UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
(Mark One)-
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2017
OR
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number: 1-14064
The Estée Lauder Companies Inc.
(Exact name of registrant as specified in its charter)
Delaware
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11-2408943
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767 Fifth Avenue, New York, New York
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10153
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212-572-4200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
|
Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
At October 25, 2017, 224,817,594 shares of the registrants Class A Common Stock, $.01 par value, and 143,419,528 shares of the registrants Class B Common Stock, $.01 par value, were outstanding.
THE ESTÉE LAUDER COMPANIES INC.
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
|
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Three Months Ended
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(In millions, except per share data) |
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2017 |
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2016 |
|
||
|
|
|
|
|
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Net Sales |
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$ |
3,274 |
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$ |
2,865 |
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Cost of Sales |
|
711 |
|
596 |
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|
|
|
|
|
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Gross Profit |
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2,563 |
|
2,269 |
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||
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|
|
|
|
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Operating Expenses |
|
|
|
|
|
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Selling, general and administrative |
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1,961 |
|
1,825 |
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Restructuring and other charges |
|
34 |
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26 |
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||
Total operating expenses |
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1,995 |
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1,851 |
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|
|
|
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||
Operating Income |
|
568 |
|
418 |
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|
|
|
|
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Interest expense |
|
31 |
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21 |
|
||
Interest income and investment income, net |
|
12 |
|
6 |
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||
Earnings before Income Taxes |
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549 |
|
403 |
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|
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Provision for income taxes |
|
119 |
|
107 |
|
||
Net Earnings |
|
430 |
|
296 |
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||
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Net earnings attributable to noncontrolling interests |
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(3 |
) |
(2 |
) |
||
Net Earnings Attributable to The Estée Lauder Companies Inc. |
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$ |
427 |
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$ |
294 |
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Net earnings attributable to The Estée Lauder Companies Inc. per common share |
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|
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Basic |
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$ |
1.16 |
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$ |
.80 |
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Diluted |
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$ |
1.14 |
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$ |
.79 |
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|
|
|
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Weighted-average common shares outstanding |
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|
|
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Basic |
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368.4 |
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366.4 |
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Diluted |
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375.4 |
|
373.3 |
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||
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|
|
|
|
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Cash dividends declared per common share |
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$ |
.34 |
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$ |
.30 |
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See notes to consolidated financial statements.
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
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Three Months Ended
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(In millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
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Net earnings |
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$ |
430 |
|
$ |
296 |
|
|
|
|
|
|
|
||
Other comprehensive income (loss): |
|
|
|
|
|
||
Net unrealized investment loss |
|
(1 |
) |
(4 |
) |
||
Net derivative instrument loss |
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(9 |
) |
(6 |
) |
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Amounts included in net periodic benefit cost |
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5 |
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8 |
|
||
Translation adjustments |
|
54 |
|
1 |
|
||
Benefit (provision) for deferred income taxes on components of other comprehensive income |
|
1 |
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(1 |
) |
||
Total other comprehensive income (loss) |
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50 |
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(2 |
) |
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Comprehensive income |
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480 |
|
294 |
|
||
|
|
|
|
|
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Comprehensive income attributable to noncontrolling interests: |
|
|
|
|
|
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Net earnings |
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(3 |
) |
(2 |
) |
||
Translation adjustments |
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(1 |
) |
(1 |
) |
||
|
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(4 |
) |
(3 |
) |
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Comprehensive income attributable to The Estée Lauder Companies Inc. |
|
$ |
476 |
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$ |
291 |
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See notes to consolidated financial statements.
THE ESTÉE LAUDER COMPANIES INC.
|
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September 30 |
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June 30 |
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(In millions, except share data) |
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2017 |
|
2017 |
|
||
|
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(Unaudited) |
|
|
|
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ASSETS |
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Current Assets |
|
|
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Cash and cash equivalents |
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$ |
1,444 |
|
$ |
1,136 |
|
Short-term investments |
|
381 |
|
605 |
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||
Accounts receivable, net |
|
1,799 |
|
1,395 |
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||
Inventory and promotional merchandise, net |
|
1,518 |
|
1,479 |
|
||
Prepaid expenses and other current assets |
|
365 |
|
349 |
|
||
Total current assets |
|
5,507 |
|
4,964 |
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||
|
|
|
|
|
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Property, Plant and Equipment, net |
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1,695 |
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1,671 |
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Other Assets |
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Long-term investments |
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1,087 |
|
1,026 |
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Goodwill |
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1,921 |
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1,916 |
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Other intangible assets, net |
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1,316 |
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1,327 |
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Other assets |
|
676 |
|
664 |
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Total other assets |
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5,000 |
|
4,933 |
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Total assets |
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$ |
12,202 |
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$ |
11,568 |
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|
|
|
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LIABILITIES AND EQUITY |
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Current Liabilities |
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Current debt |
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$ |
552 |
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$ |
189 |
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Accounts payable |
|
679 |
|
835 |
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Other accrued liabilities |
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1,911 |
|
1,799 |
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Total current liabilities |
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3,142 |
|
2,823 |
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|
|
|
|
|
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Noncurrent Liabilities |
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|
|
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Long-term debt |
|
3,383 |
|
3,383 |
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Other noncurrent liabilities |
|
924 |
|
960 |
|
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Total noncurrent liabilities |
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4,307 |
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4,343 |
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Contingencies |
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Equity |
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Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at September 30, 2017 and June 30, 2017; shares issued: 431,707,987 at September 30, 2017 and 429,968,260 at June 30, 2017; Class B shares authorized: 304,000,000 at September 30, 2017 and June 30, 2017; shares issued and outstanding: 143,419,528 at September 30, 2017 and 143,762,288 at June 30, 2017 |
|
6 |
|
6 |
|
||
Paid-in capital |
|
3,665 |
|
3,559 |
|
||
Retained earnings |
|
8,752 |
|
8,452 |
|
||
Accumulated other comprehensive loss |
|
(435 |
) |
(484 |
) |
||
|
|
11,988 |
|
11,533 |
|
||
Less: Treasury stock, at cost; 206,604,964 Class A shares at September 30, 2017 and 205,627,082 Class A shares at June 30, 2017 |
|
(7,257 |
) |
(7,149 |
) |
||
Total stockholders equity The Estée Lauder Companies Inc. |
|
4,731 |
|
4,384 |
|
||
Noncontrolling interests |
|
22 |
|
18 |
|
||
Total equity |
|
4,753 |
|
4,402 |
|
||
Total liabilities and equity |
|
$ |
12,202 |
|
$ |
11,568 |
|
See notes to consolidated financial statements.
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
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Three Months Ended
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||||
(In millions) |
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2017 |
|
2016 |
|
||
|
|
|
|
|
|
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Cash Flows from Operating Activities |
|
|
|
|
|
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Net earnings |
|
$ |
430 |
|
$ |
296 |
|
Adjustments to reconcile net earnings to net cash flows from operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
127 |
|
106 |
|
||
Deferred income taxes |
|
(3 |
) |
(32 |
) |
||
Non-cash stock-based compensation |
|
57 |
|
88 |
|
||
Excess tax benefits from stock-based compensation arrangements |
|
|
|
(10 |
) |
||
Net loss (gain) on disposal of property, plant and equipment |
|
3 |
|
(7 |
) |
||
Non-cash restructuring and other charges |
|
|
|
1 |
|
||
Pension and post-retirement benefit expense |
|
18 |
|
20 |
|
||
Pension and post-retirement benefit contributions |
|
(8 |
) |
(4 |
) |
||
Changes in fair value of contingent consideration |
|
1 |
|
4 |
|
||
Other non-cash items |
|
(3 |
) |
(4 |
) |
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Increase in accounts receivable, net |
|
(390 |
) |
(365 |
) |
||
Increase in inventory and promotional merchandise, net |
|
(16 |
) |
(31 |
) |
||
Decrease in other assets, net |
|
13 |
|
4 |
|
||
Decrease in accounts payable |
|
(166 |
) |
(170 |
) |
||
Increase (decrease) in other accrued and noncurrent liabilities |
|
30 |
|
(46 |
) |
||
Net cash flows provided by (used for) operating activities |
|
93 |
|
(150 |
) |
||
|
|
|
|
|
|
||
Cash Flows from Investing Activities |
|
|
|
|
|
||
Capital expenditures |
|
(116 |
) |
(85 |
) |
||
Payments for acquired businesses, net of cash acquired |
|
(11 |
) |
(10 |
) |
||
Proceeds from the disposition of investments |
|
311 |
|
365 |
|
||
Purchases of investments |
|
(148 |
) |
(348 |
) |
||
Proceeds from sale of property, plant and equipment |
|
|
|
12 |
|
||
Net cash flows provided by (used for) investing activities |
|
36 |
|
(66 |
) |
||
|
|
|
|
|
|
||
Cash Flows from Financing Activities |
|
|
|
|
|
||
Proceeds of current debt, net |
|
362 |
|
263 |
|
||
Repayments and redemptions of long-term debt |
|
|
|
(2 |
) |
||
Net proceeds from stock-based compensation transactions |
|
48 |
|
26 |
|
||
Excess tax benefits from stock-based compensation arrangements |
|
|
|
10 |
|
||
Payments to acquire treasury stock |
|
(111 |
) |
(222 |
) |
||
Dividends paid to stockholders |
|
(126 |
) |
(111 |
) |
||
Net cash flows provided by (used for) financing activities |
|
173 |
|
(36 |
) |
||
|
|
|
|
|
|
||
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
|
6 |
|
2 |
|
||
Net Increase (Decrease) in Cash and Cash Equivalents |
|
308 |
|
(250 |
) |
||
Cash and Cash Equivalents at Beginning of Period |
|
1,136 |
|
914 |
|
||
Cash and Cash Equivalents at End of Period |
|
$ |
1,444 |
|
$ |
664 |
|
See notes to consolidated financial statements.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of The Estée Lauder Companies Inc. and its subsidiaries (collectively, the Company). All significant intercompany balances and transactions have been eliminated.
The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
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. Certain significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, inventory, pension and other post-retirement benefit costs, goodwill, other intangible assets and long-lived assets, and income taxes. Descriptions of these policies are discussed in the notes to consolidated financial statements in the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2017. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
Currency Translation and Transactions
All assets and liabilities of foreign subsidiaries and affiliates are translated at period-end rates of exchange, while revenue and expenses are translated at weighted-average rates of exchange for the period. Unrealized translation gains (losses), net of tax, reported as cumulative translation adjustments through other comprehensive income (loss) (OCI) attributable to The Estée Lauder Companies Inc. were $54 million during the three months ended September 30, 2017 and de minimis for the three months ended September 30, 2016.
The Company enters into foreign currency forward contracts and may enter into option contracts to hedge foreign currency transactions for periods consistent with its identified exposures. Accordingly, the Company categorizes these instruments as entered into for purposes other than trading.
The accompanying consolidated statements of earnings include net exchange gains (losses) on foreign currency transactions of $(18) million and $5 million during the three months ended September 30, 2017 and 2016, respectively.
Accounts Receivable
Accounts receivable is stated net of the allowance for doubtful accounts and customer deductions totaling $31 million and $30 million as of September 30, 2017 and June 30, 2017, respectively.
Concentration of Credit Risk
The Company is a worldwide manufacturer, marketer and distributor of skin care, makeup, fragrance and hair care products. The Companys 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 all qualified customers and does not believe it is exposed significantly to any undue concentration of credit risk.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Companys largest customer sells products primarily within the United States and accounted for $275 million, or 8%, and $307 million, or 11%, of the Companys consolidated net sales for the three months ended September 30, 2017 and 2016, respectively. This customer accounted for $219 million, or 12%, and $112 million, or 8%, of the Companys accounts receivable at September 30, 2017 and June 30, 2017, respectively.
Inventory and Promotional Merchandise
Inventory and promotional merchandise, net consists of:
|
|
September 30 |
|
June 30 |
|
||
(In millions) |
|
2017 |
|
2017 |
|
||
Raw materials |
|
$ |
312 |
|
$ |
334 |
|
Work in process |
|
164 |
|
194 |
|
||
Finished goods |
|
834 |
|
762 |
|
||
Promotional merchandise |
|
208 |
|
189 |
|
||
|
|
$ |
1,518 |
|
$ |
1,479 |
|
During the first quarter of fiscal 2018, the Company adopted new accounting guidance issued by the Financial Accounting Standards Board (FASB) that simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost or net realizable value instead of lower of cost or market value. Net realizable value is defined as the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The adoption of this guidance did not have an impact on the Companys measurement of inventory and promotional merchandise.
Property, Plant and Equipment
|
|
September 30 |
|
June 30 |
|
||
(In millions) |
|
2017 |
|
2017 |
|
||
Assets (Useful Life) |
|
|
|
|
|
||
Land |
|
$ |
30 |
|
$ |
30 |
|
Buildings and improvements (10 to 40 years) |
|
195 |
|
192 |
|
||
Machinery and equipment (3 to 10 years) |
|
688 |
|
668 |
|
||
Computer hardware and software (4 to 15 years) |
|
1,135 |
|
1,115 |
|
||
Furniture and fixtures (5 to 10 years) |
|
101 |
|
96 |
|
||
Leasehold improvements |
|
2,003 |
|
1,918 |
|
||
|
|
4,152 |
|
4,019 |
|
||
Less accumulated depreciation and amortization |
|
(2,457 |
) |
(2,348 |
) |
||
|
|
$ |
1,695 |
|
$ |
1,671 |
|
The cost of assets related to projects in progress of $177 million and $183 million as of September 30, 2017 and June 30, 2017, respectively, is included in their respective asset categories above. Depreciation and amortization of property, plant and equipment was $112 million and $102 million during the three months ended September 30, 2017 and 2016, respectively. Depreciation and amortization related to the Companys manufacturing process is included in Cost of Sales, and all other depreciation and amortization is included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings.
Income Taxes
The effective rate for income taxes was 21.7% and 26.6% for the three months ended September 30, 2017 and 2016, respectively. The decrease in the effective tax rate was primarily attributable to the favorable impact of the adoption of new accounting guidance issued by the FASB related to share-based compensation awards. The impact of the new guidance resulted in a $23 million benefit to the Companys income tax provision (approximately 420 basis points). For further discussion of the adoption, see Recently Adopted Accounting Standards below.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2017 and June 30, 2017, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $63 million and $68 million, respectively. The total amount of unrecognized tax benefits at September 30, 2017 that, if recognized, would affect the effective tax rate was $39 million. During the three months ended September 30, 2017, the Company recognized a gross interest and penalty benefit of $3 million in the accompanying consolidated statement of earnings. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at September 30, 2017 and June 30, 2017 was $10 million and $13 million, respectively. On the basis of the information available as of September 30, 2017, the Company does not expect any 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:
|
|
September 30 |
|
June 30 |
|
||
(In millions) |
|
2017 |
|
2017 |
|
||
Advertising, merchandising and sampling |
|
$ |
389 |
|
$ |
319 |
|
Employee compensation |
|
368 |
|
522 |
|
||
Payroll and other taxes |
|
233 |
|
190 |
|
||
Other |
|
921 |
|
768 |
|
||
|
|
$ |
1,911 |
|
$ |
1,799 |
|
Recently Adopted Accounting Standards
Compensation - Stock Compensation
In March 2016, the FASB issued authoritative guidance that changes the way companies account for certain aspects of share-based payments to employees. This new guidance requires that all excess tax benefits and tax deficiencies related to share-based compensation awards be recorded as income tax expense or benefit in the income statement. In addition, companies are required to treat the tax effects of exercised or vested awards as discrete items in the period that they occur. This guidance also permits an employer to withhold up to the maximum statutory withholding rates in a jurisdiction without triggering liability classification, allows companies to elect to account for forfeitures as they occur, and provides requirements for the cash flow classification of cash paid by an employer when directly withholding shares for tax-withholding purposes and for the classification of excess tax benefits. The new guidance prescribes different transition methods for the various provisions.
Effective for the Company Fiscal 2018 first quarter.
Impact on consolidated financial statements As a result of the adoption of this guidance, during the three months ended September 30, 2017, the Company recognized $23 million of excess tax benefits as a reduction to the provision for income taxes in its consolidated statement of earnings. Additionally, upon adoption the Company has included these excess tax benefits in cash flows from operating activities in the net earnings caption and will continue to classify cash paid for withholding shares for tax-withholding purposes in cash flows from financing activities. This guidance was applied prospectively and prior-year periods have not been adjusted for these changes. The Company will also continue to accrue for estimated forfeitures each quarter. Finally, as the Company has no outstanding awards classified as a liability due to withholding excess taxes, there was no impact to the Companys consolidated balance sheets related to the adoption of that portion of the guidance.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Standards
Hedge Accounting
In August 2017, the FASB issued authoritative guidance to simplify hedge accounting. The amended guidance includes the following provisions:
· enables entities to better portray their risk management activities within the financial statements;
· expands an entitys ability to hedge nonfinancial and financial risk components;
· reduces complexity in fair value hedges of interest rate risk;
· eliminates the requirement to separately measure and disclose hedge ineffectiveness;
· requires the entire change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item;
· eases certain documentation and assessment requirements;
· modifies the accounting for components excluded from the assessment of hedge effectiveness; and
· requires revised tabular footnote disclosure.
The guidance also provides transition relief to make it easier for entities to apply certain amendments to existing hedges (including fair value hedges) where the hedge documentation is required to be modified.
Effective for the Company Fiscal 2020 first quarter, with early adoption permitted in any interim period. The Company must adopt the guidance using the modified retrospective approach for cash flow and net investment hedge relationships that exist on the date of adoption and adopt prospectively for the presentation and disclosure requirements.
Impact on consolidated financial statements The Company is currently evaluating the timing of adoption and impact of applying this new hedge accounting.
