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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 September 30, 2021
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
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 October 26, 2021, 231,705,365 shares of the registrant’s Class A Common Stock, $.01 par value, and 128,242,029 shares of the registrant’s Class B Common Stock, $.01 par value, were outstanding.


THE ESTÉE LAUDER COMPANIES INC.
INDEX
Page
Consolidated Statements of Earnings — Three Months Ended September 30, 2021 and 2020
Consolidated Statements of Comprehensive Income — Three Months Ended September 30, 2021 and 2020
Consolidated Balance Sheets — September 30, 2021 and June 30, 2021 (Audited)
Consolidated Statements of Cash Flows — Three Months Ended September 30, 2021 and 2020


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended
September 30
(In millions, except per share data)20212020
Net sales
$4,392 $3,562 
Cost of sales
1,057 825 
Gross profit
3,335 2,737 
Operating expenses
Selling, general and administrative
2,394 2,026 
Restructuring and other charges
6 6 
Total operating expenses
2,400 2,032 
Operating income
935 705 
Interest expense
42 45 
Interest income and investment income, net
4 14 
Other components of net periodic benefit cost
1 3 
Other income1 — 
Earnings before income taxes
897 671 
Provision for income taxes
202 146 
Net earnings695 525 
Net earnings attributable to noncontrolling interests(1)(2)
Net earnings attributable to redeemable noncontrolling interest(2)— 
Net earnings attributable to The Estée Lauder Companies Inc.$692 $523 
Net earnings attributable to The Estée Lauder Companies Inc. per common share
Basic
$1.91 $1.44 
Diluted
$1.88 $1.42 
Weighted-average common shares outstanding
Basic
362.2 362.1 
Diluted
367.9 367.2 
See notes to consolidated financial statements.
2
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
September 30
(In millions)20212020
Net earnings$695 $525 
Other comprehensive income (loss):
Net cash flow hedge gain (loss)21 (31)
Retirement plan and other retiree benefit adjustments4 6 
Translation adjustments(186)78 
Benefit (provision) for income taxes on components of other comprehensive income(12)18 
Total other comprehensive income (loss), net of tax(173)71 
Comprehensive income522 596 
Comprehensive income attributable to noncontrolling interests:
Net earnings(1)(2)
Translation adjustments1 — 
Total comprehensive income attributable to noncontrolling interests— (2)
Comprehensive income attributable to redeemable noncontrolling interest:
Net earnings(2)— 
Translation adjustments17 — 
Total comprehensive income attributable to redeemable noncontrolling interest15 — 
Comprehensive income attributable to The Estée Lauder Companies Inc.$537 $594 
See notes to consolidated financial statements.
3
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)September 30
2021		June 30
2021
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents
$3,995 $4,958 
Accounts receivable, net
2,265 1,702 
Inventory and promotional merchandise
2,633 2,505 
Prepaid expenses and other current assets
593 603 
Total current assets
9,486 9,768 
Property, plant and equipment, net
2,358 2,280 
Other assets
Operating lease right-of-use assets
2,113 2,190 
Goodwill
2,575 2,616 
Other intangible assets, net
3,923 4,095 
Other assets
1,125 1,022 
Total other assets
9,736 9,923 
Total assets
$21,580 $21,971 
LIABILITIES AND EQUITY
Current liabilities
Current debt
$281 $32 
Accounts payable
1,485 1,692 
Operating lease liabilities
371 379 
Other accrued liabilities
3,182 3,195 
Total current liabilities
5,319 5,298 
Noncurrent liabilities
Long-term debt
5,267 5,537 
Long-term operating lease liabilities
2,073 2,151 
Other noncurrent liabilities
1,964 2,037 
Total noncurrent liabilities
9,304 9,725 
Contingencies


