Estee Lauder 2010 Annual Report Download

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The Estée
Lauder
Companies
Inc.
2010
annual report

Table of contents

  • Page 1
    The Estée Lauder Companies Inc. annual report 2010

  • Page 2
    ... SUCCESSES 64 PORTFOLIO OF BRANDS 72 BOARD OF DIRECTORS 74 EXECUTIVE OFFICERS 75 FINANCIAL HIGHLIGHTS 79 FINANCIAL SECTION 151 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 152 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING...

  • Page 3
    WILLIAM P. LAUDER "Guided by the values upon which our Company was founded and our long-term corporate strategy, we met the challenges of the still-turbulent economy by generating some of our best results in years." 2

  • Page 4
    ...gained share in many important countries and channels and achieved strong sales and profits. Importantly, we achieved these goals while exercising prudent financial decision-making and managing costs. We began fiscal 2010 with the launch of the Estée Lauder brand's upgraded Advanced Night Repair...

  • Page 5
    ...Manager of our Origins and Ojon brands and a member of The Estée Lauder Companies' Board of Directors, at the launch of Origins in China, one of our most strategic markets. This was a particularly significant event for the brand and a milestone for our Company as we continue to expand our business...

  • Page 6
    ... appreciation to all of our employees who worked especially hard in fiscal 2010, I would like to thank our exceptional senior management teams for steering the Company so ably during a time of great change, both internally and externally. I am indebted to the Board for its excellent advice and...

  • Page 7
    FABRIZIO FREDA "Our successes in fiscal 2010 are a testament to the strength of The Estée Lauder Companies, the loyalty of our valued consumers and the dedication of our employees across the globe." 6

  • Page 8
    ...was a tremendous year for launching breakthrough products, services and concepts. To name a few, Clinique's Even Better Clinical Dark Spot Corrector and Estée Lauder's upgraded Advanced Night Repair experienced extraordinary success around the world. At the same time, we demonstrated outstanding 7

  • Page 9
    ... and produce even greater breakthrough products and solutions. High-Touch: We will apply our High-Touch service model to promote total value that goes beyond price or technology in new and dynamic ways across various channels. Our personalized information and education is a powerful asset...

  • Page 10
    ...better serve our global consumers. We created a Corporate Marketing Center of Excellence to help give our brands greater local consumer insights which we will use to create more targeted products and services. Enhancing Digital Capabilities: Communicating with consumers is changing as rapidly as the...

  • Page 11
    ...that is more informed, more agile and has a greater ability to adapt to, and win in, a changing beauty landscape. Clinique's Even Better Clinical Dark Spot Corrector is the first beauty product in department stores whose results rival a prescription-strength product for addressing uneven skin tone...

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    11 11

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    ... the world, there is great passion for our products, inherent consumer demand and growing consumer wealth. In fact, the demographics driving our business are strong and getting stronger. Research shows that by 2015, global women's purchasing power is expected to increase by $5 trillion and beauty is...

  • Page 17
    ... in department stores whose results rival a prescription-strength product for addressing uneven skin tone. In combination with an integrated marketing campaign encompassing TV, digital and print, the product has become a global hit and produced solid market share gain for Clinique in the United...

  • Page 18
    esteelauder.com 17

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  • Page 20
    The global launch of the 2010 M.A. C Viva Glam "From Our Lips" campaign, featuring Lady Gaga and Cyndi Lauper, has been the most successful ever. To date, Viva Glam has raised over $180 million to help fight and elevate awareness of HIV/AIDS around the world. LEFT: M.A.C Viva Glam "...

  • Page 21
    ...." In the first three months of its launch, pureDKNY ranked among the top five prestige fragrances across Europe, and did particularly well in the United Kingdom and travel retail, expanding upon the success of the well-established DKNY brand. RIGHT: DKNY pureDKNY fragrance campaign. 20

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  • Page 24
    ... and Creative Director, worked closely with Tom Pecheux, the brand's new Creative Makeup Director, to create the dynamic, fashion-inspired Pure Color collection. Our creativity and ability to innovate is a critical component of our business and extends well beyond product innovation. M.A. C and...

  • Page 25
    ... our business - products, packaging, marketing, consumer experience, education and distribution-and, simply put, it means bringing the best to everyone we touch. While High-Touch is perfectly suited for the department store environment, we are continuously seeking to translate it to all our channels...

  • Page 26
    25

  • Page 27
    ... our High-Touch service model to support our consumers' desires to indulge themselves, but on their own time and schedules. Working closely with one of our largest channels, North American department stores, Clinique created an open space at Bloomingdale's ï¬,agship store in New York City to offer...

  • Page 28
    27

  • Page 29
    ... of in-store consultants, beauty advisors, makeup artists and stylists, redesigning counters to improve navigation and adding new features to delight shoppers. We also are more effectively communicating product performance claims and developing new Consumer Relationship Management and loyalty...

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  • Page 32
    ...New York City draws four times the average consumer traffic per day versus other M.A.C freestanding stores. In fiscal 2010, we began piloting new High-Touch service formats in channels of growing importance, including beauty specialty stores, where we created unique counter displays. We innovated...

  • Page 33
    ... new High-Touch models in channels such as pop-up stores. When Lab Series Skincare for Men broke new ground with its first pop-up store in the heart of New York City, our male consumers were made to feel comfortable and engaged through innovative space and merchandising design. Created with men...

  • Page 34
    The Lab Series Skincare for Men pop-up store included internet stations, skin analyzers, complimentary shaves, mini facials and shoe shining. TOP: Lab Series Skincare for Men pop-up store interior, New York City. 33

  • Page 35
    ... markets represent. Just as different skin requires various product formulations, so, too, do distinct cultures, habits, expectations and definitions of beauty require specialized products, education, High-Touch services, consumer engagements and communication. Therefore, as we develop our business...

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  • Page 38
    ...in-country research, we learned that, in contrast to the desires of our other consumers in the region, Chinese women are most concerned with the appearance of dry, dull skin. In response to our Chinese consumers' desires, we developed and launched new products under the Estée Lauder Nutritious line...

  • Page 39
    38

  • Page 40
    ... the U.S. to beauty-related websites topped 60 million and grew 94 percent. The digital space offers the perfect opportunity for translating and sharing in the emotional connections that fans have to our products and services. While High-Touch has always meant listening closely to our consumers, the...

  • Page 41
    ... a new model of "s-commerce" - where "social and service" meet commerce. Unlike physical environments, shopping online is no longer a solitary experience, and our brands are increasingly reï¬,ecting this. The site features easy-to-use navigation, a library of "how-to" videos, improved color swatches...

  • Page 42
    ... the future, The Estée Lauder Companies will continue to innovate new ways of engaging our consumers in the digital space where we expect some of the strongest growth. From Facebook to iPads, Twitter to the blogosphere, we have exponentially expanded and improved our online capabilities and will...

  • Page 43
    42

  • Page 44
    ... a strategic opportunity to strengthen our presence in the department store channel. We created a business unit we call the "North American affiliate" in order to enable our brands to better share and leverage knowledge and insights, particularly of the retail marketplace. Formerly managed directly...

  • Page 45
    WWW.TOMFORD.COM WWW.TOMFOR

  • Page 46
    ... To improve demand planning, inventory management, decision making, speed to market and tracking of goods,฀we฀advanced฀our฀Strategic฀Modernization฀Initiative฀(SMI)฀by฀implementing฀SAP,฀an฀enterprise-wide฀ information system, at nine of our North American manufacturing sites...

  • Page 47
    ... that we implemented to support the launch of Estée Lauder's upgraded Advanced Night Repair - a 360-degree television, print and digital media campaign. TOP: Estée Lauder DFS Galleria Waikiki, Hawaii. BOTTOM: Sean "Diddy" Combs on Home Shopping Network promoting his fragrance collection. 46

  • Page 48
    47

  • Page 49
    The unveiling of Clinique's first ï¬,agship store in São Paulo, Brazil provides a strategic opportunity for the brand to expand in the third-largest beauty market in the world.

  • Page 50
    ...Parksons department store. Origins is our ninth brand in China and initial results have exceeded expectations. In Russia, we focused on our iconic brand franchises, such as Estée Lauder's Advanced Night Repair, Clinique's 3-Step Skin Care System and DKNY's Be Delicious fragrance. Through the use of...

  • Page 51
    ...are advancing our travel retail business. Worldwide, The Estée Lauder Companies ranks number one in prestige skin care and number two in makeup in the channel. From our success in mainland China, we expect to see a ripple effect positively impacting sales in travel retail, particularly in Asia/Paci...

  • Page 52
    In European pharmacies, Darphin is implementing breakthrough store navigation and merchandising systems to attract consumers, as well as educate them on how to use Darphin's product line. BOTTOM: Darphin display in a French pharmacy, Paris. 51

  • Page 53

  • Page 54
    ... have three of the top ten women's fragrances in U.S. prestige department stores. Estée Lauder's Beautiful fragrance, introduced 25 years ago, ranked number two for this fiscal year. Our high-end fragrance brands, including Jo Malone and Tom Ford, have smaller, but devoted and growing followings...

  • Page 55
    54

  • Page 56
    ... for growth in North America for our brands and even more opportunities internationally. As one of the biggest product launches in Bumble and bumble's history, its Wear and Care line reinvents the essence of the brand's styling heritage to meet the aspirations of consumers. LEFT: Jo Malone Farrow...

  • Page 57
    ... Prescriptives' loyal consumers and retailers and continue to sell the brand's top-selling products online for now. We also retained many of the brand's talented employees by transferring them to other brands while tightly managing the cost of the shutdown. RIGHT: Tom Ford Private Blend Lip Color...

  • Page 58
    57

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    58

  • Page 60
    .... As the global potential marketplace continues to expand, we are confident that The Estée Lauder Companies will continue to be at the forefront with the right products and High-Touch service experiences for women and men. We hold true to our values and are determined to continue to bring the best...

  • Page 61
    .... For our investors, we look toward a future of delivering superior growth, a greater return on invested capital and increased, sustainable profitability. At The Estée Lauder Companies, we are dedicated to achieving our strategy on the road to our ultimate goal - to remain the undisputed leader in...

  • Page 62
    leading in global prestige beauty 61

  • Page 63
    ... engagement model to new heights. GoodSkin Labs is the number one anti-aging skin care line in Germany's Douglas perfumeries. In collaboration with British lifestyle paint and wallpaper purveyor Farrow & Ball, Jo Malone launched its first-ever collection of colored candles. BRAZIL Clinique...

  • Page 64
    ...Estée Lauder became the #1 brand in prestige beauty in China in our distribution. MIDDLE EAST La Mer officially celebrated the arrival of the brand in Bahrain, the sixth country in the Middle East where La Mer is sold. Adapting to the cultural customs of Saudi Arabia, our M.A. C Make-up Artists...

  • Page 65
    ... of the most iconic skin care and makeup products, such as Advanced Night Repair Synchronized Recovery Complex, Re-Nutriv Ultimate Lift Age-Correcting Creme and Pure Color, and has two of the top 10 fragrances in U.S. prestige department stores, Beautiful and pleasures. ARAMIS Introduced in 1964...

  • Page 66
    ...featuring custom color for women. In the third quarter of fiscal 2010, we closed the global wholesale distribution of the brand. Select Prescriptives makeup and skin care products remain available for sale at prescriptives.com. LAB SERIES SKINCARE FOR MEN Lab Series Skincare for Men was introduced...

  • Page 67
    .... LA MER La Mer joined our family of brands in 1995 when we acquired the rights to Crème de la Mer. Sold in 60 countries and territories, La Mer represents supreme luxury and serious skin care treatment. The brand's legendary product, Crème de la Mer, continues to be one of the most innovative...

  • Page 68
    ... color cosmetics, skin care, professional makeup brushes and tools, accessories and fragrance. DONNA KARAN Donna Karan New York and DKNY joined The Estée Lauder Companies when the exclusive global license agreement was signed in 1997. Sold in more than 120 countries and territories, the collection...

  • Page 69
    ... acquired our initial interest in Bumble and bumble in 2000 and the brand was fully integrated in September 2006. It is sold in 25 countries and territories. The New York-based hair care and education brand creates high-quality hair care and styling products distributed through other top-tier salons...

  • Page 70
    ... the United States at Kohl's Department Stores and online at kohls.com. FLIRT!, a fresh, fun, ï¬,irty makeup collection, is everything you need to get noticed. Playful and informative "color bars" and color-matched packaging ensure shopping is as delightful as the products themselves. GOODSKIN LABS...

  • Page 71
    ...Stores nationwide and online at kohls.com. Building off the remarkable success of Daisy Fuentes' sportswear line, also sold at Kohl's, BeautyBank created several popular fragrances for the well-known entrepreneur and fashion designer, including Dianoche, Dianoche Love and Dianoche Passion. TOM FORD...

  • Page 72
    .... The collection is available in Coach retail stores in the United States and Japan, select department stores in the United States and online. OJON We acquired Ojon in 2007. It is sold in five countries and is expanding internationally. The brand creates highly effective hair care products using...

  • Page 73
    ..., CBE 2,4 Retail and Merchandising Consultant IRVINE O. HOCKADAY, JR.1 Retired President and Chief Executive Officer Hallmark Cards, Inc. FABRIZIO FREDA President and Chief Executive Officer The Estée Lauder Companies Inc. AERIN LAUDER Senior Vice President Creative Director Estée Lauder 72

  • Page 74
    ...The Estée Lauder Companies Inc. RICHARD F. ZANNINO1 Managing Director CCMP Capital Advisors, LLC RICHARD D. PARSONS2,3 Chairman Citigroup, Inc. 1. Member of Audit Committee 2. Member of Compensation Committee 3. Member of Nominating and Board Affairs Committee 4. Member of Stock Plan Subcommittee...

  • Page 75
    ...Vice President Global Research and Development Corporate Product Innovation Package Development RICHARD W. KUNES Executive Vice President Chief Financial Officer EVELYN H. LAUDER Senior Corporate Vice President LEONARD A. LAUDER Chairman Emeritus RONALD S. LAUDER Chairman Clinique Laboratories, LLC...

  • Page 76
    FINANCIAL HIGHLIGHTS FINANCIAL OVERVIEW FISCAL YEAR ENDED OR AT JUNE 30 (Dollars฀in฀millions,฀except฀per฀share฀data) 2010 2009 Change Net Sales* Operating Income* Net Earnings*†Net Earnings Per Common Share - Diluted*†Total Assets* Stockholders' Equity*†$7,795.8฀ 789.9฀ ...

  • Page 77
    HISTORICAL NET SALES GROWTH 1953 1972 $100 million 1985 $1 billion 1991 $2 billion 2010 $7.8 billion NET SALES* (Dollars in billions) 6.46 7.04 7.91 7.32 7.80 $7.80 BILLION OPERATING INCOME* (Dollars in millions) 2006 619.6 2007 749.9 2008 810.7 2009 418.4 2010 789.9 $789.9 MILLION...

  • Page 78
    ...2007 19.9 2008 21.0 2009 18.0 2010 14.7 OPERATING WORKING CAPITAL‡ (As % of net sales) 19.7 ACCOUNTS RECEIVABLE PLUS INVENTORY LESS ACCOUNTS PAYABLE 14.7% 2006 * Refer to Selected Financial Data and related footnotes on page 81. †Attributable to The Estée Lauder Companies Inc. ‡ Does not...

  • Page 79
    ...416.2 686.1 COMPOUND ANNUAL GROWTH RATE 10.1%‡ $686.1 MILLION 2010 NET SALES BY DISTRIBUTION CHANNEL U.S. Department Stores 27% 2006 2007 2008 2009 2010 28% International Department Stores Other 9% 1 3% Perfumeries Salons/Spas 5% Travel Retail 9% 9% Retail Stores ‡ Does not represent...

  • Page 80
    FINANCIAL SECTION 79

  • Page 81
    ... CONSOLIDATED FINANCIAL STATEMENTS 151 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 152 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING 153 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 154 STOCKHOLDER INFORMATION 80...

  • Page 82
    ...-off of unamortized terminated interest rate swap, issuance costs and debt discount, and tender offer costs associated with both series of notes. (e) In April 2006, we completed the sale of certain assets and operations of the reporting unit that marketed and sold Stila brand products. As a result...

  • Page 83
    ... FIFO most closely matches the ï¬,ow of our products from manufacture through sale. The reported net value of our inventory includes saleable products, promotional products, raw materials and componentry and work in process that will be sold or used in future periods. Inventory cost includes raw...

  • Page 84
    ... effect on fiscal 2010 pension expense: 25 Basis-Point Increase (In millions) 25 Basis-Point Decrease $3.3 $1.9 Discount rate Expected return on assets $(1.5) $(1.9) Our post-retirement plans are comprised of health care plans that could be impacted by health care cost trend rates, which may...

  • Page 85
    ... terminal value, the weighted-average cost of capital used to discount future cash ï¬,ows and comparable market multiples. The fiscal 2010 compound annual growth rate of sales for the first four to eight years of our projections, as considered appropriate for the individual reporting units, ranged...

  • Page 86
    ...discounting future cash ï¬,ows. INCOME TAXES We account for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns...

  • Page 87
    ... - Summary of Significant Accounting Policies" and "Note 20 - Segment Data and Related Information" of Notes to Consolidated Financial Statements 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...

  • Page 88
    ... ENDED JUNE 30 (In millions) 2010 2009 2008 NET SALES By Region: The Americas Europe, the Middle East & Africa Asia/Pacific Returns associated with restructuring activities By Product Category: Skin Care Makeup Fragrance Hair Care Other Returns associated with restructuring activities OPERATING...

  • Page 89
    ... and accelerate share growth in emerging markets such as China, Russia, the Middle East and Eastern Europe. While we expect the retail environment in North America to continue to be challenging, we recognize the need to restore profitable growth in our traditional department store channel. We have...

