MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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, reflecting
our lower gross margin and the increase in our operating
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 reflects 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 primarily
reflecting lower net sales of designer fragrance products
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 operating
income decreased 90%, or $10.4 million, to $1.1 million
primarily reflecting 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 million,
to $279.8 million. The reduced operating results for
the skin care and makeup categories primarily reflected
the decline in net sales and charges for goodwill, intangible
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 certain
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 reflected
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 million,
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 reflected lower results of approximately
$156 million in our travel retail business, Spain, France,
Russia, the United Kingdom and Italy, of which approximately
$34 million related to charges for goodwill and
intangible asset impairments and the degradation of
certain retailers.
In Asia/Pacific, operating income increased 10%, or
$15.5 million, to $165.2 million. Most of our affiliates in
this region experienced an increase despite a softer retail
environment in certain countries. Approximately $20 million
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 interest
rates on pre-existing borrowings. In addition, interest
income decreased primarily due to lower average investment
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
geographical mix of earnings, enacted tax legislation, state
and local income taxes, tax audit settlements and the
interaction of various global tax strategies.
The effective rate for income taxes for the year ended
June 30, 2009 was 33.8% as compared with 34.9% in the
prior year. The decrease in the effective income tax rate of
110 basis points was primarily attributable to a favorable
settlement with the Appeals Division of the IRS (560 basis
points), partially offset by an increase in non-deductible
expenses and an increase in state and local income tax
expense (450 basis points).
NET EARNINGS
Net earnings as compared with fiscal 2008 decreased
54%, or $255.4 million, to $218.4 million and diluted net
earnings per common share declined 54% from $2.40 to
$1.10. These results include the impact of total charges
associated with restructuring activities of $61.7 million,
after tax, or $.31 per diluted common share.