Redeemable Noncontrolling Interest842 857 
Equity
Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at September 30, 2021 and June 30, 2021; shares issued: 463,201,084 at September 30, 2021 and 462,633,034 at June 30, 2021; Class B shares authorized: 304,000,000 at September 30, 2021 and June 30, 2021; shares issued and outstanding: 128,242,029 at September 30, 2021 and 128,242,029 at June 30, 2021
6 6 
Paid-in capital
5,450 5,335 
Retained earnings
12,864 12,244 
Accumulated other comprehensive loss
(625)(470)
17,695 17,115 
Less: Treasury stock, at cost; 230,791,699 Class A shares at September 30, 2021 and 229,115,665 Class A shares at June 30, 2021
(11,614)(11,058)
Total stockholders’ equity – The Estée Lauder Companies Inc.
6,081 6,057 
Noncontrolling interests
34 34 
Total equity
6,115 6,091 
Total liabilities, redeemable noncontrolling interest and equity$21,580 $21,971 
See notes to consolidated financial statements.
4
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30
(In millions)20212020
Cash flows from operating activities
Net earnings$695 $525 
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization183 156 
Deferred income taxes(57)(39)
Non-cash stock-based compensation79 64 
Net loss on disposal of property, plant and equipment1 2 
Non-cash restructuring and other charges2 — 
Pension and post-retirement benefit expense21 23 
Pension and post-retirement benefit contributions(11)(7)
Gain on previously held equity method investment(1)— 
Other non-cash items3 (10)
Changes in operating assets and liabilities:
Increase in accounts receivable, net(583)(607)
Increase in inventory and promotional merchandise(178)(94)
Decrease (increase) in other assets, net(19)39 
Decrease in accounts payable(191)(21)
Increase (decrease) in other accrued and noncurrent liabilities(15)316 
Increase (decrease) in operating lease assets and liabilities, net(10)11 
Net cash flows provided by (used for) operating activities(81)358 
Cash flows from investing activities
Capital expenditures(205)(116)
Proceeds from purchase price refund— 32 
Payment for acquired business— (6)
Purchases of investments(6)(40)
Settlement of net investment hedges58 (112)
Net cash flows used for investing activities(153)(242)
Cash flows from financing activities
Proceeds (repayments) of current debt, net3 (747)
Repayments and redemptions of long-term debt(4)(2)
Net proceeds from stock-based compensation transactions36 58 
Payments to acquire treasury stock(557)(25)
Dividends paid to stockholders(192)(174)
Net cash flows used for financing activities(714)(890)
Effect of exchange rate changes on Cash and cash equivalents(15)19 
Net decrease in Cash and cash equivalents(963)(755)
Cash and cash equivalents at beginning of period4,958 5,022 
Cash and cash equivalents at end of period$3,995 $4,267 
See notes to consolidated financial statements.
5
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 $(175) million and $91 million, net of tax, during the three months ended September 30, 2021 and 2020, 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 losses on foreign currency transactions of $12 million and $1 million during the three months ended September 30, 2021 and 2020, respectively.

6
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 department stores, perfumeries, specialty multi-brand retailers and retailers in its travel retail business. 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 quarter sells products primarily in China travel retail and accounted for $456 million, or 10%, and $554 million, or 16%, of the Company's consolidated net sales for the three months ended September 30, 2021 and 2020, respectively. This customer accounted for $301 million, or 13%, and $179 million, or 10%, of the Company's accounts receivable at September 30, 2021 and June 30, 2021, respectively.

Another major customer of the Company during the quarter sells products primarily within the United States and accounted for $239 million, or 10%, and $133 million, or 8%, of the Company’s accounts receivable at September 30, 2021 and June 30, 2021, respectively. This customer accounted for $253 million, or 6%, and $181 million, or 5%, of the Company’s consolidated net sales for the three months ended September 30, 2021 and 2020, respectively.

