EXHIBIT 13
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Management's Discussion and Analysis Avon Products, Inc.
The following discussion of the results of operations and financial condition
of Avon should be read in conjunction with the information contained in the
Consolidated Financial Statements and Notes thereto.
Results of Operations
Consolidated - Net income in 1994 was $195.8 million, or $2.77 per share,
compared with $132.1 million, or $1.83 per share, in 1993. The 1994 results
include a charge for accounting changes of $45.2 million, or $.64 per share,
and a charge to discontinued operations of $23.8 million, or $.34 per share.
The charge for accounting changes is for the cumulative effect of changes in
accounting principles for the following: Statement of Financial Accounting
Standards ("FAS") No. 112, "Employers' Accounting for Postemployment
Benefits", for all applicable operations of $28.9 million; FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions", for
foreign plans of $8.0 million; and costs related to the development of
information systems of $8.3 million. Effective in the first quarter of 1994,
internal information systems development costs are being expensed as incurred,
rather than deferred and amortized over future periods. The 1994 loss from
discontinued operations relates to the sale of Giorgio Beverly Hills, Inc.
("Giorgio") completed in the third quarter of 1994. See Note 3 of the Notes
to the Consolidated Financial Statements.
The 1993 results include a net charge for the cumulative effect of changes
in accounting principles of $107.5 million after tax, or $1.49 per share, for
postretirement benefits (FAS No. 106) for U.S. benefit plans and income taxes
(FAS No. 109, "Accounting for Income Taxes"). The 1993 results also include a
charge to discontinued operations for the final settlement and related
expenses in an arbitration proceeding related to a business previously sold of
$10.0 million and net income from discontinued operations related to Giorgio
of $12.7 million. Net income per share from discontinued operations was $.04.
Net income for 1992 was $175.0 million, or $2.43 per share, which includes a
restructuring charge of $64.4 million after tax, or $.90 per share, and net
income from Giorgio of $10.8 million, or $.15 per share, in discontinued
operations.
Continuing Operations - Income from continuing operations before cumulative
effect of accounting changes was $264.8 million, or 12 percent, above 1993.
Income per share from continuing operations increased 14 percent to $3.75 from
$3.28 in the prior year. The 14 percent increase over prior year for income
per share exceeds the 12 percent increase in income from continuing operations
because of the lower average shares outstanding for 1994 compared with 1993.
The Company initiated a stock repurchase program in 1994 which reduced the
number of shares outstanding. See Note 9 of the Notes to the Consolidated
Financial Statements for further discussion of this program. Pretax income
was $433.8 million, a 10 percent, or $39.2 million, increase over prior year.
This increase was primarily due to higher sales and a favorable operating
expense ratio. These favorable results were partially offset by higher net
interest expense, a lower gross margin and higher non-operating expenses. Net
income was further improved by a lower effective tax rate (37.7 percent versus
38.2 percent in 1993) resulting primarily from the mix of earnings and tax
rates of international subsidiaries. Income from continuing operations in
1993 increased $8.3 million, or $.11 per share from 1992, excluding the
restructuring charge in 1992.
Consolidated net sales of $4.27 billion increased 11 percent from $3.84
billion in 1993. Sales in international increased 12 percent to $2.73 billion
from $2.45 billion in 1993 due to strong growth in the Americas Region and the
Pacific Rim and the favorable impact of the weaker U.S. Dollar in relation to
the currencies in Japan and most European countries. These improvements were
partially offset by operational declines in most Western European markets and
Japan. Sales in U.S. increased 10 percent to $1.54 billion primarily due to
an increase in average order size and an increase in Representative orders.
In 1993, consolidated net sales of $3.84 billion increased 5 percent over 1992
reflecting higher sales in international, primarily due to strong growth in
the Americas Region and the Pacific Rim, and the favorable impact of exchange
rate fluctuations in Japan. These increases were partially offset by lower
sales in Europe due to the unfavorable impact of a stronger dollar against
most European currencies and operational declines,
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mainly in Germany. 1993
sales in U.S. declined 1 percent to $1.40 billion primarily due to a decrease
in the number of orders.
Cost of sales as a percentage of sales was 39.2 percent in 1994, compared
with 38.9 percent in 1993. The decline in gross margin was primarily due to
the 1994 introduction of the apparel line in the U.S., increased sales of the
lower margin fashion, apparel and home product categories in Mexico and
declines throughout most European markets. The decline was partially offset
by margin improvements in Brazil and Argentina due to a shift in the sales mix
to higher margin items. In 1993, cost of sales as a percentage of sales was
38.9 percent, compared to 39.3 percent in 1992. The improved cost ratio
resulted primarily from margin improvements in the Americas Region, primarily
Mexico and Brazil, and in the U.S. reflecting a shift in product mix to the
higher margin cosmetics, fragrances and toiletries ("CFT") product category.
Marketing, distribution and administrative expenses of $2.1 billion
increased 10 percent from 1993 but decreased as a percentage of sales to 49.2
percent from 49.8 percent in 1993. The higher expense level reflects sales
related increases in the U.S., Brazil, Argentina, Mexico and the Pacific Rim
markets and higher expenses related to market expansion in the Eastern
European markets and the Pacific Rim, most significantly China. The
improvement in the operating expense ratio was due to sales increases in the
U.S., Brazil and Argentina partially offset by increased expenses in relation
to sales in Mexico and China and lower sales in Venezuela and Germany. In
1993, marketing, distribution and administrative expenses of $1.9 billion
increased 7 percent from 1992 and increased as a percentage of sales to 49.8
percent compared with 48.7 percent in 1992. The dollar increase reflects
higher expenses associated with increased sales volume in the Americas Region,
significantly higher advertising and marketing expenses and the incremental
effect of FAS No. 106 in the U.S., and higher expenses in the Pacific Region
partially offset by lower expenses in Europe. The increase in the operating
expense ratio was primarily due to the impact of lower sales and higher
expenses in the U.S. and an unfavorable operating expense ratio in Europe,
primarily due to lower sales in Germany and Spain. These increases were
partially offset by an improved operating expense ratio in the Americas
Region, mainly Venezuela and Argentina.
A provision of $96.0 million ($64.4 million after tax, or $.90 per share)
was recorded in 1992 for the restructuring and reconfiguration of Avon's
worldwide manufacturing and distribution facilities. The restructuring
program included closing the manufacturing facility in Spain in 1992 and the
distribution facility in Springdale, Ohio in July 1993, as well as the
reconfiguring of several other international operations. The restructuring
program was substantially completed by December 31, 1993 and was fully
completed by December 31, 1994 and has resulted in annual expense savings of
approximately $50.0 million in 1994. The program has eliminated approximately
1,200 positions worldwide and has increased operating efficiency in
distribution, eliminated redundancies in manufacturing by rationalizing
product mix, and reduced operating expenses in certain regions. Of the total
restructuring charge, approximately $71.0 million was operating-cash related
of which $4.0 million, $27.0 million and $40.0 million impacted cash flow in
1994, 1993 and 1992, respectively.
Interest expense in 1994 of $50.8 million increased $5.6 million, or 12
percent, over last year due to higher borrowings to fund working capital needs
and hyperinflationary interest rates in Brazil and higher borrowings in the
Eastern European markets and China as part of Avon's growth strategy. The
increase was partially offset by lower interest expense in Japan and the
United Kingdom reflecting lower borrowing levels in 1994. In 1993, interest
expense of $45.2 million was $1.5 million, or 3 percent, higher than 1992.
The increase was primarily due to hyperinflationary interest rates and higher
debt levels in Brazil, partially offset by lower average debt levels in the
U.S. and lower borrowings and interest rates in Japan.
Interest income in 1994 of $22.1 million decreased $3.2 million, or 13
percent, compared to last year due to lower average cash balances in Brazil in
1994. In 1993, interest income of $25.3 million decreased $12.2 million from
1992 primarily due to significantly lower levels of short-term investments in
Brazil in 1993.
Other expense, net, of $33.1 million was $14.4 million higher than 1993.
The increase was primarily due to gains related to the sales of a
non-operating investment and land in 1993 and higher non-operating expenses in
1994. Other expense, net, was $18.7 million in 1993, a $30.3 million decrease
from 1992. The decrease was due to the gains recorded in 1993, noted above,
and lower non-operating expenses in 1993 compared to 1992.
Income taxes were $163.5 million in 1994 and the effective tax rate was
37.7 percent compared with $150.8 million and an effective tax rate of 38.2
percent in 1993. The lower effective tax rate in 1994 resulted primarily from
the mix of earnings and tax rates of international subsidiaries. The 1994
effective tax rate reflects the
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utilization of foreign net operating loss carryforwards. Of the remaining net
operating loss carryforwards, a significant portion is not expected to be
utilizable in 1995, and therefore, it is expected that the 1995 effective tax
rate will be somewhat higher. It is difficult to predict what the 1995
effective tax rate will be due to various factors, primarily the mix of
international earnings. In 1993, the effective tax rate was 38.2 percent,
compared with 41.6 percent in 1992. Excluding the effect of the 1992
restructuring charge, the effective tax rate was 39.4 percent. The lower
effective tax rate in 1993 resulted primarily from the use of capital loss
carryforwards to offset the gain on the sale of a non-operating investment,
the mix of international and domestic income and a favorable adjustment to net
deferred tax assets resulting from the increase in the U.S. statutory tax rate
in 1993.
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. Among the countries in
which Avon has significant operations, extremely high rates of inflation have
been experienced in Brazil for a number of years.
Below is an analysis of the key factors affecting net sales and pretax income
from continuing operations by geographic area for each of the years in the
three-year period ended December 31, 1994. Prior year data has been restated
to reflect Giorgio as discontinued operations.
In millions
Years ended
December 31 1994 1993 1992
----------------- ----------------- -----------------
Net Pretax Net Pretax Net Pretax
Sales Income Sales Income Sales Income
----- ------ ----- ------ ----- ------
United States $1,535.1 $201.2 $1,395.6 $152.8 $1,408.1 $140.8(1)
-------- ------ -------- ------ -------- ------
International
Americas 1,415.3 273.9 1,175.2 196.4 980.6 168.4(1)
Pacific 664.3 89.7 625.6 90.9 542.8 84.0
Europe 651.8 15.3 647.7 53.5 729.0 31.5(1)
-------- ------ -------- ------ -------- ------
Total
Inter-
national 2,731.4 378.9 2,448.5 340.8 2,252.4 283.9(1)
-------- ------ -------- ------ -------- ------
Total from
operations $4,266.5 580.1 $3,844.1 493.6 $3,660.5 424.7
======== ======== ========
Corporate expenses (84.9) (69.0) (73.1)(1)
Interest expense (50.8) (45.2) (43.7)
Other income (expense) (10.6) 15.2 (17.9)
------ ------ ------
Total $433.8 $394.6 $290.0(1)
====== ====== ======
(1)Pretax income for geographic area data in 1992 includes the charge for
restructuring costs of $96.0. The effect of this charge was to reduce the
pretax income of U.S., Europe and the Americas by $54.4, $28.6 and $3.5,
respectively, and to increase corporate expenses by $9.5.
U.S. - U.S. sales increased 10 percent to $1.54 billion and pretax income
increased 32 percent to $201.2 million in 1994.
The increase in sales reflects a 6 percent increase in average order size
and a 4 percent increase in the number of Representative orders. Units sold
increased 5 percent over 1993. The sales improvement was driven by the
introduction of the new apparel line in 1994, a strong increase in sales of
color cosmetics and increases in most other major product categories. The
increase in pretax income was primarily due to the sales increase and an
improved operating expense ratio. The improved operating expense ratio
reflects the sales increase, lower marketing-related expenses, primarily
advertising, and expense savings resulting from the 1992 restructuring
program. The increase was partially offset by a lower gross margin due to a
shift in the sales mix to the lower margin apparel line.
In 1993, U.S. sales decreased 1 percent to $1.40 billion and pretax income
was $152.8 million as compared with $140.8 million in 1992. Excluding the
impact of the 1992 restructuring charge, pretax income in 1993 decreased 22
percent from the prior year. The decrease in sales reflects a 2 percent
decline in the number of Representative orders partially offset by a 1 percent
increase in average order size. The improvement in
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average order size was partially driven by an increase in sales of higher-
priced products while total units sold declined 5 percent in 1993. Marketing
emphasis on the beauty categories, which began in late 1992 and continued
throughout 1993, yielded positive results as sales in both the jewelry and CFT
categories, particularly in the Anew and other skin care brands, increased
over 1992. However, these increases were more than offset by a decline in the
gift category as consumer buying patterns shifted and a low level of consumer
confidence prevailed throughout the year. The decrease in pretax income in
1993 from 1992, excluding the restructuring charge, was due primarily to
higher operating expenses as the sales decline was offset by an improved gross
margin reflecting the shift in sales mix from gifts to the higher margin CFT
and jewelry categories. The increase in operating expenses reflects higher
spending on advertising and marketing programs designed to stimulate sales and
enhance methods of customer access and the ongoing incremental expense of FAS
No. 106.
International - International sales increased 12 percent to $2.73 billion and
pretax income increased 11 percent to $378.9 million from $340.8 million in
1993. The sales increase reflects strong unit growth in the Americas Region,
most significantly Brazil, and in the Pacific Rim and the favorable impact of
the weaker U.S. Dollar in Japan and most European countries. These
improvements were partially offset by unit declines in Europe, especially the
United Kingdom and Germany, Venezuela and Japan.
In the Americas Region, sales increased 20 percent to $1.42 billion and
pretax income increased 39 percent to $273.9 million from $196.4 million in
1993. The sales increase was due to growth in all markets, except Venezuela,
primarily in Brazil, Argentina and Mexico. The significant increase in Brazil
was due to the solid growth in the higher-priced categories of fashions and
home products and higher-priced CFT items such as Renew, a skin care product,
and the benefits of the new economic stabilization package implemented in July
which lowered inflation and improved consumer purchasing confidence. In
addition, the number of Representatives in Brazil at the end of 1994 increased
38 percent from the end of 1993 which enabled the Company to take advantage of
the improved economic environment. Argentina's strong sales growth was driven
by its image enhancement strategies and product line expansion, especially in
the CFT and fashions lines. Mexico's improvement reflects strong unit growth
following successful market penetration and image building strategies. The
large devaluation of the Peso in late December did not have a material impact
on Mexico's results for the year. The sales decline in Venezuela reflects the
significant currency devaluation and unsettled economic climate, which
depressed consumer demand and negatively affected sales in all product
categories. The improvement in pretax income reflects strong operating
results in Brazil and Argentina due to the sales growth and improved gross
margins resulting from the shift in sales to higher margin items and lower
foreign exchange losses in Brazil. The improvement was partially offset by a
lower gross margin due to increased sales in the lower margin fashion, apparel
and home products categories and higher salary and field recognition expenses
in Mexico and lower interest income in Brazil due to a lower cash position in
1994 compared with 1993. In addition, pretax profit was lower in Venezuela as
a result of the sales decline, higher exchange losses and lower interest
income reflecting the unstable economic climate.
In the Pacific Region, sales increased 6 percent to $664.3 million and
pretax income decreased 1 percent to $89.7 million from $90.9 million in 1993.
The increase in sales was due to unit growth in all Pacific Rim markets and
the favorable impact of a weaker U.S. Dollar in Japan. These improvements
were partially offset by lower units sold in Japan, which was impacted by a
significant field reconfiguration program implemented at the end of the first
quarter. The decrease in pretax income was primarily due to higher operating
expenses primarily for expansion in China as part of a long-term growth
strategy, partially offset by the sales growth in the Pacific Rim.
In the Europe Region, sales increased 1 percent to $651.8 million and
pretax income declined 71 percent to $15.3 million from $53.5 million in 1993.
The sales increase was due to the favorable impact of the weaker U.S. Dollar
against most European currencies, mainly in the fourth quarter, and unit
growth in the developing Eastern European markets, Spain and Italy. These
improvements were partially offset by unit declines in the United Kingdom and
Germany reflecting weak economies in the retail and consumer non-durable
segments and sales of lower-priced products in France. The decline in pretax
income was primarily due to operational sales declines in Germany, the United
Kingdom and France, a high fixed expense base in the Region and higher
operating expenses related to the expansion of Eastern European markets.
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In 1993, international sales increased 9 percent to $2.45 billion and
pretax income, excluding 1992 restructuring charges, increased 8 percent to
$340.8 million from $316.0 million in 1992. The sales growth reflects strong
unit growth in most markets in the Americas Region and the Pacific Rim, and
the favorable impact of the weaker U.S. Dollar in Japan. These improvements
were partially offset by sales declines in most European markets primarily due
to the strengthening of the U.S. Dollar in Europe and operational declines,
most significantly in Germany, reflecting a recessionary economy.
In the Americas Region, 1993 sales increased 20 percent to $1.18 billion
and pretax income, excluding 1992 restructuring charges, increased 14 percent
to $196.4 million from $171.9 million in 1992. The sales increase reflects
increased units sold in most markets, primarily Brazil due to new product
introductions and Argentina due to higher volume in the CFT and home product
lines. In addition, the successful launch of higher-priced skin care products
and inflation-related increases in Mexico, and higher average order size in
Venezuela due to further expansion of the fashion apparel and home product
lines also contributed to the increase. The improvement in pretax income
reflects strong operating results in Argentina and Mexico due to the sales
growth in both markets coupled with a shift to higher margin CFT products in
Mexico and a favorable operating expense ratio in Argentina resulting from an
effective cost containment program. These improvements were partially offset
by profit declines in Brazil. Although Brazil's sales increased and the cost
ratio improved due to a favorable product mix and aggressive price
negotiations with vendors, pretax income declined significantly from the prior
year due to higher monetary correction expense and lower interest income,
partially offset by lower foreign exchange losses. The decline in interest
income reflects lower average short-term investments in 1993 due to higher
dividend remittances than in 1992.
Sales in the Pacific Region increased 15 percent over 1992 due to the
favorable impact of a weaker U.S. Dollar in Japan and increased units sold in
the Pacific Rim countries. Pretax income for the Region increased 8 percent
over 1992 reflecting the sales improvement, partially offset by increased
expenses for enhanced field training and marketing programs in Japan and
higher costs in the Pacific Rim markets relating to additional initiatives to
accelerate growth in the area.
In the Europe Region, sales decreased 11 percent and pretax income,
excluding 1992 restructuring charges, decreased 11 percent to $53.5 million
from $60.1 million in 1992. The sales decline was primarily due to the
unfavorable impact of the stronger U.S. Dollar against most of the European
currencies and operational declines throughout the Region, most significantly
in Germany reflecting a recessionary economy. The decrease in pretax income
was primarily due to the sales decline, an unfavorable gross margin in
Portugal and Italy due to aggressive pricing strategies to stimulate sales,
and an unfavorable operating expense ratio. The higher operating expense
ratio was primarily in Germany due to the sales softness and increased
expenses relating to service enhancements, and in Spain due to the sales
softness and salary increases mandated by labor regulations.
See Foreign Operations section under Liquidity and Capital Resources for
additional discussion.
Corporate Expenses - Corporate expenses were $84.9 million in 1994 compared
with $69.0 million in 1993. The $15.9 million increase over 1993 reflects
higher expenses for incentive compensation programs primarily due to the
improved operating results in 1994 and a change in the long-term compensation
program. In 1993, corporate expenses increased $5.4 million from 1992,
excluding the restructuring charge in 1992. The increase reflects higher
pension expense caused by changes in actuarial assumptions and the incremental
expense of FAS No. 106.
Other Income (Expense) - Other income (expense) includes corporate non-
operating income and expense items and corporate interest income. Other
expense, net, was $10.6 million in 1994 compared with other income, net, of
$15.2 million in 1993. The increase in the net expense reflects higher
non-operating expenses in 1994 combined with the gains relating to the sales
of a non-operating investment and land in 1993. Other income, net, increased
$33.1 million from 1992 reflecting the gains on the investment and land, noted
above, and lower non-operating expenses in 1993.
Income Taxes - Effective January 1, 1993, Avon adopted FAS No. 109, whereby,
among other things, the criteria for recognizing deferred tax assets was
revised to permit recognition of such assets when future realization is more
likely than not. The cumulative effect of this accounting change was an
increase to income in 1993 of $2.5 million ($.04 per share).
Net deferred tax assets, net of valuation allowance, were $77.9 million at
December 31, 1994, an increase of $21.3 million from a net deferred tax asset
of $56.6 million at December 31, 1993, primarily as a result of
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the adoption of FAS No. 112 and FAS No. 106 for foreign plans, effective as of
January 1, 1994. A valuation allowance, as required under FAS No. 109, is
recorded primarily 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.
Accounting Changes - Effective January 1, 1994, Avon adopted FAS No. 112 for
all applicable operations and FAS No. 106 for its foreign plans. In addition,
effective January 1, 1994, Avon changed its method of accounting for internal
systems development costs. These internal costs, which were previously
deferred and amortized over future periods, are now being expensed as
incurred.
As a result of these accounting changes, Avon recorded an aggregate
non-cash charge in the first quarter of 1994 of $45.2 million, or $.64 per
share. This amount reflects the cumulative effect of adjustments for FAS No.
112 of $28.9 million, or $.41 per share, FAS No. 106 of $8.0 million, or $.11
per share, and systems development costs of $8.3 million, or $.12 per share.
The proforma effect for the change in accounting for the deferred internal
systems development costs for the years ended December 31, 1993 and 1992, had
the accounting change been adopted effective January 1, 1992, would not have
been significant.
Effective January 1, 1993, Avon adopted FAS No. 106, for its U.S. retiree
health care and life insurance benefit plans. FAS No. 106 resulted in the
recognition of an additional liability and expense for postretirement
benefits. Avon recorded the entire previously unrecognized obligation of
$183.3 million ($110.0 million after tax, or $1.53 per share) at the time of
adoption as a cumulative effect adjustment. The additional after-tax expense
in 1993 was $6.5 million.
During 1992, costs of health care and life insurance benefits, for the
U.S. and certain foreign countries, which were expensed when paid, amounted to
$4.7 million, on an after-tax basis. During 1993, the after-tax cost for
certain foreign countries was $.3 million.
Discontinued Operations - During 1994, the Company sold Giorgio, its remaining
retail business, for cash of $150.0 million. The Company recorded a loss of
$25.0 million on the sale. Since the Company has excess capital loss
carryforwards, no tax benefits have been recognized on the loss. Giorgio's
operating results are segregated and reported as discontinued operations
through the date of sale.
During 1993, Avon recorded a discontinued operations provision of $10.0
million after tax, or $.14 per share, for the final settlement and related
expenses in an arbitration proceeding related to a business previously sold.
Although Avon has completed its divestiture of all discontinued
operations, it may be liable for various contingencies relating to, among
other things, indemnifications given to the purchasers of certain discontinued
operations. An indemnification, currently being litigated, covers a patent
dispute, various environmental claims and numerous other lawsuits and claims.
Due to the complex nature of these contingencies, the ultimate outcome and
related total costs to Avon cannot currently be determined.
In June 1988, Mallinckrodt, Inc. ("Mallinckrodt") and International
Minerals & Chemical Corporation ("IMC"), now known as Mallinckrodt Group Inc.,
filed a lawsuit against Avon in the St. Louis Missouri City Circuit Court
arising from Avon's sale of Mallinckrodt to IMC in 1986. The suit alleged
that a certain patent dispute and a settlement, referred to as the DuPont
patent case, various environmental claims and numerous other lawsuits and
claims are contingent liabilities covered by an indemnification given by Avon
in connection with the sale of Mallinckrodt. In October 1991, the Missouri
Supreme Court affirmed the Circuit Court's decision that Avon has the
obligation to indemnify IMC and Mallinckrodt in connection with the DuPont
patent case, but remanded the matter for a trial on the damages, if any,
suffered by the parties. On July 27, 1992, a jury returned a verdict in the
DuPont patent case for $16.0 million, and a judgment for that amount plus
approximately $6.5 million interest was entered. On August 11, 1992, IMC and
Mallinckrodt filed post-trial motions, including a motion for a judgment
notwithstanding the verdict or, in the alternative, a motion for a new trial.
