EXHIBIT 13
29
Management's Discussion and Analysis Avon Products, Inc.
The following discussion of the results of operations and financial condition
of Avon Products, Inc. ("Avon" or "Company") should be read in conjunction
with the information contained in the Consolidated Financial Statements and
Notes thereto. These statements have been prepared in conformity with
generally accepted accounting principles and require management to make
estimates and assumptions that affect amounts reported and disclosed in the
financial statements and related notes. Actual results could differ from
these estimates.
Results of Operations
Consolidated - Net income in 1995 was $256.5 million, or $3.76 per share,
compared with $195.8 million, or $2.77 per share, in 1994. The 1995 results
include a $29.6 million, or $.43 per share, after-tax charge to discontinued
operations relating to a litigation settlement with Mallinckrodt Group, Inc.
("Mallinckrodt"). See Note 3 of the Notes to the Consolidated Financial
Statements for further discussion of this settlement. In addition, the
following one-time pretax items are included in the 1995 results: a gain of
$25.0 million, net of related costs, from a cash settlement of a lease
dispute and a $7.0 million gain, net of related expenses, due to a value-
added tax refund in the United Kingdom. Partially offsetting these gains were
charges of $12.0 million related to an early retirement program implemented
in Japan and $11.0 million for severance costs, primarily in Europe, as part
of Avon's program to reduce fixed expenses in certain markets. The gain in
the United Kingdom and expenses in Japan and Europe are included in marketing,
distribution and administrative expenses. The lease dispute related to
prior year rent charges for the Company's headquarters building. The
$25.0 million gain represents a $14.0 million recovery of disputed rent,
which is included in marketing, distribution and administrative expenses,
and $11.0 million of interest, net of related costs, which is included in
other expense, net. The net effect of these one-time items was to increase
income from continuing operations and net income by $7.6 million, or $.11
per share. The Japan and Europe expense reduction programs, which were
substantially completed at December 31, 1995, generated approximately
$6.0 million and $5.0 million, respectively, of pretax savings in 1995, with
higher levels of annual savings anticipated to be realized in 1996 and beyond.
The 1994 results included a loss of $23.8 million, or $.34 per share,
for discontinued operations relating to the sale of Giorgio Beverly Hills,
Inc. ("Giorgio"), and a non-cash charge for accounting changes of
$45.2 million after tax, or $.64 per share. The charge for accounting changes
was 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 benefit plans of
$8.0 million; and costs related to the development of information systems of
$8.3 million. Net income for 1993 was $132.1 million, or $1.83 per share,
which included a net charge for the cumulative effect of changes in
accounting principles of $107.5 million after tax, or $1.49 per share, net
income from discontinued operations related to Giorgio of $12.7 million and
a $10.0 million charge to discontinued operations for the final settlement
and related expenses in an arbitration proceeding related to a business
previously sold. Net income per share from discontinued operations was $.04
in 1993.
Continuing Operations - Income from continuing operations before the
cumulative effect of accounting changes was $286.1 million, or 8 percent
above 1994. Income per share from continuing operations increased 12 percent
to $4.19 from $3.75 in the prior year. This 12 percent increase in income per
share exceeded the 8 percent increase in income from continuing operations
reflecting the impact of lower average shares outstanding in 1995 compared
with the prior year due to the stock repurchase program begun in 1994. See
Note 8 of the Notes to the Consolidated Financial Statements for further
discussion of this program. Pretax income was $465.0 million, a 7 percent,
or $31.2 million, increase over prior year. The increase was primarily due to
higher sales and lower net interest and non-operating expenses. In addition,
the increase in pretax income reflects the one-time items previously
discussed. These favorable results were partially offset by a slight decline
in the gross margin. Income from continuing operations in 1994 increased
$27.9 million, or $.47 per share, from 1993.
<PAGE)30
Consolidated net sales of $4.49 billion increased 5 percent from $4.27
billion in 1994. International sales increased 6 percent to $2.91 billion
from $2.73 billion in 1994 due to the favorable impact of a weaker U.S.
dollar in relation to the currencies in the Europe and Pacific Regions and
strong growth in the Americas Region, primarily Brazil, and to a lesser
extent, in the United Kingdom, Central European markets and the Pacific
Rim. These improvements were partially offset by lower sales in Mexico due
to the significant peso devaluation and operational declines in Japan. Sales
in the U.S. increased 3 percent to $1.58 billion primarily due to an increase
in Representative orders and an increase in average order size. In 1994,
consolidated net sales of $4.27 billion increased 11 percent over 1993
reflecting higher international sales, primarily due to strong growth in the
Americas Region and the Pacific Rim, and the favorable impact of exchange
rate fluctuations in Japan and most European countries. These increases were
partially offset by operational declines in most Western European markets and
Japan. 1994 sales in the U.S. increased 10 percent over 1993 to
$1.54 billion primarily due to an increase in average order size, an increase
in Representative orders and the launch of apparel, a new category in 1994.
Cost of sales as a percentage of sales was 39.4 percent in 1995,
compared with 39.2 percent in 1994. The decline in gross margin was primarily
due to a shift in sales mix to the lower margin apparel line and investments
made to reduce inventory levels in the U.S., margin investments in the United
Kingdom to drive sales and a shift in the sales mix to lower margin products
in Japan and the United Kingdom. The decline was partially offset by margin
improvements in Brazil reflecting the favorable impact of the government's
economic stabilization program implemented in July 1994, a shift in sales mix
to higher margin items in Argentina and improvements in most Pacific Rim
markets. In 1994, cost of sales as a percentage of sales was 39.2 percent,
compared to 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 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.
Marketing, distribution and administrative expenses of $2.2 billion
increased $116.8 million, or 6 percent, from 1994 and increased as a
percentage of sales to 49.3 percent from 49.2 percent in 1994. Excluding the
one-time items previously mentioned, operating expenses increased
$114.8 million. The increase in operating expenses reflects sales-related
increases throughout most markets in the Americas Region, most significantly
Brazil, and higher expense levels in the Pacific Rim, Japan and most European
markets. These increases were partially offset by lower expenses in Mexico
due to the significant peso devaluation. The increase in the operating
expense ratio reflects increased expenses in relation to sales in Brazil and
Venezuela, lower sales in Mexico and higher expenses in Japan mainly due to
expanded marketing programs in 1995. These increases were partially offset
by improved operating expense ratios in the U.S., throughout Europe, most
significantly in the United Kingdom and Germany, and in China due to the
sales increase. In 1994, 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
reflected sales-related increases in the U.S., Brazil, Argentina, Mexico and
the Pacific Rim markets and higher expenses related to market expansion in
the Central 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.
Interest expense in 1995 of $41.3 million decreased $9.5 million, or 19
percent, compared to the prior year due to lower interest rates on borrowings
in Brazil and in the U.S. and lower debt levels in Japan. These decreases
were partially offset by higher borrowings in the Central European markets
reflecting Avon's continued global expansion strategy. Interest expense in
1994 of $50.8 million increased $5.6 million, or 12 percent, over 1993 due to
higher borrowings to fund working capital needs and hyperinflationary interest
rates in Brazil and higher borrowings in the Central 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.
31
Interest income in 1995 of $19.4 million decreased $2.7 million, or 12
percent, compared to last year due to lower interest rates and lower average
cash balances in Brazil. Interest income in 1994 of $22.1 million decreased
$3.2 million, or 13 percent, compared to 1993 due to lower average cash
balances in Brazil in 1994.
Other expense, net, was $20.6 million, a $12.5 million decrease from
1994. The decrease was primarily due to the $11.0 million portion of the
previously discussed favorable lease settlement and lower monetary correction
expense in Brazil, partially offset by higher non-operating expenses and
unfavorable net foreign exchange in 1995. Other expense, net, was $33.1
million in 1994, a $14.4 million increase over 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.
Income taxes were $176.4 million in 1995 and the effective tax rate was
37.9 percent compared with $163.5 million and an effective tax rate of 37.7
percent in 1994. The effective tax rate was higher in 1995 due to the mix of
earnings and income tax rates of international subsidiaries. The utilization
of foreign net operating loss carryforwards did not significantly impact the
effective tax rate in 1995. In 1994, the effective tax rate was 37.7 percent,
compared with 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 and the utilization of foreign net operating loss carryforwards
in 1994.
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. The annual inflation rate
in Brazil, however, has decreased significantly in 1995 as the economic
environment has improved as a result of the government's economic
stabilization program implemented in mid-1994. While it is not possible to
forecast with certainty, it is currently expected that Brazil's inflation
rate will remain relatively stable throughout 1996. Venezuela and Mexico
experienced high rates of inflation in 1995.
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, 1995.
