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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 September 30, 2023
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 25, 2023, 232,304,564 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.
THE ESTÉE LAUDER COMPANIES INC.
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) | | | | | | | | | | 2023 | | 2022 |
| | | | | | | | | | | | |
Net sales | | | | | | | | | | $ | 3,518 | | | $ | 3,930 | |
Cost of sales | | | | | | | | | | 1,070 | | | 1,023 | |
| | | | | | | | | | | | |
Gross profit | | | | | | | | | | 2,448 | | | 2,907 | |
| | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | |
Selling, general and administrative | | | | | | | | | | 2,349 | | | 2,244 | |
Restructuring and other charges | | | | | | | | | | 1 | | | 2 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total operating expenses | | | | | | | | | | 2,350 | | | 2,246 | |
| | | | | | | | | | | | |
| Operating income | | | | | | | | | | 98 | | | 661 | |
| | | | | | | | | | | | |
| Interest expense | | | | | | | | | | 95 | | | 46 | |
| Interest income and investment income, net | | | | | | | | | | 41 | | | 15 | |
| Other components of net periodic benefit cost | | | | | | | | | | (2) | | | (3) | |
| | | | | | | | | | | | |
| Earnings before income taxes | | | | | | | | | | 46 | | | 633 | |
| | | | | | | | | | | | |
| Provision for income taxes | | | | | | | | | | 10 | | | 143 | |
| Net earnings | | | | | | | | | | 36 | | | 490 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net earnings attributable to redeemable noncontrolling interest | | | | | | | | | | (5) | | | (1) | |
| Net earnings attributable to The Estée Lauder Companies Inc. | | | | | | | | | | $ | 31 | | | $ | 489 | |
| | | | | | | | | | | | |
| Net earnings attributable to The Estée Lauder Companies Inc. per common share | | | | | | | | | | | | |
Basic | | | | | | | | | | $ | 0.09 | | | $ | 1.37 | |
Diluted | | | | | | | | | | $ | 0.09 | | | $ | 1.35 | |
| | | | | | | | | | | | |
Weighted-average common shares outstanding | | | | | | | | | | | | |
Basic | | | | | | | | | | 358.4 | | | 357.9 | |
Diluted | | | | | | | | | | 360.5 | | | 361.4 | |
See notes to consolidated financial statements.
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended
September 30 | | |
| (In millions) | | | | | | | 2023 | | 2022 | | | | |
| | | | | | | | | | | | | |
| Net earnings | | | | | | | $ | 36 | | | $ | 490 | | | | | |
| | | | | | | | | | | | | |
| Other comprehensive income (loss): | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net cash flow hedge gain | | | | | | | 19 | | | 49 | | | | | |
Cross-currency swap contract gain | | | | | | | — | | | — | | | | | |
| Retirement plan and other retiree benefit adjustments | | | | | | | (1) | | | — | | | | | |
| Translation adjustments | | | | | | | (120) | | | (381) | | | | | |
Provision for income taxes on components of other comprehensive income | | | | | | | (38) | | | (19) | | | | | |
Total other comprehensive loss, net of tax | | | | | | | (140) | | | (351) | | | | | |
Comprehensive income (loss) | | | | | | | (104) | | | 139 | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Comprehensive loss (income) attributable to redeemable noncontrolling interest: | | | | | | | | | | | | | |
Net earnings | | | | | | | (5) | | | (1) | | | | | |
| Translation adjustments | | | | | | | 11 | | | 35 | | | | | |
Total comprehensive loss attributable to redeemable noncontrolling interest | | | | | | | 6 | | | 34 | | | | | |
Comprehensive income (loss) attributable to The Estée Lauder Companies Inc. | | | | | | | $ | (98) | | | $ | 173 | | | | | |
See notes to consolidated financial statements.
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS | | | | | | | | | | | | | | |
| (In millions, except share data) | | September 30
2023 | | June 30
2023 |
| | (Unaudited) | | |
ASSETS | | | | |
Current assets | | | | |
Cash and cash equivalents | | $ | 3,090 | | | $ | 4,029 | |
Accounts receivable, net | | 1,909 | | | 1,452 | |
Inventory and promotional merchandise | | 2,863 | | | 2,979 | |
Prepaid expenses and other current assets | | 723 | | | 679 | |
Total current assets | | 8,585 | | | 9,139 | |
| | | | |
Property, plant and equipment, net | | 3,103 | | | 3,179 | |
| | | | |
Other assets | | | | |
Operating lease right-of-use assets | | 1,787 | | | 1,797 | |
Goodwill | | 2,455 | | | 2,486 | |
Other intangible assets, net | | 5,515 | | | 5,602 | |
Other assets | | 1,205 | | | 1,212 | |
Total other assets | | 10,962 | | | 11,097 | |
Total assets | | $ | 22,650 | | | $ | 23,415 | |
| | | | |
LIABILITIES AND EQUITY | | | | |
Current liabilities | | | | |
Current debt | | $ | 1,005 | | | $ | 997 | |
Accounts payable | | 1,257 | | | 1,670 | |
Operating lease liabilities | | 352 | | | 357 | |
Other accrued liabilities | | 3,300 | | | 3,216 | |
Total current liabilities | | 5,914 | | | 6,240 | |
| | | | |
Noncurrent liabilities | | | | |
Long-term debt | | 7,088 | | | 7,117 | |
Long-term operating lease liabilities | | 1,687 | | | 1,698 | |
Other noncurrent liabilities | | 1,793 | | | 1,943 | |
Total noncurrent liabilities | | 10,568 | | | 10,758 | |
| | | | |
Commitments and contingencies | |
| |
|
| | | | |
| Redeemable Noncontrolling Interest | | 826 | | | 832 | |
| | | | |
Equity | | | | |
Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at September 30, 2023 and June 30, 2023; shares issued: 469,905,435 at September 30, 2023 and 469,668,085 at June 30, 2023; Class B shares authorized: 304,000,000 at September 30, 2023 and June 30, 2023; shares issued and outstanding: 125,542,029 at September 30, 2023 and 125,542,029 at June 30, 2023 | | 6 | | | 6 | |
Paid-in capital | | 6,249 | | | 6,153 | |
Retained earnings | | 13,784 | | | 13,991 | |
| Accumulated other comprehensive loss | | (1,063) | | | (934) | |
| | 18,976 | | | 19,216 | |
Less: Treasury stock, at cost; 237,604,494 Class A shares at September 30, 2023 and 237,590,199 Class A shares at June 30, 2023 | | (13,634) | | | (13,631) | |
| | | | |
| | | | |
Total equity | | 5,342 | | | 5,585 | |
| Total liabilities, redeemable noncontrolling interest and equity | | $ | 22,650 | | | $ | 23,415 | |
See notes to consolidated financial statements.
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) | | | | | | | | | | | | | | |
| | Three Months Ended
September 30 |
| (In millions) | | 2023 | | 2022 |
| | | | |
| Cash flows from operating activities | | | | |
| Net earnings | | $ | 36 | | | $ | 490 | |
| Adjustments to reconcile net earnings to net cash flows from operating activities: | | | | |
| Depreciation and amortization | | 203 | | | 178 | |
| Deferred income taxes | | (57) | | | (53) | |
| Non-cash stock-based compensation | | 80 | | | 53 | |
| Net loss on disposal of property, plant and equipment | | 1 | | | 2 | |
| Non-cash restructuring and other charges | | 2 | | | 9 | |
| Pension and post-retirement benefit expense | | 13 | | | 13 | |
| Pension and post-retirement benefit contributions | | (54) | | | (5) | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other non-cash items | | 7 | | | (3) | |
| Changes in operating assets and liabilities: | | | | |
| Increase in accounts receivable, net | | (477) | | | (579) | |
Decrease (increase) in inventory and promotional merchandise | | 62 | | | (229) | |
Decrease (increase) in other assets, net | | (17) | | | 3 | |
| Decrease in accounts payable | | (255) | | | (375) | |
Increase (decrease) in other accrued and noncurrent liabilities | | 51 | | | (135) | |
| Decrease in operating lease assets and liabilities, net | | (3) | | | (19) | |
Net cash flows used for operating activities | | (408) | | | (650) | |
| | | | |
| Cash flows from investing activities | | | | |
| Capital expenditures | | (295) | | | (152) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Settlement of net investment hedges | | — | | | 138 | |
| Net cash flows used for investing activities | | (295) | | | (14) | |
| | | | |
| Cash flows from financing activities | | | | |
Proceeds (repayments) of current debt, net | | (1) | | | 249 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Repayments and redemptions of long-term debt | | (3) | | | (254) | |
| Net proceeds from stock-based compensation transactions | | 15 | | | 26 | |
| Payments to acquire treasury stock | | (3) | | | (110) | |
| | | | |
| Settlement of cross-currency swap | | 9 | | | — | |
| Dividends paid to stockholders | | (236) | | | (215) | |
| | | | |
Net cash flows used for financing activities | | (219) | | | (304) | |
| | | | |
| Effect of exchange rate changes on Cash and cash equivalents | | (17) | | | (51) | |
Net decrease in Cash and cash equivalents | | (939) | | | (1,019) | |
| Cash and cash equivalents at beginning of period | | 4,029 | | | 3,957 | |
| Cash and cash equivalents at end of period | | $ | 3,090 | | | $ | 2,938 | |
See notes to consolidated financial statements.
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, 2023.
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, 2023. 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 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 losses, net of tax, reported as translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc. were $143 million and $352 million, during the three months ended September 30, 2023 and 2022, 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 uses cross-currency swap contracts to hedge the impact of foreign currency changes on certain intercompany foreign currency denominated debt. Additionally, the Company 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 on foreign currency transactions of $16 million and $14 million during the three months ended September 30, 2023 and 2022, respectively.
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 first quarter of fiscal 2024 sells products primarily within the United States and accounted for $194 million, or 10%, and $93 million, or 6%, of the Company's accounts receivable at September 30, 2023 and June 30, 2023, respectively.
Inventory and Promotional Merchandise
Inventory and promotional merchandise consists of the following: | | | | | | | | | | | | | | |
| (In millions) | | September 30, 2023 | | June 30, 2023 |
Raw materials | | $ | 863 | | | $ | 876 | |
Work in process | | 325 | | | 362 | |
Finished goods | | 1,334 | | | 1,404 | |
Promotional merchandise | | 341 | | | 337 | |
| | $ | 2,863 | | | $ | 2,979 | |
Property, Plant and Equipment
Property, plant and equipment consists of the following: | | | | | | | | | | | | | | |
| (In millions) | | September 30, 2023 | | June 30, 2023 |
Assets (Useful Life) | | | | |
Land and improvements(1) | | $ | 68 | | | $ | 70 | |
Buildings and improvements (10 to 40 years) | | 852 | | | 843 | |
Machinery and equipment (3 to 10 years) | | 1,083 | | | 1,071 | |
Computer hardware and software (4 to 10 years) | | 1,767 | | | 1,651 | |
Furniture and fixtures (5 to 10 years) | | 137 | | | 136 | |
Leasehold improvements | | 2,336 | | | 2,310 | |
| Construction in progress | | 691 | | | 827 | |
| | 6,934 | | | 6,908 | |
Less accumulated depreciation and amortization | | (3,831) | | | (3,729) | |
| | $ | 3,103 | | | $ | 3,179 | |
(1)Land improvements are depreciated over a 10 year useful life.
