Estee Lauder 2012 Annual Report Download - page 117

THE EST{E LAUDER COMPANIES INC. 115
activities of $59.4 million, or 0.7% of net sales, in fiscal
2011 and $84.7 million, or 1.1% of net sales, in fiscal 2010.
We believe the following analysis of operating results bet-
ter reflects the manner in which we conduct and view our
business.
Product Categories
All product categories benefited from initiatives we imple-
mented as part of the Program including a more strategi-
cally focused approach to spending. Skin care operating
income increased 37%, or $160.8 million, to $595.1 mil-
lion, primarily reflecting improved results from all of our
heritage brands driven by increased net sales from higher-
margin product launches. Makeup operating income
increased 18%, or $77.0 million, to $493.8 million, primar-
ily reflecting improved results from our makeup artist
brands and from our larger heritage brands. The higher
results also reflected the favorable comparison to fiscal
2010 which included a charge to the category related to
our long-term perfumery strategy, as previously discussed,
of approximately $30 million. Fragrance operating income
increased over 100%, or $54.4 million, to $80.7 million,
primarily reflecting higher net sales from Estée Lauder
and designer fragrances driven by fiscal 2011 product
launches, improved cost of goods and a more strategi-
cally focused approach to spending as part of our strategy
to improve profitability. Hair care operating results
decreased 47%, or $2.9 million, reflecting the reformula-
tion and relaunch of Ojon brand products in the fourth
quarter of fiscal 2011. This decrease was partially offset by
higher results from Aveda. The category also reflected
goodwill and other intangible asset impairment charges of
$33 million as compared with $36 million in fiscal 2010.
Geographic Regions
Operating results in each of our geographic regions ben-
efited from the initiatives we implemented as part of the
Program and a more strategically focused approach to
spending, as well as significant improvement in cost of
sales from favorable product mix and enhanced inventory
management, resulting in significant improvements in
their operating income.
Operating income in the Americas increased 52%, or
$83.4 million, to $244.9 million, reflecting strong sales
from our heritage and makeup artist brands, partially off-
set by incremental spending in line with our strategy.
In Europe, the Middle East & Africa, operating income
increased 30%, or $151.1 million, to $651.9 million,
reflecting higher results from our travel retail business,
Russia, the United Kingdom and the Middle East of
approximately $94 million, combined. Partially offsetting
these improvements were lower results in the Balkans and
Spain of approximately $9 million, combined. The higher
results also reflected a favorable comparison to fiscal
2010 which included a charge related to our long-term
perfumery strategy, as previously discussed, of approxi-
mately $34 million.
In Asia/Pacific, operating income increased 19%, or
$39.7 million, to $252.0 million. Virtually all countries in
the region reported higher operating results, led by
approximately $46 million in China, Hong Kong, Taiwan
and Malaysia, combined. Partially offsetting these
increases were lower operating results of approximately
$7 million in Japan and Australia.
INTEREST EXPENSE, NET
Net interest expense was $63.9 million as compared with
$74.3 million in fiscal 2010. Interest expense decreased
primarily due to a reduction of debt balances that resulted
from the $200 million debt tender offer we completed in
the fourth quarter of fiscal 2010.
INTEREST EXPENSE ON DEBT EXTINGUISHMENT
During the fourth quarter of fiscal 2010, we completed a
cash tender offer for $130.0 million principal amount of
our 2012 Senior Notes at a price of 108.500% of the prin-
cipal amount and for $69.9 million principal amount of
our 2013 Senior Notes at a tender price of 118.813% of
the principal amount. We recorded a pre-tax expense on
the extinguishment of debt of $27.3 million representing
the tender premium of $24.2 million, the pro-rata write-off
of $2.4 million of unamortized terminated interest rate
swap, issuance costs and debt discount, and $0.7 million
in tender offer costs associated with both series of notes.
PROVISION FOR INCOME TAXES
The provision for income taxes represents U.S. federal,
foreign, state and local income taxes. The effective rate
differs from the federal statutory rate primarily due to the
effect of state and local income taxes, the taxation of
foreign income and income tax reserve adjustments,
which represent changes in our net liability for unrecog-
nized tax benefits including tax settlements and lapses of
the applicable statutes of limitations. Our effective tax
rate will change from year to year based on recurring and
non-recurring factors including, but not limited to, the
geographical mix of earnings, enacted tax legislation,
state and local income taxes, tax reserve adjustments, the
ultimate disposition of deferred tax assets relating to
stock-based compensation and the interaction of various
global tax strategies.
The effective income tax rate for fiscal 2011 was 31.4%
as compared with 29.9% in fiscal 2010. The increase in