UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2020~~2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-14064

The Estée Lauder Companies Inc.

(Exact name of registrant as specified in its charter)

Delaware

11-2408943

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

767 Fifth Avenue, New York, New York

10153

(Address of principal executive offices)

(Zip Code)

212-572-4200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, or former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $.01 par value	EL	New York Stock Exchange

~~Securities registered pursuant to Section 12(g) of the Act:~~

~~None~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

At April ~~24, 2020, 224,763,197~~26, 2021, 231,894,845 shares of the registrant’s Class A Common Stock, $.01 par value, and ~~135,235,429~~130,617,029 shares of the registrant’s Class B Common Stock, $.01 par value, were outstanding.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

INDEX


			Page

Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Consolidated Statements of Earnings (L (Loss)~~oss)~~ — Three and Nine Months Ended March 31, ~~2020~~2021 and ~~2019~~2020			2

Consolidated Statements of Comprehensive ~~Income~~Incom e (Loss) — Three and Nine Months Ended March 31, ~~2020~~2021 and ~~2019~~2020			3

Consolidated Balance Sheets — March 31, ~~2020~~2021 and June 30, ~~2019~~2020 (Audited)			4

Consolidated Statements of Cash Flows — Nine Months Ended March 31, ~~2020~~2021 and ~~2019~~2020			5

Notes to Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			3843

Item 3. Quantitative and Qualitative Disclosures About Market Risk			6973

Item 4. Controls and Procedures			6973

Part II. Other Information

Item 1. Legal Proceedings			6974

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			7074

Item 6. Exhibits			7175

Signatures			7276

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(Unaudited)


		Three Months Ended March 31						Nine Months Ended March 31							Three Months Ended March 31				Nine Months Ended March 31
(In millions, except per share data)	(In millions, except per share data)	2020		2019		2020		2019		(In millions, except per share data)	2021		2020		2021		2020

Net sales	Net sales	$	3,345	$	3,744	$	11,864	$	11,273	Net sales	$	3,864	$	3,345	$	12,279	$	11,864
Cost of sales	Cost of sales	836		819		2,785		2,552		Cost of sales	939		836		2,848		2,785

Gross profit	Gross profit	2,509		2,925		9,079		8,721		Gross profit	2,925		2,509		9,431		9,079

Operating expenses	Operating expenses									Operating expenses
Selling, general and administrative	Selling, general and administrative	2,030		2,170		6,753		6,435		Selling, general and administrative	2,145		2,030		6,761		6,753
Restructuring and other charges	Restructuring and other charges	24		29		54		99		Restructuring and other charges	131		24		172		54
Goodwill impairment	Goodwill impairment	275		48		786		68		Goodwill impairment	0		275		54		786
Impairments of other intangible and long-lived assets		71		4		337		22
Impairment of other intangible and long-lived assets										Impairment of other intangible and long-lived assets	33		71		60		337
Total operating expenses	Total operating expenses	2,400		2,251		7,930		6,624		Total operating expenses	2,309		2,400		7,047		7,930

Operating income	Operating income	109		674		1,149		2,097		Operating income	616		109		2,384		1,149

Interest expense	Interest expense	42		32		112		101		Interest expense	43		42		131		112
Interest income and investment income, net	Interest income and investment income, net	14		15		41		42		Interest income and investment income, net	9		14		40		41
Other components of net periodic benefit cost	Other components of net periodic benefit cost	1		1		3		1		Other components of net periodic benefit cost	2		1		12		3
Other income, net		—		71		576		71
Other income										Other income	0		0		0		576
Earnings before income taxes	Earnings before income taxes	80		727		1,651		2,108		Earnings before income taxes	580		80		2,281		1,651

Provision for income taxes	Provision for income taxes	84		170		496		472		Provision for income taxes	122		84		421		496
Net earnings (loss)	Net earnings (loss)	(4)		557		1,155		1,636		Net earnings (loss)	458		(4)		1,860		1,155

Net earnings attributable to noncontrolling interests	Net earnings attributable to noncontrolling interests	(2)		(2)		(9)		(8)		Net earnings attributable to noncontrolling interests	(2)		(2)		(8)		(9)
Net earnings (loss) attributable to The Estée Lauder Companies Inc.	Net earnings (loss) attributable to The Estée Lauder Companies Inc.	$	(6)	$	555	$	1,146	$	1,628	Net earnings (loss) attributable to The Estée Lauder Companies Inc.	$	456	$	(6)	$	1,852	$	1,146

Net earnings (loss) attributable to The Estée Lauder Companies Inc. per common share	Net earnings (loss) attributable to The Estée Lauder Companies Inc. per common share									Net earnings (loss) attributable to The Estée Lauder Companies Inc. per common share
Basic	Basic	$	(.02)	$	1.53	$	3.18	$	4.47	Basic	$	1.25	$	(.02)	$	5.10	$	3.18
Diluted	Diluted	$	(.02)	$	1.51	$	3.12	$	4.39	Diluted	$	1.24	$	(.02)	$	5.03	$	3.12

Weighted-average common shares outstanding	Weighted-average common shares outstanding									Weighted-average common shares outstanding
Basic	Basic	360.2		361.9		360.6		364.0		Basic	363.6		360.2		362.9		360.6
Diluted	Diluted	360.2		368.3		367.1		370.9		Diluted	369.0		360.2		368.1		367.1

See notes to consolidated financial statements.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


		Three Months Ended March 31						Nine Months Ended March 31							Three Months Ended March 31				Nine Months Ended March 31
(In millions)	(In millions)	2020		2019		2020		2019		(In millions)	2021		2020		2021		2020

Net earnings (loss)	Net earnings (loss)	$	(4)	$	557	$	1,155	$	1,636	Net earnings (loss)	$	458	$	(4)	$	1,860	$	1,155

Other comprehensive income (loss):	Other comprehensive income (loss):									Other comprehensive income (loss):
Net unrealized investment gain		—		9		—		14

Net cash flow hedge gain (loss)	Net cash flow hedge gain (loss)	34		(7)		10		2		Net cash flow hedge gain (loss)	41		34		(16)		10
Amounts included in net periodic benefit cost		6		3		16		10
Retirement plan and other retiree benefit adjustments										Retirement plan and other retiree benefit adjustments	7		6		19		16
Translation adjustments	Translation adjustments	(185)		(72)		(191)		(87)		Translation adjustments	(121)		(185)		170		(191)
Benefit (provision) for deferred income taxes on components of other comprehensive income		2		(1)		15		(4)
Total other comprehensive loss		(143)		(68)		(150)		(65)
Benefit (provision) for income taxes on components of other comprehensive income										Benefit (provision) for income taxes on components of other comprehensive income	(32)		2		6		15
Total other comprehensive income (loss), net of tax										Total other comprehensive income (loss), net of tax	(105)		(143)		179		(150)
Comprehensive income (loss)	Comprehensive income (loss)	(147)		489		1,005		1,571		Comprehensive income (loss)	353		(147)		2,039		1,005

Comprehensive income attributable to noncontrolling interests:	Comprehensive income attributable to noncontrolling interests:									Comprehensive income attributable to noncontrolling interests:
Net earnings	Net earnings	(2)		(2)		(9)		(8)		Net earnings	(2)		(2)		(8)		(9)
Translation adjustments	Translation adjustments	—		—		1		1		Translation adjustments	1		0		(1)		1
		(2)		(2)		(8)		(7)			(1)		(2)		(9)		(8)
Comprehensive income (loss) attributable to The Estée Lauder Companies Inc.	Comprehensive income (loss) attributable to The Estée Lauder Companies Inc.	$	(149)	$	487	$	997	$	1,564	Comprehensive income (loss) attributable to The Estée Lauder Companies Inc.	$	352	$	(149)	$	2,030	$	997

See notes to consolidated financial statements.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED BALANCE SHEETS


(In millions, except share data)	(In millions, except share data)	March 31 2020		June 30 2019		(In millions, except share data)	March 31 2021		June 30 2020
		(Unaudited)					(Unaudited)
ASSETS	ASSETS					ASSETS
Current assets	Current assets					Current assets
Cash and cash equivalents	Cash and cash equivalents	$	4,876	$	2,987	Cash and cash equivalents	$	6,399	$	5,022
Accounts receivable, net	Accounts receivable, net	1,846		1,831		Accounts receivable, net	1,735		1,194
Inventory and promotional merchandise	Inventory and promotional merchandise	2,087		2,006		Inventory and promotional merchandise	2,134		2,062
Prepaid expenses and other current assets	Prepaid expenses and other current assets	424		388		Prepaid expenses and other current assets	729		614
Total current assets	Total current assets	9,233		7,212		Total current assets	10,997		8,892

Property, plant and equipment, net	Property, plant and equipment, net	2,092		2,068		Property, plant and equipment, net	2,106		2,055

Other assets	Other assets					Other assets
Operating lease right-of-use assets	Operating lease right-of-use assets	2,446		—		Operating lease right-of-use assets	2,212		2,282
Goodwill	Goodwill	1,633		1,868		Goodwill	1,369		1,401
Other intangible assets, net	Other intangible assets, net	2,190		1,203		Other intangible assets, net	2,294		2,338
Other assets	Other assets	769		805		Other assets	922		813
Total other assets	Total other assets	7,038		3,876		Total other assets	6,797		6,834
Total assets	Total assets	$	18,363	$	13,156	Total assets	$	19,900	$	17,781

LIABILITIES AND EQUITY	LIABILITIES AND EQUITY					LIABILITIES AND EQUITY
Current liabilities	Current liabilities					Current liabilities
Current debt	Current debt	$	1,527	$	516	Current debt	$	471	$	1,222
Accounts payable	Accounts payable	1,162		1,490		Accounts payable	1,277		1,177
Operating lease liabilities	Operating lease liabilities	371		—		Operating lease liabilities	372		375
Other accrued liabilities	Other accrued liabilities	2,621		2,599		Other accrued liabilities	3,077		2,405
Total current liabilities	Total current liabilities	5,681		4,605		Total current liabilities	5,197		5,179

Noncurrent liabilities	Noncurrent liabilities					Noncurrent liabilities
Long-term debt	Long-term debt	4,674		2,896		Long-term debt	5,487		4,914
Long-term operating lease liabilities	Long-term operating lease liabilities	2,288		—		Long-term operating lease liabilities	2,198		2,278
Other noncurrent liabilities	Other noncurrent liabilities	1,362		1,244		Other noncurrent liabilities	1,460		1,448
Total noncurrent liabilities	Total noncurrent liabilities	8,324		4,140		Total noncurrent liabilities	9,145		8,640

Contingencies	Contingencies					Contingencies			0
							0
Equity	Equity					Equity
Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at March 31, 2020 and June 30, 2019; shares issued: 451,339,096 at March 31, 2020 and 443,685,124 at June 30, 2019; Class B shares authorized: 304,000,000 at March 31, 2020 and June 30, 2019; shares issued and outstanding: 135,235,429 at March 31, 2020 and 139,537,814 at June 30, 2019		6		6
Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at March 31, 2021 and June 30, 2020; shares issued: 459,687,905 at March 31, 2021 and 451,927,441 at June 30, 2020; Class B shares authorized: 304,000,000 at March 31, 2021 and June 30, 2020; shares issued and outstanding: 130,617,029 at March 31, 2021 and 135,235,429 at June 30, 2020						Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at March 31, 2021 and June 30, 2020; shares issued: 459,687,905 at March 31, 2021 and 451,927,441 at June 30, 2020; Class B shares authorized: 304,000,000 at March 31, 2021 and June 30, 2020; shares issued and outstanding: 130,617,029 at March 31, 2021 and 135,235,429 at June 30, 2020	6		6
Paid-in capital	Paid-in capital	4,760		4,403		Paid-in capital	5,231		4,790
Retained earnings	Retained earnings	10,595		9,984		Retained earnings	11,420		10,134
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(712)		(563)		Accumulated other comprehensive loss	(487)		(665)
		14,649		13,830			16,170		14,265
Less: Treasury stock, at cost; 226,588,577 Class A shares at March 31, 2020 and 222,120,630 Class A shares at June 30, 2019		(10,320)		(9,444)
Less: Treasury stock, at cost; 227,738,087 Class A shares at March 31, 2021 and 226,637,238 Class A shares at June 30, 2020						Less: Treasury stock, at cost; 227,738,087 Class A shares at March 31, 2021 and 226,637,238 Class A shares at June 30, 2020	(10,642)		(10,330)
Total stockholders’ equity – The Estée Lauder Companies Inc.	Total stockholders’ equity – The Estée Lauder Companies Inc.	4,329		4,386		Total stockholders’ equity – The Estée Lauder Companies Inc.	5,528		3,935
Noncontrolling interests	Noncontrolling interests	29		25		Noncontrolling interests	30		27
Total equity	Total equity	4,358		4,411		Total equity	5,558		3,962
Total liabilities and equity	Total liabilities and equity	$	18,363	$	13,156	Total liabilities and equity	$	19,900	$	17,781

See notes to consolidated financial statements.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Nine Months Ended March 31							Nine Months Ended March 31
(In millions)	(In millions)	2020		2019		(In millions)	2021		2020

Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net earnings	Net earnings	$	1,155	$	1,636	Net earnings	$	1,860	$	1,155
Adjustments to reconcile net earnings to net cash flows from operating activities:	Adjustments to reconcile net earnings to net cash flows from operating activities:					Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization	Depreciation and amortization	447		404		Depreciation and amortization	475		447
Deferred income taxes	Deferred income taxes	(65)		(46)		Deferred income taxes	(103)		(65)
Non-cash stock-based compensation	Non-cash stock-based compensation	210		201		Non-cash stock-based compensation	255		210
Net loss on disposal of property, plant and equipment	Net loss on disposal of property, plant and equipment	6		6		Net loss on disposal of property, plant and equipment	19		6
Non-cash restructuring and other charges	Non-cash restructuring and other charges	19		—		Non-cash restructuring and other charges	97		19
Pension and post-retirement benefit expense	Pension and post-retirement benefit expense	62		53		Pension and post-retirement benefit expense	75		62
Pension and post-retirement benefit contributions	Pension and post-retirement benefit contributions	(54)		(23)		Pension and post-retirement benefit contributions	(35)		(54)
Goodwill, other intangible and long-lived asset impairments	Goodwill, other intangible and long-lived asset impairments	1,123		90		Goodwill, other intangible and long-lived asset impairments	114		1,123
Changes in fair value of contingent consideration	Changes in fair value of contingent consideration	(9)		(18)		Changes in fair value of contingent consideration	(2)		(9)
Gain on liquidation of an investment in a foreign subsidiary, net		—		(71)

Gain on previously held equity method investment	Gain on previously held equity method investment	(553)		—		Gain on previously held equity method investment	0		(553)
Other non-cash items	Other non-cash items	(11)		(17)		Other non-cash items	(17)		(11)
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Increase in accounts receivable, net	Increase in accounts receivable, net	(48)		(377)		Increase in accounts receivable, net	(506)		(48)
Increase in inventory and promotional merchandise		(41)		(184)
Decrease (increase) in inventory and promotional merchandise						Decrease (increase) in inventory and promotional merchandise	13		(41)
Increase in other assets, net	Increase in other assets, net	(63)		(73)		Increase in other assets, net	(122)		(63)
Decrease in accounts payable		(317)		(105)
Increase (decrease) in accounts payable						Increase (decrease) in accounts payable	55		(317)
Increase in other accrued and noncurrent liabilities	Increase in other accrued and noncurrent liabilities	62		280		Increase in other accrued and noncurrent liabilities	629		62
Increase in operating lease assets and liabilities, net		22		—
Increase (decrease) in operating lease assets and liabilities, net						Increase (decrease) in operating lease assets and liabilities, net	(30)		22
Net cash flows provided by operating activities	Net cash flows provided by operating activities	1,945		1,756		Net cash flows provided by operating activities	2,777		1,945

Cash flows from investing activities	Cash flows from investing activities					Cash flows from investing activities
Capital expenditures	Capital expenditures	(468)		(441)		Capital expenditures	(386)		(468)
Proceeds from purchase price refund						Proceeds from purchase price refund	32		0
Payments for acquired businesses, net of cash acquired	Payments for acquired businesses, net of cash acquired	(1,047)		—		Payments for acquired businesses, net of cash acquired	(8)		(1,047)
Proceeds from the disposition of investments		—		1,229

Purchases of investments	Purchases of investments	(5)		(14)		Purchases of investments	(40)		(5)
Settlement of net investment hedges	Settlement of net investment hedges	(37)		—		Settlement of net investment hedges	(175)		(37)
Net cash flows provided by (used for) investing activities		(1,557)		774
Net cash flows used for investing activities						Net cash flows used for investing activities	(577)		(1,557)

Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities
Proceeds (repayments) of current debt, net	Proceeds (repayments) of current debt, net	1,514		(167)		Proceeds (repayments) of current debt, net	(746)		1,514
Proceeds from issuance of long-term debt, net	Proceeds from issuance of long-term debt, net	1,783		—		Proceeds from issuance of long-term debt, net	596		1,783
Debt issuance costs	Debt issuance costs	(14)		—		Debt issuance costs	(4)		(14)
Repayments and redemptions of long-term debt	Repayments and redemptions of long-term debt	(511)		(1)		Repayments and redemptions of long-term debt	(6)		(511)
Net proceeds from stock-based compensation transactions		148		154
Proceeds from stock-based compensation transactions						Proceeds from stock-based compensation transactions	180		148
Payments to acquire treasury stock	Payments to acquire treasury stock	(883)		(1,344)		Payments to acquire treasury stock	(316)		(883)
Payments of contingent consideration	Payments of contingent consideration	(3)		—		Payments of contingent consideration	0		(3)
Dividends paid to stockholders	Dividends paid to stockholders	(502)		(453)		Dividends paid to stockholders	(561)		(502)
Payments to noncontrolling interest holders for dividends	Payments to noncontrolling interest holders for dividends	(7)		(3)		Payments to noncontrolling interest holders for dividends	(5)		(7)
Net cash flows provided by (used for) financing activities	Net cash flows provided by (used for) financing activities	1,525		(1,814)		Net cash flows provided by (used for) financing activities	(862)		1,525

Effect of exchange rate changes on Cash and cash equivalents	Effect of exchange rate changes on Cash and cash equivalents	(24)		5		Effect of exchange rate changes on Cash and cash equivalents	39		(24)
Net increase in Cash and cash equivalents	Net increase in Cash and cash equivalents	1,889		721		Net increase in Cash and cash equivalents	1,377		1,889
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	2,987		2,181		Cash and cash equivalents at beginning of period	5,022		2,987
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	4,876	$	2,902	Cash and cash equivalents at end of period	$	6,399	$	4,876

See notes to consolidated financial statements.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of The Estée Lauder Companies Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated.

The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. InThe unaudited interim consolidated financial statements furnished reflect all adjustments which are, in the opinion of management, ~~all adjustments of a normal recurring nature considered~~ necessary for a fair ~~presentation have been included.~~statement of the results for the interim periods presented. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2019.~~2020.

Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to current year presentation.

~~COVID-19 Business Update~~

During the third quarter of fiscal 2020, the outbreak and global spread of COVID-19 caused a significant disruption in the Company’s operating environment. Accordingly, the Company modified a number of its business practices, in part due to legislation, executive orders and guidance from government entities and healthcare authorities. These include the temporary closing of businesses deemed “non-essential,” travel bans and restrictions, social distancing and quarantines. The Company will continue to monitor the impact of COVID-19 on its consolidated financial statements.

Management Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses reported in those financial statements. Descriptions of the Company’s significant accounting policies are discussed in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2019.~~2020. Management evaluates the related estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment, including those related to the impacts of the COVID-19 pandemic, will be reflected in the consolidated financial statements in future periods.

Currency Translation and Transactions

All assets and liabilities of foreign subsidiaries and affiliates are translated at period-end rates of exchange, while revenue and expenses are translated at ~~weighted-average~~monthly average rates of exchange for the period. Unrealized translation gains (losses), net of tax, reported as ~~cumulative~~ translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc. were ~~$(173)~~$(143) million and $2$(173) million, net of tax, during the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$(170)~~$175 million and ~~$(11)~~$(170) million, net of tax, during the nine months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. For the Company’s subsidiaries operating in highly inflationary economies, the U.S. dollar is the functional currency. Remeasurement adjustments in financial statements in a highly inflationary economy and other transactional gains and losses are reflected in ~~earnings.~~earnings (loss). These subsidiaries are not material to the Company’s consolidated financial statements or liquidity.

~~Table of Contents~~

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~In fiscal 2019, the Company had an investment in a foreign subsidiary that owned the Company’s available-for-sale securities.~~

~~During the three months ended March 31, 2019, the Company sold its available-for-sale securities, which liquidated this investment in the foreign subsidiary.~~As a result, the Company recorded a realized foreign currency gain on liquidation of $77 million and a gross loss on the sale of available-for-sale securities of $6 million, both of which were reclassified from accumulated OCI (“AOCI”) to Other income, net in the accompanying consolidated statements of earnings (loss).

The Company enters into foreign currency forward contracts and may enter into option contracts to hedge foreign currency transactions for periods consistent with its identified exposures. ~~Beginning in the first quarter of fiscal 2020, the~~The Company ~~entered~~also enters into foreign currency forward contracts to hedge a portion of its net investment in certain foreign operations, which are designated as net investment hedges. See Note 76 – Derivative Financial Instruments for further discussion. The Company categorizes these instruments as entered into for purposes other than trading.

The accompanying consolidated statements of earnings (loss) include net exchange gains (losses) on foreign currency transactions of ~~$15~~$(3) million and ~~$73~~$15 million during the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$40~~$(5) million and ~~$52~~$40 million during the nine months ended March 31, 2021 and 2020, ~~and 2019,~~ respectively.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Concentration of Credit Risk

The Company is a worldwide manufacturer, marketer and distributor of skin care, makeup, fragrance and hair care products. The Company’s sales subject to credit risk are made primarily to department stores, perfumeries, specialty multi-brand retailers and retailers in its travel retail business. The Company grants credit to qualified customers. As a result of the COVID-19 pandemic, the Company has enhanced its assessment of its customers' abilities to pay with a greater focus on factors affecting their liquidity and less on historical payment performance. While the Company does not believe it is exposed significantly to any undue concentration of credit risk at this time, it continues to monitor the extent of the impact of the COVID-19 pandemic on its customers' abilities, individually and collectively, to make timely payments.

The Company’s largest customer during the three and nine months ended March 31, 2021 sells products primarily in China travel retail. This customer accounted for $690 million or 18%, and $143 million or 4% for the three months ended March 31, 2021 and 2020, respectively, and $1,898 million or 15% and $608 million or 5% for the nine months ended March 31, 2021 and 2020, respectively, of the Company's consolidated net sales. This customer accounted for $366 million, or 21%, and $297 million, or 24%, of the Company's accounts receivable at March 31, 2021 and June 30, 2020, respectively.

Another major customer of the Company during the quarter sells products primarily within the United States and accounted for $179 million, or 10%, and $87 million, or 7%, of the Company’s accounts receivable at March 31, 2021 and June 30, 2020, respectively. This customer accounted for $167 million, or 4%, and $149 million, or 4%, for the three months ended March 31, 2021 and 2020, respectively, and $510 million or 4% and $589 million or 5% for the nine months ended March 31, 2021 and 2020, respectively, of the Company’s consolidated net sales.

Inventory and Promotional Merchandise

Inventory and promotional merchandise consists ~~of:~~of the following:


(In millions)	(In millions)	March 31 2020		June 30 2019		(In millions)	March 31 2021		June 30 2020
Raw materials	Raw materials	$	540	$	541	Raw materials	$	551	$	542
Work in process	Work in process	261		268		Work in process	282		305
Finished goods	Finished goods	1,106		981		Finished goods	1,078		995
Promotional merchandise	Promotional merchandise	180		216		Promotional merchandise	223		220
		$	2,087	$	2,006		$	2,134	$	2,062

Property, Plant and Equipment

(In millions) March 31
2020 June 30
2019
Assets (Useful Life)
Land $ 33 $ 29
Buildings and improvements (10 to 40 years) 385 337
Machinery and equipment (3 to 10 years) 840 811
Computer hardware and software (4 to 10 years) 1,297 1,264
Furniture and fixtures (5 to 10 years) 117 116
Leasehold improvements 2,370 2,274
5,042 4,831
Less accumulated depreciation and amortization (2,950) (2,763)
$ 2,092 $ 2,068

Property, plant and equipment consists of the following:


(In millions)	March 31 2021		June 30 2020
Assets (Useful Life)
Land	$	56	$	33
Buildings and improvements (10 to 40 years)	467		400
Machinery and equipment (3 to 10 years)	946		865
Computer hardware and software (4 to 10 years)	1,374		1,335
Furniture and fixtures (5 to 10 years)	121		120
Leasehold improvements	2,397		2,381
	5,361		5,134
Less accumulated depreciation and amortization	(3,255)		(3,079)
	$	2,106	$	2,055

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The cost of assets related to projects in progress of ~~$509~~$581 million and ~~$474~~$501 million as of March 31, ~~2020~~2021 and June 30, ~~2019,~~2020, respectively, is included in their respective asset categories above. Depreciation and amortization of property, plant and equipment was ~~$131~~$129 million and ~~$121~~$131 million during the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$383~~$380 million and ~~$358~~$383 million during the nine months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. Depreciation and amortization related to the Company’s manufacturing process is included in Cost of sales, and all other depreciation and amortization is included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings (loss).

Leases

The Company recognized $33 million and $13 million of long-lived asset impairments, included in Impairments of other intangible and long-lived assets, in the accompanying consolidated statements of earnings (loss) for the three and nine months ended March 31, 2021 and 2020, respectively. The fiscal 2021 impairments related to other assets (i.e. rights associated with commercial operating leases), operating lease right-of-use assets and the related property, plant and equipment in certain freestanding stores primarily in Europe, and the fiscal 2020 impairments related to operating lease right-of-use assets and the related property, plant and equipment in certain freestanding stores primarily in North America. In both periods, the impairments were due to the negative impacts of the COVID-19 pandemic.

Income Taxes

The effective rate for income taxes ~~was 105.0% and 23.4%~~ for the three ~~months ended March 31, 2020~~ and ~~2019, respectively, and 30.0% and 22.4% for the~~ nine months ended March 31, 2021 and 2020 are as follows:


	Three Months Ended March 31				Nine Months Ended March 31
	2021		2020		2021		2020
Effective rate for income taxes	21.0	%	105.0	%	18.5	%	30.0	%
Basis-point change from the prior-year period	(8,400)				(1,150)

For the three and ~~2019, respectively. The increase~~nine months ended March 31, 2021, the decrease in the effective tax rate ~~in both periods~~ was primarily attributable to the impact of nondeductible goodwill ~~impairment~~ charges ~~associated with~~recognized in the ~~Company’s Too Faced, BECCA~~three and ~~Smashbox reporting units,~~nine months ended March 31, 2020 and a ~~higher~~lower effective tax rate on the ~~Company’s~~Company's foreign ~~operations and the~~operations. The lower amount of earnings before income taxes ~~which increases~~for the three and nine months ended March 31, 2020 increased the impact of the nondeductible charges.

The effective tax rate for the three and nine months ended March 31, 2021 included the impact of the U.S. government issuance of final global intangible low-taxed income (“GILTI”) tax regulations in July 2020 under the Tax Cuts and Jobs Act that provide for a high-tax exception to the GILTI tax. These regulations are retroactive to the original enactment of the GILTI tax provision, which includes the Company's 2019 and 2020 fiscal years. The Company has elected to apply the GILTI high-tax exception to fiscal 2021, 2020 and 2019. The election for fiscal 2021 resulted in reductions of 100 basis points and 110 basis points to the effective tax rates for the three and nine months ended March 31, 2021, respectively. The impact of the elections with respect to fiscal 2020 and 2019 was recognized as a discrete item in the provision for income taxes in the second and third quarters of fiscal 2021 and resulted in reductions of 30 basis points and 220 basis points to the effective tax rates for the three and nine months ended March 31, 2021, respectively.

As of March 31, ~~2020~~2021 and June 30, ~~2019,~~2020, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled ~~$69~~$72 million and ~~$67~~$70 million, respectively. The total amount of unrecognized tax benefits at March 31, ~~2020~~2021 that, if recognized, would affect the effective tax rate was ~~$52~~$57 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three and nine months ended March 31, ~~2020~~2021 in the accompanying consolidated statements of earnings (loss) was $1$2 million and $3 million, respectively. ~~At March 31, 2020 and June 30, 2019, the~~The total gross accrued interest and penalties in the accompanying consolidated balance sheets at March 31, 2021 and June 30, 2020, was ~~$13~~$16 million and ~~$12~~$13 million, respectively. On the basis of the information available as of March 31, ~~2020,~~2021, the Company does not expect significant changes to the total amount of unrecognized tax benefits within the next twelve months.

~~Other Accrued Liabilities~~

~~Other accrued liabilities consist of the following:~~

(In millions) March 31
2020 June 30
2019
Advertising, merchandising and sampling $ 405 $ 352
Employee compensation 379 574
Deferred revenue 306 314
Other 1,531 1,359
$ 2,621 $ 2,599

~~Recently Adopted Accounting Standards~~

~~Leases (Accounting Standards Codification (“ASC”) Topic 842~~ – ~~Leases (“ASC 842”))~~

In February 2016, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that requires lessees to account for most leases on their balance sheets with the liability being equal to the present value of the lease payments. The right-of-use asset is based on the lease liability adjusted for certain costs such as initial direct costs, prepaid lease payments and lease incentives received. Lease expense is recognized similar to previous accounting guidance with operating leases resulting in a straight-line expense, and finance leases resulting in a front-loaded expense similar to the previous accounting for capital leases.

In July 2018, the FASB amended this guidance to clarify certain narrow aspects of the new lease accounting standard that may have been incorrectly or inconsistently applied, and did not add new guidance. Also, in July 2018, the FASB issued authoritative guidance that allows companies to elect to adopt the new standard using a modified retrospective transition approach with a cumulative-effect adjustment to retained earnings in the period of adoption. Companies that elect the new adoption method were not required to restate the prior comparative periods in the financial statements.

~~Effective for the Company –~~ Fiscal 2020 first quarter. An entity is permitted to apply the foregoing guidance using either of the modified retrospective transition approaches described in the standard, with certain practical expedients.

~~Impact on consolidated financial statements –~~ ~~On July 1, 2019, the Company adopted ASC 842, see~~ ~~Note 4 – Leases~~ ~~for further discussion~~.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Accrued Liabilities

Other accrued liabilities consist of the following:


(In millions)	March 31 2021		June 30 2020
Advertising, merchandising and sampling	$	299	$	256
Employee compensation	534		424
Deferred revenue	310		222
Payroll and other taxes	287		250
Accrued income taxes	327		208
Sales return accrual	270		212

Other	1,050		833
	$	3,077	$	2,405

Recently ~~Issued~~Adopted Accounting Standards

~~FASB Staff Question-and-Answer Document (Q&A): ASC Topic 842 and ASC Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic~~

In April 2020, the FASB issued a Staff Q&A that focuses on the application of the lease guidance for lease concessions related solely to the effects of COVID-19. The FASB issued the guidelines to reduce the burden and complexity for companies to account for such lease concessions (e.g., rent abatements or other economic incentives) under current lease accounting rules due to COVID-19 by providing certain practical expedients that can be used.

~~Effective for the Company –~~ ~~The Company can immediately apply the optional accounting for lease concessions related to the effects of COVID-19 as of April 2020.~~

~~Impact on consolidated financial statements –~~ ~~The Company is currently assessing the impact of applying this guidance on its lease arrangements and expects to adopt this guidance in the fiscal 2020 fourth quarter.~~

~~Reference Rate Reform (ASC Topic 848) (Accounting Standards Update (“ASU”) 2020-04 - Facilitation of the Effects of Reference Rate Reform on Financial Reporting)~~

In March 2020, the FASB issued authoritative guidance to provide optional relief for companies preparing for the discontinuation of interest rates such as LIBOR, which is expected to be phased out at the end of calendar 2021, and applies to lease contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that have LIBOR as the benchmark rate.

~~Effective for the Company –~~ ~~This guidance can be applied for a limited time, as of the beginning of the interim period that includes March 12, 2020 or any date thereafter, through December 31, 2022.The guidance will no longer be available to apply after December 31, 2022.~~

~~Impact on consolidated financial statements –~~ ~~The Company is currently assessing the impact of applying this guidance on its existing derivative contracts, leases and other arrangements, as well as when to adopt this guidance.~~

Measurement of Credit Losses on Financial Instruments (ASC Topic 326 – Financial Instruments – Credit Losses) (“ASC 326”)

In June 2016, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued authoritative guidance that requires companies to utilize an impairment model for most financial assets measured at amortized cost and certain other financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses. In addition, this guidance changes the recognition method for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk, and requires additional disclosures. In general, modified retrospective adoption will be required for all outstanding instruments that fall under this guidance.

In November 2019, the FASB issued authoritative guidance (ASU 2019-11 – Codification Improvements to Topic 326, Financial Instruments – Credit Losses) that amends ASC Topic 326 to clarify, improve and amend certain aspects of this guidance, such as disclosures related to accrued interest receivables and the estimation of credit losses associated with financial assets secured by collateral.

In February 2020, the FASB issued authoritative guidance (ASU 2020-02 – Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842)) that amends and clarifies Topic 326 and Topic 842. For Topic 326, the codification was updated to include the Securities and Exchange Commission staff interpretations associated with registrants engaged in lending activities.

Effective for the Company – Fiscal 2021 first quarter.

Impact on consolidated financial statements – ~~The~~On July 1, 2020, the Company is currently evaluating the impact of applying this guidance on its financial instruments, such as accounts receivable. While the Company’s evaluation is ongoing, we are also assessing the impact that COVID-19 will have on theadopted ASC 326. The adoption of this standard did not have a material impact on ~~its~~the Company’s consolidated financial statements. See

Note 8 – Revenue Recognition

~~Table of Contents~~ for further discussion.

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Goodwill and Other – Internal-Use Software (ASU 2018-15 – Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract)

In August 2018, the FASB issued authoritative guidance that permits companies to capitalize the costs incurred for setting up business systems that operate on cloud technology. The new guidance aligns the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance does not affect the accounting for the service element of a hosting arrangement that is a service contract. Capitalized costs associated with a hosting arrangement that is a service contract must be amortized over the term of the hosting arrangement to the same line item in the income statement as the expense for fees for the hosting arrangement.

Effective for the Company – Fiscal 2021 first quarter, with early adoption permitted in any interim period. This guidance can be adopted either retrospectively, or prospectively to all implementation costs incurred after the date of adoption.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impact on consolidated financial statements – On July 1, 2020, the Company adopted this guidance prospectively to all implementation costs incurred after the date of adoption. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

Recently Issued Accounting Standards

Reference Rate Reform (ASC Topic 848)

In March 2020, the FASB issued authoritative guidance to provide optional relief for companies preparing for the discontinuation of interest rates such as the London Interbank Offered Rate (“LIBOR”), which is expected to be phased out at the end of calendar 2021, and applies to lease contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that have LIBOR as the benchmark rate.

In January 2021, the FASB issued authoritative guidance that makes amendments to the new rules on accounting for reference rate reform. The amendments clarify that for all derivative instruments affected by the changes to interest rates used for discounting, margining or contract price alignment, regardless of whether they reference LIBOR or another rate expected to be discontinued as a result of reference rate reform, an entity may apply certain practical expedients in ASC Topic 848.

Effective for the Company – This guidance can be applied for a limited time through December 31, 2022.The guidance will no longer be available to apply after December 31, 2022.

Impact on consolidated financial statements – The Company ~~has determined that it will adopt this guidance on a prospective basis to all implementation costs incurred after the date of adoption and~~ is currently ~~evaluating~~assessing the impact of applying this guidance ~~to its business systems that operate on cloud technology. While the Company’s evaluation is ongoing, the adoption of this standard is not expected to have a material impact~~ on its ~~consolidated financial statements.~~existing derivative contracts, leases and other arrangements, as well as when to adopt this guidance.

Income Taxes (ASU 2019-12 – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes)

In December 2019, the FASB issued authoritative guidance that simplifies the accounting for income taxes by removing certain exceptions and making simplifications in other areas.

Effective for the Company – Fiscal 2022 first quarter, with early adoption permitted in any interim period. If adopted early, the Company must adopt all the amendments in the same period. The amendments have differing adoption methods including retrospectively, prospectively and/or modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption, depending on the specific change.

Impact on consolidated financial statements~~statements~~ – The Company is in the process of finalizing its evaluation and currently ~~evaluating the impact~~expects to record a cumulative adjustment of ~~applying this guidance and believes~~approximately $120 million as an increase to its fiscal 2022 opening retained earnings balance for deferred taxes related to a previously held equity method investment that ~~it has transactions that may fall under the scope.~~became a foreign subsidiary.

No other recently issued accounting pronouncements are expected to have a material impact on the Company’s consolidated financial statements.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – ACQUISITION OF BUSINESS

On December 18, 2019, the Company acquired the remaining 66.66% equity interest in Have&Be Co. Ltd. (“Have & Be”), the global skin care company behind Dr. Jart+ and men’s grooming brand Do The Right Thing, for $1,268 million in cash. ~~This acquisition is expected to further strengthen~~Based on the ~~Company’s leadership position~~final purchase price and working capital adjustments, the Company estimated a refund receivable of $32 million that was outstanding as of June 30, 2020 and was received in ~~skin care and expand its consumer reach in Asia/Pacific, North America,~~ the ~~United Kingdom and travel retail. We~~first quarter of fiscal 2021. The Company originally acquired a minority interest in Have & Be in December 2015, and that investment structure included a formula-based call option for the remaining equity interest. The original minority interest was accounted for as an equity method investment, which had a carrying value of $133 million at the acquisition date. The acquisition of the remaining equity interest in Have & Be was considered a step acquisition, whereby the Company remeasured the previously held equity method investment to its fair value of $682 million, resulting in the recognition of a gain of $549 million. The acquisition of the remaining equity interest also resulted in the recognition of a previously unrealized foreign currency gain of $4 million, which was reclassified from accumulated OCI. The total gain on the Company’s previously held equity method investment of $553 million is included in Other income ~~net~~ in the accompanying consolidated statements of earnings (loss) for the nine months ended March 31, 2020. The fair value of the previously held equity method investment was determined based upon a valuation of the acquired business, as of the date of acquisition, using 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. ~~As of March 31, 2020, the~~The accounting for the Have & Be business combination ~~is provisional pending the calculation~~was finalized as of ~~the final purchase price, finalization of the opening balance sheet (working capital adjustments), the final valuation report, and allocation of the total consideration transferred.~~June 30, 2020.

~~Table of Contents~~

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

The amount paid at closing was funded by cash on hand including the proceeds from the issuance of debt. In anticipation of the closing, the Company transferred cash to a foreign subsidiary for purposes of making the closing payment. As a result, the Company recognized a foreign currency gain of $23 million, which is also included in Other income ~~net~~ in the accompanying consolidated statements of earnings (loss) for the nine months ended March 31, 2020.

~~The Company recorded a preliminary allocation of~~

Further information is included in the ~~total consideration transferred, which includes the cash paid at closing and the fair value of its previously held equity method investment,~~notes to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair value at the acquisition date. The excess of the total consideration transferred over the fair value of the net tangible and intangible assets acquired was recorded as goodwill. The preliminary allocation of the total consideration transferred, including immaterial measurement period adjustments as of March 31, 2020, has been recorded as follows:


~~(In millions, unaudited)~~
~~Cash~~	$	~~228~~
~~Accounts receivable~~	13
~~Inventory~~	91
~~Other current assets~~	5
~~Property, plant and equipment~~	3
~~Right-of-use assets~~	3
~~Intangible assets~~	~~1,427~~
~~Goodwill~~	~~573~~
~~Other long-term assets~~	4
~~Total assets acquired~~	~~2,347~~

~~Accounts payable~~	15
~~Other accrued liabilities~~	25
~~Deferred income taxes~~	~~352~~
~~Lease liability~~	1
~~Total liabilities assumed~~	~~393~~
~~Total consideration transferred~~	$	~~1,954~~

~~The results of operations of Have & Be are reported on a one-month lag to facilitate~~ consolidated ~~reporting. For the three and nine months ended March 31, 2020,~~financial statements in the Company's consolidated statements of earnings (loss) included approximately $67 million of net sales and $11 million net of tax, of net loss, inclusive of acquisition-related costs, related to Have & Be. Acquisition-related costs, which primarily include financial advisory, accounting and legal fees, in the amount of $1 million and $7 million are included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings (loss)Annual Report on Form 10-K for the ~~three and nine months~~fiscal year ended ~~March 31, 2020, respectively. Pro forma results~~June 30, 2020.

Table of ~~operations reflecting the acquisition of Have & Be are not presented, as the impact on the Company’s consolidated financial results would not have been material.~~Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – GOODWILL AND OTHER INTANGIBLE ASSETS

~~As previously discussed in~~ ~~Note 2 – Acquisition of Business~~, in December 2019, the Company acquired Have & Be, which included the addition of goodwill of $573 million, amortizable intangible assets (customer lists) of $842 million with amortization periods of 7.5 years to 17.5 years, and non-amortizable intangible assets (trademarks) of $585 million. Goodwill associated with the acquisition is primarily attributable to the future revenue growth opportunities associated with additional share in the skin care category, as well as the value associated with assembled workforce. As such, the goodwill has been allocated to the Company’s skin care product category. The goodwill recorded in connection with this acquisition is not expected to be deductible for tax purposes. As of March 31, 2020, the accounting for the Have & Be business combination is provisional pending the calculation of the final purchase price, finalization of the opening balance sheet (working capital adjustments), the final valuation report, and allocation of the total consideration transferred.

~~During the nine months ended March 31, 2020, the Company recognized $10 million of goodwill associated with the continuing earn-out obligations related to the acquisition of the Bobbi Brown brand.~~

~~Table of Contents~~

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

The intangible assets acquired in connection with the acquisition of Have & Be are classified as level 3 in the fair value hierarchy. The estimate of the fair values of the acquired amortizable intangible assets were determined using a multi-period excess earnings income approach by discounting the incremental after-tax cash flows over multiple periods. Fair value was determined under this approach by estimating future cash flows over multiple periods, as well as a terminal value, and discounting such cash flows at a rate of return that reflects the relative risk of the cash flows. The estimate of the fair values of the acquired intangible assets not subject to amortization were determined using an income approach, specifically the relief-from-royalty method. This method assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the comparable asset.

The following table presents goodwill by product category and the related change in the carrying amount:

(In millions) Skin Care Makeup Fragrance Hair Care Total
Balance as of June 30, 2019
Goodwill $ 185 $ 1,199 $ 254 $ 390 $ 2,028
Accumulated impairments (36) (68) (22) (34) (160)
149 1,131 232 356 1,868
Goodwill acquired during the period 573 10 — — 583
Impairment charges (52) (734) — — (786)
Translation adjustments, goodwill (30) — (2) (2) (34)
Translation adjustments, accumulated impairments 1 — — 1 2
492 (724) (2) (1) (235)
Balance as of March 31, 2020
Goodwill 728 1,209 252 388 2,577
Accumulated impairments (87) (802) (22) (33) (944)
$ 641 $ 407 $ 230 $ 355 $ 1,633


(In millions)	Skin Care		Makeup		Fragrance		Hair Care		Total
Balance as of June 30, 2020
Goodwill	$	519	$	1,210	$	254	$	389	$	2,372
Accumulated impairments	(95)		(817)		(26)		(33)		(971)
	424		393		228		356		1,401

Goodwill acquired during the period	0		6		0		4		10
Impairment charges(1)	(54)		(13)		0		0		(67)
Translation adjustments, goodwill	21		0		4		3		28
Translation adjustments, accumulated impairments	(1)		0		0		(2)		(3)
	(34)		(7)		4		5		(32)

Balance as of March 31, 2021
Goodwill	540		1,216		258		396		2,410
Accumulated impairments	(150)		(830)		(26)		(35)		(1,041)
	$	390	$	386	$	232	$	361	$	1,369

(1)A goodwill impairment charge of $13 million was recorded in connection with the exit of the global distribution of BECCA products and is included in Restructuring and other charges in the accompanying consolidated statements of earnings (loss) for the three and nine months ended March 31, 2021. See Note 4 – Charges Associated with Restructuring and Other Activities for further information relating to the Post-COVID Business Acceleration Program. See “Impairment Testing During the Nine Months Ended March 31, 2021” below for further information relating to fiscal 2021 impairment charges related to GLAMGLOW.

Other intangible assets consist of the following:

March 31, 2020 June 30, 2019
(In millions)
Gross
Carrying
Value
Accumulated
Amortization
Total Net
Book
Value
Gross
Carrying
Value
Accumulated
Amortization
Total Net
Book
Value
Amortizable intangible assets:
Customer lists and other $ 1,482 $ 411 $ 1,071 $ 684 $ 369 $ 315
License agreements 43 43 — 43 43 —
$ 1,525 $ 454 $ 1,071 $ 727 $ 412 $ 315
Non-amortizable intangible assets:
Trademarks 1,119 888
Total intangible assets $ 2,190 $ 1,203


	March 31, 2021						June 30, 2020
(In millions)	Gross Carrying Value		Accumulated Amortization		Total Net Book Value		Gross Carrying Value		Accumulated Amortization		Total Net Book Value
Amortizable intangible assets:
Customer lists and other	$	1,641	$	564	$	1,077	$	1,590	$	475	$	1,115
License agreements	43		43		0		43		43		0
	$	1,684	$	607	1,077		$	1,633	$	518	1,115
Non-amortizable intangible assets:
Trademarks and other					1,217						1,223
Total intangible assets					$	2,294					$	2,338

The aggregate amortization expense related to amortizable intangible assets was ~~$23~~$25 million and ~~$13~~$23 million for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~was $45~~$77 million and ~~$38~~$45 million for the nine months ended March 31, 2021 and 2020, ~~and 2019,~~ respectively.

The estimated aggregate amortization expense for the remainder of fiscal ~~2020~~2021 and for each of the next four fiscal years is as follows:

Fiscal
(In millions) 2020 2021 2022 2023 2024
Estimated aggregate amortization expense $ 30 $ 104 $ 103 $ 103 $ 101


	Fiscal
(In millions)	2021		2022		2023		2024		2025
Estimated aggregate amortization expense	$	24	$	101	$	100	$	100	$	100

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment Testing During the Nine Months Ended March 31, 2021

During November 2020, given the actual and the estimate of the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting the Company and lower than expected results from geographic expansion, the Company made further revisions to the internal forecasts relating to its GLAMGLOW reporting unit. The Company concluded that the changes in circumstances in this reporting unit triggered the need for an interim impairment review of its trademark and goodwill. These changes in circumstances were also an indicator that the carrying amounts of GLAMGLOW's long-lived assets, including customer lists, may not be recoverable. Accordingly, the Company performed an interim impairment test for the trademark and a recoverability test for the long-lived assets as of November 30, 2020. The Company concluded that the carrying value of the trademark for GLAMGLOW exceeded its estimated fair value, which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded an impairment charge of $21 million. In addition, the Company concluded that the carrying value of the GLAMGLOW customer lists intangible asset was fully impaired and recorded an impairment charge of $6 million. The fair value of all other long-lived assets of GLAMGLOW exceeded their carrying values and were not impaired as of November 30, 2020. After adjusting the carrying values of the trademark and customer lists intangible assets, the Company completed an interim quantitative impairment test for goodwill and recorded a goodwill impairment charge of $54 million, reducing the carrying value of goodwill for the GLAMGLOW reporting unit to 0. The fair value of the GLAMGLOW reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. The impairment charges for the nine months ended March 31, 2021 were reflected in the skin care product category and in the Americas region. As of March 31, 2021, the remaining carrying value of the trademark related to the GLAMGLOW reporting unit was $36 million.

Impairment Testing During the Nine Months Ended March 31, 2020

During December 2019, given the continuing declines in prestige makeup, generally in North America, and the ongoing competitive activity, the Company’s Too Faced, BECCA and Smashbox reporting units made revisions to their internal forecasts concurrent with the ~~Company’s~~Company's brand strategy review process. The Company concluded that the changes in circumstances in these reporting units triggered the need for an interim impairment review of their respective trademarks and goodwill. These changes in circumstances were also an indicator that the carrying amounts of their respective long-lived assets, including customer lists, may not be recoverable. Accordingly, the Company performed interim impairment tests for the trademarks and recoverability tests for the long-lived assets as of December 31, 2019. The Company concluded that the carrying amounts of the long-lived assets were recoverable. The Company also concluded that the carrying values of the trademarks exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded impairment charges totaling $266 million for trademarks during the three months ended December 31, 2019. After adjusting the carrying value of the trademarks, the Company completed interim quantitative impairment tests for goodwill and recorded goodwill impairment charges for each of these reporting units, totaling $511 million during the three months ended December 31, 2019. The fair value of each reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During March 2020, given the actual and the estimate of the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting the Company, the Company made revisions to the internal forecasts relating to its Too Faced, BECCA, Smashbox and GLAMGLOW reporting units. The Company concluded that the changes in circumstances in these reporting units triggered the need for an interim impairment review of their respective trademarks and goodwill. These changes in circumstances were also an indicator that the carrying amounts of their respective long-lived assets, including customer lists, may not be recoverable. Accordingly, the Company performed interim impairment tests for the trademarks and recoverability tests for the long-lived assets as of March 31, 2020. The Company concluded that the carrying amounts of the long-lived assets were recoverable. The Company also concluded that the carrying values of the trademarks exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows based on probability weighted cash flows, and recorded impairment charges. After adjusting the carrying value of the trademarks, the Company completed interim quantitative impairment tests for goodwill and recorded goodwill impairment charges for each of these reporting units. The fair value of each reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows, based on probability weighted undiscounted cash flows, and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit.

A summary of the impairment charges for the three and nine months ended March 31, 2020 and the remaining trademark and goodwill carrying values as of March 31, 2020, for each reporting unit, are as follows:

Impairment Charge
(In millions) Three Months Ended
March 31, 2020 Nine Months Ended
March 31, 2020 Carrying Value
Reporting Unit: Product Category Region Trademark Goodwill Trademark Goodwill Trademark Goodwill
Too Faced Makeup The Americas $ 42 $ 162 $ 253 $ 592 $ 272 $ 13
BECCA Makeup The Americas 14 35 47 70 51 28
Smashbox Makeup The Americas 1 26 23 72 32 —
GLAMGLOW Skin care The Americas 1 52 1 52 62 62
Total $ 58 $ 275 $ 324 $ 786 $ 417 $ 103

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~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~Impairment Testing During the Nine Months Ended March 31, 2019~~

During December 2018, the Company’s Smashbox reporting unit made revisions to its internal forecasts reflecting a slowdown of its makeup business driven by increased competitive activity and lower than expected growth in key retail channels for the brand. The Company concluded that these changes in circumstances in the Smashbox reporting unit triggered the need for an interim impairment review of its trademark and goodwill. Accordingly, the Company performed an interim impairment test as of December 31, 2018. The Company concluded that the carrying value of the Smashbox trademark exceeded its estimated fair value, which was determined utilizing a royalty rate to determine discounted projected future cash flows. As a result, the Company recognized an impairment charge of $18 million for the trademark during the three months ended December 31, 2018. After adjusting the carrying value of the trademark, the Company completed an interim quantitative impairment test for goodwill and recorded a goodwill impairment charge related to the Smashbox reporting unit of $20 million during the three months ended December 31, 2018.

During March 2019, the Company’s Smashbox reporting unit made additional revisions to its internal forecasts reflecting the continued slowdown of its makeup business driven by ongoing competitive activity and lower than expected growth in key retail channels for the brand. The Company concluded that these changes in circumstances in the Smashbox reporting unit triggered the need for an interim impairment review of its trademark and goodwill. Accordingly, the Company performed an interim impairment test as of March 31, 2019. The Company concluded that the carrying value of the Smashbox trademark exceeded its estimated fair value, which was determined utilizing a royalty rate to determine discounted projected future cash flows. As a result, the Company recognized an impairment charge of $4 million for the trademark during the three months ended March 31, 2019. After adjusting the carrying value of the trademark, the Company completed an interim quantitative impairment test for goodwill and recorded a goodwill impairment charge related to the Smashbox reporting unit of $48 million during the three months ended March 31, 2019.

The Company compared the fair value of the Smashbox reporting unit with its carrying amount to calculate the impairment charge. The fair values of the reporting unit as of December 31, 2018 and March 31, 2019 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 unit. These impairment charges were reflected in the makeup product category and in The Americas region.


			Impairment Charge
(In millions)			Three Months Ended March 31, 2020				Nine Months Ended March 31, 2020				Carrying Value
Reporting Unit:	Product Category	Region	Trademark		Goodwill		Trademark		Goodwill		Trademark		Goodwill
Too Faced	Makeup	The Americas	$	42	$	162	$	253	$	592	$	272	$	13
BECCA	Makeup	The Americas	14		35		47		70		51		28
Smashbox	Makeup	The Americas	1		26		23		72		32		0
GLAMGLOW	Skin care	The Americas	1		52		1		52		62		62
Total			$	58	$	275	$	324	$	786	$	417	$	103

~~NOTE 4 - LEASES~~

During the first quarter of fiscal 2020, the Company adopted ASC 842 using the modified retrospective transition approach permitted under the new standard for leases that existed at July 1, 2019 and, accordingly, the prior comparative periods were not restated. Under this method, the Company was required to assess the remaining future payments of existing leases as of July 1, 2019. Additionally, as of the date of adoption, the Company elected the package of practical expedients that did not require the Company to assess whether expired or existing contracts contain leases as defined in ASC 842, did not require reassessment of the lease classification (i.e. operating lease vs. finance lease) for expired or existing leases, and did not require a change to the accounting for previously capitalized initial direct costs.

The adoption of this standard impacted the Company’s consolidated balance sheet due to the recognition of right-of-use (“ROU”) assets and associated lease liabilities related to operating leases as compared to the previous accounting. The accounting for finance leases under ASC 842 is consistent with the prior accounting for capital leases. The impact of the adoption of this standard on the Company’s consolidated statements of earnings (loss) and consolidated statement of cash flows was not material.

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~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Per the guidance of ASC 842, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset. The Company recognizes a lease liability and a related ROU asset at the commencement date for leases on its consolidated balance sheet, excluding short-term leases as noted below. The lease liability is equal to the present value of unpaid lease payments over the remaining lease term. The Company’s lease term at the commencement date may reflect options to extend or terminate the lease when it is reasonably certain that such options will be exercised. To determine the present value of the lease liability, the Company uses an incremental borrowing rate, which is defined as the rate of interest that the Company would have to pay to borrow (on a collateralized basis over a similar term) an amount equal to the lease payments in similar economic environments. The ROU asset is based on the corresponding lease liability adjusted for certain costs such as initial direct costs, prepaid lease payments and lease incentives received. Both operating and finance lease ROU assets are reviewed for impairment, consistent with other long-lived assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. After an ROU asset is impaired, any remaining balance of the ROU asset is amortized on a straight-line basis over the shorter of the remaining lease term or the estimated useful life.

After the lease commencement date, the Company evaluates lease modifications, if any, that could result in a change in the accounting for leases. For a lease modification, an evaluation is performed to determine if it should be treated as either a separate lease or a change in the accounting of an existing lease. In addition, significant changes in events or circumstances within the Company’s control are assessed to determine whether a change in the accounting for leases is required.

Certain of the Company’s leases provide for variable lease payments for the right to use an underlying asset that vary due to changes in facts and circumstances occurring after the commencement date, other than the passage of time. Variable lease payments that are dependent on an index or rate (e.g., Consumer Price Index) are included in the initial measurement of the lease liability, the initial measurement of the ROU asset, and the lease classification test based on the index or rate as of the commencement date. Any changes from the commencement date estimation of the index- and rate-based variable payments are expensed as incurred in the period of the change. Variable lease payments that are not known at the commencement date and are determinable based on the performance or use of the underlying asset, are not included in the initial measurement of the lease liability or the ROU asset, but instead are expensed as incurred. The Company’s variable lease payments primarily include rents based on a percentage of sales in excess of stipulated levels, common area maintenance based on the percentage of the total square footage leased by the Company, as well as costs relating to embedded leases, such as third-party manufacturing agreements.

~~Upon the adoption of ASC 842, the Company made the following accounting policy elections:~~

•Certain of the Company’s contracts contain lease components as well as non-lease components, such as an agreement to purchase services. Unless an accounting policy is elected to the contrary, the contract consideration must be allocated to the separate lease and non-lease components in accordance with ASC 842. For purposes of allocating contract consideration, the Company elected not to separate the lease components from non-lease components for all asset classes. This was applied to all existing leases as of July 1, 2019 and will be applied to new leases on an ongoing basis.

•The Company elected not to apply the measurement and recognition requirements of ASC 842 to short-term leases (i.e. leases with a term of 12 months or less). Accordingly, short-term leases will not be recorded as ROU assets or lease liabilities on the Company’s consolidated balance sheets, and the related lease payments will be recognized in net earnings on a straight-line basis over the lease term.

•For certain leases relating to automobiles, information technology equipment and office equipment, the Company elected to apply the guidance of ASC 842 utilizing a portfolio approach. Under this approach, the Company combined and accounted for leases (as a portfolio) with similar characteristics (e.g., lease term, discount rates, etc.) as a single lease, provided its application is not materially different when compared to the application at the individual lease level.

As a result of the adoption of ASC 842, the Company recorded a cumulative adjustment of $29 million, net of tax, as a reduction to its fiscal 2020 opening balance of retained earnings, primarily to reflect the fair value of operating lease ROU assets that were impaired at, or prior to, the adoption date. In addition, the Company recognized operating lease ROU assets and liabilities of $2,598 million and $2,764 million, respectively, as of July 1, 2019. Finance lease ROU assets and liabilities are not material.

The Company has operating and finance leases primarily for real estate properties, including corporate offices, facilities to support the Company’s manufacturing, assembly, research and development and distribution operations and retail stores, as well as information technology equipment, automobiles and office equipment, with remaining terms of approximately 1 year to 59 years. Some of the Company’s lease contracts include options to extend the leases for up to 30 years, while others include options to terminate the leases within 25 years.

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~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~A summary of total lease costs and other information for the periods relating to the Company’s finance and operating leases is as follows:~~

(In millions) Three Months Ended
March 31, 2020 Nine Months Ended
March 31, 2020
Total lease cost
Finance lease cost:
Amortization of right-of-use assets $ 3 $ 9
Interest on lease liabilities — —
Operating lease cost 150 383
Short-term lease cost 5 20
Variable lease cost 41 133
Total $ 199 $ 545
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 350
Financing cash flows from finance leases $ 10
Right-of-use assets obtained in exchange for new operating lease liabilities $ 216
Weighted-average remaining lease term – finance leases 2 years
Weighted-average remaining lease term – operating leases 11 years
Weighted-average discount rate – finance leases 2.7 %
Weighted-average discount rate – operating leases 2.5 %

The total future minimum lease payments, over the remaining lease term, relating to the Company’s operating and finance leases for the remainder of fiscal 2020 and for each of the next four fiscal years and thereafter is as follows:

(In millions) Operating Leases Finance Leases
Remainder of fiscal 2020 $ 113 $ 4
Fiscal 2021 397 7
Fiscal 2022 364 3
Fiscal 2023 324 1
Fiscal 2024 291 —
Thereafter 1,586 —
Total future minimum lease payments 3,075 15
Less imputed interest (416) —
Total $ 2,659 $ 15

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~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~Operating lease and finance lease liabilities included in the consolidated balance sheet are as follows:~~

March 31, 2020
(In millions) Operating Leases Finance Leases
Total current liabilities $ 371 $ 9
Total noncurrent liabilities 2,288 6
Total $ 2,659 $ 15

The ROU assets and lease liabilities related to finance leases are included in Other assets and in Current debt and Long-term debt, respectively, in the accompanying consolidated balance sheet as of March 31, 2020.

~~The following table summarizes scheduled maturities of the Company’s contractual obligations relating to operating leases for which cash flows are fixed and determinable as of June 30, 2019:~~


~~(In millions)~~	~~Payments Due in Fiscal Year~~⁽¹⁾
~~Fiscal 2020~~	$	~~421~~
~~Fiscal 2021~~	~~383~~
~~Fiscal 2022~~	~~348~~
~~Fiscal 2023~~	~~316~~
~~Fiscal 2024~~	~~289~~
~~Thereafter~~	~~1,625~~
~~Total contractual obligations~~	$	~~3,382~~

⁽¹⁾Minimum operating lease commitments only include base rent. Certain leases provide for contingent rents that are not measurable at inception and primarily include rents based on a percentage of sales in excess of stipulated levels, as well as common area maintenance. These amounts are excluded from minimum operating lease commitments and are included in the determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably measurable. Such amounts have not been material to total rent expense.

The Company recognized $13 million of long-lived asset impairments, included in Impairments of other intangible and long-lived assets, in the accompanying consolidated statements of earnings (loss) for the three and nine months ended March 31, 2020, related to operating lease ROU assets and the related property, plant and equipment in certain freestanding stores primarily in North America due to the impact of the COVID-19 pandemic.

As of March 31, 2020, the Company has additional operating lease obligations, relating primarily to facilities to support the Company’s manufacturing operations, retail stores, and corporate offices, that have not yet commenced of $98 million. These leases will commence between fiscal 2020 and fiscal 2030 with lease terms of 1 year to 20 years.

NOTE 54 – CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES

Charges associated with restructuring activities for the three months ended March 31, 2021 were as follows:


	Sales Returns (included in Net Sales)		Cost of Sales		Operating Expenses				Total
(In millions)					Restructuring Charges		Other Charges
Leading Beauty Forward Program	$	0	$	(1)	$	3	$	4	$	6
Post-COVID Business Acceleration Program	10		5		121		3		139
Total	$	10	$	4	$	124	$	7	$	145

Charges associated with restructuring activities for the nine months ended March 31, 2021 were as follows:


	Sales Returns (included in Net Sales)		Cost of Sales		Operating Expenses				Total
(In millions)					Restructuring Charges		Other Charges
Leading Beauty Forward Program	$	0	$	4	$	(7)	$	9	$	6
Post-COVID Business Acceleration Program	10		5		167		3		185
Total	$	10	$	9	$	160	$	12	$	191

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Leading Beauty Forward Program

In May 2016, the Company announced a multi-year initiative (“Leading Beauty ~~Forward”~~Forward Program” or ~~“LBF”~~“LBF Program”) to build on its strengths and better leverage its cost structure to free resources for investment to continue its growth momentum. The LBF Program is designed to enhance the Company’s go-to-market capabilities, reinforce its leadership in global prestige beauty and continue creating sustainable value. As of June 30, 2019, the Company concluded the approvals of all major initiatives under the LBF Program related to the optimization of select corporate functions, supply chain activities, and corporate and regional market support structures, as well as the exit of underperforming businesses, and expects to substantially complete those initiatives through fiscal 2021.

LBF Program Approvals

The LBF Program approved restructuring and other charges expected to be incurred were:

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~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Sales
Returns
(included in
Net Sales) Cost of Sales Operating Expenses Total
(In millions) Restructuring
Charges Other
Charges
Total Charges Approved
Cumulative through March 31, 2020 $ 14 $ 88 $ 507 $ 358 $ 967


	Sales Returns (included in Net Sales)		Cost of Sales		Operating Expenses				Total
(In millions)					Restructuring Charges		Other Charges
Total Charges (Adjustments) Approved
Cumulative through June 30, 2020	$	13	$	85	$	511	$	358	$	967
Nine months ended March 31, 2021	1		0		(11)		10		0
Cumulative through March 31, 2021	$	14	$	85	$	500	$	368	$	967

(In millions) Employee-
Related
Costs Asset-
Related
Costs Contract
Terminations Other Exit
Costs Total
Restructuring Charges Approved
Cumulative through March 31, 2020 $ 461 $ 7 $ 25 $ 14 $ 507
Included in the above table, cumulative LBF Program restructuring initiatives approved by the Company by major cost type were:


(In millions)	Employee- Related Costs		Asset- Related Costs		Contract Terminations		Other Exit Costs		Total
Restructuring Charges (Adjustments) Approved
Cumulative through June 30, 2020	$	460	$	28	$	7	$	16	$	511
Nine months ended March 31, 2021	(13)		0		2		0		(11)
Cumulative through March 31, 2021	$	447	$	28	$	9	$	16	$	500

The Company records approved charges associated with restructuring and other activities once the relevant accounting criteria have been met.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LBF Program Restructuring and Other Charges

Total cumulative charges recorded associated with restructuring and other activities for the LBF Program were:

(In millions) Sales
Returns
(included in
Net Sales) Cost of Sales Operating Expenses Total
Restructuring
Charges Other
Charges
Total Charges
Cumulative through June 30, 2019 $ 14 $ 55 $ 457 $ 265 $ 791
Nine months ended March 31, 2020 — 9 20 34 63
Cumulative through March 31, 2020 $ 14 $ 64 $ 477 $ 299 $ 854

(In millions) Employee-
Related
Costs Asset-
Related
Costs Contract
Terminations Other Exit
Costs Total
Restructuring Charges (Adjustments)
Cumulative through June 30, 2019 $ 445 $ 4 $ 3 $ 5 $ 457
Nine months ended March 31, 2020 (5) 19 5 1 20
Cumulative through March 31, 2020 $ 440 $ 23 $ 8 $ 6 $ 477


(In millions)	Sales Returns (included in Net Sales)		Cost of Sales		Operating Expenses				Total
					Restructuring Charges		Other Charges
Total Charges (Adjustments)
Cumulative through June 30, 2020	$	14	$	65	$	491	$	304	$	874
Nine months ended March 31, 2021	0		4		(7)		9		6
Cumulative through March 31, 2021	$	14	$	69	$	484	$	313	$	880

For the three and nine months ended March 31, 2020, the Company recognized $18 million of asset-related costs due to the impairment of operating lease ROU assets as a result of closed freestanding retail stores, approved under LBF, whereby the ability to sublease the locations was negatively impacted by the COVID-19 pandemic. These charges were initially approved under LBF prior to fiscal 2020 as contract terminations related to continuing lease payments to landlords after exiting the location.


(In millions)	Employee- Related Costs		Asset- Related Costs		Contract Terminations		Other Exit Costs		Total
Restructuring Charges (Adjustments)
Cumulative through June 30, 2020	$	451	$	27	$	6	$	7	$	491
Nine months ended March 31, 2021	(10)		0		1		2		(7)
Cumulative through March 31, 2021	$	441	$	27	$	7	$	9	$	484

Employee-related costs reflect adjustments to the accrual estimate for certain employees who either resigned or transferred to other existing positions within the Company.

Changes in accrued restructuring charges for the nine months ended March 31, ~~2020~~2021 relating to the LBF Program were:


(In millions)	(In millions)	Employee- Related Costs		Asset- Related Costs		Contract Terminations		Other Exit Costs		Total		(In millions)	Employee- Related Costs		Asset- Related Costs		Contract Terminations		Other Exit Costs		Total
Balance at June 30, 2019		$	202	$	—	$	—	$	1	$	203
Balance at June 30, 2020												Balance at June 30, 2020	$	112	$	0	$	0	$	0	$	112
Charges (adjustments)	Charges (adjustments)	(5)		19		5		1		20		Charges (adjustments)	(10)		0		1		2		(7)
Cash payments	Cash payments	(74)		—		(5)		(2)		(81)		Cash payments	(50)		0		(1)		0		(51)
Translation adjustments	Translation adjustments	(2)		—		—		—		(2)		Translation adjustments	1		0		0		0		1
Non-cash asset write-offs		—		(19)		—		—		(19)
Balance at March 31, 2020		$	121	$	—	$	—	$	—	$	121
Balance at March 31, 2021												Balance at March 31, 2021	$	53	$	0	$	0	$	2	$	55

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~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Accrued restructuring charges at March 31, ~~2020~~2021 relating to the LBF Program are expected to result in cash expenditures funded from cash provided by operations of approximately ~~$35~~$37 million, ~~$63 million, $20~~$14 million and $3$4 million for the remainder of fiscal ~~2020~~2021 and for fiscal ~~2021,~~ 2022 and 2023, respectively.

Additional information about the LBF Program is included in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2019.~~2020.

Post-COVID Business Acceleration Program

On August 20, 2020, the Company announced a two-year restructuring program, Post-COVID Business Acceleration Program (the “PCBA Program”), designed to resize the Company's business against the dramatic shifts to its distribution landscape and consumer behaviors in the wake of the COVID-19 pandemic. The PCBA Program is designed to help improve efficiency and effectiveness by rebalancing resources to growth areas of prestige beauty. It is expected to further strengthen the Company by building upon the foundational capabilities in which the Company has invested.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The PCBA Program’s main areas of focus include accelerating the shift to online with the realignment of the Company’s distribution network reflecting freestanding store and certain department store closures, with a focus on North America and Europe, the Middle East & Africa; the reduction in brick-and-mortar point of sale employees and related support staff; and the redesign of the Company’s regional branded marketing organizations, plus select opportunities in global brands and functions. This program is expected to position the Company to better execute its long-term strategy while strengthening its financial flexibility.

At this time the Company estimates a net reduction over the duration of the PCBA Program in the range of approximately 1,500 to 2,000 positions globally, including temporary and part-time employees. This reduction takes into account the elimination of some positions, retraining and redeployment of certain employees and investment in new positions in key areas. The Company also estimates the closure over the duration of the PCBA Program of approximately 10% to 15% of its freestanding stores globally, primarily in Europe, the Middle East & Africa and in North America.

The Company plans to approve specific initiatives under the PCBA Program through fiscal 2022 and expects to complete those initiatives through fiscal 2023. The Company expects that the PCBA Program will result in related restructuring and other charges totaling between $400 million and $500 million, before taxes.

PCBA Program Approvals

The PCBA Program cumulative charges approved by the Company through March 31, 2021 were:


	Sales Returns (included in Net Sales)		Cost of Sales		Operating Expenses				Total
(In millions)					Restructuring Charges		Other Charges
Total Charges (Adjustments) Approved
Nine months ended March 31, 2021	$	39	$	(6)	$	180	$	17	$	230

Included in the above table, cumulative PCBA Program restructuring initiatives approved by the Company through March 31, 2021 by major cost type were:


(In millions)	Employee- Related Costs		Asset- Related Costs		Contract Terminations		Other Exit Costs		Total
Restructuring Charges Approved
Nine months ended March 31, 2021	$	73	$	99	$	5	$	3	$	180

Specific actions taken since the PCBA Program inception include:

•Optimize Distribution Network – To help restore profitability to pre-COVID-19 pandemic levels in certain areas of its distribution network and, as part of a broader initiative to be completed in phases, the Company has approved initiatives to close a number of underperforming freestanding stores, counters and other retail locations, mainly in certain affiliates in Europe, the Middle East & Africa and the United Kingdom, North America, Latin America and the Company's travel retail network. These anticipated closures reflect changing consumer behavior including higher demand for online and omnichannel capabilities. These activities will result in a net reduction in workforce, inventory and other asset write-offs, product returns, and termination of contracts.

•Optimize Digital Organization and Other Go-To-Market Organizations – The Company approved initiatives to enhance its go-to-market capabilities and shift more resources to support online growth. These actions will result in a net reduction of the workforce, which includes position eliminations, the re-leveling of certain positions and an investment in new capabilities.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

•Optimize Select Marketing, Brand and Global Functions – The Company has started to reduce its corporate office footprint and is moving toward the future of work in a post-COVID environment, by restructuring where and how its employees work and collaborate. These actions will result primarily in lease termination fees.

•Exit of the Global Distribution of BECCA Products – In reviewing the Company's brand portfolio to improve efficiency and to ensure the sustainability of long-term investments, the decision was made to exit the global distribution of BECCA products due to its limited distribution, the ongoing decline in product demand and the challenging environment caused by the COVID-19 pandemic. These activities resulted in charges for the impairment of goodwill and other intangible assets, product returns, termination of contracts, and employee severance. The Company expects to substantially complete these initiatives during fiscal 2022.

PCBA Program Restructuring and Other Charges

Restructuring charges are comprised of the following:

Employee-Related Costs – Employee-related costs are primarily comprised of severance and other post-employment benefit costs, calculated based on salary levels, prior service and other statutory minimum benefits, if applicable.

Asset-Related Costs – Asset-related costs primarily consist of asset write-offs or accelerated depreciation related to long-lived assets in certain freestanding stores (including rights associated with commercial operating leases and operating lease right-of-use assets) that will be taken out of service prior to their existing useful life as a direct result of a restructuring initiative. These costs also include goodwill and other intangible asset impairment charges relating to the exit of the global distribution of BECCA products.

Contract Terminations – Costs related to contract terminations include continuing payments to a third party after the Company has ceased benefiting from the rights conveyed in the contract, or a payment made to terminate a contract prior to its expiration.

Other Exit Costs – Other exit costs related to restructuring activities generally include costs to relocate facilities or employees, recruiting to fill positions as a result of relocation of operations, and employee outplacement for separated employees.

Other charges associated with restructuring activities are comprised of the following:

Sales Returns and Cost of Sales – Product returns (offset by the related cost of sales) and inventory write-offs or write-downs as a direct result of an approved restructuring initiative to exit certain businesses or locations will be recorded as a component of Net sales and/or Cost of sales when estimable and reasonably assured.

Other Charges – The Company approved other charges related to the design and implementation of approved initiatives, which are charged to Operating expenses as incurred and primarily include the following:

•Consulting and other professional services for organizational design of the future structures and processes as well as the implementation thereof,

•Temporary labor backfill,

•Costs to establish and maintain a Project Management Office (“PMO”) for the duration of the PCBA Program, including internal costs for employees dedicated solely to project management activities, and other PMO-related expenses incremental to the Company’s ongoing operations (e.g., rent and utilities), and

•Recruitment and training costs for new and reskilled employees to acquire and apply the capabilities needed to perform responsibilities as a direct result of an approved restructuring initiative.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company records approved charges associated with restructuring and other activities once the relevant accounting criteria have been met. Total cumulative charges recorded associated with restructuring and other activities for the PCBA Program were:


	Sales Returns (included in Net Sales)		Cost of Sales		Operating Expenses				Total
(In millions)					Restructuring Charges		Other Charges
Total Charges
Nine months ended March 31, 2021	$	10	$	5	$	167	$	3	$	185


(In millions)	Employee- Related Costs		Asset- Related Costs(1)		Contract Terminations		Other Exit Costs		Total
Restructuring Charges
Nine months ended March 31, 2021	$	70	$	93	$	4	$	0	$	167

(1)Asset-related costs include goodwill and other intangible asset impairment charges of $13 million and $34 million, respectively, relating to the exit of the global distribution of BECCA products.

Changes in accrued restructuring charges for the nine months ended March 31, 2021 relating to the PCBA Program were:


(In millions)	Employee- Related Costs		Asset- Related Costs		Contract Terminations		Other Exit Costs		Total
Charges	$	70	$	93	$	4	$	0	$	167
Cash payments	(8)		0		(4)		0		(12)
Noncash asset write-offs	0		(93)		0		0		(93)
Balance at March 31, 2021	$	62	$	0	$	0	$	0	$	62

Accrued restructuring charges at March 31, 2021 relating to the PCBA Program are expected to result in cash expenditures funded from cash provided by operations of approximately $37 million, $18 million, and $7 million for the remainder of fiscal 2021 and for fiscal 2022 and 2023, respectively.

NOTE 65 – DEBT

In ~~November 2019,~~August 2020, the Company repaid the remaining $750 million borrowed under its $1,500 million revolving credit facility that was outstanding as of June 30, 2020.

In March 2021, the Company completed a public offering of ~~$500~~$600 million aggregate principal amount of its ~~2.000%~~1.950% Senior Notes due ~~December 1, 2024~~March 15, 2031 (the “2024 Senior Notes”), $650 million aggregate principal amount of its 2.375% Senior Notes due December 1, 2029 (the “2029 Senior Notes”) and $650 million aggregate principal amount of its 3.125% Senior Notes due December 1, 2049 (the “2049“2031 Senior Notes”). The Company used some of the net proceeds from this offering for general corporate purposes, ~~including~~which included operating expenses, working capital and capital expenditures. In addition, the Company intends to ~~fund~~use the ~~acquisition of Have & Be and refinance its $500 million aggregate principal amount of 1.80%~~net proceeds from this offering to repay the 1.700% Senior Notes ~~that became~~ due ~~February 7, 2020.~~May 10, 2021 and fund a portion of the purchase price to increase the Company's investment in DECIEM Beauty Group Inc.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

These recently issued notes are summarized as follows:

Notes Issue Date Price Yield Unamortized
Debt
Discount Debt
Issuance
Costs Semi-annual
interest
payments
($ in millions)
2024 Senior Notes November 2019 99.421 % 2.122 % $ 3 $ 3 June 1/December 1
2029 Senior Notes ⁽¹⁾
November 2019 99.046 2.483 6 4 June 1/December 1
2049 Senior Notes November 2019 98.769 3.189 8 7 June 1/December 1


($ in millions)	Issue Date	Price		Yield		Unamortized Debt Discount		Debt Issuance Costs		Semi-annual interest payments
2031 Senior Notes (1)	March 2021	99.340	%	2.023	%	$	(4)	$	(4)	March 15/September 15

⁽¹⁾In ~~April and May 2019,~~March 2020, in anticipation of the issuance of the ~~2029~~2031 Senior Notes, the Company entered into a series of treasury lock agreements on a notional amount totaling ~~$500~~$200 million at a weighted-average all-in rate of ~~2.50%~~0.84%. The treasury lock agreements were settled upon the issuance of the new debt, and the Company recognized a ~~loss~~gain in OCI of ~~$33~~$11 million that is being amortized to interest expense over the life of the ~~2029~~2031 Senior Notes. As a result of the treasury lock agreements, as well as the debt discount and debt issuance costs, the effective interest rate on the ~~2029~~2031 Senior Notes will be ~~3.15%~~1.89% over the life of the debt.

~~In March 2020,~~See Note 16 – Subsequent Events for further information relating to the ~~Company borrowed $1,300 million under its existing $1,500 million revolving credit facility, and had $200 million of commercial paper outstanding as of~~debt repayment made subsequent to March 31, ~~2020.~~2021.

NOTE 76 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The Company enters into foreign currency forward contracts, and may enter into option contracts, to reduce the effects of fluctuating foreign currency exchange rates. In addition, the Company enters into interest rate derivatives to manage the effects of interest rate movements on the Company’s aggregate liability portfolio, including potential future debt issuances. During the first quarter of fiscal 2020, the Company entered into foreign currency forward contracts to hedge a portion of its net investment in certain foreign operations, which are designated as net investment hedges. The Company ~~entered~~enters into the net investment hedges to offset the risk of changes in the U.S. dollar value of the Company’s investment in these foreign operations due to fluctuating foreign exchange rates. Time value is excluded from the effectiveness assessment and is recognized under a systematic and rational method over the life of the hedging instrument in Selling, general and administrative expenses. The net gain or loss on net investment hedges is recorded within translation adjustments, as a component of accumulated OCI (“AOCI”) on the Company’s consolidated balance sheets, until the sale or substantially complete liquidation of the underlying assets of the Company’s investment. The Company also enters into foreign currency forward contracts, and may use option contracts, not designated as hedging instruments, to mitigate the change in fair value of specific assets and liabilities on the consolidated balance ~~sheet.~~sheets. At March 31, ~~2020,~~2021, the notional amount of derivatives not designated as hedging instruments was ~~$3,399~~$4,404 million. The Company does not utilize derivative financial instruments for trading or speculative purposes. Costs associated with entering into derivative financial instruments ~~are~~have not been material to the Company’s consolidated financial results.

~~Table of Contents~~

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

For each derivative contract entered into, where the Company looks to obtain hedge accounting treatment, the Company formally and contemporaneously documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking the hedge transaction, the nature of the risk being hedged, and how the hedging instruments’ effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. At inception, the Company evaluates the effectiveness of hedge relationships quantitatively, and has elected to perform, after initial evaluation, qualitative effectiveness assessments of certain hedge relationships to support an ongoing expectation of high effectiveness, if effectiveness testing is required. If based on the qualitative assessment, it is determined that a derivative has ceased to be a highly effective hedge, the Company will perform a quantitative assessment to determine whether to discontinue hedge accounting with respect to that derivative prospectively.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair values of the Company’s derivative financial instruments included in the consolidated balance sheets are presented as follows:


		Asset Derivatives								Liability Derivatives									Asset Derivatives					Liability Derivatives
			Fair Value ⁽¹⁾							Fair Value ⁽¹⁾								Fair Value (1)					Fair Value (1)
(In millions)	(In millions)	Balance Sheet Location	March 31 2020		June 30 2019		Balance Sheet Location	March 31 2020		June 30 2019		(In millions)	Balance Sheet Location	March 31 2021		June 30 2020		Balance Sheet Location	March 31 2021		June 30 2020
Derivatives Designated as Hedging Instruments	Derivatives Designated as Hedging Instruments											Derivatives Designated as Hedging Instruments
Foreign currency cash flow hedges	Foreign currency cash flow hedges	Prepaid expenses and other current assets	$	48	$	23	Other accrued liabilities	$	3	$	4	Foreign currency cash flow hedges	Prepaid expenses and other current assets	$	16	$	26	Other accrued liabilities	$	21	$	3
Net investment hedges	Net investment hedges	Prepaid expenses and other current assets	—		—		Other accrued liabilities	17		—		Net investment hedges	Prepaid expenses and other current assets	115		21		Other accrued liabilities	0		62
Interest rate-related derivatives	Interest rate-related derivatives	Prepaid expenses and other current assets	14		3		Other accrued liabilities	1		26		Interest rate-related derivatives	Prepaid expenses and other current assets	7		15		Other accrued liabilities	15		3

Total Derivatives Designated as Hedging Instruments	Total Derivatives Designated as Hedging Instruments		62		26			21		30		Total Derivatives Designated as Hedging Instruments		138		62			36		68

Derivatives Not Designated as Hedging Instruments	Derivatives Not Designated as Hedging Instruments											Derivatives Not Designated as Hedging Instruments
Foreign currency forward contracts	Foreign currency forward contracts	Prepaid expenses and other current assets	24		4		Other accrued liabilities	24		2		Foreign currency forward contracts	Prepaid expenses and other current assets	5		40		Other accrued liabilities	108		15

Total derivatives	Total derivatives		$	86	$	30		$	45	$	32	Total derivatives		$	143	$	102		$	144	$	83

⁽¹⁾See Note 87 – Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined.

2021

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amounts of the gains and losses related to the Company’s derivative financial instruments designated as hedging instruments that are included in the assessment of effectiveness are as follows:

Amount of Gain or (Loss)
Recognized in OCI on
Derivatives Location of Gain or
(Loss) Reclassified
from AOCI into
Earnings
Amount of Gain or (Loss)
Reclassified from AOCI into
Earnings⁽¹⁾
Three Months Ended
March 31 Three Months Ended
March 31
(In millions) 2020 2019 2020 2019
Derivatives in Cash Flow Hedging Relationships:
Foreign currency forward contracts $ 46 $ 2 Net sales $ 10 $ 8
Interest rate-related derivatives (2) — Interest expense — 1
44 2 Total derivatives $ 10 $ 9
Derivatives in Net Investment Hedging Relationships⁽²⁾:
Foreign currency forward contracts⁽³⁾
(20) —
Total derivatives $ 24 $ 2

^{Amount of Gain (Loss)
Recognized in OCI on
Derivatives Location of Gain (Loss)
Reclassified from AOCI
into Earnings (Loss) Amount of Gain (Loss)
Reclassified from AOCI into Earnings (Loss)(1)
Three Months Ended
March 31 Three Months Ended
March 31
(In millions) 2021 2020 2021 2020
Derivatives in Cash Flow Hedging Relationships:
Foreign currency forward contracts $ 22 $ 46 Net sales $ (7) $ 10
Interest rate-related derivatives 11 (2) Interest expense (1) 0
33 44 (8) 10
Derivatives in Net Investment Hedging Relationships(2):
Foreign currency forward contracts(3) 125 (20) 0 0
Total derivatives $ 158 $ 24 $ (8) $ 10}

(1)The amount reclassified into earnings (loss) as a result of the discontinuance of cash flow hedges because probable forecasted transactions will no longer occur by the end of the original time period was not material.

(2)During the three months ended March 31, 2021 and 2020, the gain recognized in earnings (loss) from net investment hedges related to the amount excluded from effectiveness testing was $5 million and $12 million, respectively.

(3)Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets.


	Amount of Gain (Loss) Recognized in OCI on Derivatives				Location of Gain (Loss) Reclassified from AOCI into Earnings	Amount of Gain (Loss) Reclassified from AOCI into Earnings(1)
	Nine Months Ended March 31					Nine Months Ended March 31
(In millions)	2021		2020			2021		2020
Derivatives in Cash Flow Hedging Relationships:

Foreign currency forward contracts	$	(43)	$	50	Net sales	$	(11)	$	29
Interest rate-related derivatives	14		(11)		Interest expense	(2)		0
	(29)		39			(13)		29
Derivatives in Net Investment Hedging Relationships(2):
Foreign currency forward contracts(3)	(17)		(54)			0		0
Total derivatives	$	(46)	$	(15)		$	(13)	$	29

(1)The amount reclassified into earnings as a result of the discontinuance of cash flow hedges because probable forecasted transactions will no longer occur by the end of the original time period was not material.

⁽²⁾During the ~~three~~nine months ended March 31, 2021 and 2020, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was ~~$12 million.~~$15 million and $37 million, respectively.

⁽³⁾Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets.

Amount of Gain or (Loss)
Recognized in OCI on
Derivatives Location of Gain or
(Loss) Reclassified
from AOCI into
Earnings
Amount of Gain or (Loss)
Reclassified from AOCI into
Earnings⁽¹⁾
Nine Months Ended
March 31 Nine Months Ended
March 31
(In millions) 2020 2019 2020 2019
Derivatives in Cash Flow Hedging Relationships:
Foreign currency forward contracts $ 50 $ 18 Net sales $ 29 $ 15
Interest rate-related derivatives (11) — Interest expense — 1
39 18 Total derivatives $ 29 $ 16
Derivatives in Net Investment Hedging Relationships⁽²⁾:
Foreign currency forward contracts⁽³⁾
(54) —
Total derivatives $ (15) $ 18

⁽¹⁾The amount reclassified into earnings as a result of the discontinuance of cash flow hedges because probable forecasted transactions will no longer occur by the end of the original time period was not material.

⁽²⁾~~During the nine months ended March 31, 2020, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $37 million.~~

⁽³⁾~~Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets.~~

2122

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


			Amount of Gain or (Loss) Recognized in Earnings on Derivatives ⁽¹⁾																					Amount of Gain (Loss) Recognized in Earnings (Loss) on Derivatives (1)
		Location of Gain or (Loss) Recognized in Earnings on Derivatives																				Location of Gain (Loss) Recognized in Earnings (Loss) on Derivatives
					Three Months Ended March 31									Nine Months Ended March 31						Location of Gain (Loss) Recognized in Earnings (Loss) on Derivatives				Three Months Ended March 31			Nine Months Ended March 31
(In millions)	(In millions)				2020			2019			2020			2019	(In millions)		Location of Gain (Loss) Recognized in Earnings (Loss) on Derivatives	2021							2020
Derivatives in Fair Value Hedging Relationships:	Derivatives in Fair Value Hedging Relationships:													Derivatives in Fair Value Hedging Relationships:

Interest rate swap contracts	Interest rate swap contracts	Interest expense	$	12		$	8		$	13		$	17	Interest rate swap contracts		Interest expense		$	(18)	$	12	$	(23)		$	13

⁽¹⁾Changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt.

Additional information regarding the cumulative amount of fair value hedging gain (loss) recognized in earnings for items designated and qualifying as hedged items in fair value hedges is as follows:


(In millions)	(In millions)					(In millions)
Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included	Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included	Carrying Amount of the Hedged Liabilities		Cumulative Amount of Fair Value Hedging Gain/(Loss) Included in the Carrying Amount of the Hedged Liability		Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included	Carrying Amount of the Hedged Liabilities		Cumulative Amount of Fair Value Hedging Gain (Loss) Included in the Carrying Amount of the Hedged Liability
		March 31, 2020		March 31, 2020			March 31, 2021		March 31, 2021
Current debt	Current debt	$	—	$	—	Current debt	$	451	$	1
Long-term debt	Long-term debt	713		14		Long-term debt	936		(9)
Total debt	Total debt	$	713	$	14	Total debt	$	1,387	$	(8)

2223

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Additional information regarding the effects of fair value and cash flow hedging relationships for derivatives designated and qualifying as hedging instruments is as follows:

Three Months Ended March 31
2020 2019
(In millions) Net Sales Interest
expense Net Sales Interest
expense
Total amounts of income and expense line items presented in the consolidated statements of earnings (loss) in which the effects of fair value and cash flow hedges are recorded $ 3,345 $ 42 $ 3,744 $ 32
The effects of fair value and cash flow hedging relationships:
Gain (loss) on fair value hedge relationships – interest rate contracts:
Hedged item Not applicable (12) Not applicable (8)
Derivatives designated as hedging instruments Not applicable 12 Not applicable 8
Gain (loss) on cash flow hedge relationships – interest rate contracts:
Amount of gain reclassified from AOCI into earnings Not applicable — Not applicable 1
Gain (loss) on cash flow hedge relationships – foreign currency forward contracts:
Amount of gain reclassified from AOCI into earnings 10 Not applicable 8 Not applicable


	Three Months Ended March 31
	2021				2020
(In millions)	Net Sales		Interest Expense		Net Sales		Interest Expense
Total amounts of income and expense line items presented in the consolidated statements of earnings (loss) in which the effects of fair value and cash flow hedges are recorded	$	3,864	$	43	$	3,345	$	42

The effects of fair value and cash flow hedging relationships:
Gain (loss) on fair value hedge relationships – interest rate contracts:
Hedged item	Not applicable		18		Not applicable		(12)
Derivatives designated as hedging instruments	Not applicable		(18)		Not applicable		12

Gain (loss) on cash flow hedge relationships – interest rate contracts:
Amount of loss reclassified from AOCI into earnings (loss)	Not applicable		(1)		Not applicable		0

Gain (loss) on cash flow hedge relationships – foreign currency forward contracts:
Amount of gain reclassified from AOCI into earnings (loss)	(7)		Not applicable		10		Not applicable

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended March 31
2020 2019
(In millions) Net Sales Interest Expense Net Sales Interest Expense
Total amounts of income and expense line items presented in the consolidated statements of earnings (loss) in which the effects of fair value and cash flow hedges are recorded $ 11,864 $ 112 $ 11,273 $ 101
The effects of fair value and cash flow hedging relationships:
Gain (loss) on fair value hedge relationships – interest rate contracts:
Hedged item Not applicable (13) Not applicable (17)
Derivatives designated as hedging instruments Not applicable 13 Not applicable 17
Gain (loss) on cash flow hedge relationships – interest rate contracts:
Amount of gain reclassified from AOCI into earnings Not applicable — Not applicable 1
Gain (loss) on cash flow hedge relationships – foreign currency forward contracts:
Amount of gain reclassified from AOCI into earnings 29 Not applicable 15 Not applicable


	Nine Months Ended March 31
	2021				2020
(In millions)	Net Sales		Interest Expense		Net Sales		Interest Expense
Total amounts of income and expense line items presented in the consolidated statements of earnings in which the effects of fair value and cash flow hedges are recorded	$	12,279	$	131	$	11,864	$	112

The effects of fair value and cash flow hedging relationships:
Gain (loss) on fair value hedge relationships – interest rate contracts:
Hedged item	Not applicable		23		Not applicable		(13)
Derivatives designated as hedging instruments	Not applicable		(23)		Not applicable		13

Gain (loss) on cash flow hedge relationships – interest rate contracts:
Amount of loss reclassified from AOCI into earnings	Not applicable		(2)		Not applicable		0

Gain (loss) on cash flow hedge relationships – foreign currency forward contracts:
Amount of gain reclassified from AOCI into earnings	(11)		Not applicable		29		Not applicable

The ~~amounts~~amount of ~~the~~ gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments are presented as follows:


			Amount of Gain or (Loss) Recognized in Earnings on Derivatives																							Amount of Gain (Loss) Recognized in Earnings (Loss) on Derivatives
		Location of Gain or (Loss) Recognized in Earnings on Derivatives	Three Months Ended March 31									Nine Months Ended March 31								Location of Gain (Loss) Recognized in Earnings (Loss) on Derivatives			Three Months Ended March 31						Nine Months Ended March 31
(In millions)	(In millions)				2020			2019			2020			2019	(In millions)		Location of Gain (Loss) Recognized in Earnings (Loss) on Derivatives	2021			2020			2021			2020
Derivatives Not Designated as Hedging Instruments:	Derivatives Not Designated as Hedging Instruments:													Derivatives Not Designated as Hedging Instruments:

Foreign currency forward contracts	Foreign currency forward contracts	Selling, general and administrative	$	49		$	(12)		$	52		$	(2)	Foreign currency forward contracts		Selling, general and administrative		$	(97)		$	49		$	(34)		$	52

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash Flow Hedges

The Company enters into foreign currency forward contracts, and may enter into foreign currency option contracts, to hedge anticipated transactions and receivables and payables denominated in foreign currencies, for periods consistent with the Company’s identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the cash flows that the Company receives from foreign subsidiaries. The foreign currency forward contracts entered into to hedge anticipated transactions have been designated as cash flow hedges and have varying maturities through the end of ~~March~~December 2022. Hedge effectiveness of the foreign currency forward contracts is based on the forward method, which includes time value in the effectiveness assessment. At March 31, ~~2020,~~2021, the Company had cash flow hedges outstanding with a notional amount totaling ~~$1,584~~$1,390 million.

The Company may enter into interest rate forward contracts to hedge anticipated issuance of debt for periods consistent with the Company’s identified exposures. The purpose of the hedging activities is to minimize the effect of interest rate movements on the cost of debt issuance.

~~Table of Contents~~

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued, and gains and losses in AOCI are reclassified to sales when the underlying forecasted transaction occurs. If it is probable that the forecasted transaction will no longer occur, then any gains or losses in AOCI are reclassified to current-period sales. As of March 31, ~~2020,~~2021, the Company’s foreign currency cash flow hedges were highly effective.

The estimated net ~~gain~~loss on the Company’s derivative instruments designated as cash flow hedges as of March 31, ~~2020~~2021 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is ~~$22~~$8 million. The accumulated net gain on derivative instruments in AOCI was ~~$39~~$4 million and ~~$29~~$20 million as of March 31, ~~2020~~2021 and June 30, ~~2019,~~2020, respectively.

Fair Value Hedges

The Company enters into interest rate derivative contracts to manage the exposure to interest rate fluctuations on its funded indebtedness. The Company has interest rate swap agreements, with notional amounts totaling $450 million, $250 million and ~~$250~~$700 million to effectively convert the fixed rate interest on its 2021 Senior Notes, 2022 Senior Notes and ~~2022~~2030 Senior Notes, respectively, to variable interest rates based on three-month LIBOR plus a margin. These interest rate swap agreements are designated as fair value hedges of the related long-term debt, and the changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt.

See Note 16 – Subsequent Events for further information relating to the interest rate swap transactions that occurred subsequent to March 31, 2021.

Net Investment Hedges

The Company enters into foreign currency forward contracts, designated as net investment hedges, to hedge a portion of its net investment in certain foreign operations. The net gain or loss on these contracts is recorded within translation adjustments, as a component of AOCI on the Company’s consolidated balance sheets. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the Company’s net investment in these foreign operations. The net investment hedge contracts have varying maturities through the end of April ~~2020.~~2021. Hedge effectiveness of the net investment hedge contracts is based on the spot method. At March 31, ~~2020,~~2021, the Company had net investment hedges outstanding with a notional amount totaling ~~$1,759~~$1,920 million.

Credit Risk

As a matter of policy, the Company enters into derivative contracts only with counterparties that have a long-term credit rating of at least A- or higher by at least 2 nationally recognized rating agencies. The counterparties to these contracts are major financial institutions. Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the gross fair value of contracts in asset positions, which totaled ~~$86~~$143 million at March 31, ~~2020.~~2021. To manage this risk, the Company has strict counterparty credit guidelines that are continually monitored. Accordingly, management believes risk of loss under these hedging contracts is remote.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 87 – FAIR VALUE MEASUREMENTS

The Company records certain of its financial assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. The accounting for fair value measurements must be applied to nonfinancial assets and nonfinancial liabilities that require initial measurement or remeasurement at fair value, which principally consist of assets and liabilities acquired through business combinations and goodwill, indefinite-lived intangible assets and long-lived assets for the purposes of calculating potential impairment. The Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:

Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

~~Table of Contents~~

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, ~~2020:~~2021:

(In millions) Level 1 Level 2 Level 3 Total
Assets:
Foreign currency forward contracts $ — $ 72 $ — $ 72
Interest rate-related derivatives — 14 — 14
Total $ — $ 86 $ — $ 86
Liabilities:
Foreign currency forward contracts $ — $ 44 $ — $ 44
Interest rate-related derivatives — 1 — 1
Contingent consideration — — 27 27
Total $ — $ 45 $ 27 $ 72


(In millions)	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	3,518	$	0	$	—	$	3,518
Foreign currency forward contracts	0		136		0		136
Interest rate-related derivatives	0		7		0		7
Total	$	3,518	$	143	$	0	$	3,661

Liabilities:
Foreign currency forward contracts	$	0	$	129	$	0	$	129
Interest rate-related derivatives	0		15		0		15
Contingent consideration	0		0		2		2
Total	$	0	$	144	$	2	$	146

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, ~~2019:~~2020:

(In millions) Level 1 Level 2 Level 3 Total
Assets:
Foreign currency forward contracts $ — $ 27 $ — $ 27
Interest rate-related derivatives — 3 — 3
Total $ — $ 30 $ — $ 30
Liabilities:
Foreign currency forward contracts $ — $ 6 $ — $ 6
Interest rate-related derivatives — 26 — 26
Contingent consideration — — 36 36
Total $ — $ 32 $ 36 $ 68


(In millions)	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	2,810	$	0	$	0	$	2,810
Foreign currency forward contracts	0		87		0		87
Interest rate-related derivatives	0		15		0		15
Total	$	2,810	$	102	$	0	$	2,912

Liabilities:
Foreign currency forward contracts	$	0	$	80	$	0	$	80
Interest rate-related derivatives	0		3		0		3
Contingent consideration	0		0		4		4
Total	$	0	$	83	$	4	$	87

The estimated fair values of the Company’s financial instruments are as follows:

March 31
2020 June 30
2019
(In millions)
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Nonderivatives
Cash and cash equivalents $ 4,876 $ 4,876 $ 2,987 $ 2,987
Current and long-term debt 6,201 6,454 3,412 3,706
Additional purchase price payable — — 3 3
Contingent consideration 27 27 36 36
Derivatives
Foreign currency forward contracts – asset (liability), net 28 28 21 21
Interest rate-related derivatives – asset (liability), net 13 13 (23) (23)


	March 31 2021				June 30 2020
(In millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Nonderivatives
Cash and cash equivalents	$	6,399	$	6,399	$	5,022	$	5,022
Current and long-term debt	5,958		6,465		6,136		6,902
Contingent consideration	2		2		4		4

Derivatives
Foreign currency forward contracts – asset (liability), net	7		7		7		7
Interest rate-related derivatives – asset (liability), net	(8)		(8)		12		12

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the Company’s impairment charges for the nine months ended March 31, 2021 for certain of its nonfinancial assets measured at fair value on a nonrecurring basis, classified as Level 3, due to a change in circumstances that triggered an interim impairment test:


(In millions)	Impairment charges		Date of Fair Value Measurement	Fair Value(1)
Goodwill
GLAMGLOW	$	54	November 30, 2020	$	0
BECCA(2)	13		February 28, 2021	0
Total	67			0

Other intangible assets, net (trademark and customer lists)
GLAMGLOW	27		November 30, 2020	36
BECCA(2)	34		February 28, 2021	0
Total	61			36

Long-lived assets	33		March 31, 2021	35
Total	$	161		$	71

(1)See Note 3 - Goodwill and Other Intangible Assets for discussion of the valuation techniques used to measure fair value, the description of the inputs and information used to develop those inputs.

(2)See Note 4 – Charges Associated with Restructuring and Other Activities for further information relating to goodwill and other intangible asset impairment charges recorded in connection with the exit of the global distribution of BECCA products.

The following table presents the Company’s impairment charges for the nine months ended March 31, 2020 for certain of its nonfinancial assets measured at fair value on a nonrecurring basis, classified as Level 3, due to a change in circumstances that triggered an interim impairment test:


(In millions)	(In millions)	Impairment charges		Date of Fair Value Measurement	Fair Value⁽¹⁾		(In millions)	Impairment charges		Date of Fair Value Measurement	Fair Value(1)

Goodwill	Goodwill	$	786	March 31, 2020	$	103	Goodwill	$	786	March 31, 2020	$	103
Other intangible assets, net (trademark)	Other intangible assets, net (trademark)	324		March 31, 2020	417		Other intangible assets, net (trademark)	324		March 31, 2020	417
Long-lived assets	Long-lived assets	13		March 31, 2020	11		Long-lived assets	13		March 31, 2020	11
Total	Total	$	1,123		$	531	Total	$	1,123		$	531

⁽¹⁾See Note 3 ~~– Goodwill and Other Intangible Assets~~ ~~for discussion of the valuation techniques used to measure fair value, the description of the inputs and information used to develop those inputs.~~

The following table presents the Company’s impairment charges for the nine months ended March 31, 2019 for certain of its nonfinancial assets measured at fair value on a nonrecurring basis, classified as Level 3, due to a change in circumstances that triggered an interim impairment test:

(In millions) Impairment charges
Date of Fair Value
Measurement
Fair Value⁽¹⁾
Goodwill $ 68 March 31, 2019 $ 72
Other intangible assets, net (trademark) 22 March 31, 2019 55
Total $ 90 $ 127

⁽¹⁾~~See~~ ~~Note 3 –~~- Goodwill and Other Intangible Assets for discussion of the valuation techniques used to measure fair value, the description of the inputs and information used to develop those inputs.

The following methods and assumptions were used to estimate the fair value of the Company’s financial instruments for which it is practicable to estimate that value:

Cash and cash equivalents – Cash and all highly-liquid securities with original maturities of three months or less are classified as cash and cash equivalents, primarily consisting of cash deposits in interest bearing accounts, time deposits and money market funds (classified within Level 1 of the valuation hierarchy). ~~The carrying amount~~Cash deposits in interest bearing accounts and time deposits are carried at cost, which approximates fair value ~~primarily~~ due to the short maturity of cash equivalent instruments.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Foreign currency forward contracts – The fair values of the Company’s foreign currency forward contracts were determined using an industry-standard valuation model, which is based on an income approach. The significant observable inputs to the model, such as swap yield curves and currency spot and forward rates, were obtained from an independent pricing service. To determine the fair value of contracts under the model, the difference between the contract price and the current forward rate was discounted using LIBOR for contracts with maturities up to 12 months, and swap yield curves for contracts with maturities greater than 12 months.

Interest rate contracts – The fair values of the Company’s interest rate contracts were determined using an industry-standard valuation model, which is based on the income approach. The significant observable inputs to the model, such as treasury yield curves, swap yield curves and LIBOR forward rates, were obtained from independent pricing services.

Current and long-term debt – The fair value of the Company’s debt was estimated based on the current rates offered to the Company for debt with the same remaining maturities. To a lesser extent, debt also includes finance lease obligations for which the carrying amount approximates the fair value. The Company’s debt is classified within Level 2 of the valuation hierarchy.

~~Additional purchase price payable –~~ The Company’s additional purchase price payable represents fixed minimum additional purchase price that was discounted using the Company’s incremental borrowing rate, which was approximately 1%. The additional purchase price payable is classified within Level 2 of the valuation hierarchy.

~~Table of Contents~~

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Contingent consideration – Contingent consideration obligations consist of potential obligations related to the Company’s acquisitions in previous years. The amounts to be paid under these obligations are contingent upon the achievement of stipulated financial targets by the business subsequent to acquisition. At March 31, ~~2020,~~2021, the fair values of the contingent consideration related to certain acquisition earn-outs were based on the Company’s estimate of the applicable financial targets as per the terms of the agreements. Significant changes in the projected future operating results would result in a significantly higher or lower fair value measurement. As these are unobservable inputs, the Company’s contingent consideration is classified within Level 3 of the valuation hierarchy.

Changes in the fair value of the contingent consideration obligations for ~~the~~ nine months ended March 31, ~~2020~~2021 are included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings (loss) and were as follows:


(In millions)	Fair Value
Contingent consideration at June 30, ~~2019~~2020	$	364
Changes in fair value	~~(9)~~(2)
Contingent consideration at March 31, ~~2020~~2021	$	272

NOTE 98 – REVENUE RECOGNITION

The Company’s revenue recognition accounting policies are described in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2019.~~2020.

Accounts Receivable

Accounts receivable, net is stated net of the allowance for doubtful accounts and customer deductions totaling ~~$39~~$50 million and ~~$32~~$63 million as of March 31, ~~2020~~2021 and June 30, ~~2019,~~2020, respectively. ~~The~~During the first quarter of fiscal 2021, the Company adopted ASC 326 using the modified retrospective transition approach and, accordingly, the prior comparative period was not restated. Under this new standard, the Company is required to measure credit losses based on the Company’s estimate of expected losses rather than incurred losses, which generally results in earlier recognition of allowances for credit losses. In accordance with ASC 326, the Company evaluated certain criteria, including aging and historical write-offs, current economic condition of specific customers and future economic conditions of countries utilizing a consumption index to determine the appropriate allowance for ~~doubtful accounts~~credit losses. The Company writes-off receivables once it is ~~based upon~~determined that the ~~evaluation of accounts receivable aging, specific exposures~~receivables are no longer collectible and ~~historical trends.~~as allowed by local laws. Payment terms are short-term in nature and are generally less than one year.

~~Deferred Revenue~~

~~Significant changes~~

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in ~~deferred revenue during~~ the ~~period~~allowance for credit losses are as follows:


(In millions)	~~March 31, 2020~~
Balance at June 30, ~~2019~~2020	$	~~361~~36
~~Revenue recognized that was included in the deferred revenue balance at the beginning of the period~~ASC 326 cumulative effect adjustment (pre-tax)	~~(268)~~4
~~Revenue deferred during the period~~Adjustment for expected credit losses	~~269~~ (5)
Write-offs, net & other	(10)
Balance at March 31, ~~2020~~2021	$	~~362~~25

As a result of the adoption of ASC 326, the Company recorded a cumulative adjustment of approximately $3 million, net of tax, as a reduction to its fiscal 2021 opening balance of retained earnings relating to its trade receivables.

The remaining balance of the allowance for doubtful accounts of $25 million, as of March 31, 2021, relates to non-credit losses, which are primarily due to customer deductions.

Deferred Revenue

Changes in deferred revenue during the period are as follows:


	Three Months Ended March 31				Nine Months Ended March 31
(In millions)	2021		2020		2021		2020
Deferred revenue, beginning of period	$	420	$	425	$	279	$	361
Revenue recognized that was included in the deferred revenue balance at the beginning of the period	(25)		(26)		(198)		(268)
Revenue deferred (released) during the period	(30)		(37)		278		269
Other	(4)		0		2		0
Deferred revenue, end of period	$	361	$	362	$	361	$	362

Transaction Price Allocated to the Remaining Performance Obligations

At March 31, ~~2020,~~2021, the combined estimated revenue expected to be recognized in the next twelve months related to performance obligations for customer loyalty programs, gift with purchase promotions, purchase with purchase promotions and gift card liabilities that are unsatisfied (or partially unsatisfied) is ~~$306 million.~~$310 million, and the remaining balance will be recognized beyond the next twelve months.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 109 – PENSION AND POST-RETIREMENT BENEFIT PLANS

The Company maintains pension plans covering substantially all of its full-time employees for its U.S. operations and a majority of its international operations. The Company also maintains post-retirement benefit plans that provide certain medical and dental benefits to eligible employees. Descriptions of these plans are included in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2019.~~2020.

The components of net periodic benefit cost for the three months ended March 31, 2021 and 2020 consisted of the following:


	Pension Plans								Other than Pension Plans
	U.S.				International				Post-retirement
(In millions)	2021		2020		2021		2020		2021		2020
Service cost	$	12	$	9	$	9	$	9	$	2	$	0
Interest cost	8		9		2		3		1		2
Expected return on plan assets	(14)		(14)		(4)		(4)		(1)		0
Amortization of:
Actuarial loss	5		5		1		1		0		0

Settlements	0		0		1		0		0		0
Special termination benefits	0		0		1		1		0		0
Net periodic benefit cost	$	11	$	9	$	10	$	10	$	2	$	2

The components of net periodic benefit cost for the nine months ended March 31, 2021 and 2020 consisted of the following:


	Pension Plans								Other than Pension Plans
	U.S.				International				Post-retirement
(In millions)	2021		2020		2021		2020		2021		2020
Service cost	$	34	$	29	$	27	$	27	$	2	$	2
Interest cost	23		26		7		8		4		5
Expected return on plan assets	(40)		(40)		(10)		(11)		(1)		(1)
Amortization of:
Actuarial loss	15		12		3		4		0		0

Settlements	0		0		1		0		0		0
Special termination benefits	0		0		10		1		0		0
Net periodic benefit cost	$	32	$	27	$	38	$	29	$	5	$	6

During the nine months ended March 31, 2021, the Company made contributions to its international pension plans totaling $22 million.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~The components of net periodic benefit cost for the three months ended March 31, 2020 and 2019 consisted of the following:~~

Pension Plans Other than
Pension Plans
U.S. International Post-retirement
(In millions) 2020 2019 2020 2019 2020 2019
Service cost $ 9 $ 10 $ 9 $ 8 $ — $ 1
Interest cost 9 10 3 3 2 2
Expected return on plan assets (14) (15) (4) (3) — (1)
Amortization of:
Actuarial loss 5 3 1 — — —
Special termination benefits — — 1 — — —
Net periodic benefit cost $ 9 $ 8 $ 10 $ 8 $ 2 $ 2

~~The components of net periodic benefit cost for the nine months ended March 31, 2020 and 2019 consisted of the following:~~

Pension Plans Other than
Pension Plans
U.S. International Post-retirement
(In millions) 2020 2019 2020 2019 2020 2019
Service cost $ 29 $ 28 $ 27 $ 23 $ 2 $ 2
Interest cost 26 28 8 9 5 6
Expected return on plan assets (40) (41) (11) (10) (1) (2)
Amortization of:
Actuarial loss 12 8 4 2 — —
Special termination benefits — — 1 — — —
Net periodic benefit cost $ 27 $ 23 $ 29 $ 24 $ 6 $ 6

During the nine months ended March 31, 2020, the Company made contributions to its U.S. qualified defined benefit pension plan and international pension plans totaling $30 million and $11 million, respectively.

The amounts recognized in the consolidated balance sheets related to the Company’s pension and post-retirement benefit plans consist of the following:

(In millions) March 31
2020 June 30
2019
Other assets $ 125 $ 105
Other accrued liabilities (27) (27)
Other noncurrent liabilities (430) (418)
Funded status (332) (340)
Accumulated other comprehensive loss 319 334
Net amount recognized $ (13) $ (6)


(In millions)	March 31 2021		June 30 2020
Other assets	$	137	$	127
Other accrued liabilities	(27)		(27)
Other noncurrent liabilities	(470)		(440)
Funded status	(360)		(340)
Accumulated other comprehensive loss	304		324
Net amount recognized	$	(56)	$	(16)

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Commitments

~~Table~~In February 2021, the Company agreed to acquire additional shares in DECIEM Beauty Group Inc. (“DECIEM”) that will increase its existing equity interest from approximately 29% to approximately 76%. Upon closing, which is expected to occur in May 2021, the Company will pay approximately $1,000 million and will have the right to purchase, and will grant the remaining investors a right to sell to the Company, the remaining interests after a three-year period, with a purchase price based on the future performance of ~~Contents~~

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 11 – CONTINGENCIES~~DECIEM.

Legal Proceedings

The Company is involved, from time to time, in litigation and other legal proceedings incidental to its business, including employment, intellectual property, real estate, environmental, regulatory, advertising, trade relations, tax, privacy, and product liability matters (including asbestos-related claims). Management believes that the outcome of current litigation and legal proceedings will not have a material adverse effect upon the Company’s business, results of operations, financial condition or cash flows. However, management’s assessment of the Company’s current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against the Company not presently known to the Company or determinations by judges, juries or other finders of fact which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or proceedings. Reasonably possible losses in addition to the amounts accrued for such litigation and legal proceedings are not material to the Company’s consolidated financial statements.

~~Contingencies~~

During the fiscal 2018 third quarter, the Company learned that some of its testing related to certain product advertising claims did not meet the Company’s standards, necessitating further validation. This review is ongoing, resulting in modifications to certain advertising claims. This is not a product safety issue and does not relate to the quality of the ingredients or the manufacturing of the Company’s products. Based on the Company’s review to date, it does not believe that this matter will be material to the Company, and 0 accrual has been recorded.

NOTE 1211 – STOCK PROGRAMS

Total net stock-based compensation expense is attributable to the granting of, and the remaining requisite service periods of stock options, restricted stock units (“RSUs”), performance share units (“PSUs”), long-term PSUs, long-term price-vested units (“PVUs”) and share units. Compensation expense attributable to net stock-based compensation ~~is as follows:~~

Three Months Ended
March 31 Nine Months Ended
March 31
(In millions) 2020 2019 2020 2019
Compensation expense $ 71 $ 70 $ 210 $ 201
Income tax benefit $ 13 $ 13 $ 39 $ 38
was $86 million and $71 million for the three months ended March 31, 2021 and 2020, respectively, and was $255 million and $210 million for the nine months ended March 31, 2021 and 2020, respectively.

Stock Options

During the nine months ended March 31, ~~2020,~~2021, the Company granted stock options in respect of approximately ~~1.3~~1.5 million shares of Class A Common Stock with an exercise price per share of ~~$199.24~~$218.40 and a weighted-average grant date fair value per share of ~~$51.44.~~$54.61. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The aggregate intrinsic value of stock options exercised during the nine months ended March 31, ~~2020~~2021 was ~~$252~~$317 million.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Units

The Company granted RSUs in respect of approximately ~~0.8~~1.0 million shares of Class A Common Stock during the nine months ended March 31, ~~2020~~2021 with a weighted-average grant date fair value per share of ~~$199.25~~$219.01 that, at the time of grant, ~~were~~are scheduled to vest as follows: 0.3 million in fiscal ~~2021,~~2022, 0.4 million in fiscal 2023 and 0.3 million in fiscal ~~2022 and 0.2 million in fiscal 2023.~~2024. Vesting of RSUs is generally subject to the continued employment or the retirement of the grantees. The RSUs are accompanied by dividend equivalent rights, payable upon settlement of the RSUs either in cash or shares (based on the terms of the particular award) and, as such, were valued at the closing market price of the Company’s Class A Common Stock on the date of grant.

~~Table of Contents~~

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Performance Share Units

During the nine months ended March 31, ~~2020,~~2021, the Company granted PSUs with a target payout of approximately 0.1 million shares of Class A Common Stock with a weighted-average grant date fair value per share of ~~$199.18,~~$218.11, which will be settled in stock subject to the achievement of the Company’s net sales and diluted net earnings per common share ~~and return on invested capital goals~~ for the three fiscal years ending June 30, ~~2022,~~2023, all subject to continued employment or the retirement of the grantees. In January 2020 and March 2020, the Company granted PSUs with a target payout of approximately 0.1 million shares with a weighted-average grant date fair value per share of $162.15, which will be settled in stock subject to the achievement of certain net sales and net operating profit goals of certain subsidiaries of the Company for the calendar year ending 2022. For PSUs granted, no settlement will occur for results below the applicable minimum threshold. PSUs are accompanied by dividend equivalent rights that will be payable in cash upon settlement of the PSUs and, as such, were valued at the closing market value of the Company’s Class A Common Stock on the date of grant.

In September ~~2019,~~2020, approximately ~~0.4~~0.2 million shares of the Company’s Class A Common Stock were issued, and related accrued dividends were paid, relative to the target goals set at the time of the issuance, in settlement of ~~0.3~~0.5 million PSUs which vested as of June 30, ~~2019.~~2020.

Long-term Performance Share Units

In March 2021, the Company granted to the Company’s Chief Executive Officer (“CEO”) PSUs with an aggregate payout of 68,578 shares of the Company's Class A Common Stock, to incentivize him to continue serving through at least June 30, 2024. Generally, no portion of this award will vest unless the Company has achieved positive Cumulative Operating Income, as defined in the performance share unit award agreement, during the relevant performance period, and delivery of shares of the Company’s Class A Common Stock, if any, will be made on September 2, 2025. The PSUs are accompanied by dividend equivalent rights that will be payable in cash at the same time as any delivery of shares of the Company's Class A Common Stock. The aggregate grant date fair value of the PSUs of approximately $20 million was estimated using the closing stock price of the Company's Class A Common Stock on the date of grant. As of March 31, 2021, the total unrecognized compensation cost related to unvested PSU awards was $20 million and the related period over which it is expected to be recognized is approximately 3.3 years, subject to the performance condition being met.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Long-term Price-Vested Units

In March 2021, the Company granted to the Company’s CEO PVUs with an aggregate payout of 85,927 shares, divided into three tranches, of the Company's Class A Common Stock, to incentivize him to continue serving through at least June 30, 2024. Generally, no portion of this award will vest unless the Company has achieved positive Cumulative Operating Income, as defined in the price-vested unit award agreement, during the relevant performance period. In addition, the vesting of each tranche is contingent upon the Company’s achievement of the respective stock price goal, which means that the average closing price per share of the Company’s Class A Common Stock traded on the New York Stock Exchange be at or above the applicable stock price goal (noted in the table below) for 20 consecutive trading days during the applicable performance period. The number of shares subject to each tranche of the price-vested unit award, as well as the stock price goals, service periods, performance periods and share delivery dates for each tranche are as follows:

Number
of
Shares
per
Tranche

Stock Price Goal
(per Share)

Service Period

Performance Period for Stock Price Goal

Performance Period for Cumulative Operating Income Goal

Share Delivery Date

First tranche

27,457

323.03

March 11, 2021 - June 30, 2024

July 1, 2021 - June 30, 2025

September 2, 2025

Second tranche

28,598

333.21

March 11, 2021 - June 30, 2024

July 1, 2021 - June 30, 2025

September 2, 2025

Third tranche

29,872

343.61

March 11, 2021 - June 30, 2024

July 1, 2021 - June 30, 2025

September 2, 2025

Total shares

85,927

Generally, delivery of shares of the Company’s Class A Common Stock, if any, will be made on September 2, 2025. The PVUs are accompanied by dividend equivalent rights that will be payable in cash at the same time as any delivery of shares of the Company's Class A Common Stock. The aggregate grant date fair value of the PVUs of approximately $20 million was estimated using the Monte Carlo Method, which requires certain assumptions. The assumptions used for this award were as follows:


Expected volatility	31.8	%
Dividend yield	0.8	%
Risk-free interest rate	0.4	%
Expected term	3.3 years

As of March 31, 2021, the total unrecognized compensation cost related to unvested PVU awards was $20 million and the related period over which it is expected to be recognized is approximately 3.3 years, subject to the performance conditions and stock price goals being met.

NOTE 1312 – NET EARNINGS (LOSS) ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. PER COMMON SHARE

Net earnings (loss) attributable to The Estée Lauder Companies Inc. per common share (“basic EPS”) is computed by dividing net earnings (loss) attributable to The Estée Lauder Companies Inc. by the weighted-average number of common shares outstanding and ~~contingently issuable~~ shares ~~(which satisfy certain conditions).~~underlying PSUs and RSUs where the vesting conditions have been met. Net earnings (loss) attributable to The Estée Lauder Companies Inc. per common share assuming dilution (“diluted EPS”) is computed by reflecting potential dilution from stock-based awards.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation between the numerator and denominator of the basic and diluted EPS computations is as follows:

Three Months Ended
March 31 Nine Months Ended
March 31
(In millions, except per share data) 2020 2019 2020 2019
Numerator:
Net earnings (loss) attributable to The Estée Lauder Companies Inc. $ (6) $ 555 $ 1,146 $ 1,628
Denominator:
Weighted-average common shares outstanding – Basic 360.2 361.9 360.6 364.0
Effect of dilutive stock options — 4.6 4.6 4.8
Effect of PSUs — 0.3 0.3 0.3
Effect of RSUs — 1.5 1.6 1.8
Weighted-average common shares outstanding – Diluted 360.2 368.3 367.1 370.9
Net earnings (loss) attributable to The Estée Lauder Companies Inc. per common share:
Basic $ (0.02) $ 1.53 $ 3.18 $ 4.47
Diluted $ (0.02) $ 1.51 $ 3.12 $ 4.39


	Three Months Ended March 31				Nine Months Ended March 31
(In millions, except per share data)	2021		2020		2021		2020
Numerator:
Net earnings (loss) attributable to The Estée Lauder Companies Inc.	$	456	$	(6)	$	1,852	$	1,146

Denominator:
Weighted-average common shares outstanding – Basic	363.6		360.2		362.9		360.6
Effect of dilutive stock options(1)	4.1		0		3.9		4.6
Effect of PSUs(1)	0.2		0		0.2		0.3
Effect of RSUs(1)	1.1		0		1.1		1.6
Weighted-average common shares outstanding – Diluted	369.0		360.2		368.1		367.1

Net earnings (loss) attributable to The Estée Lauder Companies Inc. per common share:
Basic	$	1.25	$	(.02)	$	5.10	$	3.18
Diluted	$	1.24	$	(.02)	$	5.03	$	3.12

(1)For the three months ended March 31, 2020, the effects of potentially dilutive stock options, PSUs and RSUs were excluded from the computation of diluted EPS as they were anti-dilutive due to the net loss incurred during the period. ~~As of March 31, 2020 and 2019, the number of~~

The shares of Class A Common Stock underlying stock options, RSUs and PSUs that were excluded in the computation of diluted EPS because their inclusion would be anti-dilutive ~~was 1.3 million shares~~were as follows:


	Three Months Ended March 31		Nine Months Ended March 31
(In millions)	2021	2020	2021	2020
Stock options(1)	0	0	0.9	1.3
RSUs and PSUs(1)	0	0	0.1	0

(1)Not applicable for the three months ended March 31, 2020, since the effects of potentially dilutive stock options, PSUs and ~~1.6 million shares, respectively.~~ RSUs were excluded from the computation of diluted EPS as they were anti-dilutive due to the net loss incurred during the period.

As of March 31, 2021 and 2020, ~~and 2019, 1.2~~0.9 million and ~~1.3~~1.2 million shares, respectively, of Class A Common Stock underlying PSUs have been excluded from the calculation of diluted EPS because the number of shares ultimately issued is contingent on the achievement of certain performance targets of the Company, as discussed in Note 1211 – Stock Programs.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1413 – EQUITY

Total Stockholders’ Equity – The Estée Lauder Companies Inc.


		Three Months Ended March 31						Nine Months Ended March 31							Three Months Ended March 31				Nine Months Ended March 31
(In millions)	(In millions)	2020		2019		2020		2019		(In millions)	2021		2020		2021		2020
Common stock, beginning of the period	Common stock, beginning of the period	$	6	$	6	$	6	$	6	Common stock, beginning of the period	$	6	$	6	$	6	$	6
Stock-based compensation	Stock-based compensation	—		—		—		—		Stock-based compensation	0		0		0		0
Common stock, end of the period	Common stock, end of the period	6		6		6		6		Common stock, end of the period	6		6		6		6

Paid-in capital, beginning of the period	Paid-in capital, beginning of the period	4,615		4,162		4,403		3,972		Paid-in capital, beginning of the period	5,068		4,615		4,790		4,403
Common stock dividends	Common stock dividends	1		—		3		—		Common stock dividends	1		1		2		3
Stock-based compensation	Stock-based compensation	144		169		354		359		Stock-based compensation	162		144		439		354
Paid-in capital, end of the period	Paid-in capital, end of the period	4,760		4,331		4,760		4,331		Paid-in capital, end of the period	5,231		4,760		5,231		4,760

Retained earnings, beginning of the period	Retained earnings, beginning of the period	10,775		9,586		9,984		9,040		Retained earnings, beginning of the period	11,159		10,775		10,134		9,984
Common stock dividends	Common stock dividends	(174)		(157)		(506)		(455)		Common stock dividends	(195)		(174)		(563)		(506)
Net earnings (loss) attributable to The Estée Lauder Companies Inc.	Net earnings (loss) attributable to The Estée Lauder Companies Inc.	(6)		555		1,146		1,628		Net earnings (loss) attributable to The Estée Lauder Companies Inc.	456		(6)		1,852		1,146
Cumulative effect of adoption of new accounting standards	Cumulative effect of adoption of new accounting standards	—		—		(29)		(229)		Cumulative effect of adoption of new accounting standards	0		0		(3)		(29)
Retained earnings, end of the period	Retained earnings, end of the period	10,595		9,984		10,595		9,984		Retained earnings, end of the period	11,420		10,595		11,420		10,595

Accumulated other comprehensive loss, beginning of the period	Accumulated other comprehensive loss, beginning of the period	(569)		(430)		(563)		(434)		Accumulated other comprehensive loss, beginning of the period	(383)		(569)		(665)		(563)
Other comprehensive loss		(143)		(68)		(149)		(64)
Other comprehensive income (loss)										Other comprehensive income (loss)	(104)		(143)		178		(149)
Accumulated other comprehensive loss, end of the period	Accumulated other comprehensive loss, end of the period	(712)		(498)		(712)		(498)		Accumulated other comprehensive loss, end of the period	(487)		(712)		(487)		(712)

Treasury stock, beginning of the period	Treasury stock, beginning of the period	(10,253)		(9,018)		(9,444)		(7,896)		Treasury stock, beginning of the period	(10,429)		(10,253)		(10,330)		(9,444)
Acquisition of treasury stock	Acquisition of treasury stock	(65)		(215)		(768)		(1,248)		Acquisition of treasury stock	(212)		(65)		(212)		(768)
Stock-based compensation	Stock-based compensation	(2)		(2)		(108)		(91)		Stock-based compensation	(1)		(2)		(100)		(108)
Treasury stock, end of the period	Treasury stock, end of the period	(10,320)		(9,235)		(10,320)		(9,235)		Treasury stock, end of the period	(10,642)		(10,320)		(10,642)		(10,320)

Total stockholders’ equity – The Estée Lauder Companies Inc.	Total stockholders’ equity – The Estée Lauder Companies Inc.	4,329		4,588		4,329		4,588		Total stockholders’ equity – The Estée Lauder Companies Inc.	5,528		4,329		5,528		4,329

Noncontrolling interests, beginning of the period	Noncontrolling interests, beginning of the period	27		27		25		22		Noncontrolling interests, beginning of the period	35		27		27		25
Net earnings attributable to noncontrolling interests	Net earnings attributable to noncontrolling interests	2		2		9		8		Net earnings attributable to noncontrolling interests	2		2		8		9
Distribution to noncontrolling interest holders	Distribution to noncontrolling interest holders	—		—		(4)		—		Distribution to noncontrolling interest holders	(6)		0		(6)		(4)
Other comprehensive loss		—		—		(1)		(1)
Other comprehensive (income) loss										Other comprehensive (income) loss	(1)		0		1		(1)
Noncontrolling interests, end of the period	Noncontrolling interests, end of the period	29		29		29		29		Noncontrolling interests, end of the period	30		29		30		29

Total equity	Total equity	$	4,358	$	4,617	$	4,358	$	4,617	Total equity	$	5,558	$	4,358	$	5,558	$	4,358

Cash dividends declared per common share	Cash dividends declared per common share	$	.48	$	.43	$	1.39	$	1.24	Cash dividends declared per common share	$	.53	$	.48	$	1.54	$	1.39

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of quarterly cash dividends declared per share on the Company’s Class A and Class B Common Stock during the nine months ended March 31, ~~2020:~~2021:

Date Declared

Record Date

Payable Date

Amount per Share

August ~~16, 2019~~19, 2020

August ~~30, 2019~~31, 2020

September ~~16, 2019~~

~~.43~~

~~October 30, 2019~~

~~November 29, 2019~~

~~December 16, 2019~~

~~.48~~

~~February 5, 2020~~

~~February 28, 2020~~

~~March 16,~~15, 2020

.48

October 30, 2020

November 30, 2020

December 15, 2020

.53

February 4, 2021

February 26, 2021

March 15, 2021

.53

On April 30, 2021, a dividend was declared in the amount of $.53 per share on the Company’s Class A and Class B Common Stock. The dividend is payable in cash on June 15, 2021 to stockholders of record at the close of business on May 28, 2021.

Common Stock

During the nine months ended March 31, ~~2020,~~2021, the Company purchased approximately ~~4.6~~1.2 million shares of its Class A Common Stock for ~~$883~~$316 million. ~~Beginning in early February 2020,~~In March 2021, the Company ~~temporarily suspended~~resumed its repurchase of shares of the Company's Class A Common ~~Stock, and may resume repurchases in the future.~~Stock.

During the nine months ended March 31, ~~2020,~~2021, approximately ~~4.3~~4.6 million shares of the Company’s Class B Common Stock were converted into the same amount of shares of the Company’s Class A Common Stock.

Accumulated Other Comprehensive Income ~~(Loss)~~

The following table represents changes in AOCI, net of tax, by component for the nine months ended March 31, ~~2020:~~2021:

(In millions)
Net Cash
Flow Hedge
Gain (Loss)
Amounts
Included in Net
Periodic Benefit
Cost
Translation
Adjustments
Total
Balance at June 30, 2019 $ 21 $ (253) $ (331) $ (563)
OCI before reclassifications 29 (1)
⁽¹⁾
(170)
⁽²⁾
(142)
Amounts reclassified to Net earnings (loss) (22) 13 2 (7)
Net current-period OCI 7 12 (168) (149)
Balance at March 31, 2020 $ 28 $ (241) $ (499) $ (712)

^{(In millions) Net Cash
Flow Hedge
Gain (Loss) Retirement Plan and Other Retiree Benefit Adjustments Translation
Adjustments Total
Balance at June 30, 2020 $ 14 $ (244) $ (435) $ (665)
OCI before reclassifications (22) 1 (1) 175 (2) 154
Amounts reclassified to Net earnings 10 14 0 24
Net current-period OCI (12) 15 175 178
Balance at March 31, 2021 $ 2 $ (229) $ (260) $ (487)}

(1)Consists of foreign currency translation ~~losses.~~gains.

⁽²⁾See Note 76 – Derivative Financial Instruments for gains (losses) relating to net investment hedges.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table represents the effects of reclassification adjustments from AOCI into net earnings (loss) for the three and nine months ended March 31, ~~2020~~2021 and ~~2019:~~2020:

Amount Reclassified from AOCI Affected Line Item in
Consolidated
Statements of Earnings (Loss)
Three Months Ended
March 31 Nine Months Ended
March 31
(In millions) 2020 2019 2020 2019
Gain (Loss) on Investments
Gain (loss) on investments $ — $ (6) $ — $ (6) Other income, net
Benefit (provision) for deferred taxes — — — — Provision for income taxes
$ — $ (6) $ — $ (6) Net earnings (loss)
Gain (Loss) on Cash Flow Hedges
Foreign currency forward contracts $ 10 $ 8 $ 29 $ 15 Net sales
Interest rate-related derivatives — 1 — 1 Interest expense
10 9 29 16
Benefit (provision) for deferred taxes (2) (2) (7) (4) Provision for income taxes
$ 8 $ 7 $ 22 $ 12 Net earnings (loss)
Amounts Included in Net Periodic Benefit Cost
Amortization of actuarial loss $ (6) $ (3) $ (16) $ (10)
Earnings before income taxes ⁽¹⁾
Benefit for deferred taxes 1 1 3 3 Provision for income taxes
$ (5) $ (2) $ (13) $ (7) Net earnings (loss)
Cumulative Translation Adjustments
Gain on previously held equity method investment $ — $ — $ 4 $ — Other income, net
Loss on liquidation of an investment in a foreign subsidiary — — (6) — Restructuring and other charges
Gain on liquidation of an investment in a foreign subsidiary — 77 — 77 Other income, net
$ — $ 77 $ (2) $ 77 Net earnings (loss)
Total reclassification adjustments, net $ 3 $ 76 $ 7 $ 76 Net earnings (loss)

^{Amount Reclassified from AOCI Affected Line Item in
Consolidated
Statements of Earnings (Loss)
Three Months Ended
March 31 Nine Months Ended
March 31
(In millions) 2021 2020 2021 2020
Gain (Loss) on Cash Flow Hedges
Foreign currency forward contracts $ (7) $ 10 $ (11) $ 29 Net sales
Interest rate-related derivatives (1) 0 (2) 0 Interest expense
(8) 10 (13) 29
Benefit (provision) for deferred taxes 2 (2) 3 (7) Provision for income taxes
$ (6) $ 8 (10) $ 22 Net earnings (loss)
Retirement Plan and Other Retiree Benefit Adjustments
Amortization of actuarial loss $ (6) $ (6) $ (18) $ (16) Other components of net periodic benefit cost (1)
Settlements (1) 0 (1) 0 Other components of net periodic benefit cost (1)
(7) (6) (19) (16) Earnings before income taxes (1)
Benefit for deferred taxes 3 1 5 3 Provision for income taxes
$ (4) $ (5) $ (14) $ (13) Net earnings (loss)
Cumulative Translation Adjustments
Gain on previously held equity method investment $ 0 $ 0 $ 0 $ 4 Other income
Loss on liquidation of an investment in a foreign subsidiary 0 0 0 (6) Restructuring and other charges
$ 0 $ 0 0 $ (2) Net earnings (loss)
Total reclassification adjustments, net $ (10) $ 3 $ (24) $ 7 Net earnings (loss)}

(1)See Note 109 – Pension and Post-Retirement Benefit Plansfor additional information.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1514 – STATEMENT OF CASH FLOWS

Supplemental cash flow information for the nine months ended March 31, ~~2020~~2021 and ~~2019~~2020 is as follows:

(In millions) 2020 2019
Cash:
Cash paid during the period for interest $ 94 $ 99
Cash paid during the period for income taxes $ 472 $ 400
Non-cash investing and financing activities:
Capital lease, capitalized interest and asset retirement obligations incurred $ — $ 8
Property, plant and equipment accrued but unpaid $ 47 $ 39


(In millions)	2021		2020
Cash:
Cash paid during the period for interest	$	108	$	94
Cash paid during the period for income taxes	$	435	$	472

Non-cash investing and financing activities:

Property, plant and equipment accrued but unpaid	$	68	$	47

Right-of-use assets obtained in exchange for new operating lease liabilities	$	167	$	216

~~Table of Contents~~

~~THE ESTÉE LAUDER COMPANIES INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

NOTE 1615 – SEGMENT DATA AND RELATED INFORMATION

Reportable operating segments include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the “Chief Executive”) in deciding how to allocate resources and in assessing performance. Although the Company operates in 1 business segment, beauty products, management also evaluates performance on a product category basis. Product category performance is measured based upon net sales before returns associated with restructuring and other activities, and earnings before income taxes, other components of net periodic benefit cost, interest expense, interest income and investment income, net, other income, net, and charges associated with restructuring and other activities. Returns and charges associated with restructuring and other activities are not allocated to ~~the~~our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed a Company-wide ~~initiative~~initiatives to redesign, resize and reorganize select ~~corporate functions and go-to-market structures.~~

~~During the fiscal 2020 first quarter, changes were made to reflect certain Leading Beauty Forward enhancements made to the capabilities and cost structure~~areas of the Company’s travel retail business, which are primarily centralized in The Americas region, and resulted in a change to the royalty structure of the travel retail business to reflect the value created in The Americas region. Accordingly, the fiscal 2019 operating income of The Americas was increased, with a corresponding decrease in Europe, the Middle East & Africa, by $229 million and $640 million for the three and nine months ended March 31, 2019, respectively, to conform with the current year methodology and presentation.business.

The accounting policies for the Company’s reportable segments are substantially the same as those for the consolidated financial statements, as described in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2019.~~2020. The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; thus, no additional information is produced for the Chief Executive or included herein. ~~Other than the changes in total assets as a result of the acquisition discussed in~~ ~~Note 2 - Acquisition of Business, which impacted the Asia/Pacific region, and the goodwill and other intangible asset impairments discussed in~~ ~~Note 3 – Goodwill and Other Intangible Assets, which impacted The Americas region, there~~There has been no significant variance in the total or long-lived asset values associated with the Company’s segment data since June 30, ~~2019.~~2020.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


		Three Months Ended March 31						Nine Months Ended March 31							Three Months Ended March 31				Nine Months Ended March 31
(In millions)	(In millions)	2020		2019		2020		2019		(In millions)	2021		2020		2021		2020
PRODUCT CATEGORY DATA	PRODUCT CATEGORY DATA									PRODUCT CATEGORY DATA
Net sales:	Net sales:									Net sales:
Skin Care	Skin Care	$	1,723	$	1,744	$	5,770	$	4,962	Skin Care	$	2,259	$	1,723	$	7,113	$	5,770
Makeup	Makeup	1,146		1,461		4,249		4,427		Makeup	1,018		1,146		3,243		4,249
Fragrance	Fragrance	349		392		1,392		1,401		Fragrance	454		349		1,478		1,392
Hair Care	Hair Care	119		136		417		433��		Hair Care	128		119		418		417
Other	Other	8		13		36		52		Other	15		8		37		36
		3,345		3,746		11,864		11,275			3,874		3,345		12,289		11,864
Returns associated with restructuring and other activities	Returns associated with restructuring and other activities	—		(2)		—		(2)		Returns associated with restructuring and other activities	(10)		0		(10)		0
Net sales	Net sales	$	3,345	$	3,744	$	11,864	$	11,273	Net sales	$	3,864	$	3,345	$	12,279	$	11,864

Operating income (loss) before charges associated with restructuring and other activities:	Operating income (loss) before charges associated with restructuring and other activities:									Operating income (loss) before charges associated with restructuring and other activities:
Skin Care	Skin Care	$	418	$	593	$	1,822	$	1,624	Skin Care	$	804	$	418	$	2,453	$	1,822
Makeup	Makeup	(283)		99		(790)		398		Makeup	(72)		(283)		(115)		(790)
Fragrance	Fragrance	—		17		163		156		Fragrance	47		0		248		163
Hair Care	Hair Care	(2)		(2)		10		27		Hair Care	(17)		(2)		(10)		10
Other	Other	1		2		7		9		Other	(1)		1		(1)		7
		134		709		1,212		2,214			761		134		2,575		1,212
Reconciliation:	Reconciliation:									Reconciliation:
Charges associated with restructuring and other activities	Charges associated with restructuring and other activities	(25)		(35)		(63)		(117)		Charges associated with restructuring and other activities	(145)		(25)		(191)		(63)
Interest expense	Interest expense	(42)		(32)		(112)		(101)		Interest expense	(43)		(42)		(131)		(112)
Interest income and investment income, net	Interest income and investment income, net	14		15		41		42		Interest income and investment income, net	9		14		40		41
Other components of net periodic benefit cost	Other components of net periodic benefit cost	(1)		(1)		(3)		(1)		Other components of net periodic benefit cost	(2)		(1)		(12)		(3)
Other income, net		—		71		576		71
Other income										Other income	0		0		0		576
Earnings before income taxes	Earnings before income taxes	$	80	$	727	$	1,651	$	2,108	Earnings before income taxes	$	580	$	80	$	2,281	$	1,651

GEOGRAPHIC DATA⁽¹⁾	GEOGRAPHIC DATA⁽¹⁾									GEOGRAPHIC DATA(1)
Net sales:	Net sales:									Net sales:
The Americas	The Americas	$	892	$	1,155	$	3,278	$	3,609	The Americas	$	916	$	892	$	2,837	$	3,278
Europe, the Middle East & Africa	Europe, the Middle East & Africa	1,525		1,625		5,281		4,825		Europe, the Middle East & Africa	1,706		1,525		5,276		5,281
Asia/Pacific	Asia/Pacific	928		966		3,305		2,841		Asia/Pacific	1,252		928		4,176		3,305
		3,345		3,746		11,864		11,275			3,874		3,345		12,289		11,864
Returns associated with restructuring and other activities	Returns associated with restructuring and other activities	—		(2)		—		(2)		Returns associated with restructuring and other activities	(10)		0		(10)		0
Net sales	Net sales	$	3,345	$	3,744	$	11,864	$	11,273	Net sales	$	3,864	$	3,345	$	12,279	$	11,864

Operating income (loss):	Operating income (loss):									Operating income (loss):
The Americas	The Americas	$	(217)	$	200	$	(571)	$	583	The Americas	$	155	$	(217)	$	256	$	(571)
Europe, the Middle East & Africa	Europe, the Middle East & Africa	202		265		1,084		940		Europe, the Middle East & Africa	361		202		1,429		1,084
Asia/Pacific	Asia/Pacific	149		244		699		691		Asia/Pacific	245		149		890		699
		134		709		1,212		2,214			761		134		2,575		1,212
Charges associated with restructuring and other activities	Charges associated with restructuring and other activities	(25)		(35)		(63)		(117)		Charges associated with restructuring and other activities	(145)		(25)		(191)		(63)
Operating income	Operating income	$	109	$	674	$	1,149	$	2,097	Operating income	$	616	$	109	$	2,384	$	1,149

⁽¹⁾The net sales ~~and operating income~~ from the Company’s travel retail business are included in the Europe, the Middle East & Africa region, with the exception of the net sales of Dr. Jart+ in the travel retail channel that are reflected in Korea in the Asia/Pacific region. Operating income attributable to the travel retail sales included in Europe, the Middle East & Africa is included in that region and in The Americas.

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THE ESTÉE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1716 – SUBSEQUENT EVENTS

Debt

In April ~~2020,~~2021, the Company ~~completed a public offering of $700~~repaid $450 million aggregate principal amount of its ~~2.600%~~1.70% Senior Notes due ~~April 15, 2030. The Company intends to use the~~May 10, 2021 in full, partially from proceeds from ~~this offering for general corporate purposes, which may include operating expenses, working capital, capital expenditures~~the 2031 Senior Notes issued in March 2021 and ~~redemption~~cash on hand, and ~~repayment of short-term or long-term borrowings, including outstanding commercial paper as it matures. Also in April 2020,~~ the ~~Company repaid the $200 million in commercial paper that was outstanding at March 31, 2020 and borrowed the remaining $200 million under its existing $1,500 million revolving credit facility.~~corresponding interest rate swaps were settled.

Derivative Financial Instruments

In April 2021, the Company entered into an interest rate swap agreement with a notional amount of $300 million to partially convert the fixed rate interest on its outstanding 2031 Senior Notes, to variable interest rates based on three-month LIBOR plus a margin. This interest rate swap agreement was designated as a fair value hedge.

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THE ESTÉE LAUDER COMPANIES INC.

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, ~~2020~~2021 and ~~2019,~~2020, and reflects the basis of presentation described in Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies for all periods presented. Products and services that do not meet our definition of skin care, makeup, fragrance and hair care have been included in the “other” category.


		Three Months Ended March 31						Nine Months Ended March 31							Three Months Ended March 31				Nine Months Ended March 31
(In millions)	(In millions)	2020		2019		2020		2019		(In millions)	2021		2020		2021		2020
NET SALES	NET SALES									NET SALES
By Product Category:	By Product Category:									By Product Category:
Skin Care	Skin Care	$	1,723	$	1,744	$	5,770	$	4,962	Skin Care	$	2,259	$	1,723	$	7,113	$	5,770
Makeup	Makeup	1,146		1,461		4,249		4,427		Makeup	1,018		1,146		3,243		4,249
Fragrance	Fragrance	349		392		1,392		1,401		Fragrance	454		349		1,478		1,392
Hair Care	Hair Care	119		136		417		433		Hair Care	128		119		418		417
Other	Other	8		13		36		52		Other	15		8		37		36
		3,345		3,746		11,864		11,275			3,874		3,345		12,289		11,864
Returns associated with restructuring and other activities	Returns associated with restructuring and other activities	—		(2)		—		(2)		Returns associated with restructuring and other activities	(10)		—		(10)		—
Net sales	Net sales	$	3,345	$	3,744	$	11,864	$	11,273	Net sales	$	3,864	$	3,345	$	12,279	$	11,864

By Region:
By Region(1):										By Region(1):
The Americas	The Americas	$	892	$	1,155	$	3,278	$	3,609	The Americas	$	916	$	892	$	2,837	$	3,278
Europe, the Middle East & Africa	Europe, the Middle East & Africa	1,525		1,625		5,281		4,825		Europe, the Middle East & Africa	1,706		1,525		5,276		5,281
Asia/Pacific	Asia/Pacific	928		966		3,305		2,841		Asia/Pacific	1,252		928		4,176		3,305
		3,345		3,746		11,864		11,275			3,874		3,345		12,289		11,864
Returns associated with restructuring and other activities	Returns associated with restructuring and other activities	—		(2)		—		(2)		Returns associated with restructuring and other activities	(10)		—		(10)		—
Net sales	Net sales	$	3,345	$	3,744	$	11,864	$	11,273	Net sales	$	3,864	$	3,345	$	12,279	$	11,864

OPERATING INCOME (LOSS)	OPERATING INCOME (LOSS)									OPERATING INCOME (LOSS)
By Product Category:	By Product Category:									By Product Category:
Skin Care	Skin Care	$	418	$	593	$	1,822	$	1,624	Skin Care	$	804	$	418	$	2,453	$	1,822
Makeup	Makeup	(283)		99		(790)		398		Makeup	(72)		(283)		(115)		(790)
Fragrance	Fragrance	0		17		163		156		Fragrance	47		—		248		163
Hair Care	Hair Care	(2)		(2)		10		27		Hair Care	(17)		(2)		(10)		10
Other	Other	1		2		7		9		Other	(1)		1		(1)		7
		134		709		1,212		2,214			761		134		2,575		1,212
Charges associated with restructuring and other activities	Charges associated with restructuring and other activities	(25)		(35)		(63)		(117)		Charges associated with restructuring and other activities	(145)		(25)		(191)		(63)
Operating income	Operating income	$	109	$	674	$	1,149	$	2,097	Operating income	$	616	$	109	$	2,384	$	1,149

By Region:
By Region(1):										By Region(1):
The Americas	The Americas	$	(217)	$	200	$	(571)	$	583	The Americas	$	155	$	(217)	$	256	$	(571)
Europe, the Middle East & Africa	Europe, the Middle East & Africa	202		265		1,084		940		Europe, the Middle East & Africa	361		202		1,429		1,084
Asia/Pacific	Asia/Pacific	149		244		699		691		Asia/Pacific	245		149		890		699
		134		709		1,212		2,214			761		134		2,575		1,212
Charges associated with restructuring and other activities	Charges associated with restructuring and other activities	(25)		(35)		(63)		(117)		Charges associated with restructuring and other activities	(145)		(25)		(191)		(63)
Operating income	Operating income	$	109	$	674	$	1,149	$	2,097	Operating income	$	616	$	109	$	2,384	$	1,149

(1) The net sales from our travel retail business are included in the Europe, the Middle East & Africa region, with the exception of the net sales of Dr. Jart+ in the travel retail channel that are reflected in Korea in the Asia/Pacific region. Operating income attributable to the travel retail sales included in Europe, the Middle East & Africa is included in that region and in The Americas.

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During the fiscal 2020 first quarter, changes were made to reflect certain Leading Beauty Forward enhancements made to the capabilities and cost structure of our travel retail business, which are primarily centralized in The Americas region, and resulted in a change to the royalty structure of the travel retail business to reflect the value created in The Americas region. Accordingly, the fiscal 2019 operating income of The Americas was increased, with a corresponding decrease in Europe, the Middle East & Africa by $229 million and $640 million for the three and nine months ended March 31, 2019, respectively, to conform with the current year methodology and presentation.

The following table presents certain consolidated earnings data as a percentage of net sales:

Three Months Ended
March 31 Nine Months Ended
March 31
2020 2019 2020 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 25.0 21.9 23.5 22.6
Gross profit 75.0 78.1 76.5 77.4
Operating expenses:
Selling, general and administrative 60.7 58.0 56.9 57.1
Restructuring and other charges 0.7 0.8 0.5 0.9
Goodwill impairment 8.2 1.3 6.6 0.6
Impairments of other intangible and long-lived assets 2.1 0.1 2.8 0.2
Total operating expenses 71.7 60.1 66.8 58.8
Operating income 3.3 18.0 9.7 18.6
Interest expense 1.3 0.9 1.0 0.9
Interest income and investment income, net 0.4 0.4 0.3 0.4
Other components of net periodic benefit cost — — — —
Other income, net — 1.9 4.9 0.6
Earnings before income taxes 2.4 19.4 13.9 18.7
Provision for income taxes (2.5) (4.5) (4.2) (4.2)
Net earnings (loss) (0.1) 14.9 9.7 14.5
Net earnings attributable to noncontrolling interests (0.1) (0.1) — (0.1)
Net earnings (loss) attributable to The Estée Lauder Companies Inc. (0.2) % 14.8 % 9.7 % 14.4 %


	Three Months Ended March 31				Nine Months Ended March 31
	2021		2020		2021		2020
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	24.3		25.0		23.2		23.5
Gross profit	75.7		75.0		76.8		76.5

Operating expenses:
Selling, general and administrative	55.5		60.7		55.1		56.9
Restructuring and other charges	3.4		0.7		1.4		0.5
Goodwill impairment	—		8.2		0.4		6.6
Impairment of other intangible and long-lived assets	0.9		2.1		0.5		2.8
Total operating expenses	59.8		71.7		57.4		66.8

Operating income	15.9		3.3		19.4		9.7
Interest expense	1.1		1.3		1.1		1.0
Interest income and investment income, net	0.2		0.4		0.3		0.3
Other components of net periodic benefit cost	0.1		—		0.1		—
Other income	—		—		—		4.9

Earnings before income taxes	15.0		2.4		18.6		13.9
Provision for income taxes	(3.2)		(2.5)		(3.4)		(4.2)

Net earnings (loss)	11.9		(0.1)		15.1		9.7
Net earnings attributable to noncontrolling interests	(0.1)		(0.1)		(0.1)		—

Net earnings (loss) attributable to The Estée Lauder Companies Inc.	11.8	%	(0.2)	%	15.1	%	9.7	%

Not adjusted for differences caused by rounding

We continually introduce new products, support new and established products through advertising, merchandising and sampling and phase out existing products that no longer meet the needs of our consumers or our objectives. The economics of developing, producing, launching, supporting and discontinuing products impact our sales and operating performance each period. The introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning.

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Non-GAAP Financial Measures

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THE ESTÉE LAUDER COMPANIES INC.

We operate on a global basis, with the majority of our net sales generated outside the United States. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations. Therefore, we present certain net sales, operating results and diluted net earnings per common share information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of our underlying business outside the United States. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We calculate constant currency information by translating current-period results using prior-year period weighted-average foreign currency exchange rates and adjusting for the period-over-period impact of foreign currency cash flow hedging activities.

Overview

COVID-19 Business Update

The COVID-19 pandemic continues to disrupt our operating environment, temporarily impacting retail traffic and certain consumer preferences. During the ~~third quarter~~three months ended March 31, 2021, the resurgence of ~~fiscal 2020, the outbreak~~COVID-19 cases in several countries, particularly in Western Europe and ~~global~~Latin America, led to government restrictions to prevent further spread of ~~COVID-19 caused a significant disruption in our operating environment. As~~ the ~~global spread~~virus. These restrictions included temporary business closures, curtailment of COVID-19 rapidly continues, we remain first and foremost focused on the health and safety of our employees, beauty advisors and consumers. Accordingly, we modified a number of our business practices, in part due to legislation, executive orders and guidance from government entities and healthcare authorities (collectively, “COVID-19 Directives”). These include the temporary closing of businesses deemed “non-essential,” travel, ~~bans and restrictions,~~ social distancing and quarantines.

~~As a result of the COVID-19 Directives,~~Retail impact

While most brick-and-mortar retail stores ~~across most regions, whether operated by us or~~globally that sell our customers, have been closed for some period of time. In Asia/Pacific, some retail stores in northern Asia have been reopening after closing for most of February 2020 and March 2020, while most retail stores in southern Asia remain closed, and retail stores in Europe, the Middle East & Africa and in The Americas began closing in early March 2020. In addition, air travel has been largely curtailed to and from Asia since the end of January 2020 and the remaining international travel routes since March 2020, adversely impacting the growth trend of the travel retail business. As of mid-April 2020, approximately 50% of retail stores,products, whether operated by us or our customers, were open during the third quarter of fiscal 2021, most notably in China and the United States, there were intermittent closures throughout the rest of the world. In the United Kingdom, Japan, Canada, Italy, Spain, France, Mexico and Brazil, in particular, many retail stores were temporarily closed for some period during the third quarter of fiscal 2021 due to the resurgence of COVID-19 cases. Globally, in areas where stores were open, consumer traffic was significantly reduced as compared to the pre-COVID-19 pandemic period. In addition, while domestic travel in China, especially in Hainan, and some other travel corridors in Asia/Pacific, ~~primarily in northern Asia. Virtually all stores in mainland China~~most notably Korea, were open, ~~as of mid-April 2020. Net~~international travel has remained largely curtailed globally due to both government restrictions and consumer health concerns that continue to adversely impact consumer traffic in most travel retail locations.

Somewhat offsetting the significant declines in brick-and-mortar channels, net sales growth of our products online (through our own websites, third-party platforms and websites of our retailers) has ~~accelerated globally. We will continue to assess,~~remained strong in ~~accordance with~~every region during the ~~guidance~~third quarter of ~~governments and healthcare authorities, when our stores can reopen across all regions.~~fiscal 2021.

During this time, a majority of our facilities continued to manufacture and distribute products globally, albeit in a much-reduced capacity in light of safety measures taken to protect our employees, and we are likely to record higher excess and obsolescence charges for the remainder of fiscal 2020. In addition, there have been minimal disruptions to our supply chain. We have, to date, been able to obtain raw materials and componentry. At this time we expect to be able to produce and distribute our products when the demand increases.Consumer Preferences

The ~~strong net sales momentum~~COVID-19 pandemic-related closures of offices, retail stores and other businesses and the significant decline in social gatherings have influenced consumer preferences and practices. Specifically, the demand for makeup continues to be weak given fewer makeup usage occasions while other categories have been more resilient.

Cost Controls

In response to the ongoing impacts from the COVID-19 pandemic, we ~~had~~continue to implement cost control actions in certain areas of the business to effectively manage the changing business environment.

Business Update

We are a leader in prestige beauty, which combines the repeat purchase and relative affordability of consumer goods with the high quality products and services of luxury goods. Within prestige beauty, we are well diversified by brand, product category, product sub-category, geography, channel, consumer segment and price point. This diversity allows us to leverage consumer analytics and insights with agility by deploying our brands to fast growing and profitable opportunities. These analytics and insights, combined with our creativity, inform our innovation to provide a broad, locally-relevant and inclusive range of prestige products allowing us to compete effectively for a greater share of a consumer's beauty routine. Elements of our strategy are described in the ~~first half~~Overview on pages 28-31 of fiscal 2020 continued into January 2020. In January 2020, net sales grew in all regions and major product categories, however, as the COVID-19 outbreak began to spread, global net sales declined in February 2020. By March 2020, all regions were experiencing the impact of store closures and quarantines, resulting in net sales declines in all regions and product categoriesour Annual Report on Form 10-K for the fiscal year ended June 30, 2020, third quarter. Towards the end of the quarter, Asia/Pacific began to show signs of recovery and some markets in the region, including mainland China and Taiwan, ended the fiscal 2020 third quarter with net sales growth. By product category, skin care demonstrated the greatest resilience due to the routine nature of its usage and the onset of recovery in Asia. Net sales of skin care products rose in international markets, led by Estée Lauder and incremental net sales from Have&Be Co. Ltd., the company that markets and sells Dr. Jart+ that was acquired in December 2019 ("Have & Be"). While we are seeing some pockets of recovery and as ~~stores gradually reopen around the world, we expect global prestige beauty to continue to be adversely impacted at least over the next few months.~~well as below.

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~~Online~~During the third quarter of fiscal 2021, net sales increased approximately 16% from the prior-year period, reflecting an easier comparison against the outbreak of COVID-19 in early calendar 2020. We saw increases across most product categories and all regions, as well as strong growth online.

•Our skin care net sales benefited from the launch of the new Estée Lauder Advanced Night Repair Synchronized Multi-Recovery Complex, the launch of the new The Concentrate from La Mer and strength in basic skin care from Clinique. Dr. Jart+ and Origins also contributed to skin care growth. These new products support high-loyalty hero franchises.

•The COVID-19 pandemic limited social and business activities and consumers wore less makeup. Demand for lipstick and foundation were most acutely impacted, contributing to lower makeup net sales across the portfolio. Our brands continued to generate interest in makeup through virtual marketing efforts such as classes, virtual try on technology and greater emphasis on social media platforms, as well as a focus on sub-categories that continue to resonate with consumers.

•Our fragrance net sales increased in the third quarter of fiscal 2021, reflecting strength in luxury and artisanal scents. Fragrance net sales growth ~~accelerated as we worked~~was led by Jo Malone London, Tom Ford Beauty, Kilian Paris and Le Labo. The category also benefited from the launch of Beautiful Magnolia from Estée Lauder.

•Our hair care net sales increased, reflecting Aveda's launch of Botanical Repair in the first quarter of fiscal 2021.

Our net sales growth by geographic region in the third quarter of fiscal 2021 reflects, in part, the cadence of COVID-19 recovery and resurgence around the world.

•Net sales increased in The Americas, reflecting some recovery in North America compared to capture consumer demand online. Our brands have responded with various initiatives, including thoughtful crisis messaging, strong social selling programs, self-care focus, makeup tips for working from home and live online product demonstrations. While we are encouraged by the ~~acceleration~~prior year where brick-and-mortar retail locations were shut down toward the end of the fiscal 2020 third quarter as COVID-19 spread globally. This was partially offset by declines in Latin America where many retail locations closed as the resurgence of COVID-19 led to increased government restrictions and store closures during the third quarter of fiscal 2021.

•The Europe, the Middle East & Africa region net sales returned to growth, led by our travel retail business, direct-to-consumer online and retailer restocking in advance of further recovery.

•The Asia/Pacific region grew, reflecting increases in mainland China, Australia, Korea, and several smaller markets.

Outlook

The COVID-19 pandemic has disrupted business ~~and~~both for our ~~brands’ ability to adapt consumer communications to the current situation, it is not enough to compensate~~Company and for the ~~declines in other channels of distribution. COVID-19 and its various impacts~~retailers who sell our products. There have also influenced consumer preferences due to the closures of offices, retail stores and other businesses and the significant decline in social gatherings. The demand for skin care and hair care products has been ~~more resilient than the demand for makeup and fragrance. We are also mindful of the risks related to~~ restructurings and bankruptcies in the retail industry, including among our customers and destocking and tighter working capital management by retailers, as well as on the operating performance of our freestanding retail stores, the related financial impact of which cannot be reasonably estimated at this time.

In response to the impacts from COVID-19, we started to implement strict cost controls in January 2020 to help mitigate the expected loss of sales in mainland China and travel retail. In the fiscal 2020 third quarter, we took immediate actions to reduce expenses, including advertising and promotion activities, travel, meetings, consulting, and certain employee costs, including implementing a hiring freeze. Combined, these resulted in approximately $250 million of savings in the period. As the COVID-19 impacts rapidly spread throughout Europe and the Americas, the corresponding impact on net sales resulted in an operating margin decline. The cost controls put in place during the fiscal 2020 third quarter are expected to deliver an even larger benefit starting in the fiscal 2020 fourth quarter.

Additionally, we announced new cost saving actions on April 15, 2020, that are expected to have a greater impact beginning in May 2020. These include furloughs and similar unpaid temporary leaves of absence for many point of sale employees; temporary salary reductions for senior executives and other management employees; and a temporary elimination of cash retainers for the Board of Directors. Together, we estimate that these actions, combined with those implemented in the fiscal 2020 third quarter, will reduce operating expenses by approximately $500 million to $600 million in the fiscal 2020 fourth quarter. In addition, we expect to reduce capital investments (e.g., facilities and consumer-facing counters) by approximately $250 million to $300 million for fiscal 2020. We have temporarily suspended repurchases of our Class A Common Stock and have suspended the quarterly cash dividend that would have been paid in June 2020. In addition, as of April 2020, we raised an additional $2,200 million of cash by issuing $700 million of Senior Unsecured Notes and borrowing the full amount under our $1,500 million revolving credit facility. We will continue to monitor the impact of COVID-19 and adjust our action plans accordingly as the situation progresses. We stand ready to facilitate the recovery as soon as the market dynamics support it.

There are no comparable recent events that provide guidance concerning the impacts of a global pandemic like COVID-19. Due to the uncertainty of its duration and severity and the speed with which this outbreak is developing and impacting us and our consumers, customers and suppliers, at this time we are not able to reasonably estimate the extent of the adverse impact on our financial condition or results of operations. The degree to which COVID-19 and its collateral effects impact our business, the results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including how quickly and to what extent there are sustainable improvements in the retail environment and general economic conditions. As we continue to monitor COVID-19 developments, including the impacts on our consumers, customers and suppliers, we may adjust actions and take further actions. However, there is no certainty that the measures we take will be sufficient to mitigate the risks posed by, and the impacts of, COVID-19.

~~Business Update~~

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 consumers’ changing behaviors and shopping preferences. 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. Elements of our strategy are described in the ~~Overview~~ ~~on pages 25-27 of our Annual Report on Form 10-K for the year ended June 30, 2019, as well as below.~~

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While we continue to face strong competition and economic challenges globally, COVID-19 has caused a more significant disruption to our business and the retail industry generally. We are seeing, and believe there will be more, restructurings and bankruptcies in the retail industry, including among our customers; destocking and tighter working capital management by retailers; challenges for suppliers; and an acceleration in the shifts in ~~consumer~~ preferences as to where and how ~~they~~consumers shop, as well as changes in their preferences for certain products. We are mindful that these trends may continue to impact the pace of recovery. The ~~severe decline~~continued curtailment in international travel is also ~~causing a significant decline in~~affecting our travel retail business in most of the world, which had been historically one of our ~~most profitable channels.~~fastest growth areas. In addition to impacting net sales and profitability, these and other challenges ~~will~~may impact our ability to collect receivables and our operating cash flows generally, and ~~will~~may adversely impact the goodwill and other ~~intangibles~~intangible assets associated with our ~~acquired brands.~~ brands and the long-lived assets in certain of our freestanding stores (i.e. resulting in impairments).

We continue to monitor the effects of the global macroeconomic environment; social and political issues; regulatory matters, including the imposition of tariffs; geopolitical tensions; and global security issues. For example, we continue to monitor the geopolitical tensions between the United States and China and the uncertainties caused by the evolving trade policy dispute, which could increase our cost of sales and negatively impact our overall net sales, or otherwise have a material adverse effect on our business. We also note that the United Kingdom reached a trade agreement and completed its transition out of the European Union (“EU”) in December 2020 (i.e. “Brexit”), and we continue to monitor the potential ~~implications of the ongoing~~political and economic ~~and political~~ uncertainties ~~stemming~~ from the United Kingdom’s exit and transition from the European Union (i.e. “Brexit”) and continue developing our risk mitigation strategies to address such uncertainties. These strategies include changes related to regulatory and legislative compliance, assessing alternatives to supply chain routing, revising customer arrangements and analyzing inventory levels.Brexit.

We are also cautious of foreign currency movements, including their impacts on tourism, which has already been adversely affected by COVID-19 and COVID-19 Directives. Additionally, we continue to monitor the effects of the global macroeconomic environment; social and political issues; regulatory matters, including the imposition of tariffs; geopolitical tensions; and global security issues.

~~COVID-19 is proving to be the most significant challenge we have faced as a public company.~~

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The uncertainty around the timing, speed and duration of the recovery from the adverse impacts of the COVID-19 pandemic will continue to affect our ability to grow sales profitably. ~~While, historically,~~We believe we ~~believed we could,~~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, ~~among our geographic regions, product categories, brands and channels of distribution, COVID-19 will require even greater~~ discipline and ~~agility.~~agility, and by implementing our Post-COVID Business Acceleration Program. As the current situation progresses, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, there ~~will~~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 ~~will continue~~are continuing to monitor these and other risks that may affect our business.

Our “heritage brands” are Estée Lauder, Clinique and Origins. Our “makeup artist brands” are M•A•C and Bobbi Brown. Our “luxury brands” are La Mer, Jo Malone London, Tom Ford, AERIN, RODIN olio lusso, Le Labo, Editions de Parfums Frédéric Malle and By Kilian. Our “designer fragrances” are sold under the Tommy Hilfiger, Donna Karan New York, DKNY, Michael Kors, Kiton and Ermenegildo Zegna brand names, which we license from their respective owners.

Leading Beauty Forward Program and Post-COVID Business Acceleration Program

Information about our ~~multi-year initiative,~~restructuring initiatives, the Leading Beauty Forward isProgram and the Post-COVID Business Acceleration Program, are described in Notes to Consolidated Financial Statements, Note 54 – Charges Associated with Restructuring and Other Activities herein, as well as, in Notes to Consolidated Financial Statements, Note 10 – Charges Associated with Restructuring and Other Activities and in the Overview on page 2630 of our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2019.~~2020.

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Goodwill and Other Intangible Asset Impairments

During ~~December 2019,~~November 2020, given the ~~continuing declines in prestige makeup, generally in North America,~~actual and the ~~ongoing competitive activity, our Too Faced, BECCA~~estimate of the potential future impacts relating to the uncertainty of the duration and ~~Smashbox reporting units~~severity of COVID-19 impacting us and lower than expected results from geographic expansion, we made further revisions to ~~their~~the internal forecasts ~~concurrent with~~relating to our ~~brand strategy review process.~~GLAMGLOW reporting unit. We concluded that the changes in circumstances in ~~these~~this reporting ~~units~~unit triggered the need for an interim impairment review of ~~their respective trademarks~~its trademark and goodwill. These changes in circumstances were also an indicator that the carrying amounts of ~~their respective~~GLAMGLOW's long-lived assets, including customer lists, may not be recoverable. Accordingly, we performed an interim impairment ~~tests~~test for the ~~trademarks~~trademark and a recoverability ~~tests~~test for the long-lived assets as of ~~December 31, 2019.~~November 30, 2020. We concluded that the carrying ~~amounts~~value of the ~~long-lived assets were recoverable. We also concluded that the carrying values of the trademarks~~trademark for GLAMGLOW exceeded ~~their~~its estimated fair ~~values,~~value, which ~~were~~was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded an impairment ~~charges totaling $266 million for trademarks during the three months ended December 31, 2019. After adjusting~~charge of $21 million. In addition, we concluded that the carrying value of the ~~trademarks,~~GLAMGLOW customer lists intangible asset was fully impaired and recorded an impairment charge of $6 million. The fair value of all other long-lived assets of GLAMGLOW exceeded their carrying values and were not impaired as of November 30, 2020. After adjusting the carrying values of the trademark and customer lists intangible assets, we completed an interim quantitative impairment ~~tests~~test for goodwill and recorded a goodwill impairment ~~charges~~charge of $54 million, reducing the carrying value of goodwill for ~~each of these~~the GLAMGLOW reporting ~~units, totaling $511 million during the three months ended December 31, 2019.~~unit to zero. The fair value of ~~each~~the GLAMGLOW reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit.

During March 2020, given the actual and the estimate of potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting us, we made revisions to the internal forecasts relating to our Too Faced, BECCA, Smashbox and GLAMGLOW reporting units. We concluded that the changes in circumstances in these reporting units triggered the need for an interim impairment review of their respective trademarks and goodwill. These changes in circumstances were also an indicator that the carrying amounts of their respective long-lived assets, including customer lists, may not be recoverable. Accordingly, we performed interim impairment tests for the trademarks and recoverability tests for the long-lived assets as of March 31, 2020. We concluded that the carrying amounts of the long-lived assets were recoverable. We also concluded that the carrying values of the trademarks exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows based on probability weighted cash flows, and recorded impairment charges. After adjusting the carrying value of the trademarks, we completed interim quantitative impairment tests for goodwill and recorded goodwill The impairment charges for ~~each of these reporting units. The fair value of each reporting unit was based upon an equal weighting of~~ the income and market approaches, utilizing estimated cash flows, based on probability weighted undiscounted cash flows, and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit.

~~A summary of the impairment charges for the three and~~ nine months ended March 31, ~~2020~~2021 were reflected in the skin care product category and in the ~~remaining trademark and goodwill carrying values as~~Americas region. As of March 31, ~~2020, for each~~2021, the remaining carrying value of the trademark related to the GLAMGLOW reporting unit ~~are as follows:~~was $36 million.

The key assumptions used to determine the estimated fair value of the reporting units are primarily predicated on the estimated future impacts of COVID-19, the success of future new product launches, the achievement of international 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 these reporting units operate, resulting changes in the key assumptions could have negative impacts on the estimated fair values of the reporting units and it is possible we could recognize additional impairment charges in the future.

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NET SALES


		Three Months Ended March 31								Nine Months Ended March 31								Three Months Ended March 31					Nine Months Ended March 31
($ in millions)	($ in millions)	2020			2019		2020			2019		($ in millions)	2021			2020		2021			2020
As Reported:	As Reported:											As Reported:
Net sales	Net sales	$	3,345		$	3,744	$	11,864		$	11,273	Net sales	$	3,864		$	3,345	$	12,279		$	11,864
$ Change from prior-year period	$ Change from prior-year period	(399)					591					$ Change from prior-year period	519					415
% Change from prior-year period	% Change from prior-year period	(11)		%			5		%			% Change from prior-year period	16		%			3		%

Non-GAAP Financial Measure⁽¹⁾:	Non-GAAP Financial Measure⁽¹⁾:											Non-GAAP Financial Measure(1):
% Change from prior-year period in constant currency	% Change from prior-year period in constant currency	(10)		%			6		%			% Change from prior-year period in constant currency	13		%			2		%

⁽¹⁾See “Reconciliations of Non-GAAP Financial Measures” beginning on page ~~57 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.~~

For the three months ended March 31, 2020, reported net sales decreased in all product categories and across all geographic regions driven by the negative impacts of the COVID-19 pandemic, including our response and the responses of others to COVID-19 Directives. These directives include the temporary closing of businesses deemed “non-essential,” travel bans and restrictions, social distancing and quarantines. Despite these global declines, net sales for the period benefited from higher sales of Estée Lauder products, net sales increases from our travel retail business, an acceleration of sales of certain of our products online, and incremental net sales from our fiscal 2020 second quarter acquisition of Have & Be.

For the nine months ended March 31, 2020, reported net sales benefited from strong net sales growth prior to the impacts of COVID-19, an increase in the skin care product category and growth in the Asia/Pacific and Europe, the Middle East & Africa geographic regions. Skin care net sales growth primarily reflected higher sales from Estée Lauder, La Mer and Origins, as well as incremental net sales of our fiscal 2020 second quarter acquisition of Have & Be. Net sales increases in mainland China and our travel retail business drove growth internationally. As noted above, the impacts of COVID-19 are causing a significant disruption to our business, and we expect the results of operations of our product categories and regions to continue to be adversely impacted for the remainder of fiscal 2020 and in subsequent periods.

The total net sales in each period was impacted by approximately $44 million and $106 million of unfavorable foreign currency translation for the three and nine months ended March 31, 2020, respectively.

~~Product Categories~~

~~Skin Care~~

Three Months Ended
March 31 Nine Months Ended
March 31
($ in millions) 2020 2019 2020 2019
As Reported:
Net sales $ 1,723 $ 1,744 $ 5,770 $ 4,962
$ Change from prior-year period (21) 808
% Change from prior-year period (1) % 16 %
Non-GAAP Financial Measure⁽¹⁾:
% Change from prior-year period in constant currency — % 17 %

⁽¹⁾~~See “Reconciliations of Non-GAAP Financial Measures”~~ ~~beginning on page 57~~61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

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Reported ~~skin care~~ net sales ~~decreased~~increased for the three months ended March 31, ~~2020,~~2021, primarily reflecting ~~lower~~higher net sales ~~from most brands, led by Clinique,~~in our ~~makeup artist brands, La Mer, Origins~~skin care and ~~Aveda, primarily reflecting the challenging environment, especially~~fragrance product categories and in ~~brick and mortar retail, as a result of the COVID-19 pandemic as discussed above. In addition, we recognized lower~~all geographic regions. The net sales ~~from gift with purchase and purchase with purchase promotional products compared to the prior year. Collectively, these resulted~~growth in ~~a decrease of approximately $154 million in the category. The lower net sales from Clinique and La Mer also~~our skin care product category reflected an unfavorable comparison to the prior-year period due to higher launch activity in the prior year. Despite these challenges, online net sales grew for Clinique, La Mer and Origins. Partially offsetting the decline in those brands were higher net sales from Estée Lauder, La Mer and ~~incremental~~Clinique, as well as net sales growth from Dr. Jart+ and Origins. Fragrance net sales increased, primarily benefiting from higher net sales from ~~our fiscal 2020 second quarter acquisition~~Jo Malone London and Tom Ford Beauty. The net sales growth in the skin care and fragrance product categories reflected the success of ~~Have & Be, combined, of approximately $141 million.~~hero product franchises, new product offerings and successful holiday events. Net sales ~~increased from Estée Lauder, reflecting~~grew internationally, led by higher net sales in mainland China and in our travel retail business, as well as net sales growth in Australia, Korea and and Hong Kong. Direct-to-consumer online net sales grew double-digits, representing approximately 15% of net sales for the ~~continued success of existing product franchises, such as Advanced Night Repair and Perfectionist.~~three months ended March 31, 2021 compared to approximately 12% in the prior-year period.

Reported ~~skin care~~ net sales increased for the nine months ended March 31, ~~2020,~~2021, primarily ~~due to growth internationally~~reflecting higher net sales in our skin care and ~~reflected~~fragrance product categories and in our Asia/Pacific region. The net sales increase in our skin care product category was primarily driven by higher net sales from Estée Lauder, ~~and~~ La Mer, ~~combined, of approximately $796 million, as well as incremental~~Dr. Jart+ and Clinique. Fragrance net sales increased, primarily benefiting from our fiscal 2020 second quarter acquisition of Have & Be of $67 million. Net sales increased from Estée Lauder, reflecting the continued success of existing product franchises, such as Advanced Night Repair, Perfectionist, Re-Nutriv, Revitalizing Supreme+ and Micro Essence, and new product launches, such as Advanced Night Repair Intense Reset Concentrate. The increase in net sales from La Mer reflected international growth, and benefited from existing products, such as The Treatment Lotion, and product relaunches, such as The Regenerating Serum, as well as targeted expanded consumer reach. Partially offsetting these increases were lower net sales from Clinique and M·A·C, combined, of approximately $68 million. Net sales declined from Clinique primarily due to the continued challenging retail environment that negatively impacted department stores in the United States. The lower net sales from M·A·C reflected declines in all geographic regions, led by the United States and the United Kingdom, due to the challenging retail environment that negatively impacted department stores and freestanding stores. These challenges are being exacerbated by the COVID-19 impacts described above, and are also impacting other brands.

The skin care net sales increases were impacted by approximately $19 million and $45 million of unfavorable foreign currency translation for the three and nine months ended March 31, 2020, respectively.

~~Makeup~~

Three Months Ended
March 31 Nine Months Ended
March 31
($ in millions) 2020 2019 2020 2019
As Reported:
Net sales $ 1,146 $ 1,461 $ 4,249 $ 4,427
$ Change from prior-year period (315) (178)
% Change from prior-year period (22) % (4) %
Non-GAAP Financial Measure⁽¹⁾:
% Change from prior-year period in constant currency (20) % (3) %

⁽¹⁾~~See “Reconciliations of Non-GAAP Financial Measures”~~ ~~beginning on page 57 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.~~

Reported makeup net sales decreased for the three months ended March 31, 2020, reflecting lower net sales from our makeup artist brands, Clinique and Tom Ford, combined, of approximately $260 million. Net sales decreased from these brands reflecting the challenging environment, especially in brick-and-mortar retail and travel retail locations, as a result of the COVID-19 pandemic as discussed above. Despite the challenging environment, net sales from Tom Ford, Clinique and Bobbi Brown grew in the online channel.

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~~THE ESTÉE LAUDER COMPANIES INC.~~

Reported makeup net sales decreased for the nine months ended March 31, 2020 from M·A·C, Clinique, Too Faced and BECCA, combined, of approximately $268 million. The decrease in net sales from these brands reflected declines in North America, due to the general decline in prestige makeup and ongoing competitive activity, as well as the challenging environment as a result of COVID-19. International net sales from M·A·C and Clinique also reflected decreases as a result of the challenging retail environment as a result of COVID-19. The lower net sales from BECCA also reflected a difficult comparison to certain prior-year launches. Partially offsetting these decreases were higher net sales from Estée Lauder and La Mer, combined, of approximately $113 million. The higher net sales from Estée Lauder were primarily due to the success of our Double Wear franchise and Futurist line of products. The higher net sales from La Mer were primarily due to growth internationally, higher sales of existing products, such as The Luminous Lifting Cushion Foundation, and targeted expanded consumer reach.

~~Makeup net sales were impacted by approximately $19 million and $45 million of unfavorable foreign currency translation for the three and nine months ended March 31, 2020, respectively.~~

~~Fragrance~~

Three Months Ended
March 31 Nine Months Ended
March 31
($ in millions) 2020 2019 2020 2019
As Reported:
Net sales $ 349 $ 392 $ 1,392 $ 1,401
$ Change from prior-year period (43) (9)
% Change from prior-year period (11) % (1) %
Non-GAAP Financial Measure⁽¹⁾:
% Change from prior-year period in constant currency (10) % — %

~~Reported fragrance net sales decreased for the three months ended March 31, 2020, reflecting lower~~ net sales from Jo Malone London and ~~certain of our designer fragrances, combined, of approximately $39 million. The decrease~~Tom Ford Beauty. Net sales in ~~net sales from these brands primarily reflected the challenges as a result of the COVID-19 pandemic.The decline in net sales from certain of our designer fragrances also reflected a decrease in North America,~~Asia/Pacific increased, primarily due to ~~an unfavorable comparison to the prior-year period as a result of the December 2019 expiration of our license agreement with Tory Burch and higher launch activity in the prior year.~~

Reported fragrance net sales decreased for the nine months ended March 31, 2020, reflecting lower net sales from certain of our designer fragrances and Estée Lauder of approximately $64 million, combined. The lower net sales from certain designer fragrances reflected a decline in North America, primarily due to an unfavorable comparison to the prior-year period as a result of the December 2019 expiration of our license agreement with Tory Burch and higher launch activity in the prior year, which primarily drove the declines for our products in the department store and specialty-multi channels. The net sales decline from Estée Lauder was primarily due to an unfavorable comparison to the prior-year launch of Beautiful Belle in North America. Partially offsetting these decreases were higher net sales ~~from Tom Ford~~in mainland China and ~~Jo Malone London, combined, of approximately $53 million. Net sales increased from Tom Ford across all geographic regions, which benefited from higher~~Korea. Despite the net sales ~~from certain Private Blend franchises, new product launches, such as Métallique and Soleil Neige, and the stronger demand for holiday sets. The~~growth in our travel retail business (primarily in Hainan), net sales ~~increase from Jo Malone London reflected growth~~ in ~~Asia/Pacific, led by mainland China, Japan and Korea, primarily~~our Europe, the Middle East & Africa region declined due to the continued ~~success of certain hero franchises, new product launches, such as Poppy & Barley, and targeted expanded consumer reach.~~

The fragrance net sales increases were impacted by approximately $5 million and $14 million of unfavorable foreign currency translation for the three and nine months ended March 31, 2020, respectively.

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~~Hair Care~~

Three Months Ended
March 31 Nine Months Ended
March 31
($ in millions) 2020 2019 2020 2019
As Reported:
Net sales $ 119 $ 136 $ 417 $ 433
$ Change from prior-year period (17) (16)
% Change from prior-year period (13) % (4) %
Non-GAAP Financial Measure⁽¹⁾:
% Change from prior-year period in constant currency (12) % (3) %

Reported hair care net sales decreased for the three and nine months ended March 31, 2020, reflecting lower net sales from Aveda and Bumble and bumble. In both periods, the lower net sales from Aveda were primarily driven by a decline in retail traffic and salon and store closures as a result of the COVID-19 pandemic, as discussed above. Net sales declined in both periods from Bumble and bumble due to the softness in North America in the salon and specialty-multi channels.

~~Geographic Regions~~

~~The Americas~~

Three Months Ended
March 31 Nine Months Ended
March 31
($ in millions) 2020 2019 2020 2019
As Reported:
Net sales $ 892 $ 1,155 $ 3,278 $ 3,609
$ Change from prior-year period (263) (331)
% Change from prior-year period (23) % (9) %
Non-GAAP Financial Measure⁽¹⁾:
% Change from prior-year period in constant currency (23) % (9) %

Reported net sales in The Americas for the three and nine months ended March 31, 2020 decreased due to lower net sales in the United States of approximately $232 million and $305 million, respectively. Net sales decreased in the United States for the three months ended March 31, 2020, reflecting declines from most brands and channels of distribution due to the challenging environment as a resultchallenges of the COVID-19 pandemic, including ~~the~~ temporary ~~closing of~~retail store closures and reduced consumer foot traffic in brick-and-mortar retail ~~stores,~~locations, the continued curtailment of international travel, ~~bans~~ and ~~restrictions,~~continued social distancing and quarantines. ~~The decline in~~Direct-to-consumer online net sales continued to have strong growth, representing approximately 18% of net sales for the nine months ended March 31, ~~2020 also reflected lower~~2021 compared to approximately 12% in the prior-year period.

The total net sales from our makeup artist brands, Clinique, Too Faced and BECCA due to the decline in prestige makeup generally in North America. Also contributing to the decline was an unfavorable comparison to prior-year launch activity from certain of our designer fragrances, Estée Lauder and BECCA. The decline from certain of our designer fragrances also reflected lower net sales as a result of the December 2019 expiration of our license agreement with Tory Burch. In addition, for both periods, we recognized lower net sales from gift with purchase and purchase with purchase promotional products compared to the prior year.

~~Net sales in The Americas~~changes were impacted by approximately $2$95 million ~~of unfavorable~~ and $3$212 million of favorable foreign currency translation for the three and nine months ended March 31, ~~2020,~~2021, respectively.

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~~Europe, the Middle East & Africa~~

Three Months Ended
March 31 Nine Months Ended
March 31
($ in millions) 2020 2019 2020 2019
As Reported:
Net sales $ 1,525 $ 1,625 $ 5,281 $ 4,825
$ Change from prior-year period (100) 456
% Change from prior-year period (6) % 9 %
Non-GAAP Financial Measure⁽¹⁾:
% Change from prior-year period in constant currency (5) % 11 %

Reported net sales decreased in most markets in Europe, the Middle East & Africa for the three months ended March 31, 2020, led by the United Kingdom, Russia, Italy, Germany and France, combined, of approximately $103 million, due to the evolution of the COVID-19 pandemic and its challenges across the region, including temporary closing of brick-and-mortar stores, travel bans and restrictions, social distancing and quarantines. Partially offsetting these decreases was an increase in net sales from our travel retail business of approximately $24 million, which growth took place primarily in the first half of the quarter. Net sales in travel retail increased primarily from Estée Lauder, as a result of the continued success of certain hero franchises, such as Advanced Night Repair, partially offset by decreases in net sales from M·A·C, Tom Ford and Clinique, reflecting the shift in consumer preferences to skin care products from other product categories as a result of the COVID-19 pandemic.

Reported net sales increased for the nine months ended March 31, 2020, reflecting higher net sales from our travel retail business of approximately $536 million. These increases were led by Estée Lauder, La Mer and Origins, driven, in part, by the continued success of certain hero franchises, such as the Advanced Night Repair line of products from Estée Lauder, La Mer Treatment Lotion and Dr. Andrew Weil For Origins Mega-Mushroom Relief & Resilience Soothing Treatment Lotion. Also contributing to the net sales increase were new product launches, including Estée Lauder’s Advanced Night Repair Intense Reset Concentrate and The Regenerating Serum from La Mer, as well as strategic investment spending to support both new and existing products. Partially offsetting these increases were lower net sales from the United Kingdom and France, combined, of approximately $64 million, primarily driven by the continued adverse macroeconomic conditions.

Net sales in Europe, the Middle East & Africa were impacted by approximately $17 million and $53 million of unfavorable foreign currency translation for the three and nine months ended March 31, 2020, respectively.

~~Asia/Pacific~~

Three Months Ended
March 31 Nine Months Ended
March 31
($ in millions) 2020 2019 2020 2019
As Reported:
Net sales $ 928 $ 966 $ 3,305 $ 2,841
$ Change from prior-year period (38) 464
% Change from prior-year period (4) % 16 %
Non-GAAP Financial Measure⁽¹⁾:
% Change from prior-year period in constant currency (1) % 18 %

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Reported net sales decreased in Asia/Pacific for the three months ended March 31, 2020, reflecting lower net sales in most markets, led by Hong Kong, Australia, Japan and Malaysia, combined, of approximately $93 million due to the evolution of the COVID-19 pandemic and its challenges across the region, including temporary closing of brick-and-mortar retail stores, travel bans and restrictions, social distancing and quarantines. Despite the decreases in net sales in department stores and freestanding stores, net sales of our products online grew double digits. Partially offsetting these declines were higher net sales in Korea of approximately $63 million, driven by the incremental net sales from our fiscal 2020 second quarter acquisition of Have & Be.

Reported net sales increased in Asia/Pacific for the nine months ended March 31, 2020, reflecting higher net sales in mainland China and Korea, combined, of approximately $554 million. The higher net sales in mainland China reflected double-digit growth from virtually every brand, led by Estée Lauder, La Mer, M·A·C and Tom Ford, continued growth in skin care and makeup, targeted expanded consumer reach, and new product launches, such as Estée Lauder’s Advanced Night Repair Intense Reset Concentrate and a new larger size of The Treatment Lotion from La Mer. The net sales increase in mainland China benefited every channel, led by online (due to the continued growth and successful holiday events and campaigns on Tmall), department stores, specialty-multi and freestanding stores. The net sales growth in Korea reflected incremental net sales from our fiscal 2020 second quarter acquisition of Have & Be. These increases were partially offset by lower net sales in Hong Kong of approximately $124 million, due to the pre-COVID-19 protests there that were negatively impacting traffic in downtown shops and the airport and also led to intermittent store closures.~~Since January 2020, our business in Hong Kong, and elsewhere in Asia/Pacific has been adversely impacted by challenges attributable to the COVID-19 pandemic discussed above.~~

~~Net sales in Asia/Pacific were impacted by approximately $25 million and $56 million of unfavorable foreign currency translation for the three and nine months ended March 31, 2020, respectively.~~

~~We strategically stagger our new product launches by geographic market, which may account for differences in regional sales growth.~~

~~GROSS MARGIN~~

~~Gross margin decreased to 75.0% and 76.5% for the three and nine months ended March 31, 2020, respectively, as compared with 78.1% and 77.4% in the prior-year periods.~~

Favorable (Unfavorable) Basis Points
March 31, 2020
Three Months Ended Nine Months Ended
Mix of business (160) —
Obsolescence charges (30) (40)
Manufacturing costs and other (150) (50)
Foreign exchange transactions 20 —
Subtotal (320) (90)
Charges associated with restructuring and other activities 10 —
Total (310) (90)

The decrease in gross margin for the three months ended March 31, 2020 reflected the unfavorable impact from our mix of business primarily due to unfavorable changes in strategic pricing and channel mix, due, in part, to the impacts of COVID-19; higher cost of sales related to our fiscal 2020 acquisition of Have & Be, which includes an inventory step-up adjustment of $11 million, or approximately 35 basis points; unfavorable change from new product introductions; and the higher cost from product sets. Also reflected were unfavorable changes in manufacturing costs and other, including the impacts of incremental tariffs.

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~~OPERATING EXPENSES~~

Operating expenses as a percentage of net sales increased to 71.7% and 66.8% for the three and nine months ended March 31, 2020, respectively, as compared with 60.1% and 58.8% in the prior-year periods.

Favorable (Unfavorable) Basis Points
March 31, 2020
Three Months Ended Nine Months Ended
General and administrative expenses 230 20
Advertising, merchandising, sampling and product development (260) (100)
Selling (180) 50
Stock-based compensation (20) 10
Store operating costs (30) 10
Shipping (40) (10)
Foreign exchange transactions 50 40
Subtotal (250) 20
Charges associated with restructuring and other activities 10 40
Goodwill, other intangible and long-lived asset impairments (890) (860)
Changes in fair value of contingent consideration (30) —
Total (1,160) (800)

For the three months ended March 31, 2020, the increase in operating expense margin was primarily driven by the impact of goodwill, other intangible and long-lived asset impairments; lower net sales driven by the impact of COVID-19; continued strategic investments in advertising and promotional activities, such as digital advertising and social media spending in mainland China; and an increase in selling expenses, such as continued employee payroll costs. These increases were partially offset by the decrease in general and administrative expenses, primarily due to lower accrued employee incentive compensation as a result of the anticipated impacts of COVID-19 on the fiscal 2020 business performance.

For the nine months ended March 31, 2020, the increase in operating expense margin was driven by the impact of goodwill, other intangible and long-lived asset impairments. In addition, advertising and promotional activities increased to support new product launches, digital spending, social media and targeted expanded consumer reach, primarily in mainland China.

As previously discussed, we started to implement strict cost controls in January 2020 to help mitigate the expected loss of sales in mainland China and travel retail. Additional steps include furloughs and similar unpaid temporary leaves of absence for many point of sale employees; temporary salary reductions for senior executives and other management employees; a temporary elimination of cash retainers for the Board of Directors; and expanded cost control measures (e.g., advertising and promotion activities and consulting), the majority of which are beginning in May 2020.

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~~OPERATING RESULTS~~

Three Months Ended
March 31 Nine Months Ended
March 31
($ in millions) 2020 2019 2020 2019
As Reported:
Operating income $ 109 $ 674 $ 1,149 $ 2,097
$ Change from prior-year period (565) (948)
% Change from prior-year period (84) % (45) %
Operating margin 3.3 % 18.0 % 9.7 % 18.6 %
Non-GAAP Financial Measure⁽¹⁾:
% Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill, other intangible and long-lived asset impairments and changes in fair value of contingent consideration (36) % 2 %

The reported operating margin for the three and nine months ended March 31, 2020 decreased from the prior-year periods driven by the year-over-year impact of goodwill, other intangible and long-lived asset impairments of $294 million and $1,033 million for the three and nine months ended March 31, 2020, respectively, the decrease in gross margin and the increase in operating expenses as a percentage of net sales, as previously noted.

~~Charges~~Returns associated with restructuring and other activities are not allocated to our product categories or geographic regions because they result from activities that are deemed a Company-wide initiative to redesign, resize and reorganize select corporate functions and go-to-market structures. Accordingly, the following discussions of Net sales by Product Categories and Geographic Regions exclude the fiscal 2021 third quarter impact of returns associated with restructuring and other activities of approximately $10 million.

Product Categories

Skin Care


	Three Months Ended March 31					Nine Months Ended March 31
($ in millions)	2021			2020		2021			2020
As Reported:
Net sales	$	2,259		$	1,723	$	7,113		$	5,770
$ Change from prior-year period	536					1,343
% Change from prior-year period	31		%			23		%

Non-GAAP Financial Measure(1):
% Change from prior-year period in constant currency	28		%			21		%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

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Reported skin care net sales increased for the three months ended March 31, 2021, reflecting higher net sales from Estée Lauder, La Mer and Clinique of approximately $502 million, combined. Net sales increased from Estée Lauder and La Mer, led by our travel retail business (primarily in Hainan) and mainland China, reflecting strong growth from direct-to-consumer online net sales of products from these brands primarily due to the successful holiday and promotional events. Net sales increased from Estée Lauder, reflecting the continued success of hero product franchises, such as Advanced Night Repair, Revitalizing Supreme+ and Daywear, as well as fiscal 2021 product launches, such as Advanced Night Repair Synchronized Multi-Recovery Complex, Revitalizing Supreme+ Bright, and the relaunch of Perfectionist Pro. The increase in net sales from La Mer also benefited from the continued success of hero products, such as Crème de la Mer, The Concentrate, The Treatment Lotion and The Eye Concentrate, as well as the fiscal 2021 launch of the Genaissance de la Mer The Concentrated Night Balm and targeted expanded consumer reach. Net sales increased from Clinique for the three months ended March 31, 2021, primarily due to higher net sales in our travel retail business (primarily in Hainan) and in North America, reflecting the continued success of existing products, such as Dramatically Different products and Even Better Clinical Radical Dark Spot Corrector + Interrupter, and new product launches, such as Moisture Surge 100H Auto-Replenishing Hydrator.

Reported skin care net sales increased for the nine months ended March 31, 2021, reflecting higher net sales from Estée Lauder, La Mer, and Clinique, as well as incremental net sales attributable to our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter, of approximately $1,452 million, combined. Net sales increased from Estée Lauder, La Mer and Clinique, as noted above.

The skin care net sales increases were impacted by approximately $58 million and $139 million of favorable foreign currency translation for the three and nine months ended March 31, 2021, respectively.

Makeup


	Three Months Ended March 31					Nine Months Ended March 31
($ in millions)	2021			2020		2021			2020
As Reported:
Net sales	$	1,018		$	1,146	$	3,243		$	4,249
$ Change from prior-year period	(128)					(1,006)
% Change from prior-year period	(11)		%			(24)		%

Non-GAAP Financial Measure(1):
% Change from prior-year period in constant currency	(13)		%			(25)		%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported makeup net sales decreased for the three and nine months ended March 31, 2021, due to lower net sales from virtually all brands, led by M·A·C, Estée Lauder and Clinique, combined, of approximately $115 million and $766 million, respectively. The makeup product category continues to be more negatively impacted by the effects of the COVID-19 pandemic, especially the challenging environment in brick-and-mortar retail locations, the continued consumer preference for skin care products, and the limited use of makeup. The continued decline in prestige makeup and ongoing competitive activity in North America also contributed to the decline in net sales from these brands in both periods.

The makeup net sales decreases were impacted by approximately $24 million and $46 million of favorable foreign currency translation for the three and nine months ended March 31, 2021, respectively.

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Fragrance


	Three Months Ended March 31					Nine Months Ended March 31
($ in millions)	2021			2020		2021			2020
As Reported:
Net sales	$	454		$	349	$	1,478		$	1,392
$ Change from prior-year period	105					86
% Change from prior-year period	30		%			6		%

Non-GAAP Financial Measure(1):
% Change from prior-year period in constant currency	27		%			5		%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported fragrance net sales increased for the three months ended March 31, 2021, primarily due to higher net sales from Jo Malone London and Tom Ford Beauty of approximately $86 million, combined, and net sales of products from these brands increased in all geographic regions. Jo Malone London benefited from successful holiday and promotional events and new product launches, such as the Blossoms Collection and Scarlet Poppy Cologne Intense. The increase in net sales from Tom Ford Beauty was primarily due to the continued success of hero product franchises, such as Oud Wood and Black Orchid, the continued success of the fiscal 2021 second quarter launch of Bitter Peach, and new product launches in the third quarter of fiscal 2021, such as Tubereuse Nue and Costa Azzurra.

Reported fragrance net sales increased for the nine months ended March 31, 2021, primarily due to higher net sales from Jo Malone London and Tom Ford Beauty of approximately $110 million, combined. The increase in net sales from Jo Malone London, led by mainland China and North America, was primarily due to successful holiday and promotional events, the success of certain hero product franchises and new product launches, such as Scents for the Season, the Blossoms Collection and Scarlet Poppy. Net sales from Tom Ford Beauty increased for the nine months ended March 31, 2021, reflecting growth in all geographic regions, benefiting from the continued success of hero product franchises and new product launches, such as Bitter Peach, Tubereuse Nue and Costa Azzurra.

Partially offsetting these increases in net sales for the nine months ended March 31, 2021, were lower net sales from certain of our designer fragrances, led by our travel retail business, primarily due to the continued challenging environment as a result of the COVID-19 pandemic.

The fragrance net sales increases were impacted by approximately $10 million and $21 million of favorable foreign currency translation for the three and nine months ended March 31, 2021, respectively.

Hair Care


	Three Months Ended March 31					Nine Months Ended March 31
($ in millions)	2021			2020		2021			2020
As Reported:
Net sales	$	128		$	119	$	418		$	417
$ Change from prior-year period	9					1
% Change from prior-year period	8		%			—		%

Non-GAAP Financial Measure(1):
% Change from prior-year period in constant currency	6		%			(1)		%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

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Reported hair care net sales increased for the three months ended March 31, 2021, primarily due to higher net sales from Aveda driven by the success of existing product franchises, such as Nutriplenish, and the continued success of the fiscal 2021 first quarter launch of Botanical Repair, which led to growth in all geographic regions.

Reported hair care net sales for the nine months ended March 31, 2021 were virtually flat, reflecting higher net sales primarily from Aveda, as noted above, partially offset by lower net sales from Bumble and bumble, reflecting the net sales decline in North America primarily due to temporary salon and freestanding store closures as a result of the COVID-19 pandemic.

The increases in net sales for the three and nine months ended March 31, 2021 from Aveda also reflected strong growth from direct-to-consumer online net sales.

Geographic Regions

The Americas


	Three Months Ended March 31					Nine Months Ended March 31
($ in millions)	2021			2020		2021			2020
As Reported:
Net sales	$	916		$	892	$	2,837		$	3,278
$ Change from prior-year period	24					(441)
% Change from prior-year period	3		%			(13)		%

Non-GAAP Financial Measure(1):
% Change from prior-year period in constant currency	4		%			(12)		%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported net sales in The Americas increased for the three months ended March 31, 2021, led by the United States of approximately $26 million, and in all product categories, except makeup. The increase in the United States partially reflected a recovery compared to the prior-year challenges stemming from the outbreak of COVID-19.

Partially offsetting this increase in net sales for the three months ended March 31, 2021, were lower net sales in Latin America due to the resurgence of COVID-19 cases in certain countries that led to government restrictions, as well as the continued decline in North America prestige makeup and the ongoing competitive activity.

Reported net sales in The Americas decreased in virtually all countries for the nine months ended March 31, 2021, led by the United States of approximately $387 million, and in all product categories, led by makeup. The net sales decrease in the region was led by M·A·C and Estée Lauder (primarily due to the declines in the makeup category), as a result of the continued challenging environment caused by the COVID-19 pandemic, including the resurgence of COVID-19 cases, reduced consumer traffic in brick-and-mortar retail locations, and continued social distancing. The decline in North America prestige beauty, primarily makeup, and the ongoing competitive activity also contributed to the decline in net sales.

Direct-to-consumer online net sales in The Americas grew double digits for the three and nine months ended March 31, 2021, and represented approximately 19% and 22% of total net sales in the region compared to approximately 15% and 14% in the prior-year periods, respectively.

Net sales in The Americas were impacted by approximately $10 million and $39 million of unfavorable foreign currency translation for the three and nine months ended March 31, 2021, respectively.

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Europe, the Middle East & Africa


	Three Months Ended March 31					Nine Months Ended March 31
($ in millions)	2021			2020		2021			2020
As Reported:
Net sales	$	1,706		$	1,525	$	5,276		$	5,281
$ Change from prior-year period	181					(5)
% Change from prior-year period	12		%			—		%

Non-GAAP Financial Measure(1):
% Change from prior-year period in constant currency	10		%			(1)		%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported net sales for the three months ended March 31, 2021 increased in Europe, the Middle East & Africa, reflecting higher net sales in our travel retail business and Russia of approximately $221 million, combined. Despite the continued curtailment of international travel as a result of the COVID-19 pandemic, the increase in net sales from our travel retail business was led by the continued success of hero product franchises from Estée Lauder, La Mer and Origins, reflecting the increase in China travel retail (primarily Hainan) due, in part, to increased duty-free purchase limits and the acceleration of new digital selling models. The net sales increase from Russia primarily reflects the timing of shipments related to retailer restocking and the shift in sales orders from some retailers in the prior-year period related to a system implementation.

Partially offsetting these increases in net sales for the three months ended March 31, 2021, were lower net sales from the United Kingdom, reflecting the continued challenges from the resurgence of COVID-19 cases that led to government restrictions, such as quarantines and temporary closures of businesses deemed non-essential.

Reported net sales for the nine months ended March 31, 2021 decreased in Europe, the Middle East & Africa, reflecting lower net sales in most markets across the region, led by the United Kingdom, France and Iberia of approximately $159 million, combined. The decrease in net sales from these markets reflects the continued challenges from the COVID-19 pandemic, including the resurgence of COVID-19 cases that led to government restrictions, such as temporary store closures and quarantines, and reduced consumer traffic in brick-and-mortar retail. The adverse macroeconomic conditions and the liquidation of a key retailer in the fiscal 2021 second quarter also contributed to the decrease in net sales in the United Kingdom.

Partially offsetting these decreases for the nine months ended March 31, 2021, were higher net sales from our travel retail business, led by the continued success of hero product franchises from Estée Lauder and La Mer, primarily driven by the increases in net sales in China travel retail (primarily Hainan), as noted above.

For the three and nine months ended March 31, 2021, despite the challenges in brick-and-mortar retail locations, direct-to-consumer online net sales in Europe, the Middle East & Africa more than doubled, representing approximately 4% and 5%, respectively, of total net sales in the region compared to approximately 2% in both prior-year periods.

Net sales in Europe, the Middle East & Africa were impacted by approximately $24 million and $54 million of favorable foreign currency translation for the three and nine months ended March 31, 2021, respectively.

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THE ESTÉE LAUDER COMPANIES INC.

Asia/Pacific


	Three Months Ended March 31					Nine Months Ended March 31
($ in millions)	2021			2020		2021			2020
As Reported:
Net sales	$	1,252		$	928	$	4,176		$	3,305
$ Change from prior-year period	324					871
% Change from prior-year period	35		%			26		%

Non-GAAP Financial Measure(1):
% Change from prior-year period in constant currency	26		%			20		%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported net sales in Asia/Pacific increased for the three months ended March 31, 2021, reflecting higher net sales primarily in mainland China, Australia, Korea and Hong Kong of approximately $334 million, combined, and in all product categories. The increase in net sales in mainland China reflected higher net sales in all product categories, led by skin care. The success of holiday and promotional events in mainland China contributed to growth in virtually all brands and all channels, led by Estée Lauder and La Mer and department stores and third-party platforms, respectively. Net sales in Australia increased in all product categories and from all brands, led by Estée Lauder and Clinique, driven by a recovery compared to the prior-year challenges stemming from the outbreak of COVID-19. Net sales increased in Korea, reflecting growth in all product categories, except makeup, and benefited from the increase in net sales from Dr. Jart+ and Jo Malone London. Net sales in Hong Kong increased for the three months ended March 31, 2021, in all product categories, except makeup, and from most brands, led by La Mer and Estée Lauder, reflecting an easy comparison to the prior-year period as a result of the outbreak of COVID-19. Direct-to-consumer online net sales in Asia/Pacific for the three months ended March 31, 2021 grew double digits.

Partially offsetting these increases in net sales for the three months ended March 31, 2021 were lower net sales in Japan primarily due to the ongoing challenges stemming from the COVID-19 pandemic, including reduced consumer traffic in brick-and-mortar retail locations, the continued curtailment of international travel, and social distancing and quarantines.

Reported net sales in Asia/Pacific increased for the nine months ended March 31, 2021, reflecting higher net sales primarily in mainland China and Korea of approximately $984 million, combined, and in our skin care product category. The increase in net sales in mainland China reflected higher net sales primarily in our skin care product category, led by Estée Lauder, La Mer and Dr. Jart+, as well as third-party platforms and department stores. Net sales increased in Korea, primarily benefiting from incremental net sales from our acquisition of Dr. Jart+ at the end of the fiscal 2020 second quarter and higher net sales from Jo Malone London. Direct-to-consumer online net sales in Asia/Pacific for the nine months ended March 31, 2021 grew double digits, representing approximately 31% of total net sales in the region compared to approximately 25% in the prior-year period.

Partially offsetting these increases for the nine months ended March 31, 2021, were lower net sales in Japan and Hong Kong of approximately $122 million, combined, primarily due to the ongoing challenges stemming from the COVID-19 pandemic, including reduced consumer traffic in brick-and-mortar retail locations, the continued curtailment of international travel, social distancing and quarantines, and border closures in Hong Kong.

Net sales in Asia/Pacific were impacted by approximately $80 million and $196 million of favorable foreign currency translation for the three and nine months ended March 31, 2021, respectively.

We strategically stagger our new product launches by geographic market, which may account for differences in regional sales growth.

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GROSS MARGIN

Gross margin increased to 75.7% and 76.8% for the three and nine months ended March 31, 2021, respectively, as compared with 75.0% and 76.5% in the prior-year periods.


	Favorable (Unfavorable) Basis Points
	March 31, 2021
	Three Months Ended	Nine Months Ended
Mix of business	235	100
Obsolescence charges	(65)	(30)
Manufacturing costs and other	(30)	—
Foreign exchange transactions	(50)	(40)
Subtotal	90	30
Charges associated with restructuring and other activities	(20)	—
Total	70	30

The favorable impact from our mix of business for the three and nine months ended March 31, 2021 was primarily due to the favorable change in product category mix (i.e. a decline in net sales of our lower margin makeup category, led by North America and Europe, the Middle East & Africa (primarily our travel retail business)), favorable changes in strategic pricing, lower costs from product sets, and lower costs of promotional items as a result of reduced consumer traffic in brick-and-mortar retail locations. For the three months ended March 31, 2021, the favorable impact from our mix of business was also driven by an increase in net sales of our higher margin luxury and artisanal fragrance brands.

OPERATING EXPENSES

Operating ~~Income~~expenses as a percentage of net sales was 59.8% and 57.4% for the three and nine months ended March 31, 2021, respectively, as compared with 71.7% and 66.8% in the prior-year periods.


	Favorable (Unfavorable) Basis Points
	March 31, 2021
	Three Months Ended	Nine Months Ended
General and administrative expenses	(230)	(180)
Advertising, merchandising, sampling and product development	200	60
Selling	520	320
Stock-based compensation	(20)	(40)
Store operating costs	70	30
Shipping	—	(10)
Foreign exchange transactions	(10)	20
Subtotal	530	200
Charges associated with restructuring and other activities	(270)	(90)
Goodwill, other intangible and long-lived asset impairments	940	850
Changes in fair value of contingent consideration	(10)	(20)
Total	1,190	940

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THE ESTÉE LAUDER COMPANIES INC.

For the three months ended March 31, 2021, the decrease in operating expense margin was driven by higher net sales compared to the prior-year period that reflected the negative impact of the outbreak of COVID-19; the year-over-year impact of goodwill, other intangible and long-lived asset impairments of $313 million; and a decrease in selling expense, due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, including the decline in consumer traffic, store closures, and the continued shift in consumer preference to online. The advertising, merchandising, sampling and product development favorability was driven by the increase in net sales, partially offset by the increase in advertising and promotional expense, primarily due to continued strategic investments and a difficult comparison to the prior-year period that reflected cost saving actions implemented in response to the impacts of the COVID-19 pandemic.

For the nine months ended March 31, 2021, the decrease in operating expense margin was driven by the year-over-year impact of goodwill, other intangible and long-lived asset impairments of $1,009 million, as well as favorability from selling expense and advertising and promotional expense, as noted above.

Partially offsetting these favorable impacts for the three and nine months ended March 31, 2021 were increases in general and administrative expenses, primarily due to an increase in employee incentive compensation from the prior-year period, which reflected lower accrued employee incentive compensation as a result of the anticipated impacts of the COVID-19 pandemic.

OPERATING RESULTS


	Three Months Ended March 31						Nine Months Ended March 31
($ in millions)	2021			2020			2021			2020
As Reported:
Operating income	$	616		$	109		$	2,384		$	1,149
$ Change from prior-year period	507						1,235
% Change from prior-year period	100+%						100+%

Operating margin	15.9		%	3.3		%	19.4		%	9.7		%

Non-GAAP Financial Measure(1):
% Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill, other intangible and long-lived asset impairments and changes in fair value of contingent consideration	66		%				16		%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

The reported operating margin for the three and nine months ended March 31, 2021 increased from the prior-year periods driven by the year-over-year impact of goodwill, other intangible and long-lived asset impairments of $313 million and $1,009 million for the three and nine months end March 31, 2021, respectively, the decrease in operating expenses as a percentage of net sales and the increase in gross margin, as previously noted.

Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business. Accordingly, the following discussions of Operating income by Product Categories and Geographic Regions exclude the impact of charges associated with restructuring and other ~~activities.~~activities of $145 million, or 4% of net sales and $25 million, or 1% of net sales for the three months ended March 31, 2021 and 2020, respectively, and $191 million, or 2% of net sales and $63 million, or 1% of net sales for the nine months ended March 31, 2021 and 2020, respectively.

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THE ESTÉE LAUDER COMPANIES INC.

Product Categories

Skin Care


		Three Months Ended March 31								Nine Months Ended March 31								Three Months Ended March 31					Nine Months Ended March 31
($ in millions)	($ in millions)	2020			2019		2020			2019		($ in millions)	2021			2020		2021			2020
As Reported:	As Reported:											As Reported:
Operating income	Operating income	$	418		$	593	$	1,822		$	1,624	Operating income	$	804		$	418	$	2,453		$	1,822
$ Change from prior-year period	$ Change from prior-year period	(175)					198					$ Change from prior-year period	386					631
% Change from prior-year period	% Change from prior-year period	(30)		%			12		%			% Change from prior-year period	92		%			35		%

Non-GAAP Financial Measure⁽¹⁾:	Non-GAAP Financial Measure⁽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 changes in fair value of contingent consideration.		(19)		%			16		%
% Change in operating income from the prior-year period adjusting for the impact of goodwill, other intangible and long-lived asset impairments and changes in fair value of contingent consideration												% Change in operating income from the prior-year period adjusting for the impact of goodwill, other intangible and long-lived asset impairments and changes in fair value of contingent consideration	70		%			35		%

⁽¹⁾See “Reconciliations of Non-GAAP Financial Measures” beginning on page 5761 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported skin care operating income increased for the three months ended March 31, 2021, primarily driven by higher results from Estée Lauder, La Mer, GLAMGLOW and Clinique of approximately $454 million, combined. The increases in operating income from Estée Lauder, La Mer and Clinique were primarily driven by the increases in net sales. The higher results from La Mer were partially offset by the increase in advertising and promotional expense, primarily due to investments to support holiday and promotional events and a difficult comparison to the prior-year period that reflected cost saving actions implemented in response to the impacts of the COVID-19 pandemic. Operating income from GLAMGLOW increased for the three months ended March 31, 2021, driven by the favorable year-over-year impact of goodwill and other intangible asset impairments of $53 million.

Partially offsetting the increase in operating income for the three months ended March 31, 2021, were higher general and administrative expenses, primarily due to increased employee incentive compensation from the prior-year period, which reflected lower accrued employee incentive compensation as a result of the anticipated impacts of the COVID-19 pandemic.

Reported skin care operating income increased for the nine months ended March 31, 2021, primarily driven by higher results from Estée Lauder, La Mer and Clinique of approximately $888 million, combined. The increases in operating income from these brands primarily reflected higher net sales, as well as lower selling expenses due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, including the decline in consumer traffic, store closures, and the continued shift in consumer preference to online. These increases were partially offset by increased advertising and promotional activities primarily to support holiday and promotional events and new product launches.

Partially offsetting the increase in operating income for the nine months ended March 31, 2021, were higher general and administrative expenses, primarily due to increased employee incentive compensation and lower results from GLAMGLOW driven by the unfavorable year-over-year impact of goodwill and other intangible asset impairments of $28 million.

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THE ESTÉE LAUDER COMPANIES INC.

Makeup


	Three Months Ended March 31					Nine Months Ended March 31
($ in millions)	2021			2020		2021			2020
As Reported:
Operating loss	$	(72)		$	(283)	$	(115)		$	(790)
$ Change from prior-year period	211					675
% Change from prior-year period	75		%			85		%

Non-GAAP Financial Measure(1):
% Change in operating loss from the prior-year period adjusting for the impact of goodwill, other intangible and long-lived asset impairments	(100+)%					(100+)%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported ~~skin care~~makeup operating ~~income decreased~~results increased for the three and nine months ended March 31, ~~2020,~~2021, driven by ~~lower results from GLAMGLOW, La Mer, Clinique and Estée Lauder, combined,~~the favorable year-over-year impact of ~~approximately $139 million. The decline in operating income from GLAMGLOW reflected the current year~~ goodwill and other intangible asset impairments related to Too Faced, BECCA and Smashbox, combined, of ~~$53 million. The~~approximately $280 million and $1,057 million for the three and nine months, respectively.

Partially offsetting the decreases in operating loss for the three and nine months ended March 31, 2021, were lower results from ~~La Mer reflected a decrease in gross profit and an increase in operating expenses,~~M·A·C primarily ~~selling expenses related~~due to ~~continued employee costs. The decline in operating income from Clinique reflected~~ the decrease in net sales, ~~partially~~ offset by ~~disciplined~~lower selling expense ~~management~~and store operating costs, due to ~~mitigate~~ the ~~net sales decline as a result~~impacts of the COVID-19 ~~pandemic. The lower results from Estée Lauder reflected strategic investments~~pandemic on brick-and-mortar retail locations, including the decline in ~~advertising~~consumer traffic, store closures, and ~~promotional activities, which more than offset~~ the ~~brand's increase~~continued shift in ~~gross profit.~~

~~Reported skin care~~consumer preference to online, as well as disciplined expense management. Also offsetting the decreases in operating ~~income increased~~loss for the three and nine months ended March 31, ~~2020, driven by~~2021 were higher ~~results~~general and administrative expenses, primarily due to increased employee incentive compensation from ~~Estée Lauder and La Mer, combined, of approximately $378 million. The increases in operating income~~the prior-year period, which reflected higher net sales, partially offset by strategic investments in advertising and promotional activities and targeted expanded consumer reach. The increase in skin care operating income also reflected the decrease inlower accrued employee incentive compensation as a result of the anticipated impacts of the COVID-19 onpandemic, as well as the ~~fiscal 2020 business performance. Partially offsetting these increases were the~~unfavorable year-over-year impact of ~~the goodwill and other intangible~~long-lived asset impairments in certain of our freestanding stores relating to ~~GLAMGLOW discussed above, lower results from Clinique reflecting the decline in net sales, and strategic investments in information systems.~~COVID-19 of $14 million.

~~Makeup~~

Three Months Ended
March 31 Nine Months Ended
March 31
($ in millions) 2020 2019 2020 2019
As Reported:
Operating income (loss) $ (283) $ 99 $ (790) $ 398
$ Change from prior-year period (382) (1,188)
% 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, other intangible and long-lived asset impairments (96) % (43) %
Fragrance

^{Three Months Ended
March 31 Nine Months Ended
March 31
($ in millions) 2021 2020 2021 2020
As Reported:
Operating income $ 47 $ — $ 248 $ 163
$ Change from prior-year period 47 85
% Change from prior-year period — % 52 %
Non-GAAP Financial Measure(1):
% Change in operating income from the prior-year period adjusting for the impact of long-lived asset impairments and changes in fair value of contingent consideration — % 60 %}

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 5761 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported ~~makeup~~fragrance operating ~~results decreased~~income increased for the three and nine months ended March 31, ~~2020, driven by lower~~2021, primarily reflecting higher results from ~~Too Faced, M·A·C, Clinique,~~Tom Ford Beauty and ~~BECCA,~~Jo Malone London, combined, of approximately ~~$445 million. The lower results from Too Faced and BECCA reflected the current year goodwill and other intangible asset impairments of approximately $204~~$62 million and ~~$49~~$110 million, respectively. ~~The lower results from M·A·C reflected~~In both periods, the ~~decrease in net sales, partially offset by disciplined expense management, while the decrease~~increases in operating income from ~~Clinique was driven primarily by~~these brands reflected higher net sales and lower selling expenses due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, including the decline in net sales. Also reflected in the decrease in reported makeup operating results is the impact of long-lived asset impairments relating to COVID-19. Partially offsetting these decreases were higher results from Estée Lauder and Smashbox, combined, of approximately $64 million. The increase in operating income from Estée Lauder was due to disciplined expense management, primarily advertising and promotional activities. The fiscal 2020 third quarter results from Smashbox included $27 million of goodwill and other intangible asset impairments,consumer traffic, store closures, and the ~~fiscal 2019 operating results included $52 million relating~~continued shift in consumer preference to the fiscal 2019 goodwill and other intangible asset impairments. The makeup operating results also reflected the decrease in accrued employee incentive compensation as a result of the anticipated impacts of COVID-19 on the fiscal 2020 business performance.

online.

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Reported makeup operating results decreased for the nine months ended March 31, 2020 driven by lower results from Too Faced, M·A·C and BECCA, combined, of approximately $1,210 million. The fiscal 2020 operating results from Too Faced and BECCA include $845 million and $117 million of goodwill and other intangible asset impairments, respectively. The lower results from M·A·C were driven by the decrease in net sales. Also reflected in the decrease in reported makeup operating results is the impact of long-lived asset impairments relating to COVID-19. Partially offsetting ~~these decreases were higher results from Estée Lauder and La Mer, combined, of $96 million driven by~~ the ~~increase~~increases in ~~net sales.~~

~~Fragrance~~

Three Months Ended
March 31 Nine Months Ended
March 31
($ in millions) 2020 2019 2020 2019
As Reported:
Operating income $ — $ 17 $ 163 $ 156
$ Change from prior-year period (17) 7
% Change from prior-year period (100) % 4 %

~~Reported fragrance~~ operating income ~~decreased~~ for the ~~three months ended March 31, 2020, driven primarily by Jo Malone London, reflecting the decrease in net sales.~~

Reported fragrance operating income increased for the nine months ended March 31, 2020, primarily due to higher results from Le Labo, reflecting higher net sales due, in part, to targeted expanded consumer reach, partially offset by lower results from Clinique, reflecting lower net sales.

~~Hair Care~~

Three Months Ended
March 31 Nine Months Ended
March 31
($ in millions) 2020 2019 2020 2019
As Reported:
Operating income (loss) $ (2) $ (2) $ 10 $ 27
$ Change from prior-year period — (17)
% Change from prior-year period — % (63) %

~~Reported hair care operating results for~~ three and nine months ended March 31, ~~2020~~2021, were increases from Jo Malone London in advertising and promotional activities primarily driven by increased spend for digital advertising and to support new product launches and a difficult comparison to the prior-year period that reflected ~~lower results~~cost saving actions implemented in response to the impacts of the COVID-19 pandemic.

Also offsetting the increases in fragrance operating income for the three and nine months ended March 31, 2021 were higher general and administrative expenses, primarily due to increased employee incentive compensation from ~~Aveda and Bumble and bumble driven primarily by~~ the ~~decrease in net sales, offset by the decrease in~~prior-year period, which reflected lower accrued employee incentive compensation as a result of the anticipated impacts of the COVID-19 pandemic, as well as the unfavorable year-over-year impact of long-lived asset impairments in certain of our freestanding stores relating to COVID-19 of $8 million.

Hair Care


	Three Months Ended March 31				Nine Months Ended March 31
($ in millions)	2021		2020		2021		2020
As Reported:
Operating income (loss)	$	(17)	$	(2)	$	(10)	$	10
$ Change from prior-year period	(15)				(20)
% Change from prior-year period	(100+)%				(100+)%

Reported hair care operating results decreased for the three and nine months ended March 31, 2021, primarily driven by higher general and administrative expenses, primarily due to increased employee incentive compensation from the prior-year period, which reflected lower accrued employee incentive compensation as a result of the anticipated impacts of the COVID-19 pandemic.

Partially offsetting the decrease in operating results for the nine months ended March 31, 2021, were higher results from Aveda driven by the successes of existing product franchises, a new launch and holiday events, as discussed above.

Geographic Regions

The Americas


	Three Months Ended March 31					Nine Months Ended March 31
($ in millions)	2021			2020		2021			2020
As Reported:
Operating income (loss)	$	155		$	(217)	$	256		$	(571)
$ Change from prior-year period	372					827
% Change from prior-year period	100+%					100+%

Non-GAAP Financial Measure(1):
% Change in operating income (loss) from the prior-year period adjusting for the impact of goodwill, other intangible and long-lived asset impairments and changes in fair value of contingent consideration	20		%			(39)		%

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 61 for reconciliations between non-GAAP financial measures and the ~~fiscal 2020 business performance.~~most directly comparable U.S. GAAP measures.

Reported operating results increased in The Americas for the three and nine months ended March 31, 2021, driven by the favorable year-over-year impact of goodwill, other intangible and long-lived asset impairments of approximately $346 million and $1,042 million, for the three and nine months, respectively, and lower selling expenses due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, discussed above.

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~~Geographic Regions~~Partially offsetting the increases in operating results for the three and nine months ended March 31, 2021 were higher general and administrative expenses, primarily due to increased employee incentive compensation from the prior-year period, which reflected lower accrued employee incentive compensation as a result of the anticipated impacts of the COVID-19 pandemic.

~~The Americas~~Europe, the Middle East & Africa


		Three Months Ended March 31								Nine Months Ended March 31								Three Months Ended March 31					Nine Months Ended March 31
($ in millions)	($ in millions)	2020			2019		2020			2019		($ in millions)	2021			2020		2021			2020
As Reported:	As Reported:											As Reported:
Operating income (loss)		$	(217)		$	200	$	(571)		$	583
Operating income												Operating income	$	361		$	202	$	1,429		$	1,084
$ Change from prior-year period	$ Change from prior-year period	(417)					(1,154)					$ Change from prior-year period	159					345
% Change from prior-year period	% Change from prior-year period	(100+)%					(100+)%					% Change from prior-year period	79		%			32		%

Non-GAAP Financial Measure⁽¹⁾:	Non-GAAP Financial Measure⁽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 changes in fair value of contingent consideration		(47)		%			(17)		%
% Change in operating income from the prior-year period adjusting for the impact of long-lived asset impairments and changes in fair value of contingent consideration												% Change in operating income from the prior-year period adjusting for the impact of long-lived asset impairments and changes in fair value of contingent consideration	97		%			35		%

⁽¹⁾See “Reconciliations of Non-GAAP Financial Measures” beginning on page 5761 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

Reported operating results decreased in The Americas for the three months ended March 31, 2020, primarily due to the year-over-year impact of goodwill, other intangible and long-lived asset impairments of $294 million, as previously discussed, and the decrease in net sales, partially offset by a decrease in accrued employee incentive compensation as a result of the anticipated impacts of COVID-19 on the fiscal 2020 business performance and disciplined expense management.

Reported operating results decreased for the nine months ended March 31, 2020, primarily due to the decrease in net sales, year-over-year impact of goodwill, other intangible and long-lived asset impairments of $1,033 million, as previously discussed, and higher expenses relating primarily to professional service fees, enhanced capabilities in select corporate functions to support our strategic initiatives, and investments in information systems. Partially offsetting these decreases was higher intercompany royalty income ~~reflecting the value created in The Americas, given the growth of our travel retail business, and a decrease in accrued employee incentive compensation, as discussed above.~~

~~Europe, the Middle East & Africa~~

Three Months Ended
March 31 Nine Months Ended
March 31
($ in millions) 2020 2019 2020 2019
As Reported:
Operating income $ 202 $ 265 $ 1,084 $ 940
$ Change from prior-year period (63) 144
% Change from prior-year period (24) % 15 %

~~Reported operating income decreased~~increased in Europe, the Middle East & Africa for the three and nine months ended March 31, ~~2020, reflecting lower~~2021, primarily driven by higher results from ~~the United Kingdom~~our travel retail business and Russia, combined, of approximately ~~$45~~$194 million ~~primarily due to~~and $458 million, respectively, reflecting the ~~decrease~~increase in net ~~sales.~~ sales and disciplined expense management.

Partially offsetting the ~~decrease~~increases in ~~net sales from the United Kingdom were lower operating expenses due to disciplined expense management, most notably, strategic selling efficiencies.~~

~~Reported~~ operating income ~~increased~~for the three and nine months ended March 31, 2021 is the impact of long-lived asset impairments in certain of our freestanding stores relating to COVID-19 of $33 million. Also offsetting the increase in operating results for the nine months ended March 31, ~~2020,~~2021 were lower results from most markets across the region, primarily driven by the declines in net sales.

Asia/Pacific


	Three Months Ended March 31					Nine Months Ended March 31
($ in millions)	2021			2020		2021			2020
As Reported:
Operating income	$	245		$	149	$	890		$	699
$ Change from prior-year period	96					191
% Change from prior-year period	64		%			27		%

Reported operating income increased in Asia/Pacific for the three and nine months ended March 31, 2021, primarily reflecting higher results from ~~our travel retail business, offset by lower results~~mainland China. In both periods, the increase in operating income from the United Kingdom, combined, of approximately $171 million. The higher results from our travel retail business were primarily due to higher net sales, partially offset by strategic investment spending in advertising and promotional activities. The lower results from the United Kingdom weremainland China was driven by the ~~decrease~~increase in net sales, partially offset by ~~lower operating expenses~~the increase in advertising and promotional expense, primarily due to ~~disciplined expense management, most notably, selling efficiencies.~~investments to support holiday events and campaigns and new product launches and a difficult comparison to the prior-year period that reflected cost saving actions implemented in response to the impacts of the COVID-19 pandemic.

Partially offsetting the increases in operating income for the three and nine months ended March 31, 2021 were lower results from Japan, reflecting the decrease in net sales.

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~~Asia/Pacific~~INTEREST AND INVESTMENT INCOME

Three Months Ended
March 31 Nine Months Ended
March 31
($ in millions) 2020 2019 2020 2019
As Reported:
Operating income $ 149 $ 244 $ 699 $ 691
$ Change from prior-year period (95) 8
% Change from prior-year period (39) % 1 %


	Three Months Ended March 31				Nine Months Ended March 31
(In millions)	2021		2020		2021		2020
Interest expense	$	43	$	42	$	131	$	112
Interest income and investment income, net	$	9	$	14	$	40	$	41

Reported operating income decreased in most markets in Asia/Pacific for the three months ended March 31, 2020, led by Hong Kong, mainland China, Japan, Korea and Singapore, combined, of approximately $91 million. The operating income decreased in Hong Kong, driven by lower net sales, partially offset by disciplinedInterest expense management. The lower results from mainland China were primarily driven by an increase in operating expenses, most notably, advertising and promotional activities to support digital advertising, social media and targeted expanded consumer reach, selling expenses relating to continued employee costs, and shipping costs in line with the net sales growth in the online channel. The lower results from Japan reflected an increase in operating expenses, primarily advertising and promotional activities and selling expenses, and a decrease in net sales. The decrease in operating income from Korea was driven by an increase in operating expenses relating to the fiscal 2020 second quarter acquisition of Have & Be, which included incremental amortization expense related to acquired intangible assets. The lower results from Singapore were primarily driven by a decrease in net sales.

~~Reported operating income~~ increased for the nine months ended March 31, 2020, led by higher results in mainland China of approximately $96 million, driven by net sales growth. The net sales increases in mainland China were partially offset by an increase in advertising and promotional activities to support digital advertising, social media and targeted expanded consumer reach. The growth in operating income was offset by lower results in Hong Kong and Japan, combined, of approximately $78 million. The operating income decreased in Hong Kong driven by lower net sales, partially offset by disciplined expense management. The lower results from Japan reflected an increase in operating expenses, primarily advertising and promotional activities and selling expenses.

~~INTEREST AND INVESTMENT INCOME~~

Three Months Ended
March 31 Nine Months Ended
March 31
(In millions) 2020 2019 2020 2019
Interest expense $ 42 $ 32 $ 112 $ 101
Interest income and investment income, net $ 14 $ 15 $ 41 $ 42

~~Interest expense increased for both periods~~2021, primarily due to the issuance of additional long-term debt in November ~~2019.~~2019 and April 2020.

Interest income and investment income, net decreased for the three and nine months ended March 31, 2021, reflecting decreases in investment income due to lower interest rates, partially offset by higher equity method investment income from our minority investments.

OTHER INCOME ~~NET~~

On December 18, 2019, we acquired the remaining equity interest in Have&Be Co. Ltd. (“Have & Be”), the global skin care company behind Dr. Jart+ and men’s grooming brand Do The Right Thing, for $1,268 million in cash. Based on the final purchase price and working capital adjustments, we estimated a refund receivable of $32 million that was outstanding as of June 30, 2020 and was received in the first quarter of fiscal 2021. We originally acquired a minority interest in Have & Be in December 2015, which included a formula-based call option for the remaining equity interest. The original minority interest was accounted for as an equity method investment, which had a carrying value of $133 million at the acquisition date. The acquisition of the remaining equity interest in Have & Be was considered a step acquisition, whereby we remeasured the previously held equity method investment to its fair value of $682 million, resulting in the recognition of a gain of $549 million. The acquisition of the remaining equity interest also resulted in the recognition of a previously unrealized foreign currency gain of $4 million, which was reclassified from accumulated ~~OCI.~~other comprehensive income. The total gain on our previously held equity method investment of $553 million is included in Other income ~~net~~ in the accompanying consolidated statements of earnings for the nine months ended March 31, 2020.

The amount paid at closing was funded by cash on hand including the proceeds from the issuance of debt. In anticipation of the closing, we transferred cash to a foreign subsidiary for purposes of making the closing payment. As a result, we recognized a foreign currency gain of $23 million, which is also included in Other income ~~net~~ in the accompanying consolidated statements of earnings for the nine months ended March 31, 2020. See Notes to Consolidated Financial Statements, Note 2 – Acquisition of Business for additional information.

~~THE ESTÉE LAUDER COMPANIES INC.~~

The Tax Cuts and Jobs Act (the “TCJA”), which was enacted on December 22, 2017, presented us with opportunities to manage cash and investments more efficiently on a global basis. Accordingly, during fiscal 2019, as part of the assessment of those opportunities, we sold our available-for-sale securities, which liquidated our investment in the foreign subsidiary that owned those securities. As a result, we recorded a realized foreign currency gain on liquidation of $77 million and a gross loss on the sale of available-for-sale securities of $6 million, both of which were reclassified from accumulated OCI and are reflected in Other income, net. See ~~Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies~~ ~~for further information.~~

PROVISION FOR INCOME TAXES

The provision for income taxes represents U.S. federal, foreign, state and local income taxes. The effective rate differs from the federal statutory rate primarily due to the effect of state and local income taxes, the tax impact of share-based compensation, the taxation of foreign income and income tax reserve adjustments, which represent changes in our net liability for unrecognized tax benefits including tax settlements and lapses of the applicable statutes of limitations. Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the tax impact of share-based compensation and the interaction of various global tax strategies. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of change.


		Three Months Ended March 31						Nine Months Ended March 31							Three Months Ended March 31				Nine Months Ended March 31
		2020		2019		2020		2019			2021		2020		2021		2020
Effective rate for income taxes	Effective rate for income taxes	105.0	%	23.4	%	30.0	%	22.4	%	Effective rate for income taxes	21.0	%	105.0	%	18.5	%	30.0	%
Basis-point change from the prior-year period	Basis-point change from the prior-year period	8,160				760				Basis-point change from the prior-year period	(8,400)				(1,150)

The increase in the effective tax rate in both periods was primarily attributable to the impact of nondeductible goodwill impairment charges associated with our Too Faced, BECCA and Smashbox reporting units, a higher effective tax rate on our foreign operations and the lower amount of earnings before income taxes, which increases the impact of the nondeductible charges.

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For the three and nine months ended March 31, 2021, the decrease in the effective tax rate was primarily attributable to the impact of nondeductible goodwill charges recognized in the three and nine months ended March 31, 2020 and a lower effective tax rate on our foreign operations. The lower amount of earnings before income taxes for the three and nine months ended March 31, 2020 increased the impact of the nondeductible charges.

The effective tax rate for the three and nine months ended March 31, 2021 included the impact of the U.S. government issuance of final global intangible low-taxed income (“GILTI”) tax regulations in July 2020 under the Tax Cuts and Jobs Act (the “TCJA”) that provide for a high-tax exception to the GILTI tax. These regulations are retroactive to the original enactment of the GILTI tax provision, which includes our 2019 and 2020 fiscal years. We have elected to apply the GILTI high-tax exception to fiscal 2021, 2020 and 2019. The election for fiscal 2021 resulted in reductions of 100 basis points and 110 basis points to the effective tax rates for the three and nine months ended March 31, 2021, respectively. The impact of the elections with respect to fiscal 2020 and 2019 was recognized as a discrete item in the provision for income taxes in the second and third quarters of fiscal 2021 and resulted in reductions of 30 basis points and 220 basis points to the effective tax rates for the three and nine months ended March 31, 2021, respectively.

NET EARNINGS (LOSS) ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC.


		Three Months Ended March 31								Nine Months Ended March 31								Three Months Ended March 31					Nine Months Ended March 31
($ in millions, except per share data)	($ in millions, except per share data)	2020			2019		2020			2019		($ in millions, except per share data)	2021			2020		2021			2020
As Reported:	As Reported:											As Reported:
Net earnings (loss) attributable to The Estée Lauder Companies Inc.	Net earnings (loss) attributable to The Estée Lauder Companies Inc.	$	(6)		$	555	$	1,146		$	1,628	Net earnings (loss) attributable to The Estée Lauder Companies Inc.	$	456		$	(6)	$	1,852		$	1,146
$ Change from prior-year period	$ Change from prior-year period	(561)					(482)					$ Change from prior-year period	462					706
% Change from prior-year period	% Change from prior-year period	(100+)%					(30)		%			% Change from prior-year period	100+%					62		%
Diluted net earnings (loss) per common share	Diluted net earnings (loss) per common share	$	(0.02)		$	1.51	$	3.12		$	4.39	Diluted net earnings (loss) per common share	$	1.24		$	(.02)	$	5.03		$	3.12
% Change from prior-year period	% Change from prior-year period	(100+%)					(29)		%			% Change from prior-year period	100+%					61		%

Non-GAAP Financial Measure⁽¹⁾:	Non-GAAP Financial Measure⁽¹⁾:											Non-GAAP Financial Measure(1):
% Change in diluted net earnings (loss) per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill, other intangible and long-lived asset impairments, other income, net, changes in fair value of contingent consideration, the Transition Tax, the remeasurement of U.S. net deferred tax assets as of the TCJA enactment date and the establishment of a net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA		(45)		%			(1)		%
% Change in diluted net earnings (loss) per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill, other intangible and long-lived asset impairments, other income and changes in fair value of contingent consideration												% Change in diluted net earnings (loss) per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill, other intangible and long-lived asset impairments, other income and changes in fair value of contingent consideration	92		%			23		%

⁽¹⁾See “Reconciliations of Non-GAAP Financial Measures” below for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES

We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period, or do not reflect the Company’s underlying ongoing business, provides transparency for such items and helps investors and others compare and analyze our operating performance from period to period. In the future, we expect to incur charges or adjustments similar in nature to those presented below; however, the impact to the Company’s results in a given period may be highly variable and difficult to predict. Our non-GAAP financial measures may not be comparable to similarly titled measures used by, or determined in a manner consistent with, other companies. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. The following tables present Net sales, Operating income and Diluted net earnings (loss) per common share adjusted to exclude the impact of charges associated with restructuring and other activities; goodwill, ~~and~~ other intangible ~~asset impairments;~~and long-lived asset impairments relating to COVID-19; other ~~income, net;~~income; the changes in the fair value of contingent ~~consideration; the Transition Tax; the remeasurement~~consideration.

Table of U.S. net deferred tax assets as of the TCJA enactment date; the establishment of a net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA; and the effects of foreign currency translation.Contents

THE ESTÉE LAUDER COMPANIES INC.

The following tables provide reconciliations between these non-GAAP financial measures and the most directly comparable U.S. GAAP measures.


	Three Months Ended March 31				Variance		% Change		% Change in Constant Currency
($ in millions, except per share data)	2021		2020
Net sales, as reported	$	3,864	$	3,345	$	519	16	%	13	%
Returns associated with restructuring and other activities	10		—		10
Net sales, as adjusted	$	3,874	$	3,345	$	529	16	%	13	%

Operating income, as reported	$	616	$	109	$	507	100+%		100+%
Charges associated with restructuring and other activities	145		25		120
Goodwill, other intangible and long-lived asset impairments	33		346		(313)
Changes in fair value of contingent consideration	—		(2)		2
Operating income, as adjusted	$	794	$	478	$	316	66	%	64	%

Diluted net earnings (loss) per common share, as reported	$	1.24	$	(.02)	$	1.26	100+%		100+%
Charges associated with restructuring and other activities	.31		.05		.26
Goodwill and other intangible asset impairments	.07		.83		(.76)

Changes in fair value of contingent consideration	—		(.01)		.01
Diluted net earnings (loss) per common share, as adjusted	$	1.62	$	0.85	$	.77	92	%	88	%

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THE ESTÉE LAUDER COMPANIES INC.


		Three Months Ended March 31						Variance				% Change				% Change in Constant Currency
($ in millions, except per share data)										($ in millions, except per share data)				Nine Months Ended March 31							Variance			% Change				% Change in constant currency
	($ in millions, except per share data)	2020		2019							Variance				% Change				% Change in Constant Currency				($ in millions, except per share data)				2021			2020			Variance			% Change		% Change in constant currency
Net sales, as reported	Net sales, as reported	$	3,345	$	3,744	$	(399)			Net sales, as reported				12,279				$		11,864						$	415		3		%	2					%
Returns associated with restructuring and other activities	Returns associated with restructuring and other activities	—		2		(2)								Returns associated with restructuring and other activities			10				—					10
Net sales, as adjusted	Net sales, as adjusted	$	3,345	$	3,746	$	(401)	(11)	%			(10)	%	Net sales, as adjusted			$	12,289			$	11,864		$	425			4	%					2		%

Operating income, as reported	Operating income, as reported	$	109	$	674	$	(565)	(84)	%			(83)	%	Operating income, as reported			$	2,384			$	1,149		$	1,235			100+%					100+%
Charges associated with restructuring and other activities	Charges associated with restructuring and other activities	25		35		(10)								Charges associated with restructuring and other activities			191				63			128
Goodwill, other intangible and long-lived asset impairments	Goodwill, other intangible and long-lived asset impairments	346		52		294								Goodwill, other intangible and long-lived asset impairments			114				1,123			(1,009)
Changes in fair value of contingent consideration	Changes in fair value of contingent consideration	(2)		(9)		7								Changes in fair value of contingent consideration			(2)				(9)			7
Operating income, as adjusted	Operating income, as adjusted	$	478	$	752	$	(274)	(36)	%			(36)	%	Operating income, as adjusted			$	2,687			$	2,326		$	361			16	%				14		%

Diluted net earnings (loss) per common share, as reported	Diluted net earnings (loss) per common share, as reported	$	(.02)	$	1.51	$	(1.53)	(100+)%				(100)	%	Diluted net earnings (loss) per common share, as reported			$	5.03			$	3.12		$	1.91			61	%				59		%
Charges associated with restructuring and other activities	Charges associated with restructuring and other activities	.05		.07		(.02)								Charges associated with restructuring and other activities			.41				.14			.27
Goodwill, other intangible and long-lived asset impairments	Goodwill, other intangible and long-lived asset impairments	.83		.14		.69								Goodwill, other intangible and long-lived asset impairments			.25				2.62			(2.37)
Other income, net		—		(.15)		.15
Other income														Other income			—				(1.23)			1.23
Changes in fair value of contingent consideration	Changes in fair value of contingent consideration	(.01)		(.02)		.01								Changes in fair value of contingent consideration			(.01)				(.02)			.01

Diluted net earnings (loss) per common share, as adjusted	Diluted net earnings (loss) per common share, as adjusted	$	.85	$	1.55	$	(.70)	(45)	%			(45)	%	Diluted net earnings (loss) per common share, as adjusted			$	5.68			$	4.63		$	1.05			23	%				20		%

~~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
2020 2019
Net sales, as reported $ 11,864 $ 11,273 $ 591 5 % 6 %
Returns associated with restructuring and other activities — 2 (2)
Net sales, as adjusted $ 11,864 $ 11,275 $ 589 5 % 6 %
Operating income, as reported $ 1,149 $ 2,097 $ (948) (45) % (44) %
Charges associated with restructuring and other activities 63 117 (54)
Goodwill, other intangible and long-lived asset impairments 1,123 90 1,033
Changes in fair value of contingent consideration (9) (18) 9
Operating income, as adjusted $ 2,326 $ 2,286 $ 40 2 % 2 %
Diluted net earnings (loss) per common share, as reported $ 3.12 $ 4.39 $ (1.27) (29) % (28) %
Charges associated with restructuring and other activities .14 .26 (.12)
Goodwill, other intangible and long-lived asset impairments 2.62 .23 2.39
Other income, net (1.23) (.15) (1.08)
Changes in fair value of contingent consideration (.02) (.04) .02
Transition Tax resulting from the TCJA — (.03) .03
Remeasurement of U.S. net deferred tax assets as of the TCJA enactment date — .02 (.02)
Net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA — .02 (.02)
Diluted net earnings (loss) per common share, as adjusted $ 4.63 $ 4.70 $ (.07) (1) % (1) %

As diluted net earnings (loss) per common share, as adjusted, is used as a measure of the Company’s performance, we consider the impact of current and deferred income taxes when calculating the per-share impact of each of the reconciling items.

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The following tables reconcile the change in net sales by product category and geographic region, as reported, to the change in net sales excluding the effects of foreign currency translation:

As Reported Impact of foreign currency translation Variance,
in constant currency %
Change,
as reported %
Change,
in
constant currency
($ in millions) Three Months Ended
March 31, 2020 Three Months Ended
March 31, 2019 Variance
By Product Category:
Skin Care $ 1,723 $ 1,744 $ (21) $ 19 $ (2) (1) % — %
Makeup 1,146 1,461 (315) 19 (296) (22) (20)
Fragrance 349 392 (43) 5 (38) (11) (10)
Hair Care 119 136 (17) 1 (16) (13) (12)
Other 8 13 (5) — (5) (38) (38)
3,345 3,746 (401) 44 (357) (11) (10)
Returns associated with restructuring and other activities — (2) 2 — 2
Total $ 3,345 $ 3,744 $ (399) $ 44 $ (355) (11) % (9) %
By Region:
The Americas $ 892 $ 1,155 $ (263) $ 2 $ (261) (23) % (23) %
Europe, the Middle East & Africa 1,525 1,625 (100) 17 (83) (6) (5)
Asia/Pacific 928 966 (38) 25 (13) (4) (1)
3,345 3,746 (401) 44 (357) (11) (10)
Returns associated with restructuring and other activities — (2) 2 — 2
Total $ 3,345 $ 3,744 $ (399) $ 44 $ (355) (11) % (9) %


	As Reported						Impact of foreign currency translation		Variance, in constant currency		% Change, as reported		% Change, in constant currency
($ in millions)	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020		Variance
By Product Category:
Skin Care	$	2,259	$	1,723	$	536	$	(58)	$	478	31	%	28	%
Makeup	1,018		1,146		(128)		(24)		(152)		(11)		(13)
Fragrance	454		349		105		(10)		95		30		27
Hair Care	128		119		9		(2)		7		8		6
Other	15		8		7		—		7		88		88
	3,874		3,345		529		(94)		435		16		13
Returns associated with restructuring and other activities	(10)		—		(10)		(1)		(11)
Total	$	3,864	$	3,345	$	519	$	(95)	$	424	16	%	13	%

By Region:
The Americas	$	916	$	892	$	24	$	10	$	34	3	%	4	%
Europe, the Middle East & Africa	1,706		1,525		181		(24)		157		12		10
Asia/Pacific	1,252		928		324		(80)		244		35		26
	3,874		3,345		529		(94)		435		16		13
Returns associated with restructuring and other activities	(10)		—		(10)		(1)		(11)
Total	$	3,864	$	3,345	$	519	$	(95)	$	424	16	%	13	%

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		As Reported										Impact of foreign currency translation		Variance, in constant currency			% Change, as reported			% Change, in constant currency			As Reported						Impact of foreign currency translation		Variance, in constant currency		% Change, as reported	% Change, in constant currency
($ in millions)	($ in millions)	Nine Months Ended March 31, 2020		Nine Months Ended March 31, 2019		Variance																($ in millions)	Nine Months Ended March 31, 2021		Nine Months Ended March 31, 2020		Variance
By Product Category:	By Product Category:															By Product Category:
Skin Care	Skin Care	$	5,770	$	4,962	$	808	$	45	$	853	16	%	17	%	Skin Care		$	7,113		$	5,770	$	1,343	$	(139)	$	1,204	23	%	21	%
Makeup	Makeup	4,249		4,427		(178)		45		(133)		(4)		(3)		Makeup		3,243			4,249		(1,006)		(46)		(1,052)		(24)		(25)
Fragrance	Fragrance	1,392		1,401		(9)		14		5		(1)		—		Fragrance		1,478			1,392		86		(21)		65		6		5
Hair Care	Hair Care	417		433		(16)		2		(14)		(4)		(3)		Hair Care		418			417		1		(4)		(3)		—		(1)
Other	Other	36		52		(16)		—		(16)		(31)		(31)		Other		37			36		1		(1)		—		3		—
		11,864		11,275		589		106		695		5		6				12,289			11,864		425		(211)		214		4		2
Returns associated with restructuring and other activities	Returns associated with restructuring and other activities	—		(2)		2		—		2						Returns associated with restructuring and other activities		(10)			—		(10)		(1)		(11)
Total	Total	$	11,864	$	11,273	$	591	$	106	$	697	5	%	6	%	Total		$	12,279		$	11,864	$	415	$	(212)	$	203	3	%	2	%

By Region:	By Region:															By Region:
The Americas	The Americas	$	3,278	$	3,609	$	(331)	$	(3)	$	(334)	(9)	%	(9)	%	The Americas		$	2,837		$	3,278	$	(441)	$	39	$	(402)	(13)	%	(12)	%
Europe, the Middle East & Africa	Europe, the Middle East & Africa	5,281		4,825		456		53		509		9		11		Europe, the Middle East & Africa		5,276			5,281		(5)		(54)		(59)		—		(1)
Asia/Pacific	Asia/Pacific	3,305		2,841		464		56		520		16		18		Asia/Pacific		4,176			3,305		871		(196)		675		26		20
		11,864		11,275		589		106		695		5		6				12,289			11,864		425		(211)		214		4		2
Returns associated with restructuring and other activities	Returns associated with restructuring and other activities	—		(2)		2		—		2						Returns associated with restructuring and other activities		(10)			—		(10)		(1)		(11)
Total	Total	$	11,864	$	11,273	$	591	$	106	$	697	5	%	6	%	Total		$	12,279		$	11,864	$	415	$	(212)	$	203	3	%	2	%

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The following table reconciles the change in operating results by product category and geographic region, as reported, to the change in operating income excluding the impact of goodwill, other intangible and long-lived asset impairments and changes in fair value of contingent consideration:


		As Reported																					As Reported
($ in millions)	($ in millions)	Three Months Ended March 31, 2020		Three Months Ended March 31, 2019		Variance		Add: Changes in Goodwill, other intangible and long-lived asset impairments		Add: Changes in fair value of contingent consideration		Variance, as adjusted		% Change, as reported		% Change, as adjusted		($ in millions)	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020		Variance		Add: Changes in Goodwill, other intangible and long-lived asset impairments		Add: Changes in fair value of contingent consideration		Variance, as adjusted		% Change, as reported		% Change, as adjusted
By Product Category:	By Product Category:																	By Product Category:
Skin Care	Skin Care	$	418	$	593	$	(175)	$	54	$	7	$	(114)	(30)	%	(19)	%	Skin Care	$	804	$	418	$	386	$	(54)	$	—	$	332	92	%	70	%
Makeup	Makeup	(283)		99		(382)		237		—		(145)		(100+)		(96)		Makeup	(72)		(283)		211		(265)		—		(54)		75		(100+)
Fragrance	Fragrance	—		17		(17)		2		—		(15)		(100)		(100)		Fragrance	47		—		47		7		2		56		—		—
Hair Care	Hair Care	(2)		(2)		—		1		—		1		—		50		Hair Care	(17)		(2)		(15)		(1)		—		(16)		(100+)		(100+)
Other	Other	1		2		(1)		—		—		(1)		(50)		(50)		Other	(1)		1		(2)		—		—		(2)		(100+)		(100+)
		134		709		(575)		$	294	$	7	$	(274)	(81)	%	(36)	%		761		134		627		$	(313)	$	2	$	316	100+%		66	%
Charges associated with restructuring and other activities	Charges associated with restructuring and other activities	(25)		(35)		10												Charges associated with restructuring and other activities	(145)		(25)		(120)
Total	Total	$	109	$	674	$	(565)											Total	$	616	$	109	$	507

By Region:	By Region:																	By Region:
The Americas	The Americas	$	(217)	$	200	$	(417)	$	294	$	7	$	(116)	(100+)%		(47)	%	The Americas	$	155	$	(217)	$	372	$	(346)	$	—	$	26	100+%		20	%
Europe, the Middle East & Africa	Europe, the Middle East & Africa	202		265		(63)		—		—		(63)		(24)		(24)		Europe, the Middle East & Africa	361		202		159		33		2		194		79		97
Asia/Pacific	Asia/Pacific	149		244		(95)		—		—		(95)		(39)		(39)		Asia/Pacific	245		149		96		—		—		96		64		64
		134		709		(575)		$	294	$	7	$	(274)	(81)	%	(36)	%		761		134		627		$	(313)	$	2	$	316	100+%		66	%
Charges associated with restructuring and other activities	Charges associated with restructuring and other activities	(25)		(35)		10												Charges associated with restructuring and other activities	(145)		(25)		(120)
Total	Total	$	109	$	674	$	(565)											Total	$	616	$	109	$	507

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		As Reported										Add: Changes in Goodwill, other intangible and long-lived asset impairments		Add: Changes in fair value of contingent consideration		Variance, as adjusted			% Change, as reported			% Change, as adjusted				As Reported									Add: Changes in Goodwill, other intangible and long-lived asset impairments			Add: Changes in fair value of contingent consideration			Variance, as adjusted				% Change, as reported		% Change, as adjusted
($ in millions)	($ in millions)	Nine Months Ended March 31, 2020		Nine Months Ended March 31, 2019		Variance																			($ in millions)			Nine Months Ended March 31, 2021			Nine Months Ended March 31, 2020			Variance			Add: Changes in Goodwill, other intangible and long-lived asset impairments		Add: Changes in fair value of contingent consideration				Variance, as adjusted			% Change, as reported		% Change, as adjusted
By Product Category:	By Product Category:																	By Product Category:
Skin Care	Skin Care	$	1,822	$	1,624	$	198	$	54	$	10	$	262	12	%	16	%	Skin Care		$	2,453		$	1,822		$	631		$	27		$	3		$	661			35	%			35	%
Makeup	Makeup	(790)		398		(1,188)		976		—		(212)		(100+)		(43)		Makeup		(115)			(790)			675			(1,042)			—			(367)			85			(100+)
Fragrance	Fragrance	163		156		7		2		(1)		8		4		5		Fragrance		248			163			85			7			4			96			52			60
Hair Care	Hair Care	10		27		(17)		1		—		(16)		(63)		(59)		Hair Care		(10)			10			(20)			(1)			—			(21)			(100+)			(100+)
Other	Other	7		9		(2)		—		—		(2)		(22)		(22)		Other		(1)			7			(8)			—			—			(8)			(100+)			(100+)
		1,212		2,214		(1,002)		$	1,033	$	9	$	40	(45)	%	2	%			2,575			1,212			1,363			$	(1,009)		$	7		$	361		100+%			16	%
Charges associated with restructuring and other activities	Charges associated with restructuring and other activities	(63)		(117)		54												Charges associated with restructuring and other activities		(191)			(63)			(128)
Total	Total	$	1,149	$	2,097	$	(948)											Total		$	2,384		$	1,149		$	1,235

By Region:	By Region:																	By Region:
The Americas	The Americas	$	(571)	$	583	$	(1,154)	$	1,033	$	11	$	(110)	(100+)%		(17)	%	The Americas		$	256		$	(571)		$	827		$	(1,042)		$	3		$	(212)		100+%			(39)	%
Europe, the Middle East & Africa	Europe, the Middle East & Africa	1,084		940		144		—		(2)		142		15		15		Europe, the Middle East & Africa		1,429			1,084			345			33			4			382			32			35
Asia/Pacific	Asia/Pacific	699		691		8		—		—		8		1		1		Asia/Pacific		890			699			191			—			—			191			27			27
		1,212		2,214		(1,002)		$	1,033	$	9	$	40	(45)	%	2	%			2,575			1,212			1,363			$	(1,009)		$	7		$	361		100+%			16	%
Charges associated with restructuring and other activities	Charges associated with restructuring and other activities	(63)		(117)		54												Charges associated with restructuring and other activities		(191)			(63)			(128)
Total	Total	$	1,149	$	2,097	$	(948)											Total		$	2,384		$	1,149		$	1,235

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our principal sources of funds historically have been cash flows from operations, borrowings pursuant to our commercial paper program, borrowings from the issuance of long-term debt and committed and uncommitted credit lines provided by banks and other lenders in the United States and abroad. At March 31, ~~2020,~~2021, we had cash and cash equivalents of ~~$4,876~~$6,399 million compared with ~~$2,987~~$5,022 million at June 30, 2019. In light of continued global uncertainty due to the spread of COVID-19, we issued $700 million of Senior Notes in April 2020 and borrowed the full amount under our $1,500 million revolving credit facility. These actions further enhance our flexibility and liquidity at this time.2020. Our cash and cash equivalents are maintained at a number of financial institutions. To mitigate the risk of uninsured balances, we select financial institutions based on their credit ratings and financial strength, and we perform ongoing evaluations of these institutions to limit our concentration risk exposure.

Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, ~~available-for-sale securities,~~ available credit lines and access to credit markets will be adequate to support seasonal working capital needs, currently planned business operations, information technology enhancements, capital expenditures, acquisitions, dividends, stock repurchases, restructuring initiatives, commitments and other contractual obligations on both a near-term and long-term basis. ~~See~~ ~~Overview – COVID-19 Business Update~~ ~~for actions taken by us, in response to the impact of COVID-19 on our business, to help mitigate the expected loss of sales and to conserve cash.~~

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The TCJA resulted in the Transition Tax on unrepatriated earnings of our foreign subsidiaries and changed the tax law in ways that present opportunities to repatriate cash without additional U.S. federal income tax. As a result, we changed our indefinite reinvestment assertion related to certain foreign earnings, and we continue to analyze the indefinite reinvestment assertion on our remaining applicable foreign earnings. ~~Our cash and cash equivalents balance at March 31, 2020 includes~~The issuance of guidance subsequent to the enactment of the TCJA has enabled us to access a substantial portion of the cash in offshore jurisdictions associated with our ~~permanent reinvestment strategy.~~permanently reinvested earnings without significant cost. We do not believe that continuing to reinvest our foreign earnings impairs our ability to meet our domestic debt or working capital obligations. If these reinvested earnings were repatriated into the United States as dividends, we would be subject to state income taxes and applicable foreign taxes in certain jurisdictions.

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The effects of inflation have not been significant to our overall operating results in recent years. Generally, we have been able to introduce new products at higher prices, increase prices and implement other operating efficiencies to sufficiently offset cost increases, which have been moderate.

Credit Ratings

Changes in our credit ratings will likely result in changes in our borrowing costs. Our credit ratings also impact the cost of our revolving credit facility. Downgrades in our credit ratings may reduce our ability to issue commercial paper and/or long-term debt and would likely increase the relative costs of borrowing. A credit rating is not a recommendation to buy, sell, or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization, and should be evaluated independently of any other rating. As of April ~~24, 2020,~~26, 2021, our long-term debt is rated A+ with a ~~negative~~stable outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s.

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Debt

At March 31, ~~2020,~~2021, our outstanding borrowings were as follows:

($ in millions) Long-term
Debt Current
Debt Total Debt
3.125% Senior Notes, due December 1, 2049 (“2049 Senior Notes”) ^{(1), (12)}
$ 635 $ — $ 635
4.15% Senior Notes, due March 15, 2047 (“2047 Senior Notes”) ^{(2), (12)}
494 — 494
4.375% Senior Notes, due June 15, 2045 (“2045 Senior Notes”) ^{(3), (12)}
456 — 456
3.70% Senior Notes, due August 15, 2042 (“2042 Senior Notes”) ^{(4), (12)}
247 — 247
6.00% Senior Notes, due May 15, 2037 (“2037 Senior Notes”) ^{(5), (12)}
294 — 294
5.75% Senior Notes, due October 15, 2033 (“2033 Senior Notes”) ⁽⁶⁾
197 — 197
2.375% Senior Notes, due December 1, 2029 (“2029 Senior Notes”) ^{(7), (12)}
640 — 640
3.15% Senior Notes, due March 15, 2027 (“2027 Senior Notes”) ^{(8), (12)}
498 — 498
2.00% Senior Notes, due December 1, 2024 (“2024 Senior Notes”) ^{(9), (12)}
494 — 494
2.35% Senior Notes, due August 15, 2022 (“2022 Senior Notes”) ^{(10), (12)}
259 — 259
1.70% Senior Notes, due May 10, 2021 (“2021 Senior Notes”) ^{(11), (12)}
454 — 454
Commercial paper that matures through April 2020 (1.53% average interest rate) — 200 200
Revolving credit facility — 1,300 1,300
Other borrowings 6 27 33
$ 4,674 $ 1,527 $ 6,201


($ in millions)	Long-term Debt		Current Debt		Total Debt
3.125% Senior Notes, due December 1, 2049 (“2049 Senior Notes”) (1), (14)	$	635	$	—	$	635
4.15% Senior Notes, due March 15, 2047 (“2047 Senior Notes”) (2), (14)	494		—		494
4.375% Senior Notes, due June 15, 2045 (“2045 Senior Notes”) (3), (14)	455		—		455
3.70% Senior Notes, due August 15, 2042 (“2042 Senior Notes”) (4), (14)	247		—		247
6.00% Senior Notes, due May 15, 2037 (“2037 Senior Notes”) (5), (14)	294		—		294
5.75% Senior Notes, due October 15, 2033 (“2033 Senior Notes”) (6)	197		—		197
1.950% Senior Notes, due March 15, 2031 (“2031 Senior Notes”) (7), (14),(15)	592		—		592
2.600% Senior Notes, due April 15, 2030 (“2030 Senior Notes”) (8), (14)	680		—		680
2.375% Senior Notes, due December 1, 2029 (“2029 Senior Notes”) (9), (14)	641		—		641
3.15% Senior Notes, due March 15, 2027 (“2027 Senior Notes”) (10), (14)	498		—		498
2.00% Senior Notes, due December 1, 2024 (“2024 Senior Notes”) (11), (14)	496		—		496
2.35% Senior Notes, due August 15, 2022 (“2022 Senior Notes”) (12), (14)	256		—		256
1.70% Senior Notes, due May 10, 2021 (“2021 Senior Notes”) (13), (14), (15)	—		451		451

Other long-term borrowings	2		—		2
Other current borrowings	—		20		20

	$	5,487	$	471	$	5,958

⁽¹⁾Consists of $650 million principal, unamortized debt discount of $8 million and debt issuance costs of $7 million.

⁽²⁾Consists of $500 million principal, unamortized debt discount of $1 million and debt issuance costs of $5 million.

⁽³⁾Consists of $450 million principal, net unamortized debt premium of ~~$11~~$9 million and debt issuance costs of $5$4 million.

⁽⁴⁾Consists of $250 million principal, unamortized debt discount of $1 million and debt issuance costs of $2 million.

⁽⁵⁾Consists of $300 million principal, unamortized debt discount of $3 million and debt issuance costs of $3 million.

⁽⁶⁾Consists of $200 million principal, unamortized debt discount of $2 million and debt issuance costs of $1 million.

⁽⁷⁾Consists of $600 million principal, unamortized debt discount of $4 million and debt issuance costs of $4 million.

(8)Consists of $700 million principal, unamortized debt discount of $1 million, debt issuance costs of $4 million and a $15 million adjustment to reflect the fair value of interest rate swaps.

(9)Consists of $650 million principal, unamortized debt discount of $6$5 million and debt issuance costs of $4 million.

⁽⁸⁾(10)Consists of $500 million principal and debt issuance costs of $2 million.

⁽⁹⁾(11)Consists of $500 million principal, unamortized debt discount of $3$2 million and debt issuance costs of $3$2 million.

⁽¹⁰⁾(12)Consists of $250 million principal ~~a $10 million adjustment to reflect the fair value of interest rate swaps and debt issuance cost of $1 million.~~

⁽¹¹⁾~~Consists of $450 million principal~~ and a $4$6 million adjustment to reflect the fair value of interest rate swaps.

⁽¹²⁾(13)Consists of $450 million principal and a $1 million adjustment to reflect the fair value of interest rate swaps.

(14)The Senior Notes contain certain customary ~~incurrence–based~~ covenants, including limitations on indebtedness secured by liens.

~~In April 2020, we completed a public offering~~(15)See Note 16 – Subsequent Events for further information relating to the repayment of ~~$700~~the $450 million ~~aggregate~~ principal amount ~~of our 2.600%~~made and the interest rate swap agreement relating to the 2031 Senior Notes ~~due April 15, 2030. We intend~~entered into subsequent to use the proceeds from this offering for general corporate purposes, which may include operating expenses, working capital, capital expenditures and redemption and repayment of short-term or long-term borrowings, including outstanding commercial paper as it matures. Also in AprilMarch 31, 2021.

In August 2020, we repaid the ~~$200~~remaining $750 million ~~in commercial paper that was outstanding at March 31, 2020 and~~ borrowed ~~the remaining $200 million~~ under our ~~existing~~ $1,500 million revolving credit ~~facility.~~facility that was outstanding as of June 30, 2020.

Total debt as a percent of total capitalization (excluding noncontrolling interests) was ~~59%~~52% and ~~44%~~61% at March 31, ~~2020~~2021 and June 30, ~~2019,~~2020, respectively.

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Cash Flows


		Nine Months Ended March 31							Nine Months Ended March 31
(In millions)	(In millions)	2020		2019		(In millions)	2021		2020
Net cash provided by operating activities	Net cash provided by operating activities	$	1,945	$	1,756	Net cash provided by operating activities	$	2,777	$	1,945
Net cash provided by (used for) investing activities		$	(1,557)	$	774
Net cash used for investing activities						Net cash used for investing activities	$	(577)	$	(1,557)
Net cash provided by (used for) financing activities	Net cash provided by (used for) financing activities	$	1,525	$	(1,814)	Net cash provided by (used for) financing activities	$	(862)	$	1,525

The change in net cash flows from operations ~~primarily~~ reflected the ~~favorable net change~~improvement in working capital, ~~in particular accounts receivable and inventory partially offset~~primarily due to other accrued liabilities, driven by ~~accounts payable. Also partially offsetting the improvement~~an increase in ~~cash flows from operations was lower~~ accrued employee incentive compensation, as ~~a result of~~previously discussed, and accounts payable, partially offset by the ~~anticipated impacts of COVID-19 on~~unfavorable change in accounts receivable due to the ~~fiscal 2020 business performance.~~increase in net sales. The change in net cash flows from operations also reflects higher earnings before taxes, excluding non-cash items.

The change in net cash flows ~~from~~used for investing activities primarily reflected cash paid in ~~connection with the~~ fiscal 2020 relating to the second quarter acquisition of Have ~~& Be, as well as lower proceeds from~~&Be Co. Ltd., partially offset by the ~~sale~~settlement of ~~investments due to the prior-year liquidation of our foreign subsidiary that owned our available-for-sale securities.~~net investment hedges.

The change in net cash flows from financing activities primarily reflected lower proceeds ~~from~~relating to the ~~November 2019~~ issuance of long-term debt ~~changes~~(the November 2019 and April 2020 issuances in ~~short-term debt, reflecting current~~fiscal 2020, compared to the March 2021 issuance in fiscal 2021), the fiscal 2021 repayment of borrowings under our ~~existing~~ revolving credit facility, ~~and the issuance of commercial paper, and~~partially offset by lower treasury stock ~~purchases, partially offset by the repayment of the 2020 Senior Notes in the current year.~~repurchases.

Dividends

For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the nine months ended March 31, ~~2020,~~2021, see Notes to Consolidated Financial Statements, Note 1413 – Equity. ~~As noted in the~~ ~~Overview – COVID-19 Business Update, we have suspended the quarterly cash dividend that would have been paid in June 2020.~~

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, ~~2019.~~2020.

Commitments, Contractual Obligations and Contingencies

In February 2021, we agreed to acquire additional shares in DECIEM Beauty Group Inc. (“DECIEM”) that will increase our existing equity interest from approximately 29% to approximately 76%. Upon closing, which is expected to occur in May 2021, we will pay approximately $1,000 million and will also have the right to purchase, and will grant the remaining investors a right to sell to us, the remaining interests after a three-year period, with a purchase price based on the future performance of DECIEM. There have been no other significant changes to our commitments and contractual obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2019.~~2020. For a discussion of contingencies, see Notes to Consolidated Financial Statements, Note 1110 – 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 76 – Derivative Financial Instruments.

Foreign Exchange Risk Management

For a discussion of foreign exchange risk management, see Notes to Consolidated Financial Statements, Note 76 – Derivative Financial Instruments (Cash Flow Hedges, Net Investment Hedges).

Credit Risk

For a discussion of credit risk, see Notes to Consolidated Financial Statements, Note 76 – Derivative Financial Instruments (Credit Risk).

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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 ~~increase (decrease)~~decrease in the fair value of our portfolio of approximately ~~$(230)~~$198 million and ~~$48~~$222 million as of March 31, ~~2020~~2021 and June 30, ~~2019,~~2020, respectively. This potential change does not consider our underlying foreign currency exposures.

In addition, we enter into interest rate derivatives to manage the effects of interest rate movements on our aggregate liability portfolio, including future debt issuances. Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would increase (decrease) by approximately ~~$10~~$(58) million and ~~$(16)~~$9 million as of March 31, ~~2020~~2021 and June 30, ~~2019,~~2020, respectively.

Our sensitivity analysis represents an estimate of reasonably possible net losses that would be recognized on our portfolio of derivative financial instruments assuming hypothetical movements in future market rates and is not necessarily indicative of actual results, which may or may not occur. It does not represent the maximum possible loss or any expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in our portfolio of derivative financial instruments during the year. We believe, however, that any such loss incurred would be offset by the effects of market rate movements on the respective underlying transactions for which the derivative financial instrument was intended.

OFF-BALANCE SHEET ARRANGEMENTS

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.

CRITICAL ACCOUNTING POLICIES

As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2019,~~2020, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those financial statements. These estimates and assumptions can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies relate to goodwill, other intangible assets and long-lived assets, income taxes and ~~income taxes.~~business combinations. Since June 30, ~~2019,~~2020, there have been no significant changes to the assumptions and estimates related to our critical accounting policies.

RECENTLY ISSUED ACCOUNTING STANDARDS

For a discussion regarding the impact of accounting standards that were recently issued but not yet effective, on the Company’s consolidated financial statements, see Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION

We and our representatives from time to time make written or oral forward-looking statements, including in this and other filings with the Securities and Exchange Commission, in our press releases and in our reports to stockholders, which may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may address our expectations regarding sales, earnings or other future financial performance and liquidity, other performance measures, product introductions, entry into new geographic regions, information technology initiatives, new methods of sale, our long-term strategy, restructuring and other charges and resulting cost savings, and future operations or operating results. These statements may contain words like “expect,” “will,” “will likely result,” “would,” “believe,” “estimate,” “planned,” “plans,” “intends,” “may,” “should,” “could,” “anticipate,” “estimate,” “project,” “projected,” “forecast,” and “forecasted” or similar expressions. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, actual results may differ materially from our expectations. Factors that could cause actual results to differ from expectations include, without limitation:

(1)increased competitive activity from companies in the skin care, makeup, fragrance and hair care businesses;

(2)our ability to develop, produce and market new products on which future operating results may depend and to successfully address challenges in our business;

(3)consolidations, restructurings, bankruptcies and reorganizations in the retail industry causing a decrease in the number of stores that sell our products, an increase in the ownership concentration within the retail industry, ownership of retailers by our competitors or ownership of competitors by our customers that are retailers and our inability to collect receivables;

(4)destocking and tighter working capital management by retailers;

(5)the success, or changes in timing or scope, of new product launches and the success, or changes in timing or scope, of advertising, sampling and merchandising programs;

(6)shifts in the preferences of consumers as to where and how they shop;

(7)social, political and economic risks to our foreign or domestic manufacturing, distribution and retail operations, including changes in foreign investment and trade policies and regulations of the host countries and of the United States;

(8)changes in the laws, regulations and policies (including the interpretations and enforcement thereof) that affect, or will affect, our business, including those relating to our products or distribution networks, changes in accounting standards, tax laws and regulations, environmental or climate change laws, regulations or accords, trade rules and customs regulations, and the outcome and expense of legal or regulatory proceedings, and any action we may take as a result;

(9)foreign currency fluctuations affecting our results of operations and the value of our foreign assets, the relative prices at which we and our foreign competitors sell products in the same markets and our operating and manufacturing costs outside of the United States;

(10)changes in global or local conditions, including those due to the volatility in the global credit and equity markets, natural or man-made disasters, real or perceived epidemics, or energy costs, that could affect consumer purchasing, the willingness or ability of consumers to travel and/or purchase our products while traveling, the financial strength of our customers, suppliers or other contract counterparties, our operations, the cost and availability of capital which we may need for new equipment, facilities or acquisitions, the returns that we are able to generate on our pension assets and the resulting impact on funding obligations, the cost and availability of raw materials and the assumptions underlying our critical accounting estimates;

(11)impacts attributable to the ~~coronavirus outbreak, which has become the~~ COVID-19 pandemic, including disruptions to our global business;

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(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;

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(13)real estate rates and availability, which may affect our ability to increase or maintain the number of retail locations at which we sell our products and the costs associated with our other facilities;

(14)changes in product mix to products which are less profitable;

(15)our ability to acquire, develop or implement new information and distribution technologies and initiatives on a timely basis and within our cost estimates and our ability to maintain continuous operations of such systems and the security of data and other information that may be stored in such systems or other systems or media;

(16)our ability to capitalize on opportunities for improved efficiency, such as publicly-announced strategies and restructuring and cost-savings initiatives, and to integrate acquired businesses and realize value therefrom;

(17)consequences attributable to local or international conflicts around the world, as well as from any terrorist action, retaliation and the threat of further action or retaliation;

(18)the timing and impact of acquisitions, investments and divestitures; and

(19)additional factors as described in our filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended June 30, ~~2019.~~2020.

We assume no responsibility to update forward-looking statements made herein or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The information required by this item is set forth in Item 2 of this Quarterly Report on Form 10-Q under the caption Liquidity and Capital Resources - Market Risk and is incorporated herein by reference.

Item 4. Controls and Procedures.

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures, including impacts of COVID-19, as of March 31, ~~2020~~2021 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.

As part of ~~the Company’s~~our review of internal control over financial reporting, we make changes to systems and processes to improve such controls and increase efficiencies, while ensuring that we maintain an effective internal control environment. There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the third quarter of fiscal ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

THE ESTÉE LAUDER COMPANIES INC.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

For a discussion of legal proceedings, see Notes to Consolidated Financial Statements, Note 1110 – Contingencies.

~~Table of Contents~~

~~THE ESTÉE LAUDER COMPANIES INC.~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Share Repurchase Program

We are authorized by the Board of Directors to repurchase shares of our Class A Common Stock in the open market or in privately negotiated transactions, depending on market conditions and other factors. The following table provides information relating to our repurchase of Class A Common Stock during the referenced periods:

Period
Total Number
of Shares
Purchased⁽¹⁾
Average Price
Paid Per
Share Total Number of
Shares Purchased as
Part of Publicly
Announced
Program
Maximum
Number of Shares
that May Yet Be
Purchased Under
the Program⁽²⁾
January 2020 202,349 $ 204.55 183,303 34,876,924
February 2020 135,300 201.35 135,300 34,741,624
March 2020 763 188.01 — 34,741,624
338,412 203.23 318,603


Period	Total Number of Shares Purchased(1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number of Shares that May Yet Be Purchased Under the Program(2)
January 2021	8,164	$	239.71	—	34,741,624
February 2021	—	—		—	34,741,624
March 2021	738,279	287.71		737,783	34,003,841
	746,443	287.19		737,783

⁽¹⁾Includes shares that were repurchased by the Company to satisfy tax withholding obligations upon the payout of certain stock-based compensation arrangements.

⁽²⁾The Board of Directors ~~last~~has authorized ~~an increase to~~ the ~~share~~current repurchase program for up to 80.0 million shares. The total amount was last increased by ~~40.0 million shares~~the Board on October 31, 2018. Our repurchase program does not have an expiration date.

~~Beginning in early February 2020,~~In March 2021, we resumed the ~~Company temporarily suspended its~~ repurchase of shares of ~~the Company's~~our Class A Common Stock pursuant to our share repurchase program. Subsequent to March 31, 2021 and ~~may resume repurchases in the future.~~as of April 26, 2021, we purchased approximately 0.2 million additional shares for $66 million.

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THE ESTÉE LAUDER COMPANIES INC.

Item 6. Exhibits.


Exhibit Number						Description


4.1						Officers’ Certificate, dated ~~April 13, 2020~~March 4, 2021 , defining certain terms of the ~~2.600%~~1.950% Senior Notes due ~~2030~~2031 (filed as Exhibit 4.1 to our Current Report on Form 8-K filed on ~~April 13, 2020)~~March 4, 2021) ~~(SEC~~(SEC File No. ~~1-14064).~~1-1 4064).*

4.2						Form of Global Note for the ~~2.600%~~1.950% Senior Notes due ~~2030 (filed~~2031 (included as Exhibit A in Exhibit 4.1 to our Current Report on Form 8-K filed on ~~April 13, 2020)~~March 4, 2021) ((SEC File No. ~~1-14064)~~1-1 4064 ).**

10.1						~~Fourth Amendment~~Price-Vested Unit Award Agreement with Fabrizio Freda under The Estée Lauder Companies Inc. Amended and Restated Fiscal 2002 Share Incentive Plan (including Notice of Grant) (filed as Exhibit 10.1 to ~~Sublease, dated~~our Current Report on Form 8-K filed on March ~~4, 2020, between Aramis Inc. and RSL Management Corp.~~16, 2021) (SEC File No. ~~1-14064)~~1-1 4064).*†

10.2						~~Amendment~~ ~~to Employment~~Performance Share Unit Award Agreement with ~~Leonard A.~~Fabrizio Freda under The Estée Lauder Companies Inc. Amended and Restated Fiscal 2002 Share Incentive Plan (including Notice of Grant) (filed as Exhibit 10.2 to our Current Report on Form 8-K filed on March 16, 2021) ~~dated~~ ~~May 1, 2020~~ ~~(SEC~~(SEC File No. 1-14064).*†

31.1						Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO).

31.2						Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO).

32.1						Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO). (furnished)

32.2						Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO). (furnished)

101.1						The following materials from The Estée Lauder Companies Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, ~~2020~~2021 are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Statements of Earnings (Loss), (ii) the Consolidated Statements of Comprehensive Income, ~~(Loss),~~ (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements

104						The cover page from The Estée Lauder Companies Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, ~~2020~~2021 is formatted in iXBRL

* Incorporated herein by reference.

† Exhibit is a management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	THE ESTÉE LAUDER COMPANIES INC.

	By:	/s/TRACEY T. TRAVIS
Date: May ~~1, 2020~~3, 2021		Tracey T. Travis
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

7276


	March 31, 2020										June 30, 2019
(In millions)	Gross Carrying Value		Accumulated Amortization		Total Net Book Value		Gross Carrying Value		Accumulated Amortization		Total Net Book Value
Amortizable intangible assets:
Customer lists and other	$	1,482	$	411	$	1,071	$	684	$	369	$	315
License agreements	43		43		—		43		43		—
	$	1,525	$	454	$	1,071	$	727	$	412	$	315
Non-amortizable intangible assets:
Trademarks					1,119						888
Total intangible assets					$	2,190					$	1,203


(In millions)	Operating Leases		Finance Leases
Remainder of fiscal 2020	$	113	$	4
Fiscal 2021	397		7
Fiscal 2022	364		3
Fiscal 2023	324		1
Fiscal 2024	291		—
Thereafter	1,586		—
Total future minimum lease payments	3,075		15
Less imputed interest	(416)		—
Total	$	2,659	$	15


Notes	Issue Date	Price		Yield		Unamortized Debt Discount		Debt Issuance Costs		Semi-annual interest payments
($ in millions)

2024 Senior Notes	November 2019	99.421	%	2.122	%	$	3	$	3	June 1/December 1
2029 Senior Notes ⁽¹⁾	November 2019	99.046		2.483		6		4		June 1/December 1
2049 Senior Notes	November 2019	98.769		3.189		8		7		June 1/December 1


	Amount of Gain or (Loss) Recognized in OCI on Derivatives					Location of Gain or (Loss) Reclassified from AOCI into Earnings			Amount of Gain or (Loss) Reclassified from AOCI into Earnings⁽¹⁾
	Three Months Ended March 31										Three Months Ended March 31
(In millions)	2020		2019					2020			2019
Derivatives in Cash Flow Hedging Relationships:

Foreign currency forward contracts	$	46	$	2	Net sales	$	10		$	8
Interest rate-related derivatives	(2)		—		Interest expense	—			1
	44		2		Total derivatives	$	10		$	9
Derivatives in Net Investment Hedging Relationships⁽²⁾:
Foreign currency forward contracts⁽³⁾	(20)		—
Total derivatives	$	24	$	2


(In millions)	Net Cash Flow Hedge Gain (Loss)		Amounts Included in Net Periodic Benefit Cost			Translation Adjustments			Total
Balance at June 30, 2019	$	21	$	(253)		$	(331)		$	(563)
OCI before reclassifications	29		(1)		⁽¹⁾	(170)		⁽²⁾	(142)
Amounts reclassified to Net earnings (loss)	(22)		13			2			(7)
Net current-period OCI	7		12			(168)			(149)
Balance at March 31, 2020	$	28	$	(241)		$	(499)		$	(712)


	Amount Reclassified from AOCI									Affected Line Item in Consolidated Statements of Earnings (Loss)
	Three Months Ended March 31						Nine Months Ended March 31
(In millions)	2020		2019		2020		2019
Gain (Loss) on Investments
Gain (loss) on investments	$	—	$	(6)	$	—	$	(6)	Other income, net
Benefit (provision) for deferred taxes	—		—		—		—		Provision for income taxes
	$	—	$	(6)	$	—	$	(6)	Net earnings (loss)

Gain (Loss) on Cash Flow Hedges
Foreign currency forward contracts	$	10	$	8	$	29	$	15	Net sales
Interest rate-related derivatives	—		1		—		1		Interest expense
	10		9		29		16
Benefit (provision) for deferred taxes	(2)		(2)		(7)		(4)		Provision for income taxes
	$	8	$	7	$	22	$	12	Net earnings (loss)

Amounts Included in Net Periodic Benefit Cost
Amortization of actuarial loss	$	(6)	$	(3)	$	(16)	$	(10)	Earnings before income taxes ⁽¹⁾
Benefit for deferred taxes	1		1		3		3		Provision for income taxes
	$	(5)	$	(2)	$	(13)	$	(7)	Net earnings (loss)

Cumulative Translation Adjustments
Gain on previously held equity method investment	$	—	$	—	$	4	$	—	Other income, net
Loss on liquidation of an investment in a foreign subsidiary	—		—		(6)		—		Restructuring and other charges
Gain on liquidation of an investment in a foreign subsidiary	—		77		—		77		Other income, net
	$	—	$	77	$	(2)	$	77	Net earnings (loss)
Total reclassification adjustments, net	$	3	$	76	$	7	$	76	Net earnings (loss)


Period	Total Number of Shares Purchased⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number of Shares that May Yet Be Purchased Under the Program⁽²⁾
January 2020	202,349	$	204.55	183,303	34,876,924
February 2020	135,300	201.35		135,300	34,741,624
March 2020	763	188.01		—	34,741,624
	338,412	203.23		318,603