On November 5, 1992, the St. Louis Missouri City Circuit Court granted IMC's
and Mallinckrodt's motion for a judgment notwithstanding the verdict and
directed a verdict for plaintiffs in the amount of $27.1 million plus
interest. As of November 5, 1992, the interest amounted to approximately
$11.7 million. Avon, IMC and Mallinckrodt have appealed this decision. This
issue was argued before the Missouri Court of Appeals, Eastern District on May
11, 1994. On November 8, 1994, the Court of Appeals overturned the judgment
notwithstanding the verdict and ordered a new trial. All possible further
judicial review has now been exhausted and a retrial is expected during 1995.
Pre-trial proceedings and discovery activities are
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ongoing with respect to the environmental and general litigation portions of
the case.
With respect to the environmental contingencies which constitute a part of
the indemnification litigation, the total cost to Avon cannot be determined
with certainty as a result of such factors as the preliminary status of
information relating to the sites owned by the purchaser, the preliminary
regulatory involvement, the unknown magnitude and timing of cleanup efforts,
if any, to be undertaken by the purchaser or Mallinckrodt, the possibility of
recoveries against other parties, the uncertainty of the success of Avon's
defenses, and unasserted claims, if any. However, these factors have been
assessed and will continue to be assessed by Avon in estimating reserves to be
recorded in its consolidated financial statements.
The ultimate outcome and aggregate cost of resolving all of the above
contingencies will be based on a number of factors and will be determined over
a number of years. Accordingly, the total cost to Avon cannot currently be
determined with certainty. The reserves for such contingencies at December
31, 1994, which are recorded gross without anticipation of insurance
recoveries or other third-party recoveries, if any, have been estimated by
Avon's management based on its review of currently known facts and
circumstances at December 31, 1994. In the opinion of Avon's management,
based on its review of the preliminary information available at this time, the
difference, if any, between the total cost of resolving such contingencies and
reserves recorded by Avon at December 31, 1994 should not have a material
adverse impact on Avon's consolidated financial position or results of
operations, based on the current levels of such amounts. However, this
difference, if any, could have a material effect on results of operations in a
future period when resolved.
Liquidity and Capital Resources
Cash Flows - Net cash provided by continuing operations was $298.3 million in
1994 compared to $299.8 million in 1993. 1994 net cash provided by continuing
operations principally reflects, among other things, an increase in net income
of $63.7 million and an increase in accounts payable and accrued expenses
resulting from the Company's cash management practices, offset by a reduced
cumulative effect of accounting changes and increased receivables due to
higher sales levels. 1994 net cash provided by continuing operations of
$298.3 million was more than adequate to fully fund capital expenditures of
$99.9 million, cash dividends of $141.1 million and all required long-term
debt payments of $18.4 million. The $61.3 million decrease in net cash
provided by continuing operations in 1993 compared to 1992 was primarily due
to lower cash provided by operations in the U.S. and Europe, mainly Germany,
caused by higher working capital levels and lower net income. A more detailed
analysis of the individual items contributing to the 1994 and 1993 amounts is
included in the Consolidated Statement of Cash Flows.
Cash used by discontinued operations was $6.0 million in 1994, compared
with $2.3 million in 1993 and cash provided by discontinued operations of
$24.7 million in 1992. The $3.7 million increase in cash used in 1994
compared to 1993 reflects costs associated with the sale of Giorgio and lower
cash provided by Giorgio operations in 1994, partially offset by the 1993
payment of an arbitration settlement and related expenses. The $27.0 million
decrease in 1993 compared to 1992 reflects the final settlement of the
arbitration proceeding in 1993 and cash received in 1992 from previously
written-off notes and securities that Avon received in connection with the
sale of health care and other businesses in prior years.
Excluding changes in debt, net cash flow of $7.7 million in 1994 decreased
$96.0 million from $103.7 million in 1993. This variance reflects an increase
in cash used for the repurchase of common stock, an increase in capital
expenditures, higher dividend payments and the proceeds received in 1993 from
the sale of a non-operating investment. These declines were partially offset
by $150.0 million of proceeds received from the sale of Giorgio and cash used
for the acquisition of minority interests in two foreign subsidiaries in 1993.
As of December 31, 1994, 3.2 million shares of common stock have been
purchased for $188.2 million under the stock repurchase program begun in 1994.
In 1993, excluding changes in debt, net cash flow of $103.7 million
decreased $54.7 million from $158.4 million in 1992. This decrease was
primarily due to the decrease in cash provided by all operating activities and
higher dividend payments in 1993. This decrease was partially offset by the
proceeds received from the sale of a non-operating investment in 1993 and
lower cash used for the acquisition of minority interests in two foreign
subsidiaries in 1993 compared with the cost of acquiring additional shares of
the Japanese subsidiary in 1992.
Working Capital - As of December 31, 1994, working capital was $9.3 million
compared with $4.3 million at the end of 1993, excluding net assets of
discontinued
30
31
operations. The increase was primarily due to higher investments
in working assets (current assets excluding cash and equivalents and net
assets of discontinued operations), primarily accounts receivable, due to a
higher 1994 sales level, and inventory, as discussed in the Inventories
section. The increase was partially offset by increases in accounts payable
and accrued compensation.
Avon's liquidity results from its ability to generate significant cash flows
from operations and its ample unused borrowing capacity. Avon's credit
agreements do not contain any provisions or requirements with respect to
working capital.
Capital Resources - Total debt decreased $16.4 million to $177.7 million at
December 31, 1994 from $194.1 million at December 31, 1993 compared with a
reduction of $20.9 million from December 31, 1992. During 1994, cash flow
from operations and proceeds from the sale of Giorgio, which more than offset
cash used for the stock repurchase program, dividends and capital
expenditures, were used to reduce debt. During 1993 and 1992, cash flows from
operations were used to reduce debt.
Debt maturing within one year consists of borrowings from banks of $32.0
million and the current maturities of long-term debt of $29.2 million.
Management believes that cash from operations and available sources of
financing are adequate to meet anticipated requirements for working capital,
dividends, capital expenditures, the stock repurchase program and other cash
needs. It is also currently anticipated that existing debt maturing over the
next five years will be paid without refinancing.
Avon has a $600.0 million revolving credit and competitive advance
facility with various banks which can be used to finance working capital, to
provide support for the issuance of commercial paper and to support the stock
repurchase program. There were no borrowings under this facility at December
31, 1994. This facility has an annual facility fee of $.6 million as well as
a utilization fee if more than 50 percent of the total commitment is
outstanding. The agreement contains a financial covenant related to interest
coverage, as defined. The Company is in compliance with this covenant.
Avon has a $300.0 million commercial paper facility supported by the
revolving credit and competitive advance facility. The Company also has
bankers' acceptance facilities and uncommitted lines of credit available of
$235.0 million with various banks which have no compensating balances or fees.
As of December 31, 1994 and 1993, there were no borrowings under these
facilities. In addition, there are international lines of credit totalling
$276.4 million of which $32.0 million was outstanding at December 31, 1994.
There are no compensating balances or fees under these facilities.
Inventories - Avon's products are marketed during twelve to twenty-six
individual sales campaigns each year. Each campaign is conducted using a
brochure offering a wide assortment of products, many of 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, gift items and apparel. Christmas
sales cause a peak in the fourth quarter which results in the build up of
inventory at the end of the third quarter. Inventory levels are then sharply
reduced by the end of the fourth quarter. Net inventories of $412.8 million
at December 31, 1994 were $52.3 million higher than 1993 due to the
introduction of the apparel line in the U.S., sales growth in the Americas
Region, most significantly Brazil and Argentina, and expansion into new
markets, primarily Poland, Hungary and China. In addition, higher inventory
levels resulted from lower fourth quarter sales in the United Kingdom. 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 such as apparel, jewelry
and impulse gift items, products that 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 1994 of $99.9 million
(1993 - $58.1 million) were made for capacity expansion in high growth
markets, most significantly in the Pacific Rim, and to maintain worldwide
facilities. Numerous construction and information systems projects were in
progress at December 31, 1994 with an estimated cost to complete of
approximately $24.0 million. Capital expenditures in 1995 are currently
expected to increase approximately $25.0 million over 1994 levels as a result
of continued investments for capacity expansion in high growth markets, most
significantly in the Pacific Rim, and for facility modernization, information
systems and equipment replacement projects.
Foreign Operations - The Company derived approximately 64 percent and 65
percent of its 1994 consolidated net sales and consolidated pretax income from
operations,
31
32
respectively, from its international subsidiaries. In addition,
as of December 31, 1994, international subsidiaries comprised approximately 56
percent of the Company's consolidated total assets.
Avon's operations in many countries utilize numerous currencies. Avon has
significant net assets in Japan, Germany, Mexico, Philippines, Canada and the
United Kingdom. Changes in the value of these countries' currencies relative
to the U.S. Dollar result in direct charges or credits to equity. Avon also
has substantial operations in Brazil and Argentina, countries with economies
designated as highly inflationary whose functional currency is the U.S.
Dollar, whereby changes in exchange rates result in charges or credits to
income and may significantly impact the results of operations. In July 1994,
Brazil implemented a new economic stabilization package which lowered
inflation and improved consumer purchasing confidence during the second half
of the year. As a result of the sharply reduced rate of inflation in
Argentina during the past three years, effective January 1, 1995, the country
is no longer designated as having a highly inflationary economy. Also,
effective January 1, 1995, because of the trend of higher inflation rates,
Venezuela is designated as a country with a highly inflationary economy.
The Mexican Peso devalued significantly in December 1994. However,
because the devaluation occurred late in the year, there was no material
impact on the 1994 results of operations. This devaluation resulted in an
$18.0 million charge to Translation Adjustments on the Consolidated Balance
Sheet. In 1994, Mexico contributed approximately 9 percent of Avon's
consolidated net sales. It is expected that a continued weak Peso will have
some impact on 1995 results; however, management cannot at this time project
what this impact will be. Management has formulated plans to mitigate the
effect of the unstable economic conditions. Flexibility in pricing and
reliance on locally-purchased and manufactured goods in Mexico will also help
minimize the impact. In addition, 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 involved, the constantly changing exposure in
these currencies, the complexity of intercompany relationships, the hedging
activity entered into in an attempt to minimize certain of the effects of
exchange rate changes where economically feasible and the fact that all
foreign currencies do not react in the same manner against the U.S. Dollar.
Certain of the Company's financial instruments, which are discussed below
under Risk Management Strategies and in Note 8 of the Notes to the
Consolidated Financial Statements, are used to hedge various amounts relating
to certain international subsidiaries. However, the Company's foreign
currency hedging activities are not significant when compared to the Company's
international financial position or results of operations.
With the exception of Avon Japan, no foreign subsidiary relies, to any
material extent, on long-term financing. Many subsidiaries have short-term
borrowings from local commercial banks during the first nine months of the
year to fund working capital needs created by Avon's highly seasonal sales
pattern. From time to time, when tax and other cost considerations dictate,
Avon will finance subsidiary working capital needs. At December 31, 1994, the
total indebtedness of foreign subsidiaries was $77.7 million.
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 1994, these subsidiaries remitted, net of taxes, $187.3 million in
dividends and royalties. This sum is a substantial portion of the 1994
consolidated net earnings of Avon's foreign subsidiaries.
Risk Management Strategies - The Company operates internationally, with
manufacturing and distribution facilities in various locations around the
world. The Company reduces its exposure to fluctuations in interest rates and
foreign exchange rates by creating offsetting positions through the use of
derivative financial instruments. The Company currently does not use
derivative financial instruments for trading or speculative purposes, nor is
the Company a party to leveraged derivatives.
The Company may use interest rate swaps to hedge portions of its interest
expense thereby allowing the Company to establish fixed or variable interest
rates on its outstanding debt. During most of 1994 and over the recent past,
the Company has elected to use interest rate swaps to establish fixed rates on
its long-term debt. The Company closely monitors market conditions and, if in
a variable position, may also use interest rate caps whereby its net interest
expense is limited if interest rates rise above a defined level. In November
1994, one of the Company's fixed rate swap contracts expired and
32
<PAGE 33>
the interest rate on the long-term Deutsche Mark debt became variable.
Effective January 1995, the Company has interest rate caps on its long-term
Deutsche Mark debt through its maturity date.
Avon had two interest rate swap agreements at December 31, 1994 (three at
December 31, 1993), each such agreement having a notional principal amount of
$100.0 million (1993 - $100.0 million), yielding an aggregate notional
principal amount at December 31, 1994 of $200.0 million (1993 - $300.0
million). These agreements have converted the interest rate on the 170
million 6 1/8 percent Deutsche Mark notes to a variable rate established at
1.4 percentage points above one-month LIBOR (6 percent at December 31, 1994)
for November 1994 through May 1998, when the notes mature. At December 31,
1994, the Company also had three interest rate cap contracts, one of which
expired in early January 1995. One contract is for the calendar year 1995 and
places a ceiling on one-month LIBOR at 6 percent. The other contract is for
the period January 1996 to the maturity of the notes and places a ceiling on
one-month LIBOR at 9 percent. The unamortized cost of these contracts was
approximately $1.4 million at December 31, 1994 and is included in Other
Assets.
The interest rate on the long-term 6 1/8 percent Deutsche Mark notes was
fixed at approximately 10 percent from January 1992 to November 1994 through
the use of a currency exchange swap contract and several interest rate swaps.
With the expiration of one interest rate swap in November 1994, the Company's
interest rate on this $100.0 million debt was converted from a fixed to a
floating rate determined at one-month LIBOR plus 1.4 percent. At December 31,
1994 one-month LIBOR was 6 percent, resulting in an effective borrowing rate
of 7.4 percent. As a floating rate payor, the Company will have to pay higher
rates in 1995, should one-month LIBOR rise. In order to protect the Company
from possible rising rates in calendar year 1995, the Company has purchased an
interest rate cap which places a ceiling on one-month LIBOR at 6 percent. The
notional principal on this cap is $100.0 million. Another $100.0 million
notional cap was purchased for the period beginning January 1996 through May
1998, which places a ceiling on one-month LIBOR at 9 percent.
The 5 3/8 percent Swiss Franc debt, which was outstanding from January
1992 through December 1, 1994, was effectively hedged into fixed U.S. Dollar
debt through the use of a currency exchange swap contract, which also fixed
the interest rate at approximately 9 percent for that period. The currency
exchange swap agreement provided for the Company to pay in U.S. Dollars and
receive the required Swiss Francs from the counterparty to pay the principal
and interest owed to the bondholders at the required payment dates. These
bonds were repaid on December 1, 1994.
The only other significant long-term debt outstanding for the period
January 1, 1992 to December 31, 1994 was a Yen note obligation of Avon's
Japanese subsidiary, which has a fixed interest rate of 8.5 percent. The loan
agreement required periodic principal payments throughout the term of the
loan. As of December 31, 1994, the loan balance was $25.1 million, which is
payable in full during 1995 in four equal installments.
The Company may periodically hedge foreign currency royalties, net
investments in foreign subsidiaries, firm purchase commitments, contractual
foreign currency cash flows or obligations, including debt, and other third-
party or intercompany foreign currency transactions. The Company regularly
monitors its foreign currency exposures and ensures that hedge contract
amounts do not exceed the amounts of the underlying exposures.
At December 31, 1994, the Company held foreign currency forward contracts
with notional amounts totalling $184.1 million and option contracts with
notional amounts totalling $31.2 million to hedge foreign currency items.
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 to buy or sell
foreign currencies. 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 in a net receivable position would not
result in a significant write-off at December 31, 1994. In addition, there
are other swap agreements in a net payable position of an insignificant amount
at December 31, 1994. Each agreement provides for the right of offset between
counterparties to the agreement. In addition, Avon may be exposed to market
risk on its foreign exchange and interest rate swap and cap 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.
33
34
Results of Operations by Quarter Avon Products, Inc.
In millions, except per share data
First Second Third Fourth Year
----- ------ ----- ------ ----
1994
Net sales $886.0 $1,007.2 $1,009.8 $1,363.5 $4,266.5
Gross profit 533.6 618.1 616.9 825.8 2,594.4
Income
from continuing
operations before
taxes, minority
interest and
cumulative effect
of accounting changes 51.1 120.0 80.6 182.1 433.8
Income from continuing
operations before
minority interest
and cumulative effect
of accounting changes 31.2 73.2 51.9 114.0 270.3
Discontinued operations,
net (1) (1.6) (22.2) - - (23.8)
Cumulative effect of
accounting changes (2) (45.2) - - - (45.2)
Net income (loss) (15.7) 50.1 51.3 110.1 195.8
Income (loss) per share:
Income from continuing
operations before
cumulative effect of
accounting changes $ .43 $ 1.02 $ .73 $ 1.59 $ 3.75
Discontinued operations (.02) (.31) - - (.34)
Cumulative effect of
accounting changes (.63) - - - (.64)
------ -------- -------- -------- --------
Net income (loss) $ (.22) $ .71 $ .73 $ 1.59 $ 2.77(3)
====== ======== ======== ======== ========
First Second Third Fourth Year
----- ------ ----- ------ ----
1993
Net sales $808.1 $920.2 $911.3 $1,204.5 $3,844.1
Gross profit 494.5 570.0 555.8 726.8 2,347.1
Income
from continuing
operations before
taxes, minority
interest and
cumulative effect
of accounting changes 40.7 113.0 73.6 167.3 394.6
Income from continuing
operations before
minority interest
and cumulative effect
of accounting changes 24.4 67.8 47.8 103.8 243.8
Discontinued operations,
net (1) (10.1) (.3) 6.4 6.7 2.7
Cumulative effect of
accounting changes (2) (107.5) - - - (107.5)
Net income (loss) (92.9) 65.6 54.0 105.4 132.1
Income (loss) per share:
Income from continuing
operations before
cumulative effect of
accounting changes $ .34 $ .91 $ .66 $ 1.37 $ 3.28
Discontinued operations (.14) - .09 .09 .04
Cumulative effect of
accounting changes (1.49) - - - (1.49)
------ ------ ------ -------- --------
Net income (loss) $(1.29) $ .91 $ .75 $ 1.46 $ 1.83(3)
====== ====== ====== ======== ========
(1)See Note 3 to the Consolidated Financial Statements regarding discontinued
operations.
(2)See Note 2 to the Consolidated Financial Statements regarding cumulative
effect of accounting changes.
(3)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 of Common Stock by Quarter
1994 1993
------------ -------------
Quarter High Low High Low
---- --- ---- ---
First $58 $48-3/8 $64-3/8 $51-7/8
Second 61-1/4 55-5/8 61-3/4 52-1/8
Third 62-7/8 56 59-1/2 49-7/8
Fourth 63-5/8 58-5/8 53-5/8 47-7/8
Avon common stock is listed on the New York Stock Exchange. At December 31,
1994, there were approximately 26,100 shareholders of record. Dividends
declared for the last two quarters of 1994 were $.50 per share and for the
first two quarters of 1994 and last two quarters of 1993 were $.45 per share
and for the first two quarters of 1993 were $.40 per share.
34
35
Consolidated Statement of Income Avon Products, Inc.
In millions, except per share data
Years ended December 31 1994 1993 1992
-------- -------- --------
Net sales $4,266.5 $3,844.1 $3,660.5
-------- -------- --------
Costs, expenses and other
Cost of sales 1,672.1 1,497.0 1,438.2
Marketing, distribution and administrative
expenses 2,098.8 1,913.9 1,781.1
Provision for restructuring costs - - 96.0
Interest expense 50.8 45.2 43.7
Interest income (22.1) (25.3) (37.5)
Other expense, net 33.1 18.7 49.0
-------- -------- --------
Total costs, expenses and other 3,832.7 3,449.5 3,370.5
-------- -------- --------
Income from continuing operations before
taxes, minority interest and cumulative
effect of accounting changes 433.8 394.6 290.0
Income taxes 163.5 150.8 120.6
-------- -------- --------
Income from continuing operations before
minority interest and cumulative effect
of accounting changes 270.3 243.8 169.4
Minority interest (5.5) (6.9) (5.2)
-------- -------- --------
Income from continuing operations before
cumulative effect of accounting changes 264.8 236.9 164.2
Discontinued operations
Income, net of taxes 1.2 12.7 10.8
Loss on sale, net of taxes in 1993 (25.0) (10.0) -
Cumulative effect of accounting changes,
net of taxes (45.2) (107.5) -
-------- -------- --------
Net income $ 195.8 $ 132.1 $ 175.0
======== ======== ========
Income (loss) per share:
Continuing operations $ 3.75 $ 3.28 $ 2.28
Discontinued operations (.34) .04 .15
Cumulative effect of accounting changes (.64) (1.49) -
-------- -------- --------
Net income $ 2.77 $ 1.83 $ 2.43
======== ======== ========
Average shares outstanding 70.59 72.06 71.99
The accompanying notes are an integral part of these statements.
35
36
Consolidated Balance Sheet Avon Products, Inc.
In millions, except share data
December 31 1994 1993
---- ----
Assets
Current assets
Cash, including cash equivalents of $132.5 and $159.7 $ 214.8 $ 223.9
Accounts receivable (less allowance for doubtful
accounts of $27.3 and $22.0) 373.7 306.0
Inventories 412.8 360.5
Prepaid expenses and other 149.0 135.9
Net assets of discontinued operations - 18.8
-------- --------
Total current assets 1,150.3 1,045.1
-------- --------
Property, plant and equipment, at cost
Land 54.3 41.7
Buildings and improvements 531.5 495.1
Equipment 560.9 524.7
-------- --------
1,146.7 1,061.5
Less accumulated depreciation 618.3 585.3
-------- --------
528.4 476.2
-------- --------
Net assets of discontinued operations - 136.2
Other assets 299.6 261.2
-------- --------
Total assets $1,978.3 $1,918.7
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Debt maturing within one year $ 61.2 $ 70.4
Accounts payable 408.0 365.4
Accrued compensation 100.0 62.7
Other accrued liabilities 222.3 203.3
Sales and other taxes 95.7 94.9
Income taxes 253.8 225.3
-------- --------
Total current liabilities 1,141.0 1,022.0
-------- --------
Long-term debt 116.5 123.7
Employee benefit plans 366.6 295.1
Deferred income taxes 32.2 30.5
Other liabilities (including minority interest
of $48.9 and $43.2) 136.4 133.4
Commitments and contingencies
Shareholders' equity
Common stock, par value $.50 - authorized:
200,000,000 shares; issued - 86,663,874 and
86,528,692 shares 43.3 43.3
Additional paid-in capital 660.5 652.3
Retained earnings 212.4 150.6
Translation adjustments (187.1) (175.3)
Treasury stock, at cost - 17,589,639 and
14,430,073 shares (543.5) (356.9)
-------- --------
Total shareholders' equity 185.6 314.0
-------- --------
Total liabilities and shareholders' equity $1,978.3 $1,918.7
======== ========
The accompanying notes are an integral part of these statements.
36
37
Consolidated Statement of Cash Flows Avon Products, Inc.
