ESTEE LAUDER COMPANIES INC 10-Q

Item 1. Financial Statements. THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Three Months Ended March 31 Nine Months Ended March 31 (In millions, except per share data) 2023 2022 2023 2022 Net sales $ 3,751 $ 4,245 $ 12,301 $ 14,176 Cost of sales 1,159 994 3,401 3,274 Gross profit 2,592 3,251 8,900 10,902 Operating expenses Selling, general and administrative 2,281 2,275 7,155 7,554 Restructuring and other charges 14 22 24 41 Impairment of other intangible assets — 216 207 216 Total operating expenses 2,295 2,513 7,386 7,811 Operating income 297 738 1,514 3,091 Interest expense 58 41 156 125 Interest income and investment income, net 37 5 78 19 Other components of net periodic benefit cost ( 4 ) ( 1 ) ( 9 ) ( 2 ) Other income — — — 1 Earnings before income taxes 280 703 1,445 2,988 Provision for income taxes 125 130 403 630 Net earnings 155 573 1,042 2,358 Net earnings attributable to noncontrolling interests — ( 3 ) — ( 8 ) Net loss (earnings) attributable to redeemable noncontrolling interest 1 ( 12 ) ( 3 ) ( 12 ) Net earnings attributable to The Estée Lauder Companies Inc. $ 156 $ 558 $ 1,039 $ 2,338 Net earnings attributable to The Estée Lauder Companies Inc. per common share Basic $ .44 $ 1.55 $ 2.90 $ 6.48 Diluted $ .43 $ 1.53 $ 2.88 $ 6.39 Weighted-average common shares outstanding Basic 357.9 359.2 357.8 360.7 Diluted 361.2 363.6 360.9 365.8 See notes to consolidated financial statements. 2 Table of Contents THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended March 31 Nine Months Ended March 31 (In millions) 2023 2022 2023 2022 Net earnings $ 155 $ 573 $ 1,042 $ 2,358 Other comprehensive income (loss): Net cash flow hedge gain (loss) ( 43 ) 5 ( 50 ) 21 Cross-currency swap contract loss ( 11 ) — ( 11 ) — Retirement plan and other retiree benefit adjustments — 4 — 12 Translation adjustments ( 7 ) 28 ( 101 ) ( 173 ) Benefit (provision) for income taxes on components of other comprehensive income 16 ( 4 ) 23 ( 22 ) Total other comprehensive income (loss), net of tax ( 45 ) 33 ( 139 ) ( 162 ) Comprehensive income 110 606 903 2,196 Comprehensive income attributable to noncontrolling interests: Net earnings — ( 3 ) — ( 8 ) Translation adjustments — 1 — 3 Total comprehensive income attributable to noncontrolling interests — ( 2 ) — ( 5 ) Comprehensive loss (income) attributable to redeemable noncontrolling interest: Net loss (earnings) 1 ( 12 ) ( 3 ) ( 12 ) Translation adjustments ( 1 ) ( 14 ) 26 3 Total comprehensive loss (income) attributable to redeemable noncontrolling interest — ( 26 ) 23 ( 9 ) Comprehensive income attributable to The Estée Lauder Companies Inc. $ 110 $ 578 $ 926 $ 2,182 See notes to consolidated financial statements. 3 Table of Contents THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED BALANCE SHEETS (In millions, except share data) March 31 2023 June 30 2022 (Unaudited) ASSETS Current assets Cash and cash equivalents $ 5,531 $ 3,957 Accounts receivable, net 1,904 1,629 Inventory and promotional merchandise 3,097 2,920 Prepaid expenses and other current assets 715 792 Total current assets 11,247 9,298 Property, plant and equipment, net 3,026 2,650 Other assets Operating lease right-of-use assets 1,843 1,949 Goodwill 2,468 2,521 Other intangible assets, net 3,045 3,428 Other assets 1,086 1,064 Total other assets 8,442 8,962 Total assets $ 22,715 $ 20,910 LIABILITIES AND EQUITY Current liabilities Current debt $ 2,243 $ 268 Accounts payable 1,520 1,822 Operating lease liabilities 357 365 Other accrued liabilities 3,580 3,360 Total current liabilities 7,700 5,815 Noncurrent liabilities Long-term debt 5,128 5,144 Long-term operating lease liabilities 1,734 1,868 Other noncurrent liabilities 1,457 1,651 Total noncurrent liabilities 8,319 8,663 Commitments and Contingencies Redeemable Noncontrolling Interest 819 842 Equity Common stock, $ .01 par value; Class A shares authorized: 1,300,000,000 at March 31, 2023 and June 30, 2022; shares issued: 469,358,006 at March 31, 2023 and 467,949,351 at June 30, 2022; Class B shares authorized: 304,000,000 at March 31, 2023 and June 30, 2022; shares issued and outstanding: 125,542,029 at March 31, 2023 and 125,542,029 at June 30, 2022 6 6 Paid-in capital 6,103 5,796 Retained earnings 14,261 13,912 Accumulated other comprehensive loss ( 875 ) ( 762 ) 19,495 18,952 Less: Treasury stock, at cost; 237,532,271 Class A shares at March 31, 2023 and 236,435,830 Class A shares at June 30, 2022 ( 13,618 ) ( 13,362 ) Total equity 5,877 5,590 Total liabilities, redeemable noncontrolling interest and equity $ 22,715 $ 20,910 See notes to consolidated financial statements. 4 Table of Contents THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended March 31 (In millions) 2023 2022 Cash flows from operating activities Net earnings $ 1,042 $ 2,358 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization 548 546 Deferred income taxes ( 70 ) ( 90 ) Non-cash stock-based compensation 234 283 Net loss on disposal of property, plant and equipment 8 6 Non-cash restructuring and other charges 20 2 Pension and post-retirement benefit expense 40 59 Pension and post-retirement benefit contributions ( 20 ) ( 30 ) Impairment of other intangible assets 207 216 Gain on previously held equity method investment — ( 1 ) Other non-cash items ( 9 ) ( 4 ) Changes in operating assets and liabilities: Increase in accounts receivable, net ( 254 ) ( 548 ) Increase in inventory and promotional merchandise ( 154 ) ( 398 ) Increase in other assets, net ( 69 ) ( 61 ) Decrease in accounts payable ( 313 ) ( 199 ) Decrease in other accrued and noncurrent liabilities ( 151 ) ( 132 ) Decrease in operating lease assets and liabilities, net ( 42 ) ( 38 ) Net cash flows provided by operating activities 1,017 1,969 Cash flows from investing activities Capital expenditures ( 652 ) ( 658 ) Payment for acquired business — ( 3 ) Purchases of other intangible assets ( 8 ) — Purchases of investments ( 5 ) ( 10 ) Settlement of net investment hedges 138 108 Net cash flows used for investing activities ( 527 ) ( 563 ) Cash flows from financing activities Proceeds (repayments) of current debt, net 2,228 ( 4 ) Debt issuance costs — ( 1 ) Repayments and redemptions of long-term debt ( 261 ) ( 16 ) Net proceeds from stock-based compensation transactions 68 127 Payments to acquire treasury stock ( 258 ) ( 1,998 ) Dividends paid to stockholders ( 687 ) ( 624 ) Net cash flows provided by (used for) financing activities 1,090 ( 2,516 ) Effect of exchange rate changes on Cash and cash equivalents ( 6 ) ( 12 ) Net increase (decrease) in Cash and cash equivalents 1,574 ( 1,122 ) Cash and cash equivalents at beginning of period 3,957 4,958 Cash and cash equivalents at end of period $ 5,531 $ 3,836 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 normal and recurring 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 gains (losses), net of tax, reported as translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc. were $( 5 ) million and $ 13 million, net of tax, during the three months ended March 31, 2023 and 2022, respectively, and $( 66 ) million and $( 182 ) million, net of tax, during the nine months ended March 31, 2023 and 2022, 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 uses cross-currency swap contracts to hedge the impact of foreign currency changes on certain intercompany foreign currency denominated debt. Additionally, the Company 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 $ 25 million and $ 3 million during the three months ended March 31, 2023 and 2022, respectively, and $ 59 million and $( 15 ) million during the nine months ended March 31, 2023 and 2022, 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. While the Company does not believe it is exposed significantly to any undue concentration of credit risk at this time, it continues to monitor its customers' abilities, individually and collectively, to make timely payments. Inventory and Promotional Merchandise Inventory and promotional merchandise consists of the following: (In millions) March 31, 2023 June 30, 2022 Raw materials $ 916 $ 791 Work in process 353 366 Finished goods 1,527 1,449 Promotional merchandise 301 314 $ 3,097 $ 2,920 Property, Plant and Equipment Property, plant and equipment consists of the following: (In millions) March 31, 2023 June 30, 2022 Assets (Useful Life) Land $ 55 $ 53 Buildings and improvements ( 10 to 40 years) 503 491 Machinery and equipment ( 3 to 10 years) 1,032 994 Computer hardware and software ( 4 to 10 years) 1,565 1,468 Furniture and fixtures ( 5 to 10 years) 133 129 Leasehold improvements 2,284 2,246 Construction in progress 1,140 759 6,712 6,140 Less accumulated depreciation and amortization ( 3,686 ) ( 3,490 ) $ 3,026 $ 2,650 Depreciation and amortization of property, plant and equipment was $ 147 million and $ 140 million during the three months ended March 31, 2023 and 2022, respectively, and $ 421 million and $ 406 million during the nine months ended March 31, 2023 and 2022, 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 for the three and nine months ended March 31, 2023 and 2022 are as follows: Three Months Ended March 31 Nine Months Ended March 31 2023 2022 2023 2022 Effective rate for income taxes 44.6 % 18.5 % 27.9 % 21.1 % Basis-point change from the prior-year period 2,610 680 For the three months ended March 31, 2023, the increase in the effective tax rate was primarily attributable to a higher effective tax rate on the Company's foreign operations, due to the Company's geographical mix of earnings for fiscal 2023. For the nine months ended March 31, 2023, the increase in the effective tax rate was primarily attributable to a higher effective tax rate on the Company's foreign operations, due to the Company's geographical mix of earnings for fiscal 2023, and a decrease in excess tax benefits associated with stock-based compensation arrangements. 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 was effective beginning with the Company’s third quarter of fiscal 2023 and did not have an impact on the Company’s results of operations or financial position. The corporate alternative minimum tax will be effective beginning with the Company's first quarter of fiscal 2024. The Company continues to monitor developments and evaluate projected impacts, if any, of this provision to its consolidated financial statements. As of March 31, 2023 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 March 31, 2023 that, if recognized, would affect the effective tax rate was $ 50 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three and nine months ended March 31, 2023 in the accompanying consolidated statements of earnings was $ 1 million and $ 2 million, respectively. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at each of March 31, 2023 and June 30, 2022, was $ 16 million and $ 14 million, respectively. On the basis of the information available as of March 31, 2023, 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 and nine months ended March 31, 2023. Other Accrued and Noncurrent Liabilities Other accrued liabilities consist of the following: (In millions) March 31, 2023 June 30, 2022 Advertising, merchandising and sampling $ 240 $ 250 Employee compensation 525 693 Deferred revenue 306 312 Payroll and other non-income taxes 305 345 Accrued income taxes 396 267 Sales return accrual 342 252 Other 1,466 1,241 $ 3,580 $ 3,360 At March 31, 2023 and June 30, 2022, total Other noncurrent liabilities of $ 1,457 million and $ 1,651 million included $ 625 million and $ 692 million of deferred tax liabilities, respectively. 8 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 annually which is effective prospectively for the Company beginning in fiscal 2025. Early adoption is permitted. Annual disclosures, excluding the rollforward information, need to be provided in interim periods within the initial year of adoption. Impact on consolidated financial statements – The Company has a supplier financing arrangement and will apply the disclosure requirements as required by the amendments. 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 clar ify 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. In December 2022, the FASB issued authoritative guidance to defer the sunset date of ASC 848 from December 31, 2022 to December 31, 2024. Effective for the Company – This guidance can only be applied for a limited time through December 31, 2024. Impact on consolidated financial statements – The Company currently has an implementation team in place that has performed a comprehensive evaluation and is 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, 2024. No other recently issued accounting pronouncements are expected to have a material impact on the Company’s consolidated financial statements. 9 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO 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 ( 56 ) — 5 — ( 51 ) Translation and other adjustments, accumulated impairments ( 1 ) — ( 1 ) — ( 2 ) ( 57 ) — 4 — ( 53 ) Balance as of March 31, 2023 Goodwill 1,646 1,116 254 353 3,369 Accumulated impairments ( 139 ) ( 732 ) ( 30 ) — ( 901 ) $ 1,507 $ 384 $ 224 $ 353 $ 2,468 Other Intangible Assets Other intangible assets consist of the following: March 31, 2023 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, license agreements and other $ 2,036 $ 734 $ 1,302 $ 2,064 $ 628 $ 1,436 Non-amortizable intangible assets: Trademarks 1,743 1,992 Total intangible assets $ 3,045 $ 3,428 The aggregate amortization expense related to amortizable intangible assets was $ 36 million and $ 38 million for the three months ended March 31, 2023 and 2022, respectively, and $ 109 million and $ 122 million for the nine months ended March 31, 2023 and 2022, 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 $ 38 $ 146 $ 146 $ 146 $ 129 10 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impairment Analysis During the Nine Months Ended March 31, 2023 During the fiscal 2023 second quarter, given the lower-than-expected results in the overall business, the Company made revisions to the internal forecasts relating to its Smashbox reporting unit. The Company concluded that the changes in circumstances in the reporting unit triggered the need for an interim impairment review of its trademark intangible asset. The remaining carrying value of the trademark intangible asset was not recoverable and the Company recorded an impairment charge of $ 21 million reducing the carrying value to zero . During the fiscal 2023 second quarter, the Dr.Jart+ reporting unit experienced lower-than-expected growth within key geographic regions and channels that continue to be impacted by the spread of COVID-19 variants, resurgence in cases, and the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting the financial performance of the reporting unit. In addition, due to macro-economic factors, Dr.Jart+ has experienced lower-than-expected growth within key geographic regions. The Too Faced reporting unit experienced lower-than-expected results in key geographic regions and channels coupled with delays in future international expansion to areas that continue to be impacted by COVID-19. As a result, the Company made revisions to the internal forecasts relating to its Dr.Jart+ and Too Faced reporting units. Additionally, there were increases in the weighted average cost of capital for both reporting units as compared to the prior year annual goodwill and other indefinite-lived intangible asset impairment testing as of April 1, 2022. The Company concluded that the changes in circumstances in the reporting units, along with increases in the weighted average cost of capital, triggered the need for interim impairment reviews of their trademarks and goodwill. These changes in circumstances were also an indicator that the carrying amounts of Dr.Jart+’s and Too Faced’s long-lived assets, including customer lists, may not be recoverable. Accordingly, the Company performed interim impairment tests for the trademarks and a recoverability test for the long-lived assets as of November 30, 2022. The Company concluded that the carrying value of the trademark intangible assets exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows and recorded an impairment charge of $ 100 million for Dr.Jart+ and $ 86 million for Too Faced. The Company concluded that the carrying amounts of the long-lived assets were recoverable. After adjusting the carrying values of the trademarks, the Company completed interim quantitative impairment tests for goodwill. As the estimated fair value of the Dr.Jart+ and Too Faced reporting units were in excess of their carrying values, the Company concluded that the carrying amounts of the goodwill were recoverable and did not record a goodwill impairment charge related to these reporting units. The fair values of these reporting units were based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting units. The significant assumptions used in these approaches include revenue growth rates and profit margins, terminal values, weighted average cost of capital used to discount future cash flows and royalty rates for trademarks. The most significant unobservable input used to estimate the fair values of the Dr.Jart+ and Too Faced trademark intangible assets was the weighted-average cost of capital, which was 11 % and 13 %, respectively. A summary of the impairment charges for the three and nine months ended March 31, 2023 and the remaining trademark and goodwill carrying values as of March 31, 2023, for each reporting unit, are as follows: Impairment Charges Carrying Value (In millions) Three Months Ended March 31, 2023 Nine Months Ended March 31, 2023 As of March 31, 2023 Reporting Unit Geographic Region Trademarks Goodwill Trademarks Goodwill Trademarks Goodwill Smashbox The Americas $ — $ — $ 21 $ — $ — $ — Dr.Jart+ Asia/Pacific — — 100 — 330 310 Too Faced The Americas — — 86 — 186 13 Total $ — $ — $ 207 $ — $ 516 $ 323 The impairment charges for the nine months ended March 31, 2023 were reflected in the skin care product category for Dr.Jart+ and the makeup product category for Smashbox and Too Faced. 11 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impairment Analysis During the Nine Months Ended March 31, 2022 During the fiscal 2022 third quarter, given the lower-than-expected results from international expansion to areas impacted by COVID-19, the Company made revisions to the internal forecasts relating to its GLAMGLOW reporting unit. The Company concluded that the changes in circumstances in the reporting unit triggered the need for an interim impairment review of its trademark intangible asset. As of March 31, 2022, the remaining carrying value of the trademark intangible asset was not recoverable and the Company recorded an impairment charge of $ 11 million reducing the carrying value to zero . During the fiscal 2022 third quarter, given the lower-than-expected growth within key geographic regions and channels for Dr.Jart+ impacted by the spread of COVID-19 variants and resurgence in cases and the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting the financial performance of the brand, the lower than expected growth in key retail channels for DECIEM, and the lower than expected results from international expansion to areas impacted by COVID-19 for Too Faced, the Company made revisions to the internal forecasts relating to its Dr.Jart+, DECIEM and Too Faced reporting units. The Company concluded that the changes in circumstances in the reporting units triggered the need for interim impairment reviews of their trademarks and goodwill. These changes in circumstances were also an indicator that the carrying amounts of Dr.Jart+’s, DECIEM’s and Too Faced’s long-lived assets, including customer lists, may not be recoverable. Accordingly, the Company performed interim impairment tests for the trademarks and a recoverability test for the long-lived assets as of February 28, 2022. The Company concluded that the carrying amounts of the long-lived assets were recoverable. For the Dr.Jart+ reporting unit, the Company also concluded that the carrying value of the trademark intangible asset exceeded its estimated fair value, which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded an impairment charge. For the Too Faced and DECIEM reporting units, as the carrying values of the trademarks did not exceed their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, the Company did not record impairment charges. As of March 31, 2022, the estimated fair values of Too Faced’s and DECIEM's trademarks exceeded their carrying values by 13 % and 3 %, respectively. For the Too Faced and DECIEM trademark intangible assets, if all other assumptions are held constant, an increase of 100 basis points and 50 basis points, respectively, in the weighted average cost of capital would result in an impairment charge. After adjusting the carrying values of the trademarks, the Company completed interim quantitative impairment tests for goodwill. As the estimated fair value of the Dr.Jart+, DECIEM and Too Faced reporting units were in excess of their carrying values, the Company