In millions
Years ended
December 31 1995 1994 1993
---- ---- ----
Net Pretax Net Pretax Net Pretax
Sales Income Sales Income Sales Income
------- ------ ------- ------ ------- -----
United States $1,584.8 $211.6 $1,535.1 $201.2 $1,395.6 $152.8
-------- ------ -------- ------ -------- -----
International
Americas 1,466.9 265.8 1,415.3 273.9 1,175.2 196.4
Pacific 712.0 67.5 664.3 89.7 625.6 90.9
Europe 728.4 41.7 651.8 15.3 647.7 53.5
------- ----- ------- ----- ------- -----
Total International 2,907.3 375.0 2,731.4 378.9 2,448.5 340.8
------- ----- ------- ----- ------- -----
Total from
operations $4,492.1 586.6 $4,266.5 580.1 $3,844.1 493.6
======== ======= =======
Corporate expenses (74.6) (84.9) (69.0)
Interest expense (41.3) (50.8) (45.2)
Other (expense) income (5.7) (10.6) 15.2
----- ----- -----
Total $465.0 $433.8 $394.6
====== ====== =====
32
U.S. - U.S. sales increased 3 percent to $1.58 billion and pretax income
increased 5 percent to $211.6 million in 1995.
The increase in sales reflects a 2 percent increase in the number of
Representative orders and a 1 percent increase in average order size. Units
sold increased 3 percent over 1994. The sales improvement was driven by
increases in the apparel and fragrance and color cosmetics categories,
partially offset by declines in the jewelry and gift categories. A full year
of apparel sales in 1995, a category originally launched in March 1994, the
Fall introduction of the Diane Von Furstenberg collections and the success
of the children's and novelty lines all contributed to the increase in
apparel sales. The increase in the fragrance and color cosmetics category
was driven by the successful launch of Avon's newest global fragrance, Rare
Gold, in the fourth quarter and the introductions of Incredible Lengths
Mascara and Perfect Wear for Eyes in 1995. The increase in pretax income
was primarily due to the sales increase and lower overall operating expenses,
despite a significant increase in the price of paper in 1995. These
improvements were partially offset by a lower gross margin resulting from
higher sales of the lower margin apparel line and margin investments,
including clearance sales, to reduce inventory levels. In addition, the
margin was impacted by an increase in the demand for new and attractively-
priced holiday products as well as some incremental costs incurred in meeting
the demand for several of these products.
In 1994, U.S. sales increased 10 percent to $1.54 billion and pretax
income increased 32 percent to $201.2 million. 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.
International - International sales increased 6 percent to $2.91 billion and
pretax income of $375.0 million was slightly below 1994. Excluding the one-
time items previously mentioned, pretax income increased 3 percent. The
increase in sales reflects the favorable impact of the weaker U.S. dollar in
the Europe and Pacific Regions and strong unit growth in the Americas Region,
especially Brazil, most Pacific Rim markets, and the United Kingdom. These
improvements were partially offset by a significant sales decline in Mexico
due to the negative impact of the peso devaluation and reduced consumer
spending due to the weak economy. In addition, there were operational sales
declines in Japan.
In the Americas Region, sales increased 4 percent to $1.47 billion and
pretax income decreased 3 percent to $265.8 million from $273.9 million in
1994. The sales increase was mainly due to significant improvements in Brazil.
The economic stabilization program implemented in Brazil in July 1994 has
produced significantly lower levels of annual inflation generating improved
consumer confidence. In addition, in 1995, the implementation of a new
distribution center, the introduction of new higher-priced products such as
Rare Gold Parfum and Renew Intensive Treatment, strong unit growth and an
increase in number of orders contributed to the sales increase in Brazil. The
sales increase in the Region also reflects strong unit growth in Venezuela
and Chile. These improvements were partially offset by a significant sales
decline in Mexico resulting from the negative impact of the peso devaluation
which began in late December 1994. As a result, the purchasing power of the
Mexican consumer, who is struggling with one of the worst recessions on
record, has decreased in 1995. This deep recession has resulted in a shift in
sales to lower-priced products with purchases directed toward essential
products and away from luxury items such as jewelry. Mexico, however, had
double-digit increases in local currency sales reflecting an increase in
number of active Representatives. The decrease in pretax income was
33
primarily due to the unfavorable results in Mexico as well as higher
operating expenses in Brazil associated with the sales increase, including
bad debt and transportation expenses, and the implementation of a new
distribution center in 1995. In addition, higher field recognition and
marketing expenses in Venezuela in 1995 and unfavorable net foreign exchange
in Brazil also contributed to the decrease in pretax income. Brazil's net
asset position and slight devaluation generated translation losses in 1995 as
compared to a net liability position and significant devaluation which
generated gains in 1994. These declines were partially offset by the overall
sales increase and lower monetary correction expense in Brazil reflecting the
more economically stable environment. In addition, pretax profit was higher
in Argentina due to improved gross margin resulting from a shift in sales
to higher margin items, and lower operating expenses, and in Venezuela due
to higher sales and lower foreign exchange losses. The significant devaluation
of the bolivar, approximately 40 percent, in December 1995 did not have a
material impact on Venezuela's results for the year.
In the Pacific Region, sales increased 7 percent to $712.0 million and
pretax income, excluding Japan's early retirement program costs mentioned
previously, decreased 11 percent to $79.5 million from $89.7 million in 1994.
The increase in sales was due to the favorable impact of a weaker U.S. dollar
throughout the Region, most significantly in Japan, and strong unit growth
in the Pacific Rim, most significantly in China and the Philippines. These
improvements were partially offset by operational sales declines in Japan
reflecting a shift in pricing strategy to sales of lower-priced products as
a result of a decline in consumer spending due to a weak economic climate.
In addition, sales were lower in Taiwan due to a shift to lower-priced
products, and in Australia, reflecting declines in number of units sold. The
results in Japan have been impacted by the economy which has suffered in 1995
from significant exchange fluctuations, political instability, aggressive
competition from discounters and a major earthquake. Sales of cosmetics,
fragrance and toiletries ("CFT") have declined significantly in Japan. In
response to these difficult conditions, Japan has taken numerous actions,
including expanded marketing activities, an early retirement program,
previously discussed, and other cost-cutting measures. The decrease in pretax
income was due to the unfavorable operating results in Japan reflecting a
decline in gross margin due to a brochure focus on lower-priced impulse
items and higher advertising expenses to enhance product awareness and
increase consumer appeal. In addition, operating expenses were higher in the
Pacific Rim markets due to continued business expansion, mainly in China, and
increased investments to respond to heightened competition in several markets
as well as high fixed expenses in Australia. These decreases were partially
offset by the overall sales increase and improved gross margins in China and
the Philippines.
In the Europe Region, sales increased 12 percent to $728.4 million.
Excluding the one-time items previously mentioned, pretax income increased
$28.8 million to $44.1 million from 1994. The sales increase was due to the
favorable impact of a weaker U.S. dollar throughout Europe, most
significantly in Germany and the United Kingdom, as well as unit growth in
the United Kingdom, the Central European markets and Spain. The developing
Central European markets have had solid operational growth as demonstrated
by their double digit increases in units sold in both 1995 and 1994. These
improvements were partially offset by shortfalls in Germany reflecting
decreased units sold as a result of the economic downturn in the second half
of the year. The increase in pretax income was primarily due to the overall
sales increase as well as the effect of continued expense reduction efforts
throughout Europe. These improvements were partially offset by a gross margin
decline in the United Kingdom resulting from margin investments made to
support sales with low margin special offers and also to reduce inventory
levels.
In 1994, 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.
34
In the Americas Region, 1994 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
apparel 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 apparel 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 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 1994, sales in the Pacific Region 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, 1994 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 Central 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 Central European markets.
See Foreign Operations section under Liquidity and Capital Resources
for additional discussion.
Corporate Expenses - Corporate expenses were $74.6 million in 1995 compared
with $84.9 million in 1994. The $10.3 million decrease is primarily due to
the previously discussed favorable lease settlement, partially offset by
higher non-recurring expenses. In 1994, corporate expenses increased $15.9
million from 1993. The increase 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.
Other (Expense) Income - Other (expense) income includes corporate non-
operating income and expense items and corporate interest income. Other
expense, net, was $5.7 million in 1995 compared with $10.6 million in 1994,
35
a decrease of $4.9 million, due to the $11.0 million portion of the previously
discussed lease settlement partially offset by higher non-operating expenses
in 1995. Other expense, net, was $10.6 million in 1994 compared with other
income, net, of $15.2 million in 1993 reflecting higher non-operating
expenses in 1994 combined with the gains relating to the sales of a non-
operating investment and land in 1993.
Income Taxes - Effective January 1, 1993, Avon accounts for income taxes
under the provisions of FAS No. 109, "Accounting for Income Taxes", which
requires that deferred income taxes be provided on items recognized for
financial reporting purposes in different periods than for income tax
purposes at future enacted rates.
