What changed in this filing

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Item 1. Financial Statements

2021-02-05 compared with 2020-11-02 · 353 added, 155 removed, 737 unchanged (41% of the section changed)

3 unchanged sentences

Three Months Ended

December 31 Six Months Ended

(In millions, except per share data) 2020 2019 2020 2019

1 unchanged sentence

Cost of sales

1,084 1,041 1,909 1,949

3,769 3,583 6,506 6,570

Operating expenses

Selling, general and administrative

2,590 2,538 4,616 4,723

Restructuring and other charges

Goodwill impairment 54 511 54 511

Impairment of other intangible assets 27 266 27 266

Total operating expenses 2,706 3,322 4,738 5,530

3 unchanged sentences

Other components of net periodic benefit cost

Other income — 576 — 576

Earnings before income taxes 1,030 811 1,701 1,571

3 unchanged sentences

Net earnings attributable to The Estée Lauder Companies Inc.

$ 873 $ 557 $ 1,396 $ 1,152

Net earnings attributable to The Estée Lauder Companies Inc.

per common share

$ 1.44 $ 1.65

$ 1.42 $ 1.61

Basic $ 2.40 $ 1.55 $ 3.84 $ 3.19

Diluted $ 2.37 $ 1.52 $ 3.79 $ 3.13

Weighted-average common shares outstanding

Basic 363.0 360.2 363.4 360.8

Diluted 368.0 366.7 368.5 367.7

See notes to consolidated financial statements.

2 unchanged sentences

Three Months Ended

December 31 Six Months Ended

(In millions) 2020 2019 2020 2019

2 unchanged sentences

Net cash flow hedge loss ( 26 ) ( 22 ) ( 57 ) ( 24 )

Amounts included in net periodic benefit cost 6 5

Retirement plan and other retiree benefit adjustments 6 5 12 10

Translation adjustments 213 64 291 ( 6 )

Benefit for deferred income taxes on components of other comprehensive income 20 10 38 13

Total other comprehensive gain (loss) 71 ( 64 )

Total other comprehensive income (loss), net of tax 213 57 284 ( 7 )

Comprehensive income 1,090 618 1,686 1,152

1 unchanged sentence

Net earnings ( 4 ) ( 4 ) ( 6 ) ( 7 )

Translation adjustments ( 2 ) 1 ( 2 ) 1

( 6 ) ( 3 ) ( 8 ) ( 6 )

Comprehensive income attributable to The Estée Lauder Companies Inc.

$ 1,084 $ 615 $ 1,678 $ 1,146

See notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED BALANCE SHEETS

(In millions, except share data) September 30

(In millions, except share data) December 31

Current assets

25 unchanged sentences

Class A shares authorized:

1,300,000,000 at September 30, 2020 and June 30, 2020;

1,300,000,000 at December 31, 2020 and June 30, 2020;

shares issued:

453,152,184 at September 30, 2020 and 451,927,441 at June 30, 2020;

456,618,145 at December 31, 2020 and 451,927,441 at June 30, 2020;

Class B shares authorized:

304,000,000 at September 30, 2020 and June 30, 2020;

304,000,000 at December 31, 2020 and June 30, 2020;

shares issued and outstanding:

135,067,429 at September 30, 2020 and 135,235,429 at June 30, 2020

133,023,029 at December 31, 2020 and 135,235,429 at June 30, 2020

Paid-in capital

5 unchanged sentences

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

227,008,228 Class A shares at December 31, 2020 and 226,637,238 Class A shares at June 30, 2020

( 10,429 ) ( 10,330 )

6 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended

Six Months Ended

(In millions) 2020 2019

6 unchanged sentences

Net loss on disposal of property, plant and equipment 13 5

Non-cash restructuring and other charges 1 —

Pension and post-retirement benefit expense 52 41

Pension and post-retirement benefit contributions ( 25 ) ( 33 )

Goodwill and other intangible asset impairments 81 777

Changes in fair value of contingent consideration ( 2 ) ( 7 )

Gain on previously held equity method investment — ( 553 )

Other non-cash items ( 23 ) ( 10 )

1 unchanged sentence

Increase in accounts receivable, net ( 720 ) ( 347 )

Increase in inventory and promotional merchandise ( 94 ) ( 83 )

Decrease (increase) in other assets, net 39 ( 48 )

Decrease in accounts payable ( 21 ) ( 400 )

Decrease in inventory and promotional merchandise 67 31

Increase in other assets, net ( 110 ) ( 120 )

Increase (decrease) in accounts payable 63 ( 375 )

Increase in other accrued and noncurrent liabilities 750 252

Increase (decrease) in operating lease assets and liabilities, net ( 7 ) 2

Net cash flows provided by (used for) operating activities 358 ( 170 )

