ESTEE LAUDER COMPANIES INC 10-Q

Item 1. Financial Statements. THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Three Months Ended September 30 (In millions, except per share data) 2022 2021 Net sales $ 3,930 $ 4,392 Cost of sales 1,023 1,057 Gross profit 2,907 3,335 Operating expenses Selling, general and administrative 2,244 2,394 Restructuring and other charges 2 6 Total operating expenses 2,246 2,400 Operating income 661 935 Interest expense 46 42 Interest income and investment income, net 15 4 Other components of net periodic benefit cost ( 3 ) 1 Other income — 1 Earnings before income taxes 633 897 Provision for income taxes 143 202 Net earnings 490 695 Net earnings attributable to noncontrolling interests — ( 1 ) Net earnings attributable to redeemable noncontrolling interest ( 1 ) ( 2 ) Net earnings attributable to The Estée Lauder Companies Inc. $ 489 $ 692 Net earnings attributable to The Estée Lauder Companies Inc. per common share Basic $ 1.37 $ 1.91 Diluted $ 1.35 $ 1.88 Weighted-average common shares outstanding Basic 357.9 362.2 Diluted 361.4 367.9 See notes to consolidated financial statements. 2 Table of Contents THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended September 30 (In millions) 2022 2021 Net earnings $ 490 $ 695 Other comprehensive income (loss): Net cash flow hedge gain 49 21 Retirement plan and other retiree benefit adjustments — 4 Translation adjustments ( 381 ) ( 186 ) Benefit (provision) for income taxes on components of other comprehensive income ( 19 ) ( 12 ) Total other comprehensive income (loss), net of tax ( 351 ) ( 173 ) Comprehensive income 139 522 Comprehensive income attributable to noncontrolling interests: Net earnings — ( 1 ) Translation adjustments — 1 Total comprehensive income attributable to noncontrolling interests — — Comprehensive income attributable to redeemable noncontrolling interest: Net earnings ( 1 ) ( 2 ) Translation adjustments 35 17 Total comprehensive income attributable to redeemable noncontrolling interest 34 15 Comprehensive income attributable to The Estée Lauder Companies Inc. $ 173 $ 537 See notes to consolidated financial statements. 3 Table of Contents THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED BALANCE SHEETS (In millions, except share data) September 30 2022 June 30 2022 (Unaudited) ASSETS Current assets Cash and cash equivalents $ 2,938 $ 3,957 Accounts receivable, net 2,156 1,629 Inventory and promotional merchandise 3,018 2,920 Prepaid expenses and other current assets 754 792 Total current assets 8,866 9,298 Property, plant and equipment, net 2,654 2,650 Other assets Operating lease right-of-use assets 1,858 1,949 Goodwill 2,415 2,521 Other intangible assets, net 3,190 3,428 Other assets 1,006 1,064 Total other assets 8,469 8,962 Total assets $ 19,989 $ 20,910 LIABILITIES AND EQUITY Current liabilities Current debt $ 266 $ 268 Accounts payable 1,392 1,822 Operating lease liabilities 340 365 Other accrued liabilities 3,273 3,360 Total current liabilities 5,271 5,815 Noncurrent liabilities Long-term debt 5,107 5,144 Long-term operating lease liabilities 1,781 1,868 Other noncurrent liabilities 1,505 1,651 Total noncurrent liabilities 8,393 8,663 Contingencies Redeemable Noncontrolling Interest 808 842 Equity Common stock, $ .01 par value; Class A shares authorized: 1,300,000,000 at September 30, 2022 and June 30, 2022; shares issued: 468,356,871 at September 30, 2022 and 467,949,351 at June 30, 2022; Class B shares authorized: 304,000,000 at September 30, 2022 and June 30, 2022; shares issued and outstanding: 125,542,029 at September 30, 2022 and 125,542,029 at June 30, 2022 6 6 Paid-in capital 5,875 5,796 Retained earnings 14,185 13,912 Accumulated other comprehensive loss ( 1,078 ) ( 762 ) 18,988 18,952 Less: Treasury stock, at cost; 236,867,993 Class A shares at September 30, 2022 and 236,435,830 Class A shares at June 30, 2022 ( 13,471 ) ( 13,362 ) Total equity 5,517 5,590 Total liabilities, redeemable noncontrolling interest and equity $ 19,989 $ 20,910 See notes to consolidated financial statements. 4 Table of Contents THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended September 30 (In millions) 2022 2021 Cash flows from operating activities Net earnings $ 490 $ 695 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization 178 183 Deferred income taxes ( 53 ) ( 57 ) Non-cash stock-based compensation 53 79 Net loss on disposal of property, plant and equipment 2 1 Non-cash restructuring and other charges 9 2 Pension and post-retirement benefit expense 13 21 Pension and post-retirement benefit contributions ( 5 ) ( 11 ) Gain on previously held equity method investment — ( 1 ) Other non-cash items ( 3 ) 3 Changes in operating assets and liabilities: Increase in accounts receivable, net ( 579 ) ( 583 ) Increase in inventory and promotional merchandise ( 229 ) ( 178 ) Decrease (increase) in other assets, net 3 ( 19 ) Decrease in accounts payable ( 375 ) ( 191 ) Decrease in other accrued and noncurrent liabilities ( 135 ) ( 15 ) Decrease in operating lease assets and liabilities, net ( 19 ) ( 10 ) Net cash flows used for operating activities ( 650 ) ( 81 ) Cash flows from investing activities Capital expenditures ( 152 ) ( 205 ) Purchases of investments — ( 6 ) Settlement of net investment hedges 138 58 Net cash flows used for investing activities ( 14 ) ( 153 ) Cash flows from financing activities Proceeds from current debt, net 249 3 Repayments and redemptions of long-term debt ( 254 ) ( 4 ) Net proceeds from stock-based compensation transactions 26 36 Payments to acquire treasury stock ( 110 ) ( 557 ) Dividends paid to stockholders ( 215 ) ( 192 ) Net cash flows used for financing activities ( 304 ) ( 714 ) Effect of exchange rate changes on Cash and cash equivalents ( 51 ) ( 15 ) Net decrease in Cash and cash equivalents ( 1,019 ) ( 963 ) Cash and cash equivalents at beginning of period 3,957 4,958 Cash and cash equivalents at end of period $ 2,938 $ 3,995 See notes to consolidated financial statements. 