ESTEE LAUDER COMPANIES INC 10-Q

Item 1. Financial Statements. THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Three Months Ended September 30 (In millions, except per share data) 2023 2022 Net sales $ 3,518 $ 3,930 Cost of sales 1,070 1,023 Gross profit 2,448 2,907 Operating expenses Selling, general and administrative 2,349 2,244 Restructuring and other charges 1 2 Total operating expenses 2,350 2,246 Operating income 98 661 Interest expense 95 46 Interest income and investment income, net 41 15 Other components of net periodic benefit cost ( 2 ) ( 3 ) Earnings before income taxes 46 633 Provision for income taxes 10 143 Net earnings 36 490 Net earnings attributable to redeemable noncontrolling interest ( 5 ) ( 1 ) Net earnings attributable to The Estée Lauder Companies Inc. $ 31 $ 489 Net earnings attributable to The Estée Lauder Companies Inc. per common share Basic $ 0.09 $ 1.37 Diluted $ 0.09 $ 1.35 Weighted-average common shares outstanding Basic 358.4 357.9 Diluted 360.5 361.4 See notes to consolidated financial statements. 2 Table of Contents THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three Months Ended September 30 (In millions) 2023 2022 Net earnings $ 36 $ 490 Other comprehensive income (loss): Net cash flow hedge gain 19 49 Cross-currency swap contract gain — — Retirement plan and other retiree benefit adjustments ( 1 ) — Translation adjustments ( 120 ) ( 381 ) Provision for income taxes on components of other comprehensive income ( 38 ) ( 19 ) Total other comprehensive loss, net of tax ( 140 ) ( 351 ) Comprehensive income (loss) ( 104 ) 139 Comprehensive loss (income) attributable to redeemable noncontrolling interest: Net earnings ( 5 ) ( 1 ) Translation adjustments 11 35 Total comprehensive loss attributable to redeemable noncontrolling interest 6 34 Comprehensive income (loss) attributable to The Estée Lauder Companies Inc. $ ( 98 ) $ 173 See notes to consolidated financial statements. 3 Table of Contents THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED BALANCE SHEETS (In millions, except share data) September 30 2023 June 30 2023 (Unaudited) ASSETS Current assets Cash and cash equivalents $ 3,090 $ 4,029 Accounts receivable, net 1,909 1,452 Inventory and promotional merchandise 2,863 2,979 Prepaid expenses and other current assets 723 679 Total current assets 8,585 9,139 Property, plant and equipment, net 3,103 3,179 Other assets Operating lease right-of-use assets 1,787 1,797 Goodwill 2,455 2,486 Other intangible assets, net 5,515 5,602 Other assets 1,205 1,212 Total other assets 10,962 11,097 Total assets $ 22,650 $ 23,415 LIABILITIES AND EQUITY Current liabilities Current debt $ 1,005 $ 997 Accounts payable 1,257 1,670 Operating lease liabilities 352 357 Other accrued liabilities 3,300 3,216 Total current liabilities 5,914 6,240 Noncurrent liabilities Long-term debt 7,088 7,117 Long-term operating lease liabilities 1,687 1,698 Other noncurrent liabilities 1,793 1,943 Total noncurrent liabilities 10,568 10,758 Commitments and contingencies Redeemable Noncontrolling Interest 826 832 Equity Common stock, $ .01 par value; Class A shares authorized: 1,300,000,000 at September 30, 2023 and June 30, 2023; shares issued: 469,905,435 at September 30, 2023 and 469,668,085 at June 30, 2023; Class B shares authorized: 304,000,000 at September 30, 2023 and June 30, 2023; shares issued and outstanding: 125,542,029 at September 30, 2023 and 125,542,029 at June 30, 2023 6 6 Paid-in capital 6,249 6,153 Retained earnings 13,784 13,991 Accumulated other comprehensive loss ( 1,063 ) ( 934 ) 18,976 19,216 Less: Treasury stock, at cost; 237,604,494 Class A shares at September 30, 2023 and 237,590,199 Class A shares at June 30, 2023 ( 13,634 ) ( 13,631 ) Total equity 5,342 5,585 Total liabilities, redeemable noncontrolling interest and equity $ 22,650 $ 23,415 See notes to consolidated financial statements. 4 Table of Contents THE ESTÉE LAUDER COMPANIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended September 30 (In millions) 2023 2022 Cash flows from operating activities Net earnings $ 36 $ 490 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization 203 178 Deferred income taxes ( 57 ) ( 53 ) Non-cash stock-based compensation 80 53 Net loss on disposal of property, plant and equipment 1 2 Non-cash restructuring and other charges 2 9 Pension and post-retirement benefit expense 13 13 Pension and post-retirement benefit contributions ( 54 ) ( 5 ) Other non-cash items 7 ( 3 ) Changes in operating assets and liabilities: Increase in accounts receivable, net ( 477 ) ( 579 ) Decrease (increase) in inventory and promotional merchandise 62 ( 229 ) Decrease (increase) in other assets, net ( 17 ) 3 Decrease in accounts payable ( 255 ) ( 375 ) Increase (decrease) in other accrued and noncurrent liabilities 51 ( 135 ) Decrease in operating lease assets and liabilities, net ( 3 ) ( 19 ) Net cash flows used for operating activities ( 408 ) ( 650 ) Cash flows from investing activities Capital expenditures ( 295 ) ( 152 ) Settlement of net investment