In millions
Years ended December 31 1994 1993 1992
---- ---- ----
Cash flows from operating activities
Net income $195.8 $132.1 $175.0
Adjustments to reconcile income to net cash
provided by continuing operations:
Cumulative effect of accounting changes, net 45.2 107.5 -
Discontinued operations, net 23.8 (2.7) (10.8)
(Payments) provision for restructuring costs (3.5) (27.0) 56.3
Depreciation and amortization 55.7 57.2 56.7
Provision for doubtful accounts 64.9 51.4 45.3
Translation (gains) losses (9.0) 14.7 12.8
Deferred income taxes 2.2 (12.1) (29.8)
Other 26.9 17.5 27.5
Changes in assets and liabilities:
Accounts receivable (179.4) (140.8) (122.3)
Inventories (61.3) (60.9) 14.9
Prepaid expenses and other (12.1) (2.1) 4.5
Accounts payable and accrued liabilities 145.9 79.5 86.7
Income and other taxes 45.4 75.8 46.3
Noncurrent assets and liabilities (42.2) 9.7 (2.0)
------ ------ ------
Net cash provided by continuing operations 298.3 299.8 361.1
Net cash (used) provided by discontinued
operations (6.0) (2.3) 24.7
------ ------ ------
Net cash provided by operating activities 292.3 297.5 385.8
------ ------ ------
Cash flows from investing activities
Capital expenditures (99.9) (58.1) (62.7)
Disposal of assets 4.5 19.1 2.9
Acquisitions of subsidiary stock - (6.4) (28.5)
Proceeds from sale of Giorgio Beverly Hills, Inc. 150.0 - -
------ ------ ------
Net cash provided (used) by investing activities 54.6 (45.4) (88.3)
------ ------ ------
Cash flows from financing activities
Cash dividends (141.1) (124.9) (109.9)
Debt, net (maturities of three months or less) (23.3) 14.8 (5.4)
Proceeds from short-term debt 35.0 26.8 24.2
Retirement of short-term debt (16.2) (24.8) (112.7)
Proceeds from long-term debt 6.1 - -
Retirement of long-term debt (18.4) (38.2) (37.4)
Proceeds from exercise of stock options,
net of taxes .7 .9 4.2
Repurchase of common stock (188.2) (.4) (7.4)
------ ------ ------
Net cash (used) by financing activities (345.4) (145.8) (244.4)
------ ------ ------
Effect of exchange rate changes on cash and
equivalents (10.6) (24.0) (26.0)
------ ------ ------
Net (decrease) increase in cash and equivalents (9.1) 82.3 27.1
Cash and equivalents at beginning of year 223.9 141.6 114.5
------ ------ ------
Cash and equivalents at end of year $214.8 $223.9 $141.6
====== ====== ======
Cash paid for
Interest $ 47.8 $ 37.6 $ 37.3
Income taxes, net of refunds received 130.0 132.7 125.8
The accompanying notes are an integral part of these statements.
37
38
Consolidated Statement of Changes in
Shareholders' Equity Avon Products, Inc.
Additional
Common Stock Paid-In Retained Translation Treasury
In millions, except share data Shares Amount Capital Earnings Adjustments Stock Total
------------------- ---------- -------- ----------- -------- -----
Balance at December 31, 1991 86,168,007 $43.1 $633.0 $ 59.0 $(131.7) $(351.8) $251.6
Net income 175.0 175.0
Dividends - $1.50 per share (107.5) (107.5)
Translation adjustments (23.9) (23.9)
Exercise of stock options,
including tax benefits 150,380 .1 10.3 10.4
Grant, cancellation and
amortization of restricted stock 127,295 9.6 9.6
Repurchase of common stock (7.4) (7.4)
Benefit plan contributions 1.4 1.3 2.7
---------- ----- ------ ------ ------- ------- ------
Balance at December 31, 1992 86,445,682 43.2 654.3 126.5 (155.6) (357.9) 310.5
Net income 132.1 132.1
Dividends - $1.70 per share (14.5) (108.0) (122.5)
Translation adjustments (19.7) (19.7)
Exercise of stock options,
including tax benefits 24,920 .1 1.3 1.4
Grant, cancellation and
amortization of restricted stock 58,090 9.4 9.4
Repurchase of common stock (.4) (.4)
Benefit plan contributions 1.8 1.4 3.2
---------- ----- ------ ------ ------- ------- ------
Balance at December 31, 1993 86,528,692 43.3 652.3 150.6 (175.3) (356.9) 314.0
Net income 195.8 195.8
Dividends - $1.90 per share (134.0) (134.0)
Translation adjustments (11.8) (11.8)
Exercise of stock options,
including tax benefits 24,068 1.6 1.6
Grant, cancellation and
amortization of restricted stock 111,114 4.8 4.8
Repurchase of common stock (188.2) (188.2)
Benefit plan contributions 1.8 1.6 3.4
---------- ----- ------ ------ ------- ------- ------
Balance at December 31, 1994 86,663,874 $43.3 $660.5 $212.4 $(187.1) $(543.5) $185.6
========== ===== ====== ====== ======= ======= ======
The accompanying notes are an integral part of these statements.
38
39
Notes to Consolidated Financial Statements Avon Products, Inc.
In millions, except share data
1. Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include
the accounts of Avon Products, Inc. and its subsidiaries. Intercompany
balances and transactions are eliminated.
Foreign Currency Translation - 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
prevailing during the year for income and expense accounts. Translation
adjustments of these subsidiaries are recorded as a separate component of
shareholders' equity.
For financial statements of subsidiaries operating in highly inflationary
economies, nonmonetary assets (principally inventories and fixed assets) and
the related expenses (principally cost of sales and depreciation) are
translated at the respective historical exchange rates in effect when the
assets were acquired or when the subsidiary was designated as operating in a
highly inflationary economy. Monetary assets and liabilities are translated
at year-end exchange rates. All other income and expense accounts are
translated at average exchange rates prevailing during the year. Adjustments
resulting from the translation of the financial statements of these
subsidiaries are included in income.
Revenue Recognition - Avon recognizes revenue as shipments are made and title
passes to independent Representatives, who are Avon's customers.
Cash and Equivalents - Cash equivalents are stated at cost plus accrued
interest, which approximates fair value. Cash equivalents are highly liquid
debt instruments with an original maturity of three months or less and consist
of time deposits with a number of commercial banks with high credit ratings in
the U.S. and abroad. In accordance with Avon's policy, the maximum amount
invested in any one bank is limited. Avon does not believe it is exposed to
any significant credit risk on cash and equivalents.
Inventories - Inventories are stated at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) method for substantially all
U.S. inventories except apparel and the first-in, first-out method for all
other inventories.
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 20 to 45
years and equipment ranges from 5 to 15 years.
Other Assets - Effective January 1, 1994, Avon changed its method of
accounting for internal systems development costs. Previously, Avon deferred
certain internal costs related to the development of major information and
accounting systems and amortized them over future periods. These internal
development costs are now being expensed as incurred.
Financial Instruments - Derivative financial instruments are used by the
Company in the management of its interest rate and foreign currency exposures
and are accounted for on an accrual basis. Income and expense are recorded in
the same category as that arising from the related asset or liability being
hedged. Gains and losses resulting from effective hedges of existing assets,
liabilities or firm commitments are deferred and recognized when the
offsetting gains and losses are recognized on the related hedged items. Gains
realized on termination of interest rate swap contracts are deferred and
amortized over the remaining terms of the original swap agreements. Costs of
interest rate cap contracts are amortized over the effective lives of the
contracts.
Research and Development - Research and development costs are expensed as
incurred and aggregated $27.9 (1993 - $28.5; 1992 - $27.9).
Advertising - Advertising costs are expensed as incurred and aggregated $42.6
(1993 - $49.4; 1992 - $23.6).
Income Taxes - Effective January 1, 1993, Avon accounts for income taxes under
the provisions of Statement of Financial Accounting Standards ("FAS") No. 109,
"Accounting for Income Taxes", which requires that
39
40
deferred income taxes be provided on items recognized for financial reporting
purposes in different periods than for income tax purposes at future enacted
rates. See Note 7 for the cumulative effect of the adoption of FAS No. 109.
U.S. income taxes have not been provided on approximately $222.0 of
undistributed income of subsidiaries that has been or is intended to be
permanently reinvested outside the United States or is expected to be remitted
free of U.S. income taxes. If such undistributed income was remitted, foreign
withholding taxes of approximately $27.0 would be payable.
Income per Share - Primary income per share of common stock is based on the
weighted average number of shares outstanding. The decrease in average shares
outstanding for 1994 compared to 1993 is primarily due to the shares acquired
under the stock repurchase program.
Reclassifications - To conform to the 1994 presentation, certain reclass-
ifications were made to the prior years' consolidated financial statements.
See Note 3 regarding discontinued operations.
2. Accounting Changes
Effective January 1, 1994, Avon adopted 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. In addition, effective January 1, 1994, Avon
changed its method of accounting for internal systems development costs.
As a result of these accounting changes, Avon recorded an aggregate
non-cash charge in the first quarter of 1994 of $45.2, or $.64 per share.
This amount reflects the cumulative effect of adjustments for FAS No. 112 of
$28.9, or $.41 per share, FAS No. 106 of $8.0, or $.11 per share, and systems
development costs of $8.3, or $.12 per share. The proforma effect for the
change in accounting for the deferred internal systems development costs for
the years ended December 31, 1993 and 1992, had the accounting change been
adopted effective January 1, 1992, would not have been significant.
Effective January 1, 1993, Avon adopted FAS No. 106, for its U.S. retiree
health care and life insurance benefit plans. FAS No. 106 requires the
accrual of the cost of these postretirement benefits over the estimated
service lives of the employees receiving such benefits, rather than
recognizing these expenses when paid. Avon recorded the entire previously
unrecognized obligation of $183.3 ($110.0 after tax, or $1.53 per share), at
the time of adoption as a cumulative effect adjustment.
3. Discontinued Operations
During 1994, the Company sold Giorgio Beverly Hills, Inc. ("Giorgio"), its
remaining retail business for cash of $150.0. The Company recorded a loss of
$25.0 on the sale. Since the Company has excess capital loss carryforwards,
no tax benefits have been recognized on the loss.
Giorgio's operating results are segregated and reported as discontinued
operations through the date of sale in the accompanying consolidated financial
statements. Prior period financial statements have been reclassified to
conform to the current year presentation.
Amounts included in income from discontinued operations for Giorgio for
the years ended December 31, were as follows:
1994(1) 1993 1992
---- ---- ----
Net sales $58.1 $163.5 $149.4
Income before taxes 2.0 23.8 21.7
Net income 1.2 12.7 10.8
(1) Represents the net sales and income through the measurement date of June
30, 1994.
Assets and liabilities of Giorgio, reported as net assets of discontinued
operations as of December 31, were as follows:
1993
----
Current assets $ 55.5
Goodwill, net of accumulated amortization of $25.9 134.4
Other noncurrent assets 4.4
------
Total assets 194.3
------
Current liabilities 36.7
Long-term liabilities 2.6
------
Total liabilities 39.3
------
Net assets of discontinued operations $155.0
======
During 1993, Avon recorded a discontinued operations provision of $10.0
after tax, or $.14 per share, for the final settlement and related expenses in
an arbitration proceeding related to a business previously sold.
During 1992, Avon recorded a discontinued operations provision of
approximately $10.0 principally for
40
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claims and litigation relating to businesses previously sold, which was offset
by amounts recovered for notes and securities previously written off.
Other current and noncurrent liabilities include $66.0 relating to
discontinued operations. These liabilities represent the estimated cost
relating to legal contingencies discussed in Note 13, and other costs related
to businesses previously sold, including Giorgio.
4. Provision for Restructuring Costs
A provision of $96.0 ($64.4 after tax, or $.90 per share) was recorded in 1992
for the restructuring and reconfiguration of Avon's worldwide manufacturing
and distribution facilities. The restructuring program included closing the
manufacturing facility in Spain in 1992 and the distribution facility in
Springdale, Ohio in July 1993, as well as the reconfiguring of several other
international operations. The restructuring program was substantially
completed by December 31, 1993 and was fully completed by December 31, 1994.
