ESTEE LAUDER COMPANIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS We manufacture, market and sell beauty products including those in the skin care, makeup, fragrance and hair care categories, which are distributed in approximately 150 countries and territories. The following table is a comparative summary of operating results for the three months ended September 30, 2022 and 2021, and reflects the basis of presentation described in Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies for all periods presented. Products and services that do not meet our definition of skin care, makeup, fragrance and hair care have been included in the “other” category. Three Months Ended September 30 (In millions) 2022 2021 NET SALES By Product Category: 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 By Region (1) : 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 (LOSS) By Product Category: Skin Care $ 530 $ 717 Makeup 16 91 Fragrance 133 131 Hair Care (12) 2 Other — — 667 941 Charges associated with restructuring and other activities (6) (6) Operating income $ 661 $ 935 By Region (1) : 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. 32 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following table presents certain consolidated earnings data as a percentage of net sales: Three Months Ended September 30 2022 2021 Net sales 100.0 % 100.0 % Cost of sales 26.0 24.1 Gross profit 74.0 75.9 Operating expenses: Selling, general and administrative 57.1 54.5 Restructuring and other charges 0.1 0.1 Total operating expenses 57.2 54.6 Operating income 16.8 21.3 Interest expense 1.2 1.0 Interest income and investment income, net 0.4 0.1 Other components of net periodic benefit cost (0.1) — Other income — — Earnings before income taxes 16.1 20.4 Provision for income taxes (3.6) (4.6) Net earnings 12.5 15.8 Net earnings attributable to noncontrolling interests — — Net earnings attributable to redeemable noncontrolling interest — — Net earnings attributable to The Estée Lauder Companies Inc. 12.4 % 15.8 % Not adjusted for differences caused by rounding Period-over-period changes in our net sales are generally attributable to the impacts from (i) pricing on our base portfolio, including changes in strategic pricing actions and mix, (ii) volume, including changes driven by the impact of new product innovation, (iii) acquisitions and/or divestitures, and/or (iv) foreign currency translation. The net sales impact from pricing consists of changes in list prices, due to strategic pricing initiatives, and mix shifts within and among product categories, geographic regions and distribution channels. The prices at which we sell our products vary by brand, distribution channel (e.g., wholesale or direct-to-consumer) and may also vary by country. Our brands and products cover a broad array of pricing tiers. Prices of skin care and fragrance products are typically higher than makeup and hair care products. New product innovation includes the introduction of new products, as well as the innovation of existing products, including reformulations, regional expansion, repackaging and sets. A product is considered "new innovation" for the twelve-month period following the initial shipment date. Our innovation is launched at different price points than existing products and value derived from innovation may vary from year to year. 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 often has some cannibalizing effect on sales of existing products, which we take into account in our business planning. The impact of new product introductions, including timing compared to introductions in prior periods, also affects our results. 33 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Non-GAAP Financial Measures We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period helps investors and others compare operating performance between periods. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. See Reconciliations of Non-GAAP Financial Measures beginning on page 47 f or reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 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 monthly average foreign currency exchange rates and adjusting for the period-over-period impact of foreign currency cash flow hedging activities. Overview Business Update We are a leader in prestige beauty, which combines the repeat purchase and relative affordability of consumer goods with high quality products and services. Within prestige beauty, we are well diversified by product category, geography, brand, product sub-category, channel, consumer segment and price point. This diversification allows us to leverage consumer analytics and insights with agility by deploying our brands to fast growing and profitable opportunities. These analytics and insights, combined with our creativity, inform our innovation to provide a broad, locally-relevant and inclusive range of prestige products allowing us to compete effectively for a greater share of a consumer's beauty routine. Elements of our strategy are described in the Overview on pages 30-32 of our Annual Report on Form 10-K for the year ended June 30, 2022, as well as below. The COVID-19 pandemic continued to disrupt our operating environment through the fiscal 2023 first quarter, including COVID-related restrictions in China, affecting travel retail in Hainan as well as mainland China. In Hainan, the ongoing restrictions led to prolonged store closures and the curtailment of travel and caused the tightening of inventory by certain of our retailers who had previously placed orders in anticipation of the return of travel that was since delayed. The COVID-related restrictions in mainland China continued to negatively impact retail traffic. During the fiscal 2023 first quarter, our business was also negatively impacted by inflationary pressures, and recession concerns, which caused certain of our retailers in the United States to tighten inventory. During the first quarter of fiscal 2023, net sales decreased 11%, reflecting the impacts of the challenges noted above. • Our skin care net sales declined 14%, including the unfavorable impact of foreign currency translation of 3%. The category continues to be pressured by COVID-19 restrictions in Hainan, including the tightening of inventory by certain of our retailers, and in mainland China. The tightening of inventory by certain of our retailers in the United States also negatively impacted the category's growth. Despite these pressures, net sales continued to grow from La Mer and Bobbi Brown. • Our makeup net sales declined 10%, including the unfavorable impact of foreign currency translation of 4%. While we see progression towards recovery in parts of Asia/Pacific and Europe, Middle East & Africa, driven by strong activation from M·A·C, the limited social and professional activities stemming from the continued COVID-19 restrictions in China, including those impacting travel retail in Hainan and mainland China, and a difficult comparison to the prior-year period due to the timing of shipments, drove the decrease in net sales. • Our fragrance net sales decreased due to the impact of the license terminations related to certain of our designer fragrances of 12% and the unfavorable impact of foreign currency translation of 5%. Overall the category continues to benefit from the shift in consumer demand toward our luxury and artisanal offerings, including Tom Ford Beauty, Le Labo, Kilian Paris and Jo Malone London. • Our hair care net sales increased 7%, benefiting from the fiscal 2022 third quarter launch of The Ordinary’s hair care products and Aveda’s distribution expansion into mainland China. 34 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Our global distribution capability and operations allow us to focus on targeted expanded consumer reach wherever consumer demographics and trends are the most attractive. Our regional organizations, and the expertise of our people there, enable our brands to be more locally and culturally relevant in both product assortment and communications. We are evolving the way we connect with our consumers in stores, online and where they travel, including by expanding our digital and social media presence and the engagement of global and local influencers to amplify brand or product stories. We tailor implementation of our strategy by market to drive consumer engagement and embrace cultural diversity. We continuously strengthen our presence in large, image-building core markets, while broadening our presence in emerging markets. • Net sales in The Americas decreased 6%, primarily reflecting unfavorable impacts in the United States due to the timing of shipments compared to the prior-year period, the license terminations related to certain of our designer fragrances and the impact of tighter inventory management by certain of our retailers. Latin America grew double digits, reflecting growth in makeup. • Net sales in Europe, the Middle East & Africa decreased 10%, including the unfavorable impact of foreign currency translation of 4%, primarily due to continued COVID-19 restrictions in China impacting those impacting travel retail in Hainan. Partially offsetting this decrease was an increase in net sales from emerging markets in the region, led by India and the Middle East, driven by growth in the makeup category. • The continued COVID-19 restrictions impacting our business in Greater China and the Dr.Jart+ travel retail business in Korea drove the net sales decline in Asia/Pacific of 15%, including the unfavorable impact of foreign currency translation of 8%. Most of the other affiliates in the region reflected recovery from the prior-year challenges, led by growth in our fragrance and makeup product categories. Outlook The COVID-19 pandemic continues to disrupt business for us, retailers and other companies with which we do business. There have been, and are likely to continue to be, intermittent store closures and supply chain challenges. We are mindful that these trends may continue to impact the pace of recovery. We are seeing a continued and prolonged curtailment in international travel, which is also affecting our travel retail business, particularly in Asia, which historically has been one of our fastest growth areas. In addition to impacting net sales and profitability, these and other challenges may adversely impact the goodwill and other intangible assets associated with our brands, as well as long-lived assets (i.e. potentially resulting in impairments). We believe that the best way to increase long-term stockholder value is to continue providing superior products and services in the most efficient and effective manner while recognizing shifts in consumers’ behaviors and shopping practices. Accordingly, our long-term strategy has numerous initiatives across geographic regions, product categories, brands, channels of distribution and functions designed to grow our sales, provide cost efficiencies, leverage our strengths and make us more productive and profitable. We plan to build upon and leverage our history of outstanding creativity and innovation, high quality products and services, and engaging communications while investing for long-term sustainable growth. We continue to monitor the effects of the global macro environment, including the risk of recession; currency volatility; increasing inflationary pressures; supply chain challenges; social and political issues; regulatory matters, including the imposition of tariffs and sanctions; geopolitical tensions; and global security issues. For example, the strengthening of the U.S. dollar could negatively impact results within Europe, the Middle East & Africa due to pricing pressures on our retail customers and consumers in key international travel retail locations. Additionally, we continue to monitor the geopolitical tensions between the United States and China, which could have a material adverse effect on our business. We are also mindful of inflationary pressures on our cost base and are monitoring the impact on consumer preferences. 35 Table of Contents THE ESTÉE LAUDER COMPANIES INC. As the invasion of Ukraine continues and international sanctions evolve, our business and ability to operate in Russia and Ukraine continue to be negatively impacted. During the fiscal 2023 first quarter, we partially mitigated the negative impact by liquidating the majority of our remaining in-market inventory and not renewing leases that expired or may have been up for renewal for our freestanding stores. We are continuously monitoring the evolving situation, including risks and opportunities that may further affect our business, and will continue to adjust our business plans accordingly. There are uncertainties related to the future impacts on our business, including possible new sanctions that are difficult to predict due to the high level of geopolitical volatility. On a broader perspective, there could be additional negative impacts to our net sales, earnings, assets and cash flows from such uncertainties. We also note that worsening conditions could exacerbate economic challenges in other countries such as inflationary pressures, energy shortages, recessions or other consequences. In fiscal 2022, our operations in Ukraine and Russia accounted for approximately 1% of consolidated net sales. Please refer to Risk Factors in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2022, for a more complete discussion of the risks we encounter in our business and industry. The uncertainty around the timing, speed and duration of the recovery from the adverse impacts of the COVID-19 pandemic, including the impacts on our business of the ongoing restrictions in China, and the other macro challenges we are facing, will continue to affect our ability to grow sales profitably. We believe we can, to some extent, offset the impact of more ordinary challenges by continually developing and pursuing a diversified strategy with multiple engines of growth and by accelerating initiatives focused on areas of strength, discipline and agility, including continuing to execute upon and benefit from efficiencies attributable to previously approved initiatives under the Post-COVID Business Acceleration Program. As the current situation continues to progress, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, there could be a further negative effect on consumer confidence, demand, spending and willingness or ability to travel and, as a result, on our business. We are continuing to monitor these and other risks that may affect our business. Post-COVID Business Acceleration Program Information about our restructuring initiative, the Post-COVID Business Acceleration Program, is described in Notes to Consolidated Financial Statements, Note 3 – Charges Associated with Restructuring and Other Activities herein, as well as, in Notes to Consolidated Financial Statements, Note 8 – Charges Associated with Restructuring and Other Activities and in the Overview on page 33 of our Annual Report on Form 10-K for the year ended June 30, 2022. NET SALES Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Net sales $ 3,930 $ 4,392 $ Change from prior-year period (462) % Change from prior-year period (11) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (6) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales decreased, primarily driven by lower net sales from the skin care and makeup product categories and from all geographic regions primarily due to continued impacts of COVID-19 restrictions in China, affecting travel retail in Hainan and mainland China, as well as the impact of the license terminations related to certain of our designer fragrances effective June 30, 2022. Partially offsetting the decrease in net sales was higher results from the hair care product category. Skin care net sales declined, primarily driven by Estée Lauder, Dr.Jart+ and Origins, partially offset by higher net sales from La Mer and Bobbi Brown. Makeup net sales decreased due to lower net sales from Estée Lauder and Tom Ford Beauty, partially offset by higher net sales from M·A·C. Partially offsetting these decreases in net sales were hair care net sales increases from The Ordinary and our two hair care brands, led by Aveda. 36 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Net sales decreased in Asia/Pacific, primarily due to the continued impacts of COVID-19 restrictions in China, affecting retail traffic and travel. Net sales in Europe, the Middle East & Africa declined, primarily due to the continued impacts of COVID-19 restrictions impacting travel retail in Hainan, as well as lower net sales in the United Kingdom. Net sales in The Americas decreased, driven by the United States, reflecting a difficult comparison to the prior-year period due to timing of shipments, the impact of tighter inventory management by certain of our retailers, as well as the impact of the license terminations related to certain of our designer fragrances effective June 30, 2022. The total net sales decrease was impacted by approximately $176 million of unfavorable foreign currency translation. Returns associated with restructuring and other activities are not allocated to our product categories or geographic regions because they result from activities that are deemed a Company-wide initiative to redesign, resize and reorganize select corporate functions and go-to-market structures. Accordingly, the following discussions of Net sales by Product Categories and Geographic Regions exclude the impact of returns associated with restructuring and other activities for the three months ended September 30, 2022 and 2021 of $5 million and $1 million, respectively. Reported net sales decreased 10%, driven by the decrease from volume of 8%, the unfavorable impact from foreign currency translation of 4%, and the impact from the license terminations of certain of our designer fragrances of 1%. Partially offsetting these decreases was the increase from pricing of 3%, due to the favorable impact from strategic pricing actions and changes in mix. Product Categories Skin Care Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Net sales $ 2,104 $ 2,449 $ Change from prior-year period (345) % Change from prior-year period (14) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (11) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported skin care net sales decreased, reflecting lower net sales from Estée Lauder, Dr.Jart+ and Origins, of approximately $332 million, combined, primarily driven by continued impacts of COVID-19 restrictions in Hainan, including the tightening of inventory by certain of our retailers, and in mainland China. Also contributing to the decrease in net sales was the tightening of inventory by certain of our retailers in the United States. Partially offsetting these decreases in skin care net sales were higher net sales from La Mer and Bobbi Brown of approximately $25 million, combined. The increase in net sales from La Mer reflected the continued success of hero products, as well as recent launches and targeted expanded consumer reach. Bobbi Brown net sales increased, primarily driven by continued success of hero products and targeted expanded consumer reach. The skin care net sales decrease was impacted by approximately $85 million of unfavorable foreign currency translation. Reported skin care net sales decreased 14%, driven by the decrease from volume of 14% and the unfavorable impact from foreign currency translation of 3%. Partially offsetting these decreases was the increase from pricing of 3%, due to the favorable impact from strategic pricing actions and changes in mix. 37 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Makeup Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Net sales $ 1,052 $ 1,174 $ Change from prior-year period (122) % Change from prior-year period (10) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (6) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported makeup net sales decreased, reflecting