Pension-related Costs
In March 2017, the FASB issued authoritative guidance that amends how companies present net periodic benefit cost in the income statement and balance sheet relating to defined benefit pension and/or other postretirement benefit plans. Within the income statement, the new guidance requires companies to report the service cost component within operating expenses and report the other components of net periodic benefit cost below operating income (if one is reported). In addition, within the balance sheet, the guidance changes the components of the pension cost eligible for capitalization to the service cost component only (e.g., as a cost of internally manufactured inventory or a self-constructed asset).
Effective for the Company Fiscal 2019 first quarter, with early adoption permitted as of the first interim period in fiscal 2018. The guidance must be applied:
· retrospectively as it pertains to the income statement classification of the components of net periodic benefit cost; and
· prospectively as it pertains to future capitalization of service costs.
Impact on consolidated financial statements The Company will adopt this guidance when it becomes effective and although certain components of pension expense will be reclassified out of operating income, the Company does not believe this will have a material impact on reported operating income.
Goodwill
In January 2017, the FASB issued authoritative guidance which simplifies the subsequent measurement of goodwill by eliminating the second step from the quantitative goodwill impairment test. The single quantitative step test requires companies to compare the fair value of a reporting unit with its carrying amount and record an impairment charge for the amount that the carrying amount exceeds the fair value, up to the total amount of goodwill allocated to that reporting unit. The Company will continue to have the option of first performing a qualitative assessment to determine whether it is necessary to perform the quantitative goodwill impairment test.
Effective for the Company Fiscal 2021 first quarter, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
Impact on consolidated financial statements The Company did not elect to apply this guidance to its fiscal 2017 impairment testing and will continue to assess the impact of adopting it on future interim and annual impairment tests.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued authoritative guidance that requires companies to utilize an impairment model for most financial assets measured at amortized cost and certain other financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses. In addition, this new 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, as well as additional disclosures. In general, this guidance will require modified retrospective adoption for all outstanding instruments that fall under this guidance.
Effective for the Company Fiscal 2021 first quarter.
Impact on consolidated financial statements The Company is currently evaluating the impact of applying this guidance on its financial instruments, such as accounts receivable and short- and long-term investments.
Leases
In February 2016, the FASB issued authoritative guidance that requires lessees to account for most leases on their balance sheets with the liability being equal to the present value of the lease payments. The right-of-use asset will be based on the lease liability adjusted for certain costs such as direct costs. Lease expense will be recognized similar to current accounting guidance with operating leases resulting in a straight-line expense, and financing leases resulting in a front-loaded expense similar to the current accounting for capital leases. This guidance must be adopted using a modified retrospective transition approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, and provides for certain practical expedients.
Effective for the Company Fiscal 2020 first quarter, with early adoption permitted.
Impact on consolidated financial statements The Company currently has an implementation team in place that is performing a comprehensive evaluation of the impact of the adoption of this guidance. While the Company has not completed its evaluation, it believes the adoption of this standard will have a significant impact on its consolidated balance sheets. As disclosed in Note 15 Commitments and Contingencies in the notes to consolidated financial statements in the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2017, the Company had $2,427 million in future minimum lease commitments as of June 30, 2017. Upon adoption, the Companys lease liability will generally be based on the present value of such payments, and the related right-of use asset will generally be based on the lease liability, adjusted for initial direct costs.
Revenue from Contracts with Customers
In May 2014, the FASB issued authoritative guidance that defines how companies should report revenues from contracts with customers. The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It provides companies with a single comprehensive five-step principles-based model to use in accounting for revenue and supersedes current revenue recognition requirements, including most industry-specific and transaction-specific revenue guidance.
In March 2016, the FASB issued authoritative guidance that amended the principal versus agent guidance in its new revenue recognition standard. These amendments do not change the key aspects of the principal versus agent guidance, including the definition that an entity is a principal if it controls the good or service prior to it being transferred to a customer, but the amendments clarify the implementation guidance related to the considerations that must be made during the contract evaluation process.
In April 2016, the FASB issued authoritative guidance that amended the new standard to clarify the guidance on identifying performance obligations and accounting for licenses of intellectual property.
In May 2016, the FASB issued authoritative guidance that clarified certain terms, guidance and disclosure requirements during the transition period related to completed contracts and contract modifications. In addition, the FASB provided clarification on the concept of collectability, the calculation of the fair value of noncash consideration and the presentation of sales and other similar taxes.
In May 2016, the FASB issued authoritative guidance to reflect the Securities and Exchange Commission Staffs rescission of its prior comments that covered, among other things, accounting for shipping and handling costs and accounting for consideration given by a vendor to a customer.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2016, the FASB issued authoritative guidance that amends various aspects of the new standard to clarify certain terms, guidance and disclosure requirements. In particular, the guidance addresses disclosure requirements for remaining performance obligations, impairment testing for contract costs and accrual of advertising costs, as well as clarifies several examples.
Effective for the Company Fiscal 2019, with early adoption permitted. An entity is permitted to apply the foregoing guidance retrospectively to all prior periods presented, with certain practical expedients, or apply the requirements in the year of adoption, through a cumulative adjustment.
Impact on consolidated financial statements The Company will apply all of this new guidance when it becomes effective in fiscal 2019 and has not yet selected a transition method. Although the Company has not yet completed its evaluation, it has preliminarily determined that certain promotional goods, such as samples and testers, will be reclassified from Selling, general and administrative expenses to Cost of Sales in the consolidated financial statements upon adoption. Additionally, the Companys customer loyalty programs, which have historically been accounted for under the incremental cost approach, will be accounted for as a reduction of revenue based on the fair value of estimated future redemptions when the obligation is created (i.e. upon sale of the product to the consumer). Furthermore, the Company is assessing the impact that these promotional goods and loyalty programs will have on the timing of revenue recognition upon adoption.
No other recently issued accounting pronouncements are expected to have a material impact on the Companys consolidated financial statements.
NOTE 2 INVESTMENTS
Gains and losses recorded in accumulated OCI (AOCI) related to the Companys available-for-sale investments as of September 30, 2017 were as follows:
(In millions) |
|
Cost |
|
Gross Unrealized
|
|
Gross Unrealized
|
|
Fair Value |
|
||||
U.S. government and agency securities |
|
$ |
445 |
|
$ |
|
|
$ |
(1 |
) |
$ |
444 |
|
Foreign government and agency securities |
|
109 |
|
|
|
|
|
109 |
|
||||
Corporate notes and bonds |
|
532 |
|
|
|
(1 |
) |
531 |
|
||||
Time deposits |
|
230 |
|
|
|
|
|
230 |
|
||||
Other securities |
|
17 |
|
|
|
|
|
17 |
|
||||
Total |
|
$ |
1,333 |
|
$ |
|
|
$ |
(2 |
) |
$ |
1,331 |
|
Gains and losses recorded in AOCI related to the Companys available-for-sale investments as of June 30, 2017 were as follows:
(In millions) |
|
Cost |
|
Gross Unrealized
|
|
Gross Unrealized
|
|
Fair Value |
|
||||
U.S. government and agency securities |
|
$ |
464 |
|
$ |
2 |
|
$ |
(2 |
) |
$ |
464 |
|
Foreign government and agency securities |
|
103 |
|
|
|
(1 |
) |
102 |
|
||||
Corporate notes and bonds |
|
506 |
|
|
|
(1 |
) |
505 |
|
||||
Time deposits |
|
410 |
|
|
|
|
|
410 |
|
||||
Other securities |
|
16 |
|
1 |
|
|
|
17 |
|
||||
Total |
|
$ |
1,499 |
|
$ |
3 |
|
$ |
(4 |
) |
$ |
1,498 |
|
The following table presents the Companys available-for-sale securities by contractual maturity as of September 30, 2017:
(In millions) |
|
Cost |
|
Fair Value |
|
||
Due within one year |
|
$ |
381 |
|
$ |
381 |
|
Due after one through five years |
|
952 |
|
950 |
|
||
|
|
$ |
1,333 |
|
$ |
1,331 |
|
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair market value of the Companys investments with gross unrealized losses that are not deemed to be other-than temporarily impaired as of September 30, 2017:
|
|
In a Loss Position for Less Than 12
|
|
In a Loss Position for More Than 12
|
|
||||||||
(In millions) |
|
Fair Value |
|
Gross
|
|
Fair Value |
|
Gross Unrealized
|
|
||||
Available-for-sale securities |
|
$ |
537 |
|
$ |
(2 |
) |
$ |
176 |
|
$ |
(2 |
) |
Gross gains and losses on sales of investments included in the consolidated statements of earnings were not material for all periods presented.
The Company utilizes the first-in, first-out method to determine the cost of the security sold. Sales proceeds from investments classified as available-for-sale were $130 million and $181 million for the three months ended September 30, 2017 and 2016, respectively.
NOTE 3 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, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Goodwill |
|
$ |
184 |
|
$ |
1,176 |
|
$ |
255 |
|
$ |
393 |
|
$ |
2,008 |
|
Accumulated impairments |
|
(35 |
) |
|
|
(22 |
) |
(35 |
) |
(92 |
) |
|||||
|
|
149 |
|
1,176 |
|
233 |
|
358 |
|
1,916 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Goodwill acquired during the period |
|
|
|
3 |
|
|
|
|
|
3 |
|
|||||
Translation adjustments |
|
|
|
|
|
2 |
|
|
|
2 |
|
|||||
|
|
|
|
3 |
|
2 |
|
|
|
5 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance as of September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Goodwill |
|
185 |
|
1,179 |
|
258 |
|
394 |
|
2,016 |
|
|||||
Accumulated impairments |
|
(36 |
) |
|
|
(23 |
) |
(36 |
) |
(95 |
) |
|||||
|
|
$ |
149 |
|
$ |
1,179 |
|
$ |
235 |
|
$ |
358 |
|
$ |
1,921 |
|
Other intangible assets consist of the following:
|
|
September 30, 2017 |
|
June 30, 2017 |
|
||||||||||||||
(In millions) |
|
Gross
|
|
Accumulated
|
|
Total Net
|
|
Gross
|
|
Accumulated
|
|
Total Net
|
|
||||||
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Customer lists and other |
|
$ |
697 |
|
$ |
293 |
|
$ |
404 |
|
$ |
696 |
|
$ |
279 |
|
$ |
417 |
|
License agreements |
|
43 |
|
43 |
|
|
|
43 |
|
43 |
|
|
|
||||||
|
|
$ |
740 |
|
$ |
336 |
|
404 |
|
$ |
739 |
|
$ |
322 |
|
417 |
|
||
Non-amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Trademarks and other |
|
|
|
|
|
912 |
|
|
|
|
|
910 |
|
||||||
Total intangible assets |
|
|
|
|
|
$ |
1,316 |
|
|
|
|
|
$ |
1,327 |
|
The aggregate amortization expense related to amortizable intangible assets was $13 million and $4 million for the three months ended September 30, 2017 and 2016, respectively. The estimated aggregate amortization expense for the remainder of fiscal 2018 and for each of fiscal 2019 to 2022 is $39 million, $51 million, $44 million, $43 million and $42 million, respectively.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES
In May 2016, the Company announced a multi-year initiative (Leading Beauty Forward, LBF or the Program) to build on its strengths and better leverage its cost structure to free resources for investment to continue its growth momentum. LBF is designed to enhance the Companys go-to-market capabilities, reinforce its leadership in global prestige beauty and continue creating sustainable value. The Company plans to approve specific initiatives under LBF through fiscal 2019 related to the optimization of select corporate functions, supply chain activities, and corporate and regional market support structures, as well as the exit of underperforming businesses, and expects to complete those initiatives through fiscal 2021. Inclusive of charges recorded from inception through September 30, 2017, the Company expects that LBF will result in related restructuring and other charges totaling between $600 million and $700 million before taxes. In connection with LBF, at this time, the Company estimates a net reduction over the duration of LBF in the range of approximately 900 to 1,200 positions globally, which is about 2.5% of its current workforce. This reduction takes into account the elimination of some positions, retraining and redeployment of certain employees and investment in new positions in key areas.
Program-to-Date Approvals
Of the $600 million to $700 million restructuring and other charges expected to be incurred, total cumulative charges approved by the Company through September 30, 2017, some of which were recorded during fiscal 2017 and 2016, were:
|
|
Sales
|
|
|
|
Operating Expenses |
|
|
|
|||||||
|
|
(included in |
|
|
|
Restructuring |
|
Other |
|
|
|
|||||
(In millions) |
|
Net Sales) |
|
Cost of Sales |
|
Charges |
|
Charges |
|
Total |
|
|||||
Approval Period |
|
|
|
|
|
|
|
|
|
|
|
|||||
Fiscal 2016 |
|
$ |
4 |
|
$ |
28 |
|
$ |
87 |
|
$ |
71 |
|
$ |
190 |
|
Fiscal 2017 |
|
11 |
|
10 |
|
132 |
|
118 |
|
271 |
|
|||||
Three months ended September 30, 2017 |
|
|
|
|
|
28 |
|
9 |
|
37 |
|
|||||
Cumulative through September 30, 2017 |
|
$ |
15 |
|
$ |
38 |
|
$ |
247 |
|
$ |
198 |
|
$ |
498 |
|
Included in the above table, cumulative restructuring initiatives approved by the Company through September 30, 2017 by major cost type were:
(In millions) |
|
Employee-
|
|
Asset-
|
|
Contract
|
|
Other Exit
|
|
Total |
|
|||||
Approval Period |
|
|
|
|
|
|
|
|
|
|
|
|||||
Fiscal 2016 |
|
$ |
75 |
|
$ |
3 |
|
$ |
5 |
|
$ |
4 |
|
$ |
87 |
|
Fiscal 2017 |
|
126 |
|
1 |
|
|
|
5 |
|
132 |
|
|||||
Three months ended September 30, 2017 |
|
28 |
|
|
|
|
|
|
|
28 |
|
|||||
Cumulative through September 30, 2017 |
|
$ |
229 |
|
$ |
4 |
|
$ |
5 |
|
$ |
9 |
|
$ |
247 |
|
During the three months ended September 30, 2017, the Company continued to approve initiatives to enhance its go-to-market support structures and optimize select corporate functions. These actions will result in a net reduction of the workforce, which includes position eliminations, the re-leveling of certain positions and an investment in new capabilities. The Company also approved consulting and other professional services primarily related to the implementation and integration of new processes and technologies and, to a lesser extent, other costs for temporary labor backfill and recruitment related to the new capabilities.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Program-to-Date Restructuring and Other Charges
The Company records approved charges associated with restructuring and other activities once the relevant accounting criteria have been met. Total cumulative charges recorded associated with restructuring and other activities for LBF were:
|
|
Sales
|
|
|
|
Operating Expenses |
|
|
|
|||||||
|
|
(included in |
|
|
|
Restructuring |
|
Other |
|
|
|
|||||
(In millions) |
|
Net Sales) |
|
Cost of Sales |
|
Charges |
|
Charges |
|
Total |
|
|||||
Fiscal 2016 |
|
$ |
1 |
|
$ |
|
|
$ |
75 |
|
$ |
5 |
|
$ |
81 |
|
Fiscal 2017 |
|
2 |
|
15 |
|
122 |
|
73 |
|
212 |
|
|||||
Three months ended September 30, 2017 |
|
|
|
4 |
|
14 |
|
20 |
|
38 |
|
|||||
Cumulative through September 30, 2017 |
|
$ |
3 |
|
$ |
19 |
|
$ |
211 |
|
$ |
98 |
|
$ |
331 |
|
The major cost types related to the cumulative restructuring charges set forth above were:
(In millions) |
|
Employee-
|
|
Asset-
|
|
Contract
|
|
Other Exit
|
|
Total |
|
|||||
Fiscal 2016 |
|
$ |
74 |
|
$ |
1 |
|
$ |
|
|
$ |
|
|
$ |
75 |
|
Fiscal 2017 |
|
116 |
|
2 |
|
2 |
|
2 |
|
122 |
|
|||||
Three months ended September 30, 2017 |
|
13 |
|
|
|
|
|
1 |
|
14 |
|
|||||
Cumulative through September 30, 2017 |
|
$ |
203 |
|
$ |
3 |
|
$ |
2 |
|
$ |
3 |
|
$ |
211 |
|
Accrued restructuring charges from Program inception through September 30, 2017 were:
(In millions) |
|
Employee-
|
|
Asset-
|
|
Contract
|
|
Other Exit
|
|
Total |
|
|||||
Charges |
|
$ |
74 |
|
$ |
1 |
|
$ |
|
|
$ |
|
|
$ |
75 |
|
Noncash asset write-offs |
|
|
|
(1 |
) |
|
|
|
|
(1 |
) |
|||||
Translation adjustments |
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|||||
Balance at June 30, 2016 |
|
73 |
|
|
|
|
|
|
|
73 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Charges |
|
116 |
|
2 |
|
2 |
|
2 |
|
122 |
|
|||||
Cash payments |
|
(39 |
) |
|
|
(2 |
) |
(2 |
) |
(43 |
) |
|||||
Noncash asset write-offs |
|
|
|
(2 |
) |
|
|
|
|
(2 |
) |
|||||
Balance at June 30, 2017 |
|
150 |
|
|
|
|
|
|
|
150 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Charges |
|
13 |
|
|
|
|
|
1 |
|
14 |
|
|||||
Cash payments |
|
(20 |
) |
|
|
|
|
(1 |
) |
(21 |
) |
|||||
Balance at September 30, 2017 |
|
$ |
143 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
143 |
|
Restructuring charges for employee-related costs are net of adjustments to the accrual estimate for certain employees who either resigned or transferred to other existing positions within the Company. Accrued restructuring charges at September 30, 2017 are expected to result in cash expenditures funded from cash provided by operations of approximately $77 million, $56 million and $10 million for the remainder of fiscal 2018 and for each of fiscal 2019 and 2020, respectively.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 DERIVATIVE FINANCIAL INSTRUMENTS
The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The Company enters into foreign currency forward contracts and may enter into option contracts to reduce the effects of fluctuating foreign currency exchange rates. In addition, the Company enters into interest rate derivatives to manage the effects of interest rate movements on the Companys aggregate liability portfolio, including potential future debt issuances. The Company also enters into foreign currency forward contracts and may use option contracts, not designated as hedging instruments, to mitigate the change in fair value of specific assets and liabilities on the balance sheet. The Company does not utilize derivative financial instruments for trading or speculative purposes. Costs associated with entering into derivative financial instruments have not been material to the Companys 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, how the hedging instruments effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the inception of the hedges and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. If it is determined that a derivative is not highly effective, or that it has ceased to be a highly effective hedge, the Company will be required to discontinue hedge accounting with respect to that derivative prospectively.
