EXHIBIT 13
Introductory Note--Restatements
In connection with the settlement of the previously disclosed
investigation by the Securities and Exchange Commission ("SEC") relating to the
write off of an order management software system known as the "FIRST" project,
Avon has restated its Consolidated Financial Statements as of December 31,
2001, 2000 and 1999 and for the years then ended and for each of the fiscal
quarters ended March 31, 1999 through March 31, 2002. Avon had written off
$14.8 pretax, or $10.0 after tax, of FIRST assets in the first quarter of 1999
and $23.9 pretax, or $14.5 after tax, of FIRST assets in the third quarter of
2001. Avon has restated its financial statements to reflect the additional
write off as of March 31, 1999 of all capitalized costs ($23.3 pretax, or $14.0
after tax), associated with the FIRST project as of that date and a reversal of
the charge recorded in the third quarter of 2001. Other FIRST-related activity
(capitalized costs and amortization) recorded during 1999-2002 has also been
restated. A description of the adjustments that comprise the restatements is
set forth in Notes 2 and 15 of the Notes to Consolidated Financial Statements
filed with this Form 10-K/A.
The accompanying financial statements have been restated to reflect the
restatements discussed above as well as the accounting changes outlined in Note
2. No attempt has been made in this Form 10-K/A to modify or update any
disclosures except as required to reflect the results of the restatements
discussed above and any changes made to prior period financial information for
which a Form 10-K/A was not filed.
1
Management's Discussion and Analysis (Restated)
Avon Products, Inc.
Dollars in millions, except share data
The following discussion of the results of operations and financial
condition of Avon Products, Inc. ("Avon" or the "Company") should be read in
conjunction with the information contained in the Consolidated Financial
Statements and Notes thereto. These statements have been prepared in conformity
with generally accepted accounting principles which require management to make
estimates and assumptions that affect amounts reported and disclosed in the
financial statements and related notes. Actual results could differ from these
estimates.
Cautionary Statement for Purposes of the "Safe Harbor" Statement
Under the Private Securities Litigation Reform Act of 1995
Certain statements in this report which are not historical facts or
information are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, including, but not limited to, the
information set forth herein. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, levels of activity, performance or achievement of the Company, or
industry results, to be materially different from any future results, levels of
activity, performance or achievement expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
General economic and business conditions; the ability of the Company to
implement its business strategy; the Company's access to financing and its
management of foreign currency risks; the Company's ability to successfully
identify new business opportunities; the Company's ability to attract and
retain key executives; the Company's ability to achieve anticipated cost
savings and profitability targets; the impact of substantial currency exchange
devaluations in the Company's principal foreign markets; changes in the
industry; competition; the effect of regulatory and legal restrictions imposed
by foreign governments; the effect of regulatory and legal proceedings and
other factors discussed in Item 1 of the Company's Form 10-K/A. As a result of
the foregoing and other factors, no assurance can be given as to the future
results and achievements of the Company. Neither the Company nor any other
person assumes responsibility for the accuracy and completeness of these
statements.
Results of Operations
Consolidated - Net income in 2000 was $479.1 compared with $286.6 in 1999. Basic
and diluted earnings per share in 2000 were $2.01 and $1.99, respectively,
compared with $1.12 and $1.10, respectively, in 1999. Net income for 1998 was
$270.0 and basic and diluted earnings per share were $1.03 and $1.02,
respectively.
Effective January 1, 2000, the Company changed its method of accounting
for revenue recognition in accordance with Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements." See Note 3 of the Notes to
Consolidated Financial Statements. The cumulative effect of the change on prior
years resulted in a charge of $6.7, net of a tax benefit of $3.5, or $.03 per
share on a basic and diluted basis, which is included in net income for the year
ended December 31, 2000. The effect of the accounting change in 2000 was to
decrease net income before the cumulative effect of the accounting change by
$1.1.
In addition, the 2000 results include the settlement of a federal
income tax refund, which was received in January 2001, consisting of $32.5 of
tax and $62.7 of interest related to the years ended December 31, 1982, 1983,
1985 and 1986. For the year ended December 31, 2000, the Company recognized
$40.1 ($.17 and $.16 per share on a basic and diluted basis, respectively) as an
income tax benefit in the Consolidated Statements of Income, resulting from the
impact of the tax refund offset by taxes due on interest received and other
related tax obligations.
2
Special and non-recurring charges were recorded in the first quarter of 1999
for the Company's business process redesign ("BPR") program. These charges
totaled $136.4 pretax, which reduced net income by $111.9 after tax, or $.43
per share on a diluted basis. In addition, in 1999, the company recorded an
Asset impairment charge of $38.1 related to the write off of an order
management software system, which reduced net income by $24.0 or $.09 per
diluted share. The 1998 results include special and non-recurring charges
totaling $154.4 pretax, which reduced net income by $122.8 after tax, or $.46
per share on a basic and diluted basis. See Notes 14 and 15 of the Notes to
Consolidated Financial Statements for further discussion of these charges.
Consolidated net sales increased 7% in 2000 to $5.68 billion from $5.29 billion
in 1999. Sales in North America increased 5% to $2.15 billion in 2000.
International sales increased 9% to $3.53 billion due to strong growth in the
Latin American and Pacific regions and, to a lesser extent, in the European
region. In 1999, consolidated net sales of $5.29 billion increased 1% from $5.21
billion in 1998. Sales in North America increased 1% to $2.05 billion in 1999.
International sales increased 2% to $3.24 billion due to strong growth in the
Pacific region and in Europe, partially offset by declines in Latin America.
Excluding the unfavorable impact of foreign currency translation, consolidated
net sales would have increased 11% and 9% in 2000 and 1999, respectively.
Other revenue includes shipping and handling fees billed to Representatives and
totaled $40.9, $38.8 and $35.0 in 2000, 1999 and 1998, respectively.
Cost of sales as a percentage of total revenue was 37.9% in 2000, compared with
38.1% in 1999 and 39.1% in 1998. The 1999 and 1998 cost of sales included $46.0
and $37.9, respectively, of non-recurring charges for inventory write-downs
related to the Company's BPR program. The charges related to the closure of
facilities, discontinuation of certain product lines, size-of-line reductions
and a change in strategy for product dispositions. See Note 14 of the Notes to
Consolidated Financial Statements for further discussion of these charges.
Excluding the charges, cost of sales as a percentage of total revenue was 37.3%
in 1999 versus 38.4% in 1998.
In 2000, the gross margin variance versus 1999 was due to improvements in all
international regions, most significantly in the Pacific region, including Japan
and China, as well as Central and Eastern Europe, due to lower product costs on
imports from euro countries coupled with a shift in mix to higher margin
products, and in Russia, due to a favorable comparison resulting from a discount
pricing policy in 1999. Gross margins remained level with prior year in Brazil
and the U.S. These improvements were partially offset by declines in Puerto
Rico, due to inventory variations related to the consolidation of operations,
and in Mexico and the Philippines, resulting from higher sales of a lower margin
mix of cosmetics, fragrance and toiletries ("CFT") products and selective price
cuts to meet competition. In addition, the 2000 financial information was
restated to reflect certain accounting changes (see Note 2 of the Notes to
Consolidated Financial Statements), which