ESTEE LAUDER COMPANIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS We manufacture, market and sell beauty products including those in the skin care, makeup, fragrance and hair care categories, which are distributed in approximately 150 countries and territories. The following table is a comparative summary of operating results for the three months ended September 30, 2023 and 2022, and reflects the basis of presentation described in Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies for all periods presented. Products and services that do not meet our definition of skin care, makeup, fragrance and hair care have been included in the “other” category. Three Months Ended September 30 (In millions) 2023 2022 NET SALES By Product Category: 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 By Region (1) : 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) By Product Category: Skin Care $ 35 $ 530 Makeup (39) 16 Fragrance 108 133 Hair Care (22) (12) Other 18 — 100 667 Charges associated with restructuring and other activities (2) (6) Operating income $ 98 $ 661 By Region (1) : 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. 29 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following table presents certain consolidated earnings data as a percentage of net sales: Three Months Ended September 30 2023 2022 Net sales 100.0 % 100.0 % Cost of sales 30.4 26.0 Gross profit 69.6 74.0 Operating expenses: Selling, general and administrative 66.8 57.1 Restructuring and other charges — 0.1 Total operating expenses 66.8 57.2 Operating income 2.8 16.8 Interest expense 2.7 1.2 Interest income and investment income, net 1.2 0.4 Other components of net periodic benefit cost (0.1) (0.1) Earnings before income taxes 1.3 16.1 Provision for income taxes 0.3 3.6 Net earnings 1.0 12.5 Net earnings attributable to redeemable noncontrolling interest (0.1) — Net earnings attributable to The Estée Lauder Companies Inc. 0.9 % 12.4 % Not adjusted for differences caused by rounding Period-over-period changes in our net sales are generally attributable to the impacts from (i) pricing on our base portfolio, including changes in mix and those due to strategic pricing actions, (ii) volume, including changes driven by the impact of new product innovation, (iii) acquisitions and/or divestitures, and/or (iv) foreign currency translation. The percentages disclosed for these impacts are calculated on an individual basis. The net sales impact from pricing consists of changes in list prices, due to strategic pricing actions, and mix shifts within and among product categories, geographic regions, brands and distribution channels. The prices at which we sell our products vary by brand, distribution channel (e.g., wholesale or direct-to-consumer) and may also vary by country. Our brands and products cover a broad array of pricing tiers. Prices of skin care and fragrance products are typically higher than makeup and hair care products. New product innovation includes the introduction of new products, as well as changes related to existing products or where they are sold, including reformulations, regional expansion, repackaging and sets. A product is considered "new innovation" for the twelve-month period following the initial shipment date. Our innovation is launched at different price points than existing products and value derived from innovation may vary from year to year. We continually introduce new products, support new and established products through advertising, merchandising and sampling and phase out existing products that no longer meet the needs of our consumers or our objectives. The economics of developing, producing, launching, supporting and discontinuing products impact our sales and operating performance each period. The introduction of new products often has some cannibalizing effect on sales of existing products, which we take into account in our business planning. The impact of new product introductions, including timing compared to introductions in prior periods, also affects our results. 30 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Non-GAAP Financial Measures We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period helps investors and others compare operating performance between periods. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. See Reconciliations of Non-GAAP Financial Measures beginning on page 44 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. We operate on a global basis, with the majority of our net sales generated outside the United States. Accordingly, fluctuations in foreign currency exchange rates affect our results of operations. Therefore, we present certain net sales, operating results and diluted net earnings per common share information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of our underlying business outside the United States. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We calculate constant currency information by translating current-period results using monthly average foreign currency exchange rates and adjusting for the period-over-period impact of foreign currency cash flow hedging activities. Overview We are a leader in prestige beauty, which combines the repeat purchase and relative affordability of consumer goods with high quality products and services. Within prestige beauty, we are diversified by product category, geography, brand, product sub-category, channel, consumer segment and price point. We also leverage consumer analytics and insights with agility by deploying our brands to fast growing and profitable opportunities. These analytics and insights, combined with our creativity, inform our innovation to provide a broad, locally-relevant and inclusive range of prestige products allowing us to compete effectively for a greater share of a consumer's beauty routine. Elements of our strategy are described in the Overview on pages 30-32 of our Annual Report on Form 10-K for the year ended June 30, 2023, as well as below. • Our skin care net sales declined 22%, primarily driven by lower net sales from Estée Lauder and La Mer. These decreases primarily reflect a decline in our Asia travel retail business, primarily due to our and our retailers' actions to reset retailer inventory levels, and changes in government and retailer policies related to unstructured market activity, that led to lower product shipments compared to the prior-year period. The net sales decrease in Estée Lauder was also due to incremental headwinds from a slower-than-expected recovery of overall prestige beauty in mainland China. Partially offsetting the decrease in skin care net sales were higher net sales from The Ordinary, reflecting growth in every geographic region. • Our makeup net sales increased slightly, primarily driven by higher net sales from M·A·C, Too Faced, Clinique, and TOM FORD, partially offset by lower net sales from Estée Lauder primarily reflecting a decline in our Asia travel retail business. This was primarily due to our and our retailers' actions to reset retailer inventory levels, and changes in government and retailer policies related to unstructured market activity, that led to lower product shipments compared to the prior-year period. • Our fragrance net sales increased 5%, primarily driven by growth from Le Labo, benefiting from the growth of hero products, new product launches and targeted expanded consumer reach due to the brand's launch in mainland China during the fiscal 2023 fourth quarter. • Our hair care net sales declined 6%, primarily attributable to lower net sales from Aveda, reflecting a decline in North America, in the salon channel and in our online business. Our global distribution capability and operations allow us to focus on targeted expanded consumer reach wherever consumer demographics and trends are attractive. Our regional organizations, and the expertise of our people there, enable our brands to be more locally and culturally relevant in both product assortment and communications. We are evolving the way we connect with our consumers in stores, online and where they travel, including by expanding our digital and social media presence and the engagement of global and local influencers to amplify brand or product stories. We tailor implementation of our strategy by market to drive consumer engagement and embrace inclusion and cultural diversity. We continuously strengthen our presence in large, image-building core markets, while broadening our presence in emerging markets. 31 Table of Contents THE ESTÉE LAUDER COMPANIES INC. • Net sales in The Americas increased 8%, primarily driven by higher net sales in the United States, Mexico and Brazil. The increase in net sales in the United States primarily reflected continued strong performance by The Ordinary in skin care, as well as growth in fragrance, led by Le Labo and TOM FORD. The region also benefited from incremental royalty revenue associated with the fiscal 2023 fourth quarter acquisition of the TOM FORD brand. Net sales in Mexico and Brazil increased in all product categories, led by makeup, and benefited from targeted expanded consumer reach. • Net sales in Europe, the Middle East & Africa decreased 26%, primarily driven by our Asia travel retail business. The decline in our Asia travel retail business was primarily due to our and our retailers' actions to reset retailer inventory levels, and changes in government and retailer policies related to unstructured market activity, that led to lower product shipments compared to the prior-year period. • Net sales in Asia/Pacific decreased 6%, including the unfavorable impact of foreign currency translation of 3%, driven by lower net sales in mainland China, reflecting incremental headwinds from a slower-than-expected recovery of overall prestige beauty in mainland China, partially offset by higher net sales in Hong Kong SAR, driven by the resumption of travel from mainland China to Hong Kong SAR due to the lifting of travel restrictions. Outlook We have experienced, and are expecting to continue to experience, challenges within our Asia travel retail business, as well as incremental headwinds from a slower-than-expected recovery of overall prestige beauty in mainland China. These challenges, combined with the risks of business disruption in Israel and other parts of the Middle East (net sales from Israel and the Middle East accounted for approximately 2% of consolidated net sales in each of fiscal 2023 and the first quarter of fiscal 2024), are expected to negatively impact net sales and profitability, including an unfavorable impact to our effective tax rate from changes to our geographical mix of earnings. We believe that the best way to increase long-term stockholder value is to continue providing superior products and services in the most efficient and effective manner while recognizing shifts in consumers’ behaviors and shopping practices. Accordingly, our long-term strategy has numerous initiatives across geographic regions, product categories, brands, channels of distribution and functions designed to grow our sales, provide cost efficiencies, leverage our strengths and make us more productive and profitable. We plan to build upon and leverage our history of outstanding creativity and innovation, high quality products and services, and engaging communications while investing for long-term sustainable growth. We continue to monitor the effects of the global macro environment, including the risk of recession; currency volatility; inflationary pressures; supply chain challenges; social and political issues; regulatory matters, including the imposition of tariffs and sanctions; geopolitical tensions; and global security issues. For example, the strengthening of the U.S. dollar could negatively impact results within Europe, the Middle East & Africa due to pricing pressures on our retail customers and consumers in key international travel retail locations. Additionally, we continue to monitor the geopolitical tensions between the United States and China, which could have a material adverse effect on our business. We are also mindful of inflationary pressures on our cost base and are monitoring the impact on consumer preferences. A decline in net sales and profitability may adversely impact the goodwill and other intangible assets associated with our brands, as well as long-lived assets, potentially resulting in impairments. Cybersecurity Incident Disclosed in July 2023 As initially disclosed on July 18, 2023, we identified a cybersecurity incident in which an unauthorized third party gained access to some of our systems. After becoming aware of the incident, we proactively took down some of our systems to help secure our business operations and subsequently brought back online core systems within days. While the response to the incident resulted in some disruptions to our business operations, most notably general corporate activities and order processing, our production and sales operations were minimally impacted. Our investigation into the identification of the impacted systems and the unauthorized access is complete. We determined that the unauthorized third party obtained some data from our systems. We are continuing to work to understand the nature and scope of the data obtained, and can confirm, based on the investigation to date, that the data obtained includes some consumer and employee data (such as names, contact information, and dates of birth). We took steps, and continue to take steps, to enhance the security of our systems, and are continuing to coordinate with law enforcement authorities. We have provided and will continue to provide notification to governmental authorities in certain jurisdictions and we have also notified, and will continue to notify, affected individuals where required by law. 32 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Based on the information available to date, we believe the incident is contained. The incident did not have a material impact on net sales and was $.08 dilutive to earnings per share for the fiscal 2024 first quarter and based on this information is not expected to have a material impact on net sales and is expected to be dilutive approximately $.08 to earnings per share for the fiscal 2024 full year. NET SALES Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Net sales $ 3,518 $ 3,930 $ Change from prior-year period (412) % Change from prior-year period (10) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency adjusting for returns associated with restructuring and other activities (10) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 44 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales decreased during the three months ended September 30, 2023, primarily driven by lower net sales from the skin care product category of $466 million. Reported net sales decreased during the three months ended September 30, 2023, primarily reflecting lower net sales from Europe, the Middle East & Africa and, to a lesser extent, Asia/Pacific, partially offset by higher net sales in The Americas. Net sales for the three months ended September 30, 2023, reflects $17 million of incremental royalty revenue included in The Americas region and the other category from the new revenue stream associated with the TOM FORD trademark as a result of the fiscal 2023 fourth quarter acquisition of the TOM FORD brand. The total net sales decrease was impacted by approximately $11 million of unfavorable foreign currency translation. Returns associated with restructuring and other activities are not allocated to our product categories or geographic regions because they result from activities that are deemed a Company-wide initiative to redesign, resize and reorganize select corporate functions and go-to-market structures. Accordingly, the following discussions of Net sales by Product Categories and Geographic Regions exclude the impact of returns associated with restructuring and other activities for the three months ended September 30, 2022 of $5 million. Reported net sales decreased 10% for the three months ended September 30, 2023, driven by the decrease from volume of 13%, partially offset by an increase from pricing of 2% due to the favorable impact from strategic pricing actions, partially offset by changes in mix. 33 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Product Categories Skin Care Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Net sales $ 1,638 $ 2,104 $ Change from prior-year period (466) % Change from prior-year period (22) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (21) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 44 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported skin care net sales decreased, primarily driven by lower net sales from Estée Lauder and La Mer, combined, of approximately $437 million. These decreases primarily reflect a decline in our Asia travel retail business, primarily due to our and our retailers' actions to reset retailer inventory levels, and changes in government and retailer policies related to unstructured market activity, that led to lower product shipments compared to the prior-year period. The net sales decrease in Estée Lauder was also due to incremental headwinds from a slower-than-expected recovery of overall prestige beauty in mainland China. Partially offsetting these decreases in skin care net sales were higher net sales from The Ordinary, driven by growth in every geographic region, reflecting success of hero products, new product launches and targeted expanded consumer reach. The skin care net sales decrease was impacted by approximately $17 million of unfavorable foreign currency translation. Reported skin care net sales decreased 22% for the three months ended September 30, 2023, driven by the decrease from volume of 22% and the unfavorable impact from foreign currency translation of 1%. These decreases were partially offset by an increase from pricing of 1%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix. Makeup Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Net sales $ 1,063 $ 1,052 $ Change from prior-year period 11 % Change from prior-year period 1 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 1 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 44 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 34 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported makeup net sales increased, primarily driven by higher net sales from M·A·C, Too Faced, Clinique, and TOM FORD, combined, of approximately $49 million. The increase in net sales from M·A·C was primarily driven by the success of hero products and new product launches. The increase in net sales from Too Faced reflected the success of hero products, targeted expanded consumer reach, and new product launches. Net sales from Clinique increased, reflecting the fiscal 2024 first quarter launch of High Impact High-Fi Full Volume Mascara. Net sales from TOM FORD increased, benefiting from solid performance in the lip, eye and face subcategories. Partially offsetting the increase in makeup net sales was a decrease in net sales from Estée Lauder, primarily reflecting a decline in our Asia travel retail business, primarily due to our and our retailers' actions to reset retailer inventory levels, and changes in government and retailer policies related to unstructured market activity, that led to lower product shipments compared to the prior-year period. The makeup net sales increase was impacted by approximately $3 million of favorable foreign currency translation. Reported makeup net sales increased 1% for the three months ended September 30, 2023, driven by an increase from pricing of 3% due to the favorable impact from strategic pricing actions, partially offset by changes in mix. Partially offsetting this increase was the decrease from volume of 2%. Fragrance Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Net sales $ 637 $ 607 $ Change from prior-year period 30 % Change from prior-year period 5 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 5 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 44 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported fragrance net sales increased, driven by higher net sales from Le Labo, benefiting from the growth of hero products, including the successful City Exclusives collection, new product launches and targeted expanded consumer reach due to the brand's launch in mainland China during the fiscal 2023 fourth quarter. Fragrance net sales were impacted by approximately $2 million of favorable foreign currency translation. Reported fragrance net sales increased 5% for the three months ended September 30, 2023, driven by the increase from pricing of 4%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix. The impact from volume was flat period-over-period. 35 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Hair Care Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Net sales $ 148 $ 158 $ Change from prior-year period (10) % Change from prior-year period (6) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (7) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 44 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported hair care net sales decreased, driven by lower net sales from Aveda, reflecting a decline in North America, in the salon channel and in our online business. The hair care net sales decrease was impacted by approximately $1 million of favorable foreign currency translation. Reported hair care net sales decreased 6% for the three months ended September 30, 2023, driven by the decrease from volume of 11%. This decrease was partially offset by the increase from pricing of 4%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix, and the favorable impact from foreign currency translation of 1%. Geographic Regions We strategically time our new product launches by geographic market, which may account for differences in regional sales growth. The Americas Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Net sales $ 1,208 $ 1,123 $ Change from prior-year period 85 % Change from prior-year period 8 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 8 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 44 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. The increase in reported net sales in The Americas was driven primarily by increased net sales in the United States, Mexico and Brazil, combined, of approximately $82 million. The increase in net sales in the United States primarily reflected strong performance by The Ordinary, as well as growth in fragrance, led by Le Labo and TOM FORD. Also contributing to the increase in net sales in the United States was incremental royalty revenue associated with the fiscal 2023 fourth quarter acquisition of the TOM FORD brand of $17 million. The increase in net sales in Mexico and Brazil was driven by growth across all product categories, led by makeup, and benefited from targeted expanded consumer reach. Net sales in The Americas were impacted by approximately $2 million of unfavorable foreign currency translation. 36 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported net sales in The Americas increased 8% for the three months ended September 30, 2023, driven by the increase from volume of 5%, the impact from the royalty revenue from the fiscal 2023 fourth quarter acquisition of the TOM FORD brand of 2%, and the impact from pricing of 1%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix. Europe, the Middle East & Africa Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Net sales $ 1,252 $ 1,682 $ Change from prior-year period (430) % Change from prior-year period (26) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (27) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 44 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales decreased in Europe, the Middle East & Africa, primarily driven by lower net sales from our Asia travel retail business. The decrease in net sales from our Asia travel retail business was primarily due to our and our retailers' actions to reset retailer inventory levels, and changes in government and retailer policies related to unstructured market activity, that led to lower product shipments compared to the prior-year period. Net sales in Europe, the Middle East & Africa were impacted by approximately $29 million of favorable foreign currency translation. Reported net sales in Europe, the Middle East & Africa decreased 26% for the three months ended September 30, 2023, driven by the decrease from volume of 26% and a decrease from pricing of 1%, due to the unfavorable impact from changes in mix, partially offset by strategic pricing actions. Partially offsetting these decreases was the favorable impact from foreign currency translation of 2%. Asia/Pacific Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Net sales $ 1,058 $ 1,130 $ Change from prior-year period (72) % Change from prior-year period (6) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (3) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 44 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales decreased in Asia/Pacific, primarily driven by incremental headwinds from a slower-than-expected recovery of overall prestige beauty in mainland China. 37 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Partially offsetting the net sales decrease in Asia/Pacific was an increase in net sales in Hong Kong SAR, driven by the resumption of travel from mainland China to Hong Kong SAR due to the lifting of travel restrictions. Net sales in Asia/Pacific were impacted by approximately $38 million of unfavorable foreign currency translation. Reported net sales in Asia/Pacific decreased 6% for the three months ended September 30, 2023, driven by the decrease from volume of 11% and the unfavorable impact from foreign currency translation of 3%. Partially offsetting these decreases was the increase from pricing of 8%, due to the favorable impact from strategic pricing actions and changes in mix. GROSS MARGIN Gross margin decreased to 69.6% for the three months ended September 30, 2023, as compared with 74.0% in the prior-year period. Favorable (Unfavorable) Basis Points September 30, 2023 Three Months Ended Mix of business (85) Obsolescence charges (115) Manufacturing costs and other (150) Foreign exchange transactions (90) Total (440) The decrease in gross margin reflected unfavorable impacts from higher manufacturing costs and other, driven primarily by the under absorption of manufacturing variances due to lower production volumes in the second half of fiscal 2023. The unfavorable impact from obsolescence charges is primarily due to excess inventory on hand driven by lower than expected demand primarily within our travel retail business and mainland China. The unfavorable impact from our mix of business is primarily driven by higher costs associated with promotional items. 38 Table of Contents THE ESTÉE LAUDER COMPANIES INC. OPERATING EXPENSES Operating expenses as a percentage of net sales was 66.8% for the three months ended September 30, 2023 as compared with 57.2% in the prior-year period. Favorable (Unfavorable) Basis Points September 30, 2023 Three Months Ended General and administrative expenses (300) Advertising, merchandising, sampling and product development (320) Selling (160) Stock-based compensation (90) Store operating costs (100) Foreign exchange transactions 20 Subtotal (950) Charges associated with restructuring and other activities 10 Changes in fair value of acquisition-related stock options (20) Total (960) The unfavorable change in operating expense margin was driven by the decrease in net sales and also reflected unfavorable impacts relating to advertising, merchandising, sampling and product development, general and administrative expenses, selling expenses and store operating costs, as we continue to invest in our business, while also decreasing certain expenses through disciplined expense management. The increase in general and administrative expense, including stock-based compensation, reflected higher employee-related costs, primarily driven by the unfavorable year-over-year comparisons in the recognition of expenses and adjustments related to our performance share units, restricted stock units and incentive compensation, as well as annual increases to salaries and wages. Also contributing to the increase in general and administrative expenses were expenses incurred related to the July 2023 cybersecurity incident. OPERATING RESULTS Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Operating income $ 98 $ 661 $ Change from prior-year period (563) % Change from prior-year period (85) % Operating margin 2.8 % 16.8 % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities and the change in fair value of acquisition-related stock options (84) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 44 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. The decrease in reported operating margin was primarily driven by a decrease in net sales, decrease in gross margin and the increase in operating expense margin as discussed above. 39 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business. Accordingly, the following discussions of Operating income by Product Categories and Geographic Regions exclude the impact of charges associated with restructuring and other activities for the three months ended September 30, 2023 and 2022 of $2 million and $6 million, respectively. Product Categories Skin Care Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Operating income $ 35 $ 530 $ Change from prior-year period (495) % Change from prior-year period (93) % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the change in fair value of acquisition-related stock options (92) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 44 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported skin care operating income decreased, reflecting lower operating results from Estée Lauder and La Mer, combined, of approximately $400 million, primarily driven by decreases in net sales. Also contributing to the decrease in skin care operating income was higher obsolescence charges primarily due to excess inventory on hand driven by lower than expected demand primarily within our travel retail business and mainland China, as well as an increase in stock-based compensation expense and higher employee-related costs, as discussed above. Makeup Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Operating income (loss) $ (39) $ 16 $ Change from prior-year period (55) % Change from prior-year period (100+)% Reported makeup operating income decreased, reflecting lower results from Estée Lauder, primarily driven by a decrease in net sales, an increase in selling expenses due to higher staffing costs compared to the prior-year period, and an increase in advertising and promotional activities to support strategic investments to drive growth. Also contributing to the decrease in makeup operating income was higher obsolescence charges primarily due to excess inventory on hand driven by lower than expected demand primarily within our travel retail business and mainland China, as well as higher employee-related costs and an increase in stock-based compensation expense, as discussed above. Partially offsetting the decrease in makeup operating income were improved results from TOM FORD, primarily driven by an increase in net sales, and the decrease in royalty expense compared to the prior-year period due to the fiscal 2023 fourth quarter acquisition of the TOM FORD brand. 40 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Fragrance Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Operating income $ 108 $ 133 $ Change from prior-year period (25) % Change from prior-year period (19) % Reported fragrance operating income decreased, reflecting lower results from Jo Malone London and TOM FORD, combined, of approximately $19 million. Operating income from Jo Malone London decreased, driven by an increase in advertising and promotional investment to support both new and existing products, an increase in general and administrative expenses, and an increase in selling expenses driven by increased staffing costs compared to the prior-year period, partially offset by an increase in net sales. Operating income from TOM FORD decreased, reflecting higher cost of sales, due in part to an increase in net sales and promotional items, an increase in selling expenses driven by increased staffing costs compared to the prior-year period and higher advertising and promotional activities to support the fiscal 2024 first quarter launch of Café Rose, partially offset by an increase in net sales and the decrease in royalty expense as a result of the fiscal 2023 fourth quarter acquisition of TOM FORD brand. Also contributing to the decrease in fragrance operating income were higher employee-related costs and an increase in stock-based compensation expense, as discussed above. Partially offsetting the decrease in fragrance operating income were higher results from Le Labo, primarily driven by an increase in net sales, partially offset by higher advertising and promotional activities to support hero products and new product launches, higher selling expenses due to increased staffing costs compared to the prior-year period and higher store operations costs to support targeted expanded consumer reach. Hair Care Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Operating income (loss) $ (22) $ (12) $ Change from prior-year period (10) % Change from prior-year period (83) % Reported hair care operating results decreased, primarily driven by lower results from Aveda and Bumble and bumble, combined, of approximately $7 million, driven by a decrease in net sales. Partially offsetting the lower results from Aveda was disciplined advertising and promotional expense management. Also contributing to the decrease in fragrance operating income were higher employee-related costs and an increase in stock-based compensation expense, as discussed above. 41 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Geographic Regions The Americas Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Operating income (loss) $ (182) $ 125 $ Change from prior-year period (307) % Change from prior-year period (100+)% Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the change in fair value of acquisition-related stock options (100+)% (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 44 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported operating results decreased in The Americas, primarily reflecting lower operating results from North America of approximately $300 million. The decrease in operating results in North America was primarily driven by the United States, reflecting lower intercompany royalty income of $185 million compared to the prior-year period, driven by a decrease in net sales in our travel retail business, higher cost of sales due to higher obsolescence charges primarily due to excess inventory on hand driven by lower demand, higher general and administrative expenses driven by higher stock-based compensation expenses, as discussed above, partially offset by an increase in net sales. Europe, the Middle East & Africa Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Operating income $ 144 $ 334 $ Change from prior-year period (190) % Change from prior-year period (57) % Reported operating income decreased in Europe, the Middle East & Africa, primarily driven by lower results from our travel retail business, primarily due to the decrease in net sales, partially offset by the associated decrease in intercompany royalty expense to The Americas of $185 million. 42 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Asia/Pacific Three Months Ended September 30 ($ in millions) 2023 2022 As Reported: Operating income $ 138 $ 208 $ Change from prior-year period (70) % Change from prior-year period (34) % Reported operating income decreased in Asia/Pacific, primarily driven by lower operating results from mainland China and Korea, combined, of approximately $85 million. The lower operating results in mainland China were driven by a decrease in net sales, partially offset by disciplined advertising and promotional expense management. Operating income in Korea decreased, led by Dr.Jart+, due to decreases in net sales and an increase in cost of sales, due in part to an increase in promotional items, partially offset by lower selling expenses. Partially offsetting the operating income decrease were higher results from Hong Kong SAR, primarily driven by an increase in net sales, partially offset by a higher cost of sales, due in part to an increase in promotional items. INTEREST AND INVESTMENT INCOME Three Months Ended September 30 (In millions) 2023 2022 Interest expense $ 95 $ 46 Interest income and investment income, net $ 41 $ 15 Interest expense increased, primarily reflecting a higher debt balance, due in part to the financing of our acquisition of the TOM FORD brand, including the issuance of commercial paper primarily in the second half of fiscal 2023, and the issuance of Senior Notes in May 2023. Also contributing to the increase in interest expense was higher interest rates compared to the prior-year period. Interest income and investment income, net increased, primarily reflecting higher interest rates compared to the prior-year period. PROVISION FOR INCOME TAXES The provision for income taxes represents U.S. federal, foreign, state and local income taxes. The effective rate differs from the federal statutory rate primarily due to the effect of state and local income taxes, the tax impact of share-based compensation, the taxation of foreign income and income tax reserve adjustments, which represent changes in our net liability for unrecognized tax benefits including tax settlements and lapses of the applicable statutes of limitations. Our effective tax rate will change from quarter-to-quarter based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the tax impact of share-based compensation, the interaction of various global tax strategies and the impact from certain acquisitions. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of change. Three Months Ended September 30 2023 2022 Effective rate for income taxes 21.7 % 22.6 % Basis-point change from the prior-year period (90) 43 Table of Contents THE ESTÉE LAUDER COMPANIES INC. For the three months ended September 30, 2023, 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 our foreign operations, due to our 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. NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. Three Months Ended September 30 ($ in millions, except per share data) 2023 2022 As Reported: Net earnings attributable to The Estée Lauder Companies Inc. $ 31 $ 489 $ Change from prior-year period (458) % Change from prior-year period (94) % Diluted net earnings per common share $ 0.09 $ 1.35 % Change from prior-year period (94) % Non-GAAP Financial Measure (1) : % Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities and the change in fair value of acquisition-related stock options (92) % (1) See “ Reconciliations of Non-GAAP Financial Measures” below for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period, or do not reflect the Company’s underlying ongoing business, provides transparency for such items and helps investors and others compare and analyze our operating performance from period to period. In the future, we expect to incur charges or adjustments similar in nature to those presented below; however, the impact to the Company’s results in a given period may be highly variable and difficult to predict. Our non-GAAP financial measures may not be comparable to similarly titled measures used by, or determined in a manner consistent with, other companies. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. The following tables present Net sales, Operating income and Diluted net earnings per common share adjusted to exclude the impact of charges associated with restructuring and other activities; the change in fair value of acquisition-related stock options; and the effects of foreign currency translation. 44 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following table provides reconciliations between these non-GAAP financial measures and the most directly comparable U.S. GAAP measures. ($ in millions, except per share data) Three Months Ended September 30 Variance % Change % Change in constant currency 2023 2022 Net sales, as reported $ 3,518 $ 3,930 $ (412) (10) % (10) % Returns associated with restructuring and other activities — 5 (5) Net sales, as adjusted $ 3,518 $ 3,935 $ (417) (11) % (10) % Operating income, as reported $ 98 $ 661 $ (563) (85) % (84) % Charges associated with restructuring and other activities 2 6 (4) Change in fair value of acquisition-related stock options 8 1 7 Operating income, as adjusted $ 108 $ 668 $ (560) (84) % (83) % Diluted net earnings per common share, as reported $ .09 $ 1.35 $ (1.26) (94) % (92) % Charges associated with restructuring and other activities — .02 (.02) Change in fair value of acquisition-related stock options (less portion attributable to redeemable noncontrolling interest) .02 — .02 Diluted net earnings per common share, as adjusted $ .11 $ 1.37 $ (1.26) (92) % (91) % As diluted net earnings per common share, as adjusted, is used as a measure of the Company’s performance, we consider the impact of current and deferred income taxes when calculating the per-share impact of each of the reconciling items. 45 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following table reconciles the change in net sales by product category and geographic region, as reported, to the change in net sales excluding the effects of foreign currency translation: As Reported Impact of foreign currency translation Variance, in constant currency % Change, as reported % Change, in constant currency Three Months Ended September 30 ($ in millions) 2023 2022 Variance By Product Category: Skin Care $ 1,638 $ 2,104 $ (466) $ 17 $ (449) (22) % (21) % Makeup 1,063 1,052 11 (3) 8 1 1 Fragrance 637 607 30 (2) 28 5 5 Hair Care 148 158 (10) (1) (11) (6) (7) Other 32 14 18 — 18 100+ 100+ 3,518 3,935 (417) 11 (406) (11) (10) Returns associated with restructuring and other activities — (5) 5 — 5 Total $ 3,518 $ 3,930 $ (412) $ 11 $ (401) (10) % (10) % By Region: The Americas $ 1,208 $ 1,123 $ 85 $ 2 $ 87 8 % 8 % Europe, the Middle East & Africa 1,252 1,682 (430) (29) (459) (26) (27) Asia/Pacific 1,058 1,130 (72) 38 (34) (6) (3) 3,518 3,935 (417) 11 (406) (11) (10) Returns associated with restructuring and other activities — (5) 5 — 5 Total $ 3,518 $ 3,930 $ (412) $ 11 $ (401) (10) % (10) % 46 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following table reconciles the change in operating results by product category and geographic region, as reported, to the change in operating income excluding the change in fair value of acquisition-related stock options: As Reported Add: Change in fair value of acquisition-related stock options Variance, as adjusted % Change, as reported % Change, as adjusted Three Months Ended September 30 ($ in millions) 2023 2022 Variance By Product Category: Skin Care $ 35 $ 530 $ (495) $ 7 $ (488) (93) % (92) % Makeup (39) 16 (55) — (55) (100+) (100+) Fragrance 108 133 (25) — (25) (19) (19) Hair Care (22) (12) (10) — (10) (83) (83) Other 18 — 18 — 18 100 100 100 667 (567) $ 7 $ (560) (85) % (84) % Charges associated with restructuring and other activities (2) (6) 4 Total $ 98 $ 661 $ (563) By Region: The Americas $ (182) $ 125 $ (307) $ 7 $ (300) (100+)% (100+)% Europe, the Middle East & Africa 144 334 (190) — (190) (57) (57) Asia/Pacific 138 208 (70) — (70) (34) (34) 100 667 (567) $ 7 $ (560) (85) % (84) % Charges associated with restructuring and other activities (2) (6) 4 Total $ 98 $ 661 $ (563) FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Overview Our principal sources of funds historically have been cash flows from operations, borrowings pursuant to our commercial paper program, borrowings from the issuance of long-term debt and committed and uncommitted credit lines provided by banks and other lenders in the United States and abroad. At September 30, 2023, we had cash and cash equivalents of $3,090 million compared with $4,029 million at June 30, 2023. Our cash and cash equivalents are maintained at a number of financial institutions. To mitigate the risk of uninsured balances, we select financial institutions based on their credit ratings and financial strength, and we perform ongoing evaluations of these institutions to limit our concentration risk exposure. Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support seasonal working capital needs, currently planned business operations, information technology enhancements, capital expenditures, acquisitions, dividends, stock repurchases, restructuring initiatives, commitments and other contractual obligations on both a near-term and long-term basis. 47 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The Tax Cuts and Jobs Act (“TCJA”) resulted in the Transition Tax on unrepatriated earnings of our foreign subsidiaries and changed the tax law in ways that present opportunities to repatriate cash without additional U.S. federal income tax. During the fiscal 2023 fourth quarter, we changed our assertion regarding our ability and intent to indefinitely reinvest undistributed earnings from certain foreign subsidiaries. We continue to analyze the indefinite reinvestment assertion on our remaining applicable foreign earnings. We do not believe that continuing to reinvest these remaining applicable foreign earnings impairs our ability to meet our domestic debt or working capital obligations. If these reinvested earnings were repatriated into the United States as dividends, we would be subject to state income taxes and applicable foreign taxes in certain jurisdictions. Inflation impacted our operating results in the fiscal 2024 first quarter and we expect it to continue. Generally, we have plans to introduce new products at higher prices, increase prices and implement other operating efficiencies which we expect to offset some of these cost increases. Credit Ratings Changes in our credit ratings will likely result in changes in our borrowing costs. Our credit ratings also impact the cost of our revolving credit facility. Downgrades in our credit ratings may reduce our ability to issue commercial paper and/or long-term debt and would likely increase the relative costs of borrowing. A credit rating is not a recommendation to buy, sell, or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization, and should be evaluated independently of any other rating. As of October 25, 2023, our long-term debt is rated A+ with a negative outlook by Standard & Poor’s and A1 with a negative outlook by Moody’s. 48 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Debt