FORM 10-Q
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 September 30, 1997March 31, 1998
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)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)
The number of shares of Common Stock (par value $.25) outstanding at
October 31, 1997 was 132,007,706
2
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, 1998 was 131,740,152.
2
Table of Contents
Part I. Financial Information
Page
Numbers
-------
Item 1. Financial Statements
Consolidated Statement of IncomeOperations
Three Months Ended September 30, 1997March 31, 1998 and
September 30, 1996....................................March 31, 1997........................................ 3
Nine Months Ended September 30, 1997 and
September 30, 1996.................................... 4
Consolidated Balance Sheet
September 30, 1997March 31, 1998 and December 31, 1996................ 51997.................... 4
Consolidated Statement of Cash Flows
NineThree Months Ended September 30, 1997March 31, 1998 and
September 30, 1996.................................... 6March 31, 1997........................................ 5
Notes to Consolidated Financial Statements................ 7-96-11
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition............. 10-1912-20
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders....... 21
Item 6. Exhibits and Reports on Form 8-K.......................... 2022
Signatures......................................................... 2123
2
3
PART I. FINANCIAL INFORMATION
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF INCOMEOPERATIONS
(In millions, except per share data)
Three months ended
September 30March 31
------------------
1998 1997 1996
---- ----
(unaudited)
Net sales........................................... $1,249.4 $1,177.3$1,183.4 $1,087.6
Costs, expenses and other:
Cost of sales....................................... 517.2 474.8503.1 441.6
Marketing, distribution and
administrative expenses........................... 614.7 597.6626.1 572.9
Special charge...................................... 70.5 -
Interest expense.................................... 11.2 10.99.5 9.6
Interest income..................................... (2.4) (3.3)(2.3) (2.3)
Other expense, (income), net........................ .8 (1.6)net.................................. 3.1 2.8
-------- --------
Total costs, expenses and other..................... 1,141.5 1,078.41,210.0 1,024.6
-------- --------
Income(Loss) income before taxes and minority interest........... 107.9 98.9interest.... (26.6) 63.0
Income taxes........................................ 39.9 36.16.1 23.3
-------- --------
Income(Loss) income before minority interest..................... 68.0 62.8interest.............. (32.7) 39.7
Minority interest................................... .6 (.3)1.7 1.6
-------- --------
Net income..........................................(loss) income................................... $ 68.6(31.0) $ 62.541.3
======== ========
Income(Loss) earnings per share....................................share:
Basic ........................................... $ .52(.24) $ .47.31
======== ========
Average shares outstanding.......................... 132.29 132.93Diluted.......................................... $ (.24) $ .31
======== ========
The accompanying notes are an integral part of these statements.
3
4
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF INCOMEBALANCE SHEET
(In millions, except per share data)
Nine months ended
September 30
-----------------millions)
March 31 December 31
1998 1997 1996
---- ----
(unaudited)
Net sales........................................... $3,562.0 $3,322.1
Costs,ASSETS
Current assets:
Cash and equivalents............................. $ 84.8 $ 141.9
Accounts receivable.............................. 478.0 444.8
Inventories...................................... 598.5 564.8
Prepaid expenses and other:
Cost of sales....................................... 1,434.9 1,313.5
Marketing, distributionother....................... 210.4 192.5
-------- --------
Total current assets............................. 1,371.7 1,344.0
-------- --------
Property, plant and administrative expenses........................... 1,779.5 1,684.6
Interest expense.................................... 31.6 30.9
Interest income..................................... (7.8) (10.9)equipment, at cost............. 1,298.6 1,281.6
Less accumulated depreciation.................... 694.2 670.6
-------- --------
604.4 611.0
-------- --------
Other expense, net.................................. 2.4 6.6
------- -------assets..................................... 331.5 317.9
-------- --------
Total costs, expenses and other..................... 3,240.6 3,024.7
------- -------
Income before taxes and minority interest........... 321.4 297.4
Income taxes........................................ 118.9 111.5
------- ------
Income before minority interest..................... 202.5 185.9
Minority interest................................... 2.6 -
-------- -------
Net income.......................................... $ 205.1 $ 185.9assets..................................... $2,307.6 $2,272.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year.................... $ 201.1 $ 132.1
Accounts payable................................. 382.0 476.0
Accrued compensation............................. 114.6 111.3
Other accrued liabilities........................ 339.5 268.9
Sales and other taxes............................ 94.4 101.0
Income per share.................................... $ 1.55 $ 1.39
======== ========
Average shares outstanding.......................... 132.47 133.91taxes..................................... 252.2 266.6
-------- --------
Total current liabilities........................ 1,383.8 1,355.9
-------- --------
Long-term debt................................... 201.7 102.2
Employee benefit plans........................... 373.2 367.6
Deferred income taxes............................ 28.9 31.2
Other liabilities................................ 129.0 131.0
Shareholders' equity:
Common stock..................................... 43.8 43.7
Additional paid-in capital....................... 743.1 733.1
Retained earnings................................ 585.1 660.9
Accumulated comprehensive income................. (274.2) (270.3)
Treasury stock, at cost.......................... (906.8) (882.4)
-------- --------
Total shareholders' equity....................... 191.0 285.0
-------- --------
Total liabilities and shareholders' equity....... $2,307.6 $2,272.9
======== ========
The accompanying notes are an integral part of these statements.
4
5
AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETSTATEMENT OF CASH FLOWS
(In millions)
September 30 DecemberThree months ended
March 31
------------------
1998 1997 1996
---- ----
(unaudited)
ASSETS
Current assets:
Cash flows from operating activities:
Net (loss) income....................................... $(31.0) $ 41.3
Adjustments to reconcile net (loss) income to net cash
used by operating activities:
Special and equivalents............................. $ 85.7 $ 184.5non-recurring charges....................... 100.3 --
Depreciation and amortization........................... 16.5 16.3
Provision for doubtful accounts......................... 24.8 16.8
Translation gains....................................... (.5) --
Deferred income taxes................................... (5.3) (4.5)
Other................................................... 1.4 3.3
Changes in assets and liabilities:
Accounts receivable.............................. 499.0 437.0
Inventories...................................... 656.7 530.0receivable................................... (62.2) (18.1)
Inventories........................................... (73.9) (51.1)
Prepaid expenses and other....................... 223.7 198.1
-------- ---------
Total current assets............................. 1,465.1 1,349.6
-------- ---------
Property, plantother............................ (14.7) (10.8)
Accounts payable and equipment, at cost........... 1,271.7 1,224.9
Less accumulated depreciation.................... 665.0 658.3
-------- ---------
606.7 566.6
-------- ---------
Other assets..................................... 334.3 306.2
-------- ---------
Total assets..................................... $2,406.1 $2,222.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year.................... $ 357.2 $ 97.1
Accounts payable................................. 390.9 469.3
Accrued compensation............................. 114.9 142.4
Other accrued liabilities........................ 272.4 238.7
Salesliabilities.............. (66.3) (155.1)
Income and other taxes............................ 120.8 124.6
Income taxes..................................... 299.6 319.2
-------- -------
Total current liabilities........................ 1,555.8 1,391.3
-------- -------
Long-term debt................................... 103.2 104.5
Employee benefit plans........................... 354.7 384.8
Deferred income taxes............................ 32.1 33.9taxes................................ (19.5) (20.1)
Noncurrent assets and liabilities..................... (4.5) (4.6)
------ ------
Net cash used by operating activities................... (134.9) (186.6)
------ ------
Cash flows from investing activities:
Capital expenditures.................................... (26.5) (24.6)
Disposal of assets...................................... 1.1 1.1
Other liabilities................................ 133.3 66.2
Shareholders' equity:
Common stock..................................... 43.7 43.5
Additional paid-in capital....................... 722.1 693.6
Retained earnings................................ 568.7 488.8
Translation adjustments.......................... (245.7) (210.7)
Treasuryinvesting activities.............................. (.2) (10.4)
------ ------
Net cash used by investing activities................... (25.6) (33.9)
------ ------
Cash flows from financing activities:
Cash dividends.......................................... (46.3) (41.9)
Debt, net (maturities of three months or less).......... 132.7 203.9
Proceeds from short-term debt........................... 39.8 12.9
Retirement of short-term debt........................... (3.8) (1.0)
Retirement of long-term debt............................ (.1) (.2)
Repurchase of common stock.............................. (24.8) (30.2)
Proceeds from exercise of stock at cost.......................... (861.8) (773.5)
-------- -------
Total shareholders' equity....................... 227.0 241.7
-------- -------
Total liabilitiesoptions................. 8.2 5.6
------ ------
Net cash provided by financing activities............... 105.7 149.1
------ ------
Effect of exchange rate changes on cash and shareholders' equity....... $2,406.1 $2,222.4
======== ========equivalents. (2.3) (7.1)
------ ------
Net decrease in cash and equivalents.................... (57.1) (78.5)
Cash and equivalents beginning of period................ 141.9 184.5
------ ------
Cash and equivalents end of period...................... $ 84.8 $106.0
====== ======
The accompanying notes are an integral part of these statements.
5
6
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Nine months ended
September 30
-----------------
1997 1996
---- ----
(unaudited)
Cash flows from operating activities:
Net income.............................................. $ 205.1 $ 185.9
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization........................... 50.8 48.0
Provision for doubtful accounts......................... 58.9 55.0
Translation losses (gains).............................. .3 (1.0)
Deferred income taxes................................... (9.5) (2.5)
Other................................................... 7.9 6.2
Changes in assets and liabilities:
Accounts receivable................................... (139.8) (111.7)
Inventories........................................... (143.8) (148.5)
Prepaid expenses and other............................ (14.6) (23.8)
Accounts payable and accrued liabilities.............. (54.3) (30.6)
Income and other taxes................................ (18.3) (1.1)
Noncurrent assets and liabilities..................... (33.0) (2.6)
------ ------
Net cash used by continuing operations.................. (90.3) (26.7)
Net cash used by discontinued operations................ - (37.2)
------ ------
Net cash used by operating activities................... (90.3) (63.9)
----- ------
Cash flows from investing activities:
Capital expenditures.................................... (111.0) (62.6)
Disposal of assets...................................... 2.8 3.2
Other investing activities.............................. (8.6) (6.3)
------ ------
Net cash used by investing activities................... (116.8) (65.7)
------ ------
Cash flows from financing activities:
Cash dividends.......................................... (126.6) (119.2)
Debt, net (maturities of three months or less).......... 162.9 292.0
Proceeds from short-term debt........................... 13.6 10.9
Retirement of short-term debt........................... (14.0) (10.0)
Proceeds from long-term debt............................ 100.0 -
Retirement of long-term debt............................ (.6) (.9)
Repurchase of common stock.............................. (90.0) (124.4)
Proceeds from exercise of stock options................. 19.6 6.1
Other financing activities.............................. 58.6 -
------ ------
Net cash provided by financing activities............... 123.5 54.5
------ ------
Effect of exchange rate changes on cash and equivalents. (15.2) (8.9)
------ ------
Net decrease in cash and equivalents.................... (98.8) (84.0)
Cash and equivalents, beginning of period................ 184.5 151.4
------- -----
Cash and equivalents, end of period......................$ 85.7 $ 67.4
======= =======
The accompanying notes are an integral part of these statements.
6
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AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars 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 19961997 Annual Report to Shareholders. The interim statements
are unaudited but include all adjustments, which consisted of only normal
recurring accruals, 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-endyear 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, 1998, the Company adopted Statement of Financial
Accounting Standards ("FAS") No. 130, "Reporting Comprehensive Income." FAS
No. 130 requires disclosure of comprehensive income in interim periods and
additional disclosures of the components of comprehensive income on an annual
basis. Comprehensive income includes all changes in equity during a period
except those resulting from investments by and distributions to the Company's
stockholders. The components of comprehensive income are included in Note 7.
Effective January 1, 1998, the Company adopted AICPA Statement of
Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP No. 98-1 requires certain costs
in connection with developing or obtaining internal-use software to be
capitalized that previously would have been expensed as incurred. The
adoption of SOP No. 98-1 did not have a material impact on the Company's
results of operation, financial position, or cash flows.
2. INFORMATION RELATING TO THE STATEMENT OF CASH FLOWS
"Net cash used by continuing operations"operating activities" includes the following cash
payments for interest and income taxes:
NineThree months ended
September 30
-----------------March 31
------------------
1998 1997 1996
---- ----
Interest............................................ $ 21.39.6 $ 18.73.2
Income taxes, net of refunds received............... 137.0 116.9
During the second quarter of 1997, the Company reached final agreement
with the Internal Revenue Service with respect to its examination of the
Company's income tax returns for the years 1982 through 1989. As anticipated,
payments, including related interest, made under this settlement will
approximate $42.4 of which $12.0 has been paid as of September 30, 1997.
Reserves previously had been provided by the Company related to the agreement.
During the second quarter of 1997, the 170 million 6-1/8% deutsche mark
notes ("Notes") due May 1998 and the related currency exchange contract were
reclassified to short term. The Notes have been effectively converted into
U.S. dollar debt of $100.0 through the use of a currency exchange swap
contract which includes both principal and interest. During the third quarter
of 1997, the Company issued $100.0 of long-term debt and the net proceeds were
used to pay down commercial paper borrowings.
In late September, the Company entered into a securities lending
transaction resulting in the borrowing of securities which were subsequently
sold for net proceeds approximating $58.6 used to repay commercial paper
borrowings. The borrowed securities are due to the lender no later than
December 29, 2000, but at the Company's option can be returned at any time.
The obligation is included in other non-current liabilities on the balance
sheet. The effective interest rate on this transaction is expected to be 6.5%.
28.9 35.1
6
78
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
In May 1998, the Company issued $100.0 of long-term debt and the net
proceeds will be used to pay down commercial paper borrowings. As a result of
the refinancing of commercial paper borrowings with the new long-term debt,
$100.0 of commercial paper borrowings as of March 31, 1998 were reclassified
to long-term debt.
3. INCOMEEARNINGS (LOSS) PER SHARE
IncomeBasic earnings (loss) per share of common stock is based on("EPS") are computed by dividing net
income (loss) by the weighted averageweighted-average number of shares outstanding. The decreaseoutstanding during the
year. Diluted earnings (loss) per share are calculated to give effect to all
potentially dilutive common shares that were outstanding during the year.
For the three months ended March 31, 1998 and 1997, the number of shares
used in the computation of basic and diluted earnings (loss) per share are as
follows:
1998 1997
------ ------
Basic EPS 131.78 132.88
Weighted-average shares
Incremental shares from
conversion of:
Stock options (1) - 1.22
------ ------
Diluted EPS
Adjusted weighted-
average shares outstanding131.78 134.10
====== ======
(1) In 1998, the calculation of EPS assuming dilution is antidilutive and
accordingly, EPS have not been adjusted for the three and nine months ended September 30, 1997 compared to the respective
periodsconversion of 1996 is primarily due to the shares acquired under the stock repurchase programs.options
into additional common shares.
During the first ninethree months of 1997,1998, the Company purchased approximately
1.5 million396,500 shares of common stock for $90.0$24.8 compared to approximately 2.9
million532,500
shares purchased for $124.4$30.2 during the first ninethree months of 1996.1997. As of September 30, 1997,March
31, 1998, the cumulative number of shares repurchased under the three-year
stock repurchase program which ended in February 1997 was approximately
12.7 million12,664,000 shares for a total cost of approximately $424.4. Under a new
repurchase program, which began in February 1997, the Company repurchased
7
8
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
approximately 1.5 million2,235,400 shares at a total cost of approximately $88.5$134.2 as of
September 30, 1997.March 31, 1998. Under this new program, the Company may buy back up to $500.0$500
million of its currently outstanding common stock through open market
purchases over a period of up to three to five years.
Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings Per
Share", was issued in February 1997 and is effective for the Company's
financial statements for the year ending4. INVENTORIES
March 31 December 31
1997. Early adoption is
not permitted. After the effective date, all prior period earnings per share
("EPS") data shall be restated. SFAS No. 128 establishes standards for
computing and presenting EPS and replaces the presentation of previously
disclosed EPS with both basic and diluted EPS. Based upon the Company's
current capitalization structure, the EPS amounts calculated in accordance
with FAS No. 128 are expected to approximate the Company's EPS amounts
computed in accordance with Accounting Principles Board Opinion No. 15,
"Earnings Per Share."
4. INVENTORIES
September 30 December 311998 1997 1996
---- ----
Raw materials................ $161.5 $136.7$165.9 $147.4
Finished goods............... 495.2 393.3432.6 417.4
------ -----
$656.7 $530.0------
$598.5 $564.8
====== ======
8
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AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
5. DIVIDENDS
Cash dividends paid per share of common stock were $.315 and $.945$.34 for the three
and nine months ended September 30, 1997, respectively,March 31, 1998 and $.29 and
$.87$.315 for the corresponding 1996 periods. The1997 period. On
February 17, 1998, the Company increased the annual dividend rate for 1997 is
$1.26 compared to $1.16 for 1996.$1.36
from $1.26.
6. 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.
8
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AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
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). Avon has
rejected the assertions in this case, believes it has meritorious defenses to
the claims and is vigorously contesting this lawsuit.
In the opinion of Avon's management, based on its review of the
information available at this time, the difference, if any, between the total
cost of resolving such contingencies and reserves recorded by Avon at September 30, 1997March
31, 1998 should not have a material adverse impact on Avon's consolidated
financial position, results of operations, or cash flows.
7. COMPREHENSIVE (LOSS) INCOME
For the three-months ended March 31, 1998 and 1997, the components of
comprehensive (loss) income are, as follows:
1998 1997
----- -----
Net (loss) income $(31.0) $41.3
Other comprehensive (loss) income:
Change in equity due to
foreign currency
translation and
transaction adjustments (3.9) (9.8)
----- -----
Comprehensive (loss) income $(34.9) $31.5
===== =====
9
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AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
8. SPECIAL AND NON-RECURRING CHARGES
In October 1997, the Company announced a worldwide re-engineering program
in order to streamline operations and improve profitability, through gross
margin improvement and expense reductions. The one-time charges resulted in a
pretax charge of $108.4 ($84.2 net of tax, or $.64 per share on a basic and
diluted basis) for the three months ended March 31, 1998.
Special and non-recurring charges by category of expenditures are, as
follows:
Special Cost of Sales
Charge Charge Total
------- ------------- -----
Employee severance costs $51.0 $51.0
Inventories $37.9 37.9
Write-down of assets to net
realizable value 10.9 10.9
Other 8.6 8.6
----- ----- -----
$70.5 $37.9 $108.4
===== ===== =====
The write-down of assets relates to the closure of a Far East buying
office and manufacturing facilities in Puerto Rico and the Dominican Republic.
Additionally, as a result of on-going government restrictions, the Company has
decided to close certain branches and a regional office in China.
Inventory-related charges represent losses to write-down the carrying value
of non-strategic inventory, prior to disposal. The charge relates to the
closure of facilities, discontinuation of certain product lines, size-of-line
reductions and a change in strategy for product dispositions.
Employee severance costs are expenses, both domestic and international,
associated with the realignment of the Company's global operations. The
workforce will be reduced by approximately 2,200 employees, or 6% of the
total. Approximately one-half of the employees to be terminated relate to the
facility closures.
The liability balance at March 31, 1998 is as follows:
Special Cost of
Charge Sales Charge Total
Provision $ 70.5 $37.9 $108.4
Cash Expenditures (8.1) (8.1)
Non-cash write-offs (12.4) (37.9) (50.3)
---- ---- ----
Balance at March 31, 1998 $ 50.0 $(50.0)
==== ==== ====
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AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
The remaining balance at March 31, 1998 relates primarily to employee
severance costs that will be paid during 1998 and 1999.
The Company expects to record additional charges in 1998 and early 1999 as
additional plans are finalized.
11
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AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars 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 September 30, 1997March 31, 1998 and 1996.1997.
Consolidated
Avon's net loss for the three months ended March 31, 1998 was $31.0, or
$.24 per share on a basic and diluted basis, compared with net income of
$41.3, or $.31 per share on a basic and diluted basis in 1997. Pretax loss
was $26.6 in 1998 compared with pretax income of $63.0 in 1997. Special and
non-recurring charges were recorded in the first quarter of 1998 for the
Company's previously announced business process redesign program. These
charges totaled $108.4 pretax, which reduced net income by $84.2 after tax, or
$.64 per share on a basic and diluted basis. The special charge of $70.5 is
primarily related to employee severance benefits as well as facility
rationalizations in Puerto Rico, Dominican Republic and China. In addition,
$37.9 was charged to cost of sales for inventory write-downs. The one-time
charges represent the first part of an estimated $200.0 total charge that will
help the Company deliver the higher sales and profit targets previously
communicated. Before the charges, net income for the three months ended September 30, 1997March
31, 1998 of $68.6,$53.2, or $.52$.40 per share on a basic and diluted basis, increased
10% and 11%, respectively,29% from net income of
$62.5, or $.47 per share, in the comparable period of 1996.in 1997. Pretax income, before the charges, of
$107.9$81.8 increased 9%30% over 1997 due to higher sales, and an improved expense ratio. Thesegross margin
and favorable results wereforeign exchange partially offset by a decline in the gross margin,
unfavorable net interest and unfavorable net foreign exchange in 1997. Net
income was also affected by favorable minority interest due mainly to the
results in China and aslightly higher effective tax rate. The higher effective tax
rate (37.0% versus 36.5% in 1996) resulted primarily from the mix of earnings
and tax rates of international subsidiaries.operating
expense ratio.
Consolidated net sales for the three months ended September 30, 1997March 31, 1998 of
$1,249.4$1,183.4 increased $72.1,$95.8, or 6%9%, over the comparable period of the prior year.
The increase in sales was due to an 8%11% increase in international and a 3%5%
increase in U.S. sales which includes the results of Discovery Toys, Inc.U.S sales. The international sales improvement resulted from
strong growth in all major markets in the Americas, most significantly in
Mexico, Brazil and Argentina. Sales continued to grow
significantly inArgentina, as well as the United Kingdom, Russia and Taiwan.Kingdom. These
improvements were partially offset by sales declines in Germanythe Philippines,
Thailand and Brazil.Malaysia. Excluding the effectimpact of foreign currency exchange,
consolidated net sales rose 10%16% over the comparable period of the prior year.
Cost of sales as a percentage of net sales was 41.4%42.5% in the thirdfirst quarter
of 19971998 compared to 40.3%40.6% in the thirdfirst quarter of 1996.1997. Excluding the one-
time charge of $37.9, cost of sales as a percentage of sales was 39.3%. The
declineincrease in the gross margin of 1.3 points, resulted from lowerhigher margins in
Japanall major markets in the Americas, most significantly in Brazil, the latter
due to an aggressive pricing
strategy and in Brazil reflecting a continued consumer shift towards lower-
priced products as well as actions taken to reduce inventory levels. In
addition, the gross marginlevels which had an unfavorable
impact on margins in the U.S. declined due to investments in
strategic pricing initiatives to drive customer sales. These declines were
partially offset by a margin improvement in the United Kingdom due to a shift
in sales mix to higher-margin items.
10
11
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Marketing, distribution and administrative expenses of $614.7 increased
$17.1, or 3%, over the comparable period of 1996, but decreased as a
percentage of sales to 49.2% from 50.8% in 1996. The increase in operating
expenses was primarily in markets which have experienced strong sales growth,
including Mexico, Taiwan, Russia, Argentina and the United Kingdom. These
increases were partially offset by lower expenses in Brazil reflecting reduced
advertising expenses and in Germany and Japan due to the impact of a stronger
U.S. dollar in 1997. The decrease in the expense ratio was due to improvements
throughout Europe due to continued fixed expense reduction efforts, in Mexico
resulting from dramatic sales growth and in Japan due to reduced distribution
expenses and more efficient order entry processes. These improvements were
partially offset by higher expense ratios in Germany reflecting the sales
decline and in Venezuela due to increased marketing and distribution expenses.
Interest expense of $11.2 increased $.3 over the comparable period of
last year primarily due to increased average working capital borrowings in
1997.
Interest income decreased $.9 versus the comparable period of last year
primarily due to lower interest rates in Brazil.
Other (income) expense, net, was $2.4 unfavorable, representing an
expense of $.8 in 1997 compared to income of $1.6 in 1996, primarily due to
unfavorable net foreign exchange.
U.S.
Net sales increased 3% while pretax income declined 8% in the third
quarter of 1997 compared with the third quarter of 1996. Excluding the
results of Discovery Toys, which was acquired in early 1997, sales were up 1%
and pretax income decreased 3%. The 1% sales increase reflected a 4% increase
in the average order size partially offset by a 3% decline in the number of
Representative orders. The sales improvement resulted primarily from growth
in the cosmetics, fragrance and toiletries category ("CFT"), with a
significant increase in personal care products resulting from the introduction
of Avon Techniques, a hair care line, and continued success of the specialty
bath segment. In the non-CFT categories, apparel sales grew due to the success
of children's back to school, novelty apparel and casual clothing lines.
These improvements were almost completely offset by a decline in the gift and
decorative category attributable to the phenomenal success of the 1996 Winter
Velvet Barbie. Pretax income decreased 3%, excluding the results of Discovery
Toys, due primarily to a decline in the gross margin. The gross margin
decline resulted from strategic price investments in CFT products aimed at
energizing customer sales.
11
12
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
International
Net sales increased 8%, or 14% excluding the effect of foreign currency
exchange, over the comparable period of 1996 and pretax income increased 21%.
The sales increase reflects improvements in all regions, primarily in the
Americas. Sales growth in the Americas was driven by significant improvements
in Mexico, strong unit growth in Argentina, and to a lesser extent in ChileMexico and Central America and an increased average order size in Venezuela.
Mexico's continued sales growth reflected double-digit increases in the number
of orders, average order size and active Representatives primarilyArgentina due
to customer growth initiatives. These initiatives included incentive programs
focused on retention, sampling concentrated on breakthrough products,
advertisingincreased cosmetics, fragrance and an emphasis on market penetration in metropolitan areas.
Sales in the Pacific region were up due to strong unit growth in Taiwan,
Australia, and the Philippines. Taiwan'stoiletries ("CFT") sales performance was the strongest
in the region driven by awith higher
number of active Representatives and the
successful launch of Lighten Up Undereye Treatment. The sales improvement inmargins. In Europe, reflected strong growth in the United Kingdom driven by increases in
the average order size and number of orders as well as a favorable exchange
rate impact. In addition, the sales growth in the United Kingdom is
attributable to an ongoing focus on improving market share through brand and
image enhancement. Sales grew in Russia due to exceptional growth in the
number of units and Representatives.
These higher sales were partially offset by declines in Germany and
Brazil and, to a lesser extent in Thailand. The sales decline in Germany
resulted from an unfavorable exchange impact of a stronger U.S. dollar in 1997
and a continued weak economic environment which resulted in lower consumer
spending and higher unemployment. Consumers in Brazil continued to experience
a tightening of credit which has limited their purchasing ability. The sales
decrease in Thailand resulted from unit declines primarily due to a weakening
economic condition. To grow sales, new achievement programs in Brazil and the
party plan concept in Germany were implemented.
The 21% increase in pretax income reflected improvements in Argentina,
Mexico, the United Kingdom and to a lesser extent, the Philippines. The
increase in Argentina was primarily due to the sales growth and an improvement
in the operating expense ratio resulting from lower distribution costs per
order as well as reduced incentive programs in 1997. Higher pretax results in
Mexico, the United Kingdom and Philippines were primarily driven by increased
sales. These favorable results were partially offset by lower pretax income in
Japan due to a significant grossGermany reported strong margin decline resulting from strategic
pricing programs as well a shift in sales mix to lower margin non-CFT items.
The competitive environment remains intense in Japan with the continued
relaxation of import restrictions and the resulting accelerated growth in
discount outlets. As a result, prices were adjusted earlier this year to make
products more competitive in the marketplace. Several new programs were
introduced in 1997 including the multiple order system which allows
Representatives to place orders more frequently. Efforts have also been
focused on improving access, and innovative recruiting programs have been
12
13
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
launchedimprovements primarily as a result of a shift in mix to increase market penetration. Consequently, customers servedselling higher margin
products. The U.S. also reported a favorable gross margin as compared to 1997
which was attributable to pricing strategies and cost improvements. These
improvements were partially offset by margin declines in Japan grew 58%most major markets in
the Pacific, as a result of unfavorable foreign currency impacts.
Marketing, distribution and active Representatives grew 46%administrative expenses of $626.1 increased
$53.2, or 9%, over the comparable period of 1997 and increased as a percentage
of net sales to 52.9% from 52.7%. The increase in operating expenses was
primarily in markets which have experienced strong sales growth, including all
major markets in the prior year. Pretax resultsAmericas, the United Kingdom and the U.S. These
increases were alsopartially offset by lower expenses in Germanythe Pacific primarily due
to lower sales and the impact of currency devaluations. The overall increase
in Chinathe expense ratio was primarily due to higher expense ratios in Mexico due
to increased marketing and promotional expenses associated with new product
launches and in Venezuela due to increased administrative expenses as a current government licensing revalidation
process of all direct selling companies, which has delayed our branch
expansion in China.
Several currencies in the Pacific Rim devalued significantly since the
endresult
of the second quarterimplementation of 1997. The Thailand baht devalueda new labor law. This increase was partially offset
by 28%, the
Philippine peso by 22%improvements throughout Europe and the Malaysian ringgit and Indonesian rupiah each
devalued by 19%. These devaluations lowered pretax income by approximately
$4.0 in the third quarter of 1997. In responseJapan due to this situation, several
actions have been taken by local management including cost negotiations with
vendors, identification of expense reductions and acontinued active focus
on growing the
Representative base. In terms of size, these markets represented approximately
5% of Avon's consolidated net sales in 1996.
Brazil, previously designated as a countryreducing operating expenses.
Interest income and interest expense remained level with a highly inflationary
economy, was converted to non-hyperinflationary status, effective July 1,
1997, due to the reduced cumulative inflation rate over the past three years.
The effect of the change is not considered significant to the Company's
consolidated financial statements.
Results of Operations--Nine Months Ended September 30, 1997 and 1996
Consolidated
Avon's net income for the nine months ended September 30, 1997 of $205.1,
or $1.55 per share, increased 10% and 12%, respectively, compared to net
income of $185.9, or $1.39 per share, in the comparable
period of 1996.
Pretax income1997.
Other expense, net, of $321.4 increased 8%$3.1 was $.3 unfavorable to the comparable period
of last year, primarily due to highernon-recurring corporate expenses partially
offset by favorable foreign currency exchange.
Excluding the charges, the effective tax rate was 37.0% in the first
quarter of 1998 and 1997. The tax benefit on the one-time charges was 22.3%
due to the mix of countries and tax jurisdictions incurring the charges.
U.S.
Net sales an improved expense
ratioincreased 5% and favorable net foreign exchangepretax income decreased 74% compared with the
first quarter of 1997. A 2% increase in 1997. Thesethe average order size along with a
3% increase in the number of active Representatives contributed to the sales
increase. The sales increase resulted from increases werein CFT, fashion jewelry
and accessories, style and home entertainment categories partially offset by a
decline in the gross margingift and unfavorable net interestdecorative category. The increase in 1997. Net income of $205.1the CFT category
was impacted by a lower effective tax rate
(37.0% versus 37.5% in 1996)mainly due primarily to the mix of earnings and tax
rates of international subsidiaries. In addition, the increase in net income
reflects a favorable minority interest impact due mainly to the results in
Japan and China. Income per share of $1.55 was favorably impacted by the
lower average shares outstanding in 1997 compared to 1996 due to continued
stock repurchases.
Consolidated net sales for the nine months ended September 30, 1997 of
$3,562.0 increased $239.9, or 7%, over the comparable periodsuccessful launch of the prior
year. The higherDiane Von Furstenburg
fragrance, Forest Lily, and the Far Away and Rare Gold gift with purchase
event, coupled with the successful launch of Avon's transfer-resistant
technology lipstick and Avon Color's Spring Shade Collection with eye shadow
samples in the brochure. Accessories showed strong performance with the
introduction of licensed Winnie the Pooh carryalls and watches. Higher sales was due to a 10% increase in international and a 2%
increase in U.S. sales which includes the results of Discovery Toys. The
international sales improvement resulted from strong growth in most markets,
most significantly in Mexico, the United Kingdom, Argentina, the Pacific Rim
and Russia. Sales growth in Chile, Venezuela, Central America and Poland also
contributed to the improvement. These improvements were partially offset by
sales declines in Brazil and Germany. Excluding the impact of foreign
13
14
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
currency exchange, consolidated net sales rose 11% overin the comparable period
ofstyle and home entertainment categories were primarily driven by an
increase in the prior year.
Cost of sales as a percentage of sales was 40.3% compared to 39.5% in
1996. The higher cost ratio was primarily due to gross margin declines in
Brazil reflecting actions taken to reduce inventory levels and in Japan due to sales of lower priced itemsdemonstration products purchased by Representatives,
as well as the launch of a collection of inspirational and price reductions taken in the CFT category.
These declines were partially offset by margin improvements in Venezuela and
the United Kingdom due to a shift in sales mix to higher-margin items.
Marketing, distribution and administrative expenses of $1,779.5 increased
$94.9, or 6%, over the comparable period of 1996, but decreased as a
percentage of sales to 50.0% from 50.7% in 1996. The increase in operating
expenses was primarily in markets which have experienced strong sales growth,
including Mexico, the Pacific Rim, the United Kingdom, Venezuela and Russia.religious products.
These increases were partially offset by lower expensesa decline in Germanythe gift and decorative
category primarily attributable to softer Easter and Barbie sales.
Excluding the one-time charges, pretax income increased 11% due to the
impactimproved sales and a favorable gross margin primarily driven by revised
pricing strategies, cost improvements and reduced clearance activity.
International
Net sales increased 11%, or 21% excluding the effect of a stronger U.S. dollar in 1997 as well as a continued focus on fixed
expense reductions. The decrease in the expense ratio was due to improvements
throughout Europe due to ongoing fixed expense reduction efforts and in Mexico
due to dramatic sales growth. These improvements were partially offset by
higher expense ratios in Brazil and Germany due to the sales decline despite
lower expenses discussed above.
Interest expense increased $.7 versusforeign currency
exchange, over the comparable period of 1996
primarily due to higher overall debt levels partially offset by lower interest
rates in Brazil.
Interest1997 and pretax income decreased $3.1 from49%.
Excluding the one-time charges, pretax income increased 44% over the
comparable period of 1996
primarily due to lower interest rates in Brazil.
Other expense, net, of $2.4 was $4.2 favorable to the comparable period
of last year primarily due to net foreign exchange.
U.S.
Net1997.
The sales increased 2% while pretax income decreased 4%increase reflects double-digit growth in the first nine
months of 1997. Excluding the results of Discovery Toys, sales were up 1%Americas and
pretax income was level with the prior year. A 4% increase in the average
order size partially offset by a 3% decrease in the number of Representative
orders resulted in the sales increase. Units sold increased 5%. The sales
improvement resulted from increases in the CFT categoryEurope regions partially offset by declines in the Pacific region. Sales
increases in the Americas were highlighted by significant growth in Brazil,
Argentina and Mexico with these countries showing strong growth in units,
active Representatives and orders. Mexico's sales increases resulted from the
success of new product launches such as Anew Night Force, as well as apparel
and fashion jewelryhome line extensions with superior design and accessory categories. The launch
of Anew Retinol Recovery Complexpromotions. Brazil's growth
in sales was also driven by attractive pricing and Avon Techniques hair care line and the
first quarter 1997successful new product
introductionslaunches. In Europe, sales rose significantly in the specialty bath segment drove
theUnited Kingdom due to
increases in units and orders; however, other major European markets reported
flat sales growth. Total sales for Central Europe and Russia grew 50% versus
1997 with all countries showing strong double-digit growth in the CFT category. In addition,number of
active Representatives, units and orders.
These higher sales were partially offset by sales declines in most major
markets in the launchPacific caused by unfavorable foreign currency translation.
After years of strong economic growth throughout the Pacific, the aftermath of
the renovated Anew
line earlier this year contributedcurrency crisis is causing subdued economic growth as markets struggle to
higher CFTenact economic reform programs. However, most markets, especially the
Philippines, Australia, Taiwan, and to a lesser extent Japan, showed growth in
local currency sales driven by improvements in the number of active
Representatives, orders and customers served. Excluding the effect of foreign
currency exchange, sales in 1997. The decrease
in apparel sales was due to the success of the Olympic games collection inPacific grew 10%.
14
15
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
1996 and lower sales of demonstration products in the first two quarters of
1997. Sales of fashion jewelry and accessories decreased primarily due to
lower first quarter sales which were impacted by the demonstration product
pricing policy change made earlier this year.
Pretax income was level with the comparable period of the prior year
excluding the results of Discovery Toys. The 44% increase in sales was completely
offset by higher expenses and a slight decline in the gross margin. The
higher expense level was primarily driven by strategic investments including
advertising and promotional support for new products, costs associated with
the centralization of the returned goods and call center operations and
increased field incentives designed to drive sales. Discovery Toys had a
negative impact on pretax income due to the seasonal nature of the business.
International
Net sales increased 10% over the comparable period of 1996 and pretax
income increased 14%. The sales increase reflects improvementsincreases in all regions. Sales growthmajor markets
in Europe and the Americas, was highlighted by significant growthmost significantly in Mexico and strong unit increases in Argentina, Chile and Central America.
Sales grew in Venezuela due to a higher average order size in 1997. The sales
increase in the Pacific region was due to strong unit growth in almost every
market in the Pacific Rim, primarily in Taiwan, the Philippines, and China.
An increased average order size and unit growth inGermany, the United Kingdom
and a
dramatic increase in the number of units and active Representatives in Russia
and Poland contributed to the increase in Europe. These improvements were
partially offset by significant declines in Germany due to ongoing economic
weakness and a negative currency impact and in Brazil resulting from a weak
consumer economy. Excluding the impact of foreign currency exchange,
international sales rose 16% over the comparable period of 1996.
The 14% increase in pretax income reflected increases in the Americas and
Europe regions. The most significant contributor in the Americas was Mexico
due to the strong sales improvement. The increase in Europe reflected the
sales increase and improved expense ratios throughout the region due to the
continued effect of fixed expense reduction efforts. Pretax income was higher
in the Philippines due to the sales increase. These favorable results were
partially offset by decreases in Brazil and, to a lesser extent, in Japan.
PretaxArgentina and Mexico. The increase in
pretax income over the prior year is due to the sales increases discussed
above and strong margin improvements in the United Kingdom, Germany and Brazil
as compared to 1997. An improved gross margin due to a change in category mix
towards higher margin products and lower operating expenses due to ongoing
expense reduction programs contributed to the pretax income increases in
Germany and the United Kingdom. Margins improved significantly in Brazil due
to declines in 1997 resulting from actions taken to reduce inventory. Despite
the weak economic conditions in the Pacific, pretax income for the quarter was
slightly favorable as compared to the prior year, due to an improved operating
expense ratio in Japan as a result of cost reduction strategies and business
redesign efforts.
Liquidity and Capital Resources
Cash Flows
Excluding changes in debt, there was a net decrease in cash of $225.7 in
the first quarter of 1998 compared with a decrease of $294.1 in the comparable
period of 1997. The $68.4 variance primarily reflects lower net cash used by
operations and investing activities and a more positive effect of foreign
currency exchange. The decrease in cash used by operations reflects the
conclusion of the three-year long-term incentive plan which resulted in a cash
payment in the first quarter of 1997 and a higher net income in Brazil was affected by a continued tightening1998 (adjusted
for the non-cash portion of the one-time charges). Cash used for investing
activities is lower in consumer
spending and margin investments relating to inventory reduction programs. The
decline in Japan was1998 due to lower sales and a deteriorationthe acquisition of Discovery Toys, Inc. in
the gross
margin resulting from an aggressive pricing strategy.first quarter of 1997.
15
16
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Liquidity and Capital Resources
Cash Flows
Excluding changes in debt, there was a net decrease in cash of $360.7 in
the first nine months of 1997 compared with $376.0 in the comparable period of
1996. As discussed in Note 2, the Company received net proceeds of
approximately $58.6 under a securities lending transaction which was used to
repay commercial paper borrowings and is included in the cash flows as other
financing activities. Excluding debt and the other financing activities,
there was a net increase in cash usage of $43.3. This variance primarily
reflects increased capital expenditures including the relocation of the global
and U.S. office facilities, conclusion of the three-year long-term incentive
plan which resulted in a cash payment duringDuring the first quarter of 1997, as
well as a higher working capital usage level principally due to accounts
payable and accrued expenses. These items were partially offset by the impact
of discontinued operations reflected in 1996, lower repurchases of common
stock and higher net income in 1997.
For the first nine months of 1997,1998, the Company purchased approximately
1.5 million396,500 shares of common stock for $90.0$24.8 compared with $124.4$30.2 spent for the
repurchase of approximately 2.9 million532,500 shares during the comparable period in
1996.1997.
Capital Resources
Total debt increased $258.8$168.5 to $460.4 at September 30, 1997$402.8 from total
debt of $201.6$234.3 at December 31, 1996,1997,
principally due to thenormal seasonal working capital requirements mentioned above as well asduring the
seasonalityfirst three months of the business.1998. Total debt of $402.8 at September 30, 1997 of $460.4March 31, 1998 remained
relatively level with total debt of $454.3$416.7 at September 30, 1996.March 31, 1997. In addition, at
September 30,March 31, 1998, and December 31, 1997, other non-current liabilities include
approximately $58.0 and $58.6, respectively, related to securities lending
activities, as discussed in Note 2.activities.
At September 30, 1997,March 31, 1998, there were borrowings of $29.2$35.0 under the amended and
restated revolving credit and competitive advance facility agreement. This
agreement is also used to support the Company's commercial paper borrowings of
which $181.0$114.5 was outstanding at September 30, 1997.March 31, 1998.
At September 30, 1997,March 31, 1998, there were $10.0 of borrowings outstanding under
uncommitted lines of credit and there were no borrowings under the Company's
bankers' acceptance facilities.
16
17
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
At September 30, 1997, the 170 million 6-1/8% deutsche mark notes
("Notes") dueIn May 1998, and the related currency exchange contract were
classified as short term. The Notes have been effectively converted into U.S.
dollar debt of $100.0 through the use of a currency exchange swap contract
which includes both principal and interest. During the third quarter of 1997, the Company issued $100.0 of long-term debt and the net
proceeds werewill be used to pay down commercial paper borrowings. As a result of
the refinancing of commercial paper borrowings with the new long-term debt,
$100.0 of commercial paper borrowings as of March 31, 1998 were reclassified
to long-term debt.
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 September 30, 1997March 31, 1998 and December 31, 1996,1997, current liabilities exceeded
current assets by $90.7$12.1 and $41.7,$11.9, respectively. The increase of current
liabilities over current assets of $49.0$.2 was mainly due to thean increase in short-termnet
debt and decrease in(debt less cash and equivalents, partiallyequivalents), as discussed in the Debt section, an
increase in other accrued liabilities primarily due to the accrual for one-
time charges offset by the increase in inventories, reflecting the seasonal pattern of
Avon's operations, and a decrease in accounts payable.
16
17
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Although current liabilities exceeded current assets at September 30,
1997,March 31, 1998,
management believes this is due to the Company's direct selling business
format which results in lower receivable and working capital levels as well as
the Company's practice of repurchasing shares with available cash. Avon's
liquidity results from its ability to generate significant cash flows from
operations and its ample unused borrowing capacity. Actions that would
eliminate the working capital deficit are not anticipated at this time.
Avon's credit agreements do not contain any provisions or requirements with
respect to working capital.
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.
The Company periodically 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.
17
18
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
At September 30, 1997,March 31, 1998, the Company had three interest rate swap agreements on
its Notes.170 million 6-1/8% Deutsche Mark Notes ("Notes"), due May 1998. Each
agreement has a notional principal amount of $100.0. During 1995, the Company
entered into an interest rate swap agreement, which effectively converted the
interest payable on the Notes from a floating to a fixed interest rate basis
of approximately 7.2% through maturity. On May 7, 1998, the Notes were repaid
and the related contracts expired.
The Company has one interest rate cap contract with a notional principal
amount of $100.0, used to economically hedge the Company's short-term variable
interest rate working capital debt. This cap contract expires in May 1998 and
has been marked-to-market yielding an insignificant income statement
adjustment.
17
18
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
The Company may periodically hedge foreign currency royalties, net
investments in foreign subsidiaries, firm purchase commitments and contractual
foreign currency cash flows or obligations, including third-party or
intercompany foreign currency transactions. The Company regularly monitors
its foreign currency exposures and ensures that hedge contract amounts do not
exceed the amounts of the underlying exposures.
At September 30, 1997,March 31, 1998, the Company held foreign currency forward contracts
with notional amounts totaling $181.1$234.8 and option contracts with notional
amounts totaling $71.9$65.3 to hedge foreign currency items. These contracts have
various maturities through December 1998.in 1999. The Company also entered into certain foreign currency
forward contracts with notional amounts totaling $81.9$20.0 and option contracts
with notional amounts of $63.4$4.2 to economically hedge certain foreign currency
exposures, which do not qualify as hedging transactions under the current
accounting definitions and, accordingly, have been marked-to-market. The
mark-to-market adjustment on these contracts at September 30, 1997March 31, 1998 was
insignificant. The Company's risk of loss on the options in the future is
limited to premiums paid, which are insignificant.
The Company has entered into two forward contracts and two put option
contracts to purchase shares of Avon common stock. The notional amount of the
forward contracts total $10.0 ($5.0 per contract), with forward rates at
$57.572 and $58.111 for the purchase of 86,848 and 86,042 shares,
respectively. The put option contracts give the purchaser the right to sell
86,000 and 87,335 shares of Company stock to Avon at strike prices of $56.852
and $57.080, respectively. The contracts mature in 1998 and give the Company
the choice of either net cash or share settlement. Accordingly, no adjustment
for subsequent changes in fair value have been recognized.
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.
18
19
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Other Information
On October 23, 1997, the Company announced that it hashad raised its long-
term growth targets for sales and earnings and that it expectsexpected to record
special charges in connection with a major re-engineering program. Commencing
in 1998, the long-term target for sales growth has been raised to 8-10%
compounded annually, and its target for net income-per-shareearnings-per-share growth has been
raised to 16-18% annually. Previously, the Company targeted long-term sales
growth of 6-8% and long-term net income per shareearnings-per-share growth of 13-15%. The higher
targets come largely as a result of initiatives currently underway and others
under review intended to reduce costs by up to $400.0 aper year by 2000, with
$200.0 of the savings being reinvested concurrently in advertising and
marketing programs to boost sales. AvonThe Company expects to record special
charges totaling $150.0-$200.0of approximately $200.0 pretax to cover one-time costs associated with
the re-
engineeringre-engineering program. Approximately half the charges are expected to be
recorded inIn the first quarter of 1998, the Company
recorded $108.4 pretax of such one-time charges ($84.2 after tax, or $.64 per
share on a basic and diluted basis) in connection with the re-engineering
program. Slightly more than half of the total pretax charges in the quarter
were cash related and will be paid in 1998 and 1999. The Company expects to
record the balance to be recordedof such one-time charges in 1998 and early 1999.
Approximately $50 millionOn April 21, 1998, the Chinese government issued a directive banning all
direct selling in China. As of May 13, 1998, there is considerable
uncertainty as to how this directive would be interpreted and applied going
forward. In the chargesmeantime, the Company is complying with this directive by
suspending its selling activities in China and is considering alternative
methods of distribution and selling. The Company remains confident that China
will be cash-related.have significant long-term potential. In any event, the ban on direct
selling would not have a material adverse effect on the Company's overall
financial position or results of operations.
Year 2000
Management has developed a worldwide program to prepare the Company's
computer systems and applications for the Year 2000. Based on a comprehensive
assessment of key systems, the Company has commenced a project plan to address
all necessary code changes, testing and implementation required to ensure Year
2000 compliance by December 31, 1999. Management does not expect the
incremental costs of making the required system modifications to have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
19
20
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, including, but not limited to, the
information set forth in "Other Information" herein. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, levels of activity, performance or
achievement of the Company, or industry results, to be materially different
from any future results, levels of activity, performance or achievement
expressed or implied by such forward-looking statements. Such factors
include, among others, the following: general economic and business
conditions; the ability of the Company to implement its business strategy;
the Company's access to financing and its management of foreign currency
risks, the Company's ability to successfully identify new business
opportunities; 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 and
legal restrictions imposed by foreign governments; the effect of regulatory
and legal proceedings and other factors discussed in Item 1 of the Company's
Form 10-K. 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 these statements.
1920
2021
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 7, 1998, the
matters described under (c) below were voted upon.
(c) Annual meeting votes:
Against Abstentions
or and Broker
For Withheld Non-Votes
----------- -------- -----------
(1) To elect four directors to three-
year terms expiring in 2001:
Richard S. Barton................ 114,988,370 -0- 1,538,252
Edward T. Fogarty................ 114,988,370 -0- 1,538,252
George V. Grune.................. 114,988,370 -0- 1,538,252
Charles R. Perrin................ 114,988,370 -0- 1,538,252
To elect three directors to two-year
terms expiring in 2000
Stanley C. Gault................. 115,017,187 -0- 1,509,435
Andrea Jung ..................... 115,017,187 -0- 1,509,435
Susan J. Kropf................... 115,017,187 -0- 1,509,435
(2) To ratify the appointment of
Coopers & Lybrand L.L.P., as
Avon's independent accountants
for 1998.......................... 116,186,548 166,085 173,989
21
22
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
------ -----------
10.1 --First3.3 --Certificate of Amendment of the
Certificate of Incorporation of Avon 1993 Stock Incentive Plan
effective January 1, 1997.
11.1 --Statement re computation of primary income per
share.
11.2 --Statement re computation of fully diluted income
per share.Products, Inc.
27 --Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports onOn March 18, 1998, the Company filed a Form 8-K filed duringannouncing that on March
5, 1998, the third
quarterBoard of 1997.
20Directors of Avon Products, Inc., adopted a new
shareholder rights plan, effective as of the close of business on March 30,
1998, to replace the Company's existing shareholder rights plan, which expires
at the close of business on March 30, 1998
22
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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: NovemberMay 13, 19971998 By /s/ MICHAEL R. MATHIESONROBERT J. CORTI
-------------------------------
Michael R. MathiesonRobert J. Corti
Senior Vice President,
and ControllerChief Financial Officer
Principal AccountingFinancial Officer
Signed both on behalf of the
registrant and as principal
accounting officer.
2123