Net cash flows provided by operating activities 1,978 1,255

Cash flows from investing activities

1 unchanged sentence

Proceeds from purchase price refund 32 —

Payment for acquired business ( 6 ) —

Payments for acquired businesses, net of cash acquired ( 6 ) ( 1,040 )

Purchases of investments ( 40 ) ( 5 )

3 unchanged sentences

Proceeds (repayments) of current debt, net ( 747 ) 8

Proceeds from issuance of long-term debt, net — 1,783

Debt issuance costs — ( 14 )

Repayments and redemptions of long-term debt ( 4 ) ( 8 )

1 unchanged sentence

Payments to acquire treasury stock ( 102 ) ( 813 )

Payments of contingent consideration — ( 3 )

Dividends paid to stockholders ( 368 ) ( 330 )

Payments to noncontrolling interest holders for dividends ( 2 ) ( 7 )

Net cash flows used for financing activities ( 890 ) ( 416 )

Net cash flows provided by (used for) financing activities ( 1,119 ) 687

Effect of exchange rate changes on Cash and cash equivalents 61 17

Net decrease in Cash and cash equivalents ( 755 ) ( 728 )

Net increase in Cash and cash equivalents 523 609

Cash and cash equivalents at beginning of period 5,022 2,987

26 unchanged sentences

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.

Unrealized translation gains, net of tax, reported as translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc.

were $ 227 million and $ 75 million, net of tax, during the three months ended December 31, 2020 and 2019, respectively, and $ 318 million and $ 3 million, net of tax, during the six months ended December 31, 2020 and 2019, respectively.

For the Company’s subsidiaries operating in highly inflationary economies, the U.S.

6 unchanged sentences

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.

The accompanying consolidated statements of earnings include net exchange gains (losses) on foreign currency transactions of $ 27 million during the three months ended December 31, 2019, and $( 2 ) million and $ 24 million during the six months ended December 31, 2020 and 2019, respectively.

The net exchange loss on foreign currency transactions during the three months ended December 31, 2020 was not material.

THE ESTÉE LAUDER COMPANIES INC.

6 unchanged sentences

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.

The Company’s largest customer during the three and six months ended December 31, 2020 sells products primarily in China travel retail.

This customer accounted for $ 654 million or 13 %, and $ 296 million or 6 % for the three months ended December 31, 2020 and 2019, respectively, and $ 1,208 million or 14 % and $ 465 million or 5 % for the six months ended December 31, 2020 and 2019, respectively, of the Company's consolidated net sales.

This customer accounted for $ 404 million, or 20 %, and $ 297 million, or 24 %, of the Company's accounts receivable at December 31, 2020 and June 30, 2020, respectively.

Inventory and Promotional Merchandise

Inventory and promotional merchandise consists of the following:

(In millions) September 30

(In millions) December 31

Raw materials

5 unchanged sentences

Property, plant and equipment consists of the following:

(In millions) September 30

(In millions) December 31

Assets (Useful Life)

7 unchanged sentences

$ 2,142 $ 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.

The cost of assets related to projects in progress of $ 601 million and $ 501 million as of December 31, 2020 and June 30, 2020, respectively, is included in their respective asset categories above.

Depreciation and amortization of property, plant and equipment was $ 126 million and $ 127 million during the three months ended December 31, 2020 and 2019, respectively, and $ 251 million and $ 252 million during the six months ended December 31, 2020 and 2019, 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.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

The effective rate for income taxes for the three and six months ended December 31, 2020 and 2019 are as follows:

Three Months Ended

December 31 Six Months Ended

2020 2019 2020 2019

Effective rate for income taxes 14.9 % 30.8 % 17.6 % 26.2 %

Basis-point change from the prior-year period ( 1,590 ) ( 860 )

For the three and six months ended December 31, 2020, the decrease in the effective tax rate was primarily attributable to a lower effective tax rate on the Company's foreign operations and the impact of nondeductible goodwill charges recognized in the second quarter of fiscal 2020.

The effective tax rate for the three and six months ended December 31, 2020 included 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 GILTI tax.

These regulations are retroactive to the original enactment of the GILTI tax provision, which includes the Company's 2019 and 2020 fiscal years.

The Company has elected to apply the GILTI high-tax exception to fiscal 2021, 2020 and 2019.

The election for fiscal 2021 resulted in reductions of 160 basis points and 150 basis points to the effective tax rates for the three and six months ended December 31, 2020, respectively.

The impact of the elections with respect to fiscal 2020 and 2019 was recognized as a discrete item in the provision for income taxes in the second quarter of fiscal 2021 and resulted in reductions of 470 basis points and 280 basis points to the effective tax rates for the three and six months ended December 31, 2020, respectively.

As of December 31, 2020 and June 30, 2020, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $ 70 million.

The total amount of unrecognized tax benefits at December 31, 2020 that, if recognized, would affect the effective tax rate was $ 55 million.

The total gross interest and penalties accrued related to unrecognized tax benefits during the three and six months ended December 31, 2020 in the accompanying consolidated statements of earnings were not material.

