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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2019

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
(State or other jurisdiction of
incorporation or organization)

11-2408943
(I.R.S. Employer Identification No.)

767 Fifth Avenue, New York, New York
(Address of principal executive offices)

10153
(Zip Code)

212-572-4200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, 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

Securities registered pursuant to Section 12(g) of the Act:

None

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 30, 2020, 222,319,332 shares of the registrant’s Class A Common Stock, $.01 par value, and 137,220,914 shares of the registrant’s Class B Common Stock, $.01 par value, were outstanding.

Table of Contents

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, 2019 and 2018

2

Consolidated Statements of Comprehensive Income (Loss) —
Three and Six Months Ended December 31, 2019 and 2018

3

Consolidated Balance Sheets —
December 31, 2019 and June 30, 2019 (Audited)

4

Consolidated Statements of Cash Flows —
Six Months Ended December 31, 2019 and 2018

5

Notes to Consolidated Financial Statements

6

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

33

Item 3. Quantitative and Qualitative Disclosures About Market Risk

55

Item 4. Controls and Procedures

55

Part II. Other Information

Item 1. Legal Proceedings

56

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

56

Item 6. Exhibits

57

Signatures

58

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

Three Months Ended

Six Months Ended

December 31

December 31

(In millions, except per share data)

    

2019

    

2018

    

2019

    

2018

 

Net sales

$

4,624

 

$

4,005

 

$

8,519

 

$

7,529

Cost of sales

 

1,041

 

910

 

1,949

 

1,733

Gross profit

 

3,583

 

3,095

 

6,570

 

5,796

Operating expenses

Selling, general and administrative

 

2,538

 

2,257

 

4,723

 

4,265

Restructuring and other charges

7

29

30

70

Goodwill impairment

511

20

511

20

Impairment of other intangible assets

266

18

266

18

Total operating expenses

3,322

2,324

5,530

4,373

Operating income

 

261

 

771

 

1,040

 

1,423

Interest expense

 

38

 

35

 

70

 

69

Interest income and investment income, net

13

12

27

27

Other components of net periodic benefit cost

1

2

Other income

576

576

Earnings before income taxes

 

811

 

748

 

1,571

 

1,381

Provision for income taxes

 

250

 

171

 

412

 

302

Net earnings

 

561

 

577

 

1,159

 

1,079

Net earnings attributable to noncontrolling interests

 

(4)

 

(4)

 

(7)

 

(6)

Net earnings attributable to The Estée Lauder Companies Inc.

$

557

 

$

573

 

$

1,152

 

$

1,073

Net earnings attributable to The Estée Lauder Companies Inc. per common share

Basic

$

1.55

 

$

1.58

 

$

3.19

 

$

2.94

Diluted

$

1.52

$

1.55

$

3.13

$

2.88

Weighted-average common shares outstanding

Basic

 

360.2

 

363.3

 

360.8

 

365.1

Diluted

 

366.7

 

369.9

 

367.7

 

372.1

See notes to consolidated financial statements.

2

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THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

Three Months Ended

Six Months Ended

December 31

December 31

(In millions)

    

2019

    

2018

    

2019

    

2018

Net earnings

 

$

561

 

$

577

 

$

1,159

 

$

1,079

Other comprehensive income (loss):

Net unrealized investment gain

 

 

3

 

 

5

Net cash flow hedge gain (loss)

 

(22)

 

9

 

(24)

 

9

Amounts included in net periodic benefit cost

 

5

 

4

 

10

 

7

Translation adjustments

 

64

 

(38)

 

(6)

 

(15)

Benefit (provision) for deferred income taxes on components of other comprehensive income

 

10

 

 

13

 

(3)

Total other comprehensive income (loss)

 

57

 

(22)

 

(7)

 

3

Comprehensive income

 

618

 

555

 

1,152

 

1,082

Comprehensive income attributable to noncontrolling interests:

Net earnings

 

(4)

(4)

(7)

(6)

Translation adjustments

 

1

1

1

1

 

(3)

(3)

(6)

(5)

Comprehensive income attributable to The Estée Lauder Companies Inc.

 

$

615

 

$

552

 

$

1,146

 

$

1,077

See notes to consolidated financial statements.