5 Table of Contents 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. 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, 2022. Certain prior year amounts in the notes to the consolidated financial statements have been reclassified to conform to current year presentation. 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, 2022. 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 monthly average rates of exchange for the period. Unrealized translation losses, net of tax, reported as translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc. were $ 352 million and $ 175 million, net of tax, during the three months ended September 30, 2022 and 2021, 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 4 – 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 gains (losses) on foreign currency transactions of $ 14 million and $( 12 ) million during the three months ended September 30, 2022 and 2021, respectively. 6 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 seller of skin care, makeup, fragrance and hair care products. The Company’s sales subject to credit risk are made primarily to retailers in its travel retail business, department stores, specialty multi-brand retailers and perfumeries. 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 quarter sells products primarily in China travel retail and accounted for $ 413 million or 11 %, and $ 456 million, or 10 %, of the Company's consolidated net sales for the three months ended September 30, 2022 and 2021, respectively. This customer accounted for $ 355 million, or 16 %, and $ 399 million, or 24 %, of the Company's accounts receivable at September 30, 2022 and June 30, 2022, respectively. Inventory and Promotional Merchandise Inventory and promotional merchandise consists of the following: (In millions) September 30, 2022 June 30, 2022 Raw materials $ 853 $ 791 Work in process 343 366 Finished goods 1,499 1,449 Promotional merchandise 323 314 $ 3,018 $ 2,920 Property, Plant and Equipment Property, plant and equipment consists of the following: (In millions) September 30, 2022 June 30, 2022 Assets (Useful Life) Land $ 51 $ 53 Buildings and improvements ( 10 to 40 years) 478 491 Machinery and equipment ( 3 to 10 years) 975 994 Computer hardware and software ( 4 to 10 years) 1,545 1,468 Furniture and fixtures ( 5 to 10 years) 127 129 Leasehold improvements 2,174 2,246 Construction in progress 806 759 6,156 6,140 Less accumulated depreciation and amortization ( 3,502 ) ( 3,490 ) $ 2,654 $ 2,650 Depreciation and amortization of property, plant and equipment was $ 136 million and $ 130 million during the three months ended September 30, 2022 and 2021, 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. 7 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income Taxes The effective rate for income taxes was 22.6 % and 22.5 % for the three months ended September 30, 2022 and 2021, respectively. The increase in the effective tax rate of 10 basis points was primarily attributable to a higher effective tax rate on the Company's foreign operations and a decrease in excess tax benefits associated with stock-based compensation arrangements, partially offset by a reduction in income tax reserve adjustments. On August 16, 2022, the U.S. federal government enacted the Inflation Reduction Act, with tax provisions primarily focused on implementing a 1% excise tax on share repurchases and a 15% corporate alternative minimum tax based on global adjusted financial statement income. The excise tax is effective beginning with the Company’s third quarter of fiscal 2023, while the corporate alternative minimum tax will be effective beginning with the Company’s first quarter of fiscal 2024. The Company is currently evaluating the effect of the new law on its consolidated financial statements. As of September 30, 2022 and June 30, 2022, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $ 59 million and $ 61 million, respectively. The total amount of unrecognized tax benefits at September 30, 2022 that, if recognized, would affect the effective tax rate was $ 49 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three months ended September 30, 2022 in the accompanying consolidated statements of earnings was $ 1 million. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at each of September 30, 2022 and June 30, 2022, was $ 14 million. On the basis of the information available as of September 30, 2022, the Company does not expect significant changes to the total amount of unrecognized tax benefits within the next twelve months. During the fiscal 2023 first quarter, the Company formally concluded the compliance process with respect to its fiscal 2021 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 months ended September 30, 2022. Other Accrued and Noncurrent Liabilities Other accrued liabilities consist of the following: (In millions) September 30, 2022 June 30, 2022 Employee compensation $ 430 $ 693 Deferred revenue 313 312 Payroll and other non-income taxes 325 345 Accrued income taxes 332 267 Sales return accrual 307 252 Other 1,566 1,491 $ 3,273 $ 3,360 At September 30, 2022 and June 30, 2022, total Other noncurrent liabilities of $ 1,505 million and $ 1,651 million included $ 633 million and $ 692 million of deferred tax liabilities, respectively. Recently Issued Accounting Standards FASB ASU No. 2022-04 – Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations In September 2022, the FASB issued authoritative guidance which is intended to enhance the transparency surrounding the use of supplier finance programs. The guidance requires companies that use supplier finance programs to make annual disclosures about the program’s key terms, the balance sheet presentation of related amounts, the confirmed amount outstanding at the end of the period and associated rollforward information. Only the amount outstanding at the end of the period must be disclosed in interim periods. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. Effective for the Company – The guidance becomes effective for the Company’s first quarter fiscal 2024 and is applied on a retrospective basis, except for the requirement to disclose rollforward information which is effective prospectively for the Company’s first quarter fiscal 2025. Early adoption is permitted. Annual disclosures need to be provided in interim periods within the initial year of adoption. 8 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impact on consolidated financial statements – The Company has a supplier financing arrangement and is currently evaluating the impact that this guidance will have on its financial statement disclosures. Reference Rate Reform (ASC Topic 848 “ ASC 848 ” ) In March 2020, t he FAS B 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 and other contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that reference LIBOR or another rate that is expected to be discontinued as a result of reference rate reform. 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 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 currently has an implementation team in place that is performing a comprehensive evaluation and assessing the impact of applying this guidance, which includes assessing the impact to business processes and internal controls over financial reporting and the related disclosure requirements. For treasury related arrangements, the Company references LIBOR in its interest rate swap agreements and LIBOR is also used for purposes of discounting certain foreign currency and interest rate forward contracts. The Company is currently evaluating the potential impact of modifying treasury related arrangements and applying the relevant ASC 848 optional practical expedients, as needed. For existing lease, debt arrangements and other contracts, the Company will not adopt any ASC 848 optional practical expedients as it relates to these arrangements. The Company will continue to monitor new contracts that could potentially be eligible for contract modification relief through December 31, 2022. No other recently issued accounting pronouncements are expected to have a material impact on the Company’s consolidated financial statements. NOTE 2 – GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill 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, 2022 Goodwill $ 1,702 $ 1,116 $ 249 $ 353 $ 3,420 Accumulated impairments ( 138 ) ( 732 ) ( 29 ) — ( 899 ) 1,564 384 220 353 2,521 Translation and other adjustments, goodwill ( 101 ) — ( 5 ) ( 1 ) ( 107 ) Translation and other adjustments, accumulated impairments 1 — — — 1 ( 100 ) — ( 5 ) ( 1 ) ( 106 ) Balance as of September 30, 2022 Goodwill 1,601 1,116 244 352 3,313 Accumulated impairments ( 137 ) ( 732 ) ( 29 ) — ( 898 ) $ 1,464 $ 384 $ 215 $ 352 $ 2,415 9 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other Intangible Assets Other intangible assets consist of the following: September 30, 2022 June 30, 2022 (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 $ 1,945 $ 640 $ 1,305 $ 2,061 $ 625 $ 1,436 License agreements 3 3 — 3 3 — $ 1,948 $ 643 1,305 $ 2,064 $ 628 1,436 Non-amortizable intangible assets: Trademarks and other 1,885 1,992 Total intangible assets $ 3,190 $ 3,428 The aggregate amortization expense related to amortizable intangible assets was $ 36 million and $ 45 million for the three months ended September 30, 2022 and 2021, respectively. The estimated aggregate amortization expense for the remainder of fiscal 2023 and for each of the next four fiscal years is as follows: Fiscal (In millions) 2023 2024 2025 2026 2027 Estimated aggregate amortization expense $ 105 $ 140 $ 140 $ 140 $ 123 NOTE 3 – CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES Charges associated with the Post-COVID Business Acceleration Program for the three months ended September 30, 2022 were as follows: Sales Returns (included in Net Sales) Cost of Sales Operating Expenses Total (In millions) Restructuring Charges Other Charges Total $ 5 $ ( 1 ) $ 2 $ — $ 6 The types of activities included in restructuring and other charges, and the related accounting criteria, are described below. Charges associated with restructuring and other activities are not allocated to the Company's 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. 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 realign the Company's business to address 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. 10 Table of Contents 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. As of September 30, 2022, the Company estimated a net reduction over the duration of the PCBA Program in the range of 2,500 to 3,000 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 estimated 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. As of June 30, 2022, the Company approved specific initiatives under the PCBA Program and expects to substantially complete those initiatives through fiscal 2023. Inclusive of approvals from inception through June 30, 2022, the Company estimates that the PCBA Program may result in related restructuring and other charges totaling between $ 500 million and $ 515 million, before taxes. PCBA Program Approvals Total PCBA Program cumulative charges (adjustments) approved by the Company through September 30, 2022 were: 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, 2022 $ 43 $ 9 $ 424 $ 39 $ 515 Three months ended September 30, 2022 — — — — — Cumulative through September 30, 2022 $ 43 $ 9 $ 424 $ 39 $ 515 Included in the above table, cumulative PCBA Program restructuring initiatives approved by the Company through September 30, 2022 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, 2022 $ 215 $ 161 $ 43 $ 5 $ 424 Three months ended September 30, 2022 — — — — — Cumulative through September 30, 2022 $ 215 $ 161 $ 43 $ 5 $ 424 Specific actions taken since the PCBA Program inception include: • 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. • Optimize Select Marketing, Brand and Global Functions – The Company has started to reduce its corporate and certain of its brand office footprints and is moving toward the future of work in a post-COVID environment, by restructuring where and how its employees work and collaborate. In addition, the Company has approved initiatives to reduce organizational complexity and leverage scale across various Global functions. These actions will result in asset write-offs, employee severance, lease termination fees, and consulting and other professional services for the design and implementation of the future structures and processes. 11 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS • 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 across all geographic regions, including the Company's travel retail network. These anticipated closures reflect changing consumer behaviors including higher demand for online and omnichannel capabilities. These activities will result in termination of contracts, a net reduction in workforce, product returns, and inventory and other asset write-offs. • Exit of the Global Distribution of BECCA Products – In reviewing the Company's brand portfolio to improve efficiency and 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 completed these initiatives during fiscal 2022. • Exit of Certain Designer Fragrance Licenses – In reviewing the Company’s brand portfolio of fragrances and to focus on investing its resources on alternative opportunities for long-term growth and value creation globally, the Company announced that it would not be renewing its existing license agreements for the Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna product lines when their respective terms expire in June 2023. The Company has since negotiated early termination agreements with each of the licensors effective June 30, 2022 and continued to sell products under these licenses until such time. These actions resulted in asset write-offs, including charges for the impairment of goodwill, employee-related costs, and consulting and legal fees. • Brand Transformation – In reviewing the Company’s brand portfolio to accelerate growth within the makeup product category and to support long-term investments, the decision was made to strategically reposition Smashbox to capitalize on changing consumer preferences and to mitigate the impact caused by the COVID-19 pandemic on the brand. These actions will result primarily in product returns and inventory write-offs. 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. 12 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. 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 (Adjustments) Cumulative through June 30, 2022 $ 18 $ 7 $ 310 $ 13 $ 348 Three months ended September 30, 2022 5 ( 1 ) 2 — 6 Cumulative through September 30, 2022 $ 23 $ 6 $ 312 $ 13 $ 354 (In millions) Employee- Related Costs Asset- Related Costs Contract Terminations Other Exit Costs Total Restructuring Charges (Adjustments) Cumulative through June 30, 2022 $ 203 $ 86 $ 19 $ 2 $ 310 Three months ended September 30, 2022 ( 1 ) 9 ( 6 ) — 2 Cumulative through September 30, 2022 $ 202 $ 95 $ 13 $ 2 $ 312 Changes in accrued restructuring charges for the three months ended September 30, 2022 relating to the PCBA Program were: (In millions) Employee- Related Costs Asset- Related Costs Contract Terminations Other Exit Costs Total Balance at June 30, 2022 $ 125 $ — $ — $ — $ 125 Charges ( 1 ) 9 ( 6 ) — 2 Cash payments ( 10 ) — — — ( 10 ) Non-cash asset write-offs — ( 9 ) — — ( 9 ) Translation and other adjustments ( 8 ) — 7 — ( 1 ) Balance at September 30, 2022 $ 106 $ — $ 1 $ — $ 107 Accrued restructuring charges at September 30, 2022 relating to the PCBA Program are expected to result in cash expenditures funded from cash provided by operations of approximately $ 64 million, $ 34 million and $ 9 million for the remainder of fiscal 2023 and for fiscal 2024 and 2025, respectively. 13 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 – 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. 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. The Company 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 sheets. At September 30, 2022, the notional amount of derivatives not designated as hedging instruments was $ 3,389 million. The Company does not utilize derivative financial instruments for trading or speculative purposes. Costs associated with entering into derivative financial instruments have not been material to the Company’s consolidated financial results. 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. 