The fair values of the Companys derivative financial instruments included in the consolidated balance sheets are presented as follows:
|
|
Asset Derivatives |
|
Liability Derivatives |
|
||||||||||||
|
|
Balance Sheet
|
|
Fair Value (1) |
|
Balance Sheet
|
|
Fair Value (1) |
|
||||||||
(In millions) |
|
|
|
September 30
|
|
June 30
|
|
|
|
September 30
|
|
June 30
|
|
||||
Derivatives Designated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency forward contracts |
|
Prepaid expenses and other current assets |
|
$ |
5 |
|
$ |
7 |
|
Other accrued liabilities |
|
$ |
50 |
|
$ |
44 |
|
Interest rate swap contracts |
|
Prepaid expenses and other current assets |
|
2 |
|
3 |
|
Other accrued liabilities |
|
4 |
|
3 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Derivatives Designated as Hedging Instruments |
|
|
|
7 |
|
10 |
|
|
|
54 |
|
47 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency forward contracts |
|
Prepaid expenses and other current assets |
|
3 |
|
3 |
|
Other accrued liabilities |
|
2 |
|
2 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Derivatives |
|
|
|
$ |
10 |
|
$ |
13 |
|
|
|
$ |
56 |
|
$ |
49 |
|
(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 Companys derivative financial instruments designated as hedging instruments are presented as follows:
|
|
Amount of Gain or (Loss)
|
|
Location of Gain or
|
|
Amount of Gain or (Loss)
|
|
||||||||
|
|
Three Months Ended
|
|
from AOCI into
|
|
Three Months Ended
|
|
||||||||
(In millions) |
|
2017 |
|
2016 |
|
(Effective Portion) |
|
2017 |
|
2016 |
|
||||
Derivatives in Cash Flow Hedging Relationships: |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency forward contracts |
|
$ |
(18 |
) |
$ |
3 |
|
Cost of sales |
|
$ |
(5 |
) |
$ |
2 |
|
|
|
|
|
|
|
Selling, general and administrative |
|
(4 |
) |
7 |
|
||||
Interest rate-related derivatives |
|
|
|
|
|
Interest expense |
|
|
|
|
|
||||
Total derivatives |
|
$ |
(18 |
) |
$ |
3 |
|
|
|
$ |
(9 |
) |
$ |
9 |
|
(1) The gain (loss) recognized in earnings related to the amount excluded from effectiveness testing and the amount related to the ineffective portion of the hedging relationships was not material for all periods presented.
|
|
|
|
Amount of Gain or (Loss)
|
|
||||
|
|
Location of Gain or (Loss)
|
|
Three Months Ended
|
|
||||
(In millions) |
|
Derivatives |
|
2017 |
|
2016 |
|
||
Derivatives in Fair Value Hedging Relationships: |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Interest rate swap contracts |
|
Interest expense |
|
$ |
(2 |
) |
$ |
(4 |
) |
(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.
The amounts of the gains and losses related to the Companys derivative financial instruments not designated as hedging instruments are presented as follows:
|
|
|
|
Amount of Gain or (Loss)
|
|
||||
|
|
Location of Gain or (Loss)
|
|
Three Months Ended
|
|
||||
(In millions) |
|
Derivatives |
|
2017 |
|
2016 |
|
||
Derivatives Not Designated as Hedging Instruments: |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Foreign currency forward contracts |
|
Selling, general and administrative |
|
$ |
|
|
$ |
(2 |
) |
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash-Flow Hedges
The Company enters into foreign currency forward contracts to hedge anticipated transactions, as well as receivables and payables denominated in foreign currencies, for periods consistent with the Companys identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on costs and on the cash flows that the Company receives from foreign subsidiaries. The majority of foreign currency forward contracts are denominated in currencies of major industrial countries. The Company may also enter into foreign currency option contracts to hedge anticipated transactions where there is a high probability that anticipated exposures will materialize. 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 2019. Hedge effectiveness of foreign currency forward contracts is based on a hypothetical derivative methodology and excludes the portion of fair value attributable to the spot-forward difference which is recorded in current-period earnings. Hedge effectiveness of foreign currency option contracts is based on a dollar offset methodology.
The Company may enter into interest rate forward contracts to hedge anticipated issuance of debt for periods consistent with the Companys identified exposures. The purpose of the hedging activities is to minimize the effect of interest rate movements on the cost of debt issuance.
The ineffective portion of both foreign currency forward and interest rate derivatives is recorded in current-period earnings. For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses in AOCI are reclassified to earnings 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 earnings. As of September 30, 2017, the Companys foreign currency cash-flow hedges were highly effective.
At September 30, 2017, the Company had foreign currency forward contracts in the amount of $2,546 million. The foreign currencies included in foreign currency forward contracts (notional value stated in U.S. dollars) are principally the Swiss franc ($370 million), Euro ($354 million), British pound ($350 million), Hong Kong dollar ($307 million), Chinese yuan ($136 million), Japanese yen ($134 million) and Canadian dollar ($132 million).
The estimated net loss on the Companys derivative instruments designated as cash-flow hedges as of September 30, 2017 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $23 million. The accumulated net loss on derivative instruments in AOCI was $13 million and $4 million as of September 30, 2017 and June 30, 2017, respectively.
Fair-Value Hedges
The Company enters into interest rate derivative contracts to manage the exposure to interest rate fluctuations on its funded indebtedness. The Company has interest rate swap agreements, with notional amounts totaling $250 million, $450 million and $250 million to effectively convert the fixed rate interest on its 2020 Senior Notes, 2021 Senior Notes and 2022 Senior Notes, respectively, to variable interest rates based on three-month LIBOR plus a margin. These interest rate swap agreements are designated as fair-value hedges of the related long-term debt, and the changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt.
Credit Risk
As a matter of policy, the Company enters into derivative contracts only with counterparties that have a long-term credit rating of at least A- or higher by at least two nationally recognized rating agencies. The counterparties to these contracts are major financial institutions. Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the gross fair value of contracts in asset positions, which totaled $10 million at September 30, 2017. 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.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 FAIR VALUE MEASUREMENTS
The Company records certain of its financial assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. The accounting for fair value measurements must be applied to nonfinancial assets and nonfinancial liabilities that require initial measurement or remeasurement at fair value, which principally consist of assets and liabilities acquired through business combinations and goodwill, indefinite-lived intangible assets and long-lived assets for the purposes of calculating potential impairment. The Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:
Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Inputs reflect managements 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 instruments valuation.
The following table presents the Companys hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017:
(In millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
||||
Foreign currency forward contracts |
|
$ |
|
|
$ |
8 |
|
$ |
|
|
$ |
8 |
|
Interest rate swap contracts |
|
|
|
2 |
|
|
|
2 |
|
||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
||||
U.S. government and agency securities |
|
|
|
444 |
|
|
|
444 |
|
||||
Foreign government and agency securities |
|
|
|
109 |
|
|
|
109 |
|
||||
Corporate notes and bonds |
|
|
|
531 |
|
|
|
531 |
|
||||
Time deposits |
|
|
|
230 |
|
|
|
230 |
|
||||
Other securities |
|
|
|
17 |
|
|
|
17 |
|
||||
Total |
|
$ |
|
|
$ |
1,341 |
|
$ |
|
|
$ |
1,341 |
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
||||
Foreign currency forward contracts |
|
$ |
|
|
$ |
52 |
|
$ |
|
|
$ |
52 |
|
Interest rate swap contracts |
|
|
|
4 |
|
|
|
4 |
|
||||
Contingent consideration |
|
|
|
|
|
140 |
|
140 |
|
||||
Total |
|
$ |
|
|
$ |
56 |
|
$ |
140 |
|
$ |
196 |
|
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the Companys hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2017:
(In millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
||||
Foreign currency forward contracts |
|
$ |
|
|
$ |
10 |
|
$ |
|
|
$ |
10 |
|
Interest rate swap contracts |
|
|
|
3 |
|
|
|
3 |
|
||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
||||
U.S. government and agency securities |
|
|
|
464 |
|
|
|
464 |
|
||||
Foreign government and agency securities |
|
|
|
102 |
|
|
|
102 |
|
||||
Corporate notes and bonds |
|
|
|
505 |
|
|
|
505 |
|
||||
Time deposits |
|
|
|
410 |
|
|
|
410 |
|
||||
Other securities |
|
|
|
17 |
|
|
|
17 |
|
||||
Total |
|
$ |
|
|
$ |
1,511 |
|
$ |
|
|
$ |
1,511 |
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
||||
Foreign currency forward contracts |
|
$ |
|
|
$ |
46 |
|
$ |
|
|
$ |
46 |
|
Interest rate swap contracts |
|
|
|
3 |
|
|
|
3 |
|
||||
Contingent consideration |
|
|
|
|
|
139 |
|
139 |
|
||||
Total |
|
$ |
|
|
$ |
49 |
|
$ |
139 |
|
$ |
188 |
|
The estimated fair values of the Companys financial instruments are as follows:
|
|
September 30 |
|
June 30 |
|
||||||||
|
|
2017 |
|
2017 |
|
||||||||
(In millions) |
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
||||
Nonderivatives |
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
1,444 |
|
$ |
1,444 |
|
$ |
1,136 |
|
$ |
1,136 |
|
Available-for-sale securities |
|
1,331 |
|
1,331 |
|
1,498 |
|
1,498 |
|
||||
Current and long-term debt |
|
3,935 |
|
4,145 |
|
3,572 |
|
3,759 |
|
||||
Additional purchase price payable |
|
38 |
|
38 |
|
38 |
|
38 |
|
||||
Contingent consideration |
|
140 |
|
140 |
|
139 |
|
139 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Derivatives |
|
|
|
|
|
|
|
|
|
||||
Foreign currency forward contracts asset (liability), net |
|
(44 |
) |
(44 |
) |
(36 |
) |
(36 |
) |
||||
Interest rate swap contracts asset (liability), net |
|
(2 |
) |
(2 |
) |
|
|
|
|
||||
The following methods and assumptions were used to estimate the fair value of the Companys 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, money market funds and time deposits. The carrying amount approximates fair value, primarily due to the short maturity of cash equivalent instruments.
Available-for-sale securities Available-for-sale securities are classified within Level 2 of the valuation hierarchy and are valued using third-party pricing services, and for time deposits, the carrying amount approximates fair value. To determine fair value, the pricing services use market prices or prices derived from other observable market inputs such as benchmark curves, credit spreads, broker/dealer quotes, and other industry and economic factors.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign currency forward contracts The fair values of the Companys 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 swap contracts The fair values of the Companys interest rate swap 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.
Current and long-term debt The fair value of the Companys 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 capital lease obligations for which the carrying amount approximates the fair value. The Companys debt is classified within Level 2 of the valuation hierarchy.
Additional purchase price payable The Companys additional purchase price payable represents fixed minimum additional purchase price that was discounted using the Companys incremental borrowing rate, which was approximately 1%. The additional purchase price payable is classified within Level 2 of the valuation hierarchy.
Contingent consideration Contingent consideration obligations consist of potential obligations related to the Companys 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. The fair values of the contingent consideration related to certain acquisition earn-outs were estimated using a probability-weighted discount model that considers the achievement of the conditions upon which the respective contingent obligation is dependent (Monte Carlo Method).
The Monte Carlo Method has various inputs into the valuation model, in addition to the risk-adjusted projected future operating results of the acquired entities, which include the following ranges at September 30, 2017:
Risk-adjusted discount rate |
|
1.8% to 2.2% |
Revenue volatility |
|
3.5% to 7.9% |
Asset volatility |
|
20.9% to 25.4% |
Revenue and earnings before income tax, depreciation and amortization correlation coefficient factor |
|
80% |
Revenue discount rates |
|
3.0% to 4.9% |
Earnings before income tax, depreciation and amortization discount rates |
|
11.9% to 13.2% |
Significant changes in the projected future operating results would result in a significantly higher or lower fair value measurement. Changes to the discount rates, volatilities or correlation factors would have a lesser effect. The implied rates are deemed to be unobservable inputs and, as such, the Companys contingent consideration is classified within Level 3 of the valuation hierarchy.
Changes in the fair value of the contingent consideration obligations for the three months ended September 30, 2017 are included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings and were as follows:
(In millions) |
|
Fair Value |
|
|
|
|
|
|
|
Contingent consideration at June 30, 2017 |
|
$ |
139 |
|
Changes in fair value |
|
1 |
|
|
Contingent consideration at September 30, 2017 |
|
$ |
140 |
|
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 which provide certain medical and dental benefits to eligible employees. Descriptions of these plans are included in the notes to consolidated financial statements in the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
The components of net periodic benefit cost for the three months ended September 30, 2017 and 2016 consisted of the following:
|
|
|
|
|
|
|
|
|
|
Other than |
|
||||||||
|
|
Pension Plans |
|
Pension Plans |
|
||||||||||||||
|
|
U.S. |
|
International |
|
Post-retirement |
|
||||||||||||
(In millions) |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
|
||||||
Service cost |
|
$ |
9 |
|
$ |
9 |
|
$ |
7 |
|
$ |
7 |
|
$ |
1 |
|
$ |
1 |
|
Interest cost |
|
8 |
|
8 |
|
3 |
|
3 |
|
2 |
|
2 |
|
||||||
Expected return on plan assets |
|
(13 |
) |
(13 |
) |
(3 |
) |
(4 |
) |
(1 |
) |
(1 |
) |
||||||
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Prior service cost |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
||||||
Actuarial loss |
|
4 |
|
4 |
|
1 |
|
3 |
|
|
|
|
|
||||||
Net periodic benefit cost |
|
$ |
8 |
|
$ |
9 |
|
$ |
8 |
|
$ |
9 |
|
$ |
2 |
|
$ |
2 |
|
During the three months ended September 30, 2017, the Company made contributions to its international pension plans totaling approximately $4 million.
The amounts recognized in the consolidated balance sheets related to the Companys pension and post-retirement benefit plans consist of the following:
|
|
September 30 |
|
June 30 |
|
||
(In millions) |
|
2017 |
|
2017 |
|
||
Other assets |
|
$ |
100 |
|
$ |
100 |
|
Other accrued liabilities |
|
(28 |
) |
(28 |
) |
||
Other noncurrent liabilities |
|
(404 |
) |
(397 |
) |
||
Funded status |
|
(332 |
) |
(325 |
) |
||
Accumulated other comprehensive loss |
|
321 |
|
325 |
|
||
Net amount recognized |
|
$ |
(11 |
) |
$ |
|
|
NOTE 8 CONTINGENCIES
Legal Proceedings
The Company is involved, from time to time, in litigation and other legal proceedings incidental to its business. Management believes that the outcome of current litigation and legal proceedings will not have a material adverse effect upon the Companys results of operations, financial condition or cash flows. However, managements assessment of the Companys 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 managements evaluation of the possible liability or outcome of such litigation or proceedings. Reasonably possible losses in addition to the amounts accrued for litigation and other legal proceedings are not material to the Companys consolidated financial statements.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO 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), PSUs based on total stockholder return (TSR), long-term PSUs, and share units. Compensation expense attributable to net stock-based compensation is as follows:
|
|
Three Months Ended
|
|
||||
(In millions) |
|
2017 |
|
2016 |
|
||
Compensation expense |
|
$ |
57 |
|
$ |
88 |
|
Income tax benefit |
|
19 |
|
29 |
|
||
Beginning in September 2017, the equity award agreements for employee equity grants contain a new provision regarding award forfeiture, which requires the recording of stock-based compensation expense for retirement-eligible employees over the new requisite service period (six months) rather than at the date of grant.
Stock Options
During the three months ended September 30, 2017, the Company granted approximately 2.1 million stock options with an exercise price per share of $107.95 and a weighted-average grant date fair value per share of $27.66. 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, 2017 was $82 million.
Restricted Stock Units
The Company granted approximately 1.2 million RSUs during the three months ended September 30, 2017 with a weighted-average grant date fair value per share of $107.93 which, at the time of grant, were scheduled to vest as follows: 0.4 million in fiscal 2019, 0.5 million in fiscal 2020 and 0.3 million in fiscal 2021. Vesting of RSUs granted is generally subject to the continued employment or 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 Companys Class A Common Stock on the date of grant.
Performance Share Units
During the three months ended September 30, 2017, the Company granted PSUs with a target payout of approximately 0.2 million shares with a grant date fair value per share of $107.95, which will be settled in stock subject to the achievement of the Companys net sales, diluted net earnings per common share and return on invested capital goals for the three fiscal years ending June 30, 2020, all subject to continued employment or 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 Companys Class A Common Stock on the date of grant.
In September 2017, approximately 0.2 million shares of the Companys 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 0.3 million PSUs which vested as of June 30, 2017.
Performance Share Units Based on Total Stockholder Return
In August 2017, 30,267 shares of the Companys Class A Common Stock were issued, and related dividends were paid, in accordance with the terms of the grant related to the final performance period of the award, which ended June 30, 2017.
