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 2020, 2019 and 2018 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) 2020 2019 2018
NET SALES (1)
By Product Category:
Skin Care $ 7,382 $ 6,551 $ 5,595
Makeup 4,794 5,860 5,633
Fragrance 1,563 1,802 1,826
Hair Care 515 584 570
Other 40 69 67
14,294 14,866 13,691
Returns associated with restructuring and other
activities - (3) (8)
Net sales $ 14,294 $ 14,863 $ 13,683
By Region:
The Americas $ 3,794 $ 4,741 $ 5,015
Europe, the Middle East & Africa 6,262 6,452 5,634
Asia/Pacific 4,238 3,673 3,042
14,294 14,866 13,691
Returns associated with restructuring and other
activities - (3) (8)
Net sales $ 14,294 $ 14,863 $ 13,683
OPERATING INCOME (LOSS)(1)
By Product Category:
Skin Care $ 2,125 $ 1,925 $ 1,514
Makeup (1,438) 438 549
Fragrance 17 140 176
Hair Care (19) 39 64
Other 4 12 9
689 2,554 2,312
Charges associated with restructuring and other
activities (83) (241) (257)
Operating income $ 606 $ 2,313 $ 2,055
By Region:
The Americas $ (1,044) $ 672 $ 872
Europe, the Middle East & Africa 997 1,153 865
Asia/Pacific 736 729 575
689 2,554 2,312
Charges associated with restructuring and other
activities (83) (241) (257)
Operating income $ 606 $ 2,313 $ 2,055 (1)The net sales and operating income from our travel retail business are
included in the
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Table of Contents
During fiscal 2020, changes were made to reflect certain Leading Beauty Forward
enhancements made to the capabilities and cost structure of our travel retail
business, which are primarily centralized in The Americas region, and resulted
in a change to the royalty structure of the travel retail business to reflect
the value created in The Americas region. Accordingly, the fiscal 2019 and 2018
operating income of The Americas was increased, with a corresponding decrease in
Europe , the Middle East & Africa , by $866 million and $661 million ,
respectively, to conform with the current year methodology and presentation.
The following table presents certain consolidated earnings data as a percentage of net sales:
Year Ended June 30
2020 2019 2018
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 24.8 22.8 20.8
Gross profit 75.2 77.2 79.2
Operating expenses:
Selling, general and administrative 60.4 59.6 62.5
Restructuring and other charges 0.5 1.4 1.7
Goodwill impairment 5.7 0.5 -
Impairment of other intangible and long-lived assets 4.3 0.1 -
Total operating expenses 70.9 61.6 64.2
Operating income 4.2 15.6 15.0
Interest expense 1.1 0.9 0.9
Interest income and investment income, net 0.3 0.4 0.4
Other components of net periodic benefit cost - - -
Other income, net 3.9 0.4 -
Earnings before income taxes 7.3 15.5 14.5
Provision for income taxes (2.4) (3.4) (6.3)
Net earnings 4.9 12.1 8.2
Net earnings attributable to noncontrolling interests (0.1) (0.1) (0.1)
Net earnings attributable to The Estée Lauder
Companies Inc. 4.8 % 12.0 % 8.1 %
Not adjusted for differences caused by rounding
We continually introduce new products, support new and established products through advertising, merchandising and sampling and phase out existing products that no longer meet the needs of our consumers or our objectives. The economics of developing, producing, launching, supporting and discontinuing products impact our sales and operating performance each period. The introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning. Non-GAAP Financial Measures We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period helps investors and others compare operating performance between periods. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity withU.S. GAAP. See Reconciliations of Non-GAAP Financial Measures beginning on page 46 for reconciliations between non-GAAP financial measures and the most directly comparableU.S. GAAP measures. 26 -------------------------------------------------------------------------------- Table of Contents We operate on a global basis, with the majority of our net sales generated outsidethe United States . Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations. Therefore, we present certain net sales, operating results and diluted net earnings per common share information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of our underlying business outsidethe United States . Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We calculate constant currency information by translating current-period results using prior-year period weighted-average foreign currency exchange rates and adjusting for the period-over-period impact of foreign currency cash flow hedging activities. Overview COVID-19 Business Update We continue to monitor the impact of the COVID-19 pandemic, which negatively impacted the second half of fiscal 2020, on all aspects of our business. We have taken significant actions to help protect the health and safety of our employees, beauty advisors and consumers, as well as to effectively manage our business through the rapidly evolving disruptions in our operating environment. We believe we are well-positioned to participate in the markets' recovery. Beginning in calendar 2020, governments in various countries implemented restrictions to prevent further spread of the virus. These include the temporary closing of businesses deemed "non-essential," travel bans and restrictions, social distancing and quarantines. As a result, we modified a number of our business practices, in part due to legislation, executive orders and guidance from government entities and healthcare authorities (collectively, "COVID-19 Directives"). Retail impact Brick-and-mortar retail stores that sell our products across most countries have experienced temporary or ongoing store closures and, as they re-open, significantly reduced consumer traffic. This impacted the brick-and-mortar retail operations of our customers, as well as our freestanding stores. •In Asia/Pacific, nearly all retail stores have re-opened after many stores closed for most ofFebruary 2020 throughApril 2020 . •In Europe, theMiddle East &Africa , retail stores began closing in earlyMarch 2020 and gradually reopened throughJune 2020 . At the end ofJune 2020 , approximately 15% of the stores remained closed, and by mid-August most had re-opened. •In The Americas, retail stores began closing inmid-March 2020 . By the end ofJune 2020 , approximately 20% of the stores remained closed, and by mid-August, most stores had re-opened. •Sincemid-March 2020 , air travel has been largely curtailed globally, adversely impacting the annual growth trend of our travel retail business.
Somewhat offsetting the significant declines in brick-and-mortar channels, net sales growth of our products online (through our own websites, third-party platforms and websites of our retailers) has accelerated globally.
As the pandemic continues, we are continuing to assess local conditions and when counters and our stores should re-open.
Due in large part to the challenging retail environment and, with respect to the second half of fiscal 2020, uncertainties stemming from the COVID-19 pandemic, we recognizedGoodwill , other intangible asset and long-live asset impairments. See Item 8. Financial Statements and Supplementary Data - Note 6 -Goodwill and Other Intangible Assets and Note 7 - Leases for further information. Supply Chain impact During the second half of fiscal 2020, a majority of our facilities continued to manufacture and distribute products globally, albeit in a much-reduced capacity in light of safety measures designed to protect our employees in response to the COVID-19 pandemic. By the end of our fiscal year, all manufacturing and distribution facilities were operating with rapidly improving capacity. We have, to date, been able to obtain raw materials and components. At this time, we expect to be able to produce and distribute our products when the demand increases. Our cost of sales was adversely impacted by the timing of expense recognition and other costs, primarily caused by the COVID-19 pandemic, including the shutdown of certain of our manufacturing facilities and the implementation of social distancing measures. These adjustments resulted in an increase in Cost of sales for the fiscal 2020 fourth quarter and fiscal 2020 of$80 million and$83 million , respectively. Additionally, we recorded an increase in excess and obsolete inventory, which resulted in an increase in Cost of sales for the fiscal 2020 fourth quarter and fiscal 2020 of$121 million and$166 million , respectively. 27 -------------------------------------------------------------------------------- Table of Contents Cash Conservation As the impacts from COVID-19 evolved, we faced various uncertainties and implemented strict cost control measures and took actions to conserve cash. Such actions included: •Expense reductions, including advertising and promotion activities, travel, meetings, consulting, and certain employee costs, including implementing a hiring freeze, furloughs and similar unpaid temporary leaves of absence for many point of sale employees; temporary salary reductions for senior executives and other management employees; and a temporary elimination of cash retainers for the Board of Directors. Combined, these resulted in approximately$800 million of savings in the last five months of fiscal 2020. •Reduced capital investments (e.g., facilities and consumer-facing counters) by approximately$275 million for fiscal 2020. •Temporary suspension of discretionary repurchases of our Class A Common Stock. •Not declaring a quarterly cash dividend that would have been paid inJune 2020 . •Raising an additional$2,200 million of cash by issuing$700 million of Senior Unsecured Notes and borrowed the full amount under our$1,500 million revolving credit facility. InJune 2020 , we repaid$750 million borrowed under our revolving credit facility, and, inAugust 2020 , repaid the remaining$750 million . Government Assistance During 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 the fourth quarter of fiscal 2020, we qualified for and recorded$99 million in government assistance, which reduced Selling, general and administrative expenses and Cost of sales by$87 million and$10 million , respectively. The remaining$2 million was deferred and will be recognized in fiscal 2021. We are continuing to review applicable government assistance programs globally. We will continue to monitor the impacts of COVID-19 and adjust our action plans accordingly as the situation progresses.
Business Update
Our business is focused on prestige beauty, which combines the repeat purchase and relative affordability of consumer goods with the high-quality products and high-touch services of luxury goods. At the same time, we are well diversified by brand, product category, geography, channel, consumer segment and price point. Our innovation capabilities, driven by our creativity and inspired by data analytics and consumer insights, allow us to use our brand portfolio to capitalize on opportunities in fast growing and profitable areas of prestige beauty. We believe that our broad and inclusive range of prestige product offerings allows us to increase our share of a consumer's beauty routine and compete for consumers of prestige or mass brands. •In fiscal 2020, global prestige skin care continued to lead product category growth. Our skin care net sales benefited from the enduring strength of hero product lines such as Advanced Night Repair from Estée Lauder and Crème de La Mer from La Mer, as well as recent product launches, the growth inAsia and targeted expanded consumer reach. The launches of Advanced Night Repair Intense Reset Concentrate and Perfectionist Rapid Brightening Treatment Serum from Estée Lauder and The Eye Concentrate from La Mer were particularly successful inAsia/Pacific . During fiscal 2020, our Clinique brand introduced a new serum Even Better Clinical Dark Spot Corrector and Interrupter, which was successful inChina . Net sales of skin care products rose in international markets, led by Estée Lauder and incremental net sales of Dr. Jart+, which we acquired inDecember 2019 . •Global prestige makeup sales declined as COVID-19 limited social and business activities and consumers wore less makeup. Some sub-categories in makeup performed better in the COVID-19 environment, including eye products and makeup with skin care benefits such as tinted moisturizers, while demand for lipstick and foundation weakened. During fiscal 2020, our makeup net sales benefited from targeted expanded consumer reach and the continued success of existing products, such as the Double Wear franchise and Futurist line of products from Estée Lauder, as well asThe Luminous Lifting Cushion Foundation from La Mer. •Our fragrance net sales declined as consumer demand shifted from personal fragrance to bath, body and home. The decline was offset by strong growth and targeted expanded consumer reach ofLe Labo and certain new products, such as Poppy & Barley fromJo Malone London and Metallique fromTom Ford . •Our hair care net sales declined as COVID-19-related salon and retail closures could not be offset by strong online acceleration. During fiscal 2020, Aveda launched the hydrating Nutriplenish line of products, which contributed positively. 28 -------------------------------------------------------------------------------- Table of Contents 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 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. •In North America, we deployed a number of strategies to accelerate growth, which began to deliver improvements through the first half of fiscal 2020. However, the impact of COVID-19-related store closures in the latter half further aggravated the challenging environment in brick-and-mortar retail. Despite the overall decline in net sales, online net sales inNorth America grew double digits. InLatin America , we continue to launch new brands, expand social media outreach and encourage consumers to trade up from mass beauty products. •In Europe, theMiddle East &Africa , we are expanding the consumer reach of many of our brands and strengthening their digital and social media presences. •In Asia/Pacific, particularly inChina , we are leveraging our diversified brand portfolio and expansion on third-party online malls to benefit from the strong consumer demand for prestige beauty. In mainlandChina , net sales grew strong double digits reflecting growth in virtually all product categories, as well as in nearly every brand and double-digit growth in every channel, led by online. For fiscal 2020, over 40% of mainlandChina's net sales was contributed by our online channels. 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. •As part of this strategy, we have built a leadership position in the global travel retail channel, that allowed us to leverage the increase in international passenger traffic before COVID-19. While COVID-19 has significantly curtailed international travel in the near-term, we continue to believe it is a growth opportunity for the long-term. 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. 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 accelerated strongly on a global basis, reflecting strong double digit growth for fiscal 2020, as well as growth in all product categories and from nearly every brand. 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- and m-commerce sites, and sell through select third-party online malls. We believe our success in delivering particularly 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 declines caused by COVID-19. We also benefited from the transformation of certain operations that freed up resources to invest behind further growth opportunities. Our LeadingBeauty Forward initiative (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 2020, we continued to further integrate corporate citizenship and sustainability into our strategy and business operations. Areas of focus include packaging, ingredient transparency, responsible sourcing, energy and emissions, waste and water, social investments and employee engagement and safety. 29 -------------------------------------------------------------------------------- Table of Contents Outlook There are no comparable recent events that provide guidance concerning the impacts of a global pandemic like COVID-19. Due to the uncertainty of its duration and severity, at this time we are not able to reliably estimate to the same degree as prior to COVID-19 the extent of the future adverse impact on our financial condition or results of operations for fiscal 2021. The degree to which COVID-19 and its collateral effects impact our business, the results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including how quickly and to what extent there are sustainable improvements in the retail environment and general economic conditions. As we continue to monitor COVID-19 developments, including the impacts on our consumers, customers and suppliers, we may adjust prior actions and take further actions. However, there is no certainty that the actions we take will be sufficient to mitigate the risks and impacts from COVID-19. 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. While we continue to face strong competition and economic challenges globally, COVID-19 has caused a more significant disruption to our business and the retail industry generally. We are seeing, and believe there will be more impairments, restructurings and bankruptcies in the retail industry, including among our customers; destocking and tighter working capital management by retailers; challenges for suppliers; and an acceleration in the shifts in consumer preferences as to where and how they shop, as well as changes in their preferences for certain products. The severe decline in international travel is also causing a significant decline in our travel retail business, which had been historically one of our most profitable channels. In addition to impacting net sales and profitability, these and other challenges may impact our ability to collect receivables and our operating cash flows generally and may adversely impact the goodwill, other intangibles and long-lived assets associated with our acquired brands. We continue to monitor the geopolitical tensions betweenthe United States andChina and the uncertainties caused by the evolving trade policy dispute, which could increase our cost of sales and negatively impact our overall net sales, or otherwise have a material adverse effect on our business. We also continue to monitor the potential implications of the ongoing economic and political uncertainties stemming from theUnited Kingdom's exit and transition from theEuropean Union (i.e. "Brexit") and continue developing our risk mitigation strategies to address such uncertainties. These strategies include changes related to regulatory and legislative compliance, assessing alternatives to supply chain routing, revising customer arrangements and analyzing inventory levels. We are also cautious of foreign currency movements, including their impacts on tourism dynamics that have already been adversely affected by COVID-19 and COVID-19 Directives. Additionally, we continue to monitor the effects of the global macroeconomic environment; social and political issues; regulatory matters, including the imposition of tariffs; geopolitical tensions; and global security issues. COVID-19 is proving to be the most significant challenge we have faced as a public company. The uncertainty around the timing, speed and duration of the recovery from the adverse impacts 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. As the current situation progresses, 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. LeadingBeauty Forward InMay 2016 , we announced a multi-year initiative ("LeadingBeauty Forward ," or the "LBF Program") to build on our strengths and better leverage our cost structure to free resources for investment to continue our growth momentum. LeadingBeauty Forward is designed to enhance our go-to-market capabilities, reinforce our leadership in global prestige beauty and continue creating sustainable value. As ofJune 30, 2019 , we concluded the approvals of all major initiatives under LeadingBeauty Forward related to the optimization of select corporate functions, supply chain activities, and corporate and regional market support structures, as well as the exit of underperforming businesses, and expect to substantially complete those initiatives through fiscal 2021. 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. 30 -------------------------------------------------------------------------------- Table of Contents Post-COVID Business Acceleration Program OnAugust 20, 2020 , we announced a two-year restructuring program, Post-COVID Business Acceleration Program (the "Restructuring Program"), designed to resize our business against the dramatic shifts to our distribution landscape and consumer behaviors in the wake of the COVID-19 pandemic. The Restructuring Program will help improve efficiency and effectiveness by rebalancing resources to growth areas of prestige beauty. It will further strengthen us by building upon the foundational capabilities in which we have invested. The Restructuring 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. We committed to this course of action onAugust 18, 2020 . This program is expected to position us to better execute our long-term strategy while strengthening our financial flexibility. In connection with the Restructuring Program, at this time we estimate a net reduction in the range of approximately 1,500 to 2,000 positions globally, which is about 3% of our current workforce 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 of approximately 10% to 15% of our freestanding stores globally. We plan to approve specific initiatives under the Restructuring Program through fiscal 2022 and expect to complete those initiatives through fiscal 2023. We expect that the Restructuring Program will result in related restructuring and other charges totaling between$400 million and$500 million , before taxes, consisting of employee-related costs, contract terminations, asset write-offs and other costs to implement these initiatives. Once fully implemented, we expect the Restructuring Program to yield annual benefits, primarily in selling, general and administrative expenses, of between$300 million and$400 million , before taxes. We expect to reinvest a portion behind future growth initiatives.