Inventory and Promotional Merchandise

Inventory and promotional merchandise consists of the following:
(In millions)September 30
2021		June 30
2021
Raw materials
$697 $674 
Work in process
290 330 
Finished goods
1,354 1,213 
Promotional merchandise
292 288 
$2,633 $2,505 

Property, Plant and Equipment

Property, plant and equipment consists of the following:
(In millions)September 30
2021		June 30
2021
Assets (Useful Life)
Land
$53 $55 
Buildings and improvements (10 to 40 years)
257 256 
Machinery and equipment (3 to 10 years)
916 920 
Computer hardware and software (4 to 10 years)
1,375 1,303 
Furniture and fixtures (5 to 10 years)
125 125 
Leasehold improvements
2,300 2,312 
Construction in progress744 647 
5,770 5,618 
Less accumulated depreciation and amortization
(3,412)(3,338)
$2,358 $2,280 

Depreciation and amortization of property, plant and equipment was $130 million and $125 million during the three months ended September 30, 2021 and 2020, 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.
7
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes

The effective rate for income taxes was 22.5% and 21.8% for the three months ended September 30, 2021 and 2020, respectively. The increase in the effective tax rate of 70 basis points was primarily attributable to a decrease in excess tax benefits associated with stock-based compensation arrangements and an increase in income tax reserve adjustments, partially offset by a lower effective tax rate on the Company's foreign operations.

As of September 30, 2021 and June 30, 2021, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $71 million and $62 million, respectively. The total amount of unrecognized tax benefits at September 30, 2021 that, if recognized, would affect the effective tax rate was $62 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three months ended September 30, 2021 in the accompanying consolidated statements of earnings was $3 million. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at September 30, 2021 and June 30, 2021, was $16 million and $14 million, respectively. On the basis of the information available as of September 30, 2021, it is reasonably possible that the total amount of unrecognized tax benefits could decrease in a range of $5 million to $10 million within the next twelve months as a result of projected resolutions of global tax examinations and controversies and a potential lapse of the applicable statutes of limitations.

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 months ended September 30, 2021.

Other Accrued and Noncurrent Liabilities

Other accrued liabilities consist of the following:
(In millions)September 30
2021		June 30
2021
Advertising, merchandising and sampling$348 $294 
Employee compensation456 670 
Deferred revenue379 322 
Payroll and other non-income taxes311 359 
Accrued income taxes336 237 
Sales return accrual378 369 
Other974 944 
$3,182 $3,195 

At September 30, 2021 and June 30, 2021, total Other noncurrent liabilities of $1,964 million and $2,037 million included $805 million and $849 million of deferred tax liabilities, respectively.

8
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
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 contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that have LIBOR as the benchmark rate.

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 Topic 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 on its existing derivative contracts, leases and other arrangements, as well as when to adopt this guidance.
No other recently issued accounting pronouncements are expected to have a material impact on the Company’s consolidated financial statements.




















9
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO 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. As of September 30, 2021, the accounting for the DECIEM business combination is provisional pending the finalization of the opening balance sheet, the final valuation report, and allocation of the total consideration transferred.

A summary of the total consideration transferred, including immaterial measurement period adjustments as of September 30, 2021, is as follows:

(In millions)September 30, 2021
Cash paid/payable$1,095 
Fair value of DECIEM stock options liability 104 
Fair value of net Put (Call) Option233 
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%)
648 
Total consideration transferred (100%)
$2,993 

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 $2,993 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 $648 million was calculated by multiplying the gross-up of the total consideration for the acquired ownership interest of $2,993 million by the related noncontrolling interest of approximately 21.6%.

10
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 rate0.50%
Term to mid of last twelve-month period2.54 years
Operating leverage adjustment0.45
Net sales discount rate3.30%
EBITDA discount rate6.80%
EBITDA volatility38.30%
Net sales volatility17.20%

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 preliminary allocation of the total consideration transferred, including immaterial measurement period adjustments as of September 30, 2021, has been recorded as follows:

(In millions)September 30, 2021
Cash$35 
Accounts receivable64 
Inventory192 
Other current assets33 
Property, plant and equipment40 
Operating lease right-of-use assets40 
Intangible assets1,917 
Goodwill1,297 
Total assets acquired3,618 
Accounts payable21 
Operating lease liabilities 8 
Other accrued liabilities67 
Deferred income taxes485 
Long-term operating lease liabilities 44 
Total liabilities assumed625 
Total consideration transferred$2,993 

The results of operations for DECIEM and acquisition-related costs were not material to the Company's consolidated statements of earnings for the three months ended September 30, 2021. Pro forma results of operations reflecting the acquisition of DECIEM are not presented, as the impact on the Company’s consolidated financial results would not have been material.