hedges — 138 Net cash flows used for investing activities ( 295 ) ( 14 ) Cash flows from financing activities Proceeds (repayments) of current debt, net ( 1 ) 249 Repayments and redemptions of long-term debt ( 3 ) ( 254 ) Net proceeds from stock-based compensation transactions 15 26 Payments to acquire treasury stock ( 3 ) ( 110 ) Settlement of cross-currency swap 9 — Dividends paid to stockholders ( 236 ) ( 215 ) Net cash flows used for financing activities ( 219 ) ( 304 ) Effect of exchange rate changes on Cash and cash equivalents ( 17 ) ( 51 ) Net decrease in Cash and cash equivalents ( 939 ) ( 1,019 ) Cash and cash equivalents at beginning of period 4,029 3,957 Cash and cash equivalents at end of period $ 3,090 $ 2,938 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, 2023. 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, 2023. 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 will be reflected in the consolidated financial statements in future periods. Currency Translation and Transactions All assets and liabilities of foreign subsidiaries and affiliates are translated at period-end rates of exchange, while revenue and expenses are translated at monthly average rates of exchange for the period. Unrealized translation losses, net of tax, reported as translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc. were $ 143 million and $ 352 million, during the three months ended September 30, 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 on foreign currency transactions of $ 16 million and $ 14 million during the three months ended September 30, 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. The Company’s largest customer during the first quarter of fiscal 2024 sells products primarily within the United States and accounted for $ 194 million, or 10 %, and $ 93 million, or 6 %, of the Company's accounts receivable at September 30, 2023 and June 30, 2023, respectively. Inventory and Promotional Merchandise Inventory and promotional merchandise consists of the following: (In millions) September 30, 2023 June 30, 2023 Raw materials $ 863 $ 876 Work in process 325 362 Finished goods 1,334 1,404 Promotional merchandise 341 337 $ 2,863 $ 2,979 Property, Plant and Equipment Property, plant and equipment consists of the following: (In millions) September 30, 2023 June 30, 2023 Assets (Useful Life) Land and improvements (1) $ 68 $ 70 Buildings and improvements ( 10 to 40 years) 852 843 Machinery and equipment ( 3 to 10 years) 1,083 1,071 Computer hardware and software ( 4 to 10 years) 1,767 1,651 Furniture and fixtures ( 5 to 10 years) 137 136 Leasehold improvements 2,336 2,310 Construction in progress 691 827 6,934 6,908 Less accumulated depreciation and amortization ( 3,831 ) ( 3,729 ) $ 3,103 $ 3,179 (1) Land improvements are depreciated over a 10 year useful life. Depreciation and amortization of property, plant and equipment was $ 162 million and $ 136 million during the three months ended September 30, 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 was 21.7 % and 22.6 % for the three months ended September 30, 2023 and 2022, respectively. The decrease in the effective tax rate of 90 basis points was primarily attributable to a decrease in income tax reserve adjustments and an increase in the impact of excess tax benefits associated with stock-based compensation arrangements, offset by a higher effective tax rate on the Company's foreign operations, due to the Company's geographical mix of earnings for fiscal 2024. The lower amount of earnings before income taxes increased the impact of these tax adjustments in the first quarter of fiscal 2024. On August 16, 2022, the U.S. federal government enacted the Inflation Reduction Act, including a tax provision implementing a 15% corporate alternative minimum tax based on global adjusted financial statement income. The corporate alternative minimum tax became effective beginning with the Company’s first quarter of fiscal 2024 and did not have an impact on the Company’s consolidated financial statements for the three months ended September 30, 2023. As of September 30, 2023 and June 30, 2023, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $ 61 million and $ 63 million, respectively. The total amount of unrecognized tax benefits at September 30, 2023 that, if recognized, would affect the effective tax rate was $ 51 million. There was no gross interest or penalties accrued related to unrecognized tax benefits during the three months ended September 30, 2023 in the accompanying consolidated statements of earnings. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at each of September 30, 2023 and June 30, 2023, was $ 15 million. On the basis of the information available as of September 30, 2023, the Company does not expect significant changes to the total amount of unrecognized tax benefits within the next twelve months. Subsequent to September 30, 2023, the Company formally concluded the compliance process with respect to its fiscal 2022 income tax return under the U.S. Internal Revenue Service (“IRS”) Compliance Assurance Program (“CAP”), which had no impact on the Company’s consolidated financial statements for the three months ended September 30, 2023. Supplier Finance Programs Under its supplier finance programs, the Company agrees to pay the banks the stated amount of confirmed invoices from its designated suppliers on the due dates of the invoices. The Company may terminate the agreements upon written notice (with notice periods ranging from 30 to 60 days) or immediately upon a breach. The supplier invoices that have been confirmed as valid under the programs require payment in full within 90 days of the invoice date. Outstanding obligations confirmed as valid totaling $ 40 million and $ 52 million as of September 30, 2023 and June 30, 2023, respectively, are included in accounts payable in the accompanying consolidated balance sheets. Other Accrued and Noncurrent Liabilities Other accrued liabilities consist of the following: (In millions) September 30, 2023 June 30, 2023 Employee compensation $ 472 $ 546 Accrued sales incentives 371 321 Deferred revenue 336 323 Payroll and other non-income taxes 307 297 Sales return accrual 313 289 Other 1,501 1,440 $ 3,300 $ 3,216 At September 30, 2023 and June 30, 2023, total Other noncurrent liabilities of $ 1,793 million and $ 1,943 million included $ 598 million and $ 620 million of deferred tax liabilities, respectively. 8 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recently Adopted 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 became effective for the Company’s first quarter fiscal 2024 and has been 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. Impact on consolidated financial statements – The Company has supplier financing arrangements and applied the disclosure requirements as required by the amendments. Such information is included in Supplier Finance Programs above within Note 1 – Summary of Significant Accounting Policies. 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 completed its comprehensive evaluation of applying this guidance and adopted certain practical expedients for its interest rate swap agreements in the fiscal 2024 first quarter which did not have a significant impact on its consolidated financial statements. The practical expedients that were adopted permit its hedging relationships to continue without de-designation upon changes due to reference rate reform. Foreign currency forward contracts do not reference LIBOR and no practical expedients were elected but are now discounted using the Secured Overnight Financing Rate ("SOFR"). For existing lease, debt arrangements and other contracts, the Company did not adopt any ASC 848 practical expedients as it relates to these arrangements. Recently Issued Accounting Standards No 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, 2023 Goodwill $ 1,664 $ 1,116 $ 254 $ 353 $ 3,387 Accumulated impairments ( 139 ) ( 732 ) ( 30 ) — ( 901 ) 1,525 384 224 353 2,486 Translation adjustments, goodwill ( 30 ) — ( 3 ) — ( 33 ) Translation adjustments, accumulated impairments 1 — 1 — 2 ( 29 ) — ( 2 ) — ( 31 ) Balance as of September 30, 2023 Goodwill 1,634 1,116 251 353 3,354 Accumulated impairments ( 138 ) ( 732 ) ( 29 ) — ( 899 ) $ 1,496 $ 384 $ 222 $ 353 $ 2,455 Other Intangible Assets Other intangible assets consist of the following: September 30, 2023 June 30, 2023 (In millions) Gross Carrying Value Accumulated Amortization Total Net Book Value Gross Carrying Value Accumulated Amortization Total Net Book Value Amortizable intangible assets: Customer lists and other $ 2,002 $ 796 $ 1,206 $ 2,030 $ 766 $ 1,264 Non-amortizable intangible assets: Trademarks 4,309 4,338 Total intangible assets $ 5,515 $ 5,602 The aggregate amortization expense related to amortizable intangible assets was $ 36 million for the three months ended September 30, 2023 and 2022. The estimated aggregate amortization expense for the remainder of fiscal 2024 and for each of the next four fiscal years is as follows: Fiscal (In millions) 2024 2025 2026 2027 2028 Estimated aggregate amortization expense $ 108 $ 144 $ 144 $ 126 $ 101 10 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES The Company approved specific initiatives under the Post-COVID Business Acceleration Program (the “PCBA Program”) through fiscal 2022 and has substantially completed those initiatives through fiscal 2023. Additional information about the PCBA Program is included in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023. 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 September 30, 2023, the notional amount of derivatives not designated as hedging instruments was $ 4,099 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. 11 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair values of the Company’s derivative financial instruments included in the consolidated balance sheets are presented as follows: Asset Derivatives Liability Derivatives Fair Value (1) Fair Value (1) (In millions) Balance Sheet Location September 30, 2023 June 30, 2023 Balance Sheet Location September 30, 2023 June 30, 2023 Derivatives Designated as Hedging Instruments: Foreign currency cash flow hedges Prepaid expenses and other current assets $ 61 $ 56 Other accrued liabilities $ 3 $ 16 Cross-currency swap contracts Prepaid expenses and other current assets 35 22 Other accrued liabilities — — Net investment hedges Prepaid expenses and other current assets 23 — Other accrued liabilities 1 13 Interest rate-related derivatives Prepaid expenses and other current assets — — Other accrued liabilities 180 150 Total Derivatives Designated as Hedging Instruments 119 78 184 179 Derivatives Not Designated as Hedging Instruments: Foreign currency forward contracts Prepaid expenses and other current assets 22 20 Other accrued liabilities 26 20 Total derivatives $ 141 $ 98 $ 210 $ 199 (1) See Note 5 – Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined. 12 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 Recognized in OCI on Derivatives Location of Gain Reclassified from AOCI into Earnings Amount of Gain Reclassified from AOCI into Earnings (1) Three Months Ended September 30 Three Months Ended September 30 (In millions) 2023 2022 2023 2022 Derivatives in Cash Flow Hedging Relationships: Foreign currency forward contracts $ 28 $ 57 Net sales $ 9 $ 15 Interest rate-related derivatives — 7 Interest expense — — 28 64 9 15 Derivatives in Net Investment Hedging Relationships (2) : Foreign currency forward contracts (3) 30 71 — — Total derivatives $ 58 $ 135 $ 9 $ 15 (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 September 30, 2023 and 2022, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $ 5 million and $ 6 million, respectively. (3) Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets. Amount of Gain (Loss) Recognized in Earnings on Derivatives Location of Gain (Loss) Recognized in Earnings on Derivatives Three Months Ended September 30 (In millions) 2023 2022 Derivatives in Fair Value Hedging Relationships: Cross-currency swap contracts (1) Selling, general and administrative $ 13 $ — Interest rate swap contracts (2) Interest expense $ ( 29 ) $ ( 39 ) (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 $ 5 million during the three months ended September 30, 2023. (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 September 30, 2023 September 30, 2023 Long-term debt $ 814 $ ( 180 ) Intercompany debt $ — $ 56 13 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 September 30 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 $ 3,518 $ 2,349 $ 95 $ 3,930 $ 2,244 $ 46 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 29 N/A N/A 39 Derivatives designated as hedging instruments N/A N/A ( 29 ) N/A N/A ( 39 ) Gain (loss) on fair value hedge relationships – cross-currency swap contracts: Hedged item N/A ( 13 ) N/A N/A — N/A Derivatives designated as hedging instruments N/A 13 N/A N/A — N/A Gain on cash flow hedge relationships – foreign currency forward contracts: Amount of gain reclassified from AOCI into earnings 9 N/A N/A 15 N/A N/A N/A (Not applicable) 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 Recognized in Earnings on Derivatives Location of Gain Recognized in Earnings on Derivatives Three Months Ended September 30 (In millions) 2023 2022 Derivatives Not Designated as Hedging Instruments: Foreign currency forward contracts Selling, general and administrative $ 5 $ 11 14 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 September 30, 2023 As of June 30, 2023 (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 $ 141 $ ( 45 ) $ 96 $ 98 $ ( 53 ) $ 45 Derivative liabilities ( 210 ) 45 ( 165 ) ( 199 ) 53 ( 146 ) Total $ ( 69 ) $ — $ ( 69 ) $ ( 101 ) $ — $ ( 101 ) Cash Flow Hedges The Company enters into foreign currency forward contracts, and may enter into foreign currency option contracts, to hedge anticipated transactions and receivables and payables denominated in foreign currencies, for periods consistent with the Company’s identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the cash flows that the Company receives from foreign subsidiaries. The foreign currency forward contracts entered into to hedge anticipated transactions have been designated as cash flow hedges and have varying maturities through the end of March 2025. Hedge effectiveness of the foreign currency forward contracts is based on the forward method, which includes time value in the effectiveness assessment. At September 30, 2023, the Company had cash flow hedges outstanding with a notional amount totaling $ 1,560 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 September 30, 2023, the Company’s foreign currency cash flow hedges were highly effective. The estimated net gain on the Company’s derivative instruments designated as cash flow hedges as of September 30, 2023 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $ 43 million. The accumulated net gain on derivative instruments designated as cash flow hedges in AOCI was $ 99 million and $ 79 million as of September 30, 2023 and June 30, 2023, 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 September 30, 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 the three-month fallback rate SOFR 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. 