FORM 10-Q/A
UNITED STATES
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, 2002
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, 2002 was 236,447,680.
Table of Contents
Page
Numbers
-------
Part I. Financial Information
Introductory Note - Restatements................................ 3
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income
Three Months Ended March 31, 2002 (Restated) and
March 31, 2001..................................... 4
Consolidated Balance Sheets
March 31, 2002 (Restated) and December 31, 2001...... 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 (Restated) and
March 31, 2001..................................... 6
Notes to Consolidated Financial Statements (Restated).. 7-16
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition (Restated) 17-22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ..................................... 22
Part II. Other Information
Item 1. Legal Proceedings ..................................... 23
Item 6. Exhibits and Reports on Form 8-K....................... 23
Signature ...................................................... 24
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 9 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. 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 INCOME
(Unaudited)
(In millions, except per share data)
Three months ended
March 31
----------------------
2002 2001
---------- ---------
(Restated-Note 2)
Net sales........................................... $1,372.1 $1,346.4
Other revenue....................................... 11.5 10.6
-------- -------
Total revenue....................................... 1,383.6 1,357.0
Costs, expenses and other:
Cost of sales..................................... 518.5 512.5
Marketing, distribution and administrative expenses 710.8 698.7
-------- --------
Operating profit.................................... 154.3 145.8
Interest expense.................................. 13.4 19.7
Interest income................................... (4.5) (2.0)
Other (income) expense, net....................... (4.1) 1.6
-------- --------
Total other expense, net............................ 4.8 19.3
-------- --------
Income from continuing operations before taxes,
minority interest and cumulative effect
of accounting change ............................. 149.5 126.5
Income taxes........................................ 52.1 44.5
-------- --------
Income before minority interest and cumulative
effect of accounting change....................... 97.4 82.0
Minority interest................................... (1.1) -
-------- --------
Income from continuing operations before
cumulative effect of accounting change .......... 96.3 82.0
Cumulative effect of accounting change, net of tax - (0.3)
-------- --------
Net income ......................................... $ 96.3 $ 81.7
======== ========
Basic earnings per share:
Continuing operations............................. $ .41 $ .34
Cumulative effect of accounting change............ - -
-------- --------
$ .41 $ .34
======== ========
Diluted earnings per share:
Continuing operations ............................ $ .40 $ .34
Cumulative effect of accounting change............ - -
-------- --------
$ .40 $ .34
======== ========
The accompanying notes are an integral part of these statements.
4
AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
March 31 December 31
2002 2001
---------- -----------
(Restated-Note 2)
ASSETS
Current assets:
Cash and cash equivalents........................ $ 352.7 $ 508.5
Accounts receivable.............................. 506.5 519.5
Inventories...................................... 672.5 612.5
Prepaid expenses and other....................... 262.5 248.6
-------- --------
Total current assets............................. 1,794.2 1,889.1
-------- --------
Property, plant and equipment, at cost........... 1,542.2 1,552.4
Less accumulated depreciation.................... 790.7 779.7
-------- --------
751.5 772.7
Other assets..................................... 507.2 530.8
-------- --------
Total assets..................................... $3,052.9 $3,192.6
======== ========
LIABILITIES AND SHAREHOLDERS'(DEFICIT)EQUITY
Current liabilities:
Debt maturing within one year.................... $ 85.5 $ 88.8
Accounts payable................................. 349.6 404.1
Accrued compensation............................. 83.9 145.2
Other accrued liabilities........................ 337.2 338.2
Sales and taxes other than income................ 114.4 108.8
Income taxes..................................... 363.7 375.9
-------- --------
Total current liabilities........................ 1,334.3 1,461.0
-------- --------
Long-term debt................................... 1,228.1 1,236.3
Employee benefit plans........................... 441.5 436.6
Deferred income taxes............................ 32.6 30.6
Other liabilities................................ 95.0 103.2
Contingencies (Note 6)
Shareholders'(deficit)equity:
Common stock..................................... 89.3 89.1
Additional paid-in capital....................... 971.5 938.0
Retained earnings................................ 1,438.5 1,389.4
Accumulated other comprehensive loss ........... (518.4) (489.5)
Treasury stock, at cost.......................... (2,059.5) (2,002.1)
-------- --------
Total shareholders'(deficit)equity............... (78.6) (75.1)
-------- --------
Total liabilities and shareholders'(deficit)equity $3,052.9 $3,192.6
======== ========
The accompanying notes are an integral part of these statements.
5
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Three months ended
March 31
-------------------
2002 2001
------- ------
(Restated-Note 2)
Cash flows from operating activities:
Net income.............................................. $ 96.3 $ 81.7
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Special and non-recurring payments...................... (7.0) (2.3)
Cumulative effect of accounting change ................. - .3
Depreciation and amortization........................... 29.6 26.4
Provision for doubtful accounts......................... 29.3 30.4
Amortization of debt discount........................... 3.8 3.7
Foreign exchange losses................................. (10.7) 2.8
Deferred income taxes................................... (1.5) (1.7)
Other................................................... 3.0 3.3
Changes in assets and liabilities:
Accounts receivable................................... (27.1) (32.2)
Income tax receivable................................. - 95.2
Inventories........................................... (71.8) (62.1)
Prepaid expenses and other............................ (10.4) (10.7)
Accounts payable and accrued liabilities.............. (96.5) (63.3)
Income and other taxes................................ (2.1) (4.5)
Noncurrent assets and liabilities..................... 7.6 1.1
------ ------
Net cash (used in)provided by operating activities...... (57.5) 68.1
------ ------
Cash flows from investing activities:
Capital expenditures.................................... (14.6) (27.6)
Disposal of assets...................................... .2 1.5
Other investing activities.............................. (.9) (5.2)
------ ------
Net cash used in investing activities................... (15.3) (31.3)
------ ------
Cash flows from financing activities:
Cash dividends.......................................... (49.5) (47.0)
Book overdraft.......................................... (.5) .2
Debt, net (maturities of three months or less).......... 5.8 26.3
Proceeds from short-term debt........................... 17.9 18.8
Retirement of short-term debt........................... (27.6) (27.4)
Repurchase of common stock.............................. (54.5) (40.2)
Proceeds from exercise of stock options, net of taxes... 30.8 7.4
------ ------
Net cash used in financing activities................... (77.6) (61.9)
------ ------
Effect of exchange rate changes on cash and equivalents. (5.4) (5.1)
------ ------
Net decrease in cash and equivalents.................... (155.8) (30.2)
Cash and equivalents at beginning of period............. 508.5 122.7
------ ------
Cash and equivalents at end of period................... $ 352.7 $ 92.5
======= =======
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
Basis of Presentation
The accompanying Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
contained in Avon's 2001 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.
To conform to the 2002 presentation, certain reclassifications were made
to the prior periods' consolidated financial statements and the accompanying
footnotes.
Accounting for Certain Sales Incentives
Effective January 1, 2002, Avon adopted Emerging Issues Task Force
("EITF") 00-14, "Accounting for Certain Sales Incentives," which requires that
the cost of certain products and cash incentives used in Avon's promotional
activities, which were previously reported in Marketing, distribution and
administrative expenses, to be classified as Cost of sales or as a reduction of
Net sales. For comparison purposes, 2001 was reclassified to reflect the
adoption of EITF 00-14. The adoption of EITF 00-14 had no impact on operating
profit; however, gross margin decreased by approximately 0.9 points for both
the first quarters of 2002 and 2001, offset by a decrease in Marketing,
distribution and administrative expenses.
Effective January 1, 2002, Avon adopted 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," which require certain expenses related to the U.S. Retail business
previously included in Marketing, distribution and administrative expenses to
be classified as a reduction of Net sales. The adoption of EITF 00-25 and EITF
01-09 was not material to the Consolidated Financial Statements. There was no
impact on the first quarter of 2001, as the U.S. Retail business was not
launched until the third quarter of 2001.
Accounting for Goodwill and Other Intangibles Assets
Effective January 1, 2002, Avon adopted Statement of Financial Accounting
Standards ("FAS") No. 142, "Goodwill and Other Intangible Assets." Under FAS
No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized, but are assessed for impairment annually and upon the occurrence of
an event that indicates impairment may have occurred. In accordance with FAS
No. 142, Avon completed its transitional goodwill impairment assessment based
on an evaluation of estimated future cash flow and no adjustments to goodwill
were recorded.
The pro-forma effect of FAS No. 142 assuming Avon had adopted this
standard on January 1, 2001 was not material to Avon's Income from continuing
7
operations before cumulative effect of accounting change, Net income or Basic
and Diluted earnings per share for the first quarter of 2001.
Accounting for the Impairment or Disposal of Long-Lived Assets
Effective January 1, 2002, Avon adopted FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses the accounting
and reporting for the impairment and disposal of long-lived assets. The
adoption of FAS No. 144 was not material.
Cumulative Effect of Accounting Change
In the first quarter of 2001, Avon recorded a charge to earnings of $0.3,
net of taxes of $0.2, and a charge to Shareholders' (deficit) equity of $3.9,
net of taxes of $2.1, to reflect the adoption of FAS No. 133, "Accounting for
Certain Derivative Instruments and Hedging Activities," on January 1, 2001.
2. RESTATEMENTS
Restatements
In connection with the settlement of a 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. See Introductory Note-Restatements and
Note 9 of the Notes to Consolidated Financial Statements, "Asset Impairment
Charge".
The accompanying financial statements have been restated to reflect the
restatements discussed above. 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;
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 of 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, Segment
Information, and Asset Impairment Charge.
8
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
The effects of these restatements on the Consolidated Financial Statements
are set forth below:
Consolidated Statement of Income
for the three months ended
March 31, 2002
-----------------------------------
As As
Reported(1) Restated (2)
----------- ------------
Marketing distribution and
administrative expenses $711.0 $710.8
Operating profit 154.1 154.3
Income from continuing
operations before taxes
and minority interest 149.3 149.5
Income taxes 52.0 52.1
Income from continuing
operations before minority
interest 97.3 97.4
Net income 96.2 96.3
Consolidated Balance Sheet
As of March 31, 2002
-----------------------------------
As As
Reported (1) Restated (2)
------------ ------------
Property, plant and equipment, at
cost $1,544.4 $1,542.2
Other assets 505.4 507.2
Total assets 3,053.3 3,052.9
Retained earnings 1,438.9 1,438.5
Total liabilities and shareholder's
(deficit) equity 3,053.3 3,052.9
(1) As reported in Avon's quarterly report on Form 10-Q for the quarter
ended March 31, 2002.
(2) Includes the effects of the restatements outlined above.
Note: Refer to Avon's Form 10-Q/A for the quarter ended March 31, 2001 for
restatements to 2001 information.
3. 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 EPS were
calculated to give effect to all potentially dilutive common shares that were
outstanding during the period.
9
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
For the three months ended March 31, 2002 and 2001, the components of basic
and diluted earnings per share are as follows:
2002 2001
-------- --------
Numerator:
Basic:
Income from continuing operations
before cumulative effect of
accounting change $ 96.3 $ 82.0
Cumulative effect of accounting change - ( 0.3)
------- -------
Net income $ 96.3 $ 81.7
======= =======
Diluted:
Income from continuing operations
before cumulative effect of accounting
change $ 96.3 $ 82.0
Interest expense on convertible notes,
net of taxes 2.6 2.5
-------- -------
Income for purposes of computing diluted
EPS before cumulative effect of
accounting change 98.9 84.5
Cumulative effect of accounting change - (0.3)
------- -------
Net income for purposes of computing
diluted EPS $ 98.9 $ 84.2
======= =======
Denominator:
Basic EPS weighted-average shares
Outstanding 236.70 237.91
Dilutive effect of:
Assumed conversion of
stock options and settlement of
forward contracts (1) 2.64 1.90
Assumed conversion of convertible notes 6.96 6.96
------- --------
Diluted EPS adjusted weighted-average
shares outstanding 246.30 246.77
======= ========
Basic EPS:
Continuing operations $ .41 $ .34
Cumulative effect of accounting change - -
------- --------
$ .41 $ .34
======= ========
Diluted EPS:
Continuing operations $ .40 $ .34
Cumulative effect of accounting change - -
------- --------
$ .40 $ .34
======= ========
(1) At March 31, 2002 and 2001, stock options and forward contracts to
purchase Avon common stock totaling 0.3 million shares and 3.4 million
shares, respectively, are not included in the earnings per share
calculation since their impact is anti-dilutive.
Avon purchased approximately 1,100,000 shares of Avon common stock for
$57.4 during the first three months of 2002, as compared to approximately
993,000 shares of Avon common stock for $41.6 during the first three months of
2001, under a previously announced share repurchase program. At March 31, 2002,
51,867 shares repurchased for $2.9 were not settled until April 2002 and were
included in Other accrued liabilities on the Consolidated Balance Sheet.
10
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
4. INVENTORIES
March 31 December 31
2002 2001
------ ------
Raw materials................ $172.1 $167.0
Finished goods............... 500.4 445.5
------ ------
$672.5 $612.5
====== ======
5. DIVIDENDS
Cash dividends paid per share of common stock were $.20 for the three
months ended March 31, 2002 and $.19 for the corresponding 2001 period. On
January 31, 2002, Avon increased the annualized dividend rate to $.80 from
$.76.
6. CONTINGENCIES
Avon is a defendant in a class action suit commenced in 1991 on behalf of
certain classes of holders of Avon's Preferred Equity-Redemption Cumulative
Stock ("PERCS"). Plaintiffs allege various contract and securities law claims
related to the PERCS (which were fully redeemed in 1991) and seek aggregate
damages of approximately $145.0, plus interest. A trial of this action took
place in the United States District Court for the Southern District of New York
and concluded in November 2001. At the conclusion of the trial, the judge
reserved decision in the matter. Avon believes it presented meritorious
defenses to the claims asserted. However, it is not possible to predict the
outcome of litigation and it is reasonably possible that the trial, and any
possible appeal, could be decided unfavorably. Management is unable to make a
meaningful estimate of the amount or range of loss that could result from an
unfavorable outcome but, under some of the damage theories presented, an
adverse award could be material to the Consolidated Financial Statements.
Avon is a defendant in an action commenced in the Supreme Court of the
State of New York by Sheldon Solow d/b/a Solow Building Company, the landlord
of the Company's former headquarters in New York City. Plaintiff seeks
aggregate damages of approximately $80.0, plus interest, for the Company's
alleged failure to restore the leasehold premises at the conclusion of the
lease term in 1997. A trial of this matter had been scheduled for February
2002, but has been stayed pending the determination of (i) an interlocutory
appeal by plaintiff of an order that denied the plaintiff's motion for summary
judgment and granted partial summary judgment in favor of the Company on one of
the plaintiff's claims; and (ii) an appeal by plaintiff of a decision in an
action against another former tenant that dismissed plaintiff's claims after
trial. While it is not possible to predict the outcome of litigation,
management believes that there are meritorious defenses to the claims asserted
and that this action should not have a material adverse effect on the
Consolidated Financial Statements. This action is being vigorously contested.
Various other 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 the opinion of Avon's management, based
on its review of the information available at this time, the total cost of
resolving such other contingencies at March 31, 2002 should not have a material
adverse effect on the Consolidated Financial Statements.
11
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
7. COMPREHENSIVE INCOME
For the three months ended March 31, 2002 and 2001, the components of
comprehensive income are as follows:
2002 2001
------ ------
Net income $ 96.3 $ 81.7
Other comprehensive loss:
Foreign currency translation and
transaction adjustments (29.2) (17.0)
Unrealized loss from available-for-sale
securities (.2) (2.6)
Net derivative gains (losses) on cash
flow hedges .5 (1.4)
------ ------
Comprehensive income $ 67.4 $ 60.7
====== ======
Cash flow hedges impacted other comprehensive loss as follows for the three
months ended March 31:
2002 2001
------ ------
Cumulative effect of accounting change $ - $(3.9)
Net (losses) gains on derivative instruments (1.5) .5
Reclassification of losses to earnings 2.0 2.0
------ ------
Net increase (decrease) to other
comprehensive loss $ .5 $(1.4)
====== ======
8. SPECIAL AND NON-RECURRING CHARGES
In May 2001, Avon announced its new Business Transformation plans, which
are designed to significantly reduce costs and expand profit margins, while
continuing to focus on consumer growth strategies. Business Transformation
initiatives include an end-to-end evaluation of business processes in key
operating areas, with target completion dates through 2004. Specifically, the
initiatives focus on simplifying Avon's marketing processes, driving supply
chain opportunities, strengthening Avon's sales model through the Sales
Leadership program and the Internet, and streamlining the Company's
organizational structure.
In the fourth quarter of 2001, Avon recorded special and non-recurring
charges of $97.4 pretax ($68.3 after-tax, or $.28 per share on a diluted basis)
primarily associated with facility rationalizations and workforce reduction
programs related to implementation of certain Business Transformation
initiatives. The $97.4 was included in the Consolidated Statement of Income for
2001 as a Special charge ($94.9) and as inventory write-downs, which were
included in Cost of sales ($2.5).
Special and non-recurring charges by business segment were as follows:
Corporate
North Latin and
America* U.S. America Europe Other Total
-------- --- ------- ------ ----- ---------
Facility
rationalizations** $ 16.8 $14.3 $ 17.7 $ 13.2 $ - $ 62.0
Workforce reduction
programs .9 9.7 6.4 2.1 14.0 33.1
Other - 2.1 - - .2 2.3
------- ----- ------- ------- ------ -------
Total accrued charge $ 17.7 $26.1 $ 24.1 $ 15.3 $ 14.2 $ 97.4
======= ===== ======= ======= ====== =======
*Excludes amounts related to the U.S.
**Includes accrued severance and related costs associated with facility
rationalizations.
12
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
Special and non-recurring charges by category of expenditures were as
follows:
Accrued
Facility
Accrued Rational-
Severance Asset ization
and Cost of Impair- Special Contract and
Related Sales ment Termination Termination Other
Costs Charge Charge Benefits Costs Costs Total
--------- ------- ------- ----------- ----------- --------- -----
Facility
rationalizations $ 42.9 $ 2.5 $ 5.1 $ 5.0 $ 2.2 $ 4.3 $ 62.0
Workforce
reduction programs 26.9 - - 6.2 - - 33.1
Other - - .3 - 1.3 .7 2.3
------ ------ ------ ------ ------ ------ ------
Total accrued charge $ 69.8 $ 2.5 $ 5.4 $ 11.2 $ 3.5 $ 5.0 $ 97.4
====== ====== ====== ====== ====== ====== ======
Accrued severance and related costs are expenses, both domestic and
international, associated with facility rationalizations and workforce
reduction programs. Employee severance costs were accounted for in accordance
with the Company's existing FAS No. 112, "Employers' Accounting for Post
employment Benefits," severance plans, or with other accounting literature.
Approximately 3,500 employees, or 8.0% of the total workforce, will receive
severance benefits. As of March 31, 2002, approximately 225 of these employees
were receiving severance benefits. The facility rationalizations will primarily
result in either expanding an existing facility, building a new facility or
sourcing product through third party vendors. In certain circumstances,
employees terminated due to facility rationalizations will need to be replaced.
The majority of the employee severance costs will be paid in 2002 and 2003 in
accordance with the original plan.
The Cost of sales charge represents losses associated with a facility
closure in Puerto Rico.
Primarily as a result of facility rationalizations, management identified
indicators of possible impairment of certain long-lived assets, consisting of
buildings and improvements, equipment and other assets. In assessing and
measuring impairment of long-lived assets, the Company applied the provisions
of FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". Recoverability of assets to be held and
used was measured by the comparison of the carrying amount of the assets with
expected future cash flows of the assets (assets were grouped at the lowest
level for which there were identifiable cash flows that were largely
independent of the cash flows of other groups of assets). As a result of the
impairment review, an asset impairment charge was recorded. Approximately $4.0
of the asset impairment charge relates to the closure of a facility in Puerto
Rico and reflects the reduction in the carrying value of equipment to its
estimated fair market value based on selling prices for comparable equipment.
The equipment is expected to be sold in the first half of 2002. The remaining
charge relates to assets (leasehold improvements and other assets) that have
been abandoned.
Special termination benefits represent the impact of employee terminations
on the Company's benefit plans in the U.S. and certain
13
international locations. In accordance with FAS No. 88, "Employers' Accounting
for Settlements and Curtailment of Defined Benefit Pension Plans and for
Termination Benefits," the plans experienced a net loss from curtailment and
special termination benefits of $1.3 and $9.9, respectively. The curtailment
charge reflects the difference between the liabilities assuming all of the
participants terminate as of their severance date versus the ongoing liability
for these participants assuming continued active employment. The special
termination benefits include a loss resulting from an increase in a liability
due to additional service and pay earned during the severance period, coupled
with an additional liability attributable to paying benefits at an actual rate
versus an assumed rate.
Contract termination costs primarily represent lease buyout costs related
to the facility closures in North America (including the U.S.) and a
cancellation of a contract with a third party (a supplier of warehousing and
logistical services) in the U.S.
Accrued facility rationalization and other costs primarily represent
incremental costs associated with the facility rationalizations, including
administrative expenses during the shutdown period, employee and union
communication costs and legal fees.
The liability balance at March 31, 2002 was as follows:
Accrued
Facility
Accrued Rational-
Severance Asset ization
and Cost of Impair- Special Contract and
Related Sales ment Termination Termination Other
Costs Charge Charge Benefits Costs Costs Total
--------- ------- ------- ----------- ----------- --------- -----
Balance at
December 31, 2001 $ 67.1 $ - $ - $ - $ 3.5 $ 4.5 $ 75.1
Cash expenditures (5.5) - - - (1.4) (.1) (7.0)
------- ----- ----- ------- ------ ------ ------
$ 61.6 $ - $ - $ - $ 2.1 $ 4.4 $ 68.1
======= ===== ===== ======= ====== ====== ======
9. ASSET IMPAIRMENT CHARGE
In the first quarter of 1999, Avon originally recorded a Special charge of
$151.2 pre-tax, which included the write off of $14.8 in pre-tax costs ($10.0
after tax) associated with portions 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
14
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 Introductory Note - Restatements and Note 2 of the Notes to
Consolidated Financial Statements, "Restatements".
10. SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is as follows:
Three Months Ended March 31,
-------------------------------------------
2002 2001
-------------------- -------------------
Net Operating Net Operating
Sales Profit Sales Profit
-------- -------- -------- --------
North America:
U.S. $ 496.6 $ 93.0 $ 461.0 $ 82.4
U.S. Retail* 1.8 (7.0) 2.2 (3.7)
Other** 52.8 6.2 54.3 6.0
-------- -------- -------- --------
Total 551.2 92.2 517.5 84.7
-------- -------- -------- --------
International:
Latin America North*** 227.8 45.7 216.3 47.6
Latin America South*** 172.0 19.8 213.0 30.6
-------- -------- -------- --------
Latin America 399.8 65.5 429.3 78.2
Pacific 181.0 22.5 181.9 20.7
Europe 240.1 31.9 219.5 26.9
-------- -------- -------- --------
Total International 820.9 119.9 830.7 125.8
-------- -------- -------- --------
Total from operations $1,372.1 $ 212.1 $1,348.2 $ 210.5
Global expenses - (57.8) (1.8) (64.7)
-------- -------- -------- --------
Total $1,372.1 $ 154.3 $1,346.4 $ 145.8
======== ======== ======== ========
*Includes U.S. Retail and Avon Center.
**Includes Canada and Puerto Rico.
***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. Avon's operations in Mexico reported net sales for
2002 and 2001 of $154.7 and $139.9, respectively, and operating profit for 2002
and 2001 of $30.0 and $30.7, respectively.
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, for the three months ended March 31:
2002 2001
-------- --------
Beauty* $ 884.7 $ 864.5
Beauty Plus** 280.7 284.8
Beyond Beauty*** 206.7 197.1
-------- --------
Total net sales $1,372.1 $1,346.4
======== ========
*Beauty includes cosmetics, fragrance and toiletries.
**Beauty Plus includes fashion jewelry, watches and apparel and accessories.
***Beyond Beauty includes home products, gift and decorative, and candles.
Sales from Health and Wellness products are divided among the three categories
based on product segmentations.
11. Financial Instruments
In February 2002, Avon entered into an interest rate swap contract with a
notional amount of $100.0 to convert fixed interest on its $100.0, 6.55% Notes
payable due 2007 to a variable interest rate based on LIBOR. The contract
expires in August 2007.
In April 2002, Avon terminated an interest rate swap contract with a
notional amount of $50.0. At inception, the swap was designated as a hedge of a
portion of Avon's $100.0, 6.25% Bonds due 2018 and, accordingly, both the
interest rate swap and underlying debt were adjusted to reflect their fair
values at termination. Effective with the termination of the swap, the fair
value adjustment to the underlying debt is being amortized over the remaining
term.
At March 31, 2002, Avon has forward contracts to purchase approximately
271,000 shares of Avon Common Stock at an average price of $46.11 per share.
Under the contracts, Avon can choose physical, net-share or net-cash
settlement. The maximum number of shares that could be required to be issued to
net share settle the contract is 50.0 million. The contracts mature in October
2002 and were recorded as equity instruments. As equity instruments, no
adjustments for changes in fair value were recognized.
12. Subsequent Event
On May 2, 2002, Avon declared a quarterly dividend on its common stock of
$.20 per share, payable June 1, 2002, to shareholders of record on May 16,
2002.
16
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
RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 2002 AND 2001.
Consolidated
Favorable
(Unfavorable)
%/Point
2002 2001 Change
-------- -------- -----------
Net sales $1,372.1 $1,346.4 2%
Total revenue 1,383.6 1,357.0 2%
Marketing, distribution and
administrative expenses 710.8 698.7 2%
Operating profit 154.3 145.8 6%
Interest expense 13.4 19.7 (32)%
Interest income (4.5) (2.0) -
Other (income) expense, net (4.1) 1.6 -
Net income 96.3 81.7 18%
Diluted earnings per share .40 .34 18%
Gross margin 62.5% 62.2% .3
Operating expense ratio 51.4% 51.5% .1
Operating margin 11.2% 10.7% .4
Effective tax rate 34.8% 35.2% .4
Net sales growth was driven by an increase in both units and the number of
active Representatives, with increases in North America and Europe. Net sales
declined in Latin America and remained flat in the Pacific due to the negative
impact of foreign exchange. Excluding the impact of foreign currency exchange
consolidated Net sales increased 8% with increases in all regions.
Gross margin increased due to improvements in North America and Latin
America, partially offset by declines in Europe and the Pacific regions.
Marketing, distribution and administrative expenses increased as
additional investments were made in consumer-related initiatives such as
additional advertising and brochure enhancements. Operating expenses decreased
as a percentage of Total revenue primarily due to lower expense ratios in
Europe and the Pacific, partially offset by a higher expense ratio in Latin
America. The expense ratio in North America was flat.
Interest expense decreased $6.3 primarily as a result of lower interest
rates on Avon's debt.
Interest income increased $2.5 primarily due to interest earned on higher
cash and cash equivalent balances in 2002.
Other (income) expense, net was favorable by $5.7 mainly due to foreign
exchange gains of $11.3 on a U.S. dollar denominated intercompany loan
receivable in Argentina peso in 2002, partially offset by foreign exchange
losses (Argentine peso and Mexican peso) in 2002.
17
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
The effective tax rate decreased due to the favorable impact of
repatriation planning and changes in the earnings mix and tax rates of
international subsidiaries.
Segment Review
North America
%/Point
2002 2001 Change
------ ------ ------
Net sales $551.2 $517.5 7%
Operating profit 92.2 84.7 9%
Operating margin 16.5% 16.2% .3
Net sales increased due to 5% growth in units and 2% increase in the
number of active Representatives. The U.S business, which represents
approximately 90% of the North American segment, reported a sales increase of
8% resulting from a 5% increase in units and a 3% increase in the average
number of active Representatives. These increases were driven by the expansion
of the Sales Leadership program and the success of the Health and Wellness
product line as well as new product launches, including Peony Soft Musk and
Anew Biologie.
Operating profit and operating margin increased in North America primarily
due to improvements in the U.S. (U.S. operating margin improved 0.8 points),
partially offset by expenses associated with the U.S. Retail business.
o The U.S. operating margin improvement was primarily attributable to
the sales increase discussed above, expense savings associated with
Business Transformation projects and gross margin expansion (mainly
due to favorable product mix and supply chain savings), partially
offset by incremental consumer-related investments such as brochure
enhancements.
Europe
%/Point
2002 2001 Change
------ ------ ------
Net sales $240.1 $219.5 9%
Operating profit 31.9 26.9 18%
Operating margin 13.2% 12.2% 1.0
Net sales increased 9% in U.S. dollars and 14% in local currency driven by
a 17% increase in units and an 18% increase in the number of active
Representatives. The sales increase reflects sales growth of approximately 40%
in the markets in Central and Eastern Europe, with Russia increasing by 75%,
partially offset by sales declines in most Western European markets, excluding
the United Kingdom.
o In Russia, units increased significantly as a result of more
competitive pricing and advertising. There was also an increase in
average Representatives due to enhanced training programs.
o In the United Kingdom, units increased as a result of increased
spending for consumer motivation and new product launches.
o Sales declines in most West European markets were primarily the
result of a weak economic environment.
The increase in operating profit and operating margin was primarily due to
improvements in Central and Eastern Europe and the United Kingdom, partially
offset by declines in most Western European markets.
18
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
o In Central and Eastern Europe, operating margin improved due to
significant sales growth as well as the leveraging of
operating expenses as these markets achieve scale.
o In the United Kingdom, operating margin was favorably impacted by
mid-single digit sales growth, product mix and tight expense
controls, partially offset by incremental spending on brochure
enhancements and expenses associated with Business Transformation
projects.
o In Western Europe, operating margin declined as a result of lower
sales.
Latin America
%/Point
2002 2001 Change
------ ------ ------
Net sales $399.8 $429.3 (7)%
Operating profit 65.5 78.2 (16)%
Operating margin 16.4% 18.2% (1.8)
Net sales decreased 7% resulting from declines in Argentina and Venezuela,
partially offset by growth in Mexico and Brazil. Net sales in local currency
increased 6% due to a 6% increase in units and a 7% increase in active
Representatives.
o Argentina's net sales were negatively impacted by that country's unstable
economic situation and the devaluation of the Argentine peso. Local
management has taken numerous actions to counter the challenges presented
by this current crisis. While it is difficult to predict the impact the
economic situation will have on future results, management currently
expects U.S. dollar sales and profit for Avon Argentina in 2002 to be
significantly lower than in 2001.
o Venezuela's U.S. dollar sales were negatively impacted by the devaluation
of the Bolivar resulting from the political turmoil in that country.
Excluding the impact of exchange, net sales in Venezuela increased due to
growth in units resulting from new product launches and consumer
promotions.
o Mexico's net sales benefited from the strength of the Health and Wellness
line and new product launches.
o Brazil's performance reflects an increase in active Representatives, due
to the continued roll out of the Sales Leadership program, as well as
successful product launches.
The decrease in operating profit and operating margin resulted from
declines in Mexico and Argentina, partially offset by improvements in Brazil
and Venezuela.
o In Mexico, operating margin was negatively impacted by a new luxury tax
imposed at the beginning of 2002, which could not be recovered through
pricing during the first quarter of 2002 as the brochures were already
printed, and accelerated depreciation associated with the Business
Transformation initiative to transition to a new distribution facility in
Celaya. Avon expects to recover the luxury tax through higher pricing in
the remainder of 2002. The decrease in operating margin was partially
offset by gross margin improvement due to favorable product mix.
19
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
o In Argentina, operating margin decreased primarily due to lower sales,
unfavorable product mix and an increase in the cost of imported supplies
resulting from the devaluation of the Argentine peso.
o In Brazil, operating margin improved as a result of an increase in sales,
expense management and supply chain savings, partially offset by
incremental consumer-related investments.
o In Venezuela, operating margin increased mainly due to gross margin
expansion driven by favorable product mix.
Pacific
%/Point
2002 2001 Change
------ ------ ------
Net sales $181.0 $181.9 -%
Operating profit 22.5 20.7 9%
Operating margin 12.2% 11.2% 1.0
Net sales were flat in U.S. dollars resulting from decreases in Japan and
the Philippines, offset by an increase in China. Net sales in local currencies
increased 6%, reflecting an 11% increase in units and a 4% increase in active
Representatives.
o Japan's net sales were negatively impacted by foreign exchange and a weak
economic environment.
o The Philippine's net sales were negatively impacted by foreign exchange.
Excluding foreign exchange, net sales increased slightly despite consumer
softness brought on by political unrest and economic uncertainty in that
market.
o China's sales growth is primarily attributable to an increase in the
number of Avon beauty boutiques in that country.
The increase in operating margin was primarily due to improvements in
China and Japan, partially offset by a decline in the Philippines.
o China's operating margin improvement resulted from an increase in sales,
product sourcing benefits and a reduction in tariffs on imported
ingredients, partially offset by incremental advertising expenses.
o Japan's operating margin was impacted by gross margin expansion due to
favorable product mix.
o The Philippine's operating margin decreased as a result of unfavorable
product mix, higher bad debt expense and incremental spending on
advertising and brochure pages.
Global Expenses
Global expenses decreased 11% primarily due to lower departmental expenses
as well as lower cash bonus accruals resulting from plans to pay a portion of
2002 bonuses in stock options instead of cash.
LIQUIDITY AND CAPITAL RESOURCES
Avon's principal sources of funds historically have been cash flows from
operations, commercial paper, borrowings under uncommitted lines of credit and
long-term borrowings.
Cash Flows
Net cash used in operating activities was $125.6 unfavorable principally
reflecting the receipt of an income tax refund of $95.2 in 2001, a tax payment
of $20.0 in 2002 deferred from 2001 and to a lesser extent, inventory
20
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
investments in anticipation of higher sales growth, other cash outlays for
severance payments and the timing of certain cash payments.
Excluding changes in debt, cash and cash equivalents decreased $151.9 in
the first quarter of 2002, compared to a decrease of $47.9 in first quarter of
2001. The higher use of cash in 2002 resulted primarily from higher cash used
in operating activities, discussed above, and higher repurchases of common
stock, partially offset by an increase in cash received from the exercise of
stock options.
Avon purchased approximately 1,100,000 shares of Avon common stock for $57.3
during the first quarter of 2001, compared with $41.6 spent for the repurchase
of approximately 993,000 shares during the first quarter of 2001.
Capital Resources
Total debt at March 31, 2002 decreased $11.5 to $1,313.6 from $1,325.1 at
December 31, 2001, principally due to an adjustment of $10.6 to reflect the
fair value of outstanding interest rate swaps. Total debt at March 31, 2002
increased $49.2 from $1,264.4 at March 31, 2001, primarily due to the issuance
of Japanese yen denominated notes payable in September 2001 and amortization of
the discount on Avon's outstanding convertible notes.
At March 31, 2002, there were no borrowings under a $600.00 revolving
credit and competitive advance facility (the "credit facility"). This credit
facility is also used to support Avon's commercial paper facility, under which
no amounts were outstanding at March 31, 2001.
At March 31, 2002, there was $6.0 outstanding under uncommitted lines of
credit.
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.
Financial Instruments and Risk Management Strategies
Interest Rate Risk
In February 2002, Avon entered into an interest rate swap contract with a
notional amount of $100.0 to convert fixed interest on its $100.0, 6.55% Notes
payable due 2007 to a variable interest rate based on LIBOR. The contract
expires in August 2007.
In April 2002, Avon terminated an interest rate swap contract with a
notional amount of $50.0. At inception, the swap was designated as a hedge of a
portion of Avon's $100.0, 6.25% Bonds due 2018 and accordingly both the
interest rate swap and underlying debt were adjusted to reflect their fair
values at termination. Effective with the termination of the swap, the fair
value adjustment to the underlying debt is being amortized over the remaining
term.
21
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
Foreign Currency Risk
At March 31, 2002, Avon held foreign currency forward and option contracts
to buy and sell foreign currencies, including cross-currency contracts to sell
one foreign currency for another, with notional amounts in U.S. dollars as
follows:
Buy Sell
------ ------
Brazilian real $ - $ 20.0
British pound 36.4 11.8
Canadian dollar - 31.2
Czech koruna - 25.7
Euro 79.3 41.4
Japanese yen 12.6 34.1
Mexican peso - 47.5
Polish zloty 14.0 8.5
Taiwanese dollar - 8.0
Other currencies 1.2 13.5
------ ------
Total $143.5 $241.7
====== ======
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
22
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.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk from the information
provided in Item 7A, Quantitative and Qualitative Disclosures About Market
Risk, of the Company's 2001 Form 10-K/A.
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 of the Notes to Consolidated Financial Statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
There are no exhibits.
(b) Reports on Form 8-K.
There were no reports on Form 8-K in the first quarter of 2002.
23
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.
24