Depreciation and amortization of property, plant and equipment was $162 million and $136 million during the three months ended September 30, 2023 and 2022, 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 ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The effective rate for income taxes was 21.7% and 22.6% for the three months ended September 30, 2023 and 2022, respectively. The decrease in the effective tax rate of 90 basis points was primarily attributable to a decrease in income tax reserve adjustments and an increase in the impact of excess tax benefits associated with stock-based compensation arrangements, offset by a higher effective tax rate on the Company's foreign operations, due to the Company's geographical mix of earnings for fiscal 2024. The lower amount of earnings before income taxes increased the impact of these tax adjustments in the first quarter of fiscal 2024.
On August 16, 2022, the U.S. federal government enacted the Inflation Reduction Act, including a tax provision implementing a 15% corporate alternative minimum tax based on global adjusted financial statement income. The corporate alternative minimum tax became effective beginning with the Company’s first quarter of fiscal 2024 and did not have an impact on the Company’s consolidated financial statements for the three months ended September 30, 2023.
As of September 30, 2023 and June 30, 2023, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $61 million and $63 million, respectively. The total amount of unrecognized tax benefits at September 30, 2023 that, if recognized, would affect the effective tax rate was $51 million. There was no gross interest or penalties accrued related to unrecognized tax benefits during the three months ended September 30, 2023 in the accompanying consolidated statements of earnings. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at each of September 30, 2023 and June 30, 2023, was $15 million. On the basis of the information available as of September 30, 2023, the Company does not expect significant changes to the total amount of unrecognized tax benefits within the next twelve months.
Subsequent to September 30, 2023, the Company formally concluded the compliance process with respect to its fiscal 2022 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, 2023.
Supplier Finance Programs
Under its supplier finance programs, the Company agrees to pay the banks the stated amount of confirmed invoices from its designated suppliers on the due dates of the invoices. The Company may terminate the agreements upon written notice (with notice periods ranging from 30 to 60 days) or immediately upon a breach. The supplier invoices that have been confirmed as valid under the programs require payment in full within 90 days of the invoice date.
Outstanding obligations confirmed as valid totaling $40 million and $52 million as of September 30, 2023 and June 30, 2023, respectively, are included in accounts payable in the accompanying consolidated balance sheets.
Other Accrued and Noncurrent Liabilities
Other accrued liabilities consist of the following: | | | | | | | | | | | | | | |
| (In millions) | | September 30, 2023 | | June 30, 2023 |
| | | | |
| Employee compensation | | $ | 472 | | | $ | 546 | |
| Accrued sales incentives | | 371 | | | 321 | |
| Deferred revenue | | 336 | | | 323 | |
| Payroll and other non-income taxes | | 307 | | | 297 | |
| | | | |
| Sales return accrual | | 313 | | | 289 | |
| Other | | 1,501 | | | 1,440 | |
| | $ | 3,300 | | | $ | 3,216 | |
At September 30, 2023 and June 30, 2023, total Other noncurrent liabilities of $1,793 million and $1,943 million included $598 million and $620 million of deferred tax liabilities, respectively.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Adopted 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 became effective for the Company’s first quarter fiscal 2024 and has been applied on a retrospective basis, except for the requirement to disclose rollforward information annually which is effective prospectively for the Company beginning in fiscal 2025.
Impact on consolidated financial statements – The Company has supplier financing arrangements and applied the disclosure requirements as required by the amendments. Such information is included in Supplier Finance Programs above within Note 1 – Summary of Significant Accounting Policies.
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 completed its comprehensive evaluation of applying this guidance and adopted certain practical expedients for its interest rate swap agreements in the fiscal 2024 first quarter which did not have a significant impact on its consolidated financial statements. The practical expedients that were adopted permit its hedging relationships to continue without de-designation upon changes due to reference rate reform. Foreign currency forward contracts do not reference LIBOR and no practical expedients were elected but are now discounted using the Secured Overnight Financing Rate ("SOFR"). For existing lease, debt arrangements and other contracts, the Company did not adopt any ASC 848 practical expedients as it relates to these arrangements.
Recently Issued Accounting Standards
No recently issued accounting pronouncements are expected to have a material impact on the Company’s consolidated financial statements.
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, 2023 | | | | | | | | | | |
Goodwill | | $ | 1,664 | | | $ | 1,116 | | | $ | 254 | | | $ | 353 | | | $ | 3,387 | |
Accumulated impairments | | (139) | | | (732) | | | (30) | | | — | | | (901) | |
| | 1,525 | | | 384 | | | 224 | | | 353 | | | 2,486 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Translation adjustments, goodwill | | (30) | | | — | | | (3) | | | — | | | (33) | |
Translation adjustments, accumulated impairments | | 1 | | | — | | | 1 | | | — | | | 2 | |
| | (29) | | | — | | | (2) | | | — | | | (31) | |
| | | | | | | | | | |
| Balance as of September 30, 2023 | | | | | | | | | | |
Goodwill | | 1,634 | | | 1,116 | | | 251 | | | 353 | | | 3,354 | |
Accumulated impairments | | (138) | | | (732) | | | (29) | | | — | | | (899) | |
| | $ | 1,496 | | | $ | 384 | | | $ | 222 | | | $ | 353 | | | $ | 2,455 | |
Other Intangible Assets
Other intangible assets consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2023 | | June 30, 2023 |
| (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 | | $ | 2,002 | | | $ | 796 | | | $ | 1,206 | | | $ | 2,030 | | | $ | 766 | | | $ | 1,264 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Non-amortizable intangible assets: | | | | | | | | | | | | |
| Trademarks | | | | | | 4,309 | | | | | | | 4,338 | |
Total intangible assets | | | | | | $ | 5,515 | | | | | | | $ | 5,602 | |
The aggregate amortization expense related to amortizable intangible assets was $36 million for the three months ended September 30, 2023 and 2022.
The estimated aggregate amortization expense for the remainder of fiscal 2024 and for each of the next four fiscal years is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal |
| (In millions) | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 |
| Estimated aggregate amortization expense | | $ | 108 | | | $ | 144 | | | $ | 144 | | | $ | 126 | | | $ | 101 | |
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES
The Company approved specific initiatives under the Post-COVID Business Acceleration Program (the “PCBA Program”) through fiscal 2022 and has substantially completed those initiatives through fiscal 2023. Additional information about the PCBA 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, 2023.
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. The Company also uses cross-currency swap contracts to hedge the impact of foreign currency changes on certain intercompany foreign currency denominated debt. 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, 2023, the notional amount of derivatives not designated as hedging instruments was $4,099 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.
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 Derivatives | | Liability Derivatives |
| | | | Fair Value (1) | | | | Fair Value (1) |
| (In millions) | | Balance Sheet
Location | | September 30, 2023 | | June 30, 2023 | | Balance Sheet
Location | | September 30, 2023 | | June 30, 2023 |
| Derivatives Designated as Hedging Instruments: | | | | | | | | | | | | |
| Foreign currency cash flow hedges | | Prepaid expenses and other current assets | | $ | 61 | | | $ | 56 | | | Other accrued liabilities | | $ | 3 | | | $ | 16 | |
| Cross-currency swap contracts | | Prepaid expenses and other current assets | | 35 | | | 22 | | | Other accrued liabilities | | — | | | — | |
| Net investment hedges | | Prepaid expenses and other current assets | | 23 | | | — | | | Other accrued liabilities | | 1 | | | 13 | |
| Interest rate-related derivatives | | Prepaid expenses and other current assets | | — | | | — | | | Other accrued liabilities | | 180 | | | 150 | |
| Total Derivatives Designated as Hedging Instruments | | | | 119 | | | 78 | | | | | 184 | | | 179 | |
| Derivatives Not Designated as Hedging Instruments: | | | | | | | | | | | | |
| Foreign currency forward contracts | | Prepaid expenses and other current assets | | 22 | | | 20 | | | Other accrued liabilities | | 26 | | | 20 | |
| Total derivatives | | | | $ | 141 | | | $ | 98 | | | | | $ | 210 | | | $ | 199 | |
| | | | | | | | | | | | |
(1)See Note 5 – Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Recognized in OCI on Derivatives | | Location of Gain Reclassified from AOCI into Earnings | | Amount of Gain Reclassified from AOCI into Earnings(1) |
| | Three Months Ended
September 30 | | | Three Months Ended
September 30 |
| (In millions) | | 2023 | | 2022 | | | 2023 | | 2022 |
Derivatives in Cash Flow Hedging Relationships: | | | | | | | | | | |
| | | | | | | | | | |
| Foreign currency forward contracts | | $ | 28 | | | $ | 57 | | | Net sales | | $ | 9 | | | $ | 15 | |
| Interest rate-related derivatives | | — | | | 7 | | | Interest expense | | — | | | — | |
| | 28 | | | 64 | | | | | 9 | | | 15 | |
Derivatives in Net Investment Hedging Relationships(2): | | | | | | | | | | |
Foreign currency forward contracts(3) | | 30 | | | 71 | | | | | — | | | — | |
| Total derivatives | | $ | 58 | | | $ | 135 | | | | | $ | 9 | | | $ | 15 | |
| | | | | | | | | | |
(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, 2023 and 2022, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $5 million and $6 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 | | | | |
| | Location of Gain (Loss) Recognized in Earnings on Derivatives | | | | | | | | | | | | |
| | | Three Months Ended
September 30 | | | | |
| (In millions) | | | 2023 | | 2022 | | | | | | | | |
| Derivatives in Fair Value Hedging Relationships: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Cross-currency swap contracts (1) | | Selling, general and administrative | | $ | 13 | | | $ | — | | | | | | | | | |
Interest rate swap contracts (2) | | Interest expense | | $ | (29) | | | $ | (39) | | | | | | | | | |
| | | | | | | | | | | | | | |
(1)Changes in the fair value representing hedge components included in the assessment of effectiveness of the cross-currency swap contracts are exactly offset by the change in the fair value of the underlying intercompany foreign currency denominated debt. The gain recognized in earnings from cross-currency swap contracts related to the amount excluded from effectiveness testing was $5 million during the three months ended September 30, 2023.
(2)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, 2023 | | September 30, 2023 |
| | | | |
| Long-term debt | | $ | 814 | | | $ | (180) | |
| Intercompany debt | | $ | — | | | $ | 56 | |
| | | | |
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 |
| | 2023 | | 2022 |
| (In millions) | | Net Sales | | Selling, General and Administrative | | Interest
Expense | | Net Sales | | Selling, General and Administrative | | 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 | | $ | 3,518 | | | $ | 2,349 | | | $ | 95 | | | $ | 3,930 | | | $ | 2,244 | | | $ | 46 | |
| The effects of fair value and cash flow hedging relationships: | | | | | | | | | | | | |
| Gain (loss) on fair value hedge relationships – interest rate contracts: | | | | | | | | | | | | |
| Hedged item | | N/A | | N/A | | 29 | | | N/A | | N/A | | 39 | |
| Derivatives designated as hedging instruments | | N/A | | N/A | | (29) | | | N/A | | N/A | | (39) | |
| | | | | | | | | | | | |
| Gain (loss) on fair value hedge relationships – cross-currency swap contracts: | | | | | | | | | | | | |
| Hedged item | | N/A | | (13) | | | N/A | | N/A | | — | | | N/A |
| Derivatives designated as hedging instruments | | N/A | | 13 | | | N/A | | N/A | | — | | | N/A |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Gain on cash flow hedge relationships – foreign currency forward contracts: | | | | | | | | | | | | |
Amount of gain reclassified from AOCI into earnings | | 9 | | | N/A | | N/A | | 15 | | | N/A | | N/A |
N/A (Not applicable)
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 Recognized in Earnings on Derivatives | | | | |
| | Location of Gain Recognized in Earnings on Derivatives | | Three Months Ended
September 30 | | | | |
| (In millions) | | | 2023 | | 2022 | | | | | | | | |
Derivatives Not Designated as Hedging Instruments: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Foreign currency forward contracts | | Selling, general and administrative | | $ | 5 | | | $ | 11 | | | | | | | | | |
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's derivative instruments are subject to enforceable master netting agreements. These agreements permit the net settlement of these contracts on a per-institution basis; however, the Company records the fair value on a gross basis on its consolidated balance sheets based on maturity dates, including those subject to master netting arrangements. The following table provides information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default or termination as stipulated by the terms of netting arrangements with each of the counterparties:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | As of September 30, 2023 | | As of June 30, 2023 | | |
| (In millions) | | | Gross Amounts of Assets / (Liabilities) Presented in Balance Sheet | | Contracts Subject to Netting | | Net Amounts of Assets / (Liabilities) | | Gross Amounts of Assets / (Liabilities) Presented in Balance Sheet | | Contracts Subject to Netting | | Net Amounts of Assets / (Liabilities) | | | | |
| Derivative Financial Contracts | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Derivative assets | | | $ | 141 | | | $ | (45) | | | $ | 96 | | | $ | 98 | | | $ | (53) | | | $ | 45 | | | | | |
| Derivative liabilities | | | (210) | | | 45 | | | (165) | | | (199) | | | 53 | | | (146) | | | | | |
| Total | | | $ | (69) | | | $ | — | | | $ | (69) | | | $ | (101) | | | $ | — | | | $ | (101) | | | | | |
Cash Flow Hedges
The Company enters into foreign currency forward contracts, and may enter into foreign currency option contracts, to hedge anticipated transactions and receivables and payables denominated in foreign currencies, for periods consistent with the Company’s identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the cash flows that the Company receives from foreign subsidiaries. The foreign currency forward contracts entered into to hedge anticipated transactions have been designated as cash flow hedges and have varying maturities through the end of March 2025. 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, 2023, the Company had cash flow hedges outstanding with a notional amount totaling $1,560 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 foreign currency hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses in AOCI are reclassified to Net 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 Net sales. As of September 30, 2023, 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, 2023 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $43 million. The accumulated net gain on derivative instruments designated as cash flow hedges in AOCI was $99 million and $79 million as of September 30, 2023 and June 30, 2023, respectively.
Fair Value Hedges
The Company enters into interest rate derivative contracts to manage the exposure to interest rate fluctuations on its funded indebtedness. At September 30, 2023, the Company has interest rate swap agreements, with notional amounts totaling $700 million and $300 million to effectively convert the fixed rate interest on its 2030 Senior Notes and 2031 Senior Notes, respectively, to variable interest rates based on the three-month fallback rate SOFR 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.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company enters into cross-currency swap contracts to manage the exposure of foreign exchange rate fluctuations on its intercompany foreign currency denominated debt. At September 30, 2023, the Company has cross-currency swap contracts with notional amounts totaling $491 million, to hedge the impact of foreign currency changes on certain intercompany foreign currency denominated debt. The cross-currency swap contracts are designated as fair value hedges of the related intercompany debt, and the gains and losses representing hedge components included in the assessment of effectiveness are presented in the same income statement line item as the earnings effect of the hedged transaction. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis. The earnings recognition of excluded components is presented in the same income statement line item as the earnings effect of the hedged transaction. Any difference between the changes in the fair value of the excluded components and amounts recognized in earnings will be recognized in AOCI.
The estimated net gain on the Company’s derivative instruments designated as fair value hedges as of September 30, 2023 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $14 million. The accumulated net loss on derivative instruments designated as fair value hedges in AOCI was $20 million as of September 30, 2023 and June 30, 2023.
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 September 2024. Hedge effectiveness of the net investment hedge contracts is based on the spot method. At September 30, 2023, the Company had net investment hedges outstanding with a notional amount totaling $1,180 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 two 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 $141 million at September 30, 2023. 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.
