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The Estée Lauder
Companies Inc.
Annual Report
2011

Table of contents

  • Page 1
    The Estée Lauder Companies Inc. Annual Report 2011

  • Page 2

  • Page 3
    ... of Brands 82 Board of Directors 84 Executive Officers 85 Financial Highlights Contents 89 Financial Section 157 Management's Report on Internal Control over Financial Reporting 158 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 159 Report of...

  • Page 4
    Executive Chairman's Letter William P. Lauder 2

  • Page 5
    ... can happen when great brands and great people deliver their very best. Throughout our history, we have been a growth company and this year was no exception. Guided by a strong strategy, we grew share in many key markets and advanced our Strategic Modernization Initiative, an important step forward...

  • Page 6
    ...2010, we released our most comprehensive Corporate Responsibility Report, highlighting the great efforts of our brands and the important strides we are taking as a company. In the past fiscal year, through our Breast Cancer Awareness Campaign, the employees and brands of The Estée Lauder Companies...

  • Page 7
    ... efforts in taking our Company to new heights. Of course, I am indebted to our incredible employees who embody the wealth of our Company. As we continue to expand our business, whether it be in the digital space or in emerging markets, we will live our mission to "bring the best to everyone we touch...

  • Page 8
    President and Chief Executive Officer's Letter Fabrizio Freda 6

  • Page 9
    ... sales by 13 percent - three times the growth of global prestige beauty. Additionally, we saw double-digit sales increases across our largest product categories of skin care and makeup, as well as in our geographic regions. We had our best year in North America in a decade, achieved prestige beauty...

  • Page 10
    ... our new corporate strategy. In the process, we reduced non-value-added costs and imposed new financial discipline across the Company. At the same time, we developed the necessary capabilities to improve our competiveness and, today, we are better positioned to manage our business more effectively...

  • Page 11
    ...by leveraging game-changing technologies, such as mobile applications and social media platforms, to allow our brands to connect with consumers in new and interactive ways. Since the digital universe is fundamentally changing how consumers research and buy beauty products, we will continue investing...

  • Page 12
    ...-Touch services. This year, we utilized our improved marketing techniques to support several of our breakthrough product launches- Estée Lauder's Advanced Night Repair Synchronized Recovery Eye Complex, Clinique's Repairwear Laser Focus, Origins' Plantscription and La Mer's The Radiant Serum - all...

  • Page 13
    we are well positioned to manage our business more effectively and efficiently. We are energized by our momentum and are committed to refining our strategy as needed to continue to capture the biggest opportunities that will sustain us for the years to come. I am confident that by staying focused...

  • Page 14
    Estée Lauder's global spokesmodels from left to right: Hilary Rhoda, Constance Jablonski, Liu Wen, Joan Smalls

  • Page 15
    To better communicate with consumers everywhere, Estée Lauder introduced new international faces as part of a global campaign based on Mrs. Estée Lauder's philosophy that "Every Woman Can Be Beautiful."

  • Page 16
    Driving Our Momentum Today, our vision to be the global leader in prestige beauty remains focused, and we are pleased to report on the incredible momentum we have set into motion.

  • Page 17
    ... could be made, and developed key strategic objectives. Since then, the results we have seen confirm that our strategy is working. Today, we remain focused on our vision and are pleased to report that we are the number one prestige skin care, makeup and fragrance player in the world. 15

  • Page 18

  • Page 19
    ... innovations in this product category, such as Clinique's Repairwear Laser Focus, Origins' Plantscription, Darphin's Melaperfect Anti-Dark Spots Perfecting Treatment and La Mer's The Radiant Serum, which we discuss in further detail in this report. LEFT: A M.A.C Cosmetics Makeup Artist at Wonder...

  • Page 20

  • Page 21
    ...the department store channel and our business. In fiscal 2011, this was especially true in North America, where we had our best year in a decade. One of the ways we did this was by creating highly innovative products, backed by a more effective advertising mix, which increased department store traf...

  • Page 22
    ... the brand across its channels. Leveraging our success in the United States, we are looking at new opportunities to increase our distribution at Sephora stores in China to help us meet the needs of local consumers and build brand equity with locally relevant products. RIGHT: Aveda's Sun Care visual...