Net deferred tax assets, net of valuation allowance, were $76.3 million
at December 31, 1995, a decrease of $1.6 million from net deferred tax assets
of $77.9 million at December 31, 1994. The valuation allowance, as required
under FAS No. 109, is recorded primarily as reserves for foreign operating
loss and capital loss carry forwards. The basis used for recognition of
deferred tax assets includes 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 benefit 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.
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.
FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of ", was issued in March 1995 and is
effective for fiscal years beginning after December 15, 1995. This statement
requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of assets may not
be recoverable. The Company will adopt this statement effective January 1,
1996 and does not anticipate any significant impact to its results of
operations or financial position upon adoption.
FAS No. 123, "Accounting for Stock-Based Compensation", was issued in
October 1995 and is effective for transactions entered into in fiscal years
beginning after December 15, 1995. This statement establishes financial
accounting and reporting standards for stock-based employee compensation
plans, such as stock purchase plans, stock options, restricted stock and
stock appreciation rights as well as non-employee equity transactions. The
Company will provide the fair value disclosure requirements of this statement
in the 1996 annual financial statements, but as permitted, the Company will
not change the method of accounting for its employee stock compensation plans.
Discontinued Operations - In December 1995, the Company entered into an
agreement with Mallinckrodt, which has fully settled the litigation initiated
by Mallinckrodt. The settlement covers all indemnity obligations related to
Avon's sale of Mallinckrodt, including environmental clean-up claims and
litigation concerning Mallinckrodt's settlement of a DuPont patent claim.
The settlement payments being made by Avon to Mallinckrodt, and related
costs, resulted in an after-tax charge to discontinued operations in the
fourth quarter of 1995, net of existing reserves, of $29.6 million, or $.43
per share.
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. Giorgio's operating results are segregated and reported as
discontinued operations through the date of sale.
Since the Company has excess capital loss carryforwards, no tax benefits
were recognized on the above losses in 1995 and 1994.
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.
36
Contingencies - Although Avon has completed its divestiture of all
discontinued operations, various lawsuits and claims (asserted and unasserted)
are pending or threatened against Avon. The Company is also involved in a
number of proceedings arising out of the federal Superfund law and similar
state laws. In some instances Avon, along with other companies, has been
designated as a potentially responsible party which may be liable for costs
associated with these various hazardous waste sites. In the opinion of Avon's
management, based on its review of the information available at this time,
the difference, if any, between the total cost of resolving such
contingencies and reserves recorded by Avon at December 31, 1995 should not
have a material adverse impact on Avon's consolidated financial position or
results of operations.
Liquidity and Capital Resources
Cash Flows - Net cash provided by continuing operations was $328.6 million
in 1995 compared to $298.3 million in 1994. The 1995 increase in net cash
provided by continuing operations principally reflects, among other things,
an increase in net income of $60.7 million partially offset by higher funding
of working capital and a cumulative effect of accounting changes in 1994. The
higher funding of working capital reflects a decrease in accounts payable and
accrued liabilities, most significantly in Brazil, partially offset by a
decrease in accounts receivable.
In 1995, net cash provided by continuing operations was in excess of
funding required for capital expenditures of $72.7 million, cash dividends of
$147.8 million and all required long-term debt payments of $29.6 million.
1994 net cash provided by continuing operations was level with 1993 due to 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. A more detailed analysis of
the individual items contributing to the 1995 and 1994 amounts is included
in the Consolidated Statement of Cash Flows.
Cash used by discontinued operations was $49.6 million in 1995, compared
with $6.0 million in 1994 and $2.3 million in 1993. The $43.6 million
increase in cash used in 1995 compared to 1994 primarily reflects a portion
of the total settlement amount that was paid to Mallinckrodt in 1995. The
final portion of the settlement was paid in January 1996. See discussion
above in Discontinued Operations section regarding this settlement. 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.
Excluding changes in debt, net cash usage of $44.7 million in 1995 was
$52.4 million unfavorable to net cash flow of $7.7 million in 1994. This
variance reflects the higher cash provided by continuing operations,
described above, as well as lower cash used in 1995 for the repurchase of
common stock, lower capital expenditures and a favorable exchange rate impact
on cash. This was more than offset by the proceeds in 1994 from the sale of
Giorgio, the Mallinckrodt settlement payment and higher dividends paid in
1995. 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, 1995, 4.8 million shares
of common stock have been purchased for $295.1 million under the stock
repurchase program begun in 1994.
Working Capital - As of December 31, 1995, current liabilities exceeded
current assets by $30.3 million compared with working capital of $9.3 million
at the end of 1994. The decline was primarily due to an increase in accrued
expenses, reflecting the reclassification from long-term liabilities of
amounts related to discontinued operations, including the final Mallinckrodt
settlement payment made in January 1996, as well as a decrease in cash and
equivalents. The decrease was partially offset by higher inventory levels, as
discussed in the Inventories section, and accounts receivable, due to a higher
1995 sales level.
37
Avon's liquidity results from its ability to generate significant cash
flows from operations and its ample unused borrowing capacity. Management
does not presently plan any actions that would eliminate the working capital
deficit at this time. Avon's credit agreements do not contain any provisions
or requirements with respect to working capital.
Capital Resources - Total debt of $161.5 million at December 31, 1995,
decreased $16.2 million from $177.7 million at December 31, 1994, compared
with a reduction of $16.4 million from December 31, 1993. During 1995, cash
flows from continuing operations as well as cash on hand were used for
dividends, the stock repurchase program, capital expenditures, a payment
made related to discontinued operations and the reduction of debt. During
1994, cash flows 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, cash flows from
operations were used to reduce debt.
Debt maturing within one year consists of borrowings from banks of
$42.3 million and the current maturities of long-term debt of $5.0 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, provide support for the issuance of commercial paper
and support the stock repurchase program. There were no borrowings
under this facility at December 31, 1995 and 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 $500.0 million commercial paper program supported by the
revolving credit and competitive advance facility. The Company also has
bankers' acceptance facilities and uncommitted lines of credit available of
$215.0 million with various banks which have no compensating balances or fees.
As of December 31, 1995 and 1994, there were no borrowings under these
facilities. In addition, as of December 31, 1995 and 1994, there are
international lines of credit totaling $320.0 million and $276.4 million,
respectively, of which $42.3 million and $32.0 million, respectively, were
outstanding. 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 and accessories, gift and decorative
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 $466.3 million at December 31, 1995 were $53.5 million
higher than 1994 due to business growth and expansion of the apparel line in
the U.S. and the United Kingdom, sales growth in Brazil, and continued
expansion into the Pacific Rim markets. These increases were partially
offset by lower inventory levels in Mexico due to the peso devaluation.
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 1995 of $72.7 million
(1994 - $99.9 million) were made for capacity expansion in high growth
markets and to maintain worldwide facilities. Numerous construction and
information systems projects were in progress at December 31, 1995 with an
38
estimated cost to complete of approximately $27.9 million. Capital
expenditures in 1996 are currently expected to be in the range of $125.0 -
$150.0 million. These expenditures will include continued investments for
capacity expansion in high growth markets, most significantly in the Pacific
Rim, and for facility modernization, information systems, equipment
replacement projects and leasehold improvements related to office facilities
for U.S. and global operations.
Foreign Operations - The Company derived approximately 65 percent and 64
percent of its 1995 consolidated net sales and consolidated pretax income
from operations, respectively, from its international subsidiaries. In
addition, as of December 31, 1995, international subsidiaries comprised
approximately 59 percent of the Company's consolidated total assets.
Avon's operations in many countries utilize numerous currencies. Avon
has significant net assets in Japan, Argentina, Germany, Canada, the
Philippines, the United Kingdom and Mexico. 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, a
country with an economy 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 significantly lowered inflation generating improved consumer
purchasing confidence during the second half of that year. As a result of the
sharply reduced rate of inflation in Argentina during the past three years,
effective January 1, 1995, the country was no longer designated as having a
highly inflationary economy. Also, effective January 1, 1995, because of the
trend of higher inflation rates, Venezuela was designated as a country
with a highly inflationary economy.
The Venezuelan bolivar devalued significantly in December 1995. However,
because the devaluation occurred late in the year, there was no material
impact on the 1995 results of operations. In 1995, Venezuela contributed
approximately 2 percent of Avon's consolidated net sales. It is expected that
a continued weak bolivar will have some impact on 1996 results; however,
management cannot at this time project what this impact will be. In Mexico,
consumer spending is not expected to improve in the first half of 1996.
