 8,640 
Contingencies


Equity
Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at September 30, 2020 and June 30, 2020; shares issued: 453,152,184 at September 30, 2020 and 451,927,441 at June 30, 2020; Class B shares authorized: 304,000,000 at September 30, 2020 and June 30, 2020; shares issued and outstanding: 135,067,429 at September 30, 2020 and 135,235,429 at June 30, 2020
6 6 
Paid-in capital
4,913 4,790 
Retained earnings
10,480 10,134 
Accumulated other comprehensive loss
(594)(665)
14,805 14,265 
Less: Treasury stock, at cost; 226,727,480 Class A shares at September 30, 2020 and 226,637,238 Class A shares at June 30, 2020
(10,353)(10,330)
Total stockholders’ equity – The Estée Lauder Companies Inc.
4,452 3,935 
Noncontrolling interests
29 27 
Total equity
4,481 3,962 
Total liabilities and equity
$17,903 $17,781 
See notes to consolidated financial statements.
4

Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30
(In millions)20202019
Cash flows from operating activities
Net earnings$525 $598 
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization156 143 
Deferred income taxes(39)11 
Non-cash stock-based compensation64 56 
Net loss on disposal of property, plant and equipment2 2 
Pension and post-retirement benefit expense23 21 
Pension and post-retirement benefit contributions(7)(9)
Other non-cash items(10)(2)
Changes in operating assets and liabilities:
Increase in accounts receivable, net(607)(487)
Increase in inventory and promotional merchandise(94)(83)
Decrease (increase) in other assets, net39 (48)
Decrease in accounts payable(21)(400)
Increase in other accrued and noncurrent liabilities316 31 
Increase (decrease) in operating lease assets and liabilities, net11 (3)
Net cash flows provided by (used for) operating activities358 (170)
Cash flows from investing activities
Capital expenditures(116)(125)
Proceeds from purchase price refund32  
Payment for acquired business(6) 
Purchases of investments(40)(5)
Settlement of net investment hedges(112)2 
Net cash flows used for investing activities(242)(128)
Cash flows from financing activities
Proceeds (repayments) of current debt, net(747)5 
Repayments and redemptions of long-term debt(2)(5)
Net proceeds from stock-based compensation transactions58 55 
Payments to acquire treasury stock(25)(313)
Dividends paid to stockholders(174)(156)
Payments to noncontrolling interest holders for dividends (2)
Net cash flows used for financing activities(890)(416)
Effect of exchange rate changes on Cash and cash equivalents19 (14)
Net decrease in Cash and cash equivalents(755)(728)
Cash and cash equivalents at beginning of period5,022 2,987 
Cash and cash equivalents at end of period$4,267 $2,259 
See notes to consolidated financial statements.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of The Estée Lauder Companies Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated.
The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim consolidated financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020.
Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to current year presentation.

Management Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses reported in those financial statements. Descriptions of the Company’s significant accounting policies are discussed in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020. Management evaluates the related estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment, including those related to the impacts of the COVID-19 pandemic, will be reflected in the consolidated financial statements in future periods.

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 $91 million and $(72) million, net of tax, during the three months ended September 30, 2020 and 2019, respectively. For the Company’s subsidiaries operating in highly inflationary economies, the U.S. dollar is the functional currency. Remeasurement adjustments in financial statements in a highly inflationary economy and other transactional gains and losses are reflected in earnings. These subsidiaries are not material to the Company’s consolidated financial statements or liquidity.
The Company enters into foreign currency forward contracts and may enter into option contracts to hedge foreign currency transactions for periods consistent with its identified exposures. The Company also enters into foreign currency forward contracts to hedge a portion of its net investment in certain foreign operations, which are designated as net investment hedges. See Note 4 – Derivative Financial Instruments for further discussion. The Company categorizes these instruments as entered into for purposes other than trading.
The accompanying consolidated statements of earnings include net exchange losses on foreign currency transactions of $1 million and $3 million during the three months ended September 30, 2020 and 2019, respectively.

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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration of Credit Risk

The Company is a worldwide manufacturer, marketer and distributor of skin care, makeup, fragrance and hair care products. The Company’s sales subject to credit risk are made primarily to department stores, perfumeries, specialty multi-brand retailers and retailers in its travel retail business. The Company grants credit to qualified customers. As a result of the COVID-19 pandemic, the Company has enhanced its assessment of its customers' abilities to pay with a greater focus on factors affecting their liquidity and less on historical payment performance. While the Company does not believe it is exposed significantly to any undue concentration of credit risk at this time, it continues to monitor the extent of the impact of the COVID-19 pandemic on its customers' abilities, individually and collectively, to make timely payments.

The Company’s largest customer during the quarter sells products primarily in China travel retail and accounted for $554 million, or 16%, and $169 million, or 4%, of the Company's consolidated net sales for the three months ended September 30, 2020 and 2019, respectively. This customer accounted for $289 million, or 15%, and $297 million, or 24%, of the Company's accounts receivable at September 30, 2020 and June 30, 2020, respectively.

Another major customer of the Company during the quarter sells products primarily within the United States and accounted for $215 million, or 11%, and $87 million, or 7%, of the Company’s accounts receivable at September 30, 2020 and June 30, 2020, respectively. This customer accounted for $181 million, or 5%, and $279 million, or 7%, of the Company’s consolidated net sales for the three months ended September 30, 2020 and 2019, respectively.
Inventory and Promotional Merchandise
Inventory and promotional merchandise consists of the following:
(In millions)September 30
2020
June 30
2020
Raw materials
$553 $542 
Work in process
266 305 
Finished goods
1,126 995 
Promotional merchandise
259 220 
$2,204 $2,062 
Property, Plant and Equipment

Property, plant and equipment consists of the following:
(In millions)September 30
2020
June 30
2020
Assets (Useful Life)
Land
$34 $33 
Buildings and improvements (10 to 40 years)
419 400 
Machinery and equipment (3 to 10 years)
913 865 
Computer hardware and software (4 to 10 years)
1,374 1,335 
Furniture and fixtures (5 to 10 years)
122 120 
Leasehold improvements
2,426 2,381 
5,288 5,134 
Less accumulated depreciation and amortization
(3,211)(3,079)
$2,077 $2,055 

The cost of assets related to projects in progress of $523 million and $501 million as of September 30, 2020 and June 30, 2020, respectively, is included in their respective asset categories above. Depreciation and amortization of property, plant and equipment was $125 million during the three months ended September 30, 2020 and 2019. Depreciation and amortization related to the Company’s manufacturing process is included in Cost of sales, and all other depreciation and amortization is included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The effective rate for income taxes was 21.8% and 21.3% for the three months ended September 30, 2020 and 2019, respectively. The increase in the effective tax rate of 50 basis points was primarily attributable to a higher effective tax rate on the Company's foreign operations.

The fiscal 2021 first quarter effective tax rate included a 130 basis point reduction to the current period effective tax rate due to the impact of the U.S. government issuance of final global intangible low-taxed income (“GILTI”) tax regulations in July 2020 under the Tax Cuts and Jobs Act that provide for a high-tax exception to the current year GILTI tax. These newly-issued regulations are retroactive to the original enactment of the GILTI tax provision, which includes the Company's 2019 and 2020 fiscal years. The Company is currently evaluating the impact and ability to apply the GILTI regulations relating to fiscal 2019 and fiscal 2020.

The fiscal 2021 first quarter effective tax rate also included a 120 basis point increase to the current period effective tax rate due to the pending December 31, 2020 expiration of a tax law in China that expanded the corporate income tax deduction allowance for advertising and promotion expenses (“expiring China tax law”). The favorable impact from a possible re-enactment of the expiring China tax law would be recognized in the provision for income taxes in the period that includes the date of such re-enactment.
As of September 30, 2020 and June 30, 2020, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $73 million and $70 million, respectively. The total amount of unrecognized tax benefits at September 30, 2020 that, if recognized, would affect the effective tax rate was $58 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three months ended September 30, 2020 in the accompanying consolidated statements of earnings was $1 million. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at September 30, 2020 and June 30, 2020, was $14 million and $13 million, respectively. On the basis of the information available as of September 30, 2020, it is reasonably possible that the total amount of unrecognized tax benefits could decrease in a range of $5 million to $10 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.
Other Accrued Liabilities
Other accrued liabilities consist of the following:
(In millions)September 30
2020
June 30
2020
Advertising, merchandising and sampling$316 $256 
Employee compensation405 424 
Deferred revenue353 222 
Payroll and other taxes277 250 
Accrued income taxes269 208 
Sales return accrual253 212 
Other821 833 
$2,694 $2,405 
Debt

In August 2020, the Company repaid the remaining $750 million borrowed under its $1,500 million revolving credit facility that was outstanding as of June 30, 2020.

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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Adopted Accounting Standards

Measurement of Credit Losses on Financial Instruments (ASC Topic 326 – Financial Instruments – Credit Losses) (“ASC 326”)
In June 2016, the FASB issued authoritative guidance that requires companies to utilize an impairment model for most financial assets measured at amortized cost and certain other financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses. In addition, this guidance changes the recognition method for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk, and requires additional disclosures. In general, modified retrospective adoption will be required for all outstanding instruments that fall under this guidance.

In November 2019, the FASB issued authoritative guidance (ASU 2019-11 – Codification Improvements to Topic 326, Financial Instruments – Credit Losses) that amends ASC Topic 326 to clarify, improve and amend certain aspects of this guidance, such as disclosures related to accrued interest receivables and the estimation of credit losses associated with financial assets secured by collateral.

In February 2020, the FASB issued authoritative guidance (ASU 2020-02 – Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842)) that amends and clarifies Topic 326 and Topic 842. For Topic 326, the codification was updated to include the Securities and Exchange Commission staff interpretations associated with registrants engaged in lending activities.

Effective for the Company – Fiscal 2021 first quarter.

Impact on consolidated financial statements – On July 1, 2020, the Company adopted ASC 326. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. See Note 6 – Revenue Recognition for further discussion.
Goodwill and Other – Internal-Use Software (ASU 2018-15 – Intangibles Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract)
In August 2018, the FASB issued authoritative guidance that permits companies to capitalize the costs incurred for setting up business systems that operate on cloud technology. The new guidance aligns the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance does not affect the accounting for the service element of a hosting arrangement that is a service contract. Capitalized costs associated with a hosting arrangement that is a service contract must be amortized over the term of the hosting arrangement to the same line item in the income statement as the expense for fees for the hosting arrangement.
Effective for the Company  Fiscal 2021 first quarter, with early adoption permitted in any interim period. This guidance can be adopted either retrospectively, or prospectively to all implementation costs incurred after the date of adoption.
Impact on consolidated financial statements – On July 1, 2020, the Company adopted this guidance prospectively to all implementation costs incurred after the date of adoption. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
Recently Issued Accounting Standards

Reference Rate Reform (ASC Topic 848) (Accounting Standards Update (“ASU”) 2020-04 - Facilitation of the Effects of Reference Rate Reform on Financial Reporting)
In March 2020, the FASB issued authoritative guidance to provide optional relief for companies preparing for the discontinuation of interest rates such as LIBOR, which is expected to be phased out at the end of calendar 2021, and applies to lease contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that have LIBOR as the benchmark rate.

Effective for the Company – This guidance can be applied for a limited time, as of the beginning of the interim period that includes March 12, 2020 or any date thereafter, through December 31, 2022. The guidance will no longer be available to apply after December 31, 2022.

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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impact on consolidated financial statements – The Company is currently assessing the impact of applying this guidance on its existing derivative contracts, leases and other arrangements, as well as when to adopt this guidance.
Income Taxes (ASU 2019-12 – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes)
In December 2019, the FASB issued authoritative guidance that simplifies the accounting for income taxes by removing certain exceptions and making simplifications in other areas.
Effective for the Company – Fiscal 2022 first quarter, with early adoption permitted in any interim period. If adopted early, the Company must adopt all the amendments in the same period. The amendments have differing adoption methods including retrospectively, prospectively and/or modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption, depending on the specific change.
Impact on consolidated financial statements – The Company is currently evaluating the impact of applying this guidance and believes that it has transactions that may fall under the scope.
No other recently issued accounting pronouncements are expected to have a material impact on the Company’s consolidated financial statements.
NOTE 2 – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents goodwill by product category and the related change in the carrying amount:

(In millions)Skin CareMakeupFragranceHair CareTotal
Balance as of June 30, 2020
Goodwill
$519 $1,210 $254 $389 $2,372 
Accumulated impairments
(95)(817)(26)(33)(971)
424 393 228 356 1,401 
Goodwill acquired during the period
 2  4 6 
Translation adjustments, goodwill
10  5 1 16 
Translation adjustments, accumulated impairments
(1)  (1)(2)
9 2 5 4 20 
Balance as of September 30, 2020
Goodwill
529 1,212 259 394 2,394 
Accumulated impairments
(96)(817)(26)(34)(973)
$433 $395 $233 $360 $1,421 

Other intangible assets consist of the following:

September 30, 2020June 30, 2020
(In millions)Gross
Carrying
Value
Accumulated
Amortization
Total Net
Book
Value
Gross
Carrying
Value
Accumulated
Amortization
Total Net
Book
Value
Amortizable intangible assets:
Customer lists and other
$1,615 $500 $1,115 $1,590 $475 $1,115 
License agreements43 43 $ 43 43 $ 
$1,658 $543 $1,115 $1,633 $518 $1,115 
Non-amortizable intangible assets:
Trademarks and other1,243 1,223 
Total intangible assets
$2,358 $2,338 

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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate amortization expense related to amortizable intangible assets was $25 million and $11 million for the three months ended September 30, 2020 and 2019, respectively. The estimated aggregate amortization expense for the remainder of fiscal 2021 and for each of the next four fiscal years is as follows:

Fiscal
(In millions)20212022202320242025
Estimated aggregate amortization expense$77 $102 $101 $100 $99 

NOTE 3 – CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES

Charges associated with restructuring activities for the three months ended September 30, 2020 were as follows:

Sales
Returns
(included in
Net Sales)
Cost of SalesOperating ExpensesTotal
(In millions)Restructuring
Charges
Other
Charges
Leading Beauty Forward Program$ $3 $(8)$2 $(3)
Post-COVID Business Acceleration Program  12  12 
Total$ $3 $4 $2 $9 

Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business.

Leading Beauty Forward Program

In May 2016, the Company announced a multi-year initiative (“Leading Beauty Forward Program” or “LBF Program”) to build on its strengths and better leverage its cost structure to free resources for investment to continue its growth momentum. The LBF Program is designed to enhance the Company’s go-to-market capabilities, reinforce its leadership in global prestige beauty and continue creating sustainable value. As of June 30, 2019, the Company concluded the approvals of all major initiatives under the LBF Program related to the optimization of select corporate functions, supply chain activities, and corporate and regional market support structures, as well as the exit of underperforming businesses, and expects to substantially complete those initiatives through fiscal 2021.

LBF Program Approvals

The LBF Program approved restructuring and other charges expected to be incurred were:

Sales
Returns
(included in
Net Sales)
Cost of SalesOperating ExpensesTotal
(In millions)Restructuring
Charges
Other
Charges
Total Charges Approved
Cumulative through June 30, 2020$13 $85 $511 $358 $967 
Three months ended September 30, 2020
1  (8)7  
Cumulative through September 30, 2020$14 $85 $503 $365 $967 

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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)Employee-
Related
Costs
Asset-
Related
Costs
Contract
Terminations
Other Exit
Costs
Total
Restructuring Charges Approved
Cumulative through June 30, 2020$460 $28 $7 $16 $511 
Three months ended September 30, 2020
(8)   (8)
Cumulative through September 30, 2020$452 $28 $7 $16 $503 

The Company records approved charges associated with restructuring and other activities once the relevant accounting criteria have been met.

LBF Program Restructuring and Other Charges

Total cumulative charges recorded associated with restructuring and other activities for the LBF Program were:

(In millions)Sales
Returns
(included in
Net Sales)
Cost of SalesOperating ExpensesTotal
Restructuring
Charges
Other
Charges
Total Charges
Cumulative through June 30, 2020$14 $65 $491 $304 $874 
Three months ended September 30, 2020 3 (8)2 (3)
Cumulative through September 30, 2020$14 $68 $483 $306 $871 

(In millions)Employee-
Related
Costs
Asset-
Related
Costs
Contract
Terminations
Other Exit
Costs
Total
Restructuring Charges (Adjustments)
Cumulative through June 30, 2020$451 $27 $6 $7 $491 
Three months ended September 30, 2020(8)   (8)
Cumulative through September 30, 2020$443 $27 $6 $7 $483 

Employee-related costs reflect adjustments to the accrual estimate for certain employees who either resigned or transferred to other existing positions within the Company.

Changes in accrued restructuring charges for the three months ended September 30, 2020 relating to the LBF Program were:

(In millions)Employee-
Related
Costs
Asset-
Related
Costs
Contract
Terminations
Other Exit
Costs
Total
Balance at June 30, 2020$112 $ $ $ $112 
Charges (adjustments)(8)   (8)
Cash payments(23)   (23)
Balance at September 30, 2020$81 $ $ $ $81 

Accrued restructuring charges at September 30, 2020 relating to the LBF Program are expected to result in cash expenditures funded from cash provided by operations of approximately $56 million, $20 million and $5 million for the remainder of fiscal 2021 and for fiscal 2022 and 2023, respectively. The expected cash expenditures for fiscal 2024 are de minimis.

Additional information about the LBF Program is included in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020.

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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Post-COVID Business Acceleration Program

On August 20, 2020, the Company announced a two-year restructuring program, Post-COVID Business Acceleration Program (the “PCBA Program”), designed to resize the Company's business against the dramatic shifts to its distribution landscape and consumer behaviors in the wake of the COVID-19 pandemic. The PCBA Program is designed to help improve efficiency and effectiveness by rebalancing resources to growth areas of prestige beauty. It is expected to further strengthen the Company by building upon the foundational capabilities in which the Company has invested.

The PCBA Program’s main areas of focus include accelerating the shift to online with the realignment of the Company’s distribution network reflecting freestanding store and certain department store closures, with a focus on North America and Europe, the Middle East & Africa; the reduction in brick-and-mortar point of sale employees and related support staff; and the redesign of the Company’s regional branded marketing organizations, plus select opportunities in global brands and functions. This program is expected to position the Company to better execute its long-term strategy while strengthening its financial flexibility.

In connection with the PCBA Program, at this time the Company estimates a net reduction in the range of approximately 1,500 to 2,000 positions globally, which is about 3% of its current workforce including temporary and part-time employees. This reduction takes into account the elimination of some positions, retraining and redeployment of certain employees and investment in new positions in key areas. The Company also estimates the closure of approximately 10% to 15% 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 $400 million and $500 million, before taxes.

PCBA Program Approvals

Total cumulative charges approved by the Company through September 30, 2020 were:

Sales
Returns
(included in
Net Sales)
Cost of SalesOperating ExpensesTotal
(In millions)Restructuring
Charges
Other
Charges
Total Charges Approved
Three months ended September 30, 2020$2 $ $13 $3 $18 

Included in the above table, cumulative PCBA Program restructuring initiatives approved by the Company through September 30, 2020 by major cost type were:

(In millions)Employee-
Related
Costs
Asset-
Related
Costs
Contract
Terminations
Other Exit
Costs
Total
Restructuring Charges Approved
Three months ended September 30, 2020$12 $1 $ $ $13 

Specific actions taken since the PCBA Program inception include:

Optimize Distribution Network – To help restore profitability to pre-COVID-19 pandemic levels and, as part of a broader initiative to be completed in phases, the Company has approved initiatives to close a number of underperforming freestanding stores and counters, mainly in the United Kingdom and certain affiliates in Europe, the Middle East & Africa. These anticipated closures reflect changing consumer behavior including higher demand for online and omnichannel capabilities. These activities will result in product returns, inventory write-offs, reduction of workforce, and termination of contracts.



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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Optimize Digital Organization – The Company approved initiatives to enhance its go-to-market support structures and align more resources to support online and digital activities. These initiatives are primarily intended to shift certain areas of focus from traditional brick-and-mortar to social and digital strategies to provide enhanced consumer experience, as well as to support expanded omnichannel opportunities. These actions will result in a net reduction of the workforce, which includes position eliminations, the re-leveling of certain positions and an investment in new capabilities.

PCBA Program Restructuring and Other Charges

Restructuring charges are comprised of the following:

Employee-Related Costs – Employee-related costs are primarily comprised of severance and other post-employment benefit costs, calculated based on salary levels, prior service and other statutory minimum benefits, if applicable.

Asset-Related Costs – Asset-related costs primarily consist of asset write-offs or accelerated depreciation related to long-lived assets (including operating lease right-of-use assets) that will be taken out of service prior to their existing useful life as a direct result of a restructuring initiative.

Contract Terminations – Costs related to contract terminations include continuing payments to a third party after the Company has ceased benefiting from the rights conveyed in the contract, or a payment made to terminate a contract prior to its expiration.

Other Exit Costs – Other exit costs related to restructuring activities generally include costs to relocate facilities or employees, recruiting to fill positions as a result of relocation of operations, and employee outplacement for separated employees.

Other charges associated with restructuring activities are comprised of the following:

Sales Returns and Cost of Sales – Product returns (offset by the related cost of sales) and inventory write-offs or write-downs as a direct result of an approved restructuring initiative to exit certain businesses or locations will be recorded as a component of Net sales and/or Cost of sales when estimable and reasonably assured.

Other Charges – The Company approved other charges relate to the design and implementation of approved initiatives, which are charged to Operating Expenses as incurred and primarily include the following:
Consulting and other professional services for organizational design of the future structures and processes as well as the implementation thereof,
Temporary labor backfill,
Costs to establish and maintain a Project Management Office (“PMO”) for the duration of the PCBA Program, including internal costs for employees dedicated solely to project management activities, and other PMO-related expenses incremental to the Company’s ongoing operations (e.g., rent and utilities), and
Recruitment and training costs for new and reskilled employees to acquire and apply the capabilities needed to perform responsibilities as a direct result of an approved restructuring initiative.


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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company records approved charges associated with restructuring and other activities once the relevant accounting criteria have been met. Total cumulative charges recorded associated with restructuring and other activities for the PCBA Program were:

Sales
Returns
(included in
Net Sales)
Cost of SalesOperating ExpensesTotal
(In millions)Restructuring
Charges
Other
Charges
Total Charges
Cumulative through September 30, 2020$ $ $12 $ $12 


(In millions)Employee-
Related
Costs
Asset-
Related
Costs
Contract
Terminations
Other Exit
Costs
Total
Restructuring Charges
Cumulative through September 30, 2020$12 $ $ $ $12 

Accrued restructuring charges at September 30, 2020 relating to the PCBA Program are expected to result in cash expenditures funded from cash provided by operations of approximately $9 million, $2 million and $1 million for the remainder of fiscal 2021 and for fiscal 2022 and 2023, respectively.

NOTE 4 – DERIVATIVE FINANCIAL INSTRUMENTS
The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The Company enters into foreign currency forward contracts, and may enter into option contracts, to reduce the effects of fluctuating foreign currency exchange rates. In addition, the Company enters into interest rate derivatives to manage the effects of interest rate movements on the Company’s aggregate liability portfolio, including potential future debt issuances. The Company enters into the net investment hedges to offset the risk of changes in the U.S. dollar value of the Company’s investment in these foreign operations due to fluctuating foreign exchange rates. Time value is excluded from the effectiveness assessment and is recognized under a systematic and rational method over the life of the hedging instrument in Selling, general and administrative expenses. The net gain or loss on net investment hedges is recorded within translation adjustments, as a component of accumulated OCI (“AOCI”) on the Company’s consolidated balance sheets, until the sale or substantially complete liquidation of the underlying assets of the Company’s investment. The Company also enters into foreign currency forward contracts, and may use option contracts, not designated as hedging instruments, to mitigate the change in fair value of specific assets and liabilities on the consolidated balance sheets. At September 30, 2020, the notional amount of derivatives not designated as hedging instruments was $4,189 million. The Company does not utilize derivative financial instruments for trading or speculative purposes. Costs associated with entering into derivative financial instruments have not been material to the Company’s consolidated financial results.
For each derivative contract entered into, where the Company looks to obtain hedge accounting treatment, the Company formally and contemporaneously documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking the hedge transaction, the nature of the risk being hedged, and how the hedging instruments’ effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. At inception, the Company evaluates the effectiveness of hedge relationships quantitatively, and has elected to perform, after initial evaluation, qualitative effectiveness assessments of certain hedge relationships to support an ongoing expectation of high effectiveness, if effectiveness testing is required. If based on the qualitative assessment, it is determined that a derivative has ceased to be a highly effective hedge, the Company will perform a quantitative assessment to determine whether to discontinue hedge accounting with respect to that derivative prospectively.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the Company’s derivative financial instruments included in the consolidated balance sheets are presented as follows:

Asset DerivativesLiability Derivatives
Fair Value (1)
Fair Value (1)
(In millions)Balance Sheet
Location
September 30
2020
June 30
2020
Balance Sheet
Location
September 30
2020
June 30
2020
Derivatives Designated as Hedging Instruments
Foreign currency cash flow hedgesPrepaid expenses and other current assets$6 $26 Other accrued liabilities$13 $3 
Net investment hedgesPrepaid expenses and other current assets8 21 Other accrued liabilities 62 
Interest rate-related derivativesPrepaid expenses and other current assets13 15 Other accrued liabilities3 3 
Total Derivatives Designated as Hedging Instruments27 62 16 68 
Derivatives Not Designated as Hedging Instruments
Foreign currency forward contractsPrepaid expenses and other current assets8 40 Other accrued liabilities13 15 
Total derivatives$35 $102 $29 $83 
(1)See Note 5 – Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined.
The amounts of the gains and losses related to the Company’s derivative financial instruments designated as hedging instruments that are included in the assessment of effectiveness are as follows:

Amount of Gain or (Loss)
Recognized in OCI on
Derivatives
Location of Gain or
(Loss) Reclassified
from AOCI into
Earnings
Amount of Gain or (Loss)
Reclassified from AOCI into Earnings(1)
Three Months Ended
September 30
Three Months Ended
September 30
(In millions)2020201920202019
Derivatives in Cash Flow Hedging Relationships:
Foreign currency forward contracts
$(31)$25 
Net sales
$1 $13 
Interest rate-related derivatives
 (14)
Interest expense
(1) 
(31)11  13 
Derivatives in Net Investment Hedging Relationships(2):
Foreign currency forward contracts(3)
(63)3   
Total derivatives
$(94)$14 $ $13 
(1)The amount reclassified into earnings as a result of the discontinuance of cash flow hedges because probable forecasted transactions will no longer occur by the end of the original time period was not material.
(2)During the three months ended September 30, 2020, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $5 million.
(3)Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets.

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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amount of Gain or (Loss)
Recognized in Earnings on
Derivatives (1)
Location of Gain or (Loss) Recognized in Earnings on Derivatives
Three Months Ended
September 30
(In millions)20202019
Derivatives in Fair Value Hedging Relationships:
Interest rate swap contracts
Interest expense
$(2)$2 
(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.

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
September 30, 2020September 30, 2020
Current debt$453 $4 
Long-term debt259 9 
Total debt$712 $13 
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
20202019
(In millions)Net SalesInterest
Expense
Net SalesInterest
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$3,562