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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________
FORM 10-Q
(Mark One)

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022
or

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission file number 1-14064
The Estée Lauder Companies Inc.
(Exact name of registrant as specified in its charter)

Delaware | 11-2408943
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
767 Fifth Avenue, New York, New York | 10153
(Address of principal executive offices) | (Zip Code)

212-572-4200
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:

Title of each class | Trading Symbol(s) | Name of each exchange on which registered
Class A Common Stock, $.01 par value | EL | New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ☒ | Accelerated filer | ☐
Non-accelerated filer | ☐ | Smaller reporting company | ☐
|  | Emerging growth company | ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At October 26, 2022, 231,270,298 shares of the registrant’s Class A Common Stock, $.01 par value, and 125,542,029 shares of the registrant’s Class B Common Stock, $.01 par value, were outstanding.

Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
INDEX

| Page
Part I. Financial Information |
Item 1. Financial Statements (Unaudited) |
Consolidated Statements of Earnings — Three Months Ended September 30, 2022 and 2021 | 2
Consolidated Statements of Comprehensive Incom e — Three Months Ended September 30, 2022 and 2021 | 3
Consolidated Balance Sheets — September 30, 2022 and June 30, 2022 (Audited) | 4
Consolidated Statements of Cash Flows — Three Months Ended September 30, 2022 and 2021 | 5
Notes to Consolidated Financial Statements | 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 54
Item 4. Controls and Procedures | 54
Part II. Other Information |
Item 1. Legal Proceedings | 54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 55
Item 6. Exhibits | 55
Signatures | 56

Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

|  |  |  |  |  | Three Months Ended September 30
(In millions, except per share data) |  |  |  |  |  |  |  |  |  | 2022 |  | 2021
Net sales |  |  |  |  |  |  |  |  |  | $ | 3,930 |  |  | $ | 4,392 |
Cost of sales |  |  |  |  |  |  |  |  |  | 1,023 |  |  | 1,057 |
Gross profit |  |  |  |  |  |  |  |  |  | 2,907 |  |  | 3,335 |
Operating expenses |  |  |  |  |  |  |  |  |  |  |  |
Selling, general and administrative |  |  |  |  |  |  |  |  |  | 2,244 |  |  | 2,394 |
Restructuring and other charges |  |  |  |  |  |  |  |  |  | 2 |  |  | 6 |
Total operating expenses |  |  |  |  |  |  |  |  |  | 2,246 |  |  | 2,400 |
Operating income |  |  |  |  |  |  |  |  |  | 661 |  |  | 935 |
Interest expense |  |  |  |  |  |  |  |  |  | 46 |  |  | 42 |
Interest income and investment income, net |  |  |  |  |  |  |  |  |  | 15 |  |  | 4 |
Other components of net periodic benefit cost |  |  |  |  |  |  |  |  |  | (3) |  |  | 1 |
Other income |  |  |  |  |  |  |  |  |  | — |  |  | 1 |
Earnings before income taxes |  |  |  |  |  |  |  |  |  | 633 |  |  | 897 |
Provision for income taxes |  |  |  |  |  |  |  |  |  | 143 |  |  | 202 |
Net earnings |  |  |  |  |  |  |  |  |  | 490 |  |  | 695 |
Net earnings attributable to noncontrolling interests |  |  |  |  |  |  |  |  |  | — |  |  | (1) |
Net earnings attributable to redeemable noncontrolling interest |  |  |  |  |  |  |  |  |  | (1) |  |  | (2) |
Net earnings attributable to The Estée Lauder Companies Inc. |  |  |  |  |  |  |  |  |  | $ | 489 |  |  | $ | 692 |
Net earnings attributable to The Estée Lauder Companies Inc. per common share |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  |  |  |  |  |  |  |  | $ | 1.37 |  |  | $ | 1.91 |
Diluted |  |  |  |  |  |  |  |  |  | $ | 1.35 |  |  | $ | 1.88 |
Weighted-average common shares outstanding |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  |  |  |  |  |  |  |  | 357.9 |  |  | 362.2 |
Diluted |  |  |  |  |  |  |  |  |  | 361.4 |  |  | 367.9 |

See notes to consolidated financial statements.
2

Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

|  |  |  |  | Three Months Ended September 30 |  |
(In millions) |  |  |  |  |  |  | 2022 |  | 2021 |  |  |  |
Net earnings |  |  |  |  |  |  | $ | 490 |  |  | $ | 695 |  |  |  |  |
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |  |
Net cash flow hedge gain |  |  |  |  |  |  | 49 |  |  | 21 |  |  |  |  |
Retirement plan and other retiree benefit adjustments |  |  |  |  |  |  | — |  |  | 4 |  |  |  |  |
Translation adjustments |  |  |  |  |  |  | (381) |  |  | (186) |  |  |  |  |
Benefit (provision) for income taxes on components of other comprehensive income |  |  |  |  |  |  | (19) |  |  | (12) |  |  |  |  |
Total other comprehensive income (loss), net of tax |  |  |  |  |  |  | (351) |  |  | (173) |  |  |  |  |
Comprehensive income |  |  |  |  |  |  | 139 |  |  | 522 |  |  |  |  |
Comprehensive income attributable to noncontrolling interests: |  |  |  |  |  |  |  |  |  |  |  |  |
Net earnings |  |  |  |  |  |  | — |  |  | (1) |  |  |  |  |
Translation adjustments |  |  |  |  |  |  | — |  |  | 1 |  |  |  |  |
Total comprehensive income attributable to noncontrolling interests |  |  |  |  |  |  | — |  |  | — |  |  |  |  |
Comprehensive income attributable to redeemable noncontrolling interest: |  |  |  |  |  |  |  |  |  |  |  |  |
Net earnings |  |  |  |  |  |  | (1) |  |  | (2) |  |  |  |  |
Translation adjustments |  |  |  |  |  |  | 35 |  |  | 17 |  |  |  |  |
Total comprehensive income attributable to redeemable noncontrolling interest |  |  |  |  |  |  | 34 |  |  | 15 |  |  |  |  |
Comprehensive income attributable to The Estée Lauder Companies Inc. |  |  |  |  |  |  | $ | 173 |  |  | $ | 537 |  |  |  |  |

See notes to consolidated financial statements.
3

Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS

(In millions, except share data) |  | September 30 2022 |  | June 30 2022
|  | (Unaudited) |  |
ASSETS |  |  |  |
Current assets |  |  |  |
Cash and cash equivalents |  | $ | 2,938 |  |  | $ | 3,957 |
Accounts receivable, net |  | 2,156 |  |  | 1,629 |
Inventory and promotional merchandise |  | 3,018 |  |  | 2,920 |
Prepaid expenses and other current assets |  | 754 |  |  | 792 |
Total current assets |  | 8,866 |  |  | 9,298 |
Property, plant and equipment, net |  | 2,654 |  |  | 2,650 |
Other assets |  |  |  |
Operating lease right-of-use assets |  | 1,858 |  |  | 1,949 |
Goodwill |  | 2,415 |  |  | 2,521 |
Other intangible assets, net |  | 3,190 |  |  | 3,428 |
Other assets |  | 1,006 |  |  | 1,064 |
Total other assets |  | 8,469 |  |  | 8,962 |
Total assets |  | $ | 19,989 |  |  | $ | 20,910 |
LIABILITIES AND EQUITY |  |  |  |
Current liabilities |  |  |  |
Current debt |  | $ | 266 |  |  | $ | 268 |
Accounts payable |  | 1,392 |  |  | 1,822 |
Operating lease liabilities |  | 340 |  |  | 365 |
Other accrued liabilities |  | 3,273 |  |  | 3,360 |
Total current liabilities |  | 5,271 |  |  | 5,815 |
Noncurrent liabilities |  |  |  |
Long-term debt |  | 5,107 |  |  | 5,144 |
Long-term operating lease liabilities |  | 1,781 |  |  | 1,868 |
Other noncurrent liabilities |  | 1,505 |  |  | 1,651 |
Total noncurrent liabilities |  | 8,393 |  |  | 8,663 |
Contingencies |  |  |  |
Redeemable Noncontrolling Interest |  | 808 |  |  | 842 |
Equity |  |  |  |
Common stock, $.01 par value; Class A shares authorized: 1,300,000,000 at September 30, 2022 and June 30, 2022; shares issued: 468,356,871 at September 30, 2022 and 467,949,351 at June 30, 2022; Class B shares authorized: 304,000,000 at September 30, 2022 and June 30, 2022; shares issued and outstanding: 125,542,029 at September 30, 2022 and 125,542,029 at June 30, 2022 |  | 6 |  |  | 6 |
Paid-in capital |  | 5,875 |  |  | 5,796 |
Retained earnings |  | 14,185 |  |  | 13,912 |
Accumulated other comprehensive loss |  | (1,078) |  |  | (762) |
|  | 18,988 |  |  | 18,952 |
Less: Treasury stock, at cost; 236,867,993 Class A shares at September 30, 2022 and 236,435,830 Class A shares at June 30, 2022 |  | (13,471) |  |  | (13,362) |
Total equity |  | 5,517 |  |  | 5,590 |
Total liabilities, redeemable noncontrolling interest and equity |  | $ | 19,989 |  |  | $ | 20,910 |

See notes to consolidated financial statements.
4

Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|  | Three Months Ended September 30
(In millions) |  | 2022 |  | 2021
Cash flows from operating activities |  |  |  |
Net earnings |  | $ | 490 |  |  | $ | 695 |
Adjustments to reconcile net earnings to net cash flows from operating activities: |  |  |  |
Depreciation and amortization |  | 178 |  |  | 183 |
Deferred income taxes |  | (53) |  |  | (57) |
Non-cash stock-based compensation |  | 53 |  |  | 79 |
Net loss on disposal of property, plant and equipment |  | 2 |  |  | 1 |
Non-cash restructuring and other charges |  | 9 |  |  | 2 |
Pension and post-retirement benefit expense |  | 13 |  |  | 21 |
Pension and post-retirement benefit contributions |  | (5) |  |  | (11) |
Gain on previously held equity method investment |  | — |  |  | (1) |
Other non-cash items |  | (3) |  |  | 3 |
Changes in operating assets and liabilities: |  |  |  |
Increase in accounts receivable, net |  | (579) |  |  | (583) |
Increase in inventory and promotional merchandise |  | (229) |  |  | (178) |
Decrease (increase) in other assets, net |  | 3 |  |  | (19) |
Decrease in accounts payable |  | (375) |  |  | (191) |
Decrease in other accrued and noncurrent liabilities |  | (135) |  |  | (15) |
Decrease in operating lease assets and liabilities, net |  | (19) |  |  | (10) |
Net cash flows used for operating activities |  | (650) |  |  | (81) |
Cash flows from investing activities |  |  |  |
Capital expenditures |  | (152) |  |  | (205) |
Purchases of investments |  | — |  |  | (6) |
Settlement of net investment hedges |  | 138 |  |  | 58 |
Net cash flows used for investing activities |  | (14) |  |  | (153) |
Cash flows from financing activities |  |  |  |
Proceeds from current debt, net |  | 249 |  |  | 3 |
Repayments and redemptions of long-term debt |  | (254) |  |  | (4) |
Net proceeds from stock-based compensation transactions |  | 26 |  |  | 36 |
Payments to acquire treasury stock |  | (110) |  |  | (557) |
Dividends paid to stockholders |  | (215) |  |  | (192) |
Net cash flows used for financing activities |  | (304) |  |  | (714) |
Effect of exchange rate changes on Cash and cash equivalents |  | (51) |  |  | (15) |
Net decrease in Cash and cash equivalents |  | (1,019) |  |  | (963) |
Cash and cash equivalents at beginning of period |  | 3,957 |  |  | 4,958 |
Cash and cash equivalents at end of period |  | $ | 2,938 |  |  | $ | 3,995 |

See notes to consolidated financial statements.
5

Table of Contents
THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of The Estée Lauder Companies Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated.
The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim consolidated financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
Certain prior year amounts in the notes to the consolidated financial statements have been reclassified to conform to current year presentation.
Management Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses reported in those financial statements. Descriptions of the Company’s significant accounting policies are discussed in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022. Management evaluates the related estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment, including those related to the impacts of the COVID-19 pandemic, will be reflected in the consolidated financial statements in future periods.
Currency Translation and Transactions
All assets and liabilities of foreign subsidiaries and affiliates are translated at period-end rates of exchange, while revenue and expenses are translated at monthly average rates of exchange for the period. Unrealized translation losses, net of tax, reported as translation adjustments through other comprehensive income (loss) (“OCI”) attributable to The Estée Lauder Companies Inc. were $352 million and $175 million, net of tax, during the three months ended September 30, 2022 and 2021, respectively. For the Company’s subsidiaries operating in highly inflationary economies, the U.S. dollar is the functional currency. Remeasurement adjustments in financial statements in a highly inflationary economy and other transactional gains and losses are reflected in earnings. These subsidiaries are not material to the Company’s consolidated financial statements or liquidity.
The Company enters into foreign currency forward contracts and may enter into option contracts to hedge foreign currency transactions for periods consistent with its identified exposures. The Company also enters into foreign currency forward contracts to hedge a portion of its net investment in certain foreign operations, which are designated as net investment hedges. See Note 4 – Derivative Financial Instruments for further discussion. The Company categorizes these instruments as entered into for purposes other than trading.
The accompanying consolidated statements of earnings include net exchange gains (losses) on foreign currency transactions of $14 million and $(12) million during the three months ended September 30, 2022 and 2021, respectively.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration of Credit Risk
The Company is a worldwide manufacturer, marketer and seller of skin care, makeup, fragrance and hair care products. The Company’s sales subject to credit risk are made primarily to retailers in its travel retail business, department stores, specialty multi-brand retailers and perfumeries. The Company grants credit to qualified customers. As a result of the COVID-19 pandemic, the Company has enhanced its assessment of its customers' abilities to pay with a greater focus on factors affecting their liquidity and less on historical payment performance. While the Company does not believe it is exposed significantly to any undue concentration of credit risk at this time, it continues to monitor the extent of the impact of the COVID-19 pandemic on its customers' abilities, individually and collectively, to make timely payments.
The Company’s largest customer during the quarter sells products primarily in China travel retail and accounted for $413 million or 11%, and $456 million, or 10%, of the Company's consolidated net sales for the three months ended September 30, 2022 and 2021, respectively. This customer accounted for $355 million, or 16%, and $399 million, or 24%, of the Company's accounts receivable at September 30, 2022 and June 30, 2022, respectively.
Inventory and Promotional Merchandise
Inventory and promotional merchandise consists of the following:

(In millions) |  | September 30, 2022 |  | June 30, 2022
Raw materials |  | $ | 853 |  |  | $ | 791 |
Work in process |  | 343 |  |  | 366 |
Finished goods |  | 1,499 |  |  | 1,449 |
Promotional merchandise |  | 323 |  |  | 314 |
|  | $ | 3,018 |  |  | $ | 2,920 |

Property, Plant and Equipment
Property, plant and equipment consists of the following:

(In millions) |  | September 30, 2022 |  | June 30, 2022
Assets (Useful Life) |  |  |  |
Land |  | $ | 51 |  |  | $ | 53 |
Buildings and improvements (10 to 40 years) |  | 478 |  |  | 491 |
Machinery and equipment (3 to 10 years) |  | 975 |  |  | 994 |
Computer hardware and software (4 to 10 years) |  | 1,545 |  |  | 1,468 |
Furniture and fixtures (5 to 10 years) |  | 127 |  |  | 129 |
Leasehold improvements |  | 2,174 |  |  | 2,246 |
Construction in progress |  | 806 |  |  | 759 |
|  | 6,156 |  |  | 6,140 |
Less accumulated depreciation and amortization |  | (3,502) |  |  | (3,490) |
|  | $ | 2,654 |  |  | $ | 2,650 |

Depreciation and amortization of property, plant and equipment was $136 million and $130 million during the three months ended September 30, 2022 and 2021, respectively. Depreciation and amortization related to the Company’s manufacturing process is included in Cost of sales, and all other depreciation and amortization is included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The effective rate for income taxes was 22.6% and 22.5% for the three months ended September 30, 2022 and 2021, respectively. The increase in the effective tax rate of 10 basis points was primarily attributable to a higher effective tax rate on the Company's foreign operations and a decrease in excess tax benefits associated with stock-based compensation arrangements, partially offset by a reduction in income tax reserve adjustments.
On August 16, 2022, the U.S. federal government enacted the Inflation Reduction Act, with tax provisions primarily focused on implementing a 1% excise tax on share repurchases and a 15% corporate alternative minimum tax based on global adjusted financial statement income. The excise tax is effective beginning with the Company’s third quarter of fiscal 2023, while the corporate alternative minimum tax will be effective beginning with the Company’s first quarter of fiscal 2024. The Company is currently evaluating the effect of the new law on its consolidated financial statements.
As of September 30, 2022 and June 30, 2022, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $59 million and $61 million, respectively. The total amount of unrecognized tax benefits at September 30, 2022 that, if recognized, would affect the effective tax rate was $49 million. The total gross interest and penalties accrued related to unrecognized tax benefits during the three months ended September 30, 2022 in the accompanying consolidated statements of earnings was $1 million. The total gross accrued interest and penalties in the accompanying consolidated balance sheets at each of September 30, 2022 and June 30, 2022, was $14 million. On the basis of the information available as of September 30, 2022, the Company does not expect significant changes to the total amount of unrecognized tax benefits within the next twelve months.
During the fiscal 2023 first quarter, the Company formally concluded the compliance process with respect to its fiscal 2021 income tax return under the U.S. Internal Revenue Service (“IRS”) Compliance Assurance Program (“CAP”), which had no impact on the Company’s consolidated financial statements for the three months ended September 30, 2022.
Other Accrued and Noncurrent Liabilities
Other accrued liabilities consist of the following:

(In millions) |  | September 30, 2022 |  | June 30, 2022
Employee compensation |  | $ | 430 |  |  | $ | 693 |
Deferred revenue |  | 313 |  |  | 312 |
Payroll and other non-income taxes |  | 325 |  |  | 345 |
Accrued income taxes |  | 332 |  |  | 267 |
Sales return accrual |  | 307 |  |  | 252 |
Other |  | 1,566 |  |  | 1,491 |
|  | $ | 3,273 |  |  | $ | 3,360 |

At September 30, 2022 and June 30, 2022, total Other noncurrent liabilities of $1,505 million and $1,651 million included $633 million and $692 million of deferred tax liabilities, respectively.
Recently Issued Accounting Standards
FASB ASU No. 2022-04 – Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations
In September 2022, the FASB issued authoritative guidance which is intended to enhance the transparency surrounding the use of supplier finance programs. The guidance requires companies that use supplier finance programs to make annual disclosures about the program’s key terms, the balance sheet presentation of related amounts, the confirmed amount outstanding at the end of the period and associated rollforward information. Only the amount outstanding at the end of the period must be disclosed in interim periods. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations.
Effective for the Company – The guidance becomes effective for the Company’s first quarter fiscal 2024 and is applied on a retrospective basis, except for the requirement to disclose rollforward information which is effective prospectively for the Company’s first quarter fiscal 2025. Early adoption is permitted. Annual disclosures need to be provided in interim periods within the initial year of adoption.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impact on consolidated financial statements – The Company has a supplier financing arrangement and is currently evaluating the impact that this guidance will have on its financial statement disclosures.
Reference Rate Reform (ASC Topic 848 “ASC 848”)
In March 2020, t he FAS B issued authoritative guidance to provide optional relief for companies preparing for the discontinuation of interest rates such as the London Interbank Offered Rate (“LIBOR”) and applies to lease and other contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that reference LIBOR or another rate that is expected to be discontinued as a result of reference rate reform.
In January 2021, the FASB issued authoritative guidance that makes amendments to the new rules on accounting for reference rate reform. The amendments clarify that for all derivative instruments affected by the changes to interest rates used for discounting, margining or contract price alignment, regardless of whether they reference LIBOR or another rate expected to be discontinued as a result of reference rate reform, an entity may apply certain practical expedients in ASC 848.
Effective for the Company – This guidance can be applied for a limited time through December 31, 2022. The guidance will no longer be available to apply after December 31, 2022.
Impact on consolidated financial statements – The Company currently has an implementation team in place that is performing a comprehensive evaluation and assessing the impact of applying this guidance, which includes assessing the impact to business processes and internal controls over financial reporting and the related disclosure requirements. For treasury related arrangements, the Company references LIBOR in its interest rate swap agreements and LIBOR is also used for purposes of discounting certain foreign currency and interest rate forward contracts. The Company is currently evaluating the potential impact of modifying treasury related arrangements and applying the relevant ASC 848 optional practical expedients, as needed. For existing lease, debt arrangements and other contracts, the Company will not adopt any ASC 848 optional practical expedients as it relates to these arrangements. The Company will continue to monitor new contracts that could potentially be eligible for contract modification relief through December 31, 2022.
No other recently issued accounting pronouncements are expected to have a material impact on the Company’s consolidated financial statements.
NOTE 2 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The following table presents goodwill by product category and the related change in the carrying amount:

(In millions) |  | Skin Care |  | Makeup |  | Fragrance |  | Hair Care |  | Total
Balance as of June 30, 2022 |  |  |  |  |  |  |  |  |  |
Goodwill |  | $ | 1,702 |  |  | $ | 1,116 |  |  | $ | 249 |  |  | $ | 353 |  |  | $ | 3,420 |
Accumulated impairments |  | (138) |  |  | (732) |  |  | (29) |  |  | — |  |  | (899) |
|  | 1,564 |  |  | 384 |  |  | 220 |  |  | 353 |  |  | 2,521 |
Translation and other adjustments, goodwill |  | (101) |  |  | — |  |  | (5) |  |  | (1) |  |  | (107) |
Translation and other adjustments, accumulated impairments |  | 1 |  |  | — |  |  | — |  |  | — |  |  | 1 |
|  | (100) |  |  | — |  |  | (5) |  |  | (1) |  |  | (106) |
Balance as of September 30, 2022 |  |  |  |  |  |  |  |  |  |
Goodwill |  | 1,601 |  |  | 1,116 |  |  | 244 |  |  | 352 |  |  | 3,313 |
Accumulated impairments |  | (137) |  |  | (732) |  |  | (29) |  |  | — |  |  | (898) |
|  | $ | 1,464 |  |  | $ | 384 |  |  | $ | 215 |  |  | $ | 352 |  |  | $ | 2,415 |

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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Intangible Assets
Other intangible assets consist of the following:

|  | September 30, 2022 |  | June 30, 2022
(In millions) |  | Gross Carrying Value |  | Accumulated Amortization |  | Total Net Book Value |  | Gross Carrying Value |  | Accumulated Amortization |  | Total Net Book Value
Amortizable intangible assets: |  |  |  |  |  |  |  |  |  |  |  |
Customer lists and other |  | $ | 1,945 |  |  | $ | 640 |  |  | $ | 1,305 |  |  | $ | 2,061 |  |  | $ | 625 |  |  | $ | 1,436 |
License agreements |  | 3 |  |  | 3 |  |  | — |  |  | 3 |  |  | 3 |  |  | — |
|  | $ | 1,948 |  |  | $ | 643 |  |  | 1,305 |  |  | $ | 2,064 |  |  | $ | 628 |  |  | 1,436 |
Non-amortizable intangible assets: |  |  |  |  |  |  |  |  |  |  |  |
Trademarks and other |  |  |  |  |  | 1,885 |  |  |  |  |  |  | 1,992 |
Total intangible assets |  |  |  |  |  | $ | 3,190 |  |  |  |  |  |  | $ | 3,428 |

The aggregate amortization expense related to amortizable intangible assets was $36 million and $45 million for the three months ended September 30, 2022 and 2021, respectively. The estimated aggregate amortization expense for the remainder of fiscal 2023 and for each of the next four fiscal years is as follows:

|  | Fiscal
(In millions) |  | 2023 |  | 2024 |  | 2025 |  | 2026 |  | 2027
Estimated aggregate amortization expense |  | $ | 105 |  |  | $ | 140 |  |  | $ | 140 |  |  | $ | 140 |  |  | $ | 123 |

NOTE 3 – CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES
Charges associated with the Post-COVID Business Acceleration Program for the three months ended September 30, 2022 were as follows:

|  | Sales Returns (included in Net Sales) |  | Cost of Sales |  | Operating Expenses |  | Total
(In millions) |  |  |  | Restructuring Charges |  | Other Charges |
Total |  | $ | 5 |  |  | $ | (1) |  |  | $ | 2 |  |  | $ | — |  |  | $ | 6 |

The types of activities included in restructuring and other charges, and the related accounting criteria, are described below.
Charges associated with restructuring and other activities are not allocated to the Company's product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business.
Post-COVID Business Acceleration Program
On August 20, 2020, the Company announced a two-year restructuring program, Post-COVID Business Acceleration Program (the “PCBA Program”), designed to realign the Company's business to address the dramatic shifts to its distribution landscape and consumer behaviors in the wake of the COVID-19 pandemic. The PCBA Program is designed to help improve efficiency and effectiveness by rebalancing resources to growth areas of prestige beauty. It is expected to further strengthen the Company by building upon the foundational capabilities in which the Company has invested.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The PCBA Program’s main areas of focus include accelerating the shift to online with the realignment of the Company’s distribution network reflecting freestanding store and certain department store closures, with a focus on North America and Europe, the Middle East & Africa; the reduction in brick-and-mortar point of sale employees and related support staff; and the redesign of the Company’s regional branded marketing organizations, plus select opportunities in global brands and functions. This program is expected to position the Company to better execute its long-term strategy while strengthening its financial flexibility.
As of September 30, 2022, the Company estimated a net reduction over the duration of the PCBA Program in the range of 2,500 to 3,000 positions globally, including temporary and part-time employees. This reduction takes into account the elimination of some positions, retraining and redeployment of certain employees and investment in new positions in key areas. The Company also estimated the closure over the duration of the PCBA Program of approximately 10% to 15% of its freestanding stores globally, primarily in Europe, the Middle East & Africa and in North America.
As of June 30, 2022, the Company approved specific initiatives under the PCBA Program and expects to substantially complete those initiatives through fiscal 2023. Inclusive of approvals from inception through June 30, 2022, the Company estimates that the PCBA Program may result in related restructuring and other charges totaling between $500 million and $515 million, before taxes.
PCBA Program Approvals
Total PCBA Program cumulative charges (adjustments) approved by the Company through September 30, 2022 were:

|  | Sales Returns (included in Net Sales) |  | Cost of Sales |  | Operating Expenses |  | Total
(In millions) |  |  |  | Restructuring Charges |  | Other Charges |
Total Charges (Adjustments) Approved |  |  |  |  |  |  |  |  |  |
Cumulative through June 30, 2022 |  | $ | 43 |  |  | $ | 9 |  |  | $ | 424 |  |  | $ | 39 |  |  | $ | 515 |
Three months ended September 30, 2022 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Cumulative through September 30, 2022 |  | $ | 43 |  |  | $ | 9 |  |  | $ | 424 |  |  | $ | 39 |  |  | $ | 515 |

Included in the above table, cumulative PCBA Program restructuring initiatives approved by the Company through September 30, 2022 by major cost type were:

(In millions) |  | Employee- Related Costs |  | Asset- Related Costs |  | Contract Terminations |  | Other Exit Costs |  | Total
Restructuring Charges (Adjustments) Approved |  |  |  |  |  |  |  |  |  |
Cumulative through June 30, 2022 |  | $ | 215 |  |  | $ | 161 |  |  | $ | 43 |  |  | $ | 5 |  |  | $ | 424 |
Three months ended September 30, 2022 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Cumulative through September 30, 2022 |  | $ | 215 |  |  | $ | 161 |  |  | $ | 43 |  |  | $ | 5 |  |  | $ | 424 |

Specific actions taken since the PCBA Program inception include:
•Optimize Digital Organization and Other Go-To-Market Organizations – The Company approved initiatives to enhance its go-to-market capabilities and shift more resources to support online growth. These actions will result in a net reduction of the workforce, which includes position eliminations, the re-leveling of certain positions and an investment in new capabilities.
•Optimize Select Marketing, Brand and Global Functions – The Company has started to reduce its corporate and certain of its brand office footprints and is moving toward the future of work in a post-COVID environment, by restructuring where and how its employees work and collaborate. In addition, the Company has approved initiatives to reduce organizational complexity and leverage scale across various Global functions. These actions will result in asset write-offs, employee severance, lease termination fees, and consulting and other professional services for the design and implementation of the future structures and processes.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•Optimize Distribution Network – To help restore profitability to pre-COVID-19 pandemic levels in certain areas of its distribution network and, as part of a broader initiative to be completed in phases, the Company has approved initiatives to close a number of underperforming freestanding stores, counters and other retail locations, mainly in certain affiliates across all geographic regions, including the Company's travel retail network. These anticipated closures reflect changing consumer behaviors including higher demand for online and omnichannel capabilities. These activities will result in termination of contracts, a net reduction in workforce, product returns, and inventory and other asset write-offs.
•Exit of the Global Distribution of BECCA Products – In reviewing the Company's brand portfolio to improve efficiency and the sustainability of long-term investments, the decision was made to exit the global distribution of BECCA products due to its limited distribution, the ongoing decline in product demand and the challenging environment caused by the COVID-19 pandemic. These activities resulted in charges for the impairment of goodwill and other intangible assets, product returns, termination of contracts, and employee severance. The Company completed these initiatives during fiscal 2022.
•Exit of Certain Designer Fragrance Licenses – In reviewing the Company’s brand portfolio of fragrances and to focus on investing its resources on alternative opportunities for long-term growth and value creation globally, the Company announced that it would not be renewing its existing license agreements for the Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna product lines when their respective terms expire in June 2023. The Company has since negotiated early termination agreements with each of the licensors effective June 30, 2022 and continued to sell products under these licenses until such time. These actions resulted in asset write-offs, including charges for the impairment of goodwill, employee-related costs, and consulting and legal fees.
•Brand Transformation – In reviewing the Company’s brand portfolio to accelerate growth within the makeup product category and to support long-term investments, the decision was made to strategically reposition Smashbox to capitalize on changing consumer preferences and to mitigate the impact caused by the COVID-19 pandemic on the brand. These actions will result primarily in product returns and inventory write-offs.
PCBA Program Restructuring and Other Charges
Restructuring charges are comprised of the following:
Employee-Related Costs – Employee-related costs are primarily comprised of severance and other post-employment benefit costs, calculated based on salary levels, prior service and other statutory minimum benefits, if applicable.
Asset-Related Costs – Asset-related costs primarily consist of asset write-offs or accelerated depreciation related to long-lived assets in certain freestanding stores (including rights associated with commercial operating leases and operating lease right-of-use assets) that will be taken out of service prior to their existing useful life as a direct result of a restructuring initiative. These costs also include goodwill and other intangible asset impairment charges relating to the exit of the global distribution of BECCA products.
Contract Terminations – Costs related to contract terminations include continuing payments to a third party after the Company has ceased benefiting from the rights conveyed in the contract, or a payment made to terminate a contract prior to its expiration.
Other Exit Costs – Other exit costs related to restructuring activities generally include costs to relocate facilities or employees, recruiting to fill positions as a result of relocation of operations, and employee outplacement for separated employees.
Other charges associated with restructuring activities are comprised of the following:
Sales Returns and Cost of Sales – Product returns (offset by the related cost of sales) and inventory write-offs or write-downs as a direct result of an approved restructuring initiative to exit certain businesses or locations will be recorded as a component of Net sales and/or Cost of sales when estimable and reasonably assured.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Charges – The Company approved other charges related to the design and implementation of approved initiatives, which are charged to Operating expenses as incurred and primarily include the following:
•Consulting and other professional services for organizational design of the future structures and processes as well as the implementation thereof;
•Temporary labor backfill;
•Costs to establish and maintain a PMO for the duration of the PCBA Program, including internal costs for employees dedicated solely to project management activities, and other PMO-related expenses incremental to the Company’s ongoing operations (e.g., rent and utilities); and
•Recruitment and training costs for new and reskilled employees to acquire and apply the capabilities needed to perform responsibilities as a direct result of an approved restructuring initiative.
The Company records approved charges associated with restructuring and other activities once the relevant accounting criteria have been met. Total cumulative charges recorded associated with restructuring and other activities for the PCBA Program were:

|  | Sales Returns (included in Net Sales) |  | Cost of Sales |  | Operating Expenses |  | Total
(In millions) |  |  |  | Restructuring Charges |  | Other Charges |
Total Charges (Adjustments) |  |  |  |  |  |  |  |  |  |
Cumulative through June 30, 2022 |  | $ | 18 |  |  | $ | 7 |  |  | $ | 310 |  |  | $ | 13 |  |  | $ | 348 |
Three months ended September 30, 2022 |  | 5 |  |  | (1) |  |  | 2 |  |  | — |  |  | 6 |
Cumulative through September 30, 2022 |  | $ | 23 |  |  | $ | 6 |  |  | $ | 312 |  |  | $ | 13 |  |  | $ | 354 |

(In millions) |  | Employee- Related Costs |  | Asset- Related Costs |  | Contract Terminations |  | Other Exit Costs |  | Total
Restructuring Charges (Adjustments) |  |  |  |  |  |  |  |  |  |
Cumulative through June 30, 2022 |  | $ | 203 |  |  | $ | 86 |  |  | $ | 19 |  |  | $ | 2 |  |  | $ | 310 |
Three months ended September 30, 2022 |  | (1) |  |  | 9 |  |  | (6) |  |  | — |  |  | 2 |
Cumulative through September 30, 2022 |  | $ | 202 |  |  | $ | 95 |  |  | $ | 13 |  |  | $ | 2 |  |  | $ | 312 |

Changes in accrued restructuring charges for the three months ended September 30, 2022 relating to the PCBA Program were:

(In millions) |  | Employee- Related Costs |  | Asset- Related Costs |  | Contract Terminations |  | Other Exit Costs |  | Total
Balance at June 30, 2022 |  | $ | 125 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 125 |
Charges |  | (1) |  |  | 9 |  |  | (6) |  |  | — |  |  | 2
Cash payments |  | (10) |  |  | — |  |  | — |  |  | — |  |  | (10) |
Non-cash asset write-offs |  | — |  |  | (9) |  |  | — |  |  | — |  |  | (9) |
Translation and other adjustments |  | (8) |  |  | — |  |  | 7 |  |  | — |  |  | (1) |
Balance at September 30, 2022 |  | $ | 106 |  |  | $ | — |  |  | $ | 1 |  |  | $ | — |  |  | $ | 107 |

Accrued restructuring charges at September 30, 2022 relating to the PCBA Program are expected to result in cash expenditures funded from cash provided by operations of approximately $64 million, $34 million and $9 million for the remainder of fiscal 2023 and for fiscal 2024 and 2025, respectively.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – DERIVATIVE FINANCIAL INSTRUMENTS
The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The Company enters into foreign currency forward contracts, and may enter into option contracts, to reduce the effects of fluctuating foreign currency exchange rates. In addition, the Company enters into interest rate derivatives to manage the effects of interest rate movements on the Company’s aggregate liability portfolio, including potential future debt issuances. The Company also enters into foreign currency forward contracts to hedge a portion of its net investment in certain foreign operations, which are designated as net investment hedges. The Company enters into the net investment hedges to offset the risk of changes in the U.S. dollar value of the Company’s investment in these foreign operations due to fluctuating foreign exchange rates. Time value is excluded from the effectiveness assessment and is recognized under a systematic and rational method over the life of the hedging instrument in Selling, general and administrative expenses. The net gain or loss on net investment hedges is recorded within translation adjustments, as a component of accumulated OCI (“AOCI”) on the Company’s consolidated balance sheets, until the sale or substantially complete liquidation of the underlying assets of the Company’s investment. The Company also enters into foreign currency forward contracts, and may use option contracts, not designated as hedging instruments, to mitigate the change in fair value of specific assets and liabilities on the consolidated balance sheets. At September 30, 2022, the notional amount of derivatives not designated as hedging instruments was $3,389 million. The Company does not utilize derivative financial instruments for trading or speculative purposes. Costs associated with entering into derivative financial instruments have not been material to the Company’s consolidated financial results.
For each derivative contract entered into, where the Company looks to obtain hedge accounting treatment, the Company formally and contemporaneously documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking the hedge transaction, the nature of the risk being hedged, and how the hedging instruments’ effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. At inception, the Company evaluates the effectiveness of hedge relationships quantitatively, and has elected to perform, after initial evaluation, qualitative effectiveness assessments of certain hedge relationships to support an ongoing expectation of high effectiveness, if effectiveness testing is required. If based on the qualitative assessment, it is determined that a derivative has ceased to be a highly effective hedge, the Company will perform a quantitative assessment to determine whether to discontinue hedge accounting with respect to that derivative prospectively.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the Company’s derivative financial instruments included in the consolidated balance sheets are presented as follows:

|  | Asset Derivatives |  | Liability Derivatives
|  |  |  | Fair Value (1) |  |  |  | Fair Value (1)
(In millions) |  | Balance Sheet Location |  | September 30, 2022 |  | June 30, 2022 |  | Balance Sheet Location |  | September 30, 2022 |  | June 30, 2022
Derivatives Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency cash flow hedges |  | Prepaid expenses and other current assets |  | $ | 97 |  |  | $ | 57 |  |  | Other accrued liabilities |  | $ | — |  |  | $ | 1 |
Net investment hedges |  | Prepaid expenses and other current assets |  | 39 |  |  | 107 |  |  | Other accrued liabilities |  | — |  |  | — |
Interest rate-related derivatives |  | Prepaid expenses and other current assets |  | — |  |  | 24 |  |  | Other accrued liabilities |  | 154 |  |  | 115 |
Total Derivatives Designated as Hedging Instruments |  |  |  | 136 |  |  | 188 |  |  |  |  | 154 |  |  | 116 |
Derivatives Not Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | Prepaid expenses and other current assets |  | 31 |  |  | 27 |  |  | Other accrued liabilities |  | 54 |  |  | 104 |
Total derivatives |  |  |  | $ | 167 |  |  | $ | 215 |  |  |  |  | $ | 208 |  |  | $ | 220 |

(1)See Note 5 – Fair Value Measurements for further information about how the fair value of derivative assets and liabilities are determined.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts of the gains and losses related to the Company’s derivative financial instruments designated as hedging instruments that are included in the assessment of effectiveness are as follows:

|  | Amount of Gain (Loss) Recognized in OCI on Derivatives |  | Location of Gain (Loss) Reclassified from AOCI into Earnings |  | Amount of Gain (Loss) Reclassified from AOCI into Earnings(1)
|  | Three Months Ended September 30 |  |  | Three Months Ended September 30
(In millions) |  | 2022 |  | 2021 |  |  | 2022 |  | 2021
Derivatives in Cash Flow Hedging Relationships: |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | $ | 57 |  |  | $ | 15 |  |  | Net sales |  | $ | 15 |  |  | $ | (6) |
Interest rate-related derivatives |  | 7 |  |  | — |  |  | Interest expense |  | — |  |  | — |
|  | 64 |  |  | 15 |  |  |  |  | 15 |  |  | (6) |
Derivatives in Net Investment Hedging Relationships(2): |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts(3) |  | 71 |  |  | 36 |  |  |  |  | — |  |  | — |
Total derivatives |  | $ | 135 |  |  | $ | 51 |  |  |  |  | $ | 15 |  |  | $ | (6) |

(1)There was no amount reclassified into earnings as a result of the discontinuance of cash flow hedges because probable forecasted transactions will no longer occur by the end of the original time period.
(2)During the three months ended September 30, 2022 and 2021, the gain recognized in earnings from net investment hedges related to the amount excluded from effectiveness testing was $6 million and $2 million, respectively.
(3)Included within translation adjustments as a component of AOCI on the Company’s consolidated balance sheets.

|  |  |  |  |  |  |  | Amount of Gain (Loss) Recognized in Earnings on Derivatives (1) |  |  |  |
|  | Location of Gain (Loss) Recognized in Earnings on Derivatives |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  | Three Months Ended September 30 |  |
(In millions) |  |  |  |  |  |  | 2022 |  | 2021 |  |  |  |
Derivatives in Fair Value Hedging Relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap contracts |  | Interest expense |  |  |  |  |  | $ | (39) |  |  | $ | (10) |  |  |  |  |

(1)Changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional information regarding the cumulative amount of fair value hedging gain (loss) recognized in earnings for items designated and qualifying as hedged items in fair value hedges is as follows:

(In millions) |  |  |  |
Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included |  | Carrying Amount of the Hedged Liabilities |  | Cumulative Amount of Fair Value Hedging Gain (Loss) Included in the Carrying Amount of the Hedged Liability
|  | September 30, 2022 |  | September 30, 2022
Current debt |  | $ | — |  |  | $ | — |
Long-term debt |  | 838 |  |  | (154) |
Total debt |  | $ | 838 |  |  | $ | (154) |

Additional information regarding the effects of fair value and cash flow hedging relationships for derivatives designated and qualifying as hedging instruments is as follows:

|  | Three Months Ended September 30
|  | 2022 |  | 2021
(In millions) |  | Net Sales |  | Interest Expense |  | Net Sales |  | Interest Expense
Total amounts of income and expense line items presented in the consolidated statements of earnings in which the effects of fair value and cash flow hedges are recorded |  | $ | 3,930 |  |  | $ | 46 |  |  | $ | 4,392 |  |  | $ | 42 |
The effects of fair value and cash flow hedging relationships: |  |  |  |  |  |  |  |
Gain (loss) on fair value hedge relationships – interest rate contracts: |  |  |  |  |  |  |  |
Hedged item |  | Not applicable |  | 39 |  |  | Not applicable |  | 10 |
Derivatives designated as hedging instruments |  | Not applicable |  | (39) |  |  | Not applicable |  | (10) |
Gain (loss) on cash flow hedge relationships – interest rate contracts: |  |  |  |  |  |  |  |
Amount of loss reclassified from AOCI into earnings |  | Not applicable |  | — |  |  | Not applicable |  | — |
Gain (loss) on cash flow hedge relationships – foreign currency forward contracts: |  |  |  |  |  |  |  |
Amount of gain (loss) reclassified from AOCI into earnings |  | 15 |  |  | Not applicable |  | (6) |  |  | Not applicable

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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amount of gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments are presented as follows:

|  |  |  |  |  |  |  | Amount of Gain (Loss) Recognized in Earnings on Derivatives |  |  |  |
|  | Location of Gain (Loss) Recognized in Earnings on Derivatives |  |  |  | Three Months Ended September 30 |  |
(In millions) |  |  |  |  |  |  | 2022 |  | 2021 |  |  |  |
Derivatives Not Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | Selling, general and administrative |  |  |  |  |  | $ | 11 |  |  | $ | (11) |  |  |  |  |

Cash Flow Hedges
The Company enters into foreign currency forward contracts, and may enter into foreign currency option contracts, to hedge anticipated transactions and receivables and payables denominated in foreign currencies, for periods consistent with the Company’s identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the cash flows that the Company receives from foreign subsidiaries. The foreign currency forward contracts entered into to hedge anticipated transactions have been designated as cash flow hedges and have varying maturities through the end of June 2024. Hedge effectiveness of the foreign currency forward contracts is based on the forward method, which includes time value in the effectiveness assessment. At September 30, 2022, the Company had cash flow hedges outstanding with a notional amount totaling $1,588 million.
The Company may enter into interest rate forward contracts to hedge anticipated issuance of debt for periods consistent with the Company’s identified exposures. The purpose of the hedging activities is to minimize the effect of interest rate movements on the cost of debt issuance.
For foreign currency hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses in AOCI are reclassified to sales when the underlying forecasted transaction occurs. If it is probable that the forecasted transaction will no longer occur, then any gains or losses in AOCI are reclassified to current-period sales. As of September 30, 2022, the Company’s foreign currency cash flow hedges were highly effective.
The estimated net gain on the Company’s derivative instruments designated as cash flow hedges as of September 30, 2022 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $68 million. The accumulated net gain on derivative instruments in AOCI was $139 million and $90 million as of September 30, 2022 and June 30, 2022, respectively.
Fair Value Hedges
The Company enters into interest rate derivative contracts to manage the exposure to interest rate fluctuations on its funded indebtedness. The Company has interest rate swap agreements, with notional amounts totaling $700 million and $300 million to effectively convert the fixed rate interest on its 2030 Senior Notes and 2031 Senior Notes, respectively, to variable interest rates based on three-month LIBOR plus a margin. These interest rate swap agreements are designated as fair value hedges of the related long-term debt, and the changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Investment Hedges
The Company enters into foreign currency forward contracts, designated as net investment hedges, to hedge a portion of its net investment in certain foreign operations. The net gain or loss on these contracts is recorded within translation adjustments, as a component of AOCI on the Company’s consolidated balance sheets. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the Company’s net investment in these foreign operations. The net investment hedge contracts have varying maturities through the end of May 2023. Hedge effectiveness of the net investment hedge contracts is based on the spot method. At September 30, 2022, the Company had net investment hedges outstanding with a notional amount totaling $1,037 million.
Credit Risk
As a matter of policy, the Company enters into derivative contracts only with counterparties that have a long-term credit rating of at least A- or higher by at least two nationally recognized rating agencies. The counterparties to these contracts are major financial institutions. Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the gross fair value of contracts in asset positions, which totaled $167 million at September 30, 2022. To manage this risk, the Company has strict counterparty credit guidelines that are continually monitored. Accordingly, management believes risk of loss under these hedging contracts is remote.
NOTE 5 – FAIR VALUE MEASUREMENTS
The Company records certain of its financial assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. The accounting for fair value measurements must be applied to nonfinancial assets and nonfinancial liabilities that require initial measurement or remeasurement at fair value, which principally consist of assets and liabilities acquired through business combinations and goodwill, indefinite-lived intangible assets and long-lived assets for the purposes of calculating potential impairment. The Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:
Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2022:

(In millions) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |
Money market funds |  | $ | 329 |  |  | $ | — |  |  | $ | — |  |  | $ | 329 |
Foreign currency forward contracts |  | — |  |  | 167 |  |  | — |  |  | 167 |
Total |  | $ | 329 |  |  | $ | 167 |  |  | $ | — |  |  | $ | 496 |
Liabilities: |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | $ | — |  |  | $ | 54 |  |  | $ | — |  |  | $ | 54 |
Interest rate-related derivatives |  | — |  |  | 154 |  |  | — |  |  | 154 |
DECIEM stock options |  | — |  |  | — |  |  | 69 |  |  | 69 |
Total |  | $ | — |  |  | $ | 208 |  |  | $ | 69 |  |  | $ | 277 |

The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2022:

(In millions) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |
Money market funds |  | $ | 961 |  |  | $ | — |  |  | $ | — |  |  | $ | 961 |
Foreign currency forward contracts |  | — |  |  | 191 |  |  | — |  |  | 191 |
Interest rate-related derivatives |  | — |  |  | 24 |  |  | — |  |  | 24 |
Total |  | $ | 961 |  |  | $ | 215 |  |  | $ | — |  |  | $ | 1,176 |
Liabilities: |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | $ | — |  |  | $ | 105 |  |  | $ | — |  |  | $ | 105 |
Interest rate-related derivatives |  | — |  |  | 115 |  |  | — |  |  | 115 |
DECIEM stock options |  | — |  |  | — |  |  | 74 |  |  | 74 |
Total |  | $ | — |  |  | $ | 220 |  |  | $ | 74 |  |  | $ | 294 |

The estimated fair values of the Company’s financial instruments are as follows:

|  | September 30, 2022 |  | June 30, 2022
(In millions) |  | Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
Nonderivatives |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 2,938 |  |  | $ | 2,938 |  |  | $ | 3,957 |  |  | $ | 3,957 |
Current and long-term debt |  | 5,373 |  |  | 4,809 |  |  | 5,412 |  |  | 5,139 |
DECIEM stock options |  | 69 |  |  | 69 |  |  | 74 |  |  | 74 |
Derivatives |  |  |  |  |  |  |  |
Foreign currency forward contracts – asset (liability), net |  | 113 |  |  | 113 |  |  | 86 |  |  | 86 |
Interest rate-related derivatives – asset (liability), net |  | (154) |  |  | (154) |  |  | (91) |  |  | (91) |

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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following methods and assumptions were used to estimate the fair value of the Company’s financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents – Cash and all highly-liquid securities with original maturities of three months or less are classified as cash and cash equivalents, primarily consisting of cash deposits in interest bearing accounts, time deposits and money market funds (classified within Level 1 of the valuation hierarchy). Cash deposits in interest bearing accounts and time deposits are carried at cost, which approximates fair value, due to the short maturity of cash equivalent instruments.
Foreign currency forward contracts – The fair values of the Company’s foreign currency forward contracts were determined using an industry-standard valuation model, which is based on an income approach. The significant observable inputs to the model, such as swap yield curves and currency spot and forward rates, were obtained from an independent pricing service. To determine the fair value of contracts under the model, the difference between the contract price and the current forward rate was discounted using LIBOR for contracts with maturities up to 12 months, and swap yield curves for contracts with maturities greater than 12 months.
Interest rate - related derivatives – The fair values of the Company’s interest rate contracts were determined using an industry-standard valuation model, which is based on the income approach. The significant observable inputs to the model, such as treasury yield curves, swap yield curves and LIBOR forward rates, were obtained from independent pricing services.
Current and long-term debt – The fair value of the Company’s debt was estimated based on the current rates offered to the Company for debt with the same remaining maturities. To a lesser extent, debt also includes finance lease obligations for which the carrying amount approximates the fair value. The Company’s debt is classified within Level 2 of the valuation hierarchy.
DECIEM stock options – The stock option liability represents the employee stock options issued by DECIEM in replacement and exchange for certain vested and unvested DECIEM employee stock options previously issued by DECIEM, in connection with the Company's acquisition of DECIEM. The DECIEM stock options are subject to the terms and conditions of DECIEM's 2021 Stock Option Plan. The DECIEM stock option liability is measured using the Monte Carlo Method, which requires certain assumptions. Significant changes in the projected future operating results would result in a higher or lower fair value measurement. Changes to the discount rates or volatilities would have a lesser effect. These inputs are categorized as Level 3 of the valuation hierarchy. The DECIEM stock options are remeasured to fair value at each reporting date through the period when the options are exercised or repurchased (i.e., when they are settled), with an offsetting entry to compensation expense. See Note 9 – Stock Programs for discussion.
Changes in the DECIEM stock option liability for the three months ended September 30, 2022 are included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings and were as follows:

(In millions) |  | Fair Value
DECIEM stock option liability as of June 30, 2022 |  | $ | 74 |
Changes in fair value, net of foreign currency remeasurements(1) |  | 1 |
Translation adjustments and other, net |  | (6) |
DECIEM stock option liability as of September 30, 2022 |  | $ | 69 |

(1)Amount includes expense attributable to graded vesting of stock options which is not material fo r the three months ended September 30, 2022.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – REVENUE RECOGNITION
The Company’s revenue recognition accounting policies are described in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
Accounts Receivable
Accounts receivable, net is stated net of the allowance for doubtful accounts and customer deductions totaling $28 million and $27 million as of September 30, 2022 and June 30, 2022, respectively. Payment terms are short-term in nature and are generally less than one year.
Changes in the allowance for credit losses are as follows:

(In millions) |  | September 30, 2022
Balance at June 30, 2022 |  | $ | 10 |
Provision for expected credit losses |  | 3 |
Write-offs, net & other |  | (1) |
Balance at September 30, 2022 |  | $ | 12 |

The remaining balance of the allowance for doubtful accounts of $16 million and $17 million as of September 30, 2022 and June 30, 2022, respectively, relates to non-credit losses, which are primarily due to customer deductions.
Deferred Revenue
Changes in deferred revenue during the period are as follows:

|  |  |  | Three Months Ended September 30
(In millions) |  |  |  |  |  | 2022 |  | 2021
Deferred revenue, beginning of period |  |  |  |  |  | $ | 362 |  |  | $ | 371 |
Revenue recognized that was included in the deferred revenue balance at the beginning of the period |  |  |  |  |  | (149) |  |  | (170) |
Revenue deferred during the period |  |  |  |  |  | 157 |  |  | 223 |
Other |  |  |  |  |  | (8) |  |  | 2 |
Deferred revenue, end of period |  |  |  |  |  | $ | 362 |  |  | $ | 426 |

Transaction Price Allocated to the Remaining Performance Obligations
At September 30, 2022, the combined estimated revenue expected to be recognized in the next twelve months related to performance obligations for customer loyalty programs, gift with purchase promotions, purchase with purchase promotions and gift card liabilities that are unsatisfied (or partially unsatisfied) is $313 million. The remaining balance of deferred revenue at September 30, 2022 will be recognized beyond the next twelve months.
NOTE 7 – PENSION AND POST-RETIREMENT BENEFIT PLANS
The Company maintains pension plans covering substantially all of its full-time employees for its U.S. operations and a majority of its international operations. The Company also maintains post-retirement benefit plans that provide certain medical and dental benefits to eligible employees. Descriptions of these plans are included in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of net periodic benefit cost for the three months ended September 30, 2022 and 2021 consisted of the following:

|  | Pension Plans |  | Other than Pension Plans
|  | U.S. |  | International |  | Post-retirement
(In millions) |  | 2022 |  | 2021 |  | 2022 |  | 2021 |  | 2022 |  | 2021
Service cost |  | $ | 9 |  |  | $ | 12 |  |  | $ | 7 |  |  | $ | 8 |  |  | $ | — |  |  | $ | 1 |
Interest cost |  | 10 |  |  | 8 |  |  | 3 |  |  | 3 |  |  | 2 |  |  | 1 |
Expected return on plan assets |  | (14) |  |  | (14) |  |  | (4) |  |  | (4) |  |  | — |  |  | — |
Amortization of: |  |  |  |  |  |  |  |  |  |  |  |
Actuarial loss |  | 1 |  |  | 4 |  |  | (1) |  |  | — |  |  | — |  |  | — |
Special termination benefits |  | — |  |  | — |  |  | — |  |  | 2 |  |  | — |  |  | — |
Net periodic benefit cost |  | $ | 6 |  |  | $ | 10 |  |  | $ | 5 |  |  | $ | 9 |  |  | $ | 2 |  |  | $ | 2 |

During the three months ended September 30, 2022, the Company made contributions to its international pension plans totaling $3 million.
The amounts recognized in the consolidated balance sheets related to the Company’s pension and post-retirement benefit plans consist of the following:

(In millions) |  | September 30, 2022 |  | June 30, 2022
Other assets |  | $ | 132 |  |  | $ | 151 |
Other accrued liabilities |  | (24) |  |  | (24) |
Other noncurrent liabilities |  | (349) |  |  | (357) |
Funded status |  | (241) |  |  | (230) |
Accumulated other comprehensive loss |  | 158 |  |  | 155 |
Net amount recognized |  | $ | (83) |  |  | $ | (75) |

NOTE 8 – CONTINGENCIES
Legal Proceedings
The Company is involved, from time to time, in litigation and other legal proceedings incidental to its business, including product liability matters (including asbestos-related claims), advertising, regulatory, employment, intellectual property, real estate, environmental, trade relations, tax, and privacy. Management believes that the outcome of current litigation and legal proceedings will not have a material adverse effect upon the Company’s business, results of operations, financial condition or cash flows. However, management’s assessment of the Company’s current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against the Company not presently known to the Company or determinations by judges, juries or other finders of fact which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or proceedings. Reasonably possible losses in addition to the amounts accrued for such litigation and legal proceedings are not material to the Company’s consolidated financial statements.
NOTE 9 – STOCK PROGRAMS
Additional information relating to the Company's stock programs and the DECIEM stock options are included in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's Stock Programs
Total net stock-based compensation expense is attributable to the granting of, and the remaining requisite service periods of stock options, restricted stock units (“RSUs”), performance share units (“PSUs”), long-term PSUs, including long-term price-vested units and share units. Compensation expense attributable to net stock-based compensation was $53 million and $79 million for the three months ended September 30, 2022 and 2021, respectively.
Stock Options
During the three months ended September 30, 2022, the Company granted stock options in respect of approximately 1.2 million shares of Class A Common Stock with an exercise price per share of $246.15 and a weighted-average grant date fair value per share of $79.07. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The aggregate intrinsic value of stock options exercised during the three months ended September 30, 2022 was $44 million.
Restricted Stock Units
During the three months ended September 30, 2022, the Company granted RSUs in respect of approximately 1.1 million shares of Class A Common Stock with a weighted-average grant date fair value per share of $246.16 that, at the time of grant, are scheduled to vest at 0.4 million, 0.4 million, and 0.3 million shares per year, in fiscal 2024, fiscal 2025 and fiscal 2026, respectively. Vesting of RSUs is generally subject to the continued employment or the retirement of the grantees. The RSUs are generally accompanied by dividend equivalent rights, payable upon settlement of the RSUs either in cash or shares (based on the terms of the particular award) and, as such, were generally valued at the closing market price of the Company’s Class A Common Stock on the date of grant.
Performance Share Units
During the three months ended September 30, 2022, the Company granted PSUs with a target payout of approximately 0.1 million shares of Class A Common Stock with a grant date fair value per share of $246.15, which will be settled in stock subject to the achievement of the Company’s net sales, diluted net earnings per common share and return on invested capital goals for the three fiscal years ending June 30, 2025, all subject to continued employment or the retirement of the grantees. For PSUs granted, no settlement will occur for results below the applicable minimum threshold. PSUs are accompanied by dividend equivalent rights that will be payable in cash upon settlement of the PSUs and, as such, were valued at the closing market value of the Company’s Class A Common Stock on the date of grant.
In September 2022, approximately 0.2 million shares of the Company’s Class A Common Stock were issued, and related accrued dividends were paid, relative to the target goals set at the time of the issuance, in settlement of 0.1 million PSUs with a performance period ended June 30, 2022.
DECIEM Stock Options
The DECIEM stock options are liability-classified awards as they are expected to be settled in cash and are remeasured to fair value at each reporting date through date of settlement. Total stock-based compensation expense is attributable to the exchange or replacement of and the remaining requisite service period of stock options. The total stock option expense for the three months ended September 30, 2022 and 2021 was not material. There were no DECIEM stock options exercised during the three months ended September 30, 2022.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The DECIEM stock options are reported as a stock option liability of $69 million and $74 million in Other noncurrent liabilities in the accompanying consolidated balance sheets at September 30, 2022 and June 30, 2022, respectively. The fair value of the stock options were calculated using the following key assumptions into the Monte Carlo Method:

|  | September 30, 2022 |  | June 30, 2022 |  |
Risk-free rate |  | 3.90% |  | 3.20% |  |
Term to mid of last twelve-month period |  | 1.17 years |  | 1.42 years |  |
Operating leverage adjustment |  | 0.45 |  | 0.45 |  |
Net sales discount rate |  | 6.70% |  | 6.00% |  |
EBITDA discount rate |  | 10.10% |  | 9.40% |  |
EBITDA volatility |  | 35.70% |  | 33.90% |  |
Net sales volatility |  | 16.10% |  | 15.30% |  |

NOTE 10 – NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. PER COMMON SHARE
Net earnings attributable to The Estée Lauder Companies Inc. per common share (“basic EPS”) is computed by dividing net earnings attributable to The Estée Lauder Companies Inc. by the weighted-average number of common shares outstanding and shares underlying PSUs and RSUs where the vesting conditions have been met. Net earnings attributable to The Estée Lauder Companies Inc. per common share assuming dilution (“diluted EPS”) is computed by reflecting potential dilution from stock-based awards.
A reconciliation between the numerator and denominator of the basic and diluted EPS computations is as follows:

|  |  |  |  |  | Three Months Ended September 30
(In millions, except per share data) |  |  |  |  |  |  |  |  |  | 2022 |  | 2021
Numerator: |  |  |  |  |  |  |  |  |  |  |  |
Net earnings attributable to The Estée Lauder Companies Inc. |  |  |  |  |  |  |  |  |  | $ | 489 |  |  | $ | 692 |
Denominator: |  |  |  |  |  |  |  |  |  |  |  |
Weighted-average common shares outstanding – Basic |  |  |  |  |  |  |  |  |  | 357.9 |  |  | 362.2 |
Effect of dilutive stock options |  |  |  |  |  |  |  |  |  | 2.7 |  | 4.2
Effect of PSUs |  |  |  |  |  |  |  |  |  | 0.1 |  | 0.2
Effect of RSUs |  |  |  |  |  |  |  |  |  | 0.7 |  | 1.3
Weighted-average common shares outstanding – Diluted |  |  |  |  |  |  |  |  |  | 361.4 |  |  | 367.9 |
Net earnings attributable to The Estée Lauder Companies Inc. per common share: |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  |  |  |  |  |  |  |  | $ | 1.37 |  |  | $ | 1.91 |
Diluted |  |  |  |  |  |  |  |  |  | $ | 1.35 |  |  | $ | 1.88 |

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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The shares of Class A Common Stock underlying stock options, RSUs and PSUs that were excluded in the computation of diluted EPS because their inclusion would be anti-dilutive were as follows:

|  |  | Three Months Ended September 30
(In millions) |  |  |  |  | 2022 |  | 2021
Stock options |  |  |  |  | 1.3 |  | 0.3
RSUs and PSUs |  |  |  |  | — |  | 0.2

As of September 30, 2022 and 2021, 0.4 million and 0.7 million shares, respectively, of Class A Common Stock underlying PSUs have been excluded from the calculation of diluted EPS because the number of shares ultimately issued is contingent on the achievement of certain performance targets of the Company, as discussed in Note 9 – Stock Programs.
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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
Total Stockholders’ Equity – The Estée Lauder Companies Inc.

|  |  |  |  |  | Three Months Ended September 30
(In millions) |  |  |  |  |  |  |  |  |  | 2022 |  | 2021
Common stock, beginning of the period |  |  |  |  |  |  |  |  |  | $ | 6 |  |  | $ | 6 |
Stock-based compensation |  |  |  |  |  |  |  |  |  | — |  |  | — |
Common stock, end of the period |  |  |  |  |  |  |  |  |  | 6 |  |  | 6 |
Paid-in capital, beginning of the period |  |  |  |  |  |  |  |  |  | 5,796 |  |  | 5,335 |
Common stock dividends |  |  |  |  |  |  |  |  |  | 1 |  |  | 1 |
Stock-based compensation |  |  |  |  |  |  |  |  |  | 78 |  |  | 114 |
Paid-in capital, end of the period |  |  |  |  |  |  |  |  |  | 5,875 |  |  | 5,450 |
Retained earnings, beginning of the period |  |  |  |  |  |  |  |  |  | 13,912 |  |  | 12,244 |
Common stock dividends |  |  |  |  |  |  |  |  |  | (216) |  |  | (193) |
Net earnings attributable to The Estée Lauder Companies Inc. |  |  |  |  |  |  |  |  |  | 489 |  |  | 692 |
Cumulative effect of adoption of new accounting standards |  |  |  |  |  |  |  |  |  | — |  |  | 121 |
Retained earnings, end of the period |  |  |  |  |  |  |  |  |  | 14,185 |  |  | 12,864 |
Accumulated other comprehensive loss, beginning of the period |  |  |  |  |  |  |  |  |  | (762) |  |  | (470) |
Other comprehensive income (loss) attributable to The Estée Lauder Companies Inc. |  |  |  |  |  |  |  |  |  | (316) |  |  | (155) |
Accumulated other comprehensive loss, end of the period |  |  |  |  |  |  |  |  |  | (1,078) |  |  | (625) |
Treasury stock, beginning of the period |  |  |  |  |  |  |  |  |  | (13,362) |  |  | (11,058) |
Acquisition of treasury stock |  |  |  |  |  |  |  |  |  | (92) |  |  | (519) |
Stock-based compensation |  |  |  |  |  |  |  |  |  | (17) |  |  | (37) |
Treasury stock, end of the period |  |  |  |  |  |  |  |  |  | (13,471) |  |  | (11,614) |
Total stockholders’ equity – The Estée Lauder Companies Inc. |  |  |  |  |  |  |  |  |  | 5,517 |  |  | 6,081 |
Noncontrolling interests, beginning of the period |  |  |  |  |  |  |  |  |  | — |  |  | 34 |
Net earnings attributable to noncontrolling interests |  |  |  |  |  |  |  |  |  | — |  |  | 1 |
Translation adjustments and other, net |  |  |  |  |  |  |  |  |  | — |  |  | (1) |
Noncontrolling interests, end of the period |  |  |  |  |  |  |  |  |  | — |  |  | 34 |
Total equity |  |  |  |  |  |  |  |  |  | $ | 5,517 |  |  | $ | 6,115 |
Redeemable noncontrolling interest, beginning of the period |  |  |  |  |  |  |  |  |  | $ | 842 |  |  | $ | 857 |
Net earnings attributable to redeemable noncontrolling interest |  |  |  |  |  |  |  |  |  | 1 |  |  | 2 |
Translation adjustments |  |  |  |  |  |  |  |  |  | (35) |  |  | (17) |
Redeemable noncontrolling interest, end of the period |  |  |  |  |  |  |  |  |  | $ | 808 |  |  | $ | 842 |
Cash dividends declared per common share |  |  |  |  |  |  |  |  |  | $ | .60 |  |  | $ | .53 |

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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of quarterly cash dividends declared per share on the Company’s Class A and Class B Common Stock during the three months ended September 30, 2022:

Date Declared |  | Record Date |  | Payable Date |  | Amount per Share
August 17, 2022 |  | August 31, 2022 |  | September 15, 2022 |  | $ | .60 |

On November 1, 2022, a dividend was declared in the amount of $.66 per share on the Company’s Class A and Class B Common Stock. The dividend is payable in cash on December 15, 2022 to stockholders of record at the close of business on November 30, 2022.
Common Stock
During the three months ended September 30, 2022, the Company purchased approximately 0.4 million shares of its Class A Common Stock for $110 million.
Accumulated Other Comprehensive Income
The following table represents changes in AOCI, net of tax, by component for the three months ended September 30, 2022:

(In millions) |  | Net Cash Flow Hedge Gain (Loss) |  | Amounts Included in Net Periodic Benefit Cost |  | Translation Adjustments |  | Total
Balance at June 30, 2022 |  | $ | 68 |  |  | $ | (114) |  |  | $ | (716) |  |  | $ | (762) |
OCI before reclassifications |  | 49 |  |  | (2) |  | (1) | (352) |  | (2) | (305) |
Amounts reclassified to Net earnings |  | (11) |  |  | — |  |  | — |  |  | (11) |
Net current-period OCI |  | 38 |  |  | (2) |  |  | (352) |  |  | (316) |
Balance at September 30, 2022 |  | $ | 106 |  |  | $ | (116) |  |  | $ | (1,068) |  |  | $ | (1,078) |

(1)Consists of foreign currency translation losses.
(2)See Note 4 – Derivative Financial Instruments for gains (losses) relating to net investment hedges.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table represents the effects of reclassification adjustments from AOCI into net earnings for the three months ended September 30, 2022 and 2021:

|  |  |  |  |  | Amount Reclassified from AOCI |  |  |  |  |  | Affected Line Item in Consolidated Statements of Earnings
|  |  |  | Three Months Ended September 30 |  |  |
(In millions) |  |  |  |  |  | 2022 |  | 2021 |  |  |  |  |
Gain (Loss) on Cash Flow Hedges |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts |  |  |  |  |  | $ | 15 |  |  | $ | (6) |  |  |  |  |  |  | Net sales
Interest rate-related derivatives |  |  |  |  |  | — |  |  | — |  |  |  |  |  |  | Interest expense
|  |  |  |  |  | 15 |  |  | (6) |  |  |  |  |  |  |
Benefit (provision) for deferred taxes |  |  |  |  |  | (4) |  |  | 2 |  |  |  |  |  |  | Provision for income taxes
|  |  |  |  |  | 11 |  |  | (4) |  |  |  |  |  |  | Net earnings
Retirement Plan and Other Retiree Benefit Adjustments |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amortization of actuarial loss |  |  |  |  |  | — |  |  | (4) |  |  |  |  |  |  | Other components of net periodic benefit cost (1)
Benefit for deferred taxes |  |  |  |  |  | — |  |  | 1 |  |  |  |  |  |  | Provision for income taxes
|  |  |  |  |  | — |  |  | (3) |  |  |  |  |  |  | Net earnings
Total reclassification adjustments, net |  |  |  |  |  | $ | 11 |  |  | $ | (7) |  |  |  |  |  |  | Net earnings

(1)See Note 7 – Pension and Post-Retirement Benefit Plans for additional information.
NOTE 12 – STATEMENT OF CASH FLOWS
Supplemental cash flow information for the three months ended September 30, 2022 and 2021 is as follows:

(In millions) |  | 2022 |  | 2021
Cash: |  |  |  |
Cash paid during the period for interest |  | $ | 33 |  |  | $ | 30 |
Cash paid during the period for income taxes |  | $ | 113 |  |  | $ | 125 |
Non-cash investing and financing activities: |  |  |  |
Property, plant and equipment accrued but unpaid |  | $ | 171 |  |  | $ | 126 |
Right-of-use assets obtained in exchange for new/modified operating lease liabilities |  | $ | 70 |  |  | $ | 44 |

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THE ESTÉE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – SEGMENT DATA AND RELATED INFORMATION
Reportable operating segments include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the “Chief Executive”) in deciding how to allocate resources and in assessing performance. Although the Company operates in one business segment, beauty products, management also evaluates performance on a product category basis. Product category performance is measured based upon net sales before returns associated with restructuring and other activities, and operating income (loss) before charges associated with restructuring and other activities. Returns and charges associated with restructuring and other activities are not allocated to the Company's product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business.
The accounting policies for the Company’s reportable segments are substantially the same as those for the consolidated financial statements, as described in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022. The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; thus, no additional information is produced for the Chief Executive or included herein. There has been no significant variance in the total or long-lived asset values associated with the Company’s segment data since June 30, 2022.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|  |  |  |  |  | Three Months Ended September 30
(In millions) |  |  |  |  |  |  |  |  |  | 2022 |  | 2021
PRODUCT CATEGORY DATA |  |  |  |  |  |  |  |  |  |  |  |
Net sales: |  |  |  |  |  |  |  |  |  |  |  |
Skin Care |  |  |  |  |  |  |  |  |  | $ | 2,104 |  |  | $ | 2,449 |
Makeup |  |  |  |  |  |  |  |  |  | 1,052 |  |  | 1,174 |
Fragrance |  |  |  |  |  |  |  |  |  | 607 |  |  | 609 |
Hair Care |  |  |  |  |  |  |  |  |  | 158 |  |  | 148 |
Other |  |  |  |  |  |  |  |  |  | 14 |  |  | 13 |
|  |  |  |  |  |  |  |  |  | 3,935 |  |  | 4,393 |
Returns associated with restructuring and other activities |  |  |  |  |  |  |  |  |  | (5) |  |  | (1) |
Net sales |  |  |  |  |  |  |  |  |  | $ | 3,930 |  |  | $ | 4,392 |
Operating income (loss) before charges associated with restructuring and other activities: |  |  |  |  |  |  |  |  |  |  |  |
Skin Care |  |  |  |  |  |  |  |  |  | $ | 530 |  |  | $ | 717 |
Makeup |  |  |  |  |  |  |  |  |  | 16 |  |  | 91 |
Fragrance |  |  |  |  |  |  |  |  |  | 133 |  |  | 131 |
Hair Care |  |  |  |  |  |  |  |  |  | (12) |  |  | 2 |
Other |  |  |  |  |  |  |  |  |  | — |  |  | — |
|  |  |  |  |  |  |  |  |  | 667 |  |  | 941 |
Reconciliation: |  |  |  |  |  |  |  |  |  |  |  |
Charges associated with restructuring and other activities |  |  |  |  |  |  |  |  |  | (6) |  |  | (6) |
Interest expense |  |  |  |  |  |  |  |  |  | (46) |  |  | (42) |
Interest income and investment income, net |  |  |  |  |  |  |  |  |  | 15 |  |  | 4 |
Other components of net periodic benefit cost |  |  |  |  |  |  |  |  |  | 3 |  |  | (1) |
Other income |  |  |  |  |  |  |  |  |  | — |  |  | 1 |
Earnings before income taxes |  |  |  |  |  |  |  |  |  | $ | 633 |  |  | $ | 897 |
GEOGRAPHIC DATA(1) |  |  |  |  |  |  |  |  |  |  |  |
Net sales: |  |  |  |  |  |  |  |  |  |  |  |
The Americas |  |  |  |  |  |  |  |  |  | $ | 1,123 |  |  | $ | 1,194 |
Europe, the Middle East & Africa |  |  |  |  |  |  |  |  |  | 1,682 |  |  | 1,873 |
Asia/Pacific |  |  |  |  |  |  |  |  |  | 1,130 |  |  | 1,326 |
|  |  |  |  |  |  |  |  |  | 3,935 |  |  | 4,393 |
Returns associated with restructuring and other activities |  |  |  |  |  |  |  |  |  | (5) |  |  | (1) |
Net sales |  |  |  |  |  |  |  |  |  | $ | 3,930 |  |  | $ | 4,392 |
Operating income: |  |  |  |  |  |  |  |  |  |  |  |
The Americas |  |  |  |  |  |  |  |  |  | $ | 125 |  |  | $ | 254 |
Europe, the Middle East & Africa |  |  |  |  |  |  |  |  |  | 334 |  |  | 465 |
Asia/Pacific |  |  |  |  |  |  |  |  |  | 208 |  |  | 222 |
|  |  |  |  |  |  |  |  |  | 667 |  |  | 941 |
Charges associated with restructuring and other activities |  |  |  |  |  |  |  |  |  | (6) |  |  | (6) |
Operating income |  |  |  |  |  |  |  |  |  | $ | 661 |  |  | $ | 935 |

(1) The net sales from the Company’s travel retail business are included in the Europe, the Middle East & Africa region, with the exception of net sales of Dr.Jart+ in the travel retail channel that are reflected in Korea in the Asia/Pacific region. Operating income attributable to the travel retail sales included in Europe, the Middle East & Africa is included in that region and in The Americas.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
We manufacture, market and sell beauty products including those in the skin care, makeup, fragrance and hair care categories, which are distributed in approximately 150 countries and territories. The following table is a comparative summary of operating results for the three months ended September 30, 2022 and 2021, and reflects the basis of presentation described in Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies for all periods presented. Products and services that do not meet our definition of skin care, makeup, fragrance and hair care have been included in the “other” category.

|  |  |  | Three Months Ended September 30 |  |
(In millions) |  |  |  |  |  | 2022 |  | 2021 |  |  |  |
NET SALES |  |  |  |  |  |  |  |  |  |  |  |
By Product Category: |  |  |  |  |  |  |  |  |  |  |  |
Skin Care |  |  |  |  |  | $ | 2,104 |  |  | $ | 2,449 |  |  |  |  |
Makeup |  |  |  |  |  | 1,052 |  |  | 1,174 |  |  |  |  |
Fragrance |  |  |  |  |  | 607 |  |  | 609 |  |  |  |  |
Hair Care |  |  |  |  |  | 158 |  |  | 148 |  |  |  |  |
Other |  |  |  |  |  | 14 |  |  | 13 |  |  |  |  |
|  |  |  |  |  | 3,935 |  |  | 4,393 |  |  |  |  |
Returns associated with restructuring and other activities |  |  |  |  |  | (5) |  |  | (1) |  |  |  |  |
Net sales |  |  |  |  |  | $ | 3,930 |  |  | $ | 4,392 |  |  |  |  |
By Region(1): |  |  |  |  |  |  |  |  |  |  |  |
The Americas |  |  |  |  |  | $ | 1,123 |  |  | $ | 1,194 |  |  |  |  |
Europe, the Middle East & Africa |  |  |  |  |  | 1,682 |  |  | 1,873 |  |  |  |  |
Asia/Pacific |  |  |  |  |  | 1,130 |  |  | 1,326 |  |  |  |  |
|  |  |  |  |  | 3,935 |  |  | 4,393 |  |  |  |  |
Returns associated with restructuring and other activities |  |  |  |  |  | (5) |  |  | (1) |  |  |  |  |
Net sales |  |  |  |  |  | $ | 3,930 |  |  | $ | 4,392 |  |  |  |  |
OPERATING INCOME (LOSS) |  |  |  |  |  |  |  |  |  |  |  |
By Product Category: |  |  |  |  |  |  |  |  |  |  |  |
Skin Care |  |  |  |  |  | $ | 530 |  |  | $ | 717 |  |  |  |  |
Makeup |  |  |  |  |  | 16 |  |  | 91 |  |  |  |  |
Fragrance |  |  |  |  |  | 133 |  |  | 131 |  |  |  |  |
Hair Care |  |  |  |  |  | (12) |  |  | 2 |  |  |  |  |
Other |  |  |  |  |  | — |  |  | — |  |  |  |  |
|  |  |  |  |  | 667 |  |  | 941 |  |  |  |  |
Charges associated with restructuring and other activities |  |  |  |  |  | (6) |  |  | (6) |  |  |  |  |
Operating income |  |  |  |  |  | $ | 661 |  |  | $ | 935 |  |  |  |  |
By Region(1): |  |  |  |  |  |  |  |  |  |  |  |
The Americas |  |  |  |  |  | $ | 125 |  |  | $ | 254 |  |  |  |  |
Europe, the Middle East & Africa |  |  |  |  |  | 334 |  |  | 465 |  |  |  |  |
Asia/Pacific |  |  |  |  |  | 208 |  |  | 222 |  |  |  |  |
|  |  |  |  |  | 667 |  |  | 941 |  |  |  |  |
Charges associated with restructuring and other activities |  |  |  |  |  | (6) |  |  | (6) |  |  |  |  |
Operating income |  |  |  |  |  | $ | 661 |  |  | $ | 935 |  |  |  |  |

(1) The net sales from the Company's travel retail business are included in the Europe, the Middle East & Africa region, with the exception of net sales of Dr.Jart+ in the travel retail channel that are reflected in Korea in the Asia/Pacific region. Operating income attributable to the travel retail sales included in Europe, the Middle East & Africa is included in that region and in The Americas.
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The following table presents certain consolidated earnings data as a percentage of net sales:

|  |  |  | Three Months Ended September 30 |  |
|  |  |  |  |  | 2022 |  | 2021 |  |  |  |
Net sales |  |  |  |  |  | 100.0 | % |  | 100.0 | % |  |  |  |
Cost of sales |  |  |  |  |  | 26.0 |  |  | 24.1 |  |  |  |  |
Gross profit |  |  |  |  |  | 74.0 |  |  | 75.9 |  |  |  |  |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |
Selling, general and administrative |  |  |  |  |  | 57.1 |  |  | 54.5 |  |  |  |  |
Restructuring and other charges |  |  |  |  |  | 0.1 |  |  | 0.1 |  |  |  |  |
Total operating expenses |  |  |  |  |  | 57.2 |  |  | 54.6 |  |  |  |  |
Operating income |  |  |  |  |  | 16.8 |  |  | 21.3 |  |  |  |  |
Interest expense |  |  |  |  |  | 1.2 |  |  | 1.0 |  |  |  |  |
Interest income and investment income, net |  |  |  |  |  | 0.4 |  |  | 0.1 |  |  |  |  |
Other components of net periodic benefit cost |  |  |  |  |  | (0.1) |  |  | — |  |  |  |  |
Other income |  |  |  |  |  | — |  |  | — |  |  |  |  |
Earnings before income taxes |  |  |  |  |  | 16.1 |  |  | 20.4 |  |  |  |  |
Provision for income taxes |  |  |  |  |  | (3.6) |  |  | (4.6) |  |  |  |  |
Net earnings |  |  |  |  |  | 12.5 |  |  | 15.8 |  |  |  |  |
Net earnings attributable to noncontrolling interests |  |  |  |  |  | — |  |  | — |  |  |  |  |
Net earnings attributable to redeemable noncontrolling interest |  |  |  |  |  | — |  |  | — |  |  |  |  |
Net earnings attributable to The Estée Lauder Companies Inc. |  |  |  |  |  | 12.4 | % |  | 15.8 | % |  |  |  |

Not adjusted for differences caused by rounding
Period-over-period changes in our net sales are generally attributable to the impacts from (i) pricing on our base portfolio, including changes in strategic pricing actions and mix, (ii) volume, including changes driven by the impact of new product innovation, (iii) acquisitions and/or divestitures, and/or (iv) foreign currency translation.
The net sales impact from pricing consists of changes in list prices, due to strategic pricing initiatives, and mix shifts within and among product categories, geographic regions and distribution channels. The prices at which we sell our products vary by brand, distribution channel (e.g., wholesale or direct-to-consumer) and may also vary by country. Our brands and products cover a broad array of pricing tiers. Prices of skin care and fragrance products are typically higher than makeup and hair care products.
New product innovation includes the introduction of new products, as well as the innovation of existing products, including reformulations, regional expansion, repackaging and sets. A product is considered "new innovation" for the twelve-month period following the initial shipment date. Our innovation is launched at different price points than existing products and value derived from innovation may vary from year to year. We continually introduce new products, support new and established products through advertising, merchandising and sampling and phase out existing products that no longer meet the needs of our consumers or our objectives. The economics of developing, producing, launching, supporting and discontinuing products impact our sales and operating performance each period. The introduction of new products often has some cannibalizing effect on sales of existing products, which we take into account in our business planning. The impact of new product introductions, including timing compared to introductions in prior periods, also affects our results.
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Non-GAAP Financial Measures
We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period helps investors and others compare operating performance between periods. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. See Reconciliations of Non-GAAP Financial Measures beginning on page 47 f or reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
We operate on a global basis, with the majority of our net sales generated outside the United States. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations. Therefore, we present certain net sales, operating results and diluted net earnings per common share information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of our underlying business outside the United States. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We calculate constant currency information by translating current-period results using monthly average foreign currency exchange rates and adjusting for the period-over-period impact of foreign currency cash flow hedging activities.
Overview
Business Update
We are a leader in prestige beauty, which combines the repeat purchase and relative affordability of consumer goods with high quality products and services. Within prestige beauty, we are well diversified by product category, geography, brand, product sub-category, channel, consumer segment and price point. This diversification allows us to leverage consumer analytics and insights with agility by deploying our brands to fast growing and profitable opportunities. These analytics and insights, combined with our creativity, inform our innovation to provide a broad, locally-relevant and inclusive range of prestige products allowing us to compete effectively for a greater share of a consumer's beauty routine. Elements of our strategy are described in the Overview on pages 30-32 of our Annual Report on Form 10-K for the year ended June 30, 2022, as well as below.
The COVID-19 pandemic continued to disrupt our operating environment through the fiscal 2023 first quarter, including COVID-related restrictions in China, affecting travel retail in Hainan as well as mainland China. In Hainan, the ongoing restrictions led to prolonged store closures and the curtailment of travel and caused the tightening of inventory by certain of our retailers who had previously placed orders in anticipation of the return of travel that was since delayed. The COVID-related restrictions in mainland China continued to negatively impact retail traffic. During the fiscal 2023 first quarter, our business was also negatively impacted by inflationary pressures, and recession concerns, which caused certain of our retailers in the United States to tighten inventory.
During the first quarter of fiscal 2023, net sales decreased 11%, reflecting the impacts of the challenges noted above.
•Our skin care net sales declined 14%, including the unfavorable impact of foreign currency translation of 3%. The category continues to be pressured by COVID-19 restrictions in Hainan, including the tightening of inventory by certain of our retailers, and in mainland China. The tightening of inventory by certain of our retailers in the United States also negatively impacted the category's growth. Despite these pressures, net sales continued to grow from La Mer and Bobbi Brown.
•Our makeup net sales declined 10%, including the unfavorable impact of foreign currency translation of 4%. While we see progression towards recovery in parts of Asia/Pacific and Europe, Middle East & Africa, driven by strong activation from M·A·C, the limited social and professional activities stemming from the continued COVID-19 restrictions in China, including those impacting travel retail in Hainan and mainland China, and a difficult comparison to the prior-year period due to the timing of shipments, drove the decrease in net sales.
•Our fragrance net sales decreased due to the impact of the license terminations related to certain of our designer fragrances of 12% and the unfavorable impact of foreign currency translation of 5%. Overall the category continues to benefit from the shift in consumer demand toward our luxury and artisanal offerings, including Tom Ford Beauty, Le Labo, Kilian Paris and Jo Malone London.
•Our hair care net sales increased 7%, benefiting from the fiscal 2022 third quarter launch of The Ordinary’s hair care products and Aveda’s distribution expansion into mainland China.
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Our global distribution capability and operations allow us to focus on targeted expanded consumer reach wherever consumer demographics and trends are the most attractive. Our regional organizations, and the expertise of our people there, enable our brands to be more locally and culturally relevant in both product assortment and communications. We are evolving the way we connect with our consumers in stores, online and where they travel, including by expanding our digital and social media presence and the engagement of global and local influencers to amplify brand or product stories. We tailor implementation of our strategy by market to drive consumer engagement and embrace cultural diversity. We continuously strengthen our presence in large, image-building core markets, while broadening our presence in emerging markets.
•Net sales in The Americas decreased 6%, primarily reflecting unfavorable impacts in the United States due to the timing of shipments compared to the prior-year period, the license terminations related to certain of our designer fragrances and the impact of tighter inventory management by certain of our retailers. Latin America grew double digits, reflecting growth in makeup.
•Net sales in Europe, the Middle East & Africa decreased 10%, including the unfavorable impact of foreign currency translation of 4%, primarily due to continued COVID-19 restrictions in China impacting those impacting travel retail in Hainan. Partially offsetting this decrease was an increase in net sales from emerging markets in the region, led by India and the Middle East, driven by growth in the makeup category.
•The continued COVID-19 restrictions impacting our business in Greater China and the Dr.Jart+ travel retail business in Korea drove the net sales decline in Asia/Pacific of 15%, including the unfavorable impact of foreign currency translation of 8%. Most of the other affiliates in the region reflected recovery from the prior-year challenges, led by growth in our fragrance and makeup product categories.
Outlook
The COVID-19 pandemic continues to disrupt business for us, retailers and other companies with which we do business. There have been, and are likely to continue to be, intermittent store closures and supply chain challenges. We are mindful that these trends may continue to impact the pace of recovery. We are seeing a continued and prolonged curtailment in international travel, which is also affecting our travel retail business, particularly in Asia, which historically has been one of our fastest growth areas. In addition to impacting net sales and profitability, these and other challenges may adversely impact the goodwill and other intangible assets associated with our brands, as well as long-lived assets (i.e. potentially resulting in impairments).
We believe that the best way to increase long-term stockholder value is to continue providing superior products and services in the most efficient and effective manner while recognizing shifts in consumers’ behaviors and shopping practices. Accordingly, our long-term strategy has numerous initiatives across geographic regions, product categories, brands, channels of distribution and functions designed to grow our sales, provide cost efficiencies, leverage our strengths and make us more productive and profitable. We plan to build upon and leverage our history of outstanding creativity and innovation, high quality products and services, and engaging communications while investing for long-term sustainable growth.
We continue to monitor the effects of the global macro environment, including the risk of recession; currency volatility; increasing inflationary pressures; supply chain challenges; social and political issues; regulatory matters, including the imposition of tariffs and sanctions; geopolitical tensions; and global security issues. For example, the strengthening of the U.S. dollar could negatively impact results within Europe, the Middle East & Africa due to pricing pressures on our retail customers and consumers in key international travel retail locations. Additionally, we continue to monitor the geopolitical tensions between the United States and China, which could have a material adverse effect on our business. We are also mindful of inflationary pressures on our cost base and are monitoring the impact on consumer preferences.
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As the invasion of Ukraine continues and international sanctions evolve, our business and ability to operate in Russia and Ukraine continue to be negatively impacted. During the fiscal 2023 first quarter, we partially mitigated the negative impact by liquidating the majority of our remaining in-market inventory and not renewing leases that expired or may have been up for renewal for our freestanding stores. We are continuously monitoring the evolving situation, including risks and opportunities that may further affect our business, and will continue to adjust our business plans accordingly. There are uncertainties related to the future impacts on our business, including possible new sanctions that are difficult to predict due to the high level of geopolitical volatility. On a broader perspective, there could be additional negative impacts to our net sales, earnings, assets and cash flows from such uncertainties. We also note that worsening conditions could exacerbate economic challenges in other countries such as inflationary pressures, energy shortages, recessions or other consequences. In fiscal 2022, our operations in Ukraine and Russia accounted for approximately 1% of consolidated net sales. Please refer to Risk Factors in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2022, for a more complete discussion of the risks we encounter in our business and industry.
The uncertainty around the timing, speed and duration of the recovery from the adverse impacts of the COVID-19 pandemic, including the impacts on our business of the ongoing restrictions in China, and the other macro challenges we are facing, will continue to affect our ability to grow sales profitably. We believe we can, to some extent, offset the impact of more ordinary challenges by continually developing and pursuing a diversified strategy with multiple engines of growth and by accelerating initiatives focused on areas of strength, discipline and agility, including continuing to execute upon and benefit from efficiencies attributable to previously approved initiatives under the Post-COVID Business Acceleration Program. As the current situation continues to progress, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, there could be a further negative effect on consumer confidence, demand, spending and willingness or ability to travel and, as a result, on our business. We are continuing to monitor these and other risks that may affect our business.
Post-COVID Business Acceleration Program
Information about our restructuring initiative, the Post-COVID Business Acceleration Program, is described in Notes to Consolidated Financial Statements, Note 3 – Charges Associated with Restructuring and Other Activities herein, as well as, in Notes to Consolidated Financial Statements, Note 8 – Charges Associated with Restructuring and Other Activities and in the Overview on page 33 of our Annual Report on Form 10-K for the year ended June 30, 2022.
NET SALES

