EXHIBIT 13
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Management's Discussion and Analysis
Avon Products, Inc.
Dollars in millions, except share data
The following discussion of the results of operations and financial condition of
Avon Products, Inc. ("Avon" or "Company") should be read in conjunction with the
information contained in the Consolidated Financial Statements and Notes
thereto. These statements have been prepared in conformity with generally
accepted accounting principles 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.
All share and per share data included in this report have been restated to
reflect two-for-one stock splits distributed in September 1998 and June 1996.
Forward-Looking Statement
Certain statements in this report which are not historical facts or information
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including, but not limited to, the information
set forth herein. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
levels of activity, performance or achievement of the Company, or industry
results, to be materially different from any future results, levels of activity,
performance or achievement expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general
economic and business conditions; the ability of the Company to implement its
business strategy; the Company's access to financing and its management of
foreign currency risks; the Company's ability to successfully identify new
business opportunities; the Company's ability to attract and retain key
executives; the Company's ability to achieve anticipated cost savings and
profitability targets; the impact of substantial currency exchange devaluations
in the Company's principal foreign markets; changes in the industry;
competition; the effect of regulatory and legal restrictions imposed by foreign
governments; the effect of regulatory and legal proceedings and other factors
discussed in Item 1 of the Company's Form 10-K. As a result of the foregoing
and other factors, no assurance can be given as to the future results and
achievements of the Company. Neither the Company nor any other person assumes
responsibility for the accuracy and completeness of these statements.
Results of Operations
Consolidated - Net income in 1998 was $270.0 compared with $338.8 in 1997. Basic
and diluted earnings per share in 1998 were $1.03 and $1.02, respectively,
compared with $1.28 and $1.27, respectively, in 1997.
Special and non-recurring charges were recorded in the first and third quarters
of 1998 for the Company's previously announced business process redesign
program. These charges totaled $154.4 pretax, which reduced net income by
$122.8 after tax, or $.46 per share on a basic and diluted basis. See Note 13
of the Notes to Consolidated Financial Statements for further discussion of this
program. Before the charges, net income for the year ended December 31, 1998 of
$392.8 increased 16% over 1997. Earnings per share before the charges of $1.49
and $1.48 on a basic and diluted basis, respectively, increased 16% and 17%,
respectively, from the comparable period in 1997. The 1997 results include the
favorable settlement of a value-added tax claim in the United Kingdom equal to
approximately $26.5 on a pretax basis. The $26.5 gain represents a $20.6
settlement of disputed value-added tax charges from prior years, which is
included in other (income) expense, net and $5.9 of interest which is included
in interest income. The net effect of this gain was to increase 1997 net income
by $16.7 and both basic and diluted earnings per share by $.06. Net income for
1996 was $317.9 and basic and diluted earnings per share were $1.19 and $1.18,
respectively.
Excluding the charges, operating profit was $633.9, or 17% over 1997 due to
higher sales and an improved gross margin, partially offset by a higher
operating expense ratio in 1998. Excluding the impact of foreign exchange,
operating profit increased 27% over 1997. The improvement in operating profit
combined with a favorable foreign exchange impact was partially mitigated by the
1997 value-added tax settlement in the United Kingdom. As a result, pretax
income before the charges, rose $75.4, or 14%, over 1997. Net income was also
impacted by a lower effective tax rate in 1998 and by favorable minority
interest due mainly to the results in China.
On a consolidated basis, Avon's net sales of $5.21 billion increased 3%
from $5.08 billion in 1997. Sales in North America increased 5% to $2.06 billion
primarily due to a 5% increase in the U.S. attributable mainly to a higher
average order size. International sales increased 1% to $3.15 billion from
$3.11 billion due to strong growth in Latin America, most significantly in
Brazil, Mexico, Argentina and Venezuela, as well as in Europe reflecting
improvements in the United Kingdom and Poland. These increases
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were partially offset by sales declines in the Pacific, most significantly in
Japan, China and the Philippines. Excluding the impact of foreign exchange,
consolidated net sales rose 9% over the prior year. In 1997, consolidated net
sales of $5.08 billion increased 6% from $4.81 billion in 1996. International
sales increased 7% to $3.11 billion from $2.92 billion in 1996 due to strong
growth in Latin America, most significantly in Mexico, Argentina, Chile and
Venezuela, and in the United Kingdom, Russia, Central Europe and the Pacific
Rim, primarily Taiwan and the Philippines. These improvements were partially
offset by sales declines in Germany, Brazil and Japan. Sales in North America
increased 4% to $1.97 billion primarily due to the 1997 acquisition of Discovery
Toys and an increase in the U.S. average order size partially offset by a
decrease in the number of Representative orders. Excluding the impact of
foreign currency exchange, 1997 consolidated net sales rose 10% over 1996.
Cost of sales as a percentage of sales was 39.4% in 1998, compared with 40.4% in
1997. The 1998 cost of sales includes $37.9 of a non-recurring charge for
inventory write-downs related to the Company's business process redesign
program. The charge relates to the closure of facilities, discontinuation of
certain product lines, size-of-line reductions and a change in strategy for
product dispositions. See Note 13 of the Notes to the Consolidated Financial
Statements for further discussion of these charges. Excluding the charge, cost
of sales as a percentage of sales was 38.7%, a 1.7 point improvement from 1997.
This improvement was primarily due to a higher margin in Brazil, reflecting
actions taken in 1997 to reduce inventory levels combined with cost reduction
programs in 1998. Additionally, the gross margin in Venezuela improved as a
result of pricing strategies and business redesign efforts. Japan's gross margin
improved as a result of cost reduction initiatives, and the U.S. improved its
margin through pricing strategies, cost improvements and reduced clearance
activity in the non-cosmetics, fragrance and toiletries categories. In 1997,
cost of sales as a percentage of sales was 40.4%, compared with 39.9% in 1996.
The decline in gross margin was primarily due to unfavorable cost ratios in
Japan, resulting from an aggressive pricing strategy and a shift in sales mix to
lower-margin items, and in Brazil, reflecting a consumer shift towards lower-
priced products as well as actions taken to reduce inventory levels. These
declines were partially offset by a margin improvement in the United Kingdom due
to a shift in sales mix to higher-margin items.
Marketing, distribution and administrative expenses of $2.56 billion
increased $79.4, or 3%, from 1997 and increased as a percentage of sales to
49.2% from 48.9% in 1997. Increased operating expenses in the U.S. were
attributable primarily to the sales growth. Operating expenses grew in Brazil
in 1998 due to higher sales and increased marketing programs. Mexico's
operating expenses were higher in 1998 reflecting sales growth driven by
increased incentive programs and higher brochure costs to support the growth in
Representatives. These increases were partially offset by lower expenses in the
Pacific due to lower sales and the impact of currency devaluations. The overall
increase in the expense ratio was due to higher expense ratios in Mexico due to
increased marketing and promotional expenses associated with new product
launches, in Venezuela due to increased administrative expenses as a result of
the implementation of a new labor law, in Argentina due to increased marketing
expenses and in China reflecting the shutdown of sales operations for most of
the second quarter of 1998. In 1997, marketing, distribution and administrative
expenses of $2.48 billion increased $136.1, or 6%, from 1996 and increased
slightly as a percentage of sales to 48.9% from 48.8% in 1996. The increase in
operating expenses was attributed to markets which had experienced strong sales
growth, including Mexico, the United Kingdom, Russia, Taiwan and Venezuela.
Operating expenses in the U.S. increased due to higher strategic spending in
advertising and promotional support for new launches, the national rollout of
Avon Home and costs associated with the centralization of certain operational
areas. In addition, operating expenses in China were higher due to expenses
incurred in preparation for the planned opening of 24 new branches during 1997
which were not put into operation because of new government recertification
requirements on direct selling activities. These increases were partially
offset by lower expenses in Germany due mainly to the impact of a stronger U.S.
dollar in 1997.
Special charges of $116.5 were recorded in 1998 for the Company's business
process redesign program. These charges are primarily related to employee
severance benefits and facility rationalizations in Puerto Rico, the Dominican
Republic, Hong Kong and China as well as asset write-downs associated with the
divestiture of the Discovery Toys
business unit. See Note 13 of the Notes to the Consolidated Financial
Statements for further discussion of these charges.
Interest expense in 1998 of $41.0 was $.8 favorable to prior year due to
lower cost of borrowings. Interest expense in 1997 of $41.8 increased $1.8
compared to 1996 primarily due to increased domestic debt levels partially
offset by lower average debt outstanding in Brazil in 1997.
Interest income in 1998 of $15.9 decreased $.8 compared to 1997 primarily
due to the interest portion of the 1997 favorable value-added tax settlement in
the United Kingdom, partially offset by a Mexico tax refund claim, as well as
higher interest rates and increased average short-term investments in Brazil in
1998. Interest income in 1997 of $16.7 increased $2.2 compared to 1996 due to
the interest portion of the value-added tax settlement in the United Kingdom
partially offset by lower interest rates in Brazil and lower cash investment
levels in the U.S.
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Other (income) expense, net, was $14.4 unfavorable to 1997. Excluding the
1997 value-added tax settlement in the United Kingdom, other (income) expense,
net was $6.2 favorable primarily due to favorable foreign exchange. In 1997,
other (income) expense, net, was $24.8 favorable to 1996 due to the $20.6
portion of the value-added tax settlement in the United Kingdom as well as lower
foreign exchange losses in 1997.
Income taxes were $190.8 in 1998 and the effective tax rate was 41.9%
compared with $197.9 and an effective tax rate of 37.0% in 1997. Excluding the
effect of the special and non-recurring charges, income taxes were $222.4 and
the effective tax rate was 36.4%. The 36.4% effective tax rate was lower in
1998 due to the mix of earnings and income tax rates of the international
subsidiaries. In 1997, the effective tax rate was 37.0% compared with 37.5% in
1996. The effective tax rate was lower in 1997 due to the mix of earnings and
income tax rates of international subsidiaries.
Inflation in the United States has remained at a relatively low level
during the last three years and has not had a major effect on Avon's results of
operations. Many countries in which Avon has operations have experienced higher
rates of inflation than the United States. Mexico, Venezuela and Russia
experienced high cumulative rates of inflation over the three-year period 1996
through 1998. However, Mexico will be converted to non-hyperinflationary status
beginning January 1, 1999 due to reduced cumulative inflation rates during the
past three years.
Below is an analysis of the key factors affecting net sales and operating
profit by reportable segment for each of the years in the three-year period
ended December 31, 1998.
Years ended December 31 1998 1997 1996
Net Operating Net Operating Net Operating
Sales Profit Sales Profit Sales Profit
North America:
U.S. $1,774.0 $ 302.8 $1,696.7 $ 261.8 $1,672.5 $ 267.4
Other 287.6 40.2 275.4 35.1 224.3 34.4
-------- ------- -------- ------- -------- -------
Total 2,061.6 343.0 1,972.1 296.9 1,896.8 301.8
International*
Latin America 1,665.1 344.4 1,513.3 280.0 1,385.6 273.3
Pacific 623.3 62.5 782.4 67.0 751.1 77.0
Europe 862.7 108.5 811.6 91.7 780.7 67.4
-------- ------- -------- ------- -------- -------
Total 3,151.1 515.4 3,107.3 438.7 2,917.4 417.7
Total from operations $5,212.7 858.4 $5,079.4 735.6 $4,814.2 719.5
======== ======= ======== ======= ======== =======
Global expenses (224.5) (191.5) (174.7)
Special and non-recurring
charges (154.4) - -
Operating profit $ 479.5 $ 544.1 $ 544.8
======= ======= =======
* Excludes Canada, Dominican Republic and Puerto Rico which are now included in
North America.
Note: 1997 and 1996 data have been restated to reflect the Company's segments on
an operating profit basis. See Note 11 of the Notes to the Consolidated
Financial Statements for further details.
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North America - Sales in North America increased 5% to $2.06 billion and
operating profit increased 16% to $343.0 in 1998. The U.S. business, which
represents almost 90% of the North American segment, reported sales and
operating profit growth of 5% and 16%, respectively. Sales growth in the U.S.
reflected a 4% increase in the average order size coupled with a 1% increase in
the number of Representative orders. The sales improvement resulted from
increases in fashion jewelry and accessories, cosmetics, fragrance and
toiletries ("CFT") and home entertainment categories partially offset by a
decline in the gift and decorative category. Sales of fashion jewelry and
accessories rose significantly over the prior year, primarily in the accessories
segment, with the success of such products as organizer handbags, the Home Run
Hero watch introduced in the fourth quarter and increased sales of licensed
products, including Winnie the Pooh carryalls and sports watches. Growth in the
CFT category was driven by successful launches of Rare Rubies, Anew Retinol Hand
Complex, the Diane Von Furstenberg fragrance, Forest Lily. In addition, the
success of Avon's transfer resistant technology lipstick and Avon Color's Spring
Shade Collection combined with continued growth of the Avon Techniques hair care
and Skin-So-Soft lines contributed to the growth in CFT. Higher sales in the
home entertainment category were driven by the launch of a collection of
inspirational and religious products, as well as an increase in the sales of
demonstration products purchased by Representatives. These increases were
partially offset by a decline in the gift and decorative category resulting from
the phasing out of the Avon Home line and lower sales of Barbie and holiday
products in 1998. The improvement in U.S. operating profit was mainly a result
of the above sales increase combined with a favorable gross margin driven by
cost improvements, revised pricing strategies and reduced clearance activity.
In 1997, North American sales increased 4% to $1.97 billion and operating
profit decreased 2% to $296.9. Sales in the U.S. segment rose 1% to $1.70
billion and operating profit decreased 2% to $261.8. The 1% sales growth
reflected a 3% increase in average order size partially offset by a 2% decrease
in the number of Representative orders. Units sold in the U.S. increased 4%
over 1996. The U.S. sales improvement resulted from increases in the CFT and
gift and decorative categories partially offset by declines in apparel. The
growth in the CFT category was driven by the launches of Anew Retinol Recovery
Complex and Avon Techniques hair care line in addition to the first quarter 1997
product introductions in the specialty bath segment, such as California Bath and
the Soft and Sensual line extension of the Skin-So-Soft brand. Additionally, the
renovated Anew launch in early 1997 contributed to higher CFT sales. The
continued success of the seasonal Barbie dolls, the launch of Avon Home and the
success of the Mattel line of toys led to the increase in gift and decorative
sales. Apparel sales were lower in 1997 due to the success of the Olympic Games
collection in 1996 and lower sales of demonstration products in the first two
quarters of 1997. The decrease in operating profit resulted from a lower gross
margin and a higher operating expense ratio. The decline in gross margin was
due to strategic price investments in CFT products aimed at energizing customer
sales and the addition of Avon Home, a lower-margin new business. The
unfavorable operating expense ratio was driven by higher expenses related to
advertising and promotional support for new products, costs associated with the
centralization of the returned goods and call center operations and increased
field incentives designed to drive sales. In addition, operational costs
associated with higher returned goods processing in 1997 contributed to the
unfavorable expense ratio.