5. Inventories
Inventories at December 31, consisted of the following:
1994 1993
---- ----
Raw materials $118.4 $117.8
Finished goods 294.4 242.7
------ ------
Total $412.8 $360.5
====== ======
LIFO-based inventories totaled $88.0 (1993--$89.3), with the current
estimated replacement cost exceeding the carrying value by approximately $20.4
(1993 - $25.7).
6. Debt
Debt at December 31, consisted of the following:
1994 1993
---- ----
Maturing within one year:
Notes payable $ 32.0 $ 16.1
Current portion of long-term debt 29.2 54.3
------ ------
Total $ 61.2 $ 70.4
====== ======
Long-term debt:
170 million 6 1/8% Deutsche Mark notes, due 1998 (1) $100.0 $100.0
10 billion 8 1/2% Yen notes, due 1994 and 1995 (2) 25.1 39.1
5 3/8% Swiss Franc bonds, due 1994 - 35.2
Other, payable to 2004 with interest from 6% to 24% 20.6 3.7
Less current portion (29.2) (54.3)
------ ------
Total $116.5 $123.7
====== ======
(1)The Deutsche Mark notes have been effectively converted into U.S. Dollar
debt through the use of a currency exchange swap contract which includes
both the principal and the interest. Reflected in the carrying value of
the debt was a swap contract receivable (payable) at December 31, 1994 of
$9.0 (1993 - ($2.0)).
(2)The Yen notes are the obligation of the Japanese subsidiary and are
collateralized by its property and plant having a net book value of $67.6
at December 31, 1994. The 10 billion Yen notes were issued in 1990. As
of December 31, 1993, the balance of the notes was 4.4 billion Yen of which
1.9 billion Yen were paid during 1994 and 2.5 billion Yen are payable
during 1995.
(3)See Note 8 regarding financial instruments.
Annual maturities of long-term debt for each of the next five years are:
1995 - $29.2; 1996 - $4.3; 1997 - $2.5; 1998 - $102.0; and 1999 - $1.7.
In October 1994, the Company entered into a five year, $600.0 revolving
credit and competitive advance facility agreement with various banks. This
facility replaces the two previously existing revolving credit facilities
which totalled $600.0. At December 31, 1994 and 1993, there were no
borrowings under the respective credit facilities. Within this new facility,
the Company is able to borrow, on an uncommitted basis, up to $200.0 in
various foreign currencies. The 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 new facility is based on LIBOR, prime, federal
funds or money market auction rates. This facility has an annual facility fee
of $.6, as well as a utilization fee if more than 50% of the total commitment
41
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is outstanding. The facility contains a covenant for interest coverage, as
defined. The Company is in compliance with this covenant.
Avon has a $300.0 commercial paper facility supported by the revolving
credit and competitive advance facility. In addition, the Company has
bankers' acceptance facilities and uncommitted lines of credit available of
$235.0 with various banks which have no compensating balances or fees. As of
December 31, 1994 and 1993, there were no borrowings under these facilities.
The maximum borrowing under these facilities during 1994 and 1993 was $219.1
and $238.8, respectively, and the annual average borrowing during the year
was approximately $127.2 and $143.5, respectively, at average annual interest
rates of approximately 4.6% and 3.4%, respectively.
International lines of credit total $276.4 of which $32.0 was outstanding
at December 31, 1994. The maximum borrowing under these facilities during
1994 and 1993 was $50.5 and $73.1, respectively, and the annual average
borrowing during the years was $38.9 and $46.8, respectively, at average
annual interest rates of approximately 10.8% and 6.6%, respectively. Such
lines have no compensating balances or fees.
Avon also has letters of credit outstanding totalling $21.5 (1993 -
$21.3), which guarantee various insurance activities. In addition, Avon has
outstanding letters of credit for various trade activities.
Interest Expense - The components of interest expense for the years ended
December 31, were as follows:
1994 1993 1992
---- ---- ----
Interest on debt $41.3 $35.0 $32.6
Other 9.5 10.2 11.1
----- ----- -----
Total $50.8 $45.2 $43.7
===== ===== =====
7. Income Taxes
Effective January 1, 1993, Avon adopted FAS No. 109, whereby, among other
things, the criteria for recognizing deferred tax assets was revised to permit
recognition of such assets when future realization is more likely than not.
The cumulative effect of this accounting change was an increase to income in
1993 of $2.5 ($.04 per share).
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:
1994 1993
---- ----
Deferred tax assets:
Postretirement benefits $ 82.6 $ 78.0
Accrued expenses and reserves 67.5 57.8
Foreign operating loss carryforwards 29.5 41.2
Capital loss carryforwards 24.9 12.2
Postemployment benefits 12.6 -
All other 55.2 63.3
Valuation allowance (69.5) (66.9)
------- -------
Total deferred tax assets 202.8 185.6
------- -------
Deferred tax liabilities:
Depreciation (46.6) (44.0)
Prepaid retirement plan cost (35.9) (35.4)
Capitalized interest (17.7) (19.0)
Unremitted foreign earnings (10.6) (7.9)
All other (14.1) (22.7)
------- -------
Total deferred tax liabilities (124.9) (129.0)
------- -------
Net deferred tax assets $ 77.9 $ 56.6
======= =======
Deferred tax assets (liabilities) at December 31, were classified as
follows:
1994 1993
---- ----
Deferred tax assets:
Prepaid expenses and other $ 45.5 $ 43.3
Other assets 69.3 50.6
------- ------
Total deferred tax assets 114.8 93.9
------- ------
Deferred tax liabilities:
Income taxes (4.7) (6.8)
Deferred income taxes (32.2) (30.5)
------- ------
Total deferred tax liabilities (36.9) (37.3)
------- ------
Net deferred tax assets $ 77.9 $ 56.6
======= ======
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The valuation allowance required under FAS No. 109 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 and minority interest for
the years ended December 31, was as follows:
1994 1993 1992
---- ---- ----
United States $127.3 $109.6 $ 96.6
Foreign 306.5 285.0 193.4
------ ------ ------
Total $433.8 $394.6 $290.0
====== ====== ======
The provision for income taxes for the years ended December 31, was as
follows:
1994 1993 1992
---- ---- ----
Federal:
Current $ 34.0 $ 14.9 $ 30.8
Deferred (4.1) (3.5) (16.8)
------ ------ ------
29.9 11.4 14.0
------ ------ ------
Foreign:
Current 119.8 141.0 110.7
Deferred 6.1 (9.2) (10.4)
------ ------ ------
125.9 131.8 100.3
------ ------ ------
State and other:
Current 7.5 8.5 9.1
Deferred .2 (.9) (2.8)
------ ------ ------
7.7 7.6 6.3
------ ------ ------
Total $163.5 $150.8 $120.6
====== ====== ======
The effective tax rate for the years ended December 31, was as follows:
1994 1993 1992
---- ---- ----
Statutory federal rate 35.0% 35.0% 34.0%
State and local taxes, net of federal tax benefit 1.2 1.3 1.5
Tax-exempt operations (1.4) (1.8) (1.5)
Taxes on foreign income, including translation 9.3 8.3 12.1
Utilization of net operating loss carryforwards (5.0) (.2) (.2)
Other (1.4) (4.4) (4.3)
----- ----- -----
Effective tax rate 37.7% 38.2% 41.6%
===== ===== =====
At December 31, 1994, Avon had foreign operating loss carryforwards of
$82.9. The loss carryforwards expiring between 1995 and 2003 were $61.8 and
the loss carryforwards which do not expire were $21.1. Capital loss
carryforwards, which expire between 1997 and 1999 and may be used to offset
capital gains, if any, approximated $71.0 at December 31, 1994.
8. Financial Instruments and
Risk Management
Risk Management - The Company operates internationally, with manufacturing and
distribution facilities in various locations around the world. The Company
may reduce its exposure to fluctuations in interest rates and foreign exchange
rates by creating offsetting positions through the use of derivative financial
instruments. The Company currently does not use derivative financial
instruments for trading or speculative purposes, nor is the Company a party to
leveraged derivatives.
The 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 measure of the Company's exposure through its use of derivatives.
Interest Rates - The Company may use interest rate swaps to hedge portions of
its interest expense thereby allowing the Company to establish fixed or
variable interest rates on its outstanding debt. During most of 1994 and over
the recent past, the Company elected to use interest rate swaps to establish
fixed rates on its long-term debt. The Company closely monitors market
conditions and, if in a variable position, may also use interest rate caps
which limit net interest expense if interest rates rise above a defined level.
In November 1994, one of the Company's fixed rate swap contracts expired and
the interest rate on the long-term Deutsche Mark debt became variable.
Effective January 1995, the Company has interest rate caps on its long-term
Deutsche Mark debt through its maturity date.
43
44
Avon had two interest rate swap agreements at December 31, 1994 (three at
December 31, 1993), each such agreement having a notional principal amount of
$100.0 (1993 - $100.0), yielding an aggregate notional principal amount at
December 31, 1994 of $200.0 (1993 - $300.0). These agreements have converted
the interest rate on the 170 million 6 1/8% Deutsche Mark notes to a variable
rate established at 1.4 percentage points above one-month LIBOR (6% at
December 31, 1994) for November 1994 through May 1998, when the notes mature.
At December 31, 1994, the Company also had three interest rate cap contracts,
one of which expired in early January 1995. One contract is for the calendar
year 1995 and places a ceiling on one-month LIBOR at 6%. The other contract
is for the period January 1996 to the maturity of the notes and places a
ceiling on one-month LIBOR at 9%. The unamortized cost of these contracts was
approximately $1.4 at December 31, 1994 and is included in Other Assets.
During 1993, Avon had a gain of $16.6 from the sale of interest rate swap
contracts on the Deutsche Mark notes, which is being amortized over the
remaining term of the original swap agreements. As of December 31, 1994, the
unamortized balance was $11.7 (1993 - $15.9). In addition, a gain on the
sale, in 1990, of certain interest rate swap agreements related to the Swiss
Franc bonds was amortized over the life of the original swap agreements, which
expired in December 1994.
Foreign Currencies - The Company may periodically hedge foreign currency
royalties, net investments in foreign subsidiaries, firm purchase commitments,
contractual foreign currency cash flows or obligations, including debt, and
other third-party or intercompany foreign currency transactions. The Company
regularly monitors its foreign currency exposures and ensures that hedge
contract amounts do not exceed the amounts of the underlying exposures.
At December 31, 1994, the Company held foreign currency forward contracts
with notional amounts totalling $184.1 and option contracts with notional
amounts totalling $31.2 to hedge foreign currency items. These contracts all
have maturities prior to December 31, 1995.
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:
1994
--------------
Buy Sell
--- ----
Deutsche Marks $ 72.1 $ 10.4
Japanese Yen 40.0 -
Pound Sterling - 53.2
Canadian Dollar - 26.1
Other currencies 2.2 11.3
------ ------
$114.3 $101.0
====== ======
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 in a net receivable position would not
result in a significant write-off at December 31, 1994. In addition, there
are other swap agreements in a net payable position of an insignificant amount
at December 31, 1994. Each agreement provides for the right of offset between
counterparties to the agreement. In addition, Avon may be exposed to market
risk on its foreign exchange and interest rate swap and cap 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 - FAS No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosure of the following
information about the fair value of certain financial instruments for which it
is practicable to estimate that value. For purposes of the following
disclosure, the fair value of a financial
44
45
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 amounts disclosed represent management's best estimates of fair value.
In accordance with FAS No. 107, Avon has excluded certain financial
instruments and all other assets and liabilities from its disclosure.
Accordingly, the aggregate fair value amounts presented are not intended to,
and do not, represent the underlying fair value of Avon.
The methods and assumptions used to estimate fair value are as follows:
Grantor trust - The fair value of these investments, principally money market
funds, is based on the quoted market prices for issues listed on exchanges.
The carrying amount of money market funds approximates fair value.
Debt maturing within one year and long-term debt - The fair value of all debt
has been estimated based on the quoted market prices for issues listed on
exchanges and the current rates offered to Avon Japan for debt of the same
remaining maturities.
Forward exchange and currency option contracts - The fair value of forward
exchange and currency option contracts is estimated based on quoted market
prices from banks.
Interest rate swap, currency swap and interest rate cap agreements - The fair
value of interest rate swap, currency swap and interest rate cap 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:
1994 1993
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Cash and equivalents $ 214.8 $ 214.8 $ 223.9 $ 223.9
Grantor trust 50.8 50.8 20.8 20.8
Debt maturing within one year (61.2) (62.1) (97.2) (96.5)
Currency swap contract on debt
maturing within one year - - 26.8 25.0
Long-term debt (125.5) (128.8) (121.7) (120.8)
Currency swap contract on long-term
debt 9.0 9.4 (2.0) (3.3)
Other forward exchange and option
contracts .5 2.1 2.7 2.9
Interest rate cap contracts 1.4 2.5 .6 .6
Interest rate swap receivable - - .2 .2
Interest rate swaps payable (.7) (13.7) (1.7) (23.7)
9. Shareholders' Equity
Stock Plans - Under various plans, options have been granted to key employees
to purchase stock at the fair market value on the date of grant.
A summary of changes in stock options, is as follows:
Outstanding
Options Price
----------- -----
December 31, 1992 237,917 $23-$52
Granted 25,000 63
Exercised (24,920) 23- 33
Cancelled (14,000) 23- 33
-------- -------
December 31, 1993 223,997 23- 63
Granted 413,000 53
Exercised (24,068) 23- 33
Cancelled (80,827) 23- 63
-------- -------
December 31, 1994 532,102 $23-$53
======== =======
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At December 31, 1994, options for 108,263 shares were exercisable at
prices ranging from $23 to $52 per share.
The 1993 Stock Incentive Plan ("1993 Plan"), which replaced the 1970 Stock
Option Incentive Plan, provides for several types of equity-based incentive
compensation awards. Under the 1993 Plan, the maximum number of shares that
may be awarded is 3,525,000 shares of which no more than 2,000,000 shares may
be used for restricted share and stock bonus grants. Awards, when made, may
also be in the form of stock options, stock appreciation rights, dividend
equivalent rights or performance unit awards. Stock options granted to
officers and key employees shall be at a price no less than fair market value
on the date the option is granted. During 1993, 10,000 restricted shares were
granted under the 1993 Plan, with an aggregate value of approximately $.5,
which is being amortized over a 7.6 year vesting period. During 1994, 133,985
restricted shares were granted under the 1993 Plan with an aggregate value of
$7.6 and vest over a two to five year period.
Effective January 1, 1994, the 1994 Long-Term Incentive Plan ("1994 LTIP")
was authorized under the 1993 Plan. The 1994 LTIP provides for the grant of
two forms of incentive awards; performance units consisting of potential cash
incentives and 10 year stock options. Performance units are earned out over
the three-year performance period 1994-1996, based on the degree of attainment
of performance objectives. The cash target value of all performance units is
approximately $29.0. One third of such options issued in 1994 vest each year
over a three-year period following the grant date; no such options were
exercisable as of December 31, 1994.
As of December 31, 1993, required performance goals under the prior
long-term incentive plan were achieved and accordingly fifty percent of
previously issued restricted shares were vested and issued in early 1994. An
additional thirty percent of such shares vested and were issued in early 1995
while the remaining twenty percent will vest as of January 3, 1996. During
1993, 48,090 restricted shares were issued under that plan (1992 - 127,295),
with an aggregate value on the date of grant of $3.5 (1992 - $6.9). Expense
is recorded as the restricted shares vest over the periods established for
each grant.
Compensation expense under all plans was $14.4 (1993 - $9.4; 1992 - $9.8).
The unamortized cost as of December 31, 1994 was $7.2 (1993 - $5.3). The
accrued cost of the performance units at December 31, 1994 was $9.6.
In 1994, Avon contributed 59,520 shares (1993 - 57,501) of treasury stock
to an employees' savings plan and recognized expense for its fair value on the
dates of the contributions to the plan. An estimated additional contribution
of 52,000 shares, for which the expense has been accrued at December 31, 1994,
will be made to the plan in 1995 since the Company met its performance goal,
as defined in the plan. The expense recognized for the plan in 1994 was $6.5
(1993 - $4.3; 1992 - $4.4).
Share Rights Plan - Avon has a 1987 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 $.01 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 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.
Dividends - On August 2, 1994, Avon increased the regular dividend on common
shares to an annual rate of $2.00 per share from an annual rate of $1.80. The
first quarterly dividend at the new rate of $.50 per share was paid on
September 1, 1994.
On August 9, 1993, Avon increased the regular dividend on common shares to
an annual rate of $1.80 per share from an annual rate of $1.60. The first
quarterly dividend at the new rate of $.45 per share was paid on September 1,
1993.
On August 3, 1992, Avon increased the regular dividend on common shares to
an annual rate of $1.60 per share from an annual rate of $1.40. The first
quarterly dividend at the new rate of $.40 per share was paid on September 1,
1992.
Stock Repurchase Program - During 1994, Avon's Board of Directors authorized a
stock repurchase program under which Avon may buyback up to 10% of its
outstanding common stock, or approximately 7,000,000 shares. The shares will
be purchased in the open market over a period of up to three years. As of
December 31, 1994, 3.2 million shares have been purchased for $188.2 which is
included in Treasury Stock.
46
47
10. Employee Benefit Plans
Retirement Plans - Avon and certain subsidiaries have 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. During 1992, as a result of an enhanced early retirement
program in the United States, an additional liability of $15.9 was recognized
and included in the 1992 Provision for Restructuring Costs.
Net retirement plan expense for the years ended December 31, was
determined as follows:
1994 1993 1992
---- ---- ----
Service cost $33.7 $33.6 $31.2
Interest cost 54.2 55.3 51.5
Actual return on plan assets 19.9 (77.4) (48.3)
Net amortization (deferral) (72.5) 19.8 (14.0)
----- ----- -----
Net retirement plan expense $35.3 $31.3 $20.4
===== ===== =====
The funded status of retirement plans at December 31, consisted of the
following:
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
Plan assets at fair value (primarily
listed stocks and bonds) $519.4 $567.1 $ 42.7 $ 38.8
------ ------ ------- -------
Present value of projected benefit
obligation
Accumulated benefit obligation
Vested (385.1) (374.9) (133.6) (129.7)
Nonvested (54.5) (59.4) (29.5) (25.0)
Projected compensation increases (81.6) (87.5) (41.1) (34.9)
------ ------ ------- -------
Projected benefit obligation (521.2) (521.8) (204.2) (189.6)
------ ------ ------- -------
Plan assets (less than) in excess
of projected benefit obligation (1.8) 45.3 (161.5) (150.8)
Unrecognized net loss 97.4 69.0 22.3 22.5
Urecognized prior service cost 15.4 12.5 8.9 8.8
Unrecognized transition (gain) loss (26.7) (45.0) 10.6 18.3
Adjustment for additional liability - - (7.3) (13.0)
------ ------ ------- -------
Prepaid (accrued) retirement
plan cost $ 84.3 $ 81.8 $(127.0) $(114.2)
====== ====== ======= =======
Prepaid retirement plan cost shown above is included in Other Assets. The
accrued retirement plan cost shown above is primarily included in Employee
Benefit Plans.
The weighted average assumptions used to determine the data above for the
years ended December 31, are as follows:
1994 1993 1992
---- ---- ----
Discount rate 7.7% 7.7% 8.1%
Rate of compensation increase 4.7 5.5 6.1
Rate of return on assets 9.2 9.5 10.3
47
48
Retirement plan expense is determined using assumptions as of the
beginning of the year. The funded status is determined using assumptions as
of the end of the year.
Supplemental Executive Retirement and Life Insurance Plans - Avon has a
Supplemental Executive Retirement Plan ("SERP") which is a defined benefit
plan under which Avon will pay supplemental pension benefits to key executives
in addition to amounts received under Avon's retirement plan. The annual cost
of this plan has been included in the determination of the net retirement plan
expense shown above and amounted to $3.9 (1993 - $4.3; 1992 - $6.4). Such
benefits will be paid from Avon's assets. The unfunded accumulated benefit
obligation under this plan at December 31, 1994 was $15.5 (1993 - $16.9) and
is primarily included in Employee Benefit Plans.
Avon also maintains a Supplemental Life Insurance Plan ("SLIP") under
which additional death benefits ranging from $.35 to $2.0 are provided to
certain active and retired officers. Avon has acquired corporate-owned life
insurance policies to provide partial funding of the benefits. The cash
surrender value of these policies at December 31, 1994 was $24.8
(1993 - $21.9) and is held in the grantor trust.
Avon has established a grantor trust to provide funding for the benefits
payable under the SERP and SLIP. The trust is irrevocable and assets
contributed to the trust can only be used to pay such benefits with certain
exceptions. During 1994, the Company contributed an additional $32.2 to fund
these benefit plans. The assets held in the trust at December 31, 1994,
amounted to $75.6 (1993 - $42.7), consisting of a money market fund, a managed
portfolio of equity securities and corporate-owned life insurance policies.
These assets are included in Other Assets.
Postretirement Benefits - Avon provides health care, in excess of Medicare
coverage, 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. See Note 2 regarding the adoption of FAS No. 106.
Net postretirement benefit cost for the years ended December 31, included
the following components:
1994 1993
---- ----
Service cost $ 3.3 $ 3.3
Interest cost 15.2 14.2
----- -----
Total postretirement benefit cost $18.5 $17.5
===== =====
During 1992, costs of health care and life insurance benefits for the U.S.
and certain foreign countries, which were expensed when incurred, amounted to
$4.7, on an after-tax basis. During 1993, the after-tax cost for certain
foreign countries was $.3.
The accumulated postretirement benefits obligation at December 31, which
is unfunded, for the U.S. plan, and certain foreign plans for which the
obligation was not significant, consisted of the following:
1994 1993
---- ----
Retirees $143.5 $112.9
Other fully eligible participants 11.6 29.3
Other active participants 51.3 47.1
Unrealized gains 3.4 3.1
------ ------
Accumulated postretirement benefits
obligation $209.8 $192.4
====== ======
The assumptions used to determine the data above for the years ended
December 31, are as follows:
1994 1993
---- ----
Discount rate 8.5% 7.5%
Rate of assumed compensation increases 5.0 4.5
The assumed rate of future increases in the per capita cost of health care
benefits (the health care cost trend rate) was 12.0% for 1994 and will
gradually decrease each year thereafter to 5.8% in 2005 and beyond.
Increasing the health care cost trend rate by one percentage point would
increase the accumulated postretirement benefits obligation at December 31,
1994 by $23.5 and would increase the 1994 annual postretirement benefits
expense by $2.5.
Postemployment Benefits - Effective January 1, 1994, the Company adopted FAS
No. 112, as discussed in Note 2. FAS No. 112 requires the accrual of the cost
of postemployment benefits rather than expensing the costs when paid. These
benefits include salary continuation, severance benefits, disability benefits
and continuation of health care benefits and life insurance coverage to former
48
49
employees after employment but before retirement. At December 31, 1994, the
accrual for postemployment benefits was $38.8 and is included in Employee
Benefit Plans.
11. Geographic Information
Avon's business is comprised of one business segment, direct selling of
products to consumers primarily through independent sales Representatives.
Operations by Geographic Area - Direct selling operations are conducted in the
United States, the Americas, the Pacific and Europe. Sales and pretax income
by geographic area are presented on page 26. Identifiable assets by
geographic area at December 31, were as follows:
1994 1993 1992
---- ---- ----
United States $ 414.2 $ 379.6 $ 375.2
-------- -------- --------
International
Americas 463.9 366.6 338.2
Pacific 329.2 279.8 232.0
Europe 308.6 275.5 263.4
-------- -------- --------
Total International 1,101.7 921.9 833.6
-------- -------- --------
Corporate and other* 462.4 617.2 483.8
-------- -------- --------
Total $1,978.3 $1,918.7 $1,692.6
======== ======== ========
*Includes Cash Equivalents of $132.5 (1993 - $159.7; 1992 - $95.5).
Foreign Exchange - Financial statement translation of subsidiaries operating
in highly inflationary economies and foreign currency transactions resulted in
losses netting to $6.8 (1993 - $5.2; 1992 - $16.9), which are included in
Other Expense, 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
of $23.9 (1993 - $34.7; 1992 - $28.6).
12. Leases and Commitments
Minimum rental commitments under noncancellable operating leases primarily for
equipment and office space at December 31, 1994, consisted of the following:
Year
1995 $ 53.0
1996 38.2
1997 20.9
1998 7.3
1999 4.2
Later years 1.9
Sublease rental income (17.5)
------
Total $108.0
======
Rent expense related to continuing operations was $94.0 (1993 - $90.9;
1992 - $86.9). Various construction and information systems projects were in
progress at December 31, 1994 with an estimated cost to complete of
approximately $24.0.
13. 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. The most significant of these are described below.
In 1991, a class action suit was initiated against Avon on behalf of
certain classes of holders of Avon's Preferred Equity-Redemption Cumulative
Stock ("PERCS"), alleging various contract and securities law claims relating
to the PERCS (which were fully redeemed that year). Avon has rejected the
assertions in this case, believes it has meritorious defenses to the claims
and is vigorously contesting this lawsuit.
In June 1988, Mallinckrodt, Inc. ("Mallinckrodt") and International
Minerals & Chemical Corporation ("IMC"), now known as Mallinckrodt Group Inc.,
filed a lawsuit against Avon in the St. Louis Missouri City Circuit Court
arising from Avon's sale of Mallinckrodt to IMC in 1986. The suit alleged
that a certain patent dispute and a settlement, referred to as the DuPont
patent case, various environmental claims and numerous other lawsuits and
claims are contingent liabilities covered by an indemnification given by Avon
in connection with the sale of
49
50
Mallinckrodt. In October 1991, the Missouri Supreme Court affirmed the
Circuit Court's decision that Avon has the obligation to indemnify IMC and
Mallinckrodt in connection with the DuPont patent case, but remanded the
matter for a trial on the damages, if any, suffered by the parties. On July
27, 1992, a jury returned a verdict in the DuPont patent case for $16.0, and a
judgment for that amount plus approximately $6.5 interest was entered. On
August 11, 1992, IMC and Mallinckrodt filed post-trial motions, including a
motion for a judgment notwithstanding the verdict or, in the alternative, a
motion for a new trial. On November 5, 1992, the St. Louis Missouri City
Circuit Court granted IMC's and Mallinckrodt's motion for a judgment
notwithstanding the verdict and directed a verdict for plaintiffs in the
amount of $27.1 plus interest. As of November 5, 1992, the interest amounted
to approximately $11.7. Avon, IMC and Mallinckrodt appealed this decision.
This issue was argued before the Missouri Court of Appeals, Eastern District
on May 11, 1994. On November 8, 1994, the Court of Appeals overturned the
judgment notwithstanding the verdict and ordered a new trial. All possible
further judicial review has now been exhausted and a retrial is expected
during 1995. Pre-trial proceedings and discovery activities are ongoing with
respect to the environmental and general litigation portions of the case.
With respect to the environmental contingencies which constitute a part of
the indemnification litigation, the total cost to Avon cannot be determined
with certainty as a result of such factors as the preliminary status of
information relating to the sites owned by the purchaser, the preliminary
regulatory involvement, the unknown magnitude and timing of cleanup efforts,
if any, to be undertaken by the purchaser or Mallinckrodt, the possibility of
recoveries against other parties, the uncertainty of the success of Avon's
defenses, and unasserted claims, if any. However, these factors have been
assessed and will continue to be assessed by Avon in estimating reserves to be
recorded in its consolidated financial statements.
The ultimate outcome and aggregate cost of resolving all of the above
contingencies will be based on a number of factors and will be determined over
a number of years. Accordingly, the total cost to Avon cannot currently be
determined with certainty. The reserves for such contingencies at December
31, 1994, which are recorded gross without anticipation of insurance
recoveries or other third-party recoveries, if any, have been estimated by
Avon's management based on its review of currently known facts and
circumstances at December 31, 1994. In the opinion of Avon's management,
based on its review of the preliminary information available at this time, the
difference, if any, between the total cost of resolving such contingencies and
reserves recorded by Avon at December 31, 1994 should not have a material
adverse impact on Avon's consolidated financial position or results of
operations, based on the current levels of such amounts. However, this
difference, if any, could have a material effect on results of operations in a
future period when resolved.
50
51
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 Coopers & Lybrand L.L.P., 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, Coopers & Lybrand L.L.P. and the internal auditors to monitor the
proper discharge of each of their respective responsibilities. Coopers &
Lybrand L.L.P. 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.
/s/James E. Preston /s/Edwina D. Woodbury
James E. Preston Edwina D. Woodbury
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
Report of Independent Accountants
To the Shareholders of Avon Products, Inc.
We have audited the accompanying consolidated balance sheet of Avon Products,
Inc. and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1994.
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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Avon
Products, Inc. and subsidiaries at December 31, 1994 and 1993, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
In 1994, Avon changed its methods of accounting for postemployment
benefits, for postretirement benefits other than pensions for its foreign
benefit plans, and for internal systems development costs. In addition, in
1993 Avon changed its methods of accounting for income taxes and
postretirement benefits other than pensions for its United States benefit
plans. These changes are discussed in Notes 1 and 2 to the consolidated
financial statements.
/s/Coopers & Lybrand L.L.P.
New York, New York
February 1, 1995
51
52
Eleven-Year Review
In millions, except per
share and employee data 1994 1993 1992 1991
---- ---- ---- ----
Income data
Net sales $4,266.5 $3,844.1 $3,660.5 $3,441.0
Interest expense 50.8 45.2 43.7 75.4
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 433.8 394.6 290.0(2) 352.9
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 270.3 243.8 169.4(2) 209.3
Income from continuing
operations 264.8 236.9 164.2(2) 204.8
Income (loss) from
discontinued operations,
net (23.8) 2.7 10.8 (69.1)
Cumulative effect of
accounting changes,
net (1) (45.2) (107.5) - -
Net income (loss) 195.8 132.1 175.0(2) 135.7
-------- -------- -------- --------
Income (loss) per
share of common
stock - assuming
full dilution(4)
Continuing operations $ 3.75 $ 3.28 $ 2.28(2) $ 2.86
Discontinued operations (.34) .04 .15 (.97)
Cumulative effect of
accounting changes (.64) (1.49) - -
Net income (loss) 2.77 1.83 2.43(2) 1.89
-------- -------- -------- --------
Cash dividends per share
Common $ 1.90 $ 1.70 $ 1.50 $ 4.40(6)
Preferred - - - 1.011
Balance sheet data
Working capital $ 9.3 $ 23.1 $ (99.5) $ (135.3)
Capital expenditures 99.9 58.1 62.7 61.2
Property, plant and
equipment, net 528.4 476.2 476.7 468.5
Total assets 1,978.3 1,918.7 1,692.6 1,693.3
Debt maturing within
one year 61.2 70.4 37.3 143.8
Long-term debt 116.5 123.7 177.7 208.1
Total debt 177.7 194.1 215.0 351.9
Shareholders' equity 185.6 314.0 310.5 251.6
-------- -------- -------- --------
Number of employees
United States 7,900 8,000 8,700 9,200
International 22,500 21,500 20,700 20,900
-------- -------- -------- --------
Total employees 30,400 29,500 29,400 30,100
======== ======== ======== ========
<FN>
Note: The data in the Eleven-Year Review has been restated to reflect the
retail businesses, Giorgio (1987-1994) and Parfums Stern (1987-1989),
as discontinued operations.
(1)Effective January 1, 1994, Avon adopted Statement of Financial Accounting
Standards Board ("FAS") No. 112, "Employer's 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. In addition, effective January 1, 1994, Avon changed its
method of accounting for internal systems development costs. These
development costs are being expensed as incurred, rather than deferred and
amortized over future periods. 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". See Notes 2 and 7 of the Notes to
the Consolidated Financial Statements. Effective January 1, 1988 Avon adopted
FAS No. 96, "Accounting for Income Taxes".
(2)In 1992, Avon began the restructuring of its worldwide manufacturing and
distribution facilities and recorded a provision of $96.0 ($64.4 after tax, or
$.90 per share) as described in Note 4 of the Notes to the Consolidated
Financial Statements. Income from continuing operations in 1993 increased 4%
from $228.6, or $3.17 per share, excluding the 1992 restructuring charge.
(3)The following nonrecurring transactions were recorded during 1987: a pretax
gain of $191.0 ($121.1 after tax, or $1.72 per share) resulting from the sale
of subsidiary stock and a special provision for restructure of $47.5 ($29.4
after tax, or $.42 per share).
(4)In management's opinion, per share amounts assuming full dilution provide
the most meaningful comparison of per share data because they show the full
effect of the conversion of 18.0 preferred shares into approximately 12.96
common shares on June 3, 1991.
(5)In 1989 and 1988, the calculation of income per share assuming full
dilution is antidilutive and, accordingly, the primary income per share amount
is reported as "income per share of common stock assuming full dilution."
(6)Includes special dividend of $3.00 paid in 1991.
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ELEVEN-YEAR REVIEW (CONTINUED)
Avon Products, Inc.
1990 1989 1988 1987 1986 1985 1984
---- ---- ---- ---- ---- ---- ----
$3,291.6 $2,998.3 $2,835.2 $2,506.2 $2,235.1 $2,003.7 $2,260.3
77.5 118.0 112.9 77.5 45.5 49.1 45.0
305.6 252.9 208.3 359.6(3) 205.0 171.2 253.9
180.3 134.1 121.1 224.8(3) 127.1 104.9 141.2
174.1 126.5 112.3 222.8(3) 126.7 105.0 141.4
21.2 (71.9) (536.8) (63.7) 32.0 (164.9) 40.3
- - 20.0 - - - -
195.3 54.6 (404.5) 159.1(3) 158.7 (59.9) 181.7
-------- -------- -------- -------- -------- -------- --------
$ 2.32 $ 1.63(5) $ 1.51(5) $ 3.16(3) $ 1.78 $ 1.31 $ 1.68
.28 (1.29)(5) (8.62)(5) (.90) .45 (2.07) .48
- - .32(5) - - - -
2.60 .34(5) (6.79)(5) 2.26(3) 2.23 (.76) 2.16
-------- -------- -------- -------- -------- -------- --------
$ 1.00 $ 1.00 $ 1.50 $ 2.00 $ 2.00 $ 2.00 $ 2.00
2.00 2.00 1.00 - - - -
$ 71.6 $ 56.3 $ 51.0 $ 122.2 $ 129.1 $ 186.6 $ 191.7
36.3 33.3 46.0 45.9 57.5 47.2 73.6
467.2 472.5 529.1 561.3 536.2 544.6 526.6
2,010.1 1,994.1 2,362.6 2,419.6 2,143.0 2,188.0 2,188.7
207.1 151.7 205.6 62.8 104.6 54.5 56.8
334.8 673.2 917.9 801.8 671.2 592.2 392.0
541.9 824.9 1,123.5 864.6 775.8 646.7 448.8
393.4 228.3 239.3 758.6 681.3 926.4 1,157.1
-------- -------- -------- -------- -------- -------- --------
9,500 9,400 9,700 10,500 10,800 10,000 11,400
20,300 19,900 18,400 18,100 17,700 18,200 18.300
-------- -------- -------- -------- -------- -------- --------
29,800 29,300 28,100 28,600 28,500 28,200 29,700
======== ======== ======== ======== ======== ======== ========
53