UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~FORM 10-Q~~

(Mark One)-

x~~Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934~~


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

		For the quarterly period ended December 31, 2019

		or

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

		For the transition period from to

		Commission file number 1-14064

~~For the quarterly period ended December 31, 2018~~

o~~Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934~~

~~For the transition period from to~~

~~Commission file number: 1-14064~~

The Estée Lauder Companies ~~Inc.~~Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		11-2408943 (I.R.S. Employer Identification No.)

767 Fifth Avenue, New York, New York (Address of principal executive offices)		10153 (Zip Code)

~~212-572-4200~~212-572-4200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $.01 par value	EL	New York Stock Exchange

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

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x⌧ No o◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x⌧ No o◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x⌧	Accelerated filer o☐
Non-accelerated filer o☐	Smaller reporting company o☐
	Emerging growth company o☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x⌧

At January ~~29, 2019, 218,255,377~~30, 2020, 222,319,332 shares of the registrant’s Class A Common Stock, $.01 par value, and ~~142,907,134~~137,220,914 shares of the registrant’s Class B Common Stock, $.01 par value, were outstanding.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

INDEX

~~INDEX~~


		Page

Part I. Financial Information

Item 1. Financial Statements (Unaudited)

	Consolidated Statements of Earnings —
Three and Six Months Ended December 31, ~~2018~~2019 and ~~2017~~2018	2

	Consolidated Statements of Comprehensive Income (Loss) —
Three and Six Months Ended December 31, ~~2018~~2019 and ~~2017~~2018	3

	Consolidated Balance Sheets —
December 31, ~~2018~~2019 and June 30, ~~2018~~2019 (Audited)	4

	Consolidated Statements of Cash Flows —
Six Months Ended December 31, ~~2018~~2019 and ~~2017~~2018	5

	Notes to Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		3533

Item 3. Quantitative and Qualitative Disclosures About Market Risk		5855

Item 4. Controls and Procedures		5855

Part II. Other Information

Item 1. Legal Proceedings		5956

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		5956

Item 6. Exhibits		5957

Signatures		6058

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

Three Months Ended
December 31

Six Months Ended
December 31

(In millions, except per share data)

2018

2017

2018

2017

Net sales

$
4,005

$
3,744

$
7,529

$
7,018

Cost of sales

910

753

1,733

1,464

Gross profit

3,095

2,991

5,796

5,554

Operating expenses

Selling, general and administrative

2,257

2,214

4,265

4,174

Restructuring and other charges

29

67

70

101

Goodwill impairment

20

—

20

—

Impairment of other intangible assets

18

—

18

—

Total operating expenses

2,324

2,281

4,373

4,275

Operating income

771

710

1,423

1,279

Interest expense

35

32

69

63

Interest income and investment income, net

12

12

27

24

Other components of net periodic benefit cost

—

—

—

1

Earnings before income taxes

748

690

1,381

1,239

Provision for income taxes

171

565

302

684

Net earnings

577

125

1,079

555

Net earnings attributable to noncontrolling interests

(4
)
(2
)
(6
)
(5
)
Net earnings attributable to The Estée Lauder Companies Inc.

$
573

$
123

$
1,073

$
550

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

Basic

$
1.58

$
.33

$
2.94

$
1.49

Diluted

$
1.55

$
.33

$
2.88

$
1.46

Weighted-average common shares outstanding

Basic

363.3

368.7

365.1

368.5

Diluted

369.9

376.1

372.1

375.7


	Three Months Ended				Six Months Ended
	December 31				December 31
(In millions, except per share data)	2019		2018		2019		2018

Net sales	$	4,624	$	4,005	$	8,519	$	7,529
Cost of sales		1,041		910		1,949		1,733

Gross profit		3,583		3,095		6,570		5,796

Operating expenses
Selling, general and administrative		2,538		2,257		4,723		4,265
Restructuring and other charges		7		29		30		70
Goodwill impairment		511		20		511		20
Impairment of other intangible assets		266		18		266		18
Total operating expenses		3,322		2,324		5,530		4,373

Operating income		261		771		1,040		1,423

Interest expense		38		35		70		69
Interest income and investment income, net		13		12		27		27
Other components of net periodic benefit cost		1		—		2		—
Other income		576		—		576		—
Earnings before income taxes		811		748		1,571		1,381

Provision for income taxes		250		171		412		302
Net earnings		561		577		1,159		1,079

Net earnings attributable to noncontrolling interests		(4)		(4)		(7)		(6)
Net earnings attributable to The Estée Lauder Companies Inc.	$	557	$	573	$	1,152	$	1,073

Net earnings attributable to The Estée Lauder Companies Inc. per common share
Basic	$	1.55	$	1.58	$	3.19	$	2.94
Diluted	$	1.52	$	1.55	$	3.13	$	2.88

Weighted-average common shares outstanding
Basic		360.2		363.3		360.8		365.1
Diluted		366.7		369.9		367.7		372.1

See notes to consolidated financial statements.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

Three Months Ended
December 31

Six Months Ended
December 31

(In millions)

2018

2017

2018

2017

Net earnings

$
577

$
125

$
1,079

$
555

Other comprehensive income (loss):

Net unrealized investment gain (loss)

3

(6
)
5

(7
)
Net derivative instrument gain (loss)

9

4

9

(5
)
Amounts included in net periodic benefit cost

4

5

7

10

Translation adjustments

(38
)
28

(15
)
82

Provision for deferred income taxes on components of other comprehensive income

—

(3
)
(3
)
(2
)
Total other comprehensive income (loss)

(22
)
28

3

78

Comprehensive income

555

153

1,082

633

Comprehensive income attributable to noncontrolling interests:

Net earnings

(4
)
(2
)
(6
)
(5
)
Translation adjustments

1

—

1

(1
)

(3
)
(2
)
(5
)
(6
)
Comprehensive income attributable to The Estée Lauder Companies Inc.

$
552

$
151

$
1,077

$
627


	Three Months Ended				Six Months Ended
	December 31				December 31
(In millions)	2019		2018		2019		2018

Net earnings	$	561	$	577	$	1,159	$	1,079

Other comprehensive income (loss):
Net unrealized investment gain		—		3		—		5
Net cash flow hedge gain (loss)		(22)		9		(24)		9
Amounts included in net periodic benefit cost		5		4		10		7
Translation adjustments		64		(38)		(6)		(15)
Benefit (provision) for deferred income taxes on components of other comprehensive income		10		—		13		(3)
Total other comprehensive income (loss)		57		(22)		(7)		3
Comprehensive income		618		555		1,152		1,082

Comprehensive income attributable to noncontrolling interests:
Net earnings		(4)		(4)		(7)		(6)
Translation adjustments		1		1		1		1
		(3)		(3)		(6)		(5)
Comprehensive income attributable to The Estée Lauder Companies Inc.	$	615	$	552	$	1,146	$	1,077

See notes to consolidated financial statements.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED BALANCE SHEETS


	December 31		June 30
(In millions, except share data)	2019		2019
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	3,596	$	2,987
Accounts receivable, net		2,225		1,831
Inventory and promotional merchandise		2,058		2,006
Prepaid expenses and other current assets		469		388
Total current assets		8,348		7,212

Property, plant and equipment, net		2,086		2,068

Other assets
Operating lease right-of-use assets		2,517		—
Goodwill		1,920		1,868
Other intangible assets, net		2,342		1,203
Other assets		724		805
Total other assets		7,503		3,876
Total assets	$	17,937	$	13,156

LIABILITIES AND EQUITY
Current liabilities
Current debt	$	522	$	516
Accounts payable		1,137		1,490
Operating lease liabilities		369		—
Other accrued liabilities		2,925		2,599
Total current liabilities		4,953		4,605

Noncurrent liabilities
Long-term debt		4,662		2,896
Long-term operating lease liabilities		2,318		—
Other noncurrent liabilities		1,403		1,244
Total noncurrent liabilities		8,383		4,140

Contingencies

Equity
Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at December 31, 2019 and June 30, 2019; shares issued: 448,452,843 at December 31, 2019 and 443,685,124 at June 30, 2019; Class B shares authorized: 304,000,000 at December 31, 2019 and June 30, 2019; shares issued and outstanding: 137,220,914 at December 31, 2019 and 139,537,814 at June 30, 2019		6		6
Paid-in capital		4,615		4,403
Retained earnings		10,775		9,984
Accumulated other comprehensive loss		(569)		(563)
		14,827		13,830
Less: Treasury stock, at cost; 226,278,070 Class A shares at December 31, 2019 and 222,120,630 Class A shares at June 30, 2019		(10,253)		(9,444)
Total stockholders’ equity – The Estée Lauder Companies Inc.		4,574		4,386
Noncontrolling interests		27		25
Total equity		4,601		4,411
Total liabilities and equity	$	17,937	$	13,156

December 31

June 30

(In millions, except share data)

2018

2018

(Unaudited)

ASSETS

Current assets

Cash and cash equivalents

$
1,876

$
2,181

Short-term investments

525

534

Accounts receivable, net

2,000

1,487

Inventory and promotional merchandise, net

1,651

1,618

Prepaid expenses and other current assets

388

348

Total current assets

6,440

6,168

Property, plant and equipment, net

1,859

1,823

Other assets

Long-term investments

600

843

Goodwill

1,911

1,926

Other intangible assets, net

1,233

1,276

Other assets

633

531

Total other assets

4,377

4,576

Total assets

$
12,676

$
12,567

LIABILITIES AND EQUITY

Current liabilities

Current debt

$
18

$
183

Accounts payable

995

1,182

Other accrued liabilities

2,763

1,945

Total current liabilities

3,776

3,310

Noncurrent liabilities

Long-term debt

3,373

3,361

Other noncurrent liabilities

1,194

1,186

Total noncurrent liabilities

4,567

4,547

Contingencies

Equity

Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at December 31, 2018 and June 30, 2018; shares issued: 438,325,994 at December 31, 2018 and 435,413,976 at June 30, 2018; Class B shares authorized: 304,000,000 at December 31, 2018 and June 30, 2018; shares issued and outstanding: 142,907,134 at December 31, 2018 and 143,051,679 at June 30, 2018

6

6

Paid-in capital

4,162

3,972

Retained earnings

9,586

9,040

Accumulated other comprehensive loss

(430
)
(434
)

13,324

12,584

Less: Treasury stock, at cost; 219,373,382 Class A shares at December 31, 2018 and 211,320,208 Class A shares at June 30, 2018

(9,018
)
(7,896
)
Total stockholders’ equity — The Estée Lauder Companies Inc.

4,306

4,688

Noncontrolling interests

27

22

Total equity

4,333

4,710

Total liabilities and equity

$
12,676

$
12,567

See notes to consolidated financial statements.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended
December 31

(In millions)

2018

2017

Cash flows from operating activities

Net earnings

$
1,079

$
555

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

Depreciation and amortization

269

256

Deferred income taxes

(46
)
106

Non-cash stock-based compensation

131

132

Net loss on disposal of property, plant and equipment

5

7

Non-cash restructuring and other charges

—

1

Pension and post-retirement benefit expense

35

35

Pension and post-retirement benefit contributions

(12
)
(14
)
Goodwill and other intangible assets impairments

38

—

Changes in fair value of contingent consideration

(9
)
3

Other non-cash items

(13
)
(9
)
Changes in operating assets and liabilities:

Increase in accounts receivable, net

(343
)
(281
)
Decrease (increase) in inventory and promotional merchandise, net

(21
)
66

Decrease (increase) in other assets, net

(53
)
1

Decrease in accounts payable

(174
)
(111
)
Increase in other accrued and noncurrent liabilities

387

692

Net cash flows provided by operating activities

1,273

1,439

Cash flows from investing activities

Capital expenditures

(292
)
(263
)
Proceeds from the disposition of investments

271

609

Purchases of investments

(14
)
(479
)
Net cash flows used for investing activities

(35
)
(133
)

Cash flows from financing activities

Proceeds (repayments) of current debt, net

(169
)
222

Repayments and redemptions of long-term debt

—

(1
)
Net proceeds from stock-based compensation transactions

59

83

Payments to acquire treasury stock

(1,126
)
(398
)
Dividends paid to stockholders

(297
)
(267
)
Payments to noncontrolling interest holders for dividends

(3
)
(1
)
Net cash flows used for financing activities

(1,536
)
(362
)

Effect of exchange rate changes on Cash and cash equivalents

(7
)
25

Net increase (decrease) in Cash and cash equivalents

(305
)
969

Cash and cash equivalents at beginning of period

2,181

1,136

Cash and cash equivalents at end of period

$
1,876

$
2,105


	Six Months Ended
	December 31
(In millions)	2019		2018

Cash flows from operating activities
Net earnings	$	1,159	$	1,079
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization		287		269
Deferred income taxes		7		(46)
Non-cash stock-based compensation		139		131
Net loss on disposal of property, plant and equipment		5		5
Pension and post-retirement benefit expense		41		35
Pension and post-retirement benefit contributions		(33)		(12)
Goodwill and other intangible asset impairments		777		38
Changes in fair value of contingent consideration		(7)		(9)
Gain on previously held equity method investment		(553)		—
Other non-cash items		(10)		(13)
Changes in operating assets and liabilities:
Increase in accounts receivable, net		(347)		(343)
Decrease (increase) in inventory and promotional merchandise		31		(21)
Increase in other assets, net		(120)		(53)
Decrease in accounts payable		(375)		(174)
Increase in other accrued and noncurrent liabilities		252		387
Increase in operating lease assets and liabilities, net		2		—
Net cash flows provided by operating activities		1,255		1,273

Cash flows from investing activities
Capital expenditures		(291)		(292)
Payments for acquired businesses, net of cash acquired		(1,040)		—
Proceeds from the disposition of investments		—		271
Purchases of investments		(5)		(14)
Settlement of net investment hedges		(14)		—
Net cash flows used for investing activities		(1,350)		(35)

Cash flows from financing activities
Proceeds (repayments) of current debt, net		8		(169)
Proceeds from issuance of long-term debt, net		1,783		—
Debt issuance costs		(14)		—
Repayments and redemptions of long-term debt		(8)		—
Net proceeds from stock-based compensation transactions		71		59
Payments to acquire treasury stock		(813)		(1,126)
Payments of contingent consideration		(3)		—
Dividends paid to stockholders		(330)		(297)
Payments to noncontrolling interest holders for dividends		(7)		(3)
Net cash flows provided by (used for) financing activities		687		(1,536)

Effect of exchange rate changes on Cash and cash equivalents		17		(7)
Net increase (decrease) in Cash and cash equivalents		609		(305)
Cash and cash equivalents at beginning of period		2,987		2,181
Cash and cash equivalents at end of period	$	3,596	$	1,876

See notes to consolidated financial statements.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 —– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of The Estée Lauder Companies Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated.

The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2018.~~2019.

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

Management Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses reported in those financial statements. Descriptions of the Company’s significant accounting policies are discussed in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2018.~~2019. Management evaluates the related estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

Currency Translation and Transactions

All assets and liabilities of foreign subsidiaries and affiliates are translated at period-end rates of exchange, while revenue and expenses are translated at weighted-average rates of exchange for the period. Unrealized translation gains (losses), net of tax, reported as cumulative translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc. were ~~$(34)~~$75 million and ~~$30~~$(34) million, net of tax, during the three months ended December 31, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$(13)~~$3 million and ~~$84~~$(13) million, net of tax, during the six months ended December 31, ~~2018~~2019 and ~~2017,~~2018, respectively. For the Company’s subsidiaries operating in highly inflationary economies, the U.S. dollar is the functional currency. Remeasurement adjustments in financial statements in a highly inflationary economy and other transactional gains and losses are reflected in earnings. These subsidiaries are not material to the Company’s consolidated financial statements or liquidity.

The Company enters into foreign currency forward contracts and may enter into option contracts to hedge foreign currency transactions for periods consistent with its identified exposures. ~~Accordingly,~~Beginning in the first quarter of fiscal 2020, the Company entered into foreign currency forward contracts to hedge a portion of its net investment in certain foreign operations, which are designated as net investment hedges. See Note 7 - Derivative Financial Instruments for further discussion. The Company categorizes these instruments as entered into for purposes other than trading.

The accompanying consolidated statements of earnings include net exchange ~~losses~~gains (losses) on foreign currency transactions of $7$27 million and ~~$17~~$(7) million during the three months ended December 31, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$21~~$24 million and ~~$35~~$(21) million during the six months ended December 31, ~~2018~~2019 and ~~2017,~~2018, respectively.

Concentration of Credit Risk

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

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventory and Promotional Merchandise

Inventory and promotional merchandise ~~net~~ consists of:

	December 31		June 30

					December 31		June 30
(In millions)	2018		2018		2019		2019
Raw materials	$	438	$	432	$	519	$	541
Work in process	191		222			237		268
Finished goods	840		798			1,101		981
Promotional merchandise	182		166			201		216
	$	1,651	$	1,618
					$	2,058	$	2,006

Property, Plant and Equipment

	December 31			June 30

							December 31		June 30
(In millions)	2018			2018			2019		2019
Assets (Useful Life)
Land	$	29		$	30		$	29	$	29
Buildings and improvements (10 to 40 years)	269			237				367		337
Machinery and equipment (3 to 10 years)	748			719				836		811
Computer hardware and software (4 to 10 years)	1,245			1,193				1,308		1,264
Furniture and fixtures (5 to 10 years)	121			104				117		116
Leasehold improvements	2,217			2,152				2,385		2,274
	4,629			4,435
								5,042		4,831
Less accumulated depreciation and amortization	(2,770		)	(2,612		)		(2,956)		(2,763)
	$	1,859		$	1,823
							$	2,086	$	2,068

The cost of assets related to projects in progress of ~~$346~~$503 million and ~~$300~~$474 million as of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, respectively, is included in their respective asset categories above. Depreciation and amortization of property, plant and equipment was ~~$121~~$127 million and ~~$114~~$121 million during the three months ended December 31, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$237~~$252 million and ~~$226~~$237 million during the six months ended December 31, ~~2018~~2019 and ~~2017,~~2018, respectively. Depreciation and amortization related to the Company’s manufacturing process is included in Cost of sales, and all other depreciation and amortization is included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings.

Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TCJA includes broad and complex changes to the U.S. tax code that impacted the Company’s accounting and reporting for income taxes. The impacts under the TCJA in the prior fiscal year primarily consisted of the following:

· ~~A reduction in the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018, which resulted in a fiscal 2018 U.S. blended statutory income tax rate for the Company of 28.1%.~~

· ~~A one-time mandatory deemed repatriation tax on unremitted foreign earnings (the “Transition Tax”), which the Company elected to pay over an eight-year period.~~

· ~~A remeasurement of U.S. net deferred tax assets.~~

· ~~The recognition of foreign withholding taxes in connection with the reversal of the Company’s indefinite reinvestment assertion related to certain foreign earnings.~~

Staff Accounting Bulletin No. 118 (“SAB 118”) established a one-year measurement period (effective December 22, 2017), whereby provisional amounts recorded for effects of the changes from the TCJA could be subject to adjustment. The one-year measurement period expired on December 22, 2018 and, therefore, the accounting to record the effects of the changes from the TCJA was required to be completed during the three months ended December 31, 2018.

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~For the year ended June 30, 2018, the Company recorded the following provisional charges related to the TCJA:~~

· ~~$351 million associated with the Transition Tax.~~

· ~~$53 million in connection with the remeasurement of U.S. net deferred tax assets resulting from the statutory tax rate reduction.~~

· ~~$46 million related to foreign withholding taxes associated with the reversal of its indefinite reinvestment assertion related to certain foreign earnings.~~

During the three and six months ended December 31, 2018, the Company recorded a credit of $2 million and $12 million, respectively, to adjust its fiscal 2018 provisional charge associated with the Transition Tax. These credits reflect certain technical interpretations related to the Transition Tax computation. The final cumulative charge related to this matter is $339 million. The charges related to the Transition Tax are primarily included in Other noncurrent liabilities in the accompanying consolidated balance sheet as of December 31, 2018.

During the three months ended December 31, 2018, the Company recorded an increase of $8 million to its provisional charge recorded in fiscal 2018 associated with the remeasurement of its net deferred tax assets resulting from the reduction in the U.S. corporate income tax rate. This adjustment was due to the revision of certain temporary differences. The final cumulative charge related to this matter is $61 million.

In addition, the Company recorded a charge of $9 million for the three months ended September 30, 2018 related to foreign withholding taxes recorded in fiscal 2018 in connection with the reversal of its indefinite reinvestment assertion related to certain foreign earnings. This charge reflected the Company’s interpretation of recently issued guidance from the U.S. government, and the accounting for this item pursuant to SAB 118 was considered complete as of September 30, 2018. The final cumulative charge related to this matter is $55 million.

Although the accounting related to the income tax effects of the TCJA is complete pursuant to SAB 118, certain technical aspects of the TCJA remain subject to varying degrees of uncertainty as additional technical guidance and clarification from the U.S. government is expected to be issued over an extended period. Receipt of additional guidance and clarification from the U.S. government may result in material changes to the provision for income taxes. To the extent applicable, the Company would recognize such adjustments in the provision for income taxes in the period that additional guidance and clarification is received.

Provisions under the TCJA that became effective for the Company in the current fiscal year include a further reduction in the U.S. statutory rate to 21%, a new minimum tax on global intangible low-taxed income (“GILTI”), a base erosion anti-abuse tax, a foreign derived intangible income deduction and changes to IRC Section 162(m) related to the deductibility of executive compensation.

~~For more information about the TCJA and the related impact on the Company, see~~ ~~Note 8 — Income Taxes~~ ~~in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018.~~

The effective rate for income taxes was ~~22.9%~~30.8% and ~~81.9%~~22.9% for the three months ended December 31, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~21.9%~~26.2% and ~~55.2%~~21.9% for the six months ended December 31, ~~2018~~2019 and ~~2017,~~2018, respectively. The ~~decrease~~increase in the effective tax rate in both periods was primarily attributable to the provisional charges related to the TCJA that were recorded in the three months ended December 31, 2017. Also contributing to the lower effective tax rate was a higher benefit related to share-based compensation awards, the impact of nondeductible goodwill impairment charges associated with the ~~lower U.S. statutory tax rate~~Company's Too Faced, BECCA and Smashbox reporting units and to a ~~lower~~higher effective tax rate on ~~our~~the Company's foreign ~~operations due to a favorable geographic mix of earnings, partially offset by the impact of GILTI.~~operations.

As of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled ~~$68 million and $60 million, respectively.~~$67 million. The total amount of unrecognized tax benefits at December 31, ~~2018~~2019 that, if recognized, would affect the effective tax rate was ~~$47~~$50 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three and six months ended December 31, ~~2018~~2019 in the accompanying consolidated statements of earnings was $1 million and $3$2 million, respectively. ~~The~~At December 31, 2019 and June 30, 2019, the total gross accrued interest and penalties in the accompanying consolidated balance sheets ~~at December 31, 2018 and June 30, 2018~~ was $12 ~~million and $9 million, respectively.~~million. On the basis of the information available as of December 31, ~~2018,~~2019, the Company does not expect significant changes to the total amount of unrecognized tax benefits within the next twelve months.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Accrued Liabilities

Other accrued liabilities consist of the following:

	December 31		June 30

					December 31		June 30
(In millions)	2018		2018		2019		2019
Advertising, merchandising and sampling	$	417	$	348	$	416	$	352
Employee compensation	416		579			437		574
Deferred revenue	425		33			378		314
Sales return accrual	197		—
Payroll and other taxes	293		190			325		221
Accrued income taxes	245		90
Accrued general and administrative expenses						256		195
Other	770		705			1,113		943
	$	2,763	$	1,945
					$	2,925	$	2,599

Recently Adopted Accounting Standards

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

In ~~October 2018,~~February 2016, the ~~Company replaced its undrawn $1.5 billion senior unsecured revolving credit facility~~Financial Accounting Standards Board (“FASB”) issued authoritative guidance that ~~was set~~requires lessees to ~~expire in October 2021 with a new $1.5 billion senior unsecured revolving credit facility (the “New Facility”). The New Facility expires~~account for most leases on ~~October 26, 2023 unless extended for up to two additional years in accordance~~their balance sheets with the ~~terms set forth in the agreement. Up~~liability being equal to the ~~equivalent of $500 million~~present value of the ~~New Facility~~lease payments. The right-of-use asset is available for multi-currency loans. Interest rates on borrowings under the New Facility will be based on prevailing market interest rates in accordance with the agreement. The costs incurred to establish the New Facility were not material. The New Facility has an annual fee of approximately $1 million, payable quarterly, based on the ~~Company’s current credit ratings. The New Facility contains~~lease liability adjusted for certain costs such as initial direct costs, prepaid lease payments and lease incentives received. Lease expense is recognized similar to previous accounting guidance with operating leases resulting in a ~~cross-default provision whereby~~straight-line expense, and finance leases resulting in a ~~failure~~front-loaded expense similar to ~~pay other material financial obligations in excess of $175 million (after grace periods and absent a waiver from~~ the ~~lenders) would result in an event of default and~~previous accounting for capital leases.

In July 2018, the ~~acceleration~~FASB amended this guidance to clarify certain narrow aspects of the ~~maturity of any outstanding debt under this facility.~~

~~Recently Adopted Accounting Standards~~

~~Hedge Accounting~~

~~In August 2017, the FASB issued authoritative guidance to simplify hedge accounting. The guidance includes provisions that:~~

· ~~enable entities to better portray their risk management activities within the financial statements;~~

· ~~expand an entity’s ability to hedge nonfinancial~~new lease accounting standard that may have been incorrectly or inconsistently applied, and ~~financial risk components;~~

· ~~reduce complexity~~did not add new guidance. Also, in ~~fair value hedges of interest rate risk;~~

· ~~eliminate the requirement to separately measure and disclose hedge ineffectiveness;~~

· ~~require the entire change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item;~~

· ~~ease certain documentation and assessment requirements;~~

· ~~modify the accounting for components excluded from the assessment of hedge effectiveness; and~~

· ~~require revised tabular footnote disclosure.~~

The guidance also provides transition relief to make it easier for entities to apply certain amendments to existing hedges (including fair value hedges) where the hedge documentation is required to be modified.

~~Effective for the Company~~ — ~~Fiscal 2020 first quarter, with early adoption permitted in any interim period. The guidance must be applied:~~

· ~~using the modified retrospective approach for cash flow and net investment hedge relationships that exist on the date of adoption; and~~

· ~~prospectively for the presentation and disclosure requirements.~~

~~Impact on consolidated financial statements~~ — The Company has early adopted this guidance effective as of its fiscal 2019 first quarter, and no cumulative adjustment to retained earnings was required. Upon adoption, all derivative gains and losses will be recognized in the same income statement line as the hedged items which, for all foreign currency cash flow hedges, is in Net sales. There is no change to the interest expense classification of gains and losses from interest rate swap fair value hedges. The amended presentation and disclosure requirements are being applied prospectively. See ~~Note 5 — Derivative Financial Instruments~~ ~~for further information~~.

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~Pension-related Costs~~

~~In March 2017,~~July 2018, the FASB issued authoritative guidance that ~~amends how~~allows companies ~~present net periodic benefit cost~~to elect to adopt the new standard using a modified retrospective transition approach with a cumulative-effect adjustment to retained earnings in the ~~income statement and balance sheet relating to defined benefit pension and/or other postretirement benefit plans. Within the income statement,~~period of adoption. Companies that elect the new ~~guidance requires companies~~adoption method were not required to ~~report~~restate the ~~service cost component within operating expenses and report~~prior comparative periods in the other components of net periodic benefit cost below operating income. In addition, within the balance sheet, the guidance changes the components of the pension cost eligible for capitalization to the service cost component only (e.g., as a cost of internally manufactured inventory or a self-constructed asset).financial statements.

Effective for the Company — ~~Fiscal 2019 first quarter. The guidance must be applied:~~

· ~~retrospectively as it pertains to the income statement classification of the components of net periodic benefit cost; and~~

· ~~prospectively as it pertains to future capitalization of service costs.~~

~~Impact on consolidated financial statements~~— The Company adopted this guidance when it became effective, and although certain components of pension expense are being reclassified out of operating income, this did not have a material impact on reported operating income. The Company elected the practical expedient which permits the use of amounts previously disclosed in its pension and post-retirement plan footnote as the basis for estimating the amounts necessary to retrospectively restate the prior-year period consolidated statements of earnings.

~~Revenue from Contracts with Customers~~

In May 2014, the FASB issued authoritative guidance, Accounting Standards Codification Topic 606 — Revenue from Contracts with Customers (“ASC 606”), that defines how companies should report revenues from contracts with customers. The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It provides companies with a single comprehensive five-step principles-based model to use in accounting for revenue and supersedes prior revenue recognition requirements, including most industry-specific and transaction-specific revenue guidance.

In March 2016, the FASB issued authoritative guidance that amended the principal versus agent guidance in its new revenue recognition standard. These amendments do not change the key aspects of the principal versus agent guidance, including the definition that an entity is a principal if it controls the good or service prior to it being transferred to a customer, but the amendments clarify the implementation guidance related to the considerations that must be made during the contract evaluation process.

In April 2016, the FASB issued authoritative guidance that amended the new standard to clarify the guidance on identifying performance obligations and accounting for licenses of intellectual property.

In May 2016, the FASB issued authoritative guidance that clarified certain terms, guidance and disclosure requirements during the transition period related to completed contracts and contract modifications. In addition, the FASB provided clarification on the concept of collectability, the calculation of the fair value of noncash consideration and the presentation of sales and other similar taxes.

In May 2016, the FASB issued authoritative guidance to reflect the Securities and Exchange Commission Staff’s rescission of its prior comments that covered, among other things, accounting for shipping and handling costs and accounting for consideration given by a vendor to a customer.

In December 2016, the FASB issued authoritative guidance that amends various aspects of the new standard to clarify certain terms, guidance and disclosure requirements. In particular, the guidance addresses disclosure requirements for remaining performance obligations, impairment testing for contract costs and accrual of advertising costs, as well as clarifies several examples.

~~Effective for the Company —~~ – Fiscal ~~2019~~2020 first quarter. An entity is permitted to apply the foregoing guidance ~~retrospectively to all prior periods presented,~~using either of the modified retrospective transition approaches described in the standard, with certain practical ~~expedients, or apply the requirements in the year of adoption, through a cumulative adjustment.~~expedients.

Impact on consolidated financial statements — -On July 1, ~~2018,~~2019, the Company adopted ASC ~~606,~~842, seeNote ~~7 — Revenue Recognition~~ 4 - Leasesfor further discussion.

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~Goodwill~~

In January 2017, the FASB issued authoritative guidance that simplifies the subsequent measurement of goodwill by eliminating the second step from the quantitative goodwill impairment test. The single quantitative step test requires companies to compare 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. The Company will continue to have the option of first performing a qualitative assessment to determine whether it is necessary to perform the quantitative goodwill impairment test.

~~Effective for the Company —~~ ~~Fiscal 2021 first quarter, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.~~

~~Impact on consolidated financial statements~~— The Company has early adopted this guidance effective as of its fiscal 2019 second quarter and applied the new guidance in its quantitative goodwill impairment test related to the Smashbox reporting unit. See ~~Note 3 — Goodwill and Other Intangible Assets~~ ~~for further information~~.

Recently Issued Accounting Standards

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

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

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

Effective for the Company — - Fiscal 2021 first quarter.

Impact on consolidated financial statements — – The Company is currently evaluating the impact of applying this guidance on its financial instruments, such as accounts ~~receivable and short- and long-term investments.~~

~~Leases~~

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

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

~~Effective for the Company —~~ ~~Fiscal 2020 first quarter, with early adoption permitted using either of the modified retrospective transition approaches described in the standard, with certain practical expedients.~~

~~Impact on consolidated financial statements —~~ The Company currently has an implementation team in place that is performing a comprehensive evaluation of the impact of the adoption of this guidance, which includes assessing the Company’s lease portfolio, implementing a new system to meet reporting requirements, and assessing the impact to business processes and internal controls over financial reporting and the related disclosure requirements.receivable. While the Company’s evaluation is ongoing, ~~it believes~~ the adoption of this standard ~~will~~is not expected to have a ~~significant~~material impact on its consolidated ~~balance sheets. As disclosed in~~ ~~Note 14 — Commitments and Contingencies~~ ~~in the notes to consolidated~~ financial ~~statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018, the Company had $3,320 million in future minimum lease commitments as~~statements.

Table of June 30, 2018. Upon adoption, the Company’s lease liability will generally be based on the present value of such payments and the related right-of-use asset will generally be based on the lease liability, adjusted for initial direct costs, prepaid lease payments and lease incentives received. The Company plans to adopt the new standard when it becomes effective in the fiscal 2020 first quarter using the modified retrospective transition approach for leases that exist in the period of adoption and will not restate the prior comparative periods.Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

Effective for the Company—– Fiscal 2021 first quarter, with early adoption permitted in any interim period. This guidance can be adopted ~~either:~~

· ~~retrospectively;~~either retrospectively, or

· prospectively to all implementation costs incurred after the date of adoption.

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

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

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

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

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

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

NOTE 2 ~~— INVESTMENTS~~–ACQUISITION OF BUSINESS

~~Beginning in the first quarter of fiscal~~On December 18, 2019, the Company ~~accounts~~acquired the remaining 66.66% equity interest in Have&Be Co. Ltd. (“Have & Be”), the global skin care company behind Dr. Jart+ and men’s grooming brand Do The Right Thing, for ~~its cost method investments at cost, less impairment, plus/minus subsequent observable price changes, and will be required~~$1,268 million in cash. This acquisition is expected to ~~perform an assessment each quarter to determine whether or not a triggering event has occurred that results in changes in fair value. These investments were not material to~~further strengthen the Company’s leadership position in skin care and expand its consumer reach in Asia/Pacific, North America, the United Kingdom and travel retail. We originally acquired a minority interest in Have & Be in December 2015, and that investment structure included a formula-based call option for the remaining equity interest. The original minority interest was accounted for as an equity method investment, which had a carrying value of $133 million at the acquisition date. The acquisition of the remaining equity interest in Have & Be was considered a step acquisition, whereby the Company remeasured the previously held equity method investment to its fair value of $682 million, resulting in the recognition of a gain of $549 million. The acquisition of the remaining equity interest also resulted in the recognition of a previously unrealized foreign currency gain of $4 million, which was reclassified from accumulated OCI. The total gain on the Company’s previously held equity method investment of $553 million is included in Other income in the accompanying consolidated statements of earnings for the three and six months ended December 31, 2019. The fair value of the previously held equity method investment was determined based upon a valuation of the acquired business, as of the date of acquisition, using an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies. The accounting for the Have & Be business combination is provisional pending finalization of the Have & Be calendar 2019 audited financial statements, asworking capital adjustments, and allocation of the total consideration transferred.

The amount paid at closing was funded by cash on hand including the proceeds from the issuance of debt. In anticipation of the closing, the Company transferred cash to a foreign subsidiary for purposes of making the closing payment. As a result, the Company recognized a foreign currency gain of $23 million, which is also included in Other income in the accompanying consolidated statements of earnings for the three and six months ended December 31, ~~2018.~~2019.

Table of Contents

~~Gains and losses recorded in accumulated OCI (“AOCI”) related to the Company’s available-for-sale investments as of December 31, 2018 were as follows:~~

(In millions)

Cost

Gross Unrealized
Gains

Gross Unrealized
Losses

Fair Value

U.S. government and agency securities

$
403

$
—

$
(3
)
$
400

Foreign government and agency securities

99

—

(1
)
98

Corporate notes and bonds

447

—

(5
)
442

Time deposits

—

—

—

—

Other securities

15

—

—

15

Total

$
964

$
—

$
(9
)
$
955

~~Gains and losses recorded in AOCI related to the Company’s available-for-sale investments as of June 30, 2018 were as follows:~~

(In millions)

Cost

Gross Unrealized
Gains

Gross Unrealized
Losses

Fair Value

U.S. government and agency securities

$
427

$
—

$
(5
)
$
422

Foreign government and agency securities

114

—

(2
)
112

Corporate notes and bonds

479

—

(7
)
472

Time deposits

200

—

—

200

Other securities

16

—

—

16

Total

$
1,236

$
—

$
(14
)
$
1,222

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


(In millions, unaudited)
Cash	$	228
Accounts receivable		48
Inventory		83
Other current assets		5
Property, plant and equipment		3
Right-of-use assets		3
Intangible assets		1,427
Goodwill		556
Other long-term assets		3
Total assets acquired		2,356

Accounts payable		27
Other accrued liabilities		22
Deferred income taxes		352
Lease liability		1
Total liabilities assumed		402
Total consideration transferred	$	1,954

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

NOTE 3 – GOODWILL AND OTHER INTANGIBLE ASSETS

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

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

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table presents goodwill by product category and the ~~Company’s available-for-sale securities by contractual maturity as~~related change in the carrying amount:


(In millions)	Skin Care		Makeup		Fragrance		Hair Care		Total
Balance as of June 30, 2019
Goodwill	$	185	$	1,199	$	254	$	390	$	2,028
Accumulated impairments		(36)		(68)		(22)		(34)		(160)
		149		1,131		232		356		1,868

Goodwill acquired during the period		556		7		—		—		563
Impairment charges		—		(511)		—		—		(511)
Translation adjustments, goodwill		(1)		—		—		—		(1)
Translation adjustments, accumulated impairments		1		—		—		—		1
		556		(504)		—		—		52

Balance as of December 31, 2019
Goodwill		740		1,206		254		390		2,590
Accumulated impairments		(35)		(579)		(22)		(34)		(670)
	$	705	$	627	$	232	$	356	$	1,920

Other intangible assets consist of ~~December 31, 2018:~~the following:

(In millions)

Cost

Fair Value

Due within one year

$
528

$
525

Due after one through five years

436

430

$
964

$
955


	December 31, 2019						June 30, 2019
	Gross				Total Net		Gross				Total Net
	Carrying		Accumulated		Book		Carrying		Accumulated		Book
(In millions)	Value		Amortization		Value		Value		Amortization		Value
Amortizable intangible assets:
Customer lists and other	$	1,524	$	389	$	1,135	$	684	$	369	$	315
License agreements		43		43		—		43		43		—
	$	1,567	$	432		1,135	$	727	$	412		315
Non-amortizable intangible assets:
Trademarks						1,207						888
Total intangible assets					$	2,342					$	1,203

The ~~following table presents the fair market value of the Company’s investments with gross unrealized losses that are not deemed~~aggregate amortization expense related to ~~be other-than temporarily impaired as of December 31, 2018:~~

In a Loss Position for Less Than 12
Months

In a Loss Position for More Than 12
Months

(In millions)

Fair Value

Gross
Unrealized
Losses

Fair Value

Gross Unrealized
Losses

Available-for-sale securities

$
37

$
—

$
890

$
(9
)

~~Gross gains and losses on sales of investments included in the consolidated statements of earnings were not material for all periods presented.~~

~~The Company utilizes the first-in, first-out method to determine the cost of the security sold. Sales proceeds from investments classified as available-for-sale were~~amortizable intangible assets was $11 million and ~~$166~~$12 million for the three months ended December 31, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~were $23~~was $22 million and ~~$296~~$25 million for the six months ended December 31, 2019 and 2018, respectively. The estimated aggregate amortization expense for the remainder of fiscal 2020 and ~~2017, respectively.~~for each of the next four fiscal years is as follows:


	Fiscal
(In millions)	2020		2021		2022		2023		2024
Estimated aggregate amortization expense	$	53	$	104	$	103	$	103	$	101

Table of Contents

~~NOTE 3 — GOODWILL AND OTHER INTANGIBLE ASSETS~~THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment Testing During the Six Months Ended December 31, 2019

During December 2019, given the continuing declines in prestige makeup, generally in North America, and the ongoing competitive activity, the Company’s Too Faced, BECCA and Smashbox reporting units made revisions to their internal forecasts concurrent with the Company's brand strategy review process. The Company 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, the Company performed interim impairment tests for the trademarks and recoverability tests for the long-lived assets as of December 31, 2019. The Company concluded that the carrying amounts of the long-lived assets were recoverable. The Company also concluded that the carrying values of the trademarks exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded impairment charges. After adjusting the carrying value of the trademarks, the Company completed interim quantitative impairment tests for goodwill and recorded goodwill impairment charges for each of these reporting units. The fair value of each reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. A summary of the impairment charges for the three and six months ended December 31, 2019 and the remaining trademark and goodwill carrying values as of December 31, 2019, for each reporting unit, are as follows:


(In millions)	Impairment Charge				Carrying Value
Reporting Unit:	Trademark		Goodwill		Trademark		Goodwill
Too Faced	$	211	$	430	$	314	$	175
BECCA		33		35		65		63
Smashbox		22		46		33		26
Total	$	266	$	511	$	412	$	264

The impairment charges were reflected in the makeup product category and in The Americas region.

Impairment Testing During the Six Months Ended December 31, 2018

During December 2018, the Company’s Smashbox reporting unit made revisions to its internal forecasts reflecting a slowdown of its makeup business driven by increased competitive activity and lower than expected growth in key retail channels for the brand. The Company concluded that these changes in circumstances in the Smashbox reporting unit triggered the need for an interim impairment review of its trademark and goodwill. Accordingly, the Company performed an interim impairment test as of December 31, 2018. The Company concluded that the carrying value of the Smashbox trademark exceeded its estimated fair value, which was determined utilizing a royalty rate to determine discounted projected future cash flows. As a result, the Company recognized an impairment charge of $18 million for the trademark. After adjusting the carrying value of the trademark, the Company completed an interim quantitative impairment test for goodwill and recorded a goodwill impairment charge related to the Smashbox reporting unit of $20 million. The ~~Company early adopted the FASB’s authoritative guidance that eliminated the second step from the quantitative goodwill impairment test. In accordance with this guidance, the~~ Company compared the fair value of the Smashbox reporting unit with its carrying amount to calculate the impairment charge. The fair value of the reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. These impairment charges were reflected in the makeup product category and in ~~the~~The Americas region. As

NOTE 4 - LEASES

During the first quarter of ~~December 31, 2018,~~fiscal 2020, the Company adopted ASC 842 using the modified retrospective transition approach permitted under the new standard for leases that existed at July 1, 2019 and, accordingly, the prior comparative periods were not restated. Under this method, the Company was required to assess the remaining ~~carrying values~~future payments of existing leases as of July 1, 2019. Additionally, as of the ~~goodwill~~date of adoption, the Company elected the package of practical expedients that did not require the Company to assess whether expired or existing contracts contain leases as defined in ASC 842, did not require reassessment of the lease classification (i.e. operating lease vs. finance lease) for expired or existing leases, and ~~trademark related~~did not require a change to the ~~Smashbox reporting unit were $120 million and $59 million, respectively.~~accounting for previously capitalized initial direct costs.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The ~~following table presents goodwill by product category~~adoption of this standard impacted the Company's consolidated balance sheet due to the recognition of right-of-use ("ROU") assets and associated lease liabilities related to operating leases as compared to the previous accounting. The accounting for finance leases under ASC 842 is consistent with the prior accounting for capital leases. The impact of the adoption of this standard on the Company's consolidated statements of earnings and consolidated statement of cash flows was not material.

Per the guidance of ASC 842, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset. The Company recognizes a lease liability and a related ROU asset at the commencement date for leases on its consolidated balance sheet, excluding short-term leases as noted below. The lease liability is equal to the present value of unpaid lease payments over the remaining lease term. The Company's lease term at the commencement date may reflect options to extend or terminate the lease when it is reasonably certain that such options will be exercised. To determine the present value of the lease liability, the Company uses an incremental borrowing rate, which is defined as the rate of interest that the Company would have to pay to borrow (on a collateralized basis over a similar term) an amount equal to the lease payments in similar economic environments. The ROU asset is based on the corresponding lease liability adjusted for certain costs such as initial direct costs, prepaid lease payments and lease incentives received. Both operating and finance lease ROU assets are reviewed for impairment, consistent with other long-lived assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. After an ROU asset is impaired, any remaining balance of the ROU asset is amortized on a straight-line basis over the shorter of the remaining lease term or the estimated useful life.

After the lease commencement date, the Company evaluates lease modifications, if any, that could result in a change in the ~~carrying amount:~~accounting for leases. For a lease modification, an evaluation is performed to determine if it should be treated as either a separate lease or a change in the accounting of an existing lease. In addition, significant changes in events or circumstances within the Company's control are assessed to determine whether a change in the accounting for leases is required.

(In millions)

Skin Care

Makeup

Fragrance

Hair Care

Total

Balance as of June 30, 2018

Goodwill

$
185

$
1,186

$
256

$
391

$
2,018

Accumulated impairments

(36
)
—

(22
)
(34
)
(92
)

149

1,186

234

357

1,926

Goodwill acquired during the period

—

7

—

—

7

Impairment charge

—

(20
)
—

—

(20
)
Translation adjustments, goodwill

—

—

(1
)
(2
)
(3
)
Translation adjustments, accumulated impairments

—

—

—

1

1

—

(13
)
(1
)
(1
)
(15
)

Balance as of December 31, 2018

Goodwill

185

1,193

255

389

2,022

Accumulated impairments

(36
)
(20
)
(22
)
(33
)
(111
)

$
149

$
1,173

$
233

$
356

$
1,911

~~Other intangible assets consist~~Certain of the ~~following:~~Company's leases provide for variable lease payments for the right to use an underlying asset that vary due to changes in facts and circumstances occurring after the commencement date, other than the passage of time. Variable lease payments that are dependent on an index or rate (e.g., Consumer Price Index) are included in the initial measurement of the lease liability, the initial measurement of the ROU asset, and the lease classification test based on the index or rate as of the commencement date. Any changes from the commencement date estimation of the index- and rate-based variable payments are expensed as incurred in the period of the change. Variable lease payments that are not known at the commencement date and are determinable based on the performance or use of the underlying asset, are not included in the initial measurement of the lease liability or the ROU asset, but instead are expensed as incurred. The Company's variable lease payments primarily include rents based on a percentage of sales in excess of stipulated levels, common area maintenance based on the percentage of the total square footage leased by the Company, as well as costs relating to embedded leases, such as third-party manufacturing agreements.

December 31, 2018

June 30, 2018

(In millions)

Gross
Carrying
Value

Accumulated
Amortization

Total Net
Book
Value

Gross
Carrying
Value

Accumulated
Amortization

Total Net
Book
Value

Amortizable intangible assets:

Customer lists and other

$
696

$
356

$
340

$
697

$
332

$
365

License agreements

43

43

—

43

43

—

$
739

$
399

340

$
740

$
375

365

Non-amortizable intangible assets:

Trademarks and other

893

911

Total intangible assets

$
1,233

$
1,276

Upon the adoption of ASC 842, the Company made the following accounting policy elections:

●

Certain of the Company’s contracts contain lease components as well as non-lease components, such as an agreement to purchase services. Unless an accounting policy is elected to the contrary, the contract consideration must be allocated to the separate lease and non-lease components in accordance with ASC 842. For purposes of allocating contract consideration, the Company elected not to separate the lease components from non-lease components for all asset classes. This was applied to all existing leases as of July 1, 2019 and will be applied to new leases on an ongoing basis.

●

The Company elected not to apply the measurement and recognition requirements of ASC 842 to short-term leases (i.e. leases with a term of 12 months or less). Accordingly, short-term leases will not be recorded as ROU assets or lease liabilities on the Company’s consolidated balance sheets, and the related lease payments will be recognized in net earnings on a straight-line basis over the lease term.

●

For certain leases relating to automobiles, information technology equipment and office equipment, the Company elected to apply the guidance of ASC 842 utilizing a portfolio approach. Under this approach, the Company combined and accounted for leases (as a portfolio) with similar characteristics (e.g., lease term, discount rates, etc.) as a single lease, provided its application is not materially different when compared to the application at the individual lease level.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As a result of the adoption of ASC 842, the Company recorded a cumulative adjustment of $29 million, net of tax, as a reduction to its fiscal 2020 opening balance of retained earnings, primarily to reflect the fair value of operating lease ROU assets that were impaired at, or prior to, the adoption date. In addition, the Company recognized operating lease ROU assets and liabilities of $2,598 million and $2,764 million, respectively, as of July 1, 2019. Finance lease ROU assets and liabilities are not material.

The ~~aggregate amortization expense related~~Company has operating and finance leases primarily for real estate properties, including corporate offices, facilities to ~~amortizable intangible assets was $12 million~~support the Company's manufacturing, assembly, research and development and distribution operations and retail stores, as well as information technology equipment, automobiles and office equipment, with remaining terms of approximately 1 year to 51 years. Some of the Company's lease contracts include options to extend the leases for up to 30 years, while others include options to terminate the leases within 34 years.

A summary of total lease costs and other information for the ~~three months ended December 31, 2018~~periods relating to the Company's finance and ~~2017~~operating leases is as follows:


	Three Months Ended		Six Months Ended
(In millions)	December 31, 2019		December 31, 2019
Total lease cost
Finance lease cost:
Amortization of right-of-use assets	$	3	$	6
Interest on lease liabilities		—		—
Operating lease cost		115		233
Short-term lease cost		9		15
Variable lease cost		49		92
Total	$	176	$	346
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases			$	242
Financing cash flows from finance leases			$	8
Right-of-use assets obtained in exchange for new operating lease liabilities			$	110
Weighted-average remaining lease term – finance leases				2	years
Weighted-average remaining lease term – operating leases				11	years
Weighted-average discount rate – finance leases				2.7	%
Weighted-average discount rate – operating leases				2.5	%

The total future minimum lease payments, over the remaining lease term, relating to the Company’s operating and ~~was $25 million for the six months ended December 31, 2018 and 2017. The estimated aggregate amortization expense~~finance leases for the remainder of fiscal ~~2019~~2020 and for each of the next four fiscal years and thereafter is as follows:

	Fiscal

(In millions)	2019		2020		2021		2022		2023		Operating Leases		Finance Leases
Estimated aggregate amortization expense	$	26	$	44	$	43	$	42	$	42

Remainder of fiscal 2020											$	219	$	6
Fiscal 2021												393		7
Fiscal 2022												347		3
Fiscal 2023												310		1
Fiscal 2024												286		—
Thereafter												1,559		—
Total future minimum lease payments												3,114		17
Less imputed interest												(427)		—
Total											$	2,687	$	17

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Operating lease and finance lease liabilities included in the consolidated balance sheet are as follows:


	December 31, 2019
(In millions)	Operating Leases		Finance Leases
Total current liabilities	$	369	$	10
Total noncurrent liabilities		2,318		7
Total	$	2,687	$	17

The ROU assets and lease liabilities related to finance leases are included in Other assets and in Current debt and Long-term debt, respectively, in the accompanying consolidated balance sheet as of December 31, 2019.

The following table summarizes scheduled maturities of the Company’s contractual obligations relating to operating leases for which cash flows are fixed and determinable as of June 30, 2019:


(In millions)	Payments Due in Fiscal Year⁽¹⁾
Fiscal 2020	$	421
Fiscal 2021		383
Fiscal 2022		348
Fiscal 2023		316
Fiscal 2024		289
Thereafter		1,625
Total contractual obligations	$	3,382

(1)

Minimum operating lease commitments only include base rent. Certain leases provide for contingent rents that are not measurable at inception and primarily include rents based on a percentage of sales in excess of stipulated levels, as well as common area maintenance. These amounts are excluded from minimum operating lease commitments and are included in the determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably measurable. Such amounts have not been material to total rent expense.

As of December 31, 2019, the Company has additional operating lease obligations, relating primarily to facilities to support the Company’s manufacturing, research and development and distribution operations, as well as corporate offices, that have not yet commenced of $108 million. These leases will commence between fiscal 2020 and fiscal 2030 with lease terms of 1 year to 59 years.

NOTE ~~4 —~~5 – CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES

In May 2016, the Company announced a multi-year initiative (“Leading Beauty ~~Forward,”~~Forward” or “LBF” ~~or the “Program”~~) to build on its strengths and better leverage its cost structure to free resources for investment to continue its growth momentum. LBF is designed to enhance the Company’s go-to-market capabilities, reinforce its leadership in global prestige beauty and continue creating sustainable value. ~~The~~As of June 30, 2019, the Company ~~plans to approve specific~~concluded the approvals of all major initiatives under LBF ~~through fiscal 2019~~ 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 expects to substantially complete those initiatives through fiscal 2021. Inclusive of approvals from inception through December 31, 2018, the Company estimates that LBF may result in related restructuring and other charges totaling between $900 million and $950 million, before taxes. In connection with LBF, at this time, the Company estimates a net reduction over the duration of LBF in the range of 1,800 to 2,000 positions globally. This reduction takes into account the elimination of certain positions, inclusive of positions that are unfilled, as well as retraining and redeployment of certain employees and investment in new positions in key areas.

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~Program-to-Date Approvals~~

~~Of the $900 million to $950 million~~The approved restructuring and other charges expected to be incurred ~~total cumulative charges approved by the Company through December 31, 2018, some~~were:


	Sales
	Returns				Operating Expenses
	(included in				Restructuring		Other
(In millions)	Net Sales)		Cost of Sales		Charges		Charges		Total
Total Charges Approved
Cumulative through December 31, 2019	$	14	$	88	$	507	$	358	$	967


	Employee-		Asset-
	Related		Related		Contract		Other Exit
(In millions)	Costs		Costs		Terminations		Costs		Total
Restructuring Charges Approved
Cumulative through December 31, 2019	$	461	$	7	$	25	$	14	$	507

Table of ~~which were recorded from Program inception through December 31, 2018, were:~~Contents

Sales

Returns

Operating Expenses

(In millions)

(included in
Net Sales)

Cost of Sales

Restructuring
Charges

Other
Charges

Total

Approval Period

Fiscal 2016

$
4

$
28

$
87

$
71

$
190

Fiscal 2017

11

10

132

118

271

Fiscal 2018

—

24

166

68

258

Six months ended December 31, 2018

—

9

19

29

57

Adjustments through December 31, 2018

(1
)
(1
)
(46
)
(1
)
(49
)
Cumulative through December 31, 2018

$
14

$
70

$
358

$
285

$
727

~~Included in the above table, cumulative restructuring initiatives approved by the Company through December 31, 2018 by major cost type were:~~

(In millions)

Employee-
Related
Costs

Asset-
Related
Costs

Contract
Terminations

Other Exit
Costs

Total

Approval Period

Fiscal 2016

$
75

$
3

$
5

$
4

$
87

Fiscal 2017

126

1

—

5

132

Fiscal 2018

161

—

1

4

166

Six months ended December 31, 2018

17

1

—

1

19

Adjustments through December 31, 2018

(45
)
—

(1
)
—

(46
)
Cumulative through December 31, 2018

$
334

$
5

$
5

$
14

$
358

During the six months ended December 31, 2018, the Company continued to approve initiatives to enhance its go-to-market support structures and optimize select corporate functions. These actions will result in a net reduction of the workforce, which includes position eliminations, the re-leveling of certain positions and an investment in new capabilities. The Company also approved consulting and other professional services primarily related to the implementation and integration of new processes and technologies, temporary labor backfill and recruitment related to the new capabilities. The Company continued to approve implementation costs, temporary labor backfill and consulting fees for an initiative related to supply chain planning activities. In addition, the Company approved other charges to support the LBF Project Management Office, consisting of internal and external resources that are intended to further drive project integration, organizational design capabilities and change management throughout the organization.

As initiatives under LBF progress through implementation, the Company has identified certain costs that were approved but will not be incurred. These costs, reflected as adjustments to the cumulative approved restructuring and other charges presented above, were primarily related to estimated employee-related costs for certain employees who either resigned or transferred to other existing positions within the Company.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Program-to-Date Restructuring and Other Charges~~

The Company records approved charges associated with restructuring and other activities once the relevant accounting criteria have been met. Total cumulative charges recorded associated with restructuring and other activities for LBF were:

Sales
Returns

Operating Expenses

(In millions)

(included in
Net Sales)

Cost of Sales

Restructuring
Charges

Other
Charges

Total

Fiscal 2016

$
1

$
—

$
75

$
5

$
81

Fiscal 2017

2

15

122

73

212

Fiscal 2018

8

18

127

104

257

Six months ended December 31, 2018

—

12

19

51

82

Cumulative through December 31, 2018

$
11

$
45

$
343

$
233

$
632


	Sales
	Returns				Operating Expenses
	(included in				Restructuring		Other
(In millions)	Net Sales)		Cost of Sales		Charges		Charges		Total
Total Charges
Cumulative through June 30, 2019	$	14	$	55	$	457	$	265	$	791
Six months ended December 31, 2019		—		8		1		29		38
Cumulative through December 31, 2019	$	14	$	63	$	458	$	294	$	829


	Employee-		Asset-
	Related		Related		Contract		Other Exit
(In millions)	Costs		Costs		Terminations		Costs		Total
Restructuring Charges
Cumulative through June 30, 2019	$	445	$	4	$	3	$	5	$	457
Six months ended December 31, 2019		—		—		—		1		1
Cumulative through December 31, 2019	$	445	$	4	$	3	$	6	$	458

~~The major cost types related to the cumulative~~Changes in accrued restructuring charges ~~set forth above~~for the six months ended December 31, 2019 were:

(In millions)

Employee-
Related
Costs

Asset-
Related
Costs

Contract
Terminations

Other Exit
Costs

Total

Fiscal 2016

$
74

$
1

$
—

$
—

$
75

Fiscal 2017

116

2

2

2

122

Fiscal 2018

124

1

1

1

127

Six months ended December 31, 2018

18

—

—

1

19

Cumulative through December 31, 2018

$
332

$
4

$
3

$
4

$
343


	Employee-		Asset-
	Related		Related		Contract		Other Exit
(In millions)	Costs		Costs		Terminations		Costs		Total
Balance at June 30, 2019	$	202	$	—	$	—	$	1	$	203
Charges		—		—		—		1		1
Cash payments		(52)		—		—		(2)		(54)
Balance at December 31, 2019	$	150	$	—	$	—	$	—	$	150

~~Accrued restructuring charges from Program inception through December 31, 2018 were:~~

(In millions)

Employee-
Related
Costs

Asset-
Related
Costs

Contract
Terminations

Other Exit
Costs

Total

Charges

$
74

$
1

$
—

$
—

$
75

Noncash asset write-offs

—

(1
)
—

—

(1
)
Translation adjustments

(1
)
—

—

—

(1
)
Balance at June 30, 2016

73

—

—

—

73

Charges

116

2

2

2

122

Cash payments

(39
)
—

(2
)
(2
)
(43
)
Noncash asset write-offs

—

(2
)
—

—

(2
)
Balance at June 30, 2017

150

—

—

—

150

Charges

124

1

1

1

127

Cash payments

(92
)
—

—

(1
)
(93
)
Noncash asset write-offs

—

(1
)
—

—

(1
)
Translation adjustments

(2
)
—

—

—

(2
)
Balance at June 30, 2018

180

—

1

—

181

Charges

18

—

—

1

19

Cash payments

(55
)
—

(1
)
(1
)
(57
)
Noncash asset write-offs

—

—

—

—

—

Translation and other adjustments

(2
)
—

—

—

(2
)
Balance at December 31, 2018

$
141

$
—

$
—

$
—

$
141

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~Restructuring charges for employee-related costs are net of adjustments to the accrual estimate for certain employees who either resigned or transferred to other existing positions within the Company.~~ Accrued restructuring charges at December 31, ~~2018~~2019 are expected to result in cash expenditures funded from cash provided by operations of approximately ~~$86~~$63 million, ~~$44~~$62 million, ~~$10~~$20 million and $1$5 million for the remainder of fiscal ~~2019~~2020 and for fiscal ~~2020,~~ 2021, 2022 and ~~2022,~~2023, respectively.

Additional information about LBF is included in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

NOTE ~~5 —~~6 – DEBT

In November 2019, the Company completed a public offering of $500 million aggregate principal amount of its 2.000% Senior Notes due December 1, 2024 (the “2024 Senior Notes”), $650 million aggregate principal amount of its 2.375% Senior Notes due December 1, 2029 (the “2029 Senior Notes”) and $650 million aggregate principal amount of its 3.125% Senior Notes due December 1, 2049 (the “2049 Senior Notes”). The Company used proceeds from this offering for general corporate purposes, including to fund the acquisition of Have & Be, and intends to use a portion of the proceeds to refinance its $500 million aggregate principal amount of 1.80% Senior Notes due February 7, 2020 when they become due.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

These recently issued notes are summarized as follows:


						Unamortized		Debt		Semi-annual
						Debt		Issuance		interest
Notes	Issue Date	Price		Yield		Discount		Costs		payments
($ in millions)

2024 Senior Notes	November 2019	99.421	%	2.122	%	$	3	$	3	June 1/December 1
2029 Senior Notes ⁽¹⁾	November 2019	99.046		2.483			6		4	June 1/December 1
2049 Senior Notes	November 2019	98.769		3.189			8		7	June 1/December 1

(1)

In April and May 2019, in anticipation of the issuance of the 2029 Senior Notes, the Company entered into a series of treasury lock agreements on a notional amount totaling $500 million at a weighted-average all-in rate of 2.50%. The treasury lock agreements were settled upon the issuance of the new debt, and the Company recognized a loss in OCI of $33 million that is being amortized to interest expense over the life of the 2029 Senior Notes. As a result of the treasury lock agreements, as well as the debt discount and debt issuance costs, the effective interest rate on the 2029 Senior Notes will be 3.15% over the life of the debt.

NOTE 7 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The Company enters into foreign currency forward contracts, and may enter into option contracts, to reduce the effects of fluctuating foreign currency exchange rates. In addition, the Company enters into interest rate derivatives to manage the effects of interest rate movements on the Company’s aggregate liability portfolio, including potential future debt issuances. During the first quarter of fiscal 2020, the Company entered into foreign currency forward contracts to hedge a portion of its net investment in certain foreign operations, which are designated as net investment hedges. The Company entered into the net investment hedges to offset the risk of changes in the U.S. dollar value of the Company's investment in these foreign operations due to fluctuating foreign exchange rates. Time value is excluded from the effectiveness assessment and is recognized under a systematic and rational method over the life of the hedging instrument in Selling, general and administrative expenses. The net gain or loss on net investment hedges is recorded within translation adjustments, as a component of accumulated OCI (“AOCI”) on the Company’s consolidated balance sheets, until the sale or substantially complete liquidation of the underlying assets of the Company's investment. The Company also enters into foreign currency forward contracts, and may use option contracts, not designated as hedging instruments, to mitigate the change in fair value of specific assets and liabilities on the balance sheet. The Company does not utilize derivative financial instruments for trading or speculative purposes. Costs associated with entering into derivative financial instruments ~~have~~are not ~~been~~ material to the Company’s consolidated financial results.

For each derivative contract entered into, where the Company looks to obtain hedge accounting treatment, the Company formally and contemporaneously documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking the hedge transaction, the nature of the risk being hedged, and how the hedging instruments’ effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. At inception, the Company evaluates the effectiveness of hedge relationships quantitatively, and has elected to perform, after initial evaluation, qualitative effectiveness assessments of certain hedge relationships to support an ongoing expectation of high effectiveness, if effectiveness testing is required. If based on the qualitative assessment, it is determined that a derivative has ceased to be a highly effective hedge, the Company will perform a quantitative assessment to determine whether ~~or not~~ to discontinue hedge accounting with respect to that derivative prospectively.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair values of the Company’s derivative financial instruments included in the consolidated balance sheets are ~~presented~~ as follows:

Asset Derivatives

Liability Derivatives

Fair Value (1)

Fair Value (1)

(In millions)

Balance Sheet
Location

December 31
2018

June 30
2018

Balance Sheet
Location

December 31
2018

June 30
2018

Derivatives Designated as Hedging Instruments:

Foreign currency forward contracts

Prepaid expenses and other current assets

$
32

$
30

Other accrued liabilities

$
3

$
5

Interest rate swap contracts

Prepaid expenses and other current assets

—

—

Other accrued liabilities

17

26

Total Derivatives Designated as Hedging Instruments

32

30

20

31

Derivatives Not Designated as Hedging Instruments:

Foreign currency forward contracts

Prepaid expenses and other current assets

4

3

Other accrued liabilities

2

8

Total derivatives

$
36

$
33

$
22

$
39


	Asset Derivatives					Liability Derivatives
		Fair Value ⁽¹⁾					Fair Value ⁽¹⁾
	Balance Sheet	December 31		June 30		Balance Sheet	December 31		June 30
(In millions)	Location	2019		2019		Location	2019		2019
Derivatives Designated as Hedging Instruments
Foreign currency cash flow hedges	Prepaid expenses and other current assets	$	16	$	23	Other accrued liabilities	$	9	$	4
Net investment hedges	Prepaid expenses and other current assets		—		—	Other accrued liabilities		19		—
Interest rate-related derivatives	Prepaid expenses and other current assets		3		3	Other accrued liabilities		1		26

Total Derivatives Designated as Hedging Instruments			19		26			29		30

Derivatives Not Designated as Hedging Instruments
Foreign currency forward contracts	Prepaid expenses and other current assets		31		4	Other accrued liabilities		3		2

Total Derivatives		$	50	$	30		$	32	$	32

~~(1)~~ ~~See~~ ~~Note 6 —~~

(1)	See Note 8 – Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined.

Table of ~~derivative assets and liabilities are determined.~~Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amounts of the gains and losses related to the Company’s derivative financial instruments designated as hedging instruments that are included in the assessment of effectiveness are ~~presented~~ as follows:

Amount of Gain or (Loss)
Recognized in OCI on
Derivatives

Location of Gain or

Amount of Gain or (Loss)
Reclassified from AOCI into
Earnings(1)

Three Months Ended
December 31

(Loss) Reclassified
from AOCI into

Three Months Ended
December 31

(In millions)

2018

2017

Earnings

2018

2017(2)

Derivatives in Cash Flow Hedging Relationships:

Foreign currency forward contracts

$
13

$
(9
)
Net sales

$
4

$
—

Cost of sales

—

(7
)

Selling, general and administrative

—

(7
)
Interest rate-related derivatives

—

—

Interest expense

—

1

Total derivatives

$
13

$
(9
)

$
4

$
(13
)

Amount of Gain or (Loss)

Amount of Gain or (Loss)

Recognized in OCI on

Reclassified from AOCI into

Derivatives

Location of Gain or

Earnings⁽¹⁾

Three Months Ended

(Loss) Reclassified

Three Months Ended

December 31

from AOCI into

December 31
(In millions)

2019

2018

Earnings

2019

2018
Derivatives in Cash Flow Hedging Relationships:

Foreign currency forward contracts

$
(21)

$
13

Net sales

$
6

$
4
Interest rate-related derivatives

5

—

Interest expense

—

—

(16)

13

Total derivatives

$
6

$
4
Derivatives in Net Investment Hedging Relationships⁽²⁾:

Foreign currency forward contracts⁽³⁾

(37)

—

Total derivatives

$
(53)

$
13

~~(1)~~
(1) The amount reclassified into earnings as a result of the discontinuance of cash flow hedges because probable forecasted transactions will no longer occur by the end of the original time period was not material.
(2) During the three months ended December 31, 2019, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $13 million.
(3) Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets.

Amount of Gain or (Loss)

Amount of Gain or (Loss)

Recognized in OCI on

Reclassified from AOCI into

Derivatives

Location of Gain or

Earnings⁽¹⁾

Six Months Ended

(Loss) Reclassified

Six Months Ended

December 31

from AOCI into

December 31
(In millions)

2019

2018

Earnings

2019

2018
Derivatives in Cash Flow Hedging Relationships:

Foreign currency forward contracts

$
4

$
16

Net sales

$
19

$
7
Interest rate-related derivatives

(9)

—

Interest expense

—

—

(5)

16

Total derivatives

$
19

$
7
Derivatives in Net Investment Hedging Relationships⁽²⁾:

Foreign currency forward contracts⁽³⁾

(34)

—

Total derivatives

$
(39)

$
16

(1) The amount reclassified into earnings as a result of the discontinuance of cash flow hedges because probable forecasted transactions will no longer occur by the end of the original time period was not material.
(2) During the six months ended December 31, 2019, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $25 million.
(3) Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets.

Table of ~~the discontinuance of cash flow hedges because probable forecasted transactions will no longer occur by the end of the original time period was not material.~~Contents

~~(2)~~ ~~The gain (loss) recognized in earnings related to the amount excluded from effectiveness testing was not material.~~

Amount of Gain or (Loss)
Recognized in OCI on
Derivatives

Location of Gain or

Amount of Gain or (Loss)
Reclassified from AOCI into
Earnings(1)

Six Months Ended
December 31

(Loss) Reclassified
from AOCI into

Six Months Ended
December 31

(In millions)

2018

2017

Earnings

2018

2017(2)

Derivatives in Cash Flow Hedging Relationships:

Foreign currency forward contracts

$
16

$
(27
)
Net sales

$
7

$
—

Cost of sales

—

(12
)

Selling, general and administrative

—

(11
)
Interest rate-related derivatives

—

—

Interest expense

—

1

Total derivatives

$
16

$
(27
)

$
7

$
(22
)
~~(1)~~        The amount reclassified into earnings as a result of the discontinuance of cash flow hedges because probable forecasted transactions will no longer occur by the end of the original time period was not material.
~~(2)~~        ~~The gain (loss) recognized in earnings related to the amount excluded from effectiveness testing was not material.~~

Amount of Gain or (Loss)
Recognized in Earnings on Derivatives (1)

Location of Gain or (Loss)
Recognized in Earnings on

Three Months Ended
December 31

Six Months Ended
December 31

(In millions)

Derivatives

2018

2017

2018

2017

Derivatives in Fair Value Hedging Relationships:

Interest rate swap contracts

Interest expense

$
11

$
(9
)
$
9

$
(11
)
~~(1)~~        ~~Changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt.~~
THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amount of Gain or (Loss) Recognized in Earnings on




Derivatives ⁽¹⁾

Location of Gain or (Loss)

Three Months Ended

Six Months Ended

Recognized in Earnings on

December 31

December 31
(In millions)

Derivatives

2019

2018

2019

2018
Derivatives in Fair Value Hedging Relationships:

Interest rate swap contracts

Interest expense

$
(1)

$
11

$
1

$
9
(1) Changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt.

Additional information regarding the cumulative amount of fair value hedging ~~adjustments~~gain (loss) recognized in earnings for items designated and qualifying as hedged items in fair value hedges is as follows:

(In millions)

Amount of Gain or (Loss)
Recognized in Earnings on Derivatives

Line Item in the Consolidated Balance Sheets in
Which the Hedged Item is Included

Carrying Amount of the
Hedged Assets (Liabilities)

Cumulative Amount of Fair
Value Hedging Adjustments
Included in the Carrying
Amount of the Hedged
Assets (Liabilities)

December 31, 2018

December 31, 2018

Cumulative Amount of Fair

Value Hedging Gain/(Loss)
Line Item in the Consolidated Balance Sheets in

Carrying Amount of the

Included in the Carrying Amount
Which the Hedged Item is Included

Hedged Liabilities

of the Hedged Liability


December 31, 2019

December 31, 2019
Current debt

$
250

$
—
Long-term debt

$
(930
)
$
(17
)

701

2
Total debt

$
951

$
2

Additional information regarding the effects of fair value and cash flow hedging relationships for derivatives designated and qualifying as hedging instruments is as follows:

Three Months Ended

Six Months Ended

December 31, 2018

December 31, 2018

Three Months Ended December 31

2019

2018




Interest



Interest
(In millions)

Net Sales

Interest
expense

Net Sales

Interest
expense

Net Sales

expense

Net Sales

expense
Total amounts of income and expense line items presented in the consolidated statements of earnings in which the effects of fair value and cash flow hedges are recorded

$
4,005

$
35

$
7,529

$
69

$
4,624

$
38

$
4,005

$
35

The effects of fair value and cash flow hedging relationships:








Gain (loss) on fair value hedge relationships — interest rate contracts:

Gain (loss) on fair value hedge relationships – interest rate contracts:








Hedged item

Not applicable

11

Not applicable

9

Not applicable

(1)

Not applicable

11
Derivatives designated as hedging instruments

Not applicable

(11
)
Not applicable

(9
)

Not applicable

1

Not applicable

(11)

Gain (loss) on cash flow hedge relationships — foreign currency forward contracts:

Gain (loss) on cash flow hedge relationships – foreign currency forward contracts:

Amount of gain reclassified from AOCI into earnings

4

Not applicable

7

Not applicable

6

Not applicable

4

Not applicable

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended December 31

2019

2018
(In millions)

Net Sales

Interest expense

Net Sales

Interest expense
Total amounts of income and expense line items presented in the consolidated statements of earnings in which the effects of fair value and cash flow hedges are recorded

$
8,519

$
70

$
7,529

$
69

The effects of fair value and cash flow hedging relationships:








Gain (loss) on fair value hedge relationships – interest rate contracts:








Hedged item

Not applicable

1

Not applicable

9
Derivatives designated as hedging instruments

Not applicable

(1)

Not applicable

(9)

Gain (loss) on cash flow hedge relationships – foreign currency forward contracts:








Amount of gain reclassified from AOCI into earnings

19

Not applicable

7

Not applicable

The amounts of the gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments are presented as follows:

Amount of Gain or (Loss)
Recognized in Earnings on Derivatives

Location of Gain or (Loss)
Recognized in Earnings on

Three Months Ended
December 31

Six Months Ended
December 31

(In millions)

Derivatives

2018

2017

2018

2017

Derivatives Not Designated as Hedging Instruments:

Foreign currency forward contracts

Selling, general and administrative

$
(12
)
$
(1
)
$
10

$
(5
)

Amount of Gain or (Loss)

Recognized in Earnings on

Derivatives

Location of Gain or (Loss)

Three Months Ended

Six Months Ended

Recognized in Earnings on

December 31

December 31

(In millions)

Derivatives

2019

2018

2019

2018

Derivatives Not Designated as Hedging Instruments:

Foreign currency forward contracts

Selling, general and administrative

$
30

$
(12)

$
3

$
10

~~THE ESTÉE LAUDER COMPANIES INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
Cash Flow Hedges

The Company enters into foreign currency forward contracts, and may enter into foreign currency option contracts, to hedge anticipated transactions and receivables and payables denominated in foreign currencies, for periods consistent with the Company’s identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the cash flows that the Company receives from foreign subsidiaries. The foreign currency forward contracts entered into to hedge anticipated transactions have been designated as cash flow hedges and have varying maturities through the end of ~~September 2020.~~December 2021. Hedge effectiveness of the foreign currency forward contracts is based on the forward method, which includes time value in the effectiveness assessment. At December 31, ~~2018,~~2019, the Company had outstanding foreign currency forward contracts with a notional amount totaling ~~$3,434~~$5,087 million.

The Company may enter into interest rate forward contracts to hedge anticipated issuance of debt for periods consistent with the Company’s identified exposures. The purpose of the hedging activities is to minimize the effect of interest rate movements on the cost of debt issuance.

For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued, and gains and losses in AOCI are reclassified to ~~net~~ sales when the underlying forecasted transaction occurs. If it is probable that the forecasted transaction will no longer occur, then any gains or losses in AOCI are reclassified to current-period ~~net~~ sales. As of December 31, ~~2018,~~2019, the Company’s foreign currency cash flow hedges were highly effective.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The estimated net gain on the Company’s derivative instruments designated as cash flow hedges as of December 31, ~~2018~~2019 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is ~~$22~~$6 million. The accumulated net gain on derivative instruments in AOCI was ~~$62~~$5 million and ~~$53~~$29 million as of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, respectively.

Fair Value Hedges

The Company enters into interest rate derivative contracts to manage the exposure to interest rate fluctuations on its funded indebtedness. The Company has interest rate swap agreements, with notional amounts totaling $250 million, $450 million and $250 million to effectively convert the fixed rate interest on its 2020 Senior Notes, 2021 Senior Notes and 2022 Senior Notes, respectively, to variable interest rates based on three-month LIBOR plus a margin. These interest rate swap agreements are designated as fair value hedges of the related long-term debt, and the changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt.

Net Investment Hedges

The Company enters into foreign currency forward contracts, designated as net investment hedges, to hedge a portion of its net investment in certain foreign operations. The net gain or loss on these contracts is recorded within translation adjustments, as a component of AOCI on the Company's consolidated balance sheets. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the Company's net investment in these foreign operations. The net investment hedge contracts have varying maturities through the end of January 2020. Hedge effectiveness of the net investment hedge contracts is based on the spot method. At December 31, 2019, the Company had net investment hedges outstanding with a notional amount totaling $1,738 million.

Credit Risk

As a matter of policy, the Company enters into derivative contracts only with counterparties that have a long-term credit rating of at least A- or higher by at least ~~two~~2 nationally recognized rating agencies. The counterparties to these contracts are major financial institutions. Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the gross fair value of contracts in asset positions, which totaled ~~$36~~$50 million at December 31, ~~2018.~~2019. To manage this risk, the Company has strict counterparty credit guidelines that are continually monitored. Accordingly, management believes risk of loss under these hedging contracts is remote.

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
NOTE ~~6 —~~8 – FAIR VALUE MEASUREMENTS

The Company records certain of its financial assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. The accounting for fair value measurements must be applied to nonfinancial assets and nonfinancial liabilities that require initial measurement or remeasurement at fair value, which principally consist of assets and liabilities acquired through business combinations and goodwill, indefinite-lived intangible assets and long-lived assets for the purposes of calculating potential impairment. The Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:

Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, ~~2018:~~2019:

(In millions)

Level 1

Level 2

Level 3

Total

Assets:

Foreign currency forward contracts

$
—

$
36

$
—

$
36

Available-for-sale securities:

U.S. government and agency securities

—

400

—

400

Foreign government and agency securities

—

98

—

98

Corporate notes and bonds

—

442

—

442

Time deposits

—

—

—

—

Other securities

—

15

—

15

Total

$
—

$
991

$
—

$
991

Liabilities:

Foreign currency forward contracts

$
—

$
5

$
—

$
5

Interest rate swap contracts

—

17

—

17

Contingent consideration

—

—

87

87

Total

$
—

$
22

$
87

$
109

(In millions)

Level 1

Level 2

Level 3

Total

Assets:

Foreign currency forward contracts

$
—

$
47

$
—

$
47

Interest rate-related derivatives

—

3

—

3

Total

$
—

$
50

$
—

$
50

Liabilities:

Foreign currency forward contracts

$
—

$
31

$
—

$
31

Interest rate-related derivatives

—

1

—

1

Contingent consideration

—

—

29

29

Total

$
—

$
32

$
29

$
61

~~THE ESTÉE LAUDER COMPANIES INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, ~~2018:~~2019:

(In millions)

Level 1

Level 2

Level 3

Total


Level 1

Level 2

Level 3

Total

Assets:

Foreign currency forward contracts

$
—

$
33

$
—

$
33

$
—

$
27

$
—

$
27

Available-for-sale securities:

U.S. government and agency securities

—

422

—

422

Foreign government and agency securities

—

112

—

112

Corporate notes and bonds

—

472

—

472

Time deposits

—

200

—

200

Other securities

—

16

—

16

Interest rate-related derivatives

—

3

—

3

Total

$
—

$
1,255

$
—

$
1,255

$
—

$
30

$
—

$
30

Liabilities:

Foreign currency forward contracts

$
—

$
13

$
—

$
13

$
—

$
6

$
—

$
6

Interest rate swap contracts

—

26

—

26

Interest rate-related derivatives

—

26

—

26

Contingent consideration

—

—

96

96

—

—

36

36

Total

$
—

$
39

$
96

$
135

$
—

$
32

$
36

$
68

The estimated fair values of the Company’s financial instruments are as follows:

December 31

June 30

2018

2018

December 31

June 30

2019

2019

Carrying

Fair

Carrying

Fair
(In millions)

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value


Amount

Value

Amount

Value
Nonderivatives

Cash and cash equivalents

$
1,876

$
1,876

$
2,181

$
2,181

$
3,596

$
3,596

$
2,987

$
2,987
Available-for-sale securities

955

955

1,222

1,222

Current and long-term debt

3,391

3,477

3,544

3,667

5,184

5,696

3,412

3,706
Additional purchase price payable

3

3

3

3

—

—

3

3
Contingent consideration

87

87

96

96

29

29

36

36

Derivatives

Foreign currency forward contracts — asset (liability), net

31

31

20

20

Interest rate swap contracts — asset (liability), net

(17
)
(17
)
(26
)
(26
)
Foreign currency forward contracts – asset (liability), net

16

16

21

21
Interest rate-related derivatives – asset (liability), net

2

2

(23)

(23)

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the Company’s impairment charges for the three and six months ended December 31, 2019 for certain of its nonfinancial assets measured at fair value on a nonrecurring basis, classified as Level 3, due to a change in circumstances that triggered an interim impairment test:




Date of Fair Value


(In millions)

Impairment charges

Measurement

Fair Value⁽¹⁾
Goodwill

$
511

December 31, 2019

$
264
Other intangible assets, net (trademark)

266

December 31, 2019

412
Total

$
777

$
676
(1) See Note 3 – Goodwill and Other Intangible Assets for discussion of the valuation techniques used to measure fair value, the description of the inputs and information used to develop those inputs.

The following table presents the Company’s impairment charges for the three and six months ended December 31, 2018 for certain of its nonfinancial assets measured at fair value on a nonrecurring basis, classified as Level 3, due to a change in circumstances that triggered an interim impairment test:




Date of Fair Value


(In millions)

Impairment charges

Date of Fair Value
Measurement

Fair Value(1)

Impairment charges

Measurement

Fair Value⁽¹⁾

Goodwill

$
20

December 31, 2018

$
120

$
20

December 31, 2018

$
120
Other intangible assets, net (trademark)

18

December 31, 2018

59

18

December 31, 2018

59
Total

$
38

$
179

$
38

$
179

(1) See Note 3 – Goodwill and Other Intangible Assets for discussion of the valuation techniques used to measure fair value, the description of the inputs and information used to develop those inputs.
~~(1)~~   ~~See~~ ~~Note 3 — Goodwill and Other Intangible Assets~~ ~~for discussion of the valuation techniques used to measure fair value, the description of the inputs and information used to develop those inputs.~~
~~THE ESTÉE LAUDER COMPANIES INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

The following methods and assumptions were used to estimate the fair value of the Company’s financial instruments for which it is practicable to estimate that value:

Cash and cash equivalents — – Cash and all highly-liquid securities with original maturities of three months or less are classified as cash and cash equivalents, primarily consisting of cash deposits in interest bearing accounts, time deposits and money market funds ~~and time deposits.~~(classified within Level 1 of the valuation hierarchy). The carrying amount approximates fair value, primarily due to the short maturity of cash equivalent instruments.

~~Available-for-sale securities~~ — Available-for-sale securities are classified within Level 2 of the valuation hierarchy and are valued using third-party pricing services, and for time deposits, the carrying amount approximates fair value. To determine fair value, the pricing services use market prices or prices derived from other observable market inputs such as benchmark curves, credit spreads, broker/dealer quotes, and other industry and economic factors.
Foreign currency forward contracts — –The fair values of the Company’s foreign currency forward contracts were determined using an industry-standard valuation model, which is based on an income approach. The significant observable inputs to the model, such as swap yield curves and currency spot and forward rates, were obtained from an independent pricing service. To determine the fair value of contracts under the model, the difference between the contract price and the current forward rate was discounted using LIBOR for contracts with maturities up to 12 months, and swap yield curves for contracts with maturities greater than 12 months.

Interest rate ~~swap~~ contracts —– The fair values of the Company’s interest rate ~~swap~~ contracts were determined using an industry-standard valuation model, which is based on the income approach. The significant observable inputs to the model, such as treasury yield curves, swap yield curves and LIBOR forward rates, were obtained from independent pricing services.

Current and long-term debt — –The fair value of the Company’s debt was estimated based on the current rates offered to the Company for debt with the same remaining maturities. To a lesser extent, debt also includes ~~capital~~finance lease obligations for which the carrying amount approximates the fair value. The Company’s debt is classified within Level 2 of the valuation hierarchy.

Additional purchase price payable — – The Company’s additional purchase price payable represents fixed minimum additional purchase price that was discounted using the Company’s incremental borrowing rate, which was approximately 1%1%. The additional purchase price payable is classified within Level 2 of the valuation hierarchy.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Contingent consideration — – Contingent consideration obligations consist of potential obligations related to the Company’s acquisitions in previous years. The amounts to be paid under these obligations are contingent upon the achievement of stipulated financial targets by the business subsequent to acquisition. ~~The~~At December 31, 2019, the fair values of the contingent consideration related to certain acquisition earn-outs were ~~estimated using a probability-weighted discount model that considers~~based on the ~~achievement~~Company’s estimate of the ~~conditions upon which~~applicable financial targets as per the ~~respective contingent obligation is dependent (“Monte Carlo Method”).~~
~~The Monte Carlo Method has various inputs into the valuation model, in addition to the risk-adjusted projected future operating results~~terms of the ~~acquired entities, which include the following ranges at December 31, 2018:~~
~~Risk-adjusted discount rates~~
~~3.1% to 3.3%~~
~~Revenue volatility~~
~~5.8%~~
~~Asset volatility~~
~~25.2%~~
~~Revenue and earnings before income tax, depreciation and amortization correlation coefficient factor~~
~~75.0%~~
~~Revenue discount rates~~
~~4.7% to 4.9%~~
~~Earnings before income tax, depreciation and amortization discount rates~~
~~11.9% to 12.8%~~
agreements. Significant changes in the projected future operating results would result in a significantly higher or lower fair value measurement. ~~Changes to the discount rates, volatilities or correlation factors would have a lesser effect.~~ ~~The implied rates~~As these are ~~deemed to be~~ unobservable inputs, ~~and, as such,~~ the Company’s contingent consideration is classified within Level 3 of the valuation hierarchy.
~~THE ESTÉE LAUDER COMPANIES INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Changes in the fair value of the contingent consideration obligations for the six months ended December 31, ~~2018~~2019 are included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings and were as follows:

(In millions)

Fair Value


Fair Value
Contingent consideration at June 30, 2018

$
96

Contingent consideration at June 30, 2019

$
36
Changes in fair value

(9
)

(7)
Contingent consideration at December 31, 2018

$
87

Contingent consideration at December 31, 2019

$
29

NOTE ~~7 —~~9 – REVENUE RECOGNITION

~~During~~The Company's revenue recognition accounting policies are described in the ~~first quarter of fiscal 2019, the Company adopted the new revenue accounting standard, ASC 606, under the modified retrospective method~~notes to ~~all contracts as of the date of adoption. Under this method, the~~ consolidated financial statements in the Company's Annual Report on Form 10-K for the period beginning July 1, 2018 are presented under the new revenue accounting standard, while the prior-year periods reflect the revenue accounting standards in effect during those periods. The following discussion is based on the Company’s accounting policies under the new standard; for a discussion of the Company’s prior accounting for revenue and a reconciliation of the impact of the change in accounting standard on the Company’s consolidated financial statements, see below ~~Changes in Accounting Policies~~. The Company also adopted the policy election to exclude from the transaction price all amounts collected from customers for sales and other taxes. For revenue disaggregated by product category and geographic region, see ~~Note 14 — Segment Data and Related Information~~.fiscal year ended June 30, 2019.

~~Performance Obligations~~
~~The Company recognizes revenue at a point in time when it satisfies a performance obligation by transferring control over a product and other promised goods and services to a customer.~~
The Company sells wholesale to customers in distribution channels that include department stores, travel retail, specialty multi-brand retailers, perfumeries, salons/spas and through various online sites operated by authorized retailers. The primary performance obligation related to these channels of distribution is product sales where revenue is recognized as control of the product transfers to the customer. In the Americas region, revenue is generally recognized at the time the product is made available and provided to the customer’s carrier at the Company’s location and in the Europe, the Middle East & Africa and Asia/Pacific regions, revenue is generally recognized based upon the customer’s receipt.
The Company also sells direct to consumers at Company-operated freestanding stores and online through Company-owned and operated e-commerce and m-commerce sites and through third-party online platforms. At Company-operated freestanding stores, revenue is recognized when control of the product is transferred at the point of sale. Revenue from online sales is recognized when control of the product is transferred, generally based upon the consumer’s receipt.
In connection with the sale of product, the Company may provide other promised goods and services that are deemed to be performance obligations. These are comprised of customer loyalty program obligations, gift with purchase and purchase with purchase promotions, gift cards and other promotional goods including samples and testers.
The Company offers a number of different loyalty programs to its customers across regions, brands and distribution channels including points-based programs, tier-based programs and recycling programs. Revenue is allocated between the saleable product revenue and the material right loyalty obligations based on relative standalone selling prices when the consumer purchases the products that are earning them the right to the future benefits. Deferred revenue related to the Company’s loyalty programs is estimated based on the standalone selling price and is adjusted for an estimated breakage factor. Standalone selling price is determined primarily using the observable market price of the good or service benefit if it is sold by the Company or a cost plus margin approach for goods/services not directly sold by the Company. Breakage rates consider historical patterns of redemption and/or expiration. Revenue is recognized when the benefits are redeemed or expire.
~~THE ESTÉE LAUDER COMPANIES INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
The Company provides gift with purchase promotional products to certain customers generally without additional charge and also provides purchase with purchase promotional products to certain customers at a discount in relation to prices charged for saleable product. Revenue is allocated between saleable product, gift with purchase product and purchase with purchase product based on the estimated relative standalone selling prices. Revenue is deferred and ultimately recognized based on the timing differences, if any, between when control of promotional goods and control of the related saleable products transfer to the Company’s customer (e.g., a third-party retailer), which is calculated based on the weighted-average number of days between promotional periods. The estimated standalone selling price allocated to promotional goods is based on a cost plus margin approach.
In situations where promotional products are provided by the Company to its customers at the same time as the related saleable product, such as shipments of samples and testers, the cost of these promotional products are recognized as a cost of sales at the same time as the related revenue is recognized and no deferral of revenue is required.
The Company also offers gift cards through Company-operated freestanding stores and Company-owned websites. The related deferred revenue is estimated based on expected breakage that considers historical patterns of redemption taking into consideration escheatment laws as applicable.
~~Product Returns, Sales Incentives and Other Forms of Variable Consideration~~
In measuring revenue and determining the consideration the Company is entitled to as part of a contract with a customer, the Company takes into account the related elements of variable consideration. Such elements of variable consideration include product returns and sales incentives, such as volume rebates and discounts, markdowns, margin adjustments and early-payment discounts. We also enter into arrangements containing other forms of variable consideration, including certain demonstration arrangements, for which the Company does not receive a distinct good or service or for which the Company cannot reasonably estimate the fair value of the good or service. For these types of arrangements, the adjustments to revenue are recorded at the later of when (i) the Company recognizes revenue for the transfer of the related goods or services to the customer, or (ii) the Company pays, or promises to pay, the consideration.
For the sale of goods with a right of return, the Company only recognizes revenue for the consideration it expects to be entitled to (considering the products to be returned) and records a sales return accrual within Other accrued liabilities for the amount it expects to credit back its customers. In addition, the Company recognizes an asset included in Inventory and promotional merchandise, net and a corresponding adjustment to Cost of sales for the right to recover goods from customers associated with the estimated returns.
The sales return accrual and corresponding asset include estimates that directly impact reported net sales. These estimates are calculated based on a history of actual returns, estimated future returns and information provided by retailers regarding their inventory levels. Consideration of these factors results in an estimate for anticipated sales returns that reflects increases or decreases related to seasonal fluctuations. In addition, as necessary, sales return accruals and the related assets may be established for significant future known or anticipated events. The types of known or anticipated events that are considered, and will continue to be considered, include the financial condition of the Company’s customers, store closings by retailers, changes in the retail environment and the Company’s decision to continue to support new and existing products.
The Company estimates sales incentives and other variable consideration using the most likely amount method and records reserves within Other accrued liabilities when control of the related product is transferred to the customer. Under this method, certain forms of variable consideration are based on expected sell-through results, which requires subjective estimates. These estimates are supported by historical results as well as specific facts and circumstances related to the current period.
The Company also enters into transactions and makes payments to certain of its customers related to demonstration, advertising and counter construction, some of which involve cooperative relationships with customers. These activities may be arranged either with unrelated third parties or in conjunction with the customer. To the extent the Company receives a distinct good or service in exchange for consideration and the fair value of the benefit can be reasonably estimated, the Company’s share of the counter depreciation and the other costs of these transactions (regardless of to whom they were paid) are reflected in Selling, general and administrative expenses in the accompanying consolidated statements of earnings.
~~THE ESTÉE LAUDER COMPANIES INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
Accounts Receivable
Accounts receivable, net is stated net of the allowance for doubtful accounts and customer deductions totaling ~~$31~~$35 million and ~~$29~~$32 million as of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, respectively. The allowance for doubtful accounts is based upon the evaluation of accounts receivable aging, specific exposures and historical trends. Payment terms are short-term in nature and are generally less than one year. As a result of the adoption of ASC 606, amounts relating to the Company’s sales return accrual are recorded within Other accrued liabilities and the corresponding return asset is recorded in Inventory and promotional merchandise, net, and are no longer included as a reduction to Accounts receivable, net. The Company applied the practical expedient available under ASC 606 to disregard determining significant financing components if the good/service is transferred and payment is received within one year.

Deferred Revenue
Significant changes in deferred revenue during the period are as follows:

(In millions)

December 31, 2018


December 31, 2019
Balance at July 1, 2018

$
380

Balance at June 30, 2019

$
361
Revenue recognized that was included in the deferred revenue balance at the beginning of the period

(268
)

(243)
Revenue deferred during the period

371

307
Other

(3
)
Balance at December 31, 2018

$
480

Balance at December 31, 2019

$
425

Transaction Price Allocated to the Remaining Performance Obligations
At December 31, ~~2018,~~2019, the combined estimated revenue expected to be recognized in the next twelve months related to performance obligations for customer loyalty programs, gift with purchase promotions, purchase with purchase promotions and gift card liabilities that are unsatisfied (or partially unsatisfied) is ~~$425~~$378 million.

~~Changes in Accounting Policies~~
~~As a result of the adoption of ASC 606, the Company has changed its accounting policies for revenue recognition as follows:~~
·                  For products sold that qualify for customer loyalty program awards, the Company defers a portion of revenue related to the product sales. Previously, the Company recognized revenue in full for product sales and accrued for the expected amounts of loyalty awards to be provided under the incremental cost approach.
·                  A portion of revenue is deferred for shipments of saleable products with separate performance obligations to provide gift with purchase and purchase with purchase promotional products, and is recognized as control is transferred to a customer. Previously, the Company recognized revenue for saleable products and purchase with purchase products based upon invoice prices charged to customers and included the cost of gift with purchase products and/or purchase with purchase products in Cost of sales when risks and rewards of ownership transferred to the Company’s customer (i.e. a third-party retailer).
·                  The cost of certain promotional products, including samples and testers, are classified within Cost of sales. Such costs were previously accounted for as a component of Selling, general and administrative expenses.
·                  In conjunction with the adoption of ASC 606, the Company reassessed its contracts under the variable consideration guidance, including the payments to customer guidance, and as a result certain reclassifications were made related to timing and classification of certain net demonstration payments to and from customers.
·                  For product returns, the Company established a sales return accrual and a corresponding asset for the right to recover goods in Other accrued liabilities and Inventory and promotional merchandise, net, respectively, while previously the net liability for product returns was recorded as a reduction of Accounts receivable, net.
As a result of the change in accounting policies noted above, the Company recorded a cumulative adjustment of $229 million, net of tax, as a reduction to its fiscal 2019 opening balance of retained earnings.
~~THE ESTÉE LAUDER COMPANIES INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~The following tables summarize the impacts of the adoption of ASC 606 on the Company’s consolidated financial statements as of and for the three and six months ended December 31, 2018:~~
~~Consolidated Statements of Earnings~~

Three Months Ended December 31, 2018

Six Months Ended December 31, 2018

(In millions, except per share data)

As
Reported

Impact

Prior to the
adoption of
ASC 606

As
Reported

Impact

Prior to the
adoption of
ASC 606

Net sales

$
4,005

$
67

$
4,072

$
7,529

$
134

$
7,663

Cost of sales

910

(86
)
824

1,733

(152
)
1,581

Gross profit

3,095

153

3,248

5,796

286

6,082

Selling, general and administrative

2,257

99

2,356

4,265

201

4,466

Operating income

771

54

825

1,423

85

1,508

Provision for income taxes

171

13

184

302

19

321

Net earnings attributable to The Estée Lauder Companies Inc.

573

41

614

1,073

66

1,139

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

Basic

$
1.58

$
.11

$
1.69

$
2.94

$
.18

$
3.12

Diluted

$
1.55

$
.11

$
1.66

$
2.88

$
.18

$
3.06

~~Consolidated Balance Sheet~~

December 31, 2018

(In millions)

As Reported

Impact

Prior to the
adoption of
ASC 606

Accounts receivable, net

$
2,000

$
(199
)
$
1,801

Inventory and promotional merchandise, net

1,651

(25
)
1,626

Other assets

633

(88
)
545

Total assets

12,676

(312
)
12,364

Other accrued liabilities

2,763

(551
)
2,212

Other noncurrent liabilities

1,194

(55
)
1,139

Total liabilities

8,343

(606
)
7,737

Retained earnings

9,586

295

9,881

Accumulated other comprehensive loss

(430
)
(2
)
(432
)
Total stockholders’ equity — The Estée Lauder Companies Inc.

4,306

293

4,599

~~Consolidated Statement of Cash Flows~~

Six Months Ended December 31, 2018

(In millions)

As Reported

Impact

Prior to the
adoption of
ASC 606

Net earnings

$
1,079

$
66

$
1,145

Changes in operating assets and liabilities

Decrease (increase) in accounts receivable, net

(343
)
2

(341
)
Increase in inventory and promotional merchandise, net

(21
)
(2
)
(23
)
Increase (decrease) in other accrued and noncurrent liabilities

387

(66
)
321

Net cash flows provided by operating activities

1,273

—

1,273

~~THE ESTÉE LAUDER COMPANIES INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
NOTE ~~8 —~~10 – PENSION AND POST-RETIREMENT BENEFIT PLANS

The Company maintains pension plans covering substantially all of its full-time employees for its U.S. operations and a majority of its international operations. The Company also maintains post-retirement benefit plans that provide certain medical and dental benefits to eligible employees. Descriptions of these plans are included in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2018.~~2019.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The components of net periodic benefit cost for the three months ended December 31, ~~2018~~2019 and ~~2017~~2018 consisted of the following:

Other than

Pension Plans

Pension Plans

U.S.

International

Post-retirement

Other than

Pension Plans

Pension Plans

U.S.

International

Post-retirement
(In millions)

2018

2017

2018

2017

2018

2017


2019

2018

2019

2018

2019

2018
Service cost

$
9

$
9

$
7

$
8

$
—

$
—

$
10

$
9

$
9

$
7

$
1

$
—
Interest cost

9

8

3

3

2

1

9

9

2

3

1

2
Expected return on plan assets

(13
)
(13
)
(4
)
(4
)
—

—

(13)

(13)

(4)

(4)

—

—
Amortization of:

Prior service cost

—

—

—

—

—

1

Actuarial loss

2

3

2

1

—

—

3

2

2

2

—

—
Net periodic benefit cost

$
7

$
7

$
8

$
8

$
2

$
2

$
9

$
7

$
9

$
8

$
2

$
2

The components of net periodic benefit cost for the six months ended December 31, ~~2018~~2019 and ~~2017~~2018 consisted of the following:

Other than

Pension Plans

Pension Plans

U.S.

International

Post-retirement

Other than

Pension Plans

Pension Plans

U.S.

International

Post-retirement
(In millions)

2018

2017

2018

2017

2018

2017


2019

2018

2019

2018

2019

2018
Service cost

$
18

$
18

$
15

$
15

$
1

$
1

$
20

$
18

$
18

$
15

$
2

$
1
Interest cost

18

16

6

6

4

3

17

18

5

6

3

4
Expected return on plan assets

(26
)
(26
)
(7
)
(7
)
(1
)
(1
)

(26)

(26)

(7)

(7)

(1)

(1)
Amortization of:












Prior service cost

—
��
—

—

—

—

1

Actuarial loss

5

7

2

2

—

—

7

5

3

2

—

—
Net periodic benefit cost

$
15

$
15

$
16

$
16

$
4

$
4

$
18

$
15

$
19

$
16

$
4

$
4

During the six months ended December 31, ~~2018,~~2019, the Company made contributions to its U.S. qualified defined benefit pension plan and international pension plans totaling $20 million and $6 ~~million.~~million, respectively.

The amounts recognized in the consolidated balance sheets related to the Company’s pension and post-retirement benefit plans consist of the following:

December 31

June 30

December 31

June 30
(In millions)

2018

2018


2019

2019
Other assets

$
173

$
181

$
123

$
105
Other accrued liabilities

(27
)
(27
)

(27)

(27)
Other noncurrent liabilities

(384
)
(375
)

(434)

(418)
Funded status

(238
)
(221
)

(338)

(340)
Accumulated other comprehensive loss

227

234

325

334
Net amount recognized

$
(11
)
$
13

$
(13)

$
(6)

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~9 —~~11 – CONTINGENCIES

Legal Proceedings

The Company is involved, from time to time, in litigation and other legal proceedings incidental to its business. Management believes that the outcome of current litigation and legal proceedings will not have a material adverse effect upon the Company’s business, results of operations, financial condition or cash flows. However, management’s assessment of the Company’s current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against the Company not presently known to the Company or determinations by judges, juries or other finders of fact which are not in accord with ~~management’s~~management's evaluation of the possible liability or outcome of such litigation or proceedings. Reasonably possible losses in addition to the amounts accrued for such litigation and legal proceedings are not material to the Company’s consolidated financial statements.

Contingencies

During the fiscal 2018 third quarter, the Company learned that some of its testing related to certain product advertising claims did not meet the Company’s standards, necessitating further validation. This review is ongoing, resulting in modifications to certain advertising claims. This is not a product safety issue and does not relate to the quality of the ingredients or the manufacturing of the Company’s products. Based on the Company’s review to date, it does not believe that this matter will be material to the Company, and no0 accrual has been recorded.

NOTE ~~10 —~~12 – STOCK PROGRAMS

Total net stock-based compensation expense is attributable to the granting of, and the remaining requisite service periods of stock options, restricted stock units (“RSUs”), performance share units (“PSUs”), long-term PSUs, and share units. Compensation expense attributable to net stock-based compensation is as follows:

Three Months Ended
December 31

Six Months Ended
December 31

Three Months Ended

Six Months Ended

December 31

December 31
(In millions)

2018

2017

2018

2017


2019

2018

2019

2018
Compensation expense

$
73

$
75

$
131

$
132

$
83

$
73

$
139

$
131
Income tax benefit

$
13

$
9

$
25

$
28

$
15

$
13

$
26

$
25

Stock Options

During the six months ended December 31, ~~2018,~~2019, the Company granted stock options in respect of approximately ~~1.7~~1.3 million shares of Class A Common Stock with an exercise price per share of ~~$138.23~~$199.24 and a weighted-average grant date fair value per share of ~~$38.62.~~$51.44. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The aggregate intrinsic value of stock options exercised during the six months ended December 31, ~~2018~~2019 was ~~$103~~$144 million.

Restricted Stock Units

The Company granted RSUs in respect of approximately ~~1.1~~0.8 million shares of Class A Common Stock during the six months ended December 31, ~~2018~~2019 with a weighted-average grant date fair value per share of ~~$138.15~~$199.26 that, at the time of grant, were scheduled to vest as follows: ~~0.4 million in fiscal 2020, 0.4~~0.3 million in fiscal 2021, ~~and~~ 0.3 million in fiscal ~~2022.~~2022 and 0.2 million in fiscal 2023. Vesting of RSUs ~~granted~~ is generally subject to the continued employment or the retirement of the grantees. The RSUs are accompanied by dividend equivalent rights, payable upon settlement of the RSUs either in cash or shares (based on the terms of the particular award) and, as such, were valued at the closing market price of the Company’s Class A Common Stock on the date of grant.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Performance Share Units

During the six months ended December 31, ~~2018,~~2019, the Company granted PSUs with a target payout of approximately ~~0.2~~0.1 million shares of Class A Common Stock with a grant date fair value per share of ~~$138.15,~~$199.18, which will be settled in stock subject to the achievement of the Company’s net sales, diluted net earnings per common share and return on invested capital goals for the three fiscal years ending June 30, ~~2021,~~2022, all subject to continued employment or the retirement of the grantees. For PSUs granted, no settlement will occur for results below the applicable minimum threshold. PSUs are accompanied by dividend equivalent rights that will be payable in cash upon settlement of the PSUs and, as such, were valued at the closing market value of the Company’s Class A Common Stock on the date of grant.

In September ~~2018,~~2019, approximately 0.4 million shares of the Company’s Class A Common Stock were issued, and related accrued dividends were paid, relative to the target goals set at the time of the issuance, in settlement of 0.3 million PSUs which vested as of June 30, ~~2018.~~2019.

NOTE ~~11 —~~13 – NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. PER COMMON SHARE

Net earnings attributable to The Estée Lauder Companies Inc. per common share (“basic EPS”) is computed by dividing net earnings attributable to The Estée Lauder Companies Inc. by the weighted-average number of common shares outstanding and contingently issuable shares (which satisfy certain conditions). Net earnings attributable to The Estée Lauder Companies Inc. per common share assuming dilution (“diluted EPS”) is computed by reflecting potential dilution from stock-based awards.

A reconciliation between the numerator and denominator of the basic and diluted EPS computations is as follows:

Three Months Ended
December 31

Six Months Ended
December 31

Three Months Ended

Six Months Ended

December 31

December 31
(In millions, except per share data)

2018

2017

2018

2017


2019

2018

2019

2018
Numerator:

Net earnings attributable to The Estée Lauder Companies Inc.

$
573

$
123

$
1,073

$
550

$
557

$
573

$
1,152

$
1,073

Denominator:

Weighted-average common shares outstanding — Basic

363.3

368.7

365.1

368.5

Weighted-average common shares outstanding – Basic

360.2

363.3

360.8

365.1
Effect of dilutive stock options

4.6

5.1

4.8

4.8

4.7

4.6

4.8

4.8
Effect of PSUs

0.3

0.3

0.3

0.2

0.3

0.3

0.2

0.3
Effect of RSUs

1.7

2.0

1.9

2.2

1.5

1.7

1.9

1.9
Weighted-average common shares outstanding — Diluted

369.9

376.1

372.1

375.7

Weighted-average common shares outstanding – Diluted

366.7

369.9

367.7

372.1

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

Basic

$
1.58

$
.33

$
2.94

$
1.49

$
1.55

$
1.58

$
3.19

$
2.94
Diluted

$
1.55

$
.33

$
2.88

$
1.46

$
1.52

$
1.55

$
3.13

$
2.88

As of December 31, ~~2018~~2019 and ~~2017,~~2018, the number of shares of Class A Common Stock underlying options that were excluded in the computation of diluted EPS because their inclusion would be anti-dilutive was ~~1.6~~1.3 million shares and ~~2.0~~1.6 million shares, respectively. As of December 31, ~~2018~~2019 and ~~2017,~~2018, 1.1 million shares ~~and 1.2 million shares, respectively,~~ of Class A Common Stock underlying PSUs have been excluded from the calculation of diluted EPS because the number of shares ultimately issued is contingent on the achievement of certain performance targets of the Company, as discussed in Note ~~10 —~~12 – Stock Programs.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~12 —~~14 – EQUITY

Total Stockholders’ Equity —– The Estée Lauder Companies Inc.

Three Months Ended
December 31

Six Months Ended
December 31

Three Months Ended

Six Months Ended

December 31

December 31
(In millions)

2018

2017

2018

2017


2019

2018

2019

2018
Common stock, beginning of the period

$
6

$
6

$
6

$
6

$
6

$
6

$
6

$
6
Stock-based compensation

—

—

—

—

—

—

—

—
Common stock, end of the period

6

6

6

6

6

6

6

6

Paid-in capital, beginning of the period

4,065

3,665

3,972

3,559

4,514

4,065

4,403

3,972
Common stock dividends

1

—

2

—
Stock-based compensation

97

108

190

214

100

97

210

190
Paid-in capital, end of the period

4,162

3,773

4,162

3,773

4,615

4,162

4,615

4,162

Retained earnings, beginning of the period

9,170

8,752

9,040

8,452

10,393

9,170

9,984

9,040
Common stock dividends

(157
)
(142
)
(298
)
(269
)

(175)

(157)

(332)

(298)
Net earnings attributable to The Estée Lauder Companies Inc.

573

123

1,073

550

557

573

1,152

1,073
Cumulative effect of adoption of ASC 606

—

—

(229
)
—

Cumulative effect of adoption of new accounting standards

—

—

(29)

(229)
Retained earnings, end of the period

9,586

8,733

9,586

8,733

10,775

9,586

10,775

9,586

Accumulated other comprehensive loss, beginning of the period

(409
)
(435
)
(434
)
(484
)

(627)

(409)

(563)

(434)
Other comprehensive income (loss)

(21
)
28

4

77

58

(21)

(6)

4
Accumulated other comprehensive loss, end of the period

(430
)
(407
)
(430
)
(407
)

(569)

(430)

(569)

(430)

Treasury stock, beginning of the period

(8,426
)
(7,257
)
(7,896
)
(7,149
)

(9,756)

(8,426)

(9,444)

(7,896)
Acquisition of treasury stock

(531
)
(232
)
(1,033
)
(330
)

(426)

(531)

(703)

(1,033)
Stock-based compensation

(61
)
(51
)
(89
)
(61
)

(71)

(61)

(106)

(89)
Treasury stock, end of the period

(9,018
)
(7,540
)
(9,018
)
(7,540
)

(10,253)

(9,018)

(10,253)

(9,018)

Total stockholders’ equity — The Estée Lauder Companies Inc.

4,306

4,565

4,306

4,565

Total stockholders’ equity – The Estée Lauder Companies Inc.

4,574

4,306

4,574

4,306

Noncontrolling interests, beginning of the period

24

22

22

18

28

24

25

22
Net earnings attributable to noncontrolling interests

4

2

6

5

4

4

7

6
Distribution to noncontrolling interest holders

(4)

—

(4)

—
Other comprehensive income

(1
)
—

(1
)
1

(1)

(1)

(1)

(1)
Noncontrolling interests, end of the period

27

24

27

24

27

27

27

27

Total equity

$
4,333

$
4,589

$
4,333

$
4,589

$
4,601

$
4,333

$
4,601

$
4,333

Cash dividends declared per common share

$
.43

$
.38

$
.81

$
.72

$
.48

$
.43

$
.91

$
.81

The following is a summary of quarterly cash dividends declared per share on the Company’s Class A and Class B Common Stock during the six months ended December 31, ~~2018:~~2019:

Date Declared

Record Date

Payable Date

Amount per Share

August ~~17, 2018~~16, 2019

August ~~31, 2018~~30, 2019

September ~~17, 2018~~
$
~~.38~~
~~October 30, 2018~~
~~November 30, 2018~~
~~December 17, 2018~~16, 2019

$
.43

October 30, 2019

November 29, 2019

December 16, 2019

$
.48

On February ~~4, 2019,~~5, 2020, a dividend was declared in the amount of ~~$.43~~$.48 per share on the Company’s Class A and Class B Common Stock. The dividend is payable in cash on March ~~15, 2019~~16, 2020 to stockholders of record at the close of business on February 28, ~~2019.~~2020.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Common Stock

During the six months ended December 31, ~~2018,~~2019, the Company purchased approximately ~~8.2~~4.3 million shares of its Class A Common Stock for ~~$1,126~~$813 million.
~~On October 31, 2018, the Company’s Board of Directors authorized the repurchase of up to another 40.0 million shares of the Company’s Class A Common Stock.~~

During the six months ended December 31, ~~2018,~~2019, approximately ~~0.1~~2.3 million shares of the Company’s Class B Common Stock were converted into the same amount of shares of the Company’s Class A Common Stock.

Accumulated Other Comprehensive Income (Loss)

The following table represents changes in AOCI, net of tax, by component for the six months ended December 31, ~~2018:~~2019:

Amounts

Net Cash

Included in Net

Flow Hedge

Periodic Benefit

Translation

(In millions)

Net
Unrealized
Investment
Gain (Loss)

Net
Derivative
Instrument
Gain (Loss)

Amounts
Included in Net
Periodic Benefit
Cost

Translation
Adjustments

Total


Gain (Loss)

Cost

Adjustments

Total

Balance at June 30, 2018

$
(14
)
$
39

$
(175
)
$
(284
)
$
(434
)
Balance at June 30, 2019

$
21

$
(253)

$
(331)

$
(563)

OCI before reclassifications

5

12

—

(13
)
4

(4)

(1)
⁽¹⁾

3
⁽²⁾

(2)

Amounts reclassified to Net earnings

—

(5
)
5

—

—

(14)

8

2

(4)

Net current-period OCI

5

7

5

(13
)
4

(18)

7

5

(6)

Balance at December 31, 2018

$
(9
)
$
46

$
(170
)
$
(297
)
$
(430
)
Balance at December 31, 2019

$
3

$
(246)

$
(326)

$
(569)

(1) Consists of foreign currency translation losses.
(2) See Note 7 - Derivative Financial Instruments for gains (losses) relating to net investment hedges.

The following table represents the effects of reclassification adjustments from AOCI into net earnings for the three and six months ended December 31, ~~2018~~2019 and ~~2017:~~2018:

Amount Reclassified from AOCI

Three Months Ended
December 31

Six Months Ended
December 31

Affected Line Item in
Consolidated

Amount Reclassified from AOCI

Three Months Ended

Six Months Ended

Affected Line Item in

December 31

December 31

Consolidated
(In millions)

2018

2017

2018

2017

Statements of Earnings


2019

2018

2019

2018

Statements of Earnings
Gain (Loss) on Cash Flow Hedges

Foreign currency forward contracts

$
4

$
—

$
7

$
—

Net sales

$
6

$
4

$
19

$
7

Net sales
Foreign currency forward contracts

—

(7
)
—

(12
)
Cost of sales

Foreign currency forward contracts

—

(7
)
—

(11
)
Selling, general and administrative

Interest rate-related derivatives

—

1

—

1

Interest expense

4

(13
)
7

(22
)
Earnings before income taxes

Benefit (provision) for deferred taxes

(1
)
4

(2
)
7

Provision for income taxes

(2)

(1)

(5)

(2)

Provision for income taxes

$
3

$
(9
)
$
5

$
(15
)
Net earnings

$
4

$
3

$
14

$
5

Net earnings

Amounts Included in Net Periodic Benefit Cost

Amortization of prior service cost

$
—

$
(1
)
$
—

$
(1
)
(1)

Amortization of actuarial loss

(4
)
(4
)
(7
)
(9
)
(1)

$
(5)

$
(4)

$
(10)

$
(7)

Earnings before income taxes ⁽¹⁾

(4
)
(5
)
(7
)
(10
)
Earnings before income taxes

Benefit for deferred taxes

1

1

2

3

Provision for income taxes

1

1

2

2

Provision for income taxes

$
(3
)
$
(4
)
$
(5
)
$
(7
)
Net earnings

$
(4)

$
(3)

$
(8)

$
(5)

Net earnings

Cumulative Translation Adjustments

Gain on previously held equity method investment

$
4

$
—

$
4

$
—

Other income
Loss on liquidation of an investment in a foreign subsidiary

—

—

(6)

—

Restructuring and other charges

$
4

$
—

$
(2)

$
—

Net earnings
Total reclassification adjustments, net

$
—

$
(13
)
$
—

$
(22
)
Net earnings

$
4

$
—

$
4

$
—

Net earnings
(1) See Note 10 – Pension and Post-Retirement Benefit Plans for additional information.

~~(1)~~ ~~See~~ ~~Note 8 — Pension and Post-Retirement Benefit Plans~~ ~~for additional information.~~Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~13 —~~15 – STATEMENT OF CASH FLOWS

Supplemental cash flow information for the six months ended December 31, ~~2018~~2019 and ~~2017~~2018 is as follows:

(In millions)

2018

2017

2019

2018

Cash:

Cash paid during the period for interest

$
66

$
65

$
63

$
66

Cash paid during the period for income taxes

$
217

$
129

$
314

$
217

Non-cash investing and financing activities:

Capital lease and asset retirement obligations incurred

$
8

$
4

Capital lease, capitalized interest and asset retirement obligations incurred

$
—

$
8

Property, plant and equipment accrued but unpaid

$
35

$
34

$
53

$
35

NOTE ~~14 —~~16 – SEGMENT DATA AND RELATED INFORMATION

Reportable operating segments include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the “Chief Executive”) in deciding how to allocate resources and in assessing performance. Although the Company operates in ~~one~~1 business segment, beauty products, management also evaluates performance on a product category basis. Product category performance is measured based upon net sales before returns associated with restructuring and other activities, and earnings before income taxes, other components of net periodic benefit cost, interest expense, interest income and investment income, net, other income, and charges associated with restructuring and other activities. Returns and charges associated with restructuring and other activities are not allocated to the product categories 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.

During the fiscal 2020 first quarter, changes were made to reflect certain Leading Beauty Forward enhancements made to the capabilities and cost structure of the Company’s travel retail business, which are primarily centralized in The Americas region, and resulted in a change to the royalty structure of the travel retail business to reflect the value created in The Americas region. Accordingly, the fiscal 2019 operating income of The Americas was increased, with a corresponding decrease in Europe, the Middle East & Africa, by $210 million and $411 million for the three and six months ended December 31, 2018, respectively, to conform with the current year methodology and presentation.

The accounting policies for the Company’s reportable segments are substantially the same as those for the consolidated financial statements, as described in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2018.~~2019. The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; thus, no additional information is produced for the Chief Executive or included herein. ~~There~~Other than the changes in total assets as a result of the acquisition discussed in Note 2 - Acquisition of Business, which impacted the Asia/Pacific region, and the goodwill and other intangible asset impairments discussed in Note 3 – Goodwill and Other Intangible Assets, which impacted The Americas region, there has been no significant variance in the total or long-lived asset values associated with the Company’s segment data since June 30, ~~2018.~~2019.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended
December 31

Six Months Ended
December 31

(In millions)

2018

2017

2018

2017

PRODUCT CATEGORY DATA

Net sales:

Skin Care

$
1,732

$
1,494

$
3,218

$
2,769

Makeup

1,560

1,515

2,966

2,887

Fragrance

537

565

1,009

1,041

Hair Care

154

144

297

280

Other

22

26

39

41

Net sales

$
4,005

$
3,744

$
7,529

$
7,018

Operating income (loss) before charges associated with restructuring and other activities:

Skin Care

$
565

$
453

$
1,031

$
780

Makeup

138

219

299

395

Fragrance

84

85

139

172

Hair Care

15

17

29

32

Other

4

5

7

7

806

779

1,505

1,386

Reconciliation:

Charges associated with restructuring and other activities

(35
)
(69
)
(82
)
(107
)
Interest expense

(35
)
(32
)
(69
)
(63
)
Interest income and investment income, net

12

12

27

24

Other components of net periodic benefit cost

—

—

—

(1
)
Earnings before income taxes

$
748

$
690

$
1,381

$
1,239

GEOGRAPHIC DATA(1)

Net sales:

The Americas

$
1,218

$
1,308

$
2,454

$
2,637

Europe, the Middle East & Africa

1,767

1,562

3,200

2,820

Asia/Pacific

1,020

874

1,875

1,561

Net sales

$
4,005

$
3,744

$
7,529

$
7,018

Operating income (loss):

The Americas

$
(61
)
$
98

$
(28
)
$
198

Europe, the Middle East & Africa

628

463

1,086

810

Asia/Pacific

239

218

447

378

806

779

1,505

1,386

Charges associated with restructuring and other activities

(35
)
(69
)
(82
)
(107
)
Operating income

$
771

$
710

$
1,423

$
1,279

Three Months Ended

Six Months Ended

December 31

December 31
(In millions)

2019

2018

2019

2018
PRODUCT CATEGORY DATA

Net sales:

Skin Care

$
2,205

$
1,732

$
4,047

$
3,218
Makeup

1,660

1,560

3,103

2,966
Fragrance

581

537

1,043

1,009
Hair Care

162

154

298

297
Other

16

22

28

39
Net sales

$
4,624

$
4,005

$
8,519

$
7,529

Operating income (loss) before charges associated with restructuring and other activities:

Skin Care

$
772

$
565

$
1,404

$
1,031
Makeup

(611)

138

(507)

299
Fragrance

97

84

163

139
Hair Care

12

15

12

29
Other

4

4

6

7

274

806

1,078

1,505
Reconciliation:

Charges associated with restructuring and other activities

(13)

(35)

(38)

(82)
Interest expense

(38)

(35)

(70)

(69)
Interest income and investment income, net

13

12

27

27
Other components of net periodic benefit cost

(1)

—

(2)

—
Other income

576

—

576

—
Earnings before income taxes

$
811

$
748

$
1,571

$
1,381

GEOGRAPHIC DATA⁽¹⁾

Net sales:

The Americas

$
1,226

$
1,218

$
2,386

$
2,454
Europe, the Middle East & Africa

2,079

1,767

3,756

3,200
Asia/Pacific

1,319

1,020

2,377

1,875
Net sales

$
4,624

$
4,005

$
8,519

$
7,529

Operating income (loss):

The Americas

$
(529)

$
149

$
(354)

$
383
Europe, the Middle East & Africa

505

418

882

675
Asia/Pacific

298

239

550

447

274

806

1,078

1,505
Charges associated with restructuring and other activities

(13)

(35)

(38)

(82)
Operating income

$
261

$
771

$
1,040

$
1,423
(1) The net sales and operating income from the Company’s travel retail business are included in the Europe, the Middle East & Africa region.
~~(1)~~ ~~The net sales from the Company’s travel retail business are included in the Europe, the Middle East & Africa region.~~

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

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

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 ~~over~~approximately 150 countries and territories. The following table is a comparative summary of operating results for the three and six months ended December 31, ~~2018~~2019 and ~~2017,~~2018, and reflects the basis of presentation described in Notes to Consolidated Financial Statements, Note 1 —– Summary of Significant Accounting Policies for all periods presented. Products and services that do not meet our definition of skin care, makeup, fragrance orand hair care have been included in the “other” category.

Three Months Ended
December 31

Six Months Ended
December 31

Three Months Ended

Six Months Ended

December 31

December 31
(In millions)

2018

2017

2018

2017


2019

2018

2019

2018
NET SALES








By Product Category:








Skin Care

$
1,732

$
1,494

$
3,218

$
2,769

$
2,205

$
1,732

$
4,047

$
3,218
Makeup

1,560

1,515

2,966

2,887

1,660

1,560

3,103

2,966
Fragrance

537

565

1,009

1,041

581

537

1,043

1,009
Hair Care

154

144

297

280

162

154

298

297
Other

22

26

39

41

16

22

28

39
Net sales

$
4,005

$
3,744

$
7,529

$
7,018

$
4,624

$
4,005

$
8,519

$
7,529

By Region:








The Americas

$
1,218

$
1,308

$
2,454

$
2,637

$
1,226

$
1,218

$
2,386

$
2,454
Europe, the Middle East & Africa

1,767

1,562

3,200

2,820

2,079

1,767

3,756

3,200
Asia/Pacific

1,020

874

1,875

1,561

1,319

1,020

2,377

1,875
Net sales

$
4,005

$
3,744

$
7,529

$
7,018

$
4,624

$
4,005

$
8,519

$
7,529

OPERATING INCOME (LOSS)








By Product Category:








Skin Care

$
565

$
453

$
1,031

$
780

$
772

$
565

$
1,404

$
1,031
Makeup

138

219

299

395

(611)

138

(507)

299
Fragrance

84

85

139

172

97

84

163

139
Hair Care

15

17

29

32

12

15

12

29
Other

4

5

7

7

4

4

6

7

806

779

1,505

1,386

274

806

1,078

1,505
Charges associated with restructuring and other activities

(35
)
(69
)
(82
)
(107
)

(13)

(35)

(38)

(82)
Operating income

$
771

$
710

$
1,423

$
1,279

$
261

$
771

$
1,040

$
1,423

By Region:





The Americas

$
(61
)
$
98

$
(28
)
$
198

$
(529)

$
149

$
(354)

$
383
Europe, the Middle East & Africa

628

463

1,086

810

505

418

882

675
Asia/Pacific

239

218

447

378

298

239

550

447

806

779

1,505

1,386

274

806

1,078

1,505
Charges associated with restructuring and other activities

(35
)
(69
)
(82
)
(107
)

(13)

(35)

(38)

(82)
Operating income

$
771

$
710

$
1,423

$
1,279

$
261

$
771

$
1,040

$
1,423

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

During the fiscal 2020 first quarter, changes were made to reflect certain Leading Beauty Forward enhancements made to the capabilities and cost structure of our travel retail business, which are primarily centralized in The Americas region, and resulted in a change to the royalty structure of the travel retail business to reflect the value created in The Americas region. Accordingly, the fiscal 2019 operating income of The Americas was increased, with a corresponding decrease in Europe, the Middle East & Africa by $210 million and $411 million for the three and six months ended December 31, 2018, respectively, to conform with the current year methodology and presentation.

The following table presents certain consolidated earnings data as a percentage of net sales:

Three Months Ended
December 31

Six Months Ended
December 31

2018

2017

2018

2017

Net sales

100.0
%
100.0
%
100.0
%
100.0
%
Cost of sales

22.7

20.1

23.0

20.9

Gross profit

77.3

79.9

77.0

79.1

Operating expenses:

Selling, general and administrative

56.4

59.2

56.6

59.4

Restructuring and other charges

0.7

1.7

0.9

1.5

Goodwill impairment

0.5

—

0.3

—

Impairment of other intangible assets

0.4

—

0.2

—

Total operating expenses

58.0

60.9

58.1

60.9

Operating income

19.3

19.0

18.9

18.2

Interest expense

0.9

0.9

0.9

0.9

Interest income and investment income, net

0.3

0.3

0.4

0.3

Other components of net periodic benefit cost

—

—

—

—

Earnings before income taxes

18.7

18.4

18.3

17.6

Provision for income taxes

4.3

15.1

4.0

9.7

Net earnings

14.4

3.3

14.3

7.9

Net earnings attributable to noncontrolling interests

(0.1
)
—

(0.1
)
(0.1
)

Net earnings attributable to The Estée Lauder Companies Inc.

14.3
%
3.3
%
14.3
%
7.8
%

Three Months Ended

Six Months Ended

December 31

December 31


2019

2018

2019

2018

Net sales

100.0
%
100.0
%
100.0
%
100.0
%
Cost of sales

22.5

22.7

22.9

23.0

Gross profit

77.5

77.3

77.1

77.0

Operating expenses:

Selling, general and administrative

54.9

56.4

55.4

56.6

Restructuring and other charges

0.1

0.7

0.4

0.9

Goodwill impairment

11.0

0.5

6.0

0.3

Impairment of other intangible assets

5.8

0.4

3.1

0.2

Total operating expenses

71.8

58.0

64.9

58.1

Operating income

5.6

19.3

12.2

18.9

Interest expense

0.8

0.9

0.8

0.9

Interest income and investment income, net

0.3

0.3

0.3

0.4

Other components of net periodic benefit cost

—

—

—

—

Other income

12.5

—

6.8

—

Earnings before income taxes

17.5

18.7

18.4

18.3

Provision for income taxes

5.4

4.3

4.8

4.0

Net earnings

12.1

14.4

13.6

14.3

Net earnings attributable to noncontrolling interests

(0.1)

(0.1)

(0.1)

(0.1)

Net earnings attributable to The Estée Lauder Companies Inc.

12.0
%
14.3
%
13.5
%
14.3
%
Not adjusted for differences caused by rounding

~~In order to meet the demands of consumers, we~~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 with U.S. GAAP. See Reconciliations of Non-GAAP Financial Measures beginning on page 5047 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

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THE ESTÉE LAUDER COMPANIES INC.

We operate on a global basis, with the majority of our net sales generated outside the 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 outside the 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 year~~current-period results using ~~prior year~~prior-year period weighted-average foreign currency exchange ~~rates. Beginning in fiscal 2019,~~rates and adjusting for the ~~Company adopted a new accounting standard related to hedging that resulted in gains/losses on our~~period-over-period impact of foreign currency cash flow hedging ~~activities to now be reflected in Net sales, where in prior periods they were reflected in Cost of sales and Selling, general and administrative expenses, see~~ ~~Notes to Consolidated Financial Statements, Note 5 — Derivative Financial Instruments.~~ ~~To better assess our performance in a constant currency environment, beginning in fiscal 2019 we are excluding the impact of these hedging activities in our constant currency calculations.~~

~~Overview~~activities.

Overview

We believe that the best way to increase stockholder value is to continue providing superior products and services in the most efficient and effective manner while recognizing consumers’ changing behaviors and shopping preferences. Accordingly, our long-term strategy has numerous initiatives across geographic regions, product categories, brands, channels of distribution and functions designed to grow our sales, provide cost efficiencies, leverage our strengths and make us more productive and profitable. We plan to build upon and leverage our history of outstanding creativity and innovation, high quality products and services, and engaging communications while investing for long-term sustainable growth. Elements of our strategy are described in the Overview on pages ~~23-25~~25-27 of our Annual Report on Form 10-K for the year ended June 30, ~~2018,~~2019, as well as below.

During the second quarter of fiscal ~~2019,~~2020, our global net sales momentum continued, fueled by our multiple engines of growth. Net sales grew 7%across all regions and product categories. The 15% growth as compared ~~with~~to the prior-year period was led by our skin care product category and ~~makeup product categories.~~our Europe, the Middle East & Africa and Asia/Pacific regions. We continued to benefit from growth in global prestige skin care. The strong net sales growth in skin care reflected increases in every region, with contributions from Estée Lauder, La Mer, Origins and ~~Origins continued their strong growth in skin care, with~~Clinique. We grew makeup category net sales ~~from each growing double digits.~~in the quarter, led by M·A·C in Asia/Pacific, Estée Lauder and Bobbi Brown in Asia/Pacific and in our travel retail business and Tom Ford globally. This growth was partially offset by a decline in prestige makeup generally in North America, which impacted many of our brands.

Internationally, net sales grew in nearly every market, led by China and our travel retail business. The net sales growth for the period also reflected higher net sales from ~~Estée Lauder, M~~žAž~~C and Tom Ford drove the makeup category growth, with net sales from BECCA nearly doubling. Internationally, our net sales growth was led by China and Hong Kong, and to a lesser extent~~most developed markets across Europe, the Middle East ~~and Japan, while our travel retail business continued to generate~~& Africa as well as double-digit ~~net sales increases.~~increases in Korea. In aggregate, emerging markets outside of China rose high single-digits. We believe that our success has been due, in part, to our sharp focus on key shopping events in the quarter (such as Singles’ Day and Christmas) as well as to our continued focus on strengthening consumer engagement by leveraging digital marketing and enhancing our social media strategies and execution, as we continue to pivot towards areas of prestige beauty where we see the greatest opportunities.

On December 18, 2019, we acquired the remaining equity interest in Have&Be Co. Ltd. (“Have & Be”), the global skin care company behind Dr. Jart+ and men’s grooming brand Do The Right Thing. We originally acquired a minority interest in Have & Be in December 2015. This acquisition is expected to further strengthen our leadership position in skin care and expand our consumer reach in Asia/Pacific, North America, the United Kingdom and travel retail. The results of operations of Have & Be will be reported in future periods on a one-month lag to facilitate consolidated reporting. Accordingly, operating income for the three and six months ended December 31, 2019 does not include the results of operations of Have & Be since the date of acquisition, which were not material.

While our business is performing well overall, we continue to face strong competition globally and economic challenges in certain countries. ~~In particular, we~~We are cautious of the continued decline in retail traffic primarily related to certain brick-and-mortar stores in the United States and the United Kingdom. This is due to the impact of shifts in consumer preferences as to where and how they shop, as well as adverse macroeconomic conditions in ~~those countries.~~the United Kingdom. Our business in Hong Kong continues to be challenged, as the ongoing situation there has negatively impacted traffic in downtown shops and the airport and also led to intermittent store closures. We continue to monitor the geopolitical tensions between the United States and ~~are developing scenarios~~China 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 ~~address,~~monitor the potential implications of the ongoing economic and political ~~uncertainty~~uncertainties stemming from the United Kingdom’s ~~anticipated~~ exit and transition from the European ~~Union.~~Union (i.e. “Brexit”) and continue developing our risk mitigation strategies to address such uncertainties. These strategies include changes related to regulatory and legislative compliance, assessing alternatives to supply chain routing, revising customer arrangements and analyzing inventory levels. We are monitoring the potential impacts of the recent outbreak of the coronavirus on our global business. After experiencing continued strong momentum into January, we have seen a significant decline in air travel and consumer traffic in key shopping and tourist areas. Although it is difficult to anticipate the full impact of the coronavirus on our business, global travel retail, localities most affected by the virus outbreak and destination markets favored by tourists are expected to experience the greatest negative impact in the coming months followed by a gradual recovery later in the fiscal year. We are also cautious of foreign currency movements, including their ~~impact~~impacts on tourism. Additionally, we continue to monitor the effects of the global macroeconomic ~~environments in certain countries such as Brazil and in the Middle East;~~environment; social and political issues; regulatory matters, including the imposition of tariffs; geopolitical tensions; global health issues and global security issues.

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THE ESTÉE LAUDER COMPANIES INC.

We believe we can, to some extent, offset the impact of these challenges by continually developing and pursuing a diversified strategy with multiple engines of growth and accelerating areas of strength among our geographic regions, product categories, brands and channels of distribution. However, if economic conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, there could be a negative effect on consumer confidence, demand, spending and willingness or ability to travel and, as a result, on our business. We will continue to monitor these and other risks that may affect our business.

Our “heritage brands” are Estée Lauder, Clinique and Origins. Our “makeup artist brands” are Mž•Až•C and Bobbi Brown. Our “luxury brands” are La Mer, Jo Malone London, Tom Ford, AERIN, RODIN olio lusso, Le Labo, Editions de Parfums Frédéric Malle and By Kilian. Our “designer fragrances” are sold under the Tommy Hilfiger, Donna Karan New York, DKNY, Michael Kors, Kiton and Ermenegildo Zegna ~~and Tory Burch~~ brand names, which we license from their respective owners.

Leading Beauty Forward

~~In May 2016, we announced a~~Information about our multi-year initiative, ~~(“Leading Beauty Forward,” or the “Program”) to build on our strengths and better leverage our cost structure to free resources for investment to continue our growth momentum.~~ Leading Beauty Forward, is ~~designed to enhance our go-to-market capabilities, reinforce our leadership~~described in global prestige beauty and continue creating sustainable value. We plan to approve specific initiatives under Leading Beauty Forward through fiscal 2019 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 complete those initiatives through fiscal 2021. Inclusive of approvals from inception through December 31, 2018, we estimate that Leading Beauty Forward may result in related restructuring and other charges totaling between $900 million and $950 million, before taxes, consisting of employee-related costs, asset write-offs and other costs to implement these initiatives. After its full implementation, we expect Leading Beauty Forward to yield annual net benefits, primarily in Selling, general and administrative expenses, of between $350 million and $450 million, before taxes. These savings can be used to improve margin, mitigate risk and invest in future growth initiatives. For additional information about restructuring and other charges, seeNotes to Consolidated Financial Statements, Note ~~4 —~~5 – Charges Associated with Restructuring and Other Activities. and in the Overview on page 26 of our Annual Report on Form 10-K for the year ended June 30, 2019.

Goodwill and Other Intangible Asset Impairments

During December ~~2018,~~2019, given the continuing declines in prestige makeup, generally in North America, and the ongoing competitive activity, our Too Faced, BECCA and Smashbox reporting ~~unit~~units made revisions to ~~its~~their internal forecasts ~~reflecting a slowdown~~concurrent with our brand strategy review process. We concluded that the changes in circumstances in these reporting units triggered the need for an interim impairment review of ~~its makeup business driven by increased competitive activity~~their respective trademarks and ~~lower than expected growth~~goodwill. These changes in ~~key retail channels~~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 ~~brand.~~trademarks and recoverability tests for the long-lived assets as of December 31, 2019. We concluded that the carrying amounts of the long-lived assets were recoverable. We also concluded that the carrying values of the trademarks exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded impairment charges. After adjusting the carrying value of the trademarks, we completed interim quantitative impairment tests for goodwill and recorded goodwill impairment charges for each of these reporting units. The fair value of each reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. A summary of the impairment charges for the three and six months ended December 31, 2019 and the remaining trademark and goodwill carrying values as of December 31, 2019, for each reporting unit, are as follows:

(In millions)

Impairment Charge

Carrying Value
Reporting Unit:

Trademark

Goodwill

Trademark

Goodwill
Too Faced

$
211

$
430

$
314

$
175
BECCA

33

35

65

63
Smashbox

22

46

33

26
Total

$
266

$
511

$
412

$
264

The impairment charges were reflected in the makeup product category and in The Americas region.

The key assumptions used to determine the estimated fair value of the reporting units are primarily predicated on the success of future new product launches, the achievement of international distribution expansion plans, and the realization of cost reduction and other efficiency efforts. If such plans do not materialize, or if there are further challenges in the business environments in which these reporting units operate, resulting changes in the key assumptions could have negative impacts on the estimated fair values of the reporting units and it is possible we could recognize additional impairment charges in the future.

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THE ESTÉE LAUDER COMPANIES INC.

In addition, during December 2019, our GLAMGLOW reporting unit updated its projected operating results to reflect lower demand for its products, impacted by shifts in market trends and key customer performance in the core markets in which its products are sold and concurrent with our brand strategy review process. We concluded that these changes in circumstances in ~~the Smashbox~~this reporting unit triggered the need for an interim impairment review of its trademark and goodwill. ~~Accordingly,~~Based on the review, we ~~performed an interim impairment test as of December 31, 2018. We~~ concluded ~~that~~ the ~~carrying~~fair value of the ~~Smashbox~~GLAMGLOW trademark exceeded its estimated fair value, which was determined utilizing a royalty rate to determine discounted projected future cash flows. As a result, we recognized an impairment charge of $18 million for the trademark. After adjusting the carrying value ~~of the trademark, we~~by approximately 12%. We completed an interim quantitative impairment test for goodwill and ~~recorded a~~concluded the fair value of the GLAMGLOW goodwill ~~impairment charge related to the Smashbox reporting unit of $20 million.~~exceeded its carrying value by approximately 5%. The fair value of the reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. ~~These impairment charges were reflected~~As of December 31, 2019, the carrying value of the GLAMGLOW trademark and goodwill was $63 million and $114 million, respectively. If this reporting unit is adversely affected by a softness in the ~~makeup product category and~~retail environment for its products in the ~~Americas region. The key assumptions used~~future, or if other business disruptions arise that cause a change to ~~determine~~its long-term financial projections, there could be a negative effect on the ~~estimated~~ fair value of the ~~reporting unit are predicated on the success of future new product launches, the achievement of international distribution expansion plans,~~related trademark 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 environment in which this reporting unit operates, a resulting change in the key assumptions could have a negative impact on the estimated fair value of the reporting unitgoodwill, and it is possible we could recognize ~~an additional~~ impairment ~~charge. As of December 31, 2018,~~charges in the ~~remaining carrying values of the goodwill and trademark related to the Smashbox reporting unit were $120 million and $59 million, respectively.~~future.

NET SALES

Three Months Ended
December 31

Six Months Ended
December 31

($ in millions)

2018

2017

2018

2017

As Reported:

Net sales

$
4,005

$
3,744

$
7,529

$
7,018

$ Change from prior-year period

261

511

% Change from prior-year period

7
%

7
%

Non-GAAP Financial Measure(1):

% Change from prior-year period in constant currency

9
%

9
%

Three Months Ended

Six Months Ended

December 31

December 31
($ in millions)

2019

2018

2019

2018
As Reported:








Net sales

$
4,624

$
4,005

$
8,519

$
7,529
$ Change from prior-year period

619



990


% Change from prior-year period

15
%



13
%



Non-GAAP Financial Measure⁽¹⁾:




% Change from prior-year period in constant currency

16
%



14
%


~~(1)~~ ~~See~~ ~~“Reconciliations of Non-GAAP Financial Measures”~~ ~~beginning on page 50~~
(1) See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

For the three and six months ended December 31, ~~2018,~~2019, reported net sales increased in ~~the skin care, makeup and hair care~~all major product categories and grew predominantly in the Asia/Pacific and Europe, the Middle East & Africa ~~and Asia/Pacific.~~geographic regions. Skin care net sales primarily benefited from higher sales of Estée Lauder, ~~and~~ La Mer, Origins and Clinique products. ~~Net~~The net sales increases from Estée Lauder MžAžC and Tom Ford ~~as well as strong growth from BECCA,~~ drove the increase in the makeup product category. Fragrance net sales primarily reflected higher net sales from Jo Malone London and Tom Ford. Each of our product categories benefited from targeted expanded consumer reach, new product offerings, and the continued success of certain hero franchises. Net sales increases in China and ~~Hong Kong continued to drive growth internationally, which contributed to the growth in our online channel (primarily third-party online platforms), while the growth in~~ our travel retail business continued to ~~benefit from the increase in international passenger traffic, particularly by Chinese travelers.~~drive growth internationally.

~~During the first quarter of fiscal 2019, the Company adopted~~ ~~Financial Accounting Standards Board Accounting Standards Codification Topic 606 — Revenue from Contracts with Customers (“ASC 606”).~~ The adoption of ASC 606 resulted in the deferral of a portion of product sales primarily related to future obligations (i) to provide gift with purchase and purchase with purchase promotional products and (ii) to satisfy customer loyalty program reward obligations, as well as the timing and classification of certain net demonstration payments to and from customers. The collective impact of the adoption of ASC 606 reduced reported net sales for the three and six months ended December 31, 2018 by $67 million and $134 million, respectively. For further information, see ~~Notes to Consolidated Financial Statements, Note 7 — Revenue Recognition~~.
~~Product Categories~~
The change in net sales in each product category for the three and six months ended December 31, 2018 included the impact of the adoption of ASC 606, which resulted in an increase (reduction) to net sales, as follows:

December 31, 2018

(In millions)

Three Months Ended

Six Months
Ended

Skin Care

$
(48
)
$
(88
)
Makeup

(14
)
(31
)
Fragrance

(9
)
(18
)
Hair Care

2

1

Other

2

2

Total

$
(67
)
$
(134
)
~~Skin Care~~

Three Months Ended
December 31

Six Months Ended
December 31

($ in millions)

2018

2017

2018

2017

As Reported:

Net sales

$
1,732

$
1,494

$
3,218

$
2,769

$ Change from prior-year period

238

449

% Change from prior-year period

16
%

16
%

Non-GAAP Financial Measure(1):

% Change from prior-year period in constant currency

18
%

18
%

~~(1)~~ ~~See~~ ~~“Reconciliations of Non-GAAP Financial Measures”~~ ~~beginning on page 50 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.~~
Reported skin care net sales increased, reflecting higher net sales from Estée Lauder and La Mer, combined, of approximately $251 million and $459 million for the three and six months ended December 31, 2018, respectively. Net sales increased from Estée Lauder, led by China and Hong Kong, reflecting the continued strength of existing product franchises, such as Advanced Night Repair, Perfectionist and Nutritious, and new product launches, such as Advanced Night Repair Eye Supercharged Complex, which drove growth in virtually all channels of distribution, primarily our travel retail, specialty-multi and online channels. The increase in net sales from La Mer reflected growth from most markets, led by China and Hong Kong, and benefited from existing and new products, such as The Treatment Lotion Hydrating Mask and The Luminous Lifting Cushion Foundation, and targeted expanded consumer reach. Also contributing to the growth of La Mer was the increase in Chinese travelers, which led to the brand’s growth in travel retail and department stores.
~~The skin care~~total net sales increases were impacted by approximately ~~$37~~$22 million and ~~$54~~$62 million of unfavorable foreign currency translation for the three and six months ended December 31, ~~2018,~~2019, respectively.

Product Categories

~~Makeup~~Skin Care

Three Months Ended
December 31

Six Months Ended
December 31

($ in millions)

2018

2017

2018

2017

As Reported:

Net sales

$
1,560

$
1,515

$
2,966

$
2,887

$ Change from prior-year period

45

79

% Change from prior-year period

3
%

3
%

Non-GAAP Financial Measure(1):

% Change from prior-year period in constant currency

5
%

5
%

Three Months Ended

Six Months Ended

December 31

December 31
($ in millions)

2019

2018

2019

2018
As Reported:








Net sales

$
2,205

$
1,732

$
4,047

$
3,218
$ Change from prior-year period

473



829


% Change from prior-year period

27
%



26
%



Non-GAAP Financial Measure⁽¹⁾:








% Change from prior-year period in constant currency

28
%



27
%


~~(1)~~
(1) See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Table of ~~Non-GAAP Financial Measures”~~ ~~beginning on page 50 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.~~Contents

THE ESTÉE LAUDER COMPANIES INC.

Reported ~~makeup~~skin care net sales increased ~~reflecting~~in every region and reflected higher net sales from Estée Lauder, MžAžCLa Mer, Origins and ~~Tom Ford,~~Clinique, combined, of approximately ~~$97~~$447 million and ~~$184~~$805 million for the three and six months ended December 31, ~~2018,~~2019, respectively. Net sales increased from Estée Lauder in both periods, led by our travel retail business and China, reflecting the continued success of existing product franchises, such as Advanced Night Repair, Perfectionist, Re-Nutriv, Revitalizing Supreme and Micro Essence, and new product launches, such as Advanced Night Repair Intense Reset Concentrate. The ~~higher~~increase in net sales from ~~Estée Lauder were primarily due to the success of our Double Wear franchise~~La Mer in both periods reflected growth across all geographic regions, and ~~Futurist Aqua Brilliance line of~~benefited from existing products, ~~which drove higher net sales in China, Hong Kong~~such as The Treatment Lotion, and ~~Korea,~~product relaunches, such as The Regenerating Serum, as well as ~~our travel retail business. The net~~targeted expanded consumer reach and stronger demand for holiday sets. Net sales ~~increase~~ from MžAžCOrigins in both periods ~~was primarily due to continued growth in China, Hong Kong and the Middle East. The increase for the brand also~~ reflected higher net sales ~~in our travel retail business, online third-party platforms~~of treatment lotions and ~~the specialty-multi channel. Partially offsetting these increases were lower net sales from the United Kingdom due to continued competitive pressures~~moisturizers and, adverse macroeconomic conditions, as well as continued declines in the United States primarily due to slower traffic in certain department stores and freestanding stores. The net sales increase in both periods from Tom Ford was driven by higher net sales of lipstick and eyeshadow products in Asia/Pacific, in particular China, and our travel retail business.

~~These increases were partially offset by lower net sales from Clinique and Smashbox, combined, of $52 million and $99 million~~ for the three ~~and six~~ months ended December 31, ~~2018, respectively.~~2019, also reflected growth in all regions. The ~~decline~~continued success of certain hero franchises, as well as strength from moisturizers and anti-aging products, contributed to the increase in net sales from Clinique ~~reflected the negative impact of the liquidation and closure of a certain North American retailer, as well as adverse macroeconomic conditions~~ in ~~the United Kingdom. The lower net sales from Smashbox reflected the slowdown of its makeup business driven by increased competitive activity and lower growth in key retail channels for the brand.~~both periods.

The ~~makeup~~skin care net sales increases were impacted by approximately ~~$36~~$10 million and ~~$65~~$26 million of unfavorable foreign currency translation for the three and six months ended December 31, ~~2018,~~2019, respectively.

~~Fragrance~~Makeup

Three Months Ended
December 31

Six Months Ended
December 31

($ in millions)

2018

2017

2018

2017

As Reported:

Net sales

$
537

$
565

$
1,009

$
1,041

$ Change from prior-year period

(28
)

(32
)

% Change from prior-year period

(5
)%

(3
)%

Non-GAAP Financial Measure(1):

% Change from prior-year period in constant currency

(2
)%

(1
)%


	Three Months Ended					Six Months Ended
	December 31					December 31
($ in millions)	2019			2018		2019			2018
As Reported:
Net sales	$	1,660		$	1,560	$	3,103		$	2,966
$ Change from prior-year period		100					137
% Change from prior-year period		6	%				5	%

Non-GAAP Financial Measure⁽¹⁾:
% Change from prior-year period in constant currency		7	%				5	%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 5047 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported ~~fragrance~~makeup net sales ~~decreased~~increased for the three months ended December 31, 2019, reflecting higher net sales from Estée Lauder, Tom Ford, Bobbi Brown and La Mer of approximately $101 million, combined. For the six months ended December 31, ~~2018, reflecting lower~~2019, reported makeup net sales increased from these brands as well as from M·A·C by $166 million, combined. The higher net sales from Estée Lauder ~~and certain of our designer fragrances, combined, of approximately $54 million and $78 million respectively. The net sales decline from Estée Lauder was primarily due to the change~~ in ~~the mix of products included in the brand’s holiday blockbuster promotion. The lower net sales from certain of our designer fragrances~~both periods were primarily due to an unfavorable comparison to the prior-year launch of Michael Kors Sexy Ruby in North America, as well as our strategic decision to reduce net sales to certain distributors in the United Kingdom.

Partially offsetting these decreases were higher net sales from Jo Malone London, Le Labo and Tom Ford, combined, of approximately $30 million and $50 million for the three and six months ended December 31, 2018, respectively. The increase in net sales from Jo Malone London for both periods was driven primarily by targeted expanded consumer reach, as well as new product launches. Net sales increased from Le Labo due to the success of ~~existing~~our Double Wear franchise and Futurist line of products, ~~new product launches~~which drove higher net sales in China and ~~targeted expanded consumer reach globally, which led to strong growth in~~ our ~~department store, freestanding store and specialty-multi channels. Net~~travel retail business. The net sales ~~increased~~increase from Tom Ford in both periods was primarily due to continued growth in Asia/Pacific, led by China and Japan, which resulted in higher net sales from third-party online malls, driven by Tmall, as well as the strength in lip and eye products, including the Lip Color and Eye Quad line of products, respectively, and targeted expanded consumer reach. Net sales from Bobbi Brown in both periods reflected higher net sales in Asia/Pacific, as well as our travel retail business, which benefited from existing products such as Intensive Skin Serum Foundation. The higher net sales in both periods from La Mer were primarily due to growth internationally, which benefited from successful holiday events and campaigns on Tmall, existing products, such as The Luminous Lifting Cushion Foundation, and targeted expanded consumer reach. Net sales increased from M·A·C for the six months ended December 31, 2019 reflecting higher net sales in Asia/Pacific primarily due to the growth from ~~the Private Blend franchise and~~Tmall in China, targeted expanded consumer ~~reach.~~reach and the strength in lip and foundation products.

These increases were partially offset by lower net sales from BECCA and Smashbox, combined, of approximately $16 million for the three months ended December 31, 2019. For the six months ended December 31, 2019, the increases were partially offset by lower net sales from these brands, as well as from Too Faced and Clinique, of approximately $54 million, combined. The decreases in both periods reflected declines in North America, due to the general decline in prestige makeup and ongoing competitive activity. The lower net sales from BECCA also reflected a difficult comparison to certain prior-year launches.

The ~~fragrance~~makeup net sales ~~decreases~~increases were impacted by approximately ~~$15~~$10 million and ~~$21~~$26 million of unfavorable foreign currency translation for the three and six months ended December 31, ~~2018,~~2019, respectively.

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~~Hair Care~~THE ESTÉE LAUDER COMPANIES INC.

Fragrance

Three Months Ended
December 31

Six Months Ended
December 31

($ in millions)

2018

2017

2018

2017

As Reported:

Net sales

$
154

$
144

$
297

$
280

$ Change from prior-year period

10

17

% Change from prior-year period

7
%

6
%

Non-GAAP Financial Measure(1):

% Change from prior-year period in constant currency

8
%

7
%


	Three Months Ended					Six Months Ended
	December 31					December 31
($ in millions)	2019			2018		2019			2018
As Reported:
Net sales	$	581		$	537	$	1,043		$	1,009
$ Change from prior-year period		44					34
% Change from prior-year period		8	%				3	%

Non-GAAP Financial Measure⁽¹⁾:
% Change from prior-year period in constant currency		9	%				4	%

(1)See “Reconciliations of Non-GAAP Financial Measures”beginning on page 5047 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported fragrance net sales increased, reflecting higher net sales from Jo Malone London and Tom Ford, combined, of approximately $40 million and $73 million for the three and six months ended December 31, 2019, respectively. In both periods, the net sales increase from Jo Malone London reflected growth across all geographic regions primarily due to the continued success of certain hero franchises, new product launches, such as Poppy & Barley, the stronger demand of holiday sets, and targeted expanded consumer reach. Net sales increased from Tom Ford in both periods across all geographic regions, which benefited from higher net sales from certain Private Blend franchises, new product launches, such as Métallique and Soleil Neige, and the stronger demand for holiday sets.

Partially offsetting these increases for the six months ended December 31, 2019 were lower net sales from certain of our designer fragrances and Estée Lauder of approximately $41 million, combined. Net sales declined from certain designer fragrances reflecting the decline in North America due, in part, to an unfavorable comparison to certain prior-year launches and declines for our products in the specialty-multi and department store channels. The net sales decline from Estée Lauder was primarily due to an unfavorable comparison to the prior-year launch of Beautiful Belle in North America and the United Kingdom.

The fragrance net sales increases were impacted by approximately $2 million and $9 million of unfavorable foreign currency translation for the three and six months ended December 31, 2019, respectively.

Hair Care


	Three Months Ended					Six Months Ended
	December 31					December 31
($ in millions)	2019			2018		2019			2018
As Reported:
Net sales	$	162		$	154	$	298		$	297
$ Change from prior-year period		8					1
% Change from prior-year period		5	%				—

Non-GAAP Financial Measure⁽¹⁾:
% Change from prior-year period in constant currency		5	%				1	%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported hair care net sales increased for the three and six months ended December 31, ~~2018,~~2019, primarily reflecting growth from Aveda. In both periods, the higher net sales from Aveda ~~particularly in our online and travel retail channels,~~ were primarily driven by new product launches, such as Nutriplenish and Full Spectrum Demi Plus, and the relaunch of Sap Moss, as well as the continued success of hero franchises such as the ~~Rosemary Mint and Shampure lines~~Damage Remedy line of ~~products, as well as~~products.

The growth in hair care net sales for the ~~launch of Cherry Almond Softening Shampoo and Conditioner.~~

~~Partially offsetting the increase in both periods were~~six months ended December 31, 2019 was mostly offset by lower net sales from Bumble and bumble ~~primarily~~ due to the softness in North America, which impacted the salon ~~channel in North America.~~and specialty-multi channels.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

Geographic Regions

The Americas

The change in net sales in each geographic region for the three and six months ended December 31, 2018 included the impact of the adoption of ASC 606, which resulted in an increase (reduction) to net sales, as follows:

December 31, 2018

(In millions)

Three Months Ended

Six Months
Ended

The Americas

$
(39
)
$
(99
)
Europe, the Middle East & Africa

(4
)
4

Asia/Pacific

(24
)
(39
)
Total

$
(67
)
$
(134
)

~~The Americas~~

Three Months Ended
December 31

Six Months Ended
December 31

($ in millions)

2018

2017

2018

2017

As Reported:

Net sales

$
1,218

$
1,308

$
2,454

$
2,637

$ Change from prior-year period

(90
)

(183
)

% Change from prior-year period

(7
)%

(7
)%

Non-GAAP Financial Measure(1):

% Change from prior-year period in constant currency

(6
)%

(6
)%


	Three Months Ended					Six Months Ended
	December 31					December 31
($ in millions)	2019			2018		2019			2018
As Reported:
Net sales	$	1,226		$	1,218	$	2,386		$	2,454
$ Change from prior-year period		8					(68)
% Change from prior-year period		1	%				(3)	%

Non-GAAP Financial Measure⁽¹⁾:
% Change from prior-year period in constant currency		1	%				(3)	%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 5047 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported net sales in The Americas for the three months ended December 31, 2019 increased due to higher net sales in the United States of approximately $10 million, reflecting higher net sales from Estée Lauder, Jo Malone London and Tom Ford, which drove the growth in the fragrance and skin care product categories. These increases more than offset the softness in North America for certain of our makeup products as previously discussed.

Reported net sales in The Americas for the six months ended December 31, ~~2018~~2019 decreased due to lower net sales in the United States of ~~$71~~approximately $73 million, primarily from M·A·C, Too Faced and ~~$148 million, respectively, driven primarily by~~BECCA due to the ~~adoption of ASC 606~~decline in prestige makeup generally in North America. Also contributing to the decline was an unfavorable comparison to prior-year launch activity from certain designer fragrances, Estée Lauder and ~~the negative impact from the liquidation and closure of a certain North American retailer. In addition,~~BECCA.

The changes in net sales in ~~Latin America and Canada, combined, decreased $18~~The Americas were impacted by approximately $1 million and ~~$35~~$5 million of favorable foreign currency translation for the three and six months ended December 31, ~~2018, respectively, due to lower~~2019, respectively.

Europe, the Middle East & Africa


	Three Months Ended					Six Months Ended
	December 31					December 31
($ in millions)	2019			2018		2019			2018
As Reported:
Net sales	$	2,079		$	1,767	$	3,756		$	3,200
$ Change from prior-year period		312					556
% Change from prior-year period		18	%				17	%

Non-GAAP Financial Measure⁽¹⁾:
% Change from prior-year period in constant currency		18	%				19	%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported net sales in ~~both periods from M~~žAž~~C, Clinique and Smashbox.~~

~~Partially offsetting these decreases were~~Europe, the Middle East & Africa increased, primarily reflecting higher net sales from ~~BECCA~~our travel retail business and, to a lesser extent, Russia of ~~$13~~approximately $297 million and ~~$11~~$533 million, combined, for the three and six months ended December 31, ~~2018, respectively, primarily due to the BFF Collection~~2019, respectively. In both periods, net sales increased in our travel retail business across most brands, led by Estée Lauder, La Mer and ~~the Ultimate Lipstick Love~~Origins, driven, in part, by increased passenger traffic, as well as new product ~~launches.~~launches, including Estée Lauder’s Advanced Night Repair Intense Reset Concentrate and The Regenerating Serum from La Mer. Also ~~offsetting the decrease for the six months ended December 31, 2018 were~~contributing to this increase was strategic investment spending to support both new and existing products. The higher net sales in Russia in both periods were primarily driven by Estée Lauder, Jo Malone London and Tom Ford, reflecting the success of hero franchises, such as Advance Night Repair from ~~La Mer of approximately $14 million primarily due to existing~~Estée Lauder, and new ~~products,~~product launches, such as ~~well as targeted expanded consumer reach~~.Poppy & Barley from Jo Malone London and Métallique and Soleil Neige from Tom Ford.

The net sales ~~decreases~~increases in ~~The Americas included~~Europe, the Middle East & Africa were impacted by approximately ~~$10~~$12 million and ~~$18~~$36 million of unfavorable foreign currency translation for the three and six months ended December 31, ~~2018,~~2019, respectively.

Table of Contents

~~Europe, the Middle East & Africa~~THE ESTÉE LAUDER COMPANIES INC.

Asia/Pacific

Three Months Ended
December 31

Six Months Ended
December 31

($ in millions)

2018

2017

2018

2017

As Reported:

Net sales

$
1,767

$
1,562

$
3,200

$
2,820

$ Change from prior-year period

205

380

% Change from prior-year period

13
%

13
%

Non-GAAP Financial Measure(1):

% Change from prior-year period in constant currency

16
%

16
%


	Three Months Ended					Six Months Ended
	December 31					December 31
($ in millions)	2019			2018		2019			2018
As Reported:
Net sales	$	1,319		$	1,020	$	2,377		$	1,875
$ Change from prior-year period		299					502
% Change from prior-year period		29	%				27	%

Non-GAAP Financial Measure⁽¹⁾:
% Change from prior-year period in constant currency		30	%				28	%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 5047 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported net sales in ~~Europe, the Middle East & Africa~~Asia/Pacific increased, ~~primarily~~ reflecting higher net sales ~~from our travel retail business~~in China and ~~to a lesser extent, the Middle East~~Japan, combined, of approximately ~~$235~~$308 million and ~~$436~~$511 million ~~combined,~~ for the three and six months ended December 31, ~~2018,~~2019, respectively. ~~Net~~In both periods, the higher net sales ~~increased~~ in ~~our travel retail business, reflecting strong~~China reflected double-digit growth ~~across most brands,~~from virtually every brand, led by Estée Lauder, La Mer, Mž·Až·C and Tom Ford, ~~driven,~~continued growth in ~~part, by an increase in international passenger traffic, particularly by Chinese travelers, as well as~~skin care and makeup, targeted expanded consumer reach, and new product ~~offerings,~~launches, such as Estée Lauder’s Advanced Night Repair ~~Eye Supercharged Complex.~~Intense Reset Concentrate and a new larger size of The ~~higher~~Treatment Lotion from La Mer. The net sales increase in China benefited every channel, led by online (due to the continued growth and successful holiday events and campaigns on Tmall), department stores, freestanding stores and specialty-multi. In both periods, the net sales growth in Japan reflected growth in virtually every brand, led by M·A·C and Jo Malone London, reflecting the success of certain hero franchises, new product launches and targeted expanded consumer reach, which contributed to growth in all major product categories and growth in virtually every channel.

These increases were partially offset by lower net sales in ~~the Middle East in both periods were primarily driven by M~~žAž~~C, reflecting a favorable comparison due to the rebalancing~~Hong Kong of ~~inventory in the prior year.~~

~~Partially offsetting the net sales increases~~approximately $33 million and $51 million for the three and six months ended December 31, ~~2018 were lower net sales~~2019, respectively, due to the ongoing situation there that has continued to negatively impact traffic in downtown shops and the ~~United Kingdom of approximately $17 million~~airport and ~~$30 million, respectively, primarily driven by competitive pressures, as well as adverse macroeconomic conditions.~~has also led to intermittent store closures.

The net sales increases in ~~Europe, the Middle East & Africa included~~Asia/Pacific were impacted by approximately ~~$47~~$11 million and ~~$78~~$31 million of unfavorable foreign currency translation for the three and six months ended December 31, ~~2018,~~2019, respectively.

~~Asia/Pacific~~

Three Months Ended
December 31

Six Months Ended
December 31

($ in millions)

2018

2017

2018

2017

As Reported:

Net sales

$
1,020

$
874

$
1,875

$
1,561

$ Change from prior-year period

146

314

% Change from prior-year period

17
%

20
%

Non-GAAP Financial Measure(1):

% Change from prior-year period in constant currency

20
%

23
%

~~(1)~~ ~~See~~ ~~“Reconciliations of Non-GAAP Financial Measures”~~ ~~beginning on page 50 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.~~

Reported net sales in Asia/Pacific increased, reflecting higher net sales in China and Hong Kong, combined, of approximately $137 million and $287 million for the three and six months ended December 31, 2018, respectively. In both periods, the higher net sales in China, led by Estée Lauder, MžAžC and La Mer, reflected continued growth from the strong demand for skin care and makeup products that benefitted virtually every channel, particularly online (primarily third-party online platforms), department stores, freestanding stores and specialty-multi. The net sales growth in Hong Kong in both periods, led by Estée Lauder, La Mer, MžAž~~C and Tom Ford, reflected a strong retail environment due to increased tourism, targeted expanded consumer reach, new product launches and the continued success of certain hero franchises.~~

The net sales increases in Asia/Pacific included approximately $32 million and $46 million of unfavorable foreign currency translation for the three and six months ended December 31, 2018, respectively.

We strategically stagger our new product launches by geographic market, which may account for differences in regional sales growth.

GROSS MARGIN

Gross margin ~~decreased~~increased to ~~77.3%~~77.5% and 77.1% for the three ~~months ended December 31, 2018 as compared with 79.9% in the prior-year period,~~ and ~~decreased to 77.0% for the~~ six months ended December 31, ~~2018~~2019, respectively, as compared with ~~79.1%~~77.3% and 77.0% in the prior-year ~~period.~~periods.

	Favorable (Unfavorable) Basis Points
	December 31, 2018
	Three Months Ended		Six Months Ended
Foreign exchange transactions	(25	)	(25	)

					Favorable (Unfavorable) Basis Points
					December 31, 2019
					Three Months Ended	Six Months Ended
Mix of business	85		95		50	65
Obsolescence charges	(50	)	(30	)	(25)	(40)
Manufacturing costs and other	(15	)	(15	)	(5)	(15)
Adoption of new accounting standards (ASC 606 and hedge accounting)	(245	)	(235	)
Subtotal	(250	)	(210	)
Charges associated with restructuring and other activities	(10	)	—
Total	(260	)	(210	)	20	10

The ~~decrease~~increase in gross margin for the three and six months ended December 31, ~~2018 primarily~~2019 reflected the ~~net impact of the adoption of recently issued accounting standards. For more information see~~ ~~Notes to Consolidated Financial Statements, Note 5 — Derivative Financial Instruments~~ ~~and~~ ~~Note 7 — Revenue Recognition.~~ ~~The~~ favorable impact from our mix of business primarily ~~reflected~~due to favorable changes in ~~the shipments of promotional items,~~ strategic pricing and product category mix, ~~partially offset by~~as well as cost of promotional items as a percentage of net sales. Also reflected in the ~~unfavorable~~favorable impact from our mix of business for the three months ended December 31, 2019 was a favorable change from new product ~~introductions.~~introductions and relaunches. Partially offsetting these favorable changes in both periods were higher costs from product sets included in mix of business, as well as unfavorable changes in manufacturing costs and other, including the impacts of incremental tariffs.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

OPERATING EXPENSES

Operating expenses as a percentage of net sales ~~decreased~~increased to ~~58.0%~~71.8% and 64.9% for the three ~~months ended December 31, 2018 as compared with 60.9% in the prior-year period,~~ and ~~decreased to 58.1% for the~~ six months ended December 31, ~~2018~~2019, respectively, as compared with ~~60.9%~~58.0% and 58.1% in the prior-year ~~period.~~periods.

	Favorable (Unfavorable) Basis Points
	December 31, 2018
	Three Months Ended		Six Months Ended

					Favorable (Unfavorable) Basis Points
					December 31, 2019
					Three Months Ended	Six Months Ended
General and administrative expenses	90		50		(90)	(70)
Advertising, merchandising, sampling and product development	(120	)	(120	)	10	(30)
Selling	130		140		150	150
Shipping	(10	)	—
Adoption of new accounting standard (ASC 606)	180		140
Stock-based compensation	10		20		—	10
Store operating costs	10		20		30	30
Shipping					10	10
Foreign exchange transactions	(10	)	10		20	30
Subtotal	280		260		130	130
Charges associated with restructuring and other activities	110		50		60	50
Goodwill and other intangible asset impairments	(100	)	(50	)	(1,590)	(860)
Changes in fair value of contingent consideration	—		20		20	—
Total	290		280		(1,380)	(680)

For the three and six months ended December 31, ~~2018,~~2019, the ~~improvements~~increases in operating expense margin ~~reflected favorable impacts~~were driven by the impact of goodwill and other intangible asset impairments. In addition, general and administrative expenses increased primarily due to professional service fees (including acquisition-related costs), enhanced capabilities in select corporate functions to support our strategic initiatives, and investments in information systems. These increases were partially offset by improvements from ~~the adoption of ASC 606;~~ selling expenses primarily ~~in North America~~ due to increased efficiencies in our sales operations and lower demonstration costs ~~partially~~ driven by changes in distribution channel mix, as well as efficiencies in our sales operations; and general and administrative expenses due to disciplined expense management. These improvements were offset by increases in advertising and promotional activities primarily due to increased spend to support new product launches, targeted expanded consumer reach, and digital advertising and social media, including costs associated with influencers.mix.

OPERATING RESULTS

Three Months Ended
December 31

Six Months Ended
December 31

($ in millions)

2018

2017

2018

2017

As Reported:

Operating income

$
771

$
710

$
1,423

$
1,279

$ Change from prior-year period

61

144

% Change from prior-year period

9
%

11
%

Operating margin

19.3
%
19.0
%
18.9
%
18.2
%

Non-GAAP Financial Measure(1):

% Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill and other intangible asset impairments and changes in fair value of contingent consideration

8
%

10
%


	Three Months Ended						Six Months Ended
	December 31						December 31
($ in millions)	2019			2018			2019			2018
As Reported:
Operating income	$	261		$	771		$	1,040		$	1,423
$ Change from prior-year period		(510)						(383)
% Change from prior-year period		(66)	%					(27)	%

Operating margin		5.6	%		19.3	%		12.2	%		18.9	%

Non-GAAP Financial Measure⁽¹⁾:
% Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill and other intangible asset impairments and changes in fair value of contingent consideration		23	%					20	%

(1)See “Reconciliations of Non-GAAP Financial Measures”beginning on page 5047 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

The reported operating margin for the three and six months ended December 31, ~~2018 increased~~2019 decreased from the prior-year periods driven by the year-over-year impact of goodwill and other intangible asset impairments of $739 million, partially offset by improvements in gross margin and other operating expenses as a percentage of net sales ~~and lower charges associated with restructuring and other activities, partially offset by the impact of goodwill and other intangible asset impairments and the lower gross margin,~~ as previously noted. ~~Also contributing to the increase in operating margin for the six months ended December 31, 2018 was the favorable impact of changes in the fair value of contingent consideration.~~

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~~Income by Product Categories and Geographic Regions exclude the impact of charges associated with restructuring and other activities.

Table of Contents

~~The adoption of ASC 606, as discussed above, reduced~~THE ESTÉE LAUDER COMPANIES INC.

Product Categories

Skin Care


	Three Months Ended					Six Months Ended
	December 31					December 31
($ in millions)	2019			2018		2019			2018
As Reported:
Operating income	$	772		$	565	$	1,404		$	1,031
$ Change from prior-year period		207					373
% Change from prior-year period		37	%				36	%

Reported skin care operating income increased for the three and six months ended December 31, ~~2018~~2019, driven by ~~$54 million and $85 million, respectively.~~

~~Product Categories~~

The change in operating income in each product category for the three and six months ended December 31, 2018 included the impact of the adoption of ASC 606, which resulted in an increase (reduction) to operating income, as follows:

December 31, 2018

(In millions)

Three Months Ended

Six Months
Ended

Skin Care

$
(33
)
$
(58
)
Makeup

(18
)
(22
)
Fragrance

(5
)
(8
)
Hair Care

1

1

Other

1

2

Total

$
(54
)
$
(85
)

~~Skin Care~~

Three Months Ended
December 31

Six Months Ended
December 31

($ in millions)

2018

2017

2018

2017

As Reported:

Operating income

$
565

$
453

$
1,031

$
780

$ Change from prior-year period

112

251

% Change from prior-year period

25
%

32
%

~~Reported skin care operating income increased in both periods, primarily~~higher results from Estée Lauder and La Mer, ~~due to~~combined, of approximately $221 million and $438 million, respectively. The increases in operating income reflected higher net ~~sales.~~sales, partially offset by strategic investments in advertising and promotional activities and targeted expanded consumer reach.

These increases in the category were partially offset by higher operating expenses relating primarily to professional service fees (including acquisition-related costs), enhanced capabilities in select corporate functions to support our strategic initiatives, and investments in information systems. Also partially offsetting these increases were lower results from Clinique reflecting strategic investments in advertising and promotional activities due, in part, to support new product launches and continued net sales growth.

Makeup

	Three Months Ended December 31					Six Months Ended December 31

											Three Months Ended					Six Months Ended
											December 31					December 31
($ in millions)	2018			2017		2018			2017		2019			2018		2019			2018
As Reported:
Operating income	$	138		$	219	$	299		$	395
Operating income (loss)											$	(611	)	$	138	$	(507	)	$	299
$ Change from prior-year period	(81		)			(96		)				(749	)				(806	)
% Change from prior-year period	(37		)%			(24		)%				(100	+)%				(100	+)%

Non-GAAP Financial Measure(1):
% Change in operating income from the prior-year period adjusting for the impact of goodwill and other intangible asset impairments	(20		)%			(15		)%				(6	)%				(20	)%

(1)	See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported makeup operating ~~income~~results decreased for the three and six months ended December 31, ~~2018~~2019 driven by lower results from ~~Smashbox, Clinique~~Too Faced, BECCA, M·A·C, and ~~Too Faced,~~Smashbox, combined, of approximately ~~$95~~$803 million and ~~$130~~$838 million, respectively. The ~~lower~~fiscal 2020 operating results from Too Faced, BECCA and Smashbox include $641 million, $68 million and $68 million of goodwill and other intangible asset impairments, respectively, and the fiscal 2019 operating results from Smashbox ~~for the three and six months ended December 31, 2018 reflected the declines in net sales, as well as~~included $38 million of goodwill and other intangible asset impairments. The lower results in ~~both periods from Clinique were driven by~~ the category also reflected the net sales declines in ~~net sales, while the lower results from Too Faced reflected~~North America as previously discussed and higher ~~investment spending behind new~~operating expenses relating primarily to professional service fees, enhanced capabilities in select corporate functions to support our strategic initiatives, and ~~existing products, as well as targeted expanded consumer reach.~~investments in information systems.

Partially offsetting the declines in both periods were higher results from Estée Lauder and Clinique, combined, of approximately $71 million. The higher results from Estée Lauder were primarily due to higher net sales, ~~as well as selling efficiencies~~while the increases in ~~North America. The lower results for the three and six months ended December 31, 2018 were further offset by~~operating income from Clinique reflected disciplined expense ~~management and~~management. The operating income from both brands also benefited from selling ~~efficiencies from Clinique, primarily in North America.~~efficiencies.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

Fragrance

	Three Months Ended December 31					Six Months Ended December 31

											Three Months Ended					Six Months Ended
											December 31					December 31
($ in millions)	2018			2017		2018			2017		2019			2018		2019			2018
As Reported:
Operating income	$	84		$	85	$	139		$	172	$	97		$	84	$	163		$	139
$ Change from prior-year period	(1		)			(33		)				13					24
% Change from prior-year period	(1		)%			(19		)%				15	%				17	%

Reported fragrance operating income ~~decreased~~increased for the three months ended December 31, ~~2018,~~2019, driven by ~~lower~~higher results from Tom Ford and Estée Lauder, ~~due to lower~~combined, of approximately $19 million, reflecting higher net sales, ~~offset by~~ disciplined expense management, ~~across all regions.~~and selling efficiencies. Reported fragrance operating income ~~decreased~~increased for the six months ended December 31, ~~2018,~~2019, driven by ~~lower~~higher results from Jo Malone London and ~~Estée Lauder,~~Tom Ford, combined, of approximately ~~$29 million. The increase from Jo Malone London~~$37 million, reflecting higher net sales, ~~was more than~~partially offset by ~~higher operating expenses~~strategic investments in advertising and promotional activities due, in part, to ~~increases in advertising~~support new product launches and ~~promotional activities. The lower results from Estée Lauder reflected lower~~continued net sales ~~offset by disciplined expense management across all regions.~~growth.

Partially offsetting the lower results for the three and six months ended December 31, ~~2018~~2019 were ~~higher~~lower results from ~~Le Labo,~~Clinique, reflecting ~~higher~~lower net sales.

Hair Care

	Three Months Ended December 31					Six Months Ended December 31

											Three Months Ended					Six Months Ended
											December 31					December 31
($ in millions)	2018			2017		2018			2017		2019			2018		2019			2018
As Reported:
Operating income	$	15		$	17	$	29		$	32	$	12		$	15	$	12		$	29
$ Change from prior-year period	(2		)			(3		)				(3)					(17)
% Change from prior-year period	(12		)%			(9		)%				(20)	%				(59)	%

Reported hair care operating income for both periods decreased primarily due to lower results from ~~Bumble and bumble,~~Aveda, reflecting ~~lower net sales. For the three months ended December 31, 2018, the increase~~strategic investments in ~~Aveda net sales was virtually offset by increases in cost of sales and~~ advertising and ~~promotion expenses due~~promotional activities to ~~spending to~~ support ~~the brand’s social media and digital campaign activity, as well as~~ new product launches and ~~digital advertising.~~

~~Partially offsetting the~~net sales growth. The lower results ~~for~~in the ~~six months ended December 31, 2018 were~~category also reflected higher ~~results from Aveda due~~operating expenses relating primarily to ~~the increase~~professional service fees, enhanced capabilities in ~~net sales.~~select corporate functions to support our strategic initiatives, and investments in information systems.

Geographic Regions

~~Geographic Regions~~The Americas


	Three Months Ended					Six Months Ended
	December 31					December 31
($ in millions)	2019			2018		2019			2018
As Reported:
Operating income (loss)	$	(529	)	$	149	$	(354	)	$	383
$ Change from prior-year period		(678	)				(737	)
% Change from prior-year period		(100	+)%				(100	+)%

Non-GAAP Financial Measure⁽¹⁾:
% Change in operating income from the prior-year period adjusting for the impact of goodwill and other intangible asset impairments and changes in fair value of contingent consideration		28	%				1	%

(1)	See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

~~The change in operating income in each geographic region for the three and six months ended December 31, 2018 included the impact~~

Table of ~~the adoption of ASC 606, which resulted in an increase (reduction) to operating income, as follows:~~

December 31, 2018

(In millions)

Three Months Ended

Six Months
Ended

The Americas

$
(21
)
$
(44
)
Europe, the Middle East & Africa

(7
)
1

Asia/Pacific

(26
)
(42
)
Total

$
(54
)
$
(85
)

Contents

~~The Americas~~THE ESTÉE LAUDER COMPANIES INC.

Three Months Ended
December 31

Six Months Ended
December 31

($ in millions)

2018

2017

2018

2017

As Reported:

Operating income

$
(61
)
$
98

$
(28
)
$
198

$ Change from prior-year period

(159
)

(226
)

% Change from prior-year period

(100
+)%

(100
+)%

Non-GAAP Financial Measure(1):

% Change in operating income from the prior-year period adjusting for the impact of goodwill and other intangible asset impairments and changes in fair value of contingent consideration

(100
+)%

(98
)%

Reported operating ~~income~~results in The Americas decreased for the three and six months ended December 31, ~~2018,~~2019, primarily due to ~~lower net sales in~~ the ~~region, investments in information systems and the~~year-over-year impact of goodwill and other intangible asset impairments ~~related~~of $739 million, as previously discussed, and higher expenses relating primarily to ~~Smashbox.~~professional service fees, enhanced capabilities in select corporate functions to support our strategic initiatives, and investments in information systems.

Partially offsetting these decreases in both periods were higher intercompany royalty income, reflecting the value created in The Americas, given the growth of our travel retail business and, to a lesser extent, higher results from Estée Lauder due to an increase in net sales, disciplined expense management and selling efficiencies.

Europe, the Middle East & Africa

	Three Months Ended December 31					Six Months Ended December 31

											Three Months Ended					Six Months Ended
											December 31					December 31
($ in millions)	2018			2017		2018			2017		2019			2018		2019			2018
As Reported:
Operating income	$	628		$	463	$	1,086		$	810	$	505		$	418	$	882		$	675
$ Change from prior-year period	165					276						87					207
% Change from prior-year period	36		%			34		%				21	%				31	%

Reported operating income in Europe, the Middle East & Africa ~~increased for the three and six months ended December 31, 2018 due to~~reflected higher results from our travel retail business and ~~the Middle East,~~Russia, combined, of approximately ~~$152~~$92 million and $282 million, respectively, reflecting the increase in net sales. The higher results in both periods were partially offset by lower results in the United Kingdom of approximately $8 million and $27 million, respectively, due to the decrease in net sales.

~~Asia/Pacific~~

Three Months Ended
December 31

Six Months Ended
December 31

($ in millions)

2018

2017

2018

2017

As Reported:

Operating income

$
239

$
218

$
447

$
378

$ Change from prior-year period

21

69

% Change from prior-year period

10
%

18
%

~~Reported operating income increased in Asia/Pacific, reflecting higher results in China and Hong Kong, combined, of approximately $28 million and $63~~$202 million for the three and six months ended December 31, ~~2018,~~2019, respectively, primarily due to higher net sales. The increases in net sales were partially offset by strategic investment spending in advertising and promotional activities to support the continued net sales growth and targeted expanded consumer reach.

Asia/Pacific


	Three Months Ended					Six Months Ended
	December 31					December 31
($ in millions)	2019			2018		2019			2018
As Reported:
Operating income	$	298		$	239	$	550		$	447
$ Change from prior-year period		59					103
% Change from prior-year period		25	%				23	%

Reported operating income increased in most markets in Asia/Pacific, led by higher results in China of approximately $68 million and $117 million for the three and six months ended December 31, 2019, respectively, driven by net sales growth. The net sales increases in China were partially offset by an increase in advertising and promotional activities to support digital advertising, social media and targeted expanded consumer reach. The growth in operating income was offset by lower results in Hong Kong of approximately $21 million and $38 million for the three and six months ended December 31, 2019, respectively, caused by lower net sales, as previously noted, partially offset by disciplined expense management.

INTEREST AND INVESTMENT INCOME

	Three Months Ended December 31				Six Months Ended December 31

									Three Months Ended				Six Months Ended
									December 31				December 31
(In millions)	2018		2017		2018		2017		2019		2018		2019		2018
Interest expense	$	35	$	32	$	69	$	63	$	38	$	35	$	70	$	69
Interest income and investment income, net	$	12	$	12	$	27	$	24	$	13	$	12	$	27	$	27

Interest expense increased for both periods ~~and~~primarily due to the issuance of additional long-term debt in November 2019, partially offset by lower commercial paper. Interest income and investment income, net increased during the three months ended December 31, 2019, primarily due to overall higher cash balances.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

OTHER INCOME

On December 18, 2019, we acquired the remaining equity interest in Have&Be Co. Ltd. (“Have & Be”), the global skin care company behind Dr. Jart+ and men’s grooming brand Do The Right Thing, for $1,268 million in cash. We originally acquired a minority interest in Have & Be in December 2015, which included a formula-based call option for the remaining equity interest. The original minority interest was accounted for as an equity method investment, which had a carrying value of $133 million at the acquisition date. The acquisition of the remaining equity interest in Have & Be was considered a step acquisition, whereby we remeasured the previously held equity method investment to its fair value of $682 million, resulting in the recognition of a gain of $549 million. The acquisition of the remaining equity interest also resulted in the recognition of a previously unrealized foreign currency gain of $4 million, which was reclassified from accumulated OCI. The total gain on our previously held equity method investment of $553 million is included in Other income in the accompanying consolidated statements of earnings for the three and six months ended December 31, ~~2018, primarily due~~2019.

The amount paid at closing was funded by cash on hand including the proceeds from the issuance of debt. In anticipation of the closing, we transferred cash to ~~increases~~a foreign subsidiary for purposes of making the closing payment. As a result, we recognized a foreign currency gain of $23 million, which is also included in ~~interest rates.~~Other income in the accompanying consolidated statements of earnings for the three and six months ended December 31, 2019. See Notes to Consolidated Financial Statements, Note 2 –Acquisition of Business for additional information.

PROVISION FOR INCOME TAXES

The provision for income taxes represents U.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.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TCJA includes broad and complex changes to the U.S. tax code that impacted our accounting and reporting for income taxes. For further discussion related to the TCJA, see ~~Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies — Income Taxes~~.

	Three Months Ended December 31				Six Months Ended December 31
	2018		2017		2018		2017

									Three Months Ended				Six Months Ended
									December 31				December 31
									2019		2018		2019		2018
Effective rate for income taxes	22.9	%	81.9	%	21.9	%	55.2	%	30.8	%	22.9	%	26.2	%	21.9	%
Basis-point change from the prior-year period	(5,900	)			(3,330	)			790				430

The effective rate for income taxes was 22.9% and 81.9% for the three months ended December 31, 2018 and 2017, respectively, and 21.9% and 55.2% for the six months ended December 31, 2018 and 2017, respectively. The decreaseincrease in the effective tax rate in both periods was primarily attributable to the provisional charges related to the TCJA that were recorded in the prior-year period. Also contributing to the lower effective tax rate was a higher benefit related to share-based compensation awards, the impact of ~~the lower U.S. statutory tax rate~~nondeductible goodwill impairment charges associated with our Too Faced, BECCA and Smashbox reporting units and a ~~lower~~higher effective tax rate on our foreign ~~operations due to a favorable geographic mix~~operations.

Table of ~~earnings, partially offset by the impact of the new minimum tax on global intangible low-taxed income.~~

Contents

THE ESTÉE LAUDER COMPANIES INC.

NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC.

Three Months Ended
December 31

Six Months Ended
December 31

($ in millions, except per share data)

2018

2017

2018

2017

As Reported:

Net earnings attributable to The Estée Lauder Companies Inc.

$
573

$
123

$
1,073

$
550

$ Change from prior-year period

450

523

% Change from prior-year period

100
+%

95
%

Diluted net earnings per common share

$
1.55

$
.33

$
2.88

$
1.46

% Change from prior-year period

100
+%

97
%

Non-GAAP Financial Measure(1):

% Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill and other intangible asset impairments, changes in fair value of contingent consideration, the Transition Tax, the remeasurement of U.S. net deferred tax assets as of the TCJA enactment date and the establishment of a net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA

14
%

15
%


	Three Months Ended					Six Months Ended
	December 31					December 31
($ in millions, except per share data)	2019			2018		2019			2018
As Reported:
Net earnings attributable to The Estée Lauder Companies Inc.	$	557		$	573	$	1,152		$	1,073
$ Change from prior-year period		(16)					79
% Change from prior-year period		(3)	%				7	%
Diluted net earnings per common share	$	1.52		$	1.55	$	3.13		$	2.88
% Change from prior-year period		(2)	%				9	%

Non-GAAP Financial Measure⁽¹⁾:
% Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill and other intangible asset impairments, other income, changes in fair value of contingent consideration, the Transition Tax, the remeasurement of U.S. net deferred tax assets as of the TCJA enactment date and the establishment of a net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA		21	%				20	%

(1)See “Reconciliations of Non-GAAP Financial Measures” ~~on page 50~~below for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

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; other income; 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.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

The following tables provide reconciliations between these non-GAAP financial measures and the most directly comparable U.S. GAAP measures. ~~Certain information in the prior-year periods has been restated to conform to current period presentation.~~

Three Months Ended

% Change

December 31

%

in Constant

($ in millions, except per share data)

2018

2017

Variance

Change

Currency

Net sales, as reported

$
4,005

$
3,744

$
261

7
%
9
%
Returns associated with restructuring and other activities

—

—

—

Net sales, as adjusted

$
4,005

$
3,744

$
261

7
%
9
%

Operating income, as reported

$
771

$
710

$
61

9
%
12
%
Charges associated with restructuring and other activities

35

69

(34
)

Goodwill and other intangible asset impairments

38

—

38

Changes in fair value of contingent consideration

2

2

—

Operating income, as adjusted

$
846

$
781

$
65

8
%
11
%

Diluted net earnings per common share, as reported

$
1.55

$
.33

$
1.22

100
+%
100
+%
Charges associated with restructuring and other activities

.08

.15

(.07
)

Goodwill and other intangible asset impairments

.09

—

.09

Changes in fair value of contingent consideration

—

—

—

Transition Tax resulting from the TCJA

—

.86

(.86
)

Remeasurement of U.S. net deferred tax assets as of the TCJA enactment date

.02

.14

(.12
)

Net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA

—

.05

(.05
)

Diluted net earnings per common share, as adjusted

$
1.74

$
1.52

$
.22

14
%
18
%


	Three Months Ended								% Change
	December 31						%		in Constant
($ in millions, except per share data)	2019		2018		Variance		Change		Currency
Net sales, as reported	$	4,624	$	4,005	$	619	15	%	16	%
Returns associated with restructuring and other activities		—		—		—
Net sales, as adjusted	$	4,624	$	4,005	$	619	15	%	16	%

Operating income, as reported	$	261	$	771	$	(510)	(66)	%	(66)	%
Charges associated with restructuring and other activities		13		35		(22)
Goodwill and other intangible asset impairments		777		38		739
Changes in fair value of contingent consideration		(7)		2		(9)
Operating income, as adjusted	$	1,044	$	846	$	198	23	%	24	%

Diluted net earnings per common share, as reported	$	1.52	$	1.55	$	(.03)	(2)	%	—	%
Charges associated with restructuring and other activities		.03		.08		(.05)
Goodwill and other intangible asset impairments		1.81		.09		1.72
Other income		(1.23)		—		(1.23)
Changes in fair value of contingent consideration		(.02)		—		(.02)
Remeasurement of U.S. net deferred tax assets as of the TCJA enactment date		—		.02		(.02)
Diluted net earnings per common share, as adjusted	$	2.11	$	1.74	$	.37	21	%	21	%

~~Not adjusted for differences caused by rounding~~


	Six Months Ended								% Change
	December 31						%		in Constant
($ in millions, except per share data)	2019		2018		Variance		Change		Currency
Net sales, as reported	$	8,519	$	7,529	$	990	13	%	14	%
Returns associated with restructuring and other activities		—		—		—
Net sales, as adjusted	$	8,519	$	7,529	$	990	13	%	14	%
Operating income, as reported	$	1,040	$	1,423	$	(383)	(27)	%	(26)	%
Charges associated with restructuring and other activities		38		82		(44)
Goodwill and other intangible asset impairments		777		38		739
Changes in fair value of contingent consideration		(7)		(9)		2
Operating income, as adjusted	$	1,848	$	1,534	$	314	20	%	21	%

Diluted net earnings per common share, as reported	$	3.13	$	2.88	$	.25	9	%	10	%
Charges associated with restructuring and other activities		.09		.18		(.09)
Goodwill and other intangible asset impairments		1.80		.09		1.71
Other income		(1.22)		—		(1.22)
Changes in fair value of contingent consideration		(.02)		(.02)		—
Transition Tax resulting from the TCJA		—		(.03)		.03
Remeasurement of U.S. net deferred tax assets as of the TCJA enactment date		—		.02		(.02)
Net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA		—		.03		(.03)
Diluted net earnings per common share, as adjusted	$	3.78	$	3.15	$	.63	20	%	21	%

Six Months Ended

% Change

December 31

%

in Constant

($ in millions, except per share data)

2018

2017

Variance

Change

Currency

Net sales, as reported

$
7,529

$
7,018

$
511

7
%
9
%
Returns associated with restructuring and other activities

—

—

—

Net sales, as adjusted

$
7,529

$
7,018

$
511

7
%
9
%

Operating income, as reported

$
1,423

$
1,279

$
144

11
%
14
%
Charges associated with restructuring and other activities

82

107

(25
)

Goodwill and other intangible asset impairments

38

—

38

Changes in fair value of contingent consideration

(9
)
3

(12
)

Operating income, as adjusted

$
1,534

$
1,389

$
145

10
%
13
%

Diluted net earnings per common share, as reported

$
2.88

$
1.46

$
1.42

97
%
100
+%
Charges associated with restructuring and other activities

.18

.22

(.04
)

Goodwill and other intangible asset impairments

.09

—

.09

Changes in fair value of contingent consideration

(.02
)
—

(.02
)

Transition Tax resulting from the TCJA

(.03
)
.86

(.89
)

Remeasurement of U.S. net deferred tax assets as of the TCJA enactment date

.02

.14

(.11
)

Net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA

.03

.05

(.03
)

Diluted net earnings per common share, as adjusted

$
3.15

$
2.73

$
.42

15
%
18
%

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.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

The following tables reconcile the change in net sales by product category and geographic region, as reported, to the change in net sales excluding the effects of foreign currency translation:

	As Reported														%

																	As Reported
																													%
																	Three months		Three months				Impact of				%		Change,
																	ended		ended				foreign		Variance,		Change,		in
																	December 31,		December 31,				currency		in constant		as		constant
($ in millions)	Three months ended December 31, 2018		Three months ended December 31, 2017		Variance			Impact of foreign currency translation		Variance, in constant currency			% Change, as reported		Change, in constant currency		2019		2018		Variance		translation		currency		reported		currency
By Product Category:
Skin Care	$	1,732	$	1,494	$	238		$	37	$	275		16	%	18	%	$	2,205	$	1,732	$	473	$	10	$	483	27	%	28	%
Makeup	1,560		1,515		45			36		81			3		5			1,660		1,560		100		10		110	6		7
Fragrance	537		565		(28		)	15		(13		)	(5	)	(2	)		581		537		44		2		46	8		9
Hair Care	154		144		10			1		11			7		8			162		154		8		—		8	5		5
Other	22		26		(4		)	—		(4		)	(15	)	(15	)		16		22		(6)		—		(6)	(27)		(27)
																		4,624		4,005		619		22		641	15		16
Returns associated with restructuring and other activities																		—		—		—		—		—
Total	$	4,005	$	3,744	$	261		$	89	$	350		7	%	9	%	$	4,624	$	4,005	$	619	$	22	$	641	15	%	16	%


By Region:
The Americas	$	1,218	$	1,308	$	(90	)	$	10	$	(80	)	(7	)%	(6	)%	$	1,226	$	1,218	$	8	$	(1)	$	7	1	%	1	%
Europe, the Middle East & Africa	1,767		1,562		205			47		252			13		16			2,079		1,767		312		12		324	18		18
Asia/Pacific	1,020		874		146			32		178			17		20			1,319		1,020		299		11		310	29		30
																		4,624		4,005		619		22		641	15		16
Returns associated with restructuring and other activities																		—		—		—		—		—
Total	$	4,005	$	3,744	$	261		$	89	$	350		7	%	9	%	$	4,624	$	4,005	$	619	$	22	$	641	15	%	16	%

	As Reported															%

																		As Reported
																														%
																		Six months		Six months				Impact of				%		Change,
																		ended		ended				foreign		Variance,		Change,		in
																		December 31,		December 31,				currency		in constant		as		constant
($ in millions)	Six months ended December 31, 2018		Six months ended December 31, 2017		Variance			Impact of foreign currency translation			Variance, in constant currency			% Change, as reported		Change, in constant currency		2019		2018		Variance		translation		currency		reported		currency
By Product Category:
Skin Care	$	3,218	$	2,769	$	449		$	54		$	503		16	%	18	%	$	4,047	$	3,218	$	829	$	26	$	855	26	%	27	%
Makeup	2,966		2,887		79			65			144			3		5			3,103		2,966		137		26		163	5		5
Fragrance	1,009		1,041		(32		)	21			(11		)	(3	)	(1	)		1,043		1,009		34		9		43	3		4
Hair Care	297		280		17			2			19			6		7			298		297		1		1		2	—		1
Other	39		41		(2		)	—			(2		)	(5	)	(5	)		28		39		(11)		—		(11)	(28)		(28)
																			8,519		7,529		990		62		1,052	13		14
Returns associated with restructuring and other activities																			—		—		—		—		—
Total	$	7,529	$	7,018	$	511		$	142		$	653		7	%	9	%	$	8,519	$	7,529	$	990	$	62	$	1,052	13	%	14	%


By Region:
The Americas	$	2,454	$	2,637	$	(183	)	$	(18	)	$	(165	)	(7	)%	(6	)%	$	2,386	$	2,454	$	(68)	$	(5)	$	(73)	(3)	%	(3)	%
Europe, the Middle East & Africa	3,200		2,820		380			(78		)	458			13		16			3,756		3,200		556		36		592	17		19
Asia/Pacific	1,875		1,561		314			(46		)	360			20		23			2,377		1,875		502		31		533	27		28
																			8,519		7,529		990		62		1,052	13		14
Returns associated with restructuring and other activities																			—		—		—		—		—
Total	$	7,529	$	7,018	$	511		$	(142	)	$	653		7	%	9	%	$	8,519	$	7,529	$	990	$	62	$	1,052	13	%	14	%

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THE ESTÉE LAUDER COMPANIES INC.

The following table reconciles the change in operating ~~income~~results by product category and geographic region, as reported, to the change in operating income excluding the impact of goodwill and other intangible asset impairments and changes in fair value of contingent consideration:

	As Reported									Add: Goodwill and		Add:

																						As Reported						Add:
																												Changes in
																												Goodwill		Add:
																						Three months		Three months				and other		Changes in				%		%
																						ended		ended				intangible		fair value of		Variance,		Change,		Change,
																						December 31,		December 31,				asset		contingent		as		as		as
($ in millions)	Three months ended December 31, 2018			Three months ended December 31, 2017			Variance			other intangible asset impairments		Changes in fair value of contingent consideration			Variance, as adjusted			% Change, as reported		% Change, as adjusted		2019		2018		Variance		impairments		consideration		adjusted		reported		adjusted
By Product Category:
Skin Care	$	565		$	453		$	112		$	—	$	(1	)	$	111		25	%	24	%	$	772	$	565	$	207	$	—	$	(3)	$	204	37	%	36	%
Makeup	138			219			(81		)	38		—			(43		)	(37	)	(20	)		(611)		138		(749)		739		—		(10)	(100	+)	(6)
Fragrance	84			85			(1		)	—		1			—			(1	)	—			97		84		13		—		(6)		7	15		8
Hair Care	15			17			(2		)	—		—			(2		)	(12	)	(12	)		12		15		(3)		—		—		(3)	(20	)	(20)
Other	4			5			(1		)	—		—			(1		)	(20	)	(20	)		4		4		—		—		—		—	—		—
	806			779			27			$	38	$	—		$	65		3	%	8	%
																							274		806		(532)	$	739	$	(9)	$	198	(66	)%	23	%
Charges associated with restructuring and other activities	(35		)	(69		)	34																(13)		(35)		22
Total	$	771		$	710		$	61														$	261	$	771	$	(510)


By Region:
The Americas	$	(61	)	$	98		$	(159	)	$	38	$	4		$	(117	)	(100	+)%	(100	+)%	$	(529)	$	149	$	(678)	$	739	$	(8)	$	53	(100	+)%	28	%
Europe, the Middle East & Africa	628			463			165			—		(4		)	161			36		35			505		418		87		—		(1)		86	21		21
Asia/Pacific	239			218			21			—		—			21			10		10			298		239		59		—		—		59	25		25
	806			779			27			$	38	$	—		$	65		3	%	8	%
																							274		806		(532)	$	739	$	(9)	$	198	(66	)%	23	%
Charges associated with restructuring and other activities	(35		)	(69		)	34																(13)		(35)		22
Total	$	771		$	710		$	61														$	261	$	771	$	(510)

	As Reported									Add: Goodwill and		Add:

																						As Reported						Add:
																												Changes in
																												Goodwill		Add:
																						Six months		Six months				and other		Changes in				%		%
																						ended		ended				intangible		fair value of		Variance,		Change,		Change,
																						December 31,		December 31,				asset		contingent		as		as		as
($ in millions)	Six months ended December 31, 2018			Six months ended December 31, 2017			Variance			other intangible asset impairments		Changes in fair value of contingent consideration			Variance, as adjusted			% Change, as reported		% Change, as adjusted		2019		2018		Variance		impairments		consideration		adjusted		reported		adjusted
By Product Category:
Skin Care	$	1,031		$	780		$	251		$	—	$	(8	)	$	243		32	%	31	%	$	1,404	$	1,031	$	373	$	—	$	3	$	376	36	%	37	%
Makeup	299			395			(96		)	38		—			(58		)	(24	)	(15	)		(507)		299		(806)		739		—		(67)	(100	+)	(20)
Fragrance	139			172			(33		)	—		(4		)	(37		)	(19	)	(21	)		163		139		24		—		(1)		23	17		17
Hair Care	29			32			(3		)	—		—			(3		)	(9	)	(9	)		12		29		(17)		—		—		(17)	(59	)	(59)
Other	7			7			—			—		—			—			—		—			6		7		(1)		—		—		(1)	(14	)	(14)
	1,505			1,386			119			$	38	$	(12	)	$	145		9	%	10	%
																							1,078		1,505		(427)	$	739	$	2	$	314	(28	)%	20	%
Charges associated with restructuring and other activities	(82		)	(107		)	25																(38)		(82)		44
Total	$	1,423		$	1,279		$	144														$	1,040	$	1,423	$	(383)


By Region:
The Americas	$	(28	)	$	198		$	(226	)	$	38	$	(8	)	$	(196	)	(100	+)%	(98	)%	$	(354)	$	383	$	(737)	$	739	$	4	$	6	(100	+)%	1	%
Europe, the Middle East & Africa	1,086			810			276			—		(4		)	272			34		33			882		675		207		—		(2)		205	31		30
Asia/Pacific	447			378			69			—		—			69			18		18			550		447		103		—		—		103	23		23
	1,505			1,386			119			$	38	$	(12	)	$	145		9	%	10	%
																							1,078		1,505		(427)	$	739	$	2	$	314	(28	)%	20	%
Charges associated with restructuring and other activities	(82		)	(107		)	25																(38)		(82)		44
Total	$	1,423		$	1,279		$	144														$	1,040	$	1,423	$	(383)

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THE ESTÉE LAUDER COMPANIES INC.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our principal sources of funds historically have been cash flows from operations, borrowings pursuant to our commercial paper program, borrowings from the issuance of long-term debt and committed and uncommitted credit lines provided by banks and other lenders in the United States and abroad. At December 31, ~~2018,~~2019, we had cash and cash equivalents of ~~$1,876~~$3,596 million compared with ~~$2,181~~$2,987 million at June 30, ~~2018.~~2019. Our cash and cash equivalents are maintained at a number of financial institutions. To mitigate the risk of uninsured balances, we select financial institutions based on their credit ratings and financial strength, and we perform ongoing evaluations of these institutions to limit our concentration risk exposure.

Our business is seasonal in nature and, accordingly, our working capital needs vary. From time to time, we may enter into investing and financing transactions that require additional funding. To the extent that these needs exceed cash from operations, we could, subject to market conditions, issue commercial paper, issue long-term debt securities or borrow under our revolving credit facilities.

Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available-for-sale securities, available credit lines and access to credit markets will be adequate to support currently planned business operations, information technology enhancements, capital expenditures, acquisitions, dividends, stock repurchases, restructuring initiatives, commitments and other contractual obligations on both a near-term and long-term basis.

The ~~recently enacted~~ TCJA resulted in the Transition Tax on unrepatriated earnings of our foreign subsidiaries and changed the tax law in ways that present opportunities to repatriate cash without additional U.S. federal income tax. ~~During fiscal 2018,~~As a result, we changed our indefinite reinvestment assertion related to certain foreign earnings, and we continue to analyze the indefinite reinvestment assertion on our remaining applicable foreign earnings. Our cash and cash equivalents ~~and short- and long-term investment balances~~balance at December 31, ~~2018 include~~2019 includes cash ~~and short- and long-term investments~~ in offshore jurisdictions associated with our permanent reinvestment strategy. We do not believe that continuing to reinvest our foreign earnings impairs our ability to meet our domestic debt or working capital obligations. If these reinvested earnings were repatriated into the 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 of January ~~29, 2019,~~30, 2020, our long-term debt is rated A+ with a stable outlook by Standard & Poor’s and A2A1 with a stable outlook by Moody’s.

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~~Debt~~THE ESTÉE LAUDER COMPANIES INC.

Debt

At December 31, ~~2018,~~2019, our outstanding borrowings were as follows:

(In millions)

Long-term
Debt

Current
Debt

Total Debt

4.15% Senior Notes, due March 15, 2047 (“2047 Senior Notes”) (1), (10)

$
494

$
—

$
494

4.375% Senior Notes, due June 15, 2045 (“2045 Senior Notes”) (2), (10)

455

—

455

3.70% Senior Notes, due August 15, 2042 (“2042 Senior Notes”) (3), (10)

247

—

247

6.00% Senior Notes, due May 15, 2037 (“2037 Senior Notes”) (4), (10)

294

—

294

5.75% Senior Notes, due October 15, 2033 (“2033 Senior Notes”) (5)

197

—

197

3.15% Senior Notes, due March 15, 2027 (“2027 Senior Notes”) (6), (10)

498

—

498

2.35% Senior Notes, due August 15, 2022 (“2022 Senior Notes”) (7), (10)

245

—

245

1.70% Senior Notes, due May 10, 2021 (“2021 Senior Notes”) (8), (10)

439

—

439

1.80% Senior Notes, due February 7, 2020 (“2020 Senior Notes”) (9), (10)

496

—

496

Other borrowings

8

18

26

$
3,373

$
18

$
3,391


	Long-term		Current
($ in millions)	Debt		Debt		Total Debt
3.125% Senior Notes, due December 1, 2049 (“2049 Senior Notes”) ^{(1), (13)}	$	635	$	—	$	635
4.15% Senior Notes, due March 15, 2047 (“2047 Senior Notes”) ^{(2), (13)}		494		—		494
4.375% Senior Notes, due June 15, 2045 (“2045 Senior Notes”) ^{(3), (13)}		455		—		455
3.70% Senior Notes, due August 15, 2042 (“2042 Senior Notes”) ^{(4), (13)}		247		—		247
6.00% Senior Notes, due May 15, 2037 (“2037 Senior Notes”) ^{(5), (13)}		294		—		294
5.75% Senior Notes, due October 15, 2033 (“2033 Senior Notes”) ⁽⁶⁾		197		—		197
2.375% Senior Notes, due December 1, 2029 (“2029 Senior Notes”) ^{(7), (13)}		640		—		640
3.15% Senior Notes, due March 15, 2027 (“2027 Senior Notes”) ^{(8), (13)}		498		—		498
2.00% Senior Notes, due December 1, 2024 (“2024 Senior Notes”) ^{(9), (13)}		494		—		494
2.35% Senior Notes, due August 15, 2022 (“2022 Senior Notes”) ^{(10), (13)}		253		—		253
1.70% Senior Notes, due May 10, 2021 (“2021 Senior Notes”) ^{(11), (13)}		448		—		448
1.80% Senior Notes, due February 7, 2020 (“2020 Senior Notes”) ^{(12), (13)}		—		500		500
Other borrowings		7		22		29
	$	4,662	$	522	$	5,184

(1)	Consists of $650 million principal, unamortized debt discount of $8 million and debt issuance costs of $7 million.

(2)	Consists of $500 million principal, unamortized debt discount of $1 million and debt issuance costs of $5 million.

(3)	Consists of $450 million principal, net unamortized debt premium of $10 million and debt issuance costs of $5 million.

(4)	Consists of $250 million principal, unamortized debt discount of $1 million and debt issuance costs of $2 million.

(5)	Consists of $300 million principal, unamortized debt discount of $3 million and debt issuance costs of $3 million.

(6)	Consists of $200 million principal, unamortized debt discount of $2 million and debt issuance costs of $1 million.

(7)	Consists of $650 million principal, unamortized debt discount of $6 million and debt issuance costs of $4 million.

(8)	Consists of $500 million principal and debt issuance costs of $2 million.

(9)	Consists of $500 million principal, unamortized debt discount of $3 million and debt issuance costs of $3 million.

(10)	Consists of $250 million principal and a $3 million adjustment to reflect the fair value of interest rate swaps.

(11)	Consists of $450 million principal, a $1 million adjustment to reflect the fair value of interest rate swaps and debt issuance costs of $1 million.

(12)	Consists of $500 million principal

(13)	The Senior Notes contain certain customary incurrence–based covenants, including limitations on indebtedness secured by liens.

~~(1)~~ ~~Consists of $500 million principal, net unamortized debt discount of $1 million and debt issuance costs of $5 million.~~

~~(2)~~ ~~Consists of $450 million principal, net unamortized debt premium of $10 million and debt issuance costs of $5 million.~~

~~(3)~~ ~~Consists of $250 million principal, unamortized debt discount of $1 million and debt issuance costs of $2 million.~~

~~(4)~~ ~~Consists of $300 million principal, unamortized debt discount of $3 million and debt issuance costs of $3 million.~~

~~(5)~~ ~~Consists of $200 million principal, unamortized debt discount of $2 million and debt issuance costs of $1 million.~~

~~(6)~~ ~~Consists of $500 million principal and debt issuance costs of $2 million.~~

~~(7)~~ ~~Consists of $250 million principal, a $4 million adjustment to reflect the fair value of interest rate swaps and debt issuance costs of $1 million.~~

~~(8)~~ ~~Consists of $450 million principal, a $10 million adjustment to reflect the fair value of interest rate swaps and debt issuance costs of $1 million.~~

~~(9)~~ ~~Consists of $500 million principal, a $3 million adjustment to reflect the fair value of interest rate swaps and debt issuance costs of $1 million.~~

~~(10)~~ ~~The Senior Notes contain certain customary incurrence—based covenants, including limitations on indebtedness secured by liens.~~

Total debt as a percent of total capitalization (excluding noncontrolling interests) was ~~44%~~53% and ~~43%~~44% at December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, respectively.

Cash Flows


	Six Months Ended
	December 31
(In millions)	2019		2018
Net cash provided by operating activities	$	1,255	$	1,273
Net cash used for investing activities	$	(1,350)	$	(35)
Net cash provided by (used for) financing activities	$	687	$	(1,536)

Six Months Ended
December 31

(In millions)

2018

2017

Net cash provided by operating activities

$
1,273

$
1,439

Net cash used for investing activities

$
35

$
133

Net cash used for financing activities

$
1,536

$
362

The change in net cash flows from operations primarily reflected ~~higher international inventory levels to support our forecasted sales activity, an~~the unfavorable net change in working capital, in particular accounts payable due to the timing and level of payments, and anhigher cash paid for taxes primarily due to the increase in ~~accounts receivable, reflecting~~earnings before taxes, as well as the timing and level of ~~shipments and collections. These changes were~~payments, partially offset by higher earnings before taxes.

The change in net cash flows from investing activities primarily reflected ~~higher proceeds, net of purchases, of investments~~cash paid in connection with the fiscal 2020 second quarter acquisition of Have & Be, as well as lower proceeds from the sale of investments due to the prior-year liquidation of our ~~cash investment strategy, partially offset by an increase in capital expenditures.~~foreign subsidiary that owned our available-for-sale securities.

The change in net cash flows from financing activities primarily reflected ~~higher~~proceeds from the November 2019 issuance of long-term debt, lower treasury stock purchases and ~~dividend payments in the current year, as well as~~ changes in short-term debt reflecting the prior-year repayment of remaining commercial paper borrowings.

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~~Dividends~~THE ESTÉE LAUDER COMPANIES INC.

Dividends

For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the six months ended December 31, ~~2018,~~2019, see Notes to Consolidated Financial Statements, Note 1214 — Equity.

Pension and Post-retirement Plan Funding

There have been no significant changes to our pension and post-retirement funding as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2018.~~2019.

Commitments, Contractual Obligations and Contingencies

There have been no significant changes to our commitments and contractual obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2018.~~2019. For a discussion of contingencies, see Notes to Consolidated Financial Statements, Note 911 — Contingencies.

Derivative Financial Instruments and Hedging Activities

For a discussion of our derivative financial instruments and hedging activities, see Notes to Consolidated Financial Statements, Note 57 — Derivative Financial Instruments.

Foreign Exchange Risk Management

For a discussion of foreign exchange risk management, see Notes to Consolidated Financial Statements, Note 57 — Derivative Financial Instruments (Cash Flow Hedges, Net Investment Hedges).

Credit Risk

For a discussion of credit risk, see Notes to Consolidated Financial Statements, Note 57 — Derivative Financial Instruments (Credit Risk).

Market Risk

We address certain financial exposures through a controlled program of market risk management that includes the use of foreign currency forward contracts to reduce the effects of fluctuating foreign currency exchange rates and to mitigate the change in fair value of specific assets and liabilities on the balance sheet. To perform a sensitivity analysis of our foreign currency forward contracts, we assess the change in fair values from the impact of hypothetical changes in foreign currency exchange rates. A hypothetical 10% strengthening of the U.S. dollar against the foreign exchange rates for the currencies in our ~~foreign exchange derivatives~~ portfolio ~~would have had a de minimis impact on the fair value of our portfolio as of December 31, 2018, but~~ would have resulted in a net ~~decrease of approximately $10 million~~increase (decrease) in the fair value of our portfolio of approximately $(238) million and $48 million as of December 31, 2019 and June 30, ~~2018.~~2019, respectively. This potential change does not consider our underlying foreign currency exposures.

In addition, we enter into interest rate derivatives to manage the effects of interest rate movements on our aggregate liability portfolio, including future debt issuances. Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would decrease by approximately ~~$20~~$12 million and ~~$24~~$16 million as of December 31, ~~2018~~2019 and June 30, ~~2018,~~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 ~~other than operating leases,~~ that would be expected to have a material current or future effect upon our financial condition or results of operations.

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THE ESTÉE LAUDER COMPANIES INC.

CRITICAL ACCOUNTING POLICIES

As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2018,~~2019, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those financial statements. These estimates and assumptions can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies relate to goodwill, other intangible assets and long-lived assets and income taxes. Since June 30, ~~2018,~~2019, there have been no significant changes to the assumptions and estimates related to our critical accounting policies.

RECENTLY ISSUED ACCOUNTING STANDARDS

For a discussion regarding the impact of accounting standards that were recently issued but not yet effective, on the Company’s consolidated financial statements, see Notes to Consolidated Financial Statements, Note 1 — –Summary of Significant Accounting Policies.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION

We and our representatives from time to time make written or oral forward-looking statements, including in this and other filings with the Securities 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 of the United States;

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~~(1) increased competitive activity from companies in the skin care, makeup, fragrance and hair care businesses;~~THE ESTÉE LAUDER COMPANIES INC.

(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 of the United States;

~~(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;~~

(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 coronavirus outbreak, including disruptions to our global 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;

(12)

shipment delays, commodity pricing, depletion of inventory and increased production costs resulting from disruptions of operations at any of the facilities that manufacture our products or at our distribution or inventory centers, including disruptions that may be caused by the implementation of information technology initiatives, or by restructurings;

(13)

real estate rates and availability, which may affect our ability to increase or maintain the number of retail locations at which we sell our products and the costs associated with our other facilities;

~~(4) destocking and tighter working capital management by retailers;~~

(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;

~~(5) the success, or changes in timing or scope, of new product launches and the success, or changes in the timing or the scope, of advertising, sampling and merchandising programs;~~

(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;

~~(6) shifts in the preferences of consumers as to where and how they shop;~~

(18)

the timing and impact of acquisitions, investments and divestitures; and

(19)

additional factors as described in our filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

(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 of the 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 of the 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) 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;

(12) 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;

~~(13) changes in product mix to products which are less profitable;~~

(14) 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;

(15) 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;

~~(16) 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;~~

~~(17) the timing and impact of acquisitions, investments and divestitures; and~~

~~(18) additional factors as described in our filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended June 30, 2018.~~

We assume no responsibility to update forward-looking statements made herein or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The information required by this item is set forth in Item 2 of this Quarterly Report on Form 10-Q under the caption Liquidity and Capital Resources - Market Risk and is incorporated herein by reference.

Item 4. Controls and Procedures.

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of December 31, ~~2018~~2019 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

As part of the Company’s review of internal control over financial reporting, we make changes to systems and processes to improve such controls and increase efficiencies, while ensuring that we maintain an effective internal control environment. There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the second quarter of fiscal ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

For a discussion of legal proceedings, see Notes to Consolidated Financial Statements, Note 911 — Contingencies.

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

Share Repurchase Program

We are authorized by the Board of Directors to repurchase shares of our Class A Common Stock in the open market or in privately negotiated transactions, depending on market conditions and other factors. The following table provides information relating to our repurchase of Class A Common Stock during the referenced periods:

Period

Total Number
of Shares
Purchased(1)

Average Price
Paid Per
Share

Total Number of
Shares Purchased
as Part of Publicly
Announced
Program

Maximum
Number of Shares
that May Yet Be
Purchased Under
the Program(2)

October 2018

2,264,490

$
138.66

1,809,984

43,611,545

November 2018

723,744

141.70

723,744

42,887,801

December 2018

1,343,421

132.52

1,343,421

41,544,380

4,331,655

137.26

3,877,149


				Total Number of	Maximum
				Shares Purchased	Number of Shares
	Total Number	Average Price		as Part of Publicly	that May Yet Be
	of Shares	Paid Per		Announced	Purchased Under
Period	Purchased⁽¹⁾	Share		Program	the Program⁽²⁾
October 2019	1,578,918	$	189.34	1,173,751	36,114,378
November 2019	710,271		188.23	710,271	35,404,107
December 2019	343,880		199.38	343,880	35,060,227
	2,633,069		190.35	2,227,902

(1)	Includes shares that were repurchased by the Company to satisfy tax withholding obligations upon the payout of certain stock-based compensation arrangements.

(2)	The Board of Directors last authorized an increase to the share repurchase program by 40.0 million shares on October 31, 2018. Our repurchase program does not have an expiration date.

~~(1)~~ ~~Includes shares that were repurchased by the Company to satisfy tax withholding obligations upon the payout of certain stock-based compensation arrangements.~~

~~(2)~~ The current repurchase program for up to 80.0 million shares was authorized by the Board of Directors on November 1, 2012 and on October 31, 2018. Our repurchase program does not have an expiration date.

Subsequent to December 31, ~~2018~~2019 and as of January ~~29, 2019,~~30, 2020, we purchased approximately ~~0.9~~0.2 million additional shares of our Class A Common Stock for ~~$110~~$42 million pursuant to our share repurchase program.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

Item 6. Exhibits.

Exhibit Number		~~Description~~
~~10.1~~		Description
4.1		~~$1.5 Billion Credit Facility,~~Officers’ Certificate, dated November 21, 2019 defining certain terms of the 2.000% Senior Notes due 2024 (filed as Exhibit 4.1 to our Current Report on Form 8-K filed on November 21, 2019).*

4.2		Form of ~~October 26, 2018, among~~ Global Note for the 2.000% Senior Notes due 2024 (included as Exhibit A in Exhibit 4.1 to our Current Report on Form 8-K filed on November 21, 2019) (filed as Exhibit 4.2 to our Current Report on Form 8-K filed on November 21, 2019).*

4.3		Officers’ Certificate, dated November 21, 2019 defining certain terms of the 2.375% Senior Notes due 2029 (filed as Exhibit 4.3 to our Current Report on Form 8-K filed on November 21, 2019).*

4.4		Form of Global Note for the 2.375% Senior Notes due 2029 (included as Exhibit A in Exhibit 4.3 to our Current Report on Form 8-K filed on November 21, 2019) (filed as Exhibit 4.4 to our Current Report on Form 8-K filed on November 21, 2019).*

4.5		Officers’ Certificate, dated November 21, 2019 defining certain terms of the 3.125% Senior Notes due 2049 (filed as Exhibit 4.5 to our Current Report on Form 8-K filed on November 21, 2019).*

4.6		Form of Global Note for the 3.125% Senior Notes due 2049 (included as Exhibit A in Exhibit 4.5 to our Current Report on Form 8-K filed on November 21, 2019) (filed as Exhibit 4.6 to our Current Report on Form 8-K filed on November 21, 2019).*

10.1		The Estée Lauder Companies Inc.~~, the Eligible Subsidiaries of the Company, as defined therein, the lenders listed therein,~~ Amended and ~~JPMorgan Chase Bank, N.A., as administrative agent~~Restated Fiscal 2002 Share Incentive Plan (filed as Exhibit 10.1 to our Current Report on Form 8-K filed on ~~October 29, 2018)~~November 19, 2019).* †

31.1		Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO).

31.2		Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO).

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO). (furnished)

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO). (furnished)
~~101.INS~~		~~XBRL Instance Document~~
~~101.SCH~~101.1		~~XBRL Taxonomy Extension Schema Document~~The following materials from The Estée Lauder Companies Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2019 are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Statements of Earnings, (ii) the Consolidated Statements of Comprehensive Income (Loss), (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements
~~101.CAL~~		~~XBRL Taxonomy Extension Calculation Linkbase Document~~
~~101.LAB~~104		~~XBRL Taxonomy Extension Label Linkbase Document~~
~~101.PRE~~		~~XBRL Taxonomy Extension Presentation Linkbase Document~~
~~101.DEF~~		~~XBRL Taxonomy Extension Definition Linkbase Document~~The cover page from The Estée Lauder Companies Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2019 is formatted in iXBRL

* Incorporated herein by reference.

† Exhibit is a management contract or compensatory plan or arrangement.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	THE ESTÉE LAUDER COMPANIES INC.


Date: February ~~5, 2019~~6, 2020	By:	/s/TRACEY T. TRAVIS
		Tracey T. Travis
		Executive Vice President
		and Chief Financial Officer
		(Principal Financial and
		Accounting Officer)

	Three Months Ended December 31						Six Months Ended December 31
(In millions, except per share data)	2018			2017			2018			2017

Net sales	$	4,005		$	3,744		$	7,529		$	7,018
Cost of sales	910			753			1,733			1,464

Gross profit	3,095			2,991			5,796			5,554

Operating expenses
Selling, general and administrative	2,257			2,214			4,265			4,174
Restructuring and other charges	29			67			70			101
Goodwill impairment	20			—			20			—
Impairment of other intangible assets	18			—			18			—
Total operating expenses	2,324			2,281			4,373			4,275

Operating income	771			710			1,423			1,279

Interest expense	35			32			69			63
Interest income and investment income, net	12			12			27			24
Other components of net periodic benefit cost	—			—			—			1
Earnings before income taxes	748			690			1,381			1,239

Provision for income taxes	171			565			302			684
Net earnings	577			125			1,079			555

Net earnings attributable to noncontrolling interests	(4		)	(2		)	(6		)	(5		)
Net earnings attributable to The Estée Lauder Companies Inc.	$	573		$	123		$	1,073		$	550

Net earnings attributable to The Estée Lauder Companies Inc. per common share
Basic	$	1.58		$	.33		$	2.94		$	1.49
Diluted	$	1.55		$	.33		$	2.88		$	1.46

Weighted-average common shares outstanding
Basic	363.3			368.7			365.1			368.5
Diluted	369.9			376.1			372.1			375.7

	December 31			June 30
(In millions, except share data)	2018			2018
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	1,876		$	2,181
Short-term investments	525			534
Accounts receivable, net	2,000			1,487
Inventory and promotional merchandise, net	1,651			1,618
Prepaid expenses and other current assets	388			348
Total current assets	6,440			6,168

Property, plant and equipment, net	1,859			1,823

Other assets
Long-term investments	600			843
Goodwill	1,911			1,926
Other intangible assets, net	1,233			1,276
Other assets	633			531
Total other assets	4,377			4,576
Total assets	$	12,676		$	12,567

LIABILITIES AND EQUITY
Current liabilities
Current debt	$	18		$	183
Accounts payable	995			1,182
Other accrued liabilities	2,763			1,945
Total current liabilities	3,776			3,310

Noncurrent liabilities
Long-term debt	3,373			3,361
Other noncurrent liabilities	1,194			1,186
Total noncurrent liabilities	4,567			4,547

Contingencies

Equity
Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at December 31, 2018 and June 30, 2018; shares issued: 438,325,994 at December 31, 2018 and 435,413,976 at June 30, 2018; Class B shares authorized: 304,000,000 at December 31, 2018 and June 30, 2018; shares issued and outstanding: 142,907,134 at December 31, 2018 and 143,051,679 at June 30, 2018	6			6
Paid-in capital	4,162			3,972
Retained earnings	9,586			9,040
Accumulated other comprehensive loss	(430		)	(434		)
	13,324			12,584
Less: Treasury stock, at cost; 219,373,382 Class A shares at December 31, 2018 and 211,320,208 Class A shares at June 30, 2018	(9,018		)	(7,896		)
Total stockholders’ equity — The Estée Lauder Companies Inc.	4,306			4,688
Noncontrolling interests	27			22
Total equity	4,333			4,710
Total liabilities and equity	$	12,676		$	12,567

(In millions)	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. government and agency securities	$	403	$	—	$	(3	)	$	400
Foreign government and agency securities	99		—		(1		)	98
Corporate notes and bonds	447		—		(5		)	442
Time deposits	—		—		—			—
Other securities	15		—		—			15
Total	$	964	$	—	$	(9	)	$	955

	In a Loss Position for Less Than 12 Months				In a Loss Position for More Than 12 Months
(In millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Available-for-sale securities	$	37	$	—	$	890	$	(9	)

	December 31, 2018						June 30, 2018
(In millions)	Gross Carrying Value		Accumulated Amortization		Total Net Book Value		Gross Carrying Value		Accumulated Amortization		Total Net Book Value
Amortizable intangible assets:
Customer lists and other	$	696	$	356	$	340	$	697	$	332	$	365
License agreements	43		43		—		43		43		—
	$	739	$	399	340		$	740	$	375	365
Non-amortizable intangible assets:
Trademarks and other					893						911
Total intangible assets					$	1,233					$	1,276

(In millions)	Employee- Related Costs			Asset- Related Costs		Contract Terminations			Other Exit Costs		Total
Approval Period
Fiscal 2016	$	75		$	3	$	5		$	4	$	87
Fiscal 2017	126			1		—			5		132
Fiscal 2018	161			—		1			4		166
Six months ended December 31, 2018	17			1		—			1		19
Adjustments through December 31, 2018	(45		)	—		(1		)	—		(46		)
Cumulative through December 31, 2018	$	334		$	5	$	5		$	14	$	358

	Sales Returns				Operating Expenses
(In millions)	(included in Net Sales)		Cost of Sales		Restructuring Charges		Other Charges		Total
Fiscal 2016	$	1	$	—	$	75	$	5	$	81
Fiscal 2017	2		15		122		73		212
Fiscal 2018	8		18		127		104		257
Six months ended December 31, 2018	—		12		19		51		82
Cumulative through December 31, 2018	$	11	$	45	$	343	$	233	$	632

	Asset Derivatives					Liability Derivatives
		Fair Value (1)					Fair Value (1)
(In millions)	Balance Sheet Location	December 31 2018		June 30 2018		Balance Sheet Location	December 31 2018		June 30 2018
Derivatives Designated as Hedging Instruments:
Foreign currency forward contracts	Prepaid expenses and other current assets	$	32	$	30	Other accrued liabilities	$	3	$	5
Interest rate swap contracts	Prepaid expenses and other current assets	—		—		Other accrued liabilities	17		26

Total Derivatives Designated as Hedging Instruments		32		30			20		31

Derivatives Not Designated as Hedging Instruments:
Foreign currency forward contracts	Prepaid expenses and other current assets	4		3		Other accrued liabilities	2		8
Total derivatives		$	36	$	33		$	22	$	39

	Amount of Gain or (Loss) Recognized in OCI on Derivatives					Location of Gain or	Amount of Gain or (Loss) Reclassified from AOCI into Earnings(1)
	Three Months Ended December 31					(Loss) Reclassified from AOCI into	Three Months Ended December 31
(In millions)	2018		2017			Earnings	2018		2017(2)
Derivatives in Cash Flow Hedging Relationships:

Foreign currency forward contracts	$	13	$	(9	)	Net sales	$	4	$	—
						Cost of sales	—		(7		)
						Selling, general and administrative	—		(7		)
Interest rate-related derivatives	—		—			Interest expense	—		1
Total derivatives	$	13	$	(9	)		$	4	$	(13	)


	Amount of Gain or (Loss)					Amount of Gain or (Loss)
	Recognized in OCI on					Reclassified from AOCI into
	Derivatives				Location of Gain or	Earnings⁽¹⁾
	Three Months Ended				(Loss) Reclassified	Three Months Ended
	December 31				from AOCI into	December 31
(In millions)	2019		2018		Earnings	2019		2018
Derivatives in Cash Flow Hedging Relationships:

Foreign currency forward contracts	$	(21)	$	13	Net sales	$	6	$	4
Interest rate-related derivatives		5		—	Interest expense		—		—
		(16)		13	Total derivatives	$	6	$	4
Derivatives in Net Investment Hedging Relationships⁽²⁾:
Foreign currency forward contracts⁽³⁾		(37)		—
Total derivatives	$	(53)	$	13

		Amount of Gain or (Loss) Recognized in Earnings on Derivatives (1)
	Location of Gain or (Loss) Recognized in Earnings on	Three Months Ended December 31					Six Months Ended December 31
(In millions)	Derivatives	2018		2017			2018		2017
Derivatives in Fair Value Hedging Relationships:
Interest rate swap contracts	Interest expense	$	11	$	(9	)	$	9	$	(11	)


(In millions)	Amount of Gain or (Loss) Recognized in Earnings on Derivatives
Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included	Carrying Amount of the Hedged Assets (Liabilities)			Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of the Hedged Assets (Liabilities)
	December 31, 2018			December 31, 2018
									Cumulative Amount of Fair
									Value Hedging Gain/(Loss)
Line Item in the Consolidated Balance Sheets in							Carrying Amount of the		Included in the Carrying Amount
Which the Hedged Item is Included							Hedged Liabilities		of the Hedged Liability
							December 31, 2019		December 31, 2019
Current debt							$	250	$	—
Long-term debt	$	(930	)	$	(17	)		701		2

Total debt							$	951	$	2


	Six Months Ended December 31
	2019				2018
(In millions)	Net Sales		Interest expense		Net Sales		Interest expense
Total amounts of income and expense line items presented in the consolidated statements of earnings in which the effects of fair value and cash flow hedges are recorded	$	8,519	$	70	$	7,529	$	69

The effects of fair value and cash flow hedging relationships:
Gain (loss) on fair value hedge relationships – interest rate contracts:
Hedged item		Not applicable		1		Not applicable		9
Derivatives designated as hedging instruments		Not applicable		(1)		Not applicable		(9)

Gain (loss) on cash flow hedge relationships – foreign currency forward contracts:
Amount of gain reclassified from AOCI into earnings		19		Not applicable		7		Not applicable

(In millions)	Level 1		Level 2		Level 3		Total
Assets:
Foreign currency forward contracts	$	—	$	36	$	—	$	36
Available-for-sale securities:
U.S. government and agency securities	—		400		—		400
Foreign government and agency securities	—		98		—		98
Corporate notes and bonds	—		442		—		442
Time deposits	—		—		—		—
Other securities	—		15		—		15
Total	$	—	$	991	$	—	$	991

Liabilities:
Foreign currency forward contracts	$	—	$	5	$	—	$	5
Interest rate swap contracts	—		17		—		17
Contingent consideration	—		—		87		87
Total	$	—	$	22	$	87	$	109


			Date of Fair Value
(In millions)	Impairment charges		Measurement	Fair Value⁽¹⁾
Goodwill	$	511	December 31, 2019	$	264
Other intangible assets, net (trademark)		266	December 31, 2019		412
Total	$	777		$	676

~~Risk-adjusted discount rates~~		~~3.1% to 3.3%~~
~~Revenue volatility~~		~~5.8%~~
~~Asset volatility~~		~~25.2%~~
~~Revenue and earnings before income tax, depreciation and amortization correlation coefficient factor~~		~~75.0%~~
~~Revenue discount rates~~		~~4.7% to 4.9%~~
~~Earnings before income tax, depreciation and amortization discount rates~~		~~11.9% to 12.8%~~

	Three Months Ended December 31, 2018							Six Months Ended December 31, 2018
(In millions, except per share data)	As Reported		Impact			Prior to the adoption of ASC 606		As Reported		Impact			Prior to the adoption of ASC 606
Net sales	$	4,005	$	67		$	4,072	$	7,529	$	134		$	7,663
Cost of sales	910		(86		)	824		1,733		(152		)	1,581
Gross profit	3,095		153			3,248		5,796		286			6,082

Selling, general and administrative	2,257		99			2,356		4,265		201			4,466

Operating income	771		54			825		1,423		85			1,508

Provision for income taxes	171		13			184		302		19			321
Net earnings attributable to The Estée Lauder Companies Inc.	573		41			614		1,073		66			1,139

Net earnings attributable to The Estée Lauder Companies Inc. per common share:
Basic	$	1.58	$	.11		$	1.69	$	2.94	$	.18		$	3.12
Diluted	$	1.55	$	.11		$	1.66	$	2.88	$	.18		$	3.06

													Other than
	Pension Plans												Pension Plans
	U.S.						International						Post-retirement

																									Other than
																	Pension Plans								Pension Plans
																	U.S.				International				Post-retirement
(In millions)	2018			2017			2018			2017			2018		2017		2019		2018		2019		2018		2019		2018
Service cost	$	9		$	9		$	7		$	8		$	—	$	—	$	10	$	9	$	9	$	7	$	1	$	—
Interest cost	9			8			3			3			2		1			9		9		2		3		1		2
Expected return on plan assets	(13		)	(13		)	(4		)	(4		)	—		—			(13)		(13)		(4)		(4)		—		—
Amortization of:
Prior service cost	—			—			—			—			—		1
Actuarial loss	2			3			2			1			—		—			3		2		2		2		—		—
Net periodic benefit cost	$	7		$	7		$	8		$	8		$	2	$	2	$	9	$	7	$	9	$	8	$	2	$	2


Date Declared	Record Date	Payable Date	Amount per Share
August ~~17, 2018~~16, 2019	August ~~31, 2018~~30, 2019	September ~~17, 2018~~	$	~~.38~~
~~October 30, 2018~~	~~November 30, 2018~~	~~December 17, 2018~~16, 2019	$	.43
October 30, 2019	November 29, 2019	December 16, 2019	$	.48


																		Amounts
																Net Cash		Included in Net
																Flow Hedge		Periodic Benefit			Translation
(In millions)	Net Unrealized Investment Gain (Loss)			Net Derivative Instrument Gain (Loss)			Amounts Included in Net Periodic Benefit Cost			Translation Adjustments			Total			Gain (Loss)		Cost			Adjustments			Total
Balance at June 30, 2018	$	(14	)	$	39		$	(175	)	$	(284	)	$	(434	)
Balance at June 30, 2019																$	21	$	(253)		$	(331)		$	(563)
OCI before reclassifications	5			12			—			(13		)	4				(4)		(1)	⁽¹⁾		3	⁽²⁾		(2)
Amounts reclassified to Net earnings	—			(5		)	5			—			—				(14)		8			2			(4)
Net current-period OCI	5			7			5			(13		)	4				(18)		7			5			(6)
Balance at December 31, 2018	$	(9	)	$	46		$	(170	)	$	(297	)	$	(430	)
Balance at December 31, 2019																$	3	$	(246)		$	(326)		$	(569)

	Amount Reclassified from AOCI
	Three Months Ended December 31						Six Months Ended December 31						Affected Line Item in Consolidated

														Amount Reclassified from AOCI
														Three Months Ended				Six Months Ended				Affected Line Item in
														December 31				December 31				Consolidated
(In millions)	2018			2017			2018			2017			Statements of Earnings	2019		2018		2019		2018		Statements of Earnings
Gain (Loss) on Cash Flow Hedges
Foreign currency forward contracts	$	4		$	—		$	7		$	—		Net sales	$	6	$	4	$	19	$	7	Net sales
Foreign currency forward contracts	—			(7		)	—			(12		)	Cost of sales
Foreign currency forward contracts	—			(7		)	—			(11		)	Selling, general and administrative
Interest rate-related derivatives	—			1			—			1			Interest expense
	4			(13		)	7			(22		)	Earnings before income taxes
Benefit (provision) for deferred taxes	(1		)	4			(2		)	7			Provision for income taxes		(2)		(1)		(5)		(2)	Provision for income taxes
	$	3		$	(9	)	$	5		$	(15	)	Net earnings

														$	4	$	3	$	14	$	5	Net earnings

Amounts Included in Net Periodic Benefit Cost
Amortization of prior service cost	$	—		$	(1	)	$	—		$	(1	)	(1)
Amortization of actuarial loss	(4		)	(4		)	(7		)	(9		)	(1)	$	(5)	$	(4)	$	(10)	$	(7)	Earnings before income taxes ⁽¹⁾
	(4		)	(5		)	(7		)	(10		)	Earnings before income taxes
Benefit for deferred taxes	1			1			2			3			Provision for income taxes		1		1		2		2	Provision for income taxes
	$	(3	)	$	(4	)	$	(5	)	$	(7	)	Net earnings
														$	(4)	$	(3)	$	(8)	$	(5)	Net earnings

Cumulative Translation Adjustments
Gain on previously held equity method investment														$	4	$	—	$	4	$	—	Other income
Loss on liquidation of an investment in a foreign subsidiary															—		—		(6)		—	Restructuring and other charges
														$	4	$	—	$	(2)	$	—	Net earnings
Total reclassification adjustments, net	$	—		$	(13	)	$	—		$	(22	)	Net earnings	$	4	$	—	$	4	$	—	Net earnings

	Three Months Ended December 31					Six Months Ended December 31
($ in millions, except per share data)	2018			2017		2018			2017
As Reported:
Net earnings attributable to The Estée Lauder Companies Inc.	$	573		$	123	$	1,073		$	550
$ Change from prior-year period	450					523
% Change from prior-year period	100		+%			95		%
Diluted net earnings per common share	$	1.55		$	.33	$	2.88		$	1.46
% Change from prior-year period	100		+%			97		%

Non-GAAP Financial Measure(1):
% Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill and other intangible asset impairments, changes in fair value of contingent consideration, the Transition Tax, the remeasurement of U.S. net deferred tax assets as of the TCJA enactment date and the establishment of a net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA	14		%			15		%

(In millions)	Long-term Debt		Current Debt		Total Debt
4.15% Senior Notes, due March 15, 2047 (“2047 Senior Notes”) (1), (10)	$	494	$	—	$	494
4.375% Senior Notes, due June 15, 2045 (“2045 Senior Notes”) (2), (10)	455		—		455
3.70% Senior Notes, due August 15, 2042 (“2042 Senior Notes”) (3), (10)	247		—		247
6.00% Senior Notes, due May 15, 2037 (“2037 Senior Notes”) (4), (10)	294		—		294
5.75% Senior Notes, due October 15, 2033 (“2033 Senior Notes”) (5)	197		—		197
3.15% Senior Notes, due March 15, 2027 (“2027 Senior Notes”) (6), (10)	498		—		498
2.35% Senior Notes, due August 15, 2022 (“2022 Senior Notes”) (7), (10)	245		—		245
1.70% Senior Notes, due May 10, 2021 (“2021 Senior Notes”) (8), (10)	439		—		439
1.80% Senior Notes, due February 7, 2020 (“2020 Senior Notes”) (9), (10)	496		—		496
Other borrowings	8		18		26
	$	3,373	$	18	$	3,391

Period	Total Number of Shares Purchased(1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number of Shares that May Yet Be Purchased Under the Program(2)
October 2018	2,264,490	$	138.66	1,809,984	43,611,545
November 2018	723,744	141.70		723,744	42,887,801
December 2018	1,343,421	132.52		1,343,421	41,544,380
	4,331,655	137.26		3,877,149