Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549-100420549

FORM 10-Q

(Mark One)-

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

For the quarterly period ended December 31, 20172018

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)

212-572-4200

(Registrant’s telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically 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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

At January 26, 2018, 224,557,65629, 2019, 218,255,377 shares of the registrant’s Class A Common Stock, $.01 par value, and 143,219,528142,907,134 shares of the registrant’s Class B Common Stock, $.01 par value, were outstanding.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

See notes to consolidated financial statements.

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

See notes to consolidated financial statements.

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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 Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017.2018.

Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to current year presentation.

Management Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses reported in those financial statements.  CertainDescriptions of the Company’s 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 Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017.  See Income Taxes for additional discussion regarding tax legislation enacted by the U.S. government in December 2017, the impact of which may affect the estimates and assumptions used to determine the expected future tax consequences of events recognized in the Company’s consolidated financial statements.2018.  Management evaluates itsthe related estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate.  As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions.  Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

Currency Translation and Transactions

All assets and liabilities of foreign subsidiaries and affiliates are translated at period-end rates of exchange, while revenue and expenses are translated at weighted-average rates of exchange for the period.  Unrealized translation gains (losses), net of tax, reported as cumulative translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc. were $30$(34) million and $(120)$30 million, net of tax, during the three months ended December 31, 20172018 and 2016,2017, respectively, and $84$(13) million and $(120)$84 million, net of tax, during the six months ended December 31, 2018 and 2017, respectively.  For the Company’s subsidiaries operating in highly inflationary economies, the U.S. dollar is the functional currency.  Remeasurement adjustments in financial statements in a highly inflationary economy and 2016, respectively.other transactional gains and losses are reflected in earnings.  These subsidiaries are not material to the Company’s consolidated financial statements or liquidity.

The Company enters into foreign currency forward contracts and may enter into option contracts to hedge foreign currency transactions for periods consistent with its identified exposures.  Accordingly, the Company categorizes these instruments as entered into for purposes other than trading.

The accompanying consolidated statements of earnings include net exchange gains (losses)losses on foreign currency transactions of $(17)$7 million and $1$17 million during the three months ended December 31, 20172018 and 2016,2017, respectively, and $(35)$21 million and $6$35 million during the six months ended December 31, 20172018 and 2016, respectively.

Accounts Receivable

Accounts receivable is stated net of the allowance for doubtful accounts and customer deductions totaling $38 million and $30 million as of December 31, 2017 and June 30, 2017, respectively.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Concentration of Credit Risk

The Company is a worldwide manufacturer, marketer and distributor of skin care, makeup, fragrance and hair care products.  The Company’s sales subject to credit risk are made primarily to department stores, perfumeries, specialty multi-brand retailers and retailers in its travel retail business.  The Company grants credit to qualified customers and does not believe it is exposed significantly to any undue concentration of credit risk.  The Company does not have any customers that represent 10% or greater of its consolidated net sales or accounts receivable in each period presented.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventory and Promotional Merchandise

Inventory and promotional merchandise, net consists of:

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 Company’s measurement of inventory and promotional merchandise.

Property, Plant and Equipment

The cost of assets related to projects in progress of $184$346 million and $183$300 million as of December 31, 20172018 and June 30, 2017,2018, respectively, is included in their respective asset categories above.  Depreciation and amortization of property, plant and equipment was $114$121 million and $108$114 million during the three months ended December 31, 20172018 and 2016,2017, respectively, and $226$237 million and $210$226 million during the six months ended December 31, 20172018 and 2016,2017, respectively.  Depreciation and amortization related to the Company’s manufacturing process is included in Cost of Sales,sales, and all other depreciation and amortization is included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“the TCJA”(the “TCJA”).  The TCJA includes broad and complex changes to the U.S. tax code that impacted the Company’s accounting and reporting for income taxestaxes.  The impacts under the TCJA in the current-year period.  These impactsprior fiscal year primarily consistconsisted of the following:

·                  A reduction in the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018, which will resultresulted in a fiscal 2018 U.S. blended statutory income tax rate for the Company of 28%28.1%.

·                  A one-time transitionalmandatory deemed repatriation tax on unremitted foreign earnings (“Transition(the “Transition Tax”), which may be paidthe Company elected to pay over an eight-year period.

·                  TheA remeasurement of U.S. net deferred tax assets asassets.

