The Estée Lauder Companies Reports Fiscal 2020 Results

The Estée Lauder Companies Inc. (NYSE: EL) today reported net sales of $14.29 billion for its fiscal year ended June 30, 2020, a decrease of 4% from $14.86 billion in the prior-year period. Excluding the impact of currency translation, net sales decreased 3%. The net sales decline was driven by retail store closures as a result of the global spread of COVID-19 that was partially offset by the tremendous acceleration online. Net sales from the Company’s acquisition of Have&Be Co. Ltd. (“Dr. Jart+”) contributed approximately 1 percentage point of growth to reported net sales.

The Company reported net earnings of $0.68 billion, compared with net earnings of $1.79 billion last year. Diluted net earnings per common share was $1.86, compared with $4.82 reported in the prior-year period. Excluding the negative impact of currency translation, adjusted diluted earnings per common share, which excludes items detailed on page 4, decreased 22% to $4.16.

Fabrizio Freda, President and Chief Executive Officer said, “Fiscal 2020 was a year without parallel, as we delivered record sales and exceptionally strong adjusted EPS growth in our first half and navigated with agility through an unprecedented pandemic in our second half. The second half also marked a period of profound pain as tragic events in the United States highlighted the systemic racial injustice that has plagued our society for far too long.

In this challenging year, our multiple engines of growth strategy proved highly effective. The Estée Lauder brand grew double-digits for the third consecutive year. Asia/Pacific was strong with organic sales growth in mainland China and several other markets driving prestige beauty share gains, our skin care category grew and was further boosted by the acquisition of Dr. Jart+, and our online channel surged. We quickly pivoted to capture consumption online during COVID-19 as retail stores around the world temporarily closed.”

Freda emphasized, “In this new fiscal year, we remain focused on the safety and well-being of our employees and consumers. Our sense of urgency to act on our recently announced racial equity commitments is strong. We enter fiscal 2021 with cautious optimism, given the vibrancy of our skin care portfolio, acceleration in Asia/Pacific, momentum online globally, and robust innovation pipeline, which includes the exciting launch this month of Estée Lauder’s new Advanced Night Repair. We expect sales trends to improve sequentially each quarter.

Our strategic priorities for fiscal 2021 rightly balance investment in these engines with cost discipline amid the ongoing pandemic. Through the Post-COVID Business Acceleration Program announced today, we are better aligning our brick-and-mortar footprint to improve productivity and invest for growth. We are well-positioned to drive growth as the market dynamics support it, yet remain equally mindful of the effects of COVID-19 on consumers, the retail sector and economics, in general, as well as geopolitical uncertainty.”

COVID-19 Business Update
The Estée Lauder Companies has stood with the global community to help limit the spread of the virus and ease the related economic hardships faced by the communities in which we live and work. Guided by its family values and a spirit of giving, the Company has made contributions to support the well-being of our communities, including monetary and in-kind donations, hand sanitizer produced at the Company’s facilities and the establishment of the ELC Cares Employee Relief Fund.

The outbreak and global spread of COVID-19 has caused a significant disruption in the Company’s operating environment. Accordingly, the Company modified a number of its business practices during the second half of fiscal 2020, in part due to legislation, executive orders and guidance from government entities and healthcare authorities (collectively, “COVID-19 Directives”). These include the temporary closing of businesses deemed “non-essential,” travel bans and restrictions, social distancing and quarantines.

Retail Impact
Primarily due to COVID-19 Directives, many retail stores across most countries, whether operated by the Company or its customers, closed for some period of time and have experienced severely reduced consumer traffic as they re-open.

• In Asia/Pacific, nearly all retail stores have re-opened after many stores closed for most of February through April 2020.
• In Europe, the Middle East & Africa, retail stores began closing in early March 2020 and have been gradually re-opening through June 2020. At the end of June 2020, approximately 15% of the stores remained closed.
• In The Americas, retail stores began closing in March 2020. By the end of June, approximately 20% of the stores remained closed.
• In addition, air travel has been largely curtailed globally due to both government restrictions and the sentiment around health concerns, which adversely impacted, and continues to impact, consumer traffic in most travel retail locations.

During the second half of fiscal 2020, online sales1 growth accelerated in every region as the Company and its retailers activated numerous digital capabilities and strategies to capture consumer demand online. Net sales in mainland China, where restrictions were lifted first, grew strong double digits year-over-year during the fourth quarter of fiscal 2020, and net sales in Korea, excluding the impact of Dr. Jart+, also returned to growth in the quarter.

COVID-19 and its wide-ranging impacts have also influenced consumer preferences and practices due to the closures of offices, retail stores and other businesses and the significant decline in social gatherings. The demand for skin care and hair care products has been more resilient than the demand for makeup and fragrance. Within skin care, the demand for products in hero franchises has remained strong, driving double-digit growth at the Estée Lauder brand during the fourth quarter of fiscal 2020.

During the second half of fiscal 2020, a majority of the Company’s facilities continued to manufacture and distribute products globally, albeit in a much-reduced capacity in light of safety measures designed to help protect the Company’s employees. As a result of (i) certain of our manufacturing facilities operating at a reduced capacity and (ii) an increase in excess and obsolete inventory caused by the reduced activity in brick-and-mortar retail, the Company’s cost of goods was adversely impacted in the fiscal fourth quarter.

The Company has been able to obtain raw materials and components as needed during the pandemic. By the end of June 2020, all manufacturing and distribution facilities were operating with rapidly-improving capacity while maintaining health and safety measures.

Cash Conservation
As the impacts from COVID-19 evolved, the Company faced various uncertainties and implemented strict cost control actions to preserve cash and the flexibility to manage the business. These actions included:

• Expense reductions, including advertising and promotion activities, travel, meetings, consulting, and certain employee costs, including implementing a hiring freeze, furloughs and similar unpaid temporary leaves of absence for many point of sale employees, temporary salary reductions for senior executives and other management employees, and a temporary elimination of cash retainers for the Board of Directors. Combined, these resulted in approximately $800 million of savings from what the Company planned to spend prior to the pandemic in the last five months of fiscal 2020.
• Reduced capital investments (e.g., facilities and consumer-facing counters) by approximately $275 million for fiscal 2020.
• Temporary suspension of repurchases of the Company’s Class A Common Stock.
• Not declaring the quarterly cash dividend that would have been paid in June 2020.
• Raising an additional $2.2 billion of cash, as of April 2020, by borrowing the full amount under its $1.5 billion revolving credit facility and issuing $700 million of Senior Notes.

In June 2020, the Company repaid $750 million borrowed under its revolving credit facility and, in August 2020, repaid the remaining $750 million. The Company also announced the declaration of a $.48 per share dividend on its Class A and Class B Common Stock payable on September 15, 2020 to stockholders of record as of August 31, 2020.

The Company continues to monitor the effects of the pandemic, which have negatively impacted many areas of its business in the second half of fiscal 2020. It will continue to invest behind the most attractive growth opportunities while, first and foremost, taking measures designed to protect the safety of its employees, beauty advisors and consumers.

Fiscal 2020 Results
Adjusted diluted earnings per common share excludes restructuring and other charges, changes in contingent consideration, goodwill, other intangible and long-lived asset impairments, and other income, net as detailed in the following table.

Net sales and operating income in the Company’s product categories and regions outside of the United States were unfavorably impacted by a stronger U.S. dollar in relation to most currencies.

Total reported operating income was $606 million, a 74% decrease from $2.3 billion in the prior year. Operating income decreased 19% excluding (i) goodwill and other intangible asset impairments related to Too Faced, BECCA, Smashbox, GLAMGLOW and Editions de Parfums Frédéric Malle, as well as long-lived asset impairments relating to certain of the Company’s freestanding stores, combined, of $1.4 billion compared to goodwill and other intangible asset impairments of $90 million related to Smashbox in the prior-year period, (ii) restructuring and other charges and adjustments of $66 million compared with restructuring and other charges and adjustments of $204 million recorded in the prior-year period and (iii) the unfavorable impact of currency translation of $22 million. This decline largely reflected lower net sales due to the impacts of COVID-19, as well as costs to maintain employee salaries and benefits in portions of the second half of the fiscal year despite retail store closures and reduced capacity at certain of our manufacturing facilities. These impacts were partially offset by strong growth in skin care in Asia/Pacific as well as the acceleration of online growth and disciplined expense management throughout the business from cost containment actions taken in response to COVID-19.

Skin Care

• Skin care net sales grew across most regions, led by Estée Lauder and La Mer. The category increased 26% in the first half of the fiscal year and was the most resilient category globally during the pandemic. Origins also increased net sales.
• Net sales of Dr. Jart+, which the Company acquired in December 2019, contributed approximately 1% to skin care net sales growth.
• Estée Lauder delivered strong double-digit growth, reflecting growth in Asia/Pacific, with significant strength in mainland China, as well as growth in the Balkans and in the United Kingdom. It also delivered double-digit growth in travel retail and triple-digit growth online, driven by consumer demand for high loyalty hero franchises, including Advanced Night Repair, Perfectionist, Re-Nutriv, Micro Essence and Revitalizing Supreme+.
• Double-digit growth from La Mer was also driven by Asia/Pacific, with significant strength in mainland China, and by travel retail given strong growth in hero products, including The Treatment Lotion and relaunches of The Regenerating Serum and The Eye Concentrate. Targeted expanded consumer reach also contributed to growth.
• Skin care operating income increased, primarily from higher net sales at Estée Lauder and La Mer. Incremental cost containment in response to COVID-19 only partially offset expenses and strategic investments that were made during the fiscal year.

Makeup

• Net sales declined in makeup with declines at all brands with the exceptions of La Mer and By Kilian. The effects of COVID-19 had a larger impact on makeup, particularly foundation and lip, and makeup sales continued to be soft in most markets. Together, these impacts more than offset the 5% growth for the category in the first half of the fiscal year.
• Net sales from La Mer grew despite the impacts of COVID-19 given strong growth in the first half of the fiscal year due to the success of The Luminous Lifting Cushion Foundation in international markets and successful holiday campaigns and events globally.
• Makeup operating income declined, primarily reflecting goodwill and other intangible asset impairments related to Too Faced, BECCA and Smashbox, lower net sales and impairment charges associated with certain freestanding stores. These impacts were partially offset by disciplined expense management across all brands in response to COVID-19.

Fragrance

• Net sales decreased, primarily due to declines from certain designer fragrances, Estée Lauder and Jo Malone London due to the impacts of COVID-19. Net sales also declined due to the expiration of the Tory Burch license agreement in December 2019. Additionally, the Estée Lauder brand had a difficult comparison due to the launch of Beautiful Belle in the prior-year period. Combined, these more than offset the 3% growth in the first half of the fiscal year.
• Strong double-digit net sales growth in Asia/Pacific accelerated year over year driven by our luxury and artisanal fragrance portfolio.
• Net sales from Le Labo rose mid-single digits with growth in nearly all regions and strong double-digit growth in Asia/Pacific and travel retail despite the decline in travel retail net sales in the second half of the fiscal year. Targeted expanded consumer reach also contributed to growth.
• Jo Malone London continued to grow net sales in Asia/Pacific, led by China, Korea and Japan, with the launches of Poppy & Barley, Vetiver & Golden Vanilla and Valentine’s Day gift sets, as well as targeted expanded consumer reach.
• Fragrance operating income declined, driven primarily by lower net sales partially offset by disciplined expense management.

Hair Care

• Hair care net sales declined at both Aveda and Bumble and bumble due to the impacts of COVID-19, as mentioned above, which led to retail and salon closures in the second half of the fiscal year. Prior to that, net sales were flat for the first half of the fiscal year.
• Net sales of Aveda’s Nutriplenish, a new line of hydrating hair care products, were strong globally prior to the salon and store closures related to COVID-19.
• Hair care operating results declined reflecting lower net sales and impairment charges associated with certain freestanding stores.

Beginning in the fiscal 2020 first quarter, changes were made to reflect certain Leading Beauty Forward enhancements in the capabilities and cost structure of our travel retail business, which are primarily centralized in The Americas region. This resulted in a change to the royalty structure of the travel retail business to reflect the value created in The Americas region. Accordingly, the fiscal 2019 operating income of The Americas was increased by $866 million, with a corresponding decrease in Europe, the Middle East & Africa, to conform with the current year methodology and presentation.

The Americas

• Most retail locations throughout the region closed in response to COVID-19 beginning in March, causing significant declines in net sales in brick-and-mortar doors. In response, the Company drove net sales to the online channel utilizing new and existing digital capabilities, which partially offset the brick-and-mortar declines.
• The North American beauty industry continued to be challenged by soft makeup sales, which impacted makeup category results at the Company’s brands.
• Online net sales growth accelerated in March following the closure of retail doors in the region and increased double-digits for the fiscal year. Online comprised 40% of sales in the region.
• Net sales in Latin America declined across the region primarily due to the impacts of COVID-19, which led to retail and salon closures in March 2020. Online sales in Latin America more than doubled.
• Operating income in The Americas decreased, reflecting goodwill and other intangible asset impairments related to Too Faced, BECCA, Smashbox, GLAMGLOW and Editions de Parfums Frédéric Malle, lower net sales and impairment charges associated with certain freestanding stores, partially offset by disciplined expense management including cost mitigation strategies in response to COVID-19.

Europe, the Middle East & Africa

• Net sales declined in virtually every market, led by the United Kingdom and the Western European markets, due to the effects from COVID-19 as the impact from retail door closures more than offset the 17% increase in net sales in the first half of the fiscal year. While gradual door re-openings began in mid-June 2020, retail traffic remained slow.
• Net sales online rose strong double-digits, reflecting the Company’s increased focus on reaching consumers digitally. The Company continued to invest in its already strong online capabilities, positioning it well for the surge in online shopping as COVID-19 caused widespread retail door closures.
• Net sales from the Company’s global travel retail business grew during the fiscal year as the adverse impacts from COVID-19 were more than offset by strong growth from July through February. Net sales growth primarily reflected strength from Estée Lauder and La Mer, due to the continued success of certain hero franchises, such as Estée Lauder’s Advanced Night Repair and La Mer’s The Treatment Lotion, Crème de la Mer and The Eye Concentrate.
• Operating income decreased, primarily reflecting lower net sales and impairment charges associated with certain freestanding stores, partially offset by disciplined expense management including cost mitigation strategies in response to COVID-19.

Asia/Pacific

• Net sales growth was driven by increases in China and Korea. Net sales increased 27% in the first half of the fiscal year before the outbreak of COVID-19 led to retail store closures at the end of January. Retail stores began to reopen in mid-March 2020 and most were open by the end of June.
• The Company quickly refocused its marketing investments to the online channel, which nearly doubled online sales for the fiscal year and grew prestige beauty share during the second half of the fiscal year.
• In mainland China, net sales grew strong double digits reflecting double-digit growth in every product category and nearly every brand, as well as in every channel, led by online. Online contributed over 40% of sales for the fiscal year. Growth in China was partially driven by successful programs during key shopping moments, including Singles Day and the 6.18 Mid-Year Shopping Festival, as well as targeted expanded consumer reach.
• Net sales growth in Korea primarily reflected incremental net sales from the Company’s acquisition of Dr. Jart+ in December 2019, which also includes total net sales of Dr. Jart+ in the travel retail channel.
• Skin care and fragrance net sales grew double-digits in the region, albeit at a slower pace in the second half of the year, and hair care net sales increased in constant currency.
• Operating income increased, reflecting the higher net sales and cost mitigation strategies in response to COVID-19, while strategic investments in social selling continued to drive business online.

Cash Flows

• For the twelve months ended June 30, 2020, net cash flows provided by operating activities were $2.28 billion, compared with $2.52 billion in the prior year. The decline primarily reflected lower net sales, partially offset by cost actions taken in response to COVID-19. The lower net sales also reduced working capital needs.
• Capital Expenditures were $623 million compared to $744 million in fiscal 2019. The Company continued to invest in e-commerce capabilities, supply chain improvements and information technology while reducing planned spending on retail and office space upgrades to preserve cash given COVID-19.
• During the fiscal year, the Company borrowed $2.72 billion, net of repayments, to fund the acquisition of Dr. Jart+ and to provide liquidity and flexibility given the uncertainty regarding the business impacts of COVID-19 in the second half of the fiscal year.
• The Company ended the year with $5.02 billion in cash and cash equivalents after repaying $750 million of its $1.50 billion revolving credit facility in June and returning $1.40 billion cash to stockholders through share repurchases and dividends during the year. In August 2020, the Company repaid the remaining $750 million borrowed under its revolving credit facility.

Fourth Quarter Results

• For the three months ended June 30, 2020, the Company reported net sales of $2.43 billion, a 32% decrease compared with $3.59 billion in the prior-year period.
• Results in the fourth quarter were driven largely by the impacts of COVID-19, as described above, with strong growth online only partially offsetting the negative impact from the retail store closures.
• Net loss was $0.46 billion, and diluted loss per share was $1.28. In the prior-year quarter, the Company reported net earnings of $0.16 billion and diluted earnings per share of $.43.
• During the three-months ended June 30, 2020, the Company recorded restructuring and other charges, changes in contingent consideration, goodwill, other intangible and long-lived asset impairments, and Other income, net primarily related to a gain on a previously held equity investment in Have&Be Co. Ltd. that, combined, totaled $334 million ($272 million after tax), equal to $.75 per diluted share. The prior-year period results include restructuring and other charges and changes in contingent consideration that, combined, totaled $105 million ($79 million after tax), equal to $.21 per diluted share, as detailed in the table on page 20.
• Excluding restructuring and other charges and adjustments, diluted net loss per common share for the three months ended June 30, 2020 was $.53, and $.50 in constant currency, a decline from net earnings per common share of $.64 in the three months ended June 30, 2019.

Outlook for Fiscal 2021 First Quarter and Full Year
The Company continues to believe that strong consumer demand for its high-quality products remains despite ongoing challenges related to COVID-19. For the fiscal year, the Company expects to continue to build global share while global prestige beauty progressively returns to growth. The Company is driving to return to its long-term growth targets of 6% to 8% sales growth, 50 basis points of operating margin expansion and double-digit adjusted diluted earnings per share growth in constant currency after a period of normalization as the impacts of COVID-19 subside.

The Company is mindful that some retail locations in certain markets may not reopen and there are likely to be lingering adverse global economic and social impacts. The Company is also mindful of other risks related to social, economic and political matters, including restructurings and bankruptcies in the retail industry, destocking and tighter working capital management by retailers, challenges for suppliers, geopolitical tensions, regulatory developments, global security issues, currency volatility, general economic challenges and changes in where and how consumers shop that is affecting consumer spending in certain countries, channels and travel corridors.

In fiscal 2021, the Company will continue to pursue several long-term strategic initiatives, among them rationalizing unproductive brick-and-mortar stores, increasing manufacturing capabilities, expanding the fulfillment capabilities of its online business, and investing in the growth opportunity of Asia/Pacific. The COVID-19 pandemic has significantly accelerated certain trends—most notably consumers’ adoption of the online channel—and as a result, the Company plans to quickly reallocate resources from certain unproductive brick-and-mortar stores, primarily in Europe and in North America, to online and other new brand-building distribution opportunities. This reallocation will also make the remaining brick-and-mortar footprint more productive and sustainable for the long term. As part of this, the Company is launching a restructuring program, the Post-COVID Business Acceleration Program.

Post-COVID Business Acceleration Program
The pandemic has rapidly accelerated macro trends in global prestige beauty that were expected over a longer time horizon. These trends include shifts in where consumers shop, what they value, why they purchase the Company’s products, and how they engage with the Company’s brands in an increasingly digital and omnichannel world.

As a result, the Company today announced a two-year initiative to rebalance investments to address the dramatic shifts in the distribution landscape and consumer behavior post-COVID-19. This will include reducing the Company’s retail footprint, primarily in Europe, the Middle East & Africa and in North America, and increasing digital investments to reflect a dramatic shift in consumer shopping to online and omnichannel capabilities in the more productive brick-and-mortar footprint. This program is expected to position the Company to better execute its long-term strategy while strengthening its financial flexibility.

Post-COVID Business Acceleration Program will begin during the Company’s fiscal 2021 first quarter. Specific initiatives are expected to be approved through the end of fiscal 2022 and completed through fiscal 2023. Key actions include:

• Realignment of the Company’s distribution network, reflecting certain department store closures and freestanding store rationalization while accelerating the shift to online.
• Further investment in digital capabilities, omnichannel, talent, and advertising and promotional activities to support continued share improvement and business acceleration.
• Implementing increased confident beauty practices at retail and adoption of new ways of working, in light of the ongoing pandemic.

In connection with the Post-COVID Business Acceleration Program, at this time the Company estimates a net reduction in the range of approximately 1,500 to 2,000 positions globally, primarily point of sale employees and related support staff in the areas that were the most disrupted, which is about 3% of its current workforce including temporary and part-time employees. This reduction takes into account the elimination of some positions, retraining and redeployment of certain employees, and investment in new positions in key areas like online.

The Company also estimates the closure of between 10-15% of its freestanding stores globally, as well as certain less productive department store counters that the Company elects to close.

Once fully implemented, the Company expects to take restructuring and other charges of between $400 million and $500 million, before taxes, consisting of employee-related costs, contract terminations across areas being restructured, asset write-offs and other costs associated with implementing these initiatives.

Once fully implemented, Post-COVID Business Acceleration Program is expected to yield annual benefits of between $300 million and $400 million, before taxes, of which a portion is expected to be reinvested in future initiatives to drive sustainable, profitable sales growth.

Full Year Fiscal 2021

Given the uncertainty around the timing, speed and duration of the recovery from the adverse impacts of COVID-19, the Company is not providing specific sales and EPS guidance for the fiscal 2021 full year. The Company is confident it is well-positioned to facilitate the recovery in fiscal 2021 as the market dynamics support it. The Company continues to implement strict cost control actions to manage the business in response to COVID-19. These include the reduction of travel, meeting, and consulting expenses as well as a reduction of employee costs, including a hiring freeze and temporary salary reductions for senior executives and other management employees, and a temporary elimination of cash retainers for the Board of Directors. The Company’s actions to control costs during this very volatile moment, while maintaining the flexibility to make strategic investments in the areas of greatest opportunity, are expected to help it emerge strongly as the global recovery begins.

First Quarter Fiscal 2021

Sales Outlook

• Reported net sales are forecasted to decline between 12% and 13% versus the prior-year period.
• The Company’s recent acquisition of Dr. Jart+ is forecasted to contribute approximately 2.5% to the Company’s overall sales growth.
• Excluding the impact of the acquisition and 1% negative impact from currency, net sales are forecasted to decrease between 14% and 15%.

Earnings per Share Outlook

• Reported diluted net earnings per common share are projected to be between $.77 and $.83. Excluding restructuring and other charges and adjustments, diluted net earnings per common share are projected to be between $.80 and $.85.
• Excluding the $.06 per share dilution related to the acquisition, adjusted diluted earnings per common share are expected to decrease between 45% and 48% on a constant currency basis.
  • Currency exchange rates are volatile and difficult to predict. Using June 30, 2020 spot rates for fiscal 2021, the negative currency impact equates to about $.01 of diluted loss per share.
  • The Company expects to take charges associated with previously approved restructuring and other activities. For Leading Beauty Forward, the charges are estimated to be between approximately $10 million to $15 million, equal to $.02 to $.03 per diluted common share. The first quarter fiscal 2021 forecast does not include charges related to the Post-COVID Business Acceleration Program.

Conference Call The Estée Lauder Companies will host a conference call at 9:30 a.m. (ET) today, August 20, 2020 to discuss its results. The dial-in number for the call is 888-294-4716 in the U.S. or 706-902-0101 internationally (conference ID number: 4170137). The call will also be webcast live at http://www.elcompanies.com/investors/events-and-presentations.

The Estée Lauder Companies Inc. is one of the world’s leading manufacturers and marketers of quality skin care, makeup, fragrance and hair care products. The Company’s products are sold in approximately 150 countries and territories under brand names including: Estée Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, Tommy Hilfiger, M·A·C, Kiton, La Mer, Bobbi Brown, Donna Karan New York, DKNY, Aveda, Jo Malone London, Bumble and bumble, Michael Kors, Darphin, Tom Ford, Smashbox, Ermenegildo Zegna, AERIN, RODIN olio lusso, Le Labo, Editions de Parfums Frédéric Malle, GLAMGLOW, By Kilian, BECCA, Too Faced and Dr. Jart+.

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This earnings release includes some non-GAAP financial measures relating to charges associated with restructuring and other activities, goodwill and other intangible asset impairments; long-lived asset impairments primarily caused by COVID-19; the changes in the fair value of contingent consideration; other income, net; the Transition Tax; the remeasurement of U.S. net deferred tax assets as of the TCJA enactment date; and the establishment of a net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA. The following is a reconciliation between the non-GAAP financial measures and the most directly comparable GAAP measures for certain consolidated statements of earnings accounts before and after these items. The Company uses certain non-GAAP financial measures, among other financial measures, to evaluate its operating performance, which represent the way the Company conducts and views its business. Management believes that excluding certain items that are not comparable from period to period, or do not reflect the Company’s underlying ongoing business, provides transparency for such items and helps investors and others compare and analyze operating performance from period to period. In the future, the Company expects to incur charges or adjustments similar in nature to those presented below; however, the impact to the Company’s 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 the Company considers the non-GAAP measures useful in analyzing its 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 GAAP.

The Company operates on a global basis, with the majority of its net sales generated outside the United States. Accordingly, fluctuations in foreign currency exchange rates can affect the Company’s results of operations. Therefore, the Company presents certain net sales, operating results and diluted earnings per share information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of its underlying business outside the United States. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. The Company calculates constant currency information by translating current-period results using prior-year period weighted average foreign currency exchange rates and adjusting for the period-over-period impact of foreign currency cash flow hedging activities.

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