Estee Lauder 2008 Annual Report Download - page 66

64 THE EST{E LAUDER COMPANIES INC.
INTEREST EXPENSE, NET
Net interest expense was $66.8 million as compared with
$38.9 million in the prior year. This change primarily
resulted from higher average debt balances, including an
additional $600.0 million of senior notes issued in the
fourth quarter of fi scal 2007, partially offset by lower aver-
age interest rates.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal,
foreign, state and local income taxes. The effective rate
differs 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 year to year 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, 2008 was 34.9%
as compared with 35.9% in the prior year. The decrease
in the effective income tax rate of 100 basis points
resulted primarily from a decrease in state and local
income tax expense (240 basis points) partially offset by
an increase in the tax effect of our foreign operations
(140 basis points).
NET EARNINGS
Net earnings as compared with fi scal 2007 increased
5%, or $24.6 million, to $473.8 million and diluted net
earnings per common share improved 11% from $2.16
to $2.40.
FISCAL 2007 AS COMPARED WITH FISCAL 2006
NET SALES
Net sales increased 9%, or $573.7 million, to $7,037.5 mil-
lion, refl ecting net sales growth in all product categories
and geographic regions. The increases in our skin care,
makeup and fragrance product categories were led by
Europe, the Middle East & Africa while the increase in hair
care net sales was predominantly in the Americas.
Excluding the impact of foreign currency translation, net
sales increased 7%.
Product Categories
Skin Care Net sales of skin care products increased 8%,
or $200.2 million, to $2,601.0 million. Most of this growth
was fueled by new product launches which made their
most signifi cant impact in our Europe, the Middle East &
Africa and Asia/Pacifi c regions. The fi scal 2007 launches
of Advanced Night Repair Concentrate Recovery Boost-
ing Treatment and Idealist Refi nisher from Estée Lauder,
operating income increased 19%, or $64.1 million, to
$405.6 million, primarily refl ecting improved international
results from certain of our core brands and net sales
growth from La Mer products and Tri-Aktiline™ Instant
Deep Wrinkle Filler from Good Skin™. In addition, the
prior year results in this category refl ected organizational
costs of approximately $30 million, primarily related to
our pharmacy channel in Europe. Makeup operating
income increased 6%, or $20.1 million, to $359.4 million,
primarily refl ecting improved results internationally. These
improvements were partially offset by lower results in the
United States from certain of our core brands, the charge
on the impairment of Stila-related fi nancial instruments,
and costs related to the establishment of new points of
distribution for M.A.C. Hair care operating income
declined 73%, or $31.0 million, to $11.5 million, primarily
refl ecting costs related to the acquisition and integration
of Ojon to position the brand for future growth. The
results in this category also refl ected an increase in intan-
gible asset amortization resulting from recent strategic
acquisitions as well as costs related to the establishment
of new points of distribution.
Geographic Regions
Operating income in the Americas declined 32%, or
$108.1 million, to $228.3 million, primarily refl ecting a dif-
fi cult retail environment in which our core brands faced
challenges in the department store channel. We also
experienced signifi cant pressure on the profi tability of our
hair care business as discussed above. At the same time,
we continued to invest in our global information
technology systems and infrastructure. In addition, we
established new points of distribution for existing brands,
incurred costs to streamline certain business activities to
generate future effi ciencies and incurred a charge on the
impairment of Stila-related fi nancial instruments, as dis-
cussed above.
In Europe, the Middle East & Africa, operating income
increased 35%, or $111.7 million, to $433.1 million pri-
marily due to higher results of approximately $71 million
in our travel retail business, the United Kingdom, Italy, the
Balkans and Spain. Partially offsetting these increases
were lower results in Russia and India of approximately $6
million, refl ecting spending to support our expansion in
these emerging markets. The overall operating results in
this region were adversely impacted in the prior year by
the pharmacy channel charges discussed above.
In Asia/Pacifi c, operating income increased 61%, or
$56.5 million, to $149.7 million. All of our affi liates in this
region experienced an increase in operating income, pri-
marily resulting from net sales growth led by Japan, Hong
Kong, China, Australia and Korea, which contributed
approximately $43 million, collectively.