concluded that the carrying amounts of the goodwill were recoverable and did not record a goodwill impairment charge related to these reporting units. The fair value of these reporting units were based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting units. The significant assumptions used in these approaches include revenue growth rates and profit margins, terminal values, weighted average cost of capital used to discount future cash flows and royalty rates for trademarks. The most significant unobservable input used to estimate the fair value of the Dr.Jart+ trademark intangible asset was the weighted-average cost of capital, which was 10.5 %. A summary of the impairment charges for the three and nine months ended March 31, 2022 and the remaining trademark and goodwill carrying values as of March 31, 2022, for each reporting unit, are as follows: (In millions) Impairment Charges Carrying Value Three and Nine Months Ended March 31, 2022 As of March 31, 2022 Reporting Unit Geographic Region Trademarks Goodwill Trademarks Goodwill GLAMGLOW The Americas $ 11 $ — $ — $ — Dr.Jart+ Asia/Pacific 205 — 486 332 Total $ 216 $ — $ 486 $ 332 The impairment charges for the three and nine months ended March 31, 2022 were reflected in the skin care product category. 12 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES Charges associated with the Post-COVID Business Acceleration Program for the three and nine months ended March 31, 2023 were as follows: Sales Returns (included in Net Sales) Cost of Sales Operating Expenses Total (In millions) Restructuring Charges Other Charges Three months ended March 31, 2023 $ 4 $ — $ 6 $ 4 $ 14 Nine months ended March 31, 2023 $ 10 $ ( 1 ) $ 12 $ 7 $ 28 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. 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 March 31, 2023, 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, as of March 31, 2023, that the PCBA Program may result in related restructuring and other charges totaling between $ 450 million and $ 480 million, before taxes. Additional information about the PCBA Program approvals is included in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022. 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. 13 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS • Optimize Select Marketing, Brand and Global Functions – The Company has started to reduce its corporate and certain of its brand office footprints and is moving toward the future of work in a post-COVID-19 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. • 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. 14 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other charges associated with restructuring activities are comprised of the following: Sales Returns and Cost of Sales – Product returns (offset by the related cost of sales) and inventory write-offs or write-downs as a direct result of an approved restructuring initiative to exit certain businesses or locations will be recorded as a component of Net sales and/or Cost of sales when estimable and reasonably assured. Other Charges – The Company approved other charges related to the design and implementation of approved initiatives, which are charged to Operating expenses as incurred and primarily include the following: • Consulting and other professional services for organizational design of the future structures and processes as well as the implementation thereof; • Temporary labor backfill; • Costs to establish and maintain a 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 Nine months ended March 31, 2023 10 ( 1 ) 12 7 28 Cumulative through March 31, 2023 $ 28 $ 6 $ 322 $ 20 $ 376 (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 Nine months ended March 31, 2023 ( 8 ) 20 ( 3 ) 3 12 Cumulative through March 31, 2023 $ 195 $ 106 $ 16 $ 5 $ 322 15 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in accrued restructuring charges for the nine months ended March 31, 2023 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 ( 8 ) 20 ( 3 ) 3 12 Cash payments ( 27 ) — ( 1 ) ( 3 ) ( 31 ) Non-cash asset write-offs — ( 20 ) — — ( 20 ) Translation and other adjustments ( 5 ) — 4 — ( 1 ) Balance at March 31, 2023 $ 85 $ — $ — $ — $ 85 Accrued restructuring charges at March 31, 2023 relating to the PCBA Program are expected to result in cash expenditures funded from cash provided by operations of approximately $ 31 million, $ 41 million and $ 13 million for the remainder of fiscal 2023 and for fiscal 2024 and 2025, respectively. 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. The Company also uses cross-currency swap contracts to hedge the impact of foreign currency changes on certain intercompany foreign currency denominated debt. 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 March 31, 2023, the notional amount of derivatives not designated as hedging instruments was $ 3,521 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. 16 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 March 31, 2023 June 30, 2022 Balance Sheet Location March 31, 2023 June 30, 2022 Derivatives Designated as Hedging Instruments: Foreign currency cash flow hedges Prepaid expenses and other current assets $ 22 $ 57 Other accrued liabilities $ 22 $ 1 Cross-currency swap contracts Prepaid expenses and other current assets — — Other accrued liabilities 11 — Net investment hedges Prepaid expenses and other current assets — 107 Other accrued liabilities 56 — Interest rate-related derivatives Prepaid expenses and other current assets 1 24 Other accrued liabilities 138 115 Total Derivatives Designated as Hedging Instruments 23 188 227 116 Derivatives Not Designated as Hedging Instruments: Foreign currency forward contracts Prepaid expenses and other current assets 58 27 Other accrued liabilities 13 104 Total derivatives $ 81 $ 215 $ 240 $ 220 (1) See Note 5 – Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined. 17 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 March 31 Three Months Ended March 31 (In millions) 2023 2022 2023 2022 Derivatives in Cash Flow Hedging Relationships: Foreign currency forward contracts $ ( 11 ) $ ( 2 ) Net sales $ 22 $ 3 Interest rate-related derivatives ( 11 ) 10 Interest expense ( 1 ) — ( 22 ) 8 21 3 Derivatives in Net Investment Hedging Relationships (2) : Foreign currency forward contracts (3) ( 23 ) 17 — — Total derivatives $ ( 45 ) $ 25 $ 21 $ 3 (1) The amount reclassified into earnings as a result of the discontinuance of cash flow hedges because probable forecasted transactions will no longer occur by the end of the original time period was not material. (2) During the three months ended March 31, 2023 and 2022, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $ 6 million and $ 3 million, respectively. (3) Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets. Amount of Gain (Loss) Recognized in OCI on Derivatives Location of Gain (Loss) Reclassified from AOCI into Earnings Amount of Gain (Loss) Reclassified from AOCI into Earnings (1) Nine Months Ended March 31 Nine Months Ended March 31 (In millions) 2023 2022 2023 2022 Derivatives in Cash Flow Hedging Relationships: Foreign currency forward contracts $ 7 $ 5 Net sales $ 59 $ ( 5 ) Interest rate-related derivatives 1 10 Interest expense ( 1 ) ( 1 ) 8 15 58 ( 6 ) Derivatives in Net Investment Hedging Relationships (2) : Foreign currency forward contracts (3) ( 38 ) 87 — — Total derivatives $ ( 30 ) $ 102 $ 58 $ ( 6 ) (1) The amount reclassified into earnings as a result of the discontinuance of cash flow hedges because probable forecasted transactions will no longer occur by the end of the original time period was not material. (2) During the nine months ended March 31, 2023 and 2022, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $ 19 million and $ 8 million, respectively. (3) Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets. 18 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amount of Gain (Loss) Recognized in Earnings on Derivatives Location of Gain (Loss) Recognized in Earnings on Derivatives Three Months Ended March 31 Nine Months Ended March 31 (In millions) 2023 2022 2023 2022 Derivatives in Fair Value Hedging Relationships: Cross-currency swap contracts (1) Selling, general and administrative $ 1 $ — $ 1 $ — Interest rate swap contracts (2) Interest expense $ 18 $ ( 69 ) $ ( 17 ) $ ( 85 ) (1) Changes in the fair value representing hedge components included in the assessment of effectiveness of the cross-currency swap contracts are exactly offset by the change in the fair value of the underlying intercompany foreign currency denominated debt. The gain recognized in earnings from cross-currency swap contracts related to the amount excluded from effectiveness testing was $ 4 million. (2) Changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt. Additional information regarding the cumulative amount of fair value hedging gain (loss) recognized in earnings for items designated and qualifying as hedged items in fair value hedges is as follows: (In millions) Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included Carrying Amount of the Hedged Liabilities Cumulative Amount of Fair Value Hedging Gain (Loss) Included in the Carrying Amount of the Hedged Liability March 31, 2023 March 31, 2023 Long-term debt $ 862 $ ( 132 ) Intercompany debt — 1 19 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additional information regarding the effects of fair value and cash flow hedging relationships for derivatives designated and qualifying as hedging instruments is as follows: Three Months Ended March 31 2023 2022 (In millions) Net Sales Selling, General and Administrative Interest Expense Net Sales Selling, General and Administrative 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 $ 3,751 $ 2,281 $ 58 $ 4,245 $ 2,275 $ 41 The effects of fair value and cash flow hedging relationships: Gain (loss) on fair value hedge relationships – interest rate contracts: Hedged item N/A N/A ( 18 ) N/A N/A 69 Derivatives designated as hedging instruments N/A N/A 18 N/A N/A ( 69 ) Gain (loss) on fair value hedge relationships – cross-currency swap contracts: Hedged item N/A ( 1 ) N/A N/A — N/A Derivatives designated as hedging instruments N/A 1 N/A N/A — N/A Gain (loss) on cash flow hedge relationships – interest rate contracts: Amount of loss reclassified from AOCI into earnings N/A N/A ( 1 ) N/A N/A — Gain (loss) on cash flow hedge relationships – foreign currency forward contracts: Amount of gain (loss) reclassified from AOCI into earnings 22 N/A N/A 3 N/A N/A N/A (Not applicable) 20 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended March 31 2023 2022 (In millions) Net Sales Selling, General and Administrative Interest Expense Net Sales Selling, General and Administrative Interest Expense Total amounts of income and expense line items presented in the consolidated statements of earnings in which the effects of fair value and cash flow hedges are recorded $ 12,301 $ 7,155 $ 156 $ 14,176 $ 7,554 $ 125 The effects of fair value and cash flow hedging relationships: Gain (loss) on fair value hedge relationships – interest rate contracts: Hedged item N/A N/A 17 N/A N/A 85 Derivatives designated as hedging instruments N/A N/A ( 17 ) N/A N/A ( 85 ) Gain (loss) on fair value hedge relationships – cross-currency swap contracts: Hedged item N/A ( 1 ) N/A N/A — N/A Derivatives designated as hedging instruments N/A 1 N/A N/A — N/A Gain (loss) on cash flow hedge relationships – interest rate contracts: Amount of loss reclassified from AOCI into earnings N/A N/A ( 1 ) N/A N/A ( 1 ) Gain (loss) on cash flow hedge relationships – foreign currency forward contracts: Amount of gain (loss) reclassified from AOCI into earnings 59 N/A N/A ( 5 ) N/A N/A N/A (Not applicable) 21 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 March 31 Nine Months Ended March 31 (In millions) 2023 2022 2023 2022 Derivatives Not Designated as Hedging Instruments: Foreign currency forward contracts Selling, general and administrative $ 4 $ 17 $ 21 $ ( 32 ) The Company's derivative instruments are subject to enforceable master netting agreements. These agreements permit the net settlement of these contracts on a per-institution basis; however, the Company records the fair value on a gross basis on its consolidated balance sheets based on maturity dates, including those subject to master netting arrangements. The following table provides information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default or termination as stipulated by the terms of netting arrangements with each of the counterparties: As of March 31, 2023 As of June 30, 2022 (In millions) Gross Amounts of Assets / (Liabilities) Presented in Balance Sheet Contracts Subject to Netting Net Amounts of Assets / (Liabilities) Gross Amounts of Assets / (Liabilities) Presented in Balance Sheet Contracts Subject to Netting Net Amounts of Assets / (Liabilities) Derivative Financial Contracts Derivative assets $ 81 $ ( 73 ) $ 8 $ 215 $ ( 104 ) $ 111 Derivative liabilities ( 240 ) 73 ( 167 ) ( 220 ) 104 ( 116 ) Total $ ( 159 ) $ — $ ( 159 ) $ ( 5 ) $ — $ ( 5 ) 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 December 2024. Hedge effectiveness of the foreign currency forward contracts is based on the forward method, which includes time value in the effectiveness assessment. At March 31, 2023, the Company had cash flow hedges outstanding with a notional amount totaling $ 2,382 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 Net 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 Net sales. As of March 31, 2023, the Company’s foreign currency cash flow hedges were highly effective. 22 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimated net gain on the Company’s derivative instruments designated as cash flow hedges as of March 31, 2023 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $ 5 million. The accumulated net gain on derivative instruments designated as cash flow hedges in AOCI was $ 40 million and $ 90 million as of March 31, 2023 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. At March 31, 2023, 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. The Company enters into cross-currency swap contracts to manage the exposure of foreign exchange rate fluctuations on it’s intercompany foreign currency denominated debt. At March 31, 2023, the Company has cross-currency swap contracts with notional amounts totaling $ 491 million, to hedge the impact of foreign currency changes on certain intercompany foreign currency denominated debt. The cross-currency swap contracts are designated as fair value hedges of the related intercompany debt, and the gains and losses representing hedge components included in the assessment of effectiveness are presented in the same income statement line item as the earnings effect of the hedged transaction. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis. The earnings recognition of excluded components is presented in the same income statement line item as the earnings effect of the hedged transaction. Any difference between the changes in the fair value of the excluded components and amounts recognized in earnings will be recognized in AOCI. The estimated net gain on the Company’s derivative instruments designated as fair value hedges as of March 31, 2023 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $ 13 million. The accumulated net loss on derivative instruments designated as fair value hedges in AOCI was $ 11 million as of March 31, 2023. 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 March 31, 2023, 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 $ 81 million at March 31, 2023. 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. 23 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2023: (In millions) Level 1 Level 2 Level 3 Total Assets: Money market funds $ 3,485 $ — $ — $ 3,485 Foreign currency forward contracts — 80 — 80 Interest rate-related derivatives — 1 — 1 Total $ 3,485 $ 81 $ — $ 3,566 Liabilities: Cross-currency swap contracts $ — 11 $ — $ 11 Foreign currency forward contracts — 91 — 91 Interest rate-related derivatives — 138 — 138 DECIEM stock options — — 73 73 Total $ — $ 240 $ 73 $ 313 24 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 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: March 31, 2023 June 30, 2022 (In millions) Carrying Amount Fair Value Carrying Amount Fair Value Nonderivatives Cash and cash equivalents $ 5,531 $ 5,531 $ 3,957 $ 3,957 Current and long-term debt 7,371 7,034 5,412 5,139 DECIEM stock options 73 73 74 74 Derivatives Cross-currency swap contracts - liability, net ( 11 ) ( 11 ) — — Foreign currency forward contracts – liability, net ( 11 ) ( 11 ) 86 86 Interest rate-related derivatives – liability, net ( 137 ) ( 137 ) ( 91 ) ( 91 ) 25 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the Company’s impairment charges for the nine months ended March 31, 2023 for certain of its nonfinancial assets measured at fair value on a nonrecurring basis, classified as Level 3, due to a change in circumstances that triggered an interim impairment test during the three months ended December 31, 2022: (In millions) Impairment charges Date of Fair Value Measurement Fair Value (1) Other intangible assets, net (trademarks) Dr.Jart+ $ 100 November 30, 2022 $ 330 Too Faced 86 November 30, 2022 186 Smashbox 21 December 31, 2022 — Total $ 207 $ 516 (1) See Note 2 - Goodwill and Other Intangible Assets for discussion of the valuation techniques used to measure fair value, the description of the inputs and information used to develop those inputs. The following table presents the Company’s impairment charges for the nine months ended March 31, 2022 for certain of its nonfinancial assets measured at fair value on a nonrecurring basis, classified as Level 3, due to a change in circumstances that triggered an interim impairment test: (In millions) Impairment charges Date of Fair Value Measurement Fair Value (1) Other intangible assets, net (trademarks) GLAMGLOW $ 11 March 31, 2022 $ — Dr.Jart+ 205 February 28, 2022 486 Total 216 486 Total $ 216 $ 486 (1) See Note 2 - Goodwill and Other Intangible Assets for discussion of the valuation techniques used to measure fair value, the description of the inputs and information used to develop those inputs. The following methods and assumptions were used to estimate the fair value of the Company’s financial instruments for which it is practicable to estimate that value: Cash and cash equivalents – Cash and all highly-liquid securities with original maturities of three months or less are classified as cash and cash equivalents, primarily consisting of cash deposits in interest bearing accounts, time deposits and money market funds (classified within Level 1 of the valuation hierarchy). 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. Cross-currency swap contracts - The fair value of the Company’s cross-currency swap 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 yield curves and currency spot and forward rates, were obtained from independent pricing services. 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. 26 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 nine months ended March 31, 2023 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) ( 2 ) Translation adjustments and other, net 1 DECIEM stock option liability as of March 31, 2023 $ 73 (1) Amount includes expense attributable to graded vesting of stock opti ons which is not material for the nine months ended March 31, 2023. 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 $ 26 million and $ 27 million as of March 31, 2023 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) March 31, 2023 Balance at June 30, 2022 $ 10 Provision for expected credit losses 1 Write-offs, net & other 1 Balance at March 31, 2023 $ 12 The remaining balance of the allowance for doubtful accounts of $ 14 million and $ 17 million as of March 31, 2023 and June 30, 2022, respectively, relates to non-credit losses, which are primarily due to customer deductions. 27 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred Revenue Changes in deferred revenue during the period are as follows: Three Months Ended March 31 Nine Months Ended March 31 (In millions) 2023 2022 2023 2022 Deferred revenue, beginning of period $ 353 $ 421 $ 362 $ 371 Revenue recognized that was included in the deferred revenue balance at the beginning of the period ( 50 ) ( 40 ) ( 330 ) ( 288 ) Revenue deferred (released) during the period ( 15 ) ( 13 ) 261 285 Other 26 ( 4 ) 21 ( 4 ) Deferred revenue, end of period $ 314 $ 364 $ 314 $ 364 Transaction Price Allocated to the Remaining Performance Obligations At March 31, 2023, the combined estimated revenue expected to be recognized in the next twelve months related to performance obligations for customer loyalty programs, gift with purchase promotions, purchase with purchase promotions and gift card liabilities that are unsatisfied (or partially unsatisfied) is $ 306 million. The remaining balance of deferred revenue at March 31, 2023 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. The components of net periodic benefit cost for the