11
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $1,297 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 will not be deductible for tax purposes. These amounts are provisional pending finalization of the opening balance sheet, the final valuation report, and allocation of the total consideration transferred.
Goodwill

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

(In millions)Skin CareMakeupFragranceHair CareTotal
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 adjustment14 — — — 14 
Translation adjustments and write-offs, goodwill(53)— (3)— (56)
Translation adjustments and write-offs, accumulated impairments1 — — — 1 
(38)— (3)— (41)
Balance as of September 30, 2021
Goodwill
1,747 1,214 259 355 3,575 
Accumulated impairments
(140)(830)(30)— (1,000)
$1,607 $384 $229 $355 $2,575 

Other Intangible Assets

Other intangible assets consist of the following:

September 30, 2021June 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
$2,209 $583 $1,626 $2,273 $544 $1,729 
License agreements43 43 — 43 43 — 
$2,252 $626 1,626 $2,316 $587 1,729 
Non-amortizable intangible assets:
Trademarks and other2,297 2,366 
Total intangible assets
$3,923 $4,095 



12
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate amortization expense related to amortizable intangible assets was $45 million and $25 million for the three months ended September 30, 2021 and 2020, respectively. The estimated aggregate amortization expense for the remainder of fiscal 2022 and for each of the next four fiscal years is as follows:
Fiscal
(In millions)20222023202420252026
Estimated aggregate amortization expense$116 $155 $154 $154 $154 

NOTE 4 – CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES

Charges associated with the Post-COVID Business Acceleration Program for the three months ended September 30, 2021 were as follows:
Sales
Returns
(included in
Net Sales)		Cost of SalesOperating ExpensesTotal
(In millions)Restructuring
Charges		Other
Charges
Total$1 $(1)$— $2 $2 

Charges associated with restructuring and other activities are not allocated to the Company's product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business.

Post-COVID Business Acceleration Program

On August 20, 2020, the Company announced a two-year restructuring program, Post-COVID Business Acceleration Program (the “PCBA Program”), designed to realign the Company's business to address the dramatic shifts to its distribution landscape and consumer behaviors in the wake of the COVID-19 pandemic. The PCBA Program is designed to help improve efficiency and effectiveness by rebalancing resources to growth areas of prestige beauty. It is expected to further strengthen the Company by building upon the foundational capabilities in which the Company has invested.

The PCBA Program’s main areas of focus include accelerating the shift to online with the realignment of the Company’s distribution network reflecting freestanding store and certain department store closures, with a focus on North America and Europe, the Middle East & Africa; the reduction in brick-and-mortar point of sale employees and related support staff; and the redesign of the Company’s regional branded marketing organizations, plus select opportunities in global brands and functions. This program is expected to position the Company to better execute its long-term strategy while strengthening its financial flexibility.

As of September 30, 2021, the Company estimates a net reduction over the duration of the PCBA Program in the range of 2,000 to 2,500 positions globally, including temporary and part-time employees. This reduction takes into account the elimination of some positions, retraining and redeployment of certain employees and investment in new positions in key areas. The Company also estimates the closure over the duration of the PCBA Program of approximately 10% to 15% of its freestanding stores globally, primarily in Europe, the Middle East & Africa and in North America.

