ESTEE LAUDER COMPANIES INC 10-Q

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) 2020 2019 Net sales $ 3,562 $ 3,895 Cost of sales 825 908 Gross profit 2,737 2,987 Operating expenses Selling, general and administrative 2,026 2,185 Restructuring and other charges 6 23 Total operating expenses 2,032 2,208 Operating income 705 779 Interest expense 45 32 Interest income and investment income, net 14 14 Other components of net periodic benefit cost 3 1 Earnings before income taxes 671 760 Provision for income taxes 146 162 Net earnings 525 598 Net earnings attributable to noncontrolling interests ( 2 ) ( 3 ) Net earnings attributable to The Estée Lauder Companies Inc. $ 523 $ 595 Net earnings attributable to The Estée Lauder Companies Inc. per common share Basic $ 1.44 $ 1.65 Diluted $ 1.42 $ 1.61 Weighted-average common shares outstanding Basic 362.1 361.4 Diluted 367.2 368.6 See notes to consolidated financial statements. 2 Table of Contents THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended September 30 (In millions) 2020 2019 Net earnings $ 525 $ 598 Other comprehensive income (loss): Net cash flow hedge loss ( 31 ) ( 2 ) Amounts included in net periodic benefit cost 6 5 Translation adjustments 78 ( 70 ) Benefit for deferred income taxes on components of other comprehensive income 18 3 Total other comprehensive gain (loss) 71 ( 64 ) Comprehensive income 596 534 Comprehensive income attributable to noncontrolling interests: Net earnings ( 2 ) ( 3 ) Comprehensive income attributable to The Estée Lauder Companies Inc. $ 594 $ 531 See notes to consolidated financial statements. 3 Table of Contents THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED BALANCE SHEETS (In millions, except share data) September 30 2020 June 30 2020 (Unaudited) ASSETS Current assets Cash and cash equivalents $ 4,267 $ 5,022 Accounts receivable, net 1,812 1,194 Inventory and promotional merchandise 2,204 2,062 Prepaid expenses and other current assets 512 614 Total current assets 8,795 8,892 Property, plant and equipment, net 2,077 2,055 Other assets Operating lease right-of-use assets 2,322 2,282 Goodwill 1,421 1,401 Other intangible assets, net 2,358 2,338 Other assets 930 813 Total other assets 7,031 6,834 Total assets $ 17,903 $ 17,781 LIABILITIES AND EQUITY Current liabilities Current debt $ 473 $ 1,222 Accounts payable 1,178 1,177 Operating lease liabilities 399 375 Other accrued liabilities 2,694 2,405 Total current liabilities 4,744 5,179 Noncurrent liabilities Long-term debt 4,913 4,914 Long-term operating lease liabilities 2,309 2,278 Other noncurrent liabilities 1,456 1,448 Total noncurrent liabilities 8,678 8,640 Contingencies Equity Common stock, $ .01 par value; Class A shares authorized: 1,300,000,000 at September 30, 2020 and June 30, 2020; shares issued: 453,152,184 at September 30, 2020 and 451,927,441 at June 30, 2020; Class B shares authorized: 304,000,000 at September 30, 2020 and June 30, 2020; shares issued and outstanding: 135,067,429 at September 30, 2020 and 135,235,429 at June 30, 2020 6 6 Paid-in capital 4,913 4,790 Retained earnings 10,480 10,134 Accumulated other comprehensive loss ( 594 ) ( 665 ) 14,805 14,265 Less: Treasury stock, at cost; 226,727,480 Class A shares at September 30, 2020 and 226,637,238 Class A shares at June 30, 2020 ( 10,353 ) ( 10,330 ) Total stockholders’ equity – The Estée Lauder Companies Inc. 4,452 3,935 Noncontrolling interests 29 27 Total equity 4,481 3,962 Total liabilities and equity $ 17,903 $ 17,781 See notes to consolidated financial statements. 4 Table of Contents THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended September 30 (In millions) 2020 2019 Cash flows from operating activities Net earnings $ 525 $ 598 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization 156 143 Deferred income taxes ( 39 ) 11 Non-cash stock-based compensation 64 56 Net loss on disposal of property, plant and equipment 2 2 Pension and post-retirement benefit expense 23 21 Pension and post-retirement benefit contributions ( 7 ) ( 9 ) Other non-cash items ( 10 ) ( 2 ) Changes in operating assets and liabilities: Increase in accounts receivable, net ( 607 ) ( 487 ) Increase in inventory and promotional merchandise ( 94 ) ( 83 ) Decrease (increase) in other assets, net 39 ( 48 ) Decrease in accounts payable ( 21 ) ( 400 ) Increase in other accrued and noncurrent liabilities 316 31 Increase (decrease) in operating lease assets and liabilities, net 11 ( 3 ) Net cash flows provided by (used for) operating activities 358 ( 170 ) Cash flows from investing activities Capital expenditures ( 116 ) ( 125 ) Proceeds from purchase price refund 32 — Payment for acquired business ( 6 ) — Purchases of investments ( 40 ) ( 5 ) Settlement of net investment hedges ( 112 ) 2 Net cash flows used for investing activities ( 242 ) ( 128 ) Cash flows from financing activities Proceeds (repayments) of current debt, net ( 747 ) 5 Repayments and redemptions of long-term debt ( 2 ) ( 5 ) Net proceeds from stock-based compensation transactions 58 55 Payments to acquire treasury stock ( 25 ) ( 313 ) Dividends paid to stockholders ( 174 ) ( 156 ) Payments to noncontrolling interest holders for dividends — ( 2 ) Net cash flows used for financing activities ( 890 ) ( 416 ) Effect of exchange rate changes on Cash and cash equivalents 19 ( 14 ) Net decrease in Cash and cash equivalents ( 755 ) ( 728 ) Cash and cash equivalents at beginning of period 5,022 2,987 Cash and cash equivalents at end of period $ 4,267 $ 2,259 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. 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, 2020. 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, 2020. 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 $ 91 million and $( 72 ) million, net of tax, during the three months ended September 30, 2020 and 2019, 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 4 – 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 $ 1 million and $ 3 million during the three months ended September 30, 2020 and 2019, respectively. 6 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 $ 554 million, or 16 %, and $ 169 million, or 4 %, of the Company's consolidated net sales for the three months ended September 30, 2020 and 2019, respectively. This customer accounted for $ 289 million, or 15 %, and $ 297 million, or 24 %, of the Company's accounts receivable at September 30, 2020 and June 30, 2020, respectively. Another major customer of the Company during the quarter sells products primarily within the United States and accounted for $ 215 million, or 11 %, and $ 87 million, or 7 %, of the Company’s accounts receivable at September 30, 2020 and June 30, 2020, respectively. This customer accounted for $ 181 million, or 5 %, and $ 279 million, or 7 %, of the Company’s consolidated net sales for the three months ended September 30, 2020 and 2019, respectively. Inventory and Promotional Merchandise Inventory and promotional merchandise consists of the following: (In millions) September 30 2020 June 30 2020 Raw materials $ 553 $ 542 Work in process 266 305 Finished goods 1,126 995 Promotional merchandise 259 220 $ 2,204 $ 2,062 Property, Plant and Equipment Property, plant and equipment consists of the following: (In millions) September 30 2020 June 30 2020 Assets (Useful Life) Land $ 34 $ 33 Buildings and improvements ( 10 to 40 years) 419 400 Machinery and equipment ( 3 to 10 years) 913 865 Computer hardware and software ( 4 to 10 years) 1,374 1,335 Furniture and fixtures ( 5 to 10 years) 122 120 Leasehold improvements 2,426 2,381 5,288 5,134 Less accumulated depreciation and amortization ( 3,211 ) ( 3,079 ) $ 2,077 $ 2,055 The cost of assets related to projects in progress of $ 523 million and $ 501 million as of September 30, 2020 and June 30, 2020, respectively, is included in their respective asset categories above. Depreciation and amortization of property, plant and equipment was $ 125 million during the three months ended September 30, 2020 and 2019. 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 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income Taxes The effective rate for income taxes was 21.8 % and 21.3 % for the three months ended September 30, 2020 and 2019, respectively. The increase in the effective tax rate of 50 basis points was primarily attributable to a higher effective tax rate on the Company's foreign operations. The fiscal 2021 first quarter effective tax rate included a 130 basis point reduction to the current period effective tax rate due to the impact of the U.S. government issuance of final global intangible low-taxed income (“GILTI”) tax regulations in July 2020 under the Tax Cuts and Jobs Act that provide for a high-tax exception to the current year GILTI tax. These newly-issued regulations are retroactive to the original enactment of the GILTI tax provision, which includes the Company's 2019 and 2020 fiscal years. The Company is currently evaluating the impact and ability to apply the GILTI regulations relating to fiscal 2019 and fiscal 2020. The fiscal 2021 first quarter effective tax rate also included a 120 basis point increase to the current period effective tax rate due to the pending December 31, 2020 expiration of a tax law in China that expanded the corporate income tax deduction allowance for advertising and promotion expenses (“expiring China tax law”). The favorable impact from a possible re-enactment of the expiring China tax law would be recognized in the provision for income taxes in the period that includes the date of such re-enactment. As of September 30, 2020 and June 30, 2020, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $ 73 million and $ 70 million, respectively. The total amount of unrecognized tax benefits at September 30, 2020 that, if recognized, would affect the effective tax rate was $ 58 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three months ended September 30, 2020 in the accompanying consolidated statements of earnings was $ 1 million. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at September 30, 2020 and June 30, 2020, was $ 14 million and $ 13 million, respectively. On the basis of the information available as of September 30, 2020, 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. Other Accrued Liabilities Other accrued liabilities consist of the following: (In millions) September 30 2020 June 30 2020 Advertising, merchandising and sampling $ 316 $ 256 Employee compensation 405 424 Deferred revenue 353 222 Payroll and other taxes 277 250 Accrued income taxes 269 208 Sales return accrual 253 212 Other 821 833 $ 2,694 $ 2,405 Debt In August 2020, the Company repaid the remaining $ 750 million borrowed under its $ 1,500 million revolving credit facility that was outstanding as of June 30, 2020. 8 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recently Adopted Accounting Standards Measurement of Credit Losses on Financial Instruments (ASC Topic 326 – Financial Instruments – Credit Losses) (“ASC 326”) In June 2016, the FASB issued authoritative guidance that requires companies to utilize an impairment model for most financial assets measured at amortized cost and certain other financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses. In addition, this guidance changes the recognition method for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk, and requires additional disclosures. In general, modified retrospective adoption will be required for all outstanding instruments that fall under this guidance. In November 2019, the FASB issued authoritative guidance (ASU 2019-11 – Codification Improvements to Topic 326, Financial Instruments – Credit Losses) that amends ASC Topic 326 to clarify, improve and amend certain aspects of this guidance, such as disclosures related to accrued interest receivables and the estimation of credit losses associated with financial assets secured by collateral. In February 2020, the FASB issued authoritative guidance (ASU 2020-02 – Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842)) that amends and clarifies Topic 326 and Topic 842. For Topic 326, the codification was updated to include the Securities and Exchange Commission staff interpretations associated with registrants engaged in lending activities. Effective for the Company – Fiscal 2021 first quarter. Impact on consolidated financial statements – On July 1, 2020, the Company adopted ASC 326. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. See Note 6 – Revenue Recognition for further discussion. Goodwill and Other – Internal-Use Software (ASU 2018-15 – Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract) In August 2018, the FASB issued authoritative guidance that permits companies to capitalize the costs incurred for setting up business systems that operate on cloud technology. The new guidance aligns the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance does not affect the accounting for the service element of a hosting arrangement that is a service contract. Capitalized costs associated with a hosting arrangement that is a service contract must be amortized over the term of the hosting arrangement to the same line item in the income statement as the expense for fees for the hosting arrangement. Effective for the Company – Fiscal 2021 first quarter, with early adoption permitted in any interim period. This guidance can be adopted either retrospectively, or prospectively to all implementation costs incurred after the date of adoption. Impact on consolidated financial statements – On July 1, 2020, the Company adopted this guidance prospectively to all implementation costs incurred after the date of adoption. The adoption of this standard did not have a material impact on the Company's consolidated financial statements. Recently Issued Accounting Standards Reference Rate Reform (ASC Topic 848) (Accounting Standards Update (“ASU”) 2020-04 - Facilitation of the Effects of Reference Rate Reform on Financial Reporting) In March 2020, the FASB issued authoritative guidance to provide optional relief for companies preparing for the discontinuation of interest rates such as LIBOR, which is expected to be phased out at the end of calendar 2021, and applies to lease contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that have LIBOR as the benchmark rate. Effective for the Company – This guidance can be applied for a limited time, as of the beginning of the interim period that includes March 12, 2020 or any date thereafter, through December 31, 2022. The guidance will no longer be available to apply after December 31, 2022. 9 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impact on consolidated financial statements – The Company is currently assessing the impact of applying this guidance on its existing derivative contracts, leases and other arrangements, as well as when to adopt this guidance. Income Taxes (ASU 2019-12 – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes) In December 2019, the FASB issued authoritative guidance that simplifies the accounting for income taxes by removing certain exceptions and making simplifications in other areas. Effective for the Company – Fiscal 2022 first quarter, with early adoption permitted in any interim period. If adopted early, the Company must adopt all the amendments in the same period. The amendments have differing adoption methods including retrospectively, prospectively and/or modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption, depending on the specific change. Impact on consolidated financial statements – The Company is currently evaluating the impact of applying this guidance and believes that it has transactions that may fall under the scope. No other recently issued accounting pronouncements are expected to have a material impact on the Company’s consolidated financial statements. NOTE 2 – GOODWILL AND OTHER INTANGIBLE ASSETS 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, 2020 Goodwill $ 519 $ 1,210 $ 254 $ 389 $ 2,372 Accumulated impairments ( 95 ) ( 817 ) ( 26 ) ( 33 ) ( 971 ) 424 393 228 356 1,401 Goodwill acquired during the period — 2 — 4 6 Translation adjustments, goodwill 10 — 5 1 16 Translation adjustments, accumulated impairments ( 1 ) — — ( 1 ) ( 2 ) 9 2 5 4 20 Balance as of September 30, 2020 Goodwill 529 1,212 259 394 2,394 Accumulated impairments ( 96 ) ( 817 ) ( 26 ) ( 34 ) ( 973 ) $ 433 $ 395 $ 233 $ 360 $ 1,421 Other intangible assets consist of the following: September 30, 2020 June 30, 2020 (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 $ 1,615 $ 500 $ 1,115 $ 1,590 $ 475 $ 1,115 License agreements 43 43 $ — 43 43 $ — $ 1,658 $ 543 $ 1,115 $ 1,633 $ 518 $ 1,115 Non-amortizable intangible assets: Trademarks and other 1,243 1,223 Total intangible assets $ 2,358 $ 2,338 10 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The aggregate amortization expense related to amortizable intangible assets was $ 25 million and $ 11 million for the three months ended September 30, 2020 and 2019, respectively. The estimated aggregate amortization expense for the remainder of fiscal 2021 and for each of the next four fiscal years is as follows: Fiscal (In millions) 2021 2022 2023 2024 2025 Estimated aggregate amortization expense $ 77 $ 102 $ 101 $ 100 $ 99 NOTE 3 – CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES Charges associated with restructuring activities for the three months ended September 30, 2020 were as follows: Sales Returns (included in Net Sales) Cost of Sales Operating Expenses Total (In millions) Restructuring Charges Other Charges Leading Beauty Forward Program $ — $ 3 $ ( 8 ) $ 2 $ ( 3 ) Post-COVID Business Acceleration Program — — 12 — 12 Total $ — $ 3 $ 4 $ 2 $ 9 Charges associated with restructuring and other activities are not allocated to our 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. Leading Beauty Forward Program In May 2016, the Company announced a multi-year initiative (“Leading Beauty Forward Program” or “LBF Program”) to build on its strengths and better leverage its cost structure to free resources for investment to continue its growth momentum. The LBF Program is designed to enhance the Company’s go-to-market capabilities, reinforce its leadership in global prestige beauty and continue creating sustainable value. As of June 30, 2019, the Company concluded the approvals of all major initiatives under the LBF Program related to the optimization of select corporate functions, supply chain activities, and corporate and regional market support structures, as well as the exit of underperforming businesses, and expects to substantially complete those initiatives through fiscal 2021. LBF Program Approvals The LBF Program approved restructuring and other charges expected to be incurred were: Sales Returns (included in Net Sales) Cost of Sales Operating Expenses Total (In millions) Restructuring Charges Other Charges Total Charges Approved Cumulative through June 30, 2020 $ 13 $ 85 $ 511 $ 358 $ 967 Three months ended September 30, 2020 1 — ( 8 ) 7 — Cumulative through September 30, 2020 $ 14 $ 85 $ 503 $ 365 $ 967 11 Table of Contents 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 Approved Cumulative through June 30, 2020 $ 460 $ 28 $ 7 $ 16 $ 511 Three months ended September 30, 2020 ( 8 ) — — — ( 8 ) Cumulative through September 30, 2020 $ 452 $ 28 $ 7 $ 16 $ 503 The Company records approved charges associated with restructuring and other activities once the relevant accounting criteria have been met. LBF Program Restructuring and Other Charges Total cumulative charges recorded associated with restructuring and other activities for the LBF Program were: (In millions) Sales Returns (included in Net Sales) Cost of Sales Operating Expenses Total Restructuring Charges Other Charges Total Charges Cumulative through June 30, 2020 $ 14 $ 65 $ 491 $ 304 $ 874 Three months ended September 30, 2020 — 3 ( 8 ) 2 ( 3 ) Cumulative through September 30, 2020 $ 14 $ 68 $ 483 $ 306 $ 871 (In millions) Employee- Related Costs Asset- Related Costs Contract Terminations Other Exit Costs Total Restructuring Charges (Adjustments) Cumulative through June 30, 2020 $ 451 $ 27 $ 6 $ 7 $ 491 Three months ended September 30, 2020 ( 8 ) — — — ( 8 ) Cumulative through September 30, 2020 $ 443 $ 27 $ 6 $ 7 $ 483 Employee-related costs reflect adjustments to the accrual estimate for certain employees who either resigned or transferred to other existing positions within the Company. Changes in accrued restructuring charges for the three months ended September 30, 2020 relating to the LBF Program were: (In millions) Employee- Related Costs Asset- Related Costs Contract Terminations Other Exit Costs Total Balance at June 30, 2020 $ 112 $ — $ — $ — $ 112 Charges (adjustments) ( 8 ) — — — ( 8 ) Cash payments ( 23 ) — — — ( 23 ) Balance at September 30, 2020 $ 81 $ — $ — $ — $ 81 Accrued restructuring charges at September 30, 2020 relating to the LBF Program are expected to result in cash expenditures funded from cash provided by operations of approximately $ 56 million, $ 20 million and $ 5 million for the remainder of fiscal 2021 and for fiscal 2022 and 2023, respectively. The expected cash expenditures for fiscal 2024 are de minimis. 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, 2020. 12 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 resize the Company's business against 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. In connection with the PCBA Program, at this time the Company estimates a net reduction in the range of approximately 1,500 to 2,000 positions globally, which is about 3 % of its current workforce including temporary and part-time employees. This reduction takes into account the elimination of some positions, retraining and redeployment of certain employees and investment in new positions in key areas. The Company also estimates the closure 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. PCBA Program Approvals Total cumulative charges approved by the Company through September 30, 2020 were: Sales Returns (included in Net Sales) Cost of Sales Operating Expenses Total (In millions) Restructuring Charges Other Charges Total Charges Approved Three months ended September 30, 2020 $ 2 $ — $ 13 $ 3 $ 18 Included in the above table, cumulative PCBA Program restructuring initiatives approved by the Company through September 30, 2020 by major cost type were: (In millions) Employee- Related Costs Asset- Related Costs Contract Terminations Other Exit Costs Total Restructuring Charges Approved Three months ended September 30, 2020 $ 12 $ 1 $ — $ — $ 13 Specific actions taken since the PCBA Program inception include: • Optimize Distribution Network – To help restore profitability to pre-COVID-19 pandemic levels 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 and counters, mainly in the United Kingdom and certain affiliates in Europe, the Middle East & Africa. These anticipated closures reflect changing consumer behavior including higher demand for online and omnichannel capabilities. These activities will result in product returns, inventory write-offs, reduction of workforce, and termination of contracts. 13 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS • Optimize Digital Organization – The Company approved initiatives to enhance its go-to-market support structures and align more resources to support online and digital activities. These initiatives are primarily intended to shift certain areas of focus from traditional brick-and-mortar to social and digital strategies to provide enhanced consumer experience, as well as to support expanded omnichannel opportunities. 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. 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 (including 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. 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 relate 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 Project Management Office (“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. 14 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Sales Operating Expenses Total (In millions) Restructuring Charges Other Charges Total Charges Cumulative through September 30, 2020 $ — $ — $ 12 $ — $ 12 (In millions) Employee- Related Costs Asset- Related Costs Contract Terminations Other Exit Costs Total Restructuring Charges Cumulative through September 30, 2020 $ 12 $ — $ — $ — $ 12 Accrued restructuring charges at September 30, 2020 relating to the PCBA Program are expected to result in cash expenditures funded from cash provided by operations of approximately $ 9 million, $ 2 million and $ 1 million for the remainder of fiscal 2021 and for fiscal 2022 and 2023, respectively. NOTE 4 – 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 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, 2020, the notional amount of derivatives not designated as hedging instruments was $ 4,189 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. 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. 15 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair values of the Company’s derivative financial instruments included in the consolidated balance sheets are presented as follows: Asset Derivatives Liability Derivatives Fair Value (1) Fair Value (1) (In millions) Balance Sheet Location September 30 2020 June 30 2020 Balance Sheet Location September 30 2020 June 30 2020 Derivatives Designated as Hedging Instruments Foreign currency cash flow hedges Prepaid expenses and other current assets $ 6 $ 26 Other accrued liabilities $ 13 $ 3 Net investment hedges Prepaid expenses and other current assets 8 21 Other accrued liabilities — 62 Interest rate-related derivatives Prepaid expenses and other current assets 13 15 Other accrued liabilities 3 3 Total Derivatives Designated as Hedging Instruments 27 62 16 68 Derivatives Not Designated as Hedging Instruments Foreign currency forward contracts Prepaid expenses and other current assets 8 40 Other accrued liabilities 13 15 Total derivatives $ 35 $ 102 $ 29 $ 83 (1) See Note 5 – Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined. 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 as follows: Amount of Gain or (Loss) Recognized in OCI on Derivatives Location of Gain or (Loss) Reclassified from AOCI into Earnings Amount of Gain or (Loss) Reclassified from AOCI into Earnings (1) Three Months Ended September 30 Three Months Ended September 30 (In millions) 2020 2019 2020 2019 Derivatives in Cash Flow Hedging Relationships: Foreign currency forward contracts $ ( 31 ) $ 25 Net sales $ 1 $ 13 Interest rate-related derivatives — ( 14 ) Interest expense ( 1 ) — ( 31 ) 11 — 13 Derivatives in Net Investment Hedging Relationships (2) : Foreign currency forward contracts (3) ( 63 ) 3 — — Total derivatives $ ( 94 ) $ 14 $ — $ 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) During the three months ended September 30, 2020, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $ 5 million. (3) Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets. 16 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amount of Gain or (Loss) Recognized in Earnings on Derivatives (1) Location of Gain or (Loss) Recognized in Earnings on Derivatives Three Months Ended September 30 (In millions) 2020 2019 Derivatives in Fair Value Hedging Relationships: Interest rate swap contracts Interest expense $ ( 2 ) $ 2 (1) Changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt. Additional information regarding the cumulative amount of fair value hedging gain (loss) recognized in earnings for items designated and qualifying as hedged items in fair value hedges is as follows: (In millions) Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included Carrying Amount of the Hedged Liabilities Cumulative Amount of Fair Value Hedging Gain/(Loss) Included in the Carrying Amount of the Hedged Liability September 30, 2020 September 30, 2020 Current debt $ 453 $ 4 Long-term debt 259 9 Total debt $ 712 $ 13 17 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 September 30 2020 2019 (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 $ 3,562 $ 45 $ 3,895 $ 32 The effects of fair value and cash flow hedging relationships: Gain (loss) on fair value hedge relationships – interest rate contracts: Hedged item Not applicable 2 Not applicable ( 2 ) Derivatives designated as hedging instruments Not applicable ( 2 ) Not applicable 2 Gain (loss) on cash flow hedge relationships – interest rate contracts: Amount of loss reclassified from AOCI into earnings Not applicable ( 1 ) Not applicable — Gain (loss) on cash flow hedge relationships – foreign currency forward contracts: Amount of gain reclassified from AOCI into earnings 1 Not applicable 13 Not applicable The amount of 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 Derivatives Three Months Ended September 30 (In millions) 2020 2019 Derivatives Not Designated as Hedging Instruments: Foreign currency forward contracts Selling, general and administrative $ 21 $ ( 27 ) 18 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 March 2022. Hedge effectiveness of the foreign currency forward contracts is based on the forward method, which includes time value in the effectiveness assessment. At September 30, 2020, the Company had cash flow hedges outstanding with a notional amount totaling $ 981 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 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 sales. As of September 30, 2020, the Company’s foreign currency cash flow hedges were highly effective. The estimated net loss on the Company’s derivative instruments designated as cash flow hedges as of September 30, 2020 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $ 6 million. The accumulated net gain (loss) on derivative instruments in AOCI was $( 11 ) million and $ 20 million as of September 30, 2020 and June 30, 2020, 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 $ 450 million and $ 250 million to effectively convert the fixed rate interest on its 2021 Senior Notes and 2022 Senior Notes, respectively, to variable interest rates based on three-month LIBOR plus a margin. These interest rate swap agreements are designated as fair value hedges of the related long-term debt, and the changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt. Net Investment Hedges The Company enters into foreign currency forward contracts, designated as net investment hedges, to hedge a portion of its net investment in certain foreign operations. The net gain or loss on these contracts is recorded within translation adjustments, as a component of AOCI on the Company’s consolidated balance sheets. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the Company’s net investment in these foreign operations. The net investment hedge contracts have varying maturities through the end of October 2020. Hedge effectiveness of the net investment hedge contracts is based on the spot method. At September 30, 2020, the Company had net investment hedges outstanding with a notional amount totaling $ 1,858 million. Credit Risk As a matter of policy, the Company enters into derivative contracts only with counterparties that have a long-term credit rating of at least A- or higher by at least two 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 $ 35 million at September 30, 2020. 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. 19 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – 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 September 30, 2020: (In millions) Level 1 Level 2 Level 3 Total Assets: Money market funds $ 1,971 $ — $ — $ 1,971 Foreign currency forward contracts — 22 — 22 Interest rate-related derivatives — 13 — 13 Total $ 1,971 $ 35 $ — $ 2,006 Liabilities: Foreign currency forward contracts $ — $ 26 $ — $ 26 Interest rate-related derivatives — 3 — 3 Contingent consideration — — 4 4 Total $ — $ 29 $ 4 $ 33 20 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2020: (In millions) Level 1 Level 2 Level 3 Total Assets: Money market funds $ 2,810 $ — $ — $ 2,810 Foreign currency forward contracts — 87 — 87 Interest rate-related derivatives — 15 — 15 Total $ 2,810 $ 102 $ — $ 2,912 Liabilities: Foreign currency forward contracts $ — $ 80 $ — $ 80 Interest rate-related derivatives — 3 — 3 Contingent consideration — — 4 4 Total $ — $ 83 $ 4 $ 87 The estimated fair values of the Company’s financial instruments are as follows: September 30 2020 June 30 2020 (In millions) Carrying Amount Fair Value Carrying Amount Fair Value Nonderivatives Cash and cash equivalents $ 4,267 $ 4,267 $ 5,022 $ 5,022 Current and long-term debt 5,386 6,180 6,136 6,902 Contingent consideration 4 4 4 4 Derivatives Foreign currency forward contracts – asset (liability), net ( 4 ) ( 4 ) 7 7 Interest rate-related derivatives – asset (liability), net 10 10 12 12 The following methods and assumptions were used to estimate the fair value of the Company’s financial instruments for which it is practicable to estimate that value: Cash and cash equivalents – Cash and all highly-liquid securities with original maturities of three months or less are classified as cash and cash equivalents, primarily consisting of cash deposits in interest bearing accounts, time deposits and money market funds (classified within Level 1 of the valuation hierarchy). Cash deposits in interest bearing accounts and time deposits are carried at cost, which approximates fair value due to the short maturity of cash equivalent instruments. Foreign currency forward contracts – The fair values of the Company’s foreign currency forward contracts were determined using an industry-standard valuation model, which is based on an income approach. The significant observable inputs to the model, such as swap yield curves and currency spot and forward rates, were obtained from an independent pricing service. To determine the fair value of contracts under the model, the difference between the contract price and the current forward rate was discounted using LIBOR for contracts with maturities up to 12 months, and swap yield curves for contracts with maturities greater than 12 months. Interest rate contracts – The fair values of the Company’s interest rate contracts were determined using an industry-standard valuation model, which is based on the income approach. The significant observable inputs to the model, such as treasury yield curves, swap yield curves and LIBOR forward rates, were obtained from independent pricing services. 21 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Current and long-term debt – The fair value of the Company’s debt was estimated based on the current rates offered to the Company for debt with the same remaining maturities. To a lesser extent, debt also includes finance lease obligations for which the carrying amount approximates the fair value. The Company’s debt is classified within Level 2 of the valuation hierarchy. Contingent consideration – Contingent consideration obligations consist of potential obligations related to the Company’s acquisitions in previous years. The amounts to be paid under these obligations are contingent upon the achievement of stipulated financial targets by the business subsequent to acquisition. At September 30, 2020, the fair values of the contingent consideration related to certain acquisition earn-outs were based on the Company’s estimate of the applicable financial targets as per the terms of the agreements. Significant changes in the projected future operating results would result in a significantly higher or lower fair value measurement. As these are unobservable inputs, the Company’s contingent consideration is classified within Level 3 of the valuation hierarchy. There have been no changes in the fair value of contingent consideration obligations for the three months ended September 30, 2020. NOTE 6 – REVENUE RECOGNITION The Company’s revenue recognition accounting policies are described in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020. Accounts Receivable Accounts receivable, net is stated net of the allowance for doubtful accounts and customer deductions totaling $ 76 million and $ 63 million as of September 30, 2020 and June 30, 2020, respectively. During the first quarter of fiscal 2021, the Company adopted ASC 326 using the modified retrospective transition approach and, accordingly, the prior comparative period was not restated. Under this new standard, the Company is required to measure credit losses based on the Company’s estimate of expected losses rather than incurred losses, which generally results in earlier recognition of allowances for credit losses. In accordance with ASC 326, the Company evaluated certain criteria, including aging and historical write-offs, current economic condition of specific customers and future economic conditions of countries utilizing a consumption index to determine the appropriate allowance for credit losses. The Company writes-off receivables once it is determined that the receivables are no longer collectible and as allowed by local laws. Payment terms are short-term in nature and are generally less than one year. Changes in the allowance for credit losses are as follows: (In millions) September 30 2020 Balance at June 30, 2020 $ 36 ASC 326 cumulative effect adjustment (pre-tax) 4 Provision for expected credit losses 5 Write-offs, net & other 1 Balance at September 30, 2020 $ 46 As a result of the adoption of ASC 326, the Company recorded a cumulative adjustment of approximately $ 3 million, net of tax, as a reduction to its fiscal 2021 opening balance of retained earnings relating to its trade receivables. The remaining balance of the allowance for doubtful accounts of $ 30 million, as of September 30, 2020, relates to non-credit losses, which are primarily due to customer deductions. 22 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred Revenue Changes in deferred revenue during the period are as follows: (In millions) September 30 2020 Balance at June 30, 2020 $ 279 Revenue recognized that was included in the deferred revenue balance at the beginning of the period ( 90 ) Revenue deferred during the period 216 Other 4 Balance at September 30, 2020 $ 409 Transaction Price Allocated to the Remaining Performance Obligations At September 30, 2020, the combined estimated revenue expected to be recognized in the next twelve months related to performance obligations for customer loyalty programs, gift with purchase promotions, purchase with purchase promotions and gift card liabilities that are unsatisfied (or partially unsatisfied) is $ 353 million, and the remaining balance will be recognized beyond the next twelve months. NOTE 7 – PENSION AND POST-RETIREMENT BENEFIT PLANS The Company maintains pension plans covering substantially all of its full-time employees for its U.S. operations and a majority of its international operations. The Company also maintains post-retirement benefit plans that provide certain medical and dental benefits to eligible employees. Descriptions of these plans are included in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020. The components of net periodic benefit cost for the three months ended September 30, 2020 and 2019 consisted of the following: Pension Plans Other than Pension Plans U.S. International Post-retirement (In millions) 2020 2019 2020 2019 2020 2019 Service cost $ 11 $ 10 $ 9 $ 9 $ — $ 1 Interest cost 8 8 2 3 1 2 Expected return on plan assets ( 13 ) ( 13 ) ( 3 ) ( 3 ) — ( 1 ) Amortization of: Actuarial loss 5 4 1 1 — — Special termination benefits — — 2 — — — Net periodic benefit cost $ 11 $ 9 $ 11 $ 10 $ 1 $ 2 During the three months ended September 30, 2020, the Company made contributions to its international pension plans totaling $ 2 million. The amounts recognized in the consolidated balance sheets related to the Company’s pension and post-retirement benefit plans consist of the following: (In millions) September 30 2020 June 30 2020 Other assets $ 130 $ 127 Other accrued liabilities ( 27 ) ( 27 ) Other noncurrent liabilities ( 456 ) ( 440 ) Funded status ( 353 ) ( 340 ) Accumulated other comprehensive loss 319 324 Net amount recognized $ ( 34 ) $ ( 16 ) 23 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 – CONTINGENCIES Legal Proceedings The Company is involved, from time to time, in litigation and other legal proceedings incidental to its business, including employment, intellectual property, real estate, environmental, regulatory, advertising, trade relations, tax, privacy, and product liability matters (including asbestos-related claims). Management believes that the outcome of current litigation and legal proceedings will not have a material adverse effect upon the Company’s business, results of operations, financial condition or cash flows. However, management’s assessment of the Company’s current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against the Company not presently known to the Company or determinations by judges, juries or other finders of fact which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or proceedings. Reasonably possible losses in addition to the amounts accrued for such litigation and legal proceedings are not material to the Company’s consolidated financial statements. NOTE 9 – STOCK PROGRAMS Total net stock-based compensation expense is attributable to the granting of, and the remaining requisite service periods of stock options, restricted stock units (“RSUs”), performance share units (“PSUs”), long-term PSUs, and share units. Compensation expense attributable to net stock-based compensation was $ 64 million and $ 56 million for the three months ended September 30, 2020 and 2019, respectively. Stock Options During the three months ended September 30, 2020, the Company granted stock options in respect of approximately 1.5 million shares of Class A Common Stock with an exercise price per share of $ 218.06 and a weighted-average grant date fair value per share of $ 54.49 . The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The aggregate intrinsic value of stock options exercised during the three months ended September 30, 2020 was $ 122 million. Restricted Stock Units The Company granted RSUs in respect of approximately 0.9 million shares of Class A Common Stock during the three months ended September 30, 2020 with a weighted-average grant date fair value per share of $ 218.06 that, at the time of grant, are scheduled to vest at 0.3 million shares per year, in fiscal 2022, fiscal 2023 and fiscal 2024. Vesting of RSUs is generally subject to the continued employment or the retirement of the grantees. The RSUs are accompanied by dividend equivalent rights, payable upon settlement of the RSUs either in cash or shares (based on the terms of the particular award) and, as such, were valued at the closing market price of the Company’s Class A Common Stock on the date of grant. Performance Share Units During the three months ended September 30, 2020, the Company granted PSUs with a target payout of approximately 0.1 million shares of Class A Common Stock with a grant date fair value per share of $ 218.06 , which will be settled in stock subject to the achievement of the Company’s net sales and diluted net earnings per common share for the three fiscal years ending June 30, 2023, all subject to continued employment or the retirement of the grantees. For PSUs granted, no settlement will occur for results below the applicable minimum threshold. PSUs are accompanied by dividend equivalent rights that will be payable in cash upon settlement of the PSUs and, as such, were valued at the closing market value of the Company’s Class A Common Stock on the date of grant. In September 2020, approximately 0.2 million shares of the Company’s Class A Common Stock were issued, and related accrued dividends were paid, relative to the target goals set at the time of the issuance, in settlement of 0.5 million PSUs which vested as of June 30, 2020. 24 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 – NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. PER COMMON SHARE Net earnings attributable to The Estée Lauder Companies Inc. per common share (“basic EPS”) is computed by dividing net earnings attributable to The Estée Lauder Companies Inc. by the weighted-average number of common shares outstanding and shares underlying PSUs and RSUs where the vesting conditions have been met. Net earnings attributable to The Estée Lauder Companies Inc. per common share assuming dilution (“diluted EPS”) is computed by reflecting potential dilution from stock-based awards. A reconciliation between the numerator and denominator of the basic and diluted EPS computations is as follows: Three Months Ended September 30 (In millions, except per share data) 2020 2019 Numerator: Net earnings attributable to The Estée Lauder Companies Inc. $ 523 $ 595 Denominator: Weighted-average common shares outstanding – Basic 362.1 361.4 Effect of dilutive stock options 3.8 4.9 Effect of PSUs 0.2 0.3 Effect of RSUs 1.1 2.0 Weighted-average common shares outstanding – Diluted 367.2 368.6 Net earnings attributable to The Estée Lauder Companies Inc. per common share: Basic $ 1.44 $ 1.65 Diluted $ 1.42 $ 1.61 As of September 30, 2020 and 2019, the number of shares of Class A Common Stock underlying options that were excluded in the computation of diluted EPS because their inclusion would be anti-dilutive was 1.3 million shares. As of September 30, 2020, the number of shares of Class A Common Stock underlying RSUs that were excluded in the computation of diluted EPS because their inclusion would be anti-dilutive was 0.2 million shares. As of September 30, 2019, there were no shares of Class A Common Stock underlying RSUs excluded in the computation of diluted EPS because their inclusion would be anti-dilutive. As of September 30, 2020 and 2019, 0.8 million and 1.1 million shares, respectively, of Class A Common Stock underlying PSUs have been excluded from the calculation of diluted EPS because the number of shares ultimately issued is contingent on the achievement of certain performance targets of the Company, as discussed in Note 9 – Stock Programs . 25 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 – EQUITY Total Stockholders’ Equity – The Estée Lauder Companies Inc. Three Months Ended September 30 (In millions) 2020 2019 Common stock, beginning of the period $ 6 $ 6 Stock-based compensation — — Common stock, end of the period 6 6 Paid-in capital, beginning of the period 4,790 4,403 Common stock dividends 1 1 Stock-based compensation 122 110 Paid-in capital, end of the period 4,913 4,514 Retained earnings, beginning of the period 10,134 9,984 Common stock dividends ( 174 ) ( 157 ) Net earnings attributable to The Estée Lauder Companies Inc. 523 595 Cumulative effect of adoption of new accounting standards ( 3 ) ( 29 ) Retained earnings, end of the period 10,480 10,393 Accumulated other comprehensive loss, beginning of the period ( 665 ) ( 563 ) Other comprehensive income (loss) 71 ( 64 ) Accumulated other comprehensive loss, end of the period ( 594 ) ( 627 ) Treasury stock, beginning of the period ( 10,330 ) ( 9,444 ) Acquisition of treasury stock — ( 277 ) Stock-based compensation ( 23 ) ( 35 ) Treasury stock, end of the period ( 10,353 ) ( 9,756 ) Total stockholders’ equity – The Estée Lauder Companies Inc. 4,452 4,530 Noncontrolling interests, beginning of the period 27 25 Net earnings attributable to noncontrolling interests 2 3 Noncontrolling interests, end of the period 29 28 Total equity $ 4,481 $ 4,558 Cash dividends declared per common share $ .48 $ .43 The following is a summary of quarterly cash dividends declared per share on the Company’s Class A and Class B Common Stock during the three months ended September 30, 2020: Date Declared Record Date Payable Date Amount per Share August 19, 2020 August 31, 2020 September 15, 2020 $ .48 26 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On October 30, 2020, a dividend was declared in the amount of $ .53 per share on the Company’s Class A and Class B Common Stock. The dividend is payable in cash on December 15, 2020 to stockholders of record at the close of business on November 30, 2020. Common Stock Beginning in early February 2020, the Company temporarily suspended its repurchase of shares of the Company's Class A Common Stock. The Company may resume repurchases in the future. During the three months ended September 30, 2020, approximately 0.2 million shares of the Company’s Class B Common Stock were converted into the same amount of shares of the Company’s Class A Common Stock. Accumulated Other Comprehensive Income The following table represents changes in AOCI, net of tax, by component for the three months ended September 30, 2020: (In millions) Net Cash Flow Hedge Gain (Loss) Amounts Included in Net Periodic Benefit Cost Translation Adjustments Total Balance at June 30, 2020 $ 14 $ ( 244 ) $ ( 435 ) $ ( 665 ) OCI before reclassifications ( 24 ) ( 1 ) (1) 91 (2) 66 Amounts reclassified to Net earnings — 5 — 5 Net current-period OCI ( 24 ) 4 91 71 Balance at September 30, 2020 $ ( 10 ) $ ( 240 ) $ ( 344 ) $ ( 594 ) (1) Consists of foreign currency translation losses. (2) See Note 4 – Derivative Financial Instruments for gains (losses) relating to net investment hedges. 27 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table represents the effects of reclassification adjustments from AOCI into net earnings for the three months ended September 30, 2020 and 2019: Amount Reclassified from AOCI Affected Line Item in Consolidated Statements of Earnings Three Months Ended September 30 (In millions) 2020 2019 Gain (Loss) on Cash Flow Hedges Foreign currency forward contracts $ 1 $ 13 Net sales Interest rate-related derivatives ( 1 ) — Interest expense — 13 Provision for deferred taxes — ( 3 ) Provision for income taxes $ — $ 10 Net earnings Amounts Included in Net Periodic Benefit Cost Amortization of actuarial loss $ ( 6 ) $ ( 5 ) Earnings before income taxes (1) Benefit for deferred taxes 1 1 Provision for income taxes $ ( 5 ) $ ( 4 ) Net earnings Cumulative Translation Adjustments Loss on liquidation of an investment in a foreign subsidiary — ( 6 ) Restructuring and other charges Total reclassification adjustments, net $ ( 5 ) $ — Net earnings (1) See Note 7 – Pension and Post-Retirement Benefit Plans for additional information. NOTE 12 – STATEMENT OF CASH FLOWS Supplemental cash flow information for the three months ended September 30, 2020 and 2019 is as follows: (In millions) 2020 2019 Cash: Cash paid during the period for interest $ 26 $ 32 Cash paid during the period for income taxes $ 119 $ 115 Non-cash investing and financing activities: Capitalized interest and asset retirement obligations incurred $ 1 $ — Property, plant and equipment accrued but unpaid $ 42 $ 50 Finance lease obligations $ 1 $ — 28 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 – SEGMENT DATA AND RELATED INFORMATION Reportable operating segments include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the “Chief Executive”) in deciding how to allocate resources and in assessing performance. Although the Company operates in one business segment, beauty products, management also evaluates performance on a product category basis. Product category performance is measured based upon net sales before returns associated with restructuring and other activities, and earnings before income taxes, other components of net periodic benefit cost, interest expense, interest income and investment income, net, other income, net, and charges associated with restructuring and other activities. Returns and charges associated with restructuring and other activities are not allocated to our 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. The accounting policies for the Company’s reportable segments are substantially the same as those for the consolidated financial statements, as described in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020. The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; thus, no additional information is produced for the Chief Executive or included herein. There has been no significant variance in the total or long-lived asset values associated with the Company’s segment data since June 30, 2020. 29 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended September 30 (In millions) 2020 2019 PRODUCT CATEGORY DATA Net sales: Skin Care $ 2,035 $ 1,842 Makeup 978 1,443 Fragrance 406 462 Hair Care 136 136 Other 7 12 Net sales $ 3,562 $ 3,895 Operating income (loss) before charges associated with restructuring and other activities: Skin Care $ 721 $ 632 Makeup ( 71 ) 104 Fragrance 60 66 Hair Care 3 — Other 1 2 714 804 Reconciliation: Charges associated with restructuring and other activities ( 9 ) ( 25 ) Interest expense ( 45 ) ( 32 ) Interest income and investment income, net 14 14 Other components of net periodic benefit cost ( 3 ) ( 1 ) Earnings before income taxes $ 671 $ 760 GEOGRAPHIC DATA (1) Net sales: The Americas $ 873 $ 1,160 Europe, the Middle East & Africa 1,540 1,677 Asia/Pacific 1,149 1,058 Net sales $ 3,562 $ 3,895 Operating income (loss): The Americas $ 65 $ 175 Europe, the Middle East & Africa 411 377 Asia/Pacific 238 252 714 804 Charges associated with restructuring and other activities ( 9 ) ( 25 ) Operating income $ 705 $ 779 (1) The net sales from the Company’s travel retail business are included in the Europe, the Middle East & Africa region, with the exception of the net sales of Dr. Jart+ in the travel retail channel that are reflected in Korea in the Asia/Pacific region. Operating income attributable to the travel retail sales included in Europe, the Middle East & Africa is included in that region and in The Americas. 30 Table of Contents THE ESTÉE LAUDER COMPANIES INC.