three months ended March 31, 2023 and 2022 consisted of the following: Pension Plans Other than Pension Plans U.S. International Post-retirement (In millions) 2023 2022 2023 2022 2023 2022 Service cost $ 10 $ 12 $ 7 $ 8 $ — $ 1 Interest cost 10 8 3 3 2 1 Expected return on plan assets ( 14 ) ( 14 ) ( 5 ) ( 4 ) — — Amortization of: Actuarial loss — 4 — — — — Prior service cost — — — — — — Special termination benefits — — 1 1 — — Net periodic benefit cost $ 6 $ 10 $ 6 $ 8 $ 2 $ 2 28 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of net periodic benefit cost for the nine months ended March 31, 2023 and 2022 consisted of the following: Pension Plans Other than Pension Plans U.S. International Post-retirement (In millions) 2023 2022 2023 2022 2023 2022 Service cost $ 28 $ 35 $ 20 $ 24 $ — $ 2 Interest cost 30 23 10 8 6 4 Expected return on plan assets ( 42 ) ( 41 ) ( 13 ) ( 11 ) — ( 1 ) Amortization of: Actuarial loss 2 11 ( 2 ) 1 — 1 Prior service cost — — — ( 1 ) — — Special termination benefits — — 1 4 — — Net periodic benefit cost $ 18 $ 28 $ 16 $ 25 $ 6 $ 6 During the nine months ended March 31, 2023, the Company made contributions to its international pension plans totaling $ 12 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) March 31, 2023 June 30, 2022 Other assets $ 134 $ 151 Other accrued liabilities ( 24 ) ( 24 ) Other noncurrent liabilities ( 361 ) ( 357 ) Funded status ( 251 ) ( 230 ) Accumulated other comprehensive loss 156 155 Net amount recognized $ ( 95 ) $ ( 75 ) NOTE 8 – COMMITMENTS AND CONTINGENCIES Commitments On April 28, 2023, the Company completed the acquisition of the TOM FORD brand. The amount paid by the Company at closing was approximately $ 2,250 million. This amount was funded by cash on hand and proceeds from the issuance of commercial paper, and approximately $ 250 million received at closing from Marcolin S.p.A. (a continuing TOM FORD licensee). An aggregate amount of $ 300 million, at 5 % interest per annum, to the sellers becomes due from the Company beginning in July 2025. The completion of the acquisition of the brand resulted in the elimination of future license royalty payments on the Company's TOM FORD Beauty business. In January 2023, the Company entered into a $ 2,000 million senior unsecured revolving credit facility that expires on January 2, 2024 (the “364-Day Facility”) for liquidity support for the Company's commercial paper program and general corporate purposes, of which the entire amount is currently undrawn and available. Interest rates on borrowings under the 364-Day Facility will be based on prevailing market interest rates in accordance with the agreement. The costs incurred to establish the 364-Day Facility were not material. The 364-Day Facility has an annual fee of approximately $ 0.6 million, payable quarterly, based on the Company’s current credit ratings. The 364-Day Facility contains a cross-default provision whereby a failure to pay other material financial obligations in excess of $ 175 million (after grace periods and absent a waiver from the lenders) would result in an event of default and the acceleration of the maturity of any outstanding debt under this facility. In January 2023, in connection with the 364-Day Facility, the Company increased its commercial paper program under which it may issue commercial paper in the United States from $ 2,500 million to $ 4,500 million. As of March 31, 2023 and April 26, 2023, the Company had $ 2,250 million and $ 3,410 million, respectively, outstanding under its commercial paper program. 29 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 $ 69 million and $ 91 million for the three months ended March 31, 2023 and 2022, respectively, and was $ 234 million and $ 283 million for the nine months ended March 31, 2023 and 2022, respectively. Stock Options During the nine months ended March 31, 2023, the Company granted stock options in respect of approximately 1.2 million shares of Class A Common Stock with an weighted-average exercise price per share of $ 246.01 and a weighted-average grant date fair value per share of $ 79.09 . The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The aggregate intrinsic value of stock options exercised during the nine months ended March 31, 2023 was $ 74 million. Restricted Stock Units During the nine months ended March 31, 2023, 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 $ 246.34 that, at the time of grant, are scheduled to vest at 0.4 million, 0.3 million, and 0.4 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 nine months ended March 31, 2023, 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. 30 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 and nine months ended March 31, 2023 was not material. The total stock option expense for the three and nine months ended March 31, 2022 resulted in income of $ 60 million and $ 58 million, respectively, net of foreign currency remeasurements and reflects a reduction in the fair value of the DECIEM stock options. There were no DECIEM stock options exercised during the nine months ended March 31, 2023. The DECIEM stock options are reported as a stock option liability of $ 73 million and $ 74 million in Other noncurrent liabilities in the accompanying consolidated balance sheets at March 31, 2023 and June 30, 2022, respectively. The fair value of the stock options were calculated using the following key assumptions in the Monte Carlo Method: March 31, 2023 June 30, 2022 Risk-free rate 4.20 % 3.20 % Term to mid of last twelve-month period 0.67 years 1.42 years Operating leverage adjustment 0.45 0.45 Net sales discount rate 7.00 % 6.00 % EBITDA discount rate 10.30 % 9.40 % EBITDA volatility 35.80 % 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. 31 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation between the numerator and denominator of the basic and diluted EPS computations is as follows: Three Months Ended March 31 Nine Months Ended March 31 (In millions, except per share data) 2023 2022 2023 2022 Numerator: Net earnings attributable to The Estée Lauder Companies Inc. $ 156 $ 558 $ 1,039 $ 2,338 Denominator: Weighted-average common shares outstanding – Basic 357.9 359.2 357.8 360.7 Effect of dilutive stock options 2.5 3.5 2.4 3.9 Effect of PSUs 0.1 0.2 0.1 0.2 Effect of RSUs 0.7 0.7 0.6 1.0 Weighted-average common shares outstanding – Diluted 361.2 363.6 360.9 365.8 Net earnings attributable to The Estée Lauder Companies Inc. per common share: Basic $ 0.44 $ 1.55 $ 2.90 $ 6.48 Diluted $ 0.43 $ 1.53 $ 2.88 $ 6.39 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 March 31 Nine Months Ended March 31 (In millions) 2023 2022 2023 2022 Stock options 2.2 1.0 2.1 0.8 RSUs and PSUs — — — 0.1 As of March 31, 2023 and 2022, 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 . 