Estee Lauder 2005 Annual Report Download - page 52

THE EST{E LAUDER COMPANIES INC.
and $58.3 million, respectively. Dividends paid on the pre-
ferred stock were $0.9 million, $17.4 million and $23.4 mil-
lion for the years ended June 30, 2005, 2004 and 2003,
respectively. The decrease in preferred stock dividends in
fiscal 2005 and 2004 primarily reflected the redemption of
$291.6 million aggregate principal amount of 2015
Preferred Stock on June 10, 2004 and the reduction in the
dividend rate on the remaining $68.4 million of the 2015
Preferred Stock. The cumulative redeemable preferred
stock dividends have been characterized as interest
expense in the accompanying consolidated statements
of earnings for the fiscal years ended June 30, 2005
and 2004.
Pension Plan Funding and Expense
We maintain pension plans covering substantially all of our
full-time employees for our U.S. operations and a majority
of our international operations. Several plans provide pen-
sion benefits based primarily on years of service and
employees’ earnings. In the United States, we maintain a
trust-based, noncontributory qualified defined benefit
pension plan (“U.S. Qualified Plan”). Additionally, we have
an unfunded, nonqualified domestic noncontributory pen-
sion plan to provide benefits in excess of statutory limita-
tions. Our international pension plans are comprised of
defined benefit and defined contribution plans.
Several factors influence our annual funding require-
ments. For the U.S. Qualified Plan, our funding policy con-
sists of annual contributions at a rate that provides for
future plan benefits and maintains appropriate funded per-
centages. Such contribution is not less than the minimum
required by the Employee Retirement Income Security Act
of 1974, as amended (“ERISA”), and subsequent pension
legislation and is not more than the maximum amount
deductible for income tax purposes. For each international
plan, our funding policies are determined by local laws and
regulations. In addition, amounts necessary to fund future
obligations under these plans could vary depending on
estimated assumptions (as detailed in “Critical Accounting
Polices and Estimates”). The effect on operating results in
the future of pension plan funding will depend on eco-
nomic conditions, employee demographics, mortality rates,
the number of participants electing to take lump-sum dis-
tributions, investment performance and funding decisions.
For fiscal 2005 and 2004, there was no minimum con-
tribution to the U.S. Qualified Plan required by ERISA.
However, at management’s discretion, we made cash con-
tributions to the U.S. Qualified Plan of $2.0 million and
$33.0 million during fiscal 2005 and 2004, respectively.
During fiscal 2006, we do not expect to make any cash
contributions to the U.S. Qualified Plan.
For fiscal 2005 and 2004, we made benefit payments
under our non-qualified domestic noncontributory pension
plan of $5.0 million and $2.5 million, respectively. We
expect to make benefit payments under this plan during
fiscal 2006 of $9.5 million. For fiscal 2005 and 2004, we
made cash contributions to our international pension plans
of $29.2 million and $22.9 million, respectively. We expect
to make contributions under these plans during fiscal 2006
of $19.9 million.
In addition, at June 30, 2005 and 2004, we recognized a
liability on our balance sheet for each pension plan if the
fair market value of the assets of that plan was less than the
accumulated benefit obligation and, accordingly, a benefit
or a charge was recorded in accumulated other compre-
hensive income (loss) in shareholders’ equity for the
change in such liability. During fiscal 2005, we recorded a
charge, net of deferred tax, of $11.4 million while in fiscal
2004, we recorded a benefit, net of deferred tax, of $16.0
million to accumulated other comprehensive income (loss).
Commitments and Contingencies
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
intend to purchase the preferred stock on that date and
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.
Certain of our business acquisition agreements include
“earn-out” provisions. These provisions generally require
that we pay to the seller or sellers of the business additional
amounts based on the performance of the acquired busi-
ness. The payments typically are made after a certain
period of time and our next earn-out payment will be
made in fiscal 2006. Since the size of each payment
depends upon performance of the acquired business, we
do not expect that such payments will have a material
adverse impact on our future results of operations or finan-
cial condition.
For additional contingencies, refer to “Item 3. Legal
Proceedings.”
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