Estee Lauder 2005 Annual Report Download - page 50

THE EST{E LAUDER COMPANIES INC.
inclusion of the dividends on redeemable preferred stock
as interest expense, which are not deductible for income
tax purposes (approximately 100 basis points), the mix of
global earnings (approximately 150 basis points) and, to a
lesser extent, the timing of certain tax planning initiatives.
The fiscal 2003 rate included benefits derived from certain
favorable tax negotiations (approximately 230 basis points).
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 and other lenders in the United States and
abroad. At June 30, 2005, we had cash and cash equiva-
lents of $553.3 million compared with $611.6 million at
June 30, 2004.
At June 30, 2005, our outstanding borrowings of $714.7
million included: (i) $246.3 million of 6% Senior Notes
due January 2012 consisting of $250.0 million principal,
unamortized debt discount of $0.8 million and a $2.9
million adjustment to reflect the fair value of an outstanding
interest rate swap; (ii) $197.4 million of 5.75% Senior Notes
due October 2033 consisting of $200.0 million principal
and unamortized debt discount of $2.6 million; (iii) $68.4
million of 2015 Preferred Stock, which shares have been
put to us and we intend to redeem them on October 26,
2005; (iv) a 3.0 billion yen term loan (approximately
$27.2 million at the exchange rate at June 30, 2005), which
is due in March 2006; (v) a 1.8 million Euro note (approxi-
mately $2.2 million at the exchange rate at June 30, 2005)
payable semi-annually through February 2008 at a variable
interest rate; (vi) $9.0 million of capital lease obligations;
(vii) $148.0 million of outstanding short-term commercial
paper payable through July 2005 at an average interest
rate of 3.08%; and (viii) $16.2 million of other short-term
borrowings.
We have a $750.0 million commercial paper program
under which we may issue commercial paper in the United
States. Our commercial paper is currently rated A-1 by
Standard & Poor’s and P-1 by Moody’s. Our long-term
credit ratings are A+ with a stable outlook by Standard &
Poor’s and A1 with a stable outlook by Moody’s. At June
30, 2005, we had $148.0 million of commercial paper out-
standing, which is being refinanced on a periodic basis as it
matures at then prevailing market interest rates. We also
have an effective shelf registration statement covering the
potential issuance of up to an additional $300.0 million in
debt securities and $168.5 million in additional uncommit-
ted credit facilities, of which $16.2 million was used as of
June 30, 2005.
Effective May 27, 2005, we entered into a five-year
$600.0 million senior revolving credit facility, expiring on
May 27, 2010. The new facility replaced our prior, unused
$400.0 million revolving credit facility, which was effective
since June 28, 2001. The new revolving credit facility may
be used for general corporate purposes, including financ-
ing working capital, and also as credit support for our com-
mercial paper program. Up to the equivalent of $250
million of the facility is available for multi-currency loans.
The interest rate on borrowings under the credit facility is
based on LIBOR or on the higher of prime, which is the
rate of interest publicly announced by the administrative
agent, or 1/2%plus the Federal funds rate. We incurred debt
issuance costs of $0.3 million which will be amortized over
the term of the facility. The credit facility has an annual fee
of $0.4 million, payable quarterly, based on our current
credit ratings. As of June 30, 2005, this facility was unused,
and we were in compliance with all related financial
and other restrictive covenants, including limitations on
indebtedness and liens.
On June 28, 2005, we received a notice of exercise of
the put right from the holder of the remaining $68.4 million
of the 2015 Preferred Stock, which requires us to purchase
the preferred stock, plus any cumulative and unpaid
dividends thereon, on or before October 26, 2005. We
plan to purchase the preferred stock on that date and to
pay the anticipated dividends from July 1, 2005 through
that date of $0.5 million at a rate based on the after-tax
yield on six-month U.S. Treasuries of 2.10%, which was
reset on July 1, 2005.
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 our needs exceed
cash from operations, we could, subject to market condi-
tions, issue commercial paper, issue long-term debt securi-
ties or borrow under the revolving credit facility.
Total debt as a percent of total capitalization was 30% at
June 30, 2005 as compared with 24% at June 30, 2004.
This increase primarily reflected the issuance of short-term
commercial paper in the fourth quarter of fiscal 2005.
The effects of inflation have not been significant to our
overall operating results in recent years. Generally, we have
been able to introduce new products at higher selling
prices or increase selling prices sufficiently to offset cost
increases, which have been moderate.
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