3

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED BALANCE SHEETS

December 31

June 30

(In millions, except share data)

    

2019

    

2019

 

(Unaudited)

ASSETS

Current assets

Cash and cash equivalents

 

$

3,596

 

$

2,987

Accounts receivable, net

 

2,225

 

1,831

Inventory and promotional merchandise

 

2,058

 

2,006

Prepaid expenses and other current assets

 

469

 

388

Total current assets

 

8,348

 

7,212

Property, plant and equipment, net

 

2,086

 

2,068

Other assets

Operating lease right-of-use assets

2,517

Goodwill

 

1,920

 

1,868

Other intangible assets, net

 

2,342

 

1,203

Other assets

 

724

 

805

Total other assets

 

7,503

 

3,876

Total assets

 

$

17,937

 

$

13,156

LIABILITIES AND EQUITY

Current liabilities

Current debt

 

$

522

 

$

516

Accounts payable

 

1,137

 

1,490

Operating lease liabilities

369

Other accrued liabilities

 

2,925

 

2,599

Total current liabilities

 

4,953

 

4,605

Noncurrent liabilities

Long-term debt

 

4,662

 

2,896

Long-term operating lease liabilities

2,318

Other noncurrent liabilities

 

1,403

 

1,244

Total noncurrent liabilities

 

8,383

 

4,140

Contingencies

Equity

Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at December 31, 2019 and June 30, 2019; shares issued: 448,452,843 at December 31, 2019 and 443,685,124 at June 30, 2019; Class B shares authorized: 304,000,000 at December 31, 2019 and June 30, 2019; shares issued and outstanding: 137,220,914 at December 31, 2019 and 139,537,814 at June 30, 2019

 

6

 

6

Paid-in capital

 

4,615

 

4,403

Retained earnings

 

10,775

 

9,984

Accumulated other comprehensive loss

 

(569)

 

(563)

 

14,827

 

13,830

Less: Treasury stock, at cost; 226,278,070 Class A shares at December 31, 2019 and 222,120,630 Class A shares at June 30, 2019

 

(10,253)

 

(9,444)

Total stockholders’ equity – The Estée Lauder Companies Inc.

 

4,574

 

4,386

Noncontrolling interests

 

27

 

25

Total equity

 

4,601

 

4,411

Total liabilities and equity

 

$

17,937

$

13,156

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)

    

2019

    

2018

 

Cash flows from operating activities

Net earnings

 

$

1,159

 

$

1,079

Adjustments to reconcile net earnings to net cash flows from operating activities:

Depreciation and amortization

 

287

 

269

Deferred income taxes

 

7

 

(46)

Non-cash stock-based compensation

 

139

 

131

Net loss on disposal of property, plant and equipment

 

5

 

5

Pension and post-retirement benefit expense

 

41

 

35

Pension and post-retirement benefit contributions

 

(33)

 

(12)

Goodwill and other intangible asset impairments

777

38

Changes in fair value of contingent consideration

(7)

(9)

Gain on previously held equity method investment

(553)

Other non-cash items

(10)

(13)

Changes in operating assets and liabilities:

Increase in accounts receivable, net

 

(347)

 

(343)

Decrease (increase) in inventory and promotional merchandise

 

31

 

(21)

Increase in other assets, net

 

(120)

 

(53)

Decrease in accounts payable

(375)

(174)

Increase in other accrued and noncurrent liabilities

 

252

 

387

Increase in operating lease assets and liabilities, net

 

2

 

Net cash flows provided by operating activities

 

1,255

 

1,273

Cash flows from investing activities

Capital expenditures

 

(291)

 

(292)

Payments for acquired businesses, net of cash acquired

 

(1,040)

 

Proceeds from the disposition of investments

271

Purchases of investments

(5)

(14)

Settlement of net investment hedges

(14)

Net cash flows used for investing activities

 

(1,350)

 

(35)

Cash flows from financing activities

Proceeds (repayments) of current debt, net

 

8

 

(169)

Proceeds from issuance of long-term debt, net

1,783

Debt issuance costs

(14)

Repayments and redemptions of long-term debt

 

(8)

 

Net proceeds from stock-based compensation transactions

 

71

 

59

Payments to acquire treasury stock

 

(813)

 

(1,126)

Payments of contingent consideration

 

(3)

 

Dividends paid to stockholders

 

(330)

 

(297)

Payments to noncontrolling interest holders for dividends

(7)

(3)

Net cash flows provided by (used for) financing activities

 

687

 

(1,536)

Effect of exchange rate changes on Cash and cash equivalents

 

17

 

(7)

Net increase (decrease) in Cash and cash equivalents

 

609

 

(305)

Cash and cash equivalents at beginning of period

 

2,987

 

2,181

Cash and cash equivalents at end of period

 

$

3,596

 

$

1,876

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. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. 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, 2019.

Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to current year presentation.

Management Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses reported in those financial statements. Descriptions of the Company’s significant accounting policies are discussed in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019. 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 weighted-average rates of exchange for the period. Unrealized translation gains (losses), net of tax, reported as cumulative translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc. were $75 million and $(34) million, net of tax, during the three months ended December 31, 2019 and 2018, respectively, and $3 million and $(13) million, net of tax, during the six months ended December 31, 2019 and 2018, 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. Beginning in the first quarter of fiscal 2020, the Company entered 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 7 - 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 $27 million and $(7) million during the three months ended December 31, 2019 and 2018, respectively, and $24 million and $(21) million during the six months ended December 31, 2019 and 2018, respectively.

Concentration of Credit Risk

The Company is a worldwide manufacturer, marketer and distributor of skin care, makeup, fragrance and hair care products. The Company’s sales subject to credit risk are made primarily to department stores, perfumeries, specialty multi-brand retailers and retailers in its travel retail business. The Company grants credit to qualified customers and does not believe it is exposed significantly to any undue concentration of credit risk.

6

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventory and Promotional Merchandise

Inventory and promotional merchandise consists of:

December 31

June 30

(In millions)

    

2019

    

2019

 

Raw materials

 

$

519

 

$

541

Work in process

 

237

 

268

Finished goods

 

1,101

 

981

Promotional merchandise

 

201

 

216

 

$

2,058

 

$

2,006

Property, Plant and Equipment

December 31

June 30

(In millions)

    

2019

    

2019

 

Assets (Useful Life)

Land

 

$

29

 

$

29

Buildings and improvements (10 to 40 years)

 

367

 

337

Machinery and equipment (3 to 10 years)

 

836

 

811

Computer hardware and software (4 to 10 years)

 

1,308

 

1,264

Furniture and fixtures (5 to 10 years)

 

117

 

116

Leasehold improvements

 

2,385

 

2,274

 

5,042

 

4,831

Less accumulated depreciation and amortization

 

(2,956)

 

(2,763)

 

$

2,086

 

$

2,068

The cost of assets related to projects in progress of $503 million and $474 million as of December 31, 2019 and June 30, 2019, respectively, is included in their respective asset categories above. Depreciation and amortization of property, plant and equipment was $127 million and $121 million during the three months ended December 31, 2019 and 2018, respectively, and $252 million and $237 million during the six months ended December 31, 2019 and 2018, 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.

Income Taxes

The effective rate for income taxes was 30.8% and 22.9% for the three months ended December 31, 2019 and 2018, respectively, and 26.2% and 21.9% for the six months ended December 31, 2019 and 2018, respectively. The increase in the effective tax rate in both periods was primarily attributable to the impact of nondeductible goodwill impairment charges associated with the Company's Too Faced, BECCA and Smashbox reporting units and to a higher effective tax rate on the Company's foreign operations.

As of December 31, 2019 and June 30, 2019, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $67 million. The total amount of unrecognized tax benefits at December 31, 2019 that, if recognized, would affect the effective tax rate was $50 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three and six months ended December 31, 2019 in the accompanying consolidated statements of earnings was $1 million and $2 million, respectively. At December 31, 2019 and June 30, 2019, the total gross accrued interest and penalties in the accompanying consolidated balance sheets was $12 million. On the basis of the information available as of December 31, 2019, the Company does not expect significant changes to the total amount of unrecognized tax benefits within the next twelve months.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Accrued Liabilities

Other accrued liabilities consist of the following:

December 31

June 30

(In millions)

    

2019

    

2019

 

Advertising, merchandising and sampling

 

$

416

 

$

352

Employee compensation

 

437

 

574

Deferred revenue

378

314

Payroll and other taxes

 

325

 

221

Accrued general and administrative expenses

256

195

Other

 

1,113

 

943

 

$

2,925

 

$

2,599

Recently Adopted Accounting Standards

Leases (Accounting Standards Codification ("ASC") Topic 842 - Leases ("ASC 842"))

In February 2016, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that requires lessees to account for most leases on their balance sheets with the liability being equal to the present value of the lease payments. The right-of-use asset is based on the lease liability adjusted for certain costs such as initial direct costs, prepaid lease payments and lease incentives received. Lease expense is recognized similar to previous accounting guidance with operating leases resulting in a straight-line expense, and finance leases resulting in a front-loaded expense similar to the previous accounting for capital leases.

