Estee Lauder 2009 Annual Report Download - page 106

THE EST{E LAUDER COMPANIES INC. 105
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.
INTEREST EXPENSE, NET
Net interest expense was $66.8 million as compared with
$38.9 million in fi scal 2007. This change primarily resulted
from higher average debt balances, including an addi-
tional $600.0 million of senior notes issued in the fourth
quarter of fi scal 2007, partially offset by lower average
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 nonde-
ductible 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 fi scal 2007. 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.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal sources of funds historically have been cash
fl ows from operations, borrowings pursuant to our com-
mercial paper program, borrowings from the issuance of
long-term debt and committed and uncommitted credit
lines provided by banks and other lenders in the United
States and abroad. At June 30, 2009, we had cash and
cash equivalents of $864.5 million compared with $401.7
million at June 30, 2008. Our cash and cash equivalents
are maintained at a number of fi nancial institutions. As of
June 30, 2009, approximately 10% of the total balance is
Product Categories
Fragrance operating income increased 29%, or $8.1 mil-
lion, to $36.2 million, refl ecting profi table international
growth, partially offset by increased spending in support
of designer fragrance products initiatives. Skin care oper-
ating income increased 19%, or $64.1 million, to $405.6
million, primarily refl ecting improved international results
from certain of our heritage brands and net sales growth
from La Mer products and Tri-Aktiline™ Instant Deep
Wrinkle Filler from Good Skin™. In addition, the fi scal
2007 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, primar-
ily reflecting improved results internationally. These
improvements were partially offset by lower results in the
United States from certain of our heritage brands, the
charge on the impairment of Stila-related fi nancial instru-
ments, 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 intangible asset amortization resulting from fi s-
cal 2008 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 heritage 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 markets. The overall operating results in this region
were adversely impacted in fi scal 2007 by the pharmacy
channel charges discussed above.