International - International sales increased 1% to $3.15 billion and operating
profit increased 17% to $515.4 from $438.7 in 1997. The sales growth resulted
from strong growth in Latin America, particularly in Brazil, Mexico, Argentina
and Venezuela, as well as in Europe reflecting improvements in the United
Kingdom and Poland. These results were significantly offset by sales declines
in the Pacific, most significantly in Japan, China and the Philippines.
Excluding the impact of foreign currency exchange, international sales rose 11%
and operating profit increased 30% over 1997.
In Latin America, sales increased 10% to $1.67 billion and operating
profit increased 23%, or $64.4, to $344.4 in 1998. The sales improvement
resulted from strong growth in Brazil and, to a lesser extent, Mexico, Argentina
and Venezuela. Brazil's growth in sales was driven by attractive pricing and
successful new product launches, which resulted in strong double-digit increases
in units and orders in 1998. Additionally, the number of active Representatives
rose 31% from 1997. Mexico's sales increase was driven by successful new
product launches including Anew Night Force, Yessamin fragrance and Women of
Earth, as well as increases in the apparel and home line extensions which
offered superior design and promotions in 1998. Argentina and Venezuela
reported strong increases in units, orders and customers served. Excluding the
impact of foreign currency exchange, sales in Latin America rose 19% over 1997.
The increase in the region's operating profit was primarily due to favorable
results in Brazil attributable to the strong sales increase and an improved
gross margin and operating expense ratio. Brazil's gross margin improvement
resulted from actions taken in 1997 to reduce inventory levels as well as better
vendor negotiations and continued cost reduction programs in 1998. The
favorable operating expense ratio was driven by the strong sales increase.
Operating profit improvements in Mexico due to the sales increase, and in
Venezuela due to pricing strategies and business redesign efforts, contributed
to the region's growth in operating profit. Excluding the impact of foreign
currency exchange, operating profit in Latin America increased 34% over the
prior year.
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In the Pacific Region, sales decreased 20% to $623.3 in 1998 and operating
profit decreased 7% to $62.5 from $67.0 in 1997. The decline in sales resulted
from decreases in every major market, most significantly in Japan, China and the
Philippines. The Asian currency and economic crisis which began in mid-1997
continued throughout 1998 and negatively impacted results in the Pacific. The
general economic environment is poor with low consumer confidence and reduced
spending. Excluding the impact of foreign currency exchange, sales decreased
3%, a 17 point differential from U.S. dollar reported results. In addition,
selling activities in China were suspended for most of the second quarter of
1998 due to governmental restrictions on direct-selling companies. As of the
beginning of June, the Company received Chinese governmental approval to resume
operations as a wholesale and retail business and became operational again in
mid-June. The Company converted its branches into retail outlets to serve
customers and received approval to utilize sales promoters, much like
Representatives, to promote product sales in China. Despite the above
difficulties, most markets showed growth in active Representatives and number of
customers served resulting from a strong focus on active recruitment to expand
the Representative base throughout the region. The Philippines posted double-
digit increases in orders, customers served and active Representatives. Local
currency sales in the Philippines increased 10% over the prior year. The
decrease in the region's operating profit resulted primarily from declines
discussed above. Despite the sales decline, Japan's operating profit increased
significantly over the prior year as a result of improvements in gross margin
and operating expense ratio. Japan's margin improvements resulted from cost
reduction strategies and the elimination of many lower-margin products in 1998.
Additionally, business process redesign efforts have resulted in lower operating
expenses. Excluding the impact of foreign currency exchange, operating profit
in the Pacific increased 19% from 1997.
In the Europe Region, sales increased 6% to $862.7 and operating profit
increased $16.8, or 18%, to $108.5 in 1998. The sales increase was primarily
due to growth in the United Kingdom resulting from a higher average order size
in 1998. The United Kingdom continues to focus on developing the core business
through Representatives, growth in orders and customers as well as brand
awareness and image enhancement. In addition, Poland's sales increased
significantly from 1997 as a result of dramatic growth in active Representatives
and all business fundamentals including units, orders and customers served.
These improvements were partially offset by sales shortfalls in Russia
attributable to the devaluation of the Russian ruble in August 1998. Average
orders have declined significantly in Russia due to low consumer purchasing
power. In response to this situation, several actions have been taken by local
management including pricing flexibility to maintain and build market share and
reduce credit sales, as well as a tightening of expense controls. Geographic
expansion into new cities has also been deferred. The devaluation negatively
affected Russia's U.S. dollar results in 1998. Excluding the impact of foreign
currency exchange, sales in Europe and Russia increased 10% and 26%,
respectively, from prior year. The increase in the region's operating profit
was due to the overall sales increase combined with an improved operating margin
in the United Kingdom. A shift in sales mix to higher-margin items contributed
to a gross margin improvement, and continued active expense management led to a
favorable operating expense ratio in the United Kingdom. These increases were
partially offset by operating profit declines in Russia mainly due to the
devaluation of the ruble discussed above. Excluding the impact of foreign
currency exchange, operating profit in Europe increased 25% over 1997.
In 1997, international sales increased 7% to $3.11 billion and operating profit
increased 5% to $438.7. The sales increase reflected strong growth in Latin
America, particularly in Mexico, Argentina, Chile and Venezuela, and in the
United Kingdom, Russia, Central Europe and the Pacific Rim, most significantly
in Taiwan and the Philippines. These improvements were partially offset by
sales declines in Germany, Brazil and Japan, discussed below. Excluding the
impact of foreign currency exchange, international sales grew 13% over 1996.
In Latin America, 1997 sales increased 9% to $1.51 billion and operating
profit increased 2%, or $6.7, to $280.0 from $273.3 in 1996. The sales
improvement was driven by tremendous growth in Mexico reflecting strong
increases in the number of orders, average order size and active Representatives
primarily due to customer growth initiatives. These initiatives included
incentive programs focused on retention, increased sampling on breakthrough
products such as Anew Vitamin C, increased advertising and an emphasis on market
penetration in metropolitan areas. The sales increase in the region also
reflected significant unit growth in Argentina and Chile and an increased
average order size in Venezuela. In addition, Central American markets posted
strong sales increases in 1997 attributable to growth in units and active
Representatives. These improvements were partially offset by a significant
sales decline in Brazil. In 1997, consumers in Brazil experienced a tightening
of credit which limited their purchasing ability resulting in declines in units
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sold and active Representatives. To improve Representative count, aggressive
retention and achievement programs were implemented including incentives and
premiums to improve activity and order size. Excluding the impact of foreign
currency exchange, sales in Latin America were up 15% over 1996. The increase
in the region's operating profit was primarily due to favorable results in
Mexico reflecting the strong sales increase, described above, combined with a
favorable operating expense ratio. In addition, operating profits were higher
in Argentina and Chile due mainly to the sales growth. These improvements were
partially offset by a lower operating profit in Brazil due to a significant
gross margin decline and an unfavorable operating expense ratio. The gross
margin decline resulted from a shift in consumer preferences towards lower-
priced products and margin investments relating to inventory reduction efforts.
The unfavorable operating expense ratio in Brazil was driven by the sales
decline. Actions were taken in Brazil to reduce manufacturing and customer
service costs, negotiate better terms and costs with vendors and introduce more
global products with a higher price and improved margin.
In the Pacific Region, 1997 sales increased 4% to $782.4 and operating profit
decreased 13% to $67.0 from $77.0 in 1996. The increase in sales was driven by
operational improvements in the Pacific Rim, most significantly in Taiwan and
the Philippines. Growth in units, customers served and active Representatives
was significant in both Taiwan and the Philippines. Taiwan's sales performance
was the strongest in the region resulting from successful merchandising
campaigns, product launches supported by strong advertising and promotional
activities, including the introduction of Lighten Up Undereye Treatment and
effective field sales programs in 1997. The sales growth in the Philippines was
driven by successful new and extended CFT lines, a new line of children's
apparel and an additional service center in 1997. These improvements were
partially offset by a significant sales decline in Japan due primarily to an
unfavorable exchange impact of a stronger U.S. dollar in 1997 and a reduction in
the average order size. Excluding the impact of foreign currency exchange,
sales in the Pacific were up 14%. The decrease in the region's operating profit
resulted from declines in Japan and, to a lesser extent, in China. The gross
margin in Japan declined significantly as a result of strategic pricing programs
as well as a shift in sales mix to lower-margin non-CFT items. The competitive
environment remained intense in Japan with the continued relaxation of import
restrictions and the accelerated growth in discount outlets. As a result,
prices were adjusted in early 1997 to make products more competitive in the
marketplace. Efforts were focused on restructuring the business in Japan for
improved profitability, including innovative recruiting programs, enhanced
advertising campaigns and new systems focused on improving customer access.
Despite sales growth in China, operating profits declined due to the government
licensing revalidation process of all direct selling companies. As a result, no
new branches were opened in 1997, but the expense base associated with the
planned expansions negatively impacted China's operating profit. The region's
operating profit was also negatively impacted by currency devaluations
throughout Southeast Asia.
Several currencies in the Pacific Rim devalued significantly during 1997.
The Thai baht devalued by 57%, the Philippine peso by 34%, the Malaysian ringgit
by 39% and the Indonesian rupiah by 61%. These devaluations lowered pretax
income by approximately $7.0 for the full year. In response to this situation,
several actions were taken by local management, including cost negotiations with
vendors and a focus on growing the Representative base. In terms of size, these
markets represented approximately 5% of Avon's consolidated net sales in 1997.
In the Europe Region, 1997 sales increased 4% to $811.6 and operating
profit increased $24.3, or 36%, to $91.7. The sales increase was primarily due
to strong growth in the United Kingdom resulting from an increased average order
size, unit growth and a favorable exchange rate impact. The sales growth in the
United Kingdom was also attributable to a focus on improving market share
through brand and image enhancement. Customers were spending more in 1997 as a
function of the improvement in image and the quality of the Avon brochure. The
European sales improvement was also driven by unit and active Representative
growth in Russia and in Central Europe, primarily Poland. Russia continued to
exceed expectations as the most successful startup market in Avon's history.
Russia's success was attributable to a strong Representative structure,
geographic expansion into new cities, installation of new assembly lines which
increased capacity and investment in system upgrades to support the sales
growth. These improvements were partially offset by sales shortfalls in Germany
resulting from an unfavorable exchange impact of a stronger U.S. dollar in 1997
and a weak economic environment which led to lower consumer spending and higher
unemployment. Excluding the impact of foreign currency exchange, sales in
Europe increased 11% over 1996. The increase in operating profit was mainly due
to the overall sales increase and an improved gross margin in the United Kingdom
resulting from a favorable product mix of higher-margin items in 1997.
Additionally, the continued effect of expense reduction efforts in Europe
contributed to a lower operating expense ratio.
See Foreign Operations section under Liquidity and Capital Resources for
additional discussion.
36
Global Expenses - Global expenses were $224.5 in 1998 compared with $191.5 in
1997. The $33.0 increase reflected increased expenses in 1998 associated with
information technology system and global marketing initiatives and higher
expenses for incentive compensation programs primarily due to the improved
operating results in 1998. In 1997, global expenses were $16.8 unfavorable
compared with 1996 primarily due to process redesign and system initiatives.
Accounting Changes - Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive
Income". This statement establishes standards for the reporting and
presentation of comprehensive income and its components in a full set of
financial statements. As shown in the statements of changes in shareholders'
equity and Note 5 of Notes to the Consolidated Financial Statements,
comprehensive income includes all changes in equity during a period, except
those resulting from investments by and distributions to the Company's
stockholders. As this standard only requires additional information in the
financial statements, it does not affect the Company's results of operations or
financial position.
Effective January 1, 1998, the Company adopted FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which changes the way the
Company reports information about its operating segments. The information for
1997 and 1996 has been restated from that previously reported in order to
conform with the current year's presentation. FAS No. 131 requires a new basis,
entitled the management approach, for determining reportable segments. This
approach is based on the way management organizes segments within a company for
making operating decisions and assessing performance. FAS No. 131 also
establishes standards for supplemental disclosure about products and services,
geographical areas and major customers. Segment results for the three years
ended December 31, 1998 are presented in Note 11.
Effective January 1, 1998, the Company adopted FAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". FAS No. 132
standardizes the disclosure requirements for pensions and other postretirement
benefits, although it does not impact the measurement or recognition of those
benefits. There was no impact on the Company's results of operations or
financial position in adopting this statement. Prior years' information has
been restated to conform with the requirements of FAS No. 132.
Effective January 1, 1998, the Company adopted AICPA Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP No. 98-1 requires certain costs in connection
with developing or obtaining internally used software to be capitalized that
previously would have been expensed as incurred. The adoption of SOP No. 98-1
did not have a material impact on the Company's results of operations, financial
position or cash flows.
Effective December 31, 1997, the Company adopted FAS No. 128, "Earnings per
Share". FAS No. 128 establishes standards for computing and presenting earnings
per share ("EPS") and replaces the presentation of previously disclosed EPS with
both basic and diluted EPS. Based upon the Company's capitalization structure,
the EPS amounts calculated in accordance with FAS No. 128 approximated the
Company's EPS amounts in accordance with Accounting Principles Board Opinion No.
15, "Earnings per Share". All prior period EPS data have been restated in
accordance with FAS No. 128.
Effective January 1, 1996, the Company adopted the fair value disclosure
requirements of FAS No. 123, "Accounting for Stock-Based Compensation". As
permitted by the statement, the Company did not change the method of accounting
for its employee stock compensation plans. See Note 8 of the Notes to the
Consolidated Financial Statements for the fair value disclosures required under
FAS No. 123.
Recent Pronouncements - In June 1998, the Financial Accounting Standards Board
issued FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". FAS No. 133 is effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999 (January 1, 2000 for the Company). FAS No.