However, inflation is expected to decline and the gross domestic product is
expected to improve slightly. Action plans are underway to reach consumers
that formerly bought only higher-priced brands to take advantage of an
environment of limited buying power. In addition, there will be a continued
focus on Representative recruiting and an evaluation of several initiatives
to improve branch distribution productivity. 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 7 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 had relied, to
any material extent, on long-term financing. During 1995, the final
repayments of the Avon Japan long-term financing were made. Currently, it is
anticipated that future Avon Japan borrowings, if required, will be on a
short-term basis. Many subsidiaries have short-term borrowings from local
39
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, 1995, the total
indebtedness of foreign subsidiaries was $61.5 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 1995, these subsidiaries remitted, net of taxes, $210.5 million in
dividends and royalties. This sum is a substantial portion of the 1995
consolidated net earnings of Avon's foreign subsidiaries.
Risk Management Strategies - The Company operates globally, with
manufacturing and distribution facilities in various locations around the
world. The Company may reduce its exposure to fluctuations in interest rates
and foreign exchange rates by creating offsetting positions through the use
of derivative financial instruments. The Company currently does not use
derivative financial instruments for trading or speculative purposes, nor is
the Company a party to leveraged derivatives.
The Company periodically uses interest rate swaps to hedge portions of
interest payable on its debt. In addition, the Company may periodically
employ interest rate caps to reduce exposure, if any, to increases in
variable interest rates.
During a substantial portion of the three-year period ended December 31,
1995, the Company utilized interest rate swaps to effectively convert
variable interest on its long-term debt to a fixed interest rate. From
November 1994 through July 10, 1995, due to the expiration of an interest
rate swap, the interest payable on the 6 1/8 percent Deutsche Mark notes
("Notes") became variable at a rate of one-month LIBOR plus 1.4 percent.
During the period, the Company had an interest rate cap in place to reduce
its exposure to increases in that variable interest rate above a specified
level. On July 11, 1995, the Company entered into a new interest rate swap
agreement, which effectively reconverted the interest payable on the Notes
to a fixed rate basis of approximately 7.2 percent through maturity.
Avon has three interest rate swap agreements on the Notes at December
31, 1995 (two at December 31, 1994), each such agreement having a notional
amount of $100.0 million (1994 - $100.0 million), yielding an aggregate
notional amount at December 31, 1995 of $300.0 million (1994 - $200.0 million).
Effective January 1995, the Company had two interest rate caps on the Notes,
each with a notional amount of $100.0 million, one of which expires in 1996
and the other expires when the Notes mature. Subsequent to the interest rate
on the Notes becoming fixed, these caps have been marked-to-market and
resulted in an insignificant mark-to-market adjustment.
In December 1995, the Company entered into an interest rate cap contract
with a notional amount of $100.0 million, which expires in early 1997, in
order to hedge a portion of the Company's anticipated short-term variable
interest rate working capital debt. This cap has been marked-to-market with
an insignificant mark-to-market adjustment.
The interest rate on the Notes was fixed at approximately 10 percent
from January 1993 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. The effective rate of interest paid for
the Notes in 1995 was approximately 7.5 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 during the years
1993 to 1995 was a Yen note obligation of Avon's Japanese subsidiary, which
had 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 was repaid during 1995.
The Company may periodically hedge foreign currency royalties, net
investments in foreign subsidiaries, firm purchase commitments, contractual
foreign currency cash flows or obligations, including third-party and
40
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, 1995, the Company held foreign currency forward
contracts with notional amounts totaling $182.2 million and option contracts
with notional amounts totaling $90.4 million to hedge foreign currency items.
These contracts all have maturities prior to December 31, 1996. The Company
also entered into certain option contracts with notional amounts of $8.2
million to economically hedge certain foreign currency exposures, which do
not qualify as hedging transactions under the current accounting definitions
and, accordingly, have been marked-to market. The mark-to-market adjustment
on these option contracts at December 31, 1995, was insignificant. The
Company's risk of loss on these options in the future is limited to premiums
paid, which are insignificant.
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, 1995. In addition, there
are other swap agreements in a net payable position of an insignificant
amount at December 31, 1995. 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.
41
Results of Operations by Quarter Avon Products, Inc.
In millions, except per share data
1995 First Second Third Fourth Year
Net sales $976.2 $1,064.0 $1,067.8 $1,384.1 $4,492.1
Gross profit 588.9 659.1 648.4 826.7 2,723.1
Income from
continuing operations
before taxes and
minority interest 56.5 133.7 87.2 187.6 465.0
Income from continuing
operations before
minority interst 34.0 80.3 55.8 118.5 288.6
Discontinued operations,
net(1) - - - (29.6) (29.6)
Net income 34.4 80.4 55.2 86.5 256.5
Income (loss) per share:
Continuing operations $ .50 $ 1.17 $ .81 $ 1.71 $ 4.19
Discontinued operations - - - (.43) (.43)
----- -------- -------- ------- -------
Net income $ .50 $ 1.17 $ .81 $ 1.28 $ 3.76(3)
===== ======== ======= ======= =======
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)
====== ======== ======== ======== ========
(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
1995 1994
Quarter High Low High Low
------- ------- ------- -------
First $61 3/8 $54 $58 $48 3/8
Second 69 3/4 59 5/8 61 1/4 55 5/8
Third 75 3/8 65 5/8 62 7/8 56
Fourth 78 3/8 68 1/2 63 5/8 58 5/8
Avon common stock is listed on the New York Stock Exchange. At December
31, 1995, there were approximately 24,800 shareholders of record. Dividends
declared and paid in 1995 of $2.10 include $.55 per share for the last two
quarters and $.50 per share for the first two quarters. Dividends declared and
paid in 1994 of $1.90 include $.50 per share for the last two quarters
and $.45 for the first two quarters.
42
Consolidated Statement of Income Avon Products, Inc.
In millions, except per share data 1995 1994 1993
Years ended December 31 ---- ---- ----
Net Sales $4,492.1 $4,266.5 $3,844.1
------- ------- -------
Costs, expenses and other
Cost of sales 1,769.0 1,672.1 1,497.0
Marketing, distribution and
administrative expenses 2,215.6 2,098.8 1,913.9
Interest expense 41.3 50.8 45.2
Interest income (19.4) (22.1) (25.3)
Other expense, net 20.6 33.1 18.7
------- ------- ------
Total costs, expenses and other 4,027.1 3,832.7 3,449.5
------- ------- -------
Income from continuing operations before
taxes, minority interest and cumulative
effect of accounting changes 465.0 433.8 394.6
Income taxes 176.4 163.5 150.8
------- ------- -------
Income from continuing operations before
minority interest and cumulative
effect of accounting changes 288.6 270.3 243.8
Minority interest (2.5) (5.5) (6.9)
------- ------- -------
Income from continuing operations before
cumulative effect of accounting changes 286.1 264.8 236.9
Discontinued operations
Income, net of taxes - 1.2 12.7
Loss on disposals, net of taxes (29.6) (25.0) (10.0)
Cumulative effect of accounting changes,
net of taxes - (45.2) (107.5)
------- ------- -------
Net income $ 256.5 $ 195.8 $ 132.1
======= ======= =======
Income (loss) per share:
Continuing operations $ 4.19 $ 3.75 $ 3.28
Discontinued operations (.43) (.34) .04
Cumulative effect of accounting changes - (.64) (1.49)
------- ------- -------
Net income $ 3.76 $ 2.77 $ 1.83
======= ======= =======
Average shares outstanding 68.24 70.59 72.06
The accompanying notes are an integral part of these statements.
43
Consolidated Balance Sheet Avon Products, Inc.
In millions except share data 1995 1994
December 31 ---- ----
Assets
Current assets
Cash, including cash equivalents of $60.5 and $132.5 $ 151.4 $ 214.8
Accounts receivable (less allowance for doubtful
accounts of $32.6 and $27.3) 402.0 373.7
Inventories 466.3 412.8
Prepaid expenses and other 195.3 149.0
-------- --------
Total current assets 1,215.0 1,150.3
-------- --------
Property, plant and equipment, at cost
Land 53.5 54.3
Buildings and improvements 546.1 531.5
Equipment 569.9 560.9
-------- --------
1,169.5 1,146.7
Less accumulated depreciation 631.7 618.3
-------- --------
537.8 528.4
-------- --------
Other assets 300.0 299.6
-------- --------
Total assets $2,052.8 $1,978.3
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Debt maturing within one year $ 47.3 $ 61.2
Accounts payable 419.7 408.0
Accrued compensation 109.3 100.0
Other accrued liabilities 277.3 222.3
Sales and other taxes 101.8 95.7
Income taxes 289.9 253.8
-------- --------
Total current liabilities 1,245.3 1,141.0
-------- --------
Long-term debt 114.2 116.5
Employee benefit plans 390.8 366.6
Deferred income taxes 33.6 32.2
Other liabilities (including minority interest
of $46.5 and $48.9) 76.2 136.4
Commitments and contingencies
Shareholders' equity
Common stock, par value $.50 - authorized:
200,000,000 shares; issued 86,749,056
and 86,663,874 shares 43.4 43.3
Additional paid-in capital 672.9 660.5
Retained earnings 325.8 212.4
Translation adjustments (202.1) (187.1)
Treasury stock, at cost - 19,131,822 and
17,589,639 shares (647.3) (543.5)
-------- --------
Total shareholders' equity 192.7 185.6
-------- --------
Total liabilities and shareholders' equity $2,052.8 $1,978.3
======== ========
The accompanying notes are an integral part of these statements
44
Consolidated Statement of Cash Flows Avon Products, Inc.
