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, 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 December 31 Six Months Ended December 31 (In millions) 2021 2020 2021 2020 NET SALES By Product Category: Skin Care $ 3,159 $ 2,819 $ 5,608 $ 4,854 Makeup 1,386 1,247 2,560 2,225 Fragrance 799 618 1,408 1,024 Hair Care 180 154 328 290 Other 16 15 29 22 5,540 4,853 9,933 8,415 Returns associated with restructuring and other activities (1) — (2) — Net sales $ 5,539 $ 4,853 $ 9,931 $ 8,415 By Region (1) : The Americas $ 1,300 $ 1,048 $ 2,494 $ 1,921 Europe, the Middle East & Africa 2,338 2,030 4,211 3,570 Asia/Pacific 1,902 1,775 3,228 2,924 5,540 4,853 9,933 8,415 Returns associated with restructuring and other activities (1) — (2) — Net sales $ 5,539 $ 4,853 $ 9,931 $ 8,415 OPERATING INCOME (LOSS) By Product Category: Skin Care $ 1,082 $ 928 $ 1,799 $ 1,649 Makeup 130 28 221 (43) Fragrance 210 141 341 201 Hair Care 8 4 10 7 Other 3 (1) 3 — 1,433 1,100 2,374 1,814 Charges associated with restructuring and other activities (15) (37) (21) (46) Operating income $ 1,418 $ 1,063 $ 2,353 $ 1,768 By Region (1) : The Americas $ 382 $ 36 $ 636 $ 101 Europe, the Middle East & Africa 620 657 1,085 1,068 Asia/Pacific 431 407 653 645 1,433 1,100 2,374 1,814 Charges associated with restructuring and other activities (15) (37) (21) (46) Operating income $ 1,418 $ 1,063 $ 2,353 $ 1,768 (1) The net sales from our travel retail business are included in the Europe, the Middle East & Africa region, with the exception of 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 2021 2020 2021 2020 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 22.1 22.3 23.0 22.7 Gross profit 77.9 77.7 77.0 77.3 Operating expenses: Selling, general and administrative 52.0 53.4 53.1 54.9 Restructuring and other charges 0.3 0.7 0.2 0.5 Goodwill impairment — 1.1 — 0.6 Impairment of other intangible and long-lived assets — 0.6 — 0.3 Total operating expenses 52.3 55.8 53.3 56.3 Operating income 25.6 21.9 23.7 21.0 Interest expense 0.8 0.9 0.8 1.0 Interest income and investment income, net 0.2 0.4 0.1 0.4 Other components of net periodic benefit cost — 0.1 — 0.1 Other income — — — — Earnings before income taxes 25.1 21.2 23.0 20.2 Provision for income taxes (5.4) (3.2) (5.0) (3.6) Net earnings 19.7 18.1 18.0 16.7 Net earnings attributable to noncontrolling interests (0.1) (0.1) (0.1) (0.1) Net loss attributable to redeemable noncontrolling interest — — — — Net earnings attributable to The Estée Lauder Companies Inc. 19.6 % 18.0 % 17.9 % 16.6 % 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 54 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 monthly 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 continued to disrupt our operating environment, impacting retail traffic and consumer preferences during the three months ended December 31, 2021. The spread of the Delta and Omicron variants and resurgence of COVID-19 cases in most parts of the world led to periodic point-of-sale staffing shortages as well as government restrictions to prevent further spread of the virus. These restrictions included the intermittent closure of businesses deemed non-essential, curtailment of travel, social distancing, vaccination requirements for brick-and-mortar businesses, 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 much of the second quarter of fiscal 2022, there were intermittent closures throughout the world due to safety protocols or restrictions. In much of Asia/Pacific, restrictions eased during the second quarter of fiscal 2022, although mainland China had regional lockdowns and much of Western Europe, particularly in the United Kingdom, experienced increased restrictions as the quarter progressed. In North America in late calendar year 2021, restrictions and store closures varied by location. COVID-19 cases generally eased in Latin America. Globally, in areas where stores were open, consumer traffic has not recovered to the pre-pandemic levels. International passenger traffic remained largely curtailed globally. However, passenger traffic in Europe, the Middle East & Africa and The Americas improved, but remained significantly below pre-pandemic levels. The improvement was due to the partial lifting of government restrictions, most notably in the United Kingdom and the United States. In Asia/Pacific, increased travel restrictions remained in place during much of the quarter, and traffic in Hainan was negatively impacted by fewer visitors due to intermittent domestic travel restrictions. During the second quarter of fiscal 2022, net sales of our products online (through our own websites, third-party platforms and websites of our retailers) continued to grow in The Americas and Asia/Pacific, benefiting from strong holiday performance and key shopping moments. The launch of a third-party online platform in mainland China also contributed to online net sales growth in Asia/Pacific. Excluding incremental online net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter, online net sales declined in Europe, the Middle East & Africa reflecting early stages of a brick-and-mortar recovery. 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. While the demand for makeup improved significantly versus the prior year, it continues to be the only category that remains below the pre-pandemic period, given fewer makeup usage occasions and ongoing mask wearing, while skin care, fragrance and hair care have all grown from pre-pandemic levels. Supply Chain The COVID-19 pandemic has contributed to global supply chain disruptions, including manufacturing and transportation delays, due to closures, employee absences, port congestion, labor and container shortages, and shipment delays. As a result, we expect higher costs to negatively impact cost of sales and operating expenses for the remainder of fiscal 2022. We expect to mitigate some of the impact to our business and our costs through strategic price increases, product mix, timing of shipments, use of air freight and less congested ports, and cost savings in other areas. 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 high quality products and services. Within prestige beauty, we are well diversified by product category, geography, brand, product sub-category, channel, consumer segment and price point. This diversification 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 31-34 of our Annual Report on Form 10-K for the year ended June 30, 2021, as well as below. During the second quarter of fiscal 2022, net sales increased 14%, reflecting early stages of a recovery and successful performance during holidays and key shopping moments in The Americas and in Europe, the Middle East & Africa as compared to a more difficult environment in the prior-year period. The net sales increase includes incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter. • Our skin care net sales benefited from the recent launch of The Hydrating Infused Emulsion from La Mer, as well as continued strength in the brand’s The Treatment Lotion and Crème de la Mer moisturizer. Incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter contributed to growth, and Clinique’s hero franchises resonated well in The Americas and in Europe, the Middle East & Africa. • The COVID-19 pandemic has generally resulted in more limited social and business activities and consumers overall wore less makeup. As restrictions lift and stores reopen in particular locations, we generally see demand for makeup products increasing. During the second quarter of fiscal 2022, net sales in makeup grew in part due to this, and was also driven by increases in Estée Lauder foundation products, as well as strong activations and expanded consumer reach from M·A·C and Too Faced. Our brands generated interest in makeup through virtual marketing efforts such as classes, virtual try on technology and greater emphasis on social media platforms. • Our fragrance net sales rose sharply as consumers gravitated to high-end and artisanal offerings from Jo Malone London, Tom Ford Beauty, Le Labo and Kilian Paris. • Our hair care net sales grew, reflecting increases from both Aveda and Bumble and bumble as brick-and-mortar channels reopened. In September 2021, we announced that we are not renewing our existing license agreements for Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna when they expire in June 2023. We expect to continue to sell products under these licenses through June 30, 2022. Our global distribution capability and operations allow us to focus on targeted expanded consumer reach wherever consumer demographics and trends are the most attractive. Our regional organizations, and the expertise of our people there, enable our brands to be more locally and culturally relevant in both product assortment and communications. We are evolving the way we connect with our consumers in stores, online and where they travel, including by expanding our digital and social media presence and the engagement of global and local influencers to amplify brand or product stories. We tailor implementation of our strategy by market to drive consumer engagement and embrace cultural diversity. We continuously strive to strengthen our presence in large, image-building core markets, while broadening our presence in emerging markets. • The increase in net sales during the fiscal 2022 second quarter was led by The Americas, primarily reflecting the reopening of brick-and-mortar stores, stronger holiday performance, targeted expanded consumer reach and incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter. • Net sales in Europe, the Middle East & Africa grew due to ongoing increases in our travel retail business, partly relating to the increase in traffic as a result of the easing of travel restrictions. In addition, brick-and-mortar retail reopened across the region, and online net sales growth, inclusive of DECIEM, continued. • Net sales increased in Asia/Pacific, reflecting higher net sales in mainland China, Australia and several smaller markets. 39 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Outlook The COVID-19 pandemic continues to disrupt business for us, retailers and other companies with which we do business. There have been, and are likely to continue to be, intermittent store closures and supply chain disruptions. 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. We expect to invest in areas to support the recovery, including advertising, online, research and development and supply chain, to drive growth in areas of opportunity and help nurture emerging trends in the rest of the business. In addition to impacting net sales and profitability, these and other challenges may adversely impact the goodwill and other intangible assets associated with our brands, as well as long-lived assets (i.e. potentially resulting in impairments). We believe that the best way to increase long-term stockholder value is to continue providing superior products and services in the most efficient and effective manner while recognizing shifts in consumers’ behaviors and shopping practices. Accordingly, our long-term strategy has numerous initiatives across geographic regions, product categories, brands, channels of distribution and functions designed to grow our sales, provide cost efficiencies, leverage our strengths and make us more productive and profitable. We plan to build upon and leverage our history of outstanding creativity and innovation, high quality products and services, and engaging communications while investing for long-term sustainable growth. We continue to monitor the effects of the global macroeconomic environment, including increasing inflationary pressures; supply chain disruptions; 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, which could have a material adverse effect on our business. We are also mindful of inflationary pressures on our cost base and are monitoring the impact on consumer preferences. 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 executing upon our Post-COVID Business Acceleration Program. As the current situation continues to progress, 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. Post-COVID Business Acceleration Program Information about our restructuring initiative, the Post-COVID Business Acceleration Program, is 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 8 – Charges Associated with Restructuring and Other Activities and in the Overview on page 33 of our Annual Report on Form 10-K for the year ended June 30, 2021. NET SALES Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 5,539 $ 4,853 $ 9,931 $ 8,415 $ Change from prior-year period 686 1,516 % Change from prior-year period 14 % 18 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 14 % 17 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 40 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported net sales increased for the three and six months ended December 31, 2021, driven by higher net sales from every product category and in every geographic region primarily reflecting (i) the continued progression towards brick-and-mortar and travel recovery compared to the prior-year challenges, which included widespread store closures, lower retail traffic, travel restrictions and quarantines, stemming from the COVID-19 pandemic; (ii) the continued success of hero product franchises; (iii) successful performance for holiday and key shopping moments (iv) new product launches; and (v) targeted expanded consumer reach. For the three and six months ended December 31, 2021, reported net sales from every product category grew double digits. Skin care net sales increased in both periods, led by higher net sales from La Mer and Clinique, as well as incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter. The increases in fragrance net sales primarily reflected higher net sales from Jo Malone London, Tom Ford Beauty, Le Labo and Kilian Paris. The net sales increases from Estée Lauder and M·A·C drove the increases in the makeup net sales. Hair care net sales increased in both periods, due to higher net sales from Aveda and Bumble and bumble. For the three and six months ended December 31, 2021, reported net sales grew in every geographic region and benefited from incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter. Net sales increased in Europe, the Middle East & Africa in both periods, reflecting continued progression towards recovery across the region, led by our travel retail business, the United Kingdom and Russia. The increases in net sales in The Americas reflected higher net sales throughout the region. Net sales increased in mainland China in both periods, driving the growth in Asia/Pacific, however, several countries in the region continued to be negatively impacted by the spread of COVID-19 variants and resurgence in cases, which led to government restrictions that were implemented to prevent further spread of the virus. The total net sales increases were impacted by approximately $7 million and $84 million of favorable foreign currency translation for the three and six months ended December 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 impact of returns associated with restructuring and other activities for the three and six months ended December 31, 2021 of $1 million and $2 million, respectively. Product Categories Skin Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 3,159 $ 2,819 $ 5,608 $ 4,854 $ Change from prior-year period 340 754 % Change from prior-year period 12 % 16 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 11 % 14 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 41 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported skin care net sales increased for the three and six months ended December 31, 2021, reflecting higher net sales from La Mer, incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter and Clinique, combined, of approximately $295 million and $610 million, respectively. Net sales from La Mer increased in both periods, led by our travel retail business and mainland China, primarily due to successful performance during holiday and key shopping moments, the continued success of hero products, such as The Treatment Lotion, Créme de la Mer and the Genaissance line of products, the current year launch of The Hydrating Infused Emulsion, and targeted expanded consumer reach. In both periods, net sales from Clinique increased, driven by our travel retail business and North America, primarily due to the continued success of existing products, such as Even Better Clinical Radical Dark Spot Corrector + Interrupter and the Take The Day Off line of products, the current-year launch of Smart Clinical Repair Wrinkle Correcting Serum and targeted expanded consumer reach. The skin care net sales increases were impacted by approximately $25 million and $73 million of favorable foreign currency translation for the three and six months ended December 31, 2021, respectively. Makeup Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 1,386 $ 1,247 $ 2,560 $ 2,225 $ Change from prior-year period 139 335 % Change from prior-year period 11 % 15 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 12 % 15 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported makeup net sales increased for the three and six months ended December 31, 2021, led by higher net sales from Estée Lauder and M·A·C, combined, of approximately $92 million and $223 million, respectively. The continued progression towards recovery in makeup, including increased usage occasions compared to the prior year, led to the increase in makeup net sales in The Americas and Europe, the Middle East & Africa in both periods. Makeup net sales in Asia/Pacific declined in both periods, as several countries in the region continued to be negatively impacted by the spread of COVID-19 variants and resurgence in cases, which led to government restrictions implemented to prevent further spread of the virus. Net sales from Estée Lauder increased in both periods, primarily driven by the continued success of existing products, such as the Double Wear and Futurist product franchises; new product launches, such as the current-year launches of Double Wear Sheer Long-Wear Foundation; successful performance during holiday and key shopping moments; new third-party online platform launch in mainland China; and the continued progression towards brick-and-mortar recovery in North America. The increase in net sales from M·A·C, in both periods, was primarily due to the continued progression towards brick-and-mortar recovery and successful performance during holiday and key shopping moments in North America and in Europe, the Middle East & Africa. Reported makeup net sales for the six months ended December 31, 2021 also benefited from higher net sales from Tom Ford Beauty primarily due to continued strength in lip products, such as Scarlet Rouge and Equus, and the continued progression towards brick-and-mortar recovery in North America. The makeup net sales increases were impacted by approximately $12 million of unfavorable and $5 million of favorable foreign currency translation for the three and six months ended December 31, 2021, respectively. 42 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Fragrance Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 799 $ 618 $ 1,408 $ 1,024 $ Change from prior-year period 181 384 % Change from prior-year period 29 % 38 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 30 % 37 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported fragrance net sales increased for the three and six months ended December 31, 2021, primarily driven by Jo Malone London, Tom Ford Beauty, Le Labo, Kilian Paris, combined, of approximately $161 million and $305 million, respectively. In both periods, fragrance net sales grew double digits in every geographic region, partially reflecting the continued progression towards brick-and-mortar and travel recovery in various parts of the world due to more store openings, increased retail traffic, and the easing of travel restrictions compared to the prior year. The increases in net sales from Jo Malone London also reflected the continued success of our hero products, such as English Pear & Freesia, successful performance during holiday and key shopping moments and continued growth of the home subcategory. Net sales increased from Tom Ford Beauty in both periods, also benefiting from successful campaigns during holiday and key shopping moments, the continued success of Private Blend fragrances, such as Oud Wood and Rose Prick, and Signature fragrances, such as the Ombre Leather line of products, and the diversification of product offerings by region. In both periods, net sales from Le Labo grew strong double digits in every geographic region, also reflecting the continued success of hero product franchises, such as Santal 33, the new product launch of Thé Matcha 26 and targeted expanded consumer reach. Net sales increased from Kilian Paris in both periods, also benefiting from the success of hero fragrances, such as Good girl gone Bad by KILIAN and Love, don't be shy, as well as current-year launches, including Apple Brandy on the Rocks. Reported fragrance net sales for the six months ended December 31, 2021 also benefited from higher net sales from certain of our designer fragrances, primarily due to the continued progression towards brick-and-mortar and travel recovery in various parts of the world, as discussed above, and the current-year launch of Michael Kors Super Gorgeous! The fragrance net sales increases were impacted by approximately $4 million of unfavorable and $6 million of favorable foreign currency translation for the three and six months ended December 31, 2021, respectively. Hair Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 180 $ 154 $ 328 $ 290 $ Change from prior-year period 26 38 % Change from prior-year period 17 % 13 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 18 % 13 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 43 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported hair care net sales increased for the three and six months ended December 31, 2021, reflecting higher net sales from Aveda and Bumble and bumble primarily due to the continued progression towards salon and retail store recovery in North America. Net sales from Aveda increased in both periods, also reflecting successful performance during holiday in North America and the continued success of existing product franchises, such as Invati, Nutriplenish and Botanical Repair. In both periods, the increase in net sales from Bumble and bumble also reflected the success of hero products, such as Hairdresser's Invisible Oil Primer, the current-year launches of Hairdresser's Invisible Oil Ultra Rich and Bb. Illuminated Blonde, and targeted expanded consumer reach. Geographic Regions We strategically time our new product launches by geographic market, which may account for differences in regional sales growth. The Americas Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 1,300 $ 1,048 $ 2,494 $ 1,921 $ Change from prior-year period 252 573 % Change from prior-year period 24 % 30 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 24 % 29 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 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 and six months ended December 31, 2021 in every country and every product category, reflecting the continued progression towards brick-and-mortar and makeup recovery from the prior-year challenges that included store closures, lower retail traffic, fewer makeup usage occasions and quarantines, stemming from the COVID-19 pandemic. The net sales increases were led by higher net sales in North America of approximately $236 million and $536 million for the three and six months ended December 31, 2021, respectively, also benefiting from successful performance during holiday and key shopping moments, incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter and higher net sales from many of our brands, including M·A·C, Clinique, Tom Ford Beauty, Aveda, Jo Malone London and Le Labo. Net sales in The Americas were impacted by approximately $1 million and $7 million of favorable foreign currency translation for the three and six months ended December 31, 2021, respectively. 44 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Europe, the Middle East & Africa Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 2,338 $ 2,030 $ 4,211 $ 3,570 $ Change from prior-year period 308 641 % Change from prior-year period 15 % 18 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 16 % 18 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 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, 2021 increased in Europe, the Middle East & Africa, reflecting early stages of re covery across the region, primarily due to store openings, increased retail traffic, and the easing of travel restrictions compared to the prior year, and successful performance during holiday and key shopping moments, led by our travel retail business, the United Kingdom and Russia, combined, of approximately $238 million and $497 million, respectively. Net sales increased in our travel retail business in both periods, reflecting continued strength of our brands with the Chinese consumer, the easing of travel restrictions, which drove increased traffic levels compared to the prior-year periods, and continued success of hero product franchises from La Mer, Origins, Clinique, Jo Malone London and Tom Ford Beauty. In both periods, these benefits were partially offset by lower net sales from Estée Lauder products, primarily reflecting a decrease in promotional activity and lower net sales from the Advanced Night Repair product franchise primarily due to the prior-period launch of Advanced Night Repair Synchronized Multi-Recovery Complex. Net sales in the United Kingdom and Russia increased in both periods, primarily reflecting the continued progression towards brick-and-mortar recovery, as noted above, and led by growth in the fragrance product category. The increases in net sales in the United Kingdom also reflected incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter. Net sales in Europe, the Middle East & Africa were impacted by approximately $13 million of unfavorable and $2 million of favorable foreign currency translation for the three and six months ended December 31, 2021, respectively. Asia/Pacific Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Net sales $ 1,902 $ 1,775 $ 3,228 $ 2,924 $ Change from prior-year period 127 304 % Change from prior-year period 7 % 10 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 6 % 8 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 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 increased in Asia/Pacific for the three months ended December 31, 2021, primarily due to higher net sales in mainland China and Australia of approximately $148 million, combined. The increase in net sales in mainland China was primarily due to the continued success of hero products franchises from Estée Lauder, La Mer and Jo Malone London, reflecting continued growth in skin care and strong momentum in fragrance, successful performance during holiday and key shopping moments, new product launches, and the current-year launch on a new third-party online platform. The increase in net sales in Australia was primarily driven by recovery compared to the prior-year challenges, including the easing of restrictions and increased retail traffic, as well as incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter. Partially offsetting these increases in net sales for the three months ended December 31, 2021, were lower net sales in Korea, reflecting the challenging brick-and-mortar retail environment stemming from the COVID-19 pandemic and the timing of holiday shipments compared to the prior-year period. Reported net sales increased in Asia/Pacific for the six months ended December 31, 2021, reflecting higher net sales in mainland China and Korea of approximately $296 million, combined. Net sales in mainland China increased, as noted above. Net sales increased in Korea, despite the challenging brick-and-mortar retail environment, primarily reflecting the continued success of hero product franchises from Dr.Jart+ and Jo Malone London, continued growth in skin care and strong momentum in fragrance and double-digit growth from online net sales. Net sales in Asia/Pacific were impacted by approximately $19 million and $75 million of favorable foreign currency translation for the three and six months ended December 31, 2021, respectively. GROSS MARGIN Gross margin increased to 77.9% and decreased to 77.0% for the three and six months ended December 31, 2021, respectively, as compared with 77.7% and 77.3% in the prior-year periods. Favorable (Unfavorable) Basis Points December 31, 2021 Three Months Ended Six Months Ended Mix of business (10) (40) Obsolescence charges — (35) Manufacturing costs and other (10) (10) Foreign exchange transactions 40 45 Subtotal 20 (40) Charges associated with restructuring and other activities — 10 Total 20 (30) The increase in gross margin for the three months ended December 31, 2021 reflected a favorable transactional foreign exchange impact due to the strengthening of the United States Dollar, partially offset by an unfavorable impact from our mix of business. The unfavorable impact from our mix of business was primarily driven by lower gross margins on DECIEM products (included in the current-year period due to the acquisition of the controlling interest in the fourth quarter of fiscal 2021) combined with the change in category mix, primarily due to the increase in makeup net sales, partially offset by strategic price increases and lower costs from product sets. The decrease in gross margin for the six months ended December 31, 2021 reflected an unfavorable impact from our mix of business, primarily due to lower gross margins on DECIEM products and higher costs from product sets, partially offset by strategic price increases. Partially offsetting the unfavorable impact from our mix of business was a favorable transactional foreign exchange impact, as noted above. 46 Table of Contents THE ESTÉE LAUDER COMPANIES INC. OPERATING EXPENSES Operating expenses as a percentage of net sales was 52.3% and 53.3% for the three and six months ended December 31, 2021, respectively, as compared with 55.8% and 56.3% in the prior-year periods. Favorable (Unfavorable) Basis Points December 31, 2021 Three Months Ended Six Months Ended General and administrative expenses 110 90 Advertising, merchandising, sampling and product development (30) 30 Selling 110 90 Stock-based compensation 20 20 Store operating costs — 10 Shipping (60) (50) Foreign exchange transactions (10) (10) Subtotal 140 180 Charges associated with restructuring and other activities 40 30 Goodwill and other intangible asset impairments 170 90 Total 350 300 The favorable changes in operating expense margin for the three and six months ended December 31, 2021, were driven by the increase in net sales, primarily due to the continued progression towards brick-and-mortar and travel recovery in various parts of the world and successful performance during holiday and key shopping moments, as discussed above. For both periods, the decrease in operating expense margin also reflected the favorable impact from selling expenses, primarily due to the shift in channel mix to online, travel retail and specialty-multi, disciplined general and administrative expense management, and the year-over-year favorable impact of goodwill and other intangible asset impairments of $81 million. Partially offsetting the benefits to operating expense margin for the three and six months ended December 31, 2021 were higher shipping costs due to the increase in net sales volume and increased shipping rates. Further offsetting the benefits to operating expense margin for the three months ended December 31, 2021 were higher advertising and promotional activities, primarily to support strategic investments in key areas of growth (e.g., Hainan, the skin care and fragrance product categories), the continued progression towards makeup recovery, holiday and key shopping moments, and in-store and airport promotions given the increase in brick-and-mortar and airport traffic. 47 Table of Contents THE ESTÉE LAUDER COMPANIES INC. OPERATING RESULTS Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating income $ 1,418 $ 1,063 $ 2,353 $ 1,768 $ Change from prior-year period 355 585 % Change from prior-year period 33 % 33 % Operating margin 25.6 % 21.9 % 23.7 % 21.0 % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill and other intangible asset impairments, changes in fair value of contingent consideration and acquisition-related stock option expense 22 % 26 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. The increase in reported operating margin for the three and six months ended December 31, 2021 from the prior-year period was primarily driven by the increase in net sales, partially offset by higher cost of sales and the increase in operating expenses, discussed above. Charges associated with restructuring and other activities are not allocated to the 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) 2021 2020 2021 2020 As Reported: Operating income $ 1,082 $ 928 $ 1,799 $ 1,649 $ Change from prior-year period 154 150 % Change from prior-year period 17 % 9 % 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 acquisition-related stock option expense 7 % 4 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 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 operating income increased for the three and six months ended December 31, 2021, led by higher results from La Mer and Clinique, combined, of approximately $89 million and $177 million, respectively, as well as a favorable year-over-year impact of goodwill and other intangible asset impairments related to GLAMGLOW of $81 million. In both periods, the increase in operating income from La Mer reflected higher net sales, partially offset by higher advertising and promotional activities primarily to support holiday and key shopping moments and new product launches. Operating income from Clinique increased, primarily due to higher net sales in both periods and, for the six months ended December 31, 2021, partially offset by higher advertising and promotional activities primarily to support holiday and key shopping moments and new product launches. Partially offsetting the increases in operating income for the three and six months ended December 31, 2021 were lower results from Estée Lauder and Origins, combined, of approximately $106 million and $193 million, respectively. In both periods, the decrease in operating income from Estée Lauder was primarily due to the decrease in net sales, primarily related to our travel retail business, higher advertising and promotional activities to support hero products, holiday and key shopping moments and new product launches, and the increase in cost of sales primarily due to higher costs for promotional items. Operating income decreased from Origins in both periods, reflecting lower net sales and the increase in advertising and promotional activities related to social media spending (including costs associated with influencers) and new product launches. Reported skin care operating income for the six months ended December 31, 2021 also benefited from high results from Bobbi Brown, primarily due to the increase in net sales as a result of the continued success of existing products, such as Vitamin Enriched Face Base, and successful holiday and key shopping moments, which led to double-digit net sales growth in every geographic region. Makeup Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating income (loss) $ 130 $ 28 $ 221 $ (43) $ Change from prior-year period 102 264 % Change from prior-year period 100+% 100+% Reported makeup operating income increased for the three months ended December 31, 2021, primarily driven by higher results from M·A·C, Tom Ford Beauty, Too Faced, and Estée Lauder of approximately $59 million, combined. Operating income from M·A·C and Tom Ford Beauty increased, primarily due to the increase in net sales. The higher results from Too Faced primarily reflected the increase in net sales and lower advertising and promotional expense as a result of more disciplined expense management. The higher results from Estée Lauder was primarily due to the increase in net sales, partially offset by higher advertising and promotional activities relating to strategic investments to support the makeup recovery, digital advertising and social media spending, and holiday and key shopping moments. Partially offsetting these increases in makeup operating income for the three months ended December 31, 2021, were lower results from Clinique due to higher advertising and promotional activities relating to strategic investments to support the makeup recovery and holiday and key shopping moments. Reported makeup operating results increased for the six months ended December 31, 2021, primarily driven by higher results from Estée Lauder, M·A·C, and Tom Ford Beauty of approximately $174 million, combined. The higher results from Estée Lauder and M·A·C were primarily due to the increases in net sales, partially offset by higher advertising and promotional activities relating to strategic investments to support the makeup recovery, digital advertising and social media spending, and holiday and promotional events. Operating income from Tom Ford Beauty increased, primarily due to the increase in net sales. 49 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Fragrance Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating income $ 210 $ 141 $ 341 $ 201 $ Change from prior-year period 69 140 % Change from prior-year period 49 % 70 % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for changes in fair value of contingent consideration 51 % 71 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 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 six months ended December 31, 2021, primarily driven by higher results from Jo Malone London, Tom Ford Beauty, Le Labo and certain of our designer fragrances, combined, of approximately $68 million and $148 million, respectively. In both periods, the higher results from Jo Malone London primarily reflected the increase in net sales, partially offset by higher cost of sales given the growth of the home subcategory and the increase in promotional items, as well as the increase in advertising and promotional activities primarily to support holiday and key shopping moments, in-store promotions given the increase in brick-and-mortar traffic, and new product launches. Operating results from Tom Ford Beauty increased in both periods, primarily due to higher net sales, partially offset by the increase in advertising and promotional activities to support strategic investments in digital advertising and social media spending (including costs associated with influencers), hero product franchises, and new product launches; higher cost of sales due, in part, to the increase in promotional items; and higher selling expenses due to the continued progression towards brick-and-mortar recovery, including more store openings and increased retail traffic compared to the prior year. The increases in operating income from Le Labo and certain of our designer fragrances, in both periods, were primarily driven by the increases in net sales. Hair Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating income $ 8 $ 4 $ 10 $ 7 $ Change from prior-year period 4 3 % Change from prior-year period 100 % 43 % Reported hair care operating income increased for the three months ended December 31, 2021, primarily due to the increase in net sales, partially offset by strategic investments to support the continued progression towards salon and retail store recovery and new product launches. Reported hair care operating income increased for the six months ended December 31, 2021, reflecting higher operating results from Bumble and bumble, primarily driven by the increase in net sales, as previously discussed. 50 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Geographic Regions The Americas Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating income $ 382 $ 36 $ 636 $ 101 $ Change from prior-year period 346 535 % 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 acquisition-related stock option expense 100+% 100+% (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 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, 2021, primarily reflecting higher operating results in the North America of approximately $344 million and $526 million, respectively, primarily due to the increases in net sales, higher intercompany royalty income primarily from growth in our travel retail business and favorable year-over-year impact of goodwill and other intangible asset impairments related to GLAMGLOW of $81 million. Partially offsetting these increases in operating income in both periods were higher advertising and promotional activities, primarily to support strategic investments in digital advertising and social media spending, holiday and key shopping moments, and in-store promotions given the increase in brick-and-mortar traffic, and increases in selling expense due to the continued progression towards brick-and-mortar and makeup recovery from the prior-year challenges, including store closures, lower retail traffic and quarantines, stemming from the COVID-19 pandemic. Europe, the Middle East & Africa Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating income $ 620 $ 657 $ 1,085 $ 1,068 $ Change from prior-year period (37) 17 % Change from prior-year period (6) % 2 % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for changes in contingent consideration (5) % 2 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 51 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported operating income decreased in Europe, the Middle East & Africa for the three months ended December 31, 2021, primarily driven by lower results from our travel retail business and the United Kingdom of approximately $67 million, combined. Operating income decreased from our travel retail business, reflecting the (i) increase in intercompany royalty expense to The Americas primarily due to the growth of our travel retail business and (ii) higher advertising and promotional activity primarily to support strategic investments in key areas of growth (primarily Hainan, hero products and the skin care product category), as well as to capture the current-year increase in airport traffic. Also contributing to the decrease in operating income from our travel retail business was higher shipping costs due to the increase in net sales volume and shipping rates. These higher expenses were partially offset by the increase in net sales. Operating income in the United Kingdom decreased, primarily driven by higher advertising and promotional activity to support strategic investments across the brands and incremental expenses attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter, partially offset by the increase in net sales. Partially offsetting these decreases in operating income were higher results from several affiliates reflecting the continued progression towards brick-and-mortar recovery, including store openings, increased retail traffic, and the easing of travel restrictions, compared to the prior year. Reported operating income increased in Europe, the Middle East & Africa for the six months ended December 31, 2021, reflecting the continued progression towards brick-and-mortar recovery, including store openings, increased retail traffic, and the easing of travel restrictions, compared to the prior year, led by Russia. The increase in operating income in Russia was primarily due to the increase in net sales, partially offset by higher advertising and promotional activity to support strategic investments across the brands. Partially offsetting these increases in operating income was lower results from our travel retail business, reflecting the increase in intercompany royalty expense to The Americas primarily due to the growth of our travel retail business and higher advertising and promotional activity to support strategic investments in key areas of growth (primarily Hainan, hero products and the skin care product category), as well as to capture the current-year increase in airport traffic. Also contributing to the decrease in operating income from our travel retail business was higher shipping costs due to the increase in net sales volume and shipping rates. These higher expenses were partially offset by the increase in net sales. Asia/Pacific Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2021 2020 2021 2020 As Reported: Operating income $ 431 $ 407 $ 653 $ 645 $ Change from prior-year period 24 8 % Change from prior-year period 6 % 1 % Reported operating income increased in Asia/Pacific for the three months ended December 31. 2021, primarily driven by higher operating results in mainland China and Korea of approximately $27 million, combined. The increase in operating income in mainland China was primarily due to the increase in net sales, partially offset by higher cost of sales due, in part, to the increase in promotional items, and higher advertising and promotional activity to support strategic investments in digital advertising and social media spending, holiday and key shopping moments, hero product franchises and new product launches. Operating results increased in Korea driven by disciplined expense management, offset by the decrease in net sales. Reported operating income increased in Asia/Pacific for the six months ended December 31. 2021, primarily due to mainland China and Korea of approximately $32 million, combined. Operating income in mainland China increased, as noted above. Operating income increased in Korea primarily driven by the increase in net sales. Partially offsetting these increases in operating income in Asia/Pacific were lower results from Japan and Thailand of approximately $25 million, combined, primarily driven by the decrease in net sales due the challenging retail environment that continues to be negatively impacted by the spread of COVID-19 variants and resurgence in cases. 52 Table of Contents THE ESTÉE LAUDER COMPANIES INC. INTEREST AND INVESTMENT INCOME Three Months Ended December 31 Six Months Ended December 31 (In millions) 2021 2020 2021 2020 Interest expense $ 42 $ 43 $ 84 $ 88 Interest income and investment income, net $ 10 $ 17 $ 14 $ 31 Interest income and investment income, net decreased due to equity method investment income recognized in the prior-year period relating to our previously held equity method investment in DECIEM. 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, the interaction of various global tax strategies and the impact from certain acquisitions. 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 2021 2020 2021 2020 Effective rate for income taxes 21.5 % 14.9 % 21.9 % 17.6 % Basis-point change from the prior-year period 660 430 For the three and six months ended December 31, 2021 and 2020, the increase in the effective tax rate was primarily attributable to a higher effective tax rate on our foreign operations. Also contributing to the increase in the effective tax rate for both periods was a decrease in excess tax benefits associated with stock-based compensation arrangements. The effective tax rate for the three and six months ended December 31, 2020 included the retroactive impact relating to fiscal 2020 and 2019 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 that provide for a high-tax exception to the GILTI tax. The impact of the final issuance of GILTI tax regulations, with respect to such prior periods, was recognized as a discrete item in the provision for income taxes in the second quarter of fiscal 2021 and resulted in 470 and 280 basis point reductions to the effective tax rates for the three and six months ended December 31, 2020, respectively. 53 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) 2021 2020 2021 2020 As Reported: Net earnings attributable to The Estée Lauder Companies Inc. $ 1,088 $ 873 $ 1,780 $ 1,396 $ Change from prior-year period 215 384 % Change from prior-year period 25 % 28 % Diluted net earnings per common share $ 2.97 $ 2.37 $ 4.85 $ 3.79 % Change from prior-year period 25 % 28 % 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 and changes in fair value of contingent consideration 15 % 21 % (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 asset impairments; the changes in fair value of contingent consideration; acquisition-related stock option expense; and the effects of foreign currency translation. The following tables provide reconciliations between these non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 54 Table of Contents THE ESTÉE LAUDER COMPANIES INC. ($ in millions, except per share data) Three Months Ended December 31 Variance % Change % Change in constant currency 2021 2020 Net sales, as reported $ 5,539 $ 4,853 $ 686 14 % 14 % Returns associated with restructuring and other activities 1 — 1 Net sales, as adjusted $ 5,540 $ 4,853 $ 687 14 % 14 % Operating income, as reported $ 1,418 $ 1,063 $ 355 33 % 33 % Charges associated with restructuring and other activities 15 37 (22) Goodwill and other intangible asset impairments — 81 (81) Changes in fair value of contingent consideration — (2) 2 Acquisition-related stock option expense 2 — 2 Operating income, as adjusted $ 1,435 $ 1,179 $ 256 22 % 21 % Diluted net earnings per common share, as reported $ 2.97 $ 2.37 $ .60 25 % 25 % Charges associated with restructuring and other activities .03 .08 (.05) Goodwill and other intangible asset impairments — .17 (.17) Changes in fair value of contingent consideration — (.01) .01 Acquisition-related stock option expense .01 — .01 Diluted net earnings per common share, as adjusted $ 3.01 $ 2.61 $ .40 15 % 15 % 55 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 2021 2020 Net sales, as reported $ 9,931 $ 8,415 $ 1,516 18 % 17 % Returns associated with restructuring and other activities 2 — 2 Net sales, as adjusted $ 9,933 $ 8,415 $ 1,518 18 % 17 % Operating income, as reported $ 2,353 $ 1,768 $ 585 33 % 32 % Charges associated with restructuring and other activities 21 46 (25) Goodwill and other intangible asset impairments — 81 (81) Changes in fair value of contingent consideration — (2) 2 Acquisition-related stock option expense 2 — 2 Operating income, as adjusted $ 2,376 $ 1,893 $ 483 26 % 24 % Diluted net earnings per common share, as reported $ 4.85 $ 3.79 $ 1.06 28 % 27 % Charges associated with restructuring and other activities .05 .09 (.04) Goodwill and other intangible asset impairments — .17 (.17) Changes in fair value of contingent consideration — (.01) .01 Acquisition-related stock option expense — — — Diluted net earnings per common share, as adjusted $ 4.90 $ 4.04 $ .86 21 % 20 % 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. 56 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 Three Months Ended December 31 ($ in millions) 2021 2020 Variance By Product Category: Skin Care $ 3,159 $ 2,819 $ 340 $ (25) $ 315 12 % 11 % Makeup 1,386 1,247 139 12 151 11 12 Fragrance 799 618 181 4 185 29 30 Hair Care 180 154 26 1 27 17 18 Other 16 15 1 1 2 7 13 5,540 4,853 687 (7) 680 14 14 Returns associated with restructuring and other activities (1) — (1) — (1) Total $ 5,539 $ 4,853 $ 686 $ (7) $ 679 14 % 14 % By Region: The Americas $ 1,300 $ 1,048 $ 252 $ (1) $ 251 24 % 24 % Europe, the Middle East & Africa 2,338 2,030 308 13 321 15 16 Asia/Pacific 1,902 1,775 127 (19) 108 7 6 5,540 4,853 687 (7) 680 14 14 Returns associated with restructuring and other activities (1) — (1) — (1) Total $ 5,539 $ 4,853 $ 686 $ (7) $ 679 14 % 14 % 57 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 Six Months Ended December 31 ($ in millions) 2021 2020 Variance By Product Category: Skin Care $ 5,608 $ 4,854 $ 754 $ (73) $ 681 16 % 14 % Makeup 2,560 2,225 335 (5) 330 15 15 Fragrance 1,408 1,024 384 (6) 378 38 37 Hair Care 328 290 38 — 38 13 13 Other 29 22 7 — 7 32 32 9,933 8,415 1,518 (84) 1,434 18 17 Returns associated with restructuring and other activities (2) — (2) — (2) Total $ 9,931 $ 8,415 $ 1,516 $ (84) $ 1,432 18 % 17 % By Region: The Americas $ 2,494 $ 1,921 $ 573 $ (7) $ 566 30 % 29 % Europe, the Middle East & Africa 4,211 3,570 641 (2) 639 18 18 Asia/Pacific 3,228 2,924 304 (75) 229 10 8 9,933 8,415 1,518 (84) 1,434 18 17 Returns associated with restructuring and other activities (2) — (2) — (2) Total $ 9,931 $ 8,415 $ 1,516 $ (84) $ 1,432 18 % 17 % 58 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following tables reconcile 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 Add: Changes in Goodwill and other intangible asset impairments Add: Changes in fair value of contingent consideration Add: Acquisition-related stock option expense Variance, as adjusted % Change, as reported % Change, as adjusted Three Months Ended December 31 ($ in millions) 2021 2020 Variance By Product Category: Skin Care $ 1,082 $ 928 $ 154 $ (81) $ — $ 2 $ 75 17 % 7 % Makeup 130 28 102 — — — 102 100+ 100+ Fragrance 210 141 69 — 2 — 71 49 51 Hair Care 8 4 4 — — — 4 100 100 Other 3 (1) 4 — — — 4 100+ 100+ 1,433 1,100 333 $ (81) $ 2 $ 2 $ 256 30 % 22 % Charges associated with restructuring and other activities (15) (37) 22 Total $ 1,418 $ 1,063 $ 355 By Region: The Americas $ 382 $ 36 $ 346 $ (81) $ — $ 2 $ 267 100+% 100+% Europe, the Middle East & Africa 620 657 (37) — 2 — (35) (6) (5) Asia/Pacific 431 407 24 — — — 24 6 6 1,433 1,100 333 $ (81) $ 2 $ 2 $ 256 30 % 22 % Charges associated with restructuring and other activities (15) (37) 22 Total $ 1,418 $ 1,063 $ 355 59 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 Add: Acquisition-related stock option expense Variance, as adjusted % Change, as reported % Change, as adjusted Six Months Ended December 31 ($ in millions) 2021 2020 Variance By Product Category: Skin Care $ 1,799 $ 1,649 $ 150 $ (81) $ — $ 2 $ 71 9 % 4 % Makeup 221 (43) 264 — — — 264 100+ 100+ Fragrance 341 201 140 — 2 — 142 70 71 Hair Care 10 7 3 — — — 3 43 43 Other 3 — 3 — — — 3 — — 2,374 1,814 560 $ (81) $ 2 $ 2 $ 483 31 % 26 % Charges associated with restructuring and other activities (21) (46) 25 Total $ 2,353 $ 1,768 $ 585 By Region: The Americas $ 636 $ 101 $ 535 $ (81) $ — $ 2 $ 456 100+% 100+% Europe, the Middle East & Africa 1,085 1,068 17 — 2 — 19 2 2 Asia/Pacific 653 645 8 — — — 8 1 1 2,374 1,814 560 $ (81) $ 2 $ 2 $ 483 31 % 26 % Charges associated with restructuring and other activities (21) (46) 25 Total $ 2,353 $ 1,768 $ 585 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, 2021, we had cash and cash equivalents of $4,603 million compared with $4,958 million at June 30, 2021. 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 Tax Cuts and Jobs Act (“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. We do not believe that continuing to reinvest our foreign earnings impairs our ability to meet our domestic debt or working capital obligations. If these reinvested earnings were repatriated into the United States as dividends, we would be subject to state income taxes and applicable foreign taxes in certain jurisdictions. The effects of inflation have not been significant to our overall operating results in recent years, however we are mindful of increasing inflationary pressures. Generally, we have been able to introduce new products at higher prices, increase prices and implement other operating efficiencies to sufficiently offset cost increases. 60 Table of Contents THE ESTÉE LAUDER COMPANIES INC. 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 27, 2022, our long-term debt is rated A+ with a stable outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s. Debt At December 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), (13) $ 636 $ — $ 636 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 1.950% Senior Notes, due March 15, 2031 ("2031 Senior Notes") (7), (13) 596 — 596 2.600% Senior Notes, due April 15, 2030 ("2030 Senior Notes") (8), (13) 688 — 688 2.375% Senior Notes, due December 1, 2029 (“2029 Senior Notes”) (9), (13) 642 — 642 3.15% Senior Notes, due March 15, 2027 (“2027 Senior Notes”) (10), (13) 498 — 498 2.00% Senior Notes, due December 1, 2024 (“2024 Senior Notes”) (11), (13) 496 — 496 2.35% Senior Notes, due August 15, 2022 (“2022 Senior Notes”) (12), (13) — 253 253 Other long-term borrowings 15 — 15 Other current borrowings — 19 19 $ 5,259 $ 272 $ 5,531 (1) Consists of $650 million principal, unamortized debt discount of $7 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 $3 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, debt issuance costs of $4 million and a $4 million gain to reflect the fair value of interest rate swaps. (8) Consists of $700 million principal, unamortized debt discount of $1 million, debt issuance costs of $3 million and a $8 million loss 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 $3 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 $3 million gain 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. Total debt as a percent of total capitalization (excluding noncontrolling interests) was 47% and 48% at December 31, 2021 and June 30, 2021, respectively. 61 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Cash Flows Six Months Ended December 31 (In millions) 2021 2020 Net cash flows provided by operating activities $ 1,846 $ 1,978 Net cash flows used for investing activities $ (414) $ (397) Net cash flows used for financing activities $ (1,775) $ (1,119) The change in net cash flows from operating activities primarily reflected the unfavorable net change in working capital as working capital needs returned to a more normalized level compared to the prior-year period, primarily in the first quarter of fiscal 2022, and we took actions to mitigate supply chain challenges. These changes were partially offset by higher earnings before taxes, excluding non-cash items. The change in net cash flows used for investing activities primarily reflected an increase in capital expenditures, primarily driven by increased investments for a new manufacturing facility in Japan, online capabilities and information technology enhancements. Partially offsetting this increase is a favorable impact from the settlement of net investment hedges, which has a corresponding unfavorable impact that is reflected in the change in working capital noted above. The change in net cash flows used for financing activities primarily reflected an increase relating to higher treasury stock repurchases, partially offset by the repayment of short-term debt made in the prior-year period. 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, 2021, see Notes to Consolidated Financial Statements, Note 12 – Equity and Redeemable Noncontrolling Interest . 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, 2021. 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, 2021. 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 $228 million and $218 million as of December 31, 2021 and June 30, 2021, 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 decrease by approximately $76 million and $83 million as of December 31, 2021 and June 30, 2021, respectively. 62 Table of Contents THE ESTÉE LAUDER COMPANIES INC. 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, 2021, 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, 2021, 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 . 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; 63 Table of Contents THE ESTÉE LAUDER COMPANIES INC. (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 volatility in the global credit and equity markets, natural or man-made disasters, real or perceived epidemics, supply chain challenges, inflation, or increased 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; (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, 2021. We assume no responsibility to update forward-looking statements made herein or otherwise. 64 Table of Contents THE ESTÉE LAUDER COMPANIES INC. 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.