Estee Lauder 2012 Annual Report Download

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The Estée Lauder
Companies Inc.
2012 Annual Report

Table of contents

  • Page 1
    The Estée Lauder Companies Inc. 2012 Annual Report

  • Page 2

  • Page 3
    ... H. Lauder 14 Sustaining Our Profitable Growth 77 Outlook 80 Portfolio of Brands 90 Board of Directors 92 Executive Officers 93 Financial Highlights 97 Financial Section 164 Management's Report on Internal Control Over Financial Reporting 165 Report of Independent Registered Public Accounting Firm...

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

  • Page 5
    ..., Fiscal 2012 was another record year for The Estée Lauder Companies. Thanks to our focused growth strategy and strong business model, we achieved sales gains in all regions and major product categories, illustrating the broad strength of our Company and the power of our brand portfolio. prestige...

  • Page 6
    ... that commitment, ensuring good governance and continuing to enhance our corporate reputation around the world. Despite the global economic and political uncertainties that marked fiscal 2012, we enter the fourth year of our strategic journey having achieved a number of record highs. 4

  • Page 7
    ...having achieved leadership, unsurpassed creativity, a strong balance sheet, and a winning strategy that enables us to take advantage of our biggest global opportunities and to ensure the sustainable, profitable growth of our business for the foreseeable future. Sincerely, a number of record highs...

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

  • Page 9
    ... best skin care. In the travel retail channel, we gained known for her tireless advocacy for breast cancer share overall, secured the number one position in awareness through The Breast Cancer Research prestige skin care and became the leading company Foundation ® and The Estée Lauder Companies...

  • Page 10
    ...increased global demand for luxury. We high-level strategy, teamwork and agility. I like to say delivered breakthrough innovations - Estée that when our Company began its strategic journey Lauder's Idealist Even Skintone Illuminator and three years ago, we looked for the winds of growth Cooling Eye...

  • Page 11
    ...our winning business model and adapt our strategies accordingly. While our overall business is performing very well, we know the world will never be predictable. efficiency and better support our global strategy. For example, our Program Management Team (PMT), which has helped us drive cost savings...

  • Page 12
    ... winning business model to all product categories and regions. committed to fulfilling our consumers' desires, wherever in the world they happen to be. We believe there is still substantial room for growth. Over the past 60 years, The Estée Lauder Companies has built an unmatched brand portfolio...

  • Page 13
    ...sales฀growth฀CAGR฀9.8%,฀more฀than฀two฀times฀as฀fast฀as฀global฀prestige฀beauty •฀฀ Improved฀gross฀margin฀by฀500฀basis฀points •฀฀ Cut฀expenses฀by฀$708฀million฀through฀cost฀savings฀initiatives •฀฀ Increased฀marketing฀spending...

  • Page 14

  • Page 15
    In Memoriam Mrs. Evelyn H. Lauder 1936-2011 We pay special tribute in this year's Annual Report to the loving memory of Evelyn H. Lauder, Senior Corporate Vice President and Head of Fragrance Development Worldwide for our Company and Founder of The Breast Cancer Research Foundation ® (BCRF) and The...

  • Page 16

  • Page 17
    ... of advertising, and social and digital strategies, pulling in new and returning consumers to our counters, stores, retailers, and e- and m-commerce sites, and driving sales across our product lines. This year, the luxury sector remained strong, and consumers worldwide spent more on coveted brands...

  • Page 18
    esteelauder.com © 2012 Estée Lauder Inc. Ad for Estée Lauder Double Wear Makeup

  • Page 19
    Double Wear Makeup New shades for every skintone. Non-stop wear. Flawless-even through heat and humidity. Comfortable. Oil-free. Oil-controlling.

  • Page 20
    ...create tomorrow's breakthrough products, execute with excellence and creativity, and provide superb High-Touch services continues to position us as the global leader in prestige beauty. And, while we believe we have a solid blueprint that serves as the foundation for our successful strategy, we also...

  • Page 21

  • Page 22

  • Page 23
    ... to spend on beauty, the global purchasing power of women continued to improve. By paying close attention to these changing dynamics, we successfully tapped into the aspirations of our consumers, allowing our Company to exceed many of our objectives in fiscal 2012. CONSUMER-INSPIRED INNOVATION We...

  • Page 24
    ...the priceless equity of our brands, which are some of the world's best known and most beloved in beauty. Our biggest brands, Estée Lauder, Clinique and M.A. C, are winning in our Company's key pillars of strength - global prestige skin care and global prestige makeup - and their continued growth is...

  • Page 25
    ...on high-performance skin care and engaging new television advertising, both the Estée Lauder and Clinique brands experienced another great year of profitable growth. During 2011, our Estée Lauder brand became the largest prestige beauty brand in the world. In fiscal 2012, the brand grew in nearly...

  • Page 26
    24

  • Page 27
    ... Bobbi Brown, La Mer and Jo Malone brands enjoyed double-digit growth in virtually every region. La Mer achieved tremendous gains in China, outpacing the prestige skin care category, while Bobbi Brown made great strides in building on its makeup artist authority to become the ultimate New York-chic...

  • Page 28
    26

  • Page 29
    ... performance in North America, where we accelerated growth in certain key channels, and in Western Europe, where we grew our business despite sluggish economic conditions. LEFT: Origins A Perfect Worldâ„¢ SPF 15 BB Age-defense tinted moisturizer offers a hint of tint and a world of protection 27

  • Page 30
    ... advertising spending across television, digital and print in select countries, focusing on the most powerful medium to best emphasize each brand's strengths. products in a department store, the brand's primary distribution channel in North America . Another exciting development of the past...

  • Page 31

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  • Page 33
    ...the major global television campaign for its companion skin care product, Even Better Clinical Dark Spot Corrector. The ad helped lift foundation sales alongside sales of the brand's entire makeup category, demonstrating the true power of our creative advertising. Clinique's latest television ad for...

  • Page 34
    ...In the more traditional advertising realm, Tom Ford Beauty and Smashbox successfully used print ads this year to great success, generating further sales growth for some of our most exciting new product lines. For Smashbox, the powerful visuals communicate the essence of the brand's Los Angeles photo...

  • Page 35

  • Page 36
    Ad for Estée Lauder Beautiful fragrance

  • Page 37

  • Page 38

  • Page 39
    ...our core department store channel. Our biggest brands worked closely with key retailers to improve navigation and merchandising while enhancing the shopping experience for consumers. Bumble and bumble, Origins, Smashbox and Bobbi Brown were especially successful in specialty multi-brand retailers by...

  • Page 40
    Pigmentï¬,ecken direkt an Ort und Stelle bekämpfen - Starten Sie JETZT! NEU EQUINOL TM Anti Pigmentï¬,ecken Serum Sofortwirkung: 73% Klärung des Hauttons Nach 12 Wochen: 55 % Reduzierung der sichtbaren Größe und Farbintensität Sichere und zugleich ich sanfte Formel ...

  • Page 41
    ...top 10 selling products in this important retailer. With Douglas, we have improved our position as a leader in skin care across the continent, adding momentum to our overall European business. Driven in part by multi-brand e-commerce sites, online is becoming the fastest-growing channel globally for...

  • Page 42
    Company-operated stores represent a compelling growth opportunity for us. Currently, we have approximately 800 Companyoperated stores globally. We opened more than 50 M.A. C, Bobbi Brown and Jo Malone stores in fiscal 2012, primarily across Europe and the Middle East. Bobbi Brown's wildly popular ...

  • Page 43

  • Page 44
    ...Company-operated stores, we are working hard to maximize other distribution opportunities within each market. Driven partly by expanding distribution, La Mer has become the fastest-growing prestige skin care brand in Europe. In Japan, Clinique, Estée Lauder and Bobbi Brown all launched successfully...

  • Page 45

  • Page 46
    ... promotional activities in the country. We also revised our distribution model and opened seven new M.A.C stores to help the brand reaffirm its number one position in prestige makeup. Our Donna Karan and Tommy Hilfiger fragrance brands also made good progress in Brazil, and we LEFT: Michael Kors...

  • Page 47
    three new limited edition fragrances for women

  • Page 48

  • Page 49
    ... emerging markets. Clinique became the number one prestige skin care treatment brand in Russia, a country where our fragrance brands have historically done well. In the Middle East - the second-largest emerging market for prestige beauty - Jo Malone and Bobbi Brown opened exciting new stores. We...

  • Page 50
    ... a critical way to build the equity of our brands while reaching consumers throughout their journeys. Our sales in travel retail have doubled in three years, bringing our Company to the number two position in beauty in the channel. Our biggest successes lie in the skin care category and with Chinese...

  • Page 51
    ... many of our brands and products, helping to build strong brand awareness. For example, Estée Lauder, Clinique, and Bobbi Brown BB creams, all of which originally launched in travel retail, have spurred sales growth for these brands as we continue their rollouts around the world. Already, we touch...

  • Page 52
    ... Supreme Global Anti-Aging Creme has been enormously successful, bringing many new consumers to the Estée Lauder brand and making it the number one skin care product in several European countries. In the Middle East, where afï¬,uent consumers have strong preferences for local fragrances, several...

  • Page 53

  • Page 54

  • Page 55
    ... ensure our signature High-Touch services are respectful of each market's specific cultural norms. M.A. C's makeup stations in the Middle East enable consumers to try our products in the privacy of special rooms, and Bobbi Brown counters in China utilize a "Skin Care Apothecary" concept attuned to...

  • Page 56
    54

  • Page 57
    ... in accelerated growth for La Mer. For more than 60 years, our unparalleled High-Touch services have distinguished us from our competitors. LEFT: Ad for the new Tom Ford Sahara Noir fragrance RIGHT: Jenna Menard, Clinique's Global Colour Artist, in action backstage at New York City's Fashion...

  • Page 58
    Last year, our online business globally grew by 24 percent, and today we have over 340 marketing and e-commerce sites across more than 50 countries. M.A. C's Magic Mirror interactive makeup station is one of the brand's most innovative High-Touch service initiatives. Developed for the traveling ...

  • Page 59
    Giambattista Valli, Paris Haute Couture Fashion Week Alexis Mabille, Paris Haute Couture Fashion Week

  • Page 60

  • Page 61
    ...among younger women. As a result, hundreds of thousands of consumers were introduced to Estée Lauder products for the first time. LEFT: The Estée Lauder Guest Blogger site features curated content by Emily Schuman of Cupcakes and Cashmere RIGHT: Smashbox's Finish at Flawless Dark Spot Correcting...

  • Page 62

  • Page 63
    ... our success in fragrance, we continue to optimize a strategy that complements our culture and maximizes our brand portfolio. The High-Touch On-line Skin Care Guide developed for Origins.com is another excellent example of how we have translated our signature experiences for the online world. The...

  • Page 64
    ... hair care alongside makeup, skin care and fragrance in this unique environment. This strategy is one we are excited to expand across a range of products and countries, including the United Kingdom and other parts of Europe. We are committed to working hand-in-hand with retailers to build the...

  • Page 65

  • Page 66
    ...-oriented hair care. This year, we worked to build brand awareness and expand the consumer base, leveraging print and digital advertising with a breakthrough marketing technique for hair care - the digital "send-a-sample" app - to allow consumers access to try the brand's products for free. RIGHT...

  • Page 67

  • Page 68
    66

  • Page 69
    ...on a global scale requires communication and transparency at all levels, and we continue to make important organizational enhancements to improve the way our business runs. Through our Strategic Modernization Initiative (SMI), we are leveraging people, processes and technology to increase visibility...

  • Page 70
    ... time from retail order to delivery. Because of SMI, we are becoming better equipped to manage worldwide inventories so that global brands are sure to have adequate supplies of products in markets where and when demand is strong. Driving non-value added costs and activities out of the system frees...

  • Page 71
    Pure Color Incredibly Long-Lasting Nail Lacquer New Colors by Tom Pecheux esteelauder.com © 2012 Estée Lauder Inc. SMASHED

  • Page 72
    A Scent for a New Day

  • Page 73
    ... access With increased insights and improved consumer relationship management capabilities today, we will be able to better tailor our products and services to our global consumers tomorrow. LEFT: Ad for Z Zegna, a new youthful and modern fragrance from Italian luxury designer Ermenegildo Zegna 71

  • Page 74
    ... browse and shop. With increased insights and improved consumer relationship management capabilities today, we will be able to better tailor our products and services to our global consumers tomorrow. FOSTERING LEADERSHIP AND CREATIVITY At the heart of our Company's success is the commitment of our...

  • Page 75

  • Page 76
    SmASHbOx PHOTO OP EYE SHADOW VElVETY SmOOTH. Hi-RES HuES. CREATED.TESTED.PHOTOGRAPHED. SMASHBOX.COM · SEPHORA · ULTA · NORDSTROM l.A.

  • Page 77
    ...to build a successful and fulfilling career. We believe each employee brings unique talent and diverse experiences that propel creativity and innovation, a hallmark of our success. Inclusion is a natural extension of how we work together and we encourage all our employees to create, to innovate, to...

  • Page 78
    76 76

  • Page 79
    ... new consumers to our brands. New channel dynamics The Estée Lauder Companies is the global leader in prestige beauty, and our focus on being a welldiversified, brand-building powerhouse of unrivaled creativity and innovation is unwavering. As our continued success during a year of global economic...

  • Page 80
    ... strategy to target new cities for growth. Strengthening the connection with these consumers beyond their local markets - whether in China, Brazil, Russia or the Middle East - will remain an important component of our strategy. We see travel retail increasingly becoming a destination for purchasing...

  • Page 81

  • Page 82
    portfolio of brands

  • Page 83
    ... products with a reputation for innovation, sophistication and superior quality. Estée Lauder has produced some of the most iconic skin care, makeup and fragrance products, including Advanced Night Repair Synchronized Recovery Complex, Idealist Even Skintone Illuminator, Double Wear and Pure Color...

  • Page 84
    ... 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 85
    ...Hilfiger joined The Estée Lauder Companies Inc. family of brands when the exclusive global license agreement was signed in 1993. Sold in more than 120 countries and territories, Tommy Hilfiger produces fragrances and body products that reï¬,ect the classic American cool of designer Tommy Hilfiger...

  • Page 86
    ... iconic best-selling Crème de la Mer has expanded into a complete range of skin care that continues to capture a devoted following. BOBBI BROWN The Estée Lauder Companies Inc. acquired Bobbi Brown in 1995. The brand is sold worldwide in select retailers and freestanding stores in 60 countries and...

  • Page 87
    ... care, skin care, body care, spa, aroma, makeup and lifestyle products as well as professional hair color. The line of high-performing botanical products fulfills the brand's mission of environmental and community leadership and responsibility. JO MALONE The Estée Lauder Companies Inc. acquired Jo...

  • Page 88
    ... brand's fragrances embody the jet set lifestyle positioning of Michael Kors. The designer's signature scent, Michael Kors, is a modern interpretation of the classic Tuberose. DARPHIN Acquired by The Estée Lauder Companies Inc. in 2003, Darphin is a Parisian high-end skin care brand, now sold in...

  • Page 89
    ... Eye Lift + Circle Reducer, the brand sells its products in retailers globally, including Parfumerie Douglas and Sephora China. Since its introduction in 2007, GoodSkin Labs is now sold in more than 15 countries worldwide and is available exclusively in the United States at Kohl's Department Stores...

  • Page 90
    .... In 2011, Tom Ford Beauty entered the color category with the Tom Ford Private Blend Lip Color Collection and today continues to redefine luxury and taste for global prestige beauty. COACH Coach, Inc., a leading brand of modern classic American accessories joined The Estée Lauder Companies Inc...

  • Page 91
    ... Ermenegildo Zegna, The Estée Lauder Companies Inc. entered into an exclusive worldwide license for the global luxury brand's fragrance and grooming business in 2011. Ermenegildo Zegna fragrances are sold in markets across North America, Europe and Asia/Pacific, as well as in Ermenegildo Zegna...

  • Page 92
    ...ficer The Estée Lauder Companies Inc. RICHARD D. PARSONS 2,3 Senior Advisor Providence Equity Group JANE LAUDER Global President General Manager Origins and Ojon BARRY S. STERNLICHT 2,4 President Chief Executive Officer Starwood Capital Group AERIN LAUDER Creative Director and Chairman Aerin...

  • Page 93
    ... F. ZANNINO1 Managing Director CCMP Capital Advisors, LLC LYNN FORESTER DE ROTHSCHILD3 Chief Executive EL Rothschild LLC LEONARD A. LAUDER Chairman Emeritus The Estée Lauder Companies Inc. MELLODY HOBSON1 President Ariel Investments, LLC IRVINE O. HOCKADAY, JR.1 Retired President and Chief...

  • Page 94
    ... Officer CARL HANEY Executive Vice President Global Research and Development Corporate Product Innovation Package Development RICHARD W. KUNES Executive Vice President Chief Financial Officer (until August 20, 2012) SARA E. MOSS Executive Vice President General Counsel GREGORY F. POLCER Executive...

  • Page 95
    ....4฀ 700.8 ฀ 1.74 ฀ 6,273.9฀ 2,629.4฀ 10% 20% 22% 24% 5% 4% Global Net Sales 2008 $7.91 billion INTERNATIONAL $4.63 BILLION 59% 63% U.S. $3.28 BILLION 41% 37% 2012 $9.71 billion INTERNATIONAL $6.13 BILLION U.S. $3.58 BILLION * Attributable to The Estée Lauder Companies Inc. 93

  • Page 96
    ... Sales Growth 1953 1972 $100 million 1985 $1 billion 2003 $5 billion 2012 $9.7 billion Net Sales (In billions) 7.91 7.32 7.80 8.81 9.71 $9.71 Billion 2008 2009 2010 2011 2012 Operating Income (In millions) 810.7 418.4 789.9 1,089.4 1,311.7 $1,311.7 Million 2008 2009 2010 2011 2012...

  • Page 97
    ...19 1.74 2.16 $2.16 2008 2009 2010 2011 2012 Operating Working Capital†Accounts Receivable Plus Inventory Less Accounts Payable (As a percentage of net sales) 21.0 18.0 14.7 17.0 16.0 16.0% 2008 2009 2010 2011 2012 * Attributable to The Estée Lauder Companies Inc. †Does not represent...

  • Page 98
    ...Annual Growth฀Rate฀20.7% (In millions) 332.3 416.2 686.1 676.0 706.0 $706.0 Million 2008 2009 2010 2011 2012 2012 Net Sales By Distribution Channel North American 27% Department Stores 27% International Department Stores Other 8% 13% Perfumeries Salon/Spas 4% Travel Retail 11% 10% Retail...

  • Page 99
    financial section THE EST{E LAUDER COMPANIES INC. 97

  • Page 100
    ... 164 Management's Report on Internal Control over Financial Reporting 165 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 166 Report of Independent Registered Public Accounting Firm 167 Stockholder Information 98 THE EST{E LAUDER COMPANIES INC...

  • Page 101
    ...selected financial information. For further information, refer to the audited consolidated financial statements and the notes thereto beginning on page 123 of this report. YEAR ENDED OR AT JUNE 30 (In millions, except per share data) 2012(a) 2011(a) 2010(a) 2009(a) 2008 STATEMENT OF EARNINGS...

  • Page 102
    ... 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 103
    ...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 2012...

  • Page 104
    ... product growth. The weighted-average cost of capital used to discount future cash flows ranged from 8% to 16% in fiscal 2012 as compared with 7.5% to 16% in fiscal 2011. The range of market multiples used in our fiscal 2012 impairment testing was from 1.7 to 3.3 times trailing-twelve-month sales...

  • Page 105
    ... growth rate applied to future cash ï¬,ows was 3% and the fiscal 2012 and 2011 discount rates ranged from 10% to 18%. The fiscal 2012 and 2011 royalty rates ranged from 0.5% to 12%. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying...

  • Page 106
    ... 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 107
    ... JUNE 30 (In millions) 2012 2011 2010 NET SALES By Region: The Americas Europe, the Middle East & Africa Asia/Pacific Returns associated with restructuring activities Net Sales By Product Category: Skin Care Makeup Fragrance Hair Care Other Returns associated with restructuring activities Net...

  • Page 108
    ... build our makeup category through the introduction of new product offerings, continue expanding our hair care brands both in the salon and in other retail channels and focus our efforts to strengthen our fragrance business model. We are strengthening our geographic presence by seeking share growth...

  • Page 109
    ... spending. Looking ahead to fiscal 2013, we plan to continue building on our strengths. We have a strong, diverse and highly valuable brand portfolio with global reach and potential, as well as a track record of outstanding creativity, innovation, entrepreneurship and healthy growth. We plan...

  • Page 110
    ... 2010, we recorded $15.7 million reï¬,ecting sales returns (less related cost of sales of $2.5 million) and $10.4 million for the write-off of inventory associated with exiting unprofitable operations, primarily related to the exit from the global wholesale distribution of the Prescriptives brand...

  • Page 111
    ...softness in the direct response television channel, which caused us to review and revise Ojon's long-term forecast. We concluded that these changes in the business of the Ojon reporting unit triggered the need for an interim impairment test of its trademarks as of December 31, 2011. These changes in...

  • Page 112
    ... Global Anti-Aging Creme from Estée Lauder contributed incremental sales of approximately $78 million, combined. Higher sales of Idealist Even Skintone Illuminator, Advanced Night Repair Synchronized Recovery Complex and Idealist Cooling Eye Illuminator from Estée Lauder and various products...

  • Page 113
    ...cult economic environments. Excluding the impact of foreign currency translation, net sales in Europe, the Middle East & Africa increased 12%. Net sales in Asia/Pacific increased 14%, or $250.7 million, to $2,011.4 million, reï¬,ecting growth in each major product category and from most countries...

  • Page 114
    ... results from our makeup artist brands. Both our skin care and makeup categories were impacted by higher investment spending on global advertising, merchandising and sampling to support major launches and existing franchises in line with our strategy. Fragrance operating income increased 24%, or $19...

  • Page 115
    .... Increased sales of Advanced Night Repair Eye Synchronized Complex from Estée Lauder and Even Better Clinical Dark Spot Corrector from Clinique, which were launched in fiscal 2010, contributed approximately $232 million to the net sales growth. Higher sales of the Time Zone line of products from...

  • Page 116
    ..., the Middle East, South Africa and France. This was attributable to improved retail 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 reï¬,ected an increase in global airline...

  • Page 117
    ... strong sales from our heritage and makeup artist brands, partially offset by incremental spending in line with our strategy. In Europe, the Middle East & Africa, operating income increased 30%, or $151.1 million, to $651.9 million, reï¬,ecting higher results from our travel retail business, Russia...

  • Page 118
    ... 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 operations, information systems enhancements, capital expenditures, potential stock...

  • Page 119
    ... costs of approximately $1 million to establish the Facility which are being amortized over the term of the Facility. The Facility has an annual fee of $0.7 million, payable quarterly, based on our current credit ratings. The Facility also contains a crossdefault provision whereby a failure to pay...

  • Page 120
    ...costs related to employee compensation, advertising, merchandising and sampling, and payroll and other taxes, as well as an increase in accounts receivable balances primarily due to the timing of shipments. Cash ï¬,ows from operating activities increased in fiscal 2011 as compared with fiscal 2010...

  • Page 121
    ...obligations, commitments pursuant to executive compensation arrangements, obligations related to our cost savings initiatives and acquisitions. Future earn-out payments and future royalty and advertising commitments were estimated based on planned future sales for the term that was in effect at June...

  • Page 122
    ... June 30, 2012 was approximately $2.8 million. As of June 30, 2012, we were in compliance with such credit-risk-related contingent features. Market Risk We use a value-at-risk model to assess the market risk of our derivative financial instruments. Value-at-risk repreTHE EST{E LAUDER COMPANIES INC.

  • Page 123
    ...: (1) increased 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...

  • Page 124
    ... the 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...

  • Page 125
    ... 789.9 74.3 27.3 - 688.3 205.9 482.4 (4.1) $ 478.3 Net Sales Cost of sales Gross Profit Operating expenses Selling, general and administrative Restructuring and other charges Goodwill impairment Impairment of other intangible and long-lived assets Total operating expenses Operating Income Interest...

  • Page 126
    ... income (loss) Less: Treasury stock, at cost; 162,371,840 Class A shares at June 30, 2012 and 150,575,090 Class A shares at June 30, 2011 Total stockholders' equity - The Estée Lauder Companies Inc. Noncontrolling interests Total equity Total liabilities and equity $ 1,347.7 1,060.3 983.6 463...

  • Page 127
    ... 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 Purchase of...

  • Page 128
    ... prior service credit (cost), net of tax Translation adjustments, net of tax Comprehensive 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...

  • Page 129
    ... businesses and other intangible assets, net of cash acquired Proceeds from the disposition of long-term investments Purchases of long-term investments Net cash ï¬,ows used for investing activities Cash Flows from Financing Activities Borrowings (repayments) of current debt, net Debt issuance costs...

  • Page 130
    ... 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 131
    ...settlements on a variable-rate asset or liability are THE EST{E LAUDER COMPANIES INC. recorded in earnings). Changes in the fair value of derivative instruments not designated as hedging instruments are reported in current-period earnings. Property, Plant and Equipment Property, plant and equipment...

  • Page 132
    ... is shipped to the customer and in the Europe, the Middle East & Africa and Asia/ Pacific regions, sales are generally recognized based upon the customer's receipt. In certain circumstances, transfer of title takes place at the point of sale, for example, at the Company's retail stores. The Company...

  • Page 133
    ... Global net expenses for advertising, merchandising, sampling, promotion and product development costs were $2,655.7 million, $2,345.8 million and $2,015.9 million in fiscal 2012, 2011 and 2010, respectively, and are expensed as incurred. Excluding the impact of purchase with purchase and gift...

  • Page 134
    ... have a material impact on the Company's consolidated results of operations. Recently Adopted Accounting Standards In September 2011, the Financial Accounting Standards Board ("FASB") amended its authoritative guidance related to multiemployer benefit plans. This revised guidance is intended to...

  • Page 135
    ... 3 - INVENTORY AND PROMOTIONAL MERCHANDISE JUNE 30 (In millions) 2012 2011 Inventory and promotional merchandise, net consists of: Raw materials Work in process Finished goods Promotional merchandise $220.7 98.0 473.9 191.0 $983.6 $230.2 93.6 475.4 196.4 $995.6 THE EST{E LAUDER COMPANIES INC...

  • Page 136
    ...The Company assigns goodwill of a reporting unit to the product category in which that reporting unit predominantly 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...

  • Page 137
    ... hair care product category and in the Americas region. The Company concluded that the carrying value of the customer list was recoverable. As of the Company's annual indefinite-lived asset impairment test on April 1, 2012, the Company determined that the carrying value of the Ojon brand trademark...

  • Page 138
    ... $1.7 million for the carrying values of the related trademarks. These impairment charges were reï¬,ected in the makeup 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 was funded by cash...

  • Page 139
    ...48.8 41.1 53.6 $213.8 Fiscal 2009 Fiscal 2010 Fiscal 2011 Fiscal 2012 Charges recorded through June 30, 2012 $ 60.9 29.3 34.6 37.1 $161.9 The following table presents accrued restructuring charges and the related activities under the Program: Employee-Related Costs (In millions) Asset Write-offs...

  • Page 140
    ...Ojon brand products. During fiscal 2010, the Company recorded $15.7 million reï¬,ecting sales returns (less related cost of sales of $2.5 million) and $10.4 million for the write-off of inventory associated with exiting unprofitable operations, primarily related to the exit from the global wholesale...

  • Page 141
    ...of the Company's deferred income tax assets and liabilities were as follows: JUNE 30 (In millions) 2012 2011 Deferred tax assets: Compensation related expenses Inventory obsolescence and other inventory related reserves Retirement benefit obligations Various accruals not currently deductible Net...

  • Page 142
    ...rst quarter of fiscal 2012, the National Appellate Court notified the Company that the appeal was denied. The Company has been assessed corporate income tax and interest of $3.8 million, net of tax, at current exchange rates. In response, the Company filed an 140 THE EST{E LAUDER COMPANIES INC.

  • Page 143
    ...: JUNE 30 (In millions) 2012 2011 Advertising, merchandising and sampling Employee compensation Payroll and other taxes Restructuring Other $ 385.9 430.1 133.0 34.8 332.0 $1,315.8 $ 401.9 422.4 125.1 28.6 318.3 $1,296.3 NOTE 10 - DEBT The Company's current and long-term debt and available...

  • Page 144
    ... to the carrying amount of the related debt is being amortized against interest expense over the remaining life of the debt. As of June 30, 2012, the Company had outstanding $230.1 million principal of 2013 Senior Notes. The 2013 Senior Notes, when issued in November 2008, were priced at 99...

  • Page 145
    ... and Contingencies for the Company's projected debt service payments, as of June 30, 2012, over the next five fiscal years. NOTE 11- DERIVATIVE FINANCIAL INSTRUMENTS The Company addresses certain financial exposures through a controlled program of risk management that includes the use of...

  • Page 146
    ...$(38.0) $(38.0) Cost of sales Selling, general and administrative $ 4.6 7.1 $11.7 $ (4.3) (10.8) $(15.1) (2) The amount of gain (loss) recognized in earnings related to the amount excluded from effectiveness testing was $(0.8) million and $0.3 million for fiscal 2012 and 2011, respectively. The...

  • Page 147
    ... consolidated statements of cash ï¬,ows. Hedge accounting treatment was discontinued prospectively and the fair value adjustment to the carrying amount of the related debt is being amortized against interest expense over the remaining life of the debt. Credit Risk As a matter of policy, the Company...

  • Page 148
    ... million. As of June 30, 2012, the Company was in compliance with such credit-risk-related contingent features. NOTE 12 - FAIR VALUE MEASUREMENTS The Company records its financial assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to...

  • Page 149
    ...used in conjunction with a 1.5% royalty rate discounted to present value at a 17% rate. To determine fair value of the trademark and customer list at April 1, 2012, the Company assessed the future performance of the related reporting unit and determined that negative cash ï¬,ows in future forecasted...

  • Page 150
    ... benefits based primarily on years of service and employees' earnings. In certain instances, the Company adjusts benefits in connection with international employee transfers. Retirement Growth Account Plan (U.S.) The Retirement Growth Account Plan is a trust-based, noncontributory qualified de...

  • Page 151
    ...Plans International Post-retirement 2012 2011 2011 2012 2011 Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Plan participant contributions Actuarial loss (gain) Foreign currency exchange... $(107.9) $(111.1) THE EST{E LAUDER COMPANIES INC. 149

  • Page 152
    Pension Plans U.S. 2012 ($ in millions) Other than Pension Plans International Post-retirement 2010 2012 2011 2010 2011 2010 2012 2011 Components of net periodic benefit cost: Service cost, net $ 27.7 Interest cost 29.8 Expected return on assets (38.9) Amortization of: Prior service cost 0.7 ...

  • Page 153
    ... 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 2012 (In millions) Restoration 2012 $111.6 $ 86.3 $ - 2011...

  • Page 154
    ...fied as Level 1. When quoted market prices are not available in an active market, these investments are classified as Level 2. Equity securities - The fair values reï¬,ect the closing price reported on a major market where the individual securities are traded. These investments are classified...

