Estee Lauder 2002 Annual Report Download - page 46

THEEST{E LAUDER COMPANIES INC.
ing principle, and excluding goodwill amortization in fiscal
2001, net earnings were $289.4 million, representing a
decrease of 20% over the prior year, and diluted earnings
per common share decreased 21% to $1.10 from $1.39
in the prior year.
The following discussions of Operating Income by
Product Categories and Geographic Regions exclude
the impact of restructuring and other non-recurring
expenses and represent the manner in which we conduct
and view our business.
Product Categories
Operating income decreased 79% to $13.4 million in fra-
grance, 14% to $183.2 million in makeup and 7% to
$248.4 million in skin care, primarily due to lower than
anticipated sales levels, coupled with continued advertis-
ing and promotional spending to promote new and
recentlylaunched products. Hair care operating income
increased 5%, from a smaller base, to $13.7 million,
primarily due to sales growth from Aveda and Bumble
and bumble.
Geographic Regions
Operating income in the Americas decreased 26% or
$77.0 million to $222.9 million, primarily due to lower
sales attributable to weakness in the U.S. economy and
continued advertising and promotional spending. In
Europe,the Middle East & Africa, operating income
decreased 11% or $21.9 million to $179.9 million, prima-
rily due to the significant decrease in our travel retail busi-
ness. Partially offsetting the decrease were improved
operating results in Italy, the United Kingdom, Spain and
Germany. We also benefited from the inclusion of oper-
ating results from our majority-owned joint venture in
Greece. In Asia/Pacific, operating income decreased
slightly to $56.0 million due to lower income in China and
Hong Kong offset by higher results in Korea, in Australia,
where we benefited from a change in retailer arrange-
ments, and in Japan, where we were able to reduce
operating expenses.
INTEREST EXPENSE, NET
Net interest expense was $9.8 million as compared with
$12.3 million in the prior year. The decrease in net interest
expense resulted from a lower effective interest rate
compared with the prior year. This was primarily due to
our interest rate risk management strategy that relied
on commercial paper and variable-rate term loans. In
January 2002, we took advantage of prevailing market
rates and issued fixed rate long-term notes to replace our
variable-rate debt. We believe this will mitigate future
interest rate volatility, but we expect it will result in a
higher level of interest expense in the near term.
PROVISION FOR INCOME TAXES
The Company’s effective tax rate will change from year to
year based on non-recurring and recurring factors includ-
ing, but not limited to, the geographical mix of earnings,
the timing and amount of foreign dividends, state and
local taxes, tax audit settlements and interaction of vari-
ous global tax strategies.
The provision for income taxes represents Federal, for-
eign, state and local income taxes. The effective rate for
income taxes for fiscal 2002 was 34.5% compared with
36% in the prior year. These rates reflect the effect of state
and local taxes, changes in tax rates in foreign jurisdic-
tions, tax credits and certain non-deductible expenses. The
decrease in the effective income tax rate was attributable
to ongoing tax planning initiatives, as well as a decrease in
non-deductible domestic royalty expense and the elimi-
nation of certain non-deductible goodwill amortization
resulting from the implementation of SFAS No. 142,
“Goodwill and Other Intangible Assets”.
FISCAL 2001 AS COMPARED WITH FISCAL 2000
NET SALES
Net sales increased 5% or $227.4 million to $4.67 billion
reflecting continued growth in the makeup, skin care and
hair care categories, partially offset by a decline in fra-
grance net sales. The United States retail business demon-
strated continued softness particularly in the fragrance
category. Growth on a reported basis reflected the impact
of a stronger U.S. dollar relative to other currencies in vir-
tually all markets in which we do business. Net sales
growth was primarily attributable to a combination of new
and recently launched products, the inclusion of newer
brands such as Bumble and bumble and changes in distri-
bution, including additional retail locations. Excluding the
impact of foreign currency translation, net sales increased
9%, with double-digit contributions from each of Europe,
the Middle East & Africa and Asia/Pacific.
The following discussions of Net Sales by Product
Categories and Geographic Regions exclude the impact
of the fiscal 2001 restructuring and other non-recurring
expenses, which were not material to our net sales, and
represent the manner in which we conduct and view our
business. For a discussion of the restructuring and other
non-recurring expenses, see “Operating Expenses —
Restructuring and Other Non-Recurring Expenses” in
this section.
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