15 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company enters into cross-currency swap contracts to manage the exposure of foreign exchange rate fluctuations on its intercompany foreign currency denominated debt. At September 30, 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 September 30, 2023 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $ 14 million. The accumulated net loss on derivative instruments designated as fair value hedges in AOCI was $ 20 million as of September 30, 2023 and June 30, 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 September 2024. Hedge effectiveness of the net investment hedge contracts is based on the spot method. At September 30, 2023, the Company had net investment hedges outstanding with a notional amount totaling $ 1,180 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 $ 141 million at September 30, 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. 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. 16 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023: (In millions) Level 1 Level 2 Level 3 Total Assets: Money market funds $ 2,094 $ — $ — $ 2,094 Foreign currency forward contracts — 106 — 106 Cross-currency swap contracts — 35 — 35 Total $ 2,094 $ 141 $ — $ 2,235 Liabilities: Foreign currency forward contracts $ — $ 30 $ — $ 30 Interest rate-related derivatives — 180 — 180 DECIEM stock options — — 103 103 Total $ — $ 210 $ 103 $ 313 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, 2023: (In millions) Level 1 Level 2 Level 3 Total Assets: Money market funds $ 3,241 $ — $ — $ 3,241 Foreign currency forward contracts — 76 — 76 Cross-currency swap contracts — 22 — 22 Total $ 3,241 $ 98 $ — $ 3,339 Liabilities: Foreign currency forward contracts $ — $ 49 $ — $ 49 Interest rate-related derivatives — 150 — 150 DECIEM stock options — — 99 99 Total $ — $ 199 $ 99 $ 298 17 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimated fair values of the Company’s financial instruments are as follows: September 30, 2023 June 30, 2023 (In millions) Carrying Amount Fair Value Carrying Amount Fair Value Nonderivatives Cash and cash equivalents $ 3,090 $ 3,090 $ 4,029 $ 4,029 Current and long-term debt 8,093 7,313 8,114 7,665 DECIEM stock options 103 103 99 99 Deferred consideration payable 340 336 341 338 Derivatives Cross-currency swap contracts – asset, net 35 35 22 22 Foreign currency forward contracts – asset, net 76 76 27 27 Interest rate-related derivatives – liability, net ( 180 ) ( 180 ) ( 150 ) ( 150 ) 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 SOFR forward curves. 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 SOFR forward curves, were obtained from independent pricing services. Current and long-term debt – The fair value of the Company’s debt was estimated based on the current rates offered to the Company for debt with the same remaining maturities. To a lesser extent, debt also includes finance lease obligations for which the carrying amount approximates the fair value. The Company’s debt is classified within Level 2 of the valuation hierarchy. Deferred consideration payable – The deferred consideration payable consists primarily of deferred payments associated with the fiscal 2023 fourth quarter acquisition of TOM FORD. The fair value of the payments treated as deferred consideration payable are calculated based on the net present value of cash payments using an estimated borrowing rate based on quoted prices for a similar liability. The Company’s deferred consideration payable is classified within Level 2 of the valuation hierarchy. 18 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECIEM stock options – The stock option liability represents the employee stock options issued by DECIEM in replacement and exchange for certain vested and unvested DECIEM employee stock options previously issued by DECIEM, in connection with the Company's acquisition of DECIEM. The DECIEM stock options are subject to the terms and conditions of DECIEM's 2021 Stock Option Plan. The DECIEM stock option liability is measured using the Monte Carlo Method, which requires certain assumptions. Significant changes in the projected future operating results would result in a higher or lower fair value measurement. Changes to the discount rates or volatilities would have a lesser effect. These inputs are categorized as Level 3 of the valuation hierarchy. The DECIEM stock options are remeasured to fair value at each reporting date through the period when the options are exercised or repurchased (i.e., when they are settled), with an offsetting entry to compensation expense. See Note 9 – Stock Programs for discussion . Changes in the DECIEM stock option liability for the three months ended September 30, 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, 2023 $ 99 Changes in fair value, net of foreign currency remeasurements 8 Translation adjustments and other, net ( 4 ) DECIEM stock option liability as of September 30, 2023 $ 103 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, 2023. Accounts Receivable Accounts receivable, net is stated net of the allowance for doubtful accounts and customer deductions totaling $ 31 million and $ 30 million as of September 30, 2023 and June 30, 2023, respectively. Payment terms are short-term in nature and are generally less than one year. Changes in the allowance for credit losses are as follows: (In millions) September 30, 2023 Balance at June 30, 2023 $ 16 Provision for expected credit losses 1 Balance at September 30, 2023 $ 17 The remaining balance of the allowance for doubtful accounts and customer deductions of $ 14 million as of September 30, 2023 and June 30, 2023, respectively, relates to non-credit losses, which are primarily due to customer deductions. 19 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 September 30 (In millions) 2023 2022 Deferred revenue, beginning of period $ 572 $ 362 Revenue recognized that was included in the deferred revenue balance at the beginning of the period ( 152 ) ( 149 ) Revenue deferred during the period 168 157 Other ( 7 ) ( 8 ) Deferred revenue, end of period $ 581 $ 362 Transaction Price Allocated to the Remaining Performance Obligations At September 30, 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, gift card liabilities and the Marcolin license arrangement related to TOM FORD that are unsatisfied (or partially unsatisfied) is $ 336 million. The remaining balance of deferred revenue at September 30, 2023 will be recognized beyond the next twelve months, of which $ 232 million relates to the non-refundable upfront payment received as part of the Marcolin licensing arrangement that is being recognized on a straight-line basis over the estimated economic life of the license, which is 20 years. Royalty Revenue – License Arrangements The Company’s contractually guaranteed minimum royalty amounts due during future periods under its existing license arrangements is disclosed in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023. 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, 2023. The components of net periodic benefit cost for the three months ended September 30, 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 $ 9 $ 9 $ 6 $ 7 $ — $ — Interest cost 12 10 5 3 2 2 Expected return on plan assets ( 14 ) ( 14 ) ( 6 ) ( 4 ) — — Amortization of: Actuarial loss (gain) 1 1 ( 2 ) ( 1 ) — — Net periodic benefit cost $ 8 $ 6 $ 3 $ 5 $ 2 $ 2 During the three months ended September 30, 2023, the Company made contributions to its international pension plans totaling $ 3 million. 20 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amounts recognized in the consolidated balance sheets related to the Company’s pension and post-retirement benefit plans consist of the following: (In millions) September 30, 2023 June 30, 2023 Other assets $ 112 $ 115 Other accrued liabilities ( 35 ) ( 34 ) Other noncurrent liabilities ( 352 ) ( 395 ) Funded status ( 275 ) ( 314 ) Accumulated other comprehensive loss 235 235 Net amount recognized $ ( 40 ) $ ( 79 ) NOTE 8 – COMMITMENTS AND CONTINGENCIES Legal Proceedings The Company is involved, from time to time, in litigation and other legal proceedings incidental to its business, including product liability matters (including asbestos-related claims), advertising, regulatory, employment, intellectual property, real estate, environmental, trade relations, tax, and privacy. Management believes that the outcome of current litigation and legal proceedings will not have a material adverse effect upon the Company’s business, results of operations, financial condition or cash flows. However, management’s assessment of the Company’s current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against the Company not presently known to the Company or determinations by judges, juries or other finders of fact which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or proceedings. Reasonably possible losses in addition to the amounts accrued for such litigation and legal proceedings are not material to the Company’s consolidated financial statements. NOTE 9 – STOCK PROGRAMS Additional information relating to the Company's stock programs and the DECIEM stock options are included in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023. 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 $ 80 million and $ 53 million for the three months ended September 30, 2023 and 2022, respectively. Stock Options During the three months ended September 30, 2023, the Company granted stock options in respect of approximately 1.8 million shares of Class A Common Stock with an exercise price per share of $ 156.39 and a weighted-average grant date fair value per share of $ 52.98 . The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The aggregate intrinsic value of stock options exercised during the three months ended September 30, 2023 was $ 17 million. Restricted Stock Units During the three months ended September 30, 2023, the Company granted RSUs in respect of approximately 1.5 million shares of Class A Common Stock with a weighted-average grant date fair value per share of $ 156.23 that, at the time of grant, are scheduled to vest at 0.6 million, 0.5 million, and 0.4 million shares per year, in fiscal 2025, fiscal 2026 and fiscal 2027, 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. 21 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Performance Share Units During the three months ended September 30, 2023, the Company granted PSUs with a target payout of approximately 0.2 million shares of Class A Common Stock with a grant date fair value per share of $ 156.39 , 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, 2026, 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 August 2023, less than 0.1 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 0.2 million PSUs with a performance period ended June 30, 2023. 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, net of foreign currency remeasurements, for the three months ended September 30, 2023 and 2022 was $ 8 million and $ 1 million, respectively. There is no related income tax benefit on the DECIEM stock-based compensation expense. There were no DECIEM stock options exercised during the three months ended September 30, 2023. The DECIEM stock options are reported as a stock option liability of $ 103 million and $ 99 million in Other accrued liabilities in the accompanying consolidated balance sheets at September 30, 2023 and June 30, 2023, respectively. The fair value of the stock options were calculated by incorporating significant assumptions including the starting equity value, actual and projected net sales and EBITDA and the following key assumptions into the Monte Carlo Method: September 30, 2023 June 30, 2023 Risk-free rate 5.10 % 4.90 % Term to mid of last twelve-month period 0.33 years 0.46 years Operating leverage adjustment 0.45 0.45 Net sales discount rate 8.00 % 7.80 % EBITDA discount rate 11.50 % 11.30 % EBITDA volatility 32.50 % 32.00 % Net sales volatility 14.60 % 14.40 % 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 using the treasury stock method. 22 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 September 30 (In millions, except per share data) 2023 2022 Numerator: Net earnings attributable to The Estée Lauder Companies Inc. $ 31 $ 489 Denominator: Weighted-average common shares outstanding – Basic 358.4 357.9 Effect of dilutive stock options 1.3 2.7 Effect of PSUs 0.1 0.1 Effect of RSUs 0.7 0.7 Weighted-average common shares outstanding – Diluted 360.5 361.4 Net earnings attributable to The Estée Lauder Companies Inc. per common share: Basic $ .09 $ 1.37 Diluted $ .09 $ 1.35 The shares of Class A Common Stock underlying stock options, RSUs and PSUs that were excluded in the computation of diluted EPS because their inclusion would be anti-dilutive were as follows: Three Months Ended September 30 (In millions) 2023 2022 Stock options 4.8 1.3 RSUs and PSUs 0.1 — As of September 30, 2023 and 2022, 0.4 million and 0.4 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 . 23 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 – EQUITY AND REDEEMABLE NONCONTROLLING INTEREST Total Stockholders’ Equity – The Estée Lauder Companies Inc. Three Months Ended September 30 (In millions, except per share data) 2023 2022 Common stock, beginning of the period $ 6 $ 6 Stock-based compensation — — Common stock, end of the period 6 6 Paid-in capital, beginning of the period 6,153 5,796 Common stock dividends 2 1 Stock-based compensation 94 78 Paid-in capital, end of the period 6,249 5,875 Retained earnings, beginning of the period 13,991 13,912 Common stock dividends ( 238 ) ( 216 ) Net earnings attributable to The Estée Lauder Companies Inc. 31 489 Retained earnings, end of the period 13,784 14,185 Accumulated other comprehensive loss, beginning of the period ( 934 ) ( 762 ) Other comprehensive loss attributable to The Estée Lauder Companies Inc. ( 129 ) ( 316 ) Accumulated other comprehensive loss, end of the period ( 1,063 ) ( 1,078 ) Treasury stock, beginning of the period ( 13,631 ) ( 13,362 ) Acquisition of treasury stock — ( 92 ) Stock-based compensation ( 3 ) ( 17 ) Treasury stock, end of the period ( 13,634 ) ( 13,471 ) Total equity $ 5,342 $ 5,517 Redeemable noncontrolling interest, beginning of the period $ 832 $ 842 Net earnings attributable to redeemable noncontrolling interest 5 1 Translation adjustments ( 11 ) ( 35 ) Redeemable noncontrolling interest, end of the period $ 826 $ 808 Cash dividends declared per common share $ .66 $ .60 24 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of quarterly cash dividends declared per share on the Company’s Class A and Class B Common Stock during the three months ended September 30, 2023: Date Declared Record Date Payable Date Amount per Share August 17, 2023 August 31, 2023 September 15, 2023 $ .66 On October 31, 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 December 15, 2023 to stockholders of record at the close of business on November 30, 2023. Common Stock Beginning in December 2022, we temporarily suspended the repurchase of shares of our Class A Common Stock. We may resume repurchases in the future. Accumulated Other Comprehensive Income The following table represents changes in AOCI, net of tax, by component for the three months ended September 30, 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, 2023 $ 59 $ ( 15 ) $ ( 177 ) $ ( 801 ) $ ( 934 ) OCI before reclassifications 21 4 1 ( 143 ) (1) ( 117 ) Amounts reclassified to Net earnings ( 7 ) ( 4 ) ( 1 ) — ( 12 ) Net current-period OCI 14 — — ( 143 ) ( 129 ) Balance at September 30, 2023 $ 73 $ ( 15 ) $ ( 177 ) $ ( 944 ) $ ( 1,063 ) (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. 25 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table represents the effects of reclassification adjustments from AOCI into net earnings for the three months ended September 30, 2023 and 2022: Amount Reclassified from AOCI Affected Line Item in Consolidated Statements of Earnings Three Months Ended September 30 (In millions) 2023 2022 Gain (Loss) on Cash Flow Hedges Foreign currency forward contracts $ 9 $ 15 Net sales Provision for deferred taxes ( 2 ) ( 4 ) Provision for income taxes 7 11 Net earnings Cross-Currency Swap Contracts Gain on cross-currency swap contracts 5 — Selling, general and administrative Provision for deferred taxes ( 1 ) — Provision for income taxes 4 — Retirement Plan and Other Retiree Benefit Adjustments Amortization of actuarial loss 1 — Other components of net periodic benefit cost (1) Provision for deferred taxes — — Provision for income taxes 1 — Net earnings Total reclassification adjustments, net $ 12 $ 11 Net earnings (1) See Note 7 – Pension and Post-Retirement Benefit Plans for additional information. NOTE 12 – STATEMENT OF CASH FLOWS Supplemental cash flow information for the three months ended September 30, 2023 and 2022 is as follows: (In millions) 2023 2022 Cash: Cash paid during the period for interest $ 58 $ 33 Cash paid during the period for income taxes $ 131 $ 113 Non-cash investing and financing activities: Property, plant and equipment accrued but unpaid $ 82 $ 171 Right-of-use assets obtained in exchange for new/modified operating lease liabilities $ 111 $ 70 26 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 – SEGMENT DATA AND RELATED INFORMATION Reportable operating segments include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the “Chief Executive”) in deciding how to allocate resources and in assessing performance. Although the Company operates in one business segment, beauty products, management also evaluates performance on a product category basis. Product category performance is measured based upon net sales before returns associated with restructuring and other activities, and operating income (loss) before charges associated with restructuring and other activities. Returns and charges associated with restructuring and other activities are not allocated to the Company's product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business. The accounting policies for the Company’s reportable segments are substantially the same as those for the consolidated financial statements, as described in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023. 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, 2023. 27 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended September 30 (In millions) 2023 2022 PRODUCT CATEGORY DATA Net sales: Skin Care $ 1,638 $ 2,104 Makeup 1,063 1,052 Fragrance 637 607 Hair Care 148 158 Other 32 14 3,518 3,935 Returns associated with restructuring and other activities — ( 5 ) Net sales $ 3,518 $ 3,930 Operating income (loss) before charges associated with restructuring and other activities: Skin Care $ 35 $ 530 Makeup ( 39 ) 16 Fragrance 108 133 Hair Care ( 22 ) ( 12 ) Other 18 — 100 667 Reconciliation: Charges associated with restructuring and other activities ( 2 ) ( 6 ) Interest expense ( 95 ) ( 46 ) Interest income and investment income, net 41 15 Other components of net periodic benefit cost 2 3 Other income — — Earnings before income taxes $ 46 $ 633 GEOGRAPHIC DATA (1) Net sales: The Americas $ 1,208 $ 1,123 Europe, the Middle East & Africa 1,252 1,682 Asia/Pacific 1,058 1,130 3,518 3,935 Returns associated with restructuring and other activities — ( 5 ) Net sales $ 3,518 $ 3,930 Operating income (loss): The Americas $ ( 182 ) $ 125 Europe, the Middle East & Africa 144 334 Asia/Pacific 138 208 100 667 Charges associated with restructuring and other activities ( 2 ) ( 6 ) Operating income $ 98 $ 661 (1) The net sales from the Company's travel retail business are included in the Europe, the Middle East & Africa region, and operating income attributable to these net sales are included in that region and in The Americas. The exception is for net sales and operating income of Dr.Jart+ in the travel retail channel in Korea that are reflected in Korea in the Asia/Pacific region. 28 Table of Contents THE ESTÉE LAUDER COMPANIES INC.