ESTEE LAUDER COMPANIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS We manufacture, market and sell beauty products including those in the skin care, makeup, fragrance and hair care categories, which are distributed in approximately 150 countries and territories. The following table is a comparative summary of operating results for the three months ended September 30, 2020 and 2019, and reflects the basis of presentation described in Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies for all periods presented. Products and services that do not meet our definition of skin care, makeup, fragrance and hair care have been included in the “other” category. Three Months Ended September 30 (In millions) 2020 2019 NET SALES By Product Category: Skin Care $ 2,035 $ 1,842 Makeup 978 1,443 Fragrance 406 462 Hair Care 136 136 Other 7 12 Net sales $ 3,562 $ 3,895 By Region (1) : The Americas $ 873 $ 1,160 Europe, the Middle East & Africa 1,540 1,677 Asia/Pacific 1,149 1,058 Net sales $ 3,562 $ 3,895 OPERATING INCOME (LOSS) By Product Category: Skin Care $ 721 $ 632 Makeup (71) 104 Fragrance 60 66 Hair Care 3 — Other 1 2 714 804 Charges associated with restructuring and other activities (9) (25) Operating income $ 705 $ 779 By Region (1) : The Americas $ 65 $ 175 Europe, the Middle East & Africa 411 377 Asia/Pacific 238 252 714 804 Charges associated with restructuring and other activities (9) (25) Operating income $ 705 $ 779 (1) The net sales from our travel retail business are included in the Europe, the Middle East & Africa region, with the exception of the net sales of Dr. Jart+ in the travel retail channel that are reflected in Korea in the Asia/Pacific region. Operating income attributable to the travel retail sales included in Europe, the Middle East & Africa is included in that region and in The Americas. 31 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following table presents certain consolidated earnings data as a percentage of net sales: Three Months Ended September 30 2020 2019 Net sales 100.0 % 100.0 % Cost of sales 23.2 23.3 Gross profit 76.8 76.7 Operating expenses: Selling, general and administrative 56.9 56.1 Restructuring and other charges 0.2 0.6 Total operating expenses 57.0 56.7 Operating income 19.8 20.0 Interest expense 1.3 0.8 Interest income and investment income, net 0.4 0.3 Other components of net periodic benefit cost 0.1 — Earnings before income taxes 18.8 19.5 Provision for income taxes (4.1) (4.1) Net earnings 14.7 15.4 Net earnings attributable to noncontrolling interests (0.1) (0.1) Net earnings attributable to The Estée Lauder Companies Inc. 14.7 % 15.3 % Not adjusted for differences caused by rounding We continually introduce new products, support new and established products through advertising, merchandising and sampling and phase out existing products that no longer meet the needs of our consumers or our objectives. The economics of developing, producing, launching, supporting and discontinuing products impact our sales and operating performance each period. The introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning. Non-GAAP Financial Measures We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period helps investors and others compare operating performance between periods. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. See Reconciliations of Non-GAAP Financial Measures beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. We operate on a global basis, with the majority of our net sales generated outside the United States. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations. Therefore, we present certain net sales, operating results and diluted net earnings per common share information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of our underlying business outside the United States. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We calculate constant currency information by translating current-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. 32 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Overview COVID-19 Business Update The COVID-19 pandemic continues to cause significant disruption to our operating environment, temporarily impacting our retail footprint and consumer preferences. During the three months ended September 30, 2020, countries around the world continued to be challenged by the pandemic with different levels of recovery from temporary business closures and other restrictions. Retail impact Many brick-and-mortar retail stores globally that sell our products, whether operated by us or our customers, were closed for some period of time during the fiscal 2021 first quarter, and consumer traffic declined significantly. • In The Americas, approximately 20% of the stores were closed at the beginning of July 2020, and by the end of September 2020, nearly all retail stores had re-opened. • In Europe, the Middle East & Africa, approximately 15% of stores were closed at the beginning of July 2020, and by the end of September 2020, nearly all retail stores had re-opened. • In Asia/Pacific, nearly all retail stores were open during the entire first quarter of fiscal 2021. • In addition, international travel has remained largely curtailed globally due to both government restrictions and consumer health concerns, which continues to adversely impact consumer traffic in most travel retail locations. Somewhat offsetting the significant declines in brick-and-mortar channels, net sales growth of our products online (through our own websites, third-party platforms and websites of our retailers) has remained strong in every region during the first quarter of fiscal 2021. The resurgence of COVID-19 cases in various parts of the world, including the United Kingdom, Ireland and other countries in Europe, has caused the re-implementation of government restrictions to prevent further spread of the virus. These restrictions include the temporary closure of businesses deemed “non-essential”, travel bans and restrictions, social distancing and quarantines. We will continue to monitor the impacts of the COVID-19 pandemic and adjust our action plans accordingly as the situation progresses. Consumer Preferences The COVID-19 pandemic related closures of offices, retail stores and other businesses and the significant decline in social gatherings have also influenced consumer preferences and practices. Demand for skin care and hair care products has been more resilient than the demand for makeup and fragrance products. Manufacturing and Distribution By the end of the fiscal 2021 first quarter, all of our manufacturing and distribution facilities were operating at sufficient levels. Cost Controls In response to the ongoing impacts from the COVID-19 pandemic, we continued to implement cost control actions to effectively manage the changing business environment. Areas where we took actions included advertising and promotion activities, travel, meetings, consulting, and certain employee costs, including implementing 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. 33 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Business Update We are a leader in prestige beauty, which combines the repeat purchase and relative affordability of consumer goods with the high quality products and services of luxury goods. Within prestige beauty, we are well diversified by brand, product category, product sub-category, geography, channel, consumer segment and price point. This diversity allows us to leverage consumer analytics and insights with agility by deploying our brands to fast growing and profitable opportunities. These analytics and insights, combined with our creativity, inform our innovation to provide a broad, locally-relevant and inclusive range of prestige products allowing us to compete effectively for a greater share of a consumer's beauty routine. Elements of our strategy are described in the Overview on pages 28-31 of our Annual Report on Form 10-K for the year ended June 30, 2020, as well as below. During the first quarter of fiscal 2021, net sales declined 9%, reflecting the impacts of the COVID-19 pandemic, including retail store closures and reduced consumer foot traffic in brick-and mortar retail. Declines in brick-and-mortar retail were partially offset by strong growth online and the incremental net sales from our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter. • Our skin care net sales benefited from the launch of the new Estée Lauder Advanced Night Repair Synchronized Multi-Recovery Complex and the launch of the new The Concentrate from La Mer. Both new products support high-loyalty hero franchises. Skin care net sales grew internationally, reflecting the renewed consumer focus on self-care during the COVID-19 pandemic. • The COVID-19 pandemic limited social and business activities and consumers wore less makeup. Demand for lipstick and foundation were most acutely impacted, contributing to lower makeup net sales from M·A·C, Estée Lauder, Clinique and Bobbi Brown. During the first quarter of fiscal 2021, our brands generated interest in makeup through virtual marketing efforts such as classes, virtual try on technology and greater emphasis on social media platforms, as well as a focus on subcategories that continue to resonate with consumers. • Our fragrance net sales also declined, as consumers continued to gravitate to bath, body and home fragrances. KILIAN PARIS and Frédéric Malle launched in mainland China, aiding their growth in the first quarter of fiscal 2021. Le Labo grew double-digits globally, primarily on the strength of its online efforts. Most other brands reported declines in fragrance net sales. • Our hair care net sales were flat, reflecting growth from Aveda, partially offset by declines at Bumble and bumble. The COVID-19 pandemic related salon closures and limited capacity re-openings were offset by strong double-digit online growth at Aveda as well as its launch of Botanical Repair in August 2020. We continue to strengthen our presence in large, image building core markets, while broadening our presence in emerging markets. Our net sales growth by geographic region in the first quarter of fiscal 2021 reflects, in part, the cadence of post-COVID-19 pandemic re-openings around the world. • Net sales growth declined the most in The Americas, where COVID-19 cases continue to rise across much of the region and strong online net sales were not enough to offset the decline of brick-and-mortar distribution. • The Europe, the Middle East & Africa region net sales declined overall, while robust online net sales growth continued. • The Asia/Pacific region grew, reflecting good momentum in mainland China, Korea and several smaller markets. Outlook While we continue to face strong competition and economic challenges globally, the COVID-19 pandemic has caused a more significant disruption to our business and the retail industry generally. We have seen, and believe there may be more impairments, restructurings and bankruptcies in the retail industry, including among our customers; destocking and tighter working capital management by retailers; challenges for suppliers; and an acceleration in the shifts in consumer preferences as to where and how they shop, as well as changes in their preferences for certain products. The severe decline in international travel is also affecting our travel retail business, which had been historically one of our most profitable channels. In addition to impacting net sales and profitability, these and other challenges may impact our ability to collect receivables and our operating cash flows generally and may adversely impact the goodwill, other intangibles and long-lived assets associated with our acquired brands. We continue to monitor the geopolitical tensions between the United States and China and the uncertainties caused by the evolving trade policy dispute, which could increase our cost of sales and negatively impact our overall net sales, or otherwise have a material adverse effect on our business. We also continue to monitor the potential implications of the ongoing economic and political uncertainties stemming from the United Kingdom’s exit and transition from the European Union (i.e. “Brexit”) and have developed our risk mitigation strategies to address such uncertainties. These strategies include changes related to regulatory and legislative compliance, assessing alternatives to supply chain routing, revising customer arrangements and analyzing inventory levels. Additionally, we continue to monitor the effects of the global macroeconomic environment; social and political issues; regulatory matters, including the imposition of tariffs; geopolitical tensions; and global security issues. 34 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The uncertainty around the timing, speed and duration of the recovery from the adverse impacts of the COVID-19 pandemic will continue to affect our ability to grow sales profitably. We believe we can, to some extent, offset the impact of more ordinary challenges by continually developing and pursuing a diversified strategy with multiple engines of growth and by accelerating initiatives focused on areas of strength, discipline and agility, and by implementing our Post-COVID Business Acceleration Program. As the current situation progresses, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, there could be a further negative effect on consumer confidence, demand, spending and willingness or ability to travel and, as a result, on our business. We are continuing to monitor these and other risks that may affect our business. Leading Beauty Forward Program and Post-COVID Business Acceleration Program Information about our restructuring initiatives, the Leading Beauty Forward Program and the Post-COVID Business Acceleration Program, are described in Notes to Consolidated Financial Statements, Note 3 – Charges Associated with Restructuring and Other Activities herein, as well as, in Notes to Consolidated Financial Statements, Note 8 – Charges Associated with Restructuring and Other Activities and in the Overview on page 30 of our Annual Report on Form 10-K for the year ended June 30, 2020. NET SALES Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Net