The Company plans to approve specific initiatives under the PCBA Program through fiscal 2022 and expects to complete those initiatives through fiscal 2023. The Company expects that the PCBA Program will result in related restructuring and other charges totaling between $400 million and $500 million, before taxes.
13
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PCBA Program Approvals

Total PCBA Program cumulative charges (adjustments) approved by the Company through September 30, 2021 were:

Sales
Returns
(included in
Net Sales)		Cost of SalesOperating ExpensesTotal
(In millions)Restructuring
Charges		Other
Charges
Total Charges (Adjustments) Approved
Cumulative through June 30, 2021$42 $(6)$257 $21 $314 
Three months ended September 30, 2021(20)9 (8)1 (18)
Cumulative through September 30, 2021$22 $3 $249 $22 $296 

Included in the above table, cumulative PCBA Program restructuring initiatives approved by the Company through September 30, 2021 by major cost type were:

(In millions)Employee-
Related
Costs		Asset-
Related
Costs		Contract
Terminations		Other Exit
Costs		Total
Restructuring Charges Approved
Cumulative through June 30, 2021$132 $108 $13 $4 $257 
Three months ended September 30, 2021(8)2 (2)— (8)
Cumulative through September 30, 2021$124 $110 $11 $4 $249 

Specific actions taken since the PCBA Program inception include:

•Optimize Distribution Network – To help restore profitability to pre-COVID-19 pandemic levels in certain areas of its distribution network and, as part of a broader initiative to be completed in phases, the Company has approved initiatives to close a number of underperforming freestanding stores, counters and other retail locations, mainly in certain affiliates across all geographic regions, including the Company's travel retail network. These anticipated closures reflect changing consumer behaviors including higher demand for online and omnichannel capabilities. These activities will result in a net reduction in workforce, inventory and other asset write-offs, product returns, and termination of contracts.

•Optimize Digital Organization and Other Go-To-Market Organizations – The Company approved initiatives to enhance its go-to-market capabilities and shift more resources to support online growth. 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.

•Optimize Select Marketing, Brand and Global Functions – The Company has started to reduce its corporate office footprint and is moving toward the future of work in a post-COVID environment, by restructuring where and how its employees work and collaborate. These actions will result primarily in lease termination fees.

•Exit of the Global Distribution of BECCA Products – In reviewing the Company's brand portfolio to improve efficiency and the sustainability of long-term investments, the decision was made to exit the global distribution of BECCA products due to its limited distribution, the ongoing decline in product demand and the challenging environment caused by the COVID-19 pandemic. These activities resulted in charges for the impairment of goodwill and other intangible assets, product returns, termination of contracts, and employee severance. The Company expects to substantially complete these initiatives during fiscal 2022.

•Exit of Certain Designer Fragrance Licenses – In reviewing the Company’s brand portfolio of fragrances and to focus on investing its resources on alternative opportunities for long-term growth and value creation globally, the Company announced that it is not renewing its existing license agreements for Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna when they expire in June 2023. The Company expects to continue to sell products under these licenses through June 30, 2022. These actions resulted in, or are expected to result in, employee-related costs, asset write-offs, including charges for the impairment of goodwill, and consulting and legal fees.
14
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PCBA Program Restructuring and Other Charges

Restructuring charges are comprised of the following:

Employee-Related Costs – Employee-related costs are primarily comprised of severance and other post-employment benefit costs, calculated based on salary levels, prior service and other statutory minimum benefits, if applicable.

Asset-Related Costs – Asset-related costs primarily consist of asset write-offs or accelerated depreciation related to long-lived assets in certain freestanding stores (including rights associated with commercial operating leases and operating lease right-of-use assets) that will be taken out of service prior to their existing useful life as a direct result of a restructuring initiative. These costs also include goodwill and other intangible asset impairment charges relating to the exit of the global distribution of BECCA products.

Contract Terminations – Costs related to contract terminations include continuing payments to a third party after the Company has ceased benefiting from the rights conveyed in the contract, or a payment made to terminate a contract prior to its expiration.

Other Exit Costs – Other exit costs related to restructuring activities generally include costs to relocate facilities or employees, recruiting to fill positions as a result of relocation of operations, and employee outplacement for separated employees.