14 Table of Contents 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 Fair Value (1) Fair Value (1) (In millions) Balance Sheet Location September 30, 2022 June 30, 2022 Balance Sheet Location September 30, 2022 June 30, 2022 Derivatives Designated as Hedging Instruments: Foreign currency cash flow hedges Prepaid expenses and other current assets $ 97 $ 57 Other accrued liabilities $ — $ 1 Net investment hedges Prepaid expenses and other current assets 39 107 Other accrued liabilities — — Interest rate-related derivatives Prepaid expenses and other current assets — 24 Other accrued liabilities 154 115 Total Derivatives Designated as Hedging Instruments 136 188 154 116 Derivatives Not Designated as Hedging Instruments: Foreign currency forward contracts Prepaid expenses and other current assets 31 27 Other accrued liabilities 54 104 Total derivatives $ 167 $ 215 $ 208 $ 220 (1) See Note 5 – Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined. 15 Table of Contents 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 (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) Three Months Ended September 30 Three Months Ended September 30 (In millions) 2022 2021 2022 2021 Derivatives in Cash Flow Hedging Relationships: Foreign currency forward contracts $ 57 $ 15 Net sales $ 15 $ ( 6 ) Interest rate-related derivatives 7 — Interest expense — — 64 15 15 ( 6 ) Derivatives in Net Investment Hedging Relationships (2) : Foreign currency forward contracts (3) 71 36 — — Total derivatives $ 135 $ 51 $ 15 $ ( 6 ) (1) There was no 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. (2) During the three months ended September 30, 2022 and 2021, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $ 6 million and $ 2 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 Earnings on Derivatives (1) Location of Gain (Loss) Recognized in Earnings on Derivatives Three Months Ended September 30 (In millions) 2022 2021 Derivatives in Fair Value Hedging Relationships: Interest rate swap contracts Interest expense $ ( 39 ) $ ( 10 ) (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. 16 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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) 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 September 30, 2022 September 30, 2022 Current debt $ — $ — Long-term debt 838 ( 154 ) Total debt $ 838 $ ( 154 ) 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 September 30 2022 2021 (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 $ 3,930 $ 46 $ 4,392 $ 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 39 Not applicable 10 Derivatives designated as hedging instruments Not applicable ( 39 ) Not applicable ( 10 ) Gain (loss) on cash flow hedge relationships – interest rate contracts: Amount of loss reclassified from AOCI into earnings Not applicable — Not applicable — Gain (loss) on cash flow hedge relationships – foreign currency forward contracts: Amount of gain (loss) reclassified from AOCI into earnings 15 Not applicable ( 6 ) Not applicable 17 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amount of gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments are presented as follows: Amount of Gain (Loss) Recognized in Earnings on Derivatives Location of Gain (Loss) Recognized in Earnings on Derivatives Three Months Ended September 30 (In millions) 2022 2021 Derivatives Not Designated as Hedging Instruments: Foreign currency forward contracts Selling, general and administrative $ 11 $ ( 11 ) 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 June 2024. Hedge effectiveness of the foreign currency forward contracts is based on the forward method, which includes time value in the effectiveness assessment. At September 30, 2022, the Company had cash flow hedges outstanding with a notional amount totaling $ 1,588 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. For foreign currency 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 September 30, 2022, the Company’s foreign currency cash flow hedges were highly effective. The estimated net gain on the Company’s derivative instruments designated as cash flow hedges as of September 30, 2022 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $ 68 million. The accumulated net gain on derivative instruments in AOCI was $ 139 million and $ 90 million as of September 30, 2022 and June 30, 2022, 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 $ 700 million and $ 300 million to effectively convert the fixed rate interest on its 2030 Senior Notes and 2031 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. 18 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 May 2023. Hedge effectiveness of the net investment hedge contracts is based on the spot method. At September 30, 2022, the Company had net investment hedges outstanding with a notional amount totaling $ 1,037 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 two 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 $ 167 million at September 30, 2022. 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. NOTE 5 – 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. 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. 19 Table of Contents 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 September 30, 2022: (In millions) Level 1 Level 2 Level 3 Total Assets: Money market funds $ 329 $ — $ — $ 329 Foreign currency forward contracts — 167 — 167 Total $ 329 $ 167 $ — $ 496 Liabilities: Foreign currency forward contracts $ — $ 54 $ — $ 54 Interest rate-related derivatives — 154 — 154 DECIEM stock options — — 69 69 Total $ — $ 208 $ 69 $ 277 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, 2022: (In millions) Level 1 Level 2 Level 3 Total Assets: Money market funds $ 961 $ — $ — $ 961 Foreign currency forward contracts — 191 — 191 Interest rate-related derivatives — 24 — 24 Total $ 961 $ 215 $ — $ 1,176 Liabilities: Foreign currency forward contracts $ — $ 105 $ — $ 105 Interest rate-related derivatives — 115 — 115 DECIEM stock options — — 74 74 Total $ — $ 220 $ 74 $ 294 The estimated fair values of the Company’s financial instruments are as follows: September 30, 2022 June 30, 2022 (In millions) Carrying Amount Fair Value Carrying Amount Fair Value Nonderivatives Cash and cash equivalents $ 2,938 $ 2,938 $ 3,957 $ 3,957 Current and long-term debt 5,373 4,809 5,412 5,139 DECIEM stock options 69 69 74 74 Derivatives Foreign currency forward contracts – asset (liability), net 113 113 86 86 Interest rate-related derivatives – asset (liability), net ( 154 ) ( 154 ) ( 91 ) ( 91 ) 20 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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). Cash deposits in interest bearing accounts and time deposits are carried at cost, which approximates fair value, due to the short maturity of cash equivalent instruments. 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 - related derivatives – 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. DECIEM stock options – The stock option liability represents the employee stock options issued by DECIEM in replacement and exchange for certain vested and unvested DECIEM employee stock options previously issued by DECIEM, in connection with the Company's acquisition of DECIEM. The DECIEM stock options are subject to the terms and conditions of DECIEM's 2021 Stock Option Plan. The DECIEM stock option liability is measured using the Monte Carlo Method, which requires certain assumptions. Significant changes in the projected future operating results would result in a higher or lower fair value measurement. Changes to the discount rates or volatilities would have a lesser effect. These inputs are categorized as Level 3 of the valuation hierarchy. The DECIEM stock options are remeasured to fair value at each reporting date through the period when the options are exercised or repurchased (i.e., when they are settled), with an offsetting entry to compensation expense. See Note 9 – Stock Programs for discussion . Changes in the DECIEM stock option liability for the three months ended September 30, 2022 are included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings and were as follows: (In millions) Fair Value DECIEM stock option liability as of June 30, 2022 $ 74 Changes in fair value, net of foreign currency remeasurements (1) 1 Translation adjustments and other, net ( 6 ) DECIEM stock option liability as of September 30, 2022 $ 69 (1) Amount includes expense attributable to graded vesting of stock options which is not material fo r the three months ended September 30, 2022. 21 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – 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, 2022. Accounts Receivable Accounts receivable, net is stated net of the allowance for doubtful accounts and customer deductions totaling $ 28 million and $ 27 million as of September 30, 2022 and June 30, 2022, respectively. Payment terms are short-term in nature and are generally less than one year. Changes in the allowance for credit losses are as follows: (In millions) September 30, 2022 Balance at June 30, 2022 $ 10 Provision for expected credit losses 3 Write-offs, net & other ( 1 ) Balance at September 30, 2022 $ 12 The remaining balance of the allowance for doubtful accounts of $ 16 million and $ 17 million as of September 30, 2022 and June 30, 2022, respectively, 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 September 30 (In millions) 2022 2021 Deferred revenue, beginning of period $ 362 $ 371 Revenue recognized that was included in the deferred revenue balance at the beginning of the period ( 149 ) ( 170 ) Revenue deferred during the period 157 223 Other ( 8 ) 2 Deferred revenue, end of period $ 362 $ 426 Transaction Price Allocated to the Remaining Performance Obligations At September 30, 2022, 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 $ 313 million. The remaining balance of deferred revenue at September 30, 2022 will be recognized beyond the next twelve months. NOTE 7 – 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, 2022. 22 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of net periodic benefit cost for the three months ended September 30, 2022 and 2021 consisted of the following: Pension Plans Other than Pension Plans U.S. International Post-retirement (In millions) 2022 2021 2022 2021 2022 2021 Service cost $ 9 $ 12 $ 7 $ 8 $ — $ 1 Interest cost 10 8 3 3 2 1 Expected return on plan assets ( 14 ) ( 14 ) ( 4 ) ( 4 ) — — Amortization of: Actuarial loss 1 4 ( 1 ) — — — Special termination benefits — — — 2 — — Net periodic benefit cost $ 6 $ 10 $ 5 $ 9 $ 2 $ 2 During the three months ended September 30, 2022, the Company made contributions to its international pension plans totaling $ 3 million. 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) September 30, 2022 June 30, 2022 Other assets $ 132 $ 151 Other accrued liabilities ( 24 ) ( 24 ) Other noncurrent liabilities ( 349 ) ( 357 ) Funded status ( 241 ) ( 230 ) Accumulated other comprehensive loss 158 155 Net amount recognized $ ( 83 ) $ ( 75 ) NOTE 8 – CONTINGENCIES Legal Proceedings The Company is involved, from time to time, in litigation and other legal proceedings incidental to its business, including product liability matters (including asbestos-related claims), advertising, regulatory, employment, intellectual property, real estate, environmental, trade relations, tax, and privacy. 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. NOTE 9 – STOCK PROGRAMS Additional information relating to the Company's stock programs and the DECIEM stock options 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, 2022. 23 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's 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, including long-term price-vested units and share units. Compensation expense attributable to net stock-based compensation was $ 53 million and $ 79 million for the three months ended September 30, 2022 and 2021, respectively. Stock Options During the three months ended September 30, 2022, the Company granted stock options in respect of approximately 1.2 million shares of Class A Common Stock with an exercise price per share of $ 246.15 and a weighted-average grant date fair value per share of $ 79.07 . 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 three months ended September 30, 2022 was $ 44 million. Restricted Stock Units During the three months ended September 30, 2022, the Company granted RSUs in respect of approximately 1.1 million shares of Class A Common Stock with a weighted-average grant date fair value per share of $ 246.16 that, at the time of grant, are scheduled to vest at 0.4 million, 0.4 million, and 0.3 million shares per year, in fiscal 2024, fiscal 2025 and fiscal 2026, respectively. Vesting of RSUs is generally subject to the continued employment or the retirement of the grantees. The RSUs are generally 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 generally valued at the closing market price of the Company’s Class A Common Stock on the date of grant. Performance Share Units During the three months ended September 30, 2022, the Company granted PSUs with a target payout of approximately 0.1 million shares of Class A Common Stock with a grant date fair value per share of $ 246.15 , which will be settled in stock subject to the achievement of the Company’s net sales, diluted net earnings per common share and return on invested capital goals for the three fiscal years ending June 30, 2025, all subject to continued employment or the retirement of the grantees. 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 2022, approximately 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 0.1 million PSUs with a performance period ended June 30, 2022. DECIEM Stock Options The DECIEM stock options are liability-classified awards as they are expected to be settled in cash and are remeasured to fair value at each reporting date through date of settlement. Total stock-based compensation expense is attributable to the exchange or replacement of and the remaining requisite service period of stock options. The total stock option expense for the three months ended September 30, 2022 and 2021 was not material. There were no DECIEM stock options exercised during the three months ended September 30, 2022. 24 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The DECIEM stock options are reported as a stock option liability of $ 69 million and $ 74 million in Other noncurrent liabilities in the accompanying consolidated balance sheets at September 30, 2022 and June 30, 2022, respectively. The fair value of the stock options were calculated using the following key assumptions into the Monte Carlo Method: September 30, 2022 June 30, 2022 Risk-free rate 3.90 % 3.20 % Term to mid of last twelve-month period 1.17 years 1.42 years Operating leverage adjustment 0.45 0.45 Net sales discount rate 6.70 % 6.00 % EBITDA discount rate 10.10 % 9.40 % EBITDA volatility 35.70 % 33.90 % Net sales volatility 16.10 % 15.30 % NOTE 10 – NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. PER COMMON SHARE Net earnings attributable to The Estée Lauder Companies Inc. per common share (“basic EPS”) is computed by dividing net earnings attributable to The Estée Lauder Companies Inc. by the weighted-average number of common shares outstanding and shares underlying PSUs and RSUs where the vesting conditions have been met. Net earnings attributable to The Estée Lauder Companies Inc. per common share assuming dilution (“diluted EPS”) is computed by reflecting potential dilution from stock-based awards. A reconciliation between the numerator and denominator of the basic and diluted EPS computations is as follows: Three Months Ended September 30 (In millions, except per share data) 2022 2021 Numerator: Net earnings attributable to The Estée Lauder Companies Inc. $ 489 $ 692 Denominator: Weighted-average common shares outstanding – Basic 357.9 362.2 Effect of dilutive stock options 2.7 4.2 Effect of PSUs 0.1 0.2 Effect of RSUs 0.7 1.3 Weighted-average common shares outstanding – Diluted 361.4 367.9 Net earnings attributable to The Estée Lauder Companies Inc. per common share: Basic $ 1.37 $ 1.91 Diluted $ 1.35 $ 1.88 25 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 were as follows: Three Months Ended September 30 (In millions) 2022 2021 Stock options 1.3 0.3 RSUs and PSUs — 0.2 As of September 30, 2022 and 2021, 0.4 million and 0.7 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 9 – Stock Programs . 26 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 – EQUITY AND REDEEMABLE NONCONTROLLING INTEREST Total Stockholders’ Equity – The Estée Lauder Companies Inc. Three Months Ended September 30 (In millions) 2022 2021 Common stock, beginning of the period $ 6 $ 6 Stock-based compensation — — Common stock, end of the period 6 6 Paid-in capital, beginning of the period 5,796 5,335 Common stock dividends 1 1 Stock-based compensation 78 114 Paid-in capital, end of the period 5,875 5,450 Retained earnings, beginning of the period 13,912 12,244 Common stock dividends ( 216 ) ( 193 ) Net earnings attributable to The Estée Lauder Companies Inc. 489 692 Cumulative effect of adoption of new accounting standards — 121 Retained earnings, end of the period 14,185 12,864 Accumulated other comprehensive loss, beginning of the period ( 762 ) ( 470 ) Other comprehensive income (loss) attributable to The Estée Lauder Companies Inc. ( 316 ) ( 155 ) Accumulated other comprehensive loss, end of the period ( 1,078 ) ( 625 ) Treasury stock, beginning of the period ( 13,362 ) ( 11,058 ) Acquisition of treasury stock ( 92 ) ( 519 ) Stock-based compensation ( 17 ) ( 37 ) Treasury stock, end of the period ( 13,471 ) ( 11,614 ) Total stockholders’ equity – The Estée Lauder Companies Inc. 5,517 6,081 Noncontrolling interests, beginning of the period — 34 Net earnings attributable to noncontrolling interests — 1 Translation adjustments and other, net — ( 1 ) Noncontrolling interests, end of the period — 34 Total equity $ 5,517 $ 6,115 Redeemable noncontrolling interest, beginning of the period $ 842 $ 857 Net earnings attributable to redeemable noncontrolling interest 1 2 Translation adjustments ( 35 ) ( 17 ) Redeemable noncontrolling interest, end of the period $ 808 $ 842 Cash dividends declared per common share $ .60 $ .53 27 Table of Contents 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 three months ended September 30, 2022: Date Declared Record Date Payable Date Amount per Share August 17, 2022 August 31, 2022 September 15, 2022 $ .60 On November 1, 2022, a dividend was declared in the amount of $ .66 per share on the Company’s Class A and Class B Common Stock. The dividend is payable in cash on December 15, 2022 to stockholders of record at the close of business on November 30, 2022. Common Stock During the three months ended September 30, 2022, the Company purchased approximately 0.4 million shares of its Class A Common Stock for $ 110 million. Accumulated Other Comprehensive Income The following table represents changes in AOCI, net of tax, by component for the three months ended September 30, 2022: (In millions) Net Cash Flow Hedge Gain (Loss) Amounts Included in Net Periodic Benefit Cost Translation Adjustments Total Balance at June 30, 2022 $ 68 $ ( 114 ) $ ( 716 ) $ ( 762 ) OCI before reclassifications 49 ( 2 ) (1) ( 352 ) (2) ( 305 ) Amounts reclassified to Net earnings ( 11 ) — — ( 11 ) Net current-period OCI 38 ( 2 ) ( 352 ) ( 316 ) Balance at September 30, 2022 $ 106 $ ( 116 ) $ ( 1,068 ) $ ( 1,078 ) (1) Consists of foreign currency translation losses. (2) See Note 4 – Derivative Financial Instruments for gains (losses) relating to net investment hedges. 28 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table represents the effects of reclassification adjustments from AOCI into net earnings for the three months ended September 30, 2022 and 2021: Amount Reclassified from AOCI Affected Line Item in Consolidated Statements of Earnings Three Months Ended September 30 (In millions) 2022 2021 Gain (Loss) on Cash Flow Hedges Foreign currency forward contracts $ 15 $ ( 6 ) Net sales Interest rate-related derivatives — — Interest expense 15 ( 6 ) Benefit (provision) for deferred taxes ( 4 ) 2 Provision for income taxes 11 ( 4 ) Net earnings Retirement Plan and Other Retiree Benefit Adjustments Amortization of actuarial loss — ( 4 ) Other components of net periodic benefit cost (1) Benefit for deferred taxes — 1 Provision for income taxes — ( 3 ) Net earnings Total reclassification adjustments, net $ 11 $ ( 7 ) Net earnings (1) See Note 7 – Pension and Post-Retirement Benefit Plans for additional information. NOTE 12 – STATEMENT OF CASH FLOWS Supplemental cash flow information for the three months ended September 30, 2022 and 2021 is as follows: (In millions) 2022 2021 Cash: Cash paid during the period for interest $ 33 $ 30 Cash paid during the period for income taxes $ 113 $ 125 Non-cash investing and financing activities: Property, plant and equipment accrued but unpaid $ 171 $ 126 Right-of-use assets obtained in exchange for new/modified operating lease liabilities $ 70 $ 44 29 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 – 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 one 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 operating income (loss) before charges associated with restructuring and other activities. Returns and charges associated with restructuring and other activities are not allocated to the Company's 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. 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, 2022. 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. There has been no significant variance in the total or long-lived asset values associated with the Company’s segment data since June 30, 2022. 30 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended September 30 (In millions) 2022 2021 PRODUCT CATEGORY DATA Net sales: Skin Care $ 2,104 $ 2,449 Makeup 1,052 1,174 Fragrance 607 609 Hair Care 158 148 Other 14 13 3,935 4,393 Returns associated with restructuring and other activities ( 5 ) ( 1 ) Net sales $ 3,930 $ 4,392 Operating income (loss) before charges associated with restructuring and other activities: Skin Care $ 530 $ 717 Makeup 16 91 Fragrance 133 131 Hair Care ( 12 ) 2 Other — — 667 941 Reconciliation: Charges associated with restructuring and other activities ( 6 ) ( 6 ) Interest expense ( 46 ) ( 42 ) Interest income and investment income, net 15 4 Other components of net periodic benefit cost 3 ( 1 ) Other income — 1 Earnings before income taxes $ 633 $ 897 GEOGRAPHIC DATA (1) Net sales: The Americas $ 1,123 $ 1,194 Europe, the Middle East & Africa 1,682 1,873 Asia/Pacific 1,130 1,326 3,935 4,393 Returns associated with restructuring and other activities ( 5 ) ( 1 ) Net sales $ 3,930 $ 4,392 Operating income: The Americas $ 125 $ 254 Europe, the Middle East & Africa 334 465 Asia/Pacific 208 222 667 941 Charges associated with restructuring and other activities ( 6 ) ( 6 ) Operating income $ 661 $ 935 (1) The net sales from the Company’s travel retail business are included in the Europe, the Middle East & Africa region, with the exception of net sales of Dr.Jart+ in the travel retail channel that are reflected in Korea in the Asia/Pacific region. Operating income attributable to the travel retail sales included in Europe, the Middle East & Africa is included in that region and in The Americas. 31 Table of Contents THE ESTÉE LAUDER COMPANIES INC.