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.

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.

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 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.

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.

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 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

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.

In March 2020, the FASB 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.

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.