In millions 1995 1994 1993
Years ended December 31 ---- ---- ----
Cash flows from operating activities
Net income $256.5 $195.8 $132.1
Adjustments to reconcile income to net cash
provided by continuing operations:
Cumulative effect of accounting changes, net - 45.2 107.5
Discontinued operations, net 29.6 23.8 (2.7)
Payments of restructuring costs - (3.5) (27.0)
Depreciation and amortization 58.3 55.7 57.2
Provision for doubtful accounts 78.0 64.9 51.4
Translation (gains) losses (.4) (9.0) 14.7
Deferred income taxes (.6) 2.2 (12.1)
Other 35.3 26.9 17.5
Changes in assets and liabilities:
Accounts receivable (132.5) (179.4) (140.8)
Inventories (54.6) (61.3) (60.9)
Prepaid expenses and other (42.4) (12.1) (2.1)
Accounts payable and accrued liabilities 60.4 145.9 79.5
Income and other taxes 57.5 45.4 75.8
Noncurrent assets and liabilities (16.5) (42.2) 9.7
------ ------ ------
Net cash provided by continuing operations 328.6 298.3 299.8
Net cash used by discontinued operations (49.6) (6.0) (2.3)
------ ------ ------
Net cash provided by operating activities 279.0 292.3 297.5
------ ------ ------
Cash flows from investing activities
Capital expenditures (72.7) (99.9) (58.1)
Disposal of assets 2.8 4.5 19.1
Acquisitions of subsidiary stock (3.4) - (6.4)
Proceeds from sale of Giorgio Beverly Hills, Inc. - 150.0 -
------ ------ ------
Net cash (used) provided by investing activities (73.3) 54.6 (45.4)
------ ------ ------
Cash flows from financing activities
Cash dividends (147.8) (141.1) (124.9)
Debt, net (maturities of three months or less) 8.8 (23.3) 14.8
Proceeds from short-term debt 32.7 35.0 26.8
Retirement of short-term debt (30.6) (16.2) (24.8)
Proceeds from long-term debt - 6.1 -
Retirement of long-term debt (29.6) (18.4) (38.2)
Proceeds from exercise of stock options,
net of taxes 1.4 .7 .9
Repurchase of common stock (106.9) (188.2) (.4)
------ ------ ------
Net cash used by financing activities (272.0) (345.4) (145.8)
Effect of exchange rate changes on cash and
equivalents 2.9 (10.6) (24.0)
------ ------ ------
Net(decrease) increase in cash and equivalents (63.4) (9.1) 82.3
Cash and equivalents at beginning of year 214.8 223.9 141.6
------ ------ ------
Cash and equivalents at end of year $151.4 $214.8 $223.9
====== ====== ======
Cash paid for
Interest $ 36.4 $ 47.8 $ 37.6
Income taxes, net of refunds received 133.5 130.4 132.7
The accompanying notes are an integral part of these statements.
45
Consolidated Statement of Changes Avon Products, Inc.
in Shareholders' Equity
In millions, except share data
Additional
Common Stock Paid-In Retained Translation Treasury
Shares Amount Capital Earnings Adjustments Stock Total
- - ------------ ------ ------- -------- ----------- ------- -----
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 amorti-
zation 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 amorti-
zation 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
Net income 256.5 256.5
Dividends - $2.10 per share (143.1) (143.1)
Translation adjustments (15.0) (15.0)
Exercise of stock options,
including tax benefits 39,627 .1 1.5 1.6
Grant, cancellation and amorti-
zation of restricted stock 45,555 8.2 8.2
Repurchase of common stock (106.9) (106.9)
Benefit plan contributions 2.7 3.1 5.8
---------- ----- ------ ------ ------- ------- ------
Balance at December 31, 1995 86,749,056 $43.4 $672.9 $325.8 $(202.1) $(647.3) $192.7
========== ===== ====== ====== ======= ======= ======
The accompanying notes are an integral part of these statements.
46
Notes to Consolidated Financial Statements Avon Products, Inc.
In millions, except share data
1. Description of the Business and Summary of Significant Accounting
Policies
Business
Avon Products, Inc. ("Avon" or "Company") is a global manufacturer
and marketer of beauty and related products. The product categories
include cosmetics, fragrance and toiletries; gift and decorative; apparel;
and fashion jewelry and accessories. Avon's business is comprised of one
industry segment, direct selling, which is conducted in the U.S., the
Americas, the Pacific and Europe. Sales are made to the ultimate customers
principally by Avon Representatives.
Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include
the accounts of Avon and its subsidiaries. Intercompany balances and
transactions are eliminated. These statements have been prepared in
conformity with generally accepted accounting principles and require
management to make estimates and assumptions that affect amounts
reported and disclosed in the financial statements and related notes.
Actual results could differ from these estimates.
Foreign Currency - The Company has operations in various countries around
the world. Fluctuations in the value of foreign currencies cause U.S. dollar-
translated amounts to change in comparison with previous periods. Accordingly,
the Company 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.
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 believes it is not 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 3 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.
Stock Options - Compensation cost is recognized for fixed price options using
the intrinsic value method. Under this method, compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount an employee must pay to acquire the
stock. Historically, the Company has not had any significant compensation cost
for options granted.
47
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. 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. Income and expense are recorded in the same
category as that arising from the related asset or liability being hedged.
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 if considered to be economic hedges; otherwise, they are
marked-to-market.
Research and Development - Research and development costs are expensed
as incurred and aggregated $27.8 (1994 - $27.9; 1993 - $28.5).
Advertising - Advertising costs are expensed as incurred and aggregated
$52.8 (1994 - $42.6; 1993 - $49.4).
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 deferred income
taxes be provided on items recognized for financial reporting purposes in
different periods than for income tax purposes at future enacted rates.
U.S. income taxes have not been provided on approximately $267.0 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 $25.0 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 during the two year period 1993 to 1995 is primarily due to the
shares acquired under the stock repurchase program.
Reclassifications - To conform to the 1995 presentation, certain
reclassifications were made to the prior years' consolidated financial
statements.
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.
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.
FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of ", was issued in March 1995 and is
effective for fiscal years beginning after December 15, 1995. This statement
requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of assets may not
be recoverable. The Company will adopt this statement effective
January 1, 1996, and does not anticipate any significant impact to its results
of operations or financial position upon adoption.
FAS No. 123, "Accounting for Stock-Based Compensation", was issued in
October 1995 and is effective for transactions entered into in fiscal years
beginning after December 15, 1995. This statement establishes financial
accounting and reporting standards for stock-based employee compensation
plans, such as stock purchase plans, stock options, restricted stock and stock
appreciation rights as well as non-employee equity transactions. The Company
will provide the fair value disclosure requirements of this statement in the
1996 annual financial statements, but as permitted, the Company will not
change the method of accounting for its employee stock compensation plans.
48
3. Discontinued Operations
In December 1995, the Company entered into an agreement with Mallinckrodt
Group, Inc. ("Mallinckrodt"), which has fully settled the litigation initiated
by Mallinckrodt. The settlement covers all indemnity obligations related to
Avon's sale of Mallinckrodt, including environmental clean-up claims and
litigation concerning Mallinckrodt's settlement of a DuPont patent claim.
The settlement payments being made by Avon to Mallinckrodt, and related
costs, resulted in an after-tax charge to discontinued operations in the
fourth quarter of 1995, net of existing reserves, of $29.6, or $.43 per share.
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. Giorgio's operating results are segregated and reported
as discontinued operations through the date of sale.
Since the Company has excess capital loss carryforwards, no tax benefits
were recognized on the above losses in 1995 and 1994.
Amounts included in income from discontinued operations for Giorgio for
the years ended December 31, were as follows:
1994(1) 1993
------ ------
Net sales $58.1 $163.5
Income before taxes 2.0 23.8
Net income 1.2 12.7
(1) Represents the net sales and income through the measurement date of
June 30, 1994.
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.
At December 31, 1995, current liabilities include $46.1 relating to
discontinued operations. These liabilities represent the estimated costs
relating to the Mallinckrodt settlement discussed above and other businesses
previously sold.