lower net sales from Estée Lauder and Tom Ford Beauty of approximately $114 million, combined, primarily driven by continued impacts of COVID-19 restrictions in China, impacting travel retail in Hainan and mainland China. Partially offsetting these decreases in net sales were higher net sales from M·A·C, primarily driven by the continued success of hero products and recent launches, as well as the brick-and-mortar recovery, including increased retail traffic compared to the prior-year period. The makeup net sales decrease was impacted by approximately $50 million of unfavorable foreign currency translation. Reported makeup net sales decreased 10%, driven by the decrease from volume of 5%, the unfavorable impact from foreign currency translation of 4%, and a decrease from pricing of 1%, due to the unfavorable impact from changes in mix, partially offset by the favorable impact from strategic pricing actions. Fragrance Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Net sales $ 607 $ 609 $ Change from prior-year period (2) % Change from prior-year period — % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 5 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported fragrance net sales remained virtually flat. This reflected the impact of the license terminations related to the Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna product lines ("certain of our designer fragrance licenses") effective June 30, 2022 of approximately $64 million, which were largely offset by higher net sales from our luxury and artisanal offerings, led by Tom Ford Beauty and Le Labo, and by higher net sales from Clinique of approximately $56 million, combined. The increase in net sales from Tom Ford Beauty reflected the continued success of Private Blend and Signature fragrances and new product launches. Net sales from Le Labo increased, reflecting the continued success of hero product franchises, new product launches and targeted expanded consumer reach. Net sales from Clinique increased, primarily reflecting growth in the Happy franchise line of products. The fragrance net sales decrease was impacted by approximately $35 million of unfavorable foreign currency translation. 38 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported fragrance net sales remained virtually flat, driven by the impact from the license terminations of certain of our designer fragrances of 12% and the unfavorable impact from foreign currency translation of 5%. Partially offsetting these decreases was the increase from volume of 13% and the increase from pricing of 4%, due to the favorable impact from strategic pricing actions and changes in mix. Hair Care Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Net sales $ 158 $ 148 $ Change from prior-year period 10 % Change from prior-year period 7 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 11 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported hair care net sales increased, reflecting higher net sales from The Ordinary and our two hair care brands. The increase was led by The Ordinary and Aveda, of approximately $7 million, combined. Net sales from The Ordinary increased, benefiting from the fiscal 2022 third quarter launch of hair care products. The increase in net sales from Aveda was primarily due to the continued success of existing product franchises, the fiscal 2023 first quarter launch of the Color Control franchise and the fiscal 2023 first quarter distribution expansion into mainland China. The hair care net sales increase was impacted by approximately $6 million of unfavorable foreign currency translation. Reported hair care net sales increased 7%, driven by the increase from pricing of 14%, due to the favorable impact from strategic pricing actions and changes in mix. Partially offsetting this increase was the decrease from volume of 3%, partially offset by new product innovation, and the unfavorable impact from foreign currency translation of 4%. Geographic Regions We strategically time our new product launches by geographic market, which may account for differences in regional sales growth. The Americas Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Net sales $ 1,123 $ 1,194 $ Change from prior-year period (71) % Change from prior-year period (6) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (7) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 39 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported net sales in The Americas decreased, primarily driven by lower net sales in the United States of approximately $72 million. The decrease in net sales in the United States reflected a difficult comparison to the prior-year period due to timing of holiday shipments in the prior-year period, the impact of license terminations related to certain of our designer fragrance licenses effective June 30, 2022 and the impact of tighter inventory management by certain of our retailers. Partially offsetting the decrease was an increase in net sales in Latin America of approximately $13 million, led by recovery in makeup. Net sales in The Americas were impacted by approximately $7 million of favorable foreign currency translation. Reported net sales in The Americas decreased 6%, driven by the decrease from volume of 9% and the impact from the license terminations related to certain of our designer fragrances of 3%. Partially offsetting this decrease was the increase from pricing of 5%, due to the favorable impact from strategic pricing actions and changes in mix, and the favorable impact from foreign currency translation of 1%. Europe, the Middle East & Africa Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Net sales $ 1,682 $ 1,873 $ Change from prior-year period (191) % Change from prior-year period (10) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (6) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales decreased in Europe, the Middle East & Africa, primarily driven by lower results from our travel retail business and the United Kingdom, combined, of approximately $166 million. The decrease in net sales from our travel retail business reflects the continued impacts of COVID-19 restrictions impacting travel retail in Hainan. The decrease in net sales from the United Kingdom was driven by lower net sales from Estée Lauder, M·A·C and Jo Malone London. Partially offsetting these decreases were increases in net sales in our emerging markets, led by an increase in net sales from India and the Middle East, of approximately $11 million, combined, reflecting growth in makeup. Net sales in Europe, the Middle East & Africa were impacted by approximately $83 million of unfavorable foreign currency translation. Reported net sales in Europe, the Middle East & Africa decreased 10%, driven by the decrease from volume of 7%, the unfavorable impact from foreign currency translation of 4%, and the impact from the license terminations related to certain of our designer fragrances of 1%. Partially offsetting these decreases was the increase from pricing of 2%, due to the favorable impact from strategic pricing actions and changes in mix. 40 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Asia/Pacific Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Net sales $ 1,130 $ 1,326 $ Change from prior-year period (196) % Change from prior-year period (15) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (7) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales decreased in Asia/Pacific, primarily driven by lower results in Greater China and the Dr.Jart+ travel retail business in Korea, of approximately $217 million, combined, due to the continued impacts of COVID-19 restrictions in China. Partially offsetting the net sales decrease were increases in most of the other affiliates in the region, as COVID-19 restrictions eased compared to the prior-year period, led by growth in our fragrance and makeup product categories. Net sales in Asia/Pacific were impacted by approximately $100 million of unfavorable foreign currency translation. Reported net sales in Asia/Pacific decreased 15%, driven by the decrease from volume of 9% and the unfavorable impact from foreign currency translation of 8%. Partially offsetting these decreases was the increase from pricing of 2%, due to the favorable impact from strategic pricing actions and changes in mix. GROSS MARGIN Gross margin decreased to 74.0% for the three months ended September 30, 2022 as compared with 75.9% in the prior-year period. Favorable (Unfavorable) Basis Points September 30, 2022 Three Months Ended Mix of business (145) Obsolescence charges 15 Manufacturing costs and other (65) Foreign exchange transactions 5 Subtotal (190) Charges associated with restructuring and other activities — Total (190) The decrease in gross margin reflected unfavorable impacts from our mix of business primarily due to the increase in promotional items and the unfavorable timing of promotional activity compared to the prior-year period, as well as higher manufacturing costs due to continued inflationary pressures. 41 Table of Contents THE ESTÉE LAUDER COMPANIES INC. OPERATING EXPENSES Operating expenses as a percentage of net sales was 57.2% for the three months ended September 30, 2022 as compared with 54.6% in the prior-year period. Favorable (Unfavorable) Basis Points September 30, 2022 Three Months Ended General and administrative expenses 30 Advertising, merchandising, sampling and product development (150) Selling (20) Stock-based compensation 40 Store operating costs (70) Shipping (90) Foreign exchange transactions 10 Subtotal (250) Changes in fair value of acquisition-related stock options (10) Total (260) The unfavorable change in operating expense margin was primarily due to an unfavorable impact from advertising, merchandising, sampling and product development expenses driven by a decrease in net sales, higher shipping rates due to continued inflationary pressures and shifts in mode of transportation, and higher store operating costs due to the brick-and-mortar recovery, including more stores being open compared to the prior-year period. This change was partially offset by a decrease in general and administrative expenses and stock-based compensation, primarily due to lower employee incentive compensation, as compared to the prior-year period. OPERATING RESULTS Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Operating income $ 661 $ 935 $ Change from prior-year period (274) % Change from prior-year period (29) % Operating margin 16.8 % 21.3 % 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 (29) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. The decrease in reported operating margin was primarily driven by a decrease in net sales, decrease in gross margin and the increase in operating expenses, discussed above. 42 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business. Accordingly, the following discussions of Operating income by Product Categories and Geographic Regions exclude the impact of charges associated with restructuring and other activities. Product Categories Skin Care Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Operating income $ 530 $ 717 $ Change from prior-year period (187) % Change from prior-year period (26) % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the change in fair value of acquisition-related stock options (26) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported skin care operating income decreased, reflecting lower results from Estée Lauder, Clinique and Origins of approximately $234 million, combined, primarily driven by decreases in net sales. Also contributing to the decrease in operating income from Estée Lauder was an increase in cost of sales primarily due to higher costs for promotional items. Operating income from Clinique also decreased due to higher cost of sales and shipping expenses driven by continued supply chain challenges and inflationary pressures. Partially offsetting the decreases in operating income for Estée Lauder and Clinique was disciplined advertising and promotional expense management. Partially offsetting the decrease in skin care operating income was lower employee incentive compensation compared to the prior-year period. Makeup Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Operating income (loss) $ 16 $ 91 $ Change from prior-year period (75) % Change from prior-year period (82) % Reported makeup operating income decreased, reflecting lower results from Estée Lauder and Tom Ford Beauty of approximately $128 million, combined, primarily driven by a decrease in net sales. The decrease in operating income from Estée Lauder also reflected higher cost of sales, as well as increased costs for advertising and promotional activities. Partially offsetting the decrease in makeup operating income was lower corporate general and administrative expenses and employee incentive compensation compared to the prior-year period. 43 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Fragrance Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Operating income $ 133 $ 131 $ Change from prior-year period 2 % Change from prior-year period 2 % Reported fragrance operating income remained virtually flat. This included higher results from Tom Ford Beauty and Clinique of approximately $22 million, combined. The higher operating income from Tom Ford Beauty was primarily driven by an increase in net sales, partially offset by higher strategic investments in advertising and promotional activities to drive hero products and support new product launches. Clinique operating income increased, primarily due to an increase in net sales. Operating income also increased due to lower employee incentive compensation compared to the prior-year period. Largely offsetting the increase was the impact of license terminations related to certain of our designer fragrances effective June 30, 2022 and lower results from Jo Malone London of approximately $32 million, combined. Operating income from Jo Malone London decreased, primarily driven by higher cost of sales and shipping costs due to increased inflationary pressures, partially offset by an increase in net sales. Hair Care Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Operating income (loss) $ (12) $ 2 $ Change from prior-year period (14) % Change from prior-year period (100+)% Reported hair care operating results decreased, primarily driven by lower results from Aveda and Bumble and bumble. The lower results from Aveda were primarily driven by higher advertising and promotional activities to support the brand's expansion into mainland China during the fiscal 2023 first quarter, partially offset by an increase in net sales. Operating results from Bumble and bumble decreased, primarily driven by higher strategic investments in advertising and promotional activities, partially offset by an increase in net sales. Partially offsetting the decrease in hair care operating income was lower corporate general and administrative expenses and employee incentive compensation compared to the prior-year period. 44 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Geographic Regions The Americas Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Operating income $ 125 $ 254 $ Change from prior-year period (129) % Change from prior-year period (51) % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the change in fair value of acquisition-related stock options (50) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported operating results decreased in The Americas, primarily reflecting lower operating results from North America of approximately $134 million. The decrease in operating results in the United States is primarily due to a decrease in net sales and increases in cost of sales and selling expenses due to the brick-and-mortar recovery, including more stores being open and increased retail traffic compared to the prior-year period. Europe, the Middle East & Africa Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Operating income $ 334 $ 465 $ Change from prior-year period (131) % Change from prior-year period (28) % Reported operating income decreased in Europe, the Middle East & Africa, primarily driven by lower results from our travel retail business of approximately $148 million. Operating income decreased in our travel retail business reflecting the (i) decrease in net sales (ii) increase in cost of sales due to higher costs due to inflationary pressures and (iii) higher advertising and promotional activity primarily to support investments in key markets and digital media campaigns to expand consumer reach. Asia/Pacific Three Months Ended September 30 ($ in millions) 2022 2021 As Reported: Operating income $ 208 $ 222 $ Change from prior-year period (14) % Change from prior-year period (6) % Reported operating income decreased in Asia/Pacific, primarily driven by a decrease in net sales in Greater China that reflected the continued impacts of COVID-19 restrictions in China, partially offset by disciplined advertising and promotional expense management. 45 Table of Contents THE ESTÉE LAUDER COMPANIES INC. INTEREST AND INVESTMENT INCOME Three Months Ended September 30 (In millions) 2022 2021 Interest expense $ 46 $ 42 Interest income and investment income, net $ 15 $ 4 Interest income and investment income, net increased, primarily reflecting higher interest rates compared to the prior-year period. PROVISION FOR INCOME TAXES The provision for income taxes represents U.S. federal, foreign, state and local income taxes. The effective rate differs from the federal statutory rate primarily due to the effect of state and local income taxes, the tax impact of share-based compensation, the taxation of foreign income and income tax reserve adjustments, which represent changes in our net liability for unrecognized tax benefits including tax settlements and lapses of the applicable statutes of limitations. Our effective tax rate will change from quarter-to-quarter based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the tax impact of share-based compensation, the interaction of various global tax strategies and the impact from certain acquisitions. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of change. Three Months Ended September 30 2022 2021 Effective rate for income taxes 22.6 % 22.5 % Basis-point change from the prior-year period 10 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. NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. Three Months Ended September 30 ($ in millions, except per share data) 2022 2021 As Reported: Net earnings attributable to The Estée Lauder Companies Inc. $ 489 $ 692 $ Change from prior-year period (203) % Change from prior-year period (29) % Diluted net earnings per common share $ 1.35 $ 1.88 % Change from prior-year period (28) % Non-GAAP Financial Measure (1) : % Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities (28) % (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. 46 Table of Contents THE ESTÉE LAUDER COMPANIES INC. RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period, or do not reflect the Company’s underlying ongoing business, provides transparency for such items and helps investors and others compare and analyze our operating performance from period to period. In the future, we expect to incur charges or adjustments similar in nature to those presented below; however, the impact to the Company’s results in a given period may be highly variable and difficult to predict. Our non-GAAP financial measures may not be comparable to similarly titled measures used by, or determined in a manner consistent with, other companies. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. The following tables present Net sales, Operating income and Diluted net earnings per common share adjusted to exclude the impact of charges associated with restructuring and other activities; the change in fair value of acquisition-related stock options; and the effects of foreign currency translation. The following table provides reconciliations between these non-GAAP financial measures and the most directly comparable U.S. GAAP measures. ($ in millions, except per share data) Three Months Ended September 30 Variance % Change % Change in constant currency 2022 2021 Net sales, as reported $ 3,930 $ 4,392 $ (462) (11) % (7) % Returns associated with restructuring and other activities 5 1 4 Net sales, as adjusted $ 3,935 $ 4,393 $ (458) (10) % (6) % Operating income, as reported $ 661 $ 935 $ (274) (29) % (26) % Charges associated with restructuring and other activities 6 6 — Change in fair value of acquisition-related stock options 1 — 1 Operating income, as adjusted $ 668 $ 941 $ (273) (29) % (26) % Diluted net earnings per common share, as reported $ 1.35 $ 1.88 $ (.53) (28) % (25) % Charges associated with restructuring and other activities .02 .01 .01 Change in fair value of acquisition-related stock options (less portion attributable to redeemable noncontrolling interest) — — — Diluted net earnings per common share, as adjusted $ 1.37 $ 1.89 $ (.52) (28) % (24) % As diluted net earnings per common share, as adjusted, is used as a measure of the Company’s performance, we consider the impact of current and deferred income taxes when calculating the per-share impact of each of the reconciling items. 47 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following table reconciles the change in net sales by product category and geographic region, as reported, to the change in net sales excluding the effects of foreign currency translation: As Reported Impact of foreign currency translation Variance, in constant currency % Change, as reported % Change, in constant currency Three Months Ended September 30 ($ in millions) 2022 2021 Variance By Product Category: Skin Care $ 2,104 $ 2,449 $ (345) $ 85 $ (260) (14) % (11) % Makeup 1,052 1,174 (122) 50 (72) (10) (6) Fragrance 607 609 (2) 35 33 0 5 Hair Care 158 148 10 6 16 7 11 Other 14 13 1 — 1 8 8 3,935 4,393 (458) 176 (282) (10) (6) Returns associated with restructuring and other activities (5) (1) (4) — (4) Total $ 3,930 $ 4,392 $ (462) $ 176 $ (286) (11) % (7) % By Region: The Americas $ 1,123 $ 1,194 $ (71) $ (7) $ (78) (6) % (7) % Europe, the Middle East & Africa 1,682 1,873 (191) 83 (108) (10) (6) Asia/Pacific 1,130 1,326 (196) 100 (96) (15) (7) 3,935 4,393 (458) 176 (282) (10) (6) Returns associated with restructuring and other activities (5) (1) (4) — (4) Total $ 3,930 $ 4,392 $ (462) $ 176 $ (286) (11) % (7) % 48 Table of Contents THE ESTÉE LAUDER COMPANIES INC. 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 change in fair value of acquisition-related stock options: As Reported Add: Change in fair value of acquisition-related stock options Variance, as adjusted % Change, as reported % Change, as adjusted Three Months Ended September 30 ($ in millions) 2022 2021 Variance By Product Category: Skin Care $ 530 $ 717 $ (187) $ 1 $ (186) (26) % (26) % Makeup 16 91 (75) — (75) (82) (82) Fragrance 133 131 2 — 2 2 2 Hair Care (12) 2 (14) — (14) (100+) (100+) Other — — — — — — — 667 941 (274) $ 1 $ (273) (29) % (29) % Charges associated with restructuring and other activities (6) (6) 0 Total $ 661 $ 935 $ (274) By Region: The Americas $ 125 $ 254 $ (129) $ 1 $ (128) (51) % (50) % Europe, the Middle East & Africa 334 465 (131) — (131) (28) (28) Asia/Pacific 208 222 (14) — (14) (6) (6) 667 941 (274) $ 1 $ (273) (29) % (29) % Charges associated with restructuring and other activities (6) (6) — Total $ 661 $ 935 $ (274) 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 September 30, 2022, we had cash and cash equivalents of $2,938 million compared with $3,957 million at June 30, 2022. Our cash and cash equivalents are maintained at a number of financial institutions. To mitigate the risk of uninsured balances, we select financial institutions based on their credit ratings and financial strength, and we perform ongoing evaluations of these institutions to limit our concentration risk exposure. Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support seasonal working capital needs, currently planned business operations, information technology enhancements, capital expenditures, acquisitions, dividends, stock repurchases, restructuring initiatives, commitments and other contractual obligations on both a near-term and long-term basis. The Tax Cuts and Jobs Act (“TCJA ” ) resulted in the Transition Tax on unrepatriated earnings of our foreign subsidiaries and changed the tax law in ways that present opportunities to repatriate cash without additional U.S. federal income tax. As a result, we changed our indefinite reinvestment assertion related to certain foreign earnings, and we continue to analyze the indefinite reinvestment assertion on our remaining applicable foreign earnings. We do not believe that continuing to reinvest our foreign earnings impairs our ability to meet our domestic debt or working capital obligations. If these reinvested earnings were repatriated into the United States as dividends, we would be subject to state income taxes and applicable foreign taxes in certain jurisdictions. 49 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The effects of inflation have not been significant to our overall operating results in recent years, however we are mindful of increasing inflationary pressures. Generally, we have been able to introduce new products at higher prices, increase prices and implement other operating efficiencies to sufficiently offset cost increases. 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 October 26, 2022, our long-term debt is rated A+ with a stable outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s. Debt At September 30, 2022, our outstanding borrowings were as follows: ($ in millions) Long-term Debt Current Debt Total Debt 3.125% Senior Notes, due December 1, 2049 (“2049 Senior Notes”) (1), (12) $ 636 $ — $ 636 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) 455 — 455 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) 295 — 295 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), (12) 548 — 548 2.600% Senior Notes, due April 15, 2030 ("2030 Senior Notes") (8), (12) 586 — 586 2.375% Senior Notes, due December 1, 2029 (“2029 Senior Notes”) (9), (12) 642 — 642 3.15% Senior Notes, due March 15, 2027 (“2027 Senior Notes”) (10), (12) 499 — 499 2.00% Senior Notes, due December 1, 2024 (“2024 Senior Notes”) (11), (12) 498 — 498 Commercial paper — 249 249 Other long-term borrowings 10 — 10 Other current borrowings — 17 17 $ 5,107 $ 266 $ 5,373 (1) Consists of $650 million principal, unamortized debt discount of $7 million and debt issuance costs of $7 million. (2) Consists of $500 million principal, unamortized debt discount of $1 million and debt issuance costs of $5 million. (3) Consists of $450 million principal, net unamortized debt premium of $9 million and debt issuance costs of $4 million. (4) Consists of $250 million principal, unamortized debt discount of $1 million and debt issuance costs of $2 million. (5) Consists of $300 million principal, unamortized debt discount of $3 million and debt issuance costs of $2 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 $3 million, debt issuance costs of $4 million and a $45 million loss to reflect the fair value of interest rate swaps. (8) Consists of $700 million principal, unamortized debt discount of $1 million, debt issuance costs of $4 million and a $109 million loss to reflect the fair value of interest rate swaps. (9) Consists of $650 million principal, unamortized debt discount of $5 million and debt issuance costs of $3 million. (10) Consists of $500 million principal and debt issuance costs of $1 million. (11) Consists of $500 million principal, unamortized debt discount of $1 million and debt issuance costs of $1 million. (12) The Senior Notes contain certain customary incurrence–based covenants, including limitations on indebtedness secured by liens. Total debt as a percent of total capitalization was 49% at September 30, 2022 and June 30, 2022. 50 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Cash Flows Three Months Ended September 30 (In millions) 2022 2021 Net cash flows used for operating activities $ (650) $ (81) Net cash flows used for investing activities $ (14) $ (153) Net cash flows used for financing activities $ (304) $ (714) The change in net cash flows used for operating activities primarily reflected lower earnings before tax, excluding non-cash items, and the unfavorable change in working capital, reflecting lower accounts payable due to timing of payments, higher inventory levels and lower other accrued liabilities, which includes the settlement of net investment hedges. The change in net cash flows used for investing activities primarily reflected a favorable impact from the settlement of net investment hedges, which is offset by the unfavorable change in other accrued liabilities as discussed above, and a decrease in capital expenditures compared to the prior-year period. The change in net cash flows used for financing activities primarily reflected a decrease relating to lower treasury stock repurchases and proceeds from the issuance of short-term commercial paper, partially offset by the repayment of the outstanding principal balance of our $250 million 2.35% senior note that matured during the fiscal 2023 first quarter. Dividends For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the three months ended September 30, 2022, see Notes to Consolidated Financial Statements, Note 11 – Equity and Redeemable Noncontrolling Interest . Pension and Post-retirement Plan Funding There have been no significant changes to our pension and post-retirement funding as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022. Commitments, Contractual Obligations and Contingencies There have been no significant changes to our commitments and contractual obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022. For a discussion of contingencies, see Notes to Consolidated Financial Statements, Note 8 – 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 4 – Derivative Financial Instruments . Foreign Exchange Risk Management For a discussion of foreign exchange risk management, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Cash Flow Hedges, Net Investment Hedges) . Credit Risk For a discussion of credit risk, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Credit Risk) . 51 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Market Risk We address certain financial exposures through a controlled program of market risk management that includes the use of foreign currency forward contracts to reduce the effects of fluctuating foreign currency exchange rates and to mitigate the change in fair value of specific assets and liabilities on the balance sheet. To perform a sensitivity analysis of our foreign currency forward contracts, we assess the change in fair values from the impact of hypothetical changes in foreign currency exchange rates. A hypothetical 10% weakening of the U.S. dollar against the foreign exchange rates for the currencies in our portfolio would have resulted in a net decrease in the fair value of our portfolio of approximately $282 million and $259 million as of September 30, 2022 and June 30, 2022, respectively. This potential change does not consider our underlying foreign currency exposures. In addition, we enter into interest rate derivatives to manage the effects of interest rate movements on our aggregate liability portfolio, including future debt issuances. Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would decrease by approximately $58 million and $41 million as of September 30, 2022 and June 30, 2022, 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, 2022, 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 - impairment assessment and income taxes. Since June 30, 2022, 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 . 52 Table of Contents THE ESTÉE LAUDER COMPANIES INC. 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 volatility in the global credit and equity markets, natural or man-made disasters, real or perceived epidemics, supply chain challenges, inflation, or increased energy costs, that could affect consumer purchasing, the willingness or ability of consumers to travel and/or purchase our products while traveling, the financial strength of our customers, suppliers or other contract counterparties, our operations, the cost and availability of capital which we may need for new equipment, facilities or acquisitions, the returns that we are able to generate on our pension assets and the resulting impact on funding obligations, the cost and availability of raw materials and the assumptions underlying our critical accounting estimates; (11) impacts attributable to the COVID-19 pandemic, including disruptions to our global business; (12) shipment delays, commodity pricing, depletion of inventory and increased production costs resulting from disruptions of operations at any of the facilities that manufacture our products or at our distribution or inventory centers, including disruptions that may be caused by the implementation of information technology initiatives, or by restructurings; 53 Table of Contents THE ESTÉE LAUDER COMPANIES INC. (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, 2022. 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.