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, 2022 and 2021, 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) 2022 2021 2022 2021 NET SALES By Product Category: Skin Care $ 2,395 $ 2,259 $ 8,003 $ 7,113 Makeup 1,114 1,018 3,674 3,243 Fragrance 579 454 1,987 1,478 Hair Care 147 128 475 418 Other 11 15 40 37 4,246 3,874 14,179 12,289 Returns associated with restructuring and other activities (1) (10) (3) (10) Net sales $ 4,245 $ 3,864 $ 14,176 $ 12,279 By Region (1) : The Americas $ 1,053 $ 916 $ 3,547 $ 2,837 Europe, the Middle East & Africa 1,990 1,706 6,201 5,276 Asia/Pacific 1,203 1,252 4,431 4,176 4,246 3,874 14,179 12,289 Returns associated with restructuring and other activities (1) (10) (3) (10) Net sales $ 4,245 $ 3,864 $ 14,176 $ 12,279 OPERATING INCOME (LOSS) By Product Category: Skin Care $ 667 $ 804 $ 2,466 $ 2,453 Makeup 7 (72) 228 (115) Fragrance 105 47 446 248 Hair Care (18) (17) (8) (10) Other — (1) 3 (1) 761 761 3,135 2,575 Charges associated with restructuring and other activities (23) (145) (44) (191) Operating income $ 738 $ 616 $ 3,091 $ 2,384 By Region (1) : The Americas $ 408 $ 155 $ 1,044 $ 256 Europe, the Middle East & Africa 281 361 1,366 1,429 Asia/Pacific 72 245 725 890 761 761 3,135 2,575 Charges associated with restructuring and other activities (23) (145) (44) (191) Operating income $ 738 $ 616 $ 3,091 $ 2,384 (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. 39 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 2022 2021 2022 2021 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 23.4 24.3 23.1 23.2 Gross profit 76.6 75.7 76.9 76.8 Operating expenses: Selling, general and administrative 53.6 55.5 53.3 55.1 Restructuring and other charges 0.5 3.4 0.3 1.4 Goodwill impairment — — — 0.4 Impairment of other intangible and long-lived assets 5.1 0.9 1.5 0.5 Total operating expenses 59.2 59.8 55.1 57.4 Operating income 17.4 15.9 21.8 19.4 Interest expense 1.0 1.1 0.9 1.1 Interest income and investment income, net 0.1 0.2 0.1 0.3 Other components of net periodic benefit cost — 0.1 — 0.1 Other income — — — — Earnings before income taxes 16.6 15.0 21.1 18.6 Provision for income taxes (3.1) (3.2) (4.4) (3.4) Net earnings 13.5 11.9 16.6 15.1 Net earnings attributable to noncontrolling interests (0.1) (0.1) (0.1) (0.1) Net earnings attributable to redeemable noncontrolling interest (0.3) — (0.1) — Net earnings attributable to The Estée Lauder Companies Inc. 13.1 % 11.8 % 16.5 % 15.1 % 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 58 f or reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 40 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 globally, primarily impacting retail traffic, travel, supply chain, inventory levels and other logistics during the three months ended March 31, 2022. The resurgence of COVID-19 cases in many Chinese provinces led to restrictions late in the fiscal 2022 third quarter to prevent further spread of the virus. Consequently, retail traffic, travel, and distribution capabilities were temporarily curtailed. Our distribution facilities in Shanghai operated with limited capacity to fulfill brick-and-mortar and online orders beginning in mid-March 2022. 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 third quarter of fiscal 2022, there were intermittent closures, primarily in mainland China, which had regional lockdowns. Globally, in areas where stores were open, consumer traffic has not recovered to the pre-pandemic levels. International passenger traffic remained soft globally. However, passenger traffic in Europe, the Middle East & Africa and The Americas improved, although it remained significantly below pre-pandemic levels. The improvement was due to the partial lifting of COVID-19-related restrictions. In Asia/Pacific, traffic in Hainan was negatively impacted by fewer visitors due to intermittent domestic travel restrictions. Consumer Preferences The continuance of 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 has improved significantly in areas where restrictions have been lifted, 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, inventory levels, use of air freight and less congested ports, and cost savings in other areas. Toward the end of the third quarter of fiscal 2022, we began to experience challenges in logistics in China due to restrictions attributable to the COVID-19 pandemic. 41 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 third quarter of fiscal 2022, net sales increased 10%, reflecting early stages of a recovery 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 initial shipments of the brand's The Treatment Lotion and continued strength in its Crème de la Mer moisturizer. Incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter also contributed to growth. • 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 third quarter of fiscal 2022, net sales in makeup grew double digits in part due to this, and was also driven by strong activations, expanded consumer reach and the launch of MACStack mascara from M·A·C, increases in Estée Lauder foundation products, as well as a strong performance from Clinique. 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, and Le Labo. • Our hair care net sales also grew double digits, reflecting increases from both Aveda and Bumble and bumble as brick-and-mortar channels recover, online growth continues and new products launch. 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 third quarter was led by Europe, the Middle East & Africa, which benefited from ongoing increases in our travel retail business, partly relating to the increase in traffic as a result of the easing of travel restrictions, which varied by location. In addition, brick-and-mortar retail reopened across the region, driving growth in department stores and freestanding retail stores. • Net sales rose in The Americas, primarily reflecting the recovery of brick-and-mortar stores, 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 decreased in Asia/Pacific, reflecting tighter COVID-19 restrictions in Greater China, partially offset by a progression towards recovery across other markets in the region. As a result of the invasion of Ukraine, we suspended all our business investments and initiatives and commercial activity in Russia and Ukraine in early March 2022. This included the temporary closure of our owned and authorized freestanding stores and our own brand sites, as well as the suspension of shipments to our retailers in Russia and Ukraine. 42 Table of Contents THE ESTÉE LAUDER COMPANIES INC. As the safety of our employees remains a top priority, we continue to take significant steps to support our employees in Ukraine, including the continuance of compensation, maintenance of regular communication and offering relocation assistance, and continue to provide compensation and support to our employees in Russia. We are monitoring the effects of this conflict, including risks that may affect our business, and expect that we will adjust our plans accordingly as the situation progresses. For the three and nine months ended March 31, 2022, the results of operations related to Russia and Ukraine were not material to our consolidated financial statements. 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 invasion of Ukraine has negatively impacted our operations in both Russia and Ukraine. In fiscal 2021, our operations in Ukraine and Russia accounted for approximately 1% of consolidated net sales. In March 2022, we announced a suspension of all our business investments and initiatives and commercial activity in Russia. Future impacts on our business, including sanctions and counter-sanctions, are difficult to predict due to the high level of uncertainty as to how these developments will evolve. On a broader perspective, there could be additional negative impacts to our net sales, earnings, assets and cash flows should these matters continue or escalate; such impacts could include economic challenges in other countries because of inflationary pressures or other consequences. Please refer to Risk Factors in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2021, for a more complete discussion of the risks we encounter in our business and industry. The uncertainty around the timing, speed and duration of the recovery from the adverse impacts of the COVID-19 pandemic, including the impacts on our business of the ongoing restrictions in China, 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. 43 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Goodwill and Other Intangible Asset Impairments During the fiscal 2022 third quarter, given the lower-than-expected results from international expansion to areas that continue to be impacted by COVID-19, we made revisions to the internal forecasts relating to our GLAMGLOW reporting unit. We concluded that the changes in circumstances in the reporting unit triggered the need for an interim impairment review of its trademark intangible asset. As of March 31, 2022, the remaining carrying value of the trademark intangible asset was not recoverable and we recorded an impairment charge of $11 million reducing the carrying value to zero. During the fiscal 2022 third quarter, given the lower-than-expected growth within key geographic regions and channels for Dr.Jart+ that continue to be impacted by the spread of COVID-19 variants and resurgence in cases and the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting the financial performance of the brand, the lower than expected growth in key retail channels for DECIEM, and the lower than expected results from international expansion to areas that continue to be impacted by COVID-19 for Too Faced, we made revisions to the internal forecasts relating to its Dr. Jart+, DECIEM and Too Faced reporting units. We concluded that the changes in circumstances in the reporting units triggered the need for interim impairment reviews of their trademarks and goodwill. These changes in circumstances were also an indicator that the carrying amounts of Dr.Jart+’s, DECIEM’s and Too Faced’s long-lived assets, including customer lists, may not be recoverable. Accordingly, we performed interim impairment tests for the trademarks and a recoverability test for the long-lived assets as of February 28, 2022. We concluded that the carrying amounts of the long-lived assets were recoverable. For the Dr.Jart+ reporting unit, we also concluded that the carrying value of the trademark intangible asset 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. For the Too Faced and DECIEM reporting units, as the carrying values of the trademarks did not exceed their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, we did not record impairment charges. As of March 31, 2022, the estimated fair values of Too Faced’s and DECIEM's trademarks exceeded their carrying values by 13% and 3%, respectively. For the Too Faced and DECIEM trademark intangible assets, if all other assumptions are held constant, an increase of 100 basis points and 50 basis points, respectively, in the weighted average cost of capital would result in an impairment charge. After adjusting the carrying values of the trademarks, we completed interim quantitative impairment tests for goodwill. As the estimated fair value of the Dr.Jart+, DECIEM and Too Faced reporting units were in excess of their carrying values, we concluded that the carrying amounts of the goodwill were recoverable and did not record a goodwill impairment charge related to these reporting units. The fair value of these reporting units were 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 units. The significant assumptions used in these approaches include revenue growth rates and profit margins, terminal values, weighted average cost of capital used to discount future cash flows and royalty rates for trademarks. The most significant unobservable input used to estimate the fair value of the Dr. Jart+ trademark intangible asset was the weighted-average cost of capital, which was 10.5%. A summary of the impairment charges for the three and nine months ended March 31, 2022 and the remaining trademark and goodwill carrying values as of March 31, 2022, for each reporting unit, are as follows: (In millions) Impairment Charge Carrying Value Reporting Unit: Geographic Region Trademarks Goodwill Trademarks Goodwill GLAMGLOW The Americas $ 11 $ — $ — $ — Dr. Jart+ Asia/Pacific 205 — 486 332 Total $ 216 $ — $ 486 $ 332 44 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The impairment charges for the three and nine months ended March 31, 2022 were reflected in the skin care product category. The fair value of the Dr. Jart+ trademark was equal to its carrying value subsequent to the impairment charge taken as of March 31, 2022. The key assumptions used to determine the estimated fair value of the reporting unit are primarily predicated on the estimated future impacts of COVID-19, the success of future new product launches, the achievement of distribution expansion plans, and the realization of cost reduction and other efficiency efforts. If such plans do not materialize, or if there are further challenges in the business environments in which the reporting unit operates, resulting changes in the key assumptions could have negative impacts on the estimated fair value of the reporting unit and it is possible we could recognize additional impairment charges in the future. NET SALES Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 4,245 $ 3,864 $ 14,176 $ 12,279 $ Change from prior-year period 381 1,897 % Change from prior-year period 10 % 15 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 11 % 15 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 58 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales increased for the three and nine months ended March 31, 2022, driven by higher net sales from every major product category and in Europe, the Middle East & Africa and The Americas 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. Reported net sales in Asia/Pacific decreased and increased for the three and nine months ended March 31, 2022, respectively. For the three months ended March 31, 2022, net sales decreased due to a resurgence of COVID-19 cases across many Chinese provinces which led to restrictions to further prevent the spread of the virus. For the nine months ended March 31, 2022, net sales increased, led by mainland China and Korea. For the three and nine months ended March 31, 2022, reported net sales increased from every major product category. Skin care net sales increased in both periods, led by La Mer and benefited from incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter. Fragrance net sales grew double-digits, led by Jo Malone London, Tom Ford Beauty and Le Labo. 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 nine months ended March 31, 2022, reported net sales grew double-digits in Europe, the Middle East & Africa and The Americas 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, reflecting recovery across the region, led by our travel retail business and the United Kingdom. The increases in net sales in The Americas reflected higher net sales throughout the region. The total net sales increases were impacted by approximately $53 million of unfavorable and $31 million of favorable foreign currency translation for the three and nine months ended March 31, 2022, respectively. 45 Table of Contents THE ESTÉE LAUDER COMPANIES INC. 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 nine months ended March 31, 2022 of $1 million and $3 million, respectively. Product Categories Skin Care Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 2,395 $ 2,259 $ 8,003 $ 7,113 $ Change from prior-year period 136 890 % Change from prior-year period 6 % 13 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 7 % 12 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 58 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported skin care net sales increased for the three months ended March 31, 2022, reflecting higher net sales from La Mer and incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter of approximately $269 million, combined. Net sales from La Mer increased, led by our travel retail business and mainland China, primarily reflecting continued success of hero products, such as Crème de la Mer and the Genaissance de la Mer line of products, the current-year launch of The Hydrating Infused Emulsion, the fiscal 2022 third-quarter launch of the new upgraded The Treatment Lotion and targeted expanded consumer reach. Partially offsetting the increase in skin care net sales for the three months ended March 31, 2022, were lower net sales from Estée Lauder and Origins of approximately $157 million, combined. The decreases in net sales from Estée Lauder and Origins reflected lower traffic in Asia due to the resurgence of COVID-19 cases in many Chinese provinces, which led to restrictions to prevent further spread of the virus. Net sales from Estée Lauder also declined due to 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. Reported skin care net sales increased for the nine months ended March 31, 2022, reflecting 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 of approximately $869 million, combined. Net sales from La Mer increased, as discussed above. Clinique net sales increased, primarily driven by our travel retail business and North America, reflecting the continued success of existing products, such as the Take The Day Off line of products and Even Better Clinical Radical Dark Spot Corrector + Interrupter. Partially offsetting the increase in skin care net sales for the nine months ended March 31, 2022, were lower net sales from Estée Lauder and Origins of approximately $197 million, combined, as discussed above. The skin care net sales increases were impacted by approximately $16 million of unfavorable and $57 million of favorable foreign currency translation for the three and nine months ended March 31, 2022, respectively. 46 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Makeup Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 1,114 $ 1,018 $ 3,674 $ 3,243 $ Change from prior-year period 96 431 % Change from prior-year period 9 % 13 % 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 58 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported makeup net sales increased for the three months ended March 31, 2022, led by higher net sales from M·A·C, Estée Lauder and Clinique, of approximately $109 million, combined. The continued progression towards recovery in makeup, including increased usage occasions compared to the prior-year period, led to the increase in makeup net sales in The Americas and Europe, the Middle East & Africa. The increase in net sales from M·A·C was primarily driven by the continued success of hero products, such as Studio Fix, the fiscal 2022 third quarter launch of MACStack mascara and successful social media campaigns during key shopping moments. Net sales from Estée Lauder increased, primarily due to the continued success of existing products, such as the Double Wear and Futurist product franchises and new product launches, such as the current-year launches of Double Wear Sheer Long-Wear Makeup. Net sales for Clinique increased, primarily reflecting continued success from Even Better Makeup and successful performance in the lip, concealer and eye subcategories. Reported makeup net sales increased for the nine months ended March 31, 2022, led by higher net sales from Estée Lauder and M·A·C of approximately $303 million, combined, as noted above. The n et sales increase from M·A·C also benefited from the continued success of existing products, such as Ruby's Crew and Re-Think Pink in the lip subcategory and Magic Extension in the mascara subcategory, as well as the success of the fiscal 2022 third quarter launch of MACStack mascara. The makeup net sales increases were impacted by approximately $19 million and $14 million of unfavorable foreign currency translation for the three and nine months ended March 31, 2022, respectively. Fragrance Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 579 $ 454 $ 1,987 $ 1,478 $ Change from prior-year period 125 509 % Change from prior-year period 28 % 34 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 31 % 35 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 58 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 fragrance net sales increased for the three months ended March 31, 2022, primarily driven by Jo Malone London, Tom Ford Beauty, Le Labo and Estée Lauder of approximately $107 million, combined . F ragrance net sales grew in every geographic region, reflecting continued growth in luxury fragrances, the brick-and-mortar and travel recovery in various parts of the world due to more store openings, increased retail traffic, successful performance during holiday and key shopping moments, and the easing of travel restrictions compared to the prior-year period. The increase in net sales from Jo Malone London reflected the fiscal 2022 third quarter launches of House of Roses and Mediterranean Blossoms and continued growth of the home and bath & body subcategories. Net sales increased from Tom Ford Beauty, also benefiting from the continued success of Private Blend and Signature fragrances and the fiscal 2022 third quarter product launches of Costa Azzurra parfum, Rose de Chine and Rose d'Amalfi. Net sales from Le Labo increased, also reflecting the continued success of hero product franchises, current-year product launches and targeted expanded consumer reach. The increase in net sales from Estée Lauder was primarily due to the continued success of the Beautiful Magnolia line of products. Reported fragrance net sales increased for the nine months ended March 31, 2022, primarily driven by Jo Malone London, Tom Ford Beauty and Le Labo of approximately $378 million, combined, and grew double digits in every geographic region, as discussed above. The increases in net sales from Jo Malone London reflected the continued success of our hero products, current-year launches and continued growth of the home and bath & body subcategories. Net sales increased from Tom Ford Beauty, reflecting the continued success of Private Blend and Signature fragrances, current-year product launches and the diversification of product offerings by region. Net sales from Le Labo increased, as discussed above. The fragrance net sales increases were impacted by approximately $14 million and $8 million of unfavorable foreign currency translation for the three and nine months ended March 31, 2022, respectively. Hair Care Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 147 $ 128 $ 475 $ 418 $ Change from prior-year period 19 57 % Change from prior-year period 15 % 14 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 17 % 14 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 58 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported hair care net sales increased for the three and nine months ended March 31, 2022, reflecting higher net sales from Aveda and Bumble and bumble, combined, of approximately $18 million and $49 million, respectively, primarily due to the continued progression towards salon and retail store recovery in North America. Net sales from Aveda increased in both periods, reflecting the continued success of existing product franchises and the fiscal 2022 third quarter relaunch of Full Spectrum Semi-Permanent Treatment Hair Color. The increases in net sales from Bumble and bumble also reflected the success of hero products, the fiscal 2022 third quarter product launches of Bb. Thickening Plumping Mask and Bb. Thickening Go Big Plumping Treatment, and targeted expanded consumer reach. Geographic Regions We strategically time our new product launches by geographic market, which may account for differences in regional sales growth. 48 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The Americas Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 1,053 $ 916 $ 3,547 $ 2,837 $ Change from prior-year period 137 710 % Change from prior-year period 15 % 25 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 14 % 25 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 58 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 nine months ended March 31, 2022 in every country and product category, reflecting the 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 $125 million and $658 million, respectively, also benefiting from incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter, higher net sales from many of our brands, led by M·A·C and Clinique, and targeted expanded consumer reach. Net sales in The Americas were impacted by approximately $6 million and $13 million of favorable foreign currency translation for the three and nine months ended March 31, 2022, respectively. Europe, the Middle East & Africa Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 1,990 $ 1,706 $ 6,201 $ 5,276 $ Change from prior-year period 284 925 % Change from prior-year period 17 % 18 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 19 % 18 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 58 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales for the three and nine months ended March 31, 2022 increased in Europe, the Middle East & Africa, reflecting continued recovery across the region, primarily due to store openings, increased retail traffic, and the easing of travel restrictions compared to the prior year, led by our travel retail business and the United Kingdom, combined, of approximately $271 million and $712 million, respectively. Despite the fiscal 2022 third quarter resurgence in COVID-19 cases in many Chinese provinces, which led to restrictions to prevent further spread of the virus and the curtailment of travel, net sales increased in our travel retail business, reflecting continued strength of our brands with the Chinese consumer, the easing of travel restrictions in Europe, the Middle East & Africa and The Americas, and continued success of hero product franchises from La Mer and Jo Malone London. These benefits were partially offset by lower net sales from Estée Lauder products, primarily reflecting 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 increased, primarily reflecting brick-and-mortar recovery, as noted above, and benefiting from the growth in makeup and fragrance. 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. 49 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Net sales in Europe, the Middle East & Africa were impacted by approximately $47 million and $45 million of unfavorable foreign currency translation for the three and nine months ended March 31, 2022, respectively. Asia/Pacific Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 1,203 $ 1,252 $ 4,431 $ 4,176 $ Change from prior-year period (49) 255 % Change from prior-year period (4) % 6 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (3) % 5 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 58 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales decreased in Asia/Pacific for the three months ended March 31, 2022, primarily driven by lower results in mainland China and Hong Kong of approximately $54 million, combined, due to the resurgence of COVID-19 cases toward the end of the fiscal 2022 third quarter that led to restrictions to prevent further spread of the virus. These restrictions resulted in limited capacity in our Shanghai distribution facilities and the temporary curtailment of retail traffic, travel and other distribution capabilities. Reported net sales increased in Asia/Pacific for the nine months ended March 31, 2022, reflecting higher net sales in mainland China, despite the resurgence in COVID-19 cases in many Chinese provinces toward the end of the fiscal 2022 third quarter, and Korea of approximately $257 million, combined. Net sales in mainland China increased, 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. Net sales increased in Korea, despite the challenging brick-and-mortar retail environment, primarily reflecting the continued success of hero product franchises from Jo Malone London and strong momentum in fragrance. Net sales in Asia/Pacific were impacted by approximately $11 million of unfavorable and $64 million of favorable foreign currency translation for the three and nine months ended March 31, 2022, respectively. GROSS MARGIN Gross margin increased to 76.6% and 76.9% for the three and nine months ended March 31, 2022, respectively, as compared with 75.7% and 76.8% in the prior-year periods. Favorable (Unfavorable) Basis Points March 31, 2022 Three Months Ended Nine Months Ended Mix of business (30) (35) Obsolescence charges 65 (5) Manufacturing costs and other (25) (10) Foreign exchange transactions 60 50 Subtotal 70 — Charges associated with restructuring and other activities 20 10 Total 90 10 50 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The increase in gross margin for the three months ended March 31, 2022 reflected favorable obsolescence charges due to a higher level of destruction in the prior-year period, the favorable impact from transactional foreign exchange due to the strengthening of the U.S. Dollar and the favorable impact from under-absorption of manufacturing overhead costs in the prior-year period, partially offset by higher inbound transportation costs driven by global supply chain disruptions as discussed above and an unfavorable impact from our mix of business. The unfavorable impact from our mix of business was primarily driven by the change in category mix, primarily due to the increase in makeup and fragrance net sales, and higher costs from new skin care products, partially offset by strategic price increases. The increase in gross margin for the nine months ended March 31, 2022 reflected a favorable transactional foreign exchange impact due to the strengthening of the U.S. Dollar, partially offset by an unfavorable impact from our mix of business. The unfavorable impact from our mix of business was primarily due to lower gross margins on DECIEM products, change in category mix primarily due to the increase in makeup and fragrance net sales and higher costs from new products and product sets, partially offset by strategic price increases. OPERATING EXPENSES Operating expenses as a percentage of net sales was 59.2% and 55.1% for the three and nine months ended March 31, 2022, respectively, as compared with 59.8% and 57.4% in the prior-year periods. Favorable (Unfavorable) Basis Points March 31, 2022 Three Months Ended Nine Months Ended General and administrative expenses 90 70 Advertising, merchandising, sampling and product development 10 30 Selling 20 70 Stock-based compensation — 10 Store operating costs 10 10 Shipping (80) (50) Foreign exchange transactions (10) (10) Subtotal 40 130 Charges associated with restructuring and other activities 290 110 Goodwill, other intangible and long-lived asset impairments (420) (60) Acquisition-related stock compensation income 150 50 Total 60 230 The favorable change in operating expense margin for the three months ended March 31, 2022, was driven by income related to the change in fair value of acquisition-related stock options of $60 million relating to the increase in our investment in DECIEM during the fiscal 2021 fourth quarter, disciplined general and administrative expense management and the increase in net sales. Partially offsetting these favorable changes were the year-over-year impact of other intangible and long-lived asset impairments of $183 million, as well as higher shipping costs due to the increase in net sales volume and increased shipping rates. The favorable change in operating expense margin for the nine months ended March 31, 2022, was driven by the increase in net sales, disciplined general and administrative expense management, the favorable impact from selling expenses, primarily due to the shift in channel mix to online, travel retail and specialty-multi, and income related to the change in fair value of acquisition-related stock options of $58 million relating to the increase in our investment in DECIEM during the fiscal 2021 fourth quarter. Partially offsetting these favorable changes in operating expense margin were the year-over-year impact of goodwill, other intangible and long-lived asset impairments of $102 million and higher shipping costs as discussed above. 51 Table of Contents THE ESTÉE LAUDER COMPANIES INC. OPERATING RESULTS Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income $ 738 $ 616 $ 3,091 $ 2,384 $ Change from prior-year period 122 707 % Change from prior-year period 20 % 30 % Operating margin 17.4 % 15.9 % 21.8 % 19.4 % 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, the change in fair value of acquisition-related stock options and changes in fair value of contingent consideration 15 % 23 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 58 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 nine months ended March 31, 2022 from the prior-year period was primarily driven by the favorable changes in operating expense margin and gross margin, discussed above, partially offset by the year-over-year impact of goodwill, other intangible and long-lived asset impairments of $183 million and $102 million, respectively. Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business. Accordingly, the following discussions of Operating income by Product Categories and Geographic Regions exclude the impact of charges associated with restructuring and other activities. Product Categories Skin Care Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income $ 667 $ 804 $ 2,466 $ 2,453 $ Change from prior-year period (137) 13 % Change from prior-year period (17) % 1 % 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 the change in fair value of acquisition-related stock options 3 % 4 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 58 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 52 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported skin care operating income decreased for the three months ended March 31, 2022, reflecting the current year impact of other intangible asset impairments related to Dr.Jart+ and GLAMGLOW of approximately $216 million, combined, as well as lower results from Estée Lauder. The decrease in operating income from Estée Lauder was primarily due to the decrease in net sales. Partially offsetting the decreases in operating income for the three months ended March 31, 2022 were higher results from La Mer primarily due to the increase in net sales, as well as $58 million of income related to the change in fair value of acquisition-related stock options relating to the increase in our investment in DECIEM during the fiscal 2021 fourth quarter. Reported skin care operating income increased for the nine months ended March 31, 2022, reflecting higher results from La Mer, Bobbi Brown and Clinique of approximately $355 million, combined, and $56 million of income related to the change in fair value of acquisition-related stock options relating to the increase in our investment in DECIEM during the fiscal 2021 fourth quarter. The higher results for La Mer reflected the increase in net sales, partially offset by the increase in cost of sales primarily due to higher costs for promotional items and 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, 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 nine months ended March 31, 2022 were the unfavorable year-over-year impact of goodwill and other intangible asset impairments related to Dr.Jart+ and GLAMGLOW of approximately $135 million, combined, as well as lower results from Estée Lauder. The decrease in operating income from Estée Lauder was primarily due to the decrease in net sales, the increase in cost of sales primarily due to higher costs for promotional items and higher advertising and promotional activities to support hero products, holiday and key shopping moments and new product launches. Makeup Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income (loss) $ 7 $ (72) $ 228 $ (115) $ Change from prior-year period 79 343 % 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 long-lived asset impairments 100+% 100+ (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 58 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported makeup operating income increased for the three months ended March 31, 2022, reflecting higher results from M·A·C, Clinique, Estée Lauder and La Mer of approximately $69 million, combined, and the favorable year-over-year impact of long-lived asset impairments of $24 million. Operating income from M·A·C increased due to the increase in net sales, partially offset by higher advertising and promotional activities to support new product launches and higher selling costs due to the brick-and-mortar recovery, including more stores being open and increased retail traffic compared to the prior year. The higher results from Clinique were primarily due to the increases in net sales, partially offset by higher selling costs due to the brick-and-mortar recovery and higher shipping costs. Operating income for Estée Lauder increased 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 and digital advertising and social media spending. Operating income from La Mer increased primarily due to an increase in net sales, partially offset by higher cost of sales, due, in part to an increase in promotional items. 53 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported makeup operating income increased for the nine months ended March 31, 2022, primarily driven by higher results from Estée Lauder and M·A·C of approximately $179 million, combined, reflecting the increases in net sales, partially offset by higher advertising and promotional activities as discussed above. Fragrance Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income $ 105 $ 47 $ 446 $ 248 $ Change from prior-year period 58 198 % Change from prior-year period 100+% 80 % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for long-lived asset impairments and changes in fair value of contingent consideration 88 % 75 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 58 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, 2022, primarily driven by higher results from Jo Malone London, Tom Ford Beauty and Le Labo, combined, of approximately $46 million and $171 million, respectively, as well as the favorable year-over-year impact of long-lived asset impairments of $9 million. In both periods, the higher results from Jo Malone London primarily reflected the increase in net sales, partially offset by higher cost of sales given the growth of the home subcategory and the increase in promotional items and the increase in selling costs resulting from the brick-and-mortar recovery. Also partially offsetting the increase in net sales from Jo Malone London for the nine months ended March 31, 2022, were higher advertising and promotional activities primarily to support in-store promotions given the increase in brick-and-mortar traffic and new product launches. Operating results from Tom Ford Beauty increased in both periods, primarily due to higher net sales, partially offset by higher cost of sales due, in part, to the increase in promotional items and the increase in advertising and promotional activities to support strategic investments in digital advertising and social media spending (including costs associated with influencers), hero product franchises, and new product launches. The increases in operating income from Le Labo, in both periods, was primarily driven by the increase in net sales. Hair Care Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating loss $ (18) $ (17) $ (8) $ (10) $ Change from prior-year period (1) 2 % Change from prior-year period (6) % 20 % Reported hair care operating income decreased for the three months ended March 31, 2022, primarily driven by increased operating expenses to support the salon and retail story recovery, partially offset by increases in operating results from Bumble and bumble and Aveda, primarily due to the increases in net sales. Reported hair care operating income increased for the nine months ended March 31, 2022, primarily driven by higher results from Bumble and bumble, primarily due to the increase in net sales. 54 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Geographic Regions The Americas Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income $ 408 $ 155 $ 1,044 $ 256 $ Change from prior-year period 253 788 % 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 the change in fair value of acquisition-related stock options 100+% 100+% (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning o n page 58 f or 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 months ended March 31, 2022, primarily reflecting higher operating results from North America of approximately $251 million, primarily due to the increase in net sales, higher intercompany royalty income primarily from growth in our travel retail business and $60 million of income related to the change in fair value of acquisition-related stock options relating to the increase in our investment in DECIEM during the fiscal 2021 fourth quarter, partially offset by an unfavorable year-over-year impact of other intangible asset impairments relating to GLAMGLOW of $11 million. Reported operating results increased in The Americas for the nine months ended March 31, 2022, primarily reflecting higher operating results from North America of approximately $776 million, primarily due to the increase in net sales, higher intercompany royalty income primarily from growth in our travel retail business, favorable year-over-year impact of goodwill and other intangible asset impairments relating to GLAMGLOW of $70 million and $58 million of acquisition-related stock option income relating to the increase in our investment in DECIEM during the fiscal 2021 fourth quarter. Partially offsetting these increases in operating income were higher advertising and promotional activities, primarily to support strategic investments in digital advertising and social media spending and in-store promotions given the increase in brick-and-mortar traffic, and increases in selling expense due to the brick-and-mortar and makeup recovery compared to the prior-year. Europe, the Middle East & Africa Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income $ 281 $ 361 $ 1,366 $ 1,429 $ Change from prior-year period (80) (63) % Change from prior-year period (22) % (4) % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for long-lived asset impairments and changes in contingent consideration (29) % (6) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 58 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 55 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported operating income decreased in Europe, the Middle East & Africa for the three and nine months ended March 31, 2022, primarily driven by lower results from our travel retail business and the United Kingdom, combined, of approximately $121 million and $162 million, respectively. In both periods, operating income decreased in our travel retail business reflecting the (i) increase in intercompany royalty expense to The Americas primarily due to the growth of our travel retail business and (ii) higher shipping costs due to the increase in net sales volume and shipping rates. Also contributing to the decrease in operating income from our travel retail business was higher advertising and promotional activity primarily to support strategic investments in key areas of growth (primarily hero products and the skin care product category), as well as to capture the current-year increase in airport traffic. These higher expenses were partially offset by the increase in net sales. Operating income decreased in the United Kingdom in both periods, led by higher selling and store operations costs as more brick-and-mortar locations were open compared to the prior-year, partially offset by an increase in net sales. Partially offsetting these decreases in operating income for the three and nine months ended March 31, 2022 were higher results from several affiliates across the region, reflecting the brick-and-mortar recovery, compared to the prior-year periods. Asia/Pacific Three Months Ended March 31 Nine Months Ended March 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income $ 72 $ 245 $ 725 $ 890 $ Change from prior-year period (173) (165) % Change from prior-year period (71) % (19) % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for other intangible asset impairments 13 % 4 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 58 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported operating income decreased in Asia/Pacific for the three and nine months ended December 31. 2021, reflecting the current year other intangible asset impairment relating to Dr. Jart+ of $205 million, partially offset by increases in operating results from other affiliates across the region due to the progression towards recovery. INTEREST AND INVESTMENT INCOME Three Months Ended March 31 Nine Months Ended March 31 (In millions) 2022 2021 2022 2021 Interest expense $ 41 $ 43 $ 125 $ 131 Interest income and investment income, net $ 5 $ 9 $ 19 $ 40 Interest income and investment income, net decreased primarily due to equity method investment income recognized in the prior-year period relating to our previously held equity method investment in DECIEM. 56 Table of Contents THE ESTÉE LAUDER COMPANIES INC. PROVISION FOR INCOME TAXES The provision for income taxes represents U.S. federal, foreign, state and local income taxes. The effective rate differs from the federal statutory rate primarily due to the effect of state and local income taxes, the tax impact of share-based compensation, the taxation of foreign income and income tax reserve adjustments, which represent changes in our net liability for unrecognized tax benefits including tax settlements and lapses of the applicable statutes of limitations. Our effective tax rate will change from quarter-to-quarter based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the tax impact of share-based compensation, 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 March 31 Nine Months Ended March 31 2022 2021 2022 2021 Effective rate for income taxes 18.5 % 21.0 % 21.1 % 18.5 % Basis-point change from the prior-year period (250) 260 The effective tax rate for the three and nine months ended March 31, 2021 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 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. For the three months ended March 31, 2022, the decrease in the effective tax rate was primarily attributable to a lower effective tax rate on the Company's foreign operations, partially offset by a decrease in excess tax benefits associated with stock-based compensation arrangements. For the nine months ended March 31, 2022, the increase in the effective tax rate was primarily attributable to a higher effective tax rate on the Company’s foreign operations, which includes the retroactive impact of the final GILTI tax regulations recognized in the prior period. Also contributing to the increase was a decrease in excess tax benefits associated with stock-based compensation arrangements. NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. Three Months Ended March 31 Nine Months Ended March 31 ($ in millions, except per share data) 2022 2021 2022 2021 As Reported: Net earnings attributable to The Estée Lauder Companies Inc. $ 558 $ 456 $ 2,338 $ 1,852 $ Change from prior-year period 102 486 % Change from prior-year period 22 % 26 % Diluted net earnings per common share $ 1.53 $ 1.24 $ 6.39 $ 5.03 % Change from prior-year period 24 % 27 % 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, other intangible and long-lived asset impairments, the change in fair value of acquisition-related stock options and changes in fair value of contingent consideration 17 % 20 % (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. 57 Table of Contents THE ESTÉE LAUDER COMPANIES INC. RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period, or do not reflect the Company’s underlying ongoing business, provides transparency for such items and helps investors and others compare and analyze our operating performance from period to period. In the future, we expect to incur charges or adjustments similar in nature to those presented below; however, the impact to the Company’s results in a given period may be highly variable and difficult to predict. Our non-GAAP financial measures may not be comparable to similarly titled measures used by, or determined in a manner consistent with, other companies. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. The following tables present Net sales, Operating income and Diluted net earnings per common share adjusted to exclude the impact of charges associated with restructuring and other activities; goodwill, other intangible and long-lived asset impairments; the changes in fair value of contingent consideration; the change in fair value of acquisition-related stock options; 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. ($ in millions, except per share data) Three Months Ended March 31 Variance % Change % Change in constant currency 2022 2021 Net sales, as reported $ 4,245 $ 3,864 $ 381 10 % 11 % Returns associated with restructuring and other activities 1 10 (9) Net sales, as adjusted $ 4,246 $ 3,874 $ 372 10 % 11 % Operating income, as reported $ 738 $ 616 $ 122 20 % 18 % Charges associated with restructuring and other activities 23 145 (122) Other intangible and long-lived asset impairments 216 33 183 Change in fair value of acquisition-related stock options (60) — (60) Operating income, as adjusted $ 917 $ 794 $ 123 15 % 16 % Diluted net earnings per common share, as reported $ 1.53 $ 1.24 $ .29 24 % 22 % Charges associated with restructuring and other activities .05 .31 (.26) Other intangible and long-lived asset impairments .45 .07 .38 Change in fair value of acquisition-related stock options (less portion attributable to redeemable noncontrolling interest) (.13) — (.13) Diluted net earnings per common share, as adjusted $ 1.90 $ 1.62 $ .28 17 % 18 % 58 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 2022 2021 Net sales, as reported $ 14,176 $ 12,279 $ 1,897 15 % 15 % Returns associated with restructuring and other activities 3 10 (7) Net sales, as adjusted $ 14,179 $ 12,289 $ 1,890 15 % 15 % Operating income, as reported $ 3,091 $ 2,384 $ 707 30 % 28 % Charges associated with restructuring and other activities 44 191 (147) Goodwill, other intangible and long-lived asset impairments 216 114 102 Changes in fair value of contingent consideration — (2) 2 Change in fair value of acquisition-related stock options (58) — (58) Operating income, as adjusted $ 3,293 $ 2,687 $ 606 23 % 22 % Diluted net earnings per common share, as reported $ 6.39 $ 5.03 $ 1.36 27 % 25 % Charges associated with restructuring and other activities .09 .41 (.32) Goodwill, other intangible and long-lived asset impairments .45 .25 .20 Changes in fair value of contingent consideration — (.01) .01 Change in fair value of acquisition-related stock options (less portion attributable to redeemable noncontrolling interest) (.13) — (.13) Diluted net earnings per common share, as adjusted $ 6.80 $ 5.68 $ 1.12 20 % 19 % 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. 59 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 March 31 ($ in millions) 2022 2021 Variance By Product Category: Skin Care $ 2,395 $ 2,259 $ 136 $ 16 $ 152 6 % 7 % Makeup 1,114 1,018 96 19 115 9 11 Fragrance 579 454 125 14 139 28 31 Hair Care 147 128 19 3 22 15 17 Other 11 15 (4) — (4) (27) (27) 4,246 3,874 372 52 424 10 11 Returns associated with restructuring and other activities (1) (10) 9 (1) 8 Total $ 4,245 $ 3,864 $ 381 $ 51 $ 432 10 % 11 % By Region: The Americas $ 1,053 $ 916 $ 137 $ (6) $ 131 15 % 14 % Europe, the Middle East & Africa 1,990 1,706 284 47 331 17 19 Asia/Pacific 1,203 1,252 (49) 11 (38) (4) (3) 4,246 3,874 372 52 424 10 11 Returns associated with restructuring and other activities (1) (10) 9 (1) 8 Total $ 4,245 $ 3,864 $ 381 $ 51 $ 432 10 % 11 % 60 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 Nine Months Ended March 31 ($ in millions) 2022 2021 Variance By Product Category: Skin Care $ 8,003 $ 7,113 $ 890 $ (57) $ 833 13 % 12 % Makeup 3,674 3,243 431 14 445 13 14 Fragrance 1,987 1,478 509 8 517 34 35 Hair Care 475 418 57 3 60 14 14 Other 40 37 3 — 3 8 8 14,179 12,289 1,890 (32) 1,858 15 15 Returns associated with restructuring and other activities (3) (10) 7 (1) 6 Total $ 14,176 $ 12,279 $ 1,897 $ (33) $ 1,864 15 % 15 % By Region: The Americas $ 3,547 $ 2,837 $ 710 $ (13) $ 697 25 % 25 % Europe, the Middle East & Africa 6,201 5,276 925 45 970 18 18 Asia/Pacific 4,431 4,176 255 (64) 191 6 5 14,179 12,289 1,890 (32) 1,858 15 15 Returns associated with restructuring and other activities (3) (10) 7 (1) 6 Total $ 14,176 $ 12,279 $ 1,897 $ (33) $ 1,864 15 % 15 % 61 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, other intangible and long-lived asset impairments and changes in fair value of contingent consideration: As Reported Add: Changes in Other intangible and long-lived asset impairments Add: Changes in fair value of contingent consideration Add: Change in fair value of acquisition-related stock options Variance, as adjusted % Change, as reported % Change, as adjusted Three Months Ended March 31 ($ in millions) 2022 2021 Variance By Product Category: Skin Care $ 667 $ 804 $ (137) $ 216 $ — $ (58) $ 21 (17) % 3 % Makeup 7 (72) 79 (24) — (2) 53 100+ 100+ Fragrance 105 47 58 (9) — — 49 100+ 88 Hair Care (18) (17) (1) — — — (1) (6) (6) Other — (1) 1 — — — 1 100+ 100 761 761 — $ 183 $ — $ (60) $ 123 — % 15 % Charges associated with restructuring and other activities (23) (145) 122 Total $ 738 $ 616 $ 122 By Region: The Americas $ 408 $ 155 $ 253 $ 11 — $ (60) $ 204 100+% 100+% Europe, the Middle East & Africa 281 361 (80) (33) — — (113) (22) (29) Asia/Pacific 72 245 (173) 205 — — 32 (71) 13 761 761 — $ 183 $ — $ (60) $ 123 — % 15 % Charges associated with restructuring and other activities (23) (145) 122 Total $ 738 $ 616 $ 122 62 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 Add: Change in fair value of acquisition-related stock options Variance, as adjusted % Change, as reported % Change, as adjusted Nine Months Ended March 31 ($ in millions) 2022 2021 Variance By Product Category: Skin Care $ 2,466 $ 2,453 $ 13 $ 135 $ (56) $ 92 1 % 4 % Makeup 228 (115) 343 (24) — (2) 317 100+ 100+ Fragrance 446 248 198 (9) 2 — 191 80 75 Hair Care (8) (10) 2 — — — 2 20 20 Other 3 (1) 4 — — — 4 100+ 100+ 3,135 2,575 560 $ 102 $ 2 $ (58) $ 606 22 % 23 % Charges associated with restructuring and other activities (44) (191) 147 Total $ 3,091 $ 2,384 $ 707 By Region: The Americas $ 1,044 $ 256 $ 788 $ (70) $ — $ (58) $ 660 100+% 100+% Europe, the Middle East & Africa 1,366 1,429 (63) (33) 2 — (94) (4) (6) Asia/Pacific 725 890 (165) 205 — — 40 (19) 4 3,135 2,575 560 $ 102 $ 2 $ (58) $ 606 22 % 23 % Charges associated with restructuring and other activities (44) (191) 147 Total $ 3,091 $ 2,384 $ 707 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, 2022, we had cash and cash equivalents of $3,836 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. 63 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 April 26, 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 March 31, 2022, 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) 455 — 455 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) 574 — 574 2.600% Senior Notes, due April 15, 2030 ("2030 Senior Notes") (8), (13) 643 — 643 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) 497 — 497 2.35% Senior Notes, due August 15, 2022 (“2022 Senior Notes”) (12), (13) — 251 251 Other long-term borrowings 11 — 11 Other current borrowings — 18 18 $ 5,188 $ 269 $ 5,457 (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 $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, debt issuance costs of $4 million and a $18 million loss 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 $53 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 $1 million. (12) Consists of $250 million principal and a $1 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 March 31, 2022 and June 30, 2021, respectively. 64 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Cash Flows Nine Months Ended March 31 (In millions) 2022 2021 Net cash flows provided by operating activities $ 1,969 $ 2,777 Net cash flows used for investing activities $ (563) $ (577) Net cash flows used for financing activities $ (2,516) $ (862) The change in net cash flows from operating activities primarily reflected higher working capital needs to support growth compared to the prior-year period and actions taken to mitigate global supply chain challenges, as well as higher cash paid for taxes. 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, as well as investments to support the reopening of our offices located around the world where COVID-19 cases subsided. 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 and proceeds from the issuance of long-term debt, net in the prior-year period, 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 nine months ended March 31, 2022, 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) . 65 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 $258 million and $218 million as of March 31, 2022 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 $41 million and $83 million as of March 31, 2022 and June 30, 2021, 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, 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: 66 Table of Contents THE ESTÉE LAUDER COMPANIES INC. (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 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; 67 Table of Contents THE ESTÉE LAUDER COMPANIES INC. (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. 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.