sales $ 3,562 $ 3,895 $ Change from prior-year period (333) % Change from prior-year period (9) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (9) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales decreased, primarily reflecting lower net sales in all product categories, except skin care, and all geographic regions, except for Asia/Pacific, due to the continued challenges of the COVID-19 pandemic, including retail store closures and reduced consumer foot traffic in brick-and-mortar retail, the continued curtailment of international travel, and continued social distancing and quarantines. Despite the overall decrease, net sales grew in our skin care category and in our Asia/Pacific region. Direct-to-consumer online net sales continued to have strong growth, representing approximately 13% of fiscal 2021 first quarter net sales compared to approximately 8% in the prior-year period. Skin care net sales increased, primarily due to the success of hero product franchises and new product launches from Estée Lauder and La Mer. Net sales in Asia/Pacific increased, reflecting higher net sales in mainland China and Korea, as well as growth in all product categories, except makeup. The incremental net sales from our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter benefited both the skin care category and Asia/Pacific. The total net sales decrease was impacted by approximately $15 million of favorable foreign currency translation. 35 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Product Categories Skin Care Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Net sales $ 2,035 $ 1,842 $ Change from prior-year period 193 % Change from prior-year period 10 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 10 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported skin care net sales increased, reflecting higher net sales from Estée Lauder and La Mer of approximately $226 million, combined, and strong growth internationally, as well as incremental net sales of $109 million attributable to our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter. Net sales from Estée Lauder increased, led by our travel retail business and mainland China, primarily due to the continued success of existing product franchises, such as Advanced Night Repair, Perfectionist and Micro Essence, and new product launches, such as the new Advanced Night Repair Synchronized Multi-Recovery Complex. The increase in net sales from La Mer was primarily driven by new product launches, such as the launch of the new The Concentrate, successful holiday and promotional events in mainland China and targeted expanded consumer reach. Partially offsetting these increases were lower net sales from Clinique and Origins of approximately $46 million, combined. Net sales from these brands declined, reflecting lower net sales in all geographic regions, with the exception of Clinique in Asia/Pacific, due to the challenging environment as a result of the COVID-19 pandemic. Despite the overall declines in net sales, direct-to-consumer online net sales from both of these brands increased, particularly at Clinique, which represented approximately 14% of Clinique's fiscal 2021 first quarter skin care net sales compared to approximately 7% in the prior-year period. The skin care net sales increase was impacted by approximately $11 million of favorable foreign currency translation. Makeup Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Net sales $ 978 $ 1,443 $ Change from prior-year period (465) % Change from prior-year period (32) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (32) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 36 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported makeup net sales decreased, primarily driven by lower net sales from M·A·C, Estée Lauder and Clinique of approximately $340 million, combined. Net sales decreased from these brands in all geographic regions, reflecting the challenging environment, especially in brick-and-mortar retail locations, and the shift in consumer preference to skin care products due to the COVID-19 pandemic. The continued decline in prestige makeup and ongoing competitive activity in North America also contributed to the decline in net sales from these brands. Despite the challenging environment, our direct-to-consumer online net sales from Estée Lauder and Clinique grew double digits and grew single digits from M·A·C, which represented approximately 18%, combined, of their fiscal 2021 first quarter makeup net sales compared to approximately 11% in the prior-year period. The makeup net sales decrease was impacted by approximately $2 million of favorable foreign currency translation. Fragrance Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Net sales $ 406 $ 462 $ Change from prior-year period (56) % Change from prior-year period (12) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (13) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported fragrance net sales decreased, reflecting lower net sales primarily from Estée Lauder, Clinique and certain of our designer fragrances of approximately $40 million, combined. The decrease in net sales from Estée Lauder and Clinique reflected lower net sales in all geographic regions, driven by North America, and our travel retail business, due to the challenging environment as a result of the COVID-19 pandemic. The decline in net sales from Clinique also reflected a decrease in North America, primarily due to holiday shipments scheduled later in the fiscal year as compared to the prior-year period. Net sales declined from certain of our designer fragrances, primarily driven by lower net sales in our travel retail business due to the curtailment of international travel and the shift in consumer preferences as a result of the COVID-19 pandemic. The fragrance net sales decrease was impacted by approximately $2 million of favorable foreign currency translation. Hair Care Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Net sales $ 136 $ 136 $ Change from prior-year period — % Change from prior-year period — % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (1) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 37 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported hair care net sales was flat to the prior year, reflecting increased net sales from Aveda, partially offset by lower net sales from Bumble and bumble. The increase in net sales from Aveda was driven by the success of existing product franchises, such as Nutriplenish, and the launch of Botanical Repair, which led to growth in all geographic regions and very high double-digit growth from our online channel. Direct-to-consumer online net sales of Aveda products represented approximately 24% of Aveda's fiscal 2021 first quarter hair care net sales compared to approximately 14% in the prior-year period. Net sales declined from Bumble and bumble primarily driven by lower net sales in North America due to salon and freestanding store closures as a result of the COVID-19 pandemic. Geographic Regions The Americas Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Net