  • Page 23

  • Page 24

  • Page 25
    ...-growing beauty markets in the world, where today 11 of our brands are sold in 38 cities through department stores, freestanding stores and multi-brand retailers. It is also the home country of countless travelers and those of Chinese descent who live in other countries around the world. Chinese...

  • Page 26
    ... site and opening in new doors. In fact, in fiscal 2011, the La Mer brand increased its sales by 55 percent in China. In Russia, prestige beauty growth is led by the fragrance category, an area where we have historically been strong. By honing in on this fact and promoting our fragrance brands, we...

  • Page 27
    ...! Starting NOW! EXTEN-10 Instant Youth Boosting Moisturizer SPF 15 NEW! INSTANTLY: • 73% increase in Moisturization • 39% increase in Healthy Glow • Empowers skin cells' natural vitality so skin looks younger, longer. • Helps prevent skin damage with Anti-Oxidants & Triple Sunscreen TM

  • Page 28
    ... for beauty and spend a significant part of their income on beauty and personal care products, particularly makeup, fragrance and hair care. This year, we began unlocking greater market opportunities by increasing the penetration of two of our biggest brands, Clinique and M·A·C, which are leaders...

  • Page 29
    ... products and services. In Latin America, we improved our organizational capabilities, expanded distribution and opened many new stores that have contributed greatly to the momentum of our business. In South Africa, we focused on improving our consumer insight capabilities and marketing strategies...

  • Page 30

  • Page 31
    ..., the Estée Lauder brand introduced three new international faces as part of a global campaign based on Mrs. Estée Lauder's belief that, "Every Woman Can Be Beautiful." LEFT: Bumble and bumble's first U.S. national ad campaign features Jimmy Paul, Bb.Editorial Stylist, using Bb.Texture hair(un...

  • Page 32
    ... in terms of how modern and global beauty is defined and communicated. Already, the message is resonating well with consumers. The launch of Estée Lauder's Idealist Even Skintone Illuminator, which features the new models in television, digital and print campaigns, is driving new, younger and more...

  • Page 33

  • Page 34
    ... more attuned to cultural differences in order to inspire our innovation and communications. We strive to resonate with consumers wherever they live and we are committed to adjusting our innovation and services accordingly. Clinique Repairwear Laser Focus Wrinkle & UV Damage Corrector serum 32

  • Page 35
    ...development of new and improved airports has allowed retailers and brands to improve point of sale imagery and service to convert travelers into shoppers and purchasers. In addition, the rapid growth in the number of Chinese travelers has created a shift in this channel toward skin care, a strategic...

  • Page 36
    Ad for Estée Lauder's Pleasures Bloom fragrance

  • Page 37

  • Page 38
    .... Working closely with our regional brand teams around the world, our travel retail team leveraged two of our highest profile global launches - Clinique's Even Better Clinical Dark Spot Corrector and Estée Lauder's Advanced Night Repair Synchronized Eye Complex - to increase local market sales. To...

  • Page 39
    airport store environment, we are successfully engaging our consumers throughout their entire journey. As a result, The Estée Lauder Companies is gaining market share in the travel retail channel in every region around the world. We are developing innovative new products and exclusive offerings for...

  • Page 40

  • Page 41
    ... for brands to communicate with them transparently, authentically and in real time. In response to these new conditions, we evolved our e-commerce strategy to encompass e-commerce, m-commerce, digital marketing and social media as part of a multidimensional, full-picture digital strategy. LEFT: Jo...

  • Page 42
    ...consumers are "living" online, what they are saying, how they are purchasing and repurchasing our products, and how they are interacting with our brands. Based on these insights, we increased our investments in digital marketing and social media activities designed to build brand equity and consumer...

  • Page 43
    ...brands have 67 Facebook pages across 27 countries with over 5 million fans. and bumble's new product line, Bb.Texture, the brand integrated its first national advertising campaign with an innovative digital campaign comprised of fan-oriented social media activities, online tools, such as a "Salon...

  • Page 44
    ..." mobile app, for example, provides weather information geo-targeted to a consumer's location. Available in six major languages, the application provides expert skin care tips related to weather conditions with a built-in store finder to drive users to one of the brand's counters. RIGHT: Tom Ford...

  • Page 45

  • Page 46
    44

  • Page 47
    45

  • Page 48

  • Page 49
    ... new ways to take our outstanding services, expert education and deeply personal customization to the next level across all channels. In Fiscal 2011, we continued to make significant improvements in our department store business. Our Estée Lauder brand, for example, opened its Beautiful Skin...