4. Inventories
Inventories at December 31, consisted of the following:
1995 1994
----- ----
Raw materials $133.2 $118.4
Finished goods 333.1 294.4
----- -----
Total $466.3 $412.8
===== =====
LIFO-based inventories totaled $107.1 (1994 - $88.0), with the current
estimated replacement cost exceeding the carrying value by approximately
$20.4 (1994 - $20.4).
5. Debt
Debt at December 31, consisted of the following:
1995 1994
---- ----
Maturing within one year:
Notes payable $ 42.3 $ 32.0
Current portion of long-term debt 5.0 29.2
---- ----
Total $ 47.3 $ 61.2
===== =====
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 - 25.1
Other, payable to 2004 with interest from 6% to 26% 19.2 20.6
Less current portion (5.0) (29.2)
----- -----
Total $114.2 $116.5
===== =====
(1) The Deutsche Mark notes ("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 currency swap contract receivable at December 31, 1995
of $18.7 (1994 - $9.0).
(2) See Note 7 regarding financial instruments.
Annual maturities of long-term debt for each of the next five years are:
1996 - $5.0; 1997 - $2.2; 1998 - $104.1; 1999 - $1.8; and 2000 - $1.6.
The Company has a five year, $600.0 revolving credit and competitive
advance facility agreement with various banks. At December 31, 1995 and
1994, there were no borrowings under this credit facility. Under this
facility, the Company is able to borrow, on an uncommitted basis, up to
49
$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 facility is based on LIBOR, prime,
federal funds or money market auction rates. The facility has an annual
facility fee of $.6, as well as a utilization fee if more than 50% of the
total commitment is outstanding. The facility contains a covenant for
interest coverage, as defined. The Company is in compliance with this
covenant.
At December 31, 1995, Avon has a $500.0 commercial paper program
supported by the revolving credit and competitive advance facility. In addition,
the Company has bankers' acceptance facilities and uncommitted lines of credit
available of $215.0 (1994 - $235.0) with various banks which have no
compensating balances or fees. As of December 31, 1995 and 1994, there were
no borrowings under any of these facilities. The maximum borrowing under
these combined facilities during 1995 and 1994 was $230.5 and $219.1,
respectively, and the annual average borrowing during the year was
approximately $151.7 and $127.2, respectively, at average annual interest
rates of approximately 6.0% and 4.6%, respectively.
At December 31, 1995 and 1994, international lines of credit totaled
$320.0 and $276.4, respectively, of which $42.3 and $32.0 were outstanding,
respectively. The maximum borrowing under these facilities during 1995 and
1994 was $55.7 and $50.5, respectively, and the annual average borrowing
during the year was $43.9 and $38.9, respectively, at average annual interest
rates of approximately 10.5% and 10.8%, respectively. Such lines have no
compensating balances or fees.
At December 31, 1995 and 1994, Avon also has letters of credit
outstanding totaling $21.5 which guarantee various insurance activities. In
addition, Avon has outstanding letters of credit for various trade activities.
6. Income Taxes
Effective January 1, 1993, Avon adopted FAS No. 109, whereby 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:
1995 1994
---- ----
Deferred tax assets:
Postretirement benefits $ 86.8 $ 82.6
Accrued expenses and reserves 54.5 70.1
Employee benefit plans 40.1 27.0
Foreign operating loss carryforwards 37.5 29.5
Capital loss carryforwards 34.8 24.9
Postemployment benefits 12.2 12.6
All other 22.0 25.6
Valuation allowance (77.6) (69.5)
----- -----
Total deferred tax assets 210.3 202.8
----- -----
Deferred tax liabilities:
Depreciation (45.5) (46.6)
Prepaid retirement plan costs (48.1) (35.9)
Capitalized interest (16.3) (17.7)
Unremitted foreign earnings (11.0) (10.6)
All other (13.1) (14.1)
----- -----
Total deferred tax liabilities (134.0) (124.9)
----- -----
Net deferred tax assets $ 76.3 $ 77.9
======= ======
Deferred tax assets (liabilities) at December 31, were classified as
follows:
1995 1994
----- -----
Deferred tax assets:
Prepaid expenses and other $ 50.8 $ 45.5
Other assets 62.0 69.3
------ ------
Total deferred tax assets 112.8 114.8
------ ------
Deferred tax liabilities:
Income taxes (2.9) (4.7)
Deferred income taxes (33.6) (32.2)
------ -----
Total deferred tax liabilities (36.5) (36.9)
------ ------
Net deferred tax assets $ 76.3 $ 77.9
====== ======
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 includes the profitability of the
operations and related deferred tax liabilities.
50
Income from continuing operations before taxes and minority interest
for the years ended December 31, was as follows:
1995 1994 1993
---- ---- ----
United States $149.7 $127.3 $109.6
Foreign 315.3 306.5 285.0
------ ------ ------
Total $465.0 $433.8 $394.6
====== ====== ======
The provision for income taxes for the years ended December 31, was as follows:
1995 1994 1993
---- ---- ----
Federal:
Current $ 23.3 $ 34.0 $ 14.9
Deferred .9 (4.1) (3.5)
------ ------- ------
24.2 29.9 11.4
------ ------- ------
Foreign:
Current 146.2 119.8 141.0
Deferred (1.4) 6.1 (9.2)
------ ------ -----
144.8 125.9 131.8
------ ------ ------
State and other:
Current 7.5 7.5 8.5
Deferred (.1) .2 (.9)
------ ------ ------
7.4 7.7 7.6
------ ------ ------
Total $176.4 $163.5 $150.8
====== ====== ======
The effective tax rate for the years ended December 31, was as follows:
1995 1994 1993
---- ---- ----
Statutory federal rate 35.0% 35.0% 5.0%
State and local taxes, net of federal tax benefit 1.0 1.2 1.3
Tax-exempt operations (.7) (1.4) (1.8)
Taxes on foreign income, including translation 7.5 9.3 8.3
Utilization of net operating loss carryforwards (.1) (5.0) (.2)
Other (4.8) (1.4) (4.4)
----- ----- -----
Effective tax rate 37.9% 37.7% 38.2%
===== ===== =====
At December 31, 1995, Avon had foreign operating loss carryforwards of
approximately $103.3. The loss carryforwards expiring between 1996 and 2003
were $70.0 and the loss carryforwards which do not expire were $33.3. Capital
loss carryforwards, which expire between 1997 and 2000 and may be used to
offset capital gains, if any, were approximately $99.5 at December 31, 1995.
7. Financial Instruments and Risk Management
Risk Management - The Company operates globally, with manufacturing and
distribution facilities in various locations around the world. The Company may
reduce its exposure to fluctuations in interest rates and foreign exchange
rates by creating offsetting positions through the use of derivative
financial instruments. The Company 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 direct measure of the Company's exposure through its use
of derivatives.
Interest Rates - The Company periodically uses interest rate swaps to hedge
portions of interest payable on its debt. In addition, the Company may
periodically employ interest rate caps to reduce exposure, if any, to
increases in variable interest rates.
During a substantial portion of the three-year period ended December 31,
1995, the Company utilized interest rate swaps to effectively convert variable
interest on its long-term debt to a fixed interest rate. From November 1994
through July 10, 1995, due to the expiration of an interest rate swap, the
interest payable on the Notes became variable at a rate of one-month LIBOR
plus 1.4%. During the period, the Company had an interest rate cap in place
to reduce its exposure to increases in that variable interest rate above a
specified level. On July 11, 1995, the Company entered into a new interest
rate swap agreement, which effectively reconverted the interest payable on
the Notes to a fixed rate basis of approximately 7.2% through maturity.
Avon has three interest rate swap agreements on the Notes at December 31,
1995 (two at December 31, 1994), each such agreement having a notional
amount of $100.0 (1994 - $100.0), yielding an aggregate notional amount at
December 31, 1995 of $300.0 (1994 - $200.0). Effective January 1995, the
Company had two interest rate caps on the Notes, each with a notional amount
of $100.0, one of which expires in 1996 and the other expires when the Notes
mature. Subsequent to the interest rate on the Notes becoming fixed, these
caps have been marked-to-market and resulted in an insignificant mark-to-
market adjustment.
51
In December 1995, the Company entered into an interest rate cap contract
with a notional amount of $100.0, which expires in early 1997, in order to
hedge a portion of the Company's anticipated short-term variable interest
rate working capital debt. This cap has been marked-to-market with an
insignificant mark-to-market adjustment.
During 1993, Avon had a gain of $16.6 from the sale of interest rate swap
contracts on the Notes, which is being amortized over the remaining term of
the original swap agreements. As of December 31, 1995, the unamortized
balance was $8.2 (1994 - $11.7). 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 third-party
and intercompany foreign currency transactions. The Company regularly
monitors its foreign currency exposures and ensures that hedge contract
amounts do not exceed the amounts of the underlying exposures.
