ESTEE LAUDER RESULTS OF OPERATIONS
We manufacture, market and sell beauty products including those in the skin care, makeup, fragrance and hair care categories, which are distributed in approximately 150 countries and territories. The following table is a comparative summary of operating results for the three and six months endedDecember 31, 2019 and 2018, and reflects the basis of presentation described in Notes to Consolidated Financial Statements, Note 1 - Summary of Significant Accounting Policies for all periods presented. Products and services that do not meet our definition of skin care, makeup, fragrance and hair care have been included in the "other" category. Three Months Ended Six Months Ended December 31 December 31 (In millions) 2019 2018 2019 2018NET SALES By Product Category: Skin Care$ 2,205 $ 1,732 $ 4,047 $ 3,218 Makeup 1,660 1,560 3,103 2,966 Fragrance 581 537 1,043 1,009 Hair Care 162 154 298 297 Other 16 22 28 39 Net sales$ 4,624 $ 4,005 $ 8,519 $ 7,529 By Region: The Americas$ 1,226 $ 1,218 $ 2,386 $ 2,454
Europe, the Middle East & Africa 2,079 1,767
3,756 3,200
Asia/Pacific 1,319 1,020 2,377 1,875
Net sales $ 4,624 $ 4,005 $ 8,519 $ 7,529
OPERATING INCOME (LOSS)
By Product Category:
Skin Care $ 772 $ 565 $ 1,404 $ 1,031
Makeup (611) 138 (507) 299
Fragrance 97 84 163 139
Hair Care 12 15 12 29
Other 4 4 6 7
274 806 1,078 1,505
Charges associated with restructuring and other
activities (13) (35) (38) (82)
Operating income $ 261 $ 771 $ 1,040 $ 1,423
By Region:
The Americas $ (529) $ 149 $ (354) $ 383 Europe, the Middle East & Africa 505 418
882 675
Asia/Pacific 298 239 550 447
274 806 1,078 1,505
Charges associated with restructuring and other
activities (13) (35) (38) (82)
Operating income $ 261 $ 771 $ 1,040 $ 1,423
33
Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
During the fiscal 2020 first quarter, changes were made to reflect certain
Leading Beauty Forward enhancements made to the capabilities and cost structure
of our travel retail business, which are primarily centralized in The Americas
region, and resulted in a change to the royalty structure of the travel retail
business to reflect the value created in The Americas region. Accordingly, the
fiscal 2019 operating income of The Americas was increased, with a corresponding
decrease in Europe , the Middle East & Africa by $210 million and $411 million
for the three and six months ended December 31, 2018 , respectively, to conform
with the current year methodology and presentation.
The following table presents certain consolidated earnings data as a percentage
of net sales:
Three Months Ended Six Months Ended
December 31 December 31
2019 2018 2019 2018
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 22.5 22.7 22.9 23.0
Gross profit 77.5 77.3 77.1 77.0
Operating expenses:Selling, general and administrative 54.9 56.4 55.4 56.6 Restructuring and other charges 0.1 0.7 0.4 0.9 Goodwill impairment 11.0 0.5 6.0 0.3 Impairment of other intangible assets 5.8 0.4
3.1 0.2
Total operating expenses 71.8 58.0 64.9 58.1
Operating income 5.6 19.3 12.2 18.9
Interest expense 0.8 0.9 0.8 0.9Interest income and investment income, net 0.3 0.3 0.3 0.4 Other components of net periodic benefit cost - -
- -
Other income 12.5 - 6.8 -
Earnings before income taxes 17.5 18.7 18.4 18.3
Provision for income taxes 5.4 4.3 4.8 4.0
Net earnings 12.1 14.4 13.6 14.3
Net earnings attributable to noncontrolling
interests (0.1) (0.1) (0.1) (0.1)
Net earnings attributable to The Estée Lauder Companies Inc. 12.0 % 14.3
% 13.5 % 14.3 %
Not adjusted for differences caused by rounding
We continually introduce new products, support new and established products through advertising, merchandising and sampling and phase out existing products that no longer meet the needs of our consumers or our objectives. The economics of developing, producing, launching, supporting and discontinuing products impact our sales and operating performance each period. The introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning. Non-GAAP Financial Measures
We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period helps investors and others compare operating performance between periods. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity withU.S. GAAP. See Reconciliations of Non-GAAP Financial Measures beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparableU.S. GAAP measures. 34 Table of Contents THE ESTÉE LAUDER COMPANIES INC.
We operate on a global basis, with the majority of our net sales generated outsidethe United States . Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations. Therefore, we present certain net sales, operating results and diluted net earnings per common share information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of our underlying business outsidethe United States . Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We calculate constant currency information by translating current-period results using prior-year period weighted-average foreign currency exchange rates and adjusting for the period-over-period impact of foreign currency cash flow hedging activities. Overview We believe that the best way to increase stockholder value is to continue providing superior products and services in the most efficient and effective manner while recognizing consumers' changing behaviors and shopping preferences. Accordingly, our long-term strategy has numerous initiatives across geographic regions, product categories, brands, channels of distribution and functions designed to grow our sales, provide cost efficiencies, leverage our strengths and make us more productive and profitable. We plan to build upon and leverage our history of outstanding creativity and innovation, high quality products and services, and engaging communications while investing for long-term sustainable growth. Elements of our strategy are described in the Overview on pages 25-27 of our Annual Report on Form 10-K for the year endedJune 30, 2019 , as well as below. During the second quarter of fiscal 2020, our global net sales momentum continued, fueled by our multiple engines of growth. Net sales grew across all regions and product categories. The 15% growth as compared to the prior-year period was led by our skin care product category and ourEurope , theMiddle East &Africa andAsia/Pacific regions. We continued to benefit from growth in global prestige skin care. The strong net sales growth in skin care reflected increases in every region, with contributions from Estée Lauder, La Mer, Origins and Clinique. We grew makeup category net sales in the quarter, led by M·A·C inAsia/Pacific , Estée Lauder andBobbi Brown inAsia/Pacific and in our travel retail business andTom Ford globally. This growth was partially offset by a decline in prestige makeup generally inNorth America , which impacted many
of our brands. Internationally, net sales grew in nearly every market, led byChina and our travel retail business. The net sales growth for the period also reflected higher net sales from most developed markets acrossEurope , theMiddle East &Africa as well as double-digit increases inKorea . In aggregate, emerging markets outside ofChina rose high single-digits. We believe that our success has been due, in part, to our sharp focus on key shopping events in the quarter (such as Singles' Day and Christmas) as well as to our continued focus on strengthening consumer engagement by leveraging digital marketing and enhancing our social media strategies and execution, as we continue to pivot towards areas of prestige beauty where we see the greatest opportunities. OnDecember 18, 2019 , we acquired the remaining equity interest inHave&Be Co. Ltd. ("Have & Be"), the global skin care company behind Dr. Jart+ and men's grooming brand Do The Right Thing. We originally acquired a minority interest in Have & Be inDecember 2015 . This acquisition is expected to further strengthen our leadership position in skin care and expand our consumer reach inAsia/Pacific ,North America , theUnited Kingdom and travel retail. 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 endedDecember 31, 2019 does not include the results of operations of Have & Be since the date of acquisition, which were not material. While our business is performing well overall, we continue to face strong competition globally and economic challenges in certain countries. We are cautious of the continued decline in retail traffic primarily related to certain brick-and-mortar stores inthe United States and theUnited Kingdom . This is due to the impact of shifts in consumer preferences as to where and how they shop, as well as adverse macroeconomic conditions in theUnited Kingdom . Our business inHong Kong continues to be challenged, as the ongoing situation there has negatively impacted traffic in downtown shops and the airport and also led to intermittent store closures. We continue to monitor the geopolitical tensions betweenthe United States andChina and the uncertainties caused by the evolving trade policy dispute, which could increase our cost of sales and negatively impact our overall net sales, or otherwise have a material adverse effect on our business. We also continue to monitor the potential implications of the ongoing economic and political uncertainties stemming from theUnited Kingdom's exit and transition from theEuropean Union (i.e. "Brexit") and continue developing our risk mitigation strategies to address such uncertainties. These strategies include changes related to regulatory and legislative compliance, assessing alternatives to supply chain routing, revising customer arrangements and analyzing inventory levels. We are monitoring the potential impacts of the recent outbreak of the coronavirus on our global business. After experiencing continued strong momentum into January, we have seen a significant decline in air travel and consumer traffic in key shopping and tourist areas. Although it is difficult to anticipate the full impact of the coronavirus on our business, global travel retail, localities most affected by the virus outbreak and destination markets favored by tourists are expected to experience the greatest negative impact in the coming months followed by a gradual recovery later in the fiscal year. We are also cautious of foreign currency movements, including their impacts on tourism. Additionally, we continue to monitor the effects of the global macroeconomic environment; social and political issues; regulatory matters, including the imposition of tariffs; geopolitical tensions; global health issues and global security issues. 35 Table of Contents THE ESTÉE LAUDER COMPANIES INC.