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 contingently issuable shares (which satisfy certain conditions). 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.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the numerator and denominator of the basic and diluted EPS computations is as follows:
|
|
Three Months Ended
|
|
||||
(In millions, except per share data) |
|
2017 |
|
2016 |
|
||
Numerator: |
|
|
|
|
|
||
Net earnings attributable to The Estée Lauder Companies Inc. |
|
$ |
427 |
|
$ |
294 |
|
|
|
|
|
|
|
||
Denominator: |
|
|
|
|
|
||
Weighted-average common shares outstanding Basic |
|
368.4 |
|
366.4 |
|
||
Effect of dilutive stock options |
|
4.5 |
|
4.5 |
|
||
Effect of PSUs |
|
0.2 |
|
0.1 |
|
||
Effect of RSUs |
|
2.3 |
|
2.3 |
|
||
Weighted-average common shares outstanding Diluted |
|
375.4 |
|
373.3 |
|
||
|
|
|
|
|
|
||
Net earnings attributable to The Estée Lauder Companies Inc. per common share: |
|
|
|
|
|
||
Basic |
|
$ |
1.16 |
|
$ |
.80 |
|
Diluted |
|
1.14 |
|
.79 |
|
As of September 30, 2017 and 2016, outstanding options to purchase 2.1 million and 2.6 million shares, respectively, of Class A Common Stock were not included in the computation of diluted EPS because their inclusion would be anti-dilutive. As of September 30, 2017 and 2016, 1.2 million shares and 0.8 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 .
NOTE 11 EQUITY
|
|
Total Stockholders Equity The Estée Lauder Companies Inc. |
|
Non- |
|
|
|
||||||||||||||||||
(In millions) |
|
Common
|
|
Paid-in
|
|
Retained
|
|
AOCI |
|
Treasury
|
|
Total |
|
controlling
|
|
Total
|
|
||||||||
Balance at June 30, 2017 |
|
$ |
6 |
|
$ |
3,559 |
|
$ |
8,452 |
|
$ |
(484 |
) |
$ |
(7,149 |
) |
$ |
4,384 |
|
$ |
18 |
|
$ |
4,402 |
|
Net earnings |
|
|
|
|
|
427 |
|
|
|
|
|
427 |
|
3 |
|
430 |
|
||||||||
Common stock dividends |
|
|
|
1 |
|
(127 |
) |
|
|
|
|
(126 |
) |
|
|
(126 |
) |
||||||||
Other comprehensive income |
|
|
|
|
|
|
|
49 |
|
|
|
49 |
|
1 |
|
50 |
|
||||||||
Acquisition of treasury stock |
|
|
|
|
|
|
|
|
|
(98 |
) |
(98 |
) |
|
|
(98 |
) |
||||||||
Stock-based compensation |
|
|
|
105 |
|
|
|
|
|
(10 |
) |
95 |
|
|
|
95 |
|
||||||||
Balance at September 30, 2017 |
|
$ |
6 |
|
$ |
3,665 |
|
$ |
8,752 |
|
$ |
(435 |
) |
$ |
(7,257 |
) |
$ |
4,731 |
|
$ |
22 |
|
$ |
4,753 |
|
The following is a summary of quarterly cash dividends declared per share on the Companys Class A and Class B Common Stock during the three months ended September 30, 2017:
Date Declared |
|
Record Date |
|
Payable Date |
|
Amount per Share |
|
|
August 17, 2017 |
|
August 31, 2017 |
|
September 15, 2017 |
|
$ |
.34 |
|
On October 31, 2017, a dividend was declared in the amount of $.38 per share on the Companys Class A and Class B Common Stock. The dividend is payable in cash on December 15, 2017 to stockholders of record at the close of business on November 30, 2017.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock
During the three months ended September 30, 2017, the Company purchased approximately 1.1 million shares of its Class A Common Stock for $111 million.
During the three months ended September 30, 2017, approximately 0.3 million shares of the Companys Class B Common Stock were converted into the same amount of shares of the Companys Class A Common Stock.
Accumulated Other Comprehensive Income (Loss)
The following table represents changes in AOCI, net of tax, by component for the three months ended September 30, 2017:
(In millions) |
|
Net
|
|
Net
|
|
Amounts
|
|
Translation
|
|
Total |
|
|||||
Balance at June 30, 2017 |
|
$ |
(1 |
) |
$ |
(3 |
) |
$ |
(213 |
) |
$ |
(267 |
) |
$ |
(484 |
) |
OCI before reclassifications |
|
(1 |
) |
(12 |
) |
(1 |
) (1) |
54 |
|
40 |
|
|||||
Amounts reclassified from AOCI |
|
|
|
6 |
|
3 |
|
|
|
9 |
|
|||||
Net current-period OCI |
|
(1 |
) |
(6 |
) |
2 |
|
54 |
|
49 |
|
|||||
Balance at September 30, 2017 |
|
$ |
(2 |
) |
$ |
(9 |
) |
$ |
(211 |
) |
$ |
(213 |
) |
$ |
(435 |
) |
(1) Consists of foreign currency translation losses.
The following table represents the effects of reclassification adjustments from AOCI into net earnings for the three months ended September 30, 2017 and 2016:
|
|
Amount Reclassified from AOCI |
|
|
|
||||
|
|
Three Months Ended
|
|
Affected Line Item in Consolidated |
|
||||
(In millions) |
|
2017 |
|
2016 |
|
Statements of Earnings |
|
||
Gain (Loss) on Investments |
|
|
|
|
|
|
|
||
Gain (loss) on investments |
|
$ |
|
|
$ |
1 |
|
Interest income and investment income, net |
|
Benefit (provision) for deferred taxes |
|
|
|
|
|
Provision for income taxes |
|
||
|
|
$ |
|
|
$ |
1 |
|
Net earnings |
|
Gain (Loss) on Cash Flow Hedges |
|
|
|
|
|
|
|
||
Foreign currency forward contracts |
|
$ |
(5 |
) |
$ |
2 |
|
Cost of sales |
|
Foreign currency forward contracts |
|
(4 |
) |
7 |
|
Selling, general and administrative |
|
||
|
|
(9 |
) |
9 |
|
Earnings before income taxes |
|
||
Benefit (provision) for deferred taxes |
|
3 |
|
(3 |
) |
Provision for income taxes |
|
||
|
|
$ |
(6 |
) |
$ |
6 |
|
Net earnings |
|
Amounts Included in Net Periodic Benefit Cost |
|
|
|
|
|
|
|
||
Amortization of prior service cost |
|
$ |
|
|
$ |
(1 |
) |
(1) |
|
Amortization of actuarial loss |
|
(5 |
) |
(7 |
) |
(1) |
|
||
|
|
(5 |
) |
(8 |
) |
Earnings before income taxes |
|
||
Benefit (provision) for deferred taxes |
|
2 |
|
2 |
|
Provision for income taxes |
|
||
|
|
$ |
(3 |
) |
$ |
(6 |
) |
Net earnings |
|
Total reclassification adjustments, net |
|
$ |
(9 |
) |
$ |
1 |
|
Net earnings |
|
(1) See Note 7 Pension and Post-Retirement Benefit Plans for additional information.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 STATEMENT OF CASH FLOWS
Supplemental cash flow information for the three months ended September 30, 2017 and 2016 is as follows:
(In millions) |
|
2017 |
|
2016 |
|
||
Cash: |
|
|
|
|
|
||
Cash paid during the period for interest |
|
$ |
34 |
|
$ |
8 |
|
Cash paid during the period for income taxes |
|
$ |
56 |
|
$ |
71 |
|
|
|
|
|
|
|
||
Non-cash investing and financing activities: |
|
|
|
|
|
||
Capital lease and asset retirement obligations incurred |
|
$ |
4 |
|
$ |
5 |
|
Non-cash purchases of short- and long-term investments, net |
|
$ |
1 |
|
$ |
14 |
|
Property, plant and equipment accrued but unpaid |
|
$ |
34 |
|
$ |
36 |
|
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, interest expense, interest income and investment income, net, and charges associated with restructuring and other activities. Returns and charges associated with restructuring and other activities are not allocated to the product categories because they result from activities that are deemed a Company-wide initiative to redesign, resize and reorganize select corporate functions and go-to-market structures.
The accounting policies for the Companys reportable segments are substantially the same as those for the consolidated financial statements, as described in the notes to consolidated financial statements in the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2017. 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 Companys segment data since June 30, 2017.
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Three Months Ended
|
|
||||
(In millions) |
|
2017 |
|
2016 |
|
||
PRODUCT CATEGORY DATA |
|
|
|
|
|
||
Net Sales: |
|
|
|
|
|
||
Skin Care |
|
$ |
1,275 |
|
$ |
1,102 |
|
Makeup |
|
1,372 |
|
1,166 |
|
||
Fragrance |
|
476 |
|
442 |
|
||
Hair Care |
|
136 |
|
136 |
|
||
Other |
|
15 |
|
21 |
|
||
|
|
3,274 |
|
2,867 |
|
||
Returns associated with restructuring and other activities |
|
|
|
(2 |
) |
||
Net Sales |
|
$ |
3,274 |
|
$ |
2,865 |
|
|
|
|
|
|
|
||
Operating Income (Loss): |
|
|
|
|
|
||
Skin Care |
|
$ |
326 |
|
$ |
212 |
|
Makeup |
|
176 |
|
149 |
|
||
Fragrance |
|
87 |
|
72 |
|
||
Hair Care |
|
15 |
|
13 |
|
||
Other |
|
2 |
|
3 |
|
||
|
|
606 |
|
449 |
|
||
Reconciliation: |
|
|
|
|
|
||
Charges associated with restructuring and other activities |
|
(38 |
) |
(31 |
) |
||
Interest expense |
|
(31 |
) |
(21 |
) |
||
Interest income and investment income, net |
|
12 |
|
6 |
|
||
Earnings before income taxes |
|
$ |
549 |
|
$ |
403 |
|
|
|
|
|
|
|
||
GEOGRAPHIC DATA |
|
|
|
|
|
||
Net Sales: |
|
|
|
|
|
||
The Americas |
|
$ |
1,329 |
|
$ |
1,233 |
|
Europe, the Middle East & Africa |
|
1,258 |
|
1,044 |
|
||
Asia/Pacific |
|
687 |
|
590 |
|
||
|
|
3,274 |
|
2,867 |
|
||
Returns associated with restructuring and other activities |
|
|
|
(2 |
) |
||
Net Sales |
|
$ |
3,274 |
|
$ |
2,865 |
|
|
|
|
|
|
|
||
Operating Income (Loss): |
|
|
|
|
|
||
The Americas |
|
$ |
100 |
|
$ |
63 |
|
Europe, the Middle East & Africa |
|
346 |
|
256 |
|
||
Asia/Pacific |
|
160 |
|
130 |
|
||
|
|
606 |
|
449 |
|
||
Charges associated with restructuring and other activities |
|
(38 |
) |
(31 |
) |
||
Operating Income |
|
$ |
568 |
|
$ |
418 |
|
THE ESTÉE LAUDER COMPANIES INC.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
We manufacture, market and sell beauty products including those in the skin care, makeup, fragrance and hair care categories, which are distributed in over 150 countries and territories. The following table is a comparative summary of operating results for the three months ended September 30, 2017 and 2016, and reflects the basis of presentation described in Notes to Consolidated Financial Statements, Note 1 Summary of Significant Accounting Policies for all periods presented. Products and services that do not meet our definition of skin care, makeup, fragrance or hair care have been included in the other category.
|
|
Three Months Ended
|
|
||||
(In millions) |
|
2017 |
|
2016 |
|
||
NET SALES |
|
|
|
|
|
||
By Product Category: |
|
|
|
|
|
||
Skin Care |
|
$ |
1,275 |
|
$ |
1,102 |
|
Makeup |
|
1,372 |
|
1,166 |
|
||
Fragrance |
|
476 |
|
442 |
|
||
Hair Care |
|
136 |
|
136 |
|
||
Other |
|
15 |
|
21 |
|
||
|
|
3,274 |
|
2,867 |
|
||
Returns associated with restructuring and other activities |
|
|
|
(2 |
) |
||
Net Sales |
|
$ |
3,274 |
|
$ |
2,865 |
|
|
|
|
|
|
|
||
By Region: |
|
|
|
|
|
||
The Americas |
|
$ |
1,329 |
|
$ |
1,233 |
|
Europe, the Middle East & Africa |
|
1,258 |
|
1,044 |
|
||
Asia/Pacific |
|
687 |
|
590 |
|
||
|
|
3,274 |
|
2,867 |
|
||
Returns associated with restructuring and other activities |
|
|
|
(2 |
) |
||
Net Sales |
|
$ |
3,274 |
|
$ |
2,865 |
|
|
|
|
|
|
|
||
OPERATING INCOME (LOSS) |
|
|
|
|
|
||
By Product Category: |
|
|
|
|
|
||
Skin Care |
|
$ |
326 |
|
$ |
212 |
|
Makeup |
|
176 |
|
149 |
|
||
Fragrance |
|
87 |
|
72 |
|
||
Hair Care |
|
15 |
|
13 |
|
||
Other |
|
2 |
|
3 |
|
||
|
|
606 |
|
449 |
|
||
Charges associated with restructuring and other activities |
|
(38 |
) |
(31 |
) |
||
Operating Income |
|
$ |
568 |
|
$ |
418 |
|
|
|
|
|
|
|
||
By Region: |
|
|
|
|
|
||
The Americas |
|
$ |
100 |
|
$ |
63 |
|
Europe, the Middle East & Africa |
|
346 |
|
256 |
|
||
Asia/Pacific |
|
160 |
|
130 |
|
||
|
|
606 |
|
449 |
|
||
Charges associated with restructuring and other activities |
|
(38 |
) |
(31 |
) |
||
Operating Income |
|
$ |
568 |
|
$ |
418 |
|
THE ESTÉE LAUDER COMPANIES INC.
The following table presents certain consolidated earnings data as a percentage of net sales:
|
|
Three Months Ended
|
|
||
|
|
2017 |
|
2016 |
|
Net sales |
|
100.0 |
% |
100.0 |
% |
Cost of sales |
|
21.7 |
|
20.8 |
|
Gross profit |
|
78.3 |
|
79.2 |
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
Selling, general and administrative |
|
59.9 |
|
63.7 |
|
Restructuring and other charges |
|
1.0 |
|
0.9 |
|
Total operating expenses |
|
60.9 |
|
64.6 |
|
|
|
|
|
|
|
Operating income |
|
17.3 |
|
14.6 |
|
Interest expense |
|
1.0 |
|
0.7 |
|
Interest income and investment income, net |
|
0.4 |
|
0.2 |
|
|
|
|
|
|
|
Earnings before income taxes |
|
16.8 |
|
14.1 |
|
Provision for income taxes |
|
3.7 |
|
3.7 |
|
|
|
|
|
|
|
Net earnings |
|
13.1 |
|
10.3 |
|
Net earnings attributable to noncontrolling interests |
|
(0.1 |
) |
|
|
|
|
|
|
|
|
Net earnings attributable to The Estée Lauder Companies Inc. |
|
13.0 |
% |
10.3 |
% |
Not adjusted for differences caused by rounding
In order to meet the demands of consumers, we continually introduce new products, support new and established products through advertising, merchandising and sampling, and phase out existing products that no longer meet the needs of our consumers or our objectives. The economics of developing, producing, launching, supporting and discontinuing products impact our sales and operating performance each period. The introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning.
Non-GAAP Financial Measures
We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period helps investors and others compare operating performance between periods. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. See Reconciliations of Non-GAAP Financial Measures beginning on page 39 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
We operate on a global basis, with the majority of our net sales generated outside the United States. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations. Therefore, we present certain net sales, operating results and diluted net earnings per common share information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of our underlying business outside the United States. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We calculate constant currency information by translating current year results using prior year weighted-average foreign currency exchange rates.
THE ESTÉE LAUDER COMPANIES INC.
Overview
We believe the best way to increase stockholder value is to continue to provide superior products and services in the most efficient and effective manner while recognizing consumers changing behaviors and shopping preferences. We are guided by our long-term strategy, which has numerous initiatives across geographic regions, product categories, brands, channels of distribution and functions that are designed to grow our sales, provide cost efficiencies, leverage our strengths and make us more productive and profitable. We plan to build upon and leverage our history of outstanding creativity and innovation, high quality products and services, and engaging communications while investing for long-term sustainable growth. Elements of our strategy are described in the Overview on pages 24-28 of our Annual Report on Form 10-K for the year ended June 30, 2017, as well as below.
During the first quarter of fiscal 2018, we continued to build global net sales momentum, fueled by our multiple engines of growth. Net sales grew 14% as compared with the prior-year period, led by our makeup, skin care and fragrance product categories. We benefited from an acceleration of global prestige skin care growth during the first quarter of fiscal 2018. The Estée Lauder brand continued its acceleration in skin care and makeup, while La Mer, Tom Ford and Jo Malone London grew strong double digits. Certain of our brands have benefited from new product introductions, which have created a halo effect on some of our hero product lines. The lines generally consist of iconic products that are major components of our brands such as Advanced Night Repair from Estée Lauder. Our fiscal 2017 acquisitions of Too Faced and BECCA contributed incremental sales to bolster the growth in the makeup category and in the Americas region. Internationally, net sales grew in substantially all of our markets, led by China, while our travel retail business continued to generate strong net sales increases. We believe that part of our success has been due to our focus on strengthening our consumer engagement by leveraging digital marketing and enhancing our social media strategies and execution, as we continue to pivot towards areas of prestige beauty where we see the greatest opportunities.
While our business is performing well overall, we continue to face strong competition globally and economic challenges in certain countries. In particular, we are cautious of the continued decline in retail traffic primarily related to some brick-and-mortar stores in the United States as a result of the impact of shifts in consumer preferences as to where and how they shop. We are also cautious of foreign currency movements, including their impact on tourism. Additionally, we continue to monitor the effects of the macroeconomic environments in certain countries such as Brazil and in the Middle East, the United Kingdoms anticipated exit from the European Union, social and political issues, geopolitical tensions and global security issues.
We believe we can, to some extent, offset the impact of these challenges by accelerating areas of strength among our geographic regions, product categories, brands and channels of distribution. However, if economic conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, there could be a negative effect on consumer confidence, demand, spending and willingness or ability to travel and, as a result, on our business. We will continue to monitor these and other risks that may affect our business.