  • Page 90
    ... a history of outstanding creativity, innovation and entrepreneurship, and initial successes in expanding our High-Touch service model beyond department stores, and believe we have a passionate, highlytalented workforce to help us achieve our long-term strategy. Our balance sheet, cash ï¬,ows and...

  • Page 91
    ...for product returns, wrote off inventory and incurred costs to reduce workforce and other exit costs. Also during fiscal 2010, we approved a restructuring initiative that included the reformulation of Ojon brand products Outsourcing - In order to balance the growing need for information technology...

  • Page 92
    ... publicly traded companies that are applied to operating performance of the reporting unit. These impairment charges were reï¬,ected in the hair care and skin care product categories and in the Americas region. During the fourth quarter of fiscal 2010, we approved a restructuring initiative...

  • Page 93
    ... in new market initiatives, or if there is a decline in the business environment in which this reporting unit operates, a resulting change in the key assumptions, including a decrease in the terminal value or increase in the discount rate, could have a negative impact on the estimated fair value...

  • Page 94
    ...our strategic focus on growing this category through creativity and innovation, particularly high growth segments, such as products that address the visible signs of aging. The recent launches of Advanced Night Repair Synchronized Recovery Complex, Advanced Night Repair Eye Synchronized Complex, and...

  • Page 95
    ... color products, the recent launches of Smooth Infusion Glossing Straightener and Control Force from Aveda and sales generated from expanded distribution outside the United States. This increase was partially offset by lower net sales in North America resulting from a soft salon retail environment...

  • Page 96
    ... to reï¬,ect the anticipated returns of these products from participating retailers, subject to our returns approval policy. Excluding the impact of foreign currency translation, net sales in Europe, the Middle East & Africa increased 8%. Net sales in Asia/Pacific increased 16%, or $210.7 million...

  • Page 97
    ...sales from the exit of the wholesale distribution of Prescriptives products, higher charges for goodwill, other intangible asset and long-lived asset impairments, and the impact of the recent economic events in Venezuela, as previously discussed. In Europe, the Middle East & Africa, operating income...

  • Page 98
    ...other product lines in this category also experienced declines, particularly in Europe, the Middle East & Africa and the Americas, partially offset by double-digit growth in Asia/Pacific. Excluding the impact of foreign currency translation, skin care net sales increased 2%. Makeup Makeup net sales...

  • Page 99
    ... approximately $13 million from new products, such as Dry Remedy Shampoo and Conditioner and the Sun Care line of products from Aveda. The category also benefited from improved sales of hair color products, as well as an increase in points of distribution outside of the United States, including the...

  • Page 100
    ... margin increased by approximately 60 basis points driven by the decline in consumer demand in the economic environment. Changes in advertising, merchandising and sampling spending result from the type, timing and level of activities related to product launches and rollouts, as well as the markets...

  • Page 101
    ...and debt discount, and tender offer costs associated with both series of notes. 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 currently planned business...

  • Page 102
    ...to introduce new products at higher prices or increase prices sufficiently to offset cost increases, which have been moderate. Credit Ratings Changes in our credit ratings will likely result in changes in our borrowing costs. Our credit ratings also impact the Debt At June 30, 2010, our outstanding...

  • Page 103
    ...$ 101.6 11 to 1 borrowing. There were no debt issuance costs incurred related to this agreement. The outstanding balance at June 30, 2010 ($4.6 million at the exchange rate at June 30, 2010) is classified as short-term debt in our consolidated balance sheet. We have a 1.5 billion Japanese yen ($16...

  • Page 104
    ... in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates." The effect of our pension plan funding on future operating results will depend on economic conditions, employee demographics, mortality rates, the number of...

  • Page 105
    ... commitments, planned funding of pension and other postretirement benefit obligations, commitments pursuant to executive compensation arrangements, obligations related to our cost savings initiatives and acquisitions. In July 2010, we acquired Smashbox Beauty Cosmetics for a purchase price of...

  • Page 106
    ... are designated as fair-value hedges of the related long-term debt and meet the accounting criteria that permit changes in the fair values of the interest rate swap agreements to exactly offset changes in the fair value of the underlying long-term debt. As of June 30, 2010, these fair-value...

  • Page 107
    ... competitive activity from companies in the skin care, makeup, fragrance and hair care businesses, some of which have greater resources than we do; (2) our ability to develop, produce and market new products on which future operating results may depend and to successfully address challenges in our...

  • Page 108
    ...number of retail locations at which we sell our products and the costs associated with our other facilities; (13) changes in product mix to products which are less profitable; (14) our ability to acquire, develop or implement new information and distribution technologies and initiatives on a timely...

  • Page 109
    ... on debt extinguishment Earnings before Income Taxes Provision for income taxes Net Earnings Net earnings attributable to noncontrolling interests Net Earnings Attributable to The Estée Lauder Companies Inc. Net earnings attributable to The Estée Lauder Companies Inc. per common share: Basic...

  • Page 110
    ... Retained earnings Accumulated other comprehensive loss Less: Treasury stock, at cost; 70,125,805 Class A shares at June 30, 2010 and 65,294,477 Class A shares at June 30, 2009 Total stockholders' equity - The Estée Lauder Companies Inc. Noncontrolling interests Total equity Total liabilities and...

  • Page 111
    ..., beginning of year Stock-based compensation Settlement of accelerated share repurchase program Purchase of noncontrolling interest Paid-in capital, end of year Retained earnings, beginning of year Cumulative effect of adjustments resulting from adoption of new accounting standards Adjusted retained...

  • Page 112
    ... income (loss) Comprehensive (income) loss attributable to noncontrolling interests: Net earnings Translation adjustments, net of tax Comprehensive income (loss) attributable to The Estée Lauder Companies Inc. $398.7 See notes to consolidated financial statements. THE EST{E LAUDER COMPANIES...

  • Page 113
    ... stock-based compensation transactions Excess tax benefits from stock-based compensation arrangements Payments to acquire treasury stock Dividends paid to stockholders Payments to noncontrolling interest holders Net cash ï¬,ows provided by (used for) financing activities Effect of Exchange Rate...

  • Page 114
    ...Estée Lauder Companies Inc. manufactures, markets and sells skin care, makeup, fragrance and hair care products around the world. Products are marketed under the following brand names: Estée Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, M.A. C, Bobbi Brown, La Mer, Aveda, Jo Malone...

  • Page 115
    ... known or anticipated events may be established. Derivative Financial Instruments The Company's derivative financial instruments are recorded as either assets or liabilities on the balance sheet and measured at fair value. All derivatives outstanding as of June 30, 2010 are (i) designated as a hedge...

  • Page 116
    ...by discounting future cash ï¬,ows. Concentration of Credit Risk The Company is a worldwide manufacturer, marketer and distributor of skin care, makeup, fragrance and hair care products. Domestic and international sales are made primarily to department stores, perfumeries and specialty retailers. The...

  • Page 117
    ...to the retailer against accounts receivable from that retailer. As a percentage of gross sales, returns were 4.3%, 4.4% and 4.4% in fiscal 2010, 2009 and 2008, respectively. Payments to Customers The Company records revenues generated from purchase with purchase promotions as sales and the costs of...

  • Page 118
    ...cash ï¬,ows. Income Taxes The Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. The net...

  • Page 119
    ... Note 13 - Pension, Deferred Compensation and Post-retirement Benefit Plans and did not have an impact on the Company's consolidated financial results. In August 2009, the FASB issued authoritative guidance to provide clarification on measuring liabilities at fair value when a quoted price in an...

  • Page 120
    ... how the initial carrying value of an equity method investment should be determined, how to account for any subsequent purchases and sales of additional ownership interests, and whether the investor must separately assess its underlying share of the investee's indefinite-lived intangible assets...

  • Page 121
    ...AGI"), a manufacturer of cosmetics ingredients. In addition, the Company acquired businesses engaged in the wholesale distribution and retail sale of Aveda products. These activities were predominantly related to the Company's skin care and hair care businesses and resulted in increases to goodwill...

  • Page 122
    Goodwill The Company assigns goodwill of a reporting unit to the product category in which that reporting unit predominantly operates at the time of its acquisition. The change in the carrying amount of goodwill is as follows: Skin Care (In millions) Makeup Fragrance Hair Care Total Balance as ...

  • Page 123
    ... rate in effect at that time, in the skin care product category and in the Europe, the Middle East & Africa region. After adjusting the carrying value of the trademark, the Company completed step one of the impairment test for goodwill and concluded that the fair value of the Darphin reporting unit...

  • Page 124
    ...The purchase price was paid in cash at closing. In addition, at various times during fiscal 2010 and 2009, the Company also acquired businesses engaged in the wholesale distribution and retail sale of the Company's products in the United States and other countries and made earn-out payments related...

  • Page 125
    ... certain information technology processes. The Company incurred costs to transition services to an outsource provider. The following table presents aggregate restructuring charges related to the Program: Employee-Related Costs (In millions) Asset Write-offs $ 4.2 11.0 $15.2 Contract Terminations...

  • Page 126
    ... provision for income taxes is comprised of the following: YEAR ENDED JUNE 30 (In millions) recorded through June 30, 2010 plus other initiatives approved through June 30, 2010 is between $35 million and $39 million related to sales returns and approximately $15 million related to inventory write...

  • Page 127
    ... Company's deferred income tax assets and liabilities as of June 30, 2010 and 2009 were as follows: 2010 (In millions) 2009 Deferred tax assets: Compensation related expenses Inventory obsolescence and other inventory related reserves Retirement benefit obligations Various accruals not currently...

  • Page 128
    ... its subsidiary in Spain for fiscal years 1999 through 2002. As a result, the subsidiary was reassessed corporate income tax of $2.5 million for this period, at current exchange rates. An appeal against this reassessment was filed with the Chief Tax Inspector. THE EST{E LAUDER COMPANIES INC. 127

  • Page 129
    ... liabilities consist of the following: JUNE 30 (In millions) 2010 2009 Advertising, merchandising and sampling Employee compensation Payroll and other taxes Restructuring Other $ 373.5 366.3 103.6 25.4 249.2 $1,118.0 $ 321.1 280.8 94.8 48.2 317.5 $1,062.4 128 THE EST{E LAUDER COMPANIES INC.

  • Page 130
    ...issuance of the new debt and the Company recognized a loss in other comprehensive income of $0.9 million that will be amortized to interest expense over the life of the 2037 Senior Notes. As a result of the forwardstarting interest rate swap agreements, the debt discount and debt issuance costs, the...

  • Page 131
    ... basis points per annum above the spot rate charged by the lender or the lender's ï¬,oating call rate agreed to by the Company at each borrowing. There were no debt issuance costs incurred related to this agreement. The outstanding balance at June 30, 2010 ($4.6 million at the exchange rate at June...

  • Page 132
    ... addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The Company primarily enters into foreign currency forward and option contracts to reduce the effects of ï¬,uctuating foreign currency exchange rates...

  • Page 133
    ...: Asset Derivatives Balance Sheet Location Fair Value(1) June 30 2010 (In millions) Liability Derivatives Balance Sheet Location Fair Value(1) June 30 2010 2009 2009 Derivatives Designated as Hedging Instruments: Foreign currency forward contracts Interest rate swap contracts Total Derivatives...

  • Page 134
    ...minimize the effect of foreign exchange rate movements on costs and on the cash ï¬,ows that the Company receives from foreign subsidiaries. The majority of foreign currency forward contracts are denominated in currencies of major industrial countries. The Company may also enter into foreign currency...

  • Page 135
    ... disclosure for the accounting for the fair value measurements must be applied to the Company's defined benefit pension plans and postretirement benefit plans. See Note 13 - Pension, Deferred Compensation and Post-retirement Benefit Plans. The Company is required to maximize the use of observable...

  • Page 136
    ... and are valued using quoted market prices on an active exchange. Available-for-sale securities are included in investments in the accompanying consolidated balance sheets. THE EST{E LAUDER COMPANIES INC. Foreign currency forward contracts - The fair values of the Company's foreign currency forward...

  • Page 137
    ... COMPENSATION 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. Several plans provide pension benefits based primarily on years of service and employees...

  • Page 138
    ... than Pension Plans International Post-retirement 2010 2009 2009 2010 2009 Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Plan participant contributions Actuarial loss (gain) Foreign currency exchange rate impact Benefits, expenses, taxes and...

  • Page 139
    ...Prior service cost 4.1 Actuarial loss (gain) Settlements and curtailments - Acquisitions, divestitures, adjustments - - Special termination benefits Net periodic benefit cost Weighted-average assumptions used to determine benefit obligations at June 30: Discount rate Rate of compensation increase...

  • Page 140
    ... service cost Net actuarial loss $0.7 $9.7 The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the Company's pension plans at June 30 are as follows: Pension Plans Retirement Growth Account 2010 (In millions) Restoration 2010 $86.9 $71.3 $ - 2009...

  • Page 141
    ...ï¬,ect the closing price reported on a major market where the individual securities are traded. These investments are classified within Level 1 of the valuation hierarchy. Debt instruments - The fair values are based on a compilation of primarily observable market information or a broker quote in...

  • Page 142
    ... June 30, 2010, 2009 and 2008, respectively. Shares of the Company's Class A Common Stock are not an investment option in the Savings Plan and the Company does not use such shares to match participants' contributions. THE EST{E LAUDER COMPANIES INC. Deferred Compensation The Company accrues for...

  • Page 143
    ... tax benefits, including related accrued interest and penalties, cannot be determined and therefore was not included. Legal Proceedings The Company is involved, from time to time, in litigation and other legal proceedings incidental to its business. Management believes that the outcome of current...

  • Page 144
    ...16 - STOCK PROGRAMS As of June 30, 2010, the Company has two active equity compensation plans which include the Amended and Restated Fiscal 2002 Share Incentive Plan (the "Fiscal 2002 Plan") and the Non-Employee Director Share Incentive Plan (collectively, the "Plans"). These Plans currently provide...

  • Page 145
    ... 30, 2009 Granted Vested Forfeited Nonvested at June 30, 2010 922.5 979.8 (558.8) (42.6) 1,300.9 Share Units The Company grants share units to certain non-employee directors under the Non-Employee Director Share Incentive Plan. The share units are convertible into shares of Class A Common Stock as...

  • Page 146
    ...-employee directors defer cash compensation in the form of cash payout share units, which are not subject to the Plans. These share units are classified as liabilities and, as such, their fair value is adjusted to reï¬,ect the current market value of the Company's Class A Common Stock. The Company...

  • Page 147
    ... currency forward and option contracts Settled interest rate-related derivatives Benefit (provision) for deferred income taxes on reclassification Net derivative instruments, end of year Net pension and post-retirement adjustments, beginning of year Changes in plan assets and benefit obligations...

  • Page 148
    ... and services that do not fit the definition of skin care, makeup, fragrance and hair care. Product category performance is measured based upon net sales before returns associated with restructuring activities, and earnings before income taxes, net interest expense, interest expense on debt...

  • Page 149
    ...2010 2009 2008 PRODUCT CATEGORY DATA Net Sales: Skin Care Makeup Fragrance Hair Care Other Returns associated with restructuring activities Depreciation and Amortization: Skin Care Makeup Fragrance Hair Care Other Goodwill, Other Intangible Asset and Long-Lived Asset Impairments: Skin Care Makeup...

  • Page 150
    ... OR AT JUNE 30 (In millions) 2010 2009 2008 GEOGRAPHIC DATA Net Sales: The Americas Europe, the Middle East & Africa Asia/Pacific Returns associated with restructuring activities Operating Income (Loss): The Americas Europe, the Middle East & Africa Asia/Pacific Total charges associated with...

  • Page 151
    ... of $9.6 million ($3.9 million after tax, or $.02 per diluted common share). NOTE 22 - SUBSEQUENT EVENT On July 1, 2010, the Company acquired Smashbox Beauty Cosmetics, a privately held, photo studio inspired prestige cosmetics company based in Los Angeles. 150 THE EST{E LAUDER COMPANIES INC.

  • Page 152
    ... company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company...

  • Page 153
    ... the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Estee Lauder Companies Inc. and subsidiaries as of June 30, 2010 and 2009, and the related consolidated statements of earnings, equity, comprehensive income (loss), and cash ï¬,ows...

  • Page 154
    ...FI RM The Board of Directors and Stockholders The Estée Lauder Companies Inc.: We have audited the accompanying consolidated balance sheets of The Estée Lauder Companies Inc. and subsidiaries ("the Company") as of June 30, 2010 and 2009, and the related consolidated statements of earnings, equity...

  • Page 155
    ... Market Price of Common Stock High $38.21 50.57 65.75 71.29 Low $30.00 35.60 47.65 54.17 Close $37.08 48.36 64.87 55.73 Annual Meeting The Company's Annual Meeting of Stockholders will be held on Tuesday, November 9, 2010, at 10:00 a.m. at: Jumeirah Essex House 160 Central Park South New York, New...

  • Page 156
    ... S&P 500 Index and a market weighted index of a publicly traded peer group. The returns are calculated by assuming an investment of $100 in the Class A Common Stock and in each index on June 30, 2005 for the five-year graph, and November 16, 1995 (the Company's initial public offering date) for the...

  • Page 157
    ...฀Companies฀Inc.฀and฀its฀subsidiaries฀own฀ numerous฀trademarks.฀Those฀appearing฀in฀the฀text฀in฀this฀ report฀include:฀3-Step฀Skin฀Care฀System,฀A฀Perfect฀World,฀ Advanced฀Night฀Repair,฀American฀Beauty,฀Aramis,฀Aramis฀ Classic,฀Aveda...

  • Page 158
    ...greenhouse gas emissions are equivalent to: 5,530.38 kilo-watt hours saved 672 hours 3,136 lbs Number of kilo-watt hours of electricity offset by purchase of renewable energy. Total continuous electricity used by a single-family home. Amount of waste recycled instead of landfilled. Sandy Alexander...

  • Page 159

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    The Estée Lauder Companies Inc. 767 Fifth Avenue New York, New York 10153