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. DuringDecember 2019 , given the continuing declines in prestige makeup, generally inNorth America , and the ongoing competitive activity, our Too Faced, BECCA and Smashbox reporting units made revisions to their internal forecasts concurrent with our brand strategy review process. DuringMarch 2020 , given the actual and the estimate of the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting us, we made additional revisions to the internal forecasts relating to our Too Faced, BECCA, Smashbox and GLAMGLOW reporting units. We concluded that the changes in circumstances in these reporting units triggered the need for an interim impairment review of their respective trademarks and goodwill. These changes in circumstances were also an indicator that the carrying amounts of their respective long-lived assets, including customer lists, may not be recoverable. Accordingly, we performed interim impairment tests for the trademarks and recoverability tests for the long-lived assets as ofDecember 31, 2019 andMarch 31, 2020 . We concluded that the carrying amounts of the long-lived assets were recoverable. ForDecember 31, 2019 andMarch 31, 2020 , we also concluded that the carrying values of the trademarks exceeded their estimated fair values and recorded impairment charges. ForDecember 31, 2019 , we utilized the relief-from-royalty method to determine discounted projected future cash flows, and forMarch 31, 2020 , the relief-from-royalty method was based on probability weighted cash flows. After adjusting the carrying values of the trademarks, we completed interim quantitative impairment tests for goodwill and recorded goodwill impairment charges for each of these reporting units. ForDecember 31, 2019 , the fair value of each reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. ForMarch 31, 2020 , the fair value of each reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows, based on probability weighted undiscounted cash flows, and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. 31 -------------------------------------------------------------------------------- Table of Contents Based on our annual goodwill and other indefinite-lived intangible asset impairment testing as ofApril 1, 2020 , we determined that the carrying value of the Editions de Parfums Frédéric Malle reporting unit exceeded its fair value. This determination was made based on updated internal forecasts, finalized and approved inJune 2020 , that reflected lower net sales growth projections due to a softer than expected retail environment for the brand, as well as the impacts relating to the uncertainty of the duration and severity of COVID-19. These changes in circumstances were also an indicator that the carrying amounts of its respective long-lived assets, including customer lists, may not be recoverable. We concluded that the carrying value of the trademarks exceeded its estimated fair value, which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded impairment charges. We concluded that the carrying amounts of the long-lived assets were recoverable. After adjusting the carrying value of the trademarks, we completed the quantitative impairment test for goodwill and recorded a goodwill impairment charge for this reporting unit. The fair value of this reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. DuringJune 2020 , given the actual and the estimate of the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting us, we made further revisions to the internal forecasts relating to our BECCA and GLAMGLOW reporting units. We concluded that the changes in circumstances in these reporting units triggered the need for an interim impairment review of their respective trademarks and goodwill. These changes in circumstances were also an indicator that the carrying amounts of their respective long-lived assets, including customer lists, may not be recoverable. Accordingly, we performed interim impairment tests for the trademarks and recoverability tests for the long-lived assets as ofJune 30, 2020 . We concluded that the carrying values of the trademarks for BECCA and GLAMGLOW exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded impairment charges. In addition, we concluded that the carrying value of the BECCA customer lists intangible asset exceeded its estimated fair value, which was determined utilizing the multi-period excess earnings income approach by discounting the incremental after-tax cash flows over multiple periods, and recorded an impairment charge. We concluded that the carrying amounts of the long-lived assets of GLAMGLOW were recoverable. After adjusting the carrying values of the trademarks and the BECCA customer lists, we completed interim quantitative impairment tests for goodwill and recorded goodwill impairment charges for each of these reporting units. The fair value of each reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. A summary of the impairment charges for the three and twelve months endedJune 30, 2020 and the remaining trademark, customer lists and goodwill carrying values as ofJune 30, 2020 , for each reporting unit, are as follows: Impairment Charge Three Months Ended Twelve Months Ended (In millions)June 30, 2020 June 30, 2020 Carrying Value Reporting Unit: Product Category Trademark Customer ListsGoodwill Trademark Customer ListsGoodwill Trademark Customer
Lists Goodwill Too Faced Makeup $ - $ - $ -$ 253 $ -$ 592 $ 272 $ 217$ 13 BECCA Makeup 24 35 15 71 35 85 27 7 13 Smashbox Makeup - - - 23 - 72 32 - - GLAMGLOW Skin care 5 - 8 6 - 60 57 6 54 Editions de ParfumsFrédéric Malle Fragrance 11 - 3 11 - 3 21 2 3 Total$ 40 $ 35$ 26 $ 364 $ 35$ 812 $ 409 $ 232$ 83
The impairment charges for the three and twelve months ended
With the exception of the Editions de Parfums Frédéric Malle, BECCA, and GLAMGLOW reporting units, fair values of all reporting units, which were primarily determined based on qualitative assessments, with material goodwill were substantially in excess of their respective carrying values.
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The fair values of the Editions de Parfums Frédéric Malle, BECCA, and GLAMGLOW
trademarks were equal to their carrying values subsequent to the impairments
charges taken as of June 30, 2020 , and the fair values of the Too Faced and
Smashbox trademarks exceeded their carrying values by approximately 7% and 16%,
respectively. As of June 30, 2020 , the carrying values of the Too Faced and
Smashbox trademarks were $272 million and $32 million , respectively. The key
assumptions used to determine the estimated fair value of the reporting units
are primarily predicated on the estimated future impacts of COVID-19, the
success of future new product launches, the achievement of distribution
expansion plans, and the realization of cost reduction and other efficiency
efforts. If such plans do not materialize, or if there are further challenges in
the business environments in which these reporting units operate, resulting
changes in the key assumptions could have negative impacts on the estimated fair
values of the reporting units and it is possible we could recognize additional
impairment charges in the future.
For additional information, see Item 8. Financial Statements and Supplementary
Data - Note 6 - Goodwill and Other Intangible Assets.
Fiscal 2019 as Compared with Fiscal 2018
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations of the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 2019 for the fiscal 2019 to fiscal
2018 comparative discussion.