133 requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction. For fair-value hedge
transactions in which the Company is hedging changes in the fair value of an
asset, liability or firm commitment, changes in the fair value of the derivative
instrument will be included in the income statement along with the offsetting
changes in the hedged item's fair value. For cash-flow hedge transactions in
which the Company is hedging the variability of cash flows related to a variable
rate asset, liability or a forecasted transaction, changes in the fair value of
the derivative instrument will be reported in other comprehensive income. The
gains and losses on the derivative instruments that are reported in other
comprehensive income will be reclassified to earnings in the periods in which
earnings are impacted by the variability of the cash flows of the hedged item.
The ineffective portion of all of the hedges will be recognized in current
period earnings. The Company has not yet determined the impact that the
adoption of FAS No. 133 will have on its results of operations or financial
position.
37
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, 1998 should not have a material adverse impact on Avon's
consolidated financial position, results of operations or cash flows.
Liquidity and Capital Resources
Cash Flows - Net cash provided by continuing operations was $324.4 in 1998
compared to $315.5 in 1997. The 1998 increase principally reflects, among other
things, a lower working capital level partially offset by lower adjusted net
income. The lower funding of working capital included the 1997 settlement of
tax issues in the U.S. A more detailed analysis of the individual items
contributing to the 1998 and 1997 amounts is included in the Consolidated
Statements of Cash Flows.
There was no cash used by discontinued operations in 1998 and 1997,
compared to $38.2 in 1996. The $38.2 cash used in 1996 primarily reflected
final payment of a settlement reached with a discontinued operation,
Mallinckrodt, in December 1995.
Excluding changes in debt and other financing activities, net cash usage of
$117.6 in 1998 was $19.7 favorable compared to net cash usage of $137.3 in 1997.
During 1998 and 1997, the Company received net proceeds of approximately $58.1
and $58.6, respectively, under securities lending transactions which were used
to repay domestic commercial paper borrowings and are included in the cash flows
as other financing activities. See Note 4 of the Notes to the Consolidated
Financial Statements for further discussion of these transactions. The $19.7
variance reflects a favorable exchange rate impact on cash and higher cash
provided by continuing operations. These sources were partially offset by
higher capital expenditures and increased dividend payouts in 1998. In 1997,
excluding changes in debt and other financing activities, there was a net
increase in cash usage of $130.7. This variance reflected lower cash provided
by continuing operations, higher capital expenditures and an unfavorable
exchange rate impact on cash. These uses were partially offset by the
unfavorable impact of discontinued operations reflected in 1996 cash flows and
lower repurchases of common stock in 1997. For the period 1994 through 1998,
32.1 million shares of common stock have been purchased for approximately $641.5
under the stock repurchase programs. See Note 9 of the Notes to Consolidated
Financial Statements for further details of the stock repurchase programs.
Working Capital - At December 31, 1998, current assets exceeded current
liabilities by $11.9 while at the end of 1997, current liabilities exceeded
current assets by $11.9. This increase of $23.8 is primarily due to lower net
debt (debt less cash and equivalents) which resulted from the repayment of
$100.0 reclassified as short-term debt in 1997 on the 6-1/8% deutsche mark notes
and lower accounts payable. In addition, higher receivables, partially offset
by lower inventory levels, as discussed in the Inventories section, and higher
accrued compensation resulting from increased incentive compensation expense in
1998 also contributed to the variance.
Avon's liquidity results from its ability to generate significant cash flows
from operations and its ample unused borrowing capacity. Avon's credit
agreements do not contain any provisions or requirements with respect to working
capital.
Capital Resources - Total debt of $256.3 at December 31, 1998 increased $22.0
from $234.3 at December 31, 1997, compared with an increase of $32.7 from
December 31, 1996. In addition, at December 31, 1998 and 1997, other non-
current liabilities included approximately $112.4 and $58.1, respectively,
related to securities lending activities. See Note 4 of the Notes to
Consolidated Financial Statements for further discussion of these activities.
During 1998 and 1997, cash flows from continuing operations and other financing
activities combined with cash on hand and higher debt levels were used for
dividends, repurchase of common stock and capital expenditures. During 1996,
cash flows from continuing operations and higher debt levels, partially offset
by higher cash and equivalents, were used for dividends, the stock repurchase
program, capital expenditures, a payment made related to discontinued operations
and the purchase of a company in South Africa.
At December 31, 1998, debt maturing within one year consists of borrowings
from banks of $53.9 and the current maturities of long-term debt of $1.4.
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.
In May 1998, Avon issued $100.0 of bonds embedded with option features (the
"bonds") to pay down commercial paper borrowings. The bonds have a twenty-year
maturity; however, after five years, the bonds, at the holder's option, can be
sold back to the Company at par or can be called at par by the underwriter and
resold to
38
investors as fifteen-year debt. The coupon rate on the bonds is 6.25% for the
first five years, but will be refinanced at market rates if the bonds are called
in year five.
In connection with the bond issuance, Avon entered into a five-year
interest rate swap contract with a notional amount of $50.0 to effectively
convert fixed interest on a portion of the bonds to a variable interest rate,
based on LIBOR.
During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007
to pay down commercial paper borrowings.
During 1996, the Company entered into an agreement, which expires in 2001,
with various banks to amend and restate the five-year, $600.0 revolving credit
and competitive advance facility agreement. Within this facility, the Company
is able to borrow, on an uncommitted basis, various foreign currencies. The new
agreement and the prior agreement are referred to, collectively, as the credit
facility.
The credit facility is primarily to be used to finance working capital,
provide support for the issuance of commercial paper and support the stock
repurchase program. At the Company's option, the interest rate on borrowings
under the credit facility is based on LIBOR, prime or federal fund rates. The
credit facility has an annual facility fee of $.4. The credit facility contains
a covenant for interest coverage, as defined. The Company is in compliance with
this covenant. There were no borrowings outstanding at December 31, 1998 and
1997.
The Company has uncommitted lines of credit available of $65.0 with various
banks which have no compensating balances or fees. As of December 31, 1998 and
1997, there were no borrowings under lines of credit or bankers' acceptance
facilities. In addition, as of December 31, 1998 and 1997, there were
international lines of credit totaling $329.5 and $295.8, respectively, of which
$53.9 and $29.4 were outstanding, respectively. There were 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. Inventories of $538.4
at December 31, 1998 were $26.4 lower than 1997 due mainly to reduced
inventory levels in the U.S. The decrease in the U.S. results from improvements
in CFT related to the implementation of supply chain initiatives which resulted
in reduced cycle times, reorder quantity reductions, reduced overstocking and
lower component prices. In addition, write-downs in fashion jewelry and
accessories and apparel associated with the Company's business process redesign
program contributed to the decrease. See Note 13 of the Notes to Consolidated
Financial Statements for further discussion of the business process redesign
program. 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 1998 were $189.5 (1997 -
$169.4). These expenditures were made for capacity expansion in high growth
markets, maintenance of worldwide facilities, contemporization and replacement
of information systems, supply chain initiatives in the U.S. and for shipping
and other customer service improvements, primarily in the United Kingdom and
Brazil. Numerous construction and information systems projects were in progress
at December 31, 1998 with an estimated cost to complete of approximately $87.4.
Capital expenditures in 1999 are currently expected to be in the range of $200.0
- - $220.0. These expenditures will include improvements on existing facilities,
continued investments for capacity expansion in high growth markets, facility
modernization, information systems and equipment replacement projects.
Foreign Operations - The Company derived approximately 60% of its 1998
consolidated net sales and consolidated operating profit from operations from
its subsidiaries outside of North America. In addition, as of December 31, 1998,
these subsidiaries comprised approximately 53% of the Company's consolidated
total assets.
Avon's operations in many countries utilize numerous currencies. Avon has
significant net assets in Brazil, the United Kingdom, Japan, Argentina, Germany
and the Philippines. Changes in the value of these countries' currencies
relative to the U.S. dollar result in direct charges or credits to equity.
Effective January 1, 1997, Mexico was designated as a country with a highly
inflationary economy due to the cumulative inflation rates over the three year
period
39
1994-1997. However, Mexico will be converted to non-hyper inflationary status
effective January 1, 1999 due to reduced cumulative inflation rates over the
past three years.
The Russian ruble devalued significantly in August 1998. In response to this
situation, several actions have been taken by local management including pricing
flexibility to maintain and build market share, the reduction of credit sales as
well as a tightening of expense controls. The devaluation negatively affected
Russia's U.S. dollar results in 1998. In terms of size, Russia's 1998 net sales
represented approximately 1% of Avon's consolidated net sales. Avon's results
continue to be negatively impacted by the Asian currency and economic crisis
which began in mid-1997.
On April 21, 1998, the Chinese government issued a directive banning all
direct selling in China resulting in the shutdown of the Company's sales
operations for most of the second quarter. As of the beginning of June, the
Company received Chinese governmental approval to resume operations as a
wholesale and retail business and became operational again on June 15, 1998.
The Company converted its 75 branches into
retail outlets to serve customers. During the end of the second quarter of
1998, Avon received government approval to utilize sales promoters, much like
Representatives, to promote product sales in China.
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 Market Rate Sensitive Instruments 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.
Some foreign subsidiaries rely primarily on borrowings from local commercial
banks to fund working capital needs created by their highly seasonal sales
pattern. From time to time, when tax and other considerations dictate, Avon will
finance subsidiary working capital needs or borrow foreign currencies. At
December 31, 1998, the total indebtedness of foreign subsidiaries was $55.6.
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 1998, these subsidiaries remitted, net of taxes, $340.2 in dividends and
royalties. This sum is a substantial portion of the 1998 consolidated net
earnings of Avon's foreign subsidiaries.
Risk Management Strategies and Market Rate Sensitive Instruments - The Company
operates globally, with manufacturing and distribution facilities in various
locations around the world. The Company may reduce its primary market exposures
to fluctuations in interest rates and foreign exchange rates by creating
offsetting positions through the use of derivative financial instruments. The
Company does not use derivative financial instruments for trading or speculative
purposes, nor is the Company a party to leveraged derivatives.
The Company periodically uses interest rate swaps to hedge portions of
interest payable on its debt. In addition, the Company may periodically employ
interest rate caps to reduce exposure, if any, to increases in variable interest
rates.
The Company may periodically hedge foreign currency royalties, net
investments in foreign subsidiaries, firm purchase commitments and contractual
foreign currency cash flows or obligations, including third-party and
intercompany foreign currency transactions. The Company regularly monitors its
foreign currency exposures and ensures that hedge contract amounts do not exceed
the amounts of the underlying exposures.
At December 31, 1998, the Company held foreign currency forward contracts
with notional amounts totaling $285.9 and option contracts with notional amounts
totaling $32.6 to hedge foreign currency items. Only $7.3 of these contracts
have maturities after December 31, 1999. Also outstanding in 1998 were foreign
currency forward contracts totaling $45.0 which do not qualify as hedging
transactions under the current accounting definitions and, accordingly, have
been marked to market. The mark-to-market adjustment at December 31, 1998 was
insignificant.
At December 31, 1998, the Company has entered into forward contracts to
purchase approximately 3,469,200 shares of Avon common stock at an average price
of $36.31 per share at December 31, 1998. The contracts mature over the next
three years and provide for physical or net share settlement to the Company.
Accordingly, no adjustment for subsequent changes in fair value has been
recognized.
40
The Company attempts to minimize its credit exposure to counterparties by
entering into interest rate swap and cap contracts only with major international
financial institutions with "A" or higher credit ratings as issued by Standard &
Poor's Corporation. The Company's foreign currency and interest rate derivatives
are comprised of over-the-counter forward contracts or options with major
international financial institutions. Although the Company's theoretical credit
risk is the replacement cost at the then estimated fair value of these
instruments, management believes that the risk of incurring losses is remote and
that such losses, if any, would not be material.
Non-performance of the counterparties to the balance of all the currency
and interest rate swap agreements would not result in a significant write off at
December 31, 1998. 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 agreements as a result of
changes in foreign exchange and interest rates. The market risk related to the
foreign exchange agreements should be substantially offset by changes in the
valuation of the underlying items being hedged.
The Company is exposed to changes in financial market conditions in the
normal course of its operations primarily due to international businesses and
transactions denominated in foreign currencies and the use of various financial
instruments to fund ongoing activities.
Various derivative and non-derivative financial instruments held by the
Company are sensitive to changes in interest rates. These financial instruments
are either discussed above or in Notes 4 and 7 of the Notes to Consolidated
Financial Statements. Interest rate changes would result in gains or losses in
the fair value of debt and other financing instruments held by the Company.
Based on the outstanding balance of all instruments at December 31, 1998, a
hypothetical 50 basis point increase or decrease in interest rates prevailing at
this date, sustained for one year, would not represent a material potential loss
in fair value, earnings or cash flows. This potential loss was calculated based
on discounted cash flow analyses using interest rates comparable to the
Company's current cost of debt. In 1998, the Company did not experience a
material loss in fair value, earnings or cash flows associated with changes in
interest rates.
The Company also engages in various hedging activities in order to reduce
potential losses due to foreign currency risks. Consistent with the nature of
the economic hedge of such foreign exchange contracts, any unrealized gain or
loss would be offset by corresponding decreases or increases, respectively, of
the underlying instrument or transaction being hedged. These financial
instruments are discussed above and in Note 7 of the Notes to Consolidated
Financial Statements. Based on the Company's foreign exchange contracts at
December 31, 1998, the impact of a 10% appreciation or 10% depreciation of the
U.S. dollar against the Company's foreign exchange contracts would not represent
a material potential loss in fair value, earnings or cash flows. This potential
loss does not consider the underlying foreign currency transaction or
translation exposures of the Company. The hypothetical impact was calculated on
the combined option and forward positions using forward rates at December 31,
1998 adjusted for an assumed 10% appreciation or 10% depreciation of the U.S.
dollar against the foreign contracts. The impact of payoffs on option contracts
is not significant to this calculation. Additionally, any foreign currency risk
associated with the foreign denominated debt instrument was assumed to be offset
by a related currency exchange swap contract. In 1998, foreign exchange losses
associated with the Company's foreign exchange contracts did not represent a
material loss in fair value, earnings or cash flows.
As of December 31, 1998, the primary currencies for which the Company has
net underlying foreign currency exchange rate exposure are the U.S. dollar
versus the Argentine peso, Brazilian real, British pound, Canadian dollar,
German mark, Japanese yen and the Mexican peso. The Company is also exposed to
other South American and Asian currencies.