The total gross accrued interest and penalties in the accompanying consolidated balance sheets at December 31, 2020 and June 30, 2020, was $ 14 million and $ 13 million, respectively.

On the basis of the information available as of December 31, 2020, the Company does not expect significant changes to the total amount of unrecognized tax benefits within the next twelve months.

Other Accrued Liabilities

Other accrued liabilities consist of the following:

(In millions) September 30

(In millions) December 31

Advertising, merchandising and sampling $ 353 $ 256

4 unchanged sentences

Sales return accrual 285 212

Accrued general and administrative expenses 295 233

Other 761 600

$ 3,264 $ 2,405

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.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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 June 2016, the Financial Accounting Standards Board (“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.

18 unchanged sentences

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.

Reference Rate Reform (ASC Topic 848)

In March 2020, the FASB issued authoritative guidance to provide optional relief for companies preparing for the discontinuation of interest rates such as the London Interbank Offered Rate (“LIBOR”), 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.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In January 2021, the FASB issued authoritative guidance that makes amendments to the new rules on accounting for reference rate reform.

The amendments clarify that all derivative instruments affected by the changes to interest rates used for discounting, margining or contract price alignment, regardless of whether they reference LIBOR or another rate expected to be discontinued as a result of reference rate reform, an entity may apply certain practical expedients in ASC Topic 848.

Effective for the Company – This guidance can be applied for a limited time through December 31, 2022.

The guidance will no longer be available to apply after December 31, 2022.

Impact on consolidated financial statements – The Company 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.

7 unchanged sentences

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

NOTE 2 – ACQUISITION OF BUSINESS

On December 18, 2019, the Company acquired the remaining 66.66 % equity interest in Have&Be Co.

(“Have & Be”), the global skin care company behind Dr.

Jart+ and men’s grooming brand Do The Right Thing, for $ 1,268 million in cash.

Based on the final purchase price and working capital adjustments, the Company estimated a refund receivable of $ 32 million that was outstanding as of June 30, 2020 and was received in the first quarter of fiscal 2021.

The Company originally acquired a minority interest in Have & Be in December 2015, and that investment structure included a formula-based call option for the remaining equity interest.

The original minority interest was accounted for as an equity method investment, which had a carrying value of $ 133 million at the acquisition date.

The acquisition of the remaining equity interest in Have & Be was considered a step acquisition, whereby the Company remeasured the previously held equity method investment to its fair value of $ 682 million, resulting in the recognition of a gain of $ 549 million.

The acquisition of the remaining equity interest also resulted in the recognition of a previously unrealized foreign currency gain of $ 4 million, which was reclassified from accumulated OCI.

The total gain on the Company’s previously held equity method investment of $ 553 million is included in Other income in the accompanying consolidated statements of earnings for the three and six months ended December 31, 2019.

The fair value of the previously held equity method investment was determined based upon a valuation of the acquired business, as of the date of acquisition, using an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies.

The accounting for the Have & Be business combination was finalized as of June 30, 2020.

The amount paid at closing was funded by cash on hand including the proceeds from the issuance of debt.

In anticipation of the closing, the Company transferred cash to a foreign subsidiary for purposes of making the closing payment.

As a result, the Company recognized a foreign currency gain of $ 23 million, which is also included in Other income in the accompanying consolidated statements of earnings for the three and six months ended December 31, 2019.

Further information 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.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – GOODWILL AND OTHER INTANGIBLE ASSETS

7 unchanged sentences

Goodwill acquired during the period

Impairment charges

( 54 ) — — — ( 54 )

Translation adjustments, goodwill

1 unchanged sentence

( 2 ) — — ( 2 ) ( 4 )

Balance as of September 30, 2020

( 20 ) 6 9 5 —

Balance as of December 31, 2020

555 1,216 263 396 2,430

Accumulated impairments

2 unchanged sentences

Other intangible assets consist of the following:

September 30, 2020 June 30, 2020

December 31, 2020 June 30, 2020

(In millions) Gross

12 unchanged sentences

$ 2,424 $ 2,338

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 aggregate amortization expense related to amortizable intangible assets was $ 27 million and $ 11 million for the three months ended December 31, 2020 and 2019, respectively, and $ 52 million and $ 22 million for the six months ended December 31, 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:

1 unchanged sentence

Estimated aggregate amortization expense $ 52 $ 105 $ 104 $ 104 $ 104

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment Testing During the Six Months Ended December 31, 2020

During November 2020, given the actual and the estimate of the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting the Company and lower than expected results from geographic expansion, the Company made further revisions to the internal forecasts relating to its GLAMGLOW reporting unit.

The Company concluded that the changes in circumstances in this reporting unit triggered the need for an interim impairment review of its trademark and goodwill.

These changes in circumstances were also an indicator that the carrying amounts of GLAMGLOW's long-lived assets, including customer lists, may not be recoverable.

Accordingly, the Company performed an interim impairment test for the trademark and a recoverability test for the long-lived assets as of November 30, 2020.

The Company concluded that the carrying value of the trademark for GLAMGLOW exceeded its estimated fair value, which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded an impairment charge of $ 21 million.

In addition, the Company concluded that the carrying value of the GLAMGLOW customer lists intangible asset was fully impaired and recorded an impairment charge of $ 6 million.

The fair value of all other long-lived assets of GLAMGLOW exceeded their carrying values and were not impaired as of November 30, 2020.

After adjusting the carrying values of the trademark and customer lists intangible assets, the Company completed an interim quantitative impairment test for goodwill and recorded a goodwill impairment charge of $ 54 million, reducing the carrying value of goodwill for the GLAMGLOW reporting unit to zero.

The fair value of the GLAMGLOW 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.

The impairment charges for the three and six months ended December 31, 2020 were reflected in the skin care product category and in the Americas region.

As of December 31, 2020, the remaining carrying value of the trademark related to the GLAMGLOW reporting unit was $ 36 million.

Impairment Testing During the Six Months Ended December 31, 2019

During December 2019, given the continuing declines in prestige makeup, generally in North America, and the ongoing competitive activity, the Company’s Too Faced, BECCA and Smashbox reporting units made revisions to their internal forecasts concurrent with the Company's brand strategy review process.

The Company concluded that the changes in circumstances in these reporting units triggered the need for an interim impairment review of their respective trademarks and goodwill.

These changes in circumstances were also an indicator that the carrying amounts of their respective long-lived assets, including customer lists, may not be recoverable.

Accordingly, the Company performed interim impairment tests for the trademarks and recoverability tests for the long-lived assets as of December 31, 2019.

The Company concluded that the carrying amounts of the long-lived assets were recoverable.

The Company also concluded that the carrying values of the trademarks exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded impairment charges.

After adjusting the carrying value of the trademarks, the Company completed interim quantitative impairment tests for goodwill and recorded goodwill impairment charges for each of these reporting units.

The fair value of each reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit.

A summary of the impairment charges for the three and six months ended December 31, 2019 and the remaining trademark and goodwill carrying values as of December 31, 2019, for each reporting unit, are as follows:

(In millions) Impairment Charge Carrying Value

Reporting Unit:

Trademark Goodwill Trademark Goodwill

Too Faced $ 211 $ 430 $ 314 $ 175

BECCA 33 35 65 63

Smashbox 22 46 33 26

Total $ 266 $ 511 $ 412 $ 264

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

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES

Charges associated with restructuring activities for the three months ended September 30, 2020 were as follows:

Charges associated with restructuring activities for the three months ended December 31, 2020 were as follows:

Net Sales) Cost of Sales Operating Expenses Total

4 unchanged sentences

Total $ — $ 2 $ 32 $ 3 $ 37

Charges associated with restructuring activities for the six months ended December 31, 2020 were as follows:

Net Sales) Cost of Sales Operating Expenses Total

(In millions) Restructuring

Charges Other

Leading Beauty Forward Program $ — $ 5 $ ( 10 ) $ 5 $ —

Post-COVID Business Acceleration Program — — 46 — 46

Total $ — $ 5 $ 36 $ 5 $ 46

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.

8 unchanged sentences

Charges Other

Total Charges Approved

Total Charges (Adjustments) 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

Six months ended December 31, 2020 1 — ( 7 ) 6 —

Cumulative through December 31, 2020 $ 14 $ 85 $ 504 $ 364 $ 967

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Included in the above table, cumulative LBF Program restructuring initiatives approved by the Company by major cost type were:

(In millions) Employee-

1 unchanged sentence

Terminations Other Exit

Restructuring Charges Approved

Restructuring Charges (Adjustments) 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

Six months ended December 31, 2020 ( 8 ) — 1 — ( 7 )

Cumulative through December 31, 2020 $ 452 $ 28 $ 8 $ 16 $ 504

The Company records approved charges associated with restructuring and other activities once the relevant accounting criteria have been met.

5 unchanged sentences

Charges Other

Total Charges

Total Charges (Adjustments)

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

Six months ended December 31, 2020 — 5 ( 10 ) 5 —

Cumulative through December 31, 2020 $ 14 $ 70 $ 481 $ 309 $ 874

(In millions) Employee-

3 unchanged sentences

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

Six months ended December 31, 2020 ( 12 ) 1 1 — ( 10 )

Cumulative through December 31, 2020 $ 439 $ 28 $ 7 $ 7 $ 481

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:

Changes in accrued restructuring charges for the six months ended December 31, 2020 relating to the LBF Program were:

(In millions) Employee-

4 unchanged sentences

Cash payments ( 36 ) — — — ( 36 )

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.

