Estee Lauder 2010 Annual Report Download - page 101

100 THE EST{E LAUDER COMPANIES INC.
NET EARNINGS ATTRIBUTABLE TO
THE ESTÉE LAUDER COMPANIES INC.
Net earnings attributable to The Estée Lauder Companies
Inc. as compared with fiscal 2008 decreased 54%, or
$255.4 million, to $218.4 million and diluted net earnings
per common share declined 54% from $2.40 to $1.10.
These results include the impact of total charges associ-
ated with restructuring activities of $61.7 million, after tax,
or $.31 per diluted common share.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal sources of funds historically have been cash
flows from operations, borrowings pursuant to our com-
mercial paper program, borrowings from the issuance of
long-term debt and committed and uncommitted credit
lines provided by banks and other lenders in the United
States and abroad. At June 30, 2010, we had cash and
cash equivalents of $1,120.7 million compared with
$864.5 million at June 30, 2009. Our cash and cash equiv-
alents are maintained at a number of financial institutions.
As of June 30, 2010, less than 10% of our total cash was
insured by governmental agencies. To mitigate the risk of
uninsured balances, we select financial institutions based
on their credit ratings and financial strength and perform
ongoing evaluations of these institutions to limit our con-
centration risk exposure.
Our business is seasonal in nature and, accordingly,
our working capital needs vary. From time to time, we
may enter into investing and financing transactions that
require additional funding. To the extent that these needs
exceed cash from operations, we could, subject to market
conditions, issue commercial paper, issue long-term debt
securities or borrow under our revolving credit facilities.
On May 24, 2010, we completed a cash tender offer
for $130.0 million principal amount of our 2012 Senior
Notes at a price of 108.500% of the principal amount and
for $69.9 million principal amount of our 2013 Senior
Notes at a tender price of 118.813% of the principal
amount. During the fourth quarter of fiscal 2010, we
recorded a pre-tax expense on the extinguishment of debt
of $27.3 million representing the tender premium, the pro-
rata write-off of unamortized terminated interest rate
swap, issuance costs and debt discount, and tender offer
costs associated with both series of notes.
Based on past performance and current expectations,
we believe that cash on hand, cash generated from opera-
tions, available credit lines and access to credit markets
will be adequate to support currently planned business
operations, information systems enhancements, capital
partially offset by cost containment and contingency
plan efforts.
In Europe, the Middle East & Africa, operating income
decreased 47%, or $203.4 million, to $229.7 million. This
decrease primarily reflected lower results of approximately
$156 million in our travel retail business, Spain, France,
Russia, the United Kingdom and Italy, of which approxi-
mately $34 million related to charges for goodwill and
other intangible asset impairments and the degradation of
certain retailers.
In Asia/Pacific, operating income increased 10%, or
$15.5 million, to $165.2 million. Most of our affiliates in
this region experienced an increase despite a softer retail
environment in certain countries. Approximately $20 mil-
lion of this increase was generated in Hong Kong, China,
Korea and Japan. Partially offsetting these improvements
were lower results in Australia, Singapore and New
Zealand of approximately $5 million, combined.
INTEREST EXPENSE, NET
Net interest expense was $75.7 million as compared with
$66.8 million in fiscal 2008. Interest expense increased
primarily due to higher average debt balances, which
include an additional $300.0 million of senior notes issued
in November 2008, partially offset by lower average inter-
est rates on pre-existing borrowings. In addition, interest
income decreased primarily due to lower average invest-
ment rates.
PROVISION FOR INCOME TAXES
The provision for income taxes represents federal, foreign,
state and local income taxes. The effective rate differs
from statutory rates due to the effect of state and local
income taxes, tax rates in foreign jurisdictions and certain
nondeductible expenses. Our effective tax rate will
change from year to year based on recurring and non-
recurring factors including, but not limited to, the
geographical mix of earnings, enacted tax legislation, state
and local income taxes, tax audit settlements and the
interaction of various global tax strategies.
The effective rate for income taxes for the year ended
June 30, 2009 was 33.8% as compared with 34.9% in fis-
cal 2008. The decrease in the effective income tax rate of
110 basis points was primarily attributable to a favorable
settlement with the Appeals Division of the IRS (560 basis
points), partially offset by an increase in non-deductible
expenses and an increase in state and local income tax
expense (450 basis points).