Estee Lauder 2007 Annual Report Download - page 43

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42 THE EST{E LAUDER COMPANIES INC.
the capitalization of interest expense on internally
developed software in connection with the upgrade of
our information systems.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, for-
eign, state and local income taxes. The effective rate dif-
fers from statutory rates due to the effect of state and
local taxes, tax rates in foreign jurisdictions and certain
nondeductible expenses. Our effective tax rate will
change from quarter to quarter based on non-recurring
and recurring factors including, but not limited to, the
geographical mix of earnings, enacted tax legislation, state
and local taxes, tax audit settlements and the interaction
of various global tax strategies. The effective rate for
income taxes for the year ended June 30, 2007 was 35.9%
as compared with 43.6% in the prior year. The decrease in
the effective income tax rate was primarily attributable to
the prior year effect of the IRS tax settlement of approxi-
mately 770 basis points.
DISCONTINUED OPERATIONS
On September 30, 2005, we committed to a plan to sell
and on April 10, 2006, we completed the sale of certain
assets and operations of our reporting unit that marketed
and sold Stila brand products. For the fi scal year ended
June 30, 2007, $0.5 million, net of tax, of operating
income was refl ected as discontinued operations, refl ect-
ing the conclusion of transitional distribution services
provided to the purchaser. The prior year charge of $80.3
million, net of tax, refl ected the then-anticipated loss on
the sale of the business of $69.9 million, net of tax, and
the operating loss of $10.4 million, net of tax.
NET EARNINGS
Net earnings as compared with the prior fiscal year
increased $205.0 million to $449.2 million and diluted net
earnings per common share improved 93% from $1.12 to
$2.16. Net earnings from continuing operations as com-
pared with the prior fi scal year increased by $124.2
million, or 38%, to $448.7 million and diluted net earnings
per common share from continuing operations increased
45% from $1.49 to $2.16.
FISCAL 2006 AS COMPARED WITH FISCAL 2005
NET SALES
Net sales increased 3%, or $183.8 million, to $6,463.8
million due to growth in our makeup, skin care and hair
care product categories, which was partially offset by
lower sales in our fragrance product category. The net
increase refl ected sales growth in all geographic regions.
support of new distribution points and product launches.
Operating results increased 3%, or $9.9 million, to $339.3
million in makeup, primarily as a result of higher net sales
and profi ts from our makeup artist brands, which more
than offset challenges among certain core brands. Skin
care operating results decreased 1%, or $4.9 million, to
$341.5 million. The results in this product category were
negatively impacted in fi scal 2007 by charges related to
our pharmacy channel. We recorded approximately $30
million for organizational costs, costs to streamline the
distribution of goods, and the impairment of goodwill and
other intangible assets. In addition, improvements in
international skin care results were partially offset by
challenges in certain core brands in the United States.
Geographic Regions
Operating income in the Americas decreased 2%, or $7.7
million, to $336.4 million, refl ecting spending behind stra-
tegic initiatives at our core brands, retailer consolidation
and costs to develop new brands in the United States.
Operating income growth from our makeup artist brands,
hair care business and our internet distribution partially
offset these results.
In Europe, the Middle East & Africa, operating income
increased 8%, or $23.9 million, to $321.4 million primarily
due to higher results of approximately $49 million from
our travel retail business, the United Kingdom, Russia and
Germany. Lower results from France partially offset
these improvements by approximately $10 million. The
current year operating results in France refl ected the
rebalancing of inventory levels at certain retailers as well
as strategic investment spending behind the fi eld sales
force. During the current year, the region was negatively
impacted by the charges discussed above related to our
pharmacy channel, partially offset by modest combined
operating income growth from the remaining affi liates in
this region.
In Asia/Pacifi c, operating income increased 33%, or
$23.1 million, to $93.2 million. This increase refl ected
improved results of approximately $23 million in Hong
Kong, China, Australia and Korea.
INTEREST EXPENSE, NET
Net interest expense was $38.9 million as compared with
$23.8 million in the prior year. This change primarily
resulted from higher average debt balances, primarily
associated with the funding of our accelerated share
repurchase program, and higher average interest rates.
Also contributing to the increase was reduced interest
income generated from lower average investment bal-
ances internationally, partially offset by higher average
investment rates. These increases were partially offset by