NOTE 5 – FAIR VALUE MEASUREMENTS
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.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
| Money market funds | | $ | 2,094 | | | $ | — | | | $ | — | | | $ | 2,094 | |
Foreign currency forward contracts | | — | | | 106 | | | — | | | 106 | |
| | | | | | | | |
| Cross-currency swap contracts | | — | | | 35 | | | — | | | 35 | |
Total | | $ | 2,094 | | | $ | 141 | | | $ | — | | | $ | 2,235 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
| | | | | | | | |
Foreign currency forward contracts | | $ | — | | | $ | 30 | | | $ | — | | | $ | 30 | |
Interest rate-related derivatives | | — | | | 180 | | | — | | | 180 | |
| DECIEM stock options | | — | | | — | | | 103 | | | 103 | |
Total | | $ | — | | | $ | 210 | | | $ | 103 | | | $ | 313 | |
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, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
| Money market funds | | $ | 3,241 | | | $ | — | | | $ | — | | | $ | 3,241 | |
Foreign currency forward contracts | | — | | | 76 | | | — | | | 76 | |
| | | | | | | | |
| Cross-currency swap contracts | | — | | | 22 | | | — | | | 22 | |
Total | | $ | 3,241 | | | $ | 98 | | | $ | — | | | $ | 3,339 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Foreign currency forward contracts | | $ | — | | | $ | 49 | | | $ | — | | | $ | 49 | |
| Interest rate-related derivatives | | — | | | 150 | | | — | | | 150 | |
| DECIEM stock options | | — | | | — | | | 99 | | | 99 | |
Total | | $ | — | | | $ | 199 | | | $ | 99 | | | $ | 298 | |
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Company’s financial instruments are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2023 | | June 30, 2023 |
| (In millions) | | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
Nonderivatives | | | | | | | | |
Cash and cash equivalents | | $ | 3,090 | | | $ | 3,090 | | | $ | 4,029 | | | $ | 4,029 | |
Current and long-term debt | | 8,093 | | | 7,313 | | | 8,114 | | | 7,665 | |
| DECIEM stock options | | 103 | | | 103 | | | 99 | | | 99 | |
| Deferred consideration payable | | 340 | | | 336 | | | 341 | | | 338 | |
| | | | | | | | |
Derivatives | | | | | | | | |
Cross-currency swap contracts – asset, net | | 35 | | | 35 | | | 22 | | | 22 | |
Foreign currency forward contracts – asset, net | | 76 | | | 76 | | | 27 | | | 27 | |
Interest rate-related derivatives – liability, net | | (180) | | | (180) | | | (150) | | | (150) | |
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 SOFR forward curves.
Cross-currency swap contracts – The fair value of the Company’s cross-currency swap 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 yield curves and currency spot and forward rates, were obtained from independent pricing services.
Interest rate-related derivatives – 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 SOFR forward curves, 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.
Deferred consideration payable – The deferred consideration payable consists primarily of deferred payments associated with the fiscal 2023 fourth quarter acquisition of TOM FORD. The fair value of the payments treated as deferred consideration payable are calculated based on the net present value of cash payments using an estimated borrowing rate based on quoted prices for a similar liability. The Company’s deferred consideration payable is classified within Level 2 of the valuation hierarchy.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 DECIEM stock option liability is measured using the Monte Carlo Method, which requires certain assumptions. Significant changes in the projected future operating results would result in a higher or lower fair value measurement. Changes to the discount rates or volatilities would have a lesser effect. These inputs are categorized as Level 3 of the valuation hierarchy. The DECIEM stock options are remeasured to fair value at each reporting date through the period when the options are exercised or repurchased (i.e., when they are settled), with an offsetting entry to compensation expense. See Note 9 – Stock Programs for discussion.
Changes in the DECIEM stock option liability for the three months ended September 30, 2023 are included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings and were as follows:
| | | | | | | | |
| (In millions) | | Fair Value |
| DECIEM stock option liability as of June 30, 2023 | | $ | 99 | |
Changes in fair value, net of foreign currency remeasurements | | 8 | |
| Translation adjustments and other, net | | (4) | |
| DECIEM stock option liability as of September 30, 2023 | | $ | 103 | |
| | |
NOTE 6 – REVENUE 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, 2023.
Accounts Receivable
Accounts receivable, net is stated net of the allowance for doubtful accounts and customer deductions totaling $31 million and $30 million as of September 30, 2023 and June 30, 2023, respectively. Payment terms are short-term in nature and are generally less than one year.
Changes in the allowance for credit losses are as follows:
| | | | | | | | |
| (In millions) | | September 30, 2023 |
| Balance at June 30, 2023 | | $ | 16 | |
| | |
| Provision for expected credit losses | | 1 | |
| | |
| Balance at September 30, 2023 | | $ | 17 | |
The remaining balance of the allowance for doubtful accounts and customer deductions of $14 million as of September 30, 2023 and June 30, 2023, respectively, relates to non-credit losses, which are primarily due to customer deductions.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Revenue
Changes in deferred revenue during the period are as follows: | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended
September 30 |
| (In millions) | | | | | | 2023 | | 2022 |
| Deferred revenue, beginning of period | | | | | | $ | 572 | | | $ | 362 | |
| Revenue recognized that was included in the deferred revenue balance at the beginning of the period | | | | | | (152) | | | (149) | |
Revenue deferred during the period | | | | | | 168 | | | 157 | |
| Other | | | | | | (7) | | | (8) | |
| Deferred revenue, end of period | | | | | | $ | 581 | | | $ | 362 | |
Transaction Price Allocated to the Remaining Performance Obligations
At September 30, 2023, the combined estimated revenue expected to be recognized in the next twelve months related to performance obligations for customer loyalty programs, gift with purchase promotions, purchase with purchase promotions, gift card liabilities and the Marcolin license arrangement related to TOM FORD that are unsatisfied (or partially unsatisfied) is $336 million. The remaining balance of deferred revenue at September 30, 2023 will be recognized beyond the next twelve months, of which $232 million relates to the non-refundable upfront payment received as part of the Marcolin licensing arrangement that is being recognized on a straight-line basis over the estimated economic life of the license, which is 20 years.
Royalty Revenue – License Arrangements
The Company’s contractually guaranteed minimum royalty amounts due during future periods under its existing license arrangements is disclosed in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
NOTE 7 – PENSION 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, 2023.
The components of net periodic benefit cost for the three months ended September 30, 2023 and 2022 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Plans | | Other than
Pension Plans |
| | U.S. | | International | | Post-retirement |
| (In millions) | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| Service cost | | $ | 9 | | | $ | 9 | | | $ | 6 | | | $ | 7 | | | $ | — | | | $ | — | |
| Interest cost | | 12 | | | 10 | | | 5 | | | 3 | | | 2 | | | 2 | |
| Expected return on plan assets | | (14) | | | (14) | | | (6) | | | (4) | | | — | | | — | |
| Amortization of: | | | | | | | | | | | | |
Actuarial loss (gain) | | 1 | | | 1 | | | (2) | | | (1) | | | — | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Net periodic benefit cost | | $ | 8 | | | $ | 6 | | | $ | 3 | | | $ | 5 | | | $ | 2 | | | $ | 2 | |
During the three months ended September 30, 2023, the Company made contributions to its international pension plans totaling $3 million.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 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, 2023 | | June 30, 2023 |
| Other assets | | $ | 112 | | | $ | 115 | |
| Other accrued liabilities | | (35) | | | (34) | |
| Other noncurrent liabilities | | (352) | | | (395) | |
| Funded status | | (275) | | | (314) | |
| Accumulated other comprehensive loss | | 235 | | | 235 | |
| Net amount recognized | | $ | (40) | | | $ | (79) | |
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved, from time to time, in litigation and other legal proceedings incidental to its business, including product liability matters (including asbestos-related claims), advertising, regulatory, employment, intellectual property, real estate, environmental, trade relations, tax, and privacy. Management believes that the outcome of current litigation and legal proceedings will not have a material adverse effect upon the Company’s business, results of operations, financial condition or cash flows. However, management’s assessment of the Company’s current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against the Company not presently known to the Company or determinations by judges, juries or other finders of fact which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or proceedings. Reasonably possible losses in addition to the amounts accrued for such litigation and legal proceedings are not material to the Company’s consolidated financial statements.
NOTE 9 – STOCK PROGRAMS
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, 2023.
The Company's Stock Programs
Total net stock-based compensation expense is attributable to the granting of, and the remaining requisite service periods of stock options, restricted stock units (“RSUs”), performance share units (“PSUs”), long-term PSUs, including long-term price-vested units and share units. Compensation expense attributable to net stock-based compensation was $80 million and $53 million for the three months ended September 30, 2023 and 2022, respectively.
Stock Options
During the three months ended September 30, 2023, the Company granted stock options in respect of approximately 1.8 million shares of Class A Common Stock with an exercise price per share of $156.39 and a weighted-average grant date fair value per share of $52.98. 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, 2023 was $17 million.
Restricted Stock Units
During the three months ended September 30, 2023, the Company granted RSUs in respect of approximately 1.5 million shares of Class A Common Stock with a weighted-average grant date fair value per share of $156.23 that, at the time of grant, are scheduled to vest at 0.6 million, 0.5 million, and 0.4 million shares per year, in fiscal 2025, fiscal 2026 and fiscal 2027, respectively. Vesting of RSUs is generally subject to the continued employment or the retirement of the grantees. The RSUs are generally 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 generally valued at the closing market price of the Company’s Class A Common Stock on the date of grant.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Performance Share Units
During the three months ended September 30, 2023, the Company granted PSUs with a target payout of approximately 0.2 million shares of Class A Common Stock with a grant date fair value per share of $156.39, which will be settled in stock subject to the achievement of the Company’s net sales, diluted net earnings per common share and return on invested capital goals for the three fiscal years ending June 30, 2026, 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 August 2023, less than 0.1 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 0.2 million PSUs with a performance period ended June 30, 2023.
DECIEM Stock Options
The DECIEM stock options are liability-classified awards as they are expected to be settled in cash and are 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, net of foreign currency remeasurements, for the three months ended September 30, 2023 and 2022 was $8 million and $1 million, respectively. There is no related income tax benefit on the DECIEM stock-based compensation expense. There were no DECIEM stock options exercised during the three months ended September 30, 2023.