The Company does not hedge its foreign currency exposure in a manner that
would entirely eliminate the effect of changes in foreign exchange rates on the
Company's consolidated financial position, results of operations and cash flows.
The impact of a 10% appreciation or 10% depreciation of the U.S. dollar against
the Company's net underlying foreign currency transaction and translation
exposures could be significant.
Other Information
On October 23, 1997, the Company announced that it raised its
long-term growth targets for sales and earnings per share and that it expects to
record special charges in connection with a major business process redesign
program. Commencing in 1998, the long-term target for sales growth has been
raised to 8-10% compounded annually, and its target for earnings per share
growth has been raised to 16-18% annually. Previously, the Company targeted
long-term sales growth of 6-8% and long-term earnings per share growth of 13-
15%. The higher targets come largely as a result of initiatives currently
underway and others under review intended to reduce costs by up to $400.0 a year
by 2000, with $200.0 of the savings being reinvested concurrently in advertising
and marketing programs to boost sales. In the first quarter of 1998, the
Company
41
recorded $108.4 pretax of such one-time charges ($84.2 after tax, or $.32 per
share on a basic and diluted basis) in connection with the business process
redesign program. Slightly more than half of the total pretax charges in the
first quarter were to be cash related with payments in 1998 and 1999. In the
third quarter of 1998, the Company recorded additional special charges for
business redesign efforts totaling $46.0 pretax ($38.6 after tax, or $.14 per
share on a basic and diluted basis). Approximately 70% of the third quarter
pretax charges were to be cash related with payments in 1998 and 1999. At
December 31, 1998, the remaining liability balance was $28.5 and relates
primarily to severance costs that will be paid during 1999. The Company expects
to record the additional one-time charges in 1999 as plans are finalized.
Euro
A single currency called the euro was introduced in Europe on January 1, 1999.
Eleven of the fifteen member countries of the European Union adopted the euro as
their common legal currency on that date. Fixed conversion rates between these
participating countries' existing currencies (the "legacy currencies") and the
euro were established as of that date. The legacy currencies are scheduled to
remain legal tender as denominations of the euro until June 30, 2002. During
this transition period, parties may settle transactions using either the euro or
a participating country's legal currency. Beginning in January 2002, new euro-
denominated bills and coins will be issued, and legacy currencies will be
withdrawn from circulation.
Avon operating subsidiaries affected by the euro conversion have
established plans to address issues raised by the euro currency conversion.
These issues include, among others, the need to adapt information technology
systems, business processes and equipment to accommodate euro-denominated
transactions, the impact of one common currency on pricing and recalculating
currency risk. Avon does not expect system and equipment conversion costs to be
material. Due to the numerous uncertainties associated with the market impact of
the euro conversion, the Company cannot reasonably estimate the effects one
common currency will have on pricing and the resulting impact, if any, on
results of operations, financial condition or cash flows.
Year 2000 Update
General
The "Year 2000 issue" is the result of computer programs being written using
two-digits rather than four to define the applicable year. If the Company's
computer programs with date-sensitive functions are not Year 2000 compliant,
they may fail or make miscalculations due to interpreting a date including "00"
to mean 1900, not 2000. The result may be disruptions in operations, including,
among other things, a temporary inability to process transactions or engage in
similar normal business activities.
The Company commenced its worldwide Year 2000 initiative in early 1996.
The Company has developed a comprehensive project plan as a means for ensuring
that all information technology ("IT") systems, including applications,
operating systems, mainframe, mid range and client server platforms, all non-
information technology ("Non-IT") systems, including embedded applications and
equipment and key third parties are Year 2000 compliant by December 31, 1999.
The Company has identified high risk applications that are critical to its
business, recognizing the fact that timely compliance of these systems is
crucial, and, therefore, has designed its programs to address these systems
first. Furthermore, the Company has established a project team to identify and
address the Company's Year 2000 risks and issues in an attempt to ensure the
integrity and reliability of the Company's information systems and business
processes.
Project Plan
The Company's Year 2000 project plan is divided into four major sections,
including: Infrastructure, Application Softwares, Validation of Third Party
Compliance and Embedded Systems. The project has five phases, which are common
to all sections: 1) identifying, inventorying and prioritizing Year 2000 items;
2) assessing Year 2000 compliance of identified items and related potential
risks in circumstances of non-compliance of these items; 3) remediating,
replacing or upgrading, as appropriate, material items that are determined not
to be Year 2000 compliant; 4) validation testing of material items to ensure
compliance; and 5) contingency planning and implementation. The Company
utilizes internal resources and outside consultants to renovate and test its IT
and Non-IT systems for Year 2000 compliance. None of the Company's other
information technology projects have been deferred due to the implementation of
the Year 2000 project.
The Infrastructure section consists of hardware, including mainframe and
AS/400 platforms, and software, including operating systems, other than
Applications Software. This section has completed all phases through
remediation and has progressed to the validation testing phase. All
Infrastructure activities are expected to be completed by June 1999.
The Applications Software section includes the conversion of both in-house
developed and vendor-supplied software applications.
42
In-house developed software that is not Year 2000 compliant has undergone
remediation of its application, whereas non-compliant vendor provided software
has been upgraded or replaced, where available by the supplier. This section's
testing phase, which includes procedures for independent validation and
verification of code, is ongoing and is anticipated to be completed by June
1999.
Validation of Third Party Compliance includes the process of recognizing,
prioritizing and communicating with key suppliers and service providers with
whom the Company has a direct and significant relationship and are believed to
be critical to its business operations. Identification of significant vendors
has been completed and a strategy has been initiated in an attempt to reasonably
ascertain their progress in addressing the Year 2000 issue. The Company has
distributed comprehensive questionnaires to key suppliers, and, with the
guidance of outside consultants, is in the process of conducting detailed
assessments of the responses received. The validation of third party compliance
is expected to be completed by May 1999. Follow-up reviews will also be
scheduled for the remainder of 1999.
The Embedded Systems section includes all hardware, software and associated
embedded computer chips that are utilized in operating and maintaining the
internal functions of the Company's facilities, i.e. climate control systems.
The Company has elected to employ a regional-based strategy for addressing Year
2000 compliance of its embedded systems. Avon U.S. operations have
substantially completed the remediation of embedded systems and anticipate all
repair and testing to be completed by March 1999. From an international
standpoint, the Company is in the process of inventorying material items that
are not Year 2000 compliant and expects the assessment phase to be completed by
July 1999, with all remediation testing scheduled to be completed by year-end
1999.
Costs
The total estimated cost associated with achieving worldwide Year 2000
compliance will be approximately $29.4, of which $17.0 has been spent to date.
Replacement costs and costs associated
with the validation of third party compliance are included in these figures.
The Company does not separately track the internal costs incurred for the Year
2000 project, those costs primarily being related to payroll costs for the
Company's information systems group. The Company's policy is to expense as
incurred information system maintenance and modification costs and to capitalize
costs related to system replacement. The costs of the Company's Year 2000
compliance efforts are being funded through operating cash flows.
Risks
The Company expects to identify and resolve all Year 2000 problems that may
adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 matters affecting the Company have been or will be identified or
corrected, resulting in part from the uncertainty of the Year 2000 readiness of
third party suppliers. Thus, the Company is unable to determine at this time
whether the consequences of Year 2000 failures will have a material impact on
the Company's results of operations, liquidity or financial condition. The
Company believes, however, that its risk of being adversely impacted by Year
2000 failures is mitigated due to its product portfolio being so diversified,
with the vast majority of its items not being date-sensitive. The strategy
employed by the Company's Year 2000 project is expected to significantly reduce
the Company's level of uncertainty about the Year 2000 issue and the Year 2000
compliance of key third parties who materially impact its business.
Contingency Plans
Development of contingency plans is in progress and will be developed in detail
during 1999. Once established, contingency plans and related cost estimates
will be continually modified, if necessary, as additional information becomes
available.
Disclaimer
Readers are cautioned that forward-looking statements contained in the Year 2000
Update should be read in conjunction with the Company's disclosure under the
heading "Forward-Looking Statement".
43
Results of Operations by Quarter
Avon Products, Inc.
All share and per share data shown below have been restated to reflect two-for-
one stock splits which were distributed in September 1998 and June 1996.
In millions, except per share data
First Second Third Fourth Year
1998
Net sales $1,183.4 $1,247.2 $1,233.2 $1,548.9 $5,212.7
Gross profit* 680.3 781.6 755.0 942.8 3,159.7
Special charges 70.5 - 46.0 - 116.5
Operating (loss)profit (16.3) 178.6 82.7 234.5 479.5
(Loss)income before taxes and
minority interest (26.6) 173.6 76.5 232.4 455.9
(Loss)income before
minority interest (32.7) 109.7 39.8 148.3 265.1
Net (loss)income $ (31.0) $ 111.4 $ 41.5 $ 148.1 $ 270.0
========= ======== ======== ======== ========
(Loss)earnings per share:
Basic $ (.12) $ .42 $ .16 $ .56 $ 1.03(1)
========= ======== ======== ======== ==========
Diluted $ (.12) $ .42 $ .16 $ .56 $ 1.02(1)
========= ======== ======== ======== ==========
*First quarter includes a one-time charge of $37.9 for inventory write-downs.
1997
Net sales $1,087.6 $1,225.0 $1,249.4 $1,517.4 $5,079.4
Gross profit 646.0 748.9 732.2 901.3 3,028.4
Operating profit 73.1 157.0 117.5 196.5 544.1
Income before taxes and
minority interest 63.0 150.5 107.9 213.5 534.9
Income before minority
interest 39.7 94.8 68.0 134.5 337.0
Net income $ 41.3 $ 95.2 $ 68.6 $ 133.7 $ 338.8
======== ======== ======== ======== ========
Earnings per share:
Basic $ .16 $ .36 $ .26 $ .51 $ 1.28(1)
======== ======== ======== ======== ===========
Diluted $ .15 $ .36 $ .26 $ .50 $ 1.27(1)
======== ======== ======== ======== ===========
(1) The sum of per share amounts for the quarters does not necessarily equal
that for the year because the computations are made independently.
Market Prices per share of Common Stock by Quarter
1998 1997
Quarter High Low High Low
First $ 40.63 $ 28.00 $ 31.81 $ 26.06
Second 44.50 36.94 37.00 25.31
Third 44.31 25.00 39.00 29.25
Fourth 46.25 25.75 38.38 27.75
Avon common stock is listed on the New York Stock Exchange. At December 31,
1998, there were 23,375 shareholders of record. The Company believes that there
are over 60,000 additional shareholders who are not "shareholders of record" but
who beneficially own and vote shares through nominee holders such as
brokers, benefit plan trustees, etc. Dividends of $.68 per share, or $.17 per
share each
quarter, were declared and paid in 1998. Dividends of $.63 per share, or $.1575
per share each quarter, were declared and paid in 1997.
44
Consolidated Statements of Income
Avon Products, Inc.
In millions, except per share data
Years ended December 31 1998 1997 1996
Net sales $5,212.7 $5,079.4 $4,814.2
Costs, expenses and other:
Cost of sales** 2,053.0 2,051.0 1,921.2
Marketing, distribution and
administrative expenses 2,563.7 2,484.3 2,348.2
Special charges 116.5 - -
--------- --------- ---------
Operating profit 479.5 544.1 544.8
========= ========= =========
Interest expense 41.0 41.8 40.0
Interest income (15.9) (16.7) (14.5)
Other (income) expense, net (1.5) (15.9) 8.9
--------- --------- ---------
Total other expenses 23.6 9.2 34.4
Income before taxes and minority interest 455.9 534.9 510.4
Income taxes 190.8 197.9 191.4
--------- -------- --------
Income before minority interest 265.1 337.0 319.0
Minority interest 4.9 1.8 (1.1)
--------- --------- ---------
Net income $ 270.0 $ 338.8 $ 317.9
========= ========= =========
Earnings per share:
Basic $ 1.03 $ 1.28* $ 1.19*
Diluted $ 1.02 $ 1.27* $ 1.18*
*Restated to reflect a two-for-one stock split distributed in September 1998.
**1998 includes a one-time charge of $37.9 for inventory write-downs.
The accompanying notes are an integral part of these statements.
45
Consolidated Balance Sheets
Avon Products, Inc.
In millions, except share data
December 31 1998 1997
Assets
Current assets
Cash, including cash equivalents of $59.7 and $60.0 $ 105.6 $ 141.9
Accounts receivable (less allowance for doubtful
accounts of $49.0 and $35.5) 492.6 444.8
Inventories 538.4 564.8
Prepaid expenses and other 204.8 192.5
--------- ---------
Total current assets $1,341.4 $1,344.0
Property, plant and equipment, at cost
Land 51.4 48.6
Buildings and improvements 613.0 567.0
Equipment 728.4 666.0
-------- --------
1,392.8 1,281.6
Less accumulated depreciation 722.9 670.6
- --------- ---------
669.9 611.0
Other assets 422.2 317.9
--------- ---------
Total assets $2,433.5 $2,272.9
========= =========
Liabilities and Shareholders' Equity
Current liabilities
Debt maturing within one year $ 55.3 $ 132.1
Accounts payable 416.9 476.0
Accrued compensation 161.3 111.3
Other accrued liabilities 308.2 268.9
Sales and taxes other than income 106.2 101.0
Income taxes 281.6 266.6
--------- ---------
Total current liabilities $1,329.5 $1,355.9
Long-term debt 201.0 102.2
Employee benefit plans 390.0 367.6
Deferred income taxes 36.3 31.2
Other liabilities (including minority interest
of $36.1 and $37.5) 191.6 131.0
Commitments and contingencies (Note 14)
Shareholders' equity
Common stock, par value $.25 - authorized:
400,000,000 shares; issued
351,314,366 and 174,711,173 shares 87.8 43.7
Additional paid-in capital 780.0 733.1
Retained earnings 719.1 660.9
Accumulated other comprehensive income (301.3) (270.3)
Treasury stock, at cost - 88,793,640 and
42,897,463 shares (1,000.5) (882.4)
--------- ---------
Total shareholders' equity 285.1 285.0
--------- ---------
Total liabilities and shareholders' equity $2,433.5 $2,272.9
========= =========
The accompanying notes are an integral part of these statements.
46
Consolidated Statements of Cash Flows
Avon Products, Inc.
In millions
Years ended December 31 1998 1997 1996
Cash flows from operating activities
Net income $ 270.0 $ 338.8 $ 317.9
Adjustments to reconcile income to net cash
provided by continuing operations:
Depreciation and amortization 72.0 72.1 64.5
Provision for doubtful accounts 91.3 80.8 79.0
Translation gains (7.2) (.1) (.2)
Deferred income taxes (13.0) 18.0 (.7)
Special charges 88.5 - -
Other 3.9 9.4 9.9
Changes in assets and liabilities:
Accounts receivable (157.6) (121.4) (125.5)
Inventories (17.2) (67.5) (65.4)
Prepaid expenses and other (4.0) 6.7 13.7
Accounts payable and accrued liabilities 13.0 42.9 97.8
Income and other taxes 19.5 (56.1) 57.7
Noncurrent assets and liabilities (34.8) (8.1) (23.6)
-------- -------- --------
Net cash provided by continuing operations 324.4 315.5 425.1
Net cash used by discontinued operations - - (38.2)
Net cash provided by operating activities 324.4 315.5 386.9
-------- -------- --------
Cash flows from investing activities
Capital expenditures (189.5) (169.4) (103.6)
Disposal of assets 5.8 3.3 3.3
Acquisitions of subsidiary stock and other
investing activities 1.4 (9.0) (6.3)
-------- -------- --------
Net cash used by investing activities (182.3) (175.1) (106.6)
-------- ------- -------
Cash flows from financing activities
Cash dividends (180.6) (168.3) (158.1)
Debt, net (maturities of three months or less) (96.1) (39.8) 17.8
Proceeds from short-term debt 54.7 25.7 37.5
Retirement of short-term debt (34.9) (49.0) (14.1)
Proceeds from long-term debt 100.1 100.0 -
Retirement of long-term debt (.6) (.8) (1.5)
Proceeds from exercise of stock options,
net of taxes 24.0 20.6 10.0
Repurchase of common stock (107.8) (110.8) (127.8)
Other financing activities 58.1 58.6 -
-------- -------- --------
Net cash used by financing activities (183.1) (163.8) (236.2)
-------- -------- --------
Effect of exchange rate changes on cash and
equivalents 4.7 (19.2) (11.0)
-------- -------- --------
Net (decrease)increase in cash and equivalents (36.3) (42.6) 33.1
Cash and equivalents at beginning of year 141.9 184.5 151.4
-------- -------- --------
Cash and equivalents at end of year $ 105.6 $ 141.9 $ 184.5
======== ======== ========
Cash paid for
Interest $ 39.2 $ 36.0 $ 35.2
Income taxes, net of refunds received 188.5 215.8 158.9
The accompanying notes are an integral part of these statements.
47
Consolidated Statements of Changes in Shareholders' Equity
Avon Products, Inc.
Accumulated
Additional
Other
Common Stock Paid-In
Retained Comprehensive Treasury
In millions, except share data Shares Amount Capital
Earnings Income Stock Total
Balance at December 31, 1995 173,498,112 $ 43.4 $ 672.9 $
325.8 $(202.1) $(647.3) $192.7
Comprehensive income:
Net income
317.9 317.9
Foreign currency translation
adjustments
(8.6) (8.6)
- ------
Total comprehensive income
309.3
Dividends - $1.16 per share
(154.9) (154.9)
Exercise of stock options, including
tax benefits 423,267 .1 15.6
15.7
Grant, cancellation and
amortization of restricted stock 36,000 2.7
2.7
Repurchase of common stock
(127.8) (127.8)
Benefit plan contributions 2.4
1.6 4.0
----------- ------ ------- -----
- --- -------- -------- -------
Balance at December 31, 1996 173,957,379 43.5 693.6
488.8 (210.7) (773.5) 241.7
Comprehensive income:
Net income
338.8 338.8
Foreign currency translation
adjustments
(59.6) (59.6)
- -------
Total comprehensive income
279.2
Dividends - $1.26 per share
(166.7) (166.7)
Exercise of stock options, including
tax benefits 713,298 .2 30.3
30.5
Grant, cancellation and
amortization of restricted stock 40,496 4.6
4.6
Repurchase of common stock
(110.8) (110.8)
Benefit plan contributions 4.6
1.9 6.5
----------- ------ ------- -----
- --- -------- -------- -------
Balance at December 31, 1997 174,711,173 43.7 733.1
660.9 (270.3) (882.4) 285.0
Comprehensive income:
Net income
270.0 270.0
Foreign currency translation
adjustments
(15.6) (15.6)
Minimum pension liability adjustment
(15.4) (15.4)
- -------
Total comprehensive income
239.0
Dividends - $.68 per share
(178.9) (178.9)
Two-for-one stock split effected
in the form of a stock
dividend from retained
earnings (Note 9) 175,419,475 43.9
(32.9) (11.0) -
Exercise of stock options, including
tax benefits 916,102 .2 38.2
38.4
Grant, cancellation and
amortization of restricted stock 267,616 7.1
7.1
Repurchase of common stock
(107.8) (107.8)
Benefit plan contributions 1.6
.7 2.3
----------- ------ ------- -----
- ---- -------- ---------- --------
Balance at December 31, 1998 351,314,366 $ 87.8 $ 780.0 $
719.1 $(301.3) $(1,000.5) $ 285.1
=========== ====== =======
========= ======== ========== ========
The accompanying notes are an integral part of these statements.
48
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 the "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 North America, Latin America, the Pacific
and Europe. Sales are made to the ultimate customers principally by independent
Avon Representatives.
Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include the
accounts of Avon and its majority and wholly-owned subsidiaries. Intercompany
balances and transactions are eliminated. These statements have been prepared in
conformity with generally accepted accounting principles and require management
to make estimates and assumptions that affect amounts reported and disclosed in
the financial statements and related notes. Actual results could differ from
these estimates.
Foreign Currency - 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
within accumulated other comprehensive income.
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 U.S. and non-U.S. commercial banks with high
credit ratings. 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 regarding 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 range from 3 to 15 years.
Other Assets - Systems development costs related to the development of major
information and accounting systems are capitalized and amortized over the
estimated useful life of the related project, not to exceed five years.
Stock Options - 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.
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,
49
liabilities and firm commitments are deferred as other assets or liabilities 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. Items which do not
qualify for hedge accounting are marked to market with the resulting gain or
loss recognized in other (income) expense, net. 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.
The Company also uses financial instruments, principally forward contracts to
purchase Avon common stock, to hedge certain employee benefit costs and the cost
of the Company's share repurchase program. Contracts that require physical or
net share settlement are initially measured at fair value with subsequent
changes in fair value not recognized.
Research and Development - Research and development costs are expensed as
incurred and aggregated in 1998 $31.4 (1997 - $29.9; 1996 - $30.2).
Advertising - Advertising costs are expensed as incurred and aggregated in 1998
$65.0 (1997 - $64.5; 1996 - $69.6).
Income Taxes - Deferred income taxes have been provided on items recognized for
financial reporting purposes in different periods than for income tax purposes
at future enacted rates.
U.S. income taxes have not been provided on approximately $198.9 of
undistributed income of subsidiaries that has been or is intended to be
permanently reinvested outside the United States or is expected to be remitted
free of U.S. income taxes. If such undistributed income was remitted, no
substantial tax cost would be incurred.
Earnings per Share - Basic earnings per share are computed by dividing net
income by the weighted-average number of shares outstanding during the year.
Diluted earnings per share are calculated to give effect to all potentially
dilutive common shares that were outstanding during the year.
For each of the three years ended December 31, the number of shares used in
the computation of basic and diluted earnings per share are as follows:
1998 1997 1996
Basic EPS
Weighted-average shares 263.27 264.67 267.40
Incremental shares from conversion of:
Stock options 2.68 2.33 1.86
------ ------ ------
Diluted EPS
Adjusted weighted-average shares 265.95 267.00 269.26
====== ====== ======
Reclassifications - To conform to the 1998 presentation, certain
reclassifications were made to the prior years' consolidated financial
statements.
2. Accounting Changes
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("FAS") No. 130, "Reporting Comprehensive Income". This statement
establishes standards for the reporting and presentation of comprehensive income
and its components in a full set of financial statements. As shown in the
Statement of Changes in Shareholders' Equity and Note 5, comprehensive income
includes all changes in equity during a period, except those resulting from
investments by and distributions to the Company's stockholders. As this
standard only requires additional information in the financial statements, it
does not affect the Company's results of operations or financial position.
Effective January 1, 1998, the Company adopted FAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which changes the way
the Company reports information about its operating segments. The information
for 1997 and 1996 has been restated from that previously reported in order to
conform with the current year's presentation. FAS No. 131 requires a new basis,
entitled the management approach, for determining reportable segments. This
approach is based on the way management organizes segments within a company for
making operating decisions and assessing performance. FAS No. 131 also
establishes standards for supplemental disclosure about products and services,
geographical areas and major customers. Segment results for the three years
ended December 31, 1998 are presented in Note 11.
Effective January 1, 1998, the Company adopted FAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". FAS No. 132
standardizes the disclosure requirements for pensions and other postretirement
benefits, though it does not impact the measurement or recognition of those
benefits. There was no impact on the Company's results of operations or
financial position in adopting this statement. Prior years' information has
been restated to conform with the requirements of FAS No. 132.
Effective January 1, 1998, the Company adopted AICPA Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP No. 98-1 requires certain costs in connection
with developing or obtaining internally used software to be capitalized that
previously would have been expensed as incurred. The adoption of SOP No. 98-1
did not have a material impact on the Company's results of operations, financial
position, or cash flows.
Effective December 31, 1997, the Company adopted FAS No. 128, "Earnings per
Share". FAS No. 128 establishes standards for computing and presenting earnings
per share ("EPS") and replaces the presentation of previously disclosed EPS with
both basic and diluted EPS. Based upon the Company's capitalization structure,
the EPS amounts calculated in accordance with FAS No. 128 approximated the
Company's EPS amounts in accordance with Accounting Principles Board Opinion
("APB") No. 15, "Earnings per Share". All prior period EPS data have been
restated in accordance with FAS No. 128.
50
Effective January 1, 1996, the Company adopted the fair value disclosure
requirements of FAS No. 123, "Accounting for Stock-Based Compensation". As
permitted by the statement, the Company did not change the method of accounting
for its employee stock compensation plans. See Note 8 for the fair value
disclosures required under FAS No. 123.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". FAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999 (January 1, 2000 for the Company). FAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction. For fair-value hedge transactions in
which the Company is hedging changes in the fair value of an asset, liability,
or firm commitment, changes in the fair value of the derivative instrument will
be included in the income statement along with the offsetting changes in the
hedged item's fair value. For cash-flow hedge transactions in which the Company
is hedging the variability of cash flows related to a variable rate asset,
liability, or a forecasted transaction, changes in the fair value of the
derivative instrument will be reported in other comprehensive income. The gains
and losses on the derivative instruments that are reported in other
comprehensive income will be reclassified to earnings in the periods in which
earnings are impacted by the variability of the cash flows of the hedged item.
The ineffective portion of all of the hedges will be recognized in current
period earnings. The Company has not yet determined the impact that the
adoption of FAS No. 133 will have on its results of operations or financial
position.
3. Inventories
Inventories at December 31 consisted of the following:
1998 1997
Raw materials $140.6 $147.4
Finished goods 397.8 417.4
------ ------
Total $538.4 $564.8
====== ======
LIFO-based inventories at December 31, 1998 were $135.3; (1997 - $143.5)
with the current estimated replacement cost exceeding the carrying value by
approximately $3.6 (1997 - $15.2).
4. Debt and Other Financing
Debt at December 31 consisted of the following (see also Note 7 regarding
financial instruments):
1998 1997
Maturing within one year:
Notes payable $ 53.9 $ 29.4
Current portion of long-term debt 1.4 102.7
------- -------
Total $ 55.3 $ 132.1
======= =======
Long-term debt:
6.25% bonds, due 2018 $ 100.0 $ -
6.55% notes, due 2007 100.0 100.0
170 million 6-1/8% deutsche mark notes, due 1998 (1) - 100.0
Other, payable to 2002 with interest from 7% to 31% 2.4 4.9
Less current portion (1.4) (102.7)
-------- --------
Total $ 201.0 $ 102.2
======== ========
(1) The deutsche mark notes ("Notes") were effectively converted into U.S.
dollar debt through the use of a currency exchange swap contract which included
both the principal and the interest. Reflected in the carrying value of the
debt was a currency swap contract payable at December 31, 1997 of $5.1.
Annual maturities of long-term debt for each of the next five years are:
1999 - $1.4; 2000 - $.6; 2001 - $.2; 2002 - $.1; and 2003 and beyond $200.1.
In May 1998, Avon issued $100.0 of bonds embedded with option features (the
"bonds") to pay down commercial paper borrowings. The bonds have a twenty-year
maturity; however, after five years, the bonds, at the holder's option, can be
sold back to the Company at par or can be called at par by the underwriter and
resold to investors as fifteen-year debt. The coupon rate on the bonds is 6.25%
for the first five years, but will be refinanced at market rates if the bonds
are called in year five.
In connection with the bond issuance, Avon entered into a five-year
interest rate swap contract with a notional amount of $50.0 to effectively
convert fixed interest on a portion of the bonds to a variable interest rate,
based on LIBOR.
During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007,
to pay down commercial paper borrowings.
During 1996, the Company entered into an agreement, which expires in 2001,
with various banks to amend and restate the five-year, $600.0 revolving credit
and competitive advance facility agreement. Within this facility, the Company
is able to borrow, on an uncommitted basis, various foreign currencies. The new
agreement and the prior agreement are referred to, collectively, as the credit
facility.
The credit facility is primarily to be used to finance working capital,
provide support for the issuance of commercial paper and support the stock
repurchase program. At the Company's option, the interest
51
rate on borrowings under the credit facility is based on LIBOR, prime, or
federal fund rates. The credit facility has an annual facility fee of $.4. The
credit facility contains a covenant for interest coverage, as defined. The
Company is in compliance with this covenant.
At December 31, 1998 and 1997, there were no borrowings outstanding under
the credit facility.
The Company has bankers' acceptance facilities and uncommitted lines of
credit available of $65.0 (1997 - $205.0) with various banks which have no
compensating balances or fees. As of December 31, 1998 and 1997, there were no
borrowings under either the bankers' acceptance facilities or uncommitted lines.
