EXHIBIT 13
29
Management's Discussion and Analysis
Avon Products, Inc.
Dollars in millions, except share data
The following discussion of the results of operations and financial
condition of Avon Products, Inc. ("Avon" or "Company") should be read in
conjunction with the information contained in the Consolidated Financial
Statements and Notes thereto. These statements have been prepared in
conformity with generally accepted accounting principles which require
management to make estimates and assumptions that affect amounts
reported and disclosed in the financial statements and related notes.
Actual results could differ from these estimates.
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 Reform Act of 1995,
including, but not limited to, the information set forth 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; the impact of substantial currency exchange devaluations
in the Company's principal foreign markets; 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.
Results of Operations
Consolidated - Net income in 1999 was $302.4 compared with $270.0 in
1998. Basic and diluted earnings per share in 1999 were $1.18 and $1.17,
respectively, compared with $1.03 and $1.02, respectively, in 1998.
Special and non-recurring charges were recorded in the first quarter of
1999 for the Company's business process redesign ("BPR") program. These
charges totaled $151.2 pretax, which reduced net income by $121.9 after
tax, or $.47 per share on a basic and diluted basis. The 1998 results
include special and non-recurring charges totaling $154.4 pretax, which
reduced net income by $122.8 after tax, or $.46 per share on a basic and
diluted basis. See Note 13 of the Notes to Consolidated Financial
Statements for further discussion of this program. Before the charges,
net income for the year ended December 31, 1999 of $424.3 increased 8%
over 1998. Earnings per share before the charges of $1.65 and $1.64 on
a basic and diluted basis, respectively, both increased 11% over the
comparable period in 1998. Net income for 1997 was $338.8 and basic
and diluted earnings per share were $1.28 and $1.27, respectively. The
1997 results include the favorable settlement of a value-added tax claim
in the United Kingdom equal to approximately $26.5 on a pretax basis.
The $26.5 gain represents a $20.6 settlement of disputed value-added tax
charges from prior years, which is included in other expense (income),
net and $5.9 of interest which is included in interest income. The net
effect of this gain was to increase 1997 net income by $16.7 and both
basic and diluted earnings per share by $.06.
Excluding the charges, operating profit in 1999 was $700.6, or 12%
over 1998, due to higher sales, an improved gross margin and a slight
improvement in the operating expense ratio. The increase in operating
profit was partially offset by higher net interest expense and
unfavorable foreign exchange in 1999. As a result, pretax income before
the charges rose $47.5, or 8%, over 1998. Net income was favorably
impacted by a lower effective tax rate in 1999, partially offset by
lower minority interest income due mainly to the improved results in
Japan and China.
On a consolidated basis, Avon's net sales of $5.29 billion
increased 1% from $5.21 billion in 1998. International sales increased
2% to $3.21 billion due to strong growth in the Pacific region, most
significantly in Japan, the Philippines, Taiwan and
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Australia, and in
Europe due to continued improvements in Poland and the United Kingdom,
partially offset by declines in Russia, Germany and France. U.S. dollar
sales decreased in Latin America primarily as a result of the Brazilian
real devaluation in early 1999 and declines in Argentina and Chile,
partially offset by growth in Mexico, Venezuela and Central America.
Sales in North America increased 1% to $2.08 billion in 1999. Excluding
the impact of foreign exchange, consolidated net sales rose 9% over the
prior year. In 1998, consolidated net sales of $5.21 billion increased
3% from $5.08 billion in 1997. Sales in North America increased 5% to
$2.06 billion primarily due to a 5% increase in the U.S. attributable
mainly to a higher average order size. International sales increased 1%
to $3.15 billion from $3.11 billion due to strong growth in Latin
America, most significantly in Brazil, Mexico, Argentina and Venezuela,
as well as in Europe reflecting improvements in the United Kingdom and
Poland. These increases were partially offset by sales declines in the
Pacific, most significantly in Japan, China and the Philippines.
Excluding the impact of foreign exchange, consolidated net sales rose 9%
over 1997.
Cost of sales as a percentage of sales was 38.4% in 1999, compared
with 39.4% in 1998. The 1999 and 1998 cost of sales include $46.0 and
$37.9, respectively, of non-recurring charges for inventory write-downs
related to the Company's BPR program. The charges relate to the closure
of facilities, discontinuation of certain product lines, size-of-line
reductions and a change in strategy for product dispositions. See Note
13 of the Notes to Consolidated Financial Statements for further
discussion of these charges. Excluding the charges, cost of sales as a
percentage of sales was 37.5% in 1999 versus 38.7% in 1998. This
favorable variance was due to improvements in all regions, most
significantly in Europe, including the United Kingdom, Germany, Italy
and Central Europe, due to a continuing focus on pricing strategies and
improved profitability of beauty plus categories, including fashion
jewelry and accessories. Japan, Mexico and the U.S. also posted strong
gross margin improvements. These improvements were partially offset by
a decline in Brazil resulting from higher costs in the second half of
the year as a result of the devaluation, and in Russia due to a pricing
discount policy begun in the fourth quarter of 1998. Excluding the
charge, the 1998 cost of sales as a percentage of sales was 1.7 points
favorable over 1997. This improvement was primarily due to a higher
margin in Brazil, reflecting actions taken in 1997 to reduce inventory
levels combined with cost reduction programs in 1998. Additionally, the
gross margin in Venezuela improved as a result of pricing strategies and
business redesign efforts. Japan's gross margin improved as a result of
cost reduction initiatives, and the U.S. improved its margin through
pricing strategies, cost improvements and reduced clearance activity in
the non-cosmetics, fragrance and toiletries category.
Marketing, distribution and administrative expenses of $2.60
billion increased $33.0, or 1%, over prior year, but decreased slightly
as a percentage of sales to 49.2% from 49.3% in 1998. Expense ratio
improvements were reported in Brazil reflecting strict expense
management and BPR initiatives, in Japan reflecting BPR efforts, and in
Central Europe reflecting volume efficiencies and a significant
reduction in expenses. These improvements were partially offset by
higher expense ratios in Mexico due to increased advertising and
incentive programs in 1999, in Germany due to strategic marketing
investments, in Venezuela due to increased incentive programs and in the
United Kingdom due to higher shipping expenses, most significantly in
the fourth quarter. In 1998, marketing, distribution and administrative
expenses of $2.57 billion increased $79.4, or 3%, from 1997 and
increased as a percentage of sales to 49.3% from 49.0% in 1997. The
overall increase in the expense ratio was due to higher expense ratios
in Mexico due to increased marketing and promotional expenses associated
with new product launches, in Venezuela due to increased administrative
expenses as a result of the implementation of a new labor law, in
Argentina due to increased marketing expenses and in China reflecting
the shutdown of sales operations for most of the second quarter of 1998.
Special charges of $105.2 and $116.5 were recorded in 1999 and
1998, respectively, for the Company's BPR program. The 1999 charges are
primarily related to employee severance benefits worldwide and the
restructuring of operations in Western Europe. The 1998 charges mainly
related to employee severance benefits and facility rationalizations in
Puerto Rico, the Dominican Republic, Hong Kong and China as well as
asset write-downs associated with the divestiture of the Discovery Toys
business unit. See Note 13 of the Notes to Consolidated Financial
Statements for further discussion of these charges.
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Interest expense in 1999 of $43.2 increased $8.5 over the prior
year primarily due to increased domestic borrowings associated with the
acceleration of the Company's share repurchase program discussed in
Notes 4 and 9 of the Notes to Consolidated Financial Statements.
Interest expense in 1998 of $34.7 was $.8 favorable to 1997 due to lower
cost of borrowings.
Interest income in 1999 of $11.1 decreased $4.8 mainly due to a
Mexico tax refund claim recognized in June 1998. Interest income in
1998 of $15.9 decreased $.8 compared to 1997 primarily due to the
interest portion of the 1997 favorable value-added tax settlement in the
United Kingdom, partially offset by the 1998 Mexico tax refund claim, as
well as higher interest rates and increased average short-term
investments in Brazil in 1998.
In 1999, other expense (income), net was $12.2 unfavorable to the
prior year due primarily to unfavorable net foreign exchange in 1999
resulting from exchange losses, primarily in Europe and Latin America.
In 1998, other expense (income), net was $14.4 unfavorable to 1997.
Excluding the 1997 value-added tax settlement in the United Kingdom,
other expense (income), net was $6.2 favorable primarily due to
favorable foreign exchange.
Income taxes were $204.2 in 1999 and the effective tax rate was
40.3% compared with $190.8 in 1998 and an effective tax rate of 41.9%.
Excluding the effect of the special and non-recurring charges, the
effective tax rate was 35.5% in 1999 compared with 36.4% in 1998 due to
the earnings mix and tax rates of international subsidiaries. Income
taxes in 1997 were $197.9 and the effective tax rate was 37.0%. The
36.4% effective tax rate was lower in 1998 versus 1997 due to the mix of
earnings and income tax rates of the international subsidiaries.
Inflation in the United States has remained at a relatively low
level during the last three years and has not had a major effect on
Avon's results of operations. Many countries in which Avon has
operations have experienced higher rates of inflation than the United
States. Venezuela and Russia experienced high cumulative rates of
inflation over the past three years. Mexico was converted to non-
hyperinflationary status beginning January 1, 1999 due to reduced
cumulative inflation rates during the three-year period 1996 through
1998.
Below is an analysis of the key factors affecting net sales and operating
profit by reportable segment for each of the years in the three-year period
ended December 31, 1999.
Years ended December 31 1999 1998 1997
Net Operating Net Operating Net Operating
Sales Profit Sales Profit Sales Profit
North America:
U.S. $1,809.3 $ 329.3 $1,774.0 $ 302.8 $1,696.7 $ 261.8
Other 274.0 44.7 287.6 40.2 275.4 35.1
Total 2,083.3 374.0 2,061.6 343.0 1,972.1 296.9
International:
Latin America 1,607.7 353.6 1,665.1 344.4 1,513.3 280.0
Europe 878.0 126.2 862.7 102.2 811.6 85.4
Pacific 720.1 102.1 623.3 62.5 782.4 67.0
Total 3,205.8 581.9 3,151.1 509.1 3,107.3 432.4
Total from operations $5,289.1 955.9 $5,212.7 852.1 $5,079.4 729.3
Global expenses (255.3) (224.5) (191.5)
Special and non-recurring
charges (151.2) (154.4) -
Operating profit $ 549.4 $ 473.2 $ 537.8
Canada, Dominican Republic and Puerto Rico are included in North America -
Other.
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1999 Compared to 1998
North America - Sales in North America increased 1% to $2.08 billion,
and operating profit increased 9% to $374.0 in 1999. The U.S. business,
which represents almost 90% of the North American segment, reported
sales and operating profit growth of 2% and 9%, respectively. The sales
increase in the U.S. resulted primarily from an increase in the average
order size. Growth in fashion jewelry and accessories and non-core
categories was partially offset by sales decreases in cosmetics,
fragrances and toiletries ("CFT") and apparel. Sales of fashion jewelry
and accessories rose significantly over the prior year reflecting the
success of sterling silver and bolder jewelry designs, the introduction
of licensed luggage and a strong performance in watches and handbags.
Additionally, sales of accessories increased significantly due to the
success of the Pokemon watch in the fourth quarter. The non-core
category, consisting primarily of home entertainment and gift and
decorative items, posted strong growth due to increased sales of
inspirational and religious products. Fourth quarter sales of
Millennium products also contributed to the overall increase of non-core
items. These improvements were partially offset by declines in the CFT
and apparel categories. The decrease in CFT sales resulted primarily
from lower fragrance sales in 1999 due to the underperformance of
women's new products as well as fewer offers on existing products.
Apparel sales decreased due to underperformance of new product
introductions and demonstration products as well as a shift in focus
from sales growth to increased profitability. A 1.1 point operating
margin improvement in the U.S. included favorable gross margin and
operating expense ratios. The gross margin improvement resulted from
supply chain cost improvements and product category management,
partially offset by price reductions in CFT during the fourth quarter to
drive sales. The favorable expense ratio reflects lower spending in
1999 on advertising, lower variable compensation and the elimination of
the Sponsorship program, partially offset by increased spending on
strategic initiatives such as the Internet and express and beauty
centers.
International - International sales increased 2% to $3.21 billion and
operating profit increased 14% to $581.9 from $509.1 in 1998. The sales
growth resulted from strong double-digit growth in the Pacific region,
most significantly in Japan, the Philippines, Taiwan and Australia, as
well as growth in Europe reflecting improvements in Poland and the
United Kingdom, and in Mexico, Venezuela and Central America. These
results were significantly offset by sales declines in Brazil, and, to a
lesser extent, in Russia, Argentina and Germany. Excluding the impact
of foreign currency exchange, international sales rose 14% and operating
profit increased 27% over 1998.
In Latin America, sales declined 3% to $1.61 billion while
operating profit increased 3% to $353.6 in 1999. Excluding the impact
of foreign currency exchange, sales increased 16%, a 19 point
differential due primarily to the Brazilian real devaluation which began
in early 1999, discussed below. Brazil, however, had double-digit
increases in local currency sales, units and number of customers served.
Sales decreased in Argentina and Chile as a result of weak economic
conditions. The Argentine economy has been in a prolonged recession
with high unemployment and low consumer spending. Despite the sales
decline, Avon continued to gain market share in Argentina in 1999.
These sales declines were partially offset by strong growth in Mexico,
and, to a lesser extent, in Venezuela and Central America. Mexico's
sales increase resulted from both operational factors including new
product launches in the cosmetics, home and fashion lines as well as
economic growth reflecting consumer price increases in 1999. Sales grew
in Venezuela due mainly to price increases as well as double-digit
increases in number of orders and active Representatives, and in Central
America due to strong increases in units, customers served and active
Representatives. The improvement in the region's operating profit was
primarily due to favorable results in Mexico attributable to the sales
increase and an improved gross margin, partially offset by increased
advertising expense and incentive programs in 1999. The gross margin
improvement in Mexico resulted from a shift in the sales mix from fewer
sales of toiletries to more sales of higher-margin cosmetics and
fragrances. However, in the third quarter of 1999, Avon's retail
competitors in the toiletries and non-CFT categories significantly
discounted their prices which led to unit declines. Management in
Mexico adjusted prices in the fourth quarter of 1999 and planned
incentive programs to aggressively recruit Representatives to mitigate
the impact of competitors' deep discounting. Active Representatives in
Mexico grew 11% in 1999. Venezuela
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contributed to the region's growth in
operating profit through a gross margin improvement driven by price
increases as well as BPR initiatives, particularly in the home segment.
As discussed, these improvements were partially offset by sales and a
gross margin decline in Brazil and weak economic conditions in Argentina
and Chile. Brazil's gross margin decline, particularly during the
fourth quarter of 1999, resulted from increased costs due to the impact
of the devaluation. However, Brazil made tremendous improvements in the
operating expense ratio attributable to reduced bad debt expense, sales
returns and transportation costs. Excluding the impact of foreign
currency exchange, operating profit in Latin America increased 22% over
1998.
The Brazilian real devalued significantly in January 1999 and, as a
result, negatively affected Brazil's U.S. dollar results in 1999. The
effect of exchange rates was reduced by foreign exchange contracts
previously in place and several actions taken by local management to
offset the devaluation, including a focused effort directed at vendor
negotiations and additional local sourcing to reduce imports. To grow
sales in 2000, management plans to increase advertising, sampling and
motivation to support new products, add more pages to the brochure and
focus on key categories including fragrance, color, skincare and
haircare. Brazil's 1999 sales, although up over 20% in local currency,
were down approximately 20% in U.S. dollars due to the devaluation.
In the Europe region, sales increased 2% to $878.0 and operating
profit increased 24% to $126.2 in 1999. Sales growth in Central Europe,
primarily Poland, and the United Kingdom was partially offset by
declines in Russia, Germany and France. Continued double-digit
increases in units, customers served and active Representatives
contributed to Central Europe's sales increase. Poland's success
reflects strong growth in the CFT category, increased Representative
retention and a change in the campaign cycle including a new brochure
every 4 weeks versus 6 weeks in the prior year. Growth in the United
Kingdom resulted from a higher average order size, increased
distributorship sales and the successful launch of a new brochure in
1999 to enhance Avon's image. Sales were lower in Russia due to the
economic crisis and ruble devaluation, which occurred in August 1998,
and in Germany due to a weak economy. Local currency sales in Russia
increased almost 30% over 1998, with a strong increase in active
Representatives. Excluding the impact of foreign currency exchange,
sales in Europe increased 13% over prior year. The increase in Europe's
operating profit resulted from operating margin improvements in Central
Europe, mainly Poland, the United Kingdom and Italy due to higher gross
margins which resulted from a continuing focus on pricing strategies and
improved profitability of non-CFT categories. These operating profit
increases were partially offset by continued declines in Russia due to
the ruble devaluation. Management in Russia will continue to focus on
market share growth and improved margins through pricing flexibility and
tight expense management. Excluding the impact of foreign currency
exchange, operating profit increased 31% over 1998.
In the Pacific region, sales increased 16% to $720.1 and operating
profit increased 63% to $102.1 in 1999. Excluding the impact of foreign
currency exchange, sales increased 8% over 1998. The sales improvement
resulted from growth in every market, most significantly in Japan due to
a favorable currency impact in 1999, and in the Philippines, Taiwan and
Australia due to strong increases in units and customers served.
Despite the earthquake in Taiwan in September 1999, sales were up
double-digits over prior year due to aggressive marketing and sales
programs, incentive offers and increased spending on advertising. The
increase in the region's operating profit resulted primarily from the
above sales increases and operating margin improvements in Japan and
China. Japan's gross margin improved due to product cost savings
initiatives in CFT and improved sourcing decisions for non-CFT as well
as a profitability screening process that led to the elimination of many
low-margin products in the apparel and jewelry segments. Additionally,
BPR efforts continue to generate significant savings across all expense
areas in Japan. China's operating margin also improved significantly in
1999 reflecting the suspension of operations for most of the second
quarter of 1998, discussed below. Excluding the impact of foreign
currency exchange, operating profit increased 53% over 1998.
1998 Compared to 1997
North America - North American sales increased 5% to $2.06 billion and
operating profit increased 16% to $343.0 in 1998. The U.S. business
reported sales and operating profit growth of 5% and 16%, respectively.
Sales growth in the U.S. reflected a 4%
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increase in the average order
size coupled with a 1% increase in the number of Representative orders.
The sales improvement resulted from increases in fashion jewelry and
accessories as well as in the CFT and home entertainment categories. These
improvements were partially offset by a decline in the gift and
decorative category. Sales of fashion jewelry and accessories rose
significantly over 1997, primarily in the accessories segment, with the
success of such products as organizer handbags, the Home Run Hero watch
introduced in the fourth quarter and increased sales of licensed
products, including Winnie the Pooh carryalls and sports watches.
Growth in the CFT category was driven by successful launches of Rare
Rubies, Anew Retinol Hand Complex and the Diane Von Furstenberg
fragrance, Forest Lily. In addition, the success of Avon's transfer
resistant technology lipstick and Avon Color's Spring Shade Collection
combined with continued growth of the Avon Techniques hair care and
Skin-So-Soft lines contributed to the growth in CFT. Higher sales in
the home entertainment category were driven by the launch of a
collection of inspirational and religious products, as well as an
increase in the sales of demonstration products purchased by
Representatives. These increases were partially offset by a decline in
the gift and decorative category resulting from the phasing out of the
Avon Home line and lower sales of Barbie and holiday products in 1998.
The improvement in U.S. operating profit was mainly a result of the
above sales increase combined with a favorable gross margin driven by
cost improvements, revised pricing strategies and reduced clearance
activity.
International - In 1998, International sales increased 1% to $3.15
billion and operating profit increased 18% to $509.1 from $432.4 in
1997. The sales growth resulted from strong growth in Latin America,
particularly in Brazil, Mexico, Argentina and Venezuela, as well as in
Europe reflecting improvements in the United Kingdom and Poland. These
results were significantly offset by sales declines in the Pacific, most
significantly in Japan, China and the Philippines. Excluding the impact
of foreign currency exchange, international sales rose 11% and operating
profit increased 31% over 1997.
In Latin America, 1998 sales increased 10% to $1.67 billion and
operating profit increased 23%, or $64.4, to $344.4 in 1998. The sales
improvement resulted from strong growth in Brazil and, to a lesser
extent, Mexico, Argentina and Venezuela. Brazil's growth in sales was
driven by attractive pricing and successful new product launches, which
resulted in strong double-digit increases in units and orders in 1998.
Additionally, the number of active Representatives rose 31% from 1997.
Mexico's sales increase was driven by successful new product launches
including Anew Night Force, Yessamin fragrance and Women of Earth, as
well as increases in the apparel and home line extensions which offered
superior design and promotions in 1998. Argentina and Venezuela
reported strong increases in units, orders and customers served.
Excluding the impact of foreign currency exchange, sales in Latin
America rose 19% over 1997. The increase in the region's operating
profit was primarily due to favorable results in Brazil attributable to
the strong sales increase and an improved gross margin and operating
expense ratio. Brazil's gross margin improvement resulted from actions
taken in 1997 to reduce inventory levels as well as better vendor
negotiations and continued cost reduction programs in 1998. The
favorable operating expense ratio was driven by the strong sales
increase. Operating profit improvements in Mexico due to the sales
increase, and in Venezuela due to pricing strategies and business
redesign efforts, contributed to the region's growth in operating
profit. Excluding the impact of foreign currency exchange, operating
profit in Latin America increased 34% over 1997.
In the Europe Region, 1998 sales increased 6% to $862.7 and
operating profit increased $16.8, or 20%, to $102.2 in 1998. The sales
increase was primarily due to growth in the United Kingdom resulting
from a higher average order size in 1998. The United Kingdom continues
to focus on developing the core business through Representatives, growth
in orders and customers as well as brand awareness and image
enhancement. In addition, Poland's sales increased significantly from
1997 as a result of dramatic growth in active Representatives and all
business fundamentals including units, orders and customers served.
These improvements were partially offset by sales shortfalls in Russia
attributable to the devaluation of the ruble in August 1998.
Average orders declined significantly in Russia due to low consumer
purchasing power. In response to this situation, several actions were
taken by local management including pricing flexibility to maintain and
build market share and reduce credit sales, as well as a tightening of
expense controls. Geographic expansion into new cities was deferred.
The devaluation negatively affected Russia's U.S. dollar results in
1998.
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Excluding the impact of foreign currency exchange, sales in
Europe and Russia increased 10% and 26%, respectively, from
1997. The increase in the region's operating profit was due to the
overall sales increase combined with an improved operating margin in the
United Kingdom. A shift in sales mix to higher-margin items contributed
to a gross margin improvement, and continued active expense management
led to a favorable operating expense ratio in the United Kingdom. These
increases were partially offset by operating profit declines in Russia
mainly due to the devaluation of the ruble discussed above. Excluding
the impact of foreign currency exchange, operating profit in Europe
increased 27% over 1997.
In the Pacific Region, 1998 sales decreased 20% to $623.3 and
operating profit decreased 7% to $62.5 from $67.0 in 1997. The decline
in sales resulted from decreases in every major market, most
significantly in Japan, China and the Philippines. The Asian currency
and economic crisis which began in mid-1997 continued throughout 1998
and negatively impacted results in the Pacific. The general economic
environment was poor with low consumer confidence and reduced spending.
Excluding the impact of foreign currency exchange, sales decreased 3%, a
17 point differential from U.S. dollar reported results. In addition,
selling activities in China were suspended for most of the second
quarter of 1998 due to governmental restrictions on direct-selling
companies. As of the beginning of June, the Company received Chinese
governmental approval to resume operations as a wholesale and retail
business and became operational again in mid-June. The Company
converted its branches into retail outlets to serve customers and
received approval to utilize sales promoters, much like Representatives,
to promote product sales in China. Despite the above difficulties, most
markets showed growth in active Representatives and number of customers
served resulting from a strong focus on active recruitment to expand the
Representative base throughout the region. The Philippines posted
double-digit increases in orders, customers served and active
Representatives. Local currency sales in the Philippines increased 10%
over the prior year. The decrease in the region's operating profit
resulted primarily from sales declines discussed above. Despite the
sales decline, Japan's operating profit increased significantly over
1997 as a result of improvements in gross margin and operating expense
ratios. Japan's margin improvements resulted from cost reduction
strategies and the elimination of many lower-margin products in 1998.
Additionally, BPR efforts resulted in lower operating expenses.
Excluding the impact of foreign currency exchange, operating profit in
the Pacific increased 19% from 1997.
See Foreign Operations section under Liquidity and Capital Resources for
additional discussion.
Global Expenses - Global expenses were $255.3 in 1999 compared with
$224.5 in 1998. The $30.8 increase was due to higher spending related
to global marketing and information technology system initiatives in
1999. In 1998, global expenses were $33.0 higher than in 1997 due to
increased expenses associated with information technology system and
global marketing initiatives and higher expenses for incentive
compensation programs primarily due to the improved operating results in
1998 versus 1997.
Recent Pronouncements - In June 1999, the Financial Accounting Standards Board
issued Financial Accounting Standard ("FAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FAS No. 133" which delayed the effective date of FAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" by one year. FAS No. 133
is now effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000 (January 1, 2001 for the Company). FAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives will be recorded each period
in current earnings or accumulated other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction. For fair-
value hedge transactions in which the Company is hedging changes in the fair
value of an asset, liability, or firm commitment, changes in the fair value of
the derivative instrument will be included in the income statement along with
the offsetting changes in the hedged item's fair value. For cash-flow hedge
transactions in which the Company is hedging the variability of cash flows
related to a variable rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in
accumulated other comprehensive income. The gains and losses on the
derivative instruments that are reported in accumulated other comprehensive
income will be
36
reclassified to earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item. The
ineffective portion of all of the hedges will be recognized in current period
earnings. The impact of FAS No. 133 on the Company's financial statements
will depend on a variety of factors, including the future level of forecasted
and actual foreign currency transactions, the extent of the Company's hedging
activities, the types of hedging instruments used and the effectiveness of
such instruments. Based on an analysis of Avon's financial instruments
outstanding at December 31, 1999, the Company does not expect the adoption of
FAS No. 133 to have a material impact on its earnings or statement of
financial position.
Contingencies - Although Avon has completed its divestiture of all
discontinued operations, various lawsuits and claims (asserted and
unasserted) are pending or threatened against Avon. The Company is also
involved in a number of proceedings arising out of the federal Superfund
law and similar state laws. In some instances, Avon, along with other
companies, has been designated as a potentially responsible party which
may be liable for costs associated with these various hazardous waste
sites. In the opinion of Avon's management, based on its review of the
information available at this time, the total cost of resolving such
contingencies at December 31, 1999 should not have a material adverse
impact on Avon's consolidated financial position, results of operations
or cash flows.
Liquidity and Capital Resources
Cash Flows - Net cash provided by operating activities was $464.6 in 1999
compared to $324.4 in 1998. The 1999 increase principally reflects, among
other things, favorable working capital levels, higher net income and higher
funding of the Company's benefit plans in 1998. A more detailed analysis of
the individual items contributing to the 1999 and 1998 amounts is included in
the Consolidated Statements of Cash Flows.
Excluding changes in debt and other financing activities, net cash usage
of $736.6 in 1999 was $619.0 unfavorable compared to net cash usage of $117.6
in 1998. The $619.0 variance primarily reflects increased repurchases of
common stock resulting from the accelerated buyback program. See Note 9 of
the Notes to Consolidated Financial Statements for further discussion of this
program. In addition, the variance was also a result of an unfavorable
exchange rate impact and increased cash used for investing activities in 1999,
including the acquisition of a manufacturing facility in Poland and increased
capital expenditures. These uses were partially offset by higher cash
provided by operating activities, discussed above. During 1998 and
1997, the Company received net proceeds of approximately $58.1 and
$58.6, respectively, under securities lending transactions which were
used to repay domestic commercial paper borrowings and are included in
the cash flows as other financing activities. See Note 4 of the Notes
to Consolidated Financial Statements for further discussion of these
transactions. In 1998, excluding changes in debt and other financing
activities, there was a net decrease in cash usage of $19.7. This
variance reflects a favorable exchange rate impact on cash and higher
cash provided by operating activities. These sources were partially
offset by higher capital expenditures and increased dividend payouts in
1998.
For the period 1994 through 1999, 58.0 million shares of common
stock have been purchased for approximately $1,442.1 under the stock
repurchase programs. See Note 9 of the Notes to Consolidated Financial
Statements for further details of the stock repurchase programs.
Working Capital - At December 31, 1999, current liabilities exceeded
current assets by $375.0 while at the end of 1998, current assets
exceeded current liabilities by $11.9. This increase of $386.9 is
primarily due to increased net debt (short-term debt less cash and
equivalents) associated with the accelerated stock repurchase program,
discussed above, as well as the reclassification of approximately $106.4
of proceeds from securities lending transactions from other non-current
liabilities to other accrued liabilities at December 31, 1999. In
addition, lower inventory levels, as discussed in the Inventories
Section, also contributed to the variance.
Although current liabilities exceeded current assets at December 31,
1999, management believes this is due to the Company's direct selling
business format which results in lower receivable and working capital
levels. Avon's liquidity results from its ability to generate
significant cash flows from operations and its ample unused borrowing
capacity. At December 31, 1999, the large excess of current
37
liabilities
over current assets as well as the issuance of long-term debt in 1999,
discussed in Note 4 of the Notes to Consolidated Financial Statements,
reflects the acceleration of the Company's share repurchase program.
These share repurchases resulted in a shareholders' deficit balance at
December 31, 1999 of $406.1. Avon's credit agreements do not contain
any provisions or requirements with respect to working capital or equity
balances.
Capital Resources - Total debt of $1,007.4 at December 31, 1999
increased $751.1 from $256.3 at December 31, 1998, compared with an
increase of $22.0 from December 31, 1997. At December 31, 1999 and
1998, approximately $106.4 and $112.4, respectively, related to security
lending activities were included in other accrued liabilities and other
non-current liabilities, respectively. See Note 4 of the Notes to
Consolidated Financial Statements for further discussion of these
transactions. During 1999 and 1998, cash flows from operating
activities and other financing activities combined with cash on hand and
higher debt levels were used for repurchase of common stock, dividends,
capital expenditures and the acquisition of a manufacturing facility in
Poland.
At December 31, 1999, debt maturing within one year consists of
borrowings from banks of $305.2 and the current maturities of long-term
debt of $.8. Management believes that cash from operations and
available sources of financing are adequate to meet anticipated
requirements for working capital, dividends, capital expenditures, the
remainder of the stock repurchase program and other cash needs.
In November 1999, the Company issued $500.0 of unsubordinated,
unsecured notes payable (the "Notes") in a private offering to
institutional investors. The proceeds from this issuance were used for
general corporate purposes, including the repayment of outstanding
short-term borrowings incurred to finance the acceleration of the
Company's share repurchase program.
In connection with the offering, Avon entered into five-year and
ten-year interest rate swap contracts with notional amounts of $200.0
and $300.0, respectively, to effectively convert fixed interest to a
variable interest rate, based on commercial paper rates on the Notes.
In May 1998, Avon issued $100.0 of bonds embedded with option features
(the "Bonds") to pay down commercial paper borrowings. The Bonds have a
twenty-year maturity; however, after five years, the Bonds, at the holder's
option, can be sold back to the Company at par or can be called at par by the
underwriter and resold to investors as fifteen-year debt. The coupon rate on
the Bonds is 6.25% for the first five years, but will be refinanced at 5.69%
plus the then corporate spread if the Bonds are reissued.
In connection with the Bond issuance, Avon entered into a five-year
interest rate swap contract with a notional amount of $50.0 to effectively
convert fixed interest on a portion of the Bonds to a variable interest rate,
based on LIBOR.
During 1997, the Company issued $100.0 of 6.55% notes, due August 1,
2007, to pay down commercial paper borrowings.
During 1996, the Company entered into an agreement (the "credit
facility"), which expires in 2001, with various banks to amend and restate the
five-year, $600.0 revolving credit and competitive advance facility agreement.
Within this facility, the Company is able to borrow, on an uncommitted basis,
various foreign currencies.
The credit facility is primarily to be used to finance working capital,
provide support for the issuance of commercial paper and support the stock
repurchase program. At the Company's option, the interest rate on borrowings
under the credit facility is based on LIBOR or the higher of prime or federal
fund rates. The credit facility has an annual facility fee of $.4. The
credit facility contains a covenant for interest coverage, as defined. The
Company is in compliance with this covenant.
At December 31, 1999, the Company has $226.4 outstanding under a $600.0
commercial paper program supported by the credit facility. There were no
borrowings outstanding as of December 31, 1998.
The Company has uncommitted lines of credit available of $49.0 in
1999 and 1998 with various banks which have no compensating balances or
fees. As of December 31, 1999 and 1998, $11.1 of these lines are being
used for letters of credit. In addition, as of December 31, 1999 and
1998, there were international lines of credit totaling $399.5 and
$329.5, respectively, of which $81.6 and $53.9 were outstanding,
respectively.
Inventories - Avon's products are marketed during twelve to twenty-six
individual sales campaigns each year. Each campaign is conducted using
a brochure offering a wide assortment of products, many of
38
which change
from campaign to campaign. It is necessary for Avon to maintain
relatively high inventory levels as a result of the nature of its
business, including the number of campaigns conducted annually and the
large number of products marketed. Avon's operations have a seasonal
pattern characteristic of many companies selling CFT, fashion jewelry
and accessories, gift and decorative items and apparel. Holiday sales
cause a peak in the fourth quarter which results in the build up of
inventory at the end of the third quarter. Inventory levels are then
sharply reduced by the end of the fourth quarter. Inventories of $523.5
at December 31, 1999 were $14.9 lower than 1998 as a result of a new
business strategy, meant to complement other redesign initiatives, with
the objective of reducing inventory clearance sales, building core
brochure sales and building global brands. This decrease was partially
offset by an increase in inventory levels in Mexico, resulting from
higher costs for cosmetics materials, increased imports to support the
home products line and lower than expected fragrance sales. It is
Avon's objective to continue to manage purchases and inventory levels
maintaining the focus of operating the business at efficient inventory
levels. However, the addition or expansion of product lines, which are
subject to changing fashion trends and consumer tastes, as well as
planned expansion in high growth markets, may cause the inventory levels
to grow periodically.
Capital Expenditures - Capital expenditures during 1999 were $203.4
(1998 - $189.5). These expenditures were made for capacity expansion in
high growth markets, maintenance of worldwide facilities,
contemporization and replacement of information systems, supply chain
initiatives in the U.S. and for shipping and other customer service
improvements including a new manufacturing and distribution facility in
Mexico and a new plant facility and national distribution center in the
Philippines. Numerous construction and information systems projects
were in progress at December 31, 1999 with an estimated cost to complete
of approximately $126.1. Capital expenditures in 2000 are currently
expected to be in the range of $220.0 - $240.0. These expenditures will
include improvements on existing facilities, continued investments for
capacity expansion in high growth markets, facility modernization,
information systems, including spending on the new Internet strategy,
and equipment replacement projects.
Foreign Operations - For the three years ending 1999, 1998 and 1997, the
Company derived approximately 60% of its consolidated net sales and
consolidated operating profit from operations from its subsidiaries
outside of North America. In addition, as of December 31, 1999 and
1998, these subsidiaries comprised approximately 53% of the Company's
consolidated total assets.
Avon's operations in many countries utilize numerous currencies. Avon
has significant net assets in Brazil, Mexico, the United Kingdom, Japan,
Argentina, Canada and the Philippines. Changes in the value of non-
hyperinflationary countries' currencies relative to the U.S. dollar
result in direct charges or credits to equity. Effective January 1,
1997, Mexico was designated as a country with a highly inflationary
economy due to the cumulative inflation rates over the three year period
1994 - 1996. However, Mexico was converted to non-hyper inflationary
status effective January 1, 1999 due to reduced cumulative inflation
rates during the three year period 1996 through 1998.
The Brazilian real devalued significantly in January 1999 and, as a
result, negatively affected Brazil's U.S. dollar results in 1999. The
effect of exchange rates was reduced by foreign exchange contracts
previously in place and several actions taken by local management to
offset the devaluation including a focused effort directed at vender
negotiations and local sourcing to reduce imports. Brazil's 1999 net
sales represented approximately 9% of Avon's consolidated net sales.
On April 21, 1998, the Chinese government issued a directive banning all
direct selling in China resulting in the shutdown of the Company's sales
operations for most of the second quarter. As of the beginning of June
1998, the Company received Chinese governmental approval to resume
operations as a wholesale and retail business and became operational
again on June 15, 1998. The Company converted its 75 branches into
retail outlets to serve customers. During the end of the second quarter
of 1998, Avon received government approval to utilize sales promoters,
much like Representatives, to promote product sales in China.
In early April 1999, the United States and China agreed to remove all
market access restrictions on direct selling in China by January 1,
2003, including the current ban on direct selling imposed by the Chinese
government in April 1998. The agreement is
39
contingent upon successful
completion of the World Trade Organization accession negotiations
between the United States and China and also includes development of
regulations for direct selling based on the World Federation of Direct
Selling Association's World Code of Conduct. Avon supports resolution
of this direct selling issue in China and remains committed to the
opportunities this promising region offers.
Avon's well diversified global portfolio of businesses has demonstrated
that the effects of weak economies and currency fluctuations in certain
countries may be offset by strong results in others. Fluctuations in
the value of foreign currencies cause U.S. dollar-translated amounts to
change in comparison with previous periods. Accordingly, Avon cannot
project in any meaningful way the possible effect of such fluctuations
upon translated amounts or future earnings. This is due to the large
number of currencies, the complexity of intercompany relationships, the
hedging activity entered into in an attempt to minimize certain of the
effects of exchange rate changes where economically feasible and the
fact that all foreign currencies do not react in the same manner against
the U.S. dollar.
Certain of the Company's financial instruments, which are discussed
below under Risk Management Strategies and Market Rate Sensitive
Instruments and in Note 7 of the Notes to Consolidated Financial
Statements, are used to hedge various amounts relating to certain
international subsidiaries. However, the Company's foreign currency
hedging activities are not material when compared to the Company's
international financial position or results of operations.
Some foreign subsidiaries rely primarily on borrowings from local
commercial banks to fund working capital needs created by their highly
seasonal sales pattern. From time to time, when tax and other
considerations dictate, Avon will finance subsidiary working capital
needs or borrow foreign currencies. At December 31, 1999, the total
indebtedness of foreign subsidiaries was $83.4.
It is Avon's policy to remit all the available cash (cash in excess of
working capital requirements, having no legal restrictions and not
considered permanently reinvested) of foreign subsidiaries as rapidly as
is practical. During 1999, these subsidiaries remitted, net of taxes,
$375.9 in dividends and royalties. This sum is a substantial portion of
the 1999 consolidated net earnings of Avon's foreign subsidiaries.
Risk Management Strategies and Market Rate Sensitive Instruments - The
Company operates globally, with manufacturing and distribution
facilities in various locations around the world. The Company may reduce
its primary market exposures to fluctuations in interest rates and
foreign exchange rates by creating offsetting positions through the use
of derivative financial instruments. The Company does not use derivative
financial instruments for trading or speculative purposes, nor is the
Company a party to leveraged derivatives.
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.
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 and 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 December 31, 1999, the Company held foreign currency forward
contracts with notional amounts totaling $290.2 and option contracts
with notional amounts totaling $20.0 to hedge foreign currency items.
All of these contracts have maturities prior to December 31, 2000. Also
outstanding in 1999 were foreign currency forward contracts totaling
$66.7 which do not qualify as hedging transactions under the current
accounting definitions and, accordingly, have been marked to market. The
mark-to-market adjustment at December 31, 1999 was not material.
The Company has entered into forward contracts to purchase
approximately 2,433,200 shares of Avon common stock at an average price of
$38.06 per share at December 31, 1999. The contracts mature over the next
two years and provide for physical or net share settlement to the Company.
Accordingly, no adjustment for subsequent changes in fair value has 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
40
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.
Non-performance of the counterparties to the balance of all the
currency and interest rate swap agreements would not result in a
significant write off at December 31, 1999. In addition, Avon may be
exposed to market risk on its foreign exchange and interest rate swap
agreements as a result of changes in foreign exchange and interest
rates. The market risk related to the foreign exchange agreements should
be substantially offset by changes in the valuation of the underlying
items being hedged.
The Company is exposed to changes in financial market conditions in
the normal course of its operations primarily due to international
businesses and transactions denominated in foreign currencies and the
use of various financial instruments to fund ongoing activities.
Various derivative and non-derivative financial instruments held by
the Company are sensitive to changes in interest rates. These financial
instruments are either discussed above or in Notes 4 and 7 of the Notes
to Consolidated Financial Statements. Interest rate changes would
result in gains or losses in the fair value of debt and other financing
instruments held by the Company. Based on the outstanding balance of
all instruments at December 31, 1999, a hypothetical 50 basis point
increase or decrease in interest rates prevailing at this date,
sustained for one year, would not represent a material potential loss in
fair value, earnings or cash flows. This potential loss was calculated
based on discounted cash flow analyses using interest rates comparable
to the Company's current cost of debt. In 1999, the Company did not
experience a material loss in fair value, earnings or cash flows
associated with changes in interest rates.
The Company is exposed to equity price fluctuations for investments
included in the grantors trust. A 10% change in equity prices would not
be material based on the fair value of equity investments as of December
31, 1999.
The Company also engages in various hedging activities in order to
reduce potential losses due to foreign currency risks. Consistent with
the nature of the economic hedge of such foreign exchange contracts, any
unrealized gain or loss would be offset by corresponding decreases or
increases, respectively, of the underlying instrument or transaction
being hedged. These financial instruments are discussed above and in
Note 7 of the Notes to Consolidated Financial Statements. Based on
the Company's foreign exchange contracts at December 31, 1999, the
impact of a 10% appreciation or 10% depreciation of the U.S. dollar
against the Company's foreign exchange contracts would not represent a
material potential loss in fair value, earnings or cash flows. This
potential loss does not consider the underlying foreign currency
transaction or translation exposures of the Company. The hypothetical
impact was calculated on the combined option and forward positions using
forward rates at December 31, 1999 adjusted for an assumed 10%
appreciation or 10% depreciation of the U.S. dollar against the foreign
contracts. The impact of payoffs on option contracts is not significant
to this calculation. In 1999, net foreign exchange losses associated
with the Company's foreign exchange contracts did not represent a
material loss in fair value, earnings or cash flows.
As of December 31, 1999, the primary currencies for which the
Company has net underlying foreign currency exchange rate exposure are
the U.S. dollar versus the Argentine peso, Brazilian real, British
pound, Canadian dollar, euro, French franc, German mark, Japanese yen
and the Mexican peso. The Company is also exposed to other South
American and Asian currencies.
The Company does not hedge its foreign currency exposure in a
manner that would entirely eliminate the effect of changes in foreign
exchange rates on the Company's consolidated financial position, results
of operations and cash flows. The impact of a 10% appreciation or 10%
depreciation of the U.S. dollar against the Company's net underlying
foreign currency transaction and translation exposures could be
material.
Other Information
In October 1997, the Company announced a worldwide business process
redesign ("BPR") program to streamline operations and improve
profitability through margin improvement and expense reductions. The
special and non-recurring charges associated with this program totaled
$151.2 pretax ($121.9 net of tax, or $.47 per share on a basic and
diluted basis) for the year ended December 31, 1999 and
41
$154.4 pretax
($122.8 net of tax, or $.46 per share on a basic and diluted basis) for
the year ended December 31, 1998.
BPR initiatives underway are intended to reduce costs by up to
$400.0 a year by 2000, with a portion of the savings being reinvested
primarily in consumer-focused initiatives. Total savings from BPR
initiatives for 1999 approximated $250.0.
Euro
A single currency called the euro was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union
adopted the euro as their common legal currency on that date. Fixed
conversion rates between these participating countries' existing
currencies (the "legacy currencies") and the euro were established as of
that date. The legacy currencies are scheduled to remain legal tender
as denominations of the euro until June 30, 2002 after which they will
be withdrawn from circulation. During this transition period, parties
may settle transactions using either the euro or a participating
country's legal currency. Beginning in January 2002, new euro-
denominated bills and coins will be issued.
Avon operating subsidiaries affected by the euro conversion have
established plans to address issues raised by the euro currency
conversion. These issues include, among others, the need to adapt
information technology systems, business processes and equipment to
accommodate euro-denominated transactions, the impact of one common
currency on pricing and recalculating currency risk. Avon does not
expect system and equipment conversion costs to be material. Due to the
numerous uncertainties associated with the market impact of the euro
conversion, the Company cannot reasonably estimate the effects one
common currency will have on pricing and the resulting impact, if any,
on results of operations, financial condition or cash flows.
Year 2000 Update
The Company did not experience any disruptions to its normal operations as a
result of the transition into calendar year 2000. Thorough testing of mission
critical business processes was performed on January 1, 2000 in order to
validate the data integrity of internal and external system interfaces. In
addition, the Company obtained confirmation from its key suppliers and vendors
that services to Avon Products, Inc. would not be interrupted.
The total estimated cost associated with achieving worldwide Year 2000
compliance, excluding internal costs, will be approximately $33.7, of
which $33.2 has been spent to date. Replacement costs and costs
associated with the validation of third party compliance are included in
these figures. The Company did not separately track the internal costs
incurred for the Year 2000 project, those costs primarily being related
to payroll costs for the Company's information systems group. The
Company's policy was to expense as incurred information system
maintenance and modification costs and to capitalize costs related to
system replacement. The costs of the Company's Year 2000 compliance
efforts are being funded through operating cash flows.
The Company will continue to monitor its business processes and third
parties for potential problems that could arise in the first few months
of calendar year 2000. Based on the Company's preparations prior to
January 1, 2000 and the absence of any problems to date, no significant
disruptions are anticipated.
42
Results of Operations by Quarter
Avon Products, Inc.
In millions, except per share data
First Second Third Fourth Year
1999**
Net sales $1,213.8 $1,258.1 $1,250.6 $1,566.6 $5,289.1
Gross profit* 705.6 806.4 785.6 960.0 3,257.6
Special charges 105.2 - - - 105.2
Operating (loss)profit (41.3) 195.8 146.3 248.6 549.4
(Loss)income before taxes and
minority interest (39.3) 188.4 136.3 221.2 506.6
(Loss)income before minority
interest (50.7) 120.6 88.5 144.0 302.4
Net(loss)income $ (48.9) $ 121.4 $ 88.2 $ 141.7 $ 302.4
(Loss)earnings per share:
Basic $ (.19) $ .46 $ .34 $ .58 $ 1.18(1)
Diluted $ (.19) $ .46 $ .34 $ .58 $ 1.17(1)
1998**
Net sales $1,183.4 $1,247.2 $1,233.2 $1,548.9 $5,212.7
Gross profit* 680.3 781.6 755.0 942.8 3,159.7
Special charges 70.5 - 46.0 - 116.5
Operating (loss)profit (17.8) 177.0 81.1 232.9 473.2
(Loss)income before taxes and
minority interest (26.6) 173.6 76.5 232.4 455.9
(Loss)income before
minority interest (32.7) 109.7 39.8 148.3 265.1
Net(loss)income $ (31.0) $ 111.4 $ 41.5 $ 148.1 $ 270.0
(Loss)earnings per share:
Basic $ (.12) $ .42 $ .16 $ .56 $ 1.03(1)
Diluted $ (.12) $ .42 $ .16 $ .56 $ 1.02(1)
*First quarter 1999 and 1998 include special and non-recurring charges of
$46.0 and $37.9, respectively, for inventory write-downs.
**Certain reclassifications have been made to the 1998 financial and 1999
quarterly information to conform to the current full year presentation.
(1) The sum of per share amounts for the quarters does not
necessarily equal that for the year because the computations are
made independently.
Market Prices Per Share of Common Stock by Quarter
1999 1998
Quarter High Low High Low
First $ 49.00 $ 35.50 $ 40.63 $ 28.00
Second 59.13 46.38 44.50 36.94
Third 56.75 24.63 44.31 25.00
Fourth 37.38 23.31 46.25 25.75
Avon common stock is listed on the New York Stock Exchange. At December
31, 1999, there were 22,964 shareholders of record. The Company
believes that there are over 70,000 additional shareholders who are not
"shareholders of record" but who beneficially own and vote shares
through nominee holders such as brokers and benefit plan trustees.
Dividends of $.72 per share, or $.18 per share each quarter, were
declared and paid in 1999. Dividends of $.68 per share, or $.17 per
share each quarter, were declared and paid in 1998.
43
Consolidated Statements of Income
Avon Products, Inc.
In millions, except per share data
Years ended December 31 1999 1998 1997
Net sales $5,289.1 $5,212.7 $5,079.4
Costs, expenses and other:
Cost of sales* 2,031.5 2,053.0 2,051.0
Marketing, distribution and
administrative expenses 2,603.0 2,570.0 2,490.6
Special charges 105.2 116.5 -
Operating profit 549.4 473.2 537.8
Interest expense 43.2 34.7 35.5
Interest income (11.1) (15.9) (16.7)
Other expense (income), net 10.7 (1.5) (15.9)
Total other expenses 42.8 17.3 2.9
Income before taxes and minority interest 506.6 455.9 534.9
Income taxes 204.2 190.8 197.9
Income before minority interest 302.4 265.1 337.0
Minority interest 0.0 4.9 1.8
Net income $ 302.4 $ 270.0 $ 338.8
Earnings per share:
Basic $ 1.18 $ 1.03 $ 1.28
Diluted $ 1.17 $ 1.02 $ 1.27
*1999 and 1998 include special and non-recurring charges of $46.0 and
$37.9, respectively, for inventory write-downs.
The accompanying notes are an integral part of these statements.
44
Consolidated Balance Sheets
Avon Products, Inc.
In millions, except share data
December 31 1999 1998
Assets
Current assets
Cash, including cash equivalents of $49.6 and $59.7 $ 117.4 $ 105.6
Accounts receivable (less allowance for doubtful
accounts of $40.0 and $49.0) 495.6 492.6
Inventories 523.5 538.4
Prepaid expenses and other 201.3 204.8
Total current assets $1,337.8 $1,341.4
Property, plant and equipment, at cost
Land 55.1 51.4
Buildings and improvements 653.4 613.0
Equipment 763.5 728.4
1,472.0 1,392.8
Less accumulated depreciation 737.2 722.9
734.8 669.9
Other assets 456.0 422.2
Total assets $2,528.6 $2,433.5
Liabilities and Shareholders' (Deficit) Equity
Current liabilities
Debt maturing within one year $ 306.0 $ 55.3
Accounts payable 435.9 416.9
Accrued compensation 165.8 161.3
Other accrued liabilities 411.6 308.2
Sales and taxes other than income 107.5 106.2
Income taxes 286.0 281.6
Total current liabilities $1,712.8 $1,329.5
Long-term debt 701.4 201.0
Employee benefit plans 398.1 390.0
Deferred income taxes 36.7 36.3
Other liabilities (including minority interest
of $32.7 and $36.1) 85.7 191.6
Commitments and contingencies (Note 14)
Shareholders' (deficit) equity
Common stock, par value $.25 - authorized:
400,000,000 shares; issued
352,575,924 and 351,314,366 shares 88.1 87.8
Additional paid-in capital 819.4 780.0
Retained earnings 837.2 719.1
Accumulated other comprehensive income (349.7) (301.3)
Treasury stock, at cost - 114,680,525 and
88,793,640 shares (1,801.1) (1,000.5)
Total shareholders' (deficit) equity (406.1) 285.1
Total liabilities and
shareholders' (deficit) equity $2,528.6 $2,433.5
The accompanying notes are an integral part of these statements.
45
Consolidated Statements of Cash Flows
Avon Products, Inc.
In millions
Years ended December 31 1999 1998 1997
Cash flows from operating activities
Net income $ 302.4 $ 270.0 $ 338.8
Adjustments to reconcile income to net cash
provided by operating activities:
Depreciation and amortization 83.0 72.0 72.1
Provision for doubtful accounts 87.5 91.3 80.8
Translation gains (.9) (7.2) (.1)
Deferred income taxes (20.0) (13.0) 18.0
Special charges 84.1 88.5 -
Other 9.7 3.9 9.4
Changes in assets and liabilities:
Accounts receivable (132.7) (157.6) (121.4)
Inventories (57.8) (17.2) (67.5)
Prepaid expenses and other 1.1 (4.0) 6.7
Accounts payable and accrued liabilities 56.3 13.0 42.9
Income and other taxes 27.6 19.5 (56.1)
Noncurrent assets and liabilities 24.3 (34.8) (8.1)
Net cash provided by operating activities 464.6 324.4 315.5
Cash flows from investing activities
Capital expenditures (203.4) (189.5) (169.4)
Disposal of assets 11.7 5.8 3.3
Acquisitions of subsidiary stock and other
investing activities (16.5) 1.4 (9.0)
Net cash used by investing activities (208.2) (182.3) (175.1)
Cash flows from financing activities
Cash dividends (186.3) (180.6) (168.3)
Debt, net (maturities of three months or less) 227.2 (96.1) (39.8)
Proceeds from short-term debt 90.8 54.7 25.7
Retirement of short-term debt (69.4) (34.9) (49.0)
Proceeds from long-term debt 500.0 100.1 100.0
Retirement of long-term debt (.2) (.6) (.8)
Proceeds from exercise of stock options 23.9 24.0 20.6
Repurchase of common stock (800.6) (107.8) (110.8)
Other financing activities - 58.1 58.6
Net cash used by financing activities (214.6) (183.1) (163.8)
Effect of exchange rate changes on cash and
equivalents (30.0) 4.7 (19.2)
Net increase(decrease) in cash and equivalents 11.8 (36.3) (42.6)
Cash and equivalents at beginning of year 105.6 141.9 184.5
Cash and equivalents at end of year $ 117.4 $ 105.6 $ 141.9
Cash paid for
Interest $ 47.1 $ 39.2 $ 36.0
Income taxes, net of refunds received 176.0 188.5 215.8
The accompanying notes are an integral part of these statements.
46
Consolidated Statements of Changes in Shareholders' (Deficit) Equity
Avon Products, Inc.
In millions, except share data
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive Treasury
Shares Amount Capital Earnings Income Stock Total
Balance at
December 31, 1996 173,957,379 $ 43.5 $ 693.6 $ 488.8 $(210.7) $(773.5) $ 241.7
Comprehensive income:
Net income 338.8 338.8
Foreign currency translation adjustments (59.6) (59.6)
Total comprehensive income 279.2
Dividends - $1.26 per share (166.7) (166.7)
Exercise of stock options,
including tax benefits 713,298 .2 30.3 30.5
Grant, cancellation and
amortization of
restricted stock 40,496 4.6 4.6
Repurchase of common stock (110.8) (110.8)
Benefit plan contributions 4.6 1.9 6.5
Balance at
December 31, 1997 174,711,173 43.7 733.1 660.9 (270.3) (882.4) 285.0
Comprehensive income:
Net income 270.0 270.0
Foreign currency translation adjustments (15.6) (15.6)
Minimum pension liability adjustment (15.4) (15.4)
Total comprehensive income 239.0
Dividends - $.68 per share (178.9) (178.9)
Two-for-one stock split effected
in the form of a stock dividend
from retained earnings
(Note 9) 175,419,475 43.9 (32.9) (11.0) -
Exercise of stock options,
including
tax benefits 916,102 .2 38.2 38.4
Grant, cancellation
and amortization
of restricted stock 267,616 7.1 7.1
Repurchase of common stock (107.8) 107.8)
Benefit plan contributions 1.6 .7 2.3
Balance at
December 31, 1998 351,314,366 87.8 780.0 719.1 (301.3)(1,000.5) 285.1
Comprehensive income:
Net income 302.4 302.4
Foreign currency translation adjustments (49.7) (49.7)
Minimum pension liability adjustment 1.3 1.3
Total comprehensive income 254.0
Dividends - $.72 per share (184.3) (184.3)
Exercise of
stock options,
including
tax benefits 1,152,549 .3 30.7 31.0
Grant, cancellation
and amortization
of restricted
stock 109,009 8.7 8.7
Repurchase of common stock (800.6) (800.6)
Balance
at December 31,
1999 352,575,924 $88.1 $819.4 $837.2 $(349.7)$(1,801.1)$(406.1)
The accompanying notes are an integral part of these statements.
47
Notes to Consolidated Financial Statements
Avon Products, Inc.
In millions, except per share data
1. Description of the Business and Summary of Significant Accounting
Policies
Business
Avon Products, Inc. ("Avon" or the "Company") is a global manufacturer and
marketer of beauty and related products. The product categories include
cosmetics, fragrance and toiletries; beauty plus which consists of jewelry and
accessories and apparel; and non-core which consists of gift and decorative
and home entertainment products. Avon's business is comprised of one industry
segment, direct selling, which is conducted in North America, Latin America,
the Pacific and Europe. Sales are made to the ultimate customers principally
by independent Avon Representatives.
Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include
the accounts of Avon and its majority and wholly-owned subsidiaries.
Intercompany balances and transactions are eliminated. These statements have
been prepared in conformity with generally accepted accounting principles and
require management to make estimates and assumptions that affect amounts
reported and disclosed in the financial statements and related notes. Actual
results could differ from these estimates.
Foreign Currency - Financial statements of foreign subsidiaries operating in
other than highly inflationary economies are translated at year-end exchange
rates for assets and liabilities and average exchange rates during the year
for income and expense accounts. The resulting translation adjustments are
recorded within accumulated other comprehensive income. Financial statements
of subsidiaries operating in highly inflationary economies are translated
using a combination of current and historical exchange rates and any
translation adjustments are included in income.
Revenue Recognition - Avon recognizes revenue as shipments are made and title
passes to the independent Representatives, who are Avon's customers.
Cash and Equivalents - Cash equivalents are stated at cost plus accrued
interest, which approximates fair value. Cash equivalents are highly liquid
debt instruments with an original maturity of three months or less and consist
of time deposits with a number of U.S. and non-U.S. commercial banks with high
credit ratings.
Inventories - Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out ("FIFO") method for all inventories.
Prior to October 1999, substantially all U.S. inventories, except apparel,
used the last-in, first-out ("LIFO") method to determine cost. The LIFO value
of such inventory was approximately $3.6 lower than it would have been under
the FIFO method at December 31, 1998. Effective October 1, 1999, the U.S.
inventories using the LIFO method were changed to the FIFO method. The change
was made because the Company had begun to realize and expects to continue to
experience cost reductions as a result of technological advancements and
process improvements in its manufacturing operations. As a result, the FIFO
method will better measure the current value of such inventories, provide a
more appropriate matching of revenues and expenses, and conform all
inventories of the Company to the same accounting method. This accounting
change was not material to the financial statements on an annual or quarterly
basis, and accordingly, no restatement of prior periods' financial statements
was made.
Depreciation - Substantially all buildings, improvements and equipment are
depreciated using the straight-line method over estimated useful lives.
Estimated useful lives for buildings and improvements range from approximately
20 to 45 years and equipment range from 3 to 15 years.
Other Assets - Systems development costs related to the development of major
information and accounting systems are capitalized and amortized over the
estimated useful life of the related project, not to exceed five years.
Stock Options - Avon applies APB Opinion 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its long-term
incentive plans. Compensation cost for fixed price options is measured as the
excess, if any, of the quoted market price of Avon's stock at the grant date
or other measurement date over the amount an employee must pay to acquire the
stock.
Financial Instruments - The Company uses derivative financial
instruments, including swaps, forward contracts and options, to manage
interest rate and foreign currency exposures. These instruments are
accounted for on an accrual basis. Gains and losses
48
on existing assets,
liabilities and firm commitments designated as hedged items are deferred
and included in other assets or liabilities and recognized when the
offsetting gains and losses are recognized in the related financial
instrument. Gains and losses and cash flows from derivative instruments
designated as hedges are classified consistent with the items being
hedged. Items which do not qualify for hedge accounting are marked to
market with the resulting gain or loss recognized in other expense
(income), net. Gains and losses on terminations of foreign exchange and
interest rate swap contracts are deferred and amortized over the
remaining terms of the original agreements.
The Company also uses financial instruments, including forward contracts to
purchase Avon common stock, to hedge certain employee benefit costs and the
cost of the Company's share repurchase program. Contracts that require
physical or net share settlement are initially measured at fair value with
subsequent changes in fair value not recognized. Contracts that require net
cash settlement are initially measured at fair value with subsequent changes
in fair value recognized as gains or losses in the income statement.
Research and Development - Research and development costs are expensed as
incurred and aggregated in 1999 $34.4 (1998 - $31.4; 1997 - $29.9).
Advertising - Advertising costs are expensed as incurred and aggregated in
1999 $63.4 (1998 - $65.0; 1997 - $64.5).
Income Taxes - Deferred income taxes have been provided on items recognized
for financial reporting purposes in different periods than for income tax
purposes at future enacted rates.
U.S. income taxes have not been provided on approximately $195.0 of
undistributed income of subsidiaries that has been or is intended to be
permanently reinvested outside the United States or is expected to be remitted
free of U.S. income taxes. If such undistributed income was remitted, no
substantial tax cost would be incurred.
Earnings per Share - Basic earnings per share are computed by dividing net
income by the weighted-average number of shares outstanding during the year.
Diluted earnings per share are calculated to give effect to all potentially
dilutive common shares that were outstanding during the year.
For each of the three years ended December 31, the number of shares used
in the computation of basic and diluted earnings per share are as follows:
1999 1998 1997
Basic EPS
Weighted-average shares 256.78 263.27 264.67
Incremental shares from conversion of:
Stock options 2.59* 2.68 2.33
Diluted EPS
Adjusted weighted-average shares 259.37 265.95 267.00
*At December 31, 1999, stock options and forward contracts to purchase
Avon common stock totaling 3.8 million shares are not included in the
diluted earnings per share calculation since their impact is anti-
dilutive.
Reclassifications - To conform to the 1999 presentation, certain
reclassifications were made to the prior years' consolidated financial
statements and the accompanying footnotes.
2. Accounting Changes
In June 1999, the Financial Accounting Standards Board issued Financial
Accounting Standard ("FAS") No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FAS No. 133", which
delayed the effective date of FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", by one year. FAS No. 133 is now
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 (January 1, 2001 for the Company). FAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives will be recorded each period in
current earnings or accumulated other comprehensive income, depending on
whether the derivative is designated as part of a hedge transaction. For
fair-value hedge transactions in which the Company is hedging changes in the
fair value of an asset, liability, or firm commitment, changes in the fair
value of the derivative instrument will be included in the income statement
along with the offsetting changes in the hedged item's fair value. For cash-
flow hedge transactions in which the Company is hedging the variability of
cash flows related to a variable rate asset, liability, or a forecasted
transaction, changes in the fair value of the derivative instrument will be
reported in accumulated other comprehensive income. The gains and losses on
the derivative instruments that are reported in accumulated other
comprehensive income will be reclassified to earnings in the periods in which
earnings are impacted by the variability of the cash flows of the hedged item.
The ineffective portion of all of the hedges will be recognized in current
period earnings. The impact of FAS No. 133 on the Company's financial
statements will depend on a variety of factors, including the future level of
forecasted and actual foreign currency transactions, the extent of the
Company's hedging activities, the types of hedging instruments used and the
effectiveness of such instruments. Based on an analysis of Avon's financial
instruments outstanding at December 31, 1999, the
49
Company does not expect the
adoption of FAS No. 133 to have a material impact on its earnings or statement
of financial position.
3. Inventories
Inventories at December 31 consisted of the following:
1999 1998
Raw materials $156.9 $140.6
Finished goods 366.6 397.8
Total $523.5 $538.4
4. Debt and Other Financing
Debt at December 31 consisted of the following (see also Note 7 regarding
financial instruments):
1999 1998
Maturing within one year:
Notes payable $305.2 $ 53.9
Current portion of long-term debt .8 1.4
Total $306.0 $ 55.3
Long-term debt:
6.90% Notes, due 2004 $200.0 $ -
6.55% Notes, due 2007 100.0 100.0
7.15% Notes, due 2009 300.0 -
6.25% Bonds, due 2018 100.0 100.0
Other, payable through 2002 with interest from 3% to 38% 2.2 2.4
Less current portion (.8) (1.4)
Total $701.4 $ 201.0
Annual maturities of long-term debt for each of the next five years are:
2000 - $.8; 2001 - $.8; 2002 - $.4; 2003 - $.2; and 2004 and beyond - $700.0.
In November of 1999, Avon issued $500.0 of notes payable (the "Notes") in
a private offering to institutional investors. The Notes are unsubordinated,
unsecured obligations of the Company. $200.0 of the Notes bear interest at a
per annum rate equal to 6.90% and mature on November 15, 2004. $300.0 of the
Notes bear interest at a per annum rate equal to 7.15% and mature on November
15, 2009. Interest on the Notes is payable semi-annually. The indenture
under which the Notes were issued limits the incurrence of liens and restricts
the incurrence of sales and leaseback transactions and transactions involving
mergers, consolidation or a sale of substantially all of the Company's assets.
In connection with the offering, Avon entered into five-year and ten-year
interest rate swap contracts with notional amounts of $200.0 and $300.0,
respectively, to effectively convert fixed interest to a variable interest
rate, based on commercial paper rates on the Notes.
In May 1998, Avon issued $100.0 of bonds embedded with option features
(the "Bonds") to pay down commercial paper borrowings. The Bonds have a
twenty-year maturity; however, after five years, the Bonds, at the holder's
option, can be sold back to the Company at par or can be called at par by the
underwriter and resold to investors as fifteen-year debt. The coupon rate on
the Bonds is 6.25% for the first five years, but will be refinanced at 5.69%
plus the then corporate spread if the Bonds are reissued.
In connection with the Bond issuance, Avon entered into a five-year
interest rate swap contract with a notional amount of $50.0 to effectively
convert fixed interest on a portion of the Bonds to a variable interest rate,
based on LIBOR.
During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007,
to pay down commercial paper borrowings.
Under the terms of a revolving credit and competitive advance facility
agreement amended in 1996 and expiring in 2001 (the "credit facility"), the
Company may borrow up to $600.0. Within this facility, the Company is able to
borrow, on an uncommitted basis, various foreign currencies.
The credit facility is primarily to be used to finance working capital,
provide support for the issuance of commercial paper and support the stock
repurchase program. At the Company's option, the interest rate on borrowings
under the credit facility is based on LIBOR or the higher of prime or federal
fund rates. The credit facility has an annual facility fee of $.4. The
credit facility contains a covenant for interest coverage, as defined. The
Company is in compliance with this covenant.
At December 31, 1999, the Company has $226.4 outstanding under a $600.0
commercial paper program supported by the credit facility. At December 31,
1998, there were no borrowings outstanding under the credit facility.
The Company has uncommitted lines of credit available of $49.0 in 1999 and
1998 with various banks which have no compensating balances or fees. As of
December 31, 1999 and 1998, $11.1 of these lines are being used for letters of
credit.
The maximum borrowings under these combined facilities during 1999 and
1998 were $840.7 and $290.7, respectively, and the annual average borrowings
during each year were approximately $304.0 and $205.7, respectively, at
average annual interest rates of approximately 5.3% and 4.8%, respectively.
At December 31, 1999 and 1998, international lines of credit totaled
$399.5 and $329.5, respectively, of which $81.6 and $53.9 were outstanding,
respectively. The maximum borrowings under these facilities during 1999 and
1998 were $121.0 and $63.6, respectively, and the annual average borrowings
during each year were $73.0 and $49.3, respectively, at average annual
interest rates of approximately 6.2% and 12.3%, respectively. Such lines have
no compensating balances or fees.
50
At December 31, 1999 and 1998, Avon also had letters of credit
outstanding totaling $15.5, which guarantee various insurance activities. In
addition, Avon had outstanding letters of credit for various trade activities.
During 1998 and 1997, the Company entered into securities lending
transactions resulting in the borrowing of securities which were subsequently
sold for net proceeds approximating $58.1 and $58.6, respectively, used to
repay commercial paper borrowings. The borrowed securities are due to the
lender no later than December 29, 2000. The obligations are included in other
accrued liabilities on the balance sheet. The effective rates on the
transactions are expected to be 5.5% and 6.5%, respectively.
5. Comprehensive Income
The following table reflects comprehensive income as of December 31:
1999 1998 1997
Net income $302.4 $270.0 $338.8
Other comprehensive loss
Change in equity due
to foreign currency
translation adjustments (49.7) (15.6) (59.6)
Minimum pension liability
adjustment 1.3 (15.4) -
Comprehensive income $254.0 $239.0 $279.2
Accumulated other comprehensive income at December 31
consisted of the following:
1999 1998
Foreign currency translation
adjustments $(335.6) $(285.9)
Minimum pension liability
adjustments (14.1) (15.4)
Total $(349.7) $(301.3)
6. Income Taxes
Deferred tax assets (liabilities) resulting from temporary differences in the
recognition of income and expense for tax and financial reporting purposes at
December 31 consisted of the following:
1999 1998
Deferred tax assets:
Postretirement benefits $ 82.8 $ 82.0
Accrued expenses and reserves 48.6 58.7
Special and non-recurring charges 7.2 9.0
Employee benefit plans 70.9 54.5
Foreign operating loss carryforwards 37.3 29.1
Capital loss carryforwards 10.0 17.4
Postemployment benefits 9.3 11.0
All other 27.0 21.3
Valuation allowance (46.7) (46.9)
Total deferred tax assets 246.4 236.1
Deferred tax liabilities:
Depreciation (43.6) (41.5)
Prepaid retirement plan costs (54.9) (55.2)
Capitalized interest (9.7) (10.6)
Unremitted foreign earnings (17.7) (17.4)
All other (19.7) (22.1)
Total deferred tax liabilities (145.6) (146.8)
Net deferred tax assets $ 100.8 $ 89.3
Deferred tax assets (liabilities) at December 31 were classified as
follows:
1999 1998
Deferred tax assets:
Prepaid expenses and other $ 90.0 $ 86.9
Other assets 52.2 44.2
Total deferred tax assets 142.2 131.1
Deferred tax liabilities:
Income taxes (4.7) (5.5)
Deferred income taxes (36.7) (36.3)
Total deferred tax liabilities (41.4) (41.8)
Net deferred tax assets $100.8 $ 89.3
The valuation allowance primarily represents reserves for foreign operating
loss and capital loss carryforwards. The basis used for recognition of
deferred tax assets included the profitability of the operations and related
deferred tax liabilities.
Income before taxes and minority interest for the years ended December 31
was as follows:
1999 1998 1997
United States $ 102.2 $ 74.2 $ 153.6
Foreign 404.4 381.7 381.3
Total $ 506.6 $ 455.9 $ 534.9
51
The provision for income taxes for the years ended December 31 was as
follows:
1999 1998 1997
Federal:
Current $ 48.4 $ 39.2 $ 27.1
Deferred (13.3) (10.4) 21.3
35.1 28.8 48.4
Foreign:
Current 167.5 153.7 148.0
Deferred (4.5) .9 (7.7)
163.0 154.6 140.3
State and other:
Current 8.3 10.9 4.8
Deferred (2.2) (3.5) 4.4
6.1 7.4 9.2
Total $ 204.2 $ 190.8 $ 197.9
The effective tax rate for the years ended December 31 was as follows:
1999 1998 1997
Statutory federal rate 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit .8 1.0 1.1
Tax-exempt operations (.3) .8 (.5)
Taxes on foreign income, including translation 4.2 4.6 1.3
Other .6 .5 .1
Effective tax rate 40.3% 41.9% 37.0%
In the fourth quarter of 1997, the Company recorded a benefit related to a
value-added tax settlement in the United Kingdom totaling $26.5, of which
$20.6 and $5.9 have been reflected in other expense (income), net and interest
income, respectively.
At December 31, 1999, Avon had foreign operating loss carryforwards of
approximately $106.0. The loss carryforwards expiring between 2000 and 2007
were $55.5 and the loss carryforwards which do not expire were $50.5. Capital
loss carryforwards, which expire between 2000 and 2001 and may be used to
offset capital gains, if any, were approximately $28.7 at December 31, 1999.
7. Financial Instruments and Risk Management
Risk Management - The Company operates globally, with manufacturing and
distribution facilities in various locations around the world. The Company may
reduce its exposure to fluctuations in interest rates and foreign exchange
rates by creating offsetting positions through the use of derivative financial
instruments. The Company does not use derivative financial instruments for
trading or speculative purposes, nor is the Company a party to leveraged
derivatives.
The notional amount of forward exchange contracts and options is the
amount of foreign currency bought or sold at maturity. The notional amount of
interest rate swaps is the underlying principal amount used in determining the
interest payments exchanged over the life of the swap. The notional amounts
are not a direct measure of the Company's exposure through its use of
derivatives.
Interest Rates - 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.
As discussed in Note 4 of the Notes to Consolidated Financial Statements,
the Company entered into a five-year interest rate swap contract with a
notional amount of $50.0 to effectively convert fixed interest on a portion of
the Bonds to a variable interest rate based on LIBOR. The Company has also
entered into five-year and ten-year interest rate swap contracts with notional
amounts of $200.0 and $300.0, respectively, to convert fixed interest to a
variable interest rate, based on commercial paper rates on the Notes.
Foreign Currencies - 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 and 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 December 31, 1999, the Company held foreign currency forward contracts
with notional amounts totaling $290.2 (1998 - $285.9) and option contracts
with notional amounts totaling $20.0 (1998 - $32.6) to hedge foreign currency
items. All of these contracts have maturities prior to December 31, 2000.
Additionally, the Company also held forward contracts with notional amounts
totaling $66.7 (1998 - $45.0) which do not qualify as hedging transactions
under the current accounting definitions and, accordingly, have been marked to
market. The mark-to-market adjustments on these forward contracts at December
31, 1999 and 1998 were insignificant.
52
These forward and option contracts to purchase and sell foreign
currencies, including cross-currency contracts to sell one foreign currency
for another currency at December 31 are summarized below:
1999 1998
Buy Sell Buy Sell
Brazilian real $ 15.0 $65.0 $ - $ 45.0
British pound 7.3 30.1 37.9 57.7
Canadian dollar - 23.8 - 39.1
Chinese renminbi - - - 5.0
Euro 82.9 10.0 - -
French franc 10.9 - - -
German mark - - 71.8 -
Indonesian rupiah 1.7 - - -
Irish punt 1.7 - - -
Italian lira 4.7 - 7.3 -
Japanese yen 4.8 60.5 1.5 67.3
Mexican peso - 45.0 - -
Spanish peseta - - 1.3 -
Taiwanese dollar - 3.0 - 18.5
Other currencies 6.2 4.3 6.8 4.3
Total $ 135.2 $241.7 $126.6 $236.9
At December 31, 1999, the Company has entered into forward contracts
to purchase approximately 2,433,200 shares of Avon common stock at an
average price of $38.06 per share at December 31, 1999. The contracts
mature over the next two years and provide for physical or net share
settlement to the Company. Accordingly, no adjustment for subsequent
changes in fair value has been recognized.
Credit and Market Risk - The Company attempts to minimize its credit exposure
to counterparties by entering into interest rate swap and cap contracts only
with major international financial institutions with "A" or higher credit
ratings as issued by Standard & Poor's Corporation. The Company's foreign
currency and interest rate derivatives are comprised of over-the-counter
forward contracts or options with major international financial institutions.
Although the Company's theoretical credit risk is the replacement cost at the
then estimated fair value of these instruments, management believes that the
risk of incurring losses is remote and that such losses, if any, would not be
material.
Non-performance of the counterparties to the balance of all the currency
and interest rate swap agreements would not result in a significant write-off
at December 31, 1999. In addition, Avon may be exposed to market risk on its
foreign exchange and interest rate swap agreements as a result of changes in
foreign exchange and interest rates. The market risk related to the foreign
exchange agreements should be substantially offset by changes in the valuation
of the underlying items being hedged.
Fair Value of Financial Instruments - For purposes of the following
disclosure, the fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. The aggregate fair value
amounts presented are not intended to, and do not, represent the underlying
fair value of Avon.
The methods and assumptions used to estimate fair value are as follows:
Grantor trust - The fair value of these investments, principally fixed income
funds and equity securities, is based on the quoted market prices for issues
listed on exchanges.
Debt maturing within one year and long-term debt and other financing - The
fair value of all debt and other financing is estimated based on the quoted
market prices.
Forward stock purchases and foreign exchange forward and option contracts -
The fair value of forward and option contracts is estimated based on quoted
market prices from banks.
Interest rate swap agreements - The fair value of interest rate swap
agreements is estimated based on quotes from the market makers of these
instruments and represents the estimated amounts that Avon would expect to
receive or pay to terminate the agreements.
The asset and (liability) amounts recorded in the balance sheet (carrying
amount) and the estimated fair values of financial instruments at December 31
consisted of the following:
1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and equivalents $ 117.4 $ 117.4 $105.6 $105.6
Grantor trust 75.4 75.4 72.2 72.7
Debt maturing within one year* (412.4) (412.4) (55.3) (55.3)
Long-term debt* (701.1) (675.6) (316.6) (322.2)
Forward stock purchases and
foreign exchange forward and
option contracts 9.8 (8.0) 1.7 23.8
Interest rate swap
receivable (payable) .5 (13.4) .1 1.6
*Other financing activities are included in Debt maturing within one year in
1999 and in Long-term debt in 1998.
53
8. Stock Option Plans
A summary of the Company's stock option activity, weighted-average exercise
price and related information for the years ended December 31 is as follows:
1997 1998 1999
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(in 000's) Price (in 000's) Price (in 000's) Price
Outstanding -
beginning
of year 5,750 $16.28 7,070 $22.29 7,127 $25.46
Granted 2,860 30.68 1,664 32.40 2,225 37.33
Exercised (1,426) 14.47 (1,412) 17.59 (1,152) 20.35
Forfeited (114) 27.50 (195) 26.87 (94) 31.14
Outstanding -
end of year 7,070 $22.29 7,127 $25.46 8,106 $29.38
Options exer-
cisable -
end of year 1,360 $15.27 2,943 $18.74 3,627 $23.32
The following table summarizes information about stock options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
Exercise Shares Average Shares Average
Price (in 000's) Price Term (in 000's) Price
$13.13 - $23.00 2,077 $ 17.21 6 years 2,077 $ 17.21
$29.63 - $35.25 4,503 $ 31.44 8 years 1,388 $ 30.44
$39.00 - $54.81 1,526 $ 39.83 9 years 162 $ 40.54
The 1993 Stock Incentive Plan ("1993 Plan") provides for several types of
equity-based incentive compensation awards. Under the 1993 Plan, the maximum
number of shares that may be awarded is 14,100,000 shares, of which no more
than 8,000,000 shares may be used for restricted share and stock bonus grants.
Awards, when made, may also be in the form of stock options, stock
appreciation rights, dividend equivalent rights or performance unit awards.
Stock options granted to officers and key employees are at a price no less
than fair market value on the date the option is granted. During 1999, 1998
and 1997, restricted shares with aggregate value and vesting and related
amortization periods were granted as follows: 1999 - 137,000 valued at $5.8
vesting over one to three years; 1998 - 499,000 valued at $16.0 vesting over
one to three years; and 1997- 36,000 shares valued at $1.2 vesting over one to
three years.
Effective January 1, 1997, the 1997 Long-Term Incentive Plan ("1997
LTIP") was authorized under the 1993 Plan. The 1997 LTIP provides for the
grant of two forms of incentive awards, performance units for potential cash
incentives and ten-year stock options. Performance units are earned over the
three-year performance period (1997-1999), based on the degree of attainment
of performance objectives. As of December 31, 1999, certain performance goals
under the 1997 LTIP were achieved and accordingly, cash incentives totaling
$31.7 were paid in 2000. Options are awarded annually over the three-year
performance period and vest in thirds over the three-year period following
each option grant date. As discussed above, these options are granted at the
fair market value on the date the option is granted.
Compensation expense under all plans in 1999 was $20.4 (1998 -
$17.8; 1997 - $15.6). The unamortized cost as of December 31, 1999 was
$6.8 (1998 - $10.5). The accrued cost of the performance units in 1999
was $35.9 (1998 - $24.1).
The Company has adopted the disclosure provisions of FAS No. 123.
Had compensation cost for the plans been based on the fair value at the
grant dates for awards under those plans consistent with the method
prescribed by FAS No. 123, net income and earnings per share would have
been the pro forma amounts indicated below:
1999 1998 1997
Pro forma net income $ 291.0 $263.0 $332.5
Pro forma earnings per share:
Basic $ 1.13 $ 1.00 $ 1.26
Diluted $ 1.12 $ .99 $ 1.25
The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-
average assumptions:
1999 1998 1997
---- ---- ----
Risk-free interest rate 5.4% 5.5% 6.3%
Expected life 5 years 5 years 5 years
Expected volatility 30% 25% - 30% 25%
Expected dividend yield 2.0% 2.0% 2.0%
The weighted-average grant date fair values of options granted during
1999, 1998 and 1997 were $10.09, $7.67 and $7.12, respectively.
54
9. Shareholders' (Deficit) Equity
Stock Split - On July 22, 1998, the Company declared a two-for-one stock
split in the form of a 100% stock dividend which was distributed in
September 1998 to shareholders of record as of the close of business on
August 24, 1998. Accordingly, the stock split has been recognized by
reclassifying the par value of the additional shares resulting from the
split from retained earnings to common stock and treasury stock. The
effect of this stock split was not retroactively reflected in the
statement of changes in shareholders' equity for 1997. All references
to the number of share and per share amounts elsewhere in the
consolidated financial statements and related footnotes have been
restated to reflect the effect of the split for all periods presented.
Share Rights Plan - Avon has a Share Rights Plan under which one right
has been declared as a dividend for each outstanding share of its common
stock. Each right, which is redeemable at $.005 at any time at Avon's
option, entitles the shareholder, among other things, to purchase one
share of Avon common stock at a price equal to one-half of the then
current market price, if certain events have occurred. The right is
exercisable if, among other events, one party obtains a beneficial
ownership of 20% or more of Avon's voting stock.
Stock Repurchase Programs - During 1994, Avon's Board authorized a stock
repurchase program under which Avon would buy back up to 10% of its then
outstanding common stock, or approximately 28.0 million shares. As of
February 1997, when the plan ended, the cumulative number of shares
repurchased was 25.3 million shares at a total cost of $424.4 which are
included in Treasury Stock. Under a new repurchase program, which began
in February 1997, the Company was authorized to buy back up to $1,100.0
of its currently outstanding common stock through open market purchases
over a period of up to five years. In October 1999, Avon's Board
approved a significant acceleration of the share repurchase program
which substantially completed this buyback program. As of December 31,
1999, the Company repurchased approximately 32.6 million shares at a
total cost of approximately $1,017.8 under this new program.
Savings Plan - The Company offers a qualified defined contribution plan,
the Avon Products, Inc. 401(k) Personal Savings Account, which allows
eligible participants to contribute 1% to 20% of qualified compensation
through payroll deductions. Effective July 1, 1998, the Company matches
employee contributions dollar for dollar up to the first 3% of eligible
compensation and $.50 for each $1.00 contributed from 4% to 6% of
eligible compensation. Prior to July 1, 1998, the Company matched
contributions in an amount equal to 25% of an employee's qualified
contribution. In 1999, matching contributions approximating $12.8 were
made in cash, which was then used to purchase Avon shares in the open
market. In 1998, Avon contributed 62,520 shares of treasury stock to an
employees' savings plan and recognized expense for its fair value. In
addition, during 1997, the Company contributed an additional 120,000
shares, for which the expense had been accrued at December 31, 1996.
Board of Directors Remuneration - Effective May 1, 1997, the Company
discontinued the Board retirement plan, which was applicable only to
non-management directors. Directors retiring after that date have had
the actuarial value of their accrued retirement benefits converted to a
one-time grant of common stock which is restricted as to transfer until
retirement. Shares totaling 52,786 were issued to directors as a result
of the discontinuance of the plan. As a replacement for such plan,
effective on and after May 1, 1997, each non-management director is
annually granted options to purchase 4,000 shares of common stock, at an
exercise price based on the fair market price of the stock on the date
of grant. The annual grant made in 1999 and 1998 consisted of 36,000
options in each year with an exercise price of $51.38 and $41.31,
respectively.
Also effective as of May 1, 1997, the annual retainer paid to non-
management directors was changed to consist of $.025 cash plus an annual
grant of shares having a value of $.025 based on the average closing
market price of the stock for the ten days preceding the date of grant.
These shares are also restricted as to transfer until the director
retires from the Board. The annual grant made in 1999 and 1998
consisted of a total of 4,284 and 5,472 shares, respectively.
10. Employee Benefit Plans
Retirement Plans - Avon and certain subsidiaries have contributory and
noncontributory retirement plans for substantially all employees. Benefits
under these plans are generally based on an employee's years of service and
average compensation near retirement. Plans are funded on a current basis
except where funding is not required. Plan assets consist primarily of equity
securities, corporate and government bonds and bank deposits.
Effective July 1998, the defined benefit retirement plan covering U.S.-based
employees was converted to a cash balance plan with benefits determined by
compensation credits related to age and service and interest credits based on
individual account balances and prevailing interest rates. Additional
amendments include a ten-year transitional benefit arrangement for certain
employees covered under the existing defined benefit retirement plan.
<PAGE 55>
Postretirement Benefits - Avon provides health care and life insurance
benefits for the majority of employees who retire under Avon's retirement
plans in the United States and certain foreign countries. The cost of such
health care benefits is shared by Avon and its retirees.
The following provides a reconciliation of benefit obligations, plan
assets and funded status of these plans:
Pension Postretirement
Benefits Benefits
1999 1998 1999 1998
Change in benefit obligation:
Beginning balance $(999.8) $(889.9) $(201.8) $(197.1)
Service cost (38.1) (35.4) (3.6) (3.3)
Interest cost (67.6) (64.5) (13.4) (13.0)
Actuarial (loss) gain 43.5 (83.0) 19.5 1.4
Benefits paid 155.1 84.9 12.1 10.2
Plan amendments (2.9) - 5.5 -
Settlements/special
termination benefits (17.2) - - -
Other 7.8 (11.9) .1 -
Ending balance $(919.2) $(999.8) $(181.6) $(201.8)
Change in plan assets:
Beginning balance $ 863.1 $ 785.5 $ - $ -
Actual return on
plan assets 113.7 102.9 - -
Company contributions 36.1 61.3 12.1 10.2
Plan participant - -
contributions 2.2 1.5 - -
Benefits paid (155.1) (84.9) (12.1) (10.2)
Other - (3.2) - -
Ending balance $ 860.0 $ 863.1 $ - $ -
Funded status of the plan $ (59.2) $(136.7) $(181.6) $(201.8)
Unrecognized actuarial
loss(gain) 48.1 139.3 (26.1) (6.2)
Unrecognized prior
service cost 3.0 (9.6) (5.0) -
Unrecognized net transition
obligation(asset) 1.6 1.3 .4 -
Accrued benefit cost $ (6.5) $ (5.7) $(212.3) $(208.0)
Amount recognized in the
statements:
Prepaid benefit $ 138.8 $ 138.0 $ - $ -
Accrued liability (145.3) (143.7) (212.3) (208.0)
Additional minimum liability (22.0) (19.7) - -
Intangible asset 7.9 4.3 - -
Accumulated other
comprehensive income 14.1 15.4 - -
$ (6.5) $ (5.7) $(212.3) $(208.0)
At December 31, 1999 and 1998, the weighted-average discount rates used
in determining the pension benefit obligation were 7.1% and 6.7%,
respectively. At December 31, 1999 and 1998, the weighted-average
discount rates used in determining the postretirement benefit obligation
were 8.0% and 7.0%, respectively.
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for pension and postretirement benefit plans
with accumulated benefit obligations in excess of plan assets were
$428.8, $381.4, and $39.4, respectively, as of December 31, 1999 and
$435.4, $397.7, and $30.7, respectively, as of December 31, 1998.
Net periodic benefit cost for the years ended December 31 was determined as
follows:
Pension Postretirement
Benefits Benefits
1999 1998 1997 1999 1998 1997
Service cost $ 38.1 $ 35.4 $ 35.2 $ 3.6 $ 3.3 $ 3.0
Interest cost 67.6 64.5 63.1 13.4 13.0 13.0
Expected return on plan assets (69.6) (64.0) (58.9) - - -
Amortization of transition
(liability) asset (.7) (6.8) (6.8) - - -
Amortization of prior
service cost .8 (.4) 3.6 - - -
Amortization of actuarial
losses (gains) 10.2 12.3 7.7 (.4) - -
Settlements or curtailments 3.5 - 4.6 - - -
Other - .3 - - - -
Net periodic benefit cost $ 49.9 $ 41.3 $ 48.5 $16.6 $16.3 $16.0
56
The weighted-average assumptions used to determine the data for the
years ended December 31 are as follows:
Pension Postretirement
Benefits Benefits
1999 1998 1997 1999 1998 1997
Discount rate 6.8% 7.1% 7.4% 7.0% 7.2% 7.7%
Rate of compensation increase 4.0 4.0 4.7 4.5 4.5 4.5
Rate of return on assets 8.8 9.2 9.2 N/A N/A N/A
For 1999, the assumed rate of future increases in the per capita cost of
health care benefits (the health care cost trend rate) was 7.4% for pre-65
claims (7.1% for post-65 claims) and will gradually decrease each year
thereafter to 5.0% in 2005 and beyond. The healthcare cost trend rate
assumption has a significant effect on the amounts reported. A one-percentage
point change in the assumed health care cost trend rates would have the
following effects:
1 Percentage 1 Percentage
(In millions) Point Increase Point Decrease
Effect on total of service
and interest cost components $ 2.4 $ 2.0
Effect on postretirement benefit
obligation 20.7 17.0
Supplemental Executive Retirement and Life Insurance Plans - Avon has a
Supplemental Executive Retirement Plan ("SERP") which is a defined benefit
plan under which Avon will pay supplemental pension benefits to key executives
in addition to amounts received under Avon's retirement plan. The annual cost
of this plan has been included in the determination of the net periodic
benefit cost shown above and in 1999 amounted to $10.1 (1998 - $6.1; 1997 -
$5.5). The accumulated benefit obligation under this plan at December 31,
1999 was $29.3 (1998 - $21.9) and is primarily included in Employee Benefit
Plans.
Avon also maintains a Supplemental Life Insurance Plan ("SLIP") under
which additional death benefits ranging from $.35 to $2.0 are provided
to certain active and retired officers. Avon has acquired corporate-
owned life insurance policies to provide partial funding of the
benefits. The cash surrender value of these policies at December 31,
1999 was $24.2 (1998 - $22.4) and is held in a grantor trust.
Avon has established a grantor trust to provide funding for the benefits
payable under the SERP and SLIP. The trust is irrevocable and assets
contributed to the trust can only be used to pay such benefits with certain
exceptions. The assets held in the trust at December 31, 1999, amounting to
$99.6 (1998 - $94.5), consisted of a fixed income portfolio, a managed
portfolio of equity securities and corporate-owned life insurance policies.
These assets are included in Other Assets.
Postemployment Benefits - Avon provides postemployment benefits which include
salary continuation, severance benefits, disability benefits, continuation of
health care benefits and life insurance coverage to former employees after
employment but before retirement. At December 31, 1999, the accrued cost for
postemployment benefits was $38.5 (1998 - $33.5) and is included in Employee
Benefit Plans.
11. Segment Information
The Company's reportable segments are based on geographic operations and
include a North American business unit and International business units
in Latin America, Pacific and Europe regions. The segments have similar
business characteristics and each offers similar products through common
customer access methods.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements.
The Company evaluates the performance of its operating segments based on
operating profits or losses. Segment revenues reflect direct sales of
products to representatives based on their geographic location.
Intersegment sales and transfers are not significant. Each segment
records direct expenses related to its employees and its operations. The
Company does not allocate income taxes, foreign exchange gains or
losses, or corporate overhead expenses to operating segments.
Identifiable assets are primarily those directly used in the operations
of each segment. Corporate and other identifiable assets include cash,
investments, deferred tax assets and prepaid pension assets.
Summarized financial information concerning the Company's reportable segments
as of December 31, is shown in the following table. Net sales and operating
profit by reportable segment are presented on page 5.
Identifiable Assets:
1999 1998 1997
North America
US $ 536.9 $ 497.2 $ 516.0
Other* 130.3 111.9 118.3
Total 667.2 609.1 634.3
International
Latin America 523.7 530.8 481.4
Europe 412.8 390.1 361.9
Pacific 410.6 379.9 376.7
Total 1,347.1 1,300.8 1,220.0
Corporate and other 514.3 523.6 418.6
Total identifiable assets $2,528.6 $2,433.5 $2,272.9
57
Capital Expenditures:
1999 1998 1997
North America
US $ 39.2 $ 32.1 $ 24.0
Other* 10.6 11.7 5.2
Total 49.8 43.8 29.2
International
Latin America 51.9 33.5 21.4
Europe 39.6 28.8 17.5
Pacific 33.6 28.1 41.2
Total 125.1 90.4 80.1
Corporate and Other 28.5 55.3 60.1
Total capital expenditures $ 203.4 $ 189.5 $ 169.4
Depreciation and Amortization:
1999 1998 1997
North America
US $ 23.7 $ 19.2 $ 17.9
Other* 3.0 2.4 2.2
Total 26.7 21.6 20.1
International
Latin America 12.8 12.0 10.7
Europe 15.4 14.9 14.8
Pacific 16.1 11.2 15.3
Total 44.3 38.1 40.8
Corporate and Other 12.0 12.3 11.2
Total depreciation
and amortization $ 83.0 $ 72.0 $ 72.1
*Includes operating information for Puerto Rico, Dominican Republic, Canada
and Discovery Toys.
The following table presents consolidated net sales by classes of principal
products, as of December 31:
1999 1998 1997
Cosmetics, fragrance and toiletries $3,226.1 $3,176.6 $3,093.9
Beauty Plus:
Jewelry and accessories 455.4 408.1 370.2
Apparel 556.1 567.7 565.6
1,011.5 975.8 935.8
Non-core* 1,051.5 1,060.3 1,049.7
Total net sales $5,289.1 $5,212.7 $5,079.4
* Non-core category primarily includes gift and decorative and home
entertainment items.
Foreign Exchange - Financial statement translation of subsidiaries
operating in highly inflationary economies and foreign currency
transactions resulted in losses (gains) in 1999 netting to $7.5 (1998 -
($1.1); 1997 - $2.2), which are included in other expense (income), net
and income taxes. In addition, cost of sales and expenses include the
unfavorable impact of the translation of inventories and prepaid
expenses at historical rates in countries with highly inflationary
economies in 1999 of $7.1 (1998 - $15.8; 1997 - $6.0).
12. Leases and Commitments
Minimum rental commitments under noncancellable operating leases,
primarily for equipment and office facilities at December 31, 1999,
consisted of the following:
Year
2000 $ 70.0
2001 53.2
2002 39.8
2003 31.0
2004 27.2
Later years 250.3
Sublease rental income (6.5)
Total $465.0
Rent expense in 1999 was $84.5 (1998 - $84.7; 1997 - $88.2). Various
construction and information systems projects were in progress at
December 31, 1999 with an estimated cost to complete of approximately
$126.1.
13. Special and Non-Recurring Charges
In October 1997, the Company announced a worldwide business process
redesign program to streamline operations and improve profitability
through margin improvement and expense reductions. The special and non-
recurring charges associated with this program totaled $151.2 pretax
($121.9 net of tax, or $.47 per share on a basic and diluted basis) for
the year ended December 31, 1999 and $154.4 pretax ($122.8 net of tax,
or $.46 per share on a basic and diluted basis) for the year ended
December 31, 1998.
Special and non-recurring charges by business segment are as follows:
1999 1998
North America $33.6 $ 84.6
Latin America 14.7 6.3
Europe 69.8 18.2
Pacific 11.8 27.3
Corporate 21.3 18.0
Total $151.2 $154.4
Special and non-recurring charges by category of expenditures are as
follows for the years ended December 31:
1999
Special Cost of
Charges Sales Charge Total
Employee severance
costs $ 57.0 $ - $ 57.0
Inventories - 46.0 46.0
Write-down of assets
to net realizable
value 26.4 - 26.4
Recognition of foreign
currency translation
adjustment 9.8 9.8
Other 12.0 - 12.0
$105.2 $46.0 $151.2
58
1998
Special Cost of
Charges Sales Charge Total
Employee severance
costs $ 56.4 $ - $ 56.4
Inventories - 37.9 37.9
Write-down of assets
to net realizable
value 31.8 - 31.8
Field program buy-out 14.4 - 14.4
Other 13.9 - 13.9
$116.5 $37.9 $154.4
Employee severance costs are expenses, both domestic and
international, associated with the realignment of the Company's global
operations. Certain employee severance costs were accounted for in
accordance with the Company's existing FAS 112, ("Employers' Accounting
for Postemployment Benefits") severance plans. Remaining severance
costs were accounted for in accordance with other accounting literature.
The workforce will be reduced by approximately 3,700 employees, or 9% of
the total. Approximately one-half of the terminated employees related
to the facility closures. As of December 31, 1999, substantially all
employees have been terminated.
Inventory-related charges represent losses to write down the carrying
value of non-strategic inventory prior to disposal. The 1999 charges
primarily result from a new business strategy for product dispositions
which fundamentally changes the way the Company markets and sells
certain inventory. This new strategy, approved and effective in March
1999, is meant to complement other redesign initiatives, with the
objective of reducing inventory clearance sales, building core brochure
sales and building global brands. The 1998 charges resulted from the
closure of facilities, discontinuation of certain product lines, size-
of-line reductions and a change in strategy for product dispositions.
The 1999 write-down of assets (primarily fixed and other assets)
relates to the restructuring of operations in Western Europe, including
the closure of a jewelry manufacturing facility in Ireland, and the
write-down of software, the use of which is no longer consistent with
the strategic direction of the Company. By centralizing certain key
functional areas and exiting unprofitable situations, the Company plans
to increase operating efficiencies and ultimately, profit growth in the
long term. The 1998 write-down of assets relates to the closure of a
Far East buying office and manufacturing facilities in Puerto Rico and
the Dominican Republic. As a result of ongoing government restrictions,
the Company has also decided to close certain branches and a regional
office in China. Also, write-downs include assets (primarily fixed and
intangible assets) associated with the divestiture of the Discovery Toys
business unit, which was effective January 15, 1999.
The field program buy-out represents costs to terminate the
Company's prior representative recruitment program in the U.S.
The recognition of foreign currency translation adjustment relates
to the closure of the jewelry manufacturing facility in Ireland.
"Other" category primarily represents lease and contract termination
costs, litigation costs, and other costs associated with the facility
closures.
The liability balance included in other accrued liabilities as of
December 31, 1999 and 1998 is as follows:
Special Cost of
Charges Sales Charge Total
Provision $116.5 $37.9 $154.4
Cash expenditures (66.0) (66.0)
Non-cash write-offs (22.0) (37.9) (59.9)
Balance at
December 31, 1998 28.5 - 28.5
Provision 105.2 46.0 151.2
Cash expenditures (67.1) (67.1)
Non-cash write-offs (40.4) (46.0) (86.4)
Balance at
December 31, 1999 $ 26.2 $ - $ 26.2
The balance at December 31, 1999 relates primarily to employee
severance costs that will be paid during 2000.
14. Contingencies
Various lawsuits and claims (asserted and unasserted), arising in the
ordinary course of business or related to businesses previously sold,
are pending or threatened against Avon.
In 1991, a class action lawsuit 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. It is anticipated that a trial may take place later in 2000.
In the opinion of Avon's management, based on its review of the
information available at this time, the total cost of resolving such
contingencies at December 31, 1999 should not have a material adverse
impact on Avon's consolidated financial position, results of operations
or cash flows.
15. Subsequent Event
On February 3, 2000 Avon's Board approved an increase in the
quarterly cash dividend to $.185 per share from $.18. The first
dividend at the new rate will be paid on March 1, 2000 to shareholders
of record on February 16, 2000. On an annualized basis, the new
dividend rate will be $.74 per share.
59
Report of Management
The accompanying consolidated financial statements of Avon Products,
Inc. have been prepared by management in conformity with generally
accepted accounting principles and necessarily include amounts that are
based on judgments and estimates. The audit report of
PricewaterhouseCoopers LLP, independent accountants, on these financial
statements is the result of their audits of these consolidated financial
statements, which were performed in accordance with generally accepted
auditing standards.
Avon maintains an internal control structure and related systems,
policies and procedures designed to provide reasonable assurance that
assets are safeguarded, transactions are executed in accordance with
appropriate authorization and accounting records may be relied upon for
the preparation of financial information. Avon also maintains an
internal audit department that evaluates and formally reports to
management on the adequacy and effectiveness of controls, policies and
procedures.
The audit committee of the board of directors, comprised solely of
outside directors, has an oversight role in the area of financial
reporting and internal controls. This committee meets several times
during the year with management, PricewaterhouseCoopers LLP and the
internal auditors to monitor the proper discharge of each of their
respective responsibilities. PricewaterhouseCoopers LLP and the internal
auditors have free access to management and to the audit committee to
discuss the results of their activities and the adequacy of controls.
It is management's opinion that Avon's policies and procedures,
reinforced by the internal control structure, provide reasonable
assurance that operations are managed in a responsible and professional
manner with a commitment to the highest standard of business conduct.
Andrea Jung Robert J. Corti
Chief Executive Officer Executive Vice President,
Chief Financial Officer
Report of Independent Accountants
To the Board of Directors and Shareholders of Avon Products, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, cash flows and changes in
shareholders' equity present fairly, in all material respects, the
financial position of Avon Products, Inc. at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles in the United States. These
financial statements are the responsibility of Avon's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United
States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
January 27, 2000
60
Eleven-Year Review
In millions, except per share and employee data
1999 1998 1997 1996
Income data
Net sales $5,289.1 $5,212.7 $5,079.4 $4,814.2
Operating Profit (1) 549.4 473.2 537.8 538.0
Interest expense (1) 43.2 34.7 35.5 33.2
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 506.6(5) 455.9(5) 534.9 510.4
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 302.4(5) 265.1(5) 337.0 319.0
Income from
continuing operations 302.4(5) 270.0(5) 338.8 317.9
Income (loss) from
discontinued
operations, net - - - -
Cumulative effect
of accounting
changes, net - - - -
Net income 302.4(5) 270.0(5) 338.8 317.9
Earnings (loss) per share
- basic (2) (3)
Continuing operations $ 1.18(5) $ 1.03(5) $ 1.28 $ 1.19
Discontinued operations - - - -
Cumulative effect of
accounting changes - - - -
Net income 1.18(5) 1.03(5) 1.28 1.19
Earnings (loss) per share
- diluted (2) (3)
Continuing operations $ 1.17(5) $ 1.02(5) $ 1.27 $ 1.18
Discontinued operations - - - -
Cumulative effect of
accounting changes - - - -
Net income 1.17(5) 1.02(5) 1.27 1.18
Cash dividends per share
Common $ .72 $ .68 $ .63 $ .58
Preferred - - - -
Balance sheet data
Working capital $ (375.0) $ 11.9 $ (11.9) $ (41.7)
Capital expenditures 203.4 189.5 169.4 103.6
Property, plant and
equipment, net 734.8 669.9 611.0 566.6
Total assets 2,528.6 2,433.5 2,272.9 2,222.4
Debt maturing within one year 306.0 55.3 132.1 97.1
Long-term debt 701.4 201.0 102.2 104.5
Total debt 1,007.4 256.3 234.3 201.6
Shareholders' (deficit) equity (406.1) 285.1 285.0 241.7
Number of employees
United States 8,800 8,000 8,100 7,800
International 31,700 25,900 26,900 25,900
Total employees (4) 40,500 33,900 35,000 33,700
61
1995 1994 1993 1992
Income data
Net sales $4,492.1 $4,266.5 $3,844.1 $3,660.5
Operating Profit (1) 500.8 489.5 427.4 339.9
Interest expense (1) 34.6 44.7 39.4 38.4
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 465.0 433.8 394.6 290.0(7)
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 288.6 270.3 243.8 169.4(7)
Income from
continuing operations 286.1 264.8 236.9 164.2(7)
Income (loss) from
discontinued
operations, net (29.6) (23.8) 2.7 10.8
Cumulative effect
of accounting
changes, net - (45.2)(6) (107.5)(6) -
Net income 256.5 195.8 132.1 175.0(7)
Earnings (loss) per share
- basic (2) (3)
Continuing operations $ 1.05 $ .94 $ .82 $ 57(7)
Discontinued operations (.11) (.09) .01 .04
Cumulative effect of
accounting changes - (.16) (.37) -
Net income .94 .69 .46 .61(7)
Earnings(loss) per share
diluted (2) (3)
Continuing operations $ 1.05 $ .93 $ .82 $ .57(7)
Discontinued operations (.11) (.08) .01 .04
Cumulative effect of
accounting changes - (.16) (.37) -
Net income .94 .69 .46 .61(7)
Cash dividends per share
Common $ .53 $ .48 $ .43 $ 38
Preferred - - - -
Balance sheet data
Working capital $ (30.3) $ 9.3 $ 23.1 $ (99.5)
Capital expenditures 72.7 99.9 58.1 62.7
Property, plant and
equipment, net 537.8 528.4 476.2 476.7
Total assets 2,052.8 1,978.3 1,918.7 1,692.6
Debt maturing within one year 47.3 61.2 70.4 37.3
Long-term debt 114.2 116.5 123.7 177.7
Total debt 161.5 177.7 194.1 215.0
Shareholders' (deficit) equity 192.7 185.6 314.0 310.5
Number of employees
United States 8,000 7,900 8,000 8,700
International 23,800 22,500 21,500 20,700
Total employees (4) 31,800 30,400 29,500 29,400
Avon Products, Inc.
1991 1990 1989
Income data
Net sales $3,441.0 $3,291.6 $2,998.3
Operating Profit (1) 430.9 409.9 369.8
Interest expense (1) 71.6 74.1 115.2
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 352.9 305.6 252.9
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 209.3 180.3 134.1
Income from
continuing operations 204.8 174.1 126.5
Income (loss) from
discontinued
operations, net (69.1) 21.2 (71.9)
Cumulative effect
of accounting
changes, net - - -
Net income 135.7 195.3 54.6
Earnings (loss) per share
- basic (2) (3)
Continuing operations $ .65(8) $ .61 $ .41(10)
Discontinued operations (.24) .09 (.33)
Cumulative effect of
accounting changes - - -
Net income .41(8) .70 .08(10)
Earnings (loss) per share
- diluted (2) (3)
Continuing operations $ .71(8) $ .58 $ .40(10)
Discontinued operations (.24) .07 (.32)
Cumulative effect of
accounting changes - - -
Net income .47(8) .65 .08(10)
Cash dividends per share
Common $ 1.10(9) $ .25 $ .25
Preferred .253 .50 .50
Balance sheet data
Working capital $ (135.3) $ 71.6 $ 56.3
Capital expenditures 61.2 36.3 33.3
Property, plant and
equipment, net 468.5 467.2 472.5
Total assets 1,693.3 2,010.1 1,994.1
Debt maturing within one year 143.8 207.1 151.7
Long-term debt 208.1 334.8 673.2
Total debt 351.9 541.9 824.9
Shareholders' (deficit) equity 251.6 393.4 228.3
Number of employees
United States 9,200 9,500 9,400
International 20,900 20,300 19,900
Total employees (4) 30,100 29,800 29,300
(1) Certain reclassifications have been made to conform to the current
full year presentation.
(2) Two-for-one stock splits were distributed in September 1998 and
June 1996. All per share data in this report, unless indicated, have
been restated to reflect the splits.
(3) Effective for the year ended December 31, 1997, the Company adopted
FAS No. 128, "Earnings per Share". FAS No. 128 establishes standards
for computing and presenting earnings per share ("EPS") and replaces the
presentation of previously disclosed EPS with both basic and diluted
EPS. Based upon the Company's capitalization structure, the EPS amounts
calculated in accordance with FAS No. 128 approximated the Company's EPS
amounts in accordance with Accounting Principles Board Opinion No. 15,
"Earnings per Share". All prior period EPS data have been restated in
accordance with FAS No. 128.
(4) Avon's calculation of full-time equivalents, or number of
employees, was revised in 1999. Restatements of prior year data are not
available, and therefore, year over year comparisons are not meaningful.
(5) In 1998, Avon began a worldwide business process redesign program
in order to streamline operations and recorded special and non-recurring
charges of $154.4 ($122.8 net of tax, or $.46 per share on a basic and
diluted basis). Excluding the special and non-recurring charges, net
income in 1998 increased 16% to $392.8 from $338.8. In 1999, special
and non-recurring charges related to this program totaled $151.2 ($121.9
net of tax, or $.47 per share on a basic and diluted basis). Excluding
the special and non-recurring charges, net income in 1999 increased 8%
to $424.3 from $392.8.
(6) Effective January 1, 1994, Avon adopted Statement of Financial
Accounting Standards ("FAS") No. 112, "Employers' Accounting for
Postemployment Benefits", for all applicable operations, and FAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions", for its foreign benefit plans. Effective January 1, 1993,
Avon adopted FAS No. 106 for its U.S. retiree health care and life
insurance benefit plans and FAS No. 109, "Accounting for Income Taxes".
Effective January 1, 1988, Avon adopted FAS No. 96, "Accounting for
Income Taxes".
(7) In 1992, Avon began the restructuring of its worldwide
manufacturing and distribution facilities and recorded a provision of
$96.0 ($64.4 after tax, or $.22 per share on a basic and diluted basis).
Income from continuing operations in 1993 increased 4% from $228.6, or
$.79 per share on a basic and diluted basis, excluding the 1992
restructuring charge.
(8) For 1991, in management's opinion, per share amounts assuming
dilution, even though the result is antidilutive, provide the most
meaningful comparison of per share data because they show the full
effect of the conversion of 72 preferred shares into approximately 51.84
common shares on June 3, 1991.
(9) Includes special dividend of $.75 paid in 1991.
(10) In 1989, the calculation of earnings per share was assumed to be
antidilutive and, accordingly, earnings per share were not adjusted for
the conversion of preferred shares into additional common shares.