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 nine months ended March 31, 2021 and 2020, 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 March 31 Nine Months Ended March 31 (In millions) 2021 2020 2021 2020 NET SALES By Product Category: Skin Care $ 2,259 $ 1,723 $ 7,113 $ 5,770 Makeup 1,018 1,146 3,243 4,249 Fragrance 454 349 1,478 1,392 Hair Care 128 119 418 417 Other 15 8 37 36 3,874 3,345 12,289 11,864 Returns associated with restructuring and other activities (10) — (10) — Net sales $ 3,864 $ 3,345 $ 12,279 $ 11,864 By Region (1) : The Americas $ 916 $ 892 $ 2,837 $ 3,278 Europe, the Middle East & Africa 1,706 1,525 5,276 5,281 Asia/Pacific 1,252 928 4,176 3,305 3,874 3,345 12,289 11,864 Returns associated with restructuring and other activities (10) — (10) — Net sales $ 3,864 $ 3,345 $ 12,279 $ 11,864 OPERATING INCOME (LOSS) By Product Category: Skin Care $ 804 $ 418 $ 2,453 $ 1,822 Makeup (72) (283) (115) (790) Fragrance 47 — 248 163 Hair Care (17) (2) (10) 10 Other (1) 1 (1) 7 761 134 2,575 1,212 Charges associated with restructuring and other activities (145) (25) (191) (63) Operating income $ 616 $ 109 $ 2,384 $ 1,149 By Region (1) : The Americas $ 155 $ (217) $ 256 $ (571) Europe, the Middle East & Africa 361 202 1,429 1,084 Asia/Pacific 245 149 890 699 761 134 2,575 1,212 Charges associated with restructuring and other activities (145) (25) (191) (63) Operating income $ 616 $ 109 $ 2,384 $ 1,149 (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. 43 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 March 31 Nine Months Ended March 31 2021 2020 2021 2020 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 24.3 25.0 23.2 23.5 Gross profit 75.7 75.0 76.8 76.5 Operating expenses: Selling, general and administrative 55.5 60.7 55.1 56.9 Restructuring and other charges 3.4 0.7 1.4 0.5 Goodwill impairment — 8.2 0.4 6.6 Impairment of other intangible and long-lived assets 0.9 2.1 0.5 2.8 Total operating expenses 59.8 71.7 57.4 66.8 Operating income 15.9 3.3 19.4 9.7 Interest expense 1.1 1.3 1.1 1.0 Interest income and investment income, net 0.2 0.4 0.3 0.3 Other components of net periodic benefit cost 0.1 — 0.1 — Other income — — — 4.9 Earnings before income taxes 15.0 2.4 18.6 13.9 Provision for income taxes (3.2) (2.5) (3.4) (4.2) Net earnings (loss) 11.9 (0.1) 15.1 9.7 Net earnings attributable to noncontrolling interests (0.1) (0.1) (0.1) — Net earnings (loss) attributable to The Estée Lauder Companies Inc. 11.8 % (0.2) % 15.1 % 9.7 % 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 61 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. 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 disrupt our operating environment, temporarily impacting retail traffic and certain consumer preferences. During the three months ended March 31, 2021, the resurgence of COVID-19 cases in several countries, particularly in Western Europe and Latin America, led to government restrictions to prevent further spread of the virus. These restrictions included temporary business closures, curtailment of travel, social distancing and quarantines. Retail impact While most brick-and-mortar retail stores globally that sell our products, whether operated by us or our customers, were open during the third quarter of fiscal 2021, most notably in China and the United States, there were intermittent closures throughout the rest of the world. In the United Kingdom, Japan, Canada, Italy, Spain, France, Mexico and Brazil, in particular, many retail stores were temporarily closed for some period during the third quarter of fiscal 2021 due to the resurgence of COVID-19 cases. Globally, in areas where stores were open, consumer traffic was significantly reduced as compared to the pre-COVID-19 pandemic period. In addition, while domestic travel in China, especially in Hainan, and some other travel corridors in Asia/Pacific, most notably Korea, were open, 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 third quarter of fiscal 2021. Consumer Preferences The COVID-19 pandemic-related closures of offices, retail stores and other businesses and the significant decline in social gatherings have influenced consumer preferences and practices. Specifically, the demand for makeup continues to be weak given fewer makeup usage occasions while other categories have been more resilient. Cost Controls In response to the ongoing impacts from the COVID-19 pandemic, we continue to implement cost control actions in certain areas of the business to effectively manage the changing business environment. 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. 45 Table of Contents THE ESTÉE LAUDER COMPANIES INC. During the third quarter of fiscal 2021, net sales increased approximately 16% from the prior-year period, reflecting an easier comparison against the outbreak of COVID-19 in early calendar 2020. We saw increases across most product categories and all regions, as well as strong growth online. • 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. Dr. Jart+ and Origins also contributed to skin care growth. These new products support high-loyalty hero franchises. • 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 sub-categories that continue to resonate with consumers. • Our fragrance net sales increased in the third quarter of fiscal 2021, reflecting strength in luxury and artisanal scents. Fragrance net sales growth was led by Jo Malone London, Tom Ford Beauty, Kilian Paris and Le Labo. The category also benefited from the launch of Beautiful Magnolia from Estée Lauder. • Our hair care net sales increased, reflecting Aveda's launch of Botanical Repair in the first quarter of fiscal 2021. Our net sales growth by geographic region in the third quarter of fiscal 2021 reflects, in part, the cadence of COVID-19 recovery and resurgence around the world. • Net sales increased in The Americas, reflecting some recovery in North America compared to the prior year where brick-and-mortar retail locations were shut down toward the end of the fiscal 2020 third quarter as COVID-19 spread globally. This was partially offset by declines in Latin America where many retail locations closed as the resurgence of COVID-19 led to increased government restrictions and store closures during the third quarter of fiscal 2021. • The Europe, the Middle East & Africa region net sales returned to growth, led by our travel retail business, direct-to-consumer online and retailer restocking in advance of further recovery. • The Asia/Pacific region grew, reflecting increases in mainland China, Australia, Korea, and several smaller markets. Outlook The COVID-19 pandemic has disrupted business both for our Company and for the retailers who sell our products. There have been restructurings and bankruptcies in the retail industry, including among our customers and an acceleration in the shifts in preferences as to where and how consumers 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 continued curtailment in international travel is also affecting our travel retail business in most of the world, which had been historically one of our fastest growth areas. 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 and other intangible assets associated with our brands and the long-lived assets in certain of our freestanding stores (i.e. resulting in impairments). 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. For example, 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 note that the United Kingdom reached a trade agreement and completed its transition out of the European Union (“EU”) in December 2020 (i.e. “Brexit”), and we continue to monitor the potential political and economic uncertainties from Brexit. 46 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 4 – Charges Associated with Restructuring and Other Activities herein, as well as, in Notes to Consolidated Financial Statements, Note 10 – 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 nine months ended March 31, 2021 were reflected in the skin care product category and in the Americas region. As of March 31, 2021, the remaining carrying value of the trademark related to the GLAMGLOW reporting unit was $36 million. NET SALES Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 3,864 $ 3,345 $ 12,279 $ 11,864 $ Change from prior-year period 519 415 % Change from prior-year period 16 % 3 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 13 % 2 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 61 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. Reported net sales increased for the three months ended March 31, 2021, primarily reflecting higher net sales in our skin care and fragrance product categories and in all geographic regions. The net sales growth in our skin care product category reflected higher net sales from Estée Lauder, La Mer and Clinique, as well as net sales growth from Dr. Jart+ and Origins. Fragrance net sales increased, primarily benefiting from higher net sales from Jo Malone London and Tom Ford Beauty. The net sales growth in the skin care and fragrance product categories reflected the success of hero product franchises, new product offerings and successful holiday events. Net sales grew internationally, led by higher net sales in mainland China and in our travel retail business, as well as net sales growth in Australia, Korea and and Hong Kong. Direct-to-consumer online net sales grew double-digits, representing approximately 15% of net sales for the three months ended March 31, 2021 compared to approximately 12% in the prior-year period. Reported net sales increased for the nine months ended March 31, 2021, 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 higher net sales from Estée Lauder, La Mer, Dr. Jart+ and Clinique. Fragrance net sales increased, primarily benefiting from higher net sales from Jo Malone London and Tom Ford Beauty. Net sales in Asia/Pacific increased, primarily due to higher net sales in mainland China and Korea. Despite the net sales growth in our travel retail business (primarily in Hainan), net sales in our Europe, the Middle East & Africa region declined 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. Direct-to-consumer online net sales continued to have strong growth, representing approximately 18% of net sales for the nine months ended March 31, 2021 compared to approximately 12% in the prior-year period. The total net sales changes were impacted by approximately $95 million and $212 million of favorable foreign currency translation for the three and nine months ended March 31, 2021, respectively. Returns associated with restructuring and other activities are not allocated to our product categories or geographic regions because they result from activities that are deemed a Company-wide initiative to redesign, resize and reorganize select corporate functions and go-to-market structures. Accordingly, the following discussions of Net sales by Product Categories and Geographic Regions exclude the fiscal 2021 third quarter impact of returns associated with restructuring and other activities of approximately $10 million. Product Categories Skin Care Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 2,259 $ 1,723 $ 7,113 $ 5,770 $ Change from prior-year period 536 1,343 % Change from prior-year period 31 % 23 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 28 % 21 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 48 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported skin care net sales increased for the three months ended March 31, 2021, reflecting higher net sales from Estée Lauder, La Mer and Clinique of approximately $502 million, combined. Net sales increased from Estée Lauder and La Mer, led by our travel retail business (primarily in Hainan) and mainland China, reflecting strong growth from direct-to-consumer online net sales of products from these brands primarily due to the successful holiday and promotional events. Net sales increased from Estée Lauder, reflecting the continued success of hero product franchises, such as Advanced Night Repair, Revitalizing Supreme+ and Daywear, as well as fiscal 2021 product launches, such as Advanced Night Repair Synchronized Multi-Recovery Complex, Revitalizing Supreme+ Bright, and the relaunch of Perfectionist Pro. The increase in net sales from La Mer also benefited from the continued success of hero products, such as Crème de la Mer, The Concentrate, The Treatment Lotion and The Eye Concentrate, as well as the fiscal 2021 launch of the Genaissance de la Mer The Concentrated Night Balm and targeted expanded consumer reach. Net sales increased from Clinique for the three months ended March 31, 2021, primarily due to higher net sales in our travel retail business (primarily in Hainan) and in North America, reflecting the continued success of existing products, such as Dramatically Different products and Even Better Clinical Radical Dark Spot Corrector + Interrupter, and new product launches, such as Moisture Surge 100H Auto-Replenishing Hydrator. Reported skin care net sales increased for the nine months ended March 31, 2021, reflecting higher net sales from Estée Lauder, La Mer, and Clinique, as well as incremental net sales attributable to our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter, of approximately $1,452 million, combined. Net sales increased from Estée Lauder, La Mer and Clinique, as noted above. The skin care net sales increases were impacted by approximately $58 million and $139 million of favorable foreign currency translation for the three and nine months ended March 31, 2021, respectively. Makeup Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 1,018 $ 1,146 $ 3,243 $ 4,249 $ Change from prior-year period (128) (1,006) % Change from prior-year period (11) % (24) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (13) % (25) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported makeup net sales decreased for the three and nine months ended March 31, 2021, due to lower net sales from virtually all brands, led by M·A·C, Estée Lauder and Clinique, combined, of approximately $115 million and $766 million, respectively. The makeup product category continues to be more negatively impacted by the effects of the COVID-19 pandemic, especially the challenging environment in brick-and-mortar retail locations, the continued consumer preference for skin care products, and the limited use of makeup. 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. The makeup net sales decreases were impacted by approximately $24 million and $46 million of favorable foreign currency translation for the three and nine months ended March 31, 2021, respectively. 49 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Fragrance Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 454 $ 349 $ 1,478 $ 1,392 $ Change from prior-year period 105 86 % Change from prior-year period 30 % 6 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 27 % 5 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 61 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 March 31, 2021, primarily due to higher net sales from Jo Malone London and Tom Ford Beauty of approximately $86 million, combined, and net sales of products from these brands increased in all geographic regions. Jo Malone London benefited from successful holiday and promotional events and new product launches, such as the Blossoms Collection and Scarlet Poppy Cologne Intense. The increase in net sales from Tom Ford Beauty was primarily due to the continued success of hero product franchises, such as Oud Wood and Black Orchid, the continued success of the fiscal 2021 second quarter launch of Bitter Peach, and new product launches in the third quarter of fiscal 2021, such as Tubereuse Nue and Costa Azzurra. Reported fragrance net sales increased for the nine months ended March 31, 2021, primarily due to higher net sales from Jo Malone London and Tom Ford Beauty of approximately $110 million, combined. The increase in net sales from Jo Malone London, led by mainland China and North America, was primarily due to successful holiday and promotional events, the success of certain hero product franchises and new product launches, such as Scents for the Season, the Blossoms Collection and Scarlet Poppy. Net sales from Tom Ford Beauty increased for the nine months ended March 31, 2021, reflecting growth in all geographic regions, benefiting from the continued success of hero product franchises and new product launches, such as Bitter Peach, Tubereuse Nue and Costa Azzurra. Partially offsetting these increases in net sales for the nine months ended March 31, 2021, were lower net sales from certain of our designer fragrances, led by our travel retail business, primarily due to the continued challenging environment as a result of the COVID-19 pandemic. The fragrance net sales increases were impacted by approximately $10 million and $21 million of favorable foreign currency translation for the three and nine months ended March 31, 2021, respectively. Hair Care Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 128 $ 119 $ 418 $ 417 $ Change from prior-year period 9 1 % Change from prior-year period 8 % — % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 6 % (1) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 50 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported hair care net sales increased for the three months ended March 31, 2021, primarily due to higher net sales from Aveda driven by the success of existing product franchises, such as Nutriplenish, and the continued success of the fiscal 2021 first quarter launch of Botanical Repair, which led to growth in all geographic regions. Reported hair care net sales for the nine months ended March 31, 2021 were virtually flat, reflecting higher net sales primarily from Aveda, as noted above, partially offset by lower net sales from Bumble and bumble, reflecting the net sales decline in North America primarily due to temporary salon and freestanding store closures as a result of the COVID-19 pandemic. The increases in net sales for the three and nine months ended March 31, 2021 from Aveda also reflected strong growth from direct-to-consumer online net sales. Geographic Regions The Americas Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 916 $ 892 $ 2,837 $ 3,278 $ Change from prior-year period 24 (441) % Change from prior-year period 3 % (13) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 4 % (12) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales in The Americas increased for the three months ended March 31, 2021, led by the United States of approximately $26 million, and in all product categories, except makeup. The increase in the United States partially reflected a recovery compared to the prior-year challenges stemming from the outbreak of COVID-19. Partially offsetting this increase in net sales for the three months ended March 31, 2021, were lower net sales in Latin America due to the resurgence of COVID-19 cases in certain countries that led to government restrictions, as well as the continued decline in North America prestige makeup and the ongoing competitive activity. Reported net sales in The Americas decreased in virtually all countries for the nine months ended March 31, 2021, led by the United States of approximately $387 million, and in all product categories, led by makeup. The net sales decrease in the region was led by 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, 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. Direct-to-consumer online net sales in The Americas grew double digits for the three and nine months ended March 31, 2021, and represented approximately 19% and 22% of total net sales in the region compared to approximately 15% and 14% in the prior-year periods, respectively. Net sales in The Americas were impacted by approximately $10 million and $39 million of unfavorable foreign currency translation for the three and nine months ended March 31, 2021, respectively. 51 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Europe, the Middle East & Africa Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 1,706 $ 1,525 $ 5,276 $ 5,281 $ Change from prior-year period 181 (5) % Change from prior-year period 12 % — % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 10 % (1) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales for the three months ended March 31, 2021 increased in Europe, the Middle East & Africa, reflecting higher net sales in our travel retail business and Russia of approximately $221 million, combined. Despite the continued curtailment of international travel as a result of the COVID-19 pandemic, the increase in net sales from our travel retail business was led by the continued success of hero product franchises from Estée Lauder, La Mer and Origins, reflecting the increase in China travel retail (primarily Hainan) due, in part, to increased duty-free purchase limits and the acceleration of new digital selling models. The net sales increase from Russia primarily reflects the timing of shipments related to retailer restocking and the shift in sales orders from some retailers in the prior-year period related to a system implementation. Partially offsetting these increases in net sales for the three months ended March 31, 2021, were lower net sales from the United Kingdom, reflecting the continued challenges from the resurgence of COVID-19 cases that led to government restrictions, such as quarantines and temporary closures of businesses deemed non-essential. Reported net sales for the nine months ended March 31, 2021 decreased in Europe, the Middle East & Africa, reflecting lower net sales in most markets across the region, led by the United Kingdom, France and Iberia of approximately $159 million, combined. The decrease in net sales from these markets reflects the continued challenges from the COVID-19 pandemic, including the resurgence of COVID-19 cases that led to 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 in the fiscal 2021 second quarter also contributed to the decrease in net sales in the United Kingdom. Partially offsetting these decreases for the nine months ended March 31, 2021, were higher net sales from our travel retail business, led by the continued success of hero product franchises from Estée Lauder and La Mer, primarily driven by the increases in net sales in China travel retail (primarily Hainan), as noted above. For the three and nine months ended March 31, 2021, 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 4% and 5%, respectively, of total net sales in the region compared to approximately 2% in both prior-year periods. Net sales in Europe, the Middle East & Africa were impacted by approximately $24 million and $54 million of favorable foreign currency translation for the three and nine months ended March 31, 2021, respectively. 52 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Asia/Pacific Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 1,252 $ 928 $ 4,176 $ 3,305 $ Change from prior-year period 324 871 % Change from prior-year period 35 % 26 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 26 % 20 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales in Asia/Pacific increased for the three months ended March 31, 2021, reflecting higher net sales primarily in mainland China, Australia, Korea and Hong Kong of approximately $334 million, combined, and in all product categories. The increase in net sales in mainland China reflected higher net sales in all product categories, led by skin care. The success of holiday and promotional events in mainland China contributed to growth in virtually all brands and all channels, led by Estée Lauder and La Mer and department stores and third-party platforms, respectively. Net sales in Australia increased in all product categories and from all brands, led by Estée Lauder and Clinique, driven by a recovery compared to the prior-year challenges stemming from the outbreak of COVID-19. Net sales increased in Korea, reflecting growth in all product categories, except makeup, and benefited from the increase in net sales from Dr. Jart+ and Jo Malone London. Net sales in Hong Kong increased for the three months ended March 31, 2021, in all product categories, except makeup, and from most brands, led by La Mer and Estée Lauder, reflecting an easy comparison to the prior-year period as a result of the outbreak of COVID-19. Direct-to-consumer online net sales in Asia/Pacific for the three months ended March 31, 2021 grew double digits. Partially offsetting these increases in net sales for the three months ended March 31, 2021 were lower net sales in Japan 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, and social distancing and quarantines. Reported net sales in Asia/Pacific increased for the nine months ended March 31, 2021, reflecting higher net sales primarily in mainland China and Korea of approximately $984 million, combined, and in our skin care product category. The increase in net sales in mainland China reflected higher net sales primarily in our skin care product category, led by Estée Lauder, La Mer and Dr. Jart+, as well as third-party platforms and department stores. Net sales increased in Korea, primarily benefiting from incremental net sales from our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter and higher net sales from Jo Malone London. Direct-to-consumer online net sales in Asia/Pacific for the nine months ended March 31, 2021 grew double digits, representing approximately 31% of total net sales in the region compared to approximately 25% in the prior-year period. Partially offsetting these increases for the nine months ended March 31, 2021, were lower net sales in Japan and Hong Kong of approximately $122 million, combined, 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 $80 million and $196 million of favorable foreign currency translation for the three and nine months ended March 31, 2021, respectively. We strategically stagger our new product launches by geographic market, which may account for differences in regional sales growth. 53 Table of Contents THE ESTÉE LAUDER COMPANIES INC. GROSS MARGIN Gross margin increased to 75.7% and 76.8% for the three and nine months ended March 31, 2021, respectively, as compared with 75.0% and 76.5% in the prior-year periods. Favorable (Unfavorable) Basis Points March 31, 2021 Three Months Ended Nine Months Ended Mix of business 235 100 Obsolescence charges (65) (30) Manufacturing costs and other (30) — Foreign exchange transactions (50) (40) Subtotal 90 30 Charges associated with restructuring and other activities (20) — Total 70 30 The favorable impact from our mix of business for the three and nine months ended March 31, 2021 was primarily due to the favorable change in product category mix (i.e. a decline in net sales of our lower margin makeup category, led by North America and Europe, the Middle East & Africa (primarily our travel retail business)), favorable changes in strategic pricing, lower costs from product sets, and lower costs of promotional items as a result of reduced consumer traffic in brick-and-mortar retail locations. For the three months ended March 31, 2021, the favorable impact from our mix of business was also driven by an increase in net sales of our higher margin luxury and artisanal fragrance brands. OPERATING EXPENSES Operating expenses as a percentage of net sales was 59.8% and 57.4% for the three and nine months ended March 31, 2021, respectively, as compared with 71.7% and 66.8% in the prior-year periods. Favorable (Unfavorable) Basis Points March 31, 2021 Three Months Ended Nine Months Ended General and administrative expenses (230) (180) Advertising, merchandising, sampling and product development 200 60 Selling 520 320 Stock-based compensation (20) (40) Store operating costs 70 30 Shipping — (10) Foreign exchange transactions (10) 20 Subtotal 530 200 Charges associated with restructuring and other activities (270) (90) Goodwill, other intangible and long-lived asset impairments 940 850 Changes in fair value of contingent consideration (10) (20) Total 1,190 940 54 Table of Contents THE ESTÉE LAUDER COMPANIES INC. For the three months ended March 31, 2021, the decrease in operating expense margin was driven by higher net sales compared to the prior-year period that reflected the negative impact of the outbreak of COVID-19; the year-over-year impact of goodwill, other intangible and long-lived asset impairments of $313 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, store closures, and the continued shift in consumer preference to online. The advertising, merchandising, sampling and product development favorability was driven by the increase in net sales, partially offset by the increase in advertising and promotional expense, primarily due to continued strategic investments and a difficult comparison to the prior-year period that reflected cost saving actions implemented in response to the impacts of the COVID-19 pandemic. For the nine months ended March 31, 2021, the decrease in operating expense margin was driven by the year-over-year impact of goodwill, other intangible and long-lived asset impairments of $1,009 million, as well as favorability from selling expense and advertising and promotional expense, as noted above. Partially offsetting these favorable impacts for the three and nine months ended March 31, 2021 were increases in general and administrative expenses, primarily due to an increase in employee incentive compensation from the prior-year period, which reflected lower accrued employee incentive compensation as a result of the anticipated impacts of the COVID-19 pandemic. OPERATING RESULTS Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating income $ 616 $ 109 $ 2,384 $ 1,149 $ Change from prior-year period 507 1,235 % Change from prior-year period 100+% 100+% Operating margin 15.9 % 3.3 % 19.4 % 9.7 % 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, other intangible and long-lived asset impairments and changes in fair value of contingent consideration 66 % 16 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. The reported operating margin for the three and nine months ended March 31, 2021 increased from the prior-year periods driven by the year-over-year impact of goodwill, other intangible and long-lived asset impairments of $313 million and $1,009 million for the three and nine months end March 31, 2021, respectively, the decrease in operating expenses as a percentage of net sales and the increase in gross margin, as previously noted. 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 of $145 million, or 4% of net sales and $25 million, or 1% of net sales for the three months ended March 31, 2021 and 2020, respectively, and $191 million, or 2% of net sales and $63 million, or 1% of net sales for the nine months ended March 31, 2021 and 2020, respectively. 55 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Product Categories Skin Care Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating income $ 804 $ 418 $ 2,453 $ 1,822 $ Change from prior-year period 386 631 % Change from prior-year period 92 % 35 % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of goodwill, other intangible and long-lived asset impairments and changes in fair value of contingent consideration 70 % 35 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 61 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 months ended March 31, 2021, primarily driven by higher results from Estée Lauder, La Mer, GLAMGLOW and Clinique of approximately $454 million, combined. The increases in operating income from Estée Lauder, La Mer and Clinique were primarily driven by the increases in net sales. The higher results from La Mer were partially offset by the increase in advertising and promotional expense, primarily due to investments to support holiday and promotional events and a difficult comparison to the prior-year period that reflected cost saving actions implemented in response to the impacts of the COVID-19 pandemic. Operating income from GLAMGLOW increased for the three months ended March 31, 2021, driven by the favorable year-over-year impact of goodwill and other intangible asset impairments of $53 million. Partially offsetting the increase in operating income for the three months ended March 31, 2021, were higher general and administrative expenses, primarily due to increased employee incentive compensation from the prior-year period, which reflected lower accrued employee incentive compensation as a result of the anticipated impacts of the COVID-19 pandemic. Reported skin care operating income increased for the nine months ended March 31, 2021, primarily driven by higher results from Estée Lauder, La Mer and Clinique of approximately $888 million, combined. The increases in operating income from these brands 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. These increases were partially offset by increased advertising and promotional activities primarily to support holiday and promotional events and new product launches. Partially offsetting the increase in operating income for the nine months ended March 31, 2021, were higher general and administrative expenses, primarily due to increased employee incentive compensation and lower results from GLAMGLOW driven by the unfavorable year-over-year impact of goodwill and other intangible asset impairments of $28 million. 56 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Makeup Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating loss $ (72) $ (283) $ (115) $ (790) $ Change from prior-year period 211 675 % Change from prior-year period 75 % 85 % Non-GAAP Financial Measure (1) : % Change in operating loss from the prior-year period adjusting for the impact of goodwill, other intangible and long-lived asset impairments (100+)% (100+)% (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 61 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 nine months ended March 31, 2021, driven by the favorable year-over-year impact of goodwill and other intangible asset impairments related to Too Faced, BECCA and Smashbox, combined, of approximately $280 million and $1,057 million for the three and nine months, respectively. Partially offsetting the decreases in operating loss for the three and nine months ended March 31, 2021, were lower results from M·A·C primarily due to the decrease in net sales, offset by lower selling expense and store operating costs, 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, as well as disciplined expense management. Also offsetting the decreases in operating loss for the three and nine months ended March 31, 2021 were higher general and administrative expenses, primarily due to increased employee incentive compensation from the prior-year period, which reflected lower accrued employee incentive compensation as a result of the anticipated impacts of the COVID-19 pandemic, as well as the unfavorable year-over-year impact of long-lived asset impairments in certain of our freestanding stores relating to COVID-19 of $14 million. Fragrance Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating income $ 47 $ — $ 248 $ 163 $ Change from prior-year period 47 85 % Change from prior-year period — % 52 % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of long-lived asset impairments and changes in fair value of contingent consideration — % 60 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported fragrance operating income increased for the three and nine months ended March 31, 2021, primarily reflecting higher results from Tom Ford Beauty and Jo Malone London, combined, of approximately $62 million and $110 million, respectively. In both periods, the increases in operating income from these brands reflected higher net sales and 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. 57 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Partially offsetting the increases in operating income for the three and nine months ended March 31, 2021, were increases from Jo Malone London in advertising and promotional activities primarily driven by increased spend for digital advertising and to support new product launches and a difficult comparison to the prior-year period that reflected cost saving actions implemented in response to the impacts of the COVID-19 pandemic. Also offsetting the increases in fragrance operating income for the three and nine months ended March 31, 2021 were higher general and administrative expenses, primarily due to increased employee incentive compensation from the prior-year period, which reflected lower accrued employee incentive compensation as a result of the anticipated impacts of the COVID-19 pandemic, as well as the unfavorable year-over-year impact of long-lived asset impairments in certain of our freestanding stores relating to COVID-19 of $8 million. Hair Care Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating income (loss) $ (17) $ (2) $ (10) $ 10 $ Change from prior-year period (15) (20) % Change from prior-year period (100+)% (100+)% Reported hair care operating results decreased for the three and nine months ended March 31, 2021, primarily driven by higher general and administrative expenses, primarily due to increased employee incentive compensation from the prior-year period, which reflected lower accrued employee incentive compensation as a result of the anticipated impacts of the COVID-19 pandemic. Partially offsetting the decrease in operating results for the nine months ended March 31, 2021, were higher results from Aveda driven by the successes of existing product franchises, a new launch and holiday events, as discussed above. Geographic Regions The Americas Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating income (loss) $ 155 $ (217) $ 256 $ (571) $ Change from prior-year period 372 827 % Change from prior-year period 100+% 100+% Non-GAAP Financial Measure (1) : % Change in operating income (loss) from the prior-year period adjusting for the impact of goodwill, other intangible and long-lived asset impairments and changes in fair value of contingent consideration 20 % (39) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 61 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 nine months ended March 31, 2021, driven by the favorable year-over-year impact of goodwill, other intangible and long-lived asset impairments of approximately $346 million and $1,042 million, for the three and nine months, respectively, and lower selling expenses due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, discussed above. 58 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Partially offsetting the increases in operating results for the three and nine months ended March 31, 2021 were higher general and administrative expenses, primarily due to increased employee incentive compensation from the prior-year period, which reflected lower accrued employee incentive compensation as a result of the anticipated impacts of the COVID-19 pandemic. Europe, the Middle East & Africa Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating income $ 361 $ 202 $ 1,429 $ 1,084 $ Change from prior-year period 159 345 % Change from prior-year period 79 % 32 % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of long-lived asset impairments and changes in fair value of contingent consideration 97 % 35 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported operating income increased in Europe, the Middle East & Africa for the three and nine months ended March 31, 2021, primarily driven by higher results from our travel retail business and Russia, combined, of approximately $194 million and $458 million, respectively, reflecting the increase in net sales and disciplined expense management. Partially offsetting the increases in operating income for the three and nine months ended March 31, 2021 is the impact of long-lived asset impairments in certain of our freestanding stores relating to COVID-19 of $33 million. Also offsetting the increase in operating results for the nine months ended March 31, 2021 were lower results from most markets across the region, primarily driven by the declines in net sales. Asia/Pacific Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating income $ 245 $ 149 $ 890 $ 699 $ Change from prior-year period 96 191 % Change from prior-year period 64 % 27 % Reported operating income increased in Asia/Pacific for the three and nine months ended March 31, 2021, primarily reflecting higher results from mainland China. In both periods, the increase in operating income from mainland China was driven by the increase in net sales, partially offset by the increase in advertising and promotional expense, primarily due to investments to support holiday events and campaigns and new product launches and a difficult comparison to the prior-year period that reflected cost saving actions implemented in response to the impacts of the COVID-19 pandemic. Partially offsetting the increases in operating income for the three and nine months ended March 31, 2021 were lower results from Japan, reflecting the decrease in net sales. 59 Table of Contents THE ESTÉE LAUDER COMPANIES INC. INTEREST AND INVESTMENT INCOME Three Months Ended March 31 Nine Months Ended March 31 (In millions) 2021 2020 2021 2020 Interest expense $ 43 $ 42 $ 131 $ 112 Interest income and investment income, net $ 9 $ 14 $ 40 $ 41 Interest expense increased for the nine months ended March 31, 2021, primarily due to the issuance of additional long-term debt in November 2019 and April 2020. Interest income and investment income, net decreased for the three and nine months ended March 31, 2021, reflecting decreases in investment income due to lower interest rates, partially offset by higher equity method investment income from our minority investments. 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 nine months ended March 31, 2020. 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 nine months ended March 31, 2020. 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 March 31 Nine Months Ended March 31 2021 2020 2021 2020 Effective rate for income taxes 21.0 % 105.0 % 18.5 % 30.0 % Basis-point change from the prior-year period (8,400) (1,150) 60 Table of Contents THE ESTÉE LAUDER COMPANIES INC. For the three and nine months ended March 31, 2021, the decrease in the effective tax rate was primarily attributable to the impact of nondeductible goodwill charges recognized in the three and nine months ended March 31, 2020 and a lower effective tax rate on our foreign operations. The lower amount of earnings before income taxes for the three and nine months ended March 31, 2020 increased the impact of the nondeductible charges. The effective tax rate for the three and nine months ended March 31, 2021 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 100 basis points and 110 basis points to the effective tax rates for the three and nine months ended March 31, 2021, 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 and third quarters of fiscal 2021 and resulted in reductions of 30 basis points and 220 basis points to the effective tax rates for the three and nine months ended March 31, 2021, respectively. NET EARNINGS (LOSS) ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. Three Months Ended March 31 Nine Months Ended March 31 ($ in millions, except per share data) 2021 2020 2021 2020 As Reported: Net earnings (loss) attributable to The Estée Lauder Companies Inc. $ 456 $ (6) $ 1,852 $ 1,146 $ Change from prior-year period 462 706 % Change from prior-year period 100+% 62 % Diluted net earnings (loss) per common share $ 1.24 $ (.02) $ 5.03 $ 3.12 % Change from prior-year period 100+% 61 % Non-GAAP Financial Measure (1) : % Change in diluted net earnings (loss) per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill, other intangible and long-lived asset impairments, other income and changes in fair value of contingent consideration 92 % 23 % (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 (loss) per common share adjusted to exclude the impact of charges associated with restructuring and other activities; goodwill, other intangible and long-lived asset impairments relating to COVID-19; other income; the changes in the fair value of contingent consideration. 61 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 March 31 Variance % Change % Change in Constant Currency ($ in millions, except per share data) 2021 2020 Net sales, as reported $ 3,864 $ 3,345 $ 519 16 % 13 % Returns associated with restructuring and other activities 10 — 10 Net sales, as adjusted $ 3,874 $ 3,345 $ 529 16 % 13 % Operating income, as reported $ 616 $ 109 $ 507 100+% 100+% Charges associated with restructuring and other activities 145 25 120 Goodwill, other intangible and long-lived asset impairments 33 346 (313) Changes in fair value of contingent consideration — (2) 2 Operating income, as adjusted $ 794 $ 478 $ 316 66 % 64 % Diluted net earnings (loss) per common share, as reported $ 1.24 $ (.02) $ 1.26 100+% 100+% Charges associated with restructuring and other activities .31 .05 .26 Goodwill and other intangible asset impairments .07 .83 (.76) Changes in fair value of contingent consideration — (.01) .01 Diluted net earnings (loss) per common share, as adjusted $ 1.62 $ 0.85 $ .77 92 % 88 % 62 Table of Contents THE ESTÉE LAUDER COMPANIES INC. ($ in millions, except per share data) Nine Months Ended March 31 Variance % Change % Change in constant currency 2021 2020 Net sales, as reported $ 12,279 $ 11,864 $ 415 3 % 2 % Returns associated with restructuring and other activities 10 — 10 Net sales, as adjusted $ 12,289 $ 11,864 $ 425 4 % 2 % Operating income, as reported $ 2,384 $ 1,149 $ 1,235 100+% 100+% Charges associated with restructuring and other activities 191 63 128 Goodwill, other intangible and long-lived asset impairments 114 1,123 (1,009) Changes in fair value of contingent consideration (2) (9) 7 Operating income, as adjusted $ 2,687 $ 2,326 $ 361 16 % 14 % Diluted net earnings (loss) per common share, as reported $ 5.03 $ 3.12 $ 1.91 61 % 59 % Charges associated with restructuring and other activities .41 .14 .27 Goodwill, other intangible and long-lived asset impairments .25 2.62 (2.37) Other income — (1.23) 1.23 Changes in fair value of contingent consideration (.01) (.02) .01 Diluted net earnings (loss) per common share, as adjusted $ 5.68 $ 4.63 $ 1.05 23 % 20 % As diluted net earnings (loss) 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. 63 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 March 31, 2021 Three Months Ended March 31, 2020 Variance By Product Category: Skin Care $ 2,259 $ 1,723 $ 536 $ (58) $ 478 31 % 28 % Makeup 1,018 1,146 (128) (24) (152) (11) (13) Fragrance 454 349 105 (10) 95 30 27 Hair Care 128 119 9 (2) 7 8 6 Other 15 8 7 — 7 88 88 3,874 3,345 529 (94) 435 16 13 Returns associated with restructuring and other activities (10) — (10) (1) (11) Total $ 3,864 $ 3,345 $ 519 $ (95) $ 424 16 % 13 % By Region: The Americas $ 916 $ 892 $ 24 $ 10 $ 34 3 % 4 % Europe, the Middle East & Africa 1,706 1,525 181 (24) 157 12 10 Asia/Pacific 1,252 928 324 (80) 244 35 26 3,874 3,345 529 (94) 435 16 13 Returns associated with restructuring and other activities (10) — (10) (1) (11) Total $ 3,864 $ 3,345 $ 519 $ (95) $ 424 16 % 13 % 64 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) Nine Months Ended March 31, 2021 Nine Months Ended March 31, 2020 Variance By Product Category: Skin Care $ 7,113 $ 5,770 $ 1,343 $ (139) $ 1,204 23 % 21 % Makeup 3,243 4,249 (1,006) (46) (1,052) (24) (25) Fragrance 1,478 1,392 86 (21) 65 6 5 Hair Care 418 417 1 (4) (3) — (1) Other 37 36 1 (1) — 3 — 12,289 11,864 425 (211) 214 4 2 Returns associated with restructuring and other activities (10) — (10) (1) (11) Total $ 12,279 $ 11,864 $ 415 $ (212) $ 203 3 % 2 % By Region: The Americas $ 2,837 $ 3,278 $ (441) $ 39 $ (402) (13) % (12) % Europe, the Middle East & Africa 5,276 5,281 (5) (54) (59) — (1) Asia/Pacific 4,176 3,305 871 (196) 675 26 20 12,289 11,864 425 (211) 214 4 2 Returns associated with restructuring and other activities (10) — (10) (1) (11) Total $ 12,279 $ 11,864 $ 415 $ (212) $ 203 3 % 2 % 65 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, other intangible and long-lived asset impairments and changes in fair value of contingent consideration: As Reported ($ in millions) Three Months Ended March 31, 2021 Three Months Ended March 31, 2020 Variance Add: Changes in Goodwill, other intangible and long-lived asset impairments Add: Changes in fair value of contingent consideration Variance, as adjusted % Change, as reported % Change, as adjusted By Product Category: Skin Care $ 804 $ 418 $ 386 $ (54) $ — $ 332 92 % 70 % Makeup (72) (283) 211 (265) — (54) 75 (100+) Fragrance 47 — 47 7 2 56 — — Hair Care (17) (2) (15) (1) — (16) (100+) (100+) Other (1) 1 (2) — — (2) (100+) (100+) 761 134 627 $ (313) $ 2 $ 316 100+% 66 % Charges associated with restructuring and other activities (145) (25) (120) Total $ 616 $ 109 $ 507 By Region: The Americas $ 155 $ (217) $ 372 $ (346) $ — $ 26 100+% 20 % Europe, the Middle East & Africa 361 202 159 33 2 194 79 97 Asia/Pacific 245 149 96 — — 96 64 64 761 134 627 $ (313) $ 2 $ 316 100+% 66 % Charges associated with restructuring and other activities (145) (25) (120) Total $ 616 $ 109 $ 507 66 Table of Contents THE ESTÉE LAUDER COMPANIES INC. As Reported Add: Changes in Goodwill, other intangible and long-lived asset impairments Add: Changes in fair value of contingent consideration Variance, as adjusted % Change, as reported % Change, as adjusted ($ in millions) Nine Months Ended March 31, 2021 Nine Months Ended March 31, 2020 Variance By Product Category: Skin Care $ 2,453 $ 1,822 $ 631 $ 27 $ 3 $ 661 35 % 35 % Makeup (115) (790) 675 (1,042) — (367) 85 (100+) Fragrance 248 163 85 7 4 96 52 60 Hair Care (10) 10 (20) (1) — (21) (100+) (100+) Other (1) 7 (8) — — (8) (100+) (100+) 2,575 1,212 1,363 $ (1,009) $ 7 $ 361 100+% 16 % Charges associated with restructuring and other activities (191) (63) (128) Total $ 2,384 $ 1,149 $ 1,235 By Region: The Americas $ 256 $ (571) $ 827 $ (1,042) $ 3 $ (212) 100+% (39) % Europe, the Middle East & Africa 1,429 1,084 345 33 4 382 32 35 Asia/Pacific 890 699 191 — — 191 27 27 2,575 1,212 1,363 $ (1,009) $ 7 $ 361 100+% 16 % Charges associated with restructuring and other activities (191) (63) (128) Total $ 2,384 $ 1,149 $ 1,235 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 March 31, 2021, we had cash and cash equivalents of $6,399 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. 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. 67 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 April 26, 2021, our long-term debt is rated A+ with a stable outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s. 68 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Debt At March 31, 2021, 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), (14) $ 635 $ — $ 635 4.15% Senior Notes, due March 15, 2047 (“2047 Senior Notes”) (2), (14) 494 — 494 4.375% Senior Notes, due June 15, 2045 (“2045 Senior Notes”) (3), (14) 455 — 455 3.70% Senior Notes, due August 15, 2042 (“2042 Senior Notes”) (4), (14) 247 — 247 6.00% Senior Notes, due May 15, 2037 (“2037 Senior Notes”) (5), (14) 294 — 294 5.75% Senior Notes, due October 15, 2033 (“2033 Senior Notes”) (6) 197 — 197 1.950% Senior Notes, due March 15, 2031 (“2031 Senior Notes”) (7), (14),(15) 592 — 592 2.600% Senior Notes, due April 15, 2030 (“2030 Senior Notes”) (8), (14) 680 — 680 2.375% Senior Notes, due December 1, 2029 (“2029 Senior Notes”) (9), (14) 641 — 641 3.15% Senior Notes, due March 15, 2027 (“2027 Senior Notes”) (10), (14) 498 — 498 2.00% Senior Notes, due December 1, 2024 (“2024 Senior Notes”) (11), (14) 496 — 496 2.35% Senior Notes, due August 15, 2022 (“2022 Senior Notes”) (12), (14) 256 — 256 1.70% Senior Notes, due May 10, 2021 (“2021 Senior Notes”) (13), (14), (15) — 451 451 Other long-term borrowings 2 — 2 Other current borrowings — 20 20 $ 5,487 $ 471 $ 5,958 (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 $9 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 $600 million principal, unamortized debt discount of $4 million and debt issuance costs of $4 million. (8) Consists of $700 million principal, unamortized debt discount of $1 million, debt issuance costs of $4 million and a $15 million adjustment to reflect the fair value of interest rate swaps. (9) Consists of $650 million principal, unamortized debt discount of $5 million and debt issuance costs of $4 million. (10) Consists of $500 million principal and debt issuance costs of $2 million. (11) Consists of $500 million principal, unamortized debt discount of $2 million and debt issuance costs of $2 million. (12) Consists of $250 million principal and a $6 million adjustment to reflect the fair value of interest rate swaps. (13) Consists of $450 million principal and a $1 million adjustment to reflect the fair value of interest rate swaps. (14) The Senior Notes contain certain customary covenants, including limitations on indebtedness secured by liens. (15) See Note 16 – Subsequent Events for further information relating to the repayment of the $450 million principal amount made and the interest rate swap agreement relating to the 2031 Senior Notes entered into subsequent to March 31, 2021. 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 52% and 61% at March 31, 2021 and June 30, 2020, respectively. 69 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Cash Flows Nine Months Ended March 31 (In millions) 2021 2020 Net cash provided by operating activities $ 2,777 $ 1,945 Net cash used for investing activities $ (577) $ (1,557) Net cash provided by (used for) financing activities $ (862) $ 1,525 The change in net cash flows from operations reflected the improvement in working capital, primarily due to other accrued liabilities, driven by an increase in accrued employee incentive compensation, as previously discussed, 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 from operations also reflects higher earnings before taxes, excluding non-cash items. 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 lower proceeds relating to the issuance of long-term debt (the November 2019 and April 2020 issuances in fiscal 2020, compared to the March 2021 issuance in fiscal 2021), 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 nine months ended March 31, 2021, see Notes to Consolidated Financial Statements, Note 13 – 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 In February 2021, we agreed to acquire additional shares in DECIEM Beauty Group Inc. (“DECIEM”) that will increase our existing equity interest from approximately 29% to approximately 76%. Upon closing, which is expected to occur in May 2021, we will pay approximately $1,000 million and will also have the right to purchase, and will grant the remaining investors a right to sell to us, the remaining interests after a three-year period, with a purchase price based on the future performance of DECIEM. There have been no other 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 10 – 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 6 – Derivative Financial Instruments . Foreign Exchange Risk Management For a discussion of foreign exchange risk management, see Notes to Consolidated Financial Statements, Note 6 – Derivative Financial Instruments (Cash Flow Hedges, Net Investment Hedges) . Credit Risk For a discussion of credit risk, see Notes to Consolidated Financial Statements, Note 6 – Derivative Financial Instruments (Credit Risk) . 70 Table of Contents THE ESTÉE LAUDER COMPANIES INC. 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 $198 million and $222 million as of March 31, 2021 and June 30, 2020, respectively. This potential change does not consider our underlying foreign currency exposures. 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 (decrease) by approximately $(58) million and $9 million as of March 31, 2021 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 . 71 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; 72 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.