  • Page 50
    ... customizable service counters by adding new "Top 10" towers to showcase the brand's most popular, best-selling products. The brand also incorporated digital tools to enhance its consumers' High-Touch shopping experience. It became the first cosmetics brand to Clinique Forecast mobile app 48

  • Page 51
    Our revitalized digital strategy has been a key driver of our product sales online and we increased our e-commerce sales by over 28%. Origins China core site homepage featuring the award-winning Make a Differenceâ„¢ collection 49

  • Page 52
    50

  • Page 53
    ... an exciting new in-store service experience called the "Mascara Bar." In Russia, where the Mascara Bar has received outstanding retail marketing attention, the brand outperformed several of the leading prestige beauty brands in the sub-category. In other channels, we made strategic investments to...

  • Page 54
    ... new technology and unrivaled creativity to capture and generate market opportunities for all of our brands. Our results this year confirm that we have a winning formula. In skin care and makeup, we accelerated the growth of our biggest brands via a number of initiatives. We developed and marketed...

  • Page 55
    ... 88% SAW SMOOTH AND RENEWED SKIN* 90% SAW REDUCTION IN THE LOOK OF LINES AND WRINKLES* CONSUMER RATED** © LAB SERIES SKINCARE FOR MEN MAX LS AGE-LESS FACE CREAM, MAX LS OVERNIGHT RENEWAL SERUM and MAX LS INSTANT EYE LIFT together create the ultimate anti-aging, Sirtuin-inspired skincare system...

  • Page 56

  • Page 57
    ... the world, the collection sold out quickly. A great advancement in skin care was GoodSkin Labs' newest hit, Exten-10â„¢ Instant Youth Boosting Moisturizer SPF 15. This exciting product is the result of our new product innovation model that aims to discover which of tomorrow's technologies is best...

  • Page 58
    ... many fragrance businesses, including ours. Recognizing the need for change, ADF took on the challenge of revitalizing its business model. It significantly reduced its cost of goods and reinvented its product development processes. Importantly, ADF addressed the complexity of its brand portfolio...

  • Page 59

  • Page 60

  • Page 61
    ... our Strategic Modernization Initiative (SMI). SMI addresses the need for more sustainable operations and has continued to deliver new processes and technology infrastructure to support our corporate strategy. We also continue to deepen our commitment to driving out non-value-added costs to increase...

  • Page 62

  • Page 63
    ... on greater talent development within our global organization. We implemented a number of initiatives to support our culture of creativity and innovation across the Company. Our new Leadership Competency Model is designed to identify and harness our strengths, turning employees into leaders based on...

  • Page 64

  • Page 65
    ... we take as a company, to live our mission to "bring the best to everyone we touch and be the best in everything we do," and we make it a priority to support the individual efforts of our brands and employees that strive to do the same. We are proud of the many initiatives we have taken together...

  • Page 66

  • Page 67
    ..., employees and retail partners raised more than $6.5 million globally for The Breast Cancer Research Foundation, founded by Evelyn H. Lauder. For the 12th year in a row, we raised awareness by illuminating landmarks worldwide in bright pink and now have the top spot in the Guinness Book of World...

  • Page 68
    ...We will continue along the course we have set for our Company, focusing on our biggest opportunities, executing with excellence via a variety of service and promotional activities and building our capabilities to sustain our momentum. RIGHT: Allure magazine's "Inï¬,uencers" feature, Bobbi Brown is...

  • Page 69
    Allure magazine's "Inï¬,uencers" feature, Bobbi Brown is The Naturalist

  • Page 70
    ... shows that there are three highly contested areas: skin care, the Chinese consumer and digital. As the leader in prestige beauty, we will continue investing to build our competitive advantage in these areas. At the same time, we will continue to Zegna Forte fragrance ad for Ermenegildo Zegna 68

  • Page 71
    ... for skin care treatments, especially anti-aging products, as the median age of the world's population continues to rise; the importance of China and the spending power of the Chinese consumer worldwide, whether at home or while traveling; and the many ways we can take our High-Touch services to...

  • Page 72
    ...technological innovation, delivering the best high-performance products and services, ensuring the right portfolio mix and anticipating and exceeding the desires of our consumers, no matter where they are in the world. Our strategy is strong and our commitment to live our vision as the global leader...

  • Page 73

  • Page 74
    Portfolio of Brands

  • Page 75
    73

  • Page 76
    ...Recovery Complex, Idealist Even Skintone Illuminator, Double Wear and Pure Color, and has two of the top 10 fragrances in the United States, Beautiful and pleasures. ARAMIS Introduced in 1964, Aramis was the first prestige men's fragrance to be sold in department stores. It is sold in more than 80...

  • Page 77
    ... introduced by Aramis in 1987. It is sold in more than 35 countries and territories worldwide. The brand's team of scientists, researchers and skin care specialists use modern technology, advanced ingredients and the latest research on men's physiological and lifestyle needs to develop products with...

  • Page 78
    76

  • Page 79
    ...me de la Mer has expanded into a complete range of skin care that continues to capture a devoted following. BOBBI BROWN Bobbi Brown was acquired in 1995. The brand is sold in select retailers in over 55 countries and territories. An exclusive beauty line developed by celebrated makeup artist Bobbi...

  • Page 80
    ...BUMBLE We acquired our initial interest in Bumble and bumble in 2000 and the brand was fully integrated in 2006. It is sold in over 20 countries and territories. The New York-based hair care and education company creates high-quality hair care and styling products distributed through top-tier salons...

  • Page 81
    79

  • Page 82
    ... 2007. TOM FORD BEAUTY For fashion designer Tom Ford, fragrance and cosmetics are the most potent tools for achieving true glamour. This luxurious collection defines modern glamour with iconic and artisanal fragrances, lush, sensuous color, high-performance skin treatments, and infused to the...

  • Page 83
    ... The Estée Lauder Companies in 2006. It is now under an exclusive global license. The collection of fragrance and ancillary beauty products embodies the timelessly chic American style. The collection is available in Coach retail stores in the United States and Japan, select department stores in the...

  • Page 84
    ...ficer The Estée Lauder Companies Inc. ROSE MARIE BRAVO, CBE 2,4 Retail and Marketing Consultant PAUL J. FRIBOURG1,2,4 Chairman Chief Executive Officer Continental Grain Company Board of Directors MELLODY HOBSON1 President Ariel Investments, LLC WEI SUN CHRISTIANSON3 Managing Director and Chief...

  • Page 85
    ... Estée Lauder Companies Inc. BARRY S. STERNLICHT 2,4 Chairman and Chief Executive Officer Starwood Capital Group RICHARD F. ZANNINO1 Managing Director CCMP Capital Advisors, LLC 1. Member of Audit Committee 2. Member of Compensation Committee 3. Member of Nominating and Board Affairs Committee...

  • Page 86
    ...Executive Vice President Research and Development Product Innovation Brand Product 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 87
    Financial Highlights Financial Overview FISCAL YEAR ENDED OR AT JUNE 30 (Dollars in millions, except per share data) 2011 2010 Change Net Sales* Operating Income* Net Earnings*†Net Earnings Per Common Share - Diluted*†Total Assets* Stockholders' Equity*†$8,810.0 1,089.4 700.8 3.48 6,273.9...

  • Page 88
    ...Net Sales Growth 1953 1972 $100 million 1985 $1 billion 1991 $2 billion 2011 $8.8 billion Net Sales* (In billions) 7.04 7.9 1 7.32 7.80 8.81 $8.81 Billion 2007 2008 810.7 2009 418.4 2010 789.9 2011 1,089.4 Operating Income* (In millions) 749.9 $1,098.4 Million 2007 2008 2009 2010 2011...

  • Page 89
    ....0 2009 18.0 2010 14.7 2011 17.0 Operating Working Capital‡ (As a percentage of net sales) 19.9 Accounts Receivable Plus Inventory Less Accounts Payable 17.0% 2007 * Refer to Selected Financial Data and related footnotes on page 91. †Attributable to The Estée Lauder Companies Inc. ‡ Does...

  • Page 90
    ...Compound Annual Growth Rate 17.9% (In millions) 349.5 332.3 416.2 686.1 676.0 Net Cash Flow From Operations Less Capital Expenditures $676.0 Million 2007 2008 2009 2010 2011 2011 Net Sales By Distribution Channel North American 27% Department Stores 27% International Department Stores Other...

