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 fiscal 2022, 2021 and 2020 and
reflects the basis of presentation described in Item 8. Financial Statements and
Supplementary Data - Note 2 - Summary of Significant Accounting Policies and
Note 22 - Segment Data and Related Information 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.
Year Ended June 30
(In millions) 2022 2021 2020
NET SALES
By Product Category:
Skin Care $ 9,886 $ 9,484 $ 7,382
Makeup 4,667 4,203 4,794
Fragrance 2,508 1,926 1,563
Hair Care 631 571 515
Other 49 45 40
17,741 16,229 14,294
Returns associated with restructuring and other
activities (4) (14) -
Net sales $ 17,737 $ 16,215 $ 14,294
By Region(1):
The Americas $ 4,623 $ 3,797 $ 3,794
Europe, the Middle East & Africa 7,681 6,946 6,262
Asia/Pacific 5,437 5,486 4,238
17,741 16,229 14,294
Returns associated with restructuring and other
activities (4) (14) -
Net sales $ 17,737 $ 16,215 $ 14,294
OPERATING INCOME (LOSS)
By Product Category:
Skin Care $ 2,753 $ 3,036 $ 2,125
Makeup 133 (384) (1,438)
Fragrance 456 215 17
Hair Care (28) (19) (19)
Other - (2) 4
3,314 2,846 689
Charges associated with restructuring and other
activities (144) (228) (83)
Operating income $ 3,170 $ 2,618 $ 606
By Region(1):
The Americas $ 1,159 $ 518 $ (1,044)
Europe, the Middle East & Africa 1,360 1,335 997
Asia/Pacific 795 993 736
3,314 2,846 689
Charges associated with restructuring and other
activities (144) (228) (83)
Operating income $ 3,170 (1)The net sales from the Company's travel retail business are included in theEurope , theMiddle East &Africa region, with the exception of net sales of Dr.Jart+ in the travel retail channel that are reflected inKorea in theAsia/Pacific region. Operating income attributable to the travel retail sales included inEurope , theMiddle East &Africa is included in that region and in TheAmericas . 28
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The following table presents certain consolidated earnings data as a percentage of net sales:
Year Ended June 30
2022 2021 2020
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 24.3 23.6 24.8
Gross profit 75.7 76.4 75.2
Operating expenses:
Selling, general and administrative 55.7 57.8 60.4
Restructuring and other charges 0.8 1.3 0.5
Goodwill impairment - 0.3 5.7
Impairment of other intangible and long-lived assets 1.4 0.8 4.3
Total operating expenses 57.9 60.2 70.9
Operating income 17.9 16.1 4.2
Interest expense 0.9 1.1 1.1
Interest income and investment income, net 0.2 0.3 0.3
Other components of net periodic benefit cost - (0.1) -
Other income, net - 5.2 3.9
Earnings before income taxes 17.1 20.5 7.3
Provision for income taxes (3.5) (2.8) (2.4)
Net earnings 13.6 17.7 4.9
Net earnings attributable to noncontrolling interests - (0.1) (0.1)
Net loss (earnings) attributable to redeemable
noncontrolling interest (0.1) - -
Net earnings attributable to The Estée Lauder
Companies Inc. 13.5 % 17.7 % 4.8 %
Not adjusted for differences caused by rounding
Period-over-period changes in our net sales are generally attributable to the
impacts from (i) pricing on our base portfolio, including changes in strategic
pricing actions and mix, (ii) volume, including changes driven by the impact of
new product innovation, (iii) acquisitions and/or divestitures, and/or (iv)
foreign currency translation.
The net sales impact from pricing consists of changes in list prices, due to
strategic pricing initiatives, and mix shifts within and among product
categories, geographic regions and distribution channels. The prices at which we
sell our products vary by brand, distribution channel (e.g., wholesale or
direct-to-consumer) and may also vary by country. Our brands and products cover
a broad array of pricing tiers. Prices of skin care and fragrance products are
typically higher than makeup and hair care products.
New product innovation includes the introduction of new products, as well as the
innovation of existing products, including reformulations, regional expansion,
repackaging and sets. A product is considered "new innovation" for the
twelve-month period following the initial shipment date. Our innovation is
launched at different price points than existing products and value derived from
innovation may vary from year to year. 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 often has some cannibalizing
effect on sales of existing products, which we take into account in our business
planning. The impact of new product introductions, including timing compared to
introductions in prior periods, also affects our results.
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Table of Contents 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 49 for reconciliations between non-GAAP financial measures and the most directly comparableU.S. GAAP measures. 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. Beginning in fiscal 2022, we calculate constant currency information by translating current-period results using monthly average foreign currency exchange rates and adjusting for the period-over-period impact of foreign currency cash flow hedging activities. Prior to fiscal 2022, constant currency information was calculated using the prior-year period weighted-average exchange rates. This change is not material to prior-period constant currency information presented herein.
Overview
COVID-19 Business Update
The COVID-19 pandemic continued to disrupt our operating environment globally, primarily impacting supply chain, inventory levels and other logistics during the year endedJune 30, 2022 . The resurgence of COVID-19 cases in many Chinese provinces led to restrictions late in the fiscal 2022 third quarter that remained in place through the end of fiscal 2022 to prevent further spread of the virus. Consequently, retail traffic, travel, and distribution capabilities were temporarily curtailed. Our distribution facilities inShanghai operated with limited capacity to fulfill brick-and-mortar and online orders beginning inmid-March 2022 and returned to normal capacity by earlyJune 2022 .
Government Assistance
Beginning in the second half of fiscal 2020, many governments in locations where we operate announced programs to assist employers whose businesses were impacted by the COVID-19 pandemic, including programs that provide rebates to incentivize employers to maintain employees on payroll who were unable to work for their usual number of hours. During fiscal 2022, 2021 and 2020, we qualified for and recorded$12 million ,$84 million and$99 million , respectively, in government assistance, which reduced Selling, general and administrative expenses by$9 million ,$78 million and$87 million , respectively, and Cost of sales by$3 million ,$6 million and$10 million , respectively. The remaining$2 million recorded in fiscal 2020 was deferred and recognized in fiscal 2021 as a reduction to Cost of sales.
We will continue to monitor the impacts of COVID-19 and adjust our action plans accordingly as the situation progresses.
Business Update
We are a leader in prestige beauty, which combines the repeat purchase and relative affordability of consumer goods with high quality products and services. Within prestige beauty, we are well diversified by product category, geography, brand, product sub-category, channel, consumer segment and price point. This diversification allows us to leverage consumer analytics and insights with agility by deploying our brands to fast growing and profitable opportunities. These analytics and insights, combined with our creativity, inform our innovation to provide a broad, locally-relevant and inclusive range of prestige products allowing us to compete effectively for a greater share of a consumer's beauty routine. •In fiscal 2022, our global prestige fragrance net sales increased 30%, leading category growth. Consumers gravitated to luxury and artisanal offerings fromJo Malone London ,Tom Ford Beauty ,Le Labo andKilian Paris . Colognes led growth at Jo Malone London, while bath & body and home subcategories continued to thrive.Tom Ford Beauty saw strong fragrance growth across regions owing to the popularity ofOud Wood and the launch of Ombre Leather Parfum. Outstanding growth fromLe Labo andKilian Paris reflected compelling activations and expanded consumer reach. 30
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•We began to see demand for makeup products increase as COVID restrictions lifted and consumers returned to social and professional settings. In fiscal 2022, net sales in makeup grew double-digits driven by strong activations, expanded consumer reach and the launch of MACStack mascara, increases in Estée Lauder DoubleWear and Futurist foundation products, as well as a strong performance in foundation and lip from Clinique. •Our skin care net sales growth reflected incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter, as well as continued strength in La Mer hero products and the launches of the Hydrating Infused Emulsion and the upgrade to The Treatment Lotion. The category has been pressured by COVID restrictions, primarily in Asian markets, at various points throughout fiscal 2022. •Our hair care net sales also grew double digits, reflecting brick-and-mortar channel recovery and new product launches from both Aveda and Bumble and bumble. Our global distribution capability and operations allow us to focus on targeted expanded consumer reach wherever consumer demographics and trends are the most attractive. Our regional organizations, and the expertise of our people there, enable our brands to be more locally and culturally relevant in both product assortment and communications. We are evolving the way we connect with our consumers in stores, online and where they travel, including by expanding our digital and social media presence and the engagement of global and local influencers to amplify brand or product stories. We tailor implementation of our strategy by market to drive consumer engagement and embrace cultural diversity. We continuously strengthen our presence in large, image-building core markets, while broadening our presence in emerging markets. •The increase in net sales during fiscal 2022 was led by TheAmericas , primarily reflecting the recovery of brick-and-mortar stores, targeted expanded consumer reach and incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter. •Net sales rose inEurope , theMiddle East &Africa , led by recovery in western markets and emerging markets as brick-and-mortar retail reopened across the region.Europe , theMiddle East &Africa also benefited from ongoing increases in our travel retail business, partly relating to the increase in traffic as a result of the easing of travel restrictions in TheAmericas andEurope , theMiddle East &Africa . •Net sales decreased slightly inAsia/Pacific , reflecting the resurgence of COVID-19 cases in many Chinese provinces which led to restrictions to further prevent the spread of the virus during the second half of fiscal 2022. Online continued to thrive, primarily due to the current-year launch on a new third-party online platform, while brick-and-mortar retail remains challenged. As a result of the invasion ofUkraine , we suspended our business investments and initiatives and commercial activity inRussia andUkraine in earlyMarch 2022 . This included the temporary closure of our owned and authorized freestanding stores and our own brand sites. As the safety of our employees remains a top priority, we continue to take significant steps to support our employees inUkraine , including the continuance of compensation, maintenance of regular communication and offering relocation assistance, and continue to provide compensation and support to our employees inRussia . We are monitoring the effects of this conflict, including risks that may affect our business, and expect that we will adjust our plans accordingly as the situation progresses.
For the year ended
We approach distribution strategically by product category and location and seek
to optimize distribution by matching our brands with appropriate opportunities
while seeking to maintain high productivity per door. We are expanding our
brands in online and travel retail, which we believe will be higher growth
channels in the long term. We also focus on brand-building retail activities,
technology-driven activations and omnichannel capabilities that enhance the
shopping experience for consumers.
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•As part of this strategy, we have built a leadership position in the global travel retail channel, that historically allowed us to leverage the robust and growing international passenger traffic. While COVID-19 has significantly curtailed international travel in the near-term, we are seeing some recovery in TheAmericas andEurope , theMiddle East &Africa and we continue to believe that global travel retail is a long-term growth opportunity. Travel retail continues to be an important channel for brand building due to the increase in traveling consumers, particularly those from emerging markets, who often experience our brands for the first time while traveling. We continue to expand our strategic presence in travel retail across duty-free locations primarily in airports and downtown stores and increasingly through online retail. We engage consumers at the airport through compelling pop-up activations in non-traditional commercial areas, and we ensure we have appropriate communication and curated assortments for targeted consumer groups. At the same time, travel retail is susceptible to a number of external factors, including fluctuations in currency exchange rates and consumers' willingness and ability to travel and spend. •Online net sales have continued to grow on a global basis, rising double digits for fiscal 2022. We continue to enhance and launch e- and m-commerce sites of our own in new and existing markets, collaborate with our retail customers on their e-commerce sites, and sell through select third-party online malls. We believe our success in delivering strong online growth is a result of adapting our strategy to meet local market and cultural needs. We also continue to develop and implement omnichannel concepts, virtual try-on tools and compelling content to deliver an integrated consumer experience and better serve consumers as they shop across channels. Our multiple engines of growth, which have historically enabled us to produce excellent net sales growth, are also helping to mitigate the impact of the COVID-19 pandemic. We also benefited from the transformation of certain operations that freed up resources to invest behind further growth opportunities. Our Post-COVID Business Acceleration Program (described below) enabled us to reduce costs and invest in new capabilities such as digital marketing and data analytics as well as increased advertising. In fiscal 2022, we continued to further integrate social impact and sustainability into our strategy and business operations. Areas of differentiation include climate & energy, green chemistry, social investments, employee engagement and safety and inclusion, diversity & equity. Other areas of focus include responsible sourcing, plastics & packaging, ingredient transparency, and animal welfare.
Outlook
The COVID-19 pandemic continues to disrupt business for us, retailers and other companies with which we do business. There have been, and are likely to continue to be, intermittent store closures and supply chain disruptions. We are mindful that these trends may continue to impact the pace of recovery. The continued curtailment in international travel is also affecting our travel retail business, particularly inAsia , which had been historically one of our fastest growth areas. In addition to impacting net sales and profitability, these and other challenges may adversely impact the goodwill and other intangible assets associated with our brands, as well as long-lived assets (i.e. potentially resulting in impairments). We believe that the best way to increase long-term stockholder value is to continue providing superior products and services in the most efficient and effective manner while recognizing shifts in consumers' behaviors and shopping practices. 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. We continue to monitor the effects of the global macro environment, including the risk of recession; currency volatility; increasing inflationary pressures; supply chain disruptions; social and political issues; regulatory matters, including the imposition of tariffs and sanctions; geopolitical tensions; and global security issues. For example, we continue to monitor the geopolitical tensions betweenthe United States andChina , which could have a material adverse effect on our business. We are also mindful of inflationary pressures on our cost base and are monitoring the impact on consumer preferences. In fiscal 2022, net sales from Donna Karan New York,DKNY ,Michael Kors ,Tommy Hilfiger and Ermenegildo Zegna accounted for approximately 1% of consolidated net sales and 10% of fragrance net sales. As noted above, we previously announced that we would not be renewing our license agreements for these product lines when their respective terms expire inJune 2023 . We have since negotiated early termination agreements with each of the licensors effectiveJune 30, 2022 and continued to sell products under these licenses until such time. We are working with the licensors and their respective new licensee, where applicable, to transition the business to the new licensees. 32
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The invasion ofUkraine has negatively impacted our operations in bothRussia andUkraine . In fiscal 2022, our operations inUkraine andRussia accounted for approximately 1% of consolidated net sales. InMarch 2022 , we announced a suspension of our business investments and initiatives and commercial activity inRussia . InJuly 2022 , we liquidated the majority of our remaining in-market inventory. Future impacts on our business, including sanctions and counter-sanctions, are difficult to predict due to the high level of uncertainty as to how these developments will evolve. On a broader perspective, there could be additional negative impacts to our net sales, earnings, assets and cash flows should these matters continue or escalate; such impacts could include economic challenges in other countries because of inflationary pressures or other consequences. Please refer to Risk Factors in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year endedJune 30, 2022 , for a more complete discussion of the risks we encounter in our business and industry. The uncertainty around the timing, speed and duration of the recovery from the adverse impacts of the COVID-19 pandemic, including the impacts on our business of the ongoing restrictions inChina , will continue to affect our ability to grow sales profitably. We believe we can, to some extent, offset the impact of more ordinary challenges by continually developing and pursuing a diversified strategy with multiple engines of growth and by accelerating initiatives focused on areas of strength, discipline and agility, and by executing upon our Post-COVID Business Acceleration Program. As the current situation continues to progress, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, there could be a further negative effect on consumer confidence, demand, spending and willingness or ability to travel and, as a result, on our business. We are continuing to monitor these and other risks that may affect our business.
Post-COVID Business Acceleration Program
OnAugust 20, 2020 , we announced a two-year restructuring program, Post-COVID Business Acceleration Program (the "PCBA Program"), designed to realign our business to address the dramatic shifts to our distribution landscape and consumer behaviors in the wake of the COVID-19 pandemic. The PCBA Program is designed to help improve efficiency and effectiveness by rebalancing resources to growth areas of prestige beauty. It is expected to further strengthen us by building upon the foundational capabilities in which we have invested. The PCBA Program's main areas of focus include accelerating the shift to online with the realignment of our distribution network reflecting freestanding store and certain department store closures, with a focus onNorth America andEurope , theMiddle East &Africa ; the reduction in brick-and-mortar point of sale employees and related support staff; and the redesign of our regional branded marketing organizations, plus select opportunities in global brands and functions. This program is expected to position us to better execute our long-term strategy while strengthening our financial flexibility. We previously estimated a net reduction over the duration of the PCBA Program in the range of approximately 2,000 to 2,500 positions globally, including temporary and part-time employees. We have revised these estimates based on the review of the PCBA Program. As ofJune 30, 2022 , we estimate a net reduction over the duration of the PCBA Program in the range of 2,500 to 3,000 positions globally, including temporary and part-time employees. This reduction takes into account the elimination of some positions, retraining and redeployment of certain employees and investment in new positions in key areas. We also estimate the closure over the duration of the PCBA Program of approximately 10% to 15% of our freestanding stores globally, primarily inEurope , theMiddle East &Africa and inNorth America . We approved specific initiatives under the PCBA Program through fiscal 2022 and expect to substantially complete those initiatives through fiscal 2023. We previously estimated that the PCBA Program would result in related restructuring and other charges totaling between$400 million and$500 million , before taxes. After concluding the final approvals and reviewing the progress of previously approved initiatives under the PCBA Program that are being implemented, we have revised our estimates for cost approvals under the PCBA Program. Inclusive of approvals from inception throughJune 28, 2022 , we now estimate that the PCBA Program may result in related restructuring and other charges totaling between$500 million and$515 million , before taxes. We previously expected, once fully implemented, the PCBA Program to yield annual benefits, primarily in Selling, general and administrative expenses, of between$300 million and$400 million , before taxes. As ofJune 30, 2022 , we now expect, once fully implemented, the PCBA Program to yield annual benefits, primarily in Selling, general and administrative expenses, of between$390 million and$410 million , before taxes. We expect to reinvest a portion of the savings behind future growth initiatives. For additional information about restructuring and other charges, see Item 8. Financial Statements and Supplementary Data - Note 8 - Charges Associated with Restructuring and Other Activities. 33
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Table of Contents Impairment Testing
We assess goodwill and other indefinite-lived intangible assets at least annually for impairment or more frequently if certain events or circumstances exist.
