Estée Lauder(EL) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the company Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including earnings, comprehensive income, balance sheets, and cash flows, along with detailed notes on accounting policies and other financial disclosures Consolidated Statements of Earnings (Loss) This section presents the unaudited consolidated statements of earnings (loss) for the specified periods Three Months Ended December 31: | Metric | 2024 (Millions) | 2023 (Millions) | Change (YoY) | | :----- | :-------------- | :-------------- | :----------- | | Net sales | $4,004 | $4,279 | (6.42)% | | Gross profit | $3,047 | $3,125 | (2.50)% | | Operating income (loss) | $(580) | $574 | (201.05)% | | Net earnings (loss) attributable to The Estée Lauder Companies Inc. | $(590) | $313 | (288.18)% | | Diluted EPS | $(1.64) | $0.87 | (288.51)% | Six Months Ended December 31: | Metric | 2024 (Millions) | 2023 (Millions) | Change (YoY) | | :----- | :-------------- | :-------------- | :----------- | | Net sales | $7,365 | $7,797 | (5.54)% | | Gross profit | $5,480 | $5,573 | (1.67)% | | Operating income (loss) | $(701) | $672 | (204.32)% | | Net earnings (loss) attributable to The Estée Lauder Companies Inc. | $(746) | $344 | (317.44)% | | Diluted EPS | $(2.07) | $0.95 | (317.89)% | Consolidated Statements of Comprehensive Income (Loss) This section presents the unaudited consolidated statements of comprehensive income (loss) for the specified periods Three Months Ended December 31: | Metric | 2024 (Millions) | 2023 (Millions) | Change (YoY) | | :----- | :-------------- | :-------------- | :----------- | | Net earnings (loss) | $(590) | $324 | (282.72)% | | Total other comprehensive income (loss), net of tax | $(284) | $220 | (229.09)% | | Comprehensive income (loss) attributable to The Estée Lauder Companies Inc. | $(874) | $520 | (268.08)% | Six Months Ended December 31: | Metric | 2024 (Millions) | 2023 (Millions) | Change (YoY) | | :----- | :-------------- | :-------------- | :----------- | | Net earnings (loss) | $(746) | $360 | (307.22)% | | Total other comprehensive income (loss), net of tax | $(201) | $80 | (351.25)% | | Comprehensive income (loss) attributable to The Estée Lauder Companies Inc. | $(947) | $422 | (324.41)% | Consolidated Balance Sheets This section presents the unaudited consolidated balance sheets as of the specified dates Balance Sheet Highlights: | Metric | December 31, 2024 (Millions) | June 30, 2024 (Millions) | Change | | :-------------------------------- | :----------------------------- | :--------------------------- | :------- | | Cash and cash equivalents | $2,586 | $3,395 | $(809) | | Total current assets | $6,896 | $7,922 | $(1,026) | | Total assets | $19,760 | $21,677 | $(1,917) | | Total current liabilities | $5,031 | $5,702 | $(671) | | Total liabilities | $15,591 | $16,363 | $(772) | | Total equity | $4,169 | $5,314 | $(1,145) | Consolidated Statements of Cash Flows This section presents the unaudited consolidated statements of cash flows for the specified periods Six Months Ended December 31: | Metric | 2024 (Millions) | 2023 (Millions) | Change (YoY) | | :-------------------------------- | :-------------- | :-------------- | :----------- | | Net cash flows provided by operating activities | $387 | $937 | (58.69)% | | Net cash flows used for investing activities | $(294) | $(557) | 47.22)% | | Net cash flows used for financing activities | $(878) | $(489) | (79.55)% | | Net decrease in Cash and cash equivalents | $(809) | $(90) | (798.89)% | Notes to Consolidated Financial Statements This section provides detailed notes supporting the consolidated financial statements, covering significant accounting policies and other financial disclosures NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section provides detailed notes on the company's significant accounting policies - Unrealized translation adjustments (net of tax) in OCI were $(323) million for the three months ended December 31, 2024 (vs $232 million in 2023) and $(208) million for the six months ended December 31, 2024 (vs $89 million in 2023) Net exchange gains on foreign currency transactions were $25 million and $44 million for the three and six months ended December 31, 2024, respectively[22][24] - The largest customer, primarily in China travel retail, accounted for 10% ($163 million) of accounts receivable at December 31, 2024, a decrease from 12% ($206 million) at June 30, 2024[27] Inventory and Promotional Merchandise (December 31, 2024 vs June 30, 2024): | Category | Dec 31, 2024 (Millions) | Jun 30, 2024 (Millions) | | :------- | :---------------------- | :---------------------- | | Raw materials | $625 | $696 | | Work in process | $246 | $308 | | Finished goods | $877 | $903 | | Promotional merchandise | $254 | $268 | | Total | $2,002 | $2,175 | - The effective tax rate decreased significantly to 9.2% (3 months) and 10.1% (6 months) for December 31, 2024, from 37.6% and 36.3% in prior-year periods, primarily due to discrete treatment of restructuring charges, goodwill/intangible asset impairment, and talcum litigation settlement agreements Unrecognized tax benefits increased to $139 million at December 31, 2024, due to a reserve accrual for Transition Tax payable reduction[32][33][36] - Outstanding obligations under supplier finance programs totaled $70 million at December 31, 2024, an increase from $58 million at June 30, 2024[41] - The company is currently evaluating the impact of recently issued FASB ASUs on Disaggregation of Income Statement Expenses, Segment Reporting, and Income Tax Disclosures, as well as the SEC Final Rule on Climate-Related Disclosures, on its consolidated financial statement disclosures[47][49][51][55] NOTE 2 – GOODWILL AND OTHER INTANGIBLE ASSETS This section details the company's goodwill and other intangible assets Goodwill by Product Category (December 31, 2024 vs June 30, 2024): | Category | Dec 31, 2024 (Millions) | Jun 30, 2024 (Millions) | | :------- | :---------------------- | :---------------------- | | Skin Care | $1,129 | $1,183 | | Makeup | $371 | $384 | | Fragrance | $221 | $223 | | Hair Care | $352 | $353 | | Total Goodwill | $2,073 | $2,143 | Other Intangible Assets (December 31, 2024 vs June 30, 2024): | Category | Dec 31, 2024 (Millions) | Jun 30, 2024 (Millions) | | :------- | :---------------------- | :---------------------- | | Amortizable intangible assets (net) | $956 | $1,076 | | Non-amortizable intangible assets (Trademarks) | $3,202 | $4,107 | | Total Other Intangible Assets, net | $4,158 | $5,183 | - During the fiscal 2025 second quarter, the company recorded total impairment charges of $861 million, including $773 million for the TOM FORD trademark (allocated across fragrance, makeup, and other product categories), $75 million for the Too Faced trademark, and $13 million for Too Faced goodwill These impairments were triggered by lower-than-expected growth in key geographic regions and channels, and increases in the weighted average cost of capital for both brands[63][64][66] NOTE 3 – CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES This section outlines charges related to restructuring and other significant activities - The company launched the Profit Recovery and Growth Plan (PRGP) on November 1, 2023, to rebuild profit margins in fiscal years 2025 and 2026 by improving gross margin, lowering the cost base, reducing overhead, and increasing investments in consumer-facing activities[67][68] - On February 3, 2025, the company committed to an expansion of the PRGP and its restructuring program, now estimating a net reduction of approximately 5,800 to 7,000 positions globally (9-11% of positions as of June 30, 2023)[72][76] - The expanded Restructuring Program is now expected to result in total charges between $1,200 million and $1,600 million (before taxes), with specific initiatives to be substantially completed by the end of fiscal 2027 Cumulative charges recorded through December 31, 2024, totaled $403 million[75][77][90] - Accrued restructuring charges of $301 million at December 31, 2024, are expected to result in cash expenditures of approximately $134 million for the remainder of fiscal 2025, $156 million for fiscal 2026, and $11 million for fiscal 2027[90] NOTE 4 – DERIVATIVE FINANCIAL INSTRUMENTS This section describes the company's derivative financial instruments and hedging activities - As of December 31, 2024, the company had derivative financial instruments with notional amounts totaling $3,443 million not designated as hedging instruments, $1,191 million for fair value hedges (interest rate and cross-currency swaps), $1,895 million for cash flow hedges (foreign currency forwards), and $1,401 million for net investment hedges[94][95][96][98][103] Fair Value of Derivative Financial Instruments (December 31, 2024): | Type | Asset Derivatives (Millions) | Liability Derivatives (Millions) | | :------------------------------ | :--------------------------- | :----------------------------- | | Foreign currency forward contracts | $118 | $52 | | Cross-currency swap contracts | $88 | $8 | | Interest rate contracts | $0 | $138 | | Total | $206 | $198 | - For the three months ended December 31, 2024, cash flow hedges recognized a $70 million gain in OCI, net investment hedges recognized an $88 million gain in OCI, and fair value hedges recognized a net gain of $9 million in earnings (loss) ($43 million gain from cross-currency swaps offset by $34 million loss from interest rate contracts)[109][111] NOTE 5 – FAIR VALUE MEASUREMENTS This section provides information on the fair value measurements of financial and nonfinancial assets and liabilities Financial Assets and Liabilities Measured at Fair Value (December 31, 2024): | Category | Level 1 (Millions) | Level 2 (Millions) | Level 3 (Millions) | Total (Millions) | | :------------------------------ | :----------------- | :----------------- | :----------------- | :--------------- | | Assets: | | | | | | Money market funds | $1,154 | — | — | $1,154 | | Foreign currency forward contracts | — | $118 | — | $118 | | Cross-currency swap contracts | — | $88 | — | $88 | | Total Assets | $1,154 | $206 | — | $1,360 | | Liabilities: | | | | | | Foreign currency forward contracts | — | $52 | — | $52 | | Interest rate contracts | — | $138 | — | $138 | | Cross-currency swap contracts | — | $8 | — | $8 | | Total Liabilities | — | $198 | — | $198 | - The fair value of the company's current and long-term debt was estimated at $6,636 million as of December 31, 2024, compared to a carrying amount of $7,280 million Nonfinancial assets measured at fair value on a nonrecurring basis, such as goodwill and indefinite-lived intangible assets, are classified as Level 3[124][133] NOTE 6 – REVENUE RECOGNITION This section outlines the company's policies and disclosures related to revenue recognition - Accounts receivable, net, totaled $1,611 million at December 31, 2024, after an allowance for doubtful accounts and customer deductions of $30 million Deferred revenue was $562 million at December 31, 2024, with $338 million expected to be recognized in the next twelve months[134][138][139] NOTE 7 – PENSION AND POST-RETIREMENT BENEFIT PLANS This section provides details on the company's pension and post-retirement benefit plans Net Periodic Benefit Cost (Six Months Ended December 31, 2024): | Component | U.S. Pension Plans (Millions) | International Pension Plans (Millions) | Post-retirement Plans (Millions) | | :---------------------- | :---------------------------- | :----------------------------------- | :------------------------------- | | Service cost | $18 | $14 | $0 | | Interest cost | $25 | $9 | $4 | | Expected return on plan assets | $(25) | $(13) | $0 | | Amortization of actuarial loss (gain) | $10 | $(3) | $0 | | Prior service cost | $0 | $0 | $(3) | | Special termination benefits | $0 | $1 | $0 | | Total Net Periodic Benefit Cost | $28 | $8 | $1 | - The funded status of the company's pension and post-retirement benefit plans was $(239) million at December 31, 2024[144] NOTE 8 – COMMITMENTS AND CONTINGENCIES This section outlines the company's significant commitments and potential contingencies - As of December 31, 2024, the company does not expect to incur material losses from securities class action and derivative matters In cosmetic talcum powder matters, 84 individual cases were pending, down from 273 at June 30, 2024[151][152] - The company recorded a $159 million charge in the fiscal 2025 first quarter for talcum litigation settlement agreements, resolving over 200 pending cases and establishing a process for future claims through 2029 As of December 31, 2024, $32 million is in Other accrued liabilities and $89 million in Other noncurrent liabilities related to these settlements[153][154] NOTE 9 – STOCK PROGRAMS This section provides information on the company's stock-based compensation programs - Total net stock-based compensation expense was $106 million for the three months and $180 million for the six months ended December 31, 2024, compared to $109 million and $189 million in the prior-year periods, respectively[159] - During the six months ended December 31, 2024, the company granted approximately 0.9 million stock options, 3.2 million Restricted Stock Units (RSUs), and 0.3 million target Performance Share Units (PSUs) PSUs with a performance period ended June 30, 2024, did not achieve target goals, resulting in no shares issued[160][161][162][163] NOTE 10 – NET EARNINGS (LOSS) ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. PER COMMON SHARE This section presents the net earnings (loss) and diluted EPS attributable to the company EPS (Three Months Ended December 31): | Metric | 2024 | 2023 | | :----- | :--- | :--- | | Basic EPS | $(1.64) | $0.87 | | Diluted EPS | $(1.64) | $0.87 | EPS (Six Months Ended December 31): | Metric | 2024 | 2023 | | :----- | :--- | :--- | | Basic EPS | $(2.07) | $0.96 | | Diluted EPS | $(2.07) | $0.95 | - For the three and six months ended December 31, 2024, the effects of potentially dilutive stock options, PSUs, and RSUs were excluded from the computation of diluted EPS as they were anti-dilutive due to the net loss incurred[168] NOTE 11 – EQUITY AND REDEEMABLE NONCONTROLLING INTEREST This section details changes in equity and redeemable noncontrolling interest - Total equity decreased to $4,169 million at December 31, 2024, from $5,712 million at December 31, 2023 Retained earnings decreased to $12,313 million from $13,858 million, primarily due to the net loss Accumulated other comprehensive loss increased to $(1,341) million from $(856) million[170] - Cash dividends declared per common share for the six months ended December 31, 2024, totaled $1.01, down from $1.32 in the prior-year period A dividend of $0.35 per share was declared on February 3, 2025, payable on March 17, 2025[170][172] NOTE 12 – STATEMENT OF CASH FLOWS This section provides supplemental information related to the consolidated statements of cash flows Supplemental Cash Flow Information (Six Months Ended December 31): | Metric | 2024 (Millions) | 2023 (Millions) | | :---------------------------------------------------- | :-------------- | :-------------- | | Cash paid for interest | $179 | $188 | | Cash paid for income taxes | $327 | $263 | | Property, plant and equipment accrued but unpaid | $24 | $41 | | Right-of-use assets obtained for new/modified operating lease liabilities | $311 | $210 | NOTE 13 – SEGMENT DATA AND RELATED INFORMATION This section provides financial data segmented by product category and geographic region Net Sales by Product Category (Three Months Ended December 31): | Category | 2024 (Millions) | 2023 (Millions) | Change (YoY) | | :--------- | :-------------- | :-------------- | :----------- | | Skin Care | $1,921 | $2,173 | (11.69)% | | Makeup | $1,150 | $1,167 | (1.46)% | | Fragrance | $744 | $737 | 0.95)% | | Hair Care | $159 | $173 | (8.09)% | | Other | $30 | $30 | 0.00)% | | Total Net Sales | $4,004 | $4,280 | (6.45)% | Operating Income (Loss) by Product Category (Three Months Ended December 31): | Category | 2024 (Millions) | 2023 (Millions) | Change (YoY) | | :--------- | :-------------- | :-------------- | :----------- | | Skin Care | $306 | $415 | (26.27)% | | Makeup | $(211) | $30 | (803.33)% | | Fragrance | $(446) | $131 | (440.46)% | | Hair Care | $(3) | $(3) | 0.00)% | | Other | $(45) | $9 | (600.00)% | | Total Operating Income (Loss) | $(399) | $582 | (168.56)% | Net Sales by Geographic Region (Three Months Ended December 31): | Region | 2024 (Millions) | 2023 (Millions) | Change (YoY) | | :-------------------------- | :-------------- | :-------------- | :----------- | | The Americas | $1,223 | $1,242 | (1.53)% | | Europe, the Middle East & Africa | $1,494 | $1,589 | (6.00)% | | Asia/Pacific | $1,287 | $1,449 | (11.20)% | | Total Net Sales | $4,004 | $4,280 | (6.45)% | Operating Income (Loss) by Geographic Region (Three Months Ended December 31): | Region | 2024 (Millions) | 2023 (Millions) | Change (YoY) | | :-------------------------- | :-------------- | :-------------- | :----------- | | The Americas | $(823) | $(55) | (1396.36)% | | Europe, the Middle East & Africa | $316 | $379 | (16.59)% | | Asia/Pacific | $108 | $258 | (58.14)% | | Total Operating Income (Loss) | $(399) | $582 | (168.56)% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial performance, condition, and outlook, covering net sales, operating income, expenses, liquidity, and critical accounting policies RESULTS OF OPERATIONS This section analyzes the company's operational performance, including net sales, gross margin, operating expenses, and net earnings by product category and geographic region Overview This overview summarizes key financial performance drivers, market conditions, and strategic initiatives for the reporting period - Net sales for the three months ended December 31, 2024, saw a 12% decrease in Skin Care (driven by Estée Lauder and La Mer due to challenging retail environments in mainland China, Asia travel retail, and Hong Kong SAR), a 1% decrease in Makeup (primarily M·A·C, TOM FORD, Smashbox, and Bobbi Brown, partially offset by Clinique and Estée Lauder), a 1% increase in Fragrance (led by Le Labo and Editions de Parfums Frédéric Malle, offset by Estée Lauder, Clinique, and TOM FORD), and an 8% decrease in Hair Care (mainly Aveda due to softness in salon channels and direct-to-consumer business)[197][202] - Geographically, net sales for the three months ended December 31, 2024, decreased 2% in The Americas (softness in North America retail and Latin America, partially offset by Amazon launch), 6% in Europe, the Middle East & Africa (primarily lower Asia travel retail sales), and 11% in Asia/Pacific (driven by mainland China, Korea, and Hong Kong SAR due to subdued consumer sentiment and Dr.Jart+ exit from Korea travel retail)[203] - The company anticipates continued volatility and uncertainty due to subdued consumer sentiment in China and Korea, changes in Korean retailer selling policies, North America underperformance, and global geopolitical risks The 'Beauty Reimagined' strategy aims to accelerate consumer coverage, foster transformative innovation, boost consumer-facing investments, and drive growth through efficiencies from the expanded Profit Recovery and Growth Plan (PRGP)[201][205] - The expanded PRGP, committed on February 3, 2025, focuses on competitive procurement, supply chain efficiencies (zero-waste), and outsourcing select services It projects a net reduction of 5,800 to 7,000 positions globally (9-11% of workforce) and total restructuring charges between $1,200 million and $1,600 million Annual target gross benefits are expected to be $800 million to $1,000 million, aiming for a return to a double-digit operating margin[213][215][216][217][218] - A $159 million charge was recorded in fiscal 2025 first quarter for talcum litigation settlement agreements Impairment charges of $773 million for TOM FORD trademark, $75 million for Too Faced trademark, and $13 million for Too Faced goodwill were recorded due to lower-than-expected growth and increased cost of capital[220][224][225] Product Categories This section analyzes net sales performance and key drivers across various product categories Skin Care This section analyzes the net sales performance and key drivers for the Skin Care product category - Reported skin care net sales decreased 12% for the three months and 10% for the six months ended December 31, 2024, primarily driven by lower net sales from Estée Lauder and La Mer due to challenging retail environments in mainland China, Asia travel retail, and Hong Kong SAR The decrease was mainly volume-driven (15% for 3 months, 12% for 6 months), partially offset by pricing increases[235][236][237][238][239] Makeup This section analyzes the net sales performance and key drivers for the Makeup product category - Reported makeup net sales decreased 1% for the three months and 2% for the six months ended December 31, 2024 This was primarily due to lower sales from M·A·C, TOM FORD, Smashbox, and Bobbi Brown, reflecting softness in key subcategories and challenging retail environments Partially offsetting this were higher net sales from Clinique (due to Amazon launch and hero products) and Estée Lauder The decline was mainly volume-driven, partially offset by strategic pricing actions[242][243][244][246][247] Fragrance This section analyzes the net sales performance and key drivers for the Fragrance product category - Reported fragrance net sales increased 1% for the three months and remained virtually flat for the six months ended December 31, 2024 Growth was led by Le Labo, Editions de Parfums Frédéric Malle, Kilian Paris (6 months), and the launch of BALMAIN Beauty (6 months) This was offset by lower sales from Estée Lauder, Clinique, and TOM FORD, particularly in North America due to retail softness Pricing increases partially offset volume decreases[248][250][251][253][254] Hair Care This section analyzes the net sales performance and key drivers for the Hair Care product category - Reported hair care net sales decreased 8% for the three months and 7% for the six months ended December 31, 2024, primarily due to lower net sales from Aveda This decline was attributed to softness in North America and Europe, the Middle East & Africa salon channels, direct-to-consumer business, and unfavorable timing of shipments The decrease was driven by both volume and pricing changes[255][256][257] - Net sales decreased across most product categories for the three and six months ended December 31, 2024, with skin care experiencing the largest decline due to challenges in Asia, while fragrance saw a slight increase driven by specific brands[228][235][242][248][255] Geographic Regions This section analyzes net sales performance and key drivers across various geographic regions The Americas This section analyzes the net sales performance and key drivers for The Americas geographic region - Reported net sales in The Americas decreased 2% for both the three and six months ended December 31, 2024 This was primarily due to lower sales in North America (softness in retail sales, distribution mix challenges) and to Latin America distributors (fragrance, Estée Lauder) These declines were partially offset by the launch of nine brands in Amazon's U.S Premium Beauty store The decrease was largely volume-driven, partially offset by pricing increases[260][261][263][264] Europe, the Middle East & Africa This section analyzes the net sales performance and key drivers for the Europe, Middle East & Africa geographic region - Reported net sales in Europe, the Middle East & Africa decreased 6% for the three months and 4% for the six months ended December 31, 2024 This was primarily driven by lower net sales in the Asia travel retail business due to a challenging retail environment and subdued Chinese consumer sentiment The six-month period saw partial offsets from higher sales in Israel and Turkey The decrease was volume-driven, with pricing remaining flat[266][267][268][269] Asia/Pacific This section analyzes the net sales performance and key drivers for the Asia/Pacific geographic region - Reported net sales in Asia/Pacific decreased 11% for both the three and six months ended December 31, 2024 This was primarily driven by lower sales from mainland China, Korea, and Hong Kong SAR, reflecting challenging retail environments and subdued consumer sentiment The net sales decline in Korea also included the exit of Dr.Jart+ from the travel retail channel The decrease was largely volume-driven, partially offset by pricing increases[272][273][274] - All geographic regions experienced net sales decreases for the three and six months ended December 31, 2024, with Asia/Pacific and EMEA being most affected by challenging retail environments and subdued consumer sentiment, while The Americas saw some offset from new distribution channels[229][260][266][272] GROSS MARGIN This section analyzes the factors influencing the company's gross margin performance - Gross margin increased to 76.1% for the three months and 74.4% for the six months ended December 31, 2024, compared to 73.0% and 71.5% in the prior-year periods This improvement was driven by lower obsolescence charges due to reduced excess inventory, favorable manufacturing cost efficiencies, and a positive mix of business reflecting strategic pricing actions[275][276] OPERATING EXPENSES This section details the trends and components of the company's operating expenses - Operating expenses as a percentage of net sales increased to 90.6% for the three months and 83.9% for the six months ended December 31, 2024, from 59.6% and 62.9% in the prior-year periods This unfavorable change was primarily due to decreased net sales, higher general and administrative expenses (including an unfavorable impact from a change in policy related to local government subsidies in China), and increased selling expenses The three-month period also saw higher advertising, merchandising, sampling, and product development expenses[278][279][280] OPERATING RESULTS This section provides a detailed analysis of operating income (loss) by product category and geographic region Product Categories This section details the operating income (loss) performance by product category - Skin Care operating income decreased 26% (3 months) and 6% (6 months) YoY, driven by lower results from La Mer, The Ordinary, and Estée Lauder due to decreased net sales and increased advertising/promotional activities Makeup operating results shifted to a loss, primarily due to $245 million in other intangible asset impairment charges (TOM FORD, Too Faced) and $13 million goodwill impairment (Too Faced), plus a $159 million charge for talcum litigation settlements (6 months) Fragrance operating income also shifted to a loss, primarily due to a $549 million other intangible asset impairment charge for TOM FORD and increased selling/advertising expenses Hair Care operating results were flat (3 months) and slightly increased (6 months) YoY, reflecting decreased operating expenses and lower cost of sales[286][289][290][291] Geographic Regions This section details the operating income (loss) performance by geographic region - The Americas operating loss increased significantly, primarily due to $848 million in other intangible asset impairment charges (TOM FORD, Too Faced) and $13 million goodwill impairment (Too Faced), plus a $159 million talcum litigation settlement charge (6 months) Europe, the Middle East & Africa operating income decreased 17% (3 months) and 22% (6 months) YoY, driven by lower results from the travel retail business Asia/Pacific operating income decreased 58% (3 months) and 57% (6 months) YoY, driven by lower results in mainland China, Hong Kong SAR, and Korea due to decreased net sales and unfavorable policy changes for local government subsidies in China[294][295][297] - Reported operating income shifted to a significant loss for both the three and six months ended December 31, 2024, primarily due to substantial goodwill and other intangible asset impairment charges related to TOM FORD and Too Faced, coupled with decreased net sales, despite an increase in gross margin[282] INTEREST AND INVESTMENT INCOME This section outlines the company's interest expense, interest income, and net investment income - Interest expense decreased to $90 million (3 months) and $182 million (6 months) YoY, reflecting a lower average debt balance Interest income and investment income, net, decreased to $23 million (3 months) and $58 million (6 months) YoY, primarily due to a lower average cash balance[298] PROVISION FOR INCOME TAXES This section explains the company's effective tax rate and the factors influencing income tax provisions - The effective tax rate decreased to 9.2% (3 months) and 10.1% (6 months) for December 31, 2024, from 37.6% and 36.3% in prior-year periods This decrease was primarily attributable to the discrete treatment of charges associated with restructuring activities, goodwill and other intangible asset impairments, talcum litigation settlement agreements, and an unfavorable impact from previously issued stock-based compensation[300][302] NET EARNINGS (LOSS) ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. This section presents the net earnings (loss) and diluted EPS attributable to the company Net Earnings (Loss) Attributable to The Estée Lauder Companies Inc.: | Metric | 3 Months Ended Dec 31, 2024 (Millions) | 3 Months Ended Dec 31, 2023 (Millions) | 6 Months Ended Dec 31, 2024 (Millions) | 6 Months Ended Dec 31, 2023 (Millions) | | :---------------------------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | | As Reported | $(590) | $313 | $(746) | $344 | | Diluted EPS As Reported | $(1.64) | $0.87 | $(2.07) | $0.95 | - Net earnings and diluted EPS significantly decreased (over 100% change) for both periods, reflecting the overall financial performance challenges[303] RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES This section provides reconciliations of non-GAAP financial measures to their most directly comparable GAAP financial measures Adjusted Operating Income (Three Months Ended Dec 31): | Metric | 2024 (Millions) | 2023 (Millions) | Variance | % Change | | :---------------------------------------------------- | :-------------- | :-------------- | :------- | :------- | | Operating income (loss), as reported | $(580) | $574 | $(1,154) | (100+)% | | Adjustments (Restructuring, Impairments, DECIEM stock options) | $1,042 | $3 | $1,039 | | | Operating income, as adjusted | $462 | $577 | $(115) | (20)% | Adjusted Diluted EPS (Three Months Ended Dec 31): | Metric | 2024 | 2023 | Variance | % Change | | :---------------------------------------------------- | :--- | :--- | :------- | :------- | | Diluted net earnings (loss) per common share, as reported | $(1.64) | $0.87 | $(2.51) | (100+)% | | Adjustments (Restructuring, Impairments, DECIEM stock options) | $2.26 | $0.01 | $2.25 | | | Diluted net earnings per common share, as adjusted | $0.62 | $0.88 | $(0.26) | (29)% | Adjusted Operating Income (Six Months Ended Dec 31): | Metric | 2024 (Millions) | 2023 (Millions) | Variance | % Change | | :---------------------------------------------------- | :-------------- | :-------------- | :------- | :------- | | Operating income (loss), as reported | $(701) | $672 | $(1,373) | (100+)% | | Adjustments (Restructuring, Impairments, Talcum, DECIEM stock options) | $1,307 | $13 | $1,294 | | | Operating income, as adjusted | $606 | $685 | $(79) | (12)% | Adjusted Diluted EPS (Six Months Ended Dec 31): | Metric | 2024 | 2023 | Variance | % Change | | :---------------------------------------------------- | :--- | :--- | :------- | :------- | | Diluted net earnings (loss) per common share, as reported | $(2.07) | $0.95 | $(3.02) | (100+)% | | Adjustments (Restructuring, Impairments, Talcum, DECIEM stock options) | $2.84 | $0.03 | $2.81 | | | Diluted net earnings per common share, as adjusted | $0.77 | $0.98 | $(0.21) | (22)% | FINANCIAL CONDITION This section discusses the company's liquidity, capital resources, debt, cash flows, and critical accounting policies LIQUIDITY AND CAPITAL RESOURCES This section assesses the company's ability to meet its financial obligations and fund operations through cash, credit, and capital markets - Cash and cash equivalents decreased to $2,586 million at December 31, 2024, from $3,395 million at June 30, 2024 The company believes its cash on hand, cash from operations, available credit lines, and access to credit markets will be adequate to support its needs Credit ratings are A with a negative watch by S&P and A2 with a negative outlook by Moody's as of January 28, 2025[322][323][327] Debt This section details the company's debt structure, repayment activities, and leverage ratios - Total debt was $7,280 million at December 31, 2024 Total debt as a percentage of total capitalization increased to 64% at December 31, 2024, from 59% at June 30, 2024 The company repaid $500 million of 2.000% Senior Notes at maturity in December 2024 using cash from operations[330][331] Cash Flows This section analyzes the company's cash flows from operating, investing, and financing activities - Net cash flows provided by operating activities decreased to $387 million for the six months ended December 31, 2024, from $937 million in the prior-year period, primarily due to lower earnings and unfavorable changes in operating assets and liabilities Net cash flows used for investing activities decreased to $(294) million from $(557) million, mainly due to lower capital expenditure payments in the prior year Net cash flows used for financing activities increased to $(878) million from $(489) million, reflecting increased long-term debt repayments partially offset by decreased dividends[333][334][335] Dividends This section provides information on cash dividends declared per common share - For a summary of quarterly cash dividends declared per share on Class A and Class B Common Stock during the six months ended December 31, 2024, refer to Note 11 – Equity and Redeemable Noncontrolling Interest[336] Pension and Post-retirement Plan Funding This section discusses the funding status and changes in the company's pension and post-retirement benefit plans - There have been no significant changes to the company's pension and post-retirement funding as discussed in its Annual Report on Form 10-K for the fiscal year ended June 30, 2024[337] Commitments, Contractual Obligations and Contingencies This section outlines the company's significant commitments, contractual obligations, and potential contingencies - There have been no significant changes to the company's commitments and contractual obligations For a discussion of contingencies, refer to Notes to Consolidated Financial Statements, Note 8 – Commitments and Contingencies[338] Derivative Financial Instruments and Hedging Activities This section describes the company's use of derivative instruments for hedging purposes - For a discussion of the company's derivative financial instruments and hedging activities, refer to Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments[339] Foreign Exchange Risk Management This section details the strategies employed to manage foreign exchange rate risks - For a discussion of foreign exchange risk management, refer to Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Fair Value Hedges, Cash Flow Hedges and Net Investment Hedges)[340] Credit Risk This section discusses the company's exposure to credit risk from financial instruments - For a discussion of credit risk, refer to Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Credit Risk)[341] Market Risk This section assesses the company's exposure to market risks, including foreign currency and interest rate fluctuations - A hypothetical 10% weakening of the U.S dollar would result in a net decrease in the fair value of foreign currency forward contracts by approximately $299 million (December 31, 2024) and cross-currency swap contracts by approximately $85 million (December 31, 2024) A hypothetical 100 basis point increase in interest rates would decrease the estimated fair value of interest rate derivatives by approximately $45 million (December 31, 2024)[342][345][346] OFF-BALANCE SHEET ARRANGEMENTS This section confirms the absence of material off-balance sheet arrangements - The company does not maintain any off-balance sheet arrangements, transactions, obligations, or other relationships with unconsolidated entities that would be expected to have a material current or future effect on its financial condition or results of operations[348] CRITICAL ACCOUNTING POLICIES This section highlights the accounting policies requiring significant judgment and estimation - The company's most critical accounting policies relate to goodwill and other indefinite-lived intangible assets – impairment assessment and income taxes There have been no significant changes to assumptions and estimates related to these policies since June 30, 2024, except as disclosed in the Impairment Analysis section[349] RECENTLY ISSUED ACCOUNTING STANDARDS This section discusses the impact of recently issued accounting standards not yet effective - For a discussion regarding the impact of accounting standards that were recently issued but not yet effective, refer to Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies[350] CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION This section provides a cautionary statement regarding forward-looking information and associated risks - The company's forward-looking statements are subject to various risks, including increased competitive activity, challenges in product development, retail industry consolidations, shifts in consumer preferences, social/political/economic risks, changes in laws/regulations, foreign currency fluctuations, global economic conditions, supply chain disruptions, real estate rates, changes in product mix, information technology challenges, ability to capitalize on efficiency initiatives, and consequences of global conflicts[353][361] - The company's financial condition reflects a decrease in cash and cash equivalents, an increase in total debt as a percentage of capitalization, and significant cash outflows from operating and financing activities Liquidity is expected to be adequate, but credit ratings have a negative outlook[322][323][327][331][333][335] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section incorporates by reference the market risk disclosures from the Management's Discussion and Analysis of Financial Condition and Results of Operations, specifically regarding foreign currency and interest rate exposures - 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[356] Item 4. Controls and Procedures Management has evaluated the effectiveness of the company's disclosure controls and procedures as of December 31, 2024, concluding they were effective No material changes to internal control over financial reporting occurred during the fiscal 2025 second quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[357] - There have been no changes in the company's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting during the second quarter of fiscal 2025[358] PART II. OTHER INFORMATION This section covers legal proceedings, equity security sales, other information, exhibits, and signatures Item 1. Legal Proceedings This section refers to Note 8 – Commitments and Contingencies for a discussion of legal proceedings, including securities class actions, derivative matters, and cosmetic talcum powder litigation - For a discussion of legal proceedings, refer to Notes to Consolidated Financial Statements, Note 8 – Commitments and Contingencies[359] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company suspended its publicly announced Class A Common Stock repurchase program in December 2022 but may resume repurchases in the future During November 2024, 364,194 shares were repurchased to satisfy tax withholding obligations for stock-based compensation - The company suspended the repurchase of shares of its Class A Common Stock under its publicly announced program in December 2022, but may resume repurchases in the future[364] - In November 2024, 364,194 shares were repurchased at an average price of $67.76 per share to satisfy tax withholding obligations upon the payout of certain stock-based compensation arrangements[360] - The maximum number of shares that may yet be purchased under the authorized program is 25,073,242[360] Item 5. Other Information No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the fiscal 2025 second quarter - During the fiscal 2025 second quarter, none of the company's directors or officers adopted or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement"[365] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including employment agreements, share incentive plans, certifications, and iXBRL formatted financial statements - The exhibits include various documents such as employment agreements (e.g., with Fabrizio Freda, Stéphane de La Faverie), a form of Performance Share Unit Award Agreement, Summary of Director Compensation, amendments to the Retirement Growth Account Plan, CEO and CFO certifications (pursuant to Rule 13a-14(a) and 18 U.S.C Section 1350), and iXBRL formatted financial statements[366] Signatures The report is signed on behalf of The Estée Lauder Companies Inc. by Akhil Shrivastava, Executive Vice President and Chief Financial Officer, on February 4, 2025 - The report was signed on behalf of The Estée Lauder Companies Inc by Akhil Shrivastava, Executive Vice President and Chief Financial Officer, on February 4, 2025[371]