el-20221231

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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 December 31, 2022


☐			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 January 26, 2023, 231,678,169 shares of the registrant’s Class A Common Stock, $.01 par value, and 125,542,029 shares of the registrant’s Class B Common Stock, $.01 par value, were outstanding.

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THE ESTÉE LAUDER COMPANIES INC.

INDEX


			Page

Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Consolidated Statements of Earnings — Three and Six Months Ended December 31, 2022 and 2021			2

Consolidated Statements of Comprehensive Incom e — Three and Six Months Ended December 31, 2022 and 2021			3

Consolidated Balance Sheets — December 31, 2022 and June 30, 2022 (Audited)			4

Consolidated Statements of Cash Flows — Six Months Ended December 31, 2022 and 2021			5

Notes to Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			35

Item 3. Quantitative and Qualitative Disclosures About Market Risk			64

Item 4. Controls and Procedures			64

Part II. Other Information

Item 1. Legal Proceedings			64

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			65

Item 6. Exhibits			65

Signatures			66

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)


	Three Months Ended December 31			Six Months Ended December 31
(In millions, except per share data)		2022		2021		2022		2021

Net sales		$	4,620	$	5,539	$	8,550	$	9,931
Cost of sales		1,219		1,223		2,242		2,280

Gross profit		3,401		4,316		6,308		7,651

Operating expenses
Selling, general and administrative		2,630		2,885		4,874		5,279
Restructuring and other charges		8		13		10		19

Impairment of other intangible assets		207		—		207		—
Total operating expenses		2,845		2,898		5,091		5,298

Operating income		556		1,418		1,217		2,353

Interest expense		52		42		98		84
Interest income and investment income, net		26		10		41		14
Other components of net periodic benefit cost		(2)		(2)		(5)		(1)
Other income		—		—		—		1
Earnings before income taxes		532		1,388		1,165		2,285

Provision for income taxes		135		298		278		500
Net earnings		397		1,090		887		1,785

Net earnings attributable to noncontrolling interests		—		(4)		—		(5)
Net loss (earnings) attributable to redeemable noncontrolling interest		(3)		2		(4)		—
Net earnings attributable to The Estée Lauder Companies Inc.		$	394	$	1,088	$	883	$	1,780

Net earnings attributable to The Estée Lauder Companies Inc. per common share
Basic		$	1.10	$	3.02	$	2.47	$	4.93
Diluted		$	1.09	$	2.97	$	2.45	$	4.85

Weighted-average common shares outstanding
Basic		357.7		360.6		357.8		361.4
Diluted		360.4		366.0		360.9		367.0

See notes to consolidated financial statements.

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THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended December 31				Six Months Ended December 31
(In millions)	2022		2021		2022		2021

Net earnings	$	397	$	1,090	$	887	$	1,785

Other comprehensive income (loss):

Net cash flow hedge gain (loss)	(56)		(5)		(7)		16
Retirement plan and other retiree benefit adjustments	—		4		—		8
Translation adjustments	287		(15)		(94)		(201)
Benefit (provision) for income taxes on components of other comprehensive income	26		(6)		7		(18)
Total other comprehensive income (loss), net of tax	257		(22)		(94)		(195)
Comprehensive income	654		1,068		793		1,590

Comprehensive income attributable to noncontrolling interests:
Net earnings	—		(4)		—		(5)
Translation adjustments	—		1		—		2
Total comprehensive income attributable to noncontrolling interests	—		(3)		—		(3)

Comprehensive loss (income) attributable to redeemable noncontrolling interest:
Net loss (earnings)	(3)		2		(4)		—
Translation adjustments	(8)		—		27		17
Total comprehensive loss (income) attributable to redeemable noncontrolling interest	(11)		2		23		17
Comprehensive income attributable to The Estée Lauder Companies Inc.	$	643	$	1,067	$	816	$	1,604

See notes to consolidated financial statements.

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THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED BALANCE SHEETS


(In millions, except share data)	December 31 2022		June 30 2022
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	3,725	$	3,957
Accounts receivable, net	1,932		1,629
Inventory and promotional merchandise	3,069		2,920
Prepaid expenses and other current assets	641		792
Total current assets	9,367		9,298

Property, plant and equipment, net	2,908		2,650

Other assets
Operating lease right-of-use assets	1,847		1,949
Goodwill	2,473		2,521
Other intangible assets, net	3,097		3,428
Other assets	1,039		1,064
Total other assets	8,456		8,962
Total assets	$	20,731	$	20,910

LIABILITIES AND EQUITY
Current liabilities
Current debt	$	260	$	268
Accounts payable	1,507		1,822
Operating lease liabilities	349		365
Other accrued liabilities	3,539		3,360
Total current liabilities	5,655		5,815

Noncurrent liabilities
Long-term debt	5,111		5,144
Long-term operating lease liabilities	1,757		1,868
Other noncurrent liabilities	1,487		1,651
Total noncurrent liabilities	8,355		8,663

Commitments and Contingencies

Redeemable Noncontrolling Interest	819		842

Equity
Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at December 31, 2022 and June 30, 2022; shares issued: 469,124,426 at December 31, 2022 and 467,949,351 at June 30, 2022; Class B shares authorized: 304,000,000 at December 31, 2022 and June 30, 2022; shares issued and outstanding: 125,542,029 at December 31, 2022 and 125,542,029 at June 30, 2022	6		6
Paid-in capital	6,000		5,796
Retained earnings	14,342		13,912
Accumulated other comprehensive loss	(829)		(762)
	19,519		18,952
Less: Treasury stock, at cost; 237,534,951 Class A shares at December 31, 2022 and 236,435,830 Class A shares at June 30, 2022	(13,617)		(13,362)


Total equity	5,902		5,590
Total liabilities, redeemable noncontrolling interest and equity	$	20,731	$	20,910

See notes to consolidated financial statements.

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THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended December 31
(In millions)	2022		2021

Cash flows from operating activities
Net earnings	$	887	$	1,785
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization	359		364
Deferred income taxes	(31)		(43)
Non-cash stock-based compensation	165		192
Net loss on disposal of property, plant and equipment	4		3
Non-cash restructuring and other charges	14		1
Pension and post-retirement benefit expense	26		39
Pension and post-retirement benefit contributions	(12)		(18)
Impairment of other intangible assets	207		—


Gain on previously held equity method investment	—		(1)
Other non-cash items	(5)		(4)
Changes in operating assets and liabilities:
Increase in accounts receivable, net	(295)		(407)
Increase in inventory and promotional merchandise	(156)		(164)
Decrease (increase) in other assets, net	33		(57)
Decrease in accounts payable	(310)		(40)
Increase (decrease) in other accrued and noncurrent liabilities	(106)		213
Decrease in operating lease assets and liabilities, net	(29)		(17)
Net cash flows provided by operating activities	751		1,846

Cash flows from investing activities
Capital expenditures	(419)		(459)

Payment for acquired business	—		(3)

Purchases of investments	(4)		(10)
Settlement of net investment hedges	138		58
Net cash flows used for investing activities	(285)		(414)

Cash flows from financing activities
Proceeds (repayments) of current debt, net	244		(4)

Debt issuance costs	—		(1)
Repayments and redemptions of long-term debt	(258)		(10)
Net proceeds from stock-based compensation transactions	37		77
Payments to acquire treasury stock	(257)		(1,428)

Dividends paid to stockholders	(451)		(409)

Net cash flows used for financing activities	(685)		(1,775)

Effect of exchange rate changes on Cash and cash equivalents	(13)		(12)
Net decrease in Cash and cash equivalents	(232)		(355)
Cash and cash equivalents at beginning of period	3,957		4,958
Cash and cash equivalents at end of period	$	3,725	$	4,603

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 normal and recurring 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, 2022.

Certain prior year amounts in the notes to the consolidated financial statements 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, 2022. 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 $291 million and $(20) million, net of tax, during the three months ended December 31, 2022 and 2021, respectively, and $(61) million and $(195) million, net of tax, during the six months ended December 31, 2022 and 2021, 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 gains (losses) on foreign currency transactions of $20 million and $(6) million during the three months ended December 31, 2022 and 2021, respectively, and $34 million and $(18) million during the six months ended December 31, 2022 and 2021, 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 seller of skin care, makeup, fragrance and hair care products. The Company’s sales subject to credit risk are made primarily to retailers in its travel retail business, department stores, specialty multi-brand retailers and perfumeries. The Company grants credit to qualified customers. While the Company does not believe it is exposed significantly to any undue concentration of credit risk at this time, it continues to monitor its customers' abilities, individually and collectively, to make timely payments.

The Company’s largest customer during the three and six months ended December 31, 2022 sells products primarily in China travel retail. This customer accounted for $242 million, or 12%, and $399 million, or 24%, of the Company's accounts receivable at December 31, 2022 and June 30, 2022, respectively.

Inventory and Promotional Merchandise

Inventory and promotional merchandise consists of the following:


(In millions)	December 31, 2022		June 30, 2022
Raw materials	$	918	$	791
Work in process	318		366
Finished goods	1,519		1,449
Promotional merchandise	314		314
	$	3,069	$	2,920

Property, Plant and Equipment

Property, plant and equipment consists of the following:


(In millions)	December 31, 2022		June 30, 2022
Assets (Useful Life)
Land	$	54	$	53
Buildings and improvements (10 to 40 years)	504		491
Machinery and equipment (3 to 10 years)	1,027		994
Computer hardware and software (4 to 10 years)	1,587		1,468
Furniture and fixtures (5 to 10 years)	134		129
Leasehold improvements	2,266		2,246
Construction in progress	1,008		759
	6,580		6,140
Less accumulated depreciation and amortization	(3,672)		(3,490)
	$	2,908	$	2,650

Depreciation and amortization of property, plant and equipment was $138 million and $136 million during the three months ended December 31, 2022 and 2021, respectively, and $274 million and $266 million during the six months ended December 31, 2022 and 2021, 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.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes

The effective rate for income taxes for the three and six months ended December 31, 2022 and 2021 are as follows:


	Three Months Ended December 31				Six Months Ended December 31
	2022		2021		2022		2021
Effective rate for income taxes	25.4	%	21.5	%	23.9	%	21.9	%
Basis-point change from the prior-year period	390				200

For the three and six months ended December 31, 2022, the increase in the effective tax rate was primarily attributable to a decrease in excess tax benefits associated with stock-based compensation arrangements and a higher effective tax rate on the Company's foreign operations, partially offset by a reduction in income tax reserve adjustments.

On August 16, 2022, the U.S. federal government enacted the Inflation Reduction Act, with tax provisions primarily focused on implementing a 1% excise tax on share repurchases and a 15% corporate alternative minimum tax based on global adjusted financial statement income. The excise tax is effective beginning with the Company’s third quarter of fiscal 2023 and is not expected to have a material impact on the Company’s results of operations or financial position. The corporate alternative minimum tax will be effective beginning with the Company's first quarter of fiscal 2024. The Company continues to monitor developments and evaluate projected impacts, if any, of this provision to its consolidated financial statements.

As of December 31, 2022 and June 30, 2022, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $58 million and $61 million, respectively. The total amount of unrecognized tax benefits at December 31, 2022 that, if recognized, would affect the effective tax rate was $49 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three and six months ended December 31, 2022 in the accompanying consolidated statements of earnings was $1 million and $2 million, respectively. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at each of December 31, 2022 and June 30, 2022, was $15 million and $14 million, respectively. On the basis of the information available as of December 31, 2022, the Company does not expect significant changes to the total amount of unrecognized tax benefits within the next twelve months.

During the fiscal 2023 first quarter, the Company formally concluded the compliance process with respect to its fiscal 2021 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 and six months ended December 31, 2022.

Other Accrued and Noncurrent Liabilities

Other accrued liabilities consist of the following:


(In millions)	December 31, 2022		June 30, 2022
Advertising, merchandising and sampling	$	284	$	250
Employee compensation	473		693
Deferred revenue	344		312
Payroll and other non-income taxes	308		345
Accrued income taxes	343		267
Sales return accrual	293		252
Other	1,494		1,241
	$	3,539	$	3,360

At December 31, 2022 and June 30, 2022, total Other noncurrent liabilities of $1,487 million and $1,651 million included $636 million and $692 million of deferred tax liabilities, respectively.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recently Issued Accounting Standards

FASB ASU No. 2022-04 – Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations

In September 2022, the FASB issued authoritative guidance which is intended to enhance the transparency surrounding the use of supplier finance programs. The guidance requires companies that use supplier finance programs to make annual disclosures about the program’s key terms, the balance sheet presentation of related amounts, the confirmed amount outstanding at the end of the period and associated rollforward information. Only the amount outstanding at the end of the period must be disclosed in interim periods. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations.

Effective for the Company – The guidance becomes effective for the Company’s first quarter fiscal 2024 and is applied on a retrospective basis, except for the requirement to disclose rollforward information which is effective prospectively for the Company’s first quarter fiscal 2025. Early adoption is permitted. Annual disclosures need to be provided in interim periods within the initial year of adoption.

Impact on consolidated financial statements – The Company has a supplier financing arrangement and will apply the disclosure requirements as required by the amendments.

Reference Rate Reform (ASC Topic 848 “ASC 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 and other contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that reference LIBOR or another rate that is expected to be discontinued as a result of reference rate reform.

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 848.

In December 2022, the FASB issued authoritative guidance to defer the sunset date of ASC 848 from December 31, 2022 to December 31, 2024.

Effective for the Company – This guidance can only be applied for a limited time through December 31, 2024.

Impact on consolidated financial statements – The Company currently has an implementation team in place that has performed a comprehensive evaluation and is assessing the impact of applying this guidance, which includes assessing the impact to business processes and internal controls over financial reporting and the related disclosure requirements. For treasury related arrangements, the Company references LIBOR in its interest rate swap agreements and LIBOR is also used for purposes of discounting certain foreign currency and interest rate forward contracts. The Company is currently evaluating the potential impact of modifying treasury related arrangements and applying the relevant ASC 848 optional practical expedients, as needed. For existing lease, debt arrangements and other contracts, the Company will not adopt any ASC 848 optional practical expedients as it relates to these arrangements. The Company will continue to monitor new contracts that could potentially be eligible for contract modification relief through December 31, 2024.

No other recently issued accounting pronouncements are expected to have a material impact on the Company’s consolidated financial statements.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The following table presents goodwill by product category and the related change in the carrying amount:


(In millions)	Skin Care		Makeup		Fragrance		Hair Care		Total
Balance as of June 30, 2022
Goodwill	$	1,702	$	1,116	$	249	$	353	$	3,420
Accumulated impairments	(138)		(732)		(29)		—		(899)
	1,564		384		220		353		2,521



Translation and other adjustments, goodwill	(50)		—		3		—		(47)
Translation and other adjustments, accumulated impairments	—		—		(1)		—		(1)
	(50)		—		2		—		(48)

Balance as of December 31, 2022
Goodwill	1,652		1,116		252		353		3,373
Accumulated impairments	(138)		(732)		(30)		—		(900)
	$	1,514	$	384	$	222	$	353	$	2,473

Other Intangible Assets

Other intangible assets consist of the following:


	December 31, 2022						June 30, 2022
(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, license agreements and other	$	2,057	$	702	$	1,355	$	2,064	$	628	$	1,436


Non-amortizable intangible assets:
Trademarks and other					1,742						1,992
Total intangible assets					$	3,097					$	3,428

The aggregate amortization expense related to amortizable intangible assets was $37 million and $39 million for the three months ended December 31, 2022 and 2021, respectively, and $73 million and $84 million for the six months ended December 31, 2022 and 2021, respectively.

The estimated aggregate amortization expense for the remainder of fiscal 2023 and for each of the next four fiscal years is as follows:


	Fiscal
(In millions)	2023		2024		2025		2026		2027
Estimated aggregate amortization expense	$	75	$	147	$	147	$	147	$	130

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment Testing During the Six Months Ended December 31, 2022

During the fiscal 2023 second quarter, given the lower-than-expected results in the overall business, the Company made revisions to the internal forecasts relating to its Smashbox reporting unit. The Company concluded that the changes in circumstances in the reporting unit triggered the need for an interim impairment review of its trademark intangible asset. The remaining carrying value of the trademark intangible asset was not recoverable and the Company recorded an impairment charge of $21 million reducing the carrying value to zero.

During the fiscal 2023 second quarter, the Dr.Jart+ reporting unit experienced lower-than-expected growth within key geographic regions and channels that continue to be impacted by the spread of COVID-19 variants, resurgence in cases, and the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting the financial performance of the reporting unit. In addition, due to macro-economic factors, Dr.Jart+ has experienced lower-than-expected growth within key geographic regions. The Too Faced reporting unit experienced lower-than-expected results in key geographic regions and channels coupled with delays in future international expansion to areas that continue to be impacted by COVID-19. As a result, the Company made revisions to the internal forecasts relating to its Dr.Jart+ and Too Faced reporting units. Additionally, there were increases in the weighted average cost of capital for both reporting units as compared to the prior year annual goodwill and other indefinite-lived intangible asset impairment testing as of April 1, 2022.

The Company concluded that the changes in circumstances in the reporting units, along with increases in the weighted average cost of capital, triggered the need for interim impairment reviews of their trademarks and goodwill. These changes in circumstances were also an indicator that the carrying amounts of Dr.Jart+’s and Too Faced’s long-lived assets, including customer lists, may not be recoverable. Accordingly, the Company performed interim impairment tests for the trademarks and a recoverability test for the long-lived assets as of November 30, 2022. The Company concluded that the carrying value of the trademark intangible assets exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows and recorded an impairment charge of $100 million for Dr.Jart+ and $86 million for Too Faced. The Company concluded that the carrying amounts of the long-lived assets were recoverable. After adjusting the carrying values of the trademarks, the Company completed interim quantitative impairment tests for goodwill. As the estimated fair value of the Dr.Jart+ and Too Faced reporting units were in excess of their carrying values, the Company concluded that the carrying amounts of the goodwill were recoverable and did not record a goodwill impairment charge related to these reporting units. The fair values of these reporting units were based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting units. 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 royalty rates for trademarks. The most significant unobservable input used to estimate the fair values of the Dr.Jart+ and Too Faced trademark intangible assets was the weighted-average cost of capital, which was 11% and 13%, respectively.

A summary of the impairment charges for the three and six months ended December 31, 2022 and the remaining trademark and goodwill carrying values as of December 31, 2022, for each reporting unit, are as follows:


		Impairment Charge				Carrying Value
(In millions)		Three and Six Months Ended December 31, 2022				As of December 31, 2022
Reporting Unit:	Geographic Region	Trademarks		Goodwill		Trademarks		Goodwill
Smashbox	The Americas	$	21	$	—	$	—	$	—
Dr. Jart+	Asia/Pacific	100		—		339		318
Too Faced	The Americas	86		—		186		13
Total		$	207	$	—	$	525	$	331

The impairment charges for the three and six months ended December 31, 2022 were reflected in the skin care product category for Dr.Jart+ and the makeup product category for Smashbox and Too Faced.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES

Charges associated with the Post-COVID Business Acceleration Program for the three and six months ended December 31, 2022 were as follows:


	Sales Returns (included in Net Sales)		Cost of Sales		Operating Expenses				Total
(In millions)					Restructuring Charges		Other Charges
Three months ended December 31, 2022	$	1	$	—	$	4	$	3	$	8
Six months ended December 31, 2022	$	6	$	(1)	$	6	$	3	$	14

The types of activities included in restructuring and other charges, and the related accounting criteria, are described below.

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 two-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 December 31, 2022, the Company estimated a net reduction over the duration of the PCBA Program in the range of 2,500 to 3,000 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 estimated the closure over the duration of the PCBA Program of approximately 10% to 15% of its freestanding stores globally, primarily in Europe, the Middle East & Africa and in North America.

As of June 30, 2022, the Company approved specific initiatives under the PCBA Program and expects to substantially complete those initiatives through fiscal 2023. Inclusive of approvals from inception through June 30, 2022, the Company estimates that the PCBA Program may result in related restructuring and other charges totaling between $500 million and $515 million, before taxes. Additional information about the PCBA Program approvals 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, 2022.

Specific actions taken since the PCBA Program inception include:

•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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

•Optimize Select Marketing, Brand and Global Functions – The Company has started to reduce its corporate and certain of its brand office footprints and is moving toward the future of work in a post-COVID environment, by restructuring where and how its employees work and collaborate. In addition, the Company has approved initiatives to reduce organizational complexity and leverage scale across various Global functions. These actions will result in asset write-offs, employee severance, lease termination fees, and consulting and other professional services for the design and implementation of the future structures and processes.

•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 termination of contracts, a net reduction in workforce, product returns, and inventory and other asset write-offs.

•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 completed 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 would not be renewing its existing license agreements for the Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna product lines when their respective terms expire in June 2023. The Company has since negotiated early termination agreements with each of the licensors effective June 30, 2022 and continued to sell products under these licenses until such time. These actions resulted in asset write-offs, including charges for the impairment of goodwill, employee-related costs, and consulting and legal fees.

•Brand Transformation – In reviewing the Company’s brand portfolio to accelerate growth within the makeup product category and to support long-term investments, the decision was made to strategically reposition Smashbox to capitalize on changing consumer preferences and to mitigate the impact caused by the COVID-19 pandemic on the brand. These actions will result primarily in product returns and inventory write-offs.

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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


	Sales Returns (included in Net Sales)		Cost of Sales		Operating Expenses				Total
(In millions)					Restructuring Charges		Other Charges
Total Charges (Adjustments)
Cumulative through June 30, 2022	$	18	$	7	$	310	$	13	$	348
Six months ended December 31, 2022	6		(1)		6		3		14
Cumulative through December 31, 2022	$	24	$	6	$	316	$	16	$	362


(In millions)	Employee- Related Costs		Asset- Related Costs		Contract Terminations		Other Exit Costs		Total
Restructuring Charges (Adjustments)
Cumulative through June 30, 2022	$	203	$	86	$	19	$	2	$	310
Six months ended December 31, 2022	(3)		14		(6)		1		6
Cumulative through December 31, 2022	$	200	$	100	$	13	$	3	$	316

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in accrued restructuring charges for the six months ended December 31, 2022 relating to the PCBA Program were:


(In millions)	Employee- Related Costs		Asset- Related Costs		Contract Terminations		Other Exit Costs		Total
Balance at June 30, 2022	$	125	$	—	$	—	$	—	$	125
Charges	(3)		14		(6)		1		6
Cash payments	(17)		—		(1)