  • Page 155
    ...at the reporting date Relating to assets sold during the year Transfers in (out) Purchases, sales, issuances and settlements, net Foreign exchange impact Balance as of June 30, 2012 $39.0 1.4 (0.7) - (1.0) (1.0) $37.7 401(k) Savings Plan (U.S.) The Company's 401(k) Savings Plan ("Savings Plan") is...

  • Page 156
    ... compensation arrangements, obligations related to the Company's cost savings initiatives and acquisitions. Future earn-out payments and future royalty and advertising commitments were estimated based on planned future sales for the term that was in effect at June 30, 2012, without consideration for...

  • Page 157
    ... 3, 2011, the Company's Board of Directors declared a dividend in the amount of $.525 per share on the Company's Class A and Class B Common Stock. The dividend was paid in cash on December 14, 2011 to stockholders of record at the close of business on November 28, 2011. Information about the Company...

  • Page 158
    ... ENDED JUNE 30 (In millions) 2012 $124.7 41.1 2011 $94.8 31.5 2010 $57.0 19.0 Compensation expense Income tax benefit As of June 30, 2012, the total unrecognized compensation cost related to nonvested stock-based awards was $80.8 million and the related weighted-average period over which it...

  • Page 159
    ... of the 330,600 PSUs that vested as of June 30, 2012. In September 2011, approximately 275,200 shares of the Company's Class A Common Stock were issued and related accrued dividends were paid, relative to the target goals set at the time of issuance, in settlement of 262,000 PSUs which vested as...

  • Page 160
    ..., 2012, 2011 and 2010, 0.6 million, 0.7 million and 0.6 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 161
    ... gain recorded in AOCI at June 30, 2012, $9.8 million in gains, net of tax, related to foreign currency forward contracts, which the Company will ...and Post-retirement Benefit Plans for the discussion regarding the net pension and post-retirement adjustments. THE EST{E LAUDER COMPANIES INC. 159

  • Page 162
    .... The "other" segment includes the sales and related results of ancillary products 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...

  • Page 163
    YEAR ENDED JUNE 30 (In millions) 2012 2011 2010 PRODUCT CATEGORY DATA Net Sales: Skin Care Makeup Fragrance Hair Care Other Returns associated with restructuring activities $4,225.2 3,696.8 1,271.0 462.4 60.3 9,715.7 (2.1) $9,713.6 $3,718.6 3,370.8 1,236.0 432.3 56.9 8,814.6 (4.6) $8,810.0 $ ...

  • Page 164
    ...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 2012, 2011 and 2010 were $3,582.1 million, $3,309.1 million and $2,992.7 million, respectively. The Company's long-lived assets...

  • Page 165
    ... $42 million of accelerated orders (approximately $31 million of operating income) were recorded as net sales in the fiscal 2011 third quarter that would have occurred in the fiscal 2011 fourth quarter). (6) The Company established a provision in the fiscal 2012 third quarter for then-anticipated...

  • Page 166
    ... the heading "Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting." Fabrizio Freda President and Chief Executive Officer August 17, 2012 Richard W. Kunes Executive Vice President and Chief Financial Officer 164 THE EST{E LAUDER COMPANIES INC.

  • Page 167
    ... Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board...

  • Page 168
    ... 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, 2012 and 2011, and the related consolidated statements of earnings, equity...

  • Page 169
    ...of the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, please call the toll-free information line, 800-308-2334, or write to the Investor Relations Department at the Company's headquarters. Our Form 10-K is also available on our website at www.elcompanies...

  • Page 170
    ... five- and seventeen-year total stockholder return (stock price appreciation plus dividends) on the Company's Class A Common Stock with the cumulative total return of the S&P 500 Index and a market weighted index of a publicly traded peer group. The returns are calculated by assuming an investment...

  • Page 171
    ... in this report include: Advanced Night Repair, American Beauty, A Perfect World, Aramis, Aveda, Bb. ColorMinded, Bb. Straight, Be Legendary, Bobbi Brown, Bobbi Brown LongWear, Bumble and bumble, Calyx, Chubby Stick, Clinique, Crème de la Mer, Crème Soyeuse de La Mer, Darphin, Double Wear, Equinol...

  • Page 172
    ... EST{E LAUDER COMPANIES INC. 2012 ANNUAL REPORT ENVIRONMENTAL FIGURES The Estée Lauder Companies Inc. 2012 Annual Report is printed on paper that is made with certified renewable electricity and is Forest Stewardship Council™ (FSC®) Certified, ensuring all papers come from responsibly managed...

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