Estee Lauder 2004 Annual Report Download - page 50

THE EST{E LAUDER COMPANIES INC.
$22.0 million or 0.4% of net sales. Fiscal 2002 operating
expenses included a restructuring charge of $109.6 mil-
lion or 2.3% of net sales. Before considering the effect of
these two charges, operating expenses increased slightly
to 63.7% of net sales compared with 63.6% of net sales in
the prior year. The increase in spending primarily related
to advertising, sampling and merchandising activities par-
ticularly during the early portion of fiscal 2003 (excluding
purchase with purchase and gift with purchase activities,
discussed as a component of cost of sales) which
supported our sales growth and built momentum going
into the second half of fiscal 2003. Changes in advertising,
sampling and merchandising spending result from the
type, timing and level of activities related to product
launches and rollouts, as well as the markets being
emphasized.
OPERATING RESULTS
Operating income increased 47% or $161.6 million to
$503.7 million as compared with the prior-year period.
Operating margins were 9.9% of net sales in fiscal 2003 as
compared with 7.2% in fiscal 2002. These results include
a charge related to the pending settlement of a legal pro-
ceeding of $22.0 million in the current year and a prior
year restructuring charge of $116.6 million. Absent these
i tems, operating income increased 15% or $67.0 million to
$525.7 million and operating margins increased to 10.3%
as compared with 9.7% in fiscal 2002. These increases in
operating income and operating margin reflect sales
growth, including the benefits from favorable foreign cur-
rency exchange rates to the U.S. dollar and gross margin
improvement, as well as benefits from our prior restruc-
turings and our continued cost containment efforts.
Net earnings and net earnings per diluted share
increased approximately 67% and 80%, respectively. Net
earnings improved $127.9 million to $319.8 million and
net earnings per diluted share increased by $.56 from
$.70 to $1.26. Net earnings from continuing operations
increased by $112.7 million or 53% and diluted earnings
per common share from continuing operations increased
63% to $1.29 from $.79 in the prior year. Before the fiscal
2003 charge related to the pending settlement of a legal
proceeding and the fiscal 2002 restructuring, net earn-
ings from continuing operations increased 17% to $339.1
million and diluted earnings per common share from
continuing operations increased 23% to $1.35 from $1.10
in the prior year.
The following discussions of Operating Results by
Product Categories and Geographic Regions exclude the
impact of the fiscal 2003 charge related to the pending
settlement of a legal proceeding and the fiscal 2002
restructuring. We believe the following analysis of
operating income better reflects the manner in which we
conduct and view our business. The tables on page 43
reconcile these results to operating income as reported
in the consolidated statements of earnings.
Product Categories
Operating income more than doubled to $32.1 million in
fragrance due primarily to improved results from our
travel retail business. Operating income increased 10% to
$273.2 million in skin care and 13% to $206.6 million in
makeup reflecting higher net sales, partially offset by
strategic spending on advertising, sampling and mer-
chandising, particularly in the earlier portion of fiscal
2003. Operating income increased $1.1 million or 8% to
$14.8 million in hair care, reflecting improvements in
Aveda and Bumble and bumble, as well as higher profits in
the latter portion of the year outside the United States.
Geographic Regions
Operating income in the Americas increased 15% or
$32.5 million to $255.3 million due to sales growth, the
benefits of our prior restructurings and continued cost
containment efforts. Operating income also benefited
from the results of strategic efforts related to product sup-
port spending in the earlier part of the year that led to
increased net sales during the year. In Europe, the Middle
East & Africa, operating income increased 27% or $47.8
million to $227.7 million primarily due to the improved
operating results in the United Kingdom as well as
increased results generated from our travel retail business.
As described elsewhere, profitability in the region has
been and will continue to be affected by international
uncertainties. In Asia/Pacific, operating income decreased
24% or $13.3 million to $42.7 million. This decrease
reflects improved results in Korea and Thailand, which
were more than offset by a decrease in Australia, which
derived a benefit in the prior-year period from a change in
our retailer arrangements.
INTEREST EXPENSE, NET
Net interest expense was $8.1 million as compared with
$9.8 million in fiscal 2002. The decrease in net interest
expense was primarily due to lower outstanding net bor-
rowings and higher interest income generated by higher
invested cash balances. This improvement was partially
offset by a higher effective interest rate, which resulted
from the increased proportion of fixed rate debt as com-
pared with variable rate debt in the prior year. In May
2003, we executed a fixed-to-floating interest rate swap
on our $250.0 million 6% Senior Notes due 2012. See
“Liquidity and Capital Resources” for further details.
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