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. The unaudited interim consolidated financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair 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, 2021.

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, 2021. 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.

All assets and liabilities of foreign subsidiaries and affiliates are translated at period-end rates of exchange, while revenue and expenses are translated at monthly average rates of exchange for the period. Unrealized translation gains (losses), net of tax, reported as translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc. were $(20) million and $227 million, net of tax, during the three months ended December 31, 2021 and 2020, respectively, and $(195) million and $318 million, net of tax, during the six months ended December 31, 2021 and 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. These subsidiaries are not material to the Company’s consolidated financial statements or liquidity.

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. The Company 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 5 – 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 include net exchange losses on foreign currency transactions of $6 million during the three months ended December 31, 2021 and $18 million and $2 million during the six months ended December 31, 2021 and 2020, respectively. The net exchange loss on foreign currency transactions during the three months ended December 31, 2020 was not material.

The Company is a worldwide manufacturer, marketer and seller 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 six months ended December 31, 2021 sells products primarily in China travel retail. This customer accounted for $596 million or 11%, and $654 million, or 13%, of the Company's consolidated net sales for the three months ended December 31, 2021 and 2020, respectively, and $1,052 million, or 11%, and $1,208 million, or 14%, for the six months ended December 31, 2021 and 2020, respectively. This customer accounted for $442 million, or 21%, and $179 million, or 10%, of the Company's accounts receivable at December 31, 2021 and June 30, 2021, respectively.

Property, plant and equipment consists of the following:


(In millions)	December 31 2021		June 30 2021
Assets (Useful Life)
Land	$	57	$	55
Buildings and improvements (10 to 40 years)	497		256
Machinery and equipment (3 to 10 years)	989		920
Computer hardware and software (4 to 10 years)	1,433		1,303
Furniture and fixtures (5 to 10 years)	128		125
Leasehold improvements	2,340		2,312
Construction in progress	500		647
	5,944		5,618
Less accumulated depreciation and amortization	(3,493)		(3,338)
	$	2,451	$	2,280

Depreciation and amortization of property, plant and equipment was $136 million and $126 million during the three months ended December 31, 2021 and 2020, respectively, and $266 million and $251 million during the six months ended December 31, 2021 and 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.

For the three and six months ended December 31, 2021, the increase in the effective tax rate was primarily attributable to a higher effective tax rate on the Company's foreign operations. Also contributing to the increase in the effective tax rate for both periods was a decrease in excess tax benefits associated with stock-based compensation arrangements.

The effective tax rate for the three and six months ended December 31, 2020 included the retroactive impact relating to fiscal 2020 and 2019 of the U.S. government issuance of final global intangible low-taxed income (“GILTI”) tax regulations in July 2020 under the Tax Cuts and Jobs Act that provide for a high-tax exception to the GILTI tax. The impact of the final issuance of GILTI tax regulations, with respect to such prior periods, was recognized as a discrete item in the provision for income taxes in the second quarter of fiscal 2021 and resulted in 470 and 280 basis point reductions to the effective tax rates for the three and six months ended December 31, 2020, respectively.

As of December 31, 2021 and June 30, 2021, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $62 million. The total amount of unrecognized tax benefits at December 31, 2021 that, if recognized, would affect the effective tax rate was $52 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three and six months ended December 31, 2021 in the accompanying consolidated statements of earnings was $1 million and $4 million, respectively. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at December 31, 2021 and June 30, 2021, was $15 million and $14 million, respectively. On the basis of the information available as of December 31, 2021, the Company does not expect significant changes to the total amount of unrecognized tax benefits within the next twelve months.

During the fiscal 2022 first quarter, the Company formally concluded the compliance process with respect to its fiscal 2020 income tax return under the U.S. Internal Revenue Service (“IRS”) Compliance Assurance Program (“CAP”), which had no impact on the Company’s consolidated financial statements for the three and six months ended December 31, 2021.

Other accrued liabilities consist of the following:


(In millions)	December 31 2021		June 30 2021
Advertising, merchandising and sampling	$	375	$	294
Employee compensation	508		670
Deferred revenue	377		322
Payroll and other non-income taxes	373		359
Accrued income taxes	445		237
Sales return accrual	236		369
Other	1,140		944
	$	3,454	$	3,195

Impact on consolidated financial statements – On July 1, 2021, the Company adopted this standard and recorded a cumulative adjustment of $121 million as an increase to its fiscal 2022 opening retained earnings balance to derecognize a deferred tax liability related to a previously held equity method investment that became a foreign subsidiary.

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”) 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.

Impact on consolidated financial statements – The Company currently has an implementation team in place that is performing a comprehensive evaluation and assessing the impact of applying this guidance on its existing derivative contracts, leases and other arrangements, as well as when to adopt this guidance.