The DECIEM stock options are reported as a stock option liability of $103 million and $99 million in Other accrued liabilities in the accompanying consolidated balance sheets at September 30, 2023 and June 30, 2023, respectively. The fair value of the stock options were calculated by incorporating significant assumptions including the starting equity value, actual and projected net sales and EBITDA and the following key assumptions into the Monte Carlo Method:
| | | | | | | | | | | | | | | | |
| | | September 30, 2023 | | June 30, 2023 | | |
| Risk-free rate | | 5.10% | | 4.90% | | |
| Term to mid of last twelve-month period | | 0.33 years | | 0.46 years | | |
| Operating leverage adjustment | | 0.45 | | 0.45 | | |
| Net sales discount rate | | 8.00% | | 7.80% | | |
| EBITDA discount rate | | 11.50% | | 11.30% | | |
| EBITDA volatility | | 32.50% | | 32.00% | | |
| Net sales volatility | | 14.60% | | 14.40% | | |
NOTE 10 – NET 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 using the treasury stock method.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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) | | 2023 | | 2022 | | | | | | | | |
Numerator: | | | | | | | | | | | | |
| Net earnings attributable to The Estée Lauder Companies Inc. | | $ | 31 | | | $ | 489 | | | | | | | | | |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Weighted-average common shares outstanding – Basic | | 358.4 | | | 357.9 | | | | | | | | | |
Effect of dilutive stock options | | 1.3 | | | 2.7 | | | | | | | | | |
Effect of PSUs | | 0.1 | | | 0.1 | | | | | | | | | |
Effect of RSUs | | 0.7 | | | 0.7 | | | | | | | | | |
Weighted-average common shares outstanding – Diluted | | 360.5 | | | 361.4 | | | | | | | | | |
| | | | | | | | | | | | |
| Net earnings attributable to The Estée Lauder Companies Inc. per common share: | | | | | | | | | | | | |
Basic | | $ | .09 | | | $ | 1.37 | | | | | | | | | |
Diluted | | $ | .09 | | | $ | 1.35 | | | | | | | | | |
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) | 2023 | | 2022 | | | | |
| Stock options | 4.8 | | 1.3 | | | | |
| RSUs and PSUs | 0.1 | | — | | | | |
| | | | | | | |
As of September 30, 2023 and 2022, 0.4 million and 0.4 million shares, respectively, of Class A Common Stock underlying PSUs have been excluded from the calculation of diluted EPS because the number of shares ultimately issued is contingent on the achievement of certain performance targets of the Company, as discussed in Note 9 – Stock Programs.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
Total Stockholders’ Equity – The Estée Lauder Companies Inc. | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended
September 30 |
| (In millions, except per share data) | | | | | | | | | | 2023 | | 2022 |
| Common stock, beginning of the period | | | | | | | | | | $ | 6 | | | $ | 6 | |
| Stock-based compensation | | | | | | | | | | — | | | — | |
| Common stock, end of the period | | | | | | | | | | 6 | | | 6 | |
| | | | | | | | | | | | |
| Paid-in capital, beginning of the period | | | | | | | | | | 6,153 | | | 5,796 | |
| Common stock dividends | | | | | | | | | | 2 | | | 1 | |
| Stock-based compensation | | | | | | | | | | 94 | | | 78 | |
| Paid-in capital, end of the period | | | | | | | | | | 6,249 | | | 5,875 | |
| | | | | | | | | | | | |
| Retained earnings, beginning of the period | | | | | | | | | | 13,991 | | | 13,912 | |
| Common stock dividends | | | | | | | | | | (238) | | | (216) | |
| Net earnings attributable to The Estée Lauder Companies Inc. | | | | | | | | | | 31 | | | 489 | |
| | | | | | | | | | | | |
| Retained earnings, end of the period | | | | | | | | | | 13,784 | | | 14,185 | |
| | | | | | | | | | | | |
| Accumulated other comprehensive loss, beginning of the period | | | | | | | | | | (934) | | | (762) | |
| Other comprehensive loss attributable to The Estée Lauder Companies Inc. | | | | | | | | | | (129) | | | (316) | |
| Accumulated other comprehensive loss, end of the period | | | | | | | | | | (1,063) | | | (1,078) | |
| | | | | | | | | | | | |
| Treasury stock, beginning of the period | | | | | | | | | | (13,631) | | | (13,362) | |
| Acquisition of treasury stock | | | | | | | | | | — | | | (92) | |
| Stock-based compensation | | | | | | | | | | (3) | | | (17) | |
| Treasury stock, end of the period | | | | | | | | | | (13,634) | | | (13,471) | |
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| | | | | | | | | | | | |
| Total equity | | | | | | | | | | $ | 5,342 | | | $ | 5,517 | |
| | | | | | | | | | | | |
| Redeemable noncontrolling interest, beginning of the period | | | | | | | | | | $ | 832 | | | $ | 842 | |
| | | | | | | | | | | | |
| Net earnings attributable to redeemable noncontrolling interest | | | | | | | | | | 5 | | | 1 | |
| Translation adjustments | | | | | | | | | | (11) | | | (35) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Redeemable noncontrolling interest, end of the period | | | | | | | | | | $ | 826 | | | $ | 808 | |
| | | | | | | | | | | | |
| Cash dividends declared per common share | | | | | | | | | | $ | .66 | | | $ | .60 | |
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2023:
| | | | | | | | | | | | | | | | | | | | |
| Date Declared | | Record Date | | Payable Date | | Amount per Share |
| August 17, 2023 | | August 31, 2023 | | September 15, 2023 | | $ | .66 | |
| | | | | | |
| | | | | | |
On October 31, 2023, a dividend was declared in the amount of $.66 per share on the Company’s Class A and Class B Common Stock. The dividend is payable in cash on December 15, 2023 to stockholders of record at the close of business on November 30, 2023.
Common Stock
Beginning in December 2022, we temporarily suspended the repurchase of shares of our Class A Common Stock. We may resume repurchases in the future.
Accumulated Other Comprehensive Income
The following table represents changes in AOCI, net of tax, by component for the three months ended September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Net Cash
Flow Hedge
Gain (Loss) | | Cross-Currency Swap Contracts (2) | | Amounts
Included in Net Periodic Benefit Cost | | Translation
Adjustments | | Total |
| Balance at June 30, 2023 | | $ | 59 | | | $ | (15) | | | $ | (177) | | | $ | (801) | | | $ | (934) | |
| OCI before reclassifications | | 21 | | | 4 | | | 1 | | | (143) | | (1) | (117) | |
| Amounts reclassified to Net earnings | | (7) | | | (4) | | | (1) | | | — | | | (12) | |
| Net current-period OCI | | 14 | | | — | | | — | | | (143) | | | (129) | |
| Balance at September 30, 2023 | | $ | 73 | | | $ | (15) | | | $ | (177) | | | $ | (944) | | | $ | (1,063) | |
| | | | | | | | | | |
(1)See Note 4 – Derivative Financial Instruments for gains (losses) relating to net investment hedges.
(2)The gain recognized in AOCI, net of tax from cross-currency swap contracts represents the amount excluded from effectiveness testing.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table represents the effects of reclassification adjustments from AOCI into net earnings for the three months ended September 30, 2023 and 2022: