Estee Lauder 2009 Annual Report Download - page 103

102 THE EST{E LAUDER COMPANIES INC.
the decline in net sales and charges for goodwill, intangi-
ble asset and other long-lived asset impairments, as well
as the majority of the impact of the excess overhead
charge, loss from foreign exchange transactions and cer-
tain other operating expenses as described above.
Geographic Regions
Operating income in the Americas decreased 50%, or
$113.1 million, to $115.2 million. This decline refl ected
charges for goodwill, intangible asset and other long-lived
asset impairments, the majority of the impact of the
excess overhead charge and the charge related to the
degradation of a certain retailer of approximately $66 mil-
lion, combined. Also contributing to the decline were
lower sales experienced by the majority of our businesses
in the region due to current economic conditions, partially
offset by cost containment and contingency plan efforts.
In Europe, the Middle East & Africa, operating income
decreased 47%, or $203.4 million, to $229.7 million. This
decrease primarily refl ected lower results of approximately
$156 million in our travel retail business, Spain, France,
Russia, the United Kingdom and Italy, of which approxi-
mately $34 million related to charges for goodwill and
intangible asset impairments and the degradation of
certain retailers.
In Asia/Pacifi c, operating income increased 10%, or
$15.5 million, to $165.2 million. Most of our affi liates in
this region experienced an increase despite a softer retail
environment in certain countries. Approximately $20 mil-
lion of this increase was generated in Hong Kong, China,
Korea and Japan. Partially offsetting these improvements
were lower results in Australia, Singapore and New
Zealand of approximately $5 million, combined.
INTEREST EXPENSE, NET
Net interest expense was $75.7 million as compared with
$66.8 million in the prior year. Interest expense increased
primarily due to higher average debt balances, which
include an additional $300.0 million of senior notes issued
in November 2008, partially offset by lower average inter-
est rates on pre-existing borrowings. In addition, interest
income decreased primarily due to lower average invest-
ment 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
income taxes, tax rates in foreign jurisdictions and certain
nondeductible expenses. Our effective tax rate will
change from year to year based on recurring and
non-recurring factors including, but not limited to, the
unit and/or affected assets being tested and the impact of
the current economic environment on their projected
future results of operations. Collectively, these charges
resulted in an increase to our operating expense margin
of approximately 90 basis points. For further detailed
discussion, refer to Note 4 and Note 5 to the Notes to the
Consolidated Financial Statements.
Despite a reduction in actual selling, advertising, mer-
chandising and sampling spending, operating expense
margin increased by approximately 60 basis points driven
by the decline in consumer demand in the current eco-
nomic environment. Changes in advertising, merchandis-
ing and sampling spending result from the type, timing
and level of activities related to product launches and roll-
outs, as well as the markets being emphasized.
Other factors that contributed to the increase in
operating expense margin were higher costs of global
information technology systems and infrastructure of
approximately 50 basis points, net losses from foreign
exchange transactions of approximately 40 basis points,
and charges resulting from the degradation of the busi-
nesses of certain of our retail customers of approximately
20 basis points.
OPERATING RESULTS
Operating income decreased 48%, or $392.3 million, to
$418.4 million. Operating margin decreased to 5.7% of
net sales as compared with 10.3% in the prior year, refl ect-
ing our lower gross margin and the increase in our operat-
ing expense margin as previously discussed. The following
discussions of Operating Results by Product Categories
and Geographic Regions exclude the impact of total
charges associated with restructuring activities of $91.7
million, or 1.3% of net sales. We believe the following
analysis of operating results better refl ects the manner in
which we conduct and view our business.
Product Categories
Fragrance operating results decreased over 100%, or
$97.0 million, to an operating loss of $60.8 million primar-
ily refl ecting lower net sales of designer fragrance prod-
ucts and certain fragrances from our heritage brands as
well as a charge for intangible asset impairment, which
were partially offset by a reduction in selling, advertising,
merchandising and sampling spending. Hair care operat-
ing income decreased 90%, or $10.4 million, to $1.1 mil-
lion primarily refl ecting lower net sales and a charge for
intangible asset impairment. Skin care operating income
decreased 27%, or $111.5 million, to $294.1 million and
makeup operating income decreased 22%, or $79.6 mil-
lion, to $279.8 million. The reduced operating results for
the skin care and makeup categories primarily refl ected