FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2001
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___ to ___
Commission file number 1-4881
AVON PRODUCTS, INC.
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-0544597
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1345 Avenue of the Americas, New York, N.Y. 10105-0196
-------------------------------------------------------
(Address of principal executive offices)
(212) 282-5000
--------------
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
The number of shares of Common Stock (par value $.25) outstanding at April
30, 2001 was 237,260,702.
Table of Contents
Part I. Financial Information
Page
Numbers
-------
Introductory Note - Restatements................................ 3
Item 1. Financial Statements
Consolidated Statements of Operations
Three Months Ended March 31, 2001 (Restated) and
March 31, 2000..................................... 4
Consolidated Balance Sheets
March 31, 2001 (Restated) and December 31, 2000...... 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 (Restated) and
March 31, 2000..................................... 6
Notes to Consolidated Financial Statements(Restated)... 7-18
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition(Restated). 19-27
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.... 28
Item 6. Exhibits and Reports on Form 8-K....................... 29
Signature ...................................................... 30
2
Introductory Note--Restatements
In connection with the settlement of the previously disclosed
investigation by the Securities and Exchange Commission ("SEC") relating to the
write off of an order management software system known as the "FIRST" project,
Avon has restated its Consolidated Financial Statements as of December 31,
2001, 2000 and 1999 and for the years then ended and for each of the fiscal
quarters ended March 31, 1999 through March 31, 2002. Avon had written off
$14.8 pretax, or $10.0 after tax, of FIRST assets in the first quarter of 1999
and $23.9 pretax, or $14.5 after tax, of FIRST assets in the third quarter of
2001. Avon has restated its financial statements to reflect the additional
write off as of March 31, 1999 of all capitalized costs ($23.3 pretax, or $14.0
after tax), associated with the FIRST project as of that date and a reversal of
the charge recorded in the third quarter of 2001. Other FIRST-related activity
(capitalized costs and amortization) recorded during 1999-2002 has also been
restated. A description of the adjustments that comprise the restatements is
set forth in Notes 2 and 10 of the Notes to Consolidated Financial Statements
filed with this Form 10-Q/A.
The accompanying financial statements have been restated to reflect the
restatements discussed above as well as the accounting changes outlined in Note
2. No attempt has been made in this Form 10-Q/A to modify or update any
disclosures except as required to reflect the results of the restatements
discussed above and any changes made to prior period financial information for
which a Form 10-Q/A was not filed.
3
PART I. FINANCIAL INFORMATION
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Three months ended
March 31
--------------------
2001 2000
(Restated Note 2) ------
---------------
(unaudited)
Net sales........................................... $1,346.4 $1,306.3
Other revenue....................................... 10.6 10.4
-------- -------
Total revenue....................................... 1,357.0 1,316.7
Costs, expenses and other:
Cost of sales ................................... 512.5 501.4
Marketing, distribution and
administrative expenses......................... 698.7 677.4
-------- --------
Operating profit.................................... 145.8 137.9
Interest expense.................................. 19.7 19.9
Interest income................................... (2.0) (1.8)
Other expense, net................................ 1.6 10.2
-------- --------
Total other expense, net ........................... 19.3 28.3
-------- --------
Income from continuing operations before taxes,
minority interest and cumulative effect
of accounting changes............................. 126.5 109.6
Income taxes........................................ 44.5 39.1
-------- --------
Income before minority interest and cumulative
effect of accounting changes...................... 82.0 70.5
Minority interest................................... - -
-------- --------
Income from continuing operations before
cumulative effect of accounting changes........... 82.0 70.5
Cumulative effect of accounting changes, net of taxes (0.3) (6.7)
-------- --------
Net income ......................................... $ 81.7 $ 63.8
======== ========
Basic earnings per share:
Continuing operations............................. $ .34 $ .30
Cumulative effect of accounting changes........... - (.03)
-------- --------
$ .34 $ .27
======== ========
Diluted earnings per share:
Continuing operations ............................ $ .34 $ .30
Cumulative effect of accounting changes........... - (.03)
-------- --------
$ .34 $ .27
======== ========
The accompanying notes are an integral part of these statements.
4
AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
March 31 December 31
2001 2000
(Restated-Note 2) --------
---------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................ $ 92.5 $ 122.7
Accounts receivable.............................. 490.1 499.0
Income tax receivable ........................... - 95.2
Inventories...................................... 662.9 610.6
Prepaid expenses and other....................... 218.6 218.2
-------- --------
Total current assets............................. 1,464.1 1,545.7
-------- --------
Property, plant and equipment, at cost........... 1,510.0 1,520.4
Less accumulated depreciation.................... 751.6 754.7
-------- --------
758.4 765.7
Other assets..................................... 524.2 499.9
-------- --------
Total assets..................................... $2,746.7 $2,811.3
======== ========
LIABILITIES AND SHAREHOLDERS'(DEFICIT)EQUITY
Current liabilities:
Debt maturing within one year.................... $ 120.0 $ 105.4
Accounts payable................................. 362.2 391.3
Accrued compensation............................. 88.6 138.2
Other accrued liabilities........................ 257.6 251.7
Sales and taxes other than income................ 97.2 101.1
Income taxes..................................... 363.5 371.6
-------- --------
Total current liabilities........................ 1,289.1 1,359.3
-------- --------
Long-term debt................................... 1,144.4 1,108.2
Employee benefit plans........................... 388.2 397.2
Deferred income taxes............................ 30.6 31.3
Other liabilities................................ 93.4 95.2
Share repurchase commitments (Note 12) 40.0 51.0
Shareholders'(deficit)equity:
Common stock..................................... 88.7 88.6
Additional paid-in capital....................... 842.0 824.1
Retained earnings................................ 1,161.2 1,124.7
Accumulated other comprehensive loss ........... (420.1) (399.1)
Treasury stock, at cost.......................... (1,910.8) (1,869.2)
-------- --------
Total shareholders'(deficit)equity............... (239.0) (230.9)
-------- --------
Total liabilities and shareholders'(deficit)equity $2,746.7 $2,811.3
======== ========
The accompanying notes are an integral part of these statements
5
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Three months ended
March 31
------------------
2001 2000
(Restated Note 2) ------
---------------
(unaudited)
Cash flows from operating activities:
Net income.............................................. $ 81.7 $ 63.8
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Special and non-recurring payments...................... (2.3) (6.4)
Cumulative effect of accounting changes................. .3 6.7
Depreciation and amortization........................... 26.4 26.7
Provision for doubtful accounts......................... 30.4 29.0
Foreign exchange losses................................. 2.8 .8
Amortization of debt discount........................... 3.7 (1.6)
Deferred income taxes................................... (1.7) 3.0
Other................................................... 3.3 2.2
Changes in assets and liabilities:
Accounts receivable................................... (32.2) (19.1)
Income tax receivable................................. 95.2 -
Inventories........................................... (62.1) (91.6)
Prepaid expenses and other............................ (10.7) (8.5)
Accounts payable and accrued liabilities.............. (63.3) (156.1)
Income and other taxes................................ (4.5) (10.9)
Noncurrent assets and liabilities..................... 1.1 12.3
------ ------
Net cash provided by (used in) operating activities..... 68.1 (149.7)
------ ------
Cash flows from investing activities:
Capital expenditures.................................... (27.6) (29.9)
Disposal of assets...................................... 1.5 2.2
Other investing activities.............................. (5.2) (0.7)
------ ------
Net cash used by investing activities................... (31.3) (28.4)
------ ------
Cash flows from financing activities:
Cash dividends.......................................... (47.0) (45.8)
Book overdraft.......................................... .2 22.2
Debt, net (maturities of three months or less).......... 26.3 211.3
Proceeds from short-term debt........................... 18.8 5.4
Retirement of short-term debt........................... (27.4) (18.2)
Repurchase of common stock.............................. (40.2) (16.9)
Proceeds from exercise of stock options, net of taxes... 7.4 .2
------ ------
Net cash (used in) provided by financing activities..... (61.9) 158.2
------ ------
Effect of exchange rate changes on cash and equivalents. (5.1) (5.2)
------ ------
Net decrease in cash and equivalents.................... (30.2) (25.1)
Cash and equivalents at beginning of period............. 122.7 117.4
------ ------
Cash and equivalents at end of period................... $ 92.5 $ 92.3
======= ======
The accompanying notes are an integral part of these statements.
6
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
1. ACCOUNTING POLICIES
The accompanying Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
contained in Avon's 2000 Annual Report to Shareholders. The interim statements
are unaudited but include all adjustments, consisting of normal recurring
adjustments, that management considers necessary to fairly present the results
for the interim periods. Results for interim periods are not necessarily
indicative of results for a full year. The year-end balance sheet data was
derived from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by FAS No. 138, "Accounting for Certain
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities. In
accordance with the provisions of FAS No. 133, the Company recorded a charge to
earnings of $0.3, net of a tax benefit of $0.2, to reflect the change in
time-value of Avon's outstanding options from the date of the options' inception
through the date of transition (January 1, 2001). The Company also recorded a
charge to shareholders'(deficit)equity of $3.9, net of a tax benefit of $2.1,
included in accumulated other comprehensive loss to recognize the fair value of
all derivatives designated as cash-flow hedging instruments, which the Company
expects to reclassify into earnings within the next twelve months. These charges
are reflected as a cumulative effect of an accounting change in the accompanying
Consolidated Financial Statements. See Notes 7 and 11 of the Notes to
Consolidated Financial Statements.
Effective January 1, 2000, the Company adopted Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 provides the Securities and Exchange Commission's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. As a result of adopting SAB 101, Avon changed its revenue
recognition policy to recognize revenue upon delivery, when both title and risks
and rewards of ownership pass to the independent Representative. In accordance
with the provisions of SAB 101, the Company recorded a charge to earnings of
$6.7, net of a tax benefit of $3.5, to reflect the accounting change. For the
three months ended March 31, 2000, this charge is reflected as a cumulative
effect of an accounting change in the accompanying Consolidated Statements of
Income. Restatements were made to previously reported 2000 quarterly information
to reflect the adoption of SAB 101.
For the year ended December 31, 2000, the Company adopted the
provisions of Emerging Issues Task Force ("EITF") 00-10, "Accounting for
Shipping and Handling Fees and Costs", which requires that amounts billed to
customers for shipping and handling fees be classified as revenues. EITF 00-10
also requires the disclosure of the income statement classification of any
shipping and handling costs. 2000 quarterly information has been restated to
reflect shipping and handling fees, previously reported in Marketing,
distribution & administration expenses, in Other revenue in the Consolidated
Statements of Income. For the three months ended March 31, 2001 and 2000,
shipping and handling costs aggregated $125.2 and $119.0, respectively, and are
included in Marketing, distribution & administrative expenses in the
Consolidated Statements of Income.
In March 2000, the EITF reached a consensus on the application of EITF
Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock", with Issue No. 00-7, "Equity
Derivative Transactions that Require Net Cash Settlement if Certain Events
Outside the Control of the Issuer Occur" ("EITF 00-7"). Equity derivative
contracts that contain any provision that could require net cash settlement
(except upon the complete liquidation of the Company) must be marked to fair
value through earnings under EITF 00-7. In September 2000, the
7
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
EITF reached a consensus on Issue No.00-19, "Determination of Whether Share
Settlement Is Within the Control of the Issuer for Purposes of Applying Issue
No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). EITF 00-19
addresses questions regarding the application of EITF 00-7 and sets forth a
model to be used to determine whether equity derivative contracts should be
recorded as equity. Under the transition provisions of EITF 00-19, all contracts
existing prior to the date of the consensus are grandfathered until June 30,
2001, with a cumulative catch-up adjustment to be recorded at that time.
Additionally, any contracts entered into prior to September 20, 2000, which were
not revised to comply with the requirements of EITF 00-19 by December 31, 2000,
were reclassified out of permanent equity and into temporary equity pursuant to
Accounting Series Release No. 268. At March 31, 2001, contracts aggregating
$40.0 do not comply with the provisions of EITF 00-19 and have been included in
the accompanying Consolidated Balance Sheets in Share repurchase commitments
with a corresponding decrease in Additional paid-in capital. Subsequent to March
31, 2001, all of these contracts have been settled.
In May 2000, the EITF reached a consensus on EITF 00-14, "Accounting for
Certain Sales Incentives", which provides guidance on accounting for discounts,
coupons, rebates and free products, as well as the income statement
classification of these discounts, coupons, rebates and free products. EITF
00-14 is effective January 1, 2002, for the Company. The Company is currently
evaluating the impact of this new guidance.
In April 2001, the EITF reached a consensus on EITF 00-25, "Accounting for
Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products", which provides guidance on the income
statement classification of consideration from a vendor to a retailer in
connection with the retailer's purchase of the vendor's products or to promote
sales of the vendor's products. EITF 00-25 is effective January 1, 2002, for the
Company. The Company is currently evaluating the impact of this new guidance.
To conform to the 2001 presentation, certain reclassifications were made to
the prior periods' consolidated financial statements and the accompanying
footnotes.
2. RESTATEMENTS AND ACCOUNTING CHANGES
Restatements
In connection with the settlement of a previously disclosed
investigation by the Securities and Exchange Commission relating to the write
off of an order management software system known as the "FIRST" project, Avon
has restated its Consolidated Financial Statements as of December 31, 2001, 2000
and 1999 and for the years then ended and for each of the fiscal quarters ended
March 31, 1999 through March 31, 2002. See Introductory Note-Restatements and
Note 10 of the Notes to Consolidated Financial Statements, "Asset Impairment
Charge".
The accompanying financial statements have been restated to reflect the
restatements discussed above as well as the accounting changes outlined in this
Note. No attempt has been made in this Form 10-Q/A to modify or update any
disclosures except as required to reflect the results of the restatements
discussed above and any changes made to prior period financial information for
which a Form 10-Q/A was not filed.
The principal adjustments comprising the restatements are as follows:
o Reclassification of $14.8 of pre-tax charges recorded in the first
quarter of 1999 related to the write off of a portion of the FIRST
project, out of the "Special charges" line and into the "Asset
impairment charge" line;
8
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
o An additional Asset impairment charge of $23.3 pretax in the first
quarter of 1999 to reflect the write off of all capitalized costs
associated with the FIRST project as of March 31, 1999;
o Reversal of the third quarter 2001 Asset impairment charge of $23.9
pretax related to the abandonment of the FIRST project; and
o Restatement of all other activity related to the FIRST project,
consisting of costs incurred and capitalized subsequent to March 31,
1999 and amortization, recorded from the second quarter of 1999
through the first quarter of 2002.
These adjustments resulting from the restatements are reflected in
Management's Discussion & Analysis and the following notes: Special and
Non-Recurring Charges, Earnings per Share, Comprehensive Income (Loss), Segment
Information and Asset Impairment Charge.
Accounting Changes
In addition, the Form 10-Q/A reflects the following changes to prior
period financial information for which a Form 10-Q/A was not previously filed.
These changes are primarily the result of the previously disclosed adoption of
new accounting pronouncements and are unrelated to the restatements described
above and the FIRST project:
o Reclassifications made to reported 2001 and 2000 financial
information as a result of the adoption of EITF No. 00-14,
"Accounting for Certain Sales Incentives", EITF No. 00-25,
"Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products"
and EITF 01-09 "Accounting for Consideration Given by a Vendor to a
Customer or Reseller of the Vendor's Products". The adoption of these
EITFs had no impact on Operating profit, Net income or Earnings per
share; and
o Reclassifications made to reported financial information to conform
with the 2002 presentation primarily relating to the sale of
fundraising products in the U.S. Previously, the net sales and
fundraising expenses associated with certain U.S. fundraising
products had been included within Marketing, distribution and
administrative expenses. This reclassification resulted in an
increase to Net sales, Cost of sales and Marketing, distribution and
administrative expenses of $1.1, $0.6 and $0.5, respectively, for the
three months ended March 31, 2001 and had no impact on reported
Operating profit, Net income or Earnings per share.
The effects of these restatements and accounting changes on the
Consolidated Financial Statements are set forth below:
Consolidated Balance Sheet
As of March 31, 2001
----------------------------------
As As
Reported(1) Restated(2)
----------- -----------
Property, plant and equipment, at cost $1,512.7 $1,510.0
Other assets 536.6 524.2
Total assets 2,761.8 2,746.7
Retained earnings 1,176.3 1,161.2
Total liabilities and shareholder's
(deficit) equity 2,761.8 2,746.7
(1) As reported in Avon's Form 10-Q for the quarter ended March 31, 2001.
(2) Includes the effects of restatements and accounting changes outlined above.
Note: Refer to Avon's Form 10-Q/A for quarter ended March 31, 2000 for
restatements to 2000 information.
9
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
3. INFORMATION RELATING TO THE STATEMENT OF CASH FLOWS
"Net cash provided by (used in) operating activities" includes the following
cash payments for interest and income taxes:
Three months ended
March 31
------------------
2001 2000
---- ----
Interest............................................ $ 8.5 $ 17.7
Income taxes, net of refunds received............... 43.8 42.2
4. EARNINGS PER SHARE
Basic earnings per share ("EPS") are computed by dividing net income by the
weighted-average number of shares outstanding during the year. Diluted earnings
per share are calculated to give effect to all potentially dilutive common
shares that were outstanding during the year.
10
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
For the three months ended March 31, 2001 and 2000, the components of
basic and diluted earnings per share are as follows:
2001 2000
Numerator:
Basic:
Income from continuing operations
before cumulative effect of
accounting changes $ 82.0 $ 70.5
Cumulative effect of accounting changes (0.3) (6.7)
-------- -------
Net Income $ 81.7 $ 63.8
======== =======
Diluted:
Income from continuing operations
before cumulative effect of accounting
changes $ 82.0 $ 70.5
Interest expense on convertible notes,
net of taxes 2.5 -
-------- -------
Income for purposes of computing diluted
EPS before cumulative effect of
accounting changes 84.5 70.5
Cumulative effect of accounting changes (0.3) (6.7)
-------- -------
Net income for purposes of computing
diluted EPS $ 84.2 $ 63.8
======== =======
Denominator:
Basic EPS weighted-average shares
outstanding 237.91 237.64
Dilutive effect of:
Assumed conversion of
stock options and settlement of
forward contracts (1) 1.90 1.51
Assumed conversion of convertible notes 6.96 -
-------- -------
Diluted EPS adjusted weighted-average
shares outstanding 246.77 239.15
======== =======
Basic EPS:
Continuing operations $ .34 $ .30
Cumulative effect of accounting changes - (.03)
-------- -------
$ .34 $ .27
======== =======
Diluted EPS:
Continuing operations $ .34 $ .30
Cumulative effect of accounting changes - (.03)
-------- -------
$ .34 $ .27
======== =======
(1) At March 31, 2001 and 2000, stock options and forward contracts to purchase
Avon common stock totaling 3.4 million shares and 6.3 million shares,
respectively, are not included in the earnings per share calculation since their
impact is anti-dilutive.
The Company purchased approximately 993,000 shares of common stock for
$41.6 during the first three months of 2001, as compared to approximately
383,000 shares of common stock for $16.9 during the first three months of 2000,
under previously announced share repurchase programs. At March 31, 2001, 36,000
shares repurchased for $1.4 were not settled until April 2001 and were included
in Other accrued liabilities on the Consolidated Balance Sheet.
11
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
5. INVENTORIES
March 31 December 31
2001 2000
----- ----
Raw materials................ $175.4 $168.0
Finished goods............... 487.5 442.6
------ ------
$662.9 $610.6
====== ======
6. DIVIDENDS
Cash dividends paid per share of common stock were $.19 for the three
months ended March 31, 2001 and $.185 for the corresponding 2000 period. On
February 1, 2001, the Company increased the annual dividend rate to $.76 from
$.74.
7. CONTINGENCIES
Various lawsuits and claims (asserted and unasserted), arising in the
ordinary course of business or related to businesses previously sold, are
pending or threatened against Avon.
In 1991, a class action suit was initiated against Avon on behalf of
certain classes of holders of Avon's Preferred Equity-Redemption Cumulative
Stock ("PERCS"). This lawsuit alleges various contract and securities law claims
relating to the PERCS (which were fully redeemed that year). While it is not
possible to predict the outcome of litigation, Avon has rejected the assertions
in this case, believes it has meritorious defenses to the claims and is
vigorously contesting this lawsuit. It is anticipated that a trial may take
place in late 2001.
In the opinion of Avon's management, based on its review of the information
available at this time, the total cost of resolving such contingencies at March
31, 2001 should not have a material adverse impact on Avon's consolidated
financial position, results of operations or cash flows.
8. COMPREHENSIVE INCOME(LOSS)
For the three months ended March 31, 2001 and 2000, the components of
comprehensive income (loss) are as follows:
2001 2000
---- ----
Net income $ 81.7 $ 63.8
Other comprehensive loss:
Foreign currency translation and
transaction adjustments (17.0) (2.6)
Unrealized loss on available-for-sale
securities, net of taxes of $1.4 (2.6) -
Net losses on derivative instruments,
net of taxes of $0.8 (1.4) -
------ ------
Comprehensive income $ 60.7 $ 61.2
====== ======
At March 31, 2001, the Company estimates that $1.4 of the net losses
recorded in other comprehensive loss related to forward contracts designated as
cash flow hedges will be reclassified to earnings during the next twelve months.
12
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
The components of the net losses on derivative instruments as of March
31, 2001 are as follows:
Net losses on derivative instruments at December 31, 2000 $ -
Cumulative effect of accounting change, net of taxes of $2.1 (3.9)
Net gains on derivative instruments net of taxes of $0.2 .5
Reclassification to earnings, net of taxes of $1.1 2.0
-----
Net losses on derivative instruments at March 31, 2001 $(1.4)
=====
9. SPECIAL AND NON-RECURRING CHARGES
In October 1997, the Company announced a worldwide business process
redesign program to streamline operations and improve profitability through
margin improvement and expense reductions. The special and non-recurring charges
associated with this program totaled $136.4 pretax ($111.9 net of tax, or $.43
per share on a basic and diluted basis) for the year ended December 31, 1999 and
$154.4 pretax ($122.8 net of tax, or $.46 per share on a basic and diluted
basis) for the year ended December 31, 1998.
The 1999 special and non-recurring charges by business segment are as
follows:
North America $ 33.6
Latin America 14.7
Europe 69.8
Pacific 11.8
Corporate 6.5
-------
Total $ 136.4
=======
The 1999 special and non-recurring charges by category of expenditures are
as follows:
Special Cost of
Charge Sales Charge Total
------- ------------ -----
Employee severance costs $ 57.0 $ - $ 57.0
Inventories - 46.0 46.0
Write-down of assets to
net realizable value 11.6 - 11.6
Recognition of foreign currency
translation adjustment 9.8 - 9.8
Other 12.0 - 12.0
------- ------ ------
Total $ 90.4 $ 46.0 $ 136.4
======= ======= =======
Employee severance costs are expenses, both domestic and international,
associated with the realignment of the Company's global operations. Certain
employee severance costs were accounted for in accordance with the Company's
existing FAS 112 ("Employers' Accounting for Postemployment Benefits") severance
plans. Remaining severance costs were accounted for in accordance with other
existing accounting literature. The workforce has been reduced by 3,700
associates, or 9% of the total. Approximately one-half of the terminated
employees related to facility closures. As of March 31, 2001, all employees
under the program have been terminated.
Inventory related charges represent losses to write-down the carrying value
of non-strategic inventory prior to disposal. The charges primarily result from
a new business strategy for product dispositions which
13
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
fundamentally changes the way the Company markets and sells certain inventory.
This new strategy, approved and effective in March 1999, is meant to complement
other redesign initiatives, with the objective of reducing inventory clearance
sales, building core brochure sales and building global brands.
The write-down of assets (primarily fixed and other assets) mainly relates
to the restructuring of operations in Western Europe, including the closure of a
jewelry manufacturing facility in Ireland. By centralizing certain key
functional areas and exiting unprofitable situations, the Company plans to
increase operating efficiencies and ultimately, profit growth in the long-term.
The recognition of a foreign currency translation adjustment relates to
the closure of the jewelry manufacturing facility in Ireland.
The "Other" category primarily represents contract termination costs,
legal and consulting fees and other costs associated with the facility closures.
The liability balance at March 31, 2001 is as follows:
Special Cost of
Charge Sales Charge Total
------- ------------ -----
Balance at December 31, 2000 $ 7.9 $ - $ 7.9
Cash expenditures (2.3) - (2.3)
------ ---- -----
Balance at March 31, 2001 $ 5.6 $ - $ 5.6
====== ===== ======
The balance at March 31, 2001 related primarily to employee severance costs
that will be paid in accordance with the original plan during 2001.
10. ASSET IMPAIRMENT CHARGE
In the first quarter of 1999, Avon recorded a Special charge of $151.2 pretax,
which included the write off of $14.8 in pre-tax costs ($10.0 after tax)
associated with a portion of the order management software system known as the
FIRST project. The balance of the FIRST project's development costs had been
carried as an asset until the third quarter of 2001, when Avon recorded a
pre tax charge of $23.9 ($14.5 after tax) to write off the carrying value of
costs related to that project. The non-cash charge recorded in the third
quarter of 2001 included software development costs, certain hardware, software
interfaces and other related costs. Prior to the write off, the capitalized
software was included in Property, plant and equipment, at cost, and Other
assets on the Consolidated Balance Sheet.
The decision to abandon the FIRST project was based on various factors,
including project management and implementation issues and costs, costs for
ongoing support, and changes in Avon business strategies.
The FIRST project, and the Special charge reported by Avon in the first
quarter of 1999 that included the write off of $14.8 in pre-tax costs
associated with FIRST, were the subject of a formal investigation by the SEC
commenced in August 2000. Avon has settled that matter with the SEC and, as
part of that settlement, has restated its financial statements to reflect the
additional write off as of March 31, 1999 of all capitalized costs ($23.3
pretax, and $14.0 after tax) associated with the FIRST project as of that date
for a total first quarter write off of $38.1 pretax ($24.0 after tax). Avon has
also reversed the charge recorded in the third quarter of 2001, and has
restated all other FIRST-related activity recorded during 1999-2002.
See the Introductory Note-Restatements and Note 2 of the Notes to
Consolidated Financial Statements, "Restatements and Accounting Changes".
14
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
11. SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is as follows:
Three Months Ended
March 31
------------------
2001 2000
---- ----
Net Operating Net Operating
Sales Profit Sales Profit
----- --------- ----- ---------
North America:
U.S. $ 461.0 $ 82.4 $ 450.9 $ 81.1
Other* 56.5 2.3 58.7 4.8
----- ----- ----- ------
Total 517.5 84.7 509.6 85.9
----- ----- ----- ------
International:
Latin America North** 216.3 47.6 188.2 39.9
Latin America South** 213.0 30.6 215.4 29.9
------ ----- ----- ------
Latin America 429.3 78.2 403.6 69.8
Pacific 181.9 20.7 191.1 22.4
Europe 219.5 26.9 202.0 20.6
----- ----- ----- ------
Total International 830.7 125.8 796.7 112.8
----- ----- ----- ------
Total from operations $ 1,348.2 210.5 $1,306.3 198.7
Global expenses (1.8) (64.7) - (60.8)
--------- ------- ------- ------
Total $ 1,346.4 $ 145.8 $1,306.3 $ 137.9
========= ======== ======== ======
* Includes operating information for Canada, Puerto Rico and start-up costs
associated with the U.S. retail business.
**Latin America North primarily includes the markets of Mexico, Venezuela and
Central America. Latin America South primarily includes the markets of Brazil,
Argentina, Chile and Peru.
15
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
The following table presents consolidated net sales by classes of principal
products, as of March 31:
2001 2000
---- ----
Cosmetics, fragrance and toiletries $ 862.7 $ 822.9
Beauty Plus:
Fashion jewelry 67.9 76.8
Accessories 67.5 62.0
Apparel 117.6 109.4
Watches 19.9 13.5
-------- --------
272.9 261.7
Beyond Beauty and Other* 210.8 221.7
-------- --------
Total net sales $1,346.4 $1,306.3
======== ========
*Beyond Beauty and other primarily includes home products, gift and decorative,
health and nutrition, and candles.
To conform to the 2001 presentation, certain reclassifications were made to
the prior periods' segment information.
12. OTHER FINANCING ACTIVITIES
The Company has entered into forward contracts to purchase 1,114,400 shares
of Avon Common Stock at an average price of $35.94 per share as of March 31,
2001. The contracts mature over the next seven months and provide for physical
or net share settlement to the Company. Accordingly, no adjustment for
subsequent changes in fair value has been recognized. In accordance with the
provisions of EITF 00-19, $40.0 and $51.0 of these contracts have been included
in the accompanying Consolidated Balance Sheets in share repurchase commitments
with a corresponding decrease in additional paid-in capital as of March 31, 2001
and December 31, 2000, respectively. Subsequent to March 31, 2001, all of these
contracts have been settled. See Note 1 of the Notes to Consolidated Financial
Statements.
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company operates globally, with manufacturing and distribution
facilities in various locations around the world. The Company may reduce its
exposure to fluctuations in interest rates and foreign exchange rates by
creating offsetting positions through the use of derivative financial
instruments. The Company does not use derivative financial instruments for
trading or speculative purposes, nor is the Company a party to leveraged
derivatives.
All derivatives are recognized on the balance sheet at their fair value.
The accounting for changes in fair value (gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and further, on the type of hedging relationship. Changes
in the fair value of a derivative that is designated as a fair value hedge,
along with the loss or gain on the hedged asset or liability that is
attributable to the hedged risk, are recorded in current earnings. Changes in
the fair value of a derivative that is designated as a cash flow hedge are
recorded in other comprehensive income ("OCI") to the extent effective and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. Changes in the fair value of a derivative that is
designated as a hedge of a net investment in a foreign operation are recorded in
foreign currency translation adjustments within OCI, to the extent effective as
a hedge. Changes in the fair value of a derivative not designated as hedging
instruments are recognized in current earnings.
16
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
The Company assesses, both at the hedge's inception and on an ongoing
basis, whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items.
The ineffective portion of the derivative's gain or loss, if any, is recorded in
current earnings. The Company excludes the change in time value of option
contracts from its assessment of hedge effectiveness. When it is determined that
a derivative is not highly effective as a hedge, the Company discontinues hedge
accounting prospectively. When hedge accounting is discontinued because it is
probable that a forecasted transaction will not occur, the Company discontinues
hedge accounting for the affected portion of the forecasted transaction, and
gains and losses that were accumulated in OCI are recognized in earnings.
Interest Rates
The Company uses interest rate swaps to hedge portions of interest payable
on its debt. In addition, the Company may periodically employ interest rate caps
to reduce exposure, if any, to increases in variable interest rates.
The Company has entered into interest rate swap contracts that
effectively convert a portion of its fixed-rate debt to a variable-rate, based
on LIBOR. The Company has designated the interest rate swaps as fair value
hedges. At March 31, 2001, $550.0 of the Company's outstanding long-term debt is
designated as the hedged items to interest rate swap contracts. Accordingly,
long-term debt increased by $32.5 with a corresponding increase to Other assets
to reflect the fair value of outstanding interest rate swaps. There were no
amounts of hedge ineffectiveness as of March 31, 2001 related to these interest
rate swaps.
The Company has also entered into an interest rate cap to convert a
variable interest rate, resulting from the interest rate swaps above, to a fixed
interest rate. The contract has not been designated as a hedge and has been
recorded in the consolidated financial statements at fair value.
Foreign Currency
The Company uses foreign currency forward contracts and options to hedge
portions of its forecasted foreign currency cash flows resulting from forecasted
royalties, intercompany loans, and other anticipated foreign currency
transactions where there is a high probability that anticipated exposures will
materialize, including third-party and intercompany foreign currency
transactions. These contracts have been designated as cash flow hedges.
For the three months ended March 31, 2001, the net gain related to the
ineffective portion of the Company's cash-flow hedging instruments, and the net
loss related to the portion of the hedging instrument excluded from the
assessment of hedge effectiveness (time value of options) was not material. The
net gain reclassified from OCI to earnings for cash-flow hedges that have been
discontinued, because the forecasted transactions are not probable of occurring,
was not material.
As of March 31, 2001, the Company expects to reclassify $1.4 of net
losses on derivative instruments from accumulated other comprehensive income to
earnings during the next twelve months due to (a) foreign currency royalties (b)
intercompany loans settlements and (c) actual foreign currency denominated
purchases or receipts. The maximum term over which the Company is hedging
exposures to the variability of cash flows for all forecasted transactions is
twelve months.
The Company also enters into foreign currency forward contracts to
protect against the adverse effects that exchange-rate fluctuations may have on
the earnings of its foreign subsidiaries. These derivatives do not qualify for
hedge accounting and the gains and losses on these derivatives are recognized in
current earnings.
17
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
Hedges of Net Investments in Foreign Operations
The Company uses foreign-currency forward contracts and foreign currency
denominated fixed rate debt to hedge the foreign-currency exposure related to
the net assets of the Company's foreign subsidiaries.
As of March 31, 2001, the Company has entered into a loan agreement to
borrow Japanese yen to hedge Avon's net investment in it's Japanese subsidiary.
For the three months ended March 31, 2001, a $2.9 gain related to the
revaluation of this foreign currency denominated debt was included in foreign
currency translation adjustments within accumulated other comprehensive loss on
the Consolidated Balance Sheets. See Note 14 of the Notes to Consolidated
Financial Statements.
Credit and Market Risk
The Company attempts to minimize its credit exposure to counterparties by
entering into interest rate swap and cap contracts only with major international
financial institutions with "A" or higher credit ratings as issued by Standard &
Poor's Corporation. The Company's foreign currency and interest rate derivatives
are comprised of over-the-counter forward contracts or options with major
international financial institutions. Although the Company's theoretical credit
risk is the replacement cost at the then estimated fair value of these
instruments, management believes that the risk of incurring losses is remote and
that such losses, if any, would not be material.
14. DEBT
In February 2001, Avon entered into a loan agreement to borrow 5.5
billion Japanese yen. The loan bore interest at a per annum rate equal to 0.875%
and matured on April 9, 2001. Interest on the loan was paid at maturity. On
April 9, 2001, Avon amended this loan agreement to increase the amount borrowed
8.0 billion Japanese yen and to extend the maturity to May 15, 2001. The loan
bore interest at a per annum rate equal to 0.485%. Interest on the loan was paid
at maturity. On May 15, 2001, Avon further amended this loan agreement to extend
the maturity to July 12, 2001. The loan will bear interest at a per annum rate
equal to 0.455%. The loan is designated as a hedge of Avon's net investment in
Japan. See Note 13 to the Notes to Consolidated Financial Statements.
At March 31, 2001, there were no borrowings under the amended and
restated revolving credit and competitive advance facility agreement which
expires in 2001. This agreement is also used to support the Company's commercial
paper borrowings of which no amounts were outstanding at March 31, 2001. In May
2001, the Company entered into a new $600.0 revolving credit and competitive
advance facility which expires in 2006.
15. SUBSEQUENT EVENT
On May 3, 2001, the Company declared a quarterly dividend on its common
stock of $.19 per share, payable June 1, 2001, to shareholders of record on May
16, 2001.
18
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
ITEM 2. Management's Discussion and Analysis of the Results of Operations
and Financial Condition (Restated)
Results of Operations--Three Months Ended March 31, 2001 and 2000.
Consolidated
For the three-months ended March 31, 2001, net income was $81.7, or $.34
per share on a basic and diluted basis, compared with net income of $63.8, or
$.27 per share on a basic and diluted basis, in 2000. Operating profit was
$145.8 in 2001 compared to $137.9 in 2000.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by FAS No. 138, "Accounting for Certain
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities. In
accordance with the provisions of FAS No. 133, the Company recorded a charge to
earnings of $0.3, net of a tax benefit of $0.2 to reflect the change in
time-value of Avon's outstanding options from the date of the options' inception
through the date of transition (January 1, 2001). The Company also recorded a
charge to shareholders' (deficit)equity of $3.9, net of a tax benefit of $2.1,
in accumulated other comprehensive loss to recognize the fair value of all
derivatives designated as cash-flow hedging instruments, which the Company
expects to reclassify into earnings within the next twelve months. These charges
are reflected as a cumulative effect of an accounting change in the accompanying
Consolidated Financial Statements. See Notes 8 and 13 of the Notes to
Consolidated Financial Statements.
Effective January 1, 2000, the Company changed its method of accounting for
revenue recognition in accordance with Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements." The cumulative effect of the
change on prior years resulted in a charge of $6.7, net of a tax benefit of
$3.5, or $.03 per share on a basic and diluted basis, which is included in net
income for the three-months ended March 31, 2000. The impact of the accounting
change for the three-months ended March 31, 2000 was to decrease net income
before the cumulative effect of the accounting change by $4.4.
Consolidated net sales for the three-months ended March 31, 2001 increased
3% over the same period of 2000. The sales improvement was a result of increases
in Latin America, Europe and North America partially offset by declines in the
Pacific region. Excluding the impact of foreign currency exchange, consolidated
net sales rose 8% over the comparable period of the prior year, with increases
in all regions.
Gross margin increased 0.3 percentage points in the first three-month
period of 2001 compared to the same period of 2000 resulting from improvements
in all regions, most significantly in Venezuela, the United Kingdom, Brazil,
Russia and most major markets in the Pacific region.
Marketing, distribution and administrative expenses increased $21.3, or
3%, for the three-months ended March 31, 2001 over the comparable period of
2000 due to increases in all regions, excluding the Pacific region, which
remained level. Marketing, distribution and administrative expenses as a
percentage of sales remained relatively flat primarily due to higher expense
ratios in Argentina, Germany, Poland and most markets in the Pacific region,
offset by improved ratios in Venezuela, Mexico, Brazil and Russia.
19
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
Interest expense of $19.7 decreased $0.2 versus the comparable period of
2000, primarily as a result of a decline in domestic interest rates in 2001.
Interest income of $2.0 increased $0.2 as compared to the same period in 2000
primarily due to higher interest income in Poland during 2001.
Other expense (income), net of $1.6 was $8.6 favorable to the comparable
period of 2000 mainly due to foreign exchange losses during 2000 on forward
contracts in Brazil and Mexican peso hedge contracts as well as favorable
foreign exchange movements in 2001 on Japanese yen contracts.
The effective tax rate was 35.2% in the first quarter of 2001 versus 35.7%
in the first quarter of 2000, due to dividend planning and the earnings mix and
tax rates of international subsidiaries.
The following discussion addresses net sales and operating profit by
reportable segment as presented in Note 11:
North America
Net sales increased 2% in the first quarter of 2001 over the prior year.
The U.S business, which represents almost 90% of the North American segment,
reported a sales increase of 2% for the first three-months of 2001. The increase
resulted from a 3% increase in the average number of active Representatives.
U.S. sales of cosmetics, fragrance and toiletries ("CFT") grew 6% during the
first quarter reflecting a 43% increase in hair care, due to successful new
product launches in 2000 which created momentum in 2001 and increased exposure
in brochures. Color cosmetics reported strong increases versus prior year,
driven by new product activity and the relaunch of Beyond Color. Skin care, the
U.S.'s most profitable CFT segment, grew double-digits, partly due to the
continued powerful performance of Anew Retroactive. Furthermore, sales of
apparel and accessories posted a 21% growth primarily due to growth in intimate
apparel, footwear and eyewear. Growth in watches was driven by a strategic
decision to offer more concepts in 2001, including new licensed products such as
Harry Potter. Partially offsetting these sales improvements was a decline in the
jewelry category, mainly due to the successful launch of powerbeads in 2000 and
lower sales in home entertainment, resulting from fewer new product concepts in
2001.
Operating profit in North America decreased 1% (U.S. increased 2%) for the
first quarter of 2001 over the comparable period in 2000. This decrease is
primarily attributable to start-up costs associated with the U.S. retail
business, partially offset by sales increases in the U.S and Puerto Rico.
Operating profit margin in North America declined 0.5 points primarily due to a
higher expense ratio associated with the U.S. retail business discussed above.
International
International U.S. dollar net sales for the first quarter of 2001 increased
4% compared to the same period in 2000. The international sales improvement was
a result of increases in the Europe and Latin America regions. Excluding the
effect of foreign currency exchange, international sales increased 12% with
double-digit increases in the Europe and Latin America regions, as well as a
mid-single digit increase in the Pacific region.
In Europe, sales increased 9% in the first quarter, driven by growth in
Central Europe, primarily Poland, and in Russia, partially offset by a sales
decline in Germany and to a lesser extent, the United Kingdom. The sales
improvement in Central Europe, primarily Poland, resulted from
20
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
continued increases in active Representatives and units and in Russia, due to a
dramatic increase in average order size, active Representatives and units.
Poland's continued strong sales growth can be attributed to the successful
implementation of the Sales Leadership Strategy (launched in 2000). This has
resulted in increased market penetration, and along with continued focus on
Representative retention, has seen staff count levels increase by over 55%
compared to last year. In Russia, the sales increases resulted from an
improvement in the economic situation coupled with a change in the commission
structure to include several levels of Representative commissions in 2001 versus
only one in 2000. The sales decline in Germany was primarily the result of a
weak economic climate, which negatively impacted key business indicators. In the
United Kingdom, sales increased in local currency but U.S. dollar sales were
negatively impacted by foreign exchange. Excluding the impact of exchange,
Europe sales grew 17%, an 8 point variance from the dollar increase largely due
to an unfavorable exchange impact in all major markets within the region.
In Latin America, sales increased 6% in the first quarter of 2001 mainly
due to double-digit growth in Venezuela and Mexico partially offset by a small
decline in Brazil. The sales increase in Venezuela was primarily driven by
strong increases in active representatives, units and customers. Venezuela had
double-digit sales growth in all product categories, particularly in the CFT
category as a result of competitive pricing in Fragrance, Color Cosmetics and
Personal Care. The increases in Mexico were also driven by strong performance in
cosmetic lines due to investments in new product introductions to drive growth.
In Brazil, local currency sales increased double digits, but U.S. dollar sales
were negatively impacted by foreign exchange. Excluding the impact of exchange,
sales in Latin America increased 12%.
U.S. dollar sales in the Pacific region declined 5% but increased 6% in
local currency on 8% unit growth and a 13% increase in active Representatives.
In 2001, U.S. dollar sales for most major markets were negatively impacted by
foreign exchange, most significantly Japan and the Philippines. In Japan, local
currency sales increased 4% on strong unit growth, particularly in makeup and
apparel categories. The Philippines also posted strong increases in units as
well as active Representatives, which resulted in double-digit local currency
sales growth versus 2000, predominantly in the apparel category. In China, sales
growth of 40% was driven by the success of consumer initiatives, such as
sampling and promotions in major department stores and television advertising.
U.S. dollar and local currency sales in Taiwan declined double digits due to the
recent economic slowdown, which has negatively impacted unemployment rates and
consumer consumption this year.
International operating profit increased 12% in the first quarter of 2001
compared to the same period in 2000.
Operating profit in Europe increased 31% in the first quarter of 2001
primarily due to the sales increases, discussed above, as well as operating
profit margin improvements in the United Kingdom and Russia, partially offset by
margin declines in Poland and Germany. The improvement in the United Kingdom
resulted from an increase in gross margin generated by strong performance of
higher margin cosmetic items. Operating profit improvements in Russia are due to
dramatic sales growth, which led to an improvement in the expense ratio and
gross margin. Despite sales and operating profit growth, Poland reported an
unfavorable operating expense ratio, driven by increased costs to move the
distribution facility, incremental investment spending on advertising and
sampling programs and difficult comparisons against prior year, where
substantial savings were realized. In Germany, lower sales due to weak economic
conditions led to an increased expense ratio. Overall, the first quarter
operating margin in Europe increased 2.1 points versus the prior year.
21
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
In Latin America, operating profit for the first quarter of 2001
increased 12% as compared to the same period in 2000. This operating profit
improvement resulted from the sales increases, discussed above, as well as
operating profit margin improvements in Venezuela and to a lesser extent,
Brazil, partially offset by operating profit margin declines in Mexico and
Argentina. Venezuela's operating margin reflected higher gross margin driven by
price increases and cost improvements coupled with a favorable expense ratio.
The operating margin improvement in Brazil was due to favorable category mix,
effective cost management and strong vendor negotiations to lower product costs.
Despite sales and operating profit growth, Mexico reported a decline in gross
margin due to increased sales of lower margin CFT items partially offset by
lower brochure costs. In Argentina, operating margin declined due to a difficult
economic environment. Overall, the first quarter operating margin in Latin
America was up 0.9 points versus the prior year.
Operating profit in the Pacific region declined 8% in the first quarter
of 2001 resulting from the negative impact of foreign currency translation,
discussed above, and a higher operating expense ratio, partially offset by
favorable gross margin. Japan's operating margin improved 0.3 points largely due
to BPR efforts, which continue to generate significant savings across all
expense areas. An improvement in the gross margin in the Philippines was
primarily due to the conversion of Avon owned beauty centers to service centers
which shifted certain commission expenses to operating expenses, coupled with
better margin performance on all product categories. China's operating margin
improved dramatically due to a favorable operating expense ratio resulting from
significantly higher sales. While gross margin in Taiwan improved due to
favorable sales mix versus 2000, operating margin declined slightly due to
higher fixed expenses on a lower sales base. Overall, the first quarter
operating margin in the Pacific was down 0.3 points versus the prior year.
Global Expenses
Global expenses increased 6% in the first quarter of 2001 over the same
period in 2000 primarily due to higher spending related to information
technology and research and development activities.
Cash Flows
Excluding changes in debt, there was a net decrease in cash of $47.9 in the
first quarter of 2001 compared with a decrease of $223.6 in the comparable
period of 2000. The $175.7 variance resulted from higher net cash provided by
operations which primarily reflects the receipt of an income tax refund, higher
working capital levels in 2000, which included the payout of the long-term
incentive plan in 2000, the timing of cash payments and an improvement in
inventory. These sources of cash were partially offset by higher repurchases of
common stock, and increased cash used for investing activities due to the
acquisition of a distributorship in Greece during 2001.
During the first quarter of 2001, the Company purchased approximately
993,000 shares of common stock for $41.6 compared with $16.9 spent for the
repurchase of approximately 383,000 shares during the comparable period in 2000.
At March 31, 2001, 36,000 shares repurchased for $1.4 were not settled until
April 2001 and were included in Other accrued liabilities on the Consolidated
Balance Sheet.
22
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
Capital Resources
Total debt increased $50.8 to $1,264.4 from $1,213.6 at December 31, 2000,
principally due to working capital requirements and an adjustment of $32.5 to
reflect the fair value of outstanding interest rate swaps. Total debt of
$1,264.4 at March 31, 2001 was $58.9 higher than total debt of $1,205.5 at March
31, 2000, primarily due to increased borrowings to fund the Company's share
repurchase program and an adjustment of $32.5 in 2001 to reflect the fair value
of outstanding interest rate swaps.
At March 31, 2001, there were no borrowings under the amended and restated
revolving credit and competitive advance facility agreement which expires in
2001. This agreement is also used to support the Company's commercial paper
borrowings of which no amounts were outstanding at March 31, 2001. In May 2001,
the Company entered into a new $600.0 revolving credit and competitive advance
facility which expires in 2006.
At March 31, 2001, there were no borrowings outstanding under uncommitted
lines of credit.
In February 2001, Avon entered into a loan agreement to borrow 5.5 billion
Japanese Yen. The loan bore interest at a per annum rate equal to 0.875% and
matured on April 9, 2001. Interest on the loan was paid at maturity. On April 9,
2001, Avon amended this loan agreement to increase the amount borrowed to 8.0
billion Japanese yen and to extend the maturity to May 15, 2001. The loan bore
interest at a per annum rate equal to 0.485%. Interest on the loan was paid at
maturity. On May 15, 2001, Avon further amended this loan agreement to extend
the maturity to July 12, 2001. The loan will bear interest at a per annum rate
equal to 0.455%. The loan is designated as a hedge of Avon's net investment in
Japan. See Note 13 to the Notes to Consolidated Financial Statements.
Management currently believes that cash from operations and available
financing alternatives are adequate to meet anticipated requirements for working
capital, dividends, capital expenditures, the stock repurchase program and other
cash needs.
Working Capital
As of March 31, 2001 and December 31, 2000, current assets exceeded current
liabilities by $175.0 and $186.4, respectively. The decrease of current assets
over current liabilities of $11.4 was primarily due to the receipt of an income
tax refund in 2001. The decrease was partially offset by a decrease in accounts
payable and higher inventories, reflecting the seasonal pattern of Avon's
operations as well as the payout of the Company's 2000 cash incentive programs.
Financial Instruments and Risk Management Strategies
The Company operates globally, with manufacturing and distribution
facilities in various locations around the world. The Company may reduce its
exposure to fluctuations in interest rates and foreign exchange rates by
creating offsetting positions through the use of derivative financial
instruments. The Company currently does not use derivative financial instruments
for trading or speculative purposes, nor is the Company a party to leveraged
derivatives.
All derivatives are recognized on the balance sheet at their fair value.
The accounting for changes in fair value (gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and further, on the type of hedging relationship.
23
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
Changes in the fair value of a derivative that is designated as a fair value
hedge, along with the loss or gain on the hedged asset or liability that is
attributable to the hedged risk are recorded in current earnings. Changes in the
fair value of a derivative that is designated as a cash flow hedge are recorded
in other comprehensive income ("OCI") to the extent effective and reclassified
into earnings in the same period or periods during which the hedged transaction
affects earnings. Changes in the fair value of a derivative that is designated
as a hedge of a net investment in a foreign operation are recorded in foreign
currency translation adjustments within OCI to the extent effective as a hedge.
Changes in the fair value of a derivative not designated as hedging instruments
are recognized in current earnings.
The Company assesses, both at the hedge's inception and on an ongoing
basis, whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items.
The ineffective portion of the derivative's gain or loss, if any, is recorded in
current earnings. The Company excludes the change in time value of option
contracts from its assessment of hedge effectiveness. When it is determined that
a derivative is not highly effective as a hedge, the Company discontinues hedge
accounting prospectively. When hedge accounting is discontinued because it is
probable that a forecasted transaction will not occur, the Company discontinues
hedge accounting for the affected portion of the forecasted transaction, and
gains and losses that were accumulated in OCI are recognized in earnings.
Interest Rates
The Company uses interest rate swaps to hedge portions of interest payable
on its debt. In addition, the Company may periodically employ interest rate caps
to reduce exposure, if any, to increases in variable interest rates.
The Company has entered into interest rate swap contracts that effectively
convert a portion of its fixed-rate debt to a variable-rate based on LIBOR. The
Company has designated the interest rate swaps as fair value hedges. At March
31, 2001, $550.0 of the company's outstanding long-term debt is designated as
the hedged items to interest rate swap contracts. Accordingly, long-term debt
increased by $32.5 with a corresponding increase to Other assets to reflect the
fair value of outstanding interest rate swaps. There were no amounts of
hedge ineffectiveness as of March 31, 2001 related to these interest rate swaps.
The Company has also entered into an interest rate cap to convert a
variable interest rate, resulting from the interest rate swaps above, to a fixed
interest rate. The contract has not been designated as a hedge and has been
recorded in the consolidated financial statements at fair value.
Foreign Currency
The Company uses foreign currency forward contracts and options to hedge
portions of its forecasted foreign currency cash flows resulting from forecasted
royalties, intercompany loans, and other anticipated foreign currency
transactions where there is a high probability that anticipated exposures will
materialize, including third-party and intercompany foreign currency
transactions. These contracts have been designated as cash flow hedges.
For the three months ended March 31, 2001, the net gain related to the
ineffective portion of the Company's cash-flow hedging instruments, and the net
loss related to the portion of the hedging instrument excluded from the
assessment of hedge effectiveness (time value of options) was not material. The
net gain reclassified from OCI to earnings for cash-flow hedges that have been
discontinued, because the forecasted transactions are not probable of occurring,
was not material.
24
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
As of March 31, 2001, the Company expects to reclassify $1.4 of net
losses on derivative instruments from accumulated other comprehensive income to
earnings during the next twelve months due to (a) foreign currency royalties (b)
intercompany loan settlements and (b) actual foreign currency denominated
purchases or receipts. The maximum term over which the Company is hedging
exposures to the variability of cash flows for all forecasted transactions is
twelve months.
The Company also enters into foreign currency forward contracts to protect
against the adverse effects that exchange-rate fluctuations may have on the
earnings of its foreign subsidiaries. These derivatives do not qualify for hedge
accounting and the gains and losses on these derivatives are recognized in
current earnings.
Hedges of Net Investments in Foreign Operations
The Company uses foreign-currency forward contracts and foreign currency
denominated fixed rate debt to hedge the foreign-currency exposure related to
the net assets of the Company's foreign subsidiaries.
As of March 31, 2001, the Company has entered into a loan agreement to
borrow Japanese yen to hedge Avon's net investment in its Japanese subsidiary.
For the three months ended March 31, 2001, a $2.9 gain related to the
revaluation of foreign currency denominated debt was included in foreign
currency translation adjustments within accumulated other comprehensive loss on
the Consolidated Balance Sheets.
Credit and Market Risk
The Company attempts to minimize its credit exposure to counterparties by
entering into interest rate swap and cap contracts only with major international
financial institutions with "A" or higher credit ratings as issued by Standard &
Poor's Corporation. The Company's foreign currency and interest rate derivatives
are comprised of over-the-counter forward contracts or options with major
international financial institutions. Although the Company's theoretical credit
risk is the replacement cost at the then estimated fair value of these
instruments, management believes that the risk of incurring losses is remote and
that such losses, if any, would not be material.
The Company has entered into forward contracts to purchase approximately
1,114,400 shares of Avon common stock at an average price of $35.94 per share at
March 31, 2001. The contracts mature over the next seven months and provide for
physical or net share settlement to the Company. Accordingly, no adjustment for
subsequent changes in fair value has been recognized. In accordance with the
provisions of EITF 00-19, $40.0 and $51.0 of these contracts have been included
in the accompanying Consolidated Balance Sheets in Share repurchase commitments
with a corresponding decrease in Additional paid-in capital as of March 31, 2001
and December 31, 2000, respectively. Subsequent to March 31, 2001, all of these
contracts have been settled. See Note 1 of the Notes to Consolidated Financial
Statements.
Euro
A single currency called the euro was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union adopted the
euro as their common legal currency on that date. Fixed conversion rates between
these participating countries' existing currencies (the "legacy currencies") and
the euro were established as of that date. The legacy currencies are scheduled
to remain legal tender as denominations of the euro until June 30, 2002 after
which they will be withdrawn from circulation. During this transition period,
parties may settle transactions using either the euro or a participating
country's legal currency. Beginning in January 2002, new euro-denominated bills
and coins will be issued.
25
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
Avon operating subsidiaries affected by the euro conversion have
established plans to address issues raised by the euro currency conversion.
These issues include, among others, the need to adapt information technology
systems, business processes and equipment to accommodate euro-denominated
transactions, the impact of one common currency on pricing and recalculating
currency risk. Avon does not expect system and equipment conversion costs to be
material. Due to the numerous uncertainties associated with the market impact of
the euro conversion, the Company cannot reasonably estimate the effects one
common currency will have on pricing and the resulting impact, if any, on
results of operations, financial condition or cash flows.
26
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report which are not historical facts or
information are forward-looking statements within the meaning of the Private
Securities Litigation Act of 1995. Such forward-looking statements are based on
management's reasonable current assumptions and expectations. Such
forward-looking statements involve risks, uncertainties and other factors which
may cause the actual results, levels of activity, performance or achievement of
the Company to be materially different from any future results, levels of
activity, performance or achievement expressed or implied by such
forward-looking statements, and there can be no assurance that actual results
will not differ materially from management's expectations. Such factors
include, among others, the following: general economic and business conditions;
the Company's ability to implement its business strategy; the Company's ability
to successfully identify new business opportunities; the Company's access to
financing; the impact of substantial currency fluctuations in the Company's
principal foreign markets; the Company's ability to attract and retain key
executives; the Company's ability to achieve anticipated cost savings and
profitability targets; changes in the industry; competition; the effect of
regulatory, tax and legal proceedings and restrictions imposed by domestic and
foreign governments; and other factors discussed in Item 1 of the Company's
Form 10-K/A. As a result of the foregoing and other factors, no assurance can
be given as to the future results and achievements of the Company. Neither the
Company nor any other person assumes responsibility for the accuracy and
completeness of such forward-looking statements, nor undertakes an obligation
to update them.
27
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) At the annual meeting of shareholders of Avon, held on May 3, 2001, the
matters described under (c) below were voted upon.
(c) Annual meeting votes:
Abstain,
Withheld
and Broker
For Against Non-Votes
----------- ---------- -----------
(1) To elect three directors
to three-year terms
expiring in 2004 198,891,708 - 1,565,143
(2) To ratify the appointment
of PricewaterhouseCoopers LLP
as Avon's independent
accountants for 2001 199,132,188 651,409 673,254
28
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
There are no exhibits.
(b) Reports on Form 8-K.
On January 25, 2001, the Company filed a Form 8-K to provide information
regarding its adoption of Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" and the provisions of Emerging Issues Task
Force 00-10, "Accounting for Shipping and Handling Fees and Costs."
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVON PRODUCTS, INC.
-------------------
(Registrant)
Date: August 12, 2002 By /s/JANICE MAROLDA
----------------------------
Janice Marolda
Vice President,
Controller
Principal Accounting Officer
Signed both on behalf of the registrant
and as principal accounting officer.
30