Fiscal 2020 as Compared with Fiscal 2019
NET SALES
Year Ended June 30
($ in millions) 2020 2019
As Reported:
Net sales $ 14,294 $ 14,863
$ Change from prior year (569) 1,180
% Change from prior year (4) % 9 %
Non-GAAP Financial Measure(1):
% Change from prior year in constant currency (3) % 11 %
(1)See Reconciliations of Non-GAAP Financial Measures beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
The fiscal 2020 decrease in reported net sales reflected declines in virtually all product categories and geographic regions driven by the negative impacts, in the second half of the fiscal year, of the COVID-19 pandemic, including our response and the responses of others to COVID-19 Directives. These directives included the temporary closing of businesses deemed "non-essential," travel bans and restrictions, social distancing and quarantines. Skin care net sales growth primarily reflected higher sales from Estée Lauder and La Mer, as well as incremental net sales attributable to our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter. The increase in net sales in mainlandChina and our travel retail business drove growth internationally. In addition, sales of certain of our products online continued to accelerate. As noted above, the impacts of COVID-19 caused significant disruptions to our business, and we expect the results of operations of our product categories and regions to continue to be adversely impacted in subsequent periods. The fiscal 2020 reported net sales decrease was impacted by approximately$154 million of unfavorable foreign currency translation. 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 2019 impact of returns associated with restructuring and other activities of approximately$3 million . 33 --------------------------------------------------------------------------------
Table of ContentsSkin Care Year Ended June 30 ($ in millions) 2020 2019 As Reported: Net sales$ 7,382 $ 6,551 $ Change from prior year 831 956 % Change from prior year 13 % 17 % Non-GAAP Financial Measure(1): % Change from prior year in constant currency 14 % 20 %
(1)See Reconciliations of Non-GAAP Financial Measures beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported skin care net sales increased in fiscal 2020, due to growth internationally and reflected higher net sales from Estée Lauder and La Mer, combined, of approximately$844 million , as well as incremental net sales of$165 million attributable to our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter. Net sales increased from Estée Lauder, reflecting the continued success of existing product franchises, such as Advanced Night Repair, Perfectionist, Re-Nutriv and Revitalizing Supreme+, and new product launches, such as Advanced Night Repair Intense Reset Concentrate. The increase in net sales from La Mer reflected international growth, led by mainlandChina , as well as our travel retail business due to Chinese traveling consumers. Net sales from La Mer also benefited from existing products, such as The Treatment Lotion, and product relaunches, such as The Regenerating Serum, as well as targeted expanded consumer reach. Net sales increases from both Estée Lauder and La Mer drove growth in our travel retail and online channels. Partially offsetting these increases were lower net sales from Clinique and M·A·C, combined, of approximately$191 million . Net sales declined from these brands, reflecting lower net sales in all geographic regions due to the challenging environment as a result of the COVID-19 pandemic. Despite the overall decline in net sales, Clinique online net sales grew double digits. The skin care net sales increase was impacted by approximately$77 million of unfavorable foreign currency translation. Makeup Year Ended June 30 ($ in millions) 2020 2019 As Reported: Net sales$ 4,794 $ 5,860 $ Change from prior year (1,066) 227 % Change from prior year (18) % 4 % Non-GAAP Financial Measure(1): % Change from prior year in constant currency (17) % 7 %
(1)See Reconciliations of Non-GAAP Financial Measures beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported makeup net sales decreased in fiscal 2020, primarily driven by lower net sales from M·A·C, Clinique, Too Faced andBobbi Brown , combined, of approximately$886 million . The decrease in net sales from these brands reflected declines inNorth America , due to the general decline in prestige makeup and ongoing competitive activity, as well as the challenging environment as a result of the COVID-19 pandemic. International net sales from these brands, particularly inEurope , theMiddle East &Africa , also reflected the challenging environment caused by the COVID-19 pandemic, which negatively impacted the second half of fiscal 2020.
The makeup net sales decrease was impacted by approximately
34
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Table of Contents
Fragrance
Year Ended June 30
($ in millions) 2020 2019
As Reported:
Net sales $ 1,563 $ 1,802
$ Change from prior year (239) (24)
% Change from prior year (13) % (1) %
Non-GAAP Financial Measure(1):
% Change from prior year in constant currency (12) % 1 %
(1)See Reconciliations of Non-GAAP Financial Measures beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported fragrance net sales decreased in fiscal 2020, reflecting lower net sales from certain of our designer fragrances, Estée Lauder andJo Malone London of approximately$188 million , combined. The lower net sales from certain designer fragrances reflected a decline inNorth America , primarily due to the challenging environment as a result of the COVID-19 pandemic, an unfavorable comparison to the prior-year period as a result of theDecember 2019 expiration of our license agreement withTory Burch and higher launch activity in the prior year. The net sales decline from Estée Lauder reflected lower net sales in all geographic regions due to the challenging environment as a result of the COVID-19 pandemic, as well as an unfavorable comparison to the prior-year launch of Beautiful Belle inNorth America . Net sales declined fromJo Malone London due to the fiscal 2020 fourth quarter impact of the COVID-19 pandemic, primarily in our travel retail business as a result of the curtailment of air travel that adversely impacted consumer traffic in most travel retail locations. The fragrance net sales decrease was impacted by approximately$18 million of unfavorable foreign currency translation. Hair Care Year Ended June 30 ($ in millions) 2020 2019 As Reported: Net sales$ 515 $ 584 $ Change from prior year (69) 14 % Change from prior year (12) % 2 % Non-GAAP Financial Measure(1): % Change from prior year in constant currency (11) %
4 %
(1)See Reconciliations of Non-GAAP Financial Measures beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported hair care net sales decreased in fiscal 2020, due to lower net sales from Aveda and Bumble and bumble. The lower net sales from Aveda was primarily driven by a decline in retail traffic and salon and store closures, exacerbated by the impacts of the COVID-19 pandemic. Net sales declined from Bumble and bumble due to the softness inNorth America in the salon and specialty-multi channels, as well as store closures in the second half of fiscal 2020 due to the COVID-19 pandemic. 35 --------------------------------------------------------------------------------
Table of Contents Geographic Regions TheAmericas Year Ended June 30 ($ in millions) 2020 2019 As Reported: Net sales$ 3,794 $ 4,741 $ Change from prior year (947) (274) % Change from prior year (20) % (5) % Non-GAAP Financial Measure(1): % Change from prior year in constant currency (20) % (5) %
(1)See Reconciliations of Non-GAAP Financial Measures beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported net sales in TheAmericas decreased in fiscal 2020, due to lower net sales in all countries, led bythe United States of approximately$803 million , due to the challenging environment caused by the COVID-19 pandemic, including the temporary closing of brick-and-mortar retail stores, travel bans and restrictions, social distancing and quarantines, which significantly impacted the second half of fiscal 2020. The decrease in net sales inthe United States also reflected lower net sales from M·A·C, Clinique and Too Faced due to the decline in prestige makeup generally inNorth America . Also contributing to the decline was an unfavorable comparison to prior-year launch activity from certain of our designer fragrances and Estée Lauder. Despite the overall decline in net sales, online net sales in TheAmericas grew double digits.Europe , theMiddle East &Africa Year Ended June 30 ($ in millions) 2020 2019 As Reported: Net sales$ 6,262 $ 6,452 $ Change from prior year (190) 818 % Change from prior year (3) % 15 % Non-GAAP Financial Measure(1): % Change from prior year in constant currency (2) % 18 %
(1)See Reconciliations of Non-GAAP Financial Measures beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported net sales inEurope , theMiddle East &Africa decreased in fiscal 2020, reflecting lower net sales in virtually all markets, led by theUnited Kingdom and the Western European markets, combined, of approximately$335 million , due to the COVID-19 pandemic and its challenges across the region, including temporary closing of brick-and-mortar retail stores, travel bans and restrictions, social distancing and quarantines. InEurope , theMiddle East &Africa , all of our freestanding stores were closed inApril 2020 , and, despite the gradual door re-openings throughout the quarter, including those of our retailers, retail traffic was significantly reduced. While net sales from brick-and-mortar retail stores were challenged, net sales from our online channels grew double digits, as our beauty advisors shifted to Social Selling. Net sales in theUnited Kingdom decreased due to the challenging environment caused by the COVID-19 pandemic, as well as adverse macroeconomic conditions. FromMarch 2020 tomid-June 2020 , our freestanding stores and those of our retailers were closed due to the COVID-19 Directives discussed above. While gradual door re-openings began inmid-June 2020 , retail traffic remained slow. Despite the challenges in brick-and-mortar retail stores, net sales from our online channels grew strong double digits. 36 -------------------------------------------------------------------------------- Table of Contents Partially offsetting these decreases was an increase in net sales from our travel retail business of approximately$261 million . While challenged in the second half of fiscal 2020, due to the global airport closures and travel bans and restrictions caused by the COVID-19 pandemic, our travel retail business delivered strong results in the first half of fiscal 2020. Net sales in travel retail increased, primarily from Estée Lauder, reflecting the strength of certain of our hero products, such as Advanced Night Repair, and the shift in consumer preferences to skin care products from other product categories, in part, as a result of the COVID-19 pandemic. This was partially offset by decreases in net sales from M·A·C,Tom Ford and Clinique. The net sales decrease inEurope , theMiddle East &Africa included approximately$67 million of unfavorable foreign currency translation.Asia/Pacific Year Ended June 30 ($ in millions) 2020 2019 As Reported: Net sales$ 4,238 $ 3,673 $ Change from prior year 565 631 % Change from prior year 15 % 21 % Non-GAAP Financial Measure(1): % Change from prior year in constant currency 18 % 25 %
(1)See Reconciliations of Non-GAAP Financial Measures beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported net sales inAsia/Pacific increased in fiscal 2020, reflecting higher net sales in mainlandChina andKorea of approximately$822 million , combined. The higher net sales in mainlandChina reflected strong double-digit growth from virtually every brand, led by Estée Lauder, La Mer,Tom Ford and M·A·C; incremental net sales attributable to our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter; continued growth in skin care and makeup; targeted expanded consumer reach; and the success of new product launches, such as Estée Lauder's Advanced Night Repair Intense Reset Concentrate and a new larger size of The Treatment Lotion from La Mer. The net sales increase in mainlandChina benefited virtually all channels, led by online (due in part to successful holiday events and campaigns on Tmall) and department stores. The net sales growth inKorea primarily reflected incremental net sales attributable to our acquisition of Dr. Jart+ in the second quarter, including net sales of Dr. Jart+ products in the travel retail channel. These increases were partially offset by lower net sales inHong Kong of approximately$203 million , due to the pre-COVID-19 protests there that negatively impacted traffic in downtown shops and the airport and also led to intermittent store closures. Our business in the second half of the fiscal year, inHong Kong and elsewhere inAsia/Pacific , was adversely impacted by challenges attributable to the COVID-19 pandemic discussed above. The net sales increase inAsia/Pacific included approximately$89 million of unfavorable foreign currency translation. We strategically time our new product launches by geographic market, which may account for differences in regional sales growth. 37 -------------------------------------------------------------------------------- Table of Contents GROSS MARGIN Gross margin in fiscal 2020 decreased to 75.2% as compared with 77.2% in fiscal 2019. Fiscal 2020 vs. Fiscal 2019 Favorable (Unfavorable) Basis Points Mix of business 20 Obsolescence charges (115) Foreign exchange transactions 15 Manufacturing costs and other (140) Subtotal (220) Charges associated with restructuring and other activities 20 Total (200) The decrease in gross margin for fiscal 2020 in manufacturing costs and other reflected the timing of expense recognition and costs incurred as a result of the COVID-19 pandemic, including the shutdown of certain of our manufacturing facilities and the implementation of social distancing measures, of$83 million , or approximately 60 basis points; the increase in demand in certain Asian markets that caused an increase in freight, transportation and other manufacturing costs; the unfavorable impacts of incremental tariffs; and higher cost of sales related to our fiscal 2020 acquisition of Dr. Jart+, which includes an inventory step-up adjustment of$25 million , or approximately 20 basis points. Also reflected in the decrease in gross margin are obsolescence charges due to the increase in excess and obsolete inventory of$166 million or 115 basis points, of which$33 million , or approximately 20 basis points, was caused by the impact of the COVID-19 pandemic.
OPERATING EXPENSES Operating expenses as a percentage of net sales in fiscal 2020 increased to 70.9% as compared with 61.6% in fiscal 2019.
Fiscal 2020 vs. Fiscal 2019
Favorable (Unfavorable) Basis
Points
General and administrative expenses (40)
Advertising, merchandising, sampling and product development (80)
Selling 50
Shipping (20)
Store operating costs (20)
Stock-based compensation 10
Foreign exchange transactions 30
Subtotal (70)
Charges associated with restructuring and other activities 90
Changes in fair value of contingent consideration (10)
Goodwill, other intangible and long-lived asset impairments (940)
Total (930)
The fiscal 2020 operating expenses as a percent of net sales increased compared
to fiscal 2019 driven by the impact of goodwill, other intangible and long-lived
asset impairments. In addition, advertising and promotional activities increased
to support new product launches, digital spending, social media and targeted
expanded consumer reach, primarily in mainland China . The increase in general
and administrative expenses reflected higher professional service fees,
investments in information systems and to support our sustainability
initiatives, as well as amortization expense relating to the acquired intangible
assets of Dr. Jart+. Partially offsetting these increases was a decrease in
selling expense due to the reduction in employee costs as a result of the
COVID-19 government assistance, and a decrease in general and administrative
expenses due to the decrease in accrued employee incentive compensation as a
result of the COVID-19 impacts on fiscal 2020.
38
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As the impacts from COVID-19 evolved, we faced various uncertainties and
implemented strict cost control measures. They included furloughs and similar
unpaid temporary leaves of absence for many point of sale employees; temporary
salary reductions for senior executives and other management employees; a
temporary elimination of cash retainers for the Board of Directors; and expanded
cost control measures (e.g., advertising and promotion activities, travel,
meetings and consulting), the majority of which began in May 2020 .
OPERATING RESULTS
Year Ended June 30
($ in millions) 2020 2019
As Reported:
Operating income $ 606 $ 2,313
$ Change from prior year (1,707) 258
% Change from prior year (74) % 13 %
Operating Margin 4.2 % 15.6 %
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 and changes in fair value of contingent consideration
(20) % 15 %
(1)See Reconciliations of Non-GAAP Financial Measures beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
The reported operating margin for fiscal 2020 decreased from the prior year driven primarily by the year-over-year impact of goodwill, other intangible and long-lived asset impairments of$1,426 million , or 940 bps and the decrease in gross margin, as previously noted. Partially offsetting these impacts were the acceleration of online net sales growth and disciplined expense management throughout the business from cost containment actions taken in response to COVID-19. The fiscal 2020 goodwill, intangible and long-lived asset impairments and the changes in fair value of contingent consideration impacted the operating results of our product categories and geographic regions as follows: Year ended Year ended June 30, 2020 June 30, 2019Goodwill ,Goodwill , Year-over-year net Changes in fair other intangible Changes in fair other intangible impact value of contingent and long-lived value of contingent and long-lived favorable (In millions) consideration asset impairments Net Impact consideration asset impairments Net Impact (unfavorable) Product Category:Skin Care $ 7 $ (88)$ (81) $ 25 $ -$ 25 $ (106) Makeup - (1,291) (1,291) - (90) (90) (1,201) Fragrance 10 (32) (22) 12 - 12 (34) Hair Care - (14) (14) - - - (14) Other - (1) (1) - - - (1) Total $ 17$ (1,426) $ (1,409) $ 37 $ (90)$ (53) $ (1,356) Region: TheAmericas $ 7$ (1,314) $ (1,307) $ 27 $ (90)$ (63) $ (1,244)Europe , theMiddle East &Africa 10 (104) (94) 10 - 10 (104)Asia/Pacific - (8) (8) - - - (8) Total $ 17$ (1,426) $ (1,409) $ 37 $ (90)$ (53) $ (1,356) 39
-------------------------------------------------------------------------------- Table of Contents Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they result from activities that are deemed a Company-wide initiative to redesign, resize and reorganize select corporate functions and go-to-market structures. Accordingly, the following discussions of Operating income by Product Categories and Geographic Regions exclude the fiscal 2020 and 2019 impact of charges associated with restructuring and other activities of$83 million , or 1% of net sales and$241 million , or 2% of net sales, respectively. Product CategoriesSkin Care Year Ended June 30 ($ in millions) 2020 2019 As Reported: Operating income$ 2,125 $ 1,925 $ Change from prior year 200 411 % Change from prior year 10 % 27 %
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 changes in fair value of contingent consideration
16 % 27 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported skin care operating income increased in fiscal 2020, driven by higher results from Estée Lauder and La Mer, combined, of approximately$514 million . The increases in operating income reflected higher net sales, partially offset by strategic investments in advertising and promotional activities and targeted expanded consumer reach. The increase in skin care operating income also reflected the decrease in accrued employee incentive compensation as a result of the COVID-19 impacts on fiscal 2020, as well as the reduction in selling expense due, in part, to the COVID-19 government assistance programs discussed above. Partially offsetting these increases were lower results from Clinique and GLAMGLOW, combined, of approximately$179 million . The lower results from Clinique reflected the decline in net sales. Operating results from GLAMGLOW decreased primarily due to the impact of the current year goodwill and other intangible asset impairments and the change in fair value of contingent consideration of$83 million , combined. Also reflected in the decrease in reported skin care operating results is the impact of freestanding store long-lived asset impairments relating to COVID-19 of$22 million , as well as the increase in cost of sales due, in part, to the timing of expense recognition and costs incurred as a result of the COVID-19 pandemic. Makeup Year Ended June 30 ($ in millions) 2020 2019 As Reported: Operating income$ (1,438) $ 438 $ Change from prior year (1,876) (111) % Change from prior year (100+)% (20) %
Non-GAAP Financial Measure(1): % Change in operating income from the prior-year period adjusting for the impact of goodwill, other intangible and long-lived asset impairments
(100+)% (4) %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
40
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Table of Contents
Reported makeup operating results decreased in fiscal 2020, driven by lower
results from Too Faced, M·A·C and BECCA, combined, of approximately $1,527
million . The fiscal 2020 operating results from Too Faced and BECCA include $845
million and $191 million of goodwill and other intangible asset impairments,
respectively. The decrease in operating results from these brands also reflects
the decrease in net sales due to the general decline in prestige makeup and
ongoing competitive activity in North America , as well as the challenging
environment as of COVID-19. The lower results from M·A·C were driven by the
decrease in net sales as discussed above. Also reflected in the decrease in
reported makeup operating results is the impact of freestanding store long-lived
asset impairments relating to COVID-19 of $160 million .
Partially offsetting the decrease in operating results was the reduction in
selling expense due, in part, to the COVID-19 government assistance programs
discussed above and the decrease in accrued employee incentive compensation as a
result of the COVID-19 impact on fiscal 2020.
Fragrance
Year Ended June 30
($ in millions) 2020 2019
As Reported:
Operating income $ 17 $ 140
$ Change from prior year (123) (36)
% Change from prior year (88) % (20) %
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
(70) % (17) %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported fragrance operating income decreased in fiscal 2020, driven by lower results fromJo Malone London , certain of our designer fragrances, Editions de Parfums Frédéric Malle and Clinique of approximately$104 million , combined. The lower results fromJo Malone London , certain of our designer fragrances and Clinique were driven by the decreases in net sales. Operating results from Editions de Parfums Frédéric Malle decreased primarily due to the impact of the current year goodwill and other intangible asset impairments and the change in fair value of contingent consideration of$16 million , combined. Also reflected in the decrease in reported fragrance operating results is the impact of freestanding store long-lived asset impairments relating to COVID-19 of$18 million . Partially offsetting the decrease in net sales from certain of our designer fragrances was disciplined expense management. Hair Care Year Ended June 30 ($ in millions) 2020 2019 As Reported: Operating income$ (19) $ 39 $ Change from prior year (58) (25) % Change from prior year (100+)% (39) % Reported hair care operating results decreased in fiscal 2020, reflecting lower results from Aveda and Bumble and bumble driven primarily by the decrease in net sales. Also reflected in the decrease in reported hair care operating results is the impact of freestanding store long-lived asset impairments relating to COVID-19 of$14 million . 41 --------------------------------------------------------------------------------
Table of Contents Geographic Regions TheAmericas Year Ended June 30 ($ in millions) 2020 2019 As Reported: Operating income$ (1,044) $ 672 $ Change from prior year (1,716) (200) % Change from prior year (100+)% (23) %
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 changes in fair value of contingent consideration
(64) % (13) %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported operating results in TheAmericas decreased in fiscal 2020, primarily due to the year-over-year impact of goodwill, other intangible and freestanding store long-lived asset impairments and the change in fair value of contingent consideration of$1,244 million , as well as lower net sales. Partially offsetting the decrease in operating results was disciplined expense management, the decrease in accrued employee incentive compensation as a result of the COVID-19 impact on fiscal 2020 and the reduction in selling expense due, in part, to the COVID-19 government assistance programs as discussed above.
To conform with the current year methodology and presentation, reported
operating income in The
Year Ended June 30
($ in millions) 2020 2019
As Reported:
Operating income $ 997 $ 1,153
$ Change from prior year (156) 288
% Change from prior year (14) % 33 %
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
(5) % 34 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
Reported operating results inEurope , theMiddle East &Africa decreased in fiscal 2020, primarily due to the decrease in net sales, as discussed above, and freestanding store long-lived asset impairments of$104 million . Partially offsetting these decreases was higher results from our travel retail business, reflecting the increase in net sales as discussed above. To conform with the current year methodology and presentation, reported operating income inEurope , theMiddle East &Africa for fiscal 2019 was adjusted to include intercompany royalties to TheAmericas , discussed above. 42 --------------------------------------------------------------------------------
Table of ContentsAsia/Pacific Year Ended June 30 ($ in millions) 2020 2019 As Reported: Operating income$ 736 $ 729 $ Change from prior year 7 154 % Change from prior year 1 % 27 % Reported operating income inAsia/Pacific increased slightly in fiscal 2020, reflecting higher results in mainlandChina of approximately$160 million driven by net sales growth. The net sales increases in mainlandChina were partially offset by an increase in advertising and promotional activities to support digital advertising, social media and targeted expanded consumer reach. The growth in operating income was partially offset by lower results inHong Kong ,Japan andAustralia , combined, of approximately$140 million . The decreases in operating income were driven by lower net sales, partially offset by disciplined expense management. INTEREST AND INVESTMENT INCOME Year Ended June 30 (In millions) 2020 2019 Interest expense$ 161 $ 133 Interest income and investment income, net$ 48 $
58
Interest expense increased in fiscal 2020 primarily due to the issuance of additional long-term debt inNovember 2019 andApril 2020 . Interest income and investment income, net decreased in fiscal 2020, primarily due to lower interest rates. OTHER INCOME, NET 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 still outstanding as ofJune 30, 2020 , and was subsequently received inAugust 2020 . 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. The acquisition of the remaining equity interest also resulted in the recognition of a previously unrealized foreign currency gain, which was reclassified from accumulated OCI. The total gain on our previously held equity method investment is reflected in Other income, net 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, which is also included in Other income, net for the year endedJune 30, 2020 . 43 -------------------------------------------------------------------------------- Table of Contents A summary of the total purchase price and the total gain recognized in Other income, net in the consolidated statements of earnings is as follows: Measurement Period (In millions) December 18, 2019 Adjustments June 30, 2020 Purchase price Purchase price $ 1,268 $ (32) $ 1,236 Fair value of previously held equity method investment 682 (22) 660 Write-off of call option relating to previously held equity method investment 4 - 4 Total purchase price $ 1,954 $ (54) $ 1,900 For the Six Months Ended Measurement Period For the Year Ended December 31, 2019 Adjustments June 30, 2020 Gains recognized in the consolidated statement of earnings Gain on previously held equity method investment $ 549 $ (19) $ 530 Recognition of a previously unrealized foreign currency gain 4 - 4 Total gain on previously held equity method investment 553 (19) 534 Foreign currency gain on cash 23 - 23 Total Other income, net $ 576 $ (19) $ 557
See Item 8. Financial Statements and Supplementary Data - Note 5 - Acquisition of Business for additional information.
