Estee Lauder 2007 Annual Report Download - page 47

46 THE EST{E LAUDER COMPANIES INC.
assets not acquired by the Purchaser and other costs in
connection with the sale. The charges also included the
operating losses of $10.4 million, net of tax, for the fi scal
year ended June 30, 2006. Net sales associated with the
discontinued operations were $45.1 million for the fi scal
year ended June 30, 2006. All statements of earnings
information for previous years has been restated for com-
parative purposes, including the restatement of the
makeup product category and each of the geographic
regions presented in Note 17 of Notes to Consolidated
Financial Statements— Segment Data and Related
Information.
In order to facilitate the transition of the Stila business
to the Purchaser, we agreed to provide certain informa-
tion systems, accounting and other back offi ce services to
the Purchaser in exchange for monthly service fees
designed to recover the estimated costs of providing
these transition services. We also agreed with the Pur-
chaser to provide certain distribution and online services.
In both cases, the services concluded in fiscal 2007.
In addition, we agreed to manufacture and sell to the
Purchaser a limited range of products for a period of up to
four months following the Effective Date and, in the case
of one product, of up to two years.
NET EARNINGS
Net earnings as compared with fi scal 2005 declined
$161.9 million or 40% to $244.2 million and diluted net
earnings per common share decreased 37% from $1.78
to $1.12. Net earnings from continuing operations as com-
pared with fi scal 2005 decreased by $85.4 million, or
21%, to $324.5 million and diluted net earnings per
common share from continuing operations decreased
17% from $1.80 to $1.49.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds historically have been cash
fl ows from operations and borrowings under commercial
paper, borrowings from the issuance of long-term
debt and committed and uncommitted credit lines pro-
vided by banks and other lenders in the United States and
abroad. At June 30, 2007, we had cash and cash equiva-
lents of $253.7 million compared with $368.6 million at
June 30, 2006.
At June 30, 2007, our outstanding borrowings were
as follows:
through intercompany dividends as required under the
provisions of the American Jobs Creation Act of 2004 (the
“AJCA”). In connection with the repatriation, we updated
the computation of the related aggregate tax impact,
resulting in a favorable adjustment of approximately $11
million. The tax settlement, coupled with the AJCA favor-
able tax adjustment, resulted in a net increase to our fi scal
2006 income tax provision of approximately $35 million.
The increase in the effective income tax rate was attrib-
utable to the tax settlement charge of approximately 770
basis points, an increase of approximately 60 basis points
resulting from our foreign operations and an increase in
nondeductible expenses of approximately 30 basis points.
These increases were partially offset by the net reduction
in the incremental tax charge relative to the repatriation of
foreign earnings pursuant to the AJCA of approximately
570 basis points, as well as a reduction of approximately
50 basis points for miscellaneous items.
DISCONTINUED OPERATIONS
On April 10, 2006 (the “Effective Date”), we completed
the sale of certain assets and operations of the reporting
unit that marketed and sold Stila brand products to
Stila Corp. (the “Purchaser”), an affi liate of Sun Capital
Partners, Inc., for consideration of $23.0 million. The sale
price included cash of $9.3 million, a promissory note
with a notional value of $13.3 million and a fair value of
$11.0 million and convertible preferred stock with an
aggregate liquidation preference of $5.0 million and a fair
value of $2.7 million. As additional consideration for the
purchased assets, and subject to the terms and conditions
of the sale agreement, the Purchaser will pay us an
amount equal to two percent of the annual net sales of
the acquired business during the period commencing on
the Effective Date and ending August 20, 2019. We will
use these proceeds to satisfy our commitment under the
1999 agreement pursuant to which we originally pur-
chased the Stila business. The Purchaser immediately
assumed responsibility for all decisions regarding the
operations of the Stila business and we agreed to divest
ourselves of continuing involvement in the Stila business,
except as described below.
In fi scal 2006, we recorded charges of $80.3 million
(net of $43.3 million tax benefi t) to discontinued opera-
tions, which refl ected the loss on the disposition of the
business of $69.9 million, net of tax, and adjustments to
the fair value of assets sold, the costs to dispose of those