  • Page 91
    Financial Section 89

  • Page 92
    ... 157 Management's Report on Internal Control over Financial Reporting 158 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 159 Report of Independent Registered Public Accounting Firm 160 Stockholder Information 90 THE EST{E LAUDER COMPANIES INC...

  • Page 93
    ... to The Estée Lauder Companies Inc. per common share: Basic Diluted Weighted average common shares outstanding: Basic Diluted Cash dividends declared per common share BALANCE SHEET DATA: Working capital Total assets Total debt (b) (c) Stockholders' equity - The Estée Lauder Companies Inc. $8,810...

  • Page 94
    ... assets and long-lived assets, income taxes and derivatives. Management of the Company has discussed the selection of significant accounting policies and the effect of estimates with the Audit Committee of the Company's Board of Directors. REVENUE RECOGNITION Revenues from product sales are...

  • Page 95
    ...ranges, an increase or decrease in the assumptions or economic events outside our control could have a direct impact on reported net earnings. The discount rate for each plan used for determining future net periodic benefit cost is based on a review of highly rated long-term bonds. For fiscal 2011...

  • Page 96
    ...in fiscal 2010. The terminal growth rates were projected at 3% after four to eight years in fiscal 2011 and fiscal 2010, which reï¬,ects our estimate of long term market and gross domestic product growth. The weighted-average cost of capital used to discount future cash ï¬,ows ranged from 7.5% to...

  • Page 97
    ... fiscal 2011 and 2010 terminal growth rate applied to future cash ï¬,ows was 3% and the fiscal 2011 and 2010 discount rates ranged from 10% to 18% and 11% to 19%, respectively. The fiscal 2011 and 2010 royalty rates ranged from 0.5% to 12% and 0.5% to 11%, respectively. We review long-lived assets...

  • Page 98
    ... 2 - 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 99
    ... ENDED JUNE 30 (In millions) 2011 2010 2009 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 100
    ... of travelers from emerging markets, who either buy in the channel, in stores at their destination or when they return to their homes. Our "High-Touch" approach to marketing our products is a key component of our strategy. It is designed to promote the total value we offer, by leveraging our in...

  • Page 101
    and share in our distribution channels. We are also continuing to re-energize certain of our brands through the introduction of products that feature advances in research and technology and focused marketing campaigns. At the same time, we are investing in initiatives to incubate and develop next ...

  • Page 102
    .... In connection with these activities, we incurred charges for product returns, inventory write-offs, reduction of workforce and termination of contracts. •฀ O ฀ utsourcing - In order to balance the growing need for information technology support with our efforts to provide the most efficient...

  • Page 103
    ... use of a royalty rate to determine discounted projected future cash ï¬,ows ("relief-from-royalty method"). As a result, we recognized an impairment charge of $1.7 million for the carrying values of the related trademarks. These impairment charges were reï¬,ected in the makeup and skin care product...

  • Page 104
    ... makeup artist brands and the inclusion of Smashbox of approximately $322 million, combined. The recent launches of Pure Color eyeshadow products and Pure Color Long Lasting Lipstick from Estée Lauder and Redness Solutions Makeup from Clinique contributed approximately $57 million, to the increase...

  • Page 105
    ... environments, successful launches of skin care products and higher combined sales from our makeup artist brands. The net sales improvement in our travel retail business also reflected an increase in global airline passenger traffic, new points of distribution and benefits of programs designed...

  • Page 106
    ... million, to $80.7 million, primarily reï¬,ecting higher net sales from Estée Lauder and designer fragrances driven by recent product launches, improved cost of goods and a more strategically focused approach to spending as part of our strategy to improve profitability. Hair care operating results...

  • Page 107
    ... 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 fiscal 2010 launches of Advanced Night Repair Synchronized Recovery Complex, Advanced Night Repair Eye Synchronized Complex...

  • Page 108
    ... selling season, new points of distribution and the favorable impact of foreign currency translation. In the United States, net sales increases of Clinique skin care products, various designer fragrances and from our makeup artist brands were partially offset by lower sales of various Estée Lauder...

  • Page 109
    skin care products and higher combined sales from our makeup artist brands. The net sales improvement in our travel retail business also reï¬,ected a favorable comparison to fiscal 2009 due to an increase in global airline passenger traffic, new points of distribution, select customer restocking ...

  • Page 110
    ... higher net sales of designer fragrances, a more strategically focused approach to spending reï¬,ecting our strategy to improve profitability, and a favorable comparison to fiscal 2009 when we recorded approximately $13 million of other intangible asset impairment charges. Hair care operating...

  • Page 111
    ... 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...

  • Page 112
    ... be amortized over the term of the facility. The New Facility has an annual fee of $0.7 million, payable quarterly, based on our current credit ratings. The New Facility also contains a cross-default provision whereby a failure to pay other material financial obligations in excess of $100.0 million...

  • Page 113
    ... taxes. This increase was partially offset by an increase in accounts receivable balances due to timing of collections, as well as lower levels of accounts payable due to timing of payments and an increase in inventory in line with forecasted sales activity and to ensure acceptable levels of service...

  • Page 114
    ... 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 115
    ... Debt service(1) Operating lease commitments(2) Unconditional purchase obligations(3) Gross unrecognized tax benefits and interest - current(4) Total contractual obligations $2,043.3 1,364.4 1,881.5 13.0 $5,302.2 (1) Includes long-term and short-term debt and the related projected interest costs...

  • Page 116
    ... rate derivative contracts to manage the exposure to interest rate ï¬,uctuations on our funded indebtedness and anticipated issuance of debt for periods consistent with the identified exposures. During fiscal 2011, we terminated our interest rate swap agreements with a notional amount totaling...

  • Page 117
    ... 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 118
    ...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 119
    ....4 Net Sales Cost of sales Gross Profit Operating expenses Selling, general and administrative Restructuring and other special charges Goodwill impairment Impairment of other intangible and long-lived assets Total operating expenses Operating Income Interest expense, net Interest expense on debt...

  • Page 120
    ... debt Accounts payable Accrued income taxes Other accrued liabilities Total current liabilities Noncurrent Liabilities Long-term debt Accrued income taxes Other noncurrent liabilities Total noncurrent liabilities Contingencies (Note 14) Equity Common stock, $.01 par value; 650,000,000 shares Class...

  • Page 121
    ... of year Acquisition of treasury stock Stock-based compensation Treasury stock, end of year Total stockholders' equity - The Estée Lauder Companies Inc. Noncontrolling interests, beginning of year Net earnings attributable to noncontrolling interests Distributions to noncontrolling interest holders...

  • Page 122
    ... investment gain (loss), net of tax Net derivative instrument gain (loss), net of tax Net actuarial gain (loss), net of tax Net prior service credit (cost), net of tax Net transition asset (obligation), net of tax Translation adjustments, net of tax Comprehensive income (loss) Comprehensive (income...

  • Page 123
    ... ï¬,ows used for investing activities Cash Flows from Financing Activities Borrowings (repayments) of current debt, net Proceeds from issuance of long-term debt, net Repayments and redemptions of long-term debt Net settlement of interest rate derivatives Net proceeds from stock-based compensation...

  • Page 124
    ... Companies Inc. manufactures, markets and sells skin care, makeup, fragrance and hair care products around the world. Products are marketed under various brand names including: Estée Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, M.A.C, Bobbi Brown, La Mer, Aveda, Jo Malone, Bumble...

  • Page 125
    ... levels are recognized as cost of sales in the period in which they are incurred. Promotional merchandise is charged to expense at the time the merchandise is shipped to the Company's customers. Included in inventory and promotional merchandise is an inventory obsolescence reserve, which represents...

  • Page 126
    ...is determined 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...

  • Page 127
    ... rights to manufacture, market and sell beauty and beauty-related products (or particular categories thereof) using the licensors' trademarks. The licenses typically have an initial term of approximately 1 year to 19 years, and are renewable subject to the Company's THE EST{E LAUDER COMPANIES INC...

  • Page 128
    ..., potential outcomes and timing, and is a subjective critical estimate. The Company assesses its tax positions and records tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting dates. For those...

  • Page 129
    ... 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. NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS On July 1, 2010, the Company acquired Smashbox Beauty Cosmetics ("Smashbox...

  • Page 130
    ... operates at the time of acquisition. The following table presents goodwill by product category and the related change in the carrying amount: Skin Care (In millions) Makeup Fragrance Hair Care Total Balance as of June 30, 2009 Goodwill Accumulated impairments Goodwill acquired during the year...

  • Page 131
    ... of the related trademarks. These impairment charges were reï¬,ected in the makeup and skin care product categories and in the Americas region. During the third quarter of fiscal 2011, the Ojon reporting unit reassessed and subsequently altered the timing of new market initiatives, including the...

  • Page 132
    ...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. NOTE 6 - ACQUISITION OF BUSINESS On July 1, 2010, the Company acquired Smashbox. The purchase price...

  • Page 133
    ...following table presents total returns and charges associated with restructuring activities related to the Program: YEAR ENDED JUNE 30 (In millions) 2011 2010 2009 Sales returns (included in Net Sales) Cost of sales Restructuring charges Other special charges Total returns and charges associated...

  • Page 134
    ... to prior-year tax positions including tax settlements and lapses of the applicable statutes of limitations. Federal income and foreign withholding taxes have not been provided on approximately $1,208 million of undistributed earnings of foreign subsidiaries at June 30, 2011. The Company intends to...

  • Page 135
    ... which are included in Prepaid expenses and other current assets in the accompanying consolidated balance sheets. In addition, the Company had noncurrent net deferred tax assets of $61.1 million and $104.8 million as of June 30, 2011 and 2010, respectively, substantially all of which are included in...

  • Page 136
    ..., potential outcomes and timing, and is a subjective critical estimate. The Company assesses its tax positions and records tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting dates. For those...

  • Page 137
    ... (In millions) 2011 2010 Advertising, merchandising and sampling Employee compensation Payroll and other taxes Restructuring Other $ 401.9 422.4 125.1 28.6 318.3 $1,296.3 $ 373.5 366.3 103.6 25.4 249.2 $1,118.0 NOTE 10 - DEBT The Company's short-term and long-term debt and available financing...

  • Page 138
    ... of 175 basis points per annum above the spot rate charged by the lender or the lender's floating 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, 2011 THE EST{E LAUDER COMPANIES INC.

  • Page 139
    ...March 31, 2012. The interest rate on the borrowings under this credit facility is based on TIBOR (Tokyo Interbank Offered Rate) plus .75% and the facility fee incurred on the undrawn balance is 25 basis points. At June 30, 2011, no borrowings were outstanding under this facility. The Company did not...

  • Page 140
    ...Derivatives Balance Sheet Location Fair Value(1) June 30 2011 (In millions) Liability Derivatives Balance Sheet Location Fair Value(1) June 30 2011 2010 2010 Derivatives Designated as Hedging Instruments: Foreign currency forward contracts Interest rate swap contracts Total Derivatives Designated...

  • Page 141
    ... of the interest rate swap agreements are exactly offset by changes in the fair value of the underlying long-term debt. The amounts of the gains and losses related to the Company's derivative financial instruments not designated as hedging instruments are presented as follows: Location of Gain or...

  • Page 142
    ... of debt for periods consistent with the identified exposures. At June 30, 2010, the Company had interest rate swap agreements with a notional amount of $250 million, a weighted average pay rate of 0.96% and a weighted average receive rate of 5.55%. During fiscal 2011, the Company terminated its...

  • Page 143
    ... of the inputs and information used to develop those inputs. (3) Includes $8.8 million related to the reformulation of Ojon brand products, which is included in Restructuring and other special charges in the accompanying consolidated statements of earnings. THE EST{E LAUDER COMPANIES INC. 141

  • Page 144
    ...-binding offers using inputs such as swap yield curves and six-month LIBOR forward rates, which were obtained from an independent pricing service. During fiscal 2011, the Company terminated its interest rate swap agreements. See Note 11 - Derivative Financial Instruments. Current and long-term debt...

  • Page 145
    ... 2011 2010 2010 2011 2010 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 premiums paid Plan amendments Special termination...

  • Page 146
    ... long-term rate of return for a plan, the Company considers the historical rates of return, the nature of the plan's investments and an expectation for the plan's investment strategies. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans...

  • Page 147
    ... service cost Net actuarial loss $0.7 $7.9 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 2011 (In millions) Restoration 2011 $97.3 $76.1 $ - 2010...

  • Page 148
    ... for year ending June 30, 2012 2013 2014 2015 2016 Years 2017 - 2021 $ - 45.2 44.3 42.1 37.2 36.3 184.6 $ 15.5 16.6 16.5 16.1 17.9 18.4 121.4 $ - 5.5 6.1 6.7 7.4 8.1 54.9 Plan Assets The Company's investment strategy for its pension and post-retirement plan assets is to maintain a diversi...

  • Page 149
    ...Total $178.7 8.9 (0.2) (20.0) (11.6) 10.4 $166.2 Balance as of June 30, 2010 Actual return on plan assets: Relating to assets still held at the reporting date Relating to assets sold during the year Transfers in (out) Purchases, sales, issuances and settlements, net Foreign exchange impact Balance...

  • Page 150
    ...Debt service (1) Operating lease commitments(2) Unconditional purchase obligations(3) Gross unrecognized tax benefits and interest - current(4) Total contractual obligations $2,043.3 1,364.4 1,881.5 13.0 $5,302.2 (1) Includes long-term and short-term debt and the related projected interest costs...

  • Page 151
    ....4 The Company is authorized by the Board of Directors to repurchase up to 88.0 million shares of Class A Common Stock in the open market or in privately negotiated transactions, depending on market conditions and other factors. As of June 30, 2011, the cumulative total of acquired shares pursuant...

  • Page 152
    ...30, 2013, all subject to the continued employment or retirement of the grantees. Settlement will be made pursuant to a range of opportunities relative to the net sales, diluted net earnings per common share and return on invested capital targets of the Company and, as such, the compensation cost of...

  • Page 153
    ...-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 154
    ..., 2011, 2010 and 2009, 0.3 million, 0.3 million and 0.2 million, respectively, of 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 16 - Stock...

  • Page 155
    ... of skin care, makeup, fragrance, hair care and other products. These product categories meet the definition of operating segments and, accordingly, additional financial data are provided below. The "other" segment includes the sales and related results of ancillary products and services that...

  • Page 156
    ...2011 2010 2009 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 157
    ...to a country within a geographic segment based on the location of the customer. The net sales from the Company's travel retail business are included in the Europe, the Middle East & Africa region. The Company is domiciled in the United States. Net sales in the United States in fiscal 2011, 2010 and...

  • Page 158
    ... March 31(3) June 30(4) Total Year Fiscal 2011 Net Sales Gross Profit Operating Income Net Earnings Attributable to The Estée Lauder Companies Inc. Net earnings attributable to The Estée Lauder Companies Inc. per common share: Basic Diluted Fiscal 2010 Net Sales Gross Profit Operating Income...

  • Page 159
    ... the heading "Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting." Fabrizio Freda President and Chief Executive Officer August 22, 2011 Richard W. Kunes Executive Vice President and Chief Financial Officer THE EST{E LAUDER COMPANIES INC. 157

  • Page 160
    ... accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Estée Lauder Companies Inc. and subsidiaries as of June 30, 2011 and 2010, and the related consolidated statements of earnings, equity, comprehensive income (loss...

  • Page 161
    ... IR M 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, 2011 and 2010, and the related consolidated statements of earnings, equity...

  • Page 162
    ... Market Price of Common Stock High $ 65.13 81.44 96.66 106.57 Low $ 54.61 62.46 79.67 92.81 Close $ 63.23 80.70 96.36 105.19 Annual Meeting The Company's Annual Meeting of Stockholders will be held on Friday, November 11, 2011, at 10:00 a.m. at: Jumeirah Essex House 160 Central Park South New York...

  • Page 163
    ... 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, 2006 for the five-year graph, and November 16, 1995 (the Company's initial public offering date) for the...

  • Page 164
    ... Jo Malone, La Mer, Lab Series Skincare for Men, M.A. C, Max LS, Melaperfect, Ojon, Origins, O-Thority, Photo Finish, Plantscription, Powered by Nature. Proven by Science, Prescriptives, Pretty Powerful, Pure Color, Serum de La Mer, Repairwear Laser Focus, Smashbox, Smashbox Studios, Smooth Infusion...

  • Page 165
    THE EST{E LAUDER COMPANIES INC. 2011 ANNUAL REPORT ENVIRONMENTAL FIGURES The Estée Lauder Companies Inc. 2011 Annual Report is printed on paper which is made with certified renewable electricity and is FSC™ Certified, ensuring all papers meet the mark of responsible forestry. Paper used in the ...

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