At September 30, 2023, our outstanding borrowings were as follows: ($ in millions) Long-term Debt Current Debt Total Debt 5.150% Senior Notes, due May 15, 2053 ("2053 Senior Notes") (1), (15) $ 590 $ — $ 590 3.125% Senior Notes, due December 1, 2049 (“2049 Senior Notes”) (2), (15) 636 — 636 4.150% Senior Notes, due March 15, 2047 (“2047 Senior Notes”) (3), (15) 494 — 494 4.375% Senior Notes, due June 15, 2045 (“2045 Senior Notes”) (4), (15) 454 — 454 3.700% Senior Notes, due August 15, 2042 (“2042 Senior Notes”) (5), (15) 247 — 247 6.000% Senior Notes, due May 15, 2037 (“2037 Senior Notes”) (6), (15) 295 — 295 5.75% Senior Notes, due October 15, 2033 (“October 2033 Senior Notes”) (7), (15) 198 — 198 4.650% Senior Notes, due May 15, 2033 ("May 2033 Senior Notes") (8), (15) 695 — 695 1.950% Senior Notes, due March 15, 2031 ("2031 Senior Notes") (9), (15) 541 — 541 2.600% Senior Notes, due April 15, 2030 ("2030 Senior Notes") (10), (15) 570 — 570 2.375% Senior Notes, due December 1, 2029 (“2029 Senior Notes”) (11), (15) 643 — 643 4.375% Senior Notes, due May 15, 2028 ("2028 Senior Notes") (12), (15) 696 — 696 3.150% Senior Notes, due March 15, 2027 (“2027 Senior Notes”) (13), (15) 499 — 499 2.000% Senior Notes, due December 1, 2024 (“2024 Senior Notes”) (14), (15) 499 — 499 Commercial paper (16) — 997 997 Other long-term borrowings 31 — 31 Other current borrowings — 8 8 $ 7,088 $ 1,005 $ 8,093 (1) Consists of $600 million principal, unamortized debt discount of $3 million and debt issuance costs of $7 million. (2) Consists of $650 million principal, unamortized debt discount of $7 million and debt issuance costs of $7 million. (3) Consists of $500 million principal, unamortized debt discount of $1 million and debt issuance costs of $5 million. (4) Consists of $450 million principal, net unamortized debt premium of $8 million and debt issuance costs of $4 million. (5) Consists of $250 million principal, unamortized debt discount of $1 million and debt issuance costs of $2 million. (6) Consists of $300 million principal, unamortized debt discount of $2 million and debt issuance costs of $3 million. (7) Consists of $200 million principal, unamortized debt discount of $1 million and debt issuance costs of $1 million. (8) Consists of $700 million principal, unamortized debt discount of $1 million and debt issuance costs of $4 million. (9) Consists of $600 million, principal, unamortized debt discount of $3 million, debt issuance costs of $3 million and a $53 million loss to reflect the fair value of interest rate swaps. (10) Consists of $700 million principal, unamortized debt discount of $1 million, debt issuance costs of $3 million and a $126 million loss to reflect the fair value of interest rate swaps. (11) Consists of $650 million principal, unamortized debt discount of $4 million and debt issuance costs of $3 million. (12) Consists of $700 million principal, unamortized debt discount of $1 million and debt issuance costs of $3 million. (13) Consists of $500 million principal and debt issuance costs of $1 million. (14) Consists of $500 million principal and unamortized debt discount of $1 million. (15) The Senior Notes contain certain customary covenants, including limitations on indebtedness secured by liens. (16) Consists of $1,000 million principal and unamortized debt discount of $3 million. Total debt as a percent of total capitalization was 60% and 59% at September 30, 2023 and June 30, 2023, respectively. 49 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Cash Flows Three Months Ended September 30 (In millions) 2023 2022 Net cash flows used for operating activities $ (408) $ (650) Net cash flows used for investing activities $ (295) $ (14) Net cash flows used for financing activities $ (219) $ (304) The change in net cash flows used for operating activities was primarily driven by a favorable change in working capital, reflecting a favorable change in inventory and promotional merchandise, other accrued and noncurrent liabilities which includes the settlement of net investment hedges in the prior-year period, accounts payable due to timing of payments, and accounts receivable, partially offset by lower earnings before tax, excluding non-cash items. The change in net cash flows used for investing activities reflected an increase in capital expenditures, primarily driven by the investments related to our new manufacturing facility in Japan and an unfavorable impact from the settlement of net investment hedges in the prior-year period, which is offset by the favorable change in other accrued liabilities as discussed above. The change in net cash flows used for financing activities primarily reflected a favorable impact in repayments of debt due to the repayment of the outstanding principal balance of our $250 million, 2.35% senior notes that matured during the fiscal 2023 first quarter and lower treasury stock repurchases compared to the prior-year period, partially offset by a decrease in proceeds from the issuance of short-term commercial paper compared to the prior-year period. Dividends For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the three months ended September 30, 2023, see Notes to Consolidated Financial Statements, Note 11 – Equity and Redeemable Noncontrolling Interest . Pension and Post-retirement Plan Funding There have been no significant changes to our pension and post-retirement funding as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023. Commitments, Contractual Obligations and Contingencies There have been no other significant changes to our commitments and contractual obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023. For a discussion of contingencies, see Notes to Consolidated Financial Statements, Note 8 – Commitments and Contingencies . Derivative Financial Instruments and Hedging Activities For a discussion of our derivative financial instruments and hedging activities, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments . Foreign Exchange Risk Management For a discussion of foreign exchange risk management, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Cash Flow Hedges, Net Investment Hedges) . Credit Risk For a discussion of credit risk, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Credit Risk) . Market Risk We address certain financial exposures through a controlled program of market risk management that includes the use of foreign currency forward contracts to reduce the effects of fluctuating foreign currency exchange rates and to mitigate the change in fair value of specific assets and liabilities on the balance sheet. To perform a sensitivity analysis of our foreign currency forward contracts, we assess the change in fair values from the impact of hypothetical changes in foreign currency exchange rates. A hypothetical 10% weakening of the U.S. dollar against the foreign exchange rates for the currencies in our portfolio would have resulted in a net decrease in the fair value of our portfolio of approximately $248 million and $265 million as of September 30, 2023 and June 30, 2023, respectively. This potential change does not consider our underlying foreign currency exposures. 50 Table of Contents THE ESTÉE LAUDER COMPANIES INC. We also enter into cross-currency swap contracts to hedge the impact of foreign currency changes on certain intercompany foreign currency denominated debt. A hypothetical 10% weakening of the U.S. dollar against the foreign exchange rates for the currencies in our cross-currency swap contracts would have resulted in a net decrease in the fair value of our cross-currency swap contracts of approximately $49 million as of September 30, 2023 and June 30, 2023, respectively. In addition, we enter into interest rate derivatives to manage the effects of interest rate movements on our aggregate liability portfolio, including future debt issuances. Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would decrease by approximately $52 million and $55 million as of September 30, 2023 and June 30, 2023, respectively. Our sensitivity analysis represents an estimate of reasonably possible net losses that would be recognized on our portfolio of derivative financial instruments assuming hypothetical movements in future market rates and is not necessarily indicative of actual results, which may or may not occur. It does not represent the maximum possible loss or any expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in our portfolio of derivative financial instruments during the year. We believe, however, that any such loss incurred would be offset by the effects of market rate movements on the respective underlying transactions for which the derivative financial instrument was intended. OFF-BALANCE SHEET ARRANGEMENTS We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations. CRITICAL ACCOUNTING POLICIES As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those financial statements. These estimates and assumptions can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies relate to goodwill and other indefinite-lived intangible assets - impairment assessment, income taxes and asset acquisition. Since June 30, 2023, there have been no significant changes to the assumptions and estimates related to our critical accounting policies. RECENTLY ISSUED ACCOUNTING STANDARDS For a discussion regarding the impact of accounting standards that were recently issued but not yet effective, on the Company’s consolidated financial statements, see Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies . CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION We and our representatives from time to time make written or oral forward-looking statements, including in this and other filings with the Securities and Exchange Commission, in our press releases and in our reports to stockholders, which may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may address our expectations regarding sales, earnings or other future financial performance and liquidity, other performance measures, product introductions, entry into new geographic regions, information technology initiatives, new methods of sale, our long-term strategy, restructuring and other charges and resulting cost savings, and future operations or operating results. These statements may contain words like “expect,” “will,” “will likely result,” “would,” “believe,” “estimate,” “planned,” “plans,” “intends,” “may,” “should,” “could,” “anticipate,” “estimate,” “project,” “projected,” “forecast,” and “forecasted” or similar expressions. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, actual results may differ materially from our expectations. Factors that could cause actual results to differ from expectations include, without limitation: (1) increased competitive activity from companies in the skin care, makeup, fragrance and hair care businesses; 51 Table of Contents THE ESTÉE LAUDER COMPANIES INC. (2) our ability to develop, produce and market new products on which future operating results may depend and to successfully address challenges in our business; (3) consolidations, restructurings, bankruptcies and reorganizations in the retail industry causing a decrease in the number of stores that sell our products, an increase in the ownership concentration within the retail industry, ownership of retailers by our competitors or ownership of competitors by our customers that are retailers and our inability to collect receivables; (4) destocking and tighter working capital management by retailers; (5) the success, or changes in timing or scope, of new product launches and the success, or changes in timing or scope, of advertising, sampling and merchandising programs; (6) shifts in the preferences of consumers as to where and how they shop; (7) social, political and economic risks to our foreign or domestic manufacturing, distribution and retail operations, including changes in foreign investment and trade policies and regulations of the host countries and of the United States; (8) changes in the laws, regulations and policies (including the interpretations and enforcement thereof) that affect, or will affect, our business, including those relating to our products or distribution networks, changes in accounting standards, tax laws and regulations, environmental or climate change laws, regulations or accords, trade rules and customs regulations, and the outcome and expense of legal or regulatory proceedings, and any action we may take as a result; (9) foreign currency fluctuations affecting our results of operations and the value of our foreign assets, the relative prices at which we and our foreign competitors sell products in the same markets and our operating and manufacturing costs outside of the United States; (10) changes in global or local conditions, including those due to volatility in the global credit and equity markets, natural or man-made disasters, real or perceived epidemics, supply chain challenges, inflation, or increased energy costs, that could affect consumer purchasing, the willingness or ability of consumers to travel and/or purchase our products while traveling, the financial strength of our customers, suppliers or other contract counterparties, our operations, the cost and availability of capital which we may need for new equipment, facilities or acquisitions, the returns that we are able to generate on our pension assets and the resulting impact on funding obligations, the cost and availability of raw materials and the assumptions underlying our critical accounting estimates; (11) impacts attributable to the COVID-19 pandemic, including disruptions to our global business; (12) shipment delays, commodity pricing, depletion of inventory and increased production costs resulting from disruptions of operations at any of the facilities that manufacture our products or at our distribution or inventory centers, including disruptions that may be caused by the implementation of information technology initiatives, or by restructurings; (13) real estate rates and availability, which may affect our ability to increase or maintain the number of retail locations at which we sell our products and the costs associated with our other facilities; (14) changes in product mix to products which are less profitable; (15) our ability to acquire, develop or implement new information technology, including operational technology and websites, on a timely basis and within our cost estimates; to maintain continuous operations of our new and existing information technology; and to secure the data and other information that may be stored in such technologies or other systems or media; (16) our ability to capitalize on opportunities for improved efficiency, such as publicly-announced strategies and restructuring and cost-savings initiatives, and to integrate acquired businesses and realize value therefrom; (17) consequences attributable to local or international conflicts around the world, as well as from any terrorist action, retaliation and the threat of further action or retaliation; 52 Table of Contents THE ESTÉE LAUDER COMPANIES INC. (18) the timing and impact of acquisitions, investments and divestitures; and (19) additional factors as described in our filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended June 30, 2023. We assume no responsibility to update forward-looking statements made herein or otherwise. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The information required by this item is set forth in Item 2 of this Quarterly Report on Form 10-Q under the caption Liquidity and Capital Resources - Market Risk and is incorporated herein by reference.