|  |  |  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |  |  |  |  |
Net sales |  |  |  |  |  |  |  |  |  | $ | 3,930 |  |  | $ | 4,392 |
$ Change from prior-year period |  |  |  |  |  |  |  |  |  | (462) |  |  |
% Change from prior-year period |  |  |  |  |  |  |  |  |  | (11) | % |  |
Non-GAAP Financial Measure(1): |  |  |  |  |  |  |  |  |  |  |  |
% Change from prior-year period in constant currency |  |  |  |  |  |  |  |  |  | (6) | % |  |

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported net sales decreased, primarily driven by lower net sales from the skin care and makeup product categories and from all geographic regions primarily due to continued impacts of COVID-19 restrictions in China, affecting travel retail in Hainan and mainland China, as well as the impact of the license terminations related to certain of our designer fragrances effective June 30, 2022. Partially offsetting the decrease in net sales was higher results from the hair care product category.
Skin care net sales declined, primarily driven by Estée Lauder, Dr.Jart+ and Origins, partially offset by higher net sales from La Mer and Bobbi Brown. Makeup net sales decreased due to lower net sales from Estée Lauder and Tom Ford Beauty, partially offset by higher net sales from M·A·C. Partially offsetting these decreases in net sales were hair care net sales increases from The Ordinary and our two hair care brands, led by Aveda.
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Net sales decreased in Asia/Pacific, primarily due to the continued impacts of COVID-19 restrictions in China, affecting retail traffic and travel. Net sales in Europe, the Middle East & Africa declined, primarily due to the continued impacts of COVID-19 restrictions impacting travel retail in Hainan, as well as lower net sales in the United Kingdom. Net sales in The Americas decreased, driven by the United States, reflecting a difficult comparison to the prior-year period due to timing of shipments, the impact of tighter inventory management by certain of our retailers, as well as the impact of the license terminations related to certain of our designer fragrances effective June 30, 2022.
The total net sales decrease was impacted by approximately $176 million of unfavorable foreign currency translation.
Returns associated with restructuring and other activities are not allocated to our product categories or geographic regions because they result from activities that are deemed a Company-wide initiative to redesign, resize and reorganize select corporate functions and go-to-market structures. Accordingly, the following discussions of Net sales by Product Categories and Geographic Regions exclude the impact of returns associated with restructuring and other activities for the three months ended September 30, 2022 and 2021 of $5 million and $1 million, respectively.
Reported net sales decreased 10%, driven by the decrease from volume of 8%, the unfavorable impact from foreign currency translation of 4%, and the impact from the license terminations of certain of our designer fragrances of 1%. Partially offsetting these decreases was the increase from pricing of 3%, due to the favorable impact from strategic pricing actions and changes in mix.
Product Categories
Skin Care

|  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Net sales |  |  |  |  |  | $ | 2,104 |  |  | $ | 2,449 |
$ Change from prior-year period |  |  |  |  |  | (345) |  |  |
% Change from prior-year period |  |  |  |  |  | (14) | % |  |
Non-GAAP Financial Measure(1): |  |  |  |  |  |  |  |
% Change from prior-year period in constant currency |  |  |  |  |  | (11) | % |  |

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported skin care net sales decreased, reflecting lower net sales from Estée Lauder, Dr.Jart+ and Origins, of approximately $332 million, combined, primarily driven by continued impacts of COVID-19 restrictions in Hainan, including the tightening of inventory by certain of our retailers, and in mainland China. Also contributing to the decrease in net sales was the tightening of inventory by certain of our retailers in the United States.
Partially offsetting these decreases in skin care net sales were higher net sales from La Mer and Bobbi Brown of approximately $25 million, combined. The increase in net sales from La Mer reflected the continued success of hero products, as well as recent launches and targeted expanded consumer reach. Bobbi Brown net sales increased, primarily driven by continued success of hero products and targeted expanded consumer reach.
The skin care net sales decrease was impacted by approximately $85 million of unfavorable foreign currency translation.
Reported skin care net sales decreased 14%, driven by the decrease from volume of 14% and the unfavorable impact from foreign currency translation of 3%. Partially offsetting these decreases was the increase from pricing of 3%, due to the favorable impact from strategic pricing actions and changes in mix.
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Makeup

|  |  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |  |
Net sales |  |  |  |  |  |  | $ | 1,052 |  |  | $ | 1,174 |
$ Change from prior-year period |  |  |  |  |  |  | (122) |  |  |
% Change from prior-year period |  |  |  |  |  |  | (10) | % |  |
Non-GAAP Financial Measure(1): |  |  |  |  |  |  |  |  |
% Change from prior-year period in constant currency |  |  |  |  |  |  | (6) | % |  |

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported makeup net sales decreased, reflecting lower net sales from Estée Lauder and Tom Ford Beauty of approximately $114 million, combined, primarily driven by continued impacts of COVID-19 restrictions in China, impacting travel retail in Hainan and mainland China.
Partially offsetting these decreases in net sales were higher net sales from M·A·C, primarily driven by the continued success of hero products and recent launches, as well as the brick-and-mortar recovery, including increased retail traffic compared to the prior-year period.
The makeup net sales decrease was impacted by approximately $50 million of unfavorable foreign currency translation.
Reported makeup net sales decreased 10%, driven by the decrease from volume of 5%, the unfavorable impact from foreign currency translation of 4%, and a decrease from pricing of 1%, due to the unfavorable impact from changes in mix, partially offset by the favorable impact from strategic pricing actions.
Fragrance

|  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Net sales |  |  |  |  |  | $ | 607 |  |  | $ | 609 |
$ Change from prior-year period |  |  |  |  |  | (2) |  |  |
% Change from prior-year period |  |  |  |  |  | — | % |  |
Non-GAAP Financial Measure(1): |  |  |  |  |  |  |  |
% Change from prior-year period in constant currency |  |  |  |  |  | 5 | % |  |

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported fragrance net sales remained virtually flat. This reflected the impact of the license terminations related to the Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna product lines ("certain of our designer fragrance licenses") effective June 30, 2022 of approximately $64 million, which were largely offset by higher net sales from our luxury and artisanal offerings, led by Tom Ford Beauty and Le Labo, and by higher net sales from Clinique of approximately $56 million, combined. The increase in net sales from Tom Ford Beauty reflected the continued success of Private Blend and Signature fragrances and new product launches. Net sales from Le Labo increased, reflecting the continued success of hero product franchises, new product launches and targeted expanded consumer reach. Net sales from Clinique increased, primarily reflecting growth in the Happy franchise line of products.
The fragrance net sales decrease was impacted by approximately $35 million of unfavorable foreign currency translation.
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Reported fragrance net sales remained virtually flat, driven by the impact from the license terminations of certain of our designer fragrances of 12% and the unfavorable impact from foreign currency translation of 5%. Partially offsetting these decreases was the increase from volume of 13% and the increase from pricing of 4%, due to the favorable impact from strategic pricing actions and changes in mix.
Hair Care

|  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Net sales |  |  |  |  |  | $ | 158 |  |  | $ | 148 |
$ Change from prior-year period |  |  |  |  |  | 10 |  |  |
% Change from prior-year period |  |  |  |  |  | 7 | % |  |
Non-GAAP Financial Measure(1): |  |  |  |  |  |  |  |
% Change from prior-year period in constant currency |  |  |  |  |  | 11 | % |  |

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported hair care net sales increased, reflecting higher net sales from The Ordinary and our two hair care brands. The increase was led by The Ordinary and Aveda, of approximately $7 million, combined. Net sales from The Ordinary increased, benefiting from the fiscal 2022 third quarter launch of hair care products. The increase in net sales from Aveda was primarily due to the continued success of existing product franchises, the fiscal 2023 first quarter launch of the Color Control franchise and the fiscal 2023 first quarter distribution expansion into mainland China.
The hair care net sales increase was impacted by approximately $6 million of unfavorable foreign currency translation.
Reported hair care net sales increased 7%, driven by the increase from pricing of 14%, due to the favorable impact from strategic pricing actions and changes in mix. Partially offsetting this increase was the decrease from volume of 3%, partially offset by new product innovation, and the unfavorable impact from foreign currency translation of 4%.
Geographic Regions
We strategically time our new product launches by geographic market, which may account for differences in regional sales growth.
The Americas

|  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Net sales |  |  |  |  |  | $ | 1,123 |  |  | $ | 1,194 |
$ Change from prior-year period |  |  |  |  |  | (71) |  |  |
% Change from prior-year period |  |  |  |  |  | (6) | % |  |
Non-GAAP Financial Measure(1): |  |  |  |  |  |  |  |
% Change from prior-year period in constant currency |  |  |  |  |  | (7) | % |  |

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
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Reported net sales in The Americas decreased, primarily driven by lower net sales in the United States of approximately $72 million. The decrease in net sales in the United States reflected a difficult comparison to the prior-year period due to timing of holiday shipments in the prior-year period, the impact of license terminations related to certain of our designer fragrance licenses effective June 30, 2022 and the impact of tighter inventory management by certain of our retailers.
Partially offsetting the decrease was an increase in net sales in Latin America of approximately $13 million, led by recovery in makeup.
Net sales in The Americas were impacted by approximately $7 million of favorable foreign currency translation.
Reported net sales in The Americas decreased 6%, driven by the decrease from volume of 9% and the impact from the license terminations related to certain of our designer fragrances of 3%. Partially offsetting this decrease was the increase from pricing of 5%, due to the favorable impact from strategic pricing actions and changes in mix, and the favorable impact from foreign currency translation of 1%.
Europe, the Middle East & Africa

|  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Net sales |  |  |  |  |  | $ | 1,682 |  |  | $ | 1,873 |
$ Change from prior-year period |  |  |  |  |  | (191) |  |  |
% Change from prior-year period |  |  |  |  |  | (10) | % |  |
Non-GAAP Financial Measure(1): |  |  |  |  |  |  |  |
% Change from prior-year period in constant currency |  |  |  |  |  | (6) | % |  |

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported net sales decreased in Europe, the Middle East & Africa, primarily driven by lower results from our travel retail business and the United Kingdom, combined, of approximately $166 million. The decrease in net sales from our travel retail business reflects the continued impacts of COVID-19 restrictions impacting travel retail in Hainan. The decrease in net sales from the United Kingdom was driven by lower net sales from Estée Lauder, M·A·C and Jo Malone London.
Partially offsetting these decreases were increases in net sales in our emerging markets, led by an increase in net sales from India and the Middle East, of approximately $11 million, combined, reflecting growth in makeup.
Net sales in Europe, the Middle East & Africa were impacted by approximately $83 million of unfavorable foreign currency translation.
Reported net sales in Europe, the Middle East & Africa decreased 10%, driven by the decrease from volume of 7%, the unfavorable impact from foreign currency translation of 4%, and the impact from the license terminations related to certain of our designer fragrances of 1%. Partially offsetting these decreases was the increase from pricing of 2%, due to the favorable impact from strategic pricing actions and changes in mix.
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Asia/Pacific

|  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Net sales |  |  |  |  |  | $ | 1,130 |  |  | $ | 1,326 |
$ Change from prior-year period |  |  |  |  |  | (196) |  |  |
% Change from prior-year period |  |  |  |  |  | (15) | % |  |
Non-GAAP Financial Measure(1): |  |  |  |  |  |  |  |
% Change from prior-year period in constant currency |  |  |  |  |  | (7) | % |  |

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported net sales decreased in Asia/Pacific, primarily driven by lower results in Greater China and the Dr.Jart+ travel retail business in Korea, of approximately $217 million, combined, due to the continued impacts of COVID-19 restrictions in China.
Partially offsetting the net sales decrease were increases in most of the other affiliates in the region, as COVID-19 restrictions eased compared to the prior-year period, led by growth in our fragrance and makeup product categories.
Net sales in Asia/Pacific were impacted by approximately $100 million of unfavorable foreign currency translation.
Reported net sales in Asia/Pacific decreased 15%, driven by the decrease from volume of 9% and the unfavorable impact from foreign currency translation of 8%. Partially offsetting these decreases was the increase from pricing of 2%, due to the favorable impact from strategic pricing actions and changes in mix.
GROSS MARGIN
Gross margin decreased to 74.0% for the three months ended September 30, 2022 as compared with 75.9% in the prior-year period.

|  |  |  | Favorable (Unfavorable) Basis Points |  |
|  |  |  | September 30, 2022 |  |
|  |  |  | Three Months Ended |  |
Mix of business |  |  |  | (145) |  |  |
Obsolescence charges |  |  |  | 15 |  |  |
Manufacturing costs and other |  |  |  | (65) |  |  |
Foreign exchange transactions |  |  |  | 5 |  |  |
Subtotal |  |  |  | (190) |  |  |
Charges associated with restructuring and other activities |  |  |  | — |  |  |
Total |  |  |  | (190) |  |  |

The decrease in gross margin reflected unfavorable impacts from our mix of business primarily due to the increase in promotional items and the unfavorable timing of promotional activity compared to the prior-year period, as well as higher manufacturing costs due to continued inflationary pressures.
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OPERATING EXPENSES
Operating expenses as a percentage of net sales was 57.2% for the three months ended September 30, 2022 as compared with 54.6% in the prior-year period.

|  |  |  | Favorable (Unfavorable) Basis Points |  |
|  |  |  | September 30, 2022 |  |
|  |  |  | Three Months Ended |  |
General and administrative expenses |  |  |  | 30 |  |  |
Advertising, merchandising, sampling and product development |  |  |  | (150) |  |  |
Selling |  |  |  | (20) |  |  |
Stock-based compensation |  |  |  | 40 |  |  |
Store operating costs |  |  |  | (70) |  |  |
Shipping |  |  |  | (90) |  |  |
Foreign exchange transactions |  |  |  | 10 |  |  |
Subtotal |  |  |  | (250) |  |  |
Changes in fair value of acquisition-related stock options |  |  |  | (10) |  |  |
Total |  |  |  | (260) |  |  |

The unfavorable change in operating expense margin was primarily due to an unfavorable impact from advertising, merchandising, sampling and product development expenses driven by a decrease in net sales, higher shipping rates due to continued inflationary pressures and shifts in mode of transportation, and higher store operating costs due to the brick-and-mortar recovery, including more stores being open compared to the prior-year period. This change was partially offset by a decrease in general and administrative expenses and stock-based compensation, primarily due to lower employee incentive compensation, as compared to the prior-year period.
OPERATING RESULTS

|  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Operating income |  |  |  |  |  | $ | 661 |  |  | $ | 935 |
$ Change from prior-year period |  |  |  |  |  | (274) |  |  |
% Change from prior-year period |  |  |  |  |  | (29) | % |  |
Operating margin |  |  |  |  |  | 16.8 | % |  | 21.3 | %
Non-GAAP Financial Measure(1): |  |  |  |  |  |  |  |
% Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities |  |  |  |  |  | (29) | % |  |

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
The decrease in reported operating margin was primarily driven by a decrease in net sales, decrease in gross margin and the increase in operating expenses, discussed above.
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Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business. Accordingly, the following discussions of Operating income by Product Categories and Geographic Regions exclude the impact of charges associated with restructuring and other activities.
Product Categories
Skin Care

|  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Operating income |  |  |  |  |  | $ | 530 |  |  | $ | 717 |
$ Change from prior-year period |  |  |  |  |  | (187) |  |  |
% Change from prior-year period |  |  |  |  |  | (26) | % |  |
Non-GAAP Financial Measure(1): |  |  |  |  |  |  |  |
% Change in operating income from the prior-year period adjusting for the change in fair value of acquisition-related stock options |  |  |  |  |  | (26) | % |  |

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported skin care operating income decreased, reflecting lower results from Estée Lauder, Clinique and Origins of approximately $234 million, combined, primarily driven by decreases in net sales. Also contributing to the decrease in operating income from Estée Lauder was an increase in cost of sales primarily due to higher costs for promotional items. Operating income from Clinique also decreased due to higher cost of sales and shipping expenses driven by continued supply chain challenges and inflationary pressures. Partially offsetting the decreases in operating income for Estée Lauder and Clinique was disciplined advertising and promotional expense management.
Partially offsetting the decrease in skin care operating income was lower employee incentive compensation compared to the prior-year period.
Makeup

|  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Operating income (loss) |  |  |  |  |  | $ | 16 |  |  | $ | 91 |
$ Change from prior-year period |  |  |  |  |  | (75) |  |  |
% Change from prior-year period |  |  |  |  |  | (82) | % |  |

Reported makeup operating income decreased, reflecting lower results from Estée Lauder and Tom Ford Beauty of approximately $128 million, combined, primarily driven by a decrease in net sales. The decrease in operating income from Estée Lauder also reflected higher cost of sales, as well as increased costs for advertising and promotional activities.
Partially offsetting the decrease in makeup operating income was lower corporate general and administrative expenses and employee incentive compensation compared to the prior-year period.
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Fragrance

|  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Operating income |  |  |  |  |  | $ | 133 |  |  | $ | 131 |
$ Change from prior-year period |  |  |  |  |  | 2 |  |  |
% Change from prior-year period |  |  |  |  |  | 2 | % |  |

Reported fragrance operating income remained virtually flat. This included higher results from Tom Ford Beauty and Clinique of approximately $22 million, combined. The higher operating income from Tom Ford Beauty was primarily driven by an increase in net sales, partially offset by higher strategic investments in advertising and promotional activities to drive hero products and support new product launches. Clinique operating income increased, primarily due to an increase in net sales. Operating income also increased due to lower employee incentive compensation compared to the prior-year period.
Largely offsetting the increase was the impact of license terminations related to certain of our designer fragrances effective June 30, 2022 and lower results from Jo Malone London of approximately $32 million, combined. Operating income from Jo Malone London decreased, primarily driven by higher cost of sales and shipping costs due to increased inflationary pressures, partially offset by an increase in net sales.
Hair Care

|  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Operating income (loss) |  |  |  |  |  | $ | (12) |  |  | $ | 2 |
$ Change from prior-year period |  |  |  |  |  | (14) |  |  |
% Change from prior-year period |  |  |  |  |  | (100+)% |  |

Reported hair care operating results decreased, primarily driven by lower results from Aveda and Bumble and bumble. The lower results from Aveda were primarily driven by higher advertising and promotional activities to support the brand's expansion into mainland China during the fiscal 2023 first quarter, partially offset by an increase in net sales. Operating results from Bumble and bumble decreased, primarily driven by higher strategic investments in advertising and promotional activities, partially offset by an increase in net sales.
Partially offsetting the decrease in hair care operating income was lower corporate general and administrative expenses and employee incentive compensation compared to the prior-year period.
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Geographic Regions
The Americas

|  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Operating income |  |  |  |  |  | $ | 125 |  |  | $ | 254 |
$ Change from prior-year period |  |  |  |  |  | (129) |  |  |
% Change from prior-year period |  |  |  |  |  | (51) | % |  |
Non-GAAP Financial Measure(1): |  |  |  |  |  |  |  |
% Change in operating income from the prior-year period adjusting for the change in fair value of acquisition-related stock options |  |  |  |  |  | (50) | % |  |

(1)See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
Reported operating results decreased in The Americas, primarily reflecting lower operating results from North America of approximately $134 million. The decrease in operating results in the United States is primarily due to a decrease in net sales and increases in cost of sales and selling expenses due to the brick-and-mortar recovery, including more stores being open and increased retail traffic compared to the prior-year period.
Europe, the Middle East & Africa

|  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Operating income |  |  |  |  |  | $ | 334 |  |  | $ | 465 |
$ Change from prior-year period |  |  |  |  |  | (131) |  |  |
% Change from prior-year period |  |  |  |  |  | (28) | % |  |

Reported operating income decreased in Europe, the Middle East & Africa, primarily driven by lower results from our travel retail business of approximately $148 million. Operating income decreased in our travel retail business reflecting the (i) decrease in net sales (ii) increase in cost of sales due to higher costs due to inflationary pressures and (iii) higher advertising and promotional activity primarily to support investments in key markets and digital media campaigns to expand consumer reach.
Asia/Pacific

|  |  |  | Three Months Ended September 30
($ in millions) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Operating income |  |  |  |  |  | $ | 208 |  |  | $ | 222 |
$ Change from prior-year period |  |  |  |  |  | (14) |  |  |
% Change from prior-year period |  |  |  |  |  | (6) | % |  |

Reported operating income decreased in Asia/Pacific, primarily driven by a decrease in net sales in Greater China that reflected the continued impacts of COVID-19 restrictions in China, partially offset by disciplined advertising and promotional expense management.
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INTEREST AND INVESTMENT INCOME

|  |  |  | Three Months Ended September 30
(In millions) |  |  |  |  |  | 2022 |  | 2021
Interest expense |  |  |  |  |  | $ | 46 |  |  | $ | 42 |
Interest income and investment income, net |  |  |  |  |  | $ | 15 |  |  | $ | 4 |

Interest income and investment income, net increased, primarily reflecting higher interest rates compared to the prior-year period.
PROVISION FOR INCOME TAXES
The provision for income taxes represents U.S. federal, foreign, state and local income taxes. The effective rate differs from the federal statutory rate primarily due to the effect of state and local income taxes, the tax impact of share-based compensation, the taxation of foreign income and income tax reserve adjustments, which represent changes in our net liability for unrecognized tax benefits including tax settlements and lapses of the applicable statutes of limitations. Our effective tax rate will change from quarter-to-quarter based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the tax impact of share-based compensation, the interaction of various global tax strategies and the impact from certain acquisitions. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of change.

|  |  | Three Months Ended September 30
|  |  |  |  | 2022 |  | 2021
Effective rate for income taxes |  |  |  |  | 22.6 | % |  | 22.5 | %
Basis-point change from the prior-year period |  |  |  |  | 10 |  |  |

The increase in the effective tax rate of 10 basis points was primarily attributable to a higher effective tax rate on the Company's foreign operations and a decrease in excess tax benefits associated with stock-based compensation arrangements, partially offset by a reduction in income tax reserve adjustments.
NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC.

|  |  |  | Three Months Ended September 30
($ in millions, except per share data) |  |  |  |  |  | 2022 |  | 2021
As Reported: |  |  |  |  |  |  |  |
Net earnings attributable to The Estée Lauder Companies Inc. |  |  |  |  |  | $ | 489 |  |  | $ | 692 |
$ Change from prior-year period |  |  |  |  |  | (203) |  |  |
% Change from prior-year period |  |  |  |  |  | (29) | % |  |
Diluted net earnings per common share |  |  |  |  |  | $ | 1.35 |  |  | $ | 1.88 |
% Change from prior-year period |  |  |  |  |  | (28) | % |  |
Non-GAAP Financial Measure(1): |  |  |  |  |  |  |  |
% Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities |  |  |  |  |  | (28) | % |  |

(1)See “Reconciliations of Non-GAAP Financial Measures” below for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures.
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RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES
We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period, or do not reflect the Company’s underlying ongoing business, provides transparency for such items and helps investors and others compare and analyze our operating performance from period to period. In the future, we expect to incur charges or adjustments similar in nature to those presented below; however, the impact to the Company’s results in a given period may be highly variable and difficult to predict. Our non-GAAP financial measures may not be comparable to similarly titled measures used by, or determined in a manner consistent with, other companies. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. The following tables present Net sales, Operating income and Diluted net earnings per common share adjusted to exclude the impact of charges associated with restructuring and other activities; the change in fair value of acquisition-related stock options; and the effects of foreign currency translation.
The following table provides reconciliations between these non-GAAP financial measures and the most directly comparable U.S. GAAP measures.

($ in millions, except per share data) |  | Three Months Ended September 30 |  | Variance |  | % Change |  | % Change in constant currency
| 2022 |  | 2021 |  |  |
Net sales, as reported |  | $ | 3,930 |  |  | $ | 4,392 |  |  | $ | (462) |  |  | (11) | % |  | (7) | %
Returns associated with restructuring and other activities |  | 5 |  |  | 1 |  |  | 4 |  |  |  |  |
Net sales, as adjusted |  | $ | 3,935 |  |  | $ | 4,393 |  |  | $ | (458) |  |  | (10) | % |  | (6) | %
Operating income, as reported |  | $ | 661 |  |  | $ | 935 |  |  | $ | (274) |  |  | (29) | % |  | (26) | %
Charges associated with restructuring and other activities |  | 6 |  |  | 6 |  |  | — |  |  |  |  |
Change in fair value of acquisition-related stock options |  | 1 |  |  | — |  |  | 1 |  |  |  |  |
Operating income, as adjusted |  | $ | 668 |  |  | $ | 941 |  |  | $ | (273) |  |  | (29) | % |  | (26) | %
Diluted net earnings per common share, as reported |  | $ | 1.35 |  |  | $ | 1.88 |  |  | $ | (.53) |  |  | (28) | % |  | (25) | %
Charges associated with restructuring and other activities |  | .02 |  |  | .01 |  |  | .01 |  |  |  |  |
Change in fair value of acquisition-related stock options (less portion attributable to redeemable noncontrolling interest) |  | — |  |  | — |  |  | — |  |  |  |  |
Diluted net earnings per common share, as adjusted |  | $ | 1.37 |  |  | $ | 1.89 |  |  | $ | (.52) |  |  | (28) | % |  | (24) | %

As diluted net earnings per common share, as adjusted, is used as a measure of the Company’s performance, we consider the impact of current and deferred income taxes when calculating the per-share impact of each of the reconciling items.
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The following table reconciles the change in net sales by product category and geographic region, as reported, to the change in net sales excluding the effects of foreign currency translation:

|  | As Reported |  | Impact of foreign currency translation |  | Variance, in constant currency |  | % Change, as reported |  | % Change, in constant currency
|  | Three Months Ended September 30 |  |  |  |  |  |
($ in millions) |  | 2022 |  | 2021 |  | Variance |  |  |  |
By Product Category: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Skin Care |  | $ | 2,104 |  |  | $ | 2,449 |  |  | $ | (345) |  |  | $ | 85 |  |  | $ | (260) |  |  | (14) | % |  | (11) | %
Makeup |  | 1,052 |  |  | 1,174 |  |  | (122) |  |  | 50 |  |  | (72) |  |  | (10) |  |  | (6) |
Fragrance |  | 607 |  |  | 609 |  |  | (2) |  |  | 35 |  |  | 33 |  |  | 0 |  |  | 5 |
Hair Care |  | 158 |  |  | 148 |  |  | 10 |  |  | 6 |  |  | 16 |  |  | 7 |  |  | 11 |
Other |  | 14 |  |  | 13 |  |  | 1 |  |  | — |  |  | 1 |  |  | 8 |  |  | 8 |
|  | 3,935 |  |  | 4,393 |  |  | (458) |  |  | 176 |  |  | (282) |  |  | (10) |  |  | (6) |
Returns associated with restructuring and other activities |  | (5) |  |  | (1) |  |  | (4) |  |  | — |  |  | (4) |  |  |  |  |
Total |  | $ | 3,930 |  |  | $ | 4,392 |  |  | $ | (462) |  |  | $ | 176 |  |  | $ | (286) |  |  | (11) | % |  | (7) | %
By Region: |  |  |  |  |  |  |  |  |  |  |  |  |  |
The Americas |  | $ | 1,123 |  |  | $ | 1,194 |  |  | $ | (71) |  |  | $ | (7) |  |  | $ | (78) |  |  | (6) | % |  | (7) | %
Europe, the Middle East & Africa |  | 1,682 |  |  | 1,873 |  |  | (191) |  |  | 83 |  |  | (108) |  |  | (10) |  |  | (6) |
Asia/Pacific |  | 1,130 |  |  | 1,326 |  |  | (196) |  |  | 100 |  |  | (96) |  |  | (15) |  |  | (7) |
|  | 3,935 |  |  | 4,393 |  |  | (458) |  |  | 176 |  |  | (282) |  |  | (10) |  |  | (6) |
Returns associated with restructuring and other activities |  | (5) |  |  | (1) |  |  | (4) |  |  | — |  |  | (4) |  |  |  |  |
Total |  | $ | 3,930 |  |  | $ | 4,392 |  |  | $ | (462) |  |  | $ | 176 |  |  | $ | (286) |  |  | (11) | % |  | (7) | %

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The following table reconciles the change in operating results by product category and geographic region, as reported, to the change in operating income excluding the impact of change in fair value of acquisition-related stock options:

|  | As Reported |  |  |  |  |  | Add: Change in fair value of acquisition-related stock options |  | Variance, as adjusted |  | % Change, as reported |  | % Change, as adjusted
|  | Three Months Ended September 30 |  |  |  |  |  |  |  |
($ in millions) |  | 2022 |  | 2021 |  | Variance |  |  |  |  |  |
By Product Category: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Skin Care |  | $ | 530 |  |  | $ | 717 |  |  | $ | (187) |  |  |  |  |  |  | $ | 1 |  |  | $ | (186) |  |  | (26) | % |  | (26) | %
Makeup |  | 16 |  |  | 91 |  |  | (75) |  |  |  |  |  |  | — |  |  | (75) |  |  | (82) |  | (82)
Fragrance |  | 133 |  |  | 131 |  |  | 2 |  |  |  |  |  |  | — |  |  | 2 |  |  | 2 |  |  | 2 |
Hair Care |  | (12) |  |  | 2 |  |  | (14) |  |  |  |  |  |  | — |  |  | (14) |  |  | (100+) |  | (100+)
Other |  | — |  |  | — |  |  | — |  |  |  |  |  |  | — |  |  | — |  |  | — |  | —
|  | 667 |  |  | 941 |  |  | (274) |  |  |  |  |  |  | $ | 1 |  |  | $ | (273) |  |  | (29) | % |  | (29) | %
Charges associated with restructuring and other activities |  | (6) |  |  | (6) |  |  | 0 |  |  |  |  |  |  |  |  |  |  |  |  |
Total |  | $ | 661 |  |  | $ | 935 |  |  | $ | (274) |  |  |  |  |  |  |  |  |  |  |  |  |
By Region: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
The Americas |  | $ | 125 |  |  | $ | 254 |  |  | $ | (129) |  |  |  |  |  |  | $ | 1 |  |  | $ | (128) |  |  | (51) | % |  | (50) | %
Europe, the Middle East & Africa |  | 334 |  |  | 465 |  |  | (131) |  |  |  |  |  |  | — |  |  | (131) |  |  | (28) |  |  | (28) |
Asia/Pacific |  | 208 |  |  | 222 |  |  | (14) |  |  |  |  |  |  | — |  |  | (14) |  |  | (6) |  |  | (6) |
|  | 667 |  |  | 941 |  |  | (274) |  |  |  |  |  |  | $ | 1 |  |  | $ | (273) |  |  | (29) | % |  | (29) | %
Charges associated with restructuring and other activities |  | (6) |  |  | (6) |  |  | — |  |  |  |  |  |  |  |  |  |  |  |  |
Total |  | $ | 661 |  |  | $ | 935 |  |  | $ | (274) |  |  |  |  |  |  |  |  |  |  |  |  |

FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal sources of funds historically have been cash flows from operations, borrowings pursuant to our commercial paper program, borrowings from the issuance of long-term debt and committed and uncommitted credit lines provided by banks and other lenders in the United States and abroad. At September 30, 2022, we had cash and cash equivalents of $2,938 million compared with $3,957 million at June 30, 2022. Our cash and cash equivalents are maintained at a number of financial institutions. To mitigate the risk of uninsured balances, we select financial institutions based on their credit ratings and financial strength, and we perform ongoing evaluations of these institutions to limit our concentration risk exposure.
Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support seasonal working capital needs, currently planned business operations, information technology enhancements, capital expenditures, acquisitions, dividends, stock repurchases, restructuring initiatives, commitments and other contractual obligations on both a near-term and long-term basis.
The Tax Cuts and Jobs Act (“TCJA”) resulted in the Transition Tax on unrepatriated earnings of our foreign subsidiaries and changed the tax law in ways that present opportunities to repatriate cash without additional U.S. federal income tax. As a result, we changed our indefinite reinvestment assertion related to certain foreign earnings, and we continue to analyze the indefinite reinvestment assertion on our remaining applicable foreign earnings. We do not believe that continuing to reinvest our foreign earnings impairs our ability to meet our domestic debt or working capital obligations. If these reinvested earnings were repatriated into the United States as dividends, we would be subject to state income taxes and applicable foreign taxes in certain jurisdictions.
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The effects of inflation have not been significant to our overall operating results in recent years, however we are mindful of increasing inflationary pressures. Generally, we have been able to introduce new products at higher prices, increase prices and implement other operating efficiencies to sufficiently offset cost increases.
Credit Ratings
Changes in our credit ratings will likely result in changes in our borrowing costs. Our credit ratings also impact the cost of our revolving credit facility. Downgrades in our credit ratings may reduce our ability to issue commercial paper and/or long-term debt and would likely increase the relative costs of borrowing. A credit rating is not a recommendation to buy, sell, or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization, and should be evaluated independently of any other rating. As of October 26, 2022, our long-term debt is rated A+ with a stable outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s.
Debt
At September 30, 2022, our outstanding borrowings were as follows:

($ in millions) |  | Long-term Debt |  | Current Debt |  | Total Debt
3.125% Senior Notes, due December 1, 2049 (“2049 Senior Notes”) (1), (12) |  | $ | 636 |  |  | $ | — |  |  | $ | 636 |
4.15% Senior Notes, due March 15, 2047 (“2047 Senior Notes”) (2), (12) |  | 494 |  |  | — |  |  | 494 |
4.375% Senior Notes, due June 15, 2045 (“2045 Senior Notes”) (3), (12) |  | 455 |  |  | — |  |  | 455 |
3.70% Senior Notes, due August 15, 2042 (“2042 Senior Notes”) (4), (12) |  | 247 |  |  | — |  |  | 247 |
6.00% Senior Notes, due May 15, 2037 (“2037 Senior Notes”) (5), (12) |  | 295 |  |  | — |  |  | 295 |
5.75% Senior Notes, due October 15, 2033 (“2033 Senior Notes”) (6) |  | 197 |  |  | — |  |  | 197 |
1.950% Senior Notes, due March 15, 2031 ("2031 Senior Notes") (7), (12) |  | 548 |  |  | — |  |  | 548 |
2.600% Senior Notes, due April 15, 2030 ("2030 Senior Notes") (8), (12) |  | 586 |  |  | — |  |  | 586 |
2.375% Senior Notes, due December 1, 2029 (“2029 Senior Notes”) (9), (12) |  | 642 |  |  | — |  |  | 642 |
3.15% Senior Notes, due March 15, 2027 (“2027 Senior Notes”) (10), (12) |  | 499 |  |  | — |  |  | 499 |
2.00% Senior Notes, due December 1, 2024 (“2024 Senior Notes”) (11), (12) |  | 498 |  |  | — |  |  | 498 |
Commercial paper |  | — |  |  | 249 |  |  | 249 |
Other long-term borrowings |  | 10 |  |  | — |  |  | 10 |
Other current borrowings |  | — |  |  | 17 |  |  | 17 |
|  | $ | 5,107 |  |  | $ | 266 |  |  | $ | 5,373 |

(1)Consists of $650 million principal, unamortized debt discount of $7 million and debt issuance costs of $7 million.
(2)Consists of $500 million principal, unamortized debt discount of $1 million and debt issuance costs of $5 million.
(3)Consists of $450 million principal, net unamortized debt premium of $9 million and debt issuance costs of $4 million.
(4)Consists of $250 million principal, unamortized debt discount of $1 million and debt issuance costs of $2 million.
(5)Consists of $300 million principal, unamortized debt discount of $3 million and debt issuance costs of $2 million.
(6)Consists of $200 million principal, unamortized debt discount of $2 million and debt issuance costs of $1 million.
(7)Consists of $600 million, principal, unamortized debt discount of $3 million, debt issuance costs of $4 million and a $45 million loss to reflect the fair value of interest rate swaps.
(8)Consists of $700 million principal, unamortized debt discount of $1 million, debt issuance costs of $4 million and a $109 million loss to reflect the fair value of interest rate swaps.
(9)Consists of $650 million principal, unamortized debt discount of $5 million and debt issuance costs of $3 million.
(10)Consists of $500 million principal and debt issuance costs of $1 million.
(11)Consists of $500 million principal, unamortized debt discount of $1 million and debt issuance costs of $1 million.
(12)The Senior Notes contain certain customary incurrence–based covenants, including limitations on indebtedness secured by liens.
Total debt as a percent of total capitalization was 49% at September 30, 2022 and June 30, 2022.
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Cash Flows

|  | Three Months Ended September 30
(In millions) |  | 2022 |  | 2021
Net cash flows used for operating activities |  | $ | (650) |  |  | $ | (81) |
Net cash flows used for investing activities |  | $ | (14) |  |  | $ | (153) |
Net cash flows used for financing activities |  | $ | (304) |  |  | $ | (714) |

The change in net cash flows used for operating activities primarily reflected lower earnings before tax, excluding non-cash items, and the unfavorable change in working capital, reflecting lower accounts payable due to timing of payments, higher inventory levels and lower other accrued liabilities, which includes the settlement of net investment hedges.
The change in net cash flows used for investing activities primarily reflected a favorable impact from the settlement of net investment hedges, which is offset by the unfavorable change in other accrued liabilities as discussed above, and a decrease in capital expenditures compared to the prior-year period.
The change in net cash flows used for financing activities primarily reflected a decrease relating to lower treasury stock repurchases and proceeds from the issuance of short-term commercial paper, partially offset by the repayment of the outstanding principal balance of our $250 million 2.35% senior note that matured during the fiscal 2023 first quarter.
Dividends
For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the three months ended September 30, 2022, see Notes to Consolidated Financial Statements, Note 11 – Equity and Redeemable Noncontrolling Interest.
Pension and Post-retirement Plan Funding
There have been no significant changes to our pension and post-retirement funding as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
Commitments, Contractual Obligations and Contingencies
There have been no significant changes to our commitments and contractual obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022. For a discussion of contingencies, see Notes to Consolidated Financial Statements, Note 8 – Contingencies.
Derivative Financial Instruments and Hedging Activities
For a discussion of our derivative financial instruments and hedging activities, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments.
Foreign Exchange Risk Management
For a discussion of foreign exchange risk management, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Cash Flow Hedges, Net Investment Hedges).
Credit Risk
For a discussion of credit risk, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Credit Risk).
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Market Risk
We address certain financial exposures through a controlled program of market risk management that includes the use of foreign currency forward contracts to reduce the effects of fluctuating foreign currency exchange rates and to mitigate the change in fair value of specific assets and liabilities on the balance sheet. To perform a sensitivity analysis of our foreign currency forward contracts, we assess the change in fair values from the impact of hypothetical changes in foreign currency exchange rates. A hypothetical 10% weakening of the U.S. dollar against the foreign exchange rates for the currencies in our portfolio would have resulted in a net decrease in the fair value of our portfolio of approximately $282 million and $259 million as of September 30, 2022 and June 30, 2022, respectively. This potential change does not consider our underlying foreign currency exposures.
In addition, we enter into interest rate derivatives to manage the effects of interest rate movements on our aggregate liability portfolio, including future debt issuances. Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would decrease by approximately $58 million and $41 million as of September 30, 2022 and June 30, 2022, respectively.
Our sensitivity analysis represents an estimate of reasonably possible net losses that would be recognized on our portfolio of derivative financial instruments assuming hypothetical movements in future market rates and is not necessarily indicative of actual results, which may or may not occur. It does not represent the maximum possible loss or any expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in our portfolio of derivative financial instruments during the year. We believe, however, that any such loss incurred would be offset by the effects of market rate movements on the respective underlying transactions for which the derivative financial instrument was intended.
OFF-BALANCE SHEET ARRANGEMENTS
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.
CRITICAL ACCOUNTING POLICIES
As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those financial statements. These estimates and assumptions can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies relate to goodwill, other intangible assets and long-lived assets - impairment assessment and income taxes. Since June 30, 2022, there have been no significant changes to the assumptions and estimates related to our critical accounting policies.
RECENTLY ISSUED ACCOUNTING STANDARDS
For a discussion regarding the impact of accounting standards that were recently issued but not yet effective, on the Company’s consolidated financial statements, see Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION
We and our representatives from time to time make written or oral forward-looking statements, including in this and other filings with the Securities and Exchange Commission, in our press releases and in our reports to stockholders, which may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may address our expectations regarding sales, earnings or other future financial performance and liquidity, other performance measures, product introductions, entry into new geographic regions, information technology initiatives, new methods of sale, our long-term strategy, restructuring and other charges and resulting cost savings, and future operations or operating results. These statements may contain words like “expect,” “will,” “will likely result,” “would,” “believe,” “estimate,” “planned,” “plans,” “intends,” “may,” “should,” “could,” “anticipate,” “estimate,” “project,” “projected,” “forecast,” and “forecasted” or similar expressions. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, actual results may differ materially from our expectations. Factors that could cause actual results to differ from expectations include, without limitation:
(1)increased competitive activity from companies in the skin care, makeup, fragrance and hair care businesses;
(2)our ability to develop, produce and market new products on which future operating results may depend and to successfully address challenges in our business;
(3)consolidations, restructurings, bankruptcies and reorganizations in the retail industry causing a decrease in the number of stores that sell our products, an increase in the ownership concentration within the retail industry, ownership of retailers by our competitors or ownership of competitors by our customers that are retailers and our inability to collect receivables;
(4)destocking and tighter working capital management by retailers;
(5)the success, or changes in timing or scope, of new product launches and the success, or changes in timing or scope, of advertising, sampling and merchandising programs;
(6)shifts in the preferences of consumers as to where and how they shop;
(7)social, political and economic risks to our foreign or domestic manufacturing, distribution and retail operations, including changes in foreign investment and trade policies and regulations of the host countries and of the United States;
(8)changes in the laws, regulations and policies (including the interpretations and enforcement thereof) that affect, or will affect, our business, including those relating to our products or distribution networks, changes in accounting standards, tax laws and regulations, environmental or climate change laws, regulations or accords, trade rules and customs regulations, and the outcome and expense of legal or regulatory proceedings, and any action we may take as a result;
(9)foreign currency fluctuations affecting our results of operations and the value of our foreign assets, the relative prices at which we and our foreign competitors sell products in the same markets and our operating and manufacturing costs outside of the United States;
(10)changes in global or local conditions, including those due to volatility in the global credit and equity markets, natural or man-made disasters, real or perceived epidemics, supply chain challenges, inflation, or increased energy costs, that could affect consumer purchasing, the willingness or ability of consumers to travel and/or purchase our products while traveling, the financial strength of our customers, suppliers or other contract counterparties, our operations, the cost and availability of capital which we may need for new equipment, facilities or acquisitions, the returns that we are able to generate on our pension assets and the resulting impact on funding obligations, the cost and availability of raw materials and the assumptions underlying our critical accounting estimates;
(11)impacts attributable to the COVID-19 pandemic, including disruptions to our global business;
(12)shipment delays, commodity pricing, depletion of inventory and increased production costs resulting from disruptions of operations at any of the facilities that manufacture our products or at our distribution or inventory centers, including disruptions that may be caused by the implementation of information technology initiatives, or by restructurings;
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(13)real estate rates and availability, which may affect our ability to increase or maintain the number of retail locations at which we sell our products and the costs associated with our other facilities;
(14)changes in product mix to products which are less profitable;
(15)our ability to acquire, develop or implement new information and distribution technologies and initiatives on a timely basis and within our cost estimates and our ability to maintain continuous operations of such systems and the security of data and other information that may be stored in such systems or other systems or media;
(16)our ability to capitalize on opportunities for improved efficiency, such as publicly-announced strategies and restructuring and cost-savings initiatives, and to integrate acquired businesses and realize value therefrom;
(17)consequences attributable to local or international conflicts around the world, as well as from any terrorist action, retaliation and the threat of further action or retaliation;
(18)the timing and impact of acquisitions, investments and divestitures; and
(19)additional factors as described in our filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
We assume no responsibility to update forward-looking statements made herein or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is set forth in Item 2 of this Quarterly Report on Form 10-Q under the caption Liquidity and Capital Resources - Market Risk and is incorporated herein by reference.
Item 4. Controls and Procedures.
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of September 30, 2022 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
As part of our review of internal control over financial reporting, we make changes to systems and processes to improve such controls and increase efficiencies, while ensuring that we maintain an effective internal control environment. There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the first quarter of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For a discussion of legal proceedings, see Notes to Consolidated Financial Statements, Note 8 – Contingencies.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Share Repurchase Program
We are authorized by the Board of Directors to repurchase shares of our Class A Common Stock in the open market or in privately negotiated transactions, depending on market conditions and other factors. The following table provides information relating to our repurchase of Class A Common Stock during the referenced periods:

Period |  | Total Number of Shares Purchased(1) |  | Average Price Paid Per Share |  | Total Number of Shares Purchased as Part of Publicly Announced Program |  | Maximum Number of Shares that May Yet Be Purchased Under the Program(2)
July 2022 |  | 215,000 |  | $ | 252.79 |  |  | 215,000 |  | 25,665,782
August 2022 |  | 51,540 |  | 267.25 |  |  | 51,540 |  | 25,614,242
September 2022 |  | 173,300 |  | 243.41 |  |  | 100,250 |  | 25,513,992
|  | 439,840 |  | 250.79 |  |  | 366,790 |  |

(1)Includes shares that were repurchased by the Company to satisfy tax withholding obligations upon the payout of certain stock-based compensation arrangements.
(2)The Board of Directors has authorized the current repurchase program for up to 80.0 million shares. The total amount was last increased by the Board on October 31, 2018. Our repurchase program does not have an expiration date.
Subsequent to September 30, 2022 and as of October 26, 2022, we purchased approximately 0.3 million additional shares of our Class A Common Stock for $57 million pursuant to our share repurchase program.
Item 6. Exhibits.

Exhibit Number |  | Description
31.1 |  | Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO).
31.2 |  | Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO).
32.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO). (furnished)
32.2 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO). (furnished)
101.1 |  | The following materials from The Estée Lauder Companies Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022 are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Statements of Earnings, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements
104 |  | The cover page from The Estée Lauder Companies Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022 is formatted in iXBRL

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| THE ESTÉE LAUDER COMPANIES INC.
| By: | /s/ TRACEY T. TRAVIS
Date: November 2, 2022 |  | Tracey T. Travis
|  | Executive Vice President and Chief Financial Officer
|  | (Principal Financial and Accounting Officer)

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