The maximum borrowings under these combined facilities during 1998 and 1997
were $290.7 and $409.3, respectively, and the annual average borrowings during
each year were approximately $205.7 and $274.6, respectively, at average annual
interest rates of approximately 4.8% and 5.2%, respectively.
At December 31, 1998 and 1997, international lines of credit totaled $329.5
and $295.8, respectively, of which $53.9 and $29.4 were outstanding,
respectively. The maximum borrowings under these facilities during 1998 and
1997 were $63.6 and $38.8, respectively, and the annual average borrowings
during each year were $49.3 and $33.8, respectively, at average annual interest
rates of approximately 12.3% and 9.9%, respectively. Such lines have no
compensating balances or fees.
At December 31, 1998 and 1997, Avon also has letters of credit outstanding
totaling $15.5 and $15.5, respectively, which guarantee various insurance
activities. In addition, Avon has outstanding letters of credit for various
trade activities.
During 1998 and 1997, the Company entered into securities lending
transactions resulting in the borrowing of securities which were subsequently
sold for net proceeds approximating $58.1 and $58.6, respectively, used to repay
commercial paper borrowings. The borrowed securities are due to the lender no
later than December 29, 2000, but at the Company's option can be returned at any
time. The obligations are included in other non-current liabilities on the
balance sheet. The effective rates on the transactions are expected to be 5.5%.
and 6.5%, respectively.
5. Comprehensive Income
The following table reflects comprehensive income as of December 31:
1998 1997 1996
Net income $270.0 $338.8 $317.9
Other comprehensive loss
Change in equity due to foreign currency
translation adjustments (15.6) (59.6) (8.6)
Minimum pension liability adjustment (15.4) - -
------- ------- -------
Comprehensive income $239.0 $279.2 $309.3
======= ======= =======
Accumulated other comprehensive income at December 31 consisted of the
following:
1998 1997
Foreign currency translation
Adjustments $(285.9) $(270.3)
Minimum pension liability
Adjustment (15.4) -
-------- --------
Total $(301.3) $(270.3)
6. Income Taxes
Deferred tax assets (liabilities) resulting from temporary differences in the
recognition of income and expense for tax and financial reporting purposes at
December 31 consisted of the following:
1998 1997
Deferred tax assets:
Postretirement benefits $ 82.0 $ 69.3
Accrued expenses and reserves 58.7 44.0
Special and non-recurring charges 9.0 -
Employee benefit plans 54.5 40.0
Foreign operating loss carryforwards 29.1 32.5
Capital loss carryforwards 17.4 21.2
Postemployment benefits 11.0 10.6
All other 21.3 17.7
Valuation allowance (46.9) (55.7)
-------- --------
Total deferred tax assets 236.1 179.6
Deferred tax liabilities:
Depreciation (41.5) (35.6)
Prepaid retirement plan costs (55.2) (52.4)
Capitalized interest (10.6) (13.5)
Unremitted foreign earnings (17.4) (12.0)
All other (22.1) (9.0)
-------- --------
Total deferred tax liabilities (146.8) (122.5)
-------- --------
Net deferred tax assets $ 89.3 $ 57.1
======== ========
Deferred tax assets (liabilities) at December 31 were classified as follows:
1998 1997
Deferred tax assets:
Prepaid expenses and other $ 86.9 $ 76.5
Other assets 44.2 16.1
------ ------
Total deferred tax assets 131.1 92.6
Deferred tax liabilities:
Income taxes (5.5) (4.3)
Deferred income taxes (36.3) (31.2)
------- -------
Total deferred tax liabilities (41.8) (35.5)
------- -------
Net deferred tax assets $ 89.3 $ 57.1
======= =======
The valuation allowance primarily represents reserves for foreign operating loss
and capital loss carryforwards. The basis used for recognition of deferred tax
assets included the profitability of the operations and related deferred tax
liabilities.
Income before taxes and minority interest for the years ended December 31
was as follows:
1998 1997 1996
United States $ 74.2 $ 153.6 $ 171.3
Foreign 381.7 381.3 339.1
------- ------- -------
Total $ 455.9 $ 534.9 $ 510.4
======= ======= =======
52
The provision for income taxes for the years ended December 31 was as
follows:
1998 1997 1996
Federal:
Current $ 16.7 $ 5.4 $ 30.9
Deferred (10.4) 21.3 1.0
-------- ------- --------
6.3 26.7 31.9
Foreign:
Current 176.2 169.7 152.4
Deferred .9 (7.7) (1.5)
-------- -------- --------
177.1 162.0 150.9
State and other:
Current 10.9 4.8 8.8
Deferred (3.5) 4.4 (.2)
-------- -------- --------
7.4 9.2 8.6
Total $ 190.8 $ 197.9 $ 191.4
======== ======== ========
The effective tax rate for the years ended December 31 was as follows:
1998 1997 1996
Statutory federal rate 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit 1.0 1.1 1.1
Tax-exempt operations .8 (.5) (.7)
Taxes on foreign income, including translation 9.5 5.3 6.3
Other (4.4) (3.9) (4.2)
----- ----- -----
Effective tax rate 41.9% 37.0% 37.5%
===== ===== =====
During 1997, the Company reached final agreement with the Internal Revenue
Service with respect to its examination of the Company's income tax returns for
the years 1982 through 1989. As anticipated, payments, including related
interest, made under this settlement were approximately $42.4. Reserves
previously had been provided by the Company related to the agreement.
In the fourth quarter of 1997, the Company recorded a benefit related to a
value-added tax settlement in the United Kingdom totaling $26.5, of which $20.6
and $5.9 have been reflected in other (income) expense, net and interest income,
respectively.
At December 31, 1998, Avon had foreign operating loss carryforwards of
approximately $87.8. The loss carryforwards expiring between 1999 and 2006 were
$64.3 and the loss carryforwards which do not expire were $23.5. Capital loss
carryforwards, which expire between 1999 and 2001 and may be used to offset
capital gains, if any, were approximately $49.7 at December 31, 1998.
7. Financial Instruments and Risk Management
Risk Management - The Company operates globally, with manufacturing and
distribution facilities in various locations around the world. The Company may
reduce its exposure to fluctuations in interest rates and foreign exchange rates
by creating offsetting positions through the use of derivative financial
instruments. The Company does not use derivative financial instruments for
trading or speculative purposes, nor is the Company a party to leveraged
derivatives.
The notional amount of forward exchange contracts and options is the amount
of foreign currency bought or sold at maturity. The notional amount of interest
rate swaps is the underlying principal amount used in determining the interest
payments exchanged over the life of the swap. The notional amounts are not a
direct measure of the Company's exposure through its use of derivatives.
Interest Rates - The Company periodically uses interest rate swaps to hedge
portions of interest payable on its debt. In addition, the Company may
periodically employ interest rate caps to reduce exposure, if any, to increases
in variable interest rates.
As discussed in Note 4, the Company entered into a five-year interest rate
swap contract with a notional amount of $50.0 to effectively convert fixed
interest on a portion of the bonds to variable interest rate based on LIBOR.
Foreign Currencies - The Company may periodically hedge foreign currency
royalties, net investments in foreign subsidiaries, firm purchase commitments
and contractual foreign currency cash flows or obligations, including third-
party and intercompany foreign currency transactions. The Company regularly
monitors its foreign currency exposures and ensures that hedge contract amounts
do not exceed the amounts of the underlying exposures.
At December 31, 1998, the Company held foreign currency forward contracts
with notional amounts totaling $285.9 (1997 - $319.1) and option contracts with
notional amounts totaling $32.6 (1997 - $80.0) to hedge foreign currency items.
All except $7.3 of these contracts have maturities prior to December 31, 1999.
Additionally, the Company also held forward contracts with notional amounts
totaling $45.0 (1997 - $44.2) which do not qualify as hedging transactions under
the current accounting definitions and, accordingly, have been marked to market.
The mark-to-market adjustments on these forward contracts at December 31, 1998
and 1997 were insignificant.
53
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:
1998 1997
Buy Sell Buy Sell
Brazilian real $ - $ 45.0 $ - $ -
British pound 37.9 57.7 29.1 56.5
Canadian dollar - 39.1 - 30.8
Chinese renminbi - 5.0 - -
French franc - - - 13.8
German mark 71.8 - 77.2 12.4
Indonesian rupiah - - 3.7 5.0
Irish punt - - 13.0 2.9
Italian lira 7.3 - 7.8 3.7
Japanese yen 1.5 67.3 12.0 53.3
Malaysian ringgit - - - 6.0
Mexican peso - - - 40.0
Philippine peso - - - 15.0
Russian ruble - - - 20.0
Spanish peseta 1.3 - - 7.0
Taiwanese dollar - 18.5 - 20.2
Thai baht - - - 5.1
Other currencies 6.8 4.3 4.1 4.7
------ ------ ------ ------
Total $126.6 $236.9 $146.9 $296.4
At December 31, 1998, the Company has entered into forward contracts to purchase
approximately 3,469,200 shares of Avon common stock at an average price of
$36.31 per share at December 31, 1998. The contracts mature over the next three
years and provide for physical or net share settlement to the Company.
Accordingly, no adjustment for subsequent changes in fair value has been
recognized.
Credit and Market Risk - The Company attempts to minimize its credit exposure to
counterparties by entering into interest rate swap and cap contracts only with
major international financial institutions with "A" or higher credit ratings as
issued by Standard & Poor's Corporation. The Company's foreign currency and
interest rate derivatives are comprised of over-the-counter forward contracts or
options with major international financial institutions. Although the Company's
theoretical credit risk is the replacement cost at the then estimated fair value
of these instruments, management believes that the risk of incurring losses is
remote and that such losses, if any, would not be material.
Non-performance of the counterparties to the balance of all the currency
and interest rate swap agreements would not result in a significant write off at
December 31, 1998. 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 agreements as a result of
changes in foreign exchange and interest rates. The market risk related to the
foreign exchange agreements should be substantially offset by changes in the
valuation of the underlying items being hedged.
Fair Value of Financial Instruments - For purposes of the following disclosure,
the fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation. The aggregate fair value amounts presented are
not intended to, and do not, represent the underlying fair value of Avon.
The methods and assumptions used to estimate fair value are as follows:
Grantor trust - The fair value of these investments, principally fixed income
funds and equity securities, is based on the quoted market prices for issues
listed on exchanges.
Debt maturing within one year and long-term debt and other financing - The fair
value of all debt and other financing is estimated based on the quoted market
prices for issues listed on exchanges.
Forward stock purchases and foreign exchange forward and option contracts - The
fair value of forward and option contracts is estimated based
on quoted market prices from banks.
Interest rate swap and currency swap agreements - The fair value of interest
rate swap and currency swap agreements is estimated based on quotes from the
market makers of these instruments and represents the estimated amounts that
Avon would expect to receive or pay to terminate the agreements.
The asset and (liability) amounts recorded in the balance sheet (carrying
amount) and the estimated fair values of financial instruments at December 31
consisted of the following:
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and equivalents $105.6 $105.6 $141.9 $141.9
Grantor trust 72.2 72.7 61.1 62.7
Debt maturing within one year (55.3) (55.3) (127.0) (127.6)
Long-term debt and other financing (316.6) (322.2) (160.3) (162.7)
Currency swap contract on
long-term debt - - (5.1) (1.7)
Forward stock purchases and
foreign exchange forward and
option contracts 1.7 23.8 5.0 10.3
Interest rate swap receivable .1 1.6 - .1
Interest rate swap payable - - (.7) (2.2)
54
8. Stock Option Plans
A summary of the Company's stock option activity, weighted-average exercise
price and related information for the years ended December 31 is as follows:
1996 1997 1998
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(in 000's) Price (in 000's) Price (in 000's) Price
Outstanding -
beginning
of year 4,818 $14.23 5,750 $16.28 7,070 $22.29
Granted 1,788 19.81 2,860 30.68 1,664 32.40
Exercised (846) 12.08 (1,426) 14.47 (1,412) 17.59
Forfeited (10) 12.47 (114) 27.50 (195) 26.87
------ ------ ------- ------ ------- ------
Outstanding -
end of year 5,750 $16.28 7,070 $22.29 7,127 $25.46
====== ====== ======= ====== ======= ======
Options exer-
cisable -
end of year 1,150 $13.02 1,360 $15.27 2,943 $18.74
====== ====== ======= ====== ======= ======
Exercise prices for options outstanding as of December 31, 1998 consisted
of 2,996,596 options at a price range of $13 to $23, 2,515,599 options at a
price range of $30 to $32 and 1,614,678 options at a price range of $31 to $41,
with weighted-average remaining contractual lives of approximately six years,
seven years and nine years, respectively.
The 1993 Stock Incentive Plan ("1993 Plan") provides for several types of
equity-based incentive compensation awards. Under the 1993 Plan, the maximum
number of shares that may be awarded is 14,100,000 shares, of which no more than
8,000,000 shares may be used for restricted share and stock bonus grants.
Awards, when made, may also be in the form of stock options, stock appreciation
rights, dividend equivalent rights or performance unit awards. Stock options
granted to officers and key employees shall be at a price no less than fair
market value on the date the option is granted. During 1998, 1997 and 1996,
restricted shares with aggregate value and vesting and related amortization
periods were granted as follows: 1998 - 499,000 valued at $16.0 vesting over one
to three years; 1997- 36,000 shares valued at $1.2 vesting over one to three
years; and 1996 - 78,000 shares valued at $1.7 vesting over two to four years.
Effective January 1, 1997, the 1997 Long-Term Incentive Plan ("1997 LTIP")
was authorized under the 1993 Plan. The 1997 LTIP provides for the grant of two
forms of incentive awards, performance units for potential cash incentives and
ten-year stock options. Performance units are earned over the three-year
performance period (1997-1999), based on the degree of attainment of performance
objectives. 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.
Effective January 1, 1994, the 1994 Long-Term Incentive Plan ("1994 LTIP") was
authorized under the 1993 Plan authorizing the grant of two forms of incentive
awards, performance units for potential cash incentives and ten-year stock
options. As of December 31, 1996, required performance goals under the 1994
LTIP were achieved and, accordingly, the cash incentives totaling $31.0 were
paid in early 1997.
Compensation expense under all plans in 1998 was $17.8 (1997 - $15.6; 1996 -
$14.7). The unamortized cost as of December 31, 1998 was $10.5 (1997 - $2.0).
The accrued cost of the performance units in 1998 was $24.1 (1997 - $12.7).
The Company has adopted the disclosure provisions of FAS No. 123, but, as
permitted by the statement, has continued to apply APB No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
employee stock option plans. Under APB No. 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
If the Company had elected to recognize compensation cost for the plans
based on the fair value at the grant dates, consistent with the method
prescribed by FAS No. 123, net income and earnings per share would have been the
pro forma amounts indicated below:
1998 1997 1996
Pro forma net income $263.0 $332.5 $314.9
Pro forma earnings per share:
Basic $ 1.00 $ 1.26 $ 1.18
Diluted $ .99 $ 1.25 $ 1.17
Pro forma information regarding net income and earnings per share is
required by FAS No. 123, and has been determined as if the
55
Company had accounted for its employee stock options under the fair value method
of FAS No. 123. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model which was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option pricing models require the
input of highly subjective assumptions, including the expected stock price
volatility. The weighted-average assumptions used for 1998 were the risk-free
interest rate of approximately 5.5%; dividend yield of 2%; expected volatility
of the market price of the Company's common stock of 25% to 30%; and a weighted-
average expected life of the options of approximately five years. The weighted-
average assumptions used for 1997 and 1996 were the risk-free interest rate of
approximately 6.3% and 5.5%, respectively, dividend yield of 2% and 3%,
respectively, expected volatility of the market price of the Company's common
stock of 25% and 20%, respectively; and a weighted-average expected life of the
options of approximately five and three years, respectively.
9. Shareholders' Equity
Stock Split - On July 22, 1998, the Company declared a two-for-one stock split
in the form of a 100% stock dividend which was distributed in September 1998 to
shareholders of record as of the close of business on August 24, 1998.
Accordingly, the stock split has been recognized by reclassifying the par value
of the additional shares resulting from the split from retained earnings to
common stock and treasury stock. The effect of this stock split was not
retroactively reflected in the consolidated balance sheet and in the statement
of changes in shareholders' equity for 1997 and prior periods. All references
to the number of share and per share amounts elsewhere in the consolidated
financial statements and related footnotes have been restated to reflect the
effect of the split for all periods presented.
Share Rights Plan - Avon has a 1988 Share Rights Plan under which one right has
been declared as a dividend for each outstanding share of its common stock.
Each right, which is redeemable at $.005 at any time at Avon's option, entitles
the shareholder, among other things, to purchase one share of Avon common stock
at a price equal to one-half of the then current market price, if certain events
have occurred. The right is exercisable if, among other events, one party
obtains a beneficial ownership of 20% or more of Avon's voting stock.
Dividends - On February 5, 1998, Avon increased the regular dividend on common
shares to an annual rate of $.68 per share with the first quarterly dividend at
the rate of $.17 per share having been paid on March 2, 1998.
On February 1, 1997, Avon increased the regular dividend on common shares
to an annual rate of $.63 per share, with the first quarterly dividend at the
rate of $.1575 per share having been paid on March 3, 1997.
On February 1, 1996, Avon increased the regular dividend on common shares
to an annual rate of $.58 per share, with the first quarterly dividend at the
rate of $.145 per share having been paid on March 1, 1996.
Stock Repurchase Programs - During 1994, Avon's Board authorized a stock
repurchase program under which Avon would buy back up to 10% of its then
outstanding common stock, or approximately 28.0 million shares. As of February
1997, when the plan ended, the cumulative number of shares repurchased was 25.3
million shares at a total cost of $424.4 which are included in Treasury Stock.
Under a new repurchase program, which began in February 1997, the Company
repurchased approximately 6.7 million shares at a total cost of approximately
$217.2 as of December 31, 1998. Under this new program, the Company may buy
back up to $1,100.0 of its currently outstanding common stock through open
market purchases over a period of up to five years.
Savings Plan - In 1998, Avon contributed 62,520 (1997 - 87,344) shares of
treasury stock to an employees' savings plan and recognized expense for its fair
value. In addition, during 1997, the Company contributed an additional 120,000
shares, for which the expense had been accrued at December 31, 1996. The expense
recognized for the plan in 1998 was $4.5 (1997 - $2.6; 1996 - $7.0).
Board of Directors Remuneration - Effective May 1, 1997, the Company
discontinued the Board retirement plan, which was applicable only to non-
management directors. Directors retiring after that date have had the actuarial
value of their accrued retirement benefits converted to a one-time grant of
common stock which is restricted as to transfer until retirement. Shares
totaling 52,786 were issued to directors as a result of the discontinuance of
the plan. As a replacement for such plan, effective on and after May 1, 1997,
each non-management director is annually granted options to purchase 4,000
shares of common stock, at an exercise price based on the fair market price of
the stock on the date of grant. The annual grant made in 1998 and 1997
consisted of a total of 36,000 and 40,000 options with an exercise price of
$41.31 and $30.82, respectively.
Also effective as of May 1, 1997, the annual retainer paid to non-
management directors was changed to consist of $.025 cash plus an annual grant
of shares having a value of $.025 based on the average closing market price of
the stock for the ten days preceding the date of grant. These shares are also
restricted as to transfer until the director retires from the Board. The annual
grant made in 1998 and 1997 consisted of a total of 5,472 and 8,520 shares,
respectively.
10. Employee Benefit Plans
Retirement Plans - Avon and certain subsidiaries have contributory and
noncontributory retirement plans for substantially all employees. Benefits under
these plans are generally based on an employee's years of service and average
compensation near retirement. Plans are funded on a current basis except where
funding is not required. Plan assets consist primarily of equity securities,
corporate and government bonds, commingled funds and investments in limited
partnerships.
Effective July 1998, the defined benefit retirement plan covering U.S.-based
employees was converted to a cash balance plan with benefits determined by
compensation credits related to age and
56
service and interest credits based on individual account balances and prevailing
interest rates. Additional amendments include an increased company matching
contribution to the savings plan and a ten year transitional benefit arrangement
for certain employees covered under the existing defined benefit retirement
plan.
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.
The following provides a reconciliation of benefit obligations, plan assets and
funded status of these plans:
Pension Postretirement
Benefits Benefits
1998 1997 1998 1997
Change in benefit obligation:
Beginning balance $(889.9) $(874.6) $(197.1) $(196.0)
Service cost (35.4) (35.2) (3.3) (3.0)
Interest cost (64.5) (63.1) (13.0) (13.0)
Actuarial (loss) gain (83.0) (35.9) 1.4 (5.6)
Benefits paid 84.9 61.8 10.2 20.5
Plan amendments - 26.9 - -
Other (11.9) 30.2 - -
-------- -------- -------- --------
Ending balance $(999.8) $(889.9) $(201.8) $(197.1)
Change in plan assets:
Beginning balance $ 785.5 $ 690.7 $ - $ -
Actual return on - -
plan assets 102.9 117.3 - -
Company contributions 61.3 48.0 10.2 20.5
Plan participant - -
contributions 1.5 1.2 - -
Benefits paid (84.9) (61.8) (10.2) (20.5)
Other (3.2) (9.9) - -
-------- -------- -------- --------
Ending balance $ 863.1 $ 785.5 $ - $ -
Funded status of the plan $(136.7) $(104.4) $(201.8) $(197.1)
Unrecognized actuarial
loss(gain) 139.3 99.3 (6.2) (6.2)
Unrecognized prior
service cost (9.6) (7.2) - -
Unrecognized net transition
obligation(asset) 1.3 (3.0) - -
-------- -------- -------- --------
Prepaid (Accrued)
benefit cost $ (5.7) $ (15.3) $(208.0) $(203.3)
Amount recognized in the
statements:
Prepaid benefit $ 138.0 $ 115.2 $ - $ -
Accrued liability (143.7) (130.5) (208.0) (203.3)
Additional minimum liability (19.7) (18.1) - -
Intangible asset 4.3 18.1 - -
Accumulated other
comprehensive income 15.4 - - -
-------- -------- -------- --------
$ (5.7) $ (15.3) $(208.0) $(203.3)
At December 31, 1998 and 1997, the weighted-average discount rates used in
determining the pension benefit obligation were 6.7% and 7.0%, respectively. At
December 31, 1998 and 1997, the weighted-average discount rates used in
determining the postretirement benefit obligation were 7.0% and 7.2%,
respectively.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension and postretirement benefit plans with accumulated
benefits obligations in excess of plan assets were $435.4, $397.7, and $30.7,
respectively, as of December 31, 1998 and $412.4, $380.1, and $31.8,
respectively as of December 31, 1997.
Net periodic benefit cost for the years ended December 31 was determined as
follows:
Pension Postretirement
Benefits Benefits
1998 1997 1996 1998 1997 1996
Service cost $ 35.4 $ 35.2 $ 36.6 $ 3.3 $ 3.0 $ 3.3
Interest cost 64.5 63.1 61.4 13.0 13.0 14.0
Expected return on plan assets (64.0) (58.9) (58.9) - - -
Amortization of transition
(liability) asset (6.8) (6.8) (6.6) - - -
Amortization of prior
service cost (.4) 3.6 3.7 - - -
Amortization of actuarial
losses (gains) 12.3 7.7 8.9 - - -
Settlements or curtailments - 4.6 .3 - - -
Other .3 - 1.0 - - -
------ ------ ------ ----- ----- -----
Net periodic benefit cost $ 41.3 $ 48.5 $ 46.4 $16.3 $16.0 $17.3
The weighted-average assumptions used to determine the data for the years ended
December 31 are as follows:
Pension Postretirement
Benefits Benefits
1998 1997 1996 1998 1997 1996
Discount rate 7.1% 7.4% 7.3% 7.2% 7.7% 7.2%
Rate of compensation increase 4.0 4.7 4.5 4.5 4.5 4.5
Rate of return on assets 9.2 9.2 9.3 N/A N/A N/A
57
For 1998, the assumed rate of future increases in the per capita cost of
health care benefits (the health care cost trend rate) was 8.1% for pre-65
claims (7.8% for post-65 claims) and will gradually decrease each year
thereafter to 5.0% in 2005 and beyond. The healthcare cost trend rate
assumption has a significant effect on the amounts reported. A one-percentage
point change in the assumed health care cost trend rates would have the
following effects:
1 Percentage 1 Percentage
(In millions) Point Increase Point Decrease
Effect on total of service
and interest cost components 2.4 2.0
Effect on postretirement benefit
obligation 22.9 19.1
Supplemental Executive Retirement and Life Insurance Plans - Avon has a
Supplemental Executive Retirement Plan ("SERP") which is a defined benefit plan
under which Avon will pay supplemental pension benefits to key executives
in addition to amounts received under Avon's retirement plan. The annual cost of
this plan has been included in the determination of the net periodic benefit
cost shown above and in 1998 amounted to $6.1 (1997 - $5.5; 1996 - $5.5). Such
benefits will be paid from Avon's assets. The accumulated benefit obligation
under this plan at December 31, 1998 was $21.9 (1997 - $22.8) 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, 1998
was $22.4 (1997 - $20.6) and is held in a grantor trust. During 1997, certain
retirees elected to receive a cash distribution from the SLIP approximating
$10.0 which was funded by corporate-owned life insurance policies.
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, 1998, amounted to $94.5 (1997 - $81.7),
consisting of a fixed income portfolio, a managed portfolio of equity securities
and corporate-owned life insurance policies. These assets are included in Other
Assets.
Postemployment Benefits - Avon provides postemployment benefits which include
salary continuation, severance benefits, disability benefits, continuation of
health care benefits and life insurance coverage to former employees after
employment but before retirement. At December 31, 1998, the accrued cost for
postemployment benefits was $33.5 (1997 - $35.0) and is included in Employee
Benefit Plans.
11. Segment Information
The Company's reportable segments are based on geographic operations and include
a North American business unit and International business units in Latin
America, Pacific and Europe regions. The segments have similar business
characteristics and each offers similar products through common customer access
methods.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to the Consolidated Financial Statements. The
Company evaluates the performance of its operating segments based on operating
profits or losses. Segment revenues reflect direct sales of products to
representatives based on their geographic location. Intersegment sales and
transfers are not significant. Each segment records direct expenses related to
its employees and its operations. The Company does not allocate income taxes,
foreign exchange gains or losses, or corporate overhead expenses to operating
segments. Identifiable assets are primarily those directly used in the
operations of each segment. "Other" assets include corporate cash, investments,
deferred tax assets and certain intangibles.
Summarized financial information concerning the Company's reportable segments as
of December 31, is shown in the following table. Net sales and operating profit
by reportable segment are presented on page 32.
Identifiable Assets:
1998 1997 1996
North America
US $ 497.2 $ 516.0 $ 473.3
Other* 111.9 118.3 86.1
-------- -------- --------
Total 609.1 634.3 559.4
International
Latin America 530.8 481.4 461.7
Europe 390.1 361.9 376.4
Pacific 379.9 376.7 382.4
-------- -------- --------
Total 1,300.8 1,220.0 1,220.5
Corporate and other 523.6 418.6 442.5
-------- -------- --------
Total identifiable assets $2,433.5 $2,272.9 $2,222.4
58
Capital Expenditures:
1998 1997 1996
North America
US $ 32.1 $ 24.0 $ 19.9
Other* 11.7 5.2 2.8
-------- -------- --------
Total 43.8 29.2 22.7
International
Latin America 33.5 21.4 14.7
Europe 28.8 17.5 21.3
Pacific 28.1 41.2 28.0
-------- -------- --------
Total 90.4 80.1 64.0
Corporate and Other 55.3 60.1 16.9
-------- -------- --------
Total capital expenditures $ 189.5 $ 169.4 $ 103.6
Depreciation and Amortization:
1998 1997 1996
North America
US $ 19.2 $ 17.9 $ 16.0
Other* 2.4 2.2 1.9
-------- -------- --------
Total 21.6 20.1 17.9
International
Latin America 12.0 10.7 10.2
Europe 14.9 14.8 14.4
Pacific 11.2 15.3 13.0
-------- -------- --------
Total 38.1 40.8 37.6
Corporate and Other 12.3 11.2 9.0
-------- -------- --------
Total depreciation
and amortization $ 72.0 $ 72.1 $ 64.5
*Includes operating information for Puerto Rico, Dominican Republic, Canada and
Discovery Toys.
The following table presents consolidated net sales by classes of principal
products, as of December 31.
1998 1997 1996
Cosmetics, fragrance and toiletries $3,181.6 $3,093.9 $2,946.8
Gift and decorative 1,050.6 1,049.7 934.1
Apparel 572.0 565.6 556.3
Fashion jewelry and accessories 408.5 370.2 377.0
-------- -------- --------
Total $5,212.7 $5,079.4 $4,814.2
Foreign Exchange - Financial statement translation of subsidiaries operating in
highly inflationary economies and foreign currency transactions resulted in
(gains) losses in 1998 netting to ($1.1) (1997 - $2.2; 1996 - $3.1), which are
included in other (income) 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 in 1998 of $15.8 (1997 - $6.0; 1996 - $12.6).
12. Leases and Commitments
Minimum rental commitments under noncancellable operating leases, primarily for
equipment and office facilities at December 31, 1998, consisted of the
following:
Year
1999 $ 65.5
2000 51.2
2001 38.4
2002 28.6
2003 22.9
Later years 230.1
Sublease rental income (6.3)
-------
Total $430.4
Rent expense in 1998 was $84.7 (1997 - $88.2; 1996 - $89.7). Various
construction and information systems projects were in progress at December 31,
1998 with an estimated cost to complete of approximately $87.4.
13. Special and Non-Recurring Charges
In October 1997, the Company announced a worldwide business process redesign
program to streamline operations and improve profitability through margin
improvement and expense reductions. The special and non-recurring charges
associated with this program totaled $154.4 pretax ($122.8 net of tax, or $.46
per share on a basic and diluted basis) for the year ended December 31, 1998.
For the year ended December 31, 1998, special and non-recurring charges by
business segment are as follows:
Special Cost of
Charges Sales Charge Total
North America $ 58.9 $25.7 $ 84.6
Latin America 2.3 4.0 6.3
Europe 14.2 4.0 18.2
Pacific 23.1 4.2 27.3
Corporate 18.0 - 18.0
------ ----- ------
Total $116.5 $37.9 $154.4
59
For the year ended December 31, 1998, special and non-recurring charges by
category of expenditures are as follows:
Special Cost of
Charges Sales Charge Total
Employee severance
costs $ 56.4 $ - $ 56.4
Inventories - 37.9 37.9
Write-down of assets
to net realizable
value 31.8 - 31.8
Field program buy-out 14.4 - 14.4
Other 13.9 - 13.9
------ ----- ------
$116.5 $37.9 $154.4
Employee severance costs are expenses, both domestic and international,
associated with the realignment of the Company's global operations. The
workforce will be reduced by approximately two thousand employees, or 7% of the
total. Approximately one-half of the employees to be terminated relate to the
facility closures. As of December 31, 1998, approximately 90% of the two
thousand employees have been terminated.
Inventory-related charges represent losses to write down the carrying value
of non-strategic inventory prior to disposal. These charges result from the
closure of facilities, discontinuation of certain product lines, size-of-line
reductions and a change in strategy for product dispositions.
The write-down of assets relates to the closure of a Far East buying office
and manufacturing facilities in Puerto Rico and the Dominican Republic. As a
result of ongoing government restrictions, the Company has also decided to close
certain branches and a regional office in China. Also, write-downs include
assets (primarily fixed and intangible assets) associated with the divestiture
of the Discovery Toys business unit, which was effective January 15, 1999.
The field program buy-out represents costs to revamp the Company's
representative recruitment program in the U.S.
"Other" category primarily represents lease and contract termination costs,
litigation costs, and other costs associated with the facility closures.
The liability balance at December 31, 1998 is as follows:
Special Cost of
Charges Sales Charge Total
Provision $116.5 $37.9 $154.4
Cash expenditures:
Severance (43.6) - (43.6)
Field program buy-out (12.6) - (12.6)
Other (9.8) - (9.8)
Non-cash write-offs (22.0) (37.9) (59.9)
------- ------ -------
Total $ 28.5 $ - $ 28.5
The balance at December 31, 1998 relates primarily to employee severance
costs that will be paid during 1999.
The Company expects to record additional charges in 1999 as plans are
finalized.
14. Contingencies
Various lawsuits and claims (asserted and unasserted), arising in the ordinary
course of business or related to businesses previously sold, are pending or
threatened against Avon.
In 1991, a class action lawsuit was initiated against Avon on behalf of
certain classes of holders of Avon's Preferred Equity-Redemption Cumulative
Stock ("PERCS"). This lawsuit alleges various contract and securities law claims
relating to the PERCS (which were fully redeemed that year). Avon has rejected
the assertions in this case, believes it has meritorious defenses to the claims
and is vigorously contesting this lawsuit.
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, 1998
should not have a material adverse impact on Avon's consolidated financial
position, results of operations or cash flows.
15. Subsequent Event
On February 4, 1999, Avon's Board approved an increase in the quarterly
cash dividend to $.18 per share from $.17. The first dividend at the new rate
will be paid on March 1, 1999 to shareholders of record on February 16, 1999.
On an annualized basis, the new dividend rate will be $.72 per share.
60
Report of Management
The accompanying consolidated financial statements of Avon Products, Inc. have
been prepared by management in conformity with generally accepted accounting
principles and necessarily include amounts that are based on judgments and
estimates. The audit report of PricewaterhouseCoopers LLP, independent
accountants, on these financial statements is the result of their audits of
these consolidated financial statements, which were performed in accordance with
generally accepted auditing standards.
Avon maintains an internal control structure and related systems, policies
and procedures designed to provide reasonable assurance that assets are
safeguarded, transactions are executed in accordance with appropriate
authorization and accounting records may be relied upon for the preparation of
financial information. Avon also maintains an internal audit department that
evaluates and formally reports to management on the adequacy and effectiveness
of controls, policies and procedures.
The audit committee of the board of directors, comprised solely of outside
directors, has an oversight role in the area of financial reporting and internal
controls. This committee meets several times during the year with management,
PricewaterhouseCoopers LLP and the internal auditors to monitor the proper
discharge of each of their respective responsibilities. PricewaterhouseCoopers
LLP and the internal auditors have free access to management and to the audit
committee to discuss the results of their activities and the adequacy of
controls.
It is management's opinion that Avon's policies and procedures, reinforced
by the internal control structure, provide reasonable assurance that operations
are managed in a responsible and professional manner with a commitment to the
highest standard of business conduct.
Charles R. Perrin Robert J. Corti
Chief Executive Officer Executive Vice President,
Chief Financial Officer
Report of Independent Accountants
To the Shareholders of Avon Products, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of Avon
Products, Inc. and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Avon's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 4, 1999
61
Eleven-Year Review
In millions, except per share and employee data
1998 1997 1996 1995
Income data
Net sales $5,212.7 $5,079.4 $4,814.2 $4,492.1
Operating Profit 479.5 544.1 544.8 507.5
Interest expense 41.0 41.8 40.0 41.3
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 455.9(3) 534.9 510.4 465.0
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 265.1(3) 337.0 319.0 288.6
Income from
continuing operations 270.0(3) 338.8 317.9 286.1
Income (loss) from
discontinued
operations, net - - - (29.6)
Cumulative effect
of accounting
changes, net - - - -
Net income (loss) 270.0(3) 338.8 317.9 256.5
Earnings (loss) per share
- basic (1) (2)
Continuing operations $ 1.03(3) $ 1.28 $ 1.19 $ 1.05
Discontinued operations - - - (.11)
Cumulative effect of
accounting changes - - - -
Net income (loss) 1.03(3) 1.28 1.19 .94
Earnings (loss) per share
- diluted (1) (2)
Continuing operations $ 1.02(3) $ 1.27 $ 1.18 $ 1.05
Discontinued operations - - - (.11)
Cumulative effect of
accounting changes - - - -
Net income (loss) 1.02(3) 1.27 1.18 .94
Cash dividends per share
Common $ .68 $ .63 $ .58 $ .53
Preferred - - - -
Balance sheet data
Working capital $ 11.9 $ (11.9) $ (41.7) $ (30.3)
Capital expenditures 189.5 169.4 103.6 72.7
Property, plant and
equipment, net 669.9 611.0 566.6 537.8
Total assets 2,433.5 2,272.9 2,222.4 2,052.8
Debt maturing within one year 55.3 132.1 97.1 47.3
Long-term debt 201.0 102.2 104.5 114.2
Total debt 256.3 234.3 201.6 161.5
Shareholders' equity 285.1 285.0 241.7 192.7
Number of employees
United States 8,000 8,100 7,800 8,000
International 25,900 26,900 25,900 23,800
------ ------ ------ ------
Total employees 33,900 35,000 33,700 31,800
====== ====== ====== ======
62
1994 1993 1992 1991
Income data
Net sales $4,266.5 $3,844.1 $3,660.5 $3,441.0
Operating Profit 495.6 433.2 345.2 434.7
Interest expense 50.8 45.2 43.7 75.4
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 433.8 394.6 290.0(5) 352.9
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 270.3 243.8 169.4(5) 209.3
Income from
continuing operations 264.8 236.9 164.2(5) 204.8
Income (loss) from
discontinued
operations, net (23.8) 2.7 10.8 (69.1)
Cumulative effect
of accounting
changes, net (45.2)(4) (107.5)(4) - -
Net income (loss) 195.8 132.1 175.0(5) 135.7
Earnings (loss) per share
- basic (1) (2)
Continuing operations $ .94 $ .82 $ .57(5) $ .65(6)
Discontinued operations (.09) .01 .04 (.24)
Cumulative effect of
accounting changes (.16) (.37) - -
Net income (loss) .69 .46 .61(5) .41(6)
Earnings (loss) per share
- diluted (1) (2)
Continuing operations $ .93 $ .82 $ .57(5) $ .71(6)
Discontinued operations (.08) .01 .04 (.24)
Cumulative effect of
accounting changes (.16) (.37) - -
Net income (loss) .69 .46 .61(5) .47(6)
Cash dividends per share
Common $ .48 $ .43 $ .38 $ 1.10(8)
Preferred - - - .253
Balance sheet data
Working capital $ 9.3 $ 23.1 $ (99.5) $ (135.3)
Capital expenditures 99.9 58.1 62.7 61.2
Property, plant and
equipment, net 528.4 476.2 476.7 468.5
Total assets 1,978.3 1,918.7 1,692.6 1,693.3
Debt maturing within one year 61.2 70.4 37.3 143.8
Long-term debt 116.5 123.7 177.7 208.1
Total debt 177.7 194.1 215.0 351.9
Shareholders' equity 185.6 314.0 310.5 251.6
Number of employees
United States 7,900 8,000 8,700 9,200
International 22,500 21,500 20,700 20,900
------ ------ ------ ------
Total employees 30,400 29,500 29,400 30,100
====== ====== ====== ======
Avon Products, Inc.
1990 1989 1988
Income data
Net sales $3,291.6 $2,998.3 $2,835.2
Operating Profit 413.3 372.6 317.6
Interest expense 77.5 118.0 112.9
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 305.6 252.9 208.3
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 180.3 134.1 121.1
Income from
continuing operations 174.1 126.5 112.3
Income (loss) from
discontinued
operations, net 21.2 (71.9) (536.8)
Cumulative effect
of accounting
changes, net - - 20.0(4)
Net income (loss) 195.3 54.6 (404.5)
Earnings (loss) per share
- basic (1) (2)
Continuing operations $ .61 $ .41(7) $ .38(7)
Discontinued operations .09 (.33) (2.16)
Cumulative effect of
accounting changes - - .08
Net income (loss) .70 .08(7) (1.70)(7)
Earnings (loss) per share
- diluted (1) (2)
Continuing operations $ .58 $ .40(7) $ .38(7)
Discontinued operations .07 (.32) (2.16)
Cumulative effect of
accounting changes - - .08
Net income (loss) .65 .08(7) (1.70)(7)
Cash dividends per share
Common $ .25 $ .25 $ .38
Preferred .50 .50 .25
Balance sheet data
Working capital $ 71.6 $ 56.3 $ 51.0
Capital expenditures 36.3 33.3 46.0
Property, plant and
equipment, net 467.2 472.5 529.1
Total assets 2,010.1 1,994.1 2,362.6
Debt maturing within one year 207.1 151.7 205.6
Long-term debt 334.8 673.2 917.9
Total debt 541.9 824.9 1,123.5
Shareholders' equity 393.4 228.3 239.3
Number of employees
United States 9,500 9,400 9,700
International 20,300 19,900 18,400
------ ------ ------
Total employees 29,800 29,300 28,100
====== ====== ======
(1) Two-for-one stock splits were distributed in September 1998 and June 1996.
All per share data in this report, unless indicated, have been restated to
reflect the splits.
(2) Effective for the year ended December 31, 1997, the Company adopted FAS No.
128, "Earnings per Share". FAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and replaces the presentation of
previously disclosed EPS with both basic and diluted EPS. Based upon the
Company's capitalization structure, the EPS amounts calculated in accordance
with FAS No. 128 approximated the Company's EPS amounts in accordance with
Accounting Principles Board Opinion No. 15, "Earnings per Share". All prior
period EPS data have been restated in accordance with FAS No. 128.
(3) In 1998, Avon began a worldwide business process redesign program in order
to streamline operations and recorded special and non-recurring charges of
$154.4 ($122.8 net of tax, or $.46 per share on a basic and diluted basis).
Excluding the special and non-recurring charges, net income in 1998 increased
16% to $392.8 from $338.8.
(4) Effective January 1, 1994, Avon adopted Statement of Financial Accounting
Standards ("FAS") No. 112, "Employers' Accounting for Postemployment Benefits",
for all applicable operations, and FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", for its foreign benefit plans.
Effective January 1, 1993, Avon adopted FAS No. 106 for its U.S. retiree health
care and life insurance benefit plans and FAS No. 109, "Accounting for Income
Taxes". Effective January 1, 1988, Avon adopted FAS No. 96, "Accounting for
Income Taxes".
(5) In 1992, Avon began the restructuring of its worldwide manufacturing and
distribution facilities and recorded a provision of $96.0 ($64.4 after tax, or
$.22 per share on a basic and diluted basis). Income from continuing operations
in 1993 increased 4% from $228.6, or $.79 per share on a basic and diluted
basis, excluding the 1992 restructuring charge.
(6) For 1991, in management's opinion, per share amounts assuming dilution,
even though the result is antidilutive, provide the most meaningful comparison
of per share data because they show the full effect of the conversion of 72
preferred shares into approximately 51.84 common shares on June 3, 1991.
(7) In 1989 and 1988, the calculation of earnings per share was assumed to be
antidilutive and, accordingly, earnings per share were not adjusted for the
conversion of preferred shares into additional common shares.
(8) Includes special dividend of $.75 paid in 1991.