Other charges associated with restructuring activities are comprised of the following:

Sales Returns and Cost of Sales – Product returns (offset by the related cost of sales) and inventory write-offs or write-downs as a direct result of an approved restructuring initiative to exit certain businesses or locations will be recorded as a component of Net sales and/or Cost of sales when estimable and reasonably assured.

Other Charges – The Company approved other charges related to the design and implementation of approved initiatives, which are charged to Operating expenses as incurred and primarily include the following:

•Consulting and other professional services for organizational design of the future structures and processes as well as the implementation thereof,
•Temporary labor backfill,
•Costs to establish and maintain a PMO for the duration of the PCBA Program, including internal costs for employees dedicated solely to project management activities, and other PMO-related expenses incremental to the Company’s ongoing operations (e.g., rent and utilities), and
•Recruitment and training costs for new and reskilled employees to acquire and apply the capabilities needed to perform responsibilities as a direct result of an approved restructuring initiative.

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 the PCBA Program were:

Sales
Returns
(included in
Net Sales)		Cost of SalesOperating ExpensesTotal
(In millions)Restructuring
Charges		Other
Charges
Total Charges (Adjustments)
Cumulative through June 30, 2021$14 $2 $201 $4 $221 
Three months ended September 30, 20211 (1)— 2 2 
Cumulative through September 30, 2021$15 $1 $201 $6 $223 

15
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)Employee-
Related
Costs		Asset-
Related
Costs		Contract
Terminations		Other Exit
Costs		Total
Restructuring Charges (Adjustments)
Cumulative through June 30, 2021$119 $75 $6 $1 $201 
Three months ended September 30, 2021(6)4 2 — — 
Cumulative through September 30, 2021$113 $79 $8 $1 $201 

Changes in accrued restructuring charges for the three months ended September 30, 2021 relating to the PCBA Program were:

(In millions)Employee-
Related
Costs		Asset-
Related
Costs		Contract
Terminations		Other Exit
Costs		Total
Balance at June 30, 2021$101 $— $— $— $101 
Charges(6)4 2 — —
Cash payments(27)— (1)— (28)
Noncash asset write-offs— (4)— — (4)
Translation adjustment— — — — — 
Balance at September 30, 2021
$68 $— $1 $— $69 

Accrued restructuring charges at September 30, 2021 relating to the PCBA Program are expected to result in cash expenditures funded from cash provided by operations of approximately $46 million, $20 million and $3 million for the remainder of fiscal 2022 and for fiscal 2023 and 2024, respectively.

Leading Beauty Forward Program

The Company substantially completed initiatives approved under the Leading Beauty Program (the “LBF Program”) through fiscal 2021. Additional information about the LBF Program 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, 2021.

NOTE 5 – 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. 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. The Company enters 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 consolidated balance sheets. At September 30, 2021, the notional amount of derivatives not designated as hedging instruments was $3,946 million. The Company does not utilize derivative financial instruments for trading or speculative purposes. Costs associated with entering into derivative financial instruments have not been material to the Company’s consolidated financial results.





16
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 to discontinue hedge accounting with respect to that derivative prospectively.

The fair values of the Company’s derivative financial instruments included in the consolidated balance sheets are presented as follows:
Asset DerivativesLiability Derivatives
Fair Value (1)
Fair Value (1)
(In millions)Balance Sheet
Location		September 30
2021		June 30
2021		Balance Sheet
Location		September 30
2021		June 30
2021
Derivatives Designated as Hedging Instruments:
Foreign currency cash flow hedgesPrepaid expenses and other current assets$21 $12 Other accrued liabilities$12 $20 
Net investment hedgesPrepaid expenses and other current assets12 34 Other accrued liabilities— — 
Interest rate-related derivativesPrepaid expenses and other current assets9 15 Other accrued liabilities4 — 
Total Derivatives Designated as Hedging Instruments42 61 16 20 
Derivatives Not Designated as Hedging Instruments: