Company Quick10K Filing
Quick10K
Estee Lauder Companies
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$169.84 361 $61,340
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-K 2017-06-30 Annual: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-K 2016-06-30 Annual: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-K 2015-06-30 Annual: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-K 2014-06-30 Annual: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-02-14 Regulation FD
8-K 2019-02-04 Earnings, Other Events, Exhibits
8-K 2018-11-13 Shareholder Vote
8-K 2018-10-30 Earnings, Other Events, Exhibits
8-K 2018-10-26 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2018-08-17 Earnings, Other Events, Exhibits
8-K 2018-07-19 Officers
8-K 2018-04-16 Officers
8-K 2018-02-14 Officers, Exhibits
LVS Las Vegas Sands 52,670
VOD Vodafone Group Public 50,380
QTNT Quotient 578
PDFS PDF Solutions 441
PRTK Paratek Pharmaceuticals 192
VTNR Vertex Energy 66
ACT Advanced Credit Technologies 13
TRTC Terra Tech 0
XRM Xerium Technologies 0
NFX Newfield Exploration 0
EL 2018-12-31
Part I. Financial Information
Item 1. Financial Statements.
Note 1 - Summary of Significant Accounting Policies
Note 2 - Investments
Note 3 - Goodwill and Other Intangible Assets
Note 4 - Charges Associated with Restructuring and Other Activities
Note 5 - Derivative Financial Instruments
Note 6 - Fair Value Measurements
Note 7 - Revenue Recognition
Note 8 - Pension and Post-Retirement Benefit Plans
Note 9 - Contingencies
Note 10 - Stock Programs
Note 11 - Net Earnings Attributable To The EstÉE Lauder Companies Inc. per Common Share
Note 12 - Equity
Note 13 - Statement of Cash Flows
Note 14 - Segment Data and Related Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
EX-31.1 a18-41566_1ex31d1.htm
EX-31.2 a18-41566_1ex31d2.htm
EX-32.1 a18-41566_1ex32d1.htm
EX-32.2 a18-41566_1ex32d2.htm

Estee Lauder Companies Earnings 2018-12-31

EL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a18-41566_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)-

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

 

For the quarterly period ended December 31, 2018

 

OR

 

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.

(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

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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 shares of the registrant’s Class A Common Stock, $.01 par value, and 142,907,134 shares of the registrant’s Class B Common Stock, $.01 par value, were outstanding.

 

 

 


Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

INDEX

 

 

Page

Part I. Financial Information

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Consolidated Statements of Earnings —

 

Three and Six Months Ended December 31, 2018 and 2017

2

 

 

Consolidated Statements of Comprehensive Income (Loss) —

 

Three and Six Months Ended December 31, 2018 and 2017

3

 

 

Consolidated Balance Sheets —

 

December 31, 2018 and June 30, 2018 (Audited)

4

 

 

Consolidated Statements of Cash Flows —

 

Six Months Ended December 31, 2018 and 2017

5

 

 

Notes to Consolidated Financial Statements

6

 

 

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

35

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

58

 

 

Item 4. Controls and Procedures

58

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

59

 

 

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

59

 

 

Item 6. Exhibits

59

 

 

Signatures

60

 


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

 

 

See notes to consolidated financial statements.

 

2


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

 

 

See notes to consolidated financial statements.

 

3


Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

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.

 

4


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

 

 

See notes to consolidated financial statements.

 

5


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.

 

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.  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) million and $30 million, net of tax, during the three months ended December 31, 2018 and 2017, respectively, and $(13) million and $84 million, net of tax, during the six months ended December 31, 2018 and 2017, 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, 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 $7 million and $17 million during the three months ended December 31, 2018 and 2017, respectively, and $21 million and $35 million during the six months ended December 31, 2018 and 2017, 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.

 

6


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

 

(In millions)

 

2018

 

2018

 

Raw materials

 

$

438

 

$

432

 

Work in process

 

191

 

222

 

Finished goods

 

840

 

798

 

Promotional merchandise

 

182

 

166

 

 

 

$

1,651

 

$

1,618

 

 

Property, Plant and Equipment

 

 

 

December 31

 

June 30

 

(In millions)

 

2018

 

2018

 

Assets (Useful Life)

 

 

 

 

 

Land

 

$

29

 

$

30

 

Buildings and improvements (10 to 40 years)

 

269

 

237

 

Machinery and equipment (3 to 10 years)

 

748

 

719

 

Computer hardware and software (4 to 10 years)

 

1,245

 

1,193

 

Furniture and fixtures (5 to 10 years)

 

121

 

104

 

Leasehold improvements

 

2,217

 

2,152

 

 

 

4,629

 

4,435

 

Less accumulated depreciation and amortization

 

(2,770

)

(2,612

)

 

 

$

1,859

 

$

1,823

 

 

The cost of assets related to projects in progress of $346 million and $300 million as of December 31, 2018 and June 30, 2018, respectively, is included in their respective asset categories above.  Depreciation and amortization of property, plant and equipment was $121 million and $114 million during the three months ended December 31, 2018 and 2017, respectively, and $237 million and $226 million during the six months ended December 31, 2018 and 2017, 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.

 

7


Table of Contents

 

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% 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 decrease 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 the lower U.S. statutory tax rate and a lower effective tax rate on our foreign operations due to a favorable geographic mix of earnings, partially offset by the impact of GILTI.

 

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

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Other Accrued Liabilities

 

Other accrued liabilities consist of the following:

 

 

 

December 31

 

June 30

 

(In millions)

 

2018

 

2018

 

Advertising, merchandising and sampling

 

$

417

 

$

348

 

Employee compensation

 

416

 

579

 

Deferred revenue

 

425

 

33

 

Sales return accrual

 

197

 

 

Payroll and other taxes

 

293

 

190

 

Accrued income taxes

 

245

 

90

 

Other

 

770

 

705

 

 

 

$

2,763

 

$

1,945

 

 

Debt

 

In October 2018, the Company replaced its undrawn $1.5 billion senior unsecured revolving credit facility that was set to expire in October 2021 with a new $1.5 billion senior unsecured revolving credit facility (the “New Facility”).  The New Facility expires on October 26, 2023 unless extended for up to two additional years in accordance with the terms set forth in the agreement.  Up to the equivalent of $500 million of the New Facility 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 a cross-default provision whereby a failure 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 the acceleration 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 and financial risk components;

·                  reduce complexity 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.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Pension-related Costs

 

In March 2017, the FASB issued authoritative guidance that amends how companies present net periodic benefit cost in the income statement and balance sheet relating to defined benefit pension and/or other postretirement benefit plans.  Within the income statement, the new guidance requires companies to report the service cost component within operating expenses and report 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).

 

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 first quarter.  An entity is permitted to apply the foregoing guidance retrospectively to all prior periods presented, with certain practical expedients, or apply the requirements in the year of adoption, through a cumulative adjustment.

 

Impact on consolidated financial statements — On July 1, 2018, the Company adopted ASC 606, see Note 7 — Revenue Recognition for further discussion.

 

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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

 

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.

 

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.  While the Company’s evaluation is ongoing, it believes the adoption of this standard will have a significant 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 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.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Goodwill and Other — Internal-Use Software

 

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; 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.

 

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

 

NOTE 2 — INVESTMENTS

 

Beginning in the first quarter of fiscal 2019, the Company accounts for its cost method investments at cost, less impairment, plus/minus subsequent observable price changes, and will be required 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 the Company’s consolidated financial statements as of December 31, 2018.

 

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

 

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the Company’s available-for-sale securities by contractual maturity as of December 31, 2018:

 

(In millions)

 

Cost

 

Fair Value

 

Due within one year

 

$

528

 

$

525

 

Due after one through five years

 

436

 

430

 

 

 

$

964

 

$

955

 

 

The following table presents the fair market value of the Company’s investments with gross unrealized losses that are not deemed 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 $11 million and $166 million for the three months ended December 31, 2018 and 2017, respectively, and were $23 million and $296 million for the six months ended December 31, 2018 and 2017, respectively.

 

NOTE 3 — GOODWILL AND OTHER INTANGIBLE ASSETS

 

Impairment Testing During the Six Months Ended December 31, 2018

 

During December 2018, the 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 Americas region.  As of December 31, 2018, the remaining carrying values of the goodwill and trademark related to the Smashbox reporting unit were $120 million and $59 million, respectively.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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, 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 of the following:

 

 

 

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

 

 

The aggregate amortization expense related to amortizable intangible assets was $12 million for the three months ended December 31, 2018 and 2017 and was $25 million for the six months ended December 31, 2018 and 2017.  The estimated aggregate amortization expense for the remainder of fiscal 2019 and for each of the next four fiscal years is as follows:

 

 

 

Fiscal

 

(In millions)

 

2019

 

2020

 

2021

 

2022

 

2023

 

Estimated aggregate amortization expense

 

$

26

 

$

44

 

$

43

 

$

42

 

$

42

 

 

NOTE 4 — CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES

 

In May 2016, the Company announced a multi-year initiative (“Leading Beauty Forward,” “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 Company plans to approve specific 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 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.

 

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THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Program-to-Date Approvals

 

Of the $900 million to $950 million restructuring and other charges expected to be incurred, total cumulative charges approved by the Company through December 31, 2018, some of which were recorded from Program inception through December 31, 2018, were:

 

 

 

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.

 

15


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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

 

 

The major cost types related to the cumulative restructuring charges set forth above 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

 

 

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

 

 

16


Table of Contents

 

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 are expected to result in cash expenditures funded from cash provided by operations of approximately $86 million, $44 million, $10 million and $1 million for the remainder of fiscal 2019 and for fiscal 2020, 2021 and 2022, respectively.

 

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, 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 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.

 

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

 

 


(1) See Note 6 — Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined.

 

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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

)

 


(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 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.

 

18


Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Additional information regarding the cumulative amount of fair value hedging adjustments 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

 

Long-term debt

 

$

(930

)

$

(17

)

 

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

 

(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

 

$

4,005

 

$

35

 

$

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

 

11

 

Not applicable

 

9

 

Derivatives designated as hedging instruments

 

Not applicable

 

(11

)

Not applicable

 

(9

)

 

 

 

 

 

 

 

 

 

 

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

 

 

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

)

 

19


Table of Contents

 

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.  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, the Company had foreign currency forward contracts with a notional amount totaling $3,434 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, the Company’s foreign currency cash flow hedges were highly effective.

 

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

 

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 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 million at December 31, 2018.  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.

 

20


Table of Contents

 

THE ESTÉE LAUDER COMPANIES INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6 — 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.

 

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:

 

(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: