ESTEE LAUDER COMPANIES INC [EL] Filings

10-Q 1 el-20220331.htm 10-Q el-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________________________________

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2022


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

For the transition period from to

Commission file number 1-14064

The Estée Lauder Companies Inc.

(Exact name of registrant as specified in its charter)

Delaware

11-2408943

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

767 Fifth Avenue, New York, New York

10153

(Address of principal executive offices)

(Zip Code)

212-572-4200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, 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

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

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

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


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

At April 26, 2022, 231,805,171 shares of the registrant’s Class A Common Stock, $.01 par value, and 125,542,029 shares of the registrant’s Class B Common Stock, $.01 par value, were outstanding.

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THE ESTÉE LAUDER COMPANIES INC.

INDEX


			Page

Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Consolidated Statements of Earnings — Three and Nine Months Ended March 31, 2022 and 2021			2

Consolidated Statements of Comprehensive Incom e — Three and Nine Months Ended March 31, 2022 and 2021			3

Consolidated Balance Sheets — March 31, 2022 and June 30, 2021 (Audited)			4

Consolidated Statements of Cash Flows — Nine Months Ended March 31, 2022 and 2021			5

Notes to Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			39

Item 3. Quantitative and Qualitative Disclosures About Market Risk			68

Item 4. Controls and Procedures			68

Part II. Other Information

Item 1. Legal Proceedings			68

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			69

Item 6. Exhibits			69

Signatures			70

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)


	Three Months Ended March 31			Nine Months Ended March 31
(In millions, except per share data)		2022		2021		2022		2021

Net sales		$	4,245	$	3,864	$	14,176	$	12,279
Cost of sales		994		939		3,274		2,848

Gross profit		3,251		2,925		10,902		9,431

Operating expenses
Selling, general and administrative		2,275		2,145		7,554		6,761
Restructuring and other charges		22		131		41		172
Goodwill impairment		—		—		—		54
Impairment of other intangible and long-lived assets		216		33		216		60
Total operating expenses		2,513		2,309		7,811		7,047

Operating income		738		616		3,091		2,384

Interest expense		41		43		125		131
Interest income and investment income, net		5		9		19		40
Other components of net periodic benefit cost		(1)		2		(2)		12
Other income		—		—		1		—
Earnings before income taxes		703		580		2,988		2,281

Provision for income taxes		130		122		630		421
Net earnings		573		458		2,358		1,860

Net earnings attributable to noncontrolling interests		(3)		(2)		(8)		(8)
Net earnings attributable to redeemable noncontrolling interest		(12)		—		(12)		—
Net earnings attributable to The Estée Lauder Companies Inc.		$	558	$	456	$	2,338	$	1,852

Net earnings attributable to The Estée Lauder Companies Inc. per common share
Basic		$	1.55	$	1.25	$	6.48	$	5.10
Diluted		$	1.53	$	1.24	$	6.39	$	5.03

Weighted-average common shares outstanding
Basic		359.2		363.6		360.7		362.9
Diluted		363.6		369.0		365.8		368.1

See notes to consolidated financial statements.

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THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended March 31				Nine Months Ended March 31
(In millions)	2022		2021		2022		2021

Net earnings	$	573	$	458	$	2,358	$	1,860

Other comprehensive income (loss):

Net cash flow hedge gain (loss)	5		41		21		(16)
Retirement plan and other retiree benefit adjustments	4		7		12		19
Translation adjustments	28		(121)		(173)		170
Benefit (provision) for income taxes on components of other comprehensive income	(4)		(32)		(22)		6
Total other comprehensive income (loss), net of tax	33		(105)		(162)		179
Comprehensive income	606		353		2,196		2,039

Comprehensive income attributable to noncontrolling interests:
Net earnings	(3)		(2)		(8)		(8)
Translation adjustments	1		1		3		(1)
Total comprehensive income attributable to noncontrolling interests	(2)		(1)		(5)		(9)

Comprehensive income attributable to redeemable noncontrolling interest:
Net earnings	(12)		—		(12)		—
Translation adjustments	(14)		—		3		—
Total comprehensive income attributable to redeemable noncontrolling interest	(26)		—		(9)		—
Comprehensive income attributable to The Estée Lauder Companies Inc.	$	578	$	352	$	2,182	$	2,030

See notes to consolidated financial statements.

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THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED BALANCE SHEETS


(In millions, except share data)	March 31 2022		June 30 2021
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	3,836	$	4,958
Accounts receivable, net	2,209		1,702
Inventory and promotional merchandise	2,830		2,505
Prepaid expenses and other current assets	625		603
Total current assets	9,500		9,768

Property, plant and equipment, net	2,493		2,280

Other assets
Operating lease right-of-use assets	2,034		2,190
Goodwill	2,591		2,616
Other intangible assets, net	3,638		4,095
Other assets	1,103		1,022
Total other assets	9,366		9,923
Total assets	$	21,359	$	21,971

LIABILITIES AND EQUITY
Current liabilities
Current debt	$	269	$	32
Accounts payable	1,470		1,692
Operating lease liabilities	388		379
Other accrued liabilities	3,287		3,195
Total current liabilities	5,414		5,298

Noncurrent liabilities
Long-term debt	5,188		5,537
Long-term operating lease liabilities	1,948		2,151
Other noncurrent liabilities	1,758		2,037
Total noncurrent liabilities	8,894		9,725

Contingencies

Redeemable Noncontrolling Interest	865		857

Equity
Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at March 31, 2022 and June 30, 2021; shares issued: 467,516,898 at March 31, 2022 and 462,633,034 at June 30, 2021; Class B shares authorized: 304,000,000 at March 31, 2022 and June 30, 2021; shares issued and outstanding: 125,542,029 at March 31, 2022 and 128,242,029 at June 30, 2021	6		6
Paid-in capital	5,746		5,335
Retained earnings	14,076		12,244
Accumulated other comprehensive loss	(626)		(470)
	19,202		17,115
Less: Treasury stock, at cost; 235,234,161 Class A shares at March 31, 2022 and 229,115,665 Class A shares at June 30, 2021	(13,052)		(11,058)
Total stockholders’ equity – The Estée Lauder Companies Inc.	6,150		6,057
Noncontrolling interests	36		34
Total equity	6,186		6,091
Total liabilities, redeemable noncontrolling interest and equity	$	21,359	$	21,971

See notes to consolidated financial statements.

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THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended March 31
(In millions)	2022		2021

Cash flows from operating activities
Net earnings	$	2,358	$	1,860
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization	546		475
Deferred income taxes	(90)		(103)
Non-cash stock-based compensation	283		255
Net loss on disposal of property, plant and equipment	6		19
Non-cash restructuring and other charges	2		97
Pension and post-retirement benefit expense	59		75
Pension and post-retirement benefit contributions	(30)		(35)
Goodwill, other intangible and long-lived asset impairments	216		114
Changes in fair value of contingent consideration	—		(2)

Gain on previously held equity method investment	(1)		—
Other non-cash items	(4)		(17)
Changes in operating assets and liabilities:
Increase in accounts receivable, net	(548)		(506)
Decrease (increase) in inventory and promotional merchandise	(398)		13
Increase in other assets, net	(61)		(122)
Increase (decrease) in accounts payable	(199)		55
Increase (decrease) in other accrued and noncurrent liabilities	(132)		629
Decrease in operating lease assets and liabilities, net	(38)		(30)
Net cash flows provided by operating activities	1,969		2,777

Cash flows from investing activities
Capital expenditures	(658)		(386)
Proceeds from purchase price refund	—		32
Payments for acquired businesses	(3)		(8)

Purchases of investments	(10)		(40)
Settlement of net investment hedges	108		(175)
Net cash flows used for investing activities	(563)		(577)

Cash flows from financing activities
Repayments of current debt, net	(4)		(746)
Proceeds from issuance of long-term debt, net	—		596
Debt issuance costs	(1)		(4)
Repayments and redemptions of long-term debt	(16)		(6)
Net proceeds from stock-based compensation transactions	127		180
Payments to acquire treasury stock	(1,998)		(316)

Dividends paid to stockholders	(624)		(561)
Payments to noncontrolling interest holders for dividends	—		(5)
Net cash flows used for financing activities	(2,516)		(862)

Effect of exchange rate changes on Cash and cash equivalents	(12)		39
Net increase (decrease) in Cash and cash equivalents	(1,122)		1,377
Cash and cash equivalents at beginning of period	4,958		5,022
Cash and cash equivalents at end of period	$	3,836	$	6,399

See notes to consolidated financial statements.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim consolidated financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. 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, 2021.

Certain prior year amounts in the notes to the consolidated financial statements 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, 2021. 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, including those related to the impacts of the COVID-19 pandemic, 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 monthly average rates of exchange for the period. Unrealized translation gains (losses), net of tax, reported as translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc. were $13 million and $(143) million, net of tax, during the three months ended March 31, 2022 and 2021, respectively, and $(182) million and $175 million, net of tax, during the nine months ended March 31, 2022 and 2021, 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. The Company also enters 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 5 – Derivative Financial Instruments for further discussion. The Company categorizes these instruments as entered into for purposes other than trading.

The accompanying consolidated statements of earnings include net exchange gains (losses) on foreign currency transactions of $3 million and $(3) million during the three months ended March 31, 2022 and March 31, 2021, respectively, and $(15) million and $(5) million during the nine months ended March 31, 2022 and 2021, respectively.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Concentration of Credit Risk

The Company is a worldwide manufacturer, marketer and seller of skin care, makeup, fragrance and hair care products. The Company’s sales subject to credit risk are made primarily to retailers in its travel retail business, department stores, specialty multi-brand retailers and perfumeries. The Company grants credit to qualified customers. As a result of the COVID-19 pandemic, the Company has enhanced its assessment of its customers' abilities to pay with a greater focus on factors affecting their liquidity and less on historical payment performance. While the Company does not believe it is exposed significantly to any undue concentration of credit risk at this time, it continues to monitor the extent of the impact of the COVID-19 pandemic on its customers' abilities, individually and collectively, to make timely payments.

The Company’s largest customer during the three and nine months ended March 31, 2022 sells products primarily in China travel retail. This customer accounted for $740 million or 17%, and $690 million, or 18%, of the Company's consolidated net sales for the three months ended March 31, 2022 and 2021, respectively, and $1,792 million, or 13%, and $1,898 million, or 15%, for the nine months ended March 31, 2022 and 2021, respectively. This customer accounted for $457 million, or 20%, and $179 million, or 10%, of the Company's accounts receivable at March 31, 2022 and June 30, 2021, respectively.

Inventory and Promotional Merchandise

Inventory and promotional merchandise consists of the following:


(In millions)	March 31, 2022		June 30, 2021
Raw materials	$	778	$	674
Work in process	336		330
Finished goods	1,454		1,213
Promotional merchandise	262		288
	$	2,830	$	2,505

Property, Plant and Equipment

Property, plant and equipment consists of the following:


(In millions)	March 31, 2022		June 30, 2021
Assets (Useful Life)
Land	$	56	$	55
Buildings and improvements (10 to 40 years)	496		256
Machinery and equipment (3 to 10 years)	992		920
Computer hardware and software (4 to 10 years)	1,428		1,303
Furniture and fixtures (5 to 10 years)	129		125
Leasehold improvements	2,307		2,312
Construction in progress	589		647
	5,997		5,618
Less accumulated depreciation and amortization	(3,504)		(3,338)
	$	2,493	$	2,280

Depreciation and amortization of property, plant and equipment was $140 million and $129 million during the three months ended March 31, 2022 and 2021, respectively, and $406 million and $380 million during the nine months ended March 31, 2022 and 2021, 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.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Leases

The Company recognized $33 million of long-lived asset impairments, included in Impairments of other intangible and long-lived assets, in the accompanying consolidated statements of earnings for the three and nine months ended March 31, 2021. The fiscal 2021 impairments related to other assets (i.e. rights associated with commercial operating leases), operating lease right-of-use assets and the related property, plant and equipment in certain freestanding stores primarily in Europe. The impairments were due to the negative impacts of the COVID-19 pandemic. For the three and nine months ended March 31, 2022, the Company did not recognize any long-lived asset impairments.

Income Taxes

The effective rate for income taxes for the three and nine months ended March 31, 2022 and 2021 are as follows:


	Three Months Ended March 31				Nine Months Ended March 31
	2022		2021		2022		2021
Effective rate for income taxes	18.5	%	21.0	%	21.1	%	18.5	%
Basis-point change from the prior-year period	(250)				260

The effective tax rate for the three and nine months ended March 31, 2021 included the retroactive impact relating to fiscal 2020 and 2019 of the U.S. government issuance of final global intangible low-taxed income (“GILTI”) tax regulations in July 2020 under the Tax Cuts and Jobs Act that provide for a high-tax exception to the GILTI tax. The impact of the final issuance of GILTI tax regulations with respect to fiscal 2020 and 2019 was recognized as a discrete item in the provision for income taxes in the second and third quarters of fiscal 2021 and resulted in reductions of 30 basis points and 220 basis points to the effective tax rates for the three and nine months ended March 31, 2021, respectively.

For the three months ended March 31, 2022, the decrease in the effective tax rate was primarily attributable to a lower effective tax rate on the Company's foreign operations, partially offset by a decrease in excess tax benefits associated with stock-based compensation arrangements.

For the nine months ended March 31, 2022, the increase in the effective tax rate was primarily attributable to a higher effective tax rate on the Company’s foreign operations, which includes the retroactive impact of the final GILTI tax regulations recognized in the prior period. Also contributing to the increase was a decrease in excess tax benefits associated with stock-based compensation arrangements.

As of March 31, 2022 and June 30, 2021, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $63 million and $62 million, respectively. The total amount of unrecognized tax benefits at March 31, 2022 that, if recognized, would affect the effective tax rate was $53 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three and nine months ended March 31, 2022 in the accompanying consolidated statements of earnings was $1 million and $5 million, respectively. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at March 31, 2022 and June 30, 2021, was $15 million and $14 million, respectively. On the basis of the information available as of March 31, 2022, the Company does not expect significant changes to the total amount of unrecognized tax benefits within the next twelve months.

During the fiscal 2022 first quarter, the Company formally concluded the compliance process with respect to its fiscal 2020 income tax return under the U.S. Internal Revenue Service (“IRS”) Compliance Assurance Program (“CAP”), which had no impact on the Company’s consolidated financial statements for the three and nine months ended March 31, 2022.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Accrued and Noncurrent Liabilities

Other accrued liabilities consist of the following:


(In millions)	March 31, 2022		June 30, 2021
Advertising, merchandising and sampling	$	322	$	294
Employee compensation	582		670
Deferred revenue	313		322
Payroll and other non-income taxes	321		359
Accrued income taxes	299		237

Other	1,450		1,313
	$	3,287	$	3,195

At March 31, 2022 and June 30, 2021, total Other noncurrent liabilities of $1,758 million and $2,037 million included $744 million and $849 million of deferred tax liabilities, respectively.

Recently Adopted Accounting Standards

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

In December 2019, the Financial Accounting Standards Board (“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.

Impact on consolidated financial statements – On July 1, 2021, the Company adopted this standard and recorded a cumulative adjustment of $121 million as an increase to its fiscal 2022 opening retained earnings balance to derecognize a deferred tax liability related to a previously held equity method investment that became a foreign subsidiary.

Recently Issued Accounting Standards

Reference Rate Reform (ASC Topic 848 “ASC 848”)

In March 2020, the FASB issued authoritative guidance to provide optional relief for companies preparing for the discontinuation of interest rates such as the London Interbank Offered Rate (“LIBOR”) and applies to lease and other contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that reference LIBOR or another rate that is expected to be discontinued as a result of reference rate reform.

In January 2021, the FASB issued authoritative guidance that makes amendments to the new rules on accounting for reference rate reform. The amendments clarify that for all derivative instruments affected by the changes to interest rates used for discounting, margining or contract price alignment, regardless of whether they reference LIBOR or another rate expected to be discontinued as a result of reference rate reform, an entity may apply certain practical expedients in ASC 848.

Effective for the Company – This guidance can be applied for a limited time through December 31, 2022. The guidance will no longer be available to apply after December 31, 2022.

Impact on consolidated financial statements – The Company currently has an implementation team in place that is performing a comprehensive evaluation and assessing the impact of applying this guidance, which includes assessing the impact to business processes and internal controls over financial reporting and the related disclosure requirements. For treasury related arrangements, the Company references LIBOR in its interest rate swap agreements and LIBOR is also used for purposes of discounting certain foreign currency and interest rate forward contracts. The Company is currently evaluating the potential impact of modifying treasury related arrangements and applying the relevant ASC 848 optional practical expedients, as needed. For existing lease, debt arrangements and other contracts, the Company does not expect any qualifying contract modifications related to reference rate reform and therefore does not expect that the optional guidance in ASC 848 will need to be applied through December 31, 2022. The Company will continue to monitor new contracts that could potentially be eligible for contract modification relief through December 31, 2022.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2 – ACQUISITION OF BUSINESS

On May 18, 2021, the Company acquired additional shares in Deciem Beauty Group Inc. (“DECIEM”), a Toronto-based skin care company, for $1,092 million in cash, including proceeds from the issuance of debt. DECIEM is a multi-brand beauty company with a brand portfolio that includes The Ordinary and NIOD. This acquisition is expected to further strengthen the Company’s leadership position in prestige skin care, expand its global consumer reach and complement its business in the online and specialty-multi channels. The Company originally acquired a minority interest in DECIEM in June 2017. The minority interest was accounted for as an equity method investment, which had a carrying value of $65 million at the acquisition date. The acquisition of additional shares increased the Company's fully diluted equity interest from approximately 29% to approximately 76% and was considered a step acquisition. On a fully diluted basis, the DECIEM stock options, discussed below, approximated 4% of the total capital structure. Accordingly, for purposes of determining the consideration transferred, the Company excluded the DECIEM stock options, which resulted in an increase in the Company’s post-acquisition undiluted equity interest from approximately 30% to approximately 78% and the post-acquisition undiluted equity interest of the remaining noncontrolling interest holders of approximately 22%. The Company remeasured the previously held equity method investment to its fair value of $913 million, resulting in the recognition of a gain of $848 million. As part of the increase in the Company's investment, the Company was granted the right to purchase (“Call Option”), and granted the remaining investors a right to sell to the Company (“Put Option”), the remaining interests after a three-year period, with a purchase price based on the future performance of DECIEM (the “net Put (Call) Option”). As a result of this redemption feature, the Company recorded redeemable noncontrolling interest, at its acquisition‑date fair value, that is classified as mezzanine equity in the consolidated balance sheets at June 30, 2021. The accounting for the DECIEM business combination was finalized as of March 31, 2022.

A summary of the total consideration transferred, including immaterial measurement period adjustments as of March 31, 2022, is as follows:


(In millions)	March 31, 2022
Cash paid	$	1,095
Fair value of DECIEM stock options liability	104
Fair value of net Put (Call) Option	233
Total consideration for the acquired ownership interest (approximately 47.9%)	1,432
Fair value of previously held equity method investment (approximately 30.5%)	913
Fair value of redeemable noncontrolling interest (approximately 21.6%)	647
Total consideration transferred (100%)	$	2,992

As part of the acquisition of additional shares, DECIEM stock options were issued in replacement of and exchange for certain vested and unvested stock options previously issued by DECIEM. The total fair value of the DECIEM stock options of $295 million was recorded as part of the total consideration transferred, comprising of $191 million of Cash paid for vested options settled as of the acquisition date and $104 million reported as a stock options liability on the Company's consolidated balance sheet as it is not an assumed liability of DECIEM and is expected to be settled in cash upon completion of the exercise of the Put (Call). The acquisition-date fair value of the DECIEM stock options liability was calculated by multiplying the acquisition-date fair value by the number of DECIEM stock options replaced the day after the acquisition date. The stock options replaced consist of vested and partially vested stock options. See Note 10 – Stock Programs for information relating to the DECIEM stock options.

The acquisition-date fair value of the previously held equity method investment was calculated by multiplying the gross-up of the total consideration for the acquired ownership interest of $2,992 million by the related effective previously held equity interest of approximately 30.5%.

The acquisition-date fair value of the redeemable noncontrolling interest includes the acquisition-date fair value of the net Put (Call) Option of $233 million. The remaining acquisition-date fair value of the redeemable noncontrolling interest of $647 million was calculated by multiplying the gross-up of the total consideration for the acquired ownership interest of $2,992 million by the related noncontrolling interest of approximately 21.6%.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The acquisition-date fair values of the DECIEM stock options and the net Put (Call) Option were calculated by incorporating significant assumptions including the starting equity value, revenue growth rates and EBITDA and the following key assumptions into the Monte Carlo Method:


						May 18, 2021
Risk-free rate						0.50%
Term to mid of last twelve-month period						2.54 years
Operating leverage adjustment						0.45
Net sales discount rate						3.30%
EBITDA discount rate						6.80%
EBITDA volatility						38.30%
Net sales volatility						17.20%

The Company recorded a preliminary allocation of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair value at the acquisition date. The total consideration transferred includes the cash paid at closing, the fair value of its previously held equity method investment, the fair value of the redeemable noncontrolling interest, including the fair value of the net Put (Call) Option, and the fair value of the DECIEM stock options liability. The excess of the total consideration transferred over the fair value of the net tangible and intangible assets acquired was recorded as goodwill. To determine the acquisition date estimated fair value of intangible assets acquired, the Company applied the income approach, specifically the multi-period excess earnings method for customer relationships and the relief-from-royalty method for trademarks. The significant assumptions used in these approaches include revenue growth rates and profit margins, terminal values, weighted-average cost of capital used to discount future cash flows, and a customer attrition rate for customer relationships and royalty rates for trademarks. The final allocation of the total consideration transferred, including immaterial measurement period adjustments as of March 31, 2022, has been recorded as follows:


(In millions)	March 31, 2022
Cash	$	35
Accounts receivable	64
Inventory	190
Other current assets	33
Property, plant and equipment	40
Operating lease right-of-use assets	40
Intangible assets	1,917
Goodwill	1,296
Deferred income taxes	8
Total assets acquired	3,623

Accounts payable	21
Operating lease liabilities	8
Other accrued liabilities	78
Deferred income taxes	479
Long-term operating lease liabilities	45
Total liabilities assumed	631
Total consideration transferred	$	2,992

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The results of operations for DECIEM and acquisition-related costs were not material to the Company's consolidated statements of earnings for the three and nine months ended March 31, 2022. Pro forma results of operations for the fiscal 2021 periods reflecting the acquisition of DECIEM 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 May 2021 the Company increased its investment in DECIEM, which resulted in the inclusion of additional goodwill of $1,296 million, amortizable intangible assets (customer lists) of $701 million with amortization periods of 7 years to 14 years, and non-amortizable intangible assets (trademarks) of $1,216 million. Goodwill associated with the acquisition is primarily attributable to the future revenue growth opportunities associated with sales growth in the skin care category, as well as the value associated with DECIEM's 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 deductible for tax purposes.

Goodwill

The following table presents goodwill by product category and the related change in the carrying amount:


(In millions)	Skin Care		Makeup		Fragrance		Hair Care		Total
Balance as of June 30, 2021
Goodwill	$	1,786	$	1,214	$	262	$	355	$	3,617
Accumulated impairments	(141)		(830)		(30)		—		(1,001)
	1,645		384		232		355		2,616

Goodwill measurement period adjustment	13		—		—		—		13

Translation adjustments, goodwill	(34)		—		(6)		—		(40)
Translation adjustments, accumulated impairments	2		—		—		—		2
	(19)		—		(6)		—		(25)

Balance as of March 31, 2022
Goodwill	1,765		1,214		256		355		3,590
Accumulated impairments	(139)		(830)		(30)		—		(999)
	$	1,626	$	384	$	226	$	355	$	2,591

Other Intangible Assets

Other intangible assets consist of the following:


	March 31, 2022						June 30, 2021
(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	$	2,208	$	660	$	1,548	$	2,273	$	544	$	1,729
License agreements	43		43		—		43		43		—
	$	2,251	$	703	1,548		$	2,316	$	587	1,729
Non-amortizable intangible assets:
Trademarks and other					2,090						2,366
Total intangible assets					$	3,638					$	4,095