Translation adjustments 2 — — — 2

Balance at December 31, 2020 $ 66 $ 1 $ 1 $ — $ 68

Accrued restructuring charges at December 31, 2020 relating to the LBF Program are expected to result in cash expenditures funded from cash provided by operations of approximately $ 46 million, $ 17 million and $ 5 million for the remainder of fiscal 2021 and for fiscal 2022 and 2023, respectively.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Post-COVID Business Acceleration Program

6 unchanged sentences

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.

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 approximately 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.

3 unchanged sentences

PCBA Program Approvals

Total cumulative charges approved by the Company through September 30, 2020 were:

The PCBA Program cumulative charges approved by the Company through December 31, 2020 were:

Net Sales) Cost of Sales Operating Expenses Total

1 unchanged sentence

Charges Other

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:

Total Charges (Adjustments) Approved

Six months ended December 31, 2020 $ 5 $ ( 1 ) $ 46 $ 16 $ 66

Included in the above table, cumulative PCBA Program restructuring initiatives approved by the Company through December 31, 2020 by major cost type were:

(In millions) Employee-

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Terminations Other Exit

Restructuring Charges Approved

Three months ended September 30, 2020 $ 12 $ 1 $ — $ — $ 13

Restructuring Charges (Adjustments) Approved

Six months ended December 31, 2020 $ 46 $ 4 $ ( 7 ) $ 3 $ 46

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Specific actions taken since the PCBA Program inception include:

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These activities will result in product returns, inventory write-offs, reduction of workforce, and termination of contracts.

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.

1 unchanged sentence

These actions will result in a net reduction of the workforce, which includes position eliminations, the re-leveling of certain positions and an investment in new capabilities.

• Optimize Select Global Functions – The Company has started to reduce its corporate office footprint and is moving toward the future of work in a post-COVID environment, by restructuring where and how its employees work and collaborate.

These actions will result primarily in lease termination fees.

PCBA Program Restructuring and Other Charges

6 unchanged sentences

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:

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

• Consulting and other professional services for organizational design of the future structures and processes as well as the implementation thereof,

10 unchanged sentences

Total Charges

Cumulative through September 30, 2020 $ — $ — $ 12 $ — $ 12

Six months ended December 31, 2020 $ — $ — $ 46 $ — $ 46

(In millions) Employee-

2 unchanged sentences

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.

Six months ended December 31, 2020 $ 45 $ — $ 1 $ — $ 46

Changes in accrued restructuring charges for the six months ended December 31, 2020 relating to the PCBA Program were:

(In millions) Employee-

Costs Contract

Terminations Other Exit

Charges $ 45 $ — $ 1 $ — $ 46

Cash payments ( 4 ) — ( 1 ) — ( 5 )

Balance at December 31, 2020 $ 41 $ — $ — $ — $ 41

Accrued restructuring charges at December 31, 2020 relating to the PCBA Program are expected to result in cash expenditures funded from cash provided by operations of approximately $ 35 million, $ 5 million, and $ 1 million for the remainder of fiscal 2021 and for fiscal 2022 and 2023, respectively.

NOTE 5 – DERIVATIVE FINANCIAL INSTRUMENTS

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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.

At December 31, 2020, the notional amount of derivatives not designated as hedging instruments was $ 4,118 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.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For each derivative contract entered into, where the Company looks to obtain hedge accounting treatment, the Company formally and contemporaneously documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking the hedge transaction, the nature of the risk being hedged, and how the hedging instruments’ effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively.

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If based on the qualitative assessment, it is determined that a derivative has ceased to be a highly effective hedge, the Company will perform a quantitative assessment to determine whether to discontinue hedge accounting with respect to that derivative prospectively.

THE 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:

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(In millions) Balance Sheet

Location September 30

Location December 31

2020 Balance Sheet

Location September 30

Location December 31

Derivatives Designated as Hedging Instruments

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

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 as follows:

7 unchanged sentences

Three Months Ended

September 30 Three Months Ended

December 31 Three Months Ended

(In millions) 2020 2019 2020 2019

7 unchanged sentences

Foreign currency forward contracts (3)

( 79 ) ( 37 ) — —

Total derivatives

1 unchanged sentence

(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.

(2) During the three months ended December 31, 2020 and December 31, 2019, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $ 5 million and $ 13 million, respectively.

(3) Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets.

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)

Six Months Ended

December 31 Six Months Ended

(In millions) 2020 2019 2020 2019

Derivatives in Cash Flow Hedging Relationships:

Foreign currency forward contracts $ ( 65 ) $ 4 Net sales $ ( 4 ) $ 19

Interest rate-related derivatives 3 ( 9 ) Interest expense ( 1 ) —

( 62 ) ( 5 ) ( 5 ) 19

Derivatives in Net Investment Hedging Relationships (2) :

Foreign currency forward contracts (3)

( 142 ) ( 34 ) — —

Total derivatives $ ( 204 ) $ ( 39 ) $ ( 5 ) $ 19

(2) During the six months ended December 31, 2020 and December 31, 2019, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $ 10 million and $ 25 million, respectively.

(3) Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets.

THE ESTÉE LAUDER COMPANIES INC.

1 unchanged sentence

Amount of Gain or (Loss)

Recognized in Earnings on

Derivatives (1)

Recognized in Earnings on Derivatives (1)

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

Three Months Ended

December 31 Six Months Ended

(In millions) 2020 2019 2020 2019

2 unchanged sentences

Interest expense

$ ( 3 ) $ ( 1 ) $ ( 5 ) $ 1

(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.

6 unchanged sentences

Included in the Carrying Amount of the Hedged Liability

September 30, 2020 September 30, 2020

December 31, 2020 December 31, 2020

Current debt $ 452 $ 2

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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

Three Months Ended December 31

(In millions) Net Sales Interest

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( 5 ) Not applicable 6 Not applicable

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended December 31

(In millions) Net Sales Interest

Expense Net Sales Interest

Total amounts of income and expense line items presented in the consolidated statements of earnings in which the effects of fair value and cash flow hedges are recorded $ 8,415 $ 88 $ 8,519 $ 70

The effects of fair value and cash flow hedging relationships:

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

Not applicable 5 Not applicable ( 1 )

Derivatives designated as hedging instruments

Not applicable ( 5 ) Not applicable 1

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

( 4 ) Not applicable 19 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:

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Derivatives Three Months Ended

December 31 Six Months Ended

(In millions) 2020 2019 2020 2019

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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.

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 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.

At December 31, 2020, the Company had cash flow hedges outstanding with a notional amount totaling $ 1,195 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.

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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.

As of December 31, 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 December 31, 2020 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $ 25 million.

The accumulated net gain (loss) on derivative instruments in AOCI was $( 37 ) million and $ 20 million as of December 31, 2020 and June 30, 2020, respectively.

Fair Value Hedges

6 unchanged sentences

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.

The net investment hedge contracts have varying maturities through the end of January 2021.

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.

At December 31, 2020, the Company had net investment hedges outstanding with a notional amount totaling $ 1,879 million.

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.

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 $ 84 million at December 31, 2020.

To manage this risk, the Company has strict counterparty credit guidelines that are continually monitored.

13 unchanged sentences

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:

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, 2020:

(In millions) Level 1 Level 2 Level 3 Total

5 unchanged sentences

$ — $ 137 $ — $ 137

Interest rate-related derivatives

Contingent consideration

$ — $ 137 $ 2 $ 139

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:

9 unchanged sentences

$ — $ 83 $ 4 $ 87

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

10 unchanged sentences

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

The following table presents the Company’s impairment charges for the three and six months ended December 31, 2020 for certain of its nonfinancial assets measured at fair value on a nonrecurring basis, classified as Level 3, due to a change in circumstances that triggered an interim impairment test:

(In millions) Impairment charges Date of Fair Value Measurement Fair Value

Goodwill $ 54 November 30, 2020 $ —

Other intangible assets, net (trademark and customer lists) 27 November 30, 2020 36

Total $ 81 $ 36

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

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

(In millions) Impairment charges Date of Fair Value Measurement Fair Value

Goodwill $ 511 December 31, 2019 $ 264

Other intangible assets, net (trademark) 266 December 31, 2019 412

Total $ 777 $ 676

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:

1 unchanged sentence

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.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

3 unchanged sentences

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.

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.

3 unchanged sentences

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.

At December 31, 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.

Changes in the fair value of the contingent consideration obligations for six months ended December 31, 2020 are included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings and were as follows:

(In millions)

Contingent consideration at June 30, 2020 $ 4

Changes in fair value

Contingent consideration at December 31, 2020 $ 2

NOTE 7 – REVENUE RECOGNITION

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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.

Accounts receivable, net is stated net of the allowance for doubtful accounts and customer deductions totaling $ 66 million and $ 63 million as of December 31, 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.

3 unchanged sentences

Payment terms are short-term in nature and are generally less than one year.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in the allowance for credit losses are as follows:

(In millions) September 30

(In millions) December 31

Balance at June 30, 2020 $ 36

2 unchanged sentences

Write-offs, net & other ( 8 )

Balance at September 30, 2020 $ 46

Balance at December 31, 2020 $ 39

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.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The remaining balance of the allowance for doubtful accounts of $ 27 million, as of December 31, 2020, relates to non-credit losses, which are primarily due to customer deductions.

Deferred Revenue

Changes in deferred revenue during the period are as follows:

(In millions) September 30

Balance at June 30, 2020 $ 279

Three Months Ended

December 31 Six Months Ended

(In millions) 2020 2019 2020 2019

Deferred revenue, beginning of period $ 409 $ 392 $ 279 $ 361

Revenue recognized that was included in the deferred revenue balance at the beginning of the period ( 83 ) ( 83 ) ( 173 ) ( 243 )

Revenue deferred during the period 92 112 308 307

Balance at September 30, 2020 $ 409

Other 2 4 6 —

Deferred revenue, end of period $ 420 $ 425 $ 420 $ 425

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.

At December 31, 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 $ 365 million, and the remaining balance will be recognized beyond the next twelve months.

NOTE 8 – PENSION AND POST-RETIREMENT BENEFIT PLANS

3 unchanged sentences

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:

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The components of net periodic benefit cost for the three months ended December 31, 2020 and 2019 consisted of the following:

Pension Plans Other than

9 unchanged sentences

Net periodic benefit cost $ 10 $ 9 $ 17 $ 9 $ 2 $ 2

During the three months ended September 30, 2020, the Company made contributions to its international pension plans totaling $ 2 million.

The components of net periodic benefit cost for the six months ended December 31, 2020 and 2019 consisted of the following:

Pension Plans Other than

Pension Plans

International Post-retirement

(In millions) 2020 2019 2020 2019 2020 2019

Service cost $ 22 $ 20 $ 18 $ 18 $ — $ 2

Interest cost 15 17 5 5 3 3

Expected return on plan assets ( 26 ) ( 26 ) ( 6 ) ( 7 ) — ( 1 )

Amortization of:

Actuarial loss 10 7 2 3 — —

Special termination benefits — — 9 — — —

Net periodic benefit cost $ 21 $ 18 $ 28 $ 19 $ 3 $ 4

During the six months ended December 31, 2020, the Company made contributions to its international pension plans totaling $ 18 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

(In millions) December 31

Other assets $ 138 $ 127

14 unchanged sentences

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.

Compensation expense attributable to net stock-based compensation was $ 105 million and $ 83 million for the three months ended December 31, 2020 and 2019, respectively, and was $ 169 million and $ 139 million for the six months ended December 31, 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 .

During the six months ended December 31, 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 $ 218.40 and a weighted-average grant date fair value per share of $ 54.61 .

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.

The aggregate intrinsic value of stock options exercised during the six months ended December 31, 2020 was $ 209 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.

The Company granted RSUs in respect of approximately 0.9 million shares of Class A Common Stock during the six months ended December 31, 2020 with a weighted-average grant date fair value per share of $ 218.10 that, at the time of grant, are scheduled to vest at 0.3 million shares per year, in fiscal 2022, 2023 and 2024.

Vesting of RSUs is generally subject to the continued employment or the retirement of the grantees.

1 unchanged sentence

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.

During the six months ended December 31, 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 $ 218.11 , 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.

12 unchanged sentences

Three Months Ended

December 31 Six Months Ended

(In millions, except per share data) 2020 2019 2020 2019

Net earnings attributable to The Estée Lauder Companies Inc.

$ 873 $ 557 $ 1,396 $ 1,152

Weighted-average common shares outstanding – Basic

363.0 360.2 363.4 360.8

Effect of dilutive stock options

3.8 4.7 3.8 4.8

Effect of PSUs

0.2 0.3 0.2 0.2

Effect of RSUs

1.0 1.5 1.1 1.9

Weighted-average common shares outstanding – Diluted

368.0 366.7 368.5 367.7

Net earnings attributable to The Estée Lauder Companies Inc.

2 unchanged sentences

$ 2.37 $ 1.52 $ 3.79 $ 3.13

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 .

As of December 31, 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 1.5 million and 1.3 million shares, respectively.

As of December 31, 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 10 – Stock Programs .

THE ESTÉE LAUDER COMPANIES INC.

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Three Months Ended

December 31 Six Months Ended

(In millions) 2020 2019 2020 2019

Common stock, beginning of the period

$ 6 $ 6 $ 6 $ 6

Stock-based compensation

1 unchanged sentence

Paid-in capital, beginning of the period

4,913 4,514 4,790 4,403

Common stock dividends

Stock-based compensation

155 100 277 210

Paid-in capital, end of the period

5,068 4,615 5,068 4,615

Retained earnings, beginning of the period

10,480 10,393 10,134 9,984

Common stock dividends

1 unchanged sentence

Net earnings attributable to The Estée Lauder Companies Inc.

873 557 1,396 1,152

Cumulative effect of adoption of new accounting standards

— — ( 3 ) ( 29 )

Retained earnings, end of the period

1 unchanged sentence

Accumulated other comprehensive loss, beginning of the period ( 594 ) ( 627 ) ( 665 ) ( 563 )

( 665 ) ( 563 )

Other comprehensive income (loss) 211 58 282 ( 6 )

Accumulated other comprehensive loss, end of the period ( 383 ) ( 569 ) ( 383 ) ( 569 )

( 594 ) ( 627 )

Treasury stock, beginning of the period

1 unchanged sentence

Acquisition of treasury stock

— ( 426 ) — ( 703 )

Stock-based compensation

3 unchanged sentences

Total stockholders’ equity – The Estée Lauder Companies Inc.

5,421 4,574 5,421 4,574

Noncontrolling interests, beginning of the period 29 28 27 25

Net earnings attributable to noncontrolling interests 4 4 6 7

Distribution to noncontrolling interest holders — ( 4 ) — ( 4 )

Other comprehensive (income) loss 2 ( 1 ) 2 ( 1 )

Noncontrolling interests, end of the period 35 27 35 27

$ 4,481 $ 4,558

Total equity $ 5,456 $ 4,601 $ 5,456 $ 4,601

Cash dividends declared per common share

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

$ .53 $ .48 $ 1.01 $ .91

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.

The following is a summary of quarterly cash dividends declared per share on the Company’s Class A and Class B Common Stock during the six months ended December 31, 2020:

Date Declared Record Date Payable Date Amount per Share

August 19, 2020 August 31, 2020 September 15, 2020 $ .48

October 30, 2020 November 30, 2020 December 15, 2020 $ .53

On February 4, 2021, 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 March 15, 2021 to stockholders of record at the close of business on February 26, 2021.

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.

During the six months ended December 31, 2020, approximately 2.2 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:

The following table represents changes in AOCI, net of tax, by component for the six months ended December 31, 2020:

(In millions) Net Cash

Gain (Loss) Amounts

Included in Net Periodic Benefit Cost Translation

Gain (Loss) Retirement Plan and Other Retiree Benefit Adjustments Translation

Adjustments Total

5 unchanged sentences

( 44 ) 8 318 282

Balance at September 30, 2020 $ ( 10 ) $ ( 240 ) $ ( 344 ) $ ( 594 )

Balance at December 31, 2020 $ ( 30 ) $ ( 236 ) $ ( 117 ) $ ( 383 )

(1) Consists of foreign currency translation losses.

2 unchanged sentences

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:

The following table represents the effects of reclassification adjustments from AOCI into net earnings for the three and six months ended December 31, 2020 and 2019:

Amount Reclassified from AOCI Affected Line Item in

1 unchanged sentence

Three Months Ended

December 31 Six Months Ended

(In millions) 2020 2019 2020 2019

2 unchanged sentences

Interest rate-related derivatives — — ( 1 ) — Interest expense

Provision for deferred taxes — ( 3 ) Provision for income taxes

( 5 ) 6 ( 5 ) 19

Benefit (provision) for deferred taxes 1 ( 2 ) 1 ( 5 ) Provision for income taxes

$ ( 4 ) $ 4 ( 4 ) $ 14 Net earnings

Amounts Included in Net Periodic Benefit Cost

Retirement Plan and Other Retiree Benefit Adjustments

Amortization of actuarial loss $ ( 6 ) $ ( 5 ) $ ( 12 ) $ ( 10 ) Earnings before income taxes (1)

2 unchanged sentences

Cumulative Translation Adjustments

Gain on previously held equity method investment $ — $ 4 $ — $ 4 Other income

Loss on liquidation of an investment in a foreign subsidiary — — — ( 6 ) Restructuring and other charges

$ — $ 4 — $ ( 2 ) Net earnings

Total reclassification adjustments, net $ ( 9 ) $ 4 $ ( 14 ) $ 4 Net earnings

(1) See Note 8 – Pension and Post-Retirement Benefit Plans for additional information.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 – STATEMENT OF CASH FLOWS

Supplemental cash flow information for the three months ended September 30, 2020 and 2019 is as follows:

Supplemental cash flow information for the six months ended December 31, 2020 and 2019 is as follows:

(In millions) 2020 2019

4 unchanged sentences

Property, plant and equipment accrued but unpaid

Finance lease obligations $ 1 $ —

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Right-of-use assets obtained in exchange for new finance lease liabilities $ 1 $ —

Right-of-use assets obtained in exchange for new operating lease liabilities $ 148 $ 110

NOTE 14 – SEGMENT DATA AND RELATED INFORMATION

10 unchanged sentences

Three Months Ended

December 31 Six Months Ended

(In millions) 2020 2019 2020 2019

4 unchanged sentences

Hair Care 154 162 290 298

Other 15 16 22 28

Net sales $ 4,853 $ 4,624 $ 8,415 $ 8,519

4 unchanged sentences

Hair Care 4 12 7 12

Other ( 1 ) 4 — 6

1,100 274 1,814 1,078

Reconciliation:

3 unchanged sentences

Other components of net periodic benefit cost ( 7 ) ( 1 ) ( 10 ) ( 2 )

Other income — 576 — 576

Earnings before income taxes $ 1,030 $ 811 $ 1,701 $ 1,571

8 unchanged sentences

Asia/Pacific 407 298 645 550

1,100 274 1,814 1,078

Charges associated with restructuring and other activities ( 37 ) ( 13 ) ( 46 ) ( 38 )

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements