EXHIBIT 13
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 the "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 2000 was $478.4 compared with $302.4 in 1999.
Basic and diluted earnings per share in 2000 were $2.01 and $1.99,
respectively, compared with $1.18 and $1.17, respectively, in 1999. Net
income for 1998 was $270.0 and basic and diluted earnings per share were $1.03
and $1.02, respectively.
Effective January 1, 2000, the Company changed its method of accounting for
revenue recognition in accordance with Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements." See Note 2 of the Notes
to Consolidated Financial Statements. The cumulative effect of the change on
prior years resulted in a charge of $6.7, net of a tax benefit of $3.5, or
$.03 per share on a basic and diluted basis, which is included in net income
for the year ended December 31, 2000. The effect of the accounting change in
2000 was to decrease net income before the cumulative effect of the accounting
change by $1.1.
In addition, the 2000 results include the settlement of a federal income tax
refund, which was received in January 2001, consisting of $32.5 of tax and
$62.7 of interest related to the years ended December 31, 1982, 1983, 1985 and
1986. For the year ended December 31, 2000, the Company recognized $40.1
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($.17 and $.16 per share on a basic and diluted basis, respectively) as an
income tax benefit in the Consolidated Statements of Income, resulting from
the impact of the tax refund offset by taxes due on interest received and
other related tax obligations.
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 special and non-recurring charges in 1999, earnings per share of $1.65
and $1.64 on a basic and diluted basis, respectively, both increased 11% over
the comparable period in 1998.
Consolidated net sales increased 7% in 2000 to $5.67 billion from $5.29
billion in 1999. Sales in North America increased 5% to $2.15 billion in
2000. International sales increased 9% to $3.53 billion due to strong growth
in the Latin American and Pacific regions and, to a lesser extent, in the
European region. In 1999, consolidated net sales of $5.29 billion increased
1% from $5.21 billion in 1998. Sales in North America increased 1% to $2.05
billion in 1999. International sales increased 2% to $3.24 billion due to
strong growth in the Pacific region and in Europe, partially offset by
declines in Latin America. Excluding the unfavorable impact of foreign
currency translation, consolidated net sales would have increased 11% and 9%
in 2000 and 1999, respectively.
Other revenue includes shipping and handling fees billed to Representatives
and totaled $40.9, $38.8 and $35.0 in 2000, 1999 and 1998, respectively.
Cost of sales as a percentage of net sales was 37.4% in 2000, compared with
38.4% in 1999 and 39.4% in 1998. The 1999 and 1998 cost of sales included
$46.0 and $37.9, respectively, of non-recurring charges for inventory write-
downs related to the Company's BPR program. The charges related 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.
In 2000, the favorable gross margin variance versus 1999 was due to
improvements in all international regions, most significantly in the Pacific
region, including Japan and China, as well as Central and Eastern Europe, due
to lower product costs on imports from euro countries coupled with a shift in
mix to higher margin products, and in Russia, due to a favorable comparison
resulting from a discount pricing policy in 1999. Gross margins remained
level with prior year in Brazil and the U.S. These improvements were
partially offset by declines in Puerto Rico, due to inventory variations
related to the consolidation of operations, and in Mexico and the
Philippines, resulting from higher sales of a lower margin mix of cosmetics,
fragrance and toiletries ("CFT") products and selective price cuts to meet
competition.
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In 1999, the favorable gross margin variance versus 1998 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 1999 as a result of a major currency devaluation, and in Russia, due to a
pricing discount policy begun in the fourth quarter of 1998.
Marketing, distribution and administrative expenses of $2.80 billion
increased $161.4, or 6%, over prior year, but decreased as a percentage of
total revenue to 49.1% from 49.6% in 1999. The overall improvement in the
expense ratio was due to a favorable expense ratio in Mexico, resulting from
lower marketing and promotional expenses associated with product
introductions, in Russia, due to strict expense controls as well as favorable
comparisons against prior year, and in the Philippines and China, reflecting
fixed administrative expenses on a higher sales base. Expense ratio
improvements were partially offset by higher expenses in Argentina,
reflecting increased advertising and brochure costs, in the United Kingdom,
due to increased shipping and distribution costs from decreased capacity of
shipping lines during transition to a new system, and in Puerto Rico,
reflecting higher transitional expenses related to the consolidation of
operations.
Marketing, distribution and administrative expenses of $2.64 billion in 1999
increased $36.8, or 1%, over 1998, but remained level as a percentage of
total revenue versus 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 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 of
1999.
Interest expense increased $41.5 in 2000 to $84.7 and $8.5 in 1999 to $43.2.
The increases in both 2000 and 1999 are primarily the result of increased
domestic borrowings related to the acceleration of the Company's share
repurchase program, which occurred in the second half of 1999, and working
capital requirements.
Interest income in 2000 of $8.5 versus the prior year decreased $2.6
primarily resulting from reduced interest rates in Brazil and Mexico during
2000. Interest income in 1999 of $11.1 decreased $4.8 versus 1998 mainly due
to a tax refund claim recognized in 1998.
In 2000, other expense (income) net was $10.8 unfavorable to 1999 mainly due
to favorable foreign exchange in 1999 resulting from gains on Brazilian
forward contracts and, to a lesser extent, a value added tax refund in China
in 1999, partially offset by favorable comparisons versus 1999, primarily in
Europe and the Pacific. In 1999, other expense (income) net was $12.2
unfavorable to 1998 due primarily to unfavorable net foreign exchange in 1999
resulting from exchange losses, primarily in Europe and Latin America.
Income taxes were $201.7 in 2000 and the effective tax rate was 29.2% compared
with $204.2 in 1999 and an effective tax rate of 40.3%. Excluding the effect
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of a federal income tax refund in 2000 and special and non-recurring charges
in 1999, the effective tax rate was 35.0% and 35.5% in 2000 and 1999,
respectively. The effective tax rate was lower in 2000 versus 1999 due to the
settlement of foreign audits, dividend planning, utilization of net operating
loss carryforwards and the mix of earnings and income tax rates of the
international subsidiaries. Income taxes in 1998 were $190.8 and the
effective tax rate was 41.9% (36.4% excluding the effect of the special and
non-recurring charges).
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, including Venezuela and
Russia, which 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.
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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, 2000.
Years ended December 31 2000 1999 1998
Net Operating Net Operating Net Operating
Sales Profit Sales Profit Sales Profit
North America:
U.S. $1,894.9 $ 343.5 $1,809.3 $ 329.3 $1,774.0 $ 302.8
Other* 253.0 24.7 241.0 31.8 259.7 29.3
Total 2,147.9 368.2 2,050.3 361.1 2,033.7 332.1
International:
Latin America North**848.8 215.2 731.7 181.6 636.0 156.4
Latin America South**992.0 200.3 909.0 184.9 1,057.0 198.9
Latin America 1,840.8 415.5 1,640.7 366.5 1,693.0 355.3
Europe 885.6 129.5 878.0 126.2 862.7 102.2
Pacific 799.4 117.8 720.1 102.1 623.3 62.5
Total 3,525.8 662.8 3,238.8 594.8 3,179.0 520.0
Total from operations$5,673.7 1,031.0 $5,289.1 955.9 $5,212.7 852.1
Global expenses (242.3) (255.3) (224.5)
Special and non-recurring
charges - (151.2) (154.4)
Operating profit $ 788.7 $ 549.4 $ 473.2
*Includes operating information for Canada and Puerto Rico.
** Latin America North includes the major markets of Mexico, Venezuela and
Central America. Latin America South includes the major markets of Brazil,
Argentina, Chile and Peru.
To conform to the 2000 presentation, certain reclassifications were made to
the prior periods' segment information.
2000 Compared to 1999
North America - Net sales in North America increased 5% to $2.15 billion in
2000. The U.S. business, which represents almost 90% of the North American
segment, reported sales growth of 5%. The sales increase in the U.S.
resulted primarily from a 6% increase in the number of units sold, a 2%
increase in active Representatives and a higher average CFT order size.
Sales improvements in the U.S. resulted from increases in CFT categories,
fashion jewelry and watches and accessories, partially offset by declines in
apparel and home entertainment products. U.S. sales of CFT increased 7% over
1999 reflecting a double-digit increase in skincare, primarily due to strong
launches of Botanisource and Anew Retroactive, which was the largest CFT
launch ever. Color cosmetics also reported double-digit increases versus
prior year, reflecting our commitment to the Avon Color brand and powerful
new product introductions, such as Nailwear and Glazewear. Growth in the
fragrance category was driven by strong performance in Men's brands. The
personal care category also contributed to the sales increase, particularly
from the strength of the new launch of Chamomile and sales of existing Skin-
So-Soft lines, which reported the largest increases ever for this brand.
Fashion jewelry and watches increased mid-single digits versus 1999 due to
strategic growth in fashion and fine jewelry segments. Higher sales in
accessories were driven by strong performance in fashion accessories,
including handbags, totes and small leather goods. These increases were
partially offset by declines in the apparel category, due to softness in
casual wear items, and lower sales in home entertainment products, resulting
from fewer new product introductions.
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Operating profit in North America increased 2% to $368.2 in 2000 due to the
region's increased sales, discussed above, while the operating margin declined
0.5 points. The decline in operating margin is primarily due to an increase in
the operating expense ratio in Puerto Rico caused by higher transitional
expenses related to the consolidation of operations. Gross margin in North
America remained level in 2000 as compared to 1999. Operating profit in the
U.S. of $343.5 increased 4% versus 1999 reflecting sales growth, partially
offset by a slightly unfavorable expense ratio. The expense ratio in the U.S.
was negatively impacted by asset writedowns associated with the closure of
certain Company-owned Avon Beauty Centers. Excluding the asset writedowns, the
expense ratio was favorable to 1999 resulting from cost containment, BPR
savings and lower benefit expenses partially offset by increased spending on
advertising and e-commerce initiatives.
International
International sales increased 9% to $3.53 billion and operating profit
increased 11% to $662.8 in 2000. Excluding the effect of foreign exchange,
international sales increased 14% in 2000 with double-digit increases in all
regions.
In Latin America, sales increased 12% to $1.84 billion in 2000 driven by
improvements in all major markets, with Mexico, Brazil and Venezuela being the
main contributors. Excluding the impact of foreign exchange, sales in Latin
America increased 15% in 2000. Units and active Representatives for the region
rose 4% and 10%, respectively, versus the same period in 1999. The sales
growth in Mexico was driven by increases in the number of units sold, active
Representatives and customers served. Mexico had double-digit sales growth in
all product categories, particularly in the CFT category, as well as in
apparel, as a result of greater product selection. In Brazil, higher average
orders, along with increased prices and more Representatives were the main
drivers of sales improvements. Venezuela's sales improvement resulted from
increases in the number of units sold, orders, active Representatives and
customers served. Venezuela was able to post these increases despite severe
flooding in late 1999, which negatively affected operations at the beginning
of 2000, along with persistent economic and political uncertainty.
Operating profit in Latin America grew 13% to $415.5 in 2000 due to the sales
increases, discussed above, and operating margin improvements in Venezuela and
Brazil, partially offset by a decline in Argentina. The operating margin in
2000 in Latin America improved 20 basis points versus 1999. Venezuela's
operating margin reflected a higher gross margin, driven by price increases
and cost improvement, partially offset by increased marketing spending and
incentive programs. Brazil's operating margin increased primarily due to lower
bad debt and recognition expenses. Mexico's operating margin remained level
with 1999 due to savings in marketing and cost savings on purchase orders,
offset by a decrease in gross margin due to increased sales of lower margin
items and selective pricing cuts. In Argentina, operating margin declined as
incentives and advertising expenses were increased to solidify our leading
market position in a weak economic environment.
In Europe, sales increased 1% to $885.6 versus 1999 but increased 13% in local
currency on 12% growth in units and 15% higher active Representatives. The
euro, pound and zloty devalued significantly in 2000 and, as a result,
negatively affected U.S. dollar results. Sales growth in Central and Eastern
Europe, primarily Poland, and in Russia was partially offset by declines in
most Western European markets, most significantly in Germany. The sales
improvement in Central Europe resulted from double-digit increases in units,
active Representatives and customers served. New Representative leadership
programs and a new campaign cycle also favorably impacted sales in Poland.
The sales increase in Russia was due to double-digit increases in units and
active Representatives and an improved economic environment resulting from the
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stability of the Russian ruble. In Germany, the sales decline reflected a
continuing weak economic climate. In the United Kingdom, sales increased in
local currency but U.S. dollar results were negatively impacted by foreign
currency exchange.
Operating profit in Europe grew 3% to $129.5 in 2000 due to the sales
increases, discussed above, coupled with operating margin improvements in
Central and Eastern Europe, particularly Poland, and Russia, partially offset
by increased spending on incentives and advertising throughout the region and
the impact of weaker currencies. In the Europe region, operating margin in
2000 improved 30 basis points over 1999. In Poland, gross margin improved due
to a shift in mix to higher margin items, partially offset by the cost of
shipping increased orders. The operating margin improvement in Russia was
primarily due to a favorable comparison against the prior year's discount
pricing policy and product sourcing, as well as tight expense controls on a
higher sales base. A decline in the United Kingdom's operating margin was
primarily due to increased advertising, consumer motivation and sampling
activities to support sales growth, as well as increased shipping,
distribution and volume related costs due to reduced capacity of shipping
lines during transition to a new shipping system.
In the Pacific region, sales increased 11% to $799.4 in 2000 due to increases
in all major markets resulting from an 18% increase in the number of units
sold and 31% increase in active Representatives. In 2000, dollar sales for
most markets were negatively impacted by foreign currency exchange, excluding
Japan and Taiwan, where foreign currency exchange had a positive impact on
dollar sales. In Japan, sales increased double-digits due to an increase in
units sold and active Representatives despite a reduction in consumer spending
due to economic pressures, as well as a favorable exchange rate impact versus
1999. In China, sales growth of 44% was driven by channel expansion, led by
beauty boutiques. In the Philippines, dollar sales grew in the mid-single
digits, but local currency sales increased solid double-digits. In the
Philippines, increased advertising and consumer promotions resulted in strong
increases in units sold, customers served and active Representatives.
Excluding the impact of foreign exchange, sales in the Pacific region rose
13%.
Operating profit in the Pacific region increased 15% to $117.8 in 2000 due to
the sales increases, discussed above, and operating margin improvements,
primarily in Japan and China, partially offset by operating margin declines in
Taiwan and the Philippines. In the Pacific region, 2000 operating margin
improved 60 basis points over 1999. In Japan, operating margin was favorably
impacted by an improvement in gross margin due to product cost savings
initiatives and a favorable change of product mix from non-CFT to higher
margin CFT products. China's operating margin improvement was driven
primarily by increased sales growth and new higher margin products. Operating
margin declined in Taiwan primarily due to increased costs resulting from
moving to a new distribution facility and increased spending to support sales
growth. Operating margin in the Philippines was negatively impacted by a
lower gross margin resulting from higher sales of lower margin items, and
higher advertising expenses.
1999 Compared to 1998
North America - Sales in North America increased 1% to $2.05 billion, and
operating profit increased 9% to $361.1 in 1999. The U.S. business 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 beyond beauty categories
was partially offset by sales decreases in CFT and apparel. Sales of fashion
jewelry and accessories rose significantly over 1998 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
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in the fourth quarter. The Beyond Beauty 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 Beyond
Beauty 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 $3.24 billion and
operating profit increased 14% to $594.8 from $520.0 in 1998. Excluding the
impact of foreign currency exchange, international sales rose 14% and
operating profit increased 27% over 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.
In Latin America, sales declined 3% to $1.64 billion while operating profit
increased 3% to $366.5 in 1999. Excluding the impact of foreign currency
exchange, sales increased 17%, a 20 point differential due primarily to the
Brazilian real devaluation that 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 contributed to
the region's growth in operating profit through a gross margin improvement
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driven by price increases as well as BPR initiatives, particularly in the home
segment. As discussed, these improvements were partially offset by reduced
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. 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 23% 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 four weeks versus six weeks in 1998. 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 1998. 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 that 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 1998 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
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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. Excluding the impact of foreign currency exchange, operating profit
increased 53% over 1998.
See Foreign Operations section under Liquidity and Capital Resources for
additional discussion.
Global Expenses - Global expenses were $242.3 in 2000 compared with $255.3 in
1999. The $13.0 decrease was primarily due to lower expenses related to the
Company's long-term incentive plan, lower benefit expenses, insurance proceeds
received in 2000 related to the 1998 hurricane losses in Central America, the
1999 flood losses in Venezuela and 1999 earthquake losses in Taiwan, and
savings in global marketing departments, partially offset by increased
investments in information technology and retail initiatives. In 1999, global
expenses were $30.8 higher than 1998 due to higher spending related to global
marketing and information technology system initiatives.
Accounting Changes - See Note 2 of the Notes to Consolidated Financial
Statements for a discussion regarding recently issued accounting standards,
including Financial Accounting Standard No. 137, Staff Accounting Bulletin No.
101, Emerging Issues Task Force ("EITF") 00-10, EITF 00-14 and EITF 00-19.
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, 2000 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 $323.9 in 2000
compared to $448.7 in 1999. The 2000 decrease principally reflects higher
working capital levels, which primarily included increased inventory levels
and a use of cash related to accounts payable and accrued expenses,
partially offset by higher net income. The increase in inventory was mainly
due to higher sales volume and additional stock on hand to protect service
levels. Accounts payable and accrued expenses reflected the payout of the
Company's long-term incentive plan in 2000, as well as a decline in days in
payables, to a level that is consistent with valuable supply chain
partnerships developed in recent years.
Excluding changes in debt and other financing activities, net cash usage of
$97.1 in 2000 was $639.5 favorable compared to net cash usage of $736.6 in
1999. The $639.5 variance primarily reflects a decrease in repurchases of
common stock resulting from the acceleration of the buyback program in the
second half of 1999. See Note 9 of the Notes to Consolidated Financial
Statements for further discussion of the Company's share repurchase program.
In addition, the variance was also a result of a favorable exchange rate
impact on cash and decreased cash used for investing activities in 2000, due
to the acquisition of a manufacturing facility in Poland in 1999 and lower
capital expenditures in 2000. These sources of cash were partially offset
by lower cash provided by operating activities, discussed above, and a
reduction in book overdrafts in 2000. During 1998 and 1997, the Company
received net proceeds of approximately $58.1 and $58.6, respectively, under
securities lending transactions that were settled in the fourth quarter of
2000 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.
-10-
For the period 1994 through 2000, 59.6 million shares of common stock
have been purchased for approximately $1.51 billion under the stock repurchase
programs. See Note 9 of the Notes to Consolidated Financial Statements for
further details of the share repurchase programs.
Working Capital - At December 31, 2000, current assets exceeded current
liabilities by $186.4 while at December 31, 1999, current liabilities exceeded
current assets by $375.0. This increase of $561.4 is primarily due to
decreased net debt (short-term debt less cash and equivalents), the repayment
of $101.4 related to securities lending transactions that were included in
other accrued liabilities in 1999, the payout of the long-term incentive plan
in 2000 as well as the net effect of the 2000 tax refund. In addition, higher
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 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, 2000 and 1999, of $215.8 and $406.1,
respectively. Avon's credit agreements do not contain any provisions or
requirements with respect to working capital or equity balances.
Capital Resources - Total debt of $1,213.6 at December 31, 2000 increased
$206.2 from $1,007.4 at December 31, 1999, compared with an increase of $751.1
from December 31, 1998. At December 31, 1999, other accrued liabilities
included approximately $106.4, related to securities lending activities.
These liabilities were repaid in 2000. See Note 4 of the Notes to
Consolidated Financial Statements for further discussion of these
transactions. During 2000 and 1999, cash flows from operating 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 in 1999.
At December 31, 2000, debt maturing within one year consisted of
borrowings from banks of $104.6 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 July 2000, the Company issued in a private placement $735.8 principal
amount at maturity of zero coupon convertible senior notes ("Convertible
Notes") due July 12, 2020, with proceeds of approximately $350.0. The issue
price per note was $475.66, being 47.566% of the principal amount of $1,000
per note at maturity. The Convertible Notes have a 3.75% yield to maturity
and are convertible at any time into the Company's common stock at a
conversion rate of 8.2723 shares of common stock per $1,000 principal amount
at maturity of the Convertible Notes (equivalent to a conversion price of
$57.50 per share based on the initial offering price of the Convertible
Notes). The Convertible Notes may be redeemed at the option of the Company on
or after July 12, 2003, at a redemption price equal to the issue price plus
accrued original issue discount to the redemption date. The holders can
require the Company to purchase all or a portion of the Convertible Notes on
July 12, 2003, July 12, 2008 and July 12, 2013, at the redemption price per
Note of $531.74, $640.29 and $771.00, respectively. The holders may also
-11-
require the Company to repurchase the Convertible Notes if a fundamental
change, as defined, involving Avon occurs prior to July 12, 2003. The Company
has the option to pay the purchase price or, if a fundamental change has
occurred, the repurchase price in cash or common stock or a combination of
cash and common stock. The indenture under which the Convertible Notes were
issued restricts the Company's ability to merge with or consolidate into
another company or to sell substantially all of the Company's assets.
The Company also granted to the initial purchasers of the Convertible
Notes an over-allotment option to purchase an additional $105.0 of Convertible
Notes. As of August 8, 2000, the over-allotment option had been exercised and
additional Convertible Notes with an aggregate principal amount at maturity of
approximately $105.0 were purchased by the initial purchasers from the Company
for proceeds of approximately $50.0.
The net proceeds from the offering (including the proceeds of the over-
allotment option) were used for general corporate purposes, including the
repayment of short-term debt.
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 November 1999 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 on the Notes
to a variable interest rate, based on commercial paper rates. In November
2000, these interest rate swap contracts were terminated. The cost to settle
these contracts is being amortized over the remaining term of the underlying
debt. At the same time, the Company entered into new four-year and nine-year
interest rate swap contracts with notional amounts of $200.0 and $300.0,
respectively, to effectively convert fixed interest on the Notes to a variable
interest rate, based on LIBOR.
In May 2000, the Company entered into an interest rate cap
agreement with a notional amount of $150.0 expiring on May 31, 2001, to
convert a variable interest rate, resulting from the interest rate swaps
above, to a fixed interest rate. The cap rate under this contract is
7%.
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 May 1998 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. The Company is currently negotiating with various banks to renew
this credit facility and expects to have a final agreement by the end of the
second quarter of 2001. Within this facility, the Company is able to
borrow, on an uncommitted basis, various foreign currencies.
-12-
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, 2000 and 1999, the Company has $29.9 and
$226.4, respectively, outstanding under a $600.0 commercial paper
program supported by the credit facility.
The Company has uncommitted lines of credit available of $49.0 in 2000 and
1999 with various banks that have no compensating balances or fees. As of
December 31, 2000 and 1999, $11.1 of these lines are being used for letters of
credit. In addition, as of December 31, 2000 and 1999, there were
international lines of credit totaling $449.5 and $399.5, respectively, of
which $74.8 and $81.6, respectively, were outstanding.
Inventories - Avon's products are marketed during 12 to 26 individual sales
campaigns each year. Each campaign is conducted using a brochure offering a
wide assortment of products, many of 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
reduced by the end of the fourth quarter. Inventories of $610.6 at December
31, 2000 were $87.1 higher than 1999 as a result of worldwide inventory
investments due to sales increases; an increase in beauty inventories to
protect service levels, primarily in the U.S. and Europe; transitional start-
up related to new distribution/manufacturing facilities in Taiwan, Mexico and
Poland; and European new market entries. 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 2000 were $193.5 (1999 -
$203.4). These expenditures were made for capacity expansion in high growth
markets, maintenance of worldwide facilities, contemporization and replacement
of information systems, the new Internet strategy and a new manufacturing
facility in Poland. Numerous construction and information systems projects
were in progress at December 31, 2000 with an estimated cost to complete of
approximately $130.0. Capital expenditures in 2001 are currently expected to
be in the range of $200.0 - $220.0. 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 ended 2000, 1999 and 1998, 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, 2000 and 1999, these
subsidiaries comprised approximately 51% 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, the Philippines and Poland. Changes in the value of
-13-
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-hyperinflationary status effective January 1, 1999
due to reduced cumulative inflation rates during the three-year period 1996
through 1998.
The euro devalued significantly during 2000 and, as a result, negatively
affected the 2000 U.S. dollar results of the European countries using this
common currency. Net sales from these countries represent 5% of Avon's
consolidated net sales. The impact on earnings of this devaluation was
reduced by foreign exchange contracts previously in place.
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 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 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 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, 2000, the total indebtedness of foreign
subsidiaries was $76.5.
-14-
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 2000, these subsidiaries remitted, net of taxes, $393.3 in dividends
and royalties. This sum is a substantial portion of the 2000 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, 2000, the Company held foreign currency forward contracts
with notional amounts totaling $393.7 and option contracts with notional
amounts totaling $19.1 to hedge foreign currency items. All of these contracts
mature within the next 13 months. Also outstanding in 2000 were foreign
currency forward contracts totaling $34.2, 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, 2000 was
not material.
The Company has entered into forward contracts to purchase
approximately 1,374,400 shares of Avon common stock at an average price
of $37.09 per share at December 31, 2000. The contracts mature over the
next ten months and provide for physical or net share settlement to the
Company. Accordingly, no adjustment for subsequent changes in fair value
has been recognized. In accordance with the provisions of EITF 00-19,
$51.0 of these contracts have been included in the accompanying
Consolidated Balance Sheets in Share repurchase commitments with a
corresponding decrease in Additional paid-in capital. See Note 2 of the
Notes to Consolidated Financial Statements. On March 1, 2001, the
Company purchased 260,000 shares of Avon common stock at a purchase price
of $11.5 under these contracts.
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, 2000. 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.
-15-
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, 2000, 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
2000, 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,
2000.
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, 2000, 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, 2000 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 2000,
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, 2000, the primary currencies for which the Company has
net underlying foreign currency exchange rate exposure are the U.S. dollar
versus the Mexican peso, Brazilian real, Argentine peso, British pound,
Philippine peso, Polish zloty, Japanese yen and the euro. 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.
-16-
Other Information
In October 1997, the Company announced its 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 $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.
In connection with these programs, BPR initiatives reduced costs by
approximately $400.0 in 2000 versus 1997 levels, with a portion of the savings
being reinvested primarily in consumer-focused initiatives.
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 position or cash flows.
-17-
Results of Operations by Quarter (Unaudited)
Avon Products, Inc.
In millions, except per share data
First* Second* Third* Fourth Year
As As As As As As As As
Reported Restated Reported Restated Reported Restated ____** Reported __**___ Reported
2000
Net Sales $1,324.9 $1,306.7 $1,378.1 $1,382.6 $1,342.7 $1,336.0 $1,633.6 $1,648.4 $5,679.3 $5,673.7
Other revenue - 10.4 - 10.0 - 9.7 - 10.8 - 40.9
Gross profit 827.6 826.3 881.7 894.0 849.4 855.5 996.0 1,016.1 3,554.7 3,591.9
Operating profit 144.4 137.8 219.8 220.4 169.6 168.6 256.7 261.9 790.5 788.7
Income before taxes,
minority interest and
cumulative effect of
accounting change 116.0 109.5 194.6 195.1 145.3 144.3 236.8 242.1 692.7 691.0
Income before minority
interest and cumulative
effect of accounting
change 74.8 70.4 125.6 125.9 93.7 93.2 196.2 199.8 490.3 489.3
Income before cumulative
effect of accounting
change 74.8 70.4 124.5 124.9 93.0
92.3 193.9 197.5 486.2 485.1
Net Income $ 74.8 $ 63.7 $ 124.5 $ 124.9 $ 93.0 $
92.3 $ 193.9 $ 197.5 $ 486.2 $ 478.4
Basic earnings per share:
Continuing operations $ .31 $ .30 $ .52 $ .53 $ .39 $
.39 $ .81 $ .83 $ 2.05(1) $ 2.04(1)
Cumulative effect of
accounting change - (.03) - - -
- - - - - (.03)
$ .31 $ .27 $ .52 $ .53 $ .39 $
.39 $ .81 $ .83 $ 2.05(1) $ 2.01(1)
Diluted earnings per share:
Continuing operations $ .31 $ .30 $ .52 $ .52 $ .39 $
.38 $ .79 $ .81 $ 2.02(1) $ 2.02(1)
Cumulative effect of
accounting change - (.03) - - -
- - - - - (.03)
$ .31 $ .27 $ .52 $ .52 $ .39 $
.38 $ .79 $ .81 $ 2.02(1) $ 1.99(1)
*Restatements have been made to the previously reported 2000 quarterly
information to reflect the adoption of Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements",
effective January 1, 2000.
Additionally, restatements have been made to the 2000 financial information to
reflect the provisions of Emerging Issues Task Force ("EITF") 00-10,
"Accounting for Shipping and Handling Fees and Costs." See Note 2 of the
Notes to Consolidated Financial Statements.
**For comparison purposes only, fourth quarter and full year information have
been presented to exclude the impact of SAB No. 101 and
EITF 00-10.
(1) The sum of per share amounts for the quarters does not necessarily equal
that for the year because the computations are
made independently.
- -18-
1999* First Second Third Fourth Year
Net sales $1,213.8 $1,258.1 $1,250.6 $1,566.6 $5,289.1
Other revenue 9.2 9.1 9.1 11.4 38.8
Gross profit** 714.8 815.5 794.7 971.4 3,296.4
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)
*Restatements have been made to the 1999 financial information to reflect the
provisions of Emerging Issues Task Force ("EITF") 00-10, "Accounting for
Shipping and Handling Fees and Costs." See Note 2 of the Notes to
Consolidated Financial Statements.
**First quarter 1999 includes a special and non-recurring charge of $46.0 for
inventory write-downs.
(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
2000 1999
High Low High Low
Quarter
First $ 34.50 $ 25.25 $ 49.00 $ 35.50
Second 44.50 28.38 59.13 46.38
Third 44.00 35.00 56.75 24.63
Fourth 49.75 38.19 37.38 23.31
Avon common stock is listed on the New York Stock Exchange. At December 31,
2000, there were 21,978 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 $.74 per share, or $.185
per share each quarter, were declared and paid in 2000. Dividends of $.72 per
share, or $.18 per share each quarter, were declared and paid in 1999.
-19-
Consolidated Statements of Income
Avon Products, Inc.
In millions, except per share data
Years ended December 31 2000 1999 1998
Net sales $5,673.7 $5,289.1 $5,212.7
Other revenue 40.9 38.8 35.0
Total revenue $5,714.6 $5,327.9 $5,247.7
Costs, expenses and other:
Cost of sales* 2,122.7 2,031.5 2,053.0
Marketing, distribution and
administrative expenses 2,803.2 2,641.8 2,605.0
Special charges - 105.2 116.5
Operating profit 788.7 549.4 473.2
Interest expense 84.7 43.2 34.7
Interest income (8.5) (11.1) (15.9)
Other expense (income), net 21.5 10.7 (1.5)
Total other expenses 97.7 42.8 17.3
Income from continuing operations before
taxes, minority interest and cumulative
effect of accounting change 691.0 506.6 455.9
Income taxes 201.7 204.2 190.8
Income before minority interest
and cumulative effect of
accounting change 489.3 302.4 265.1
Minority interest (4.2) 0.0 4.9
Income from continuing operations before
cumulative effect of accounting change 485.1 302.4 270.0
Cumulative effect of accounting change,
net of tax (6.7) - -
Net income $ 478.4 $ 302.4 $ 270.0
Basic earnings per share:
Continuing operations $ 2.04 $ 1.18 $ 1.03
Cumulative effect of accounting change (.03) - -
$ 2.01 $ 1.18 $ 1.03
Diluted earnings per share:
Continuing operations $ 2.02 $ 1.17 $ 1.02
Cumulative effect of accounting change (.03) - -
$ 1.99 $ 1.17 $ 1.02
*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.
-20-
Consolidated Balance Sheets
Avon Products, Inc.
In millions, except share data
December 31 2000 1999
Assets
Current assets
Cash, including cash equivalents of $23.9 and $49.6 $ 122.7 $ 117.4
Accounts receivable (less allowance for doubtful
accounts of $39.2 and $40.0) 499.0 495.6
Income tax receivable 95.2 -
Inventories 610.6 523.5
Prepaid expenses and other 218.2 201.3
Total current assets 1,545.7 1,337.8
Property, plant and equipment, at cost
Land 53.0 55.1
Buildings and improvements 659.5 653.4
Equipment 810.6 763.5
1,523.1 1,472.0
Less accumulated depreciation 754.7 737.2
768.4 734.8
Other assets 512.3 456.0
Total assets $2,826.4 $2,528.6
Liabilities and Shareholders' (Deficit) Equity
Current liabilities
Debt maturing within one year $ 105.4 $ 306.0
Accounts payable 391.3 435.9
Accrued compensation 138.2 165.8
Other accrued liabilities 251.7 411.6
Sales and taxes other than income 101.1 107.5
Income taxes 371.6 286.0
Total current liabilities 1,359.3 1,712.8
Long-term debt 1,108.2 701.4
Employee benefit plans 397.2 398.1
Deferred income taxes 31.3 36.7
Other liabilities (including minority interest
of $30.7 and $32.7) 95.2 85.7
Commitments and contingencies (Note 14)
Share repurchase commitments (Note 2) 51.0 -
Shareholders' (deficit) equity
Common stock, par value $.25 - authorized:
800,000,000 shares; issued
354,535,840 and 352,575,924 shares 88.6 88.1
Additional paid-in capital 824.1 819.4
Retained earnings 1,139.8 837.2
Accumulated other comprehensive loss (399.1) (349.7)
Treasury stock, at cost - 116,373,394 and
114,680,525 shares (1,869.2) (1,801.1)
Total shareholders' (deficit) equity (215.8) (406.1)
Total liabilities and
shareholders' (deficit) equity $2,826.4 $2,528.6
The accompanying notes are an integral part of these statements.
-21-
Consolidated Statements of Cash Flows
Avon Products, Inc.
In millions
Years ended December 31 2000 1999 1998
Cash flows from operating activities
Net income $ 478.4 $ 302.4 $ 270.0
Adjustments to reconcile income to net cash
provided by operating activities:
Cumulative effect of accounting change 6.7 - -
Depreciation and amortization 97.1 83.0 72.0
Provision for doubtful accounts 94.3 87.5 91.3
Translation losses(gains) 2.7 (.9) (7.2)
Deferred income taxes 13.5 (20.0) (13.0)
Special charges (18.3) 84.1 88.5
Other 20.7 9.7 3.9
Changes in assets and liabilities:
Accounts receivable (145.6) (132.7) (157.6)
Income tax receivable (95.2) - -
Inventories (103.3) (57.8) (17.2)
Prepaid expenses and other (30.7) 1.1 (4.0)
Accounts payable and accrued liabilities (62.3) 40.4 13.0
Income and other taxes 81.5 27.6 19.5
Noncurrent assets and liabilities (15.6) 24.3 (34.8)
Net cash provided by operating activities 323.9 448.7 324.4
Cash flows from investing activities
Capital expenditures (193.5) (203.4) (189.5)
Disposal of assets 7.2 11.7 5.8
Acquisitions of subsidiary stock and other
investing activities (1.4) (16.5) 1.4
Net cash used by investing activities (187.7) (208.2) (182.3)
Cash flows from financing activities
Cash dividends (178.2) (186.3) (180.6)
Book overdrafts (13.5) 15.9 -
Debt, net (maturities of three months or less) (194.3) 227.2 (96.1)
Proceeds from short-term debt 90.5 90.8 54.7
Retirement of short-term debt (92.2) (69.4) (34.9)
Proceeds from long-term debt 400.1 500.0 100.1
Retirement of long-term debt (.3) (.2) (.6)
Proceeds from exercise of stock options 38.4 23.9 24.0
Repurchase of common stock (68.1) (800.6) (107.8)
Other financing activities (101.4) - 58.1
Net cash used by financing activities (119.0) (198.7) (183.1)
Effect of exchange rate changes on cash and
equivalents (11.9) (30.0) 4.7
Net increase(decrease) in cash and equivalents 5.3 11.8 (36.3)
Cash and equivalents at beginning of year 117.4 105.6 141.9
Cash and equivalents at end of year $ 122.7 $ 117.4 $ 105.6
Cash paid for:
Interest, net of amounts capitalized $ 96.9 $ 47.1 $ 39.2
Income taxes, net of refunds received 207.6 176.0 188.5
The accompanying notes are an integral part of these statements.
-22-
Consolidated Statements of Changes in Shareholders' (Deficit) Equity
Avon Products, Inc.
Accumulated
Additional Other
Common Stock Paid-
In Retained Comprehensive Treasury
In millions, except share data Shares Amount
Capital Earnings Loss Stock Total
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 of $7.9 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)
Comprehensive income:
Net income
478.4 478.4
Foreign currency translation adjustments
(42.9) (42.9)
Unrealized loss from available-
for-sale securities, net of tax
(6.0) (6.0)
Minimum pension liability adjustment, net of tax
(.5) (.5)
Total comprehensive income
429.0
Dividends - $.74 per share
(175.8) (175.8)
Exercise of stock options,
including tax benefits of $8.8 1,701,935 .4
49.1 49.5
Grant, cancellation and
amortization of restricted stock 257,981 .1
6.6 6.7
Repurchase of common stock
(68.1) (68.1)
Share repurchase commitments ___________ ______
(51.0) ________ _______ _______ (51.0)
Balance at December 31, 2000 354,535,840 $ 88.6 $
824.1 $1,139.8 $(399.1) $(1,869.2) $ (215.8)
The accompanying notes are an integral part of these statements.
- -23-
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 ("CFT"); Beauty Plus which consists of
jewelry, watches and accessories and apparel; and Beyond Beauty which consists
of gift and decorative, home entertainment and health and nutrition products.
Avon's business is primarily 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 upon delivery, when both title
and risks and rewards of ownership pass to the independent Representatives,
who are Avon's customers. Prior to 2000, Avon recognized revenue as shipments
were made. See Note 2 of the Notes to Consolidated Financial Statements.
Other revenues include shipping and handling fees charged to Representatives.
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 at December 31, 1999 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
-24-
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.
Deferred Software - 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.
Unamortized deferred software costs totaled $121.2 and $90.7 at December 31,
2000 and 1999, respectively, and are included in Other assets on the
Consolidated Balance Sheets.
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. Gains and losses 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 on 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 2000 - $43.1 (1999 - $38.2; 1998 - $31.4).
Advertising - Advertising costs are expensed as incurred and aggregated in
2000 - $92.4 (1999 - $63.4; 1998 - $65.0).
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 $204.0 of
undistributed income of subsidiaries that has been or is intended to be
permanently reinvested outside the United States.
Shipping and Handling - Shipping and handling costs are expensed as incurred
and aggregated in 2000 - $533.2 (1999 - $495.4; 1998 - $440.9). Shipping and
handling costs are included in Marketing, distribution and administrative
expenses on the Consolidated Statements of Income.
-25-
Earnings per Share - Basic earnings per share ("EPS") are computed by dividing
net income by the weighted-average number of shares outstanding during the
year. Diluted earnings per share are calculated to give effect to all
potentially dilutive common shares that were outstanding during the year.
For each of the three years ended December 31, the components of
basic and diluted earnings per share are as follows:
2000 1999 1998
Numerator:
Basic:
Income from continuing operations
before cumulative effect of
accounting change $ 485.1 $ 302.4 $ 270.0
Cumulative effect of accounting change (6.7) - -
______ _______ ______
Net Income $ 478.4 $ 302.4 $ 270.0
Diluted:
Income from continuing operations
before cumulative effect of accounting
change $ 485.1 $ 302.4 $ 270.0
Interest expense on Convertible Notes,
net of taxes 4.5 - -
Income for purposes of computing diluted
EPS before cumulative effect of
accounting change 489.6 302.4 270.0
Cumulative effect of accounting change (6.7) - -
Net income for purposes of computing
diluted EPS $ 482.9 $ 302.4 $ 270.0
Denominator:
Basic EPS weighted-average shares
outstanding 237.67 256.78 263.27
Dilutive effect of:
Assumed conversion of
stock options and settlement of
forward contracts 2.06* 2.59* 2.68
Assumed conversion of Convertible Notes 3.22 - -
Diluted EPS adjusted weighted-average
shares outstanding 242.95 259.37 265.95
Basic EPS:
Continuing operations $ 2.04 $ 1.18 $ 1.03
Cumulative effect of accounting change (.03) - -
$ 2.01 $ 1.18 $ 1.03
Diluted EPS:
Continuing operations $ 2.02 $ 1.17 $ 1.02
Cumulative effect of accounting change (.03) - -
$ 1.99 $ 1.17 $ 1.02
*At December 31, 2000 and 1999, stock options and forward contracts to
purchase Avon common stock totaling 1.1 million and 3.8 million shares,
respectively, are not included in the diluted EPS calculation since their
impact is anti-dilutive.
-26-
Reclassifications - To conform to the 2000 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 ("FASB") 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). In June 2000, the FASB issued FAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133". FAS No. 138 amends FAS
No. 133 and will be adopted concurrently with FAS No. 133. 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 as amended by FAS No. 138 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 Avon's financial
instruments outstanding at December 31, 2000, the Company has determined that
the cumulative effect of adoption will not be material to the Consolidated
Financial Statements.
Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101").
SAB 101 provides the Securities and Exchange Commission's views in applying
generally accepted accounting principles to revenue recognition in the
financial statements. As a result of adopting SAB 101, Avon changed its
revenue recognition policy to recognize revenue upon delivery, when both title
and risks and rewards of ownership pass to the independent Representative. In
accordance with the provisions of SAB 101, the Company recorded a charge to
earnings of $6.7, net of a tax benefit of $3.5, to reflect the accounting
change. This charge is reflected as a cumulative effect of an accounting
change in the accompanying Consolidated Statements of Income. The effect of
the change on the year ended December 31, 2000, was to decrease net income
before the cumulative effect of the accounting change by $1.1. The change in
accounting method would not have a material effect on the Statements of Income
in 1999 or 1998 if adopted in these periods.
-27-
In September 2000, the Emerging Issues Task Force ("EITF") issued EITF
00-10, "Accounting for Shipping and Handling Fees and Costs". Under the
provisions of EITF 00-10, amounts billed to a customer in a sales transaction
related to shipping and handling should be classified as revenue. EITF 00-10
also requires the disclosure of the income statement classification of any
shipping and handling costs. Prior to October 1, 2000, the Company included
shipping and handling fees in Marketing, distribution and administrative
expenses in the Consolidated Statements of Income. Effective October 1, 2000,
the Company adopted EITF 00-10, with restatement of all comparative prior
period financial statements. The adoption has no impact on the determination
of net income.
In March 2000, the EITF reached a consensus on the application of EITF
Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock", with Issue No. 00-7,
"Equity Derivative Transactions that Require Net Cash Settlement if Certain
Events Outside the Control of the Issuer Occur" ("EITF 00-7"). Equity
derivative contracts that contain any provision that could require net cash
settlement (except upon the complete liquidation of the Company) must be
marked to fair value through earnings under EITF 00-7. In September 2000, the
EITF reached a consensus on Issue No.00-19, "Determination of Whether Share
Settlement Is Within the Control of the Issuer for Purposes of Applying Issue
No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). EITF 00-19
addresses questions regarding the application of EITF 00-7 and sets forth a
model to be used to determine whether equity derivative contracts should be
recorded as equity. Under the transition provisions of EITF 00-19, all
contracts existing prior to the date of the consensus are grandfathered until
June 30, 2001, with a cumulative catch-up adjustment to be recorded at that
time. Additionally, any contracts entered into prior to September 20, 2000,
which are not revised to comply with the requirements of EITF 00-19 by
December 31, 2000, will require reclassification out of permanent equity and
into temporary equity pursuant to Accounting Series Release No. 268. This
reclassification will remain until the contracts are revised to comply with
EITF 00-19 through June 30, 2001. At December 31, 2000, contracts aggregating
$51.0 do not comply with the provisions of EITF 00-19 and have been included
in the accompanying Consolidated Balance Sheets in Share repurchase
commitments with a corresponding decrease in Additional paid-in capital. The
Company believes that the equity derivative contracts that may remain
outstanding at June 30, 2001, if any, will be in accordance with the
requirements of EITF 00-19 and does not anticipate that such adoption will
have a material impact on the consolidated financial statements. On March 1,
2001, the Company purchased 260,000 shares of Avon common stock for a purchase
price of $11.5 under these contracts.
In May 2000, the EITF reached a consensus on EITF 00-14, "Accounting for
Certain Sales Incentives", which provides guidance on accounting for
discounts, coupons, rebates and free products, as well as the income statement
classification of these discounts, coupons, rebates and free products. EITF
00-14 is effective April 1, 2001, for the Company. The Company is currently
evaluating the impact of this new guidance.
-28-
3. Inventories
Inventories at December 31 consisted of the following:
2000 1999
Raw materials $168.0 $156.9
Finished goods 442.6 366.6
Total $610.6 $523.5
4. Debt and Other Financing
Debt at December 31 consisted of the following (see also Note 7 of the Notes
to Consolidated Financial Statements regarding financial instruments):
2000 1999
Maturing within one year:
Notes payable $ 104.6 $305.2
Current portion of long-term debt .8 .8
Total $ 105.4 $306.0
Long-term debt:
6.90% Notes, due 2004 $ 200.0 $200.0
6.55% Notes, due 2007 100.0 100.0
7.15% Notes, due 2009 300.0 300.0
6.25% Bonds, due 2018 100.0 100.0
Convertible Notes, due 2020 407.0 -
Other, payable through 2005 with interest from 3% to 15% 2.0 2.2
Less current portion (.8) (.8)
Total $1,108.2 $701.4
Annual maturities of long-term debt for each of the next five years are:
2001 - $.8; 2002 - $.6; 2003 - $.4; 2004 - $200.1; and 2005 and beyond -
$907.1.
In July 2000, the Company issued in a private placement $735.8
principal amount at maturity of zero-coupon convertible senior notes
(the "Convertible Notes"), due July 12, 2020 with proceeds of
approximately $350.0. The issue price per Convertible Note was
$475.66, being 47.566% of the principal amount of $1,000 per note at
maturity. The Convertible Notes have a 3.75% yield to maturity and are
convertible at any time into the Company's common stock at a conversion
rate of 8.2723 shares of common stock per $1,000 principal amount at
maturity of the Convertible Notes (equivalent to a conversion price of
$57.50 per share based on the initial offering price of the Convertible
Notes). The Convertible Notes may be redeemed at the option of the
Company on or after July 12, 2003 at a redemption price equal to the
issue price plus accrued original issue discount to the redemption
date. The holders can require the Company to purchase all or a portion
of the Convertible Notes on July 12, 2003, July 12, 2008 and July 12,
2013, at the redemption price per note of $531.74, $640.29 and $771.00,
respectively. The holders may also require the Company to repurchase
the Convertible Notes if a fundamental change, as defined, involving
Avon occurs prior to July 12, 2003. The Company has the option to pay
the purchase price or, if a fundamental change has occurred, the
-29-
repurchase price in cash or common stock or a combination of cash and
common stock. The indenture under which the Convertible Notes were
issued restricts the Company's ability to merge with or consolidate
into another company or to sell substantially all of the Company's
assets.
The Company also granted to the initial purchasers of the Convertible
Notes an over-allotment option to purchase an additional $105.0 of Convertible
Notes. As of August 8, 2000, the over-allotment option had been exercised and
additional Convertible Notes with an aggregate principal amount at maturity of
approximately $105.0 were purchased by the initial purchasers from the Company
for proceeds of approximately $50.0.
The net proceeds from the offering (including the proceeds of the over-
allotment option) were used for general corporate purposes, including the
repayment of short-term debt.
In November 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
the mergers, consolidation or a sales of substantially all of the Company's
assets.
In connection with the November 1999 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 rates on the Notes
to a variable interest rate, based on commercial paper rates. In November
2000, these interest rate swap contracts were terminated. The cost to settle
these contracts is being amortized over the remaining term of the underlying
debt. At the same time, the Company entered into new four year and nine-year
interest rate swap contracts with notional amounts of $200.0 and $300.0,
respectively, to effectively convert fixed interest on the Notes to a variable
interest rate, based on LIBOR.
In May 2000, Avon entered into an interest rate cap agreement with a
notional amount of $150.0 expiring on May 31, 2001, to convert a variable
interest rate, resulting from the interest rate swaps above, to a fixed
interest rate. The cap rate under this contract is 7%.
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 May 1998 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. The Company is currently negotiating with
various banks to renew this credit facility and expects to have a final
-30-
agreement by the end of the second quarter of 2001. 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, 2000 and 1999,
the Company has $29.9 and $226.4, respectively, outstanding under a $600.0
commercial paper program supported by the credit facility.
The Company has uncommitted lines of credit available of $49.0 in 2000 and
1999 with various banks which have no compensating balances or fees. As of
December 31, 2000 and 1999, $11.1 of these lines are being used for letters of
credit.
The maximum borrowings under these combined facilities during 2000 and
1999 were $515.4 and $840.7, respectively, and the annual average borrowings
during each year were approximately $313.7 and $304.0, respectively, at
average annual interest rates of approximately 6.5% and 5.3%, respectively.
At December 31, 2000 and 1999, international lines of credit totaled
$449.5 and $399.5, respectively, of which $74.8 and $81.6 were outstanding,
respectively. The maximum borrowings under these facilities during 2000 and
1999 were $86.4 and $121.0, respectively, and the annual average borrowings
during each year were $77.8 and $73.0, respectively, at average annual
interest rates of approximately 6.4% and 6.2%, respectively. Such lines have
no compensating balances or fees.
At December 31, 2000 and 1999, 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 were paid during
2000. The obligations are included in other accrued liabilities on the
balance sheet at December 31, 1999. The effective rates on the transactions
were 5.5% and 6.5%, respectively.
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5. Comprehensive Income
The following table reflects comprehensive income as of December 31:
2000 1999 1998
Net income $478.4 $302.4 $270.0
Other comprehensive loss:
Foreign currency
translation adjustments (42.9) (49.7) (15.6)
Available-for-sale securities
Unrealized loss (9.3) - -
Income taxes 3.3 - -
Minimum pension liability
adjustment (.8) 2.0 (24.6)
Income taxes .3 (.7) 9.2
Comprehensive income $429.0 $254.0 $239.0
Accumulated other comprehensive loss at December 31 consisted of the
following:
2000 1999
Foreign currency translation
adjustments $(378.5) $(335.6)
Unrealized loss from
available-for-sale
securities, net of tax (6.0) -
Minimum pension liability
adjustment, net of tax (14.6) (14.1)
Total $(399.1) $(349.7)
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:
2000 1999
Deferred tax assets:
Postretirement benefits $ 80.7 $ 82.8
Accrued expenses and reserves 48.9 48.6
Special and non-recurring charges 2.4 7.2
Employee benefit plans 69.8 70.9
Foreign operating loss carryforwards 25.9 37.3
Capital loss carryforwards .2 10.0
Postemployment benefits 7.4 9.3
Revenue recognition 4.2 -
All other 30.6 27.0
Valuation allowance (25.4) (46.7)
Total deferred tax assets 244.7 246.4
Deferred tax liabilities:
Depreciation (43.1) (43.6)
Prepaid retirement plan costs (50.0) (54.9)
Capitalized interest (8.7) (9.7)
Unremitted foreign earnings (13.7) (17.7)
All other (27.2) (19.7)
Total deferred tax liabilities (142.7) (145.6)
Net deferred tax assets $ 102.0 $ 100.8
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Deferred tax assets (liabilities) at December 31 were classified as
follows:
2000 1999
Deferred tax assets:
Prepaid expenses and other $ 86.0 $ 90.0
Other assets 66.1 52.2
Total deferred tax assets 152.1 142.2
Deferred tax liabilities:
Income taxes (18.8) (4.7)
Deferred income taxes (31.3) (36.7)
Total deferred tax liabilities (50.1) (41.4)
Net deferred tax assets $102.0 $100.8
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 from continuing operations before taxes, minority interest and
cumulative effect of an accounting change for the years ended December 31 was
as follows:
2000 1999 1998
United States $ 172.0 $ 102.2 $ 74.2
Foreign 519.0 404.4 381.7
Total $ 691.0 $ 506.6 $ 455.9
The provision for income taxes for the years ended December 31 was as
follows:
2000 1999 1998
Federal:
Current $ (3.2) $ 48.4 $ 39.2
Deferred 11.1 (13.3) (10.4)
7.9 35.1 28.8
Foreign:
Current 183.8 167.5 153.7
Deferred - (4.5) .9
183.8 163.0 154.6
State and other:
Current 7.6 8.3 10.9
Deferred 2.4 (2.2) (3.5)
10.0 6.1 7.4
Total $ 201.7 $ 204.2 $ 190.8
The effective tax rate for the years ended December 31 was as follows:
2000 1999 1998
Statutory federal rate 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit .5 .8 1.0
Tax-exempt operations (.2) (.3) .8
Taxes on foreign income, including translation .3 4.2 4.6
Tax refund, net of taxes (5.8) - -
Other (.6) .6 .5
Effective tax rate 29.2% 40.3% 41.9%
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At December 31, 2000, Avon had foreign operating loss carryforwards
of approximately $78.7. The loss carryforwards expiring between 2001
and 2008 were $35.5 and the loss carryforwards which do not expire were
$43.2. Capital loss carryforwards, which expire in 2001 and may be used
to offset capital gains, if any, were approximately $.7 at December 31,
2000.
In January 2001, the Company received a federal income tax refund
consisting of $32.5 of tax and $62.7 of interest related to the carryback of
foreign tax credits and general business credits to the years ended December
31, 1982, 1983, 1985 and 1986. The Company recognized $40.1 million as an
income tax benefit in 2000 resulting from the impact of the tax refund offset
by taxes due on interest received and other related tax obligations.
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 four-year and nine-year interest rate swap contracts with
notional amounts of $200.0 and $300.0, respectively, to convert fixed interest
on the Notes to a variable interest rate, based on LIBOR.
In May 2000, Avon entered into an interest rate cap agreement
with a notional amount of $150.0 expiring on May 31, 2001, to
convert a variable interest rate, resulting from the interest rate
swaps above, to a fixed interest rate. The cap rate under this
contract is 7%.
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, 2000, the Company held foreign currency forward contracts
with notional amounts totaling $393.7 (1999 - $290.2) and option contracts
with notional amounts totaling $19.1 (1999 - $20.0) to hedge foreign currency
items. All of these contracts mature within the next 13 months.
Additionally, the Company also held forward contracts with notional amounts
totaling $34.2 (1999 - $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 adjustments on these forward contracts at December
31, 2000 and 1999, were not material.
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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:
2000 1999
Buy Sell Buy Sell
Argentine peso $ - $ 15.0 $ - $ -
Brazilian real - 8.0 15.0 65.0
British pound 5.5 41.7 7.3 30.1
Canadian dollar - 10.8 - 23.8
Euro 151.3 104.1 82.9 10.0
French franc .9 - 10.9 -
Indonesian rupiah .9 - 1.7 -
Irish punt 2.8 - 1.7 -
Italian lira 1.6 - 4.7 -
Japanese yen 13.7 20.0 4.8 60.5
Mexican peso - 43.8 - 45.0
Polish zloty - 8.4 - -
Taiwanese dollar - 7.0 - 3.0
Other currencies 2.3 9.2 6.2 4.3
Total $179.0 $ 268.0 $ 135.2 $241.7
At December 31, 2000, the Company has entered into forward contracts
to purchase approximately 1,374,400 shares of Avon common stock at an
average price of $37.09 per share at December 31, 2000. The contracts
mature over the next 10 months and provide for physical or net share
settlement to the Company. Accordingly, no adjustment for subsequent
changes in fair value has been recognized. In accordance with the
provisions of EITF 00-19, $51.0 of these contracts have been included in
the accompanying Consolidated Balance Sheets in Share repurchase
commitments with a corresponding decrease in Additional paid-in capital.
See Note 2 of the Notes to Consolidated Financial Statements. On March 1,
2001, the Company purchased 260,000 shares of Avon common stock at a
purchase price of $11.5 under these contracts.
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, 2000. 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.
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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 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:
2000 1999
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and equivalents $ 122.7 $ 122.7 $ 117.4 $ 117.4
Grantor trust 70.1 70.1 75.4 75.4
Debt maturing within one year* (105.4) (105.4) (412.4) (412.4)
Long-term debt, net of related
discount or premium (1,108.8) (1,139.3) (701.1) (675.6)
Share repurchase commitments (51.0) (14.8) - (12.3)
Foreign exchange forward and
option contracts .6 (4.2) 9.8 4.3
Interest rate swap and cap
receivable (payable) .3 20.0 .5 (13.4)
*Other financing activities are included in Debt maturing within one year in
1999.
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:
1998 1999 2000
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 7,070 $22.29 7,127 $25.46 8,106 $29.38
Granted 1,664 32.40 2,225 37.33 3,424 38.28
Exercised (1,412) 17.59 (1,152) 20.35 (1,702) 23.94
Forfeited (195) 26.87 (94) 31.14 (249) 31.68
Outstanding -
end of year 7,127 $25.46 8,106 $29.38 9,579 $33.47
Options
exercisable -
end of year 2,943 $18.74 3,627 $23.32 4,241 $28.61
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The following table summarizes information about stock options outstanding
at December 31, 2000:
___Options Outstanding__ ___Options Exercisable__
Exercise Shares Average Average Shares Average
Price (in 000's) Price Term (in 000's) Price
$13.13 - $23.00 1,142 $ 17.23 5 years 1,142 $ 17.23
$29.63 - $35.25 3,611 $ 31.54 7 years 2,532 $ 31.10
$38.25 - $54.81 4,826 $ 38.75 9 years 567 $ 40.43
The 1993 Stock Incentive Plan (the "1993 Plan"), and the Avon Products,
Inc. 2000 Stock Incentive Plan (the "2000 Plan"), which replaced the 1993 Plan
effective May 4, 2000, provide for several types of equity-based incentive
compensation awards. Under the 2000 Plan, the maximum number of shares that
may be awarded is 18,250,000 shares, of which no more than 6,000,000 shares
may be used for restricted share and stock bonus grants. Under the 1993 Plan,
the maximum number of shares that could be awarded was 14,100,000 shares, of
which no more than 8,000,000 shares could be used for restricted share and
stock bonus grants. Awards under either plan may be in the form of stock
options, stock appreciation rights, dividend equivalent rights or performance
unit awards. Stock options are granted at a price no less than fair market
value on the date the option is granted. During 2000, 1999 and 1998,
restricted shares with aggregate value and vesting and related amortization
periods were granted as follows: 2000 - 261,700 valued at $10.2 vesting over
one to three years; 1999 - 137,000 valued at $5.8 vesting over one to three
years and 1998 - 499,000 valued at $16.0 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 provided for the
grant of two forms of incentive awards, performance units for potential cash
incentives and ten-year stock options. Performance units were 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
approximately $31.0 were paid in 2000. Effective May 4, 2000, stock options
were awarded under the 2000 Plan. Options are awarded annually over a 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 2000 was $6.6 (1999 - $20.4;
1998 - $17.8). The unamortized cost of restricted shares as of December
31, 2000 was $10.0 (1999 - $6.8).
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 (after the
cumulative effect of the accounting change) would have been the pro
forma amounts indicated below:
2000 1999 1998
Pro forma net income $ 460.9 $ 291.0 $ 263.0
Pro forma earnings per share:
Basic $ 1.94 $ 1.13 $ 1.00
Diluted $ 1.92 $ 1.12 $ .99
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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:
2000 1999 1998
Risk-free interest rate 6.7% 5.4% 5.5%
Expected life 5 years 5 years 5 years
Expected volatility 40% 30% 25% - 30%
Expected dividend yield 2.0% 2.0% 2.0%
The weighted-average grant date fair values of options granted during
2000, 1999 and 1998 were $11.73, $10.09, and $7.67, respectively.
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. 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 could 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. In February 1997, Avon's Board authorized a
new repurchase program under which 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 the third
quarter of 2000, when the program was completed, the cumulative number
of shares repurchased was 33.7 million shares at a total cost of
$1,060.0. In September 2000, Avon's Board approved a new share
repurchase program under which the Company may buy up to $1,000.0 of its
outstanding stock over the next five years. As of December 31, 2000,
the Company repurchased approximately 0.6 million shares at a total cost
of approximately $25.8 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 2000 and 1999, matching contributions approximating
$12.7 and $12.8, respectively, were made in cash, which was then used to
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purchase Avon shares in the open market. In 1998, Avon contributed
62,520 shares of treasury stock to the employees' savings plan and
recognized expense for its fair value.
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. 52,786 shares 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 2000 and 1999 consisted of 34,000 and 36,000
options, respectively, with an exercise price of $38.25 and $51.38,
respectively.
Also effective as of May 1, 1997, the annual retainer paid to non-
management directors was changed to consist of twenty-five thousand
dollars cash plus an annual grant of shares having a value of twenty-five
thousand dollars based on the average closing market price of the stock
for the 10 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 2000 and 1999 consisted of a total of 5,232 and 4,284
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 10 year transitional benefit arrangement for certain
employees covered under the existing defined benefit retirement plan.
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. In 2000, Avon
adopted certain amendments to its retiree medical plans which increases
retiree contributions, changes the prescription drug program and implements a
future cap on Company contributions.
The following provides a reconciliation of benefit obligations, plan
assets and funded status of these plans:
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Pension Postretirement
Benefits Benefits
2000 1999 2000 1999
Change in benefit obligation:
Beginning balance $(919.2) $(999.8) $(181.6) $(201.8)
Service cost (36.5) (38.1) (1.9) (3.6)
Interest cost (65.6) (67.6) (11.2) (13.4)
Actuarial (loss) gain (6.8) 43.5 2.7 19.5
Benefits paid 84.3 155.1 13.7 12.1
Plan amendments (1.5) (2.9) 42.1 5.5
Settlements/special
termination benefits 1.7 (17.2) - -
Foreign currency changes 31.2 10.6 - -
Other (1.8) (2.8) .2 .1
Ending balance $(914.2) $(919.2) $(136.0) $(181.6)
Change in plan assets:
Beginning balance $ 860.0 $ 863.1 $ - $ -
Actual return on
plan assets 7.1 113.7 - -
Company contributions 39.9 36.1 13.7 12.1
Plan participant contributions 2.0 2.2 - -
Benefits paid (84.3) (155.1) (13.7) (12.1)
Foreign currency changes (21.3) 2.0 - -
Settlements/special
termination benefits (4.1) (2.0) - -
Ending balance $ 799.3 $ 860.0 $ - $ -
Funded status of the plan $(114.9) $ (59.2) $(136.0) $(181.6)
Unrecognized actuarial
loss(gain) 107.5 48.1 (27.6) (26.1)
Unrecognized prior
service cost 2.8 3.0 (44.3) (5.0)
Unrecognized net transition
obligation 2.1 1.6 .3 .4
Accrued benefit cost $ (2.5) $ (6.5) $(207.6) $(212.3)
Amount recognized in the
statements:
Prepaid benefit $ 143.9 $ 138.8 $ - $ -
Accrued liability (146.4) (145.3) (207.6) (212.3)
Additional minimum liability (31.1) (22.0) - -
Intangible asset 7.8 7.9 - -
Accumulated other
comprehensive income 23.3 14.1 - -
$ (2.5) $ (6.5) $(207.6) $(212.3)
At December 31, 2000 and 1999, the weighted-average discount rate used
in determining the pension benefit obligation was 7.1%. At December 31,
2000 and 1999, the weighted-average discount rates used in determining
the postretirement benefit obligation were 7.8% and 8.0%, 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
$390.3, $349.0, and $40.1, respectively, as of December 31, 2000, and
$428.8, $381.4, and $39.4, respectively, as of December 31, 1999.
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Net periodic benefit cost for the years ended December 31 was determined as
follows:
Pension Postretirement
Benefits Benefits
2000 1999 1998 2000 1999 1998
Service cost $ 36.5 $ 38.1 $ 35.4 $ 1.9 $ 3.6 $ 3.3
Interest cost 65.6 67.6 64.5 11.2 13.4 13.0
Expected return on plan assets (66.6) (69.6) (64.0) - - -
Amortization of transition
liability (.7) (.7) (6.8) - - -
Amortization of prior
service cost 1.0 .8 (.4) - - -
Amortization of actuarial
losses (gains) 5.6 10.2 12.3 (3.8) (.4) -
Settlements or curtailments (1.2) 2.0 - - - -
Special termination benefits 2.5 1.5 - - - -
Other (.9) - .3 - - -
Net periodic benefit cost $ 41.8 $ 49.9 $ 41.3 $ 9.3 $16.6 $16.3
The weighted-average assumptions used to determine the data for the
years ended December 31 are as follows:
Pension Postretirement
Benefits Benefits
2000 1999 1998 2000 1999 1998
Discount rate 7.2% 6.8% 7.1% 8.0% 7.0% 7.2%
Rate of compensation increase 4.0 4.0 4.0 4.5 4.5 4.5
Rate of return on assets 8.8 8.8 9.2 N/A N/A N/A
For 2000, the assumed rate of future increases in the per capita cost of
health care benefits (the health care cost trend rate) was 6.8% for pre-65
claims (6.4% 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 $ 1.8 $ 1.4
Effect on postretirement benefit
obligation 17.6 14.5
Supplemental Retirement Program - Avon maintains a supplemental retirement
program consisting of a Supplemental Executive Retirement Plan ("SERP") and a
Benefits Restoration Pension Plan ("Restoration Plan") under which non-
qualified supplemental pension benefits are paid to higher paid employees in
addition to amounts received under Avon's qualified retirement plan which is
subject to IRS limitations on covered compensation. The annual cost of this
program has been included in the determination of the net periodic benefit
cost shown above and in 2000 amounted to $10.2 (1999 - $10.1, 1998 - $6.1).
The benefit obligation under this program at December 31, 2000 was $32.9 (1999
- - $29.3) 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
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benefits. The cash surrender value of these policies at December 31,
2000 was $26.1 (1999 - $24.2) 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 and further provides for funding of
obligations under Avon's Deferred Compensation Plan. 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, 2000,
amounting to $96.2 (1999 - $99.6), 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.
The equity securities and fixed income portfolio included in the grantor trust
are classified as available-for-sale and recorded at current market value. In
2000, net unrealized gains and losses on these securities were recorded in
Other Comprehensive Income (see Note 5). In 1999, the net unrealized gains
and losses on these securities were not recorded as the carrying value
approximated market. The cost, gross unrealized gains and losses and market
value of the available-for-sale securities as of December 31, 2000, are as
follows:
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
Equity Securities $ 44.3 $ 2.5 $ (12.2) $ 34.6
U.S. Government Bonds 1.5 - - 1.5
State and Municipal Bonds 30.9 .6 (.2) 31.3
Mortgage Backed 1.9 - - 1.9
Corporate Bonds .8 - - .8
Total $ 79.4 $ 3.1 $ (12.4) $ 70.1
Payments, proceeds and net realized gains from the purchases and sales of
these securities totaled $98.3, $100.3 and $6.0, respectively, during 2000.
For the purpose of determining realized gains and losses, the cost of
securities sold was based on specific identification.
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, 2000, the accrued cost for
postemployment benefits was $31.9 (1999 - $38.5) 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, Europe and Pacific 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.
-42-
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.
Total Assets:
2000 1999 1998
North America
U.S. $ 640.0 $ 536.9 $ 497.2
Other* 128.2 114.5 111.1
Total 768.2 651.4 608.3
International
Latin America North 292.9 248.9 205.3
Latin America South 310.7 294.1 338.1
Latin America 603.6 543.0 543.4
Europe 451.3 415.4 386.0
Pacific 399.8 411.2 379.5
Total 1,454.7 1,369.6 1,308.9
Corporate and other 603.5 507.6 516.3
Total assets $ 2,826.4 $2,528.6 $2,433.5
Capital Expenditures:
2000 1999 1998
North America
U.S. $ 67.6 $ 39.2 $ 32.1
Other* 8.7 9.1 8.6
Total 76.3 48.3 40.7
International
Latin America North 17.5 37.6 17.5
Latin America South 24.6 15.8 19.1
Latin America 42.1 53.4 36.6
Europe 47.1 39.6 28.8
Pacific 13.4 33.6 28.1
Total 102.6 126.6 93.5
Corporate and other 14.6 28.5 55.3
Total capital expenditures $ 193.5 $ 203.4 $ 189.5
Depreciation and Amortization:
2000 1999 1998
North America
U.S. $ 28.5 $ 23.7 $ 19.2
Other* 3.5 2.8 2.4
Total 32.0 26.5 21.6
International
Latin America North 9.3 6.4 5.1
Latin America South 7.4 6.6 6.9
Latin America 16.7 13.0 12.0
Europe 16.0 15.4 14.9
Pacific 16.9 16.1 11.2
Total 49.6 44.5 38.1
Corporate and other 15.5 12.0 12.3
Total depreciation
and amortization $ 97.1 $ 83.0 $ 72.0
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Long-Lived Assets: 2000 1999 1998
North America
U.S. $ 283.1 $ 251.6 $ 215.9
Other* 25.3 17.2 23.9
Total 308.4 268.8 239.8
International
Latin America North 81.5 73.7 47.2
Latin America South 73.4 59.7 62.1
Latin America 154.9 133.4 109.3
Europe 175.4 152.9 135.0
Pacific 174.6 193.1 167.1
Total 504.9 479.4 411.4
Corporate and other 146.5 140.7 153.9
Total long-lived assets $ 959.8 $ 888.9 $ 805.1
*Includes operating information for Puerto Rico, Canada and Discovery Toys.
The following table presents consolidated net sales by classes of principal
products, as of December 31:
2000 1999 1998
Cosmetics, fragrance and toiletries $3,501.3 $3,220.8 $3,181.1
Beauty Plus:
Fashion Jewelry 323.4 313.4 294.5
Accessories 275.8 223.9 222.4
Apparel 476.3 474.5 469.1
Watches 68.6 49.8 42.1
1,144.1 1,061.6 1,028.1
Beyond Beauty and Other* 1,028.3 1,006.7 1,003.5
Total net sales $5,673.7 $5,289.1 $5,212.7
*Beyond Beauty and Other primarily includes home products, gift and
decorative, health and nutrition, and candles.
Foreign Exchange - Financial statement translation of subsidiaries
operating in highly inflationary economies and foreign currency
transactions resulted in losses (gains) in 2000 netting to $12.6 (1999 -
$7.5; 1998 - $(1.1)), 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 2000 of $3.2 (1999 - $7.1; 1998 - $15.8).
-44-
12. Leases and Commitments
Minimum rental commitments under noncancellable operating leases,
primarily for equipment and office facilities at December 31, 2000,
consisted of the following:
Year
2001 $ 69.1
2002 52.8
2003 40.6
2004 33.1
2005 29.1
Later years 225.3
Sublease rental income (4.5)
Total $ 445.5
Rent expense in 2000 was $85.4 (1999 - $84.5; 1998 - $84.7). Various
construction and information systems projects were in progress at
December 31, 2000, with an estimated cost to complete of approximately
$130.0.
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 totaled $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
Writedown 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
-45-
1998
Special Cost of
Charges Sales Charge Total
Employee severance
costs $ 56.4 $ - $ 56.4
Inventories - 37.9 37.9
Writedown 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 was 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, 2000, all employees under the
program have been terminated.
Inventory-related charges represent losses to write down the carrying
value of non-strategic inventory prior to disposal. The 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 writedown 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
writedown 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 writedown 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, writedowns 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 a 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.
-46-
The liability balance included in other accrued liabilities as of
December 31, 2000 and 1999, is as follows:
Special Cost of
Charges Sales Charge Total
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
Cash expenditures (18.3) - (18.3)
Balance at
December 31, 2000 $ 7.9 $ - $ 7.9
The balance at December 31, 2000, relates primarily to employee
severance costs that will be paid in accordance with the original plan
during 2001.
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). While it is not possible to predict the outcome of
litigation, Avon has rejected the assertions in this case, believes it
has meritorious defenses to the claims and is vigorously contesting this
lawsuit. It is anticipated that a trial may take place in late 2001.
In the opinion of Avon's management, based on its review of the
information available at this time, the total cost of resolving such
contingencies at December 31, 2000 should not have a material adverse
impact on Avon's consolidated financial position, results of operations
or cash flows.
As disclosed in a Form 8-K filed September 14, 2000, in response to
a private investigation by the Securities and Exchange Commission, the
Company is providing information that principally concerns an item
included in its special charge reported for the first quarter of 1999.
The item consists of an order management software system for sales
representatives known as the FIRST project, of which $15 million in
costs were written off as part of the special charge. The balance of
the project's development costs, amounting to approximately $25 million,
continue to be carried as an asset on the books of the Company.
-47-
The Company is fully cooperating with the SEC. The SEC has stated
that its inquiry should not be construed as an indication by the
Commission or its staff that any violations of law have occurred, nor
should it be considered a reflection upon any person, entity or
security. The outcome of this investigation cannot be predicted.
15. Subsequent Event
On February 1, 2001, Avon's Board approved an increase in the
quarterly cash dividend to $.19 per share from $.185. The first
dividend at the new rate will be paid on March 1, 2001, to shareholders
of record on February 15, 2001. On an annualized basis, the new
dividend rate will be $.76 per share.
-48-
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
-49-
Report of Independent Auditors
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, 2000 and 1999,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of
America. 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 our opinion.
As discussed in Note 2 of the Notes to the Consolidated Financial
Statements, the Company changed its method of accounting for revenue
recognition as a result of the adoption of Staff Accounting Bulletin No.
101, "Revenue Recognition."
PricewaterhouseCoopers LLP
New York, New York
January 25, 2001
-50-
Eleven-Year Review
Avon Products, Inc.
In millions, except per share and employee data
2000 1999 1998 1997
Income data
Net sales $5,673.7 $5,289.1 $5,212.7 $5,079.4
Other revenue 40.9 (1) 38.8(1) 35.0(1) -
Total revenue 5,714.6 5,327.9 5,247.7 5,079.4
Operating profit (4) 788.7 549.4 473.2 537.8
Interest expense (4) 84.7 43.2 34.7 35.5
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 691.0 506.6(8) 455.9(8) 534.9
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 489.3 302.4(8) 265.1(8) 337.0
Income from continuing operations
before cumulative effect
of accounting changes 485.1 302.4(8) 270.0(8) 338.8
(Loss)income from
discontinued
operations, net - - - -
Cumulative effect
of accounting
changes, net (6.7)(2) - - -
Net income 478.4 302.4(8) 270.0(8) 338.8
Earnings (loss) per share
- basic (5) (6)
Continuing operations $ 2.04 $ 1.18(8)$ 1.03(8) $ 1.28
Discontinued operations - - - -
Cumulative effect of
accounting changes (.03) - - -
Net income 2.01 1.18(8) 1.03(8) 1.28
Earnings (loss) per share
- diluted (5) (6)
Continuing operations $ 2.02 (3) $ 1.17(8)$ 1.02(8) $ 1.27
Discontinued operations - - - -
Cumulative effect of
accounting changes (.03) - - -
Net income 1.99 (3) 1.17(8) 1.02(8) 1.27
Cash dividends per share
Common $ .74 $ .72 $ .68 $ .63
Preferred - - - -
Balance sheet data
Working capital $ 186.4 $ (375.0) $ 11.9 $ (11.9)
Capital expenditures 193.5 203.4 189.5 169.4
Property, plant and
equipment, net 768.4 734.8 669.9 611.0
Total assets 2,826.4 2,528.6 2,433.5 2,272.9
Debt maturing within one year 105.4 306.0 55.3 132.1
Long-term debt 1,108.2 701.4 201.0 102.2
Total debt 1,213.6 1,007.4 256.3 234.3
Shareholders' (deficit) equity (215.8) (406.1) 285.1 285.0
Number of employees
United States 9,800 9,700 8,000 8,100
International 33,200 30,800 25,900 26,900
Total employees (7) 43,000 40,500 33,900 35,000
-51-
1996 1995 1994 1993
Income data
Net sales $4,814.2 $4,492.1 $4,266.5 $3,844.1
Other revenue - - - -
Total revenue 4,814.2 4,492.1 4,266.5 3,844.1
Operating Profit (4) 538.0 500.8 489.5 427.4
Interest expense (4) 33.2 34.6 44.7 39.4
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 510.4 465.0 433.8 394.6
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 319.0 288.6 270.3 243.8
Income from continuing operations
before cumulative effect of
accounting changes 317.9 286.1 264.8 236.9
(Loss)income from
discontinued
operations, net - (29.6) (23.8) 2.7
Cumulative effect
of accounting
changes, net - - (45.2)(9)
(107.5)(9)
Net income 317.9 256.5 195.8 132.1
Earnings (loss) per share
- basic (5) (6)
Continuing operations $ 1.19 $ 1.05 $ .94 $ .82
Discontinued operations - (.11) (.09) .01
Cumulative effect of
accounting changes - - (.16) (.37)
Net income 1.19 .94 .69 .46
Earnings(loss) per share
- diluted (5) (6)
Continuing operations $ 1.18 $ 1.05 $ .93 $ .82
Discontinued operations - (.11) (.08) .01
Cumulative effect of
accounting changes - - (.16) (.37)
Net income 1.18 .94 .69 .46
Cash dividends per share
Common $ .58 $ .53 $ .48 $ .43
Preferred - - - -
Balance sheet data
Working capital $ (41.7) $ (30.3) $ 9.3 $ 23.1
Capital expenditures 103.6 72.7 99.9 58.1
Property, plant and
equipment, net 566.6 537.8 528.4 476.2
Total assets 2,222.4 2,052.8 1,978.3 1,918.7
Debt maturing within one year 97.1 47.3 61.2 70.4
Long-term debt 104.5 114.2 116.5 123.7
Total debt 201.6 161.5 177.7 194.1
Shareholders' (deficit) equity 241.7 192.7 185.6 314.0
Number of employees
United States 7,800 8,000 7,900 8,000
International 25,900 23,800 22,500 21,500
Total employees (7) 33,700 31,800 30,400 29,500
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1992 1991 1990
Income data
Net sales $3,660.5 $3,441.0 $3,291.6
Other revenue - - -
Total revenue 3,660.5 3,441.0 3,291.6
Operating Profit (4) 339.9 430.9 409.9
Interest expense (4) 38.4 71.6 74.1
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 290.0(10) 352.9 305.6
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 169.4(10) 209.3 180.3
Income from continuing operations
before cumulative effect
of accounting changes 164.2(10) 204.8 174.1
(Loss)income from
discontinued
operations, net 10.8 (69.1) 21.2
Cumulative effect
of accounting
changes, net - - -
Net income 175.0(10) 135.7 195.3
Earnings (loss) per share
- basic (5) (6)
Continuing operations $ .57(10) $ .65(11) $ .61
Discontinued operations .04 (.24) .09
Cumulative effect of
accounting changes - - -
Net income .61(10) .41(11) .70
Earnings (loss) per share
- diluted (5) (6)
Continuing operations $ .57(10) $ .71(11) $ .58
Discontinued operations .04 (.24) .07
Cumulative effect of
accounting changes - - -
Net income .61(10) .47(11) .65
Cash dividends per share
Common $ .38 $ 1.10(12) $ .25
Preferred - .253 .50
Balance sheet data
Working capital $ (99.5) $ (135.3) $ 71.6
Capital expenditures 62.7 61.2 36.3
Property, plant and
equipment, net 476.7 468.5 467.2
Total assets 1,692.6 1,693.3 2,010.1
Debt maturing within one year 37.3 143.8 207.1
Long-term debt 177.7 208.1 334.8
Total debt 215.0 351.9 541.9
Shareholders' (deficit) equity 310.5 251.6 393.4
Number of employees
United States 8,700 9,200 9,500
International 20,700 20,900 20,300
Total employees (7) 29,400 30,100 29,800
-53-
(1) For the year ended December 31, 2000, the Company adopted the
provisions of Emerging Issues Task Force ("EITF") 00-10, "Accounting for
Shipping and Handling Fees and Costs," which requires that amounts
billed to customers for shipping and handling fees be classified as
revenues. 1999 and 1998 have been restated to reflect shipping and
handling fees, previously reported in Marketing, distribution and
administrative expenses, in Other revenue in the Consolidated Statements
of Income.
(2) For the year ended December 31, 2000, the Company recorded a charge
of $6.7 million, after tax, to reflect the adoption of Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements."
This charge is reflected as a cumulative effect of an accounting change
in the Consolidated Statements of Income.
(3) For purposes of calculating diluted earnings per share for the year
ended December 31, 2000, after tax interest expense of $4.5, applicable
to Convertible Notes, has been added back to net income.
(4) Certain reclassifications have been made to conform to the current
full year presentation.
(5) 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.
(6) 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.
(7) 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.
Approximately 25% of Avon's U.S. employees are men. Men hold
approximately 15% of all U.S. officer and manager positions, and
approximately 10% of all U.S. office and clerical positions.
(8) 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.
(9) 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."
(10) In 1992, Avon began the restructuring of its worldwide
manufacturing and distribution facilities and recorded a provision of
-54-
$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.
(11) 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.
(12) Includes special dividend of $.75 paid in 1991.
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