We believe we can, to some extent, offset the impact of these challenges by continually developing and pursuing a diversified strategy with multiple engines of growth and accelerating areas of strength among our geographic regions, product categories, brands and channels of distribution. However, if economic conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, there could be a negative effect on consumer confidence, demand, spending and willingness or ability to travel and, as a result, on our business. We will continue to monitor these and other risks that may affect our business. Our "heritage brands" are Estée Lauder, Clinique and Origins. Our "makeup artist brands" are M•A•C andBobbi Brown . Our "luxury brands" are La Mer,Jo Malone London ,Tom Ford , AERIN, RODIN olio lusso,Le Labo , Editions de Parfums Frédéric Malle and By Kilian. Our "designer fragrances" are sold under theTommy Hilfiger , Donna Karan New York,DKNY ,Michael Kors , Kiton and Ermenegildo Zegna brand names, which we license from their respective owners. LeadingBeauty Forward
Information about our multi-year initiative, Leading
DuringDecember 2019 , given the continuing declines in prestige makeup, generally inNorth America , and the ongoing competitive activity, our Too Faced, BECCA and Smashbox reporting units made revisions to their internal forecasts concurrent with our brand strategy review process. We concluded that the changes in circumstances in these reporting units triggered the need for an interim impairment review of their respective trademarks and goodwill. These changes in circumstances were also an indicator that the carrying amounts of their respective long-lived assets, including customer lists, may not be recoverable. Accordingly, we performed interim impairment tests for the trademarks and recoverability tests for the long-lived assets as ofDecember 31, 2019 . We concluded that the carrying amounts of the long-lived assets were recoverable. We also concluded that the carrying values of the trademarks exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded impairment charges. After adjusting the carrying value of the trademarks, we completed interim quantitative impairment tests for goodwill and recorded goodwill impairment charges for each of these reporting units. The fair value of each reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. A summary of the impairment charges for the three and six months endedDecember 31, 2019 and the remaining trademark and goodwill carrying values as ofDecember 31, 2019 , for each reporting unit, are as follows: (In millions) Impairment Charge Carrying Value Reporting Unit: Trademark Goodwill Trademark Goodwill Too Faced$ 211 $ 430 $ 314 $ 175 BECCA 33 35 65 63 Smashbox 22 46 33 26 Total$ 266 $ 511 $ 412 $ 264
The impairment charges were reflected in the makeup product category and in The
The key assumptions used to determine the estimated fair value of the reporting units are primarily predicated on the success of future new product launches, the achievement of international distribution expansion plans, and the realization of cost reduction and other efficiency efforts. If such plans do not materialize, or if there are further challenges in the business environments in which these reporting units operate, resulting changes in the key assumptions could have negative impacts on the estimated fair values of the reporting units and it is possible we could recognize additional impairment charges in the
future.
36
Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
In addition, duringDecember 2019 , our GLAMGLOW reporting unit updated its projected operating results to reflect lower demand for its products, impacted by shifts in market trends and key customer performance in the core markets in which its products are sold and concurrent with our brand strategy review process. We concluded that these changes in circumstances in this reporting unit triggered the need for an interim impairment review of its trademark and goodwill. Based on the review, we concluded the fair value of the GLAMGLOW trademark exceeded its carrying value by approximately 12%. We completed an interim quantitative impairment test for goodwill and concluded the fair value of the GLAMGLOW goodwill exceeded its carrying value by approximately 5%. The fair value of the reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. As ofDecember 31, 2019 , the carrying value of the GLAMGLOW trademark and goodwill was$63 million and$114 million , respectively. If this reporting unit is adversely affected by a softness in the retail environment for its products in the future, or if other business disruptions arise that cause a change to its long-term financial projections, there could be a negative effect on the fair value of the related trademark and goodwill, and it is possible we could recognize impairment charges in the future.NET SALES Three Months Ended Six Months Ended December 31 December 31 ($ in millions) 2019 2018 2019 2018 As Reported: Net sales$ 4,624 $ 4,005 $ 8,519 $ 7,529
$ Change from prior-year period 619 990 % Change from prior-year period 15 % 13 % Non-GAAP Financial Measure(1): % Change from prior-year period in constant currency 16 % 14 %
(1) See "Reconciliations of Non-GAAP Financial Measures" beginning on page 47 for
reconciliations between non-GAAP financial measures and the most directly
comparable U.S. GAAP measures.
For the three and six months ended December 31, 2019 , reported net sales
increased in all major product categories and grew predominantly in the
Asia/Pacific and Europe , the Middle East & Africa geographic regions. Skin care
net sales primarily benefited from higher sales of Estée Lauder, La Mer, Origins
and Clinique products. The net sales increases from Estée Lauder and Tom Ford
drove the increase in the makeup product category. Fragrance net sales primarily
reflected higher net sales from Jo Malone London and Tom Ford . Each of our
product categories benefited from targeted expanded consumer reach, new product
offerings, and the continued success of certain hero franchises. Net sales
increases in China and our travel retail business continued to drive growth
internationally.
The total net sales increases were impacted by approximately $22 million and $62
million of unfavorable foreign currency translation for the three and six months
ended December 31, 2019 , respectively.
Product Categories
Skin Care
Three Months Ended Six Months Ended
December 31 December 31
($ in millions) 2019 2018 2019 2018
As Reported:
Net sales $ 2,205 $ 1,732 $ 4,047 $ 3,218 $ Change from prior-year period 473 829 % Change from prior-year period 27 % 26 % Non-GAAP Financial Measure(1): % Change from prior-year period in constant currency 28 % 27 %
(1) See "Reconciliations of Non-GAAP Financial Measures" beginning on page 47 for
reconciliations between non-GAAP financial measures and the most directly
comparable U.S. GAAP measures.
37
Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
Reported skin care net sales increased in every region and reflected higher net sales from Estée Lauder, La Mer, Origins and Clinique, combined, of approximately$447 million and$805 million for the three and six months endedDecember 31, 2019 , respectively. Net sales increased from Estée Lauder in both periods, led by our travel retail business andChina , reflecting the continued success of existing product franchises, such as Advanced Night Repair, Perfectionist, Re-Nutriv, Revitalizing Supreme and Micro Essence, and new product launches, such as Advanced Night Repair Intense Reset Concentrate. The increase in net sales from La Mer in both periods reflected growth across all geographic regions, and benefited from existing products, such as The Treatment Lotion, and product relaunches, such as The Regenerating Serum, as well as targeted expanded consumer reach and stronger demand for holiday sets. Net sales from Origins in both periods reflected higher net sales of treatment lotions and moisturizers and, for the three months endedDecember 31, 2019 , also reflected growth in all regions. The continued success of certain hero franchises, as well as strength from moisturizers and anti-aging products, contributed to the increase in net sales from Clinique in both periods. The skin care net sales increases were impacted by approximately$10 million and$26 million of unfavorable foreign currency translation for the three and six months endedDecember 31, 2019 , respectively. Makeup Three Months Ended Six Months Ended December 31 December 31 ($ in millions) 2019 2018 2019 2018 As Reported: Net sales$ 1,660 $ 1,560 $ 3,103 $ 2,966
$ Change from prior-year period 100 137 % Change from prior-year period 6 % 5 % Non-GAAP Financial Measure(1): % Change from prior-year period in constant currency 7 % 5 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 47 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported makeup net sales increased for the three months endedDecember 31, 2019 , reflecting higher net sales from Estée Lauder,Tom Ford ,Bobbi Brown and La Mer of approximately$101 million , combined. For the six months endedDecember 31, 2019 , reported makeup net sales increased from these brands as well as from M·A·C by$166 million , combined. The higher net sales from Estée Lauder in both periods were primarily due to the success of our Double Wear franchise and Futurist line of products, which drove higher net sales inChina and our travel retail business. The net sales increase fromTom Ford in both periods was primarily due to continued growth inAsia/Pacific , led byChina andJapan , which resulted in higher net sales from third-party online malls, driven by Tmall, as well as the strength in lip and eye products, including the Lip Color and Eye Quad line of products, respectively, and targeted expanded consumer reach. Net sales fromBobbi Brown in both periods reflected higher net sales inAsia/Pacific , as well as our travel retail business, which benefited from existing products such asIntensive Skin Serum Foundation . The higher net sales in both periods from La Mer were primarily due to growth internationally, which benefited from successful holiday events and campaigns on Tmall, existing products, such asThe Luminous Lifting Cushion Foundation , and targeted expanded consumer reach. Net sales increased from M·A·C for the six months endedDecember 31, 2019 reflecting higher net sales inAsia/Pacific primarily due to the growth from Tmall inChina , targeted expanded consumer reach and the strength in lip and foundation products. These increases were partially offset by lower net sales from BECCA and Smashbox, combined, of approximately$16 million for the three months endedDecember 31, 2019 . For the six months endedDecember 31, 2019 , the increases were partially offset by lower net sales from these brands, as well as from Too Faced and Clinique, of approximately$54 million , combined. The decreases in both periods reflected declines inNorth America , due to the general decline in prestige makeup and ongoing competitive activity. The lower net sales from BECCA also reflected a difficult comparison to certain prior-year launches. The makeup net sales increases were impacted by approximately$10 million and$26 million of unfavorable foreign currency translation for the three and six months endedDecember 31, 2019 , respectively. 38 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Fragrance Three Months Ended Six Months Ended December 31 December 31 ($ in millions) 2019 2018 2019 2018 As Reported: Net sales$ 581 $ 537 $ 1,043 $ 1,009
$ Change from prior-year period 44 34 % Change from prior-year period 8 % 3 % Non-GAAP Financial Measure(1): % Change from prior-year period in constant currency 9 % 4 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 47 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported fragrance net sales increased, reflecting higher net sales fromJo Malone London andTom Ford , combined, of approximately$40 million and$73 million for the three and six months endedDecember 31, 2019 , respectively. In both periods, the net sales increase fromJo Malone London reflected growth across all geographic regions primarily due to the continued success of certain hero franchises, new product launches, such as Poppy & Barley, the stronger demand of holiday sets, and targeted expanded consumer reach. Net sales increased fromTom Ford in both periods across all geographic regions, which benefited from higher net sales from certain Private Blend franchises, new product launches, such as Métallique andSoleil Neige , and the stronger demand for holiday sets.
Partially offsetting these increases for the six months endedDecember 31, 2019 were lower net sales from certain of our designer fragrances and Estée Lauder of approximately$41 million , combined. Net sales declined from certain designer fragrances reflecting the decline inNorth America due, in part, to an unfavorable comparison to certain prior-year launches and declines for our products in the specialty-multi and department store channels. The net sales decline from Estée Lauder was primarily due to an unfavorable comparison to the prior-year launch of Beautiful Belle inNorth America and theUnited Kingdom . The fragrance net sales increases were impacted by approximately$2 million and$9 million of unfavorable foreign currency translation for the three and six months endedDecember 31, 2019 , respectively. Hair Care Three Months Ended Six Months EndedDecember 31 December 31
($ in millions) 2019 2018 2019 2018 As Reported: Net sales$ 162 $ 154 $ 298 $ 297
$ Change from prior-year period 8 1 % Change from prior-year period 5 % - Non-GAAP Financial Measure(1): % Change from prior-year period in constant currency 5 % 1 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 47 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported hair care net sales increased for the three and six months endedDecember 31, 2019 , primarily reflecting growth from Aveda. In both periods, the higher net sales from Aveda were primarily driven by new product launches, such as Nutriplenish and Full Spectrum Demi Plus, and the relaunch of Sap Moss, as well as the continued success of hero franchises such as the Damage Remedy
line of products. The growth in hair care net sales for the six months endedDecember 31, 2019 was mostly offset by lower net sales from Bumble and bumble due to the softness inNorth America , which impacted the salon and specialty-multi channels. 39 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Geographic Regions The Americas Three Months Ended Six Months Ended December 31 December 31 ($ in millions) 2019 2018 2019 2018 As Reported: Net sales$ 1,226 $ 1,218 $ 2,386 $ 2,454
$ Change from prior-year period 8 (68) % Change from prior-year period 1 % (3) % Non-GAAP Financial Measure(1): % Change from prior-year period in constant currency 1 % (3) %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 47 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported net sales in TheAmericas for the three months endedDecember 31, 2019 increased due to higher net sales inthe United States of approximately$10 million , reflecting higher net sales from Estée Lauder,Jo Malone London andTom Ford , which drove the growth in the fragrance and skin care product categories. These increases more than offset the softness inNorth America for certain of our makeup products as previously discussed. Reported net sales in TheAmericas for the six months endedDecember 31, 2019 decreased due to lower net sales inthe United States of approximately$73 million , primarily from M·A·C, Too Faced and BECCA due to the decline in prestige makeup generally inNorth America . Also contributing to the decline was an unfavorable comparison to prior-year launch activity from certain designer fragrances, Estée Lauder and BECCA.
The changes in net sales in The
Three Months Ended Six Months Ended
December 31 December 31
($ in millions) 2019 2018 2019 2018
As Reported:
Net sales $ 2,079 $ 1,767 $ 3,756 $ 3,200 $ Change from prior-year period 312 556 % Change from prior-year period 18 % 17 % Non-GAAP Financial Measure(1): % Change from prior-year period in constant currency 18 % 19 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 47 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported net sales inEurope , theMiddle East &Africa increased, primarily reflecting higher net sales from our travel retail business and, to a lesser extent,Russia of approximately$297 million and$533 million , combined, for the three and six months endedDecember 31, 2019 , respectively. In both periods, net sales increased in our travel retail business across most brands, led by Estée Lauder, La Mer and Origins, driven, in part, by increased passenger traffic, as well as new product launches, including Estée Lauder's Advanced Night Repair Intense Reset Concentrate and The Regenerating Serum from La Mer. Also contributing to this increase was strategic investment spending to support both new and existing products. The higher net sales inRussia in both periods were primarily driven by Estée Lauder,Jo Malone London andTom Ford , reflecting the success of hero franchises, such as Advance Night Repair from Estée Lauder, and new product launches, such as Poppy & Barley fromJo Malone London and Métallique andSoleil Neige fromTom Ford .
The net sales increases in
40
Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
Asia/Pacific
Three Months Ended Six Months Ended
December 31 December 31
($ in millions) 2019 2018 2019 2018
As Reported:
Net sales $ 1,319 $ 1,020 $ 2,377 $ 1,875 $ Change from prior-year period 299 502 % Change from prior-year period 29 % 27 % Non-GAAP Financial Measure(1): % Change from prior-year period in constant currency 30 % 28 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 47 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported net sales inAsia/Pacific increased, reflecting higher net sales inChina andJapan , combined, of approximately$308 million and$511 million for the three and six months endedDecember 31, 2019 , respectively. In both periods, the higher net sales inChina reflected double-digit growth from virtually every brand, led by Estée Lauder, La Mer, M·A·C andTom Ford , continued growth in skin care and makeup, targeted expanded consumer reach, and new product launches, such as Estée Lauder's Advanced Night Repair Intense Reset Concentrate and a new larger size of The Treatment Lotion from La Mer. The net sales increase inChina benefited every channel, led by online (due to the continued growth and successful holiday events and campaigns on Tmall), department stores, freestanding stores and specialty-multi. In both periods, the net sales growth inJapan reflected growth in virtually every brand, led by M·A·C andJo Malone London , reflecting the success of certain hero franchises, new product launches and targeted expanded consumer reach, which contributed to growth in all major product categories and growth in virtually every channel. These increases were partially offset by lower net sales inHong Kong of approximately$33 million and$51 million for the three and six months endedDecember 31, 2019 , respectively, due to the ongoing situation there that has continued to negatively impact traffic in downtown shops and the airport and has also led to intermittent store closures.
The net sales increases in
We strategically stagger our new product launches by geographic market, which may account for differences in regional sales growth.
GROSS MARGIN Gross margin increased to 77.5% and 77.1% for the three and six months endedDecember 31, 2019 , respectively, as compared with 77.3% and 77.0% in the prior-year periods. Favorable (Unfavorable) Basis Points December 31, 2019 Three Months Ended Six Months Ended Mix of business 50 65 Obsolescence charges (25) (40) Manufacturing costs and other (5) (15) Total 20 10 The increase in gross margin for the three and six months endedDecember 31, 2019 reflected the favorable impact from our mix of business primarily due to favorable changes in strategic pricing and product category mix, as well as cost of promotional items as a percentage of net sales. Also reflected in the favorable impact from our mix of business for the three months endedDecember 31, 2019 was a favorable change from new product introductions and relaunches. Partially offsetting these favorable changes in both periods were higher costs from product sets included in mix of business, as well as unfavorable changes in manufacturing costs and other, including the impacts of incremental tariffs. 41 Table of Contents THE ESTÉE LAUDER COMPANIES INC.
OPERATING EXPENSES
Operating expenses as a percentage of net sales increased to 71.8% and 64.9% for the three and six months endedDecember 31, 2019 , respectively, as compared with 58.0% and 58.1% in the prior-year periods. Favorable (Unfavorable) Basis PointsDecember 31, 2019 Three Months Ended Six Months Ended
General and administrative expenses (90) (70) Advertising, merchandising, sampling and product development
10 (30) Selling 150 150 Stock-based compensation - 10 Store operating costs 30 30 Shipping 10 10 Foreign exchange transactions 20 30 Subtotal 130 130
Charges associated with restructuring and other activities 60 50 Goodwill and other intangible asset impairments (1,590) (860) Changes in fair value of contingent consideration
20 - Total (1,380) (680) For the three and six months endedDecember 31, 2019 , the increases in operating expense margin were driven by the impact of goodwill and other intangible asset impairments. In addition, general and administrative expenses increased primarily due to professional service fees (including acquisition-related costs), enhanced capabilities in select corporate functions to support our strategic initiatives, and investments in information systems. These increases were partially offset by improvements from selling expenses primarily due to increased efficiencies in our sales operations and lower demonstration costs driven by changes in distribution channel mix. OPERATING RESULTS Three Months Ended Six Months Ended December 31 December 31 ($ in millions) 2019 2018 2019 2018 As Reported: Operating income$ 261 $ 771 $ 1,040 $ 1,423
$ Change from prior-year period (510)
(383)
% Change from prior-year period (66) %
(27) %
Operating margin 5.6 % 19.3 % 12.2 % 18.9 %
Non-GAAP Financial Measure(1):
% Change in operating income from the prior-year
period adjusting for the impact of charges
associated with restructuring and other
activities, goodwill and other intangible asset
impairments and changes in fair value of
contingent consideration 23 % 20 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 47 for
reconciliations between non-GAAP financial measures and the most directly
comparable
The reported operating margin for the three and six months endedDecember 31, 2019 decreased from the prior-year periods driven by the year-over-year impact of goodwill and other intangible asset impairments of$739 million , partially offset by improvements in gross margin and other operating expenses as a percentage of net sales as previously noted. Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they result from activities that are deemed a Company-wide initiative to redesign, resize and reorganize select corporate functions and go-to-market structures. Accordingly, the following discussions of Operating Income by Product Categories and Geographic Regions exclude the impact of charges associated with restructuring and other activities. 42 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Product Categories Skin Care Three Months Ended Six Months Ended December 31 December 31 ($ in millions) 2019 2018 2019 2018 As Reported: Operating income$ 772 $ 565 $ 1,404 $ 1,031 $ Change from prior-year period 207 373 % Change from prior-year period 37 % 36 % Reported skin care operating income increased for the three and six months endedDecember 31, 2019 , driven by higher results from Estée Lauder and La Mer, combined, of approximately$221 million and$438 million , respectively. The increases in operating income reflected higher net sales, partially offset by strategic investments in advertising and promotional activities and targeted expanded consumer reach. These increases in the category were partially offset by higher operating expenses relating primarily to professional service fees (including acquisition-related costs), enhanced capabilities in select corporate functions to support our strategic initiatives, and investments in information systems. Also partially offsetting these increases were lower results from Clinique reflecting strategic investments in advertising and promotional activities due, in part, to support new product launches and continued net sales growth. Makeup Three Months Ended Six Months Ended December 31 December 31 ($ in millions) 2019 2018 2019 2018 As Reported: Operating income (loss)$ (611 ) $ 138 $ (507 ) $ 299
$ Change from prior-year period (749 ) (806 ) % Change from prior-year period (100 +)%
(100 +)%
Non-GAAP Financial Measure(1): % Change in operating income from the prior-year period adjusting for the impact of goodwill and other intangible asset impairments (6 )%
(20 )%
(1) See "Reconciliations of Non-GAAP Financial Measures" beginning on page 47 for
reconciliations between non-GAAP financial measures and the most directly
comparable U.S. GAAP measures.
Reported makeup operating results decreased for the three and six months ended
December 31, 2019 driven by lower results from Too Faced, BECCA, M·A·C, and
Smashbox, combined, of approximately $803 million and $838 million ,
respectively. The fiscal 2020 operating results from Too Faced, BECCA and
Smashbox include $641 million , $68 million and $68 million of goodwill and other
intangible asset impairments, respectively, and the fiscal 2019 operating
results from Smashbox included $38 million of goodwill and other intangible
asset impairments. The lower results in the category also reflected the net
sales declines in North America as previously discussed and higher operating
expenses relating primarily to professional service fees, enhanced capabilities
in select corporate functions to support our strategic initiatives, and
investments in information systems.
Partially offsetting the declines in both periods were higher results from Estée
Lauder and Clinique, combined, of approximately $71 million . The higher results
from Estée Lauder were primarily due to higher net sales, while the increases in
operating income from Clinique reflected disciplined expense management. The
operating income from both brands also benefited from selling efficiencies.
43
Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
Fragrance
Three Months Ended Six Months Ended
December 31 December 31
($ in millions) 2019 2018 2019 2018
As Reported:
Operating income $ 97 $ 84 $ 163 $ 139
$ Change from prior-year period 13 24
% Change from prior-year period 15 % 17 %
Reported fragrance operating income increased for the three months ended
December 31, 2019 , driven by higher results from Tom Ford and Estée Lauder,
combined, of approximately $19 million , reflecting higher net sales, disciplined
expense management, and selling efficiencies. Reported fragrance operating
income increased for the six months ended December 31, 2019 , driven by higher
results from Jo Malone London and Tom Ford , combined, of approximately $37
million , reflecting higher net sales, partially offset by strategic investments
in advertising and promotional activities due, in part, to support new product
launches and continued net sales growth.
Partially offsetting the lower results for the three and six months ended
December 31, 2019 were lower results from Clinique, reflecting lower net sales.
Hair Care
Three Months Ended Six Months Ended
December 31 December 31
($ in millions) 2019 2018 2019 2018
As Reported:
Operating income $ 12 $ 15 $ 12 $ 29
$ Change from prior-year period (3) (17)
% Change from prior-year period (20) % (59) %
Reported hair care operating income for both periods decreased primarily due to
lower results from Aveda, reflecting strategic investments in advertising and
promotional activities to support new product launches and net sales growth. The
lower results in the category also reflected higher operating expenses relating
primarily to professional service fees, enhanced capabilities in select
corporate functions to support our strategic initiatives, and investments in
information systems.
Geographic Regions
The Americas
Three Months Ended Six Months Ended
December 31 December 31
($ in millions) 2019 2018 2019 2018
As Reported:
Operating income (loss) $ (529 ) $ 149 $ (354 ) $ 383 $ Change from prior-year period (678 ) (737 ) % Change from prior-year period (100 +)%
(100 +)%
Non-GAAP Financial Measure(1): % Change in operating income from the prior-year period adjusting for the impact of goodwill and other intangible asset impairments and changes in fair value of contingent consideration 28 %
1 %
(1) See "Reconciliations of Non-GAAP Financial Measures" beginning on page 47 for
reconciliations between non-GAAP financial measures and the most directly
comparable U.S. GAAP measures.
44
Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
Reported operating results in TheAmericas decreased for the three and six months endedDecember 31, 2019 , primarily due to the year-over-year impact of goodwill and other intangible asset impairments of$739 million , as previously discussed, and higher expenses relating primarily to professional service fees, enhanced capabilities in select corporate functions to support our strategic initiatives, and investments in information systems. Partially offsetting these decreases in both periods were higher intercompany royalty income, reflecting the value created in TheAmericas , given the growth of our travel retail business and, to a lesser extent, higher results from Estée Lauder due to an increase in net sales, disciplined expense management and selling efficiencies.
Three Months Ended Six Months Ended
December 31 December 31
($ in millions) 2019 2018 2019 2018
As Reported:
Operating income $ 505 $ 418 $ 882 $ 675
$ Change from prior-year period 87 207
% Change from prior-year period 21 % 31 %
Reported operating income in Europe , the Middle East & Africa reflected higher
results from our travel retail business and Russia , combined, of approximately
$92 million and $202 million for the three and six months ended December 31,
2019 , respectively, primarily due to higher net sales. The increases in net
sales were partially offset by strategic investment spending in advertising and
promotional activities to support the continued net sales growth and targeted
expanded consumer reach.
Asia/Pacific
Three Months Ended Six Months Ended
December 31 December 31
($ in millions) 2019 2018 2019 2018
As Reported:
Operating income $ 298 $ 239 $ 550 $ 447
$ Change from prior-year period 59 103
% Change from prior-year period 25 % 23 %
Reported operating income increased in most markets in Asia/Pacific , led by
higher results in China of approximately $68 million and $117 million for the
three and six months ended December 31, 2019 , respectively, driven by net sales
growth. The net sales increases in China were partially offset by an increase in
advertising and promotional activities to support digital advertising, social
media and targeted expanded consumer reach. The growth in operating income was
offset by lower results in Hong Kong of approximately $21 million and $38
million for the three and six months ended December 31, 2019 , respectively,
caused by lower net sales, as previously noted, partially offset by disciplined
expense management.
INTEREST AND INVESTMENT INCOME
Three Months Ended Six Months Ended
December 31 December 31
(In millions) 2019 2018 2019 2018
Interest expense $ 38 $ 35 $ 70 $ 69 Interest income and investment income, net$ 13 $
12$ 27 $ 27 Interest expense increased for both periods primarily due to the issuance of additional long-term debt inNovember 2019 , partially offset by lower commercial paper. Interest income and investment income, net increased during the three months endedDecember 31, 2019 , primarily due to overall higher cash balances. 45 Table of Contents THE ESTÉE LAUDER COMPANIES INC. OTHER INCOME
OnDecember 18, 2019 , we acquired the remaining equity interest inHave&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. We originally acquired a minority interest in Have & Be inDecember 2015 , which 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 we 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 our 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 endedDecember 31, 2019 . The amount paid at closing was funded by cash on hand including the proceeds from the issuance of debt. In anticipation of the closing, we transferred cash to a foreign subsidiary for purposes of making the closing payment. As a result, we recognized a foreign currency gain of$23 million , which is also included in Other income in the accompanying consolidated statements of earnings for the three and six months endedDecember 31, 2019 . See Notes to Consolidated Financial Statements, Note 2 - Acquisition of Business for additional information.
PROVISION FOR INCOME TAXES
The provision for income taxes representsU.S. federal, foreign, state and local income taxes. The effective rate differs from the federal statutory rate primarily due to the effect of state and local income taxes, the tax impact of share-based compensation, the taxation of foreign income and income tax reserve adjustments, which represent changes in our net liability for unrecognized tax benefits including tax settlements and lapses of the applicable statutes of limitations. Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the tax impact of share-based compensation and the interaction of various global tax strategies. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of change. Three Months Ended Six Months Ended December 31 December 31 2019 2018 2019 2018 Effective rate for income taxes 30.8 % 22.9 % 26.2 % 21.9 % Basis-point change from the prior-year period 790
430
The increase in the effective tax rate in both periods was primarily attributable to the impact of nondeductible goodwill impairment charges associated with our Too Faced, BECCA and Smashbox reporting units and a higher effective tax rate on our foreign operations.
46
Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC.
Three Months Ended Six Months Ended
December 31 December 31 ($ in millions, except per share data) 2019 2018 2019 2018 As Reported: Net earnings attributable to The Estée Lauder Companies Inc.$ 557 $ 573 $ 1,152 $ 1,073 $ Change from prior-year period (16) 79 % Change from prior-year period (3) % 7 % Diluted net earnings per common share$ 1.52 $ 1.55 $ 3.13 $ 2.88 % Change from prior-year period (2) % 9 % Non-GAAP Financial Measure(1): % Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill and other intangible asset impairments, other income, changes in fair value of contingent consideration, the Transition Tax, the remeasurement ofU.S. net deferred tax assets as of the TCJA enactment date and the establishment of a net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA 21 % 20 %
(1)See "Reconciliations of Non-GAAP Financial Measures" below for
reconciliations between non-GAAP financial measures and the most directly
comparable
RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES
We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period, or do not reflect the Company's underlying ongoing business, provides transparency for such items and helps investors and others compare and analyze our operating performance from period to period. In the future, we expect to incur charges or adjustments similar in nature to those presented below; however, the impact to the Company's results in a given period may be highly variable and difficult to predict. Our non-GAAP financial measures may not be comparable to similarly titled measures used by, or determined in a manner consistent with, other companies. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity withU.S. GAAP. The following tables present Net sales, Operating income and Diluted net earnings per common share adjusted to exclude the impact of charges associated with restructuring and other activities; goodwill and other intangible asset impairments; other income; the changes in the fair value of contingent consideration; the Transition Tax; the remeasurement ofU.S. net deferred tax assets as of the TCJA enactment date; the establishment of a net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA; and the effects of foreign currency translation. 47 Table of Contents THE ESTÉE LAUDER COMPANIES INC.
The following tables provide reconciliations between these non-GAAP financial
measures and the most directly comparable
Three Months Ended % Change
December 31 % in Constant($ in millions, except per share data) 2019 2018 Variance Change Currency Net sales, as reported$ 4,624 $ 4,005 $ 619 15 % 16 % Returns associated with restructuring and other activities - - - Net sales, as adjusted$ 4,624 $ 4,005 $ 619 15 % 16 %
Operating income, as reported$ 261 $ 771 $ (510) (66) % (66) % Charges associated with restructuring and other activities 13 35
(22)
Goodwill and other intangible asset impairments 777 38
739
Changes in fair value of contingent consideration (7) 2 (9) Operating income, as adjusted$ 1,044 $ 846 $ 198 23 % 24 % Diluted net earnings per common share, as reported$ 1.52 $ 1.55 $ (.03) (2) % - % Charges associated with restructuring and other activities .03 .08
(.05)
Goodwill and other intangible asset impairments 1.81 .09
1.72
Other income (1.23) -
(1.23)
Changes in fair value of contingent consideration (.02) -
(.02)
Remeasurement ofU.S. net deferred tax assets as of the TCJA enactment date - .02
(.02)
Diluted net earnings per common share, as adjusted$ 2.11 $ 1.74 $ .37 21 % 21 % Six Months Ended % Change December 31 % in Constant ($ in millions, except per share data) 2019 2018 Variance Change Currency Net sales, as reported$ 8,519 $ 7,529 $ 990 13 % 14 % Returns associated with restructuring and other activities - -
-
Net sales, as adjusted$ 8,519 $ 7,529 $ 990 13 % 14 % Operating income, as reported$ 1,040 $ 1,423 $ (383) (27) % (26) % Charges associated with restructuring and other activities 38 82
(44)
Goodwill and other intangible asset impairments 777 38
739
Changes in fair value of contingent consideration (7) (9)
2
Operating income, as adjusted$ 1,848 $ 1,534 $ 314 20 % 21 % Diluted net earnings per common share, as reported$ 3.13 $ 2.88 $ .25 9 % 10 % Charges associated with restructuring and other activities .09 .18
(.09)
Goodwill and other intangible asset impairments 1.80 .09
1.71
Other income (1.22) -
(1.22)
Changes in fair value of contingent consideration (.02) (.02)
-
Transition Tax resulting from the TCJA - (.03)
.03
Remeasurement ofU.S. net deferred tax assets as of the TCJA enactment date - .02
(.02)
Net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA - .03
(.03)
Diluted net earnings per common share, as adjusted$ 3.78 $ 3.15 $ .63 20 % 21 %
As diluted net earnings per common share, as adjusted, is used as a measure of
the Company's performance, we consider the impact of current and deferred income
taxes when calculating the per-share impact of each of the reconciling items.
48
Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
The following tables reconcile the change in net sales by product category and
geographic region, as reported, to the change in net sales excluding the effects
of foreign currency translation:
As Reported
%
Three months Three months Impact of % Change,
ended ended foreign Variance, Change, in
December 31, December 31, currency in constant as constant
($ in millions) 2019 2018 Variance translation currency reported currency
By Product Category:
Skin Care $ 2,205 $ 1,732 $ 473 $ 10 $ 483 27 % 28 %
Makeup 1,660 1,560 100 10 110 6 7
Fragrance 581 537 44 2 46 8 9
Hair Care 162 154 8 - 8 5 5
Other 16 22 (6) - (6) (27) (27)
4,624 4,005 619 22 641 15 16
Returns associated
with restructuringand other activities - -
- - -
Total $ 4,624 $ 4,005 $ 619 $ 22 $ 641 15 % 16 %
By Region:
The Americas $ 1,226 $ 1,218 $ 8 $ (1) $ 7 1 % 1 %Europe, the Middle East & Africa 2,079 1,767
312 12 324 18 18
Asia/Pacific 1,319 1,020 299 11 310 29 30
4,624 4,005 619 22 641 15 16
Returns associated
with restructuring
and other activities - - - - -
Total $ 4,624 $ 4,005 $ 619 $ 22 $ 641 15 % 16 %
As Reported
%
Six months Six months Impact of % Change,
ended ended foreign Variance, Change, in
December 31, December 31, currency in constant as constant
($ in millions) 2019 2018 Variance translation currency reported currency
By Product Category:
Skin Care $ 4,047 $ 3,218 $ 829 $ 26 $ 855 26 % 27 %
Makeup 3,103 2,966 137 26 163 5 5
Fragrance 1,043 1,009 34 9 43 3 4
Hair Care 298 297 1 1 2 - 1
Other 28 39 (11) - (11) (28) (28)
8,519 7,529 990 62 1,052 13 14
Returns associated
with restructuringand other activities - -
- - -
Total $ 8,519 $ 7,529 $ 990 $ 62 $ 1,052 13 % 14 %
By Region:
The Americas $ 2,386 $ 2,454 $
(68)
3,756 3,200 556 36 592 17 19
Asia/Pacific 2,377 1,875 502 31 533 27 28
8,519 7,529 990 62 1,052 13 14
Returns associated
with restructuring
and other activities - - - - -
Total $ 8,519 $ 7,529 $ 990 $ 62 $ 1,052 13 % 14 %
49
Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
The following table reconciles the change in operating results by product category and geographic region, as reported, to the change in operating income excluding the impact of goodwill and other intangible asset impairments and changes in fair value of contingent consideration:
As Reported Add:
Changes in
Goodwill Add:
Three months Three months and other Changes in % %
ended ended intangible fair value of Variance, Change, Change,
December 31, December 31, asset contingent as as as
($ in millions) 2019 2018 Variance impairments consideration adjusted reported adjusted
By Product Category:
Skin Care $ 772 $ 565 $ 207 $ - $ (3) $ 204 37 % 36 %
Makeup (611) 138 (749) 739 - (10) (100 +) (6)
Fragrance 97 84 13 - (6) 7 15 8
Hair Care 12 15 (3) - - (3) (20 ) (20)
Other 4 4 - - - - - -
274 806 (532) $ 739 $ (9) $ 198 (66 )% 23 %
Charges associated withrestructuring and other activities (13) (35)
22
Total $ 261 $ 771 $ (510)
By Region:
The Americas $ (529) $ 149 $ (678) $ 739 $ (8) $ 53 (100 +)% 28 %
Europe, the Middle East & Africa 505 418 87 - (1) 86 21 21
Asia/Pacific 298 239 59 - - 59 25 25
274 806 (532) $ 739 $ (9) $ 198 (66 )% 23 %
Charges associated
with restructuring and other
activities (13) (35) 22
Total $ 261 $ 771 $ (510)
As Reported Add:
Changes in
Goodwill Add:
Six months Six months and other Changes in % %
ended ended intangible fair value of Variance, Change, Change,
December 31, December 31, asset contingent as as as
($ in millions) 2019 2018 Variance impairments consideration adjusted reported adjusted
By Product Category:
Skin Care $ 1,404 $ 1,031 $ 373 $ - $ 3 $ 376 36 % 37 %
Makeup (507) 299 (806) 739 - (67) (100 +) (20)
Fragrance 163 139 24 - (1) 23 17 17
Hair Care 12 29 (17) - - (17) (59 ) (59)
Other 6 7 (1) - - (1) (14 ) (14)
1,078 1,505 (427) $ 739 $ 2 $ 314 (28 )% 20 %
Charges associated with
restructuring and other
activities (38) (82) 44
Total $ 1,040 $ 1,423 $ (383)
By Region:
The Americas $ (354) $ 383 $ (737) $ 739 $ 4 $ 6 (100 +)% 1 %Europe, the Middle East & Africa 882 675
207 - (2) 205 31 30
Asia/Pacific 550 447 103 - - 103 23 23
1,078 1,505 (427) $ 739 $ 2 $ 314 (28 )% 20 %
Charges associated with
restructuring and other
activities (38) (82) 44
Total $ 1,040 $ 1,423 $ (383)
50
Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal sources of funds historically have been cash flows from operations, borrowings pursuant to our commercial paper program, borrowings from the issuance of long-term debt and committed and uncommitted credit lines provided by banks and other lenders inthe United States and abroad. AtDecember 31, 2019 , we had cash and cash equivalents of$3,596 million compared with$2,987 million atJune 30, 2019 . Our cash and cash equivalents are maintained at a number of financial institutions. To mitigate the risk of uninsured balances, we select financial institutions based on their credit ratings and financial strength, and we perform ongoing evaluations of these institutions to limit
our concentration risk exposure. Our business is seasonal in nature and, accordingly, our working capital needs vary. From time to time, we may enter into investing and financing transactions that require additional funding. To the extent that these needs exceed cash from operations, we could, subject to market conditions, issue commercial paper, issue long-term debt securities or borrow under our revolving credit facilities. Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available-for-sale securities, available credit lines and access to credit markets will be adequate to support currently planned business operations, information technology enhancements, capital expenditures, acquisitions, dividends, stock repurchases, restructuring initiatives, commitments and other contractual obligations on both a near-term and long-term basis. The TCJA resulted in the Transition Tax on unrepatriated earnings of our foreign subsidiaries and changed the tax law in ways that present opportunities to repatriate cash without additionalU.S. federal income tax. As a result, we changed our indefinite reinvestment assertion related to certain foreign earnings, and we continue to analyze the indefinite reinvestment assertion on our remaining applicable foreign earnings. Our cash and cash equivalents balance atDecember 31, 2019 includes cash in offshore jurisdictions associated with our permanent reinvestment strategy. We do not believe that continuing to reinvest our foreign earnings impairs our ability to meet our domestic debt or working capital obligations. If these reinvested earnings were repatriated intothe United States as dividends, we would be subject to state income taxes and applicable foreign taxes in certain jurisdictions. The effects of inflation have not been significant to our overall operating results in recent years. Generally, we have been able to introduce new products at higher prices, increase prices and implement other operating efficiencies to sufficiently offset cost increases, which have been moderate.
Credit Ratings
Changes in our credit ratings will likely result in changes in our borrowing costs. Our credit ratings also impact the cost of our revolving credit facility. Downgrades in our credit ratings may reduce our ability to issue commercial paper and/or long-term debt and would likely increase the relative costs of borrowing. A credit rating is not a recommendation to buy, sell, or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization, and should be evaluated independently of any other rating. As ofJanuary 30, 2020 , our long-term debt is rated A+ with a stable outlook byStandard & Poor's and A1 with a stable outlook by Moody's. 51 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Debt
At
Long-term Current
($ in millions) Debt Debt Total Debt
3.125% Senior Notes, due December 1, 2049 ("2049
Senior Notes") (1), (13) $ 635 $
-
494 - 494
4.375% Senior Notes, due June 15, 2045 ("2045 Senior
Notes") (3), (13) 455 - 455
3.70% Senior Notes, due
247 - 247
6.00% Senior Notes, due May 15, 2037 ("2037 Senior
Notes") (5), (13) 294 - 294
5.75% Senior Notes, due October 15, 2033 ("2033 Senior
Notes") (6) 197 - 197
2.375% Senior Notes, due December 1, 2029 ("2029
Senior Notes") (7), (13) 640 - 640
3.15% Senior Notes, due March 15, 2027 ("2027 Senior
Notes") (8), (13) 498 - 498
2.00% Senior Notes, due
494 - 494
2.35% Senior Notes, due
253 - 253
1.70% Senior Notes, due May 10, 2021 ("2021 Senior
Notes") (11), (13) 448 - 448
1.80% Senior Notes, due February 7, 2020 ("2020 Senior
Notes") (12), (13) - 500 500
Other borrowings 7 22 29
$ 4,662 $ 522 $ 5,184 (1) Consists of
and debt issuance costs of
(2) Consists of
and debt issuance costs of
(3) Consists of
million and debt issuance costs of
(4) Consists of
and debt issuance costs of
(5) Consists of
and debt issuance costs of
(6) Consists of
and debt issuance costs of
(7) Consists of
and debt issuance costs of
(8) Consists of
(9) Consists of
and debt issuance costs of
(10) Consists of
the fair value of interest rate swaps.
(11) Consists of
fair value of interest rate swaps and debt issuance costs of
(12) Consists of
(13) The Senior Notes contain certain customary incurrence-based covenants,
including limitations on indebtedness secured by liens.
Total debt as a percent of total capitalization (excluding noncontrolling
interests) was 53% and 44% at December 31, 2019 and June 30, 2019 , respectively.
Cash Flows
Six Months Ended
December 31
(In millions) 2019 2018
Net cash provided by operating activities $ 1,255 $ 1,273
Net cash used for investing activities$ (1,350) $
(35)
Net cash provided by (used for) financing activities
The change in net cash flows from operations primarily reflected the unfavorable net change in working capital, in particular accounts payable due to the timing and level of payments, and higher cash paid for taxes primarily due to the increase in earnings before taxes, as well as the timing and level of payments, partially offset by higher earnings before taxes. The change in net cash flows from investing activities primarily reflected cash paid in connection with the fiscal 2020 second quarter acquisition of Have & Be, as well as lower proceeds from the sale of investments due to the prior-year liquidation of our foreign subsidiary that owned our available-for-sale securities. The change in net cash flows from financing activities primarily reflected proceeds from theNovember 2019 issuance of long-term debt, lower treasury stock purchases and changes in short-term debt reflecting the prior-year repayment of remaining commercial paper borrowings. 52 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Dividends
For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the six months endedDecember 31, 2019 , see Notes to Consolidated Financial Statements, Note 14 - Equity.
Pension and Post-retirement Plan Funding
There have been no significant changes to our pension and post-retirement
funding as discussed in our Annual Report on Form 10-K for the fiscal year ended
Commitments, Contractual Obligations and Contingencies
There have been no significant changes to our commitments and contractual
obligations as discussed in our Annual Report on Form 10-K for the fiscal year
ended
Derivative Financial Instruments and Hedging Activities
For a discussion of our derivative financial instruments and hedging activities, see Notes to Consolidated Financial Statements, Note 7 - Derivative Financial Instruments.
Foreign Exchange Risk Management
For a discussion of foreign exchange risk management, see Notes to Consolidated Financial Statements, Note 7 - Derivative Financial Instruments (Cash Flow Hedges, Net Investment Hedges).
Credit Risk
For a discussion of credit risk, see Notes to Consolidated Financial Statements, Note 7 - Derivative Financial Instruments (Credit Risk).
Market Risk
We address certain financial exposures through a controlled program of market risk management that includes the use of foreign currency forward contracts to reduce the effects of fluctuating foreign currency exchange rates and to mitigate the change in fair value of specific assets and liabilities on the balance sheet. To perform a sensitivity analysis of our foreign currency forward contracts, we assess the change in fair values from the impact of hypothetical changes in foreign currency exchange rates. A hypothetical 10% strengthening of theU.S. dollar against the foreign exchange rates for the currencies in our portfolio would have resulted in a net increase (decrease) in the fair value of our portfolio of approximately$(238) million and$48 million as ofDecember 31, 2019 andJune 30, 2019 , respectively. This potential change does not consider our underlying foreign currency exposures. In addition, we enter into interest rate derivatives to manage the effects of interest rate movements on our aggregate liability portfolio, including future debt issuances. Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would decrease by approximately$12 million and$16 million as ofDecember 31, 2019 andJune 30, 2019 , respectively.
Our sensitivity analysis represents an estimate of reasonably possible net losses that would be recognized on our portfolio of derivative financial instruments assuming hypothetical movements in future market rates and is not necessarily indicative of actual results, which may or may not occur. It does not represent the maximum possible loss or any expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in our portfolio of derivative financial instruments during the year. We believe, however, that any such loss incurred would be offset by the effects of market rate movements on the respective underlying transactions for which the derivative financial instrument was intended.
OFF-BALANCE SHEET ARRANGEMENTS
We do not maintain any off-balance sheet arrangements, transactions, obligations
or other relationships with unconsolidated entities that would be expected to
have a material current or future effect upon our financial condition or results
of operations.
53
Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
CRITICAL ACCOUNTING POLICIES
As disclosed in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2019 , the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those financial statements. These estimates and assumptions can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies relate to goodwill, other intangible assets and long-lived assets and income taxes. SinceJune 30, 2019 , there have been no significant changes to the assumptions and estimates related to our critical accounting policies.
RECENTLY ISSUED ACCOUNTING STANDARDS
For a discussion regarding the impact of accounting standards that were recently issued but not yet effective, on the Company's consolidated financial statements, see Notes to Consolidated Financial Statements, Note 1 - Summary of Significant Accounting Policies.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION
We and our representatives from time to time make written or oral forward-looking statements, including in this and other filings with theSecurities and Exchange Commission , in our press releases and in our reports to stockholders, which may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may address our expectations regarding sales, earnings or other future financial performance and liquidity, other performance measures, product introductions, entry into new geographic regions, information technology initiatives, new methods of sale, our long-term strategy, restructuring and other charges and resulting cost savings, and future operations or operating results. These statements may contain words like "expect," "will," "will likely result," "would," "believe," "estimate," "planned," "plans," "intends," "may," "should," "could," "anticipate," "estimate," "project," "projected," "forecast," and "forecasted" or similar expressions. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, actual results may differ materially from our expectations. Factors that could cause actual results to differ from expectations include, without limitation:
(1) increased competitive activity from companies in the skin care, makeup,
fragrance and hair care businesses;
our ability to develop, produce and market new products on which future
(2) operating results may depend and to successfully address challenges in our
business;
consolidations, restructurings, bankruptcies and reorganizations in the
retail industry causing a decrease in the number of stores that sell our
(3) products, an increase in the ownership concentration within the retail
industry, ownership of retailers by our competitors or ownership of
competitors by our customers that are retailers and our inability to collect
receivables;
(4) destocking and tighter working capital management by retailers;
the success, or changes in timing or scope, of new product launches and the
(5) success, or changes in timing or scope, of advertising, sampling and
merchandising programs;
(6) shifts in the preferences of consumers as to where and how they shop;
social, political and economic risks to our foreign or domestic
(7) manufacturing, distribution and retail operations, including changes in
foreign investment and trade policies and regulations of the host countries
and of the United States ;
54
Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
changes in the laws, regulations and policies (including the interpretations
and enforcement thereof) that affect, or will affect, our business, including
those relating to our products or distribution networks, changes in
(8) accounting standards, tax laws and regulations, environmental or climate
change laws, regulations or accords, trade rules and customs regulations, and
the outcome and expense of legal or regulatory proceedings, and any action we
may take as a result;
foreign currency fluctuations affecting our results of operations and the
(9) value of our foreign assets, the relative prices at which we and our foreign
competitors sell products in the same markets and our operating and
manufacturing costs outside of the United States ;
changes in global or local conditions, including those due to the volatility
in the global credit and equity markets, natural or man-made disasters, real
or perceived epidemics, or energy costs, that could affect consumer
purchasing, the willingness or ability of consumers to travel and/or
purchase our products while traveling, the financial strength of our
(10) customers, suppliers or other contract counterparties, our operations, the
cost and availability of capital which we may need for new equipment,
facilities or acquisitions, the returns that we are able to generate on our
pension assets and the resulting impact on funding obligations, the cost and
availability of raw materials and the assumptions underlying our critical
accounting estimates;
(11) impacts attributable to the coronavirus outbreak, including disruptions to
our global business;
shipment delays, commodity pricing, depletion of inventory and increased
production costs resulting from disruptions of operations at any of the
(12) facilities that manufacture our products or at our distribution or inventory
centers, including disruptions that may be caused by the implementation of
information technology initiatives, or by restructurings;
real estate rates and availability, which may affect our ability to increase
(13) or maintain the number of retail locations at which we sell our products and
the costs associated with our other facilities;
(14) changes in product mix to products which are less profitable;
our ability to acquire, develop or implement new information anddistribution technologies and initiatives on a timely basis and within our
(15) cost estimates and our ability to maintain continuous operations of such
systems and the security of data and other information that may be stored in
such systems or other systems or media;
our ability to capitalize on opportunities for improved efficiency, such as
(16) publicly-announced strategies and restructuring and cost-savings
initiatives, and to integrate acquired businesses and realize value
therefrom;
consequences attributable to local or international conflicts around the(17) world, as well as from any terrorist action, retaliation and the threat of
further action or retaliation;
(18) the timing and impact of acquisitions, investments and divestitures; and
additional factors as described in our filings with the Securities and
(19)
year ended June 30, 2019 .
We assume no responsibility to update forward-looking statements made herein or otherwise.
© Edgar Online, source