At December 31, 1995, the Company held foreign currency forward
contracts with notional amounts totaling $182.2 (1994 - $184.1) and option
contracts with notional amounts totaling $90.4 (1994 - $31.2) to hedge
foreign currency items. These contracts all have maturities prior to
December 31, 1996. The Company also entered into certain option contracts
with notional amounts of $8.2 to economically hedge certain foreign currency
exposures, which do not qualify as hedging transactions under the current
accounting definitions and, accordingly, have been marked-to-market. The
mark-to-market adjustment on these option contracts at December 31, 1995,
was insignificant. The Company's risk of loss on these options in the future
is limited to premiums paid, which are insignificant.
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:
1995 1994
--------------------- -----------------
Buy Sell Buy Sell
------ ------ ------ ------
Deutsche Mark $ 88.4 $ 19.8 $ 72.1 $ 10.4
Japanese Yen 35.6 45.0 40.0 -
Pound Sterling 4.4 44.9 - 53.2
Canadian Dollar 4.5 23.6 - 26.1
Other currencies 3.4 11.2 2.2 11.3
------ ------ ------ ------
Total $136.3 $144.5 $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, 1995. In addition, there
are other swap agreements in a net payable position of an insignificant
amount at December 31, 1995. 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 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.
52
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 and equity securities, is based on the quoted market prices for issues
listed on exchanges.
Debt maturing within one year and long-term debt - The fair value of all debt
is estimated based on the quoted market prices for issues listed on exchanges.
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:
1995 1994
---------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and equivalents $151.4 $151.4 $214.8 $214.8
Grantor trust 49.5 52.2 50.8 50.8
Debt maturing within one year (47.3) (47.3) (61.2) (62.1)
Long-term debt (132.9) (135.9) (125.5) (128.8)
Currency swap contract on long-term
debt 18.7 26.9 9.0 9.4
Other forward exchange and option
contracts 4.6 5.0 .5 2.1
Interest rate cap contracts .1 .1 1.4 2.5
Interest rate swap receivable .1 .1 - -
Interest rate swaps payable (.7) (11.3) (.7) (13.7)
8. 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, 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
Granted 715,162 56 - 72
Exercised (39,627) 23 - 53
Cancelled (3,227) 24 - 56
--------- --------
December 31, 1995 1,204,410 $23 - $72
========= ========
At December 31, 1995, options for 224,329 shares were exercisable at
prices ranging from $23 to $53 per share.
53
The 1993 Stock Incentive Plan ("1993 Plan") provides for several types of
equity-based incentive compensation awards. Under the 1993 Plan, the maximum
number of shares that may be awarded is 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 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 and are being amortized over a one to
five year period. During 1995, 48,000 restricted shares were granted under
the 1993 Plan with an aggregate value of $2.8 and vest and are being
amortized over a two to four 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 for potential cash incentives
and 10 year stock options. Performance units are earned over the three-year
performance period 1994-1996, based on the degree of attainment of performance
objectives. The cash target value of the performance units at December 31,
1995 was approximately $29.5. Options are awarded annually over the three-
year performance period and vest in thirds over the three-year period
following each option grant date. As discussed above, these options are
granted at the fair market value on the date the option is granted. As of
December 31, 1995, options on 125,000 shares of stock were exercisable
and are included in the total exercisable number above.
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 vested and were issued in early 1996.
During 1993, 48,090 restricted shares were issued under that plan, with an
aggregate value on the date of grant of $3.5. Expense is recorded as the
restricted shares vest over the periods established for each grant.
Compensation expense under all plans was $13.7 (1994 - $14.4;
1993 - $9.4). The unamortized cost as of December 31, 1995 was $5.0
(1994 - $7.2). The accrued cost of the performance units for the year ended
December 31, 1995 was $9.4 (1994 - $9.6).
In 1995, Avon contributed 46,178 (1994 - 59,520) shares of treasury stock
to an employees' savings plan and recognized expense for its fair value. In
addition, during 1995 the Company contributed an additional 52,000 shares,
for which the expense had been accrued at December 31, 1994. The expense
recognized for the plan in 1995 was $3.7 (1994 - $6.5; 1993 - $4.3).
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, 1995, Avon increased the regular dividend on
common shares to an annual rate of $2.20 per share from an annual rate of
$2.00. The first quarterly dividend at the new rate of $.55 per share was
paid on September 1, 1995.
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.
Stock Repurchase Program - During 1994, Avon's Board of Directors authorized
a stock repurchase program under which Avon may buy back 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, 1995, 4.8 million shares have been purchased for $295.1 which
is included in Treasury Stock.
54
9. 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. Net retirement plan expense for the years
ended December 31, was determined as follows:
1995 1994 1993
---- ---- ----
Service cost $ 33.4 $ 33.7 $33.6
Interest cost 58.5 54.2 55.3
Actual return on plan assets (121.1) 19.9 (77.4)
Net amortization (deferral) 66.4 (72.5) (19.8)
----- ----- -----
Net retirement plan expense $ 37.2 $ 35.3 $31.3
===== ===== =====
Retirement plan expense is determined using assumptions as of the
beginning of the year. The weighted average assumptions used to determine
the data for the years ended December 31, are as follows:
1995 1994 1993
---- ---- ----
Discount rate 8.2% 7.7% 7.7%
Rate of compensation increase 4.8 4.7 5.5
Rate of return on assets 9.3 9.2 9.5
The funded status of retirement plans at December 31, using assumptions
as of the end of the year, consisted of the following:
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
1995 1994 1995 1994
---- ---- ---- ----
Plan assets at fair value (primarily
listed stocks and bonds) $ 623.7 $ 519.4 $ 34.4 $ 42.7
------- ------- ------- -------
Present value of projected benefit
obligation
Accumulated benefit obligation
Vested (475.2) (385.1) (148.0) (133.6)
Nonvested (72.3) (54.5) (30.4) (29.5)
Projected compensation increases (88.3) (81.6) (38.9) (41.1)
------ ------ ------ ------
Projected benefit obligation (635.8) (521.2) (217.3) (204.2)
------ ------ ------ ------
Plan assets less than
projected benefit obligation (12.1) (1.8) (182.9) (161.5)
Unrecognized net loss 123.1 97.4 28.4 22.3
Unrecognized prior service cost 19.0 15.4 8.4 8.9
Unrecognized transition (gain) loss (29.0) (26.7) 11.6 10.6
Adjustment for additional liability - - (14.5) (7.3)
------ ------ ------ ------
Prepaid (accrued) retirement
plan cost $101.0 $ 84.3 $(149.0) $(127.0)
======= ======= ======= =======
At December 31, 1995 and 1994, the weighted average discount rates used
in determining the projected benefit obligations were 7.2% and 8.2%,
respectively.
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.
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 $4.4 (1994 - $3.9; 1993 -
$4.3). Such benefits will be paid from Avon's assets. The unfunded
55
accumulated benefit obligation under this plan at December 31, 1995 was
$21.5 (1994 - $15.5) 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, 1995 was $27.1 (1994 - $24.8)
and is held in a grantor trust.
Avon has established a grantor trust to provide funding for the benefits
payable under the SERP and SLIP. The trust is irrevocable and assets
contributed to the trust can only be used to pay such benefits with certain
exceptions. The assets held in the trust at December 31, 1995, amounted to
$76.6 (1994 - $75.6), 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:
1995 1994 1993
---- ---- ----
Service cost $ 4.0 $ 3.3 $ 3.3
Interest cost 16.3 15.2 14.2
----- ----- -----
Total postretirement benefit cost $20.3 $18.5 $17.5
===== ===== =====
The assumptions used to determine the data for the years ended December
31, are as follows:
1995 1994 1993
---- ---- ----
Discount rate 8.5% 8.5% 7.5%
Rate of assumed compensation increases 4.5 5.0 4.5
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:
1995 1994
---- ----
Retirees $158.3 $143.5
Other fully eligible participants 14.9 11.6
Other active participants 63.4 51.3
Unrealized (loss) gain (17.8) 3.4
----- -----
Accumulated postretirement benefits
obligation $218.8 $209.8
===== =====
At December 31, 1995 and 1994, the weighted average discount rates used
in determining the accumulated benefits obligation were 7.2% and 8.5%,
respectively.
The assumed rate of future increases in the per capita cost of health
care benefits (the health care cost trend rate) was 10.9% for 1995 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 have
increased the accumulated postretirement benefits obligation at December 31,
1995 by $27.9 and would have increased the 1995 annual postretirement benefits
expense by $2.7.
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 employees after employment but before retirement. At December 31, 1995,
the accrued cost for postemployment benefits was $35.8 (1994 - $38.8) and is
included in Employee Benefit Plans.
56
10. Geographic Information
Sales and pretax income by geographic area are presented on page 31.
Identifiable assets by geographic area at December 31, were as follows:
1995 1994 1993
---- ----- ----
United States $ 449.2 $ 414.2 $ 379.6
-------- -------- --------
International
Americas 498.4 463.9 366.6
Pacific 375.5 329.2 279.8
Europe 339.7 308.6 275.5
------- ------- -------
Total International 1,213.6 1,101.7 921.9
------- ------- -------
Corporate and other* 390.0 462.4 617.2
------- ------- -------
Total $2,052.8 $1,978.3 $1,918.7
======= ======= =======
*Includes Cash Equivalents of $60.5 (1994 - $132.5; 1993 - $159.7).
Foreign Exchange - Financial statement translation of subsidiaries operating
in highly inflationary economies and foreign currency transactions resulted
in losses netting to $8.3 (1994 - $6.8; 1993 - $5.2), 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 $4.7 (1994 - $23.9; 1993 - $34.7).
11. Leases and Commitments
Minimum rental commitments under noncancellable operating leases primarily
for equipment and office facilities at December 31, 1995, consisted of the
following:
Year
----
1996 $ 56.0
1997 41.2
1998 31.0
1999 21.2
2000 17.9
Later years 238.2
Sublease rental income (19.8)
------
Total $385.7(1)
======
(1) Includes leases for office facilities entered into in 1995 for U.S. and
global operations commencing in 1997.
Rent expense related to continuing operations was $78.0 (1994 - $94.0;
1993 - $90.9). Various construction and information systems projects were in
progress at December 31, 1995 with an estimated cost to complete of
approximately $27.9.
12. Contingencies
Various lawsuits and claims (asserted and unasserted), arising in the
ordinary course of business or related to businesses previously sold, are
pending or threatened against Avon.
In 1991, a class action lawsuit was initiated against Avon on behalf of
certain classes of holders of Avon's Preferred Equity-Redemption Cumulative
Stock ("PERCS"). This lawsuit alleges various contract and securities law
claims relating to the PERCS (which were fully redeemed that year). Avon has
rejected the assertions in this case, believes it has meritorious defenses to
the claims and is vigorously contesting this lawsuit.
In the opinion of Avon's management, based on its review of the information
available at this time, the difference, if any, between the total cost of
resolving such contingencies and reserves recorded by Avon at December 31,
1995 should not have a material adverse impact on Avon's consolidated
financial position or results of operations.
13. Subsequent Events
On February 1, 1996, Avon's Board of Directors voted a two-for-one stock
split of the Company's common stock. The stock split is contingent upon
shareholder approval, at the annual meeting of shareholders on May 2, 1996,
of a proposal to amend the Company's articles of incorporation to increase
the number of authorized shares of common stock. If the proposal is approved,
the stock split would become effective as soon as practicable after the
meeting. Financial information contained in this report has not been adjusted
to reflect the impact of the proposed common stock split.
Also, on February 1, 1996, Avon's Board of Directors approved an
increase in the quarterly cash dividend to $.58 per share from $.55. The
first dividend at the new rate will be paid on March 1, 1996, to shareholders
of record on February 14, 1996. On an annualized basis, the new dividend rate
will be $2.32 per share before the proposed stock split.
57
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, 1995 and 1994, 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, 1995.
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, 1995 and 1994, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1995, 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 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, 1996
58
Income data 1995 1994 1993 1992
------- ------- ------- -------
Net sales $4,492.1 $4,266.5 $3,844.1 $3,660.5
Interest expense 41.3 50.8 45.2 43.7
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 465.0 433.8 394.6 290.0(2)
Income from continuing
operations before minority
interest and cumulative
effect of accounting changes 288.6 270.3 243.8 169.4(2)
Income from
continuing operations 286.1 264.8 236.9 164.2(2)
Income (loss) from
discontinued operations, net (29.6) (23.8) 2.7 10.8
Cumulative effect of
accounting changes, net (1) - (45.2) (107.5) -
Net income (loss) 256.5 195.8 132.1 175.0(2)
Income (loss) per share of
common stock - assuming
full dilution(4)
Continuing operations $ 4.19 $ 3.75 $ 3.28 $ 2.28(2)
Discontinued operations (.43) (.34) .04 .15
Cumulative effect of
accounting changes - (.64) (1.49) -
Net income (loss) 3.76 2.77 1.83 2.43(2)
Cash dividends per share
Common $ 2.10 $ 1.90 $ 1.70 $ 1.50
Preferred - - - -
Balance sheet data
Working capital $ (30.3) $ 9.3 $ 23.1 $ (99.5)
Capital expenditures 72.7 99.9 58.1 62.7
Property, plant and
equipment, net 537.8 528.4 476.2 476.7
Total assets 2,052.8 1,978.3 1,918.7 1,692.6
Debt maturing within one year 47.3 61.2 70.4 37.3
Long-term debt 114.2 116.5 123.7 177.7
Total debt 161.5 177.7 194.1 215.0
Shareholders' equity 192.7 185.6 314.0 310.5
Number of employees
United States 8,000 7,900 8,000 8,700
International 23,800 22,500 21,500 20,700
------ ------ ------ ------
Total employees 31,800 30,400 29,500 29,400
====== ====== ====== ======
(1) Effective January 1, 1994, Avon adopted Statement of Financial
Accounting Standards ("FAS") No. 112, "Employers' Accounting for
Postemployment Benefits", for all applicable operations, and FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions",
for its foreign benefit plans. 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 6 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). 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.
59
Income data 1991 1990 1989 1988
------- ------- ------- -------
Net sales $3,441.0 $3,291.6 $2,998.3 $2,835.2
Interest expense 75.4 77.5 118.0 112.9
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 352.9 305.6 252.9 208.3
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 209.3 180.3 134.1 121.1
Income from
continuing operations 204.8 174.1 126.5 112.3
Income (loss) from
discontinued
operations, net (69.1) 21.2 (71.9) (536.8)
Cumulative effect
of accounting
changes, net (1) - - - 20.0
Net income (loss) 135.7 195.3 54.6 404.5
Income (loss) per share of
common stock - assuming
full dilution(4)
Continuing operations $ 2.86 $ 2.32 $ 1.63(5) 1.51(5)
Discontinued operations (.97) .28 (1.29)(5) (8.62)(5)
Cumulative effect of
accounting changes - - - .32(5)
Net income (loss) 1.89 2.60 .34(5) (6.79)(5)
Cash dividends per share
Common $ 4.40(6)$ 1.00 $ 1.00 $ 1.50
Preferred 1.011 2.00 2.00 1.00
Balance sheet data
Working capital $ (135.3) $ 71.6 $ 56.3 $ 51.0
Capital expenditures 61.2 36.3 33.3 46.0
Property, plant and
equipment, net 468.5 467.2 472.5 529.1
Total assets 1,693.3 2,010.1 1,994.1 2,362.6
Debt maturing within one year 143.8 207.1 151.7 205.6
Long-term debt 208.1 334.8 673.2 917.9
Total debt 351.9 541.9 824.9 1,123.5
Shareholders' equity 251.6 393.4 228.3 239.3
Number of employees
United States 9,200 9,500 9,400 9,700
International 20,900 20,300 19,900 18,400
------ ------ ------ ------
Total employees 30,100 29,800 29,300 28,100
====== ====== ====== ======
Income data 1987 1986 1985
------- ------- -------
Net sales $2,506.2 $2,235.1 $2,003.7
Interest expense 77.5 45.5 49.1
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 359.6(3) 205.0 171.2
Income from continuing
operations before minority
interest and cumulative effect
of accounting changes 224.8(3) 127.1 104.9
Income from
continuing operations 222.8(3) 126.7 105.0
Income (loss) from
discontinued operations, net (63.7) 32.0 (164.9)
Cumulative effect of
accounting changes, net (1) - - -
Net income (loss) 159.1(3) 158.7 (59.9)
Income (loss) per share of
common stock - assuming
full dilution(4)
Continuing operations $ 3.16(3) $ 1.78 $ 1.31
Discontinued operations (.90) .45 (2.07)
Cumulative effect of
accounting changes - - -
Net income (loss) 2.26(3) 2.23 (.76)
Cash dividends per share
Common $ 2.00 $ 2.00 $ 2.00
Preferred - - -
Balance sheet data
Working capital $ 122.2 $ 129.1 $ 186.6
Capital expenditures 45.9 57.5 47.2
Property, plant and
equipment, net 561.3 536.2 544.6
Total assets 2,419.6 2,143.0 2,188.0
Debt maturing within one year 62.8 104.6 54.5
Long-term debt 801.8 671.2 592.2
Total debt 864.6 775.8 646.7
Shareholders' equity 758.6 681.3 926.4
Number of employees
United States 10,500 10,800 10,000
International 18,100 17,700 18,200
------ ------ ------
Total employees 28,600 28,500 28,200
====== ====== ======