The Tax Cuts and Jobs Act (the "TCJA"), which was enacted onDecember 22, 2017 , presented us with opportunities to manage cash and investments more efficiently on a global basis. Accordingly, during fiscal 2019, as part of the assessment of those opportunities, we sold our available-for-sale securities, which liquidated our investment in the foreign subsidiary that owned those securities. As a result, we recorded a realized foreign currency gain on liquidation of$77 million and a gross loss on the sale of available-for-sale securities of$6 million , both of which were reclassified from accumulated OCI and are reflected in Other income, net for the year endedJune 30, 2019 . See Item 8. Financial Statements and Supplementary Data - Note 2 - Summary of Significant Accounting Policies - Currency Translation and Transactions for further information. PROVISION FOR INCOME TAXES The provision for income taxes representsU.S. federal, foreign, state and local income taxes. The effective rate differs from the federal statutory rate primarily due to the effect of state and local income taxes, the tax impact of share-based compensation, the taxation of foreign income and income tax reserve adjustments, which represent changes in our net liability for unrecognized tax benefits including tax settlements and lapses of the applicable statutes of limitations. Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the tax impact of share-based compensation and the interaction of various global tax strategies. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of change. 44 -------------------------------------------------------------------------------- Table of Contents The TCJA included broad and complex changes to theU.S. tax code that impacted our accounting and reporting for income taxes. See Item 8. Financial Statements and Supplementary Data - Note 9 - Income Taxes for further discussion relating to the TCJA. Year Ended June 30 2020 2019 Earnings before income taxes:$ 1,046 $ 2,307 As Reported: Effective rate for income taxes 33.5 % 22.2 % Basis-point change from prior year(1) 1,130 (2,140) Non-GAAP Financial Measure(2): Effective rate for income taxes 23.2 % 21.5 % (1)The basis point changes in our effective tax rate were materially impacted by the decrease in earnings before income taxes from fiscal 2019 to fiscal 2020. (2)Fiscal 2020 and 2019 effective tax rates exclude the net impact on the effective tax rates of charges associated with restructuring and other activities, goodwill and other intangible asset impairments, other income, net and changes in the fair value of contingent consideration. Fiscal 2020 also excludes the impact of long-lived asset impairments. Fiscal 2019 was also adjusted to exclude the finalization of the TCJA provisional charges recorded in fiscal 2018. The effective tax rate for fiscal 2020 increased approximately 1,130 basis points. The increase was primarily attributable to a higher effective tax rate on our foreign operations of approximately 910 basis points, as well as the impact of nondeductible goodwill impairment charges associated with our Too Faced, BECCA and Smashbox reporting units of approximately 740 basis points. Partially offsetting these increases was an increase in excess tax benefit credits related to stock-based compensation arrangements of approximately 480 basis points.
NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC.
Year Ended June 30
($ in millions, except per share data) 2020 2019
As Reported:
Net earnings attributable to The Estée Lauder Companies Inc. $ 684 $ 1,785
$ Change from prior year (1,101) 677
% Change from prior year (62) % 61 %
Diluted net earnings per common share $ 1.86 $ 4.82
% Change from prior year (61) % 63 %
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, the Transition Tax, the remeasurement of
(23) % 18 %
(1)See "Reconciliations of Non-GAAP Financial Measures" beginning on page 46 for
reconciliations between non-GAAP financial measures and the most directly
comparable
45
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Table of Contents
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 with U.S. GAAP. The
following tables present Net sales, Operating income and Diluted net earnings
per common share adjusted to exclude the impact of charges associated with
restructuring and other activities; goodwill and other intangible asset
impairments; long-lived asset impairments relating to COVID-19; other income,
net; the changes in the fair value of contingent consideration; the Transition
Tax; the remeasurement of U.S. net deferred tax assets as of the TCJA enactment
date; the establishment of a net deferred tax liability related to foreign
withholding taxes on certain foreign earnings resulting from the TCJA; and the
effects of foreign currency translation. The tables provide reconciliations
between these non-GAAP financial measures and the most directly comparable U.S.
GAAP measures.
Year Ended June 30 % Change in
($ in millions, except per share % Constant
data) 2020 2019 Variance Change Currency
Net sales, as reported $ 14,294 $ 14,863 $ (569) (4) % (3) %
Returns associated with
restructuring and other activities - 3 (3)
Net sales, as adjusted$ 14,294 $ 14,866 $ (572) (4) % (3) % Operating income, as reported$ 606 $ 2,313 $ (1,707) (74) % (73) % Charges associated with restructuring and other activities 83 241
(158)
Goodwill , other intangible and long-lived asset impairments 1,426 90
1,336
Changes in fair value of contingent consideration (17) (37)
20
Operating income, as adjusted$ 2,098 $ 2,607 $ (509) (20) % (19) % Diluted net earnings per common share, as reported$ 1.86 $ 4.82 $ (2.96) (61) % (60) % Charges associated with restructuring and other activities .19 .51
(.32)
Other income, net (1.20) (.15)
(1.05)
Goodwill , other intangible and long-lived asset impairments 3.31 .23
3.08
Changes in fair value of contingent consideration (.04) (.08)
.04
Transition Tax resulting from the TCJA - (.03)
.03
Remeasurement ofU.S. net deferred tax assets as of the TCJA enactment date - .02
(.02)
Net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA - .02
(.02)
Diluted net earnings per common share, as adjusted$ 4.12 $ 5.34 $ (1.22) (23) % (22) % 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. 46 -------------------------------------------------------------------------------- Table of Contents 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 Impact of % foreign Variance, % Change, in Year ended Year ended currency in constant Change, as constant ($ in millions) June 30, 2020 June 30, 2019 Variance translation currency reported currency By Product Category: Skin Care$ 7,382 $ 6,551 $ 831 $ 77$ 908 13 % 14 % Makeup 4,794 5,860 (1,066) 57 (1,009) (18) (17) Fragrance 1,563 1,802 (239) 18 (221) (13) (12) Hair Care 515 584 (69) 2 (67) (12) (11) Other 40 69 (29) - (29) (42) (42) 14,294 14,866 (572) 154 (418) (4) (3) Returns associated with restructuring and other activities - (3) 3 - 3 Total$ 14,294 $ 14,863 $ (569) $ 154 $ (415) (4) % (3) % By Region: The Americas$ 3,794 $ 4,741 $ (947) $ (2)$ (949) (20) % (20) %Europe , theMiddle East & Africa 6,262 6,452 (190) 67 (123) (3) (2) Asia/Pacific 4,238 3,673 565 89 654 15 18 14,294 14,866 (572) 154 (418) (4) (3) Returns associated with restructuring and other activities - (3) 3 - 3 Total$ 14,294 $ 14,863 $ (569) $ 154 $ (415) (4) % (3) % 47
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Table of Contents
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 and changes in fair value of contingent consideration:
As Reported Add:
Changes in
Goodwill, other
intangible and Add:
long-lived Changes in fair
Year ended Year ended asset value of contingent Variance, as
($ in millions) June 30, 2020 June 30, 2019 Variance impairments consideration adjusted % Change, as reported % Change, as adjusted
By Product Category:
Skin Care $ 2,125 $ 1,925 $ 200 $ 88 $ 18 $ 306 10 % 16 %
Makeup (1,438) 438
(1,876) 1,201 - (675)
(100+) (100+)
Fragrance 17 140 (123) 32 2 (89) (88) (70)
Hair Care (19) 39 (58) 14 - (44) (100+) (100+)
Other 4 12 (8) 1 - (7) (67) (58)
689 2,554 $ (1,865) $ 1,336 $ 20 $ (509) (73) % (20) % Charges associated with restructuring and other activities (83) (241) Total $ 606$ 2,313 By Region: TheAmericas $ (1,044) $ 672$ (1,716) $ 1,224 $ 20 $ (472) (100+)% (64) %Europe , theMiddle East & Africa 997 1,153 (156) 104 - (52) (14) (5) Asia/Pacific 736 729 7 8 - 15 1 2 689 2,554$ (1,865) $ 1,336 $ 20 $ (509) (73) % (20) % Charges associated with restructuring and other activities (83) (241) Total $ 606$ 2,313 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, 2020 , we had cash and cash equivalents of$5,022 million compared with$2,987 million atJune 30, 2019 . In response to the initial global uncertainty attributable to the COVID-19 pandemic, we issued$700 million of Senior Notes inApril 2020 and borrowed the full amount under our$1,500 million revolving credit facility in March andApril 2020 . By the end ofJune 2020 , we had repaid$750 million under the revolving credit facility, and subsequently repaid the remaining$750 million inAugust 2020 . Overall these actions were designed to further enhance our financial flexibility and liquidity. 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. See Overview - COVID-19 Business Update for actions taken by us, in response to the impact of COVID-19 on our business, which helped to mitigate the then expected loss of sales and uncertainties regarding account receivables and to conserve cash. 48 -------------------------------------------------------------------------------- Table of Contents The TCJA, which was enacted during our fiscal 2018, 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. The issuance of guidance subsequent to the enactment of the TCJA has enabled us to access a substantial portion of the cash in offshore jurisdictions associated with our permanently reinvested earnings without significant cost. We do not believe that continuing to reinvest our foreign earnings impairs our ability to meet our domestic debt or working capital obligations. If these reinvested earnings were repatriated intothe United States as dividends, we would be subject to state income taxes and applicable foreign taxes in certain jurisdictions. The effects of inflation have not been significant to our overall operating results in recent years. Generally, we have been able to introduce new products at higher prices, increase prices and implement other operating efficiencies to sufficiently offset cost increases, which have been moderate. Credit Ratings Changes in our credit ratings will likely result in changes in our borrowing costs. Our credit ratings also impact the cost of our revolving credit facility. Downgrades in our credit ratings may reduce our ability to issue commercial paper and/or long-term debt and would likely increase the relative costs of borrowing. A credit rating is not a recommendation to buy, sell, or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization, and should be evaluated independently of any other rating. As ofAugust 20, 2020 , our long-term debt is rated A+ with a negative 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 61% atJune 30, 2020 from 44% atJune 30, 2019 , primarily due to theNovember 2019 issuance of the 2.000% Senior Notes dueDecember 1, 2024 ("2024 Senior Notes"), 2.375% Senior Notes dueDecember 1, 2029 ("2029 Senior Notes") and 3.125% Senior Notes dueDecember 1, 2049 ("2049 Senior Notes"); theApril 2020 issuance of the 2.600% Senior Notes dueApril 15, 2030 ("2030 Senior Notes"); and the$750 million outstanding under our$1,500 million revolving credit facility atJune 30, 2020 . Also contributing to the increase was the decrease in total equity reflecting a decrease in net earnings, partially offset by lower treasury stock purchases. For further information regarding our current and long-term debt and available financing, see Item 8. Financial Statements and Supplementary Data - Note 11 - Debt. Cash Flows Year Ended June 30 (In millions) 2020 2019 Net cash provided by operating activities$ 2,280 $ 2,517 Net cash provided by (used for) investing activities$ (1,698) $ 473 Net cash provided by (used for) financing activities$ 1,461 $ (2,173)
The change in net cash flows from operations primarily reflected lower net sales, partially offset by the cost actions taken in response to COVID-19. The lower net sales also reduced working capital needs.
The change in net cash flows from investing activities primarily reflected cash paid, net of cash acquired, in connection with the fiscal 2020 second quarter acquisition of Have & Be, as well as lower proceeds from the sale of investments due to the prior-year liquidation of our foreign subsidiary that owned our available-for-sale securities. The change in net cash flows from financing activities primarily reflected proceeds from theNovember 2019 andApril 2020 issuance of long-term debt, changes in short-term debt, reflecting current borrowings under our existing revolving credit facility and the issuance of commercial paper, and lower treasury stock purchases, partially offset by the repayment of the 2020 Senior Notes in the current year. 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, 2019 for the fiscal 2019 to fiscal 2018 comparative discussions. 49 -------------------------------------------------------------------------------- Table of Contents 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, 2020 and throughAugust 20, 2020 , see Item 8. Financial Statements and Supplementary Data - Note 17 - Common Stock. As noted in Item 8. Financial Statements and Supplementary Data - Note 17 - Common Stock, we did not declare quarterly cash dividends that would have been paid inJune 2020 . 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 theU.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 theU.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 2020 and 2019, we met or exceeded all contribution requirements under ERISA regulations for theU.S. Qualified Plan. As we continue to monitor the funded status, we may decide to make cash contributions to theU.S. Qualified Plan or our post-retirement medical plan inthe United States during fiscal 2021. 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 2021 2020 2019
Non-qualified domestic noncontributory pension plan benefit payments
$ 23 $ 18 $ 19
International defined benefit pension plan contributions
$ 25 $ 33 Post-retirement plan benefit payments$ 8 $ 8 $ 7 Commitments and Contingencies Certain of our business acquisition agreements include contingent consideration or "earn-out" provisions. These provisions generally require that we pay to the seller or sellers of the business additional amounts based on the performance of the acquired business. Since the size of each payment depends upon performance of the acquired business, we do not expect that such payments will have a material adverse impact on our future results of operations or financial condition. For additional contingencies refer 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). 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). 50 -------------------------------------------------------------------------------- Table of Contents 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 increase (decrease) in the fair value of our portfolio of approximately$(222) million and$48 million as ofJune 30, 2020 and 2019, respectively. This potential change does not consider our underlying foreign currency exposures. In addition, we enter into interest rate derivatives to manage the effects of interest rate movements on our aggregate liability portfolio, including future debt issuances. Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would increase (decrease) by approximately$9 million and$(16) million as ofJune 30, 2020 and 2019, respectively. Our sensitivity analysis represents an estimate of reasonably possible net losses that would be recognized on our portfolio of derivative financial instruments assuming hypothetical movements in future market rates and is not necessarily indicative of actual results, which may or may not occur. It does not represent the maximum possible loss or any expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in our portfolio of derivative financial instruments during the year. We believe, however, that any such loss incurred would be offset by the effects of market rate movements on the respective underlying transactions for which the derivative financial instrument was intended. OFF-BALANCE SHEET ARRANGEMENTS We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations. 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, 2020 and our results of operations for the three fiscal years endedJune 30, 2020 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, income taxes and business combinations. 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.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 2020 and 2019, we elected to perform the qualitative assessment for 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. 51 -------------------------------------------------------------------------------- Table of Contents 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 and Note 7 - Leases. 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 credit 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 of net earnings at that time, while the reduction of a valuation allowance will result in an increase of net earnings at that time. We provide tax reserves forU.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 our Income Taxes accounting policy, see Item 8. Financial Statements and Supplementary Data - Note 2 - Summary of Significant Accounting Policies. Business Combinations We use the acquisition method of accounting for acquired businesses. Under the acquisition method, our consolidated financial statements reflect the operations of an acquired business starting from the closing date of the acquisition. We allocate the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. Any residual purchase price is recorded as goodwill. The determination of fair value, as well as the expected useful lives of certain assets acquired, requires management to make judgements and may involve the use of significant estimates, including assumptions with respect to estimated future cash flows, discount rates and valuation multiples from comparable publicly traded companies, among other things. Management estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. During fiscal 2020, we acquired the remaining 66.66% equity interest in Have & Be. We originally acquired a minority interest in Have & Be inDecember 2015 , and that investment structure included a formula-based call option for the remaining equity interest. The original minority interest was accounted for as an equity method investment. 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, resulting in the recognition of a gain. The acquisition of the remaining equity interest also resulted in the recognition of a previously unrealized foreign currency gain, which was reclassified from accumulated other comprehensive income. The fair value of the previously held equity method investment was determined based upon a valuation of the acquired business, as of the date of acquisition, using an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies. We allocated the total consideration transferred, which included the cash paid at closing and the fair value of our previously held equity method investment, to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair value at the acquisition date. The excess of the total consideration transferred over the fair value of the net tangible and intangible assets acquired was recorded as goodwill. 52 -------------------------------------------------------------------------------- Table of Contents For further discussion of our Business Combinations accounting policy, see Item 8. Financial Statements and Supplementary Data - Note 2 - Summary of Significant Accounting Policies. CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION We and our representatives from time to time make written or oral forward-looking statements, including in this and other filings with theSecurities and Exchange Commission , in our press releases and in our reports to stockholders, which may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may address our expectations regarding sales, earnings or other future financial performance and liquidity, other performance measures, product introductions, entry into new geographic regions, information technology initiatives, new methods of sale, our long-term strategy, restructuring and other charges and resulting cost savings, and future operations or operating results. These statements may contain words like "expect," "will," "will likely result," "would," "believe," "estimate," "planned," "plans," "intends," "may," "should," "could," "anticipate," "estimate," "project," "projected," "forecast," and "forecasted" or similar expressions. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, actual results may differ materially from our expectations. Factors that could cause actual results to differ from expectations include, without limitation: (1)increased competitive activity from companies in the skin care, makeup, fragrance and hair care businesses; (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 the volatility in the global credit and equity markets, natural or man-made disasters, real or perceived epidemics, or energy costs, that could affect consumer purchasing, the willingness or ability of consumers to travel and/or purchase our products while traveling, the financial strength of our 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; 53 -------------------------------------------------------------------------------- Table of Contents (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; (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 theSecurities and Exchange Commission , including this Annual Report on Form 10-K for the fiscal year endedJune 30, 2020 . 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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