During the fourth quarter of fiscal 2017, the Company recognized impairment charges for the goodwill and trademark related to its Editions de Parfums Frédéric Malle reporting unit. If the softness in the retail environment that impacted our growth projections for this reporting unit is more severe than we have anticipated, or other business disruptions arise, a resulting change in the long-term plans could have a negative impact on the estimated fair values of the related goodwill and trademark, and it is possible we could recognize an impairment charge in the future. As of September 30, 2017, the carrying values of the Editions de Parfums Frédéric Malle goodwill and trademark were $6 million and $33 million, respectively. Based on the latest quantitative assessment, as of April 1, 2017, the fair values of all other reporting units with material goodwill and other indefinite-lived intangible assets, with the exception of our fiscal 2017 acquisitions of Too Faced and BECCA, were substantially in excess of their respective carrying values. With regard to Too Faced and BECCA, the carrying values of the related goodwill and other indefinite-lived intangible assets as of the assessment date approximated their fair values.
Our heritage brands are Estée Lauder, Clinique and Origins. Our makeup artist brands are M A C and Bobbi Brown. Our luxury brands are La Mer, Jo Malone London, Tom Ford, AERIN, RODIN olio lusso, Le Labo, Editions de Parfums Frédéric Malle and By Kilian. Our designer fragrances are sold under the Tommy Hilfiger, Donna Karan New York, DKNY, Michael Kors, Kiton, Ermenegildo Zegna and Tory Burch brand names, which we license from their respective owners.
THE ESTÉE LAUDER COMPANIES INC.
Leading Beauty Forward
In May 2016, we announced a multi-year initiative (Leading Beauty Forward) to build on our strengths and better leverage our cost structure to free resources for investment to continue our growth momentum. Leading Beauty Forward is designed to enhance our go-to-market capabilities, reinforce our leadership in global prestige beauty and continue creating sustainable value. We plan to approve specific initiatives under Leading Beauty Forward through fiscal 2019 related to the optimization of select corporate functions, supply chain activities, and corporate and regional market support structures, as well as the exit of underperforming businesses, and expect to complete those initiatives through fiscal 2021. Inclusive of charges recorded from inception through September 30, 2017, we expect that Leading Beauty Forward will result in related restructuring and other charges totaling between $600 million and $700 million, before taxes, consisting of employee-related costs, asset write-offs and other costs to implement these initiatives. After its full implementation, we expect Leading Beauty Forward to yield annual net benefits, primarily in Selling, general and administrative expenses, of between $200 million and $300 million, before taxes. We expect to reinvest a portion of these savings in future growth initiatives. For additional information about Leading Beauty Forward, see Notes to Consolidated Financial Statements, Note 4 Charges Associated with Restructuring and Other Activities .
First Quarter Fiscal 2018 as Compared with First Quarter Fiscal 2017
NET SALES
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported: |
|
|
|
|
|
||
Net Sales |
|
$ |
3,274 |
|
$ |
2,865 |
|
$ Change from prior-year period |
|
409 |
|
|
|
||
% Change from prior-year period |
|
14 |
% |
|
|
||
|
|
|
|
|
|
||
Non-GAAP Financial Measure (a) : |
|
|
|
|
|
||
% Change from prior-year period in constant currency |
|
14 |
% |
|
|
||
(a) See Reconciliations of Non-GAAP Financial Measures beginning on page 39 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported net sales increased in each major product category, except hair care where net sales were flat, and grew in each geographic region. Skin care net sales primarily benefited from higher sales of Estée Lauder and La Mer products. Incremental net sales from our fiscal 2017 second quarter acquisitions of Too Faced and BECCA, as well as net sales increases from Tom Ford and Estée Lauder, drove growth in the makeup product category. Our fragrance category primarily benefited from net sales increases from Jo Malone London. Higher net sales from our fiscal 2016 and 2015 acquisitions of GLAMGLOW, By Kilian, Le Labo and Editions de Parfums Frédéric Malle also contributed to growth in our skin care and fragrance categories. Each of our product categories benefited from targeted expanded consumer reach, new product offerings, the continued success of certain hero franchises, growth from emerging markets, strength in our travel retail business and the specialty-multi and online channels.
Returns associated with restructuring activities are not allocated to our product categories or geographic regions because they result from activities that are deemed a Company-wide initiative to redesign, resize and reorganize select corporate functions and go-to-market structures.
THE ESTÉE LAUDER COMPANIES INC.
Product Categories
Skin Care
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported : |
|
|
|
|
|
||
Net Sales |
|
$ |
1,275 |
|
$ |
1,102 |
|
$ Change from prior-year period |
|
173 |
|
|
|
||
% Change from prior-year period |
|
16 |
% |
|
|
||
|
|
|
|
|
|
||
Non-GAAP Financial Measure (a) : |
|
|
|
|
|
||
% Change from prior-year period in constant currency |
|
15 |
% |
|
|
||
(a) See Reconciliations of Non-GAAP Financial Measures beginning on page 39 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported skin care net sales increased, reflecting higher net sales from Estée Lauder and La Mer of approximately $174 million, combined, partially offset by lower net sales from Clinique and M A C of approximately $18 million, combined. Higher net sales from Estée Lauder, in particular from our travel retail business and in China, were primarily due to the launch of Advanced Night Repair Eye Concentrate Matrix, which created a halo effect on the Advanced Night Repair line of products. Net sales of La Mer products grew in all regions, reflecting new product launches such as The Moisturizing Matte Lotion and the expansion of the Genaissance line of products. Also contributing to the growth of La Mer was targeted expanded consumer reach and increased sales of existing products.
The lower net sales of Clinique products primarily reflected an unfavorable comparison due to the higher level of expansion within the specialty-multi channel in the prior-year period. The lower net sales from M A C were driven by slower retail traffic in brick-and-mortar stores in the United States, reflecting the impact of shifts in consumer preferences as to where and how they shop, as well as competitive pressures.
The net sales increase for skin care included approximately $8 million of favorable foreign currency translation.
Makeup
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported : |
|
|
|
|
|
||
Net Sales |
|
$ |
1,372 |
|
$ |
1,166 |
|
$ Change from prior-year period |
|
206 |
|
|
|
||
% Change from prior-year period |
|
18 |
% |
|
|
||
|
|
|
|
|
|
||
Non-GAAP Financial Measure (a) : |
|
|
|
|
|
||
% Change from prior-year period in constant currency |
|
17 |
% |
|
|
||
(a) See Reconciliations of Non-GAAP Financial Measures beginning on page 39 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported makeup net sales increased, reflecting incremental net sales from our fiscal 2017 second quarter acquisitions of Too Faced and BECCA, as well as higher net sales from Tom Ford, Estée Lauder and M A C, of approximately $226 million, combined. Increased net sales from Tom Ford were driven by higher sales of lipstick and eyeshadow products, such as the Tom Ford Lips & Boys and Soleil Color Collections. Increased net sales of Estée Lauder products were due, in part, to higher sales from the Double Wear line of products and the Pure Color franchise. Higher net sales from M A C were driven by the Asia/Pacific region, particularly in China and Hong Kong, reflecting growth in online sales and the strength of the makeup category in that region.
THE ESTÉE LAUDER COMPANIES INC.
Partially offsetting these increases were approximately $21 million of lower net sales of Clinique and Smashbox products, which were due, in part, to a soft retail environment for our products in certain brick-and-mortar stores in the United States reflecting slower retail traffic. The lower net sales of Clinique products also reflected an unfavorable comparison due to the higher level of expansion within the specialty-multi channel in the prior-year period.
The net sales increase for makeup included approximately $9 million of favorable foreign currency translation.
Fragrance
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported : |
|
|
|
|
|
||
Net Sales |
|
$ |
476 |
|
$ |
442 |
|
$ Change from prior-year period |
|
34 |
|
|
|
||
% Change from prior-year period |
|
8 |
% |
|
|
||
|
|
|
|
|
|
||
Non-GAAP Financial Measure (a) : |
|
|
|
|
|
||
% Change from prior-year period in constant currency |
|
7 |
% |
|
|
||
(a) See Reconciliations of Non-GAAP Financial Measures beginning on page 39 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported fragrance net sales increased, primarily reflecting higher net sales from our luxury brands of approximately $53 million, combined. Contributing to this growth were higher net sales from Jo Malone London, primarily driven by the travel retail channel, as well as targeted expanded consumer reach and recent product launches, such as the English Oak fragrances. Also contributing were higher net sales from Tom Ford, reflecting, in part, the continued success of the Signature and Private Blend Franchises, including new products and growth from existing fragrances.
Partially offsetting these increases was approximately $25 million of lower net sales of certain designer and Estée Lauder fragrances. The lower net sales from certain designer fragrances primarily reflected product rationalization of certain underperforming fragrances, as well as an unfavorable comparison with greater launch activity in the prior-year period. The lower net sales of certain Estée Lauder fragrances were partially due to a decline in net sales of the Modern Muse franchise.
The net sales increase for fragrance included approximately $5 million of favorable foreign currency translation.
Hair Care
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported : |
|
|
|
|
|
||
Net Sales |
|
$ |
136 |
|
$ |
136 |
|
$ Change from prior-year period |
|
|
|
|
|
||
% Change from prior-year period |
|
|
% |
|
|
||
|
|
|
|
|
|
||
Non-GAAP Financial Measure (a) : |
|
|
|
|
|
||
% Change from prior-year period in constant currency |
|
|
% |
|
|
||
(a) See Reconciliations of Non-GAAP Financial Measures beginning on page 39 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported hair care net sales were unchanged, with moderate growth from Aveda and Bumble and bumble offset by lower hair care sales from Origins. The growth from Bumble and bumble reflected initial shipments in advance of the brands launch in Ulta Beauty, partially offset by softness in the salon channel. At Aveda, online sales grew, while sales in freestanding stores were lower.
THE ESTÉE LAUDER COMPANIES INC.
Geographic Regions
The Americas
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported : |
|
|
|
|
|
||
Net Sales |
|
$ |
1,329 |
|
$ |
1,233 |
|
$ Change from prior-year period |
|
96 |
|
|
|
||
% Change from prior-year period |
|
8 |
% |
|
|
||
|
|
|
|
|
|
||
Non-GAAP Financial Measure (a) : |
|
|
|
|
|
||
% Change from prior-year period in constant currency |
|
7 |
% |
|
|
||
(a) See Reconciliations of Non-GAAP Financial Measures beginning on page 39 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported net sales in the Americas increased due to incremental sales, primarily in the United States, from our fiscal 2017 second quarter acquisitions of Too Faced and BECCA of approximately $126 million, combined. Net sales growth from certain of our brands, including Tom Ford, La Mer and Jo Malone London, also contributed to the higher net sales in the region.
Excluding the incremental net sales from Too Faced and BECCA, net sales in the United States decreased approximately $30 million, primarily reflecting the impact of slower retail traffic in brick-and-mortar stores that particularly affected M A C, Clinique and certain of our designer fragrances. This slower retail traffic reflected the impact of shifts in consumer preferences as to where and how they shop, as well as competitive pressures. Additionally, the severe weather conditions during the current-year period in certain areas of the United States tempered our sales growth.
Net sales in the Americas included approximately $5 million of favorable foreign currency translation.
Europe, the Middle East & Africa
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported : |
|
|
|
|
|
||
Net Sales |
|
$ |
1,258 |
|
$ |
1,044 |
|
$ Change from prior-year period |
|
214 |
|
|
|
||
% Change from prior-year period |
|
20 |
% |
|
|
||
|
|
|
|
|
|
||
Non-GAAP Financial Measure (a) : |
|
|
|
|
|
||
% Change from prior-year period in constant currency |
|
18 |
% |
|
|
||
(a) See Reconciliations of Non-GAAP Financial Measures beginning on page 39 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported net sales in Europe, the Middle East & Africa increased, primarily reflecting higher sales from our travel retail business and, to a lesser extent, in Italy and the Balkans of approximately $193 million, combined. In our travel retail business, the sales growth reflected higher net sales from most of our brands including Estée Lauder, Tom Ford, Jo Malone London and La Mer, driven, in part, by an increase in international passenger traffic, particularly by Chinese travelers, as well as targeted expanded consumer reach and new product offerings. The higher net sales in Italy were primarily driven by increased net sales from M A C and La Mer. The net sales increase in the Balkans was primarily due to higher net sales from Estée Lauder, our makeup artist brands and certain of our luxury brands.
THE ESTÉE LAUDER COMPANIES INC.
These increases were partially offset by lower net sales in the Middle East of approximately $5 million, primarily driven by the rebalancing of inventory levels by certain of our distributors reflecting the impact of the macroeconomic environment on consumer purchases.
Net sales in Europe, the Middle East & Africa included approximately $22 million of favorable foreign currency translation.
Asia/Pacific
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported : |
|
|
|
|
|
||
Net Sales |
|
$ |
687 |
|
$ |
590 |
|
$ Change from prior-year period |
|
97 |
|
|
|
||
% Change from prior-year period |
|
16 |
% |
|
|
||
|
|
|
|
|
|
||
Non-GAAP Financial Measure (a) : |
|
|
|
|
|
||
% Change from prior-year period in constant currency |
|
17 |
% |
|
|
||
(a) See Reconciliations of Non-GAAP Financial Measures beginning on page 39 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported net sales in Asia/Pacific increased, reflecting higher net sales in China and Hong Kong of approximately $97 million, combined. The higher net sales in China, led by Estée Lauder, La Mer, M A C, Jo Malone London, Tom Ford and Origins reflected, in part, targeted expanded consumer reach, continued increased demand for makeup products and an acceleration in skin care that benefited virtually every channel, led by department stores and online. The sales growth in Hong Kong was primarily driven by Estée Lauder and La Mer, reflecting an increase in tourism, as well as by M A C, Tom Ford and Jo Malone London, which benefited from targeted expanded consumer reach.
These increases were partially offset by lower net sales in Japan of approximately $8 million, primarily driven by the unfavorable impact of foreign currency translation. Excluding this impact, net sales in Japan would have been flat.
Net sales in Asia/Pacific included approximately $5 million of unfavorable foreign currency translation.
We strategically stagger our new product launches by geographic market, which may account for differences in regional sales growth.
GROSS MARGIN
Gross margin decreased to 78.3% for the three months ended September 30, 2017 as compared with 79.2% in the prior-year period.
Favorable (Unfavorable) Basis Points
|
|
||
Foreign exchange transactions |
|
(20 |
) |
Mix of business |
|
20 |
|
Manufacturing costs and other |
|
10 |
|
Fiscal 2017 acquisitions |
|
(95 |
) |
Subtotal |
|
(85 |
) |
Charges associated with restructuring and other activities |
|
(5 |
) |
Total |
|
(90 |
) |
The unfavorable impact of the fiscal 2017 second quarter acquisitions was primarily due to a higher cost of sales related to Too Faced and BECCA, which also includes an inventory step-up adjustment of $6 million, or approximately 20 basis points related to Too Faced.
THE ESTÉE LAUDER COMPANIES INC.
OPERATING EXPENSES
Operating expenses as a percentage of net sales decreased to 60.9% for the three months ended September 30, 2017 as compared with 64.6% in the prior-year period.
Favorable (Unfavorable) Basis Points
|
|
||
General and administrative expenses |
|
(30 |
) |
Advertising, merchandising, sampling and product development |
|
80 |
|
Selling |
|
250 |
|
Store operating costs |
|
30 |
|
Stock-based compensation |
|
140 |
|
Fiscal 2017 gain on sale of property, plant and equipment |
|
(40 |
) |
Foreign exchange transactions |
|
(50 |
) |
Other |
|
(10 |
) |
Subtotal |
|
370 |
|
Charges associated with restructuring and other activities |
|
(10 |
) |
Changes in fair value of contingent consideration |
|
10 |
|
Total |
|
370 |
|
The improvement in operating expense margin reflected disciplined expense management across many areas and favorable mix shifts in the growth of our brands and channels. Selling expenses were favorable, reflecting lower demonstration costs, partially due to changes in distribution channel mix. Beginning in September 2017, equity award agreements for employee equity grants contain a new provision regarding award forfeiture, which requires the recording of stock-based compensation expense for retirement-eligible employees over the new requisite service period (six months) and resulted in a favorable comparison with the prior-year period. Without this provision, the awards for retirement-eligible employees would have been expensed at the date of grant, rather than through our fiscal 2018 third quarter, and would have resulted in stock-based compensation expense having an unfavorable impact on operating expense margin of approximately 40 basis points as compared to the prior-year period.
OPERATING RESULTS
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported: |
|
|
|
|
|
||
Operating Income |
|
$ |
568 |
|
$ |
418 |
|
$ Change from prior-year period |
|
150 |
|
|
|
||
% Change from prior-year period |
|
36 |
% |
|
|
||
|
|
|
|
|
|
||
Operating Margin |
|
17.3 |
% |
14.6 |
% |
||
|
|
|
|
|
|
||
Non-GAAP Financial Measure (a) : |
|
|
|
|
|
||
% Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities and changes in fair value of contingent consideration |
|
18.5 |
% |
|
|
||
(a) See Reconciliations of Non-GAAP Financial Measures beginning on page 39 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
The reported operating margin for the three months ended September 30, 2017 increased from the prior-year period, reflecting the lower operating expense margin, partially offset by the decrease in gross margin, as previously noted.
Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they result from activities that are deemed a Company-wide initiative to redesign, resize and reorganize select corporate functions and go-to-market structures. Accordingly, the following discussions of Operating Income by Product Categories and Geographic Regions exclude the impact of charges associated with restructuring and other activities.
THE ESTÉE LAUDER COMPANIES INC.
Product Categories
Skin Care
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported: |
|
|
|
|
|
||
Operating Income |
|
$ |
326 |
|
$ |
212 |
|
$ Change from prior-year period |
|
114 |
|
|
|
||
% Change from prior-year period |
|
54 |
% |
|
|
||
Reported skin care operating income increased, primarily from Estée Lauder and La Mer, due to higher net sales, partially offset by lower results from Clinique and M A C, reflecting lower net sales.
Makeup
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported: |
|
|
|
|
|
||
Operating Income |
|
$ |
176 |
|
$ |
149 |
|
$ Change from prior-year period |
|
27 |
|
|
|
||
% Change from prior-year period |
|
18 |
% |
|
|
||
Reported makeup operating income increased, reflecting higher results from Tom Ford and Estée Lauder driven by higher net sales, as well as incremental operating income from our fiscal 2017 second quarter acquisitions. Partially offsetting this increase were lower results from Smashbox and Clinique, reflecting a decrease in net sales, primarily in the United States.
Fragrance
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported: |
|
|
|
|
|
||
Operating Income |
|
$ |
87 |
|
$ |
72 |
|
$ Change from prior-year period |
|
15 |
|
|
|
||
% Change from prior-year period |
|
21 |
% |
|
|
||
Reported fragrance operating income increased, reflecting higher results from Jo Malone London and Tom Ford primarily due to higher net sales, as well as disciplined expense management. Partially offsetting these higher results were lower results from our designer fragrances and Estée Lauder as a result of lower net sales.
Hair Care
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported: |
|
|
|
|
|
||
Operating Income |
|
$ |
15 |
|
$ |
13 |
|
$ Change from prior-year period |
|
2 |
|
|
|
||
% Change from prior-year period |
|
15 |
% |
|
|
||
Reported hair care operating income increased primarily due to disciplined expense management.
THE ESTÉE LAUDER COMPANIES INC.
Geographic Regions
Americas
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported: |
|
|
|
|
|
||
Operating Income |
|
$ |
100 |
|
$ |
63 |
|
$ Change from prior-year period |
|
37 |
|
|
|
||
% Change from prior-year period |
|
59 |
% |
|
|
||
Reported operating income in the Americas increased, primarily reflecting disciplined expense management, as well as incremental operating results from our fiscal 2017 second quarter acquisitions of Too Faced and BECCA. Partially offsetting the higher results were lower results from M A C and Clinique due to a decrease in net sales.
Europe, the Middle East & Africa
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported: |
|
|
|
|
|
||
Operating Income |
|
$ |
346 |
|
$ |
256 |
|
$ Change from prior-year period |
|
90 |
|
|
|
||
% Change from prior-year period |
|
35 |
% |
|
|
||
In Europe, the Middle East & Africa, reported operating income increased, primarily due to higher results from our travel retail business and, to a lesser extent, France, of approximately $115 million, combined. The higher results in our travel retail business reflected the increase in net sales. The increased operating results in France were primarily due to the timing of advertising campaigns that are expected to occur later in the fiscal year. These higher results were partially offset by lower results in Switzerland, the Balkans and the Middle East of approximately $21 million, combined. The lower results in Switzerland were due to an unfavorable comparison to the prior-year period gain on the sale of property, plant and equipment. The lower results in the Balkans reflected higher store operating costs related to targeted expanded consumer reach and the lower results in the Middle East were due to a decrease in net sales.
Asia/Pacific
|
|
Three Months Ended September 30 |
|
||||
($ in millions) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported: |
|
|
|
|
|
||
Operating Income |
|
$ |
160 |
|
$ |
130 |
|
$ Change from prior-year period |
|
30 |
|
|
|
||
% Change from prior-year period |
|
23 |
% |
|
|
||
Reported operating income increased in Asia/Pacific, reflecting higher results in China and Hong Kong of approximately $33 million, combined, driven by net sales growth. These higher results were partially offset by lower results in Japan and, to a lesser extent, the Philippines, of approximately $5 million, combined, due to lower net sales.
THE ESTÉE LAUDER COMPANIES INC.
INTEREST AND INVESTMENT INCOME
|
|
Three Months Ended September 30 |
|
||||
(In millions) |
|
2017 |
|
2016 |
|
||
Interest expense |
|
$ |
31 |
|
$ |
21 |
|
Interest income and investment income, net |
|
$ |
12 |
|
$ |
6 |
|
Interest expense increased as compared with the prior-year period, primarily due to higher short- and long-term debt levels. Interest and investment income, net increased primarily due to an increase in interest rates and higher cash balances.
PROVISION FOR INCOME TAXES
The provision for income taxes represents U.S. federal, foreign, state and local income taxes. The effective rate differs from the federal statutory rate primarily due to the effect of state and local income taxes, the tax impact of share-based compensation, the taxation of foreign income and income tax reserve adjustments, which represent changes in our net liability for unrecognized tax benefits including tax settlements and lapses of the applicable statutes of limitations. Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the tax impact of share-based compensation and the interaction of various global tax strategies. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of change.
|
|
Three Months Ended September 30 |
|
||
|
|
2017 |
|
2016 |
|
Effective rate for income taxes |
|
21.7 |
% |
26.6 |
% |
Basis-point change from the prior-year period |
|
(490 |
) |
|
|
The effective rate for income taxes was 21.7% and 26.6% for the three months ended September 30, 2017 and 2016, respectively. The decrease in the effective tax rate was primarily attributable to the favorable impact of the adoption of new accounting guidance issued by the Financial Accounting Standards Board (FASB) related to share-based compensation awards. The impact of the new guidance resulted in a $23 million benefit to our income tax provision (approximately 420 basis points). For further discussion of the adoption, see Notes to Consolidated Financial Statements, Note 1 Summary of Significant Accounting Policies - Recently Adopted Accounting Standards .
NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC.
|
|
Three Months Ended September 30 |
|
||||
($ in millions, except per share data) |
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
||
As Reported: |
|
|
|
|
|
||
Net earnings attributable to The Estée Lauder Companies Inc. |
|
$ |
427 |
|
$ |
294 |
|
$ Change from prior-year period |
|
133 |
|
|
|
||
% Change from prior-year period |
|
45 |
% |
|
|
||
Diluted net earnings per common share |
|
$ |
1.14 |
|
$ |
.79 |
|
% Change from prior-year period |
|
44 |
% |
|
|
||
|
|
|
|
|
|
||
Non-GAAP Financial Measure (a) : |
|
|
|
|
|
||
% Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities and changes in fair value of contingent consideration |
|
42 |
% |
|
|
(a) See Reconciliations of Non-GAAP Financial Measures on page 39 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
THE ESTÉE LAUDER COMPANIES INC.
RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES
We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period, or do not reflect the Companys underlying ongoing business, provides transparency for such items and helps investors and others compare and analyze our operating performance from period to period. In the future, we expect to incur charges or adjustments similar in nature to those presented below; however, the impact to the Companys results in a given period may be highly variable and difficult to predict. Our non-GAAP financial measures may not be comparable to similarly titled measures used by, or determined in a manner consistent with, other companies. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. The following tables present Net Sales, Operating Income and Diluted net earnings per common share adjusted to exclude the impact of charges associated with restructuring and other activities, the changes in the fair value of contingent consideration and the effects of foreign currency translation. The tables provide reconciliations between these non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Certain information in the prior-year periods have been restated to conform to current period presentation.
|
|
|
|
|
|
|
|
|
|
% Change |
|
|||
|
|
Three Months Ended |
|
|
|
|
|
in |
|
|||||
|
|
September 30 |
|
|
|
% |
|
Constant |
|
|||||
($ in millions) |
|
2017 |
|
2016 |
|
Variance |
|
Change |
|
Currency |
|
|||
Net Sales, as reported |
|
$ |
3,274 |
|
$ |
2,865 |
|
$ |
409 |
|
14 |
% |
14 |
% |
Returns associated with restructuring and other activities |
|
|
|
2 |
|
(2 |
) |
|
|
|
|
|||
Net Sales, as adjusted |
|
$ |
3,274 |
|
$ |
2,867 |
|
$ |
407 |
|
14 |
% |
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
% Change |
|
|||
|
|
Three Months Ended |
|
|
|
|
|
in |
|
|||||
|
|
September 30 |
|
|
|
% |
|
Constant |
|
|||||
($ in millions) |
|
2017 |
|
2016 |
|
Variance |
|
Change |
|
Currency |
|
|||
Operating Income, as reported |
|
$ |
568 |
|
$ |
418 |
|
$ |
150 |
|
36 |
% |
34 |
% |
Charges associated with restructuring and other activities |
|
38 |
|
31 |
|
7 |
|
|
|
|
|
|||
Changes in fair value of contingent consideration |
|
1 |
|
4 |
|
(3 |
) |
|
|
|
|
|||
Operating Income, as adjusted |
|
$ |
607 |
|
$ |
453 |
|
$ |
154 |
|
34 |
% |
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
% Change |
|
|||
|
|
Three Months Ended |
|
|
|
|
|
in |
|
|||||
|
|
September 30 |
|
|
|
% |
|
Constant |
|
|||||
|
|
2017 |
|
2016 |
|
Variance |
|
Change |
|
Currency |
|
|||
Diluted net earnings per common share, as reported |
|
$ |
1.14 |
|
$ |
.79 |
|
$ |
.35 |
|
44 |
% |
43 |
% |
Charges associated with restructuring and other activities |
|
.07 |
|
.05 |
|
.02 |
|
|
|
|
|
|||
Changes in fair value of contingent consideration |
|
|
|
.01 |
|
(.01 |
) |
|
|
|
|
|||
Diluted net earnings per common share, as adjusted |
|
$ |
1.21 |
|
$ |
.85 |
|
$ |
.36 |
|
42 |
% |
41 |
% |
As diluted net earnings per common share, as adjusted, is used as a measure of the Companys performance, we consider the impact of current and deferred income taxes when calculating the per-share impact of each of the reconciling items.
THE ESTÉE LAUDER COMPANIES INC.
The following table reconciles the change in net sales by product category and geographic region, as reported, to the change in net sales excluding the effects of foreign currency translation:
|
|
As Reported |
|
|
|
|
|
|
|
|
|
|||||||||
(In millions) |
|
Three
|
|
Three
|
|
Variance |
|
Impact of
|
|
Variance,
|
|
%
|
|
%
|
|
|||||
By Product Category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Skin Care |
|
$ |
1,275 |
|
$ |
1,102 |
|
$ |
173 |
|
$ |
(8 |
) |
$ |
165 |
|
16 |
% |
15 |
% |
Makeup |
|
1,372 |
|
1,166 |
|
206 |
|
(9 |
) |
197 |
|
18 |
|
17 |
|
|||||
Fragrance |
|
476 |
|
442 |
|
34 |
|
(5 |
) |
29 |
|
8 |
|
7 |
|
|||||
Hair Care |
|
136 |
|
136 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Other |
|
15 |
|
21 |
|
(6 |
) |
|
|
(6 |
) |
(29 |
) |
(29 |
) |
|||||
|
|
3,274 |
|
2,867 |
|
407 |
|
(22 |
) |
385 |
|
14 |
|
13 |
|
|||||
Returns associated with restructuring and other activities |
|
|
|
(2 |
) |
2 |
|
|
|
2 |
|
|
|
|
|
|||||
Total |
|
$ |
3,274 |
|
$ |
2,865 |
|
$ |
409 |
|
$ |
(22 |
) |
$ |
387 |
|
14 |
% |
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
By Region: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
The Americas |
|
$ |
1,329 |
|
$ |
1,233 |
|
$ |
96 |
|
$ |
(5 |
) |
$ |
91 |
|
8 |
% |
7 |
% |
Europe, the Middle East & Africa |
|
1,258 |
|
1,044 |
|
214 |
|
(22 |
) |
192 |
|
20 |
|
18 |
|
|||||
Asia/Pacific |
|
687 |
|
590 |
|
97 |
|
5 |
|
102 |
|
16 |
|
17 |
|
|||||
|
|
3,274 |
|
2,867 |
|
407 |
|
(22 |
) |
385 |
|
14 |
|
13 |
|
|||||
Returns associated with restructuring and other activities |
|
|
|
(2 |
) |
2 |
|
|
|
2 |
|
|
|
|
|
|||||
Total |
|
$ |
3,274 |
|
$ |
2,865 |
|
$ |
409 |
|
$ |
(22 |
) |
$ |
387 |
|
14 |
% |
14 |
% |
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal sources of funds historically have been cash flows from operations, borrowings pursuant to our commercial paper program, borrowings from the issuance of long-term debt and committed and uncommitted credit lines provided by banks and other lenders in the United States and abroad. At September 30, 2017, we had cash and cash equivalents of $1,444 million compared with $1,136 million at June 30, 2017. Our cash and cash equivalents are maintained at a number of financial institutions. To mitigate the risk of uninsured balances, we select financial institutions based on their credit ratings and financial strength, and we perform ongoing evaluations of these institutions to limit our concentration risk exposure.
Our business is seasonal in nature and, accordingly, our working capital needs vary. From time to time, we may enter into investing and financing transactions that require additional funding. To the extent that these needs exceed cash from operations, we could, subject to market conditions, issue commercial paper, issue long-term debt securities or borrow under our revolving credit facilities.
Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available-for-sale securities, available credit lines and access to credit markets will be adequate to support currently planned business operations, information systems enhancements, capital expenditures, acquisitions, dividends, stock repurchases, restructuring initiatives, commitments and other contractual obligations on both a near-term and long-term basis. Our cash and cash equivalents and short- and long-term investment balances at September 30, 2017 include cash and short- and long-term investments in offshore jurisdictions associated with our permanent reinvestment strategy. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic debt or working capital obligations. If these indefinitely reinvested earnings were repatriated into the United States as dividends, we would be subject to additional taxes.
THE ESTÉE LAUDER COMPANIES INC.
The effects of inflation have not been significant to our overall operating results in recent years. Generally, we have been able to introduce new products at higher prices, increase prices and implement other operating efficiencies to sufficiently offset cost increases, which have been moderate.
Credit Ratings
Changes in our credit ratings will likely result in changes in our borrowing costs. Our credit ratings also impact the cost of our revolving credit facility. Downgrades in our credit ratings may reduce our ability to issue commercial paper and/or long-term debt and would likely increase the relative costs of borrowing. A credit rating is not a recommendation to buy, sell, or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization, and should be evaluated independently of any other rating. As of October 25, 2017, our commercial paper is rated A-1 by Standard & Poors and P-1 by Moodys, and our long-term debt is rated A+ with a stable outlook by Standard & Poors and A2 with a stable outlook by Moodys.
Debt
At September 30, 2017, our outstanding borrowings were as follows:
($ in millions) |
|
Long-term
|
|
Current
|
|
Total Debt |
|
|||
4.15% Senior Notes, due March 15, 2047 (2047 Senior Notes) (1), (10) |
|
$ |
494 |
|
$ |
|
|
$ |
494 |
|
4.375% Senior Notes, due June 15, 2045 (2045 Senior Notes) (2), (10) |
|
455 |
|
|
|
455 |
|
|||
3.70% Senior Notes, due August 15, 2042 (2042 Senior Notes) (3), (10) |
|
247 |
|
|
|
247 |
|
|||
6.00% Senior Notes, due May 15, 2037 (2037 Senior Notes) (4), (10) |
|
294 |
|
|
|
294 |
|
|||
5.75% Senior Notes, due October 15, 2033 (2033 Senior Notes) (5) |
|
197 |
|
|
|
197 |
|
|||
3.15% Senior Notes, due March 15, 2027 (2027 Senior Notes) (6), (10) |
|
497 |
|
|
|
497 |
|
|||
2.35% Senior Notes, due August 15, 2022 (2022 Senior Notes) (7), (10) |
|
251 |
|
|
|
251 |
|
|||
1.70% Senior Notes, due May 10, 2021 (2021 Senior Notes) (8), (10) |
|
444 |
|
|
|
444 |
|
|||
1.80% Senior Notes, due February 7, 2020 (2020 Senior Notes) (9), (10) |
|
498 |
|
|
|
498 |
|
|||
Commercial paper that matures through November 2017 (1.19% average interest rate) |
|
|
|
530 |
|
530 |
|
|||
Other borrowings |
|
6 |
|
22 |
|
28 |
|
|||
|
|
$ |
3,383 |
|
$ |
552 |
|
$ |
3,935 |
|
(1) Consists of $500 million principal, net unamortized debt discount of $1 million and debt issuance costs of $5 million.
(2) Consists of $450 million principal, net unamortized debt premium of $10 million and debt issuance costs of $5 million.
(3) Consists of $250 million principal, unamortized debt discount of $1 million and debt issuance costs of $2 million.
(4) Consists of $300 million principal, unamortized debt discount of $3 million and debt issuance costs of $3 million.
(5) Consists of $200 million principal, unamortized debt discount of $2 million and debt issuance costs of $1 million.
(6) Consists of $500 million principal and debt issuance costs of $3 million.
(7) Consists of $250 million principal, a $2 million adjustment to reflect the fair value of interest rate swaps and debt issuance costs of $1 million.
(8) Consists of $450 million principal, a $4 million adjustment to reflect the fair value of interest rate swaps and debt issuance costs of $2 million.
(9) Consists of $500 million principal and debt issuance costs of $2 million.
(10) The Senior Notes contain certain customary incurrencebased covenants, including limitations on indebtedness secured by liens.
As of October 25, 2017, we had approximately $616 million of commercial paper outstanding, which we may refinance or pay as it matures.
Total debt as a percent of total capitalization (excluding noncontrolling interests) was 45% at September 30, 2017 and June 30, 2017.
THE ESTÉE LAUDER COMPANIES INC.
Cash Flows
|
|
Three Months Ended
|
|
||||
(In millions) |
|
2017 |
|
2016 |
|
||
Net cash provided by (used for) operating activities |
|
$ |
93 |
|
$ |
(150 |
) |
Net cash provided by (used for) investing activities |
|
$ |
36 |
|
$ |
(66 |
) |
Net cash provided by (used for) financing activities |
|
$ |
173 |
|
$ |
(36 |
) |
The change in net cash flows from operations primarily reflected an increase in net earnings, higher advertising and promotional accruals and a change in legal accruals in the prior-year period. These increases were partially offset by an increase in accounts receivable, reflecting the timing of shipments and collections.
The change in net cash flows from investing activities primarily reflected higher proceeds, net of purchases, of investments in connection with our cash investment strategy, partially offset by an increase in capital expenditures, primarily related to counters.
The change in net cash flows from financing activities primarily reflected lower treasury stock purchases and higher commercial paper borrowings.
Dividends
For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the three months ended September 30, 2017, see Notes to Consolidated Financial Statements, Note 11 Equity .
Pension and Post-retirement Plan Funding
There have been no significant changes to our pension and post-retirement funding as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
Commitments, Contractual Obligations and Contingencies
There have been no significant changes to our commitments and contractual obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017. For a discussion of contingencies, see Notes to Consolidated Financial Statements, Note 8 Contingencies .
Derivative Financial Instruments and Hedging Activities
For a discussion of our derivative financial instruments and hedging activities, see Notes to Consolidated Financial Statements, Note 5 Derivative Financial Instruments .
Foreign Exchange Risk Management
For a discussion of foreign exchange risk management, see Notes to Consolidated Financial Statements, Note 5 Derivative Financial Instruments (Cash-Flow Hedges) .
Credit Risk
For a discussion of credit risk, see Notes to Consolidated Financial Statements, Note 5 Derivative Financial Instruments (Credit Risk) .
Market Risk
We address certain financial exposures through a controlled program of market risk management that includes the use of foreign currency forward contracts to reduce the effects of fluctuating foreign currency exchange rates and to mitigate the change in fair value of specific assets and liabilities on the balance sheet. To perform a sensitivity analysis of our foreign currency forward contracts, we assess the change in fair values from the impact of hypothetical changes in foreign currency exchange rates. A hypothetical 10% strengthening of the U.S. dollar against the foreign exchange rates for the currencies in our portfolio would have resulted in a net decrease in the fair value of our portfolio of approximately $59 million and $26 million as of September 30, 2017 and June 30, 2017, respectively. This potential change does not consider our underlying foreign currency exposures.
In addition, we enter into interest rate derivatives to manage the effects of interest rate movements on our aggregate liability portfolio, including future debt issuances. Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would decrease by $31 million and $34 million as of September 30, 2017 and June 30, 2017, respectively.
THE ESTÉE LAUDER COMPANIES INC.
Our sensitivity analysis represents an estimate of reasonably possible net losses that would be recognized on our portfolio of derivative financial instruments assuming hypothetical movements in future market rates and is not necessarily indicative of actual results, which may or may not occur. It does not represent the maximum possible loss or any expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in our portfolio of derivative financial instruments during the year. We believe, however, that any such loss incurred would be offset by the effects of market rate movements on the respective underlying transactions for which the derivative financial instrument was intended.
OFF-BALANCE SHEET ARRANGEMENTS
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities, other than operating leases, that would be expected to have a material current or future effect upon our financial condition or results of operations.
CRITICAL ACCOUNTING POLICIES
As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates and assumptions. Our most critical accounting policies relate to revenue recognition, inventory, pension and other post-retirement benefit costs, goodwill, other intangible assets and long-lived assets, and income taxes. Since June 30, 2017, there have been no significant changes to the assumptions and estimates related to our critical accounting policies.
RECENTLY ISSUED ACCOUNTING STANDARDS
For a discussion regarding the impact of accounting standards that were recently issued but not yet effective, on the Companys consolidated financial statements, see Notes to Consolidated Financial Statements, Note 1 Summary of Significant Accounting Policies .
CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION
We and our representatives from time to time make written or oral forward-looking statements, including statements contained in this and other filings with the Securities and Exchange Commission, in our press releases and in our reports to stockholders. The words and phrases will likely result, expect, believe, planned, may, should, could, anticipate, estimate, project, intend, forecast or similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include our expectations regarding sales, earnings or other future financial performance and liquidity, product introductions, entry into new geographic regions, information systems initiatives, new methods of sale, our long-term strategy, restructuring and other charges and resulting cost savings, and future operations or operating results. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, actual results may differ materially from our expectations. Factors that could cause actual results to differ from expectations include, without limitation:
(1) increased competitive activity from companies in the skin care, makeup, fragrance and hair care businesses;
(2) our ability to develop, produce and market new products on which future operating results may depend and to successfully address challenges in our business;
(3) consolidations, restructurings, bankruptcies and reorganizations in the retail industry causing a decrease in the number of stores that sell our products, an increase in the ownership concentration within the retail industry, ownership of retailers by our competitors or ownership of competitors by our customers that are retailers and our inability to collect receivables;
(4) destocking and tighter working capital management by retailers;
THE ESTÉE LAUDER COMPANIES INC.
(5) the success, or changes in timing or scope, of new product launches and the success, or changes in the timing or the scope, of advertising, sampling and merchandising programs;
(6) shifts in the preferences of consumers as to where and how they shop;
(7) social, political and economic risks to our foreign or domestic manufacturing, distribution and retail operations, including changes in foreign investment and trade policies and regulations of the host countries and of the United States;
(8) changes in the laws, regulations and policies (including the interpretations and enforcement thereof) that affect, or will affect, our business, including those relating to our products or distribution networks, changes in accounting standards, tax laws and regulations, environmental or climate change laws, regulations or accords, trade rules and customs regulations, and the outcome and expense of legal or regulatory proceedings, and any action we may take as a result;
(9) foreign currency fluctuations affecting our results of operations and the value of our foreign assets, the relative prices at which we and our foreign competitors sell products in the same markets and our operating and manufacturing costs outside of the United States;
(10) changes in global or local conditions, including those due to the volatility in the global credit and equity markets, natural or man-made disasters, real or perceived epidemics, or energy costs, that could affect consumer purchasing, the willingness or ability of consumers to travel and/or purchase our products while traveling, the financial strength of our customers, suppliers or other contract counterparties, our operations, the cost and availability of capital which we may need for new equipment, facilities or acquisitions, the returns that we are able to generate on our pension assets and the resulting impact on funding obligations, the cost and availability of raw materials and the assumptions underlying our critical accounting estimates;
(11) shipment delays, commodity pricing, depletion of inventory and increased production costs resulting from disruptions of operations at any of the facilities that manufacture nearly all of our supply of a particular type of product (i.e. focus factories) or at our distribution or inventory centers, including disruptions that may be caused by the implementation of information technology initiatives, or by restructurings;
(12) real estate rates and availability, which may affect our ability to increase or maintain the number of retail locations at which we sell our products and the costs associated with our other facilities;
(13) changes in product mix to products which are less profitable;
(14) our ability to acquire, develop or implement new information and distribution technologies and initiatives on a timely basis and within our cost estimates and our ability to maintain continuous operations of such systems and the security of data and other information that may be stored in such systems or other systems or media;
(15) our ability to capitalize on opportunities for improved efficiency, such as publicly-announced strategies and restructuring and cost-savings initiatives, and to integrate acquired businesses and realize value therefrom;
(16) consequences attributable to local or international conflicts around the world, as well as from any terrorist action, retaliation and the threat of further action or retaliation;
(17) the timing and impact of acquisitions, investments and divestitures; and
(18) additional factors as described in our filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
We assume no responsibility to update forward-looking statements made herein or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is set forth in Item 2 of this Quarterly Report on Form 10-Q under the caption Liquidity and Capital Resources - Market Risk and is incorporated herein by reference.
THE ESTÉE LAUDER COMPANIES INC.
Item 4. Controls and Procedures.
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of September 30, 2017 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the first quarter of fiscal 2018 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
For a discussion of legal proceedings, see Notes to Consolidated Financial Statements, Note 8 Contingencies .
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Share Repurchase Program
We are authorized by the Board of Directors to repurchase shares of our Class A Common Stock in the open market or in privately negotiated transactions, depending on market conditions and other factors. The following table provides information relating to our repurchase of Class A Common Stock during the referenced periods:
Period |
|
Total Number of
|
|
Average Price
|
|
Total Number of
|
|
Maximum
|
|
|
July 2017 |
|
265,000 |
|
$ |
96.04 |
|
265,000 |
|
14,186,913 |
|
August 2017 |
|
285,450 |
|
101.93 |
|
268,554 |
|
13,918,359 |
|
|
September 2017 |
|
526,550 |
|
108.19 |
|
423,544 |
|
13,494,815 |
|
|
|
|
1,077,000 |
|
103.54 |
|
957,098 |
|
|
|
|
(1) Includes shares that were repurchased by the Company to satisfy tax withholding obligations upon the payout of certain stock-based compensation arrangements.
(2) The current repurchase program for up to 40.0 million shares was authorized by the Board of Directors on November 1, 2012. Our repurchase program does not have an expiration date.
Subsequent to September 30, 2017 and as of October 25, 2017, we purchased approximately 0.4 million additional shares of our Class A Common Stock for $41 million pursuant to our share repurchase program.
THE ESTÉE LAUDER COMPANIES INC.
Exhibit
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Description |
10.1 |
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10.2 |
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Summary of Compensation for Non-Employee Directors of the Company (SEC File No. 1-14064). |
10.3 |
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10.4 |
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10.5 |
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10.6 |
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10.7 |
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10.8 |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
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XBRL Instance Document |
101.SCH |
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XBRL Taxonomy Extension Schema Document |
101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document |
* Incorporated herein by reference.
Exhibit is a management contract or compensatory plan or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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THE ESTÉE LAUDER COMPANIES INC. |
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Date: November 1, 2017 |
By: |
/s/TRACEY T. TRAVIS |
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Tracey T. Travis |
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Executive Vice President and Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
THE ESTÉE LAUDER COMPANIES INC.
AMENDED AND RESTATED
NON-EMPLOYEE DIRECTOR SHARE INCENTIVE PLAN
(as of November 1, 2017)
1. Purpose. The Estée Lauder Companies Inc. Non- Employee Director Share Incentive Plan (the Plan) is intended (i) to provide incentives which will attract, retain and motivate highly competent persons as non-employee directors of The Estée Lauder Companies Inc. (the Company), and (ii) to assist in further aligning the interests of the Companys non-employee directors with those of its other stockholders, by providing non-employee directors with opportunities to acquire shares of the Class A Common Stock, par value $0.01 per share, of the Company (Class A Common Stock) or to receive monetary payments based on the value of such shares pursuant to the Benefits (as defined below) described herein.
2. Administration. The Plan will be administered by the Board of Directors of the Company (the Board) or a committee appointed by the Board from among its members (and references herein to the Board shall be deemed to include references to any such committee, except as the context otherwise requires). The Board is authorized, subject to the provisions of the Plan, to establish such rules and regulations as it deems necessary for the proper administration of the Plan and to make such determinations and interpretations and to take such action in connection with the Plan and any Benefits (as defined below) granted hereunder as it deems necessary or advisable. All determinations and interpretations made by the Board shall be binding and conclusive on all participants and their legal representatives.
The Board may employ such legal or other counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion or computation received from any such counsel, consultant or agent. Expenses incurred by the Board in the engagement of such counsel, consultant or agent shall be paid by the Company.
3. Participants. Each member of the Board who is not an employee of the Company or any subsidiary of the Company (a Non-Employee Director) shall be eligible to participate in the Plan.
4. Type of Benefits. Benefits under the Plan shall be granted in a combination of (a) Stock Options, (b) Stock Awards and/or (c) Stock Units (each as described below, and collectively, the Benefits). Benefits may be evidenced by agreements (which need not be identical) in such forms as the Board may from time to time approve (each a Benefit Agreement); provided, however, that in the event of any conflict between the provisions of the Plan and any such Benefit Agreements, the provisions of the Plan shall prevail.
5. Common Stock Available Under The Plan.
(a) Subject to the provisions of this Section 5 and any adjustments made in accordance with Section 9 hereof, the maximum number of shares of Class A Common Stock that may be delivered to Non-Employee Directors and their beneficiaries under the Plan shall be 1,800,000 shares of Class A Common Stock, which may be authorized and unissued or treasury shares. Any shares of Class A Common Stock covered by a Stock Option or Stock Unit granted under the Plan, which is forfeited, is canceled, or expires, shall be deemed not to have been delivered for purposes of determining the maximum number of shares of Class A Common Stock available for delivery under the Plan.
(b) If any Stock Option is exercised by tendering shares of Class A Common Stock, either actually or by attestation, to the Company as full or partial payment in connection with the exercise of a Stock Option under the Plan, only the number of shares of Class A Common Stock issued net of the shares of Class A Common Stock tendered shall be deemed delivered for purposes of determining the maximum number of shares of Class A Common Stock available for delivery under the Plan.
6. Annual Stock Options.
(a) Grant. On the date of each Annual Meeting of Stockholders of the Company during the term of the Plan, each Non-Employee Director in office immediately following such Annual Meeting shall be granted automatically a Stock Option to purchase that number of whole shares of Class A Common Stock such that the value, as determined in accordance with procedures generally utilized by the Company for its financial reporting at the time of the grant, does not exceed such dollar amount determined from time to time by the Board; provided that in no event shall the grant to each Non-Employee Director exceed 10,000 shares of Class A Common Stock (subject to adjustments made in accordance with Section 9 hereof). Stock Options are not intended to constitute incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the Code).
(b) Exercise Price. Each Stock Option granted hereunder shall have a per-share exercise price equal to the Fair Market Value (as defined herein) of a share of Class A Common Stock on the date of grant (subject to adjustments made in accordance with Section 9 hereof).
(c) Payment of Exercise Price. The option exercise price may be paid in cash or, in the discretion of the Board, by the delivery of shares of Class A Common Stock then owned by the Non-Employee Director (to be valued at their Fair Market Value on the date of exercise), by the withholding of shares of Class A Common Stock for which a Stock Option is exercisable, or by a combination of these methods. In the discretion of the Board, payment may also be made by delivering a properly executed exercise notice to the Company together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the exercise price. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. The Board may prescribe any other method of paying the exercise price that it determines to be consistent with applicable law and the purpose of the Plan, including, without limitation, in lieu of the exercise of a Stock Option by delivery of shares of Class A Common Stock then owned by a Non-Employee Director, providing the Company with a notarized statement attesting to the number of shares owned, in which case upon verification by the Company, the Company would issue to the Non- Employee Director only the number of incremental shares to which the Non- Employee Director is entitled upon exercise of the Stock Option. In determining which methods a Non-Employee Director may utilize to pay the exercise price, the Board may consider such factors as it determines are appropriate.
(d) Exercise Period.
(i) General. Each Stock Option granted to a Non-Employee Director hereunder shall become exercisable beginning on the first anniversary of the date of grant, provided that the Non-Employee Director continues to serve as a director of the Company on such anniversary date; provided, however, any such Stock Option granted to a Non-Employee Director shall become immediately exercisable in the event of (A) a Change in Control of the Company (as defined in Section 9(b) hereof), subject to Section 9(b) hereof or (B) the death of the Non-Employee Director. Each Stock Option shall terminate on the tenth anniversary of the date of grant unless terminated earlier pursuant to the Plan or, for Stock Options granted before April 10, 2007, later pursuant to Section 6(d)(iii) hereof. If a Non-Employee Director ceases to serve as a director of the Company for any reason other than as a result of a Change in Control or his or her death, each Stock Option granted to such person less than one year prior to cessation of service shall immediately terminate and become null and void upon such cessation of service.
(ii) Termination of Directorship . If a Non-Employee Director ceases to serve as a director of the Company, any exercisable outstanding Stock Option previously granted to such Non-Employee Director shall, to the extent not theretofore exercised, remain exercisable at any time up to and including a date that is five years after the date of such cessation of service, except, for Stock Options granted before April 10, 2007, as set forth in Section 6(d)(iii) hereof, at which time such Stock Option shall terminate and become null and void; provided, however, that no Stock Option shall be exercisable later than ten years after the date of grant (except, for Stock Options granted before April 10, 2007, as set forth in Section 6(d)(iii) hereof); provided, further, however, if the service of a Non-Employee Director ceases by reason other than (A) death, (B) disability (as described in Section 22(e)(3) of the Code), (C) voluntary retirement from service as a director of the Company, or (D) the failure of the Company to nominate for re-election such Non- Employee Director who is otherwise eligible, unless such failure to nominate for re-election is due to any act of (1) fraud or intentional misrepresentation or (2) embezzlement, misappropriation or conversion of assets or opportunities of the Company or any subsidiary, in which case such Stock Option shall immediately terminate and become null and void.
(iii) Extension of Term. The term of exercise of any outstanding Stock Options granted prior to April 10, 2007 that have a remaining term of less than one year on the date of a Non-Employee Directors death shall automatically be extended to the first anniversary of the date of death.
(e) Post-Directorship Exercises. The exercise of any Stock Option after a Non-Employee Director ceases to serve as a director shall be subject to satisfaction of the conditions precedent that the former Non- Employee Director neither (i) competes with, or takes employment with or renders services to a competitor of, the Company, its subsidiaries or affiliates without the written consent of the Company, nor (ii) conducts himself or herself in a manner adversely affecting the Company. If a Stock Option shall be exercised by the legal or personal representative of a deceased Non-Employee Director or former Non-Employee Director, or by a person who acquired a Stock Option granted hereunder by bequest or inheritance or by reason of the death of any Non-Employee Director or former Non-Employee Director, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such legal representative or other person to exercise such Stock Option.
7. Stock Awards for New Non-Employee Directors. On the date of the first Annual Meeting of Stockholders of the Company which is at least six months after the date a Non-Employee Director is first elected to the Board, such Non-Employee Director (provided that he or she is in office immediately following the Annual Meeting) shall be granted automatically 2,000 shares of Class A Common Stock (subject to adjustments made in accordance with Section 9 hereof), without restrictions, accompanied by an amount in cash for reimbursement of income taxes related to such grant and cash reimbursement payment.
8. Annual Stock Units.
(a) On the date of each Annual Meeting of Stockholders of the Company during the term of the Plan, each Non-Employee Director in office immediately following such Annual Meeting shall be granted automatically that number of Stock Units obtained by dividing (i) a dollar amount determined from time to time by the Board by (ii) the average closing price of the Class A Common Stock for the twenty days on which trading occurred immediately preceding the date of grant of the Stock Units. Each grant of a Stock Unit shall be accompanied by a Dividend Equivalent Right (as defined below) with respect to such Stock Unit.
(b) On the first business day of the calendar year following the year in which a Non-Employee Director ceases to serve as a director, the shares of Class A Common Stock representing the Stock Units granted to the Non- Employee Director shall be distributed to him or her or, in the case of his or her death, to his or her legal or personal representative.
(c) The Board may, in its discretion, allow a Non-Employee Director to defer receipt of shares of Class A Common Stock in a manner which complies with Section 409A of the Internal Revenue Code of 1986, as amended.
(d) A Stock Unit means a notional account representing one share of Class A Common Stock. A Dividend Equivalent Right means the right to receive the amount of any dividend paid on the share of Class A Common Stock represented by a Stock Unit, which shall be payable in the form of additional Stock Units. Additional Stock Units paid in respect of Dividend Equivalent Rights shall be subject to the same terms and conditions as the Stock Units with which the Dividend Equivalent Rights are associated.
(e) Notwithstanding the foregoing, in no event shall a Non-Employee Director be granted Stock Units (including Dividend Equivalent Rights), as the case may be, pursuant to this Section 8 for greater than 10,000 shares of Class A Common Stock (subject to amendment from time to time by the Board, and to adjustments made in accordance with Section 9 hereof) in any calendar year.
9. Adjustment Provisions; Change in Control.
(a) If there shall be any change in the Class A Common Stock, through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, reverse stock split, split up, spin-off, combination of shares, exchange of shares, dividend in kind or other like change in capital structure or distribution (other than normal cash dividends) to stockholders of the Company, the Board shall adjust, in a fair and equitable manner, the Plan and each outstanding Benefit thereunder, to prevent dilution or enlargement of participants rights under the Plan, and such an adjustment shall be made successively each time any such change shall occur. Such adjustment shall be effected by one or more of the following, as applicable, as determined by the Board of Directors: (i) adjustment of the number of Class A Common Stock and/or kind of shares of common stock of the Company or other securities that may be issued under the Plan, adjustment of the number of Class A Common Stock and/or kind of shares of common stock of the Company or other securities that are subject to outstanding Benefits, and/or where applicable, the exercise price or purchase price applicable to such Benefits; (ii) grant of a right to receive one or more payments of securities, cash and/or property (which right may be evidenced as an additional Benefit under this Plan) in respect of any outstanding Benefit, (iii) provision for the settlement of any outstanding Benefit (other than a Stock Option) in such securities, cash and/or other property as would have been received had the Benefit been settled in full immediately prior to the change; provided, however, that any adjustment pursuant to this Section 9 shall comply with or otherwise ensure exemption from Section 409A of the Code, as applicable.
(b) Notwithstanding any other provision of this Plan, if there is a Change in Control of the Company, all then outstanding Stock Options shall immediately become exercisable and all outstanding Stock Units shall immediately become payable. For purposes of this Section 9(b), a Change in Control of the Company shall be deemed to have occurred upon any of the following events:
(i) On or after the date there are no shares of Class B Common Stock, par value $.01 per share, of the Company outstanding, any person as such term is used in Section 13(d) of the Exchange Act or person(s) acting together which would constitute a group for purposes of Section 13(d) of the Exchange Act (other than the Company, any subsidiary, any employee benefit plan sponsored by the Company or any member of the Lauder family or any family-controlled entities (collectively, the Lauder Family)) shall acquire (or shall have acquired during the 12-month period ending on the date of the most recent acquisition by such person(s)) and shall beneficially own (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, at least 30% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of the Board; or
(ii) During any period of twelve consecutive months, either (A) the individuals who at the beginning of such period constitute the Board of Directors or any individuals who would be Continuing Directors (as hereinafter defined) cease for any reason to constitute at least a majority thereof or (B) at any meeting of the shareholders of the Company called for the purpose of electing directors, a majority of the persons nominated by the Board for election as directors shall fail to be elected; or
(iii) Consummation of a sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company; or
(iv) Consummation of a merger or consolidation of the Company (A) in which the Company is not the continuing or surviving corporation (other than a consolidation or merger with a wholly-owned subsidiary of the Company in which all shares of the Companys common stock outstanding immediately prior to the effectiveness thereof are changed into or exchanged for common stock of the subsidiary) or (B) pursuant to which all shares of the Companys common stock are converted into cash, securities or other property, except in either case, a consolidation or merger of the Company in which the holders of the shares of Common Stock immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the shares of Common Stock of the continuing or surviving corporation immediately after such consolidation or merger or in which the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation.
Notwithstanding the foregoing, none of the following shall constitute a Change in Control of the Company: (A) changes in the relative beneficial ownership among members of the Lauder Family, without other changes that would constitute a Change in Control; or (B) any spin-off of a division or subsidiary of the Company to its stockholders.
For purposes of this Section 9(b), Continuing Directors shall mean (x) the directors of the Company in office on the Effective Date (as defined below) and (y) any successor to any such director and any additional director who after the Effective Date whose appointment or election is endorsed by a majority of the Continuing Directors at the time of his or her nomination or election.
The Board, in its discretion, may determine that, upon the occurrence of a Change in Control of the Company, each Stock Option outstanding hereunder shall terminate within a specified number of days after notice to the holder, and such holder shall receive, with respect to each share of Class A Common Stock subject to such Stock Option, an amount equal to the excess of the Fair Market Value of such shares of Class A Common Stock immediately prior to the occurrence of such Change in Control over the exercise price per share of such Stock Option; such amount to be payable in cash, in one or more kinds of property (including the property, if any, payable in the transaction constituting the Change in Control) or in a combination thereof, as the Board, in its discretion, shall determine. The provisions contained in the preceding sentence shall be inapplicable to a Stock Option granted within six (6) months before the occurrence of a Change in Control if the holder of such Stock Option is subject to the reporting requirements of Section 16(a) of the Exchange Act and no exception from liability under Section 16(b) of the Exchange Act is otherwise available to such holder.
10. Nontransferability. Stock Options and Stock Units granted under the Plan to a Non-Employee Director shall not be transferable otherwise than by will or the laws of descent and distribution, and shall be exercisable, during the Non-Employee Directors lifetime, only by the Non-Employee Director. In the event of the death of a Non-Employee Director, each Stock Option theretofore granted to him or her shall be exercisable during such period after his or her death and by such persons as set forth in Section 6 above. Notwithstanding the foregoing, at the discretion of the Board, an award of a Stock Option or Stock Unit may permit the transferability of any such Stock Option or Stock Unit by a Non-Employee Director solely to the Non-Employee Directors spouse, siblings, parents, children and/or grandchildren, or to trusts for the benefit of such persons, or to partnerships, corporations, limited liability companies or other entities owned solely by such persons, including trusts for such persons, subject to any restriction included in the award of the Stock Option or Stock Unit.
11. Other Awards and Provisions. The award of any Benefit under the Plan may also be subject to such other provisions (whether or not applicable to the Benefit awarded to any other Non-Employee Director) as the Board determines appropriate. The Board also may make any other awards to Non- Employee Directors as are consistent with the purposes of this Plan with such terms and conditions as the Board may determine in its sole discretion.
12. Issuance of Stock Certificates and Related Matters. The Company may endorse such legend or legends upon the certificates or book entries for shares of Class A Common Stock issued under this Plan and may issue such stop transfer instructions to its transfer agent in respect of such shares as the Board, in its sole discretion, determines to be necessary or appropriate to (i) prevent a violation of, or to perfect an exemption from the registration requirements of the Securities Act of 1933, as amended (the Securities Act) or (ii) implement the provisions of the Plan and any agreement between the Company and the Non-Employee Director. Notwithstanding any other provision of the Plan, the Company shall have no obligation to deliver any shares of Class A Common Stock under the Plan or make any other distribution of Benefits under the Plan unless such delivery or distribution would comply with all applicable laws (including, without limitation the Securities Act), and the applicable requirements of any securities exchange or similar entity.
13. Fair Market Value. For purposes of this Plan and any Benefits awarded hereunder, Fair Market Value shall be the closing price of the Class A Common Stock on the date of calculation (or on the last preceding trading date if Class A Common Stock was not traded on such date) if the Class A Common Stock is readily tradable on a national securities exchange or other market system, and if the Class A Common Stock is not readily tradable, Fair Market Value shall mean the amount determined in good faith by the Board as the fair market value of the Class A Common Stock.
14. Tenure. A Non-Employee Directors right, if any, to continue to serve as a director of the Company or any of its subsidiaries or affiliates shall not be enlarged or otherwise affected by his or her designation as a participant under this Plan.
15. Unfunded Plan. Non-Employee Directors shall have no right, title, or interest whatsoever in or to any investments that the Company may make to aid it in meeting its obligations under the Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Non-Employee Director, beneficiary, legal representative or any other person. To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company, and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as expressly set forth in the Plan. The Plan is not intended to be subject to the Employee Retirement Income Security Act of 1974, as amended.
16. No Fractional Shares. No fractional shares of Class A Common Stock shall be issued or delivered pursuant to the Plan. The Board shall determine whether cash or other property shall be issued or paid in lieu of fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
17. Amendment and Termination. The Board may amend the Plan from time to time or suspend or terminate the Plan at any time. However, no amendment shall have a material adverse effect on an outstanding Stock Option or Stock Unit without the consent of the holder. No amendment of the Plan may be made without approval of the stockholders of the Company if required by applicable law or by any listing agreement to which the Company is a party with a national securities exchange or other market system.
18. Compliance with Section 409A of the Code and Section 457A of the Code.
(a) General. The Company intends that any Benefits be structured in compliance with, or to satisfy an exemption from, Section 409A of the Code and all regulations, guidance, compliance programs and other interpretative authority thereunder (Section 409A), such that there are no adverse tax consequences, interest, or penalties pursuant to Section 409A as a result of the Benefits. Notwithstanding the Companys intention, in the event any Benefit is subject to Section 409A, the Committee may, in its sole discretion and without a participants prior consent, amend the Plan and/or outstanding Benefits, adopt policies and procedures, or take any other actions (including amendments, policies, procedures and actions with retroactive effect) as are necessary or appropriate to (i) exempt the Plan and/or any Benefit from the application of Section 409A, (ii) preserve the intended tax treatment of any such Benefit, or (iii) comply with the requirements of Section 409A, including without limitation any such regulations guidance, compliance programs and other interpretative authority that may be issued after the date of grant of a Benefit. This Plan shall be interpreted at all times in such a manner that the terms and provisions of the Plan and Benefits are exempt from or comply with Section 409A.
(b) Separation from Service. A termination of service as a member of the Board shall not be deemed to have occurred for purposes of any provision of the Plan or any Benefit Agreement providing for the payment of any amounts or benefits that are considered nonqualified deferred compensation (within the meaning of Section 409A) under Section 409A upon or following a termination of service as a member of the Board, unless such termination is also a separation from service within the meaning of Section 409A and the payment thereof prior to a separation from service would violate Section 409A. For purposes of any such provision of the Plan or any Benefit Agreement relating to any such payments or benefits, references to a termination, ceasing to serve, termination of continuous service or like terms shall mean separation from service. Notwithstanding any contrary provision in the Plan or any Benefit Agreement, if any participant in the Plan subsequently commences employment with the Company or its subsidiaries and is deemed a specified employee (as defined under Section 409A) at the time of his or her separation from service, any payment(s) of nonqualified deferred compensation that are otherwise required to be made under the Plan to such a participant as a result of his or her separation from service (other than a payment that is not subject to Section 409A) shall be delayed for the first six (6) months following such separation from service and shall instead be paid (in a manner set forth in the Benefit Agreement, if any) on the payment date that immediately follows the end of such six-month period (or, if earlier, within 10 business days following the date of death of such participant) or as soon as administratively practicable within 90 days thereafter, but in no event later than the end of the applicable taxable year.
(c) Section 457A. The Company intends that any Benefits be structured in compliance with, or to satisfy an exemption from, Section 457A of the Code and all regulations, guidance, compliance programs and other interpretative authority thereunder (Section 457A), such that there are no adverse tax consequences, interest, or penalties as a result of the Benefits and Section 457A. Notwithstanding the Companys intention, in the event any Benefit is subject to Section 457A, the Committee may, in its sole discretion and without a participants prior consent, amend the Plan and/or Benefits, adopt policies and procedures, or take any other actions (including amendments, policies, procedures and actions with retroactive effect) as are necessary or appropriate to (i) exempt the Plan and/or any Benefit from the application of Section 457A, (ii) preserve the intended tax treatment of any such Benefit, or (iii) comply with the requirements of Section 457A, including without limitation any such regulations, guidance, compliance programs and other interpretative authority that may be issued after the date of the grant.
(d) No Guarantee. Nothing in this Plan shall be a guarantee of any particular tax treatment.
19. Governing Law. This Plan, Benefits granted hereunder and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of New York (regardless of the law that might otherwise govern under applicable New York principles of conflict of laws).
20. Effective Date. The Plan was originally effective as of November 9, 2000 (the Effective Date). The Plan was amended and restated effective November 9, 2007, amended effective July 14, 2011, and amended and restated as of November 12, 2015.
Summary of Compensation for Non-Employee Directors of the Company
The following summary describes compensation for non-employee directors.
Annual Cash Retainer for Board Service. Effective November 2017, each non-employee director receives an annual cash retainer of $100,000, payable quarterly in advance, which may be deferred, as explained below.
Annual Cash Retainer for Presiding Director. Effective November 2017, the Presiding Director will receive an additional annual cash retainer of $30,000, payable annually in advance, which may be deferred, as explained below.
Annual Cash Retainer for Committee Service. Each non-employee director who serves on a committee receives an additional annual cash retainer, payable quarterly, in the following amounts: $12,000 per year for service on the Audit Committee, $8,000 per year for service on the Compensation Committee (including service on the Stock Plan Subcommittee), and $8,000 per year for service on the Nominating and Board Affairs Committee. The Chair of the Audit Committee receives a further annual cash retainer of $25,000. The Chairs of the Compensation Committee and the Nominating and Board Affairs Committee receive a further annual cash retainer of $15,000 each. These cash retainers for committee service may be deferred, as explained below.
Deferral of Annual Cash Retainers. Non-employee directors may elect to defer receipt of all or part of their cash-based compensation. Specifically, pursuant to Deferred Compensation Agreements, they may defer any or all of the above-referenced annual cash retainers into either (i) stock units (accompanied by dividend equivalent rights) or (ii) an interest-bearing cash account, in each case to be paid out in a lump sum in cash as of the first business day of the calendar year following the date on which the director ceases to be a member of the Board.
Initial Stock Grant. On the date of the first annual meeting of stockholders that is more than six months after a non-employee directors initial election to the Board, the director receives a grant of shares of Class A Common Stock (plus a cash payment in an amount to cover related income taxes), pursuant to the Amended and Restated Non-Employee Director Share Incentive Plan (the Director Share Plan). Effective November 2017, the amount of this initial stock grant is 2,000 shares of Class A Common Stock.
Annual Stock Units Retainer for Board Service. An additional $75,000 is payable to each non-employee director by a grant of stock units (accompanied by dividend equivalent rights) as an annual stock retainer, pursuant to the Director Share Plan. This grant is made on the date of each annual meeting of stockholders. The number of stock units to be awarded is determined by dividing $75,000 by the average closing price of the Class A Common Stock on the twenty trading days next preceding the date of grant. Each stock unit is convertible into one share of Class A Common Stock, and the Class A Common Stock represented by the stock units is distributed to the director on or after the first business day of the calendar year following the one in which the director ceases to be a member of the Board.
Annual Stock Options. In addition to the cash and stock portion of the retainer, each non-employee director receives an annual grant of options valued at no more than $100,000 on the date of grant, pursuant to the Non-Employee Director Share Plan. This grant is made on the date of each annual meeting of stockholders. The exercise price of the options is equal to the closing price of the Class A Common Stock on the date of grant. The options vest and are exercisable one year after the date of grant, provided that the director continues to serve as of such date.
Company Products. The Company provides directors with certain Company products from different brands and product categories. The Company believes that providing these products serves a business purpose by expanding the directors knowledge of the Companys business. The Company also provides each non-employee director with the opportunity to purchase up to $1,280 worth of the Companys products each calendar year (based on suggested retail prices) at no charge; if a director chooses to take advantage of this opportunity and purchase more than $640 worth of the Companys products, the excess is imputed as taxable income to the director. Non-employee directors may also purchase Company products at a price equal to 50% off the suggested retail price, which is the same discount made available to officers and other employees of the Company.
Reimbursement of Expenses. Non-employee directors are reimbursed for their reasonable expenses (including costs of travel, food, and lodging), incurred in attending Board, committee and stockholder meetings. Directors are also reimbursed for any other reasonable expenses relating to their service on the Board, including participating in director continuing education and Company site visits.
Certification
I, Fabrizio Freda certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of The Estée Lauder Companies Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 1, 2017 |
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/s/ FABRIZIO FREDA |
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Fabrizio Freda |
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President and Chief Executive Officer |
Certification
I, Tracey T. Travis certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of The Estée Lauder Companies Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 1, 2017 |
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/s/ TRACEY T. TRAVIS |
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Tracey T. Travis |
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Executive Vice President and Chief Financial Officer |
Certification
Pursuant to Rule 13a-14(b) or
Rule 15d-14(b) and 18 U.S.C. Section 1350
(as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002)
Pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), the undersigned officer of The Estée Lauder Companies Inc., a Delaware corporation (the Company), does hereby certify, to such officers knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 (the 10-Q) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m or 78o(d)), and the information contained in the 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 1, 2017 |
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/s/ FABRIZIO FREDA |
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Fabrizio Freda |
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President and Chief Executive Officer |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) and for no other purpose.
Certification
Pursuant to Rule 13a-14(b) or
Rule 15d-14(b) and 18 U.S.C. Section 1350
(as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002)
Pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), the undersigned officer of The Estée Lauder Companies Inc., a Delaware corporation (the Company), does hereby certify, to such officers knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 (the 10-Q) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m or 78o(d)), and the information contained in the 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 1, 2017 |
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/s/ TRACEY T. TRAVIS |
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Tracey T. Travis |
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Executive Vice President and Chief Financial Officer |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) and for no other purpose.