During the fiscal 2022 third quarter, given the lower-than-expected results from international expansion to areas that continue to be impacted by COVID-19, we made revisions to the internal forecasts relating to our GLAMGLOW reporting unit. We concluded that the changes in circumstances in the reporting unit triggered the need for an interim impairment review of its trademark intangible asset. The remaining carrying value of the trademark intangible asset was not recoverable and we recorded an impairment charge of$11 million reducing the carrying value to zero. During the fiscal 2022 third quarter, given the lower-than-expected growth within key geographic regions and channels for Dr.Jart+ that continue to be impacted by the spread of COVID-19 variants and resurgence in cases and the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting the financial performance of the brand, the lower than expected growth in key retail channels for DECIEM, and the lower than expected results from international expansion to areas that continue to be impacted by COVID-19 for Too Faced, we made revisions to the internal forecasts relating to the Dr.Jart+, DECIEM and Too Faced reporting units. We concluded that the changes in circumstances in the reporting units triggered the need for interim impairment reviews of their trademarks and goodwill. These changes in circumstances were also an indicator that the carrying amounts of Dr.Jart+'s, DECIEM's and Too Faced's long-lived assets, including customer lists, may not be recoverable. Accordingly, we performed interim impairment tests for the trademarks and a recoverability test for the long-lived assets as ofFebruary 28, 2022 . We concluded that the carrying amounts of the long-lived assets were recoverable. For the Dr.Jart+ reporting unit, we also concluded that the carrying value of the trademark intangible asset exceeded its estimated fair value, which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded an impairment charge of$205 million . For the Too Faced and DECIEM reporting units, as the carrying values of the trademarks did not exceed their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, we did not record impairment charges. The estimated fair values of Too Faced's and DECIEM's trademarks exceeded their carrying values by 13% and 3%, respectively. For the Too Faced and DECIEM trademark intangible assets, if all other assumptions are held constant, an increase of 100 basis points and 50 basis points, respectively, in the weighted average cost of capital would result in an impairment charge. After adjusting the carrying values of the trademarks, we completed interim quantitative impairment tests for goodwill. As the estimated fair value of the Dr.Jart+, DECIEM and Too Faced reporting units were in excess of their carrying values, we concluded that the carrying amounts of the goodwill were recoverable and did not record a goodwill impairment charge related to these reporting units. The fair values of these reporting units were based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting units. The significant assumptions used in these approaches include revenue growth rates and profit margins, terminal values, weighted average cost of capital used to discount future cash flows and royalty rates for trademarks. The most significant unobservable input used to estimate the fair value of the Dr.Jart+ trademark intangible asset was the weighted-average cost of capital, which was 10.5%. 34
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Based on our annual goodwill and other indefinite-lived intangible asset impairment testing as ofApril 1, 2022 , we determined that the carrying value of the Dr.Jart+ trademark exceeded its fair value. This determination was made based on updated internal forecasts. Given the lower-than-expected growth within key geographic regions and channels that continued to be impacted by the spread of COVID-19 variants, the resurgence in cases, regional lockdowns and the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting the financial performance of the brand, we made revisions to the internal forecasts relating to the Dr.Jart+ reporting unit. These changes in circumstances were also indicators that the carrying amounts of their respective long-lived assets may not be recoverable. We concluded that the carrying value of the trademark intangible asset exceeded its estimated fair value, which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded an impairment charge of$25 million . We concluded that the carrying amount of the long-lived assets were recoverable. After adjusting the carrying value of the trademark, we completed a quantitative impairment test for goodwill. As the estimated fair value of the reporting unit was in excess of its carrying value, we concluded that the carrying amount of the goodwill was recoverable and did not record a goodwill impairment charge related to the reporting unit. 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 units. The significant assumptions used in these approaches include revenue growth rates and profit margins, terminal values, weighted average cost of capital used to discount future cash flows and royalty rates for trademarks. The most significant unobservable input used to estimate the fair value of the trademark intangible asset was the weighted-average cost of capital, which was 10.5%. A summary of the trademark impairment charges for the three and twelve months endedJune 30, 2022 and the remaining carrying values as ofJune 30, 2022 , for each reporting unit, are as follows: (In millions) Impairment Charge Carrying Value Three Months Ended June 30, Twelve Months Ended As of June 30, Reporting Unit: Geographic Region 2022 June 30, 2022 2022 GLAMGLOW The Americas $ - $ 11 $ - Dr.Jart+ Asia/Pacific 25 230 428 Total $ 25 $ 241$ 428
The impairment charges for the three and twelve months ended
The fair values of all reporting units, which were determined based on quantitative assessments, with goodwill were substantially in excess of their respective carrying values, with the exception of the DECIEM reporting unit. The carrying value of the DECIEM reporting unit as ofJune 30, 2022 approximated its fair value. The fair value of the Dr.Jart+ trademark was equal to its carrying value subsequent to the impairment charge taken as ofApril 1, 2022 . Additionally, the fair values of the Smashbox, DECIEM and Too Faced trademark intangible assets approximated their carrying values as ofApril 1, 2022 . The key assumptions used to determine the estimated fair value of the reporting unit are primarily predicated on the estimated future impacts of COVID-19, the success of future new product launches, the achievement of 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 the reporting unit operates, resulting changes in the key assumptions could have negative impacts on the estimated fair value of the reporting unit and it is possible we could recognize additional impairment charges in the future.
For additional information, see Item 8. Financial Statements and Supplementary
Data - Note 6 -
Fiscal 2021 as Compared with Fiscal 2020
Except as disclosed herein, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations of the Company's Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 for the fiscal 2021 to fiscal 2020 comparative discussion. 35
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Fiscal 2022 as Compared with Fiscal 2021
NET SALES Year Ended June 30 ($ in millions) 2022 2021 As Reported: Net sales$ 17,737 $ 16,215 $ Change from prior year 1,522 1,921 % Change from prior year 9 % 13 % Non-GAAP Financial Measure(1): % Change from prior year in constant currency 10 % 11 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported net sales increased in fiscal 2022, driven by higher net sales from every product category and in TheAmericas andEurope , theMiddle East &Africa primarily reflecting (i) the continued progression towards brick-and-mortar and travel recovery compared to the prior-year challenges, which included widespread store closures, lower retail traffic, travel restrictions and quarantines, stemming from the COVID-19 pandemic; (ii) the continued success of hero product franchises; (iii) successful performance for holiday and key shopping moments (iv) new product launches; and (v) targeted expanded consumer reach. Reported net sales increased from every product category in fiscal 2022. Fragrance net sales grew double digits, led byJo Malone London ,Tom Ford Beauty andLe Labo . The continued progression towards recovery in makeup compared to the prior-year period contributed to the double-digit increase in makeup net sales, led by M·A·C andEstée Lauder . Skin care net sales benefited from incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter and higher results from La Mer,Bobbi Brown and Clinique, partially offset by lower results fromEstée Lauder and Origins. Hair care net sales increased, due to higher net sales from Aveda and Bumble and bumble. Fiscal 2022 reported net sales grew double digits in TheAmericas andEurope , theMiddle East &Africa benefiting from incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter. Net sales increased inEurope , theMiddle East &Africa , reflecting recovery across the region, led by our travel retail business and theUnited Kingdom . The increases in net sales in TheAmericas reflected higher net sales throughout the region. Partially offsetting the increase in reported net sales in fiscal 2022 were lower net sales inAsia/Pacific , primarily due to a resurgence of COVID-19 cases across many Chinese provinces which led to restrictions to further prevent the spread of the virus during the second half of fiscal 2022.
The fiscal 2022 reported net sales increase was impacted by approximately
Reported net sales increased 9% in fiscal 2022, driven by the increase from pricing of 7%, due to favorable impacts from changes in mix and strategic pricing actions; incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter of 2%; and the increase from volume of 1%. Partially offsetting these increases was the unfavorable impact of foreign currency translation of 1%.
Reported net sales increased 13% in fiscal 2021, driven by the increase from volume of 7%, due to new product innovation. The increases from foreign currency translation, pricing and acquisitions individually accounted for approximately 2% of the increase in fiscal 2021 net sales. Returns 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 Net sales by Product Categories and Geographic Regions exclude the fiscal 2022 and fiscal 2021 impacts of returns associated with restructuring and other activities of approximately$4 million and$14 million , respectively. 36
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Table of Contents Product CategoriesSkin Care Year Ended June 30 ($ in millions) 2022 2021 As Reported: Net sales$ 9,886 $ 9,484 $ Change from prior year 402 2,102 % Change from prior year 4 % 28 % Non-GAAP Financial Measure(1): % Change from prior year in constant currency 4 % 25 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported skin care net sales increased in fiscal 2022, primarily reflecting incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter and higher net sales from La Mer,Bobbi Brown and Clinique, combined, of approximately$837 million . Net sales from La Mer increased, led by our travel retail business and mainlandChina , primarily reflecting continued success of hero products, including Crème de la Mer and the upgrade to The Treatment Lotion, the current-year launch of The Hydrating Infused Emulsion, and targeted expanded consumer reach, including the current-year launch of a new third-party online platform in mainlandChina .Bobbi Brown net sales increased, led by our travel retail business and mainlandChina , primarily driven by continued success of hero products, such as Soothing Cleansing Oil and Vitamin Enriched Face Base, successful performance during holiday and key shopping moments and targeted expanded consumer reach. Clinique net sales increased, primarily driven by our travel retail business andNorth America , reflecting the continued success of existing products, such as the Take The Day Off line of products and Even Better Clinical Radical Dark Spot Corrector + Interrupter, and the current-year launch of Smart Clinical Repair Wrinkle Correcting Serum. Partially offsetting the fiscal 2022 increase in skin care net sales were lower net sales fromEstée Lauder and Origins of approximately$528 million , combined. The decrease in net sales fromEstée Lauder and Origins reflected the challenges due to the resurgence of COVID-19 cases inAsia during the second half of fiscal 2022, which led to restrictions to prevent further spread of the virus. Also contributing to the decrease in net sales forEstée Lauder was lower net sales from the Advanced Night Repair product franchise primarily due to the prior-period launch ofAdvanced Night Repair Synchronized Multi-Recovery Complex . Reported skin care net sales increased 4% in fiscal 2022, driven by incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter of 4%. Pricing contributed 9% to growth, due to favorable impacts from changes in mix and strategic pricing actions and was offset by the decrease from changes in volume of 9%, primarily due to new product innovation that reflected a difficult comparison to the prior year due to the launch ofAdvanced Night Repair Synchronized Multi-Recovery Complex and the challenges due to the resurgence of COVID-19 cases inAsia during the second half of fiscal 2022. Reported skin care net sales increased 28% in fiscal 2021, driven by the increase from volume of 23%, due to new product innovation; incremental net sales attributable to the increase in our ownership of Dr.Jart+ in the second quarter of fiscal 2020 and the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter of 4%, combined; the favorable impact from foreign currency translation of 3%. Partially offsetting these increases was a decrease from pricing of 2%, due to unfavorable impacts from changes in mix. 37
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Makeup
Year Ended June 30
($ in millions) 2022 2021
As Reported:
Net sales $ 4,667 $ 4,203
$ Change from prior year 464 (591)
% Change from prior year 11 % (12) %
Non-GAAP Financial Measure(1):
% Change from prior year in constant currency 12 % (14) %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported makeup net sales increased in fiscal 2022, led by higher net sales from M·A·C andEstée Lauder , of approximately$337 million , combined. The continued progression towards recovery in makeup, including increased usage occasions compared to the prior-year period, led to the increase in makeup net sales in TheAmericas andEurope , theMiddle East &Africa . The increase in net sales from M·A·C was primarily driven by the continued success of hero products, such as Studio Fix, current-year new product launches, such as MACStack mascara, and successful social media campaigns during key shopping moments. Net sales fromEstée Lauder increased, led by our travel retail business, primarily due to the continued success of existing products, such as the Double Wear and Futurist product franchises and new product launches, such as the current-year launches of Double Wear Sheer Long-Wear Makeup.
The makeup net sales increase was impacted by approximately
Reported makeup net sales increased 11% in fiscal 2022, driven by the increase
from volume of 12%, given the continued progression towards recovery and
increased makeup usage occasions compared to the prior-year period, partially
offset by the unfavorable impact from foreign currency translation of 1%.
Reported makeup net sales decreased 12% in fiscal 2021, driven by the decrease
from volume of 19%, due to the continued challenges from the COVID-19 pandemic,
including fewer makeup usage occasions. Partially offsetting this decrease was
an increase from pricing of 5%, due to favorable impacts from changes in mix and
strategic pricing actions, and the favorable impact from foreign currency
translation of 2%.
Fragrance
Year Ended June 30
($ in millions) 2022 2021
As Reported:
Net sales $ 2,508 $ 1,926
$ Change from prior year 582 363
% Change from prior year 30 % 23 %
Non-GAAP Financial Measure(1):
% Change from prior year in constant currency 32 % 21 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported fragrance net sales increased in fiscal 2022, primarily driven byJo Malone London ,Tom Ford Beauty andLe Labo of approximately$440 million , combined. Fragrance net sales grew in every geographic region, reflecting continued growth in luxury fragrances, the brick-and-mortar and travel recovery in various parts of the world due to more store openings, and successful performance during holiday and key shopping moments. The increases in net sales fromJo Malone London also reflected the continued success of our hero products, current-year launches and continued growth of the cologne, home and bath & body subcategories. Net sales increased fromTom Ford Beauty , also reflecting the continued success of Private Blend and Signature fragrances, current-year product launches and the diversification of product offerings by region. Net sales fromLe Labo increased, also reflecting the continued success of hero product franchises, current-year product launches and targeted expanded consumer reach. 38
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The fragrance net sales increase was impacted by approximately
Reported fragrance net sales increased 30% in fiscal 2022, driven by the
increase from volume of 29%, primarily due to the continued growth in luxury
fragrances, as well as the brick-and-mortar and travel recovery, and the
increase from pricing of 3%, due to the favorable impacts from strategic pricing
actions and changes in mix. Partially offsetting these increases was the
unfavorable impact from foreign currency translation of 2%.
Reported fragrance net sales increased 23% in fiscal 2021, driven by the
increase in pricing of 15%, due to favorable impacts from changes in mix and
strategic pricing actions; the increase in volume of 5%, reflecting a recovery
compared to the prior-year challenges and growth in luxury fragrances; and the
favorable impact from foreign currency translation of 3%.
Hair Care
Year Ended June 30
($ in millions) 2022 2021
As Reported:
Net sales $ 631 $ 571
$ Change from prior year 60 56
% Change from prior year 11 % 11 %
Non-GAAP Financial Measure(1):
% Change from prior year in constant currency 12 % 9 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported hair care net sales increased in fiscal 2022, reflecting higher net sales from Aveda and Bumble and bumble of approximately$47 million , combined, primarily due to the continued progression towards salon and retail store recovery inNorth America . Net sales from Aveda increased, reflecting the continued success of existing product franchises, the current-year relaunch of Full Spectrum Semi-Permanent Treatment Hair Color and Smooth Infusion, as well as new product launches. The increase in net sales from Bumble and bumble also reflected the success of hero products, current-year product launches of Bb. Thickening Plumping Mask and Bb. Thickening Go Big Plumping Treatment, and targeted expanded consumer reach.
The hair care net sales increase was impacted by approximately
Reported hair care net sales increased 11% in fiscal 2022, driven by the increase from pricing of 15%, due to favorable impacts from changes in mix and strategic pricing actions. Partially offsetting this increase was a decrease from volume of 3%, due to new product innovation, including the launches of lower-priced products as compared to the prior-year period, and the unfavorable impact from foreign currency translation of 1%. Reported hair care net sales increased 11% in fiscal 2021, driven by the increase from volume of 7%, due to new product innovation, including the launches of higher-priced products as compared to the prior-year period; the increase from pricing of 2%, primarily due to a favorable impact from strategic pricing actions; and the favorable impact from foreign currency translation of 2%. Geographic Regions
We strategically time our new product launches by geographic market, which may account for differences in regional sales growth.
39
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Table of Contents TheAmericas Year Ended June 30 ($ in millions) 2022 2021 As Reported: Net sales$ 4,623 $ 3,797 $ Change from prior year 826 3 % Change from prior year 22 % - % Non-GAAP Financial Measure(1): % Change from prior year in constant currency 21 % 1 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported net sales in TheAmericas increased in every country and product category in fiscal 2022, reflecting the brick-and-mortar and makeup recovery from the prior-year challenges that included store closures, lower retail traffic, fewer makeup usage occasions and quarantines, stemming from the COVID-19 pandemic. The net sales increases were led by higher net sales inNorth America of approximately$761 million , reflecting incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter, higher net sales from many of our brands, led by M·A·C and Clinique, and targeted expanded consumer reach.
The net sales increase in The
Reported net sales in TheAmericas increased 22% in fiscal 2022, driven by the increase from volume of 16%, reflecting the brick-and-mortar and makeup recovery from the prior-year challenges; incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter of 5%; and the favorable impact from foreign currency translation of 1%.
Year Ended June 30
($ in millions) 2022 2021
As Reported:
Net sales $ 7,681 $ 6,946
$ Change from prior year 735 684
% Change from prior year 11 % 11 %
Non-GAAP Financial Measure(1):
% Change from prior year in constant currency 12 % 9 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported net sales inEurope , theMiddle East &Africa increased in fiscal 2022, reflecting continued recovery across the region, primarily due to store openings, increased retail traffic, and the easing of travel restrictions compared to the prior year, led by our travel retail business and theUnited Kingdom of approximately$541 million , combined. Despite the resurgence in COVID-19 cases in many Chinese provinces, which led to restrictions to prevent further spread of the virus and the curtailment of travel during the second half of fiscal 2022, net sales increased in our travel retail business, reflecting continued strength of our brands with the Chinese consumer, the easing of travel restrictions inEurope , theMiddle East &Africa and TheAmericas , and continued success of hero product franchises from La Mer,Jo Malone London ,Tom Ford Beauty , Clinique and M·A·C. These benefits were partially offset by lower net sales fromEstée Lauder products, primarily reflecting lower net sales from the Advanced Night Repair product franchise primarily due to the prior-period launch ofAdvanced Night Repair Synchronized Multi-Recovery Complex . Net sales in theUnited Kingdom increased, primarily reflecting incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter, brick-and-mortar recovery, as noted above, and benefiting from the growth in makeup and fragrance. 40
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The net sales increase in
Reported net sales inEurope , theMiddle East &Africa increased 11% in fiscal 2022, driven by the increase from pricing of 9%, due to favorable impacts from changes in mix and strategic pricing actions, and incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter of 2%. Reported net sales inEurope , theMiddle East &Africa increased 11% in fiscal 2021, driven by the increase from volume of 6%, primarily due to new product innovation, including the launches of higher-priced products compare to the prior-year period; the increase from pricing of 3%, due to strategic price increases and the favorable impact from changes in mix; the favorable impact from foreign currency translation of 2%.Asia/Pacific Year Ended June 30 ($ in millions) 2022 2021 As Reported: Net sales$ 5,437 $ 5,486 $ Change from prior year (49) 1,248 % Change from prior year (1) % 29 % Non-GAAP Financial Measure(1): % Change from prior year in constant currency (1) % 22 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported net sales decreased inAsia/Pacific in fiscal 2022, primarily driven by lower results inKorea , led by Dr.Jart+,Hong Kong andThailand of approximately$134 million , combined, due to the resurgence of COVID-19 cases during the second half of fiscal 2022 that led to border closures to prevent further spread of the virus. Partially offsetting the fiscal 2022 decrease inAsia/Pacific were increased net sales from mainlandChina andAustralia of approximately$82 million , combined. Net sales increased in mainlandChina , primarily due to the continued success of hero products franchises from La Mer andJo Malone London , reflecting continued growth in skin care and strong momentum in fragrance, successful performance during holiday and key shopping moments, new product launches, and the current-year launch on a new third-party online platform. This increase was achieved despite the resurgence in COVID-19 cases in many Chinese provinces during the second half of fiscal 2022, which led to restrictions to prevent further spread of the virus and the curtailment of travel. Net sales inAustralia increased, primarily driven by incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter.
The net sales decrease in
Reported net sales inAsia/Pacific decreased 1% in fiscal 2022, driven by the decrease from volume of 9%, reflecting the challenges stemming from the resurgence of COVID-19 cases during the second half of fiscal 2022. Partially offsetting this decrease was an increase from pricing of 7%, due to favorable impact from changes in mix and strategic pricing actions, and the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter of 1%. Reported net sales inAsia/Pacific increased 29% in fiscal 2021, due to the increase from volume of 15%, driven by new product innovation, including the launches of higher-priced products compared to the prior-year period; the favorable impact of foreign currency translation of 7%; incremental net sales attributable to the increase in our ownership of Dr.Jart+ in the second quarter of fiscal 2020 and the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter of 6%, combined; and the increase from pricing of 1%. 41
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GROSS MARGIN
Gross margin in fiscal 2022 decreased to 75.7% as compared with 76.4% in fiscal
2021.
Fiscal 2022 vs. Fiscal 2021
Favorable (Unfavorable) Basis
Points
Mix of business (35)
Obsolescence charges (15)
Foreign exchange transactions 50
Manufacturing costs and other (60)
Subtotal (60)
Charges associated with restructuring and other activities (10)
Total (70)
The decrease in gross margin for fiscal 2022 reflected unfavorable impacts from
manufacturing costs and our mix of business, partially offset by a favorable
impact from transactional foreign exchange due to the strengthening of the U.S.
Dollar. The unfavorable impact from manufacturing costs was primarily due to
supply chain disruptions, including manufacturing and transportation delays,
port congestion, labor and container shortages, and shipment delays. The
unfavorable impact from our mix of business was primarily due to the change in
category mix, driven by the increase in makeup and fragrance net sales, higher
costs from new products and product sets, and lower gross margins on DECIEM
products, partially offset by strategic price increases.
OPERATING EXPENSES Operating expenses as a percentage of net sales in fiscal 2022 decreased to 57.9% as compared with 60.2% in fiscal 2021.
Fiscal 2022 vs. Fiscal 2021
Favorable (Unfavorable) Basis
Points
General and administrative expenses 100
Advertising, merchandising, sampling and product development 80
Selling 60
Shipping (70)
Store operating costs (20)
Stock-based compensation 20
Foreign exchange transactions (20)
Subtotal 150
Charges associated with restructuring and other activities 50
Goodwill , other intangible and long-lived asset impairments (30)
Changes in fair value of acquisition-related stock options 60
Total 230
The favorable change in operating expense margin in fiscal 2022 was driven by
the increase in net sales, disciplined general and administrative expense
management, disciplined advertising and promotional activities primarily to
support new product launches and holiday and key shopping moments, and the
favorable impact from selling expenses, primarily due to the shift in channel
mix to specialty-multi and pure-play sites, partially offset by higher shipping
costs due to the increase in net sales volume and increased shipping rates.
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OPERATING RESULTS
Year Ended June 30
($ in millions) 2022 2021
As Reported:
Operating income $ 3,170 $ 2,618
$ Change from prior year 552 2,012
% Change from prior year
21 % 100+%
Operating Margin 17.9 % 16.1 %
Non-GAAP Financial Measure(1): % Change in operating income from prior year adjusting for the impact of charges associated with restructuring and other activities, goodwill, other intangible and long-lived asset impairments, the change in fair value of acquisition-related stock options and changes in fair value of contingent consideration
14 % 46 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
The reported operating margin for fiscal 2022 increased from the prior-year period, primarily driven by the increase in net sales and the decrease in operating expenses as a percentage of net sales, partially offset by the decrease in gross margin, as noted above.
Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business. Accordingly, the following discussions of Operating income by Product Categories and Geographic Regions exclude the fiscal 2022 and 2021 impact of charges associated with restructuring and other activities of$144 million , or approximately 1% of net sales and$228 million , or approximately 1% of net sales, respectively. Product CategoriesSkin Care Year Ended June 30 ($ in millions) 2022 2021 As Reported: Operating income$ 2,753 $ 3,036 $ Change from prior year (283) 911 % Change from prior year (9) % 43 %
Non-GAAP Financial Measure(1): % Change in operating income from prior year adjusting for the impact of goodwill, other intangible and long-lived asset impairments and the change in fair value of acquisition-related stock options
(8) % 44 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported skin care operating income decreased in fiscal 2022, reflecting lower results fromEstée Lauder and Origins of approximately$571 million , combined, as well as the unfavorable year-over-year impact of goodwill and other intangible asset impairments of$135 million . The decrease in operating income fromEstée Lauder and Origins was primarily due to a decrease in net sales. 43
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Partially offsetting the decreases in operating income in fiscal 2022 were higher results from La Mer andBobbi Brown of approximately$217 million , combined, as well as the favorable year-over-year impact of changes in fair value of acquisition-related stock options relating to the increase in our investment in DECIEM during the fiscal 2021 fourth quarter of$93 million . The higher results from La Mer reflected an increase in net sales, partially offset by the increase in cost of sales that was mostly due to higher costs for promotional items and higher advertising and promotional activities primarily to support holiday and key shopping moments and new product launches. Operating income fromBobbi Brown increased, primarily driven by an increase in net sales.
See Item 8. Financial Statements and Supplementary Data - Note 18 - Stock Programs for additional information relating to DECIEM stock options.
Makeup
Year Ended June 30
($ in millions) 2022 2021
As Reported:
Operating income $ 133 $ (384)
$ Change from prior year 517 1,054
% Change from prior year 100+% 73 %
Non-GAAP Financial Measure(1): % Change in operating income from prior year adjusting for the impact of goodwill, other intangible and long-lived asset impairments and the change in fair value of acquisition-related stock options
100+% (100+)%
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported makeup operating income increased in fiscal 2022, reflecting higher results from M·A·C andEstée Lauder of approximately$248 million , combined, and the favorable year-over-year impact of other intangible and long-lived asset impairments of$63 million . Operating income from M·A·C increased due to the increase in net sales, partially offset by higher advertising and promotional activities to support new product launches and higher selling costs due to the brick-and-mortar recovery, including more stores being open and increased retail traffic compared to the prior year. Operating income fromEstée Lauder increased primarily due to the increase in net sales, partially offset by higher advertising and promotional activities relating to strategic investments to support the makeup recovery and digital advertising and social media spending. Fragrance Year Ended June 30 ($ in millions) 2022 2021 As Reported: Operating income$ 456 $ 215 $ Change from prior year 241 198 % Change from prior year 100+% 100+%
Non-GAAP Financial Measure(1): % Change in operating income from prior year adjusting for long-lived asset impairments and changes in fair value of contingent consideration
100+% 100+%
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
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Reported fragrance operating income increased in fiscal 2022, primarily driven by higher results fromJo Malone London ,Tom Ford Beauty andLe Labo of approximately$182 million , combined. The higher results fromJo Malone London primarily reflected the increase in net sales, partially offset by higher cost of sales given the growth of the home subcategory and the increase in advertising and promotional activities and the increase in selling costs resulting from the brick-and-mortar recovery and new product launches. Operating results fromTom Ford Beauty increased, primarily due to higher net sales, partially offset by higher cost of sales due, in part, to the increase in promotional items and the increase in advertising and promotional activities to support strategic investments in digital advertising and social media spending (including costs associated with influencers), hero product franchises, and new product launches. The increases in operating income fromLe Labo was primarily driven by the increase in net sales. Hair Care Year Ended June 30 ($ in millions) 2022 2021 As Reported: Operating loss$ (28) $ (19) $ Change from prior year (9) - % Change from prior year (47) % - %
Non-GAAP Financial Measure(1): % Change in operating income from prior year adjusting for the impact of long-lived asset impairments
(87) % (100+)%
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported hair care operating results decreased in fiscal 2022, primarily driven by lower results from Aveda due to increased operating expenses to support the salon and retail store recovery, partially offset by higher results from Bumble and bumble, primarily due to the increase in net sales, as discussed above.
Geographic Regions
The
Year Ended June 30
($ in millions) 2022 2021
As Reported:
Operating income $ 1,159 $ 518
$ Change from prior year 641 1,562
% Change from prior year 100+% 100+%
Non-GAAP Financial Measure(1): % Change in operating income from prior year adjusting for the impact of goodwill, other intangible and long-lived asset impairments and the change in fair value of acquisition-related stock options
60 % 100+%
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported operating results increased in TheAmericas in fiscal 2022, primarily reflecting higher operating results fromNorth America of approximately$612 million , primarily due to the increase in net sales, higher intercompany royalty income primarily from growth in our travel retail business, favorable year-over-year impact of goodwill, other intangible and long-lived asset impairments of$129 million and the favorable year-over-year impact of changes in fair value of acquisition-related stock options relating to the increase in our investment in DECIEM during the fiscal 2021 fourth quarter of$95 million . 45
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Partially offsetting these increases in operating income were higher advertising and promotional activities, primarily to support strategic investments in digital advertising and social media spending and in-store promotions given the increase in brick-and-mortar traffic, and increases in selling expense due to the brick-and-mortar and makeup recovery compared to the prior-year.
Year Ended June 30
($ in millions) 2022 2021
As Reported:
Operating income $ 1,360 $ 1,335
$ Change from prior year 25 338
% Change from prior year 2 % 34 %
Non-GAAP Financial Measure(1): % Change in operating income from prior year adjusting for the impact of long-lived asset impairments and changes in fair value of contingent consideration
(2) % 27 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported operating income increased inEurope , theMiddle East &Africa in fiscal 2022, primarily driven by higher results from several affiliates across the region, led by theUnited Kingdom , reflecting the brick-and-mortar recovery, compared to the prior-year periods and favorable year-over-year impact of long-lived asset impairments of$48 million . Partially offsetting the increase in reported operating income was lower results from our travel retail business. The decrease in operating income from our travel retail business was primarily driven by an increase in intercompany royalty expense to TheAmericas primarily due to the growth of our travel retail business. Also contributing to the decrease in operating income from our travel retail business was higher advertising and promotional activity primarily to support strategic investments in key areas of growth (primarily hero products and the skin care product category), as well as to capture the current-year increase in airport traffic. These higher expenses were partially offset by the increase in net sales.Asia/Pacific Year Ended June 30 ($ in millions) 2022 2021 As Reported: Operating income$ 795 $ 993 $ Change from prior year (198) 257 % Change from prior year (20) % 35 %
Non-GAAP Financial Measure(1): % Change in operating income from prior year adjusting for other intangible asset impairments
3 % 33 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 49 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported operating income decreased inAsia/Pacific in fiscal 2022, reflecting the current year other intangible asset impairment relating to Dr.Jart+ of$230 million . 46
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INTEREST AND INVESTMENT INCOME
Year Ended June 30
(In millions) 2022 2021
Interest expense $ 167 $ 173
Interest income and investment income, net $ 30 $ 51
Interest income and investment income, net decreased primarily due to equity method investment income recognized in the prior-year period relating to our previously held equity method investment in DECIEM.
OTHER INCOME, NET
OnMay 18, 2021 , we acquired additional shares in DECIEM, aToronto -based skin care company, for$1,092 million in cash, including proceeds from the issuance of debt. DECIEM is a multi-brand beauty company with a brand portfolio that includes The Ordinary and NIOD. This acquisition is expected to further strengthen our leadership position in prestige skin care, expand our global consumer reach and complement our business in the online and specialty-multi channels. We originally acquired a minority interest in DECIEM inJune 2017 . The minority interest was accounted for as an equity method investment, which had a carrying value of$65 million at the acquisition date. The acquisition of additional shares increased our fully diluted equity interest from approximately 29% to approximately 76% and was considered a step acquisition. On a fully diluted basis, the DECIEM stock options approximated 4% of the total capital structure. Accordingly, for purposes of determining the consideration transferred, we excluded the DECIEM stock options, which resulted in an increase in our post-acquisition undiluted equity interest from approximately 30% to approximately 78% and the post-acquisition undiluted equity interest of the remaining noncontrolling interest holders of approximately 22%. We remeasured the previously held equity method investment to its fair value of$913 million , resulting in the recognition of a gain of$848 million . The gain on our previously held equity method investment is included in Other income, net in the accompanying consolidated statements of earnings for the year endedJune 30, 2021 . As part of the increase in our investment, we were granted the right to purchase ("Call Option"), and granted the remaining investors a right to sell to us ("Put Option"), the remaining interests after a three-year period, with a purchase price based on the future performance of DECIEM (the "net Put (Call) Option"). As a result of this redemption feature, we recorded redeemable noncontrolling interest, at its acquisitiondate fair value, that is classified as mezzanine equity in the accompanying consolidated balance sheets atJune 30, 2021 . The accounting for the DECIEM business combination was finalized during the fiscal 2022 third quarter.
See Item 8. Financial Statements and Supplementary Data - Note 5 - Acquisition of Businesses for additional information.
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. Based on the final purchase price and working capital adjustments, we estimated a refund receivable of$32 million that was outstanding as ofJune 30, 2020 and was received in the first quarter of fiscal 2021. 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$660 million , resulting in the recognition of a gain of$530 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 other comprehensive income. The total gain on our previously held equity method investment of$534 million is included in Other income, net in the accompanying consolidated statements of earnings for the year endedJune 30, 2020 . 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$23 million , which is also included in Other income, net in the accompanying consolidated statements of earnings for the year endedJune 30, 2020 . 47
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Table of Contents PROVISION FOR INCOME TAXES The provision for income taxes representsU.S. federal, foreign, state and local income taxes. The effective rate differs from the federal statutory rate primarily due to the effect of state and local income taxes, the tax impact of share-based compensation, the taxation of foreign income and income tax reserve adjustments, which represent changes in our net liability for unrecognized tax benefits including tax settlements and lapses of the applicable statutes of limitations. Our effective tax rate will change from year-to-year based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the tax impact of share-based compensation, the interaction of various global tax strategies and the impact from certain acquisitions. The Tax Cuts and Jobs Act (the "TCJA") included broad and complex changes to theU.S. tax code that impacted our accounting and reporting for income taxes. See Item 8. Financial Statements and Supplementary Data - Note 9 - Income Taxes for further discussion relating to the TCJA. Year Ended June 30 ($ in millions) 2022 2021 Earnings before income taxes:$ 3,036 $ 3,331 As Reported: Effective rate for income taxes 20.7 % 13.7 % Basis-point change from prior year 700 (1,980) Non-GAAP Financial Measure(1): Effective rate for income taxes 21.3 % 18.7 % (1)Excludes the net impact on the effective tax rates of charges associated with restructuring and other activities, goodwill, other intangible and long-lived asset impairments, other income, net, changes in the fair value of contingent consideration and changes in the fair value of acquisition-related stock options. There was no tax expense associated with the fiscal 2021 other income, net adjustment (previously held equity method investment in DECIEM). The effective tax rate for fiscal 2022 increased approximately 700 basis points. The increase was primarily attributable to the prior year impact of the fiscal 2021 gain on our previously held equity method investment in DECIEM with no associated tax expense of approximately 530 basis points, as well as the prior-year impact of retroactively electing the global intangible low-taxed income ("GILTI") high-tax exception under the TCJA of approximately 140 basis points.
NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC.
Year Ended June 30
($ in millions, except per share data) 2022 2021
As Reported:
Net earnings attributable to The Estée Lauder Companies Inc. $ 2,390 $ 2,870
$ Change from prior year (480) 2,186
% Change from prior year (17) % 100+%
Diluted net earnings per common share $ 6.55 $ 7.79
% Change from prior year (16) % 100+%
Non-GAAP Financial Measure(1): % Change in diluted net earnings per common share from prior year adjusting for the impact of charges associated with restructuring and other activities, goodwill, other intangible and long-lived asset impairments, other income, net, changes in fair value of contingent consideration and changes in fair value of acquisition-related stock options
12 % 57 %
(1)See "Reconciliations of Non-GAAP Financial Measures" below for
reconciliations between non-GAAP financial measures and the most directly
comparable
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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, other intangible and long-lived asset impairments; other income, net; the changes in fair value of contingent consideration; the change in fair value of acquisition-related stock options; and the effects of foreign currency translation. The following tables provide reconciliations between these non-GAAP financial measures and the most directly comparableU.S. GAAP measures. Year Ended June 30 % Change in Constant ($ in millions, except per share data) 2022 2021 Variance % Change Currency Net sales, as reported$ 17,737 $ 16,215 $ 1,522 9 % 10 % Returns associated with restructuring and other activities 4 14 (10) Net sales, as adjusted$ 17,741 $ 16,229 $ 1,512 9 % 10 % Operating income, as reported$ 3,170 $ 2,618 $ 552 21 % 19% Charges associated with restructuring and other activities 144 228 (84)Goodwill , other intangible and long-lived asset impairments 241 188 53 Changes in fair value of contingent consideration - (2) 2 Change in fair value of acquisition-related stock options (55) 40 (95) Operating income, as adjusted$ 3,500 $ 3,072 $ 428 14 % 13 % Diluted net earnings per common share, as reported$ 6.55 $ 7.79 $ (1.24) (16) % (17) % Charges associated with restructuring and other activities .31 .48 (.17) Other income, net - (2.30) 2.30Goodwill , other intangible and long-lived asset impairments .50 .40 .10 Changes in fair value of contingent consideration - (.01) .01 Change in fair value of acquisition-related stock options (less portion attributable to redeemable noncontrolling interest) (.12) .09 (.21) Diluted net earnings per common share, as adjusted$ 7.24 $ 6.45 $ .79 12 % 12 % 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. 49
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The following table reconciles 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
Year Ended June 30
Impact of Variance, % Change, in
foreign currency in constant % Change, as constant
($ in millions) 2022 2021 Variance translation currency reported currency
By Product Category:
Skin Care $ 9,886 $ 9,484 $ 402 $ (3) $ 399 4 % 4 %
Makeup 4,667 4,203 464 50 514 11 12
Fragrance 2,508 1,926 582 33 615 30 32
Hair Care 631 571 60 8 68 11 12
Other 49 45 4 - 4 9 9
17,741 16,229 1,512 88 1,600 9 10
Returns associated with
restructuring and other
activities (4) (14) 10 - 10
Total $ 17,737 $ 16,215 $ 1,522 $ 88 $ 1,610 9 % 10 %
By Region:
The Americas $ 4,623 $ 3,797 $ 826 $ (22) $ 804 22 % 21 %
Europe , the Middle East &
Africa 7,681 6,946 735 117 852 11 12
Asia/Pacific 5,437 5,486 (49) (7) (56) (1) (1)
17,741 16,229 1,512 88 1,600 9 10
Returns associated with
restructuring and other
activities (4) (14) 10 - 10
Total $ 17,737 $ 16,215 $ 1,522 $ 88 $ 1,610 9 % 10 %
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The following table reconciles the change in operating income by product
category and geographic region, as reported, to the change in operating income
excluding the impact of goodwill, other intangible and long-lived asset
impairments, changes in fair value of contingent consideration and change in
fair value of acquisition-related stock options:
As Reported Add:
Changes in
Goodwill, other Add:
Year Ended June 30 intangible and Changes in fair Add: Change in fair
long-lived value of value of
asset contingent Acquisition-related Variance, as
($ in millions) 2022 2021 Variance impairments consideration stock options adjusted % Change, as reported % Change, as adjusted
By Product Category:
Skin Care $ 2,753 $ 3,036 $ (283) $ 134 $ - $ (93) $ (242) (9)% (8)%
Makeup 133 (384) 517 (63) - (2) 452 100+ 100+
Fragrance 456 215 241 (14) 2 - 229 100+ 100+
Hair Care (28) (19) (9) (4) - - (13) (47) (87)
Other - (2) 2 - - 2 100 100
3,314 2,846 $ 468 $ 53 $ 2 $ (95) $ 428 16% 14%
Charges associated with
restructuring and other
activities (144) (228)
Total $ 3,170 $ 2,618
By Region:
The Americas $ 1,159 $ 518 $ 641 $ (129) $ - $ (95) $ 417 100+% 60%
Europe , the Middle
East & Africa 1,360 1,335 25 (48) 2 - (21) 2 (2)
Asia/Pacific 795 993 (198) 230 - - 32 (20) 3
3,314 2,846 $ 468 $ 53 $ 2 $ (95) $ 428 16% 14%
Charges associated with
restructuring and other
activities (144) (228)
Total $ 3,170 $ 2,618
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Table of Contents 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. AtJune 30, 2022 , we had cash and cash equivalents of$3,957 million compared with$4,958 million atJune 30, 2021 . 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. Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support seasonal working capital needs, 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. 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, however we are mindful of increasing inflationary pressures. Generally, we have been able to introduce new products at higher prices, increase prices and implement other operating efficiencies to sufficiently offset cost increases.
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 ofAugust 17, 2022 , our long-term debt is rated A+ with a stable outlook byStandard & Poor's and A1 with a stable outlook by Moody's.
Debt and Access to Liquidity
Total debt as a percent of total capitalization (excluding noncontrolling
interests) increased to 49% at
For further information regarding our current and long-term debt and available
financing, see Item 8. Financial Statements and Supplementary Data - Note 11 -
Debt.
Cash Flows
Year Ended June 30
(In millions) 2022 2021
Net cash provided by operating activities
The change in net cash flows provided by operations reflected higher working
capital needs to support growth and to mitigate the global supply chain
challenges, as well as higher cash paid for taxes, partially offset by higher
earnings before taxes, excluding non-cash items.
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The change in net cash flows used for investing activities primarily reflected cash paid, net of cash acquired, in connection with the acquisition of additional shares in DECIEM in fiscal 2021 and the settlement of net investment hedges. These changes were partially offset by an increase in capital expenditures, primarily driven by increased investments for a new manufacturing facility inJapan , online capabilities, our freestanding stores and counters at retailers to support new and existing distribution and information technology enhancements, as well as investments to support the reopening of our offices located around the world, which were previously closed due to COVID-19. The change in net cash flows used for financing activities primarily reflected an increase relating to higher treasury stock repurchases in fiscal 2022 and proceeds from the issuance of long-term debt, net in the prior-year period, partially offset by the repayment of short-term debt and repayments and redemptions of long-term debt made in the prior-year period. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition of the Company's Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 for the fiscal 2021 to fiscal 2020 comparative discussions.
Dividends
For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the year endedJune 30, 2022 and throughAugust 17, 2022 , see Item 8. Financial Statements and Supplementary Data - Note 17 - Common Stock.
Pension and Post-retirement Plan Funding
Several factors influence the annual funding requirements for our pension
plans. For our domestic trust-based noncontributory qualified defined benefit
pension plan ("U.S. Qualified Plan"), we seek to maintain appropriate funded
percentages. For any future contributions to the U.S. Qualified Plan, we would
seek to contribute an amount or amounts that would not be less than the minimum
required by the Employee Retirement Income Security Act of 1974, as amended,
("ERISA") and subsequent pension legislation, and would not be more than the
maximum amount deductible for income tax purposes. For each international plan,
our funding policies are determined by local laws and regulations. In addition,
amounts necessary to fund future obligations under these plans could vary
depending on estimated assumptions. The effect of our pension plan funding on
future operating results will depend on economic conditions, employee
demographics, mortality rates, the number of participants electing to take
lump-sum distributions, investment performance and funding decisions.
For the U.S. Qualified Plan, we maintain an investment strategy of matching the
duration of a substantial portion of the plan assets with the duration of the
underlying plan liabilities. This strategy assists us in maintaining our overall
funded ratio. For fiscal 2022 and 2021, we met or exceeded all contribution
requirements under ERISA regulations for the U.S. Qualified Plan. As we continue
to monitor the funded status, we may decide to make cash contributions to the
U.S. Qualified Plan or our post-retirement medical plan in the United States
during fiscal 2023.
The following table summarizes actual and expected benefit payments and contributions for our other pension and post-retirement plans:
Year Ended June 30
(In millions) Expected 2023 2022 2021
Non-qualified domestic noncontributory pension plan benefit payments
$ 21 $ 18 $ 19
International defined benefit pension plan contributions
$ 38 $ 40 Post-retirement plan benefit payments$ 10 $ 11 $ 7 Commitments and Contingencies For a discussion of our contingencies, see to Item 8. Financial Statements and Supplementary Data - Note 16 - Commitments and Contingencies (Contractual Obligations).
Contractual Obligations For a discussion of our contractual obligations, see Item 8. Financial Statements and Supplementary Data - Note 16 - Commitments and Contingencies (Contractual Obligations).
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Derivative Financial Instruments and Hedging Activities For a discussion of our derivative financial instruments and hedging activities, see Item 8. Financial Statements and Supplementary Data - Note 12 - Derivative Financial Instruments. Foreign Exchange Risk Management For a discussion of foreign exchange risk management, see Item 8. Financial Statements and Supplementary Data - Note 12 - Derivative Financial Instruments (Cash Flow Hedges, Net Investment Hedges).
Credit Risk For a discussion of credit risk, see Item 8. Financial Statements and Supplementary Data - Note 12 - 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% weakening of theU.S. dollar against the foreign exchange rates for the currencies in our portfolio would have resulted in a net decrease in the fair value of our portfolio of approximately$259 million and$218 million as ofJune 30, 2022 and 2021, 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$41 million and$83 million as ofJune 30, 2022 and 2021, 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. RECENTLY ISSUED ACCOUNTING STANDARDS Refer to Item 8. Financial Statements and Supplementary Data - Note 2 - Summary of Significant Accounting Policies for discussion regarding the impact of accounting standards that were recently issued but not yet effective, on our consolidated financial statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The discussion and analysis of our financial condition atJune 30, 2022 and our results of operations for the three fiscal years endedJune 30, 2022 are based upon our consolidated financial statements, which have been prepared in conformity withU.S. generally accepted accounting principles ("U.S. GAAP"). 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. We consider accounting estimates to be critical if both (i) the nature of the estimate or assumption is material due to the levels of subjectivity and judgment involved, and (ii) the impact within a reasonable range of outcomes of the estimate and assumption is material to the Company's financial condition. Our critical accounting policies relate to goodwill, other intangible assets and long-lived assets - impairment assessment and income taxes. Management of the Company has discussed the selection of critical accounting policies and the effect of estimates with the Audit Committee of the Company's Board of Directors. 54
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Goodwill , Other Intangible Assets and Long-Lived Assets - Impairment AssessmentGoodwill is calculated as the excess of the cost of purchased businesses over the fair value of their underlying net assets. Other indefinite-lived intangible assets principally consist of trademarks.Goodwill and other indefinite-lived intangible assets are not amortized. When testing goodwill and other indefinite-lived intangible assets for impairment, we have the option of first performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. If necessary, we can perform a single step quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and record an impairment charge for the amount that the carrying amount exceeds the fair value, up to the total amount of goodwill allocated to that reporting unit. For fiscal 2022, we elected to perform the quantitative assessment for the goodwill in each of our reporting units and indefinite-lived intangible assets. We engaged a third-party valuation specialist and used industry accepted valuation models and criteria that were reviewed and approved by various levels of management. For fiscal 2021, we elected to perform the qualitative assessment for the goodwill in certain of our reporting units and indefinite-lived intangible assets. This qualitative assessment included the review of certain macroeconomic factors and entity-specific qualitative factors to determine if it was more-likely-than-not that the fair values of our reporting units were below carrying value. For our other reporting units and other indefinite-lived intangible assets, a quantitative assessment was performed. We engaged third-party valuation specialists and used industry accepted valuation models and criteria that were reviewed and approved by various levels of management. For further discussion of the methods used and factors considered in our estimates as part of the impairment testing forGoodwill , Other Intangible Assets and Long-Lived Assets, see Item 8. Financial Statements and Supplementary Data - Note 2 - Summary of Significant Accounting Policies, Note 6 -Goodwill and Other Intangible Assets. Income Taxes We calculate and provide for income taxes in each tax jurisdiction in which we operate. As the application of various tax laws relevant to our global business is often uncertain, significant judgment is required in determining our annual tax expense and in evaluating our tax positions. The provision for income taxes includes the amounts payable or refundable for the current year, the effect of deferred taxes and impacts from uncertain tax positions. We recognize deferred tax assets and liabilities for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis, net operating losses, tax credits and other carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates when the assets and liabilities are expected to be realized or settled. We regularly review deferred tax assets for realizability and establish valuation allowances based on available evidence including historical operating losses, projected future taxable income, expected timing of the reversals of existing temporary differences, and appropriate tax planning strategies. If our assessment of the realizability of a deferred tax asset changes, an increase to a valuation allowance will result in a reduction to net earnings at that time, while the reduction to a valuation allowance will result in an increase to net earnings at that time. We provide tax reserves for applicableU.S. federal, state, local and foreign tax exposures relating to periods subject to audit. The development of reserves for these exposures requires judgments about tax issues, potential outcomes and timing, and is a subjective critical estimate. We assess our tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon settlement with a tax authority that has full knowledge of all relevant information. For those tax positions where it is more-likely-than-not that a tax benefit will not be sustained, no tax benefit has been recognized in the consolidated financial statements. We classify applicable interest and penalties as a component of the provision for income taxes. Although the outcome relating to these exposures is uncertain, in our opinion adequate provisions for income taxes have been made for estimable potential liabilities emanating from these exposures. If actual outcomes differ materially from these estimates, they could have a material impact on our consolidated net earnings. For further discussion of Income Taxes, see Item 8. Financial Statements and Supplementary Data - Note 2 - Summary of Significant Accounting Policies and Note 9 - Income Taxes. 55
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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;
(2)our ability to develop, produce and market new products on which future operating results may depend and to successfully address challenges in our business;
(3)consolidations, restructurings, bankruptcies and reorganizations in the retail industry causing a decrease in the number of stores that sell our 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;
(5)the success, or changes in timing or scope, of new product launches and the 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;
(7)social, political and economic risks to our foreign or domestic manufacturing, distribution and retail operations, including changes in foreign investment and trade policies and regulations of the host countries and ofthe United States ; (8)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 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; (9)foreign currency fluctuations affecting our results of operations and the 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 ofthe United States ; (10)changes in global or local conditions, including those due to volatility in the global credit and equity markets, natural or man-made disasters, real or perceived epidemics, supply chain challenges, inflation, or increased 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 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 COVID-19 pandemic, including disruptions to our global business;
(12)shipment delays, commodity pricing, depletion of inventory and increased
production costs resulting from disruptions of operations at any of the
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;
(13)real estate rates and availability, which may affect our ability to increase
or maintain the number of retail locations at which we sell our products and the
costs associated with our other facilities;
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(14)changes in product mix to products which are less profitable;
(15)our ability to acquire, develop or implement new information and distribution technologies and initiatives on a timely basis and within our 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; (16)our ability to capitalize on opportunities for improved efficiency, such as publicly-announced strategies and restructuring and cost-savings initiatives, and to integrate acquired businesses and realize value therefrom;
(17)consequences attributable to local or international conflicts around the 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
(19)additional factors as described in our filings with the
We assume no responsibility to update forward-looking statements made herein or otherwise.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is set forth in Item 7 of this Annual Report on Form 10-K under the caption Liquidity and Capital Resources - Market Risk and is incorporated herein by reference.
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