32 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 March 31 Nine Months Ended March 31 (In millions) 2023 2022 2023 2022 Common stock, beginning of the period $ 6 $ 6 $ 6 $ 6 Stock-based compensation — — — — Common stock, end of the period 6 6 6 6 Paid-in capital, beginning of the period 6,000 5,605 5,796 5,335 Common stock dividends 1 2 3 3 Stock-based compensation 102 139 304 408 Paid-in capital, end of the period 6,103 5,746 6,103 5,746 Retained earnings, beginning of the period 14,342 13,735 13,912 12,244 Common stock dividends ( 237 ) ( 217 ) ( 690 ) ( 627 ) Net earnings attributable to The Estée Lauder Companies Inc. 156 558 1,039 2,338 Cumulative effect of adoption of new accounting standards — — — 121 Retained earnings, end of the period 14,261 14,076 14,261 14,076 Accumulated other comprehensive loss, beginning of the period ( 829 ) ( 646 ) ( 762 ) ( 470 ) Other comprehensive income (loss) attributable to The Estée Lauder Companies Inc. ( 46 ) 20 ( 113 ) ( 156 ) Accumulated other comprehensive loss, end of the period ( 875 ) ( 626 ) ( 875 ) ( 626 ) Treasury stock, beginning of the period ( 13,617 ) ( 12,482 ) ( 13,362 ) ( 11,058 ) Acquisition of treasury stock — ( 568 ) ( 184 ) ( 1,850 ) Stock-based compensation ( 1 ) ( 2 ) ( 72 ) ( 144 ) Treasury stock, end of the period ( 13,618 ) ( 13,052 ) ( 13,618 ) ( 13,052 ) Total stockholders’ equity – The Estée Lauder Companies Inc. 5,877 6,150 5,877 6,150 Noncontrolling interests, beginning of the period — 34 — 34 Net earnings attributable to noncontrolling interests — 3 — 8 Translation adjustments and other, net — ( 1 ) — ( 6 ) Noncontrolling interests, end of the period — 36 — 36 Total equity $ 5,877 $ 6,186 $ 5,877 $ 6,186 Redeemable noncontrolling interest, beginning of the period $ 819 $ 840 $ 842 $ 857 Net earnings (loss) attributable to redeemable noncontrolling interest ( 1 ) 12 3 12 Translation adjustments 1 14 ( 26 ) ( 3 ) Adjustment of redeemable noncontrolling interest to redemption value — ( 1 ) — ( 1 ) Redeemable noncontrolling interest, end of the period $ 819 $ 865 $ 819 $ 865 Cash dividends declared per common share $ .66 $ .60 $ 1.92 $ 1.73 33 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 nine months ended March 31, 2023: Date Declared Record Date Payable Date Amount per Share August 17, 2022 August 31, 2022 September 15, 2022 $ .60 November 1, 2022 November 30, 2022 December 15, 2022 $ .66 February 1, 2023 February 28, 2023 March 15, 2023 $ .66 On May 2, 2023, 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 June 15, 2023 to stockholders of record at the close of business on May 31, 2023. Common Stock During the nine months ended March 31, 2023, the Company purchased approximately 1.2 million shares of its Class A Common Stock for $ 258 million. Accumulated Other Comprehensive Income The following table represents changes in AOCI, net of tax, by component for the nine months ended March 31, 2023: (In millions) Net Cash Flow Hedge Gain (Loss) Cross-Currency Swap Contracts (2) Amounts Included in Net Periodic Benefit Cost Translation Adjustments Total Balance at June 30, 2022 $ 68 $ — $ ( 114 ) $ ( 716 ) $ ( 762 ) OCI before reclassifications 6 ( 6 ) — ( 66 ) (1) ( 66 ) Amounts reclassified to Net earnings ( 44 ) ( 3 ) — — ( 47 ) Net current-period OCI ( 38 ) ( 9 ) — ( 66 ) ( 113 ) Balance at March 31, 2023 $ 30 $ ( 9 ) $ ( 114 ) $ ( 782 ) $ ( 875 ) (1) See Note 4 – Derivative Financial Instruments for gains (losses) relating to net investment hedges. (2) The gain recognized in AOCI, net of tax from cross-currency swap contracts represents the amount excluded from effectiveness testing. 34 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 and nine months ended March 31, 2023 and 2022: Amount Reclassified from AOCI Affected Line Item in Consolidated Statements of Earnings Three Months Ended March 31 Nine Months Ended March 31 (In millions) 2023 2022 2023 2022 Gain (Loss) on Cash Flow Hedges Foreign currency forward contracts $ 22 $ 3 $ 59 $ ( 5 ) Net sales Interest rate-related derivatives ( 1 ) — ( 1 ) ( 1 ) Interest expense 21 3 58 ( 6 ) Benefit (provision) for deferred taxes ( 5 ) — ( 14 ) 2 Provision for income taxes 16 3 44 ( 4 ) Net earnings Cross-Currency Swap Contracts Gain on cross-currency swap contracts 4 — 4 — Selling, general and administrative Provision for deferred taxes ( 1 ) — ( 1 ) — Provision for income taxes 3 — 3 — Retirement Plan and Other Retiree Benefit Adjustments Amortization of prior service cost — — — 1 Other components of net periodic benefit cost (1) Amortization of actuarial loss — ( 4 ) — ( 13 ) Other components of net periodic benefit cost (1) — ( 4 ) — ( 12 ) Benefit for deferred taxes — 1 — 3 Provision for income taxes — ( 3 ) — ( 9 ) Net earnings Total reclassification adjustments, net $ 19 $ — $ 47 $ ( 13 ) Net earnings (1) See Note 7 – Pension and Post-Retirement Benefit Plans for additional information. 35 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 – STATEMENT OF CASH FLOWS Supplemental cash flow information for the nine months ended March 31, 2023 and 2022 is as follows: (In millions) 2023 2022 Cash: Cash paid during the period for interest $ 142 $ 110 Cash paid during the period for income taxes $ 387 $ 626 Non-cash investing and financing activities: Property, plant and equipment accrued but unpaid $ 239 $ 110 Financing lease modifications $ — $ ( 13 ) Right-of-use assets obtained in exchange for new/modified operating lease liabilities $ 197 $ 179 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. 36 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended March 31 Nine Months Ended March 31 (In millions) 2023 2022 2023 2022 PRODUCT CATEGORY DATA Net sales: Skin Care $ 1,922 $ 2,395 $ 6,408 $ 8,003 Makeup 1,088 1,114 3,408 3,674 Fragrance 585 579 1,967 1,987 Hair Care 149 147 489 475 Other 11 11 39 40 3,755 4,246 12,311 14,179 Returns associated with restructuring and other activities ( 4 ) ( 1 ) ( 10 ) ( 3 ) Net sales $ 3,751 $ 4,245 $ 12,301 $ 14,176 Operating income (loss) before charges associated with restructuring and other activities: Skin Care $ 256 $ 667 $ 1,207 $ 2,466 Makeup ( 15 ) 7 ( 36 ) 228 Fragrance 89 105 399 446 Hair Care ( 24 ) ( 18 ) ( 31 ) ( 8 ) Other 9 — 8 3 315 761 1,547 3,135 Reconciliation: Charges associated with restructuring and other activities ( 18 ) ( 23 ) ( 33 ) ( 44 ) Interest expense ( 58 ) ( 41 ) ( 156 ) ( 125 ) Interest income and investment income, net 37 5 78 19 Other components of net periodic benefit cost 4 1 9 2 Other income — — — 1 Earnings before income taxes $ 280 $ 703 $ 1,445 $ 2,988 GEOGRAPHIC DATA (1) Net sales: The Americas $ 1,089 $ 1,053 $ 3,447 $ 3,547 Europe, the Middle East & Africa 1,474 1,990 4,972 6,201 Asia/Pacific 1,192 1,203 3,892 4,431 3,755 4,246 12,311 14,179 Returns associated with restructuring and other activities ( 4 ) ( 1 ) ( 10 ) ( 3 ) Net sales $ 3,751 $ 4,245 $ 12,301 $ 14,176 Operating income (loss): The Americas $ ( 93 ) $ 408 $ ( 53 ) $ 1,044 Europe, the Middle East & Africa 176 281 919 1,366 Asia/Pacific 232 72 681 725 315 761 1,547 3,135 Charges associated with restructuring and other activities ( 18 ) ( 23 ) ( 33 ) ( 44 ) Operating income $ 297 $ 738 $ 1,514 $ 3,091 (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. 37 Table of Contents THE ESTÉE LAUDER COMPANIES INC.