In July 2018, the FASB amended this guidance to clarify certain narrow aspects of the new lease accounting standard that may have been incorrectly or inconsistently applied, and did not add new guidance. Also, in July 2018, the FASB issued authoritative guidance that allows companies to elect to adopt the new standard using a modified retrospective transition approach with a cumulative-effect adjustment to retained earnings in the period of adoption. Companies that elect the new adoption method were not required to restate the prior comparative periods in the financial statements.

Effective for the Company – Fiscal 2020 first quarter. An entity is permitted to apply the foregoing guidance using either of the modified retrospective transition approaches described in the standard, with certain practical expedients.

Impact on consolidated financial statements - On July 1, 2019, the Company adopted ASC 842, see Note 4 - Leases for further discussion.

Recently Issued Accounting Standards

Measurement of Credit Losses on Financial Instruments (ASC Topic 326 - Financial Instruments - Credit Losses)

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

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

Effective for the Company - Fiscal 2021 first quarter.

Impact on consolidated financial statements – The Company is currently evaluating the impact of applying this guidance on its financial instruments, such as accounts receivable. While the Company’s evaluation is ongoing, the adoption of this standard is not expected to have a material impact on its consolidated financial statements.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and Other – Internal-Use Software (ASU 2018-15 - Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract)

In August 2018, the FASB issued authoritative guidance that permits companies to capitalize the costs incurred for setting up business systems that operate on cloud technology. The new guidance aligns the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance does not affect the accounting for the service element of a hosting arrangement that is a service contract. Capitalized costs associated with a hosting arrangement that is a service contract must be amortized over the term of the hosting arrangement to the same line item in the income statement as the expense for fees for the hosting arrangement.

Effective for the Company Fiscal 2021 first quarter, with early adoption permitted in any interim period. This guidance can be adopted either retrospectively, or prospectively to all implementation costs incurred after the date of adoption.

Impact on consolidated financial statements – The Company is currently evaluating the impact of applying this guidance to its business systems that operate on cloud technology. While the Company’s evaluation is ongoing, the adoption of this standard is not expected to have a material impact on its consolidated financial statements.

Income Taxes (ASU 2019-12 – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes)

In December 2019, the FASB issued authoritative guidance that simplifies the accounting for income taxes by removing certain exceptions and making simplifications in other areas.

Effective for the Company – Fiscal 2022 first quarter, with early adoption permitted in any interim period. If adopted early, the Company must adopt all the amendments in the same period. The amendments have differing adoption methods including retrospectively, prospectively and/or modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption, depending on the specific change.

Impact on consolidated financial statements – The Company is currently evaluating the impact of applying this guidance and believes that it has transactions that may fall under the scope.

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

NOTE 2 –ACQUISITION OF BUSINESS

On December 18, 2019, the Company acquired the remaining 66.66% equity interest in Have&Be Co. Ltd. (“Have & Be”), the global skin care company behind Dr. Jart+ and men’s grooming brand Do The Right Thing, for $1,268 million in cash. This acquisition is expected to further strengthen the Company’s leadership position in skin care and expand its consumer reach in Asia/Pacific, North America, the United Kingdom and travel retail. We originally acquired a minority interest in Have & Be in December 2015, and that investment structure included a formula-based call option for the remaining equity interest. The original minority interest was accounted for as an equity method investment, which had a carrying value of $133 million at the acquisition date. The acquisition of the remaining equity interest in Have & Be was considered a step acquisition, whereby the Company remeasured the previously held equity method investment to its fair value of $682 million, resulting in the recognition of a gain of $549 million. The acquisition of the remaining equity interest also resulted in the recognition of a previously unrealized foreign currency gain of $4 million, which was reclassified from accumulated OCI. The total gain on the Company’s previously held equity method investment of $553 million is included in Other income in the accompanying consolidated statements of earnings for the three and six months ended December 31, 2019. The fair value of the previously held equity method investment was determined based upon a valuation of the acquired business, as of the date of acquisition, using 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. The accounting for the Have & Be business combination is provisional pending finalization of the Have & Be calendar 2019 audited financial statements, working capital adjustments, and allocation of the total consideration transferred.

The amount paid at closing was funded by cash on hand including the proceeds from the issuance of debt. In anticipation of the closing, the Company transferred cash to a foreign subsidiary for purposes of making the closing payment. As a result, the Company recognized a foreign currency gain of $23 million, which is also included in Other income in the accompanying consolidated statements of earnings for the three and six months ended December 31, 2019.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company recorded a preliminary allocation of the total consideration transferred, which includes the cash paid at closing and the fair value of its previously held equity method investment, to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair value at the acquisition date. The excess of the total consideration transferred over the fair value of the net tangible and intangible assets acquired was recorded as goodwill. The preliminary allocation of the total consideration transferred has been recorded as follows:

(In millions, unaudited)

    

Cash

$

228

Accounts receivable

 

48

Inventory

 

83

Other current assets

 

5

Property, plant and equipment

 

3

Right-of-use assets

3

Intangible assets

 

1,427

Goodwill

 

556

Other long-term assets

3

Total assets acquired

 

2,356

Accounts payable

 

27

Other accrued liabilities

 

22

Deferred income taxes

 

352

Lease liability

1

Total liabilities assumed

 

402

Total consideration transferred

$

1,954

The results of operations of Have & Be will be reported in future periods on a one-month lag to facilitate consolidated reporting. Accordingly, operating income for the three and six months ended December 31, 2019 does not include the results of operations of Have & Be since the date of acquisition, which were not material. Acquisition-related costs, which primarily include financial advisory, accounting and legal fees, in the amount of $6 million are included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings for the three and six months ended December 31, 2019. Pro forma results of operations reflecting the acquisition of Have & Be are not presented, as the impact on the Company’s consolidated financial results would not have been material.

NOTE 3 – GOODWILL AND OTHER INTANGIBLE ASSETS

As previously discussed in Note 2 – Acquisition of Business, in December 2019, the Company acquired Have & Be, which included the addition of goodwill of $556 million, amortizable intangible assets (customer lists) of $842 million with amortization periods of 7.5 years to 17.5 years, and non-amortizable intangible assets (trademarks) of $585 million. Goodwill associated with the acquisition is primarily attributable to the future revenue growth opportunities associated with additional share in the skin care category, as well as the value associated with assembled workforce. As such, the goodwill has been allocated to the Company’s skin care product category. The goodwill recorded in connection with this acquisition is not expected to be deductible for tax purposes. These amounts are provisional pending finalization of the Have & Be calendar 2019 audited financial statements, working capital adjustments, and allocation of the total consideration transferred.

During the six months ended December 31, 2019, the Company recognized $7 million of goodwill associated with the continuing earn-out obligations related to the acquisition of the Bobbi Brown brand.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The intangible assets acquired in connection with the acquisition of Have & Be are classified as level 3 in the fair value hierarchy. The estimate of the fair values of the acquired amortizable intangible assets were determined using a multi-period excess earnings income approach by discounting the incremental after-tax cash flows over multiple periods. Fair value was determined under this approach by estimating future cash flows over multiple periods, as well as a terminal value, and discounting such cash flows at a rate of return that reflects the relative risk of the cash flows. The estimate of the fair values of the acquired intangible assets not subject to amortization were determined using an income approach, specifically the relief-from-royalty method. This method assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the comparable asset.

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, 2019

Goodwill

 

$

185

 

$

1,199

 

$

254

 

$

390

 

$

2,028

Accumulated impairments

 

(36)

 

(68)

 

(22)

 

(34)

 

(160)

 

149

 

1,131

 

232

 

356

 

1,868

Goodwill acquired during the period

 

556

7

563

Impairment charges

(511)

(511)

Translation adjustments, goodwill

(1)

(1)

Translation adjustments, accumulated impairments

 

1

1

 

556

(504)

52

Balance as of December 31, 2019

Goodwill

 

740

1,206

254

390

2,590

Accumulated impairments

 

(35)

(579)

(22)

(34)

(670)

 

$

705

 

$

627

 

$

232

 

$

356

 

$

1,920

Other intangible assets consist of the following:

December 31, 2019

June 30, 2019

Gross

Total Net

Gross

Total Net

Carrying

Accumulated

Book 

Carrying

Accumulated

Book

(In millions)

    

Value

    

Amortization

    

Value

    

Value

    

Amortization

    

Value

 

Amortizable intangible assets:

Customer lists and other

 

$

1,524

 

$

389

 

$

1,135

 

$

684

 

$

369

 

$

315

License agreements

 

43

 

43

 

 

43