LensCrafters 2006 Annual Report Download - page 59

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MANAGEMENT’S
DISCUSSION AND ANALYSIS |59 <
Income from operations. For the reasons described above, income from operations for 2006
increased by 30.0% to Euro 756.0 million from Euro 581.4 million in 2005. As a percentage of net
sales, income from operations increased to 16.2% in 2006 from 14.1% in 2005.
Operating margin, which is income from operations divided by net sales, in the manufacturing and
wholesale segment increased to 26.0% in 2006 from 23.2% in 2005. This increase in operating
margin is attributable to lower sales commissions as a percentage of sales and higher gross profit
due to a more favorable brand mix, partially offset by higher advertising expenses (including
royalty expenses).
Operating margin in the retail segment increased to 13.1% in 2006 from 11.6% in 2005. This
increase in operating margin is attributable to lower store costs in the North American retail
business, as well as increased net sales in the North American retail business due to the fixed cost
store structure.
Other income (expense), net. Other income (expense), net was Euro (77.8) million in 2006 as
compared to Euro (42.1) million in 2005. This increase in other income (expense), net is mainly
attributable to net realized and unrealized foreign exchange transaction and remeasurement
losses in 2006 as compared to gains on similar items in 2005. Net interest expense was Euro 60.8
million in 2006 as compared to Euro 60.5 million in 2005 attributable to an increase in interest rates
which offset a decrease in outstanding indebtedness.
Net income from continuing operations. Income before taxes increased by 25.7% to Euro 678.2
million in 2006 from Euro 539.3 million in 2005. As a percentage of net sales, income before taxes
increased to 14.5% in 2006 from 13.0% in 2005. Minority interest decreased to Euro 8.7 million in
2006 from Euro 9.3 million in 2005. The Company’s effective tax rate was 35.2% in 2006, as
compared to 36.9% in 2005 due to a reduction in taxes in foreign jurisdictions. The most significant
portion of the benefit is due to the adoption in Australia of a consolidated tax regime, which
resulted in an increase in the tax basis of certain assets. Weare currently evaluating the impact of
adoption of Financial Accounting Interpretation no. 48 - Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement no. 109, as well as the impact that the adoption may
have on our future effective tax rate.
Net income from continuing operations increased by 30.2% to Euro 430.7 million in 2006 from
Euro 330.8 million in 2005. Net income from continuing operations as a percentage of net sales
increased to 9.2% in 2006 from 8.0% in 2005.
Basic earnings per share from continuing operations for 2006 were Euro 0.95 as compared to
Euro 0.73 in 2005. Diluted earnings per share from continuing operations for 2006 were Euro 0.94 as
compared to Euro 0.73 in 2005.
Discontinued operations.Discontinued operations resulted in income in 2005 and a loss in 2006
mainly attributable to the seasonal nature of the operations of the Things Remembered
discontinued business, which resulted in substantially all operational profits being realized during
the fourth quarter. The operations were sold before the fourth quarter of 2006. In addition, the sale
resulted in an accrual recorded by the Company for a potential tax liability.
Net income. Net income increased by 24.0% to Euro 424.3 million in 2006 from Euro 342.3 million
in 2005. Net income as a percentage of net sales increased to 9.1% in 2006 from 8.3% in 2005.
Basic earnings per share for 2006 were Euro 0.94 as compared to Euro 0.76 in 2005. Diluted
earnings per share for 2006 were Euro 0.93 as compared to Euro 0.76 in 2005.