sales $ 873 $ 1,160 $ Change from prior-year period (287) % Change from prior-year period (25) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (24) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales in The Americas decreased in nearly all countries, led by the United States of approximately $257 million, primarily from M·A·C, Clinique and Estée Lauder due to the challenging environment caused by the COVID-19 pandemic, including store closures, reduced consumer traffic with the gradual re-opening of brick-and-mortar stores and continued social distancing and quarantines. The decline in North America prestige beauty, primarily makeup, and the ongoing competitive activity also contributed to the decline in net sales. Despite the overall decrease in net sales, direct-to-consumer online net sales in The Americas grew strong double digits, with growth from virtually all brands, which represented approximately 19% of the region's fiscal 2021 first quarter net sales compared to approximately 10% in the prior-year period. Net sales in The Americas were impacted by approximately $14 million of unfavorable foreign currency translation. Europe, the Middle East & Africa Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Net sales $ 1,540 $ 1,677 $ Change from prior-year period (137) % Change from prior-year period (8) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (9) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 38 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported net sales decreased in virtually all markets in Europe, the Middle East & Africa, primarily led by the Middle East and the United Kingdom, as well as and our travel retail business, due to the continued challenges across the region from the COVID-19 pandemic, including reduced consumer traffic with the gradual re-opening of brick-and-mortar stores, the continued curtailment of international travel, and continued social distancing and quarantines. The adverse macroeconomic conditions also contributed to the decrease in net sales in the United Kingdom. Net sales decreased in our travel retail business, driven by limited international travel as a result of the COVID-19 pandemic, mostly offset by an increase in net sales in China travel retail (primarily Hainan). Despite the challenges in brick-and-mortar retail stores, direct-to-consumer online net sales more than doubled and represented approximately 3% of the region's fiscal 2021 first quarter net sales compared to approximately 1% in the prior-year period. Net sales in Europe, the Middle East & Africa were impacted by approximately $10 million of favorable foreign currency translation. Asia/Pacific Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Net sales $ 1,149 $ 1,058 $ Change from prior-year period 91 % Change from prior-year period 9 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 7 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales increased in Asia/Pacific, reflecting higher net sales in mainland China and Korea of approximately $182 million, combined, including incremental net sales of $105 million from our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter. Net sales increased in mainland China, primarily due to the continued success of hero product franchises and new product launches from La Mer and Estée Lauder, as well as incremental net sales attributable to our acquisition of Dr. Jart+. Net sales increased in mainland China across virtually all channels. Online net sales increased due to successful holiday events and campaigns. The increase in net sales in Korea reflected growth from virtually all brands, as well as incremental net sales from our acquisition of Dr. Jart+, and direct-to-consumer online net sales grew strong double digits, which represented approximately 21% of the region's fiscal 2021 first quarter net sales compared to approximately 17% in the prior-year period. Partially offsetting these increases were lower net sales in Hong Kong and Japan of approximately $77 million, combined, primarily due to the ongoing challenges stemming from the COVID-19 pandemic, including the resurgence of COVID-19 during the period (July 2020 in Hong Kong and August 2020 in Japan) and reduced consumer traffic with the gradual re-opening of brick-and-mortar stores, as well as the continued curtailment of international travel, social distancing and quarantines and border closures in Hong Kong. In addition, net sales in Japan decreased as a result of the unfavorable comparison to higher levels of purchasing in the prior-year period in anticipation of a value-added tax increase. Net sales in Asia/Pacific were impacted by approximately $19 million of favorable foreign currency translation. We strategically stagger our new product launches by geographic market, which may account for differences in regional sales growth. 39 Table of Contents THE ESTÉE LAUDER COMPANIES INC. GROSS MARGIN Gross margin increased to 76.8% for the three months ended September 30, 2020 as compared with 76.7% in the prior-year period. Favorable (Unfavorable) Basis Points Three Months Ended September 30, 2020 Mix of business 100 Obsolescence charges 10 Manufacturing costs and other (40) Foreign exchange transactions (50) Subtotal 20 Charges associated with restructuring and other activities (10) Total 10 The favorable impact from our mix of business was primarily due to lower costs from product sets, the favorable change in product category mix (i.e. a decline in our lower margin makeup category, primarily in Asia/Pacific), and lower costs of promotional items as a percentage of net sales. These favorable impacts to our mix of business were partially offset by the impact of our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter. OPERATING EXPENSES Operating expenses as a percentage of net sales was 57.0% for the three months ended September 30, 2020 as compared with 56.7% in the prior-year period. Favorable (Unfavorable) Basis Points Three Months Ended September 30, 2020 Three Months Ended General and administrative expenses (280) Advertising, merchandising, sampling and product development (20) Selling 230 Stock-based compensation (30) Store operating costs 10 Shipping (30) Foreign exchange transactions 40 Subtotal (80) Charges associated with restructuring and other activities 50 Total (30) The increase in operating expense margin reflected higher general and administrative expenses, primarily due to increased employee incentive compensation, reflecting bonuses paid to non-executive employees in recognition of their ongoing resilience during the COVID-19 pandemic, incremental costs attributable to our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter and the decrease in net sales. Partially offsetting this increase was a decrease in selling expense, primarily driven by the reduction in employee costs as a result of the COVID-19 pandemic. 40 Table of Contents THE ESTÉE LAUDER COMPANIES INC. OPERATING RESULTS Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Operating income $ 705 $ 779 $ Change from prior-year period (74) % Change from prior-year period (9) % Operating margin 19.8 % 20.0 % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities (11) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. The decrease in reported operating margin for the three months ended September 30, 2020 from the prior-year period was primarily driven by the decrease in net sales, partially offset by disciplined expense management throughout the business. Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business. Accordingly, the following discussions of Operating income by Product Categories and Geographic Regions exclude the impact of charges associated with restructuring and other activities. Product Categories Skin Care Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Operating income $ 721 $ 632 $ Change from prior-year period 89 % Change from prior-year period 14 % Reported skin care operating income increased, primarily driven by higher results from Estée Lauder, Clinique and La Mer of approximately $183 million, combined. The increases in operating income from Estée Lauder and La Mer reflected higher net sales, partially offset by increased advertising and promotional activities primarily to support new product launches. The higher results from Clinique reflected disciplined expense management, primarily advertising and promotional activities, and the decrease in selling expense due to the reduction in employee costs as a result the COVID-19 pandemic. 41 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Makeup Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Operating income (loss) $ (71) $ 104 $ Change from prior-year period (175) % Change from prior-year period (100+)% Reported makeup operating results decreased, primarily driven by lower results from M·A·C due to the decrease in net sales, partially offset by lower selling expenses and store operating costs due to the effects of the COVID-19 pandemic, including store closures. Fragrance Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Operating income $ 60 $ 66 $ Change from prior-year period (6) % Change from prior-year period (9) % Reported fragrance operating income decreased, driven by lower net sales, as previously noted. Partially offsetting the decrease in net sales was higher operating results from certain of our designer fragrances primarily driven by disciplined expense management and lower selling expenses due to the effects of the COVID-19 pandemic. Hair Care Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Operating income $ 3 $ — $ Change from prior-year period 3 % Change from prior-year period — % Reported hair care operating results increased, reflecting higher results from Aveda primarily due to the increase in net sales and lower selling expenses due to the reduction in employee costs as a result of the COVID-19 pandemic. Geographic Regions The Americas Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Operating income $ 65 $ 175 $ Change from prior-year period (110) % Change from prior-year period (63) % 42 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported operating results decreased in The Americas, primarily reflecting lower operating results in the United States of approximately $109 million, due to the decline in net sales, partially offset by lower selling expense due to the reduction in employee costs as a result of store closures in response to the COVID-19 pandemic. Europe, the Middle East & Africa Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Operating income $ 411 $ 377 $ Change from prior-year period 34 % Change from prior-year period 9 % Reported operating income increased in Europe, the Middle East & Africa, primarily driven by higher results from our travel retail business due to lower selling expenses, as a result of limited international travel, and disciplined expense management. Asia/Pacific Three Months Ended September 30 ($ in millions) 2020 2019 As Reported: Operating income $ 238 $ 252 $ Change from prior-year period (14) % Change from prior-year period (6) % Reported operating income decreased in Asia/Pacific, led by Japan and Hong Kong of approximately $27 million, combined. The lower operating results in both Japan and Hong Kong were primarily due to the decrease in net sales, partially offset by lower selling expenses due to the effects of the COVID-19 pandemic, including store closures, and a reduction in advertising and promotional activities. Partially offsetting these decreases was higher operating results from mainland China, reflecting the increase in net sales, partially offset by an increase in advertising and promotional activities to support holiday events and campaigns, new product launches, and digital advertising and social media spending. INTEREST AND INVESTMENT INCOME Three Months Ended September 30 (In millions) 2020 2019 Interest expense $ 45 $ 32 Interest income and investment income, net $ 14 $ 14 Interest expense increased from the prior-year period primarily due to the issuance of additional long-term debt in November 2019 and April 2020. 43 Table of Contents THE ESTÉE LAUDER COMPANIES INC. PROVISION FOR INCOME TAXES The provision for income taxes represents U.S. federal, foreign, state and local income taxes. The effective rate differs from the federal statutory rate primarily due to the effect of state and local income taxes, the tax impact of share-based compensation, the taxation of foreign income and income tax reserve adjustments, which represent changes in our net liability for unrecognized tax benefits including tax settlements and lapses of the applicable statutes of limitations. Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the tax impact of share-based compensation and the interaction of various global tax strategies. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of change. Three Months Ended September 30 2020 2019 Effective rate for income taxes 21.8 % 21.3 % Basis-point change from the prior-year period 50 The effective rate for income taxes was 21.8% and 21.3% for the three months ended September 30, 2020 and 2019, respectively. The increase in the effective tax rate of 50 basis points was primarily attributable to a higher effective tax rate on our foreign operations. The fiscal 2021 first quarter effective tax rate included a 130 basis point reduction to the current period effective tax rate due to the impact of the U.S. government issuance of final global intangible low-taxed income (“GILTI”) tax regulations in July 2020 under the Tax Cuts and Jobs Act (the “TCJA”) that provide for a high-tax exception to the current year GILTI tax. These newly-issued regulations are retroactive to the original enactment of the GILTI tax provision, which includes our 2019 and 2020 fiscal years. We are currently evaluating the impact and ability to apply the GILTI regulations relating to fiscal 2019 and fiscal 2020. The fiscal 2021 first quarter effective tax rate also included a 120 basis point increase to the current period effective tax rate due to the pending December 31, 2020 expiration of a tax law in China that expanded the corporate income tax deduction allowance for advertising and promotion