Estee Lauder 2004 Annual Report Download - page 51

THE EST{E LAUDER COMPANIES INC.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, for-
eign, state and local income taxes. The effective rate for
income taxes for fiscal 2003 was 32.9% as compared with
34.5% in fiscal 2002. These rates differ from statutory
rates, reflecting the effect of state and local taxes, tax rates
in foreign jurisdictions and certain nondeductible
expenses. The decrease in the effective tax rate was prin-
cipally attributable to ongoing tax planning initiatives,
including the favorable settlement of certain tax negotia-
tions and the reduction of the overall tax rate relating to
the Company’s foreign operations. In addition, the tax
effect of the charge related to the pending settlement of a
legal proceeding in late fiscal 2003 contributed to an
effective tax rate slightly lower than previously expected.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds historically have been cash
flows from operations and borrowings under commercial
paper, borrowings from the issuance of long-term debt
and committed and uncommitted credit lines provided
by banks in the United States and abroad. At June 30,
2004, we had cash and cash equivalents of $611.6 mil-
lion compared with $364.1 million at June 30, 2003.
At June 30, 2004, our outstanding borrowings of
$535.3 million included: (i) $236.6 million of 6% Senior
Notes due January 2012 consisting of $250.0 million prin-
cipal, unamortized debt discount of $0.9 million and a
$12.5 million adjustment to reflect the fair value of an
outstanding interest rate swap; (ii) $197.3 million of
5.75% Senior Notes due October 2033 consisting of
$200.0 million principal and unamortized debt discount
of $2.7 million; (iii) $68.4 million of Cumulative
Redeemable Preferred Stock, which shares have a manda-
tory redemption date of June 30, 2015 (see “Recently
Issued Account ing Standards”); (iv) a 3.0 billion yen term
loan (approximately $27.6 million at exchange rates as of
June 30, 2004), which is due in March 2006; and (v) $5.4
million of other short-term borrowings.
In September 2003, we issued and sold $200.0 million
of 5.75% Senior Notes due October 2033 (“5.75% Senior
Notes”) in a public offering. The 5.75% Senior Notes were
priced at 98.645% with a yield of 5.846%. Interest pay-
ments, which commenced April 15, 2004, will be made
semi-annually on April 15 and October 15 of each year. In
May 2003, in anticipation of the issuance of the 5.75%
Senior Notes, we entered into a series of treasury lock
agreements on a notional amount totaling $195.0 million
at a weighted average all-in rate of 4.53%. The treasury
lock agreements were settled upon the issuance of the
new debt and we received a payment of $15.0 million
that will be amortized against interest expense over the
life of the 5.75% Senior Notes. As a result of the treasury
lock agreements, the debt discount and debt issuance
costs, our effective interest rate on the 5.75% Senior
Notes will be 5.395% over the life of the debt. We issued
these fixed-rate notes to lock in long-term liquidity at
historically low prevailing market rates and to mitigate
future interest rate volatility.
On December 31, 2003, we and the holders of the
$6.50 Cumulative Redeemable Preferred Stock exchanged
all of the outstanding shares of $6.50 Cumulative
Redeemable P referred Stock due June 30, 2005 for a
newly issued series of cumulative redeemable preferred
stock with a mandatory redemption date of June 30,
2015 (“2015 Preferred Stock”). For the quarters ended
December 31, 2003 and March 31, 2004, the dividend
rate on the 2015 Preferred Stock was 4.75% per annum,
payable quarterly.
On April 24, 2004, Mrs. Estée Lauder passed away. As a
result, our right to call for redemption $291.6 million of
the 2015 Preferred Stock became exercisable and the
holders’ right to put to us all $360.0 million aggregate
principal amount of the 2015 Preferred Stock became
exercisable.
On June 10, 2004, we redeemed, for cash, all $291.6
million aggregate principal amount of 2015 Preferred
Stock that could be redeemed at that time. Upon this par-
tial redemption, the dividend rate on the remaining $68.4
million principal amount of 2015 Preferred Stock was
reduced, for the period from April 25, 2004 through June
30, 2004, from 4.75% per annum to 0.62% per annum,
which is a rate based on the after-tax yield on six-month
U.S. Treasuries. So long as the remaining shares of 2015
Preferred Stock are outstanding, the dividend rate will be
reset semi-annually in January and July at the then-
existing after-tax yield on six-month U.S. Treasuries. The
dividend rate for the six-month period from July 1, 2004
through December 31, 2004 is 0.994%. As a result of the
redemption of the $291.6 million principal amount of
2015 Preferred Stock and the reduction of the dividend
rate on the remaining $68.4 million principal amount of
2015 Preferred Stock, we expect to save, net of financing
costs, approximately $14.0 million in fiscal 2005.
The remaining $68.4 million principal amount of 2015
Preferred Stock may be put to us at any time at face value,
but may not be redeemed by us until May 24, 2005. If put
to us on or before June 30, 2005, we would have up to
120 days after the exercise date of the put to pay for the
shares. If the remaining shares of 2015 Preferred Stock
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