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 and six months ended December 31, 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 December 31 Six Months Ended December 31 (In millions) 2020 2019 2020 2019 NET SALES By Product Category: Skin Care $ 2,819 $ 2,205 $ 4,854 $ 4,047 Makeup 1,247 1,660 2,225 3,103 Fragrance 618 581 1,024 1,043 Hair Care 154 162 290 298 Other 15 16 22 28 Net sales $ 4,853 $ 4,624 $ 8,415 $ 8,519 By Region (1) : The Americas $ 1,048 $ 1,226 $ 1,921 $ 2,386 Europe, the Middle East & Africa 2,030 2,079 3,570 3,756 Asia/Pacific 1,775 1,319 2,924 2,377 Net sales $ 4,853 $ 4,624 $ 8,415 $ 8,519 OPERATING INCOME (LOSS) By Product Category: Skin Care $ 928 $ 772 $ 1,649 $ 1,404 Makeup 28 (611) (43) (507) Fragrance 141 97 201 163 Hair Care 4 12 7 12 Other (1) 4 — 6 1,100 274 1,814 1,078 Charges associated with restructuring and other activities (37) (13) (46) (38) Operating income $ 1,063 $ 261 $ 1,768 $ 1,040 By Region (1) : The Americas $ 36 $ (529) $ 101 $ (354) Europe, the Middle East & Africa 657 505 1,068 882 Asia/Pacific 407 298 645 550 1,100 274 1,814 1,078 Charges associated with restructuring and other activities (37) (13) (46) (38) Operating income $ 1,063 $ 261 $ 1,768 $ 1,040 (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. 36 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 December 31 Six Months Ended December 31 2020 2019 2020 2019 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 22.3 22.5 22.7 22.9 Gross profit 77.7 77.5 77.3 77.1 Operating expenses: Selling, general and administrative 53.4 54.9 54.9 55.4 Restructuring and other charges 0.7 0.1 0.5 0.4 Goodwill impairment 1.1 11.0 0.6 6.0 Impairment of other intangible assets 0.6 5.8 0.3 3.1 Total operating expenses 55.8 71.8 56.3 64.9 Operating income 21.9 5.6 21.0 12.2 Interest expense 0.9 0.8 1.0 0.8 Interest income and investment income, net 0.4 0.3 0.4 0.3 Other components of net periodic benefit cost 0.1 — 0.1 — Other income — 12.5 — 6.8 Earnings before income taxes 21.2 17.5 20.2 18.4 Provision for income taxes (3.2) (5.4) (3.6) (4.8) Net earnings 18.1 12.1 16.7 13.6 Net earnings attributable to noncontrolling interests (0.1) (0.1) (0.1) (0.1) Net earnings attributable to The Estée Lauder Companies Inc. 18.0 % 12.0 % 16.6 % 13.5 % 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 53 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. 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. Overview COVID-19 Business Update The COVID-19 pandemic continues to cause significant disruption to our operating environment, temporarily impacting retail traffic and certain consumer preferences. During the three months ended December 31, 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 Most brick-and-mortar retail stores globally that sell our products, whether operated by us or our customers, were open during the second quarter of fiscal 2021, although consumer traffic was significantly reduced as compared to the prior-year period and some retail stores were temporarily closed due to the resurgence of COVID-19 cases. In addition, international travel has remained largely curtailed globally due to both government restrictions and consumer health concerns that continue 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 second quarter of fiscal 2021. The resurgence of COVID-19 cases in various parts of the world, including the United States, the United Kingdom and other countries in Europe, and Japan, has caused the reimplementation of government restrictions to prevent further spread of the virus. These restrictions included 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, fragrance and hair care products has generally been more resilient than the demand for makeup. Manufacturing and Distribution By the end of the first quarter of fiscal 2021, and throughout the second quarter of fiscal 2021, 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. Some of these cost control actions were lifted during the second quarter of fiscal 2021. 38 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 fiscal year ended June 30, 2020, as well as below. During the second quarter of fiscal 2021, net sales increased 5% from the prior-year period, reflecting growth in our skin care product category and in our Asia/Pacific region, as well as 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, the launch of the new The Concentrate from La Mer and strength in basic skin care from Clinique. The 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 across the portfolio. Our brands continued to generate 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 increased in the second quarter of fiscal 2021, reflecting holiday gifting and continued strength in bath, body and home fragrances. Fragrance net sales growth was led by Tom Ford Beauty, Jo Malone London and Le Labo. • Our hair care net sales declined, reflecting pandemic related salon closures and limited capacity re-openings, partially offset by strong double-digit online growth and Aveda's launch of Botanical Repair in August 2020. Our net sales growth by geographic region in the second quarter of fiscal 2021 reflects, in part, the cadence of COVID-19 recovery and resurgence around the world. • Net sales declined 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, as the resurgence of COVID-19 cases led to the reimplementation of government restrictions and temporary store closures, 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. There have been 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. We are mindful that these trends may continue to impact the pace of recovery. The severe decline in international travel is also affecting our travel retail business in most of the world, 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. 39 Table of Contents THE ESTÉE LAUDER COMPANIES INC. 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. The United Kingdom reached a trade agreement and completed its transition out of the European Union (“EU”) in December 2020 (i.e. “Brexit”). The trade agreement is being provisionally applied from January 1, 2021 until ratification by the EU, which is expected later in 2021. To date, there has been minimal interruption to our business relating to the end of the Brexit transition period. We will continue to monitor the potential political and economic uncertainties from Brexit for which we have developed risk mitigation strategies. 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. 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 4 – Charges Associated with Restructuring and Other Activities herein, as well as, in Notes to Consolidated Financial Statements, Note 9 – Charges Associated with Restructuring and Other Activities and in the Overview on page 30 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. Goodwill and Other Intangible Asset Impairments During November 2020, given the actual and the estimate of the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting us and lower than expected results from geographic expansion, we made further revisions to the internal forecasts relating to our GLAMGLOW reporting unit. We concluded that the changes in circumstances in this reporting unit triggered the need for an interim impairment review of its trademark and goodwill. These changes in circumstances were also an indicator that the carrying amounts of GLAMGLOW's long-lived assets, including customer lists, may not be recoverable. Accordingly, we performed an interim impairment test for the trademark and a recoverability test for the long-lived assets as of November 30, 2020. We concluded that the carrying value of the trademark for GLAMGLOW exceeded its estimated fair value, which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded an impairment charge of $21 million. In addition, we concluded that the carrying value of the GLAMGLOW customer lists intangible asset was fully impaired and recorded an impairment charge of $6 million. The fair value of all other long-lived assets of GLAMGLOW exceeded their carrying values and were not impaired as of November 30, 2020. After adjusting the carrying values of the trademark and customer lists intangible assets, we completed an interim quantitative impairment test for goodwill and recorded a goodwill impairment charge of $54 million, reducing the carrying value of goodwill for the GLAMGLOW reporting unit to zero. The fair value of the GLAMGLOW reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. The impairment charges for the three and six months ended December 31, 2020 were reflected in the skin care product category and in the Americas region. As of December 31, 2020, the remaining carrying value of the trademark related to the GLAMGLOW reporting unit were $36 million. 40 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NET SALES Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Net sales $ 4,853 $ 4,624 $ 8,415 $ 8,519 $ Change from prior-year period 229 (104) % Change from prior-year period 5 % (1) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 3 % (3) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales increased for the three months ended December 31, 2020, primarily reflecting higher net sales in our skin care and fragrance product categories and in our Asia/Pacific region. The net sales increase in our skin care product category was primarily driven by Estée Lauder and La Mer, reflecting the success of hero product franchises, new product launches and successful holiday and promotional events. Fragrance net sales increased, benefiting from higher net sales from Tom Ford Beauty and Jo Malone London. Net sales in Asia/Pacific increased, primarily due to higher net sales in mainland China and Korea. The incremental net sales attributable to our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter benefited our skin care category and Asia/Pacific. Direct-to-consumer online net sales continued to have strong growth, representing approximately 23% of fiscal 2021 second quarter net sales compared to approximately 15% in the prior-year period and benefiting from successful holiday and promotional events. Reported net sales decreased for the six months ended December 31, 2020, 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 temporary retail store closures and reduced consumer foot traffic in brick-and-mortar retail locations, the continued curtailment of international travel, and continued social distancing and quarantines. Despite the overall decrease, net sales continued to grow in our skin care category and in our Asia/Pacific region, both reflecting double-digit growth and the incremental net sales attributable to our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter. Direct-to-consumer online net sales continued to have strong growth, representing approximately 19% of net sales for the six months ended December 31, 2020 compared to approximately 12% in the prior-year period. The total net sales changes were impacted by approximately $102 million and $117 million of favorable foreign currency translation for the three and six months ended December 31, 2020, respectively. 41 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Product Categories Skin Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Net sales $ 2,819 $ 2,205 $ 4,854 $ 4,047 $ Change from prior-year period 614 807 % Change from prior-year period 28 % 20 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 25 % 18 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported skin care net sales increased for the three and six months ended December 31, 2020, reflecting higher net sales from Estée Lauder and La Mer, as well as incremental net sales attributable to our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter, combined, of approximately $609 million and $944 million, respectively. For the three and six months ended December 31, 2020, net sales increased from Estée Lauder and La Mer, led by mainland China and our travel retail business (primarily in Hainan), reflecting high double-digit growth from direct-to-consumer online net sales of products from these brands primarily due to the successful holiday and promotional events. The continued success of existing product franchises, such as Advanced Night Repair, Nutritious, Micro Essence and Perfectionist, and new product launches, such as the new Advanced Night Repair Synchronized Multi-Recovery Complex, contributed to the increase in net sales from Estée Lauder in both periods. Net sales from La Mer increased for the three and six months ended December 31, 2020, benefiting from the continued success of existing product franchises, such as Créme de la Mer and Treatment Lotion, new product launches, such as the Genaissance de la Mer The Concentrated Night Balm and the fiscal 2021 first quarter launch of the new The Concentrate, and targeted expanded consumer reach. The skin care net sales increases were impacted by approximately $70 million and $81 million of favorable foreign currency translation for the three and six months ended December 31, 2020, respectively. Makeup Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Net sales $ 1,247 $ 1,660 $ 2,225 $ 3,103 $ Change from prior-year period (413) (878) % Change from prior-year period (25) % (28) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (26) % (29) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 42 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported makeup net sales decreased for the three and six months ended December 31, 2020, primarily driven by lower net sales from M·A·C, Estée Lauder, Bobbi Brown and Clinique, combined, of approximately $342 million and $706 million, respectively. For the three and six months ended December 31, 2020, net sales decreased from these brands, reflecting the challenging environment, especially in brick-and-mortar retail locations, and the continued consumer preference for 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 in both periods. For the three and six months ended December 31, 2020, our direct-to-consumer online net sales of products from these brands grew double digits. The makeup net sales decreases were impacted by approximately $20 million and $22 million of favorable foreign currency translation for the three and six months ended December 31, 2020, respectively. Fragrance Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Net sales $ 618 $ 581 $ 1,024 $ 1,043 $ Change from prior-year period 37 (19) % Change from prior-year period 6 % (2) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 5 % (3) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported fragrance net sales increased for the three months ended December 31, 2020, reflecting higher net sales primarily from Tom Ford Beauty and Jo Malone London, of approximately $38 million, combined. Net sales from Tom Ford Beauty increased, primarily due to the success of hero product franchises, such as Oud Wood and Ombre Leather, and new product launches, such as Bitter Peach. The increase in net sales from Jo Malone London, led by mainland China, benefited from successful holiday and promotional events, the success of certain hero product franchises, and new product launches, such as Scents for the Season. Partially offsetting these increases for the three months ended December 31, 2020, were lower net sales from certain of our designer fragrances, led by our travel retail business and the United Kingdom, primarily due to the continued challenging environment as a result of the COVID-19 pandemic, including the continued curtailment of international travel and the resurgence of COVID-19 cases that caused the reimplementation of government restrictions. Reported fragrance net sales decreased for the six months ended December 31, 2020, reflecting lower net sales primarily from certain of our designer fragrances and Estée Lauder of approximately $41 million, combined. Net sales declined from these brands, led by our travel retail business and the United Kingdom, primarily due to the continued challenging environment as a result of the COVID-19 pandemic, including the continued curtailment of international travel and the resurgence of COVID-19 cases that caused the reimplementation of government restrictions. Partially offsetting these decreases for the six months ended December 31, 2020, were higher net sales from Tom Ford Beauty, primarily due to the success of hero product franchises and new product launches. The changes in fragrance net sales were impacted by approximately $9 million and $11 million of favorable foreign currency translation for the three and six months ended December 31, 2020, respectively. 43 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Hair Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Net sales $ 154 $ 162 $ 290 $ 298 $ Change from prior-year period (8) (8) % Change from prior-year period (5) % (3) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (6) % (3) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported hair care net sales decreased for the three and six months ended December 31, 2020, reflecting lower net sales primarily from Bumble and bumble driven by the net sales decline in North America primarily due to temporary salon and freestanding store closures as a result of the COVID-19 pandemic and the shift in consumer preferences. Partially offsetting the decreases in reported hair care net sales for the six months ended December 31, 2020, were higher net sales from Aveda. The increase in net sales from Aveda was driven by the success of existing product franchises, such as Nutriplenish, the launch of Botanical Repair, and successful holiday events, which led to growth in all geographic regions. Geographic Regions The Americas Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Net sales $ 1,048 $ 1,226 $ 1,921 $ 2,386 $ Change from prior-year period (178) (465) % Change from prior-year period (15) % (19) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (13) % (18) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales in The Americas decreased in virtually all countries for the three and six months ended December 31, 2020, led by the United States of approximately $157 million and $415 million, respectively. Net sales decreased in the United States for the three and six months ended December 31, 2020, reflecting lower net sales from M·A·C and Estée Lauder (primarily due to the declines in the makeup category) as a result of the continued challenging environment caused by the COVID-19 pandemic, including the resurgence of COVID-19 cases, reduced consumer traffic in brick-and-mortar retail locations, the continued consumer preference for skin care products, and continued social distancing. 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 double digits for the three and six months ended December 31, 2020, with growth from virtually all brands, and represented approximately 27% and 23% of total net sales in the region compared to approximately 18% and 14% in the prior-year periods, respectively. Net sales in The Americas were impacted by approximately $15 million and $29 million of unfavorable foreign currency translation for the three and six months ended December 31, 2020, respectively. 44 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Europe, the Middle East & Africa Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Net sales $ 2,030 $ 2,079 $ 3,570 $ 3,756 $ Change from prior-year period (49) (186) % Change from prior-year period (2) % (5) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (3) % (6) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales for the three and six months ended December 31, 2020 decreased in most markets in Europe, the Middle East & Africa, primarily driven by the United Kingdom, France and Iberia, reflecting the continued challenges across the region from the COVID-19 pandemic, including the resurgence of COVID-19 cases that caused the reimplementation of government restrictions, such as temporary store closures and quarantines, and reduced consumer traffic in brick-and-mortar retail. The adverse macroeconomic conditions and the liquidation of a key retailer also contributed to the decrease in net sales in the United Kingdom. Partially offsetting these decreases for the three and six months ended December 31, 2020, were higher net sales from our travel retail business, primarily driven by the increases in net sales in China travel retail (primarily Hainan). These increases were led by Estée Lauder and La Mer, reflecting the continued success of certain hero franchises, such as the Advanced Night Repair line of products from Estée Lauder and La Mer Treatment Lotion, and the continued consumer preference for skin care products. For the three and six months ended December 31, 2020, despite the challenges in brick-and-mortar retail locations, direct-to-consumer online net sales in Europe, the Middle East & Africa more than doubled, representing approximately 7% and 5% of total net sales in the region compared to approximately 3% and 2% in the prior-year periods, respectively. Net sales in Europe, the Middle East & Africa were impacted by approximately $20 million and $30 million of favorable foreign currency translation for the three and six months ended December 31, 2020, respectively. Asia/Pacific Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Net sales $ 1,775 $ 1,319 $ 2,924 $ 2,377 $ Change from prior-year period 456 547 % Change from prior-year period 35 % 23 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 27 % 18 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 45 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported net sales in Asia/Pacific increased for the three and six months ended December 31, 2020, reflecting higher net sales in mainland China and Korea, which included incremental net sales from our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter, combined, of approximately $490 million and $672 million, respectively. For the three and six months ended December 31, 2020, net sales in mainland China increased primarily due to growth in our skin care product category, driven by Estée Lauder, La Mer and incremental net sales attributable to our acquisition of Dr. Jart+, and in our fragrance product category, led by Jo Malone London and Tom Ford Beauty. The success of holiday and promotional events in mainland China contributed to growth in virtually all channels in both periods, led by third-party platforms and department stores. For the three and six months ended December 31, 2020 net sales increased in Korea, reflecting growth in all product categories, except makeup, and benefited from the increase in net sales from Jo Malone London, Estée Lauder and La Mer, as well as incremental net sales from our acquisition of Dr. Jart+. For the three and six month ended December 31, 2020, direct-to-consumer online net sales of our products in Korea grew high double digits. Direct-to-consumer online net sales in Asia/Pacific for the three and six months ended December 31, 2020 grew high double digits, representing approximately 41% and 33% of total net sales in the region compared to approximately 31% and 25% in the prior-year periods, respectively. Partially offsetting these increases for the three and six months ended December 31, 2020 were lower net sales in Hong Kong and Japan, combined, of approximately $39 million and $116 million, respectively. In both periods, the decline in net sales were primarily due to the ongoing challenges stemming from the COVID-19 pandemic, including reduced consumer traffic in brick-and-mortar retail locations, the continued curtailment of international travel, social distancing and quarantines, and border closures in Hong Kong. Net sales in Asia/Pacific were impacted by approximately $97 million and $116 million of favorable foreign currency translation for the three and six months ended December 31, 2020, respectively. We strategically stagger our new product launches by geographic market, which may account for differences in regional sales growth. GROSS MARGIN Gross margin increased to 77.7% and 77.3% for the three and six months ended December 31, 2020, respectively, as compared with 77.5% and 77.1% in the prior-year periods. Favorable (Unfavorable) Basis Points December 31, 2020 Three Months Ended Six Months Ended Mix of business 105 100 Obsolescence charges (50) (15) Manufacturing costs and other (10) (20) Foreign exchange transactions (35) (45) Subtotal 10 20 Charges associated with restructuring and other activities 10 — Total 20 20 The favorable impact from our mix of business for the three and six months ended December 31, 2020 was primarily due to lower costs of testers as a result of reduced consumer traffic in brick-and-mortar retail locations, the favorable change in channel mix (i.e. from department stores to online), the favorable change in product category mix (i.e. a decline in our lower margin makeup category, primarily in North America and our travel retail business, and an increase in our higher margin skin care category, primarily within Asia/Pacific and our travel retail business), and favorable changes in strategic pricing. The favorable impact from our mix of business for the six months ended December 31, 2020 also reflected lower costs from product sets. For the three and six months ended December 31, 2020, the factors causing favorability due to changes in our mix of business were partially offset by the impact of lower margin sales of Dr. Jart+, which we acquired at the end of the fiscal 2020 second quarter. 46 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Partially offsetting the favorable impact from our mix of business for the three months ended December 31, 2020, were increases in obsolescence charges, driven by lower demand due to the impacts of the COVID-19 pandemic, that led to higher provisions for excess inventory. OPERATING EXPENSES Operating expenses as a percentage of net sales was 55.8% and 56.3% for the three and six months ended December 31, 2020, respectively, as compared with 71.8% and 64.9% in the prior-year periods. Favorable (Unfavorable) Basis Points December 31, 2020 Three Months Ended Six Months Ended General and administrative expenses (60) (160) Advertising, merchandising, sampling and product development 10 — Selling 230 240 Stock-based compensation (50) (40) Store operating costs 30 20 Shipping (10) (20) Foreign exchange transactions 10 20 Subtotal 160 60 Charges associated with restructuring and other activities (60) (10) Goodwill and other intangible asset impairments 1,510 820 Changes in fair value of contingent consideration (10) (10) Total 1,600 860 For the three and six months ended December 31, 2020, the decreases in operating expense margin were driven by the year-over-year impact of goodwill and other intangible asset impairments of $696 million and a decrease in selling expense, due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, including the decline in consumer traffic, temporary store closures, and the continued shift in consumer preference to online. Partially offsetting these favorable impacts were increases in general and administrative expenses, primarily due to an increase in employee incentive compensation and amortization expense relating to the acquired intangible assets of Dr. Jart+. OPERATING RESULTS Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Operating income $ 1,063 $ 261 $ 1,768 $ 1,040 $ Change from prior-year period 802 728 % Change from prior-year period 100+% 70 % Operating margin 21.9 % 5.6 % 21.0 % 12.2 % 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, goodwill and other intangible asset impairments and changes in fair value of contingent consideration 13 % 2 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 47 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The reported operating margin for the three and six months ended December 31, 2020 increased from the prior-year periods driven by the year-over-year impact of goodwill and other intangible asset impairments of $696 million and the decrease in selling expenses, as discussed above. Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business. Accordingly, the following discussions of Operating income by Product Categories and Geographic Regions exclude the impact of charges associated with restructuring and other activities. Product Categories Skin Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Operating income $ 928 $ 772 $ 1,649 $ 1,404 $ Change from prior-year period 156 245 % Change from prior-year period 20 % 17 % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of goodwill and other intangible asset impairments and changes in fair value of contingent consideration 31 % 23 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported skin care operating income increased for the three and six months ended December 31, 2020, primarily driven by higher results from Estée Lauder and La Mer, combined, of approximately $306 million and $465 million, respectively. For the three and six month ended December 31, 2020, the increases in operating income from Estée Lauder and La Mer primarily reflected higher net sales, as well as lower selling expenses due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, including the decline in consumer traffic, store closures, and the continued shift in consumer preference to online. In both periods, these changes from Estée Lauder and La Mer were partially offset by increased advertising and promotional activities primarily to support holiday and promotional events and new product launches. Partially offsetting the increases in operating income for the three and six months ended December 31, 2020 were lower results from GLAMGLOW due to the current year goodwill and other intangible asset impairment charges of $81 million, as well as increases in general and administrative expenses, including employee incentive compensation. 48 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Makeup Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Operating income (loss) $ 28 $ (611) $ (43) $ (507) $ Change from prior-year period 639 464 % Change from prior-year period 100+% 92 % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of goodwill and other intangible asset impairments (83) % (100+)% (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported makeup operating results increased for the three and six months ended December 31, 2020, driven by the favorable year-over-year impact of goodwill and other intangible asset impairments related to Too Faced, BECCA and Smashbox of approximately $777 million, combined. Partially offsetting the increases in operating income for the three and six months ended December 31, 2020, were lower results from M·A·C due to the decrease in net sales, offset by lower selling expenses, due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, including the decline in consumer traffic, temporary store closures, and the continued shift in consumer preference to online, and disciplined expense management. For the six months ended December 31, 2020, the higher results were also partially offset by an increase in general and administrative expenses, including employee incentive compensation. Fragrance Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Operating income $ 141 $ 97 $ 201 $ 163 $ Change from prior-year period 44 38 % Change from prior-year period 45 % 23 % Reported fragrance operating income increased for the three and six months ended December 31, 2020, reflecting higher results from Tom Ford Beauty and Jo Malone London primarily driven by the increase in net sales and disciplined expense management. Partially offsetting these increases for the three and six months ended December 31, 2020 were increases in general and administrative expenses, including employee incentive compensation. Reported fragrance operating income for the six months ended December 31, 2020, also reflected higher results from certain of our designer fragrances due to disciplined expense management. 49 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Hair Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Operating income $ 4 $ 12 $ 7 $ 12 $ Change from prior-year period (8) (5) % Change from prior-year period (67) % (42) % Reported hair care operating results decreased for the three and six months ended December 31, 2020, primarily driven by an increase in general and administrative expenses, including employee incentive compensation. Partially offsetting the decreases in operating income for the three and six months ended December 31, 2020, were higher results from Aveda, primarily due to disciplined expense management. The increase in operating income from Aveda for the six months ended December 31, 2020 also benefited from the increase in net sales driven by the success of existing product franchises, such as Nutriplenish, the launch of Botanical Repair, and successful holiday events, as discussed above. Geographic Regions The Americas Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Operating income (loss) $ 36 $ (529) $ 101 $ (354) $ Change from prior-year period 565 455 % Change from prior-year period 100+% 100+% Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of goodwill and other intangible asset impairments and changes in fair value of contingent consideration (52) % (57) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported operating results increased in The Americas for the three and six months ended December 31, 2020, primarily due to the year-over-year impact of goodwill and other intangible asset impairments of $696 million and lower selling expenses, due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, as discussed above. Partially offsetting the increases in operating results for the three and six months ended December 31, 2020 were lower net sales, primarily in the United States. 50 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Europe, the Middle East & Africa Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Operating income $ 657 $ 505 $ 1,068 $ 882 $ Change from prior-year period 152 186 % Change from prior-year period 30 % 21 % Reported operating income increased in Europe, the Middle East & Africa for the three and six months ended December 31, 2020, primarily driven by higher results from our travel retail business, reflecting the increases in net sales and disciplined expense management. Partially offsetting the increases in operating results for the three and six months ended December 31, 2020 were lower results from the United Kingdom, primarily driven by the declines in net sales. Asia/Pacific Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2020 2019 2020 2019 As Reported: Operating income $ 407 $ 298 $ 645 $ 550 $ Change from prior-year period 109 95 % Change from prior-year period 37 % 17 % Reported operating income increased in Asia/Pacific for the three and six months ended December 31, 2020, primarily reflecting higher results from mainland China. In both periods, the increase in operating income from mainland China was primarily driven by the increase in net sales, partially offset by the increase in advertising and promotional activities to support holiday events and campaigns, new product launches, and digital advertising and social media spending. Partially offsetting the increases in operating income for the three and six months ended December 31, 2020 were lower results from Japan, reflecting the decrease in net sales. INTEREST AND INVESTMENT INCOME Three Months Ended December 31 Six Months Ended December 31 (In millions) 2020 2019 2020 2019 Interest expense $ 43 $ 38 $ 88 $ 70 Interest income and investment income, net $ 17 $ 13 $ 31 $ 27 Interest expense increased for both periods, primarily due to the issuance of additional long-term debt in November 2019 and April 2020. Interest income and investment income, net increased for both periods, reflecting higher equity method investment income from our minority investments, partially offset by decreases in investment income due to lower interest rates. 51 THE ESTÉE LAUDER COMPANIES INC. OTHER INCOME On December 18, 2019, we acquired the remaining equity interest in Have&Be Co. Ltd. (“Have & Be”), the global skin care company behind Dr. Jart+ and men’s grooming brand Do The Right Thing, for $1,268 million in cash. Based on the final purchase price and working capital adjustments, we estimated a refund receivable of $32 million that was outstanding as of June 30, 2020 and was received in the first quarter of fiscal 2021. We originally acquired a minority interest in Have & Be in December 2015, which included a formula-based call option for the remaining equity interest. The original minority interest was accounted for as an equity method investment, which had a carrying value of $133 million at the acquisition date. The acquisition of the remaining equity interest in Have & Be was considered a step acquisition, whereby we remeasured the previously held equity method investment to its fair value of $682 million, resulting in the recognition of a gain of $549 million. The acquisition of the remaining equity interest also resulted in the recognition of a previously unrealized foreign currency gain of $4 million, which was reclassified from accumulated other comprehensive income. The total gain on our previously held equity method investment of $553 million is included in Other income in the accompanying consolidated statements of earnings for the three and six months ended December 31, 2019. The amount paid at closing was funded by cash on hand including the proceeds from the issuance of debt. In anticipation of the closing, we transferred cash to a foreign subsidiary for purposes of making the closing payment. As a result, we recognized a foreign currency gain of $23 million, which is also included in Other income in the accompanying consolidated statements of earnings for the three and six months ended December 31, 2019. See Notes to Consolidated Financial Statements, Note 2 – Acquisition of Business for additional information. 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 December 31 Six Months Ended December 31 2020 2019 2020 2019 Effective rate for income taxes 14.9 % 30.8 % 17.6 % 26.2 % Basis-point change from the prior-year period (1,590) (860) For the three and six months ended December 31, 2020, the decrease in the effective tax rate was primarily attributable to a lower effective tax rate on our foreign operations and the impact of nondeductible goodwill charges recognized in the second quarter of fiscal 2020. The effective tax rate for the three and six months ended December 31, 2020 included 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 GILTI tax. These regulations are retroactive to the original enactment of the GILTI tax provision, which includes our 2019 and 2020 fiscal years. We have elected to apply the GILTI high-tax exception to fiscal 2021, 2020 and 2019. The election for fiscal 2021 resulted in reductions of 160 basis points and 150 basis points to the effective tax rates for the three and six months ended December 31, 2020, respectively. The impact of the elections with respect to fiscal 2020 and 2019 was recognized as a discrete item in the provision for income taxes in the second quarter of fiscal 2021 and resulted in reductions of 470 basis points and 280 basis points to the effective tax rates for the three and six months ended December 31, 2020, respectively. 52 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. Three Months Ended December 31 Six Months Ended December 31 ($ in millions, except per share data) 2020 2019 2020 2019 As Reported: Net earnings attributable to The Estée Lauder Companies Inc. $ 873 $ 557 $ 1,396 $ 1,152 $ Change from prior-year period 316 244 % Change from prior-year period 57 % 21 % Diluted net earnings per common share $ 2.37 $ 1.52 $ 3.79 $ 3.13 % Change from prior-year period 56 % 21 % 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, goodwill and other intangible asset impairments, other income and changes in fair value of contingent consideration 24 % 7 % (1) See “ Reconciliations of Non-GAAP Financial Measures” below for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 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; goodwill and other intangible assets impairments; other income; the changes in the fair value of contingent consideration. 53 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following tables provide reconciliations between these non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Three Months Ended December 31 Variance % Change % Change in Constant Currency ($ in millions, except per share data) 2020 2019 Net sales, as reported $ 4,853 $ 4,624 $ 229 5 % 3 % Returns associated with restructuring and other activities — — — Net sales, as adjusted $ 4,853 $ 4,624 $ 229 5 % 3 % Operating income, as reported $ 1,063 $ 261 $ 802 100+% 100+% Charges associated with restructuring and other activities 37 13 24 Goodwill and other intangible asset impairments 81 777 (696) Changes in fair value of contingent consideration (2) (7) 5 Operating income, as adjusted $ 1,179 $ 1,044 $ 135 13 % 10 % Diluted net earnings per common share, as reported $ 2.37 $ 1.52 $ .85 56 % 52 % Charges associated with restructuring and other activities .08 .03 .05 Goodwill and other intangible asset impairments .17 1.81 (1.64) Other income — (1.23) 1.23 Changes in fair value of contingent consideration (.01) (.02) .01 Diluted net earnings per common share, as adjusted $ 2.61 $ 2.11 $ .50 24 % 21 % 54 Table of Contents THE ESTÉE LAUDER COMPANIES INC. ($ in millions, except per share data) Six Months Ended December 31 Variance % Change % Change in constant currency 2020 2019 Net sales, as reported $ 8,415 $ 8,519 $ (104) (1) % (3) % Returns associated with restructuring and other activities — — — Net sales, as adjusted $ 8,415 $ 8,519 $ (104) (1) % (3) % Operating income, as reported $ 1,768 $ 1,040 $ 728 70 % 67 % Charges associated with restructuring and other activities 46 38 8 Goodwill and other intangible asset impairments 81 777 (696) Changes in fair value of contingent consideration (2) (7) 5 Operating income, as adjusted $ 1,893 $ 1,848 $ 45 2 % 1 % Diluted net earnings per common share, as reported $ 3.79 $ 3.13 $ .66 21 % 19 % Charges associated with restructuring and other activities .09 .09 — Goodwill and other intangible asset impairments .17 1.80 (1.63) Other income — (1.22) 1.22 Changes in fair value of contingent consideration (.01) (.02) .01 Diluted net earnings per common share, as adjusted $ 4.04 $ 3.78 $ .26 7 % 5 % 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. 55 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 December 31, 2020 Three Months Ended December 31, 2019 Variance By Product Category: Skin Care $ 2,819 $ 2,205 $ 614 $ (70) $ 544 28 % 25 % Makeup 1,247 1,660 (413) (20) (433) (25) (26) Fragrance 618 581 37 (9) 28 6 5 Hair Care 154 162 (8) (1) (9) (5) (6) Other 15 16 (1) (2) (3) (6) (19) 4,853 4,624 229 (102) 127 5 3 Returns associated with restructuring and other activities — — — — — Total $ 4,853 $ 4,624 $ 229 $ (102) $ 127 5 % 3 % By Region: The Americas $ 1,048 $ 1,226 $ (178) $ 15 $ (163) (15) % (13) % Europe, the Middle East & Africa 2,030 2,079 (49) (20) (69) (2) (3) Asia/Pacific 1,775 1,319 456 (97) 359 35 27 4,853 4,624 229 (102) 127 5 3 Returns associated with restructuring and other activities — — — — — Total $ 4,853 $ 4,624 $ 229 $ (102) $ 127 5 % 3 % 56 Table of Contents THE ESTÉE LAUDER COMPANIES INC. As Reported Impact of foreign currency translation Variance, in constant currency % Change, as reported % Change, in constant currency ($ in millions) Six Months Ended December 31, 2020 Six Months Ended December 31, 2019 Variance By Product Category: Skin Care $ 4,854 $ 4,047 $ 807 $ (81) $ 726 20 % 18 % Makeup 2,225 3,103 (878) (22) (900) (28) (29) Fragrance 1,024 1,043 (19) (11) (30) (2) (3) Hair Care 290 298 (8) (2) (10) (3) (3) Other 22 28 (6) (1) (7) (21) (25) 8,415 8,519 (104) (117) (221) (1) (3) Returns associated with restructuring and other activities — — — — — Total $ 8,415 $ 8,519 $ (104) $ (117) $ (221) (1) % (3) % By Region: The Americas $ 1,921 $ 2,386 $ (465) $ 29 $ (436) (19) % (18) % Europe, the Middle East & Africa 3,570 3,756 (186) (30) (216) (5) (6) Asia/Pacific 2,924 2,377 547 (116) 431 23 18 8,415 8,519 (104) (117) (221) (1) (3) Returns associated with restructuring and other activities — — — — — Total $ 8,415 $ 8,519 $ (104) $ (117) $ (221) (1) % (3) % 57 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following table reconciles the change in operating results by product category and geographic region, as reported, to the change in operating income excluding the impact of goodwill and other intangible asset impairments and changes in fair value of contingent consideration: As Reported ($ in millions) Three Months Ended December 31, 2020 Three Months Ended December 31, 2019 Variance Add: Changes in Goodwill and other intangible asset impairments Add: Changes in fair value of contingent consideration Variance, as adjusted % Change, as reported % Change, as adjusted By Product Category: Skin Care $ 928 $ 772 $ 156 $ 81 $ 3 $ 240 20 % 31 % Makeup 28 (611) 639 (777) — (138) 100+ (83) Fragrance 141 97 44 — 2 46 45 49 Hair Care 4 12 (8) — — (8) (67) (67) Other (1) 4 (5) — — (5) (100+) (100+)% 1,100 274 826 $ (696) $ 5 $ 135 100+% 13 % Charges associated with restructuring and other activities (37) (13) (24) Total $ 1,063 $ 261 $ 802 By Region: The Americas $ 36 $ (529) $ 565 $ (696) $ 3 $ (128) 100+% (52) % Europe, the Middle East & Africa 657 505 152 — 2 154 30 31 Asia/Pacific 407 298 109 — — 109 37 37 1,100 274 826 $ (696) $ 5 $ 135 100+% 13 % Charges associated with restructuring and other activities (37) (13) (24) Total $ 1,063 $ 261 $ 802 58 Table of Contents THE ESTÉE LAUDER COMPANIES INC. As Reported Add: Changes in Goodwill and other intangible asset impairments Add: Changes in fair value of contingent consideration Variance, as adjusted % Change, as reported % Change, as adjusted ($ in millions) Six Months Ended December 31, 2020 Six Months Ended December 31, 2019 Variance By Product Category: Skin Care $ 1,649 $ 1,404 $ 245 $ 81 $ 3 $ 329 17 % 23 % Makeup (43) (507) 464 (777) — (313) 92 (100+)% Fragrance 201 163 38 — 2 40 23 25 Hair Care 7 12 (5) — — (5) (42) (42) Other — 6 (6) — — (6) (100) (100) 1,814 1,078 736 $ (696) $ 5 $ 45 68 % 2 % Charges associated with restructuring and other activities (46) (38) (8) Total $ 1,768 $ 1,040 $ 728 By Region: The Americas $ 101 $ (354) $ 455 $ (696) $ 3 $ (238) 100+% (57) % Europe, the Middle East & Africa 1,068 882 186 — 2 188 21 21 Asia/Pacific 645 550 95 — — 95 17 17 1,814 1,078 736 $ (696) $ 5 $ 45 68 % 2 % Charges associated with restructuring and other activities (46) (38) (8) Total $ 1,768 $ 1,040 $ 728 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 December 31, 2020, we had cash and cash equivalents of $5,545 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. 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. 59 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The effects of inflation have not been significant to our overall operating results in recent years. Generally, we have been able to introduce new products at higher prices, increase prices and implement other operating efficiencies to sufficiently offset cost increases, which have been moderate. Credit Ratings Changes in our credit ratings will likely result in changes in our borrowing costs. Our credit ratings also impact the cost of our revolving credit facility. Downgrades in our credit ratings may reduce our ability to issue commercial paper and/or long-term debt and would likely increase the relative costs of borrowing. A credit rating is not a recommendation to buy, sell, or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization, and should be evaluated independently of any other rating. As of January 29, 2021, our long-term debt is rated A+ with a negative outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s. 60 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Debt At December 31, 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) 496 — 496 2.35% Senior Notes, due August 15, 2022 (“2022 Senior Notes”) (11), (13) 258 — 258 1.70% Senior Notes, due May 10, 2021 (“2021 Senior Notes”) (12), (13) — 452 452 Other long-term borrowings 4 — 4 Other current borrowings — 18 18 $ 4,913 $ 470 $ 5,383 ______________________________________________ (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 $2 million and debt issuance costs of $2 million. (11) Consists of $250 million principal and a $8 million adjustment to reflect the fair value of interest rate swaps. (12) Consists of $450 million principal and a $2 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 50% and 61% at December 31, 2020 and June 30, 2020, respectively. 61 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Cash Flows Six Months Ended December 31 (In millions) 2020 2019 Net cash provided by operating activities $ 1,978 $ 1,255 Net cash used for investing activities $ (397) $ (1,350) Net cash provided by (used for) financing activities $ (1,119) $ 687 The change in net cash flows from operations primarily reflected the improvement in working capital, primarily due to other accrued liabilities, including an increase in accrued employee incentive compensation and higher advertising and promotional accruals, and accounts payable, partially offset by the unfavorable change in accounts receivable due to the increase in net sales. The change in net cash flows used for investing activities primarily reflected cash paid in fiscal 2020 relating to the second quarter acquisition of Have&Be Co. Ltd., partially offset by the settlement of net investment hedges. The change in net cash flows from financing activities primarily reflected proceeds in fiscal 2020 from the November 2019 issuance of long term-debt, the fiscal 2021 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 six months ended December 31, 2020, see Notes to Consolidated Financial Statements, Note 12 – 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 9 – Contingencies . Derivative Financial Instruments and Hedging Activities For a discussion of our derivative financial instruments and hedging activities, see Notes to Consolidated Financial Statements, Note 5 – Derivative Financial Instruments . Foreign Exchange Risk Management For a discussion of foreign exchange risk management, see Notes to Consolidated Financial Statements, Note 5 – Derivative Financial Instruments (Cash Flow Hedges, Net Investment Hedges) . Credit Risk For a discussion of credit risk, see Notes to Consolidated Financial Statements, Note 5 – Derivative Financial Instruments (Credit Risk) . Market Risk We address certain financial exposures through a controlled program of market risk management that includes the use of foreign currency forward contracts to reduce the effects of fluctuating foreign currency exchange rates and to mitigate the change in fair value of specific assets and liabilities on the balance sheet. To perform a sensitivity analysis of our foreign currency forward contracts, we assess the change in fair values from the impact of hypothetical changes in foreign currency exchange rates. A hypothetical 10% 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 $184 million and $222 million as of December 31, 2020 and June 30, 2020, respectively. This potential change does not consider our underlying foreign currency exposures. 62 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 $13 million and $9 million as of December 31, 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 . 63 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; 64 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.