expenses (“expiring China tax law”). The favorable impact from a possible re-enactment of the expiring China tax law would be recognized in the provision for income taxes in the period that includes the date of such re-enactment. NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. Three Months Ended September 30 ($ in millions, except per share data) 2020 2019 As Reported: Net earnings attributable to The Estée Lauder Companies Inc. $ 523 $ 595 $ Change from prior-year period (72) % Change from prior-year period (12) % Diluted net earnings per common share $ 1.42 $ 1.61 % Change from prior-year period (12) % Non-GAAP Financial Measure (1) : % Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities (14) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 44 Table of Contents THE ESTÉE LAUDER COMPANIES INC. RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period, or do not reflect the Company’s underlying ongoing business, provides transparency for such items and helps investors and others compare and analyze our operating performance from period to period. In the future, we expect to incur charges or adjustments similar in nature to those presented below; however, the impact to the 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 we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. The following tables present Net sales, Operating income and Diluted net earnings per common share adjusted to exclude the impact of charges associated with restructuring and other activities. The following tables provide reconciliations between these non-GAAP financial measures and the most directly comparable U.S. GAAP measures. ($ in millions, except per share data) Three Months Ended September 30 Variance % Change % Change in constant currency 2020 2019 Net sales, as reported $ 3,562 $ 3,895 $ (333) (9) % (9) % Returns associated with restructuring and other activities — — — Net sales, as adjusted $ 3,562 $ 3,895 $ (333) (9) % (9) % Operating income, as reported $ 705 $ 779 $ (74) (9) % (9) % Charges associated with restructuring and other activities 9 25 (16) Operating income, as adjusted $ 714 $ 804 $ (90) (11) % (11) % Diluted net earnings per common share, as reported $ 1.42 $ 1.61 $ (.19) (12) % (12) % Charges associated with restructuring and other activities .02 .06 (.04) Diluted net earnings per common share, as adjusted $ 1.44 $ 1.67 $ (.23) (14) % (14) % As diluted net earnings per common share, as adjusted, is used as a measure of the Company’s performance, we consider the impact of current and deferred income taxes when calculating the per-share impact of each of the reconciling items. 45 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following tables reconcile the change in net sales by product category and geographic region, as reported, to the change in net sales excluding the effects of foreign currency translation: As Reported Impact of foreign currency translation Variance, in constant currency % Change, as reported % Change, in constant currency ($ in millions) Three Months Ended September 30, 2020 Three Months Ended September 30, 2019 Variance By Product Category: Skin Care $ 2,035 $ 1,842 $ 193 $ (11) $ 182 10 % 10 % Makeup 978 1,443 (465) (2) (467) (32) (32) Fragrance 406 462 (56) (2) (58) (12) (13) Hair Care 136 136 — (1) (1) — (1) Other 7 12 (5) 1 (4) (42) (33) 3,562 3,895 (333) (15) (348) (9) (9) Returns associated with restructuring and other activities — — — — — Total $ 3,562 $ 3,895 $ (333) $ (15) $ (348) (9) % (9) % By Region: The Americas $ 873 $ 1,160 $ (287) $ 14 $ (273) (25) % (24) % Europe, the Middle East & Africa 1,540 1,677 (137) (10) (147) (8) (9) Asia/Pacific 1,149 1,058 91 (19) 72 9 7 3,562 3,895 (333) (15) (348) (9) (9) Returns associated with restructuring and other activities — — — — — Total $ 3,562 $ 3,895 $ (333) $ (15) $ (348) (9) % (9) % FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Overview Our principal sources of funds historically have been cash flows from operations, borrowings pursuant to our commercial paper program, borrowings from the issuance of long-term debt and committed and uncommitted credit lines provided by banks and other lenders in the United States and abroad. At September 30, 2020, we had cash and cash equivalents of $4,267 million compared with $5,022 million at June 30, 2020. Our cash and cash equivalents are maintained at a number of financial institutions. To mitigate the risk of uninsured balances, we select financial institutions based on their credit ratings and financial strength, and we perform ongoing evaluations of these institutions to limit our concentration risk exposure. Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support seasonal working capital needs, currently planned business operations, information technology enhancements, capital expenditures, acquisitions, dividends, stock repurchases, restructuring initiatives, commitments and other contractual obligations on both a near-term and long-term basis. See Overview – COVID-19 Business Update for actions taken by us, in response to the impact of the COVID-19 pandemic on our business, which helped to mitigate the then expected loss of sales and to control costs. 46 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The TCJA resulted in the Transition Tax on unrepatriated earnings of our foreign subsidiaries and changed the tax law in ways that present opportunities to repatriate cash without additional U.S. federal income tax. As a result, we changed our indefinite reinvestment assertion related to certain foreign earnings, and we continue to analyze the indefinite reinvestment assertion on our remaining applicable foreign earnings. The issuance of guidance subsequent to the enactment of the TCJA has enabled us to access a substantial portion of the cash in offshore jurisdictions associated with our permanently reinvested earnings without significant cost. We do not believe that continuing to reinvest our foreign earnings impairs our ability to meet our domestic debt or working capital obligations. If these reinvested earnings were repatriated into the United States as dividends, we would be subject to state income taxes and applicable foreign taxes in certain jurisdictions. The effects of inflation have not been significant to our overall operating results in recent years. Generally, we have been able to introduce new products at higher prices, increase prices and implement other operating efficiencies to sufficiently offset cost increases, which have been moderate. Credit Ratings Changes in our credit ratings will likely result in changes in our borrowing costs. Our credit ratings also impact the cost of our revolving credit facility. Downgrades in our credit ratings may reduce our ability to issue commercial paper and/or long-term debt and would likely increase the relative costs of borrowing. A credit rating is not a recommendation to buy, sell, or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization, and should be evaluated independently of any other rating. As of October 26, 2020, our long-term debt is rated A+ with a negative outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s. 47 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Debt At September 30, 2020, our outstanding borrowings were as follows: ($ in millions) Long-term Debt Current Debt Total Debt 3.125% Senior Notes, due December 1, 2049 (“2049 Senior Notes”) (1), (13) $ 635 $ — $ 635 4.15% Senior Notes, due March 15, 2047 (“2047 Senior Notes”) (2), (13) 494 — 494 4.375% Senior Notes, due June 15, 2045 (“2045 Senior Notes”) (3), (13) 456 — 456 3.70% Senior Notes, due August 15, 2042 (“2042 Senior Notes”) (4), (13) 247 — 247 6.00% Senior Notes, due May 15, 2037 (“2037 Senior Notes”) (5), (13) 294 — 294 5.75% Senior Notes, due October 15, 2033 (“2033 Senior Notes”) (6) 197 — 197 2.600% Senior Notes, due April 15, 2030 ("2030 Senior Notes") (7) 694 — 694 2.375% Senior Notes, due December 1, 2029 (“2029 Senior Notes”) (8), (13) 640 — 640 3.15% Senior Notes, due March 15, 2027 (“2027 Senior Notes”) (9), (13) 498 — 498 2.00% Senior Notes, due December 1, 2024 (“2024 Senior Notes”) (10), (13) 495 — 495 2.35% Senior Notes, due August 15, 2022 (“2022 Senior Notes”) (11), (13) 259 — 259 1.70% Senior Notes, due May 10, 2021 (“2021 Senior Notes”) (12), (13) — 453 453 Other long-term borrowings 4 — 4 Other current borrowings — 20 20 $ 4,913 $ 473 $ 5,386 ______________________________________________ (1) Consists of $650 million principal, unamortized debt discount of $8 million and debt issuance costs of $7 million. (2) Consists of $500 million principal, unamortized debt discount of $1 million and debt issuance costs of $5 million. (3) Consists of $450 million principal, net unamortized debt premium of $10 million and debt issuance costs of $4 million. (4) Consists of $250 million principal, unamortized debt discount of $1 million and debt issuance costs of $2 million. (5) Consists of $300 million principal, unamortized debt discount of $3 million and debt issuance costs of $3 million. (6) Consists of $200 million principal, unamortized debt discount of $2 million and debt issuance costs of $1 million. (7) Consists of $700 million principal, unamortized debt discount of $1 million and debt issuance costs of $5 million. (8) Consists of $650 million principal, unamortized debt discount of $6 million and debt issuance costs of $4 million. (9) Consists of $500 million principal and debt issuance costs of $2 million. (10) Consists of $500 million principal, unamortized debt discount of $3 million and debt issuance costs of $2 million. (11) Consists of $250 million principal and a $9 million adjustment to reflect the fair value of interest rate swaps. (12) Consists of $450 million principal and a $3 million adjustment to reflect the fair value of interest rate swaps. (13) The Senior Notes contain certain customary incurrence–based covenants, including limitations on indebtedness secured by liens. In August 2020, we repaid the remaining $750 million borrowed under our $1,500 million revolving credit facility that was outstanding as of June 30, 2020. Total debt as a percent of total capitalization (excluding noncontrolling interests) was 55% and 61% at September 30, 2020 and June 30, 2020, respectively. 48 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Cash Flows Three Months Ended September 30 (In millions) 2020 2019 Net cash provided by (used for) operating activities $ 358 $ (170) Net cash used for investing activities $ (242) $ (128) Net cash used for financing activities $ (890) $ (416) The change in net cash flows from operations primarily reflected the favorable net change in working capital, in particular, accounts payable and accrued liabilities, including the settlement of foreign currency forward contracts. These changes were partially offset by the unfavorable change in accounts receivable due to the timing of shipments. The change in net cash flows used for investing activities primarily reflected the settlement of net investment hedges and purchases of investments, partially offset by the receipt of the purchase price refund relating to the fiscal 2020 second quarter acquisition of Have&Be Co. Ltd. The change in net cash flows used for financing activities primarily reflected the repayment of borrowings under our revolving credit facility, partially offset by lower treasury stock repurchases. Dividends For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the three months ended September 30, 2020, see Notes to Consolidated Financial Statements, Note 11 – Equity . Pension and Post-retirement Plan Funding There have been no significant changes to our pension and post-retirement funding as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. Commitments, Contractual Obligations and Contingencies There have been no significant changes to our commitments and contractual obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. For a discussion of contingencies, see Notes to Consolidated Financial Statements, Note 8 – Contingencies . Derivative Financial Instruments and Hedging Activities For a discussion of our derivative financial instruments and hedging activities, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments . Foreign Exchange Risk Management For a discussion of foreign exchange risk management, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Cash Flow Hedges, Net Investment Hedges) . Credit Risk For a discussion of credit risk, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Credit Risk) . Market Risk We address certain financial exposures through a controlled program of market risk management that includes the use of foreign currency forward contracts to reduce the effects of fluctuating foreign currency exchange rates and to mitigate the change in fair value of specific assets and liabilities on the balance sheet. To perform a sensitivity analysis of our foreign currency forward contracts, we assess the change in fair values from the impact of hypothetical changes in foreign currency exchange rates. A hypothetical 10% weakening of the U.S. dollar against the foreign exchange rates for the currencies in our portfolio would have resulted in a net decrease in the fair value of our portfolio of approximately $176 million and $222 million as of September 30, 2020 and June 30, 2020, respectively. This potential change does not consider our underlying foreign currency exposures. 49 Table of Contents THE ESTÉE LAUDER COMPANIES INC. In addition, we enter into interest rate derivatives to manage the effects of interest rate movements on our aggregate liability portfolio, including future debt issuances. Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would increase by approximately $11 million and $9 million as of September 30, 2020 and June 30, 2020, respectively. Our sensitivity analysis represents an estimate of reasonably possible net losses that would be recognized on our portfolio of derivative financial instruments assuming hypothetical movements in future market rates and is not necessarily indicative of actual results, which may or may not occur. It does not represent the maximum possible loss or any expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in our portfolio of derivative financial instruments during the year. We believe, however, that any such loss incurred would be offset by the effects of market rate movements on the respective underlying transactions for which the derivative financial instrument was intended. OFF-BALANCE SHEET ARRANGEMENTS We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations. CRITICAL ACCOUNTING POLICIES As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those financial statements. These estimates and assumptions can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies relate to goodwill, other intangible assets and long-lived assets, income taxes and business combinations. Since June 30, 2020, there have been no significant changes to the assumptions and estimates related to our critical accounting policies. RECENTLY ISSUED ACCOUNTING STANDARDS For a discussion regarding the impact of accounting standards that were recently issued but not yet effective, on the Company’s consolidated financial statements, see Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies . 50 Table of Contents THE ESTÉE LAUDER COMPANIES INC. CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION We and our representatives from time to time make written or oral forward-looking statements, including in this and other filings with the Securities and Exchange Commission, in our press releases and in our reports to stockholders, which may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may address our expectations regarding sales, earnings or other future financial performance and liquidity, other performance measures, product introductions, entry into new geographic regions, information technology initiatives, new methods of sale, our long-term strategy, restructuring and other charges and resulting cost savings, and future operations or operating results. These statements may contain words like “expect,” “will,” “will likely result,” “would,” “believe,” “estimate,” “planned,” “plans,” “intends,” “may,” “should,” “could,” “anticipate,” “estimate,” “project,” “projected,” “forecast,” and “forecasted” or similar expressions. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, actual results may differ materially from our expectations. Factors that could cause actual results to differ from expectations include, without limitation: (1) increased competitive activity from companies in the skin care, makeup, fragrance and hair care businesses; (2) our ability to develop, produce and market new products on which future operating results may depend and to successfully address challenges in our business; (3) consolidations, restructurings, bankruptcies and reorganizations in the retail industry causing a decrease in the number of stores that sell our products, an increase in the ownership concentration within the retail industry, ownership of retailers by our competitors or ownership of competitors by our customers that are retailers and our inability to collect receivables; (4) destocking and tighter working capital management by retailers; (5) the success, or changes in timing or scope, of new product launches and the success, or changes in timing or scope, of advertising, sampling and merchandising programs; (6) shifts in the preferences of consumers as to where and how they shop; (7) social, political and economic risks to our foreign or domestic manufacturing, distribution and retail operations, including changes in foreign investment and trade policies and regulations of the host countries and of the United States; (8) changes in the laws, regulations and policies (including the interpretations and enforcement thereof) that affect, or will affect, our business, including those relating to our products or distribution networks, changes in accounting standards, tax laws and regulations, environmental or climate change laws, regulations or accords, trade rules and customs regulations, and the outcome and expense of legal or regulatory proceedings, and any action we may take as a result; (9) foreign currency fluctuations affecting our results of operations and the value of our foreign assets, the relative prices at which we and our foreign competitors sell products in the same markets and our operating and manufacturing costs outside of the United States; (10) changes in global or local conditions, including those due to the volatility in the global credit and equity markets, natural or man-made disasters, real or perceived epidemics, or energy costs, that could affect consumer purchasing, the willingness or ability of consumers to travel and/or purchase our products while traveling, the financial strength of our customers, suppliers or other contract counterparties, our operations, the cost and availability of capital which we may need for new equipment, facilities or acquisitions, the returns that we are able to generate on our pension assets and the resulting impact on funding obligations, the cost and availability of raw materials and the assumptions underlying our critical accounting estimates; (11) impacts attributable to the COVID-19 pandemic, including disruptions to our global business; (12) shipment delays, commodity pricing, depletion of inventory and increased production costs resulting from disruptions of operations at any of the facilities that manufacture our products or at our distribution or inventory centers, including disruptions that may be caused by the implementation of information technology initiatives, or by restructurings; 51 Table of Contents THE ESTÉE LAUDER COMPANIES INC. (13) real estate rates and availability, which may affect our ability to increase or maintain the number of retail locations at which we sell our products and the costs associated with our other facilities; (14) changes in product mix to products which are less profitable; (15) our ability to acquire, develop or implement new information and distribution technologies and initiatives on a timely basis and within our cost estimates and our ability to maintain continuous operations of such systems and the security of data and other information that may be stored in such systems or other systems or media; (16) our ability to capitalize on opportunities for improved efficiency, such as publicly-announced strategies and restructuring and cost-savings initiatives, and to integrate acquired businesses and realize value therefrom; (17) consequences attributable to local or international conflicts around the world, as well as from any terrorist action, retaliation and the threat of further action or retaliation; (18) the timing and impact of acquisitions, investments and divestitures; and (19) additional factors as described in our filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended June 30, 2020. We assume no responsibility to update forward-looking statements made herein or otherwise. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The information required by this item is set forth in Item 2 of this Quarterly Report on Form 10-Q under the caption Liquidity and Capital Resources - Market Risk and is incorporated herein by reference.