·                  The recognition of foreign withholding taxes in connection with the reversal of the enactment date.Company’s indefinite reinvestment assertion related to certain foreign earnings.

On December 22, 2017, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance that companies should apply each reportingestablished a one-year measurement period related to the income tax(effective December 22, 2017), whereby provisional amounts recorded for effects of the TCJA. SAB 118 provides that companies (i) shouldchanges from the TCJA could be subject to adjustment.  The one-year measurement period expired on December 22, 2018 and, therefore, the accounting to record the effects of the changes from the TCJA for which the accounting is complete (not provisional), (ii) should record provisional amounts for the effects of the changes from the TCJA for which the accounting is not complete, and for which reasonable estimates canwas required to be determined, in the period they are identified, and (iii) should not record provisional amounts if reasonable estimates cannot be made for the effects of the changes from the TCJA, and should continue to apply guidance based on the tax law in effect prior to the enactment on December 22, 2017.  In addition, SAB 118 establishes a one-year measurement period (through December 22, 2018) where a provisional amount could be subject to adjustment, and requires certain qualitative and quantitative disclosures related to provisional amounts and accountingcompleted during the measurement period.

The Company recorded a provisional charge for the Transition Tax of $325 million as a discrete item in the provision for income taxes for the three and six months ended December 31, 2017.  Of this amount, $39 million and $286 million are included in Other accrued liabilities and Other noncurrent liabilities, respectively, in the accompanying consolidated balance sheet as of December 31, 2017.  The Transition Tax recorded is provisional pending the finalization of earnings estimates of the Company’s foreign subsidiaries.

As a result of the reduction in the U.S. corporate tax rate, the Company remeasured its U.S. net deferred tax assets as of the enactment date and recognized a provisional charge of $51 million as a discrete item in the provision for income taxes for the three and six months ended December 31, 2017, which is a reduction in net deferred tax assets and is included in Other assets in the accompanying consolidated balance sheet as of December 31, 2017.  The measurement of U.S. net deferred tax assets is provisional as the final remeasurement cannot be determined until the underlying temporary differences are known, rather than estimated.

In addition, as a result of the Transition Tax on unremitted foreign earnings, the Company now expects to repatriate certain foreign earnings, which will be subject to foreign withholding taxes.  Accordingly, the Company recorded a provisional charge of $18 million for the foreign withholding taxes as a discrete item in the provision for income taxes for the three and six months ended December 31, 2017 as a net deferred tax liability. This amount is a reduction in net deferred tax assets and is included in Other assets in the accompanying consolidated balance sheet as of December 31, 2017.  This charge is provisional due to uncertainty at this time related to the U.S. tax treatment of such foreign withholding taxes.

The Company is continuing to analyze the impact of the TCJA.  Adjustments to the provisional charges will be recorded as discrete items in the provision for income taxes in the period in which those adjustments become reasonably estimable and/or the accounting is complete.  Such adjustments may result from, among other things, future guidance, interpretations and regulatory changes from the Internal Revenue Service, the SEC, the FASB and/or various tax jurisdictions.  The Company will complete its analysis no later than December 22, 2018.

There are other potential impacts under the TCJA which are not effective for the Company until fiscal 2019.  These primarily include a new minimum tax on global intangible low-taxed income (“GILTI”), the base erosion anti-abuse tax (“BEAT”) and the foreign derived intangibles income (“FDII”) provisions.  The Company has not recorded any impact associated with these provisions at this time.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The effective rate for income taxes was 81.9% and 28.3% forFor the three monthsyear ended December 31, 2017 and 2016, respectively.  This increase was primarily attributableJune 30, 2018, the Company recorded the following provisional charges related to the TCJA:

·                  $351 million associated with the Transition Tax of approximately 4,710 basis points,Tax.

·                  $53 million in connection with the remeasurement of U.S. net deferred tax assets resulting from the statutory tax rate reduction.

·                  $46 million related to foreign withholding taxes associated with the reversal of approximately 740 basis points, and the establishment of a net deferred tax liabilityits indefinite reinvestment assertion related to certain foreign withholding taxes on planned repatriationearnings.

During the three and six months ended December 31, 2018, the Company recorded a credit of approximately 260 basis points,$2 million and $12 million, respectively, to adjust its fiscal 2018 provisional charge associated with eachthe Transition Tax.  These credits reflect certain technical interpretations related to the Transition Tax computation.  The final cumulative charge related to this matter is $339 million.  The charges related to the Transition Tax are primarily included in Other noncurrent liabilities in the accompanying consolidated balance sheet as of December 31, 2018.

During the three months ended December 31, 2018, the Company recorded an increase of $8 million to its provisional charge recorded in fiscal 2018 associated with the remeasurement of its net deferred tax assets resulting from the enactmentreduction in the U.S. corporate income tax rate.  This adjustment was due to the revision of certain temporary differences.  The final cumulative charge related to this matter is $61 million.

In addition, the Company recorded a charge of $9 million for the three months ended September 30, 2018 related to foreign withholding taxes recorded in fiscal 2018 in connection with the reversal of its indefinite reinvestment assertion related to certain foreign earnings.  This charge reflected the Company’s interpretation of recently issued guidance from the U.S. government, and the accounting for this item pursuant to SAB 118 was considered complete as of September 30, 2018.  The final cumulative charge related to this matter is $55 million.

Although the accounting related to the income tax effects of the TCJA.  Partially offsetting this increase was approximately 350 basis points, primarily reflecting a favorable geographic mix of earnings, as well as a favorable impactTCJA is complete pursuant to SAB 118, certain technical aspects of the reducedTCJA remain subject to varying degrees of uncertainty as additional technical guidance and clarification from the U.S. government is expected to be issued over an extended period.  Receipt of additional guidance and clarification from the U.S. government may result in material changes to the provision for income taxes.  To the extent applicable, the Company would recognize such adjustments in the provision for income taxes in the period that additional guidance and clarification is received.

Provisions under the TCJA that became effective for the Company in the current fiscal year include a further reduction in the U.S. statutory rate to 21%, a new minimum tax rate.on global intangible low-taxed income (“GILTI”), a base erosion anti-abuse tax, a foreign derived intangible income deduction and changes to IRC Section 162(m) related to the deductibility of executive compensation.

For more information about the TCJA and the related impact on the Company, see Note 8 — Income Taxes in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

The effective rate for income taxes was 55.2%22.9% and 27.6%81.9% for the three months ended December 31, 2018 and 2017, respectively, and 21.9% and 55.2% for the six months ended December 31, 2018 and 2017, and 2016, respectively.  This increaseThe decrease in the effective tax rate in both periods was primarily attributable to the Transition Tax of approximately 2,620 basis points, the remeasurement of U.S. net deferred tax assets of approximately 410 basis points, and the establishment of a net deferred tax liabilityprovisional charges related to certain foreign withholding taxes on planned repatriation of approximately 150 basis points, with each resulting from the enactment ofTCJA that were recorded in the TCJA.  Partially offsetting this increasethree months ended December 31, 2017.  Also contributing to the lower effective tax rate was approximately 420 basis points, primarily reflecting a favorable impact of excess tax benefitshigher benefit related to share-based compensation awards, the impact of the lower U.S. statutory tax rate and a lower effective tax rate on our foreign operations due to a favorable geographic mix of earnings, as well as a favorablepartially offset by the impact of the reduced U.S. statutory tax rate.GILTI.

As of December 31, 20172018 and June 30, 2017,2018, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $66$68 million and $68$60 million, respectively.  The total amount of unrecognized tax benefits at December 31, 20172018 that, if recognized, would affect the effective tax rate was $46$47 million.  The total gross accrued interest and penalty expensepenalties accrued related to unrecognized tax benefits during the three months ended December 31, 2017 in the accompanying consolidated statement of earnings was $1 million.  During theand six months ended December 31, 2107, the Company recognized a gross interest and penalty benefit of $2 million2018 in the accompanying consolidated statementstatements of earnings.earnings was $1 million and $3 million, respectively.  The total gross accrued interest and penalties in the accompanying consolidated balance sheets at December 31, 20172018 and June 30, 20172018 was $10$12 million and $13$9 million, respectively.  On the basis of the information available as of December 31, 2017,2018, 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:

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.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Accrued Liabilities

Other accrued liabilities consist of the following:

Debt

In October 2018, the Company replaced its undrawn $1.5 billion senior unsecured revolving credit facility that was set to expire in October 2021 with a new $1.5 billion senior unsecured revolving credit facility (the “New Facility”).  The New Facility expires on October 26, 2023 unless extended for up to two additional years in accordance with the terms set forth in the agreement.  Up to the equivalent of $500 million of the New Facility is available for multi-currency loans.  Interest rates on borrowings under the New Facility will be based on prevailing market interest rates in accordance with the agreement.  The costs incurred to establish the New Facility were not material.  The New Facility has an annual fee of approximately $1 million, payable quarterly, based on the Company’s current credit ratings.  The New Facility contains a cross-default provision whereby a failure to pay other material financial obligations in excess of $175 million (after grace periods and absent a waiver from the lenders) would result in an event of default and the acceleration of the maturity of any outstanding debt under this facility.

Recently Adopted Accounting Standards

Hedge Accounting

In August 2017, the FASB issued authoritative guidance to simplify hedge accounting.  The guidance includes provisions that:

·                  enable entities to better portray their risk management activities within the financial statements;

·                  expand an entity’s ability to hedge nonfinancial and financial risk components;

·                  reduce complexity in fair value hedges of interest rate risk;

·                  eliminate the requirement to separately measure and disclose hedge ineffectiveness;

·                  require the entire change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item;

·                  ease certain documentation and assessment requirements;

·                  modify the accounting for components excluded from the assessment of hedge effectiveness; and

·                  require revised tabular footnote disclosure.

The guidance also provides transition relief to make it easier for entities to apply certain amendments to existing hedges (including fair value hedges) where the hedge documentation is required to be modified.

Effective for the Company — Fiscal 2020 first quarter, with early adoption permitted in any interim period.  The guidance must be applied:

·                  using the modified retrospective approach for cash flow and net investment hedge relationships that exist on the date of adoption; and

·                  prospectively for the presentation and disclosure requirements.

Impact on consolidated financial statements — The Company has early adopted this guidance effective as of its fiscal 2019 first quarter, and no cumulative adjustment to retained earnings was required.  Upon adoption, all derivative gains and losses will be recognized in the same income statement line as the hedged items which, for all foreign currency cash flow hedges, is in Net sales.  There is no change to the interest expense classification of gains and losses from interest rate swap fair value hedges.  The amended presentation and disclosure requirements are being applied prospectively.  See Note 5 — Derivative Financial Instruments for further information.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pension-related Costs

In March 2017, the FASB issued authoritative guidance that amends how companies present net periodic benefit cost in the income statement and balance sheet relating to defined benefit pension and/or other postretirement benefit plans.  Within the income statement, the new guidance requires companies to report the service cost component within operating expenses and report the other components of net periodic benefit cost below operating income.  In addition, within the balance sheet, the guidance changes the components of the pension cost eligible for capitalization to the service cost component only (e.g., as a cost of internally manufactured inventory or a self-constructed asset).

Effective for the Company — Fiscal 20182019 first quarter.  The guidance must be applied:

·                  retrospectively as it pertains to the income statement classification of the components of net periodic benefit cost; and

·                  prospectively as it pertains to future capitalization of service costs.

Impact on consolidated financial statements— The Company adopted this guidance when it became effective, and although certain components of pension expense are being reclassified out of operating income, this did not have a material impact on reported operating income.  The Company elected the practical expedient which permits the use of amounts previously disclosed in its pension and post-retirement plan footnote as the basis for estimating the amounts necessary to retrospectively restate the prior-year period consolidated statements of earnings.

Revenue from Contracts with Customers

In May 2014, the FASB issued authoritative guidance, Accounting Standards Codification Topic 606 — Revenue from Contracts with Customers (“ASC 606”), that defines how companies should report revenues from contracts with customers.  The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  It provides companies with a single comprehensive five-step principles-based model to use in accounting for revenue and supersedes prior revenue recognition requirements, including most industry-specific and transaction-specific revenue guidance.

In March 2016, the FASB issued authoritative guidance that amended the principal versus agent guidance in its new revenue recognition standard.  These amendments do not change the key aspects of the principal versus agent guidance, including the definition that an entity is a principal if it controls the good or service prior to it being transferred to a customer, but the amendments clarify the implementation guidance related to the considerations that must be made during the contract evaluation process.

In April 2016, the FASB issued authoritative guidance that amended the new standard to clarify the guidance on identifying performance obligations and accounting for licenses of intellectual property.

In May 2016, the FASB issued authoritative guidance that clarified certain terms, guidance and disclosure requirements during the transition period related to completed contracts and contract modifications.  In addition, the FASB provided clarification on the concept of collectability, the calculation of the fair value of noncash consideration and the presentation of sales and other similar taxes.

In May 2016, the FASB issued authoritative guidance to reflect the Securities and Exchange Commission Staff’s rescission of its prior comments that covered, among other things, accounting for shipping and handling costs and accounting for consideration given by a vendor to a customer.

In December 2016, the FASB issued authoritative guidance that amends various aspects of the new standard to clarify certain terms, guidance and disclosure requirements.  In particular, the guidance addresses disclosure requirements for remaining performance obligations, impairment testing for contract costs and accrual of advertising costs, as well as clarifies several examples.

Effective for the Company — Fiscal 2019 first quarter.  An entity is permitted to apply the foregoing guidance retrospectively to all prior periods presented, with certain practical expedients, or apply the requirements in the year of adoption, through a cumulative adjustment.

Impact on consolidated financial statements — As a result ofOn July 1, 2018, the adoption of this guidance, during the three and six months ended December 31,Company adopted ASC 606, see Note 7 — Revenue Recognition for further discussion.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill

In January 2017, the Company recognized $1 millionFASB issued authoritative guidance that simplifies the subsequent measurement of goodwill by eliminating the second step from the quantitative goodwill impairment test.  The single quantitative step test requires companies to compare the fair value of a reporting unit with its carrying amount and $24 million, respectively, of excess tax benefits as a reductionrecord an impairment charge for the amount that the carrying amount exceeds the fair value, up to the provision for income taxes in its consolidated statementstotal amount of earnings.  Additionally, upon adoption thegoodwill allocated to that reporting unit.  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 paidhave the option of first performing a qualitative assessment to determine whether it is necessary to perform the quantitative goodwill impairment test.

Effective for withholding sharesthe Company — Fiscal 2021 first quarter, with early adoption permitted 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.interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

Impact on consolidated financial statements— The Company will also continue to accrue for estimated forfeitures each quarter. Finally,has early adopted this guidance effective as of its fiscal 2019 second quarter and applied the Company has no outstanding awards classified as a liability due to withholding excess taxes, there was no impact to the Company’s consolidated balance sheetsnew guidance in its quantitative goodwill impairment test related to the adoption of that portion of the guidance.Smashbox reporting unit.  See Note 3 — Goodwill and Other Intangible Assets for further information.

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 entity’s 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 guidance must be applied:

·                  using the modified retrospective approach for cash flow and net investment hedge relationships that exist on the date of adoption; and

·                  prospectively for the presentation and disclosure requirements.

Impact on consolidated financial statements — The Company 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.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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 asand requires additional disclosures.  In general, this guidance will require modified retrospective adoption will be required for all outstanding instruments that fall under this guidance.

Effective for the Company — Fiscal 2021 first quarter.

Impact on consolidated financial statements — The Company is currently evaluating the impact of applying this guidance on its financial instruments, such as accounts receivable and short- and long-term investments.

Leases

In February 2016, the FASB issued authoritative guidance that requires lessees to account for most leases on their balance sheets with the liability being equal to the present value of the lease payments.  The right-of-use asset will be based on the lease liability adjusted for certain costs such as initial direct costs.costs, prepaid lease payments and lease incentives received.  Lease expense will be recognized similar to current accounting guidance with operating leases resulting in a straight-line expense, and financingfinance leases resulting in a front-loaded expense similar to the current accounting for capital leases.  This

In July 2018, the FASB amended this guidance must be adoptedto clarify certain narrow aspects of the new lease accounting standard that may have been incorrectly or inconsistently applied, and does not add new guidance.  Also in July 2018, the FASB issued authoritative guidance that allows companies to elect to adopt the new standard using a modified retrospective transition approach for leaseswith a cumulative-effect adjustment to retained earnings in the period of adoption.  Companies that exist or are entered into afterelect the beginning ofnew adoption method will not be required to restate the earliestprior comparative periodperiods in the financial statements, and provides for certain practical expedients.statements.

Effective for the Company — Fiscal 2020 first quarter, with early adoption permitted.permitted using either of the modified retrospective transition approaches described in the standard, with certain practical expedients.

Impact on consolidated financial statements — The Company currently has an implementation team in place that is performing a comprehensive evaluation of the impact of the adoption of this guidance.guidance, which includes assessing the Company’s lease portfolio, implementing a new system to meet reporting requirements, and assessing the impact to business processes and internal controls over financial reporting and the related disclosure requirements.  While the Company has not completed itsCompany’s evaluation is ongoing, it believes the adoption of this standard will have a significant impact on its consolidated balance sheets.  As disclosed in Note 1514 — Commitments and Contingencies in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017,2018, the Company had $2,427$3,320 million in future minimum lease commitments as of June 30, 2017.2018.  Upon adoption, the Company’s lease liability will generally be based on the present value of such payments and the related right-of useright-of-use asset will generally be based on the lease liability, adjusted for initial direct costs.

Revenue from Contracts with Customers

In May 2014,costs, prepaid lease payments and lease incentives received.  The Company plans to adopt the FASB issued authoritative guidancenew standard when it becomes effective in the fiscal 2020 first quarter using the modified retrospective transition approach for leases that defines how companies should report revenues from contracts with customers.  The standard requires an entity to recognize revenue to depictexist in the transferperiod of promised goods or services to customers in an amount that reflectsadoption and will not restate 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.prior comparative periods.

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and Other — Internal-Use Software

In March 2016,August 2018, the FASB issued authoritative guidance that amendedpermits companies to capitalize the principal versus agentcosts incurred for setting up business systems that operate on cloud technology.  The new guidance aligns the requirement for capitalizing implementation costs incurred in its new revenue recognition standard.  These amendments doa hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.  The guidance does not changeaffect the key aspectsaccounting for the service element of a hosting arrangement that is a service contract.  Capitalized costs associated with a hosting arrangement that is a service contract must be amortized over the term of the 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 relatedhosting arrangement to the considerations that must be made duringsame line item in the contract evaluation process.

In April 2016,income statement as the FASB issued authoritative guidance that amendedexpense for fees for 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 SEC Staff’s rescission of its prior comments that covered, among other things, accounting for shipping and handling costs and accounting for consideration given by a vendor to a customer.

In December 2016, the FASB issued authoritative guidance that amends various aspects of the new standard to clarify certain terms, guidance and disclosure requirements.  In particular, the guidance addresses disclosure requirements for remaining performance obligations, impairment testing for contract costs and accrual of advertising costs, as well as clarifies several examples.hosting arrangement.

Effective for the Company — —Fiscal 2019,2021 first quarter, with early adoption permitted.  An entity is permitted to apply the foregoingin any interim period.  This guidance retrospectivelycan be adopted either:

·                  retrospectively; or

·                  prospectively to all prior periods presented, with certain practical expedients, or applyimplementation costs incurred after the requirements in the yeardate of adoption, through a cumulative adjustment.adoption.

Impact on consolidated financial statements — The Company will apply all of this new guidance when it becomes effective in fiscal 2019 using the modified retrospective adoption 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.  The Company has assessed its third-party retailer arrangements and noted that upon adoption of the new revenue recognition standard, the Company will have a change in the classification of certain payments to customers as well as a change in the timing of certain accruals for variable consideration.  Additionally, the Company’s 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 continuing to assesscurrently evaluating the impact of applying this guidance to its business systems that its promotional goods and loyalty programs will haveoperate on the timing of revenue recognition upon adoption.cloud technology.

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

NOTE 2 — INVESTMENTS

Beginning in the first quarter of fiscal 2019, the Company accounts for its cost method investments at cost, less impairment, plus/minus subsequent observable price changes, and will be required to perform an assessment each quarter to determine whether or not a triggering event has occurred that results in changes in fair value.  These investments were not material to the Company’s consolidated financial statements as of December 31, 2018.

Gains and losses recorded in accumulated OCI (“AOCI”) related to the Company’s available-for-sale investments as of December 31, 20172018 were as follows:

Gains and losses recorded in AOCI related to the Company’s available-for-sale investments as of June 30, 2018 were as follows:

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Gains and losses recorded in AOCI related to the Company’s available-for-sale investments as of June 30, 2017 were as follows:

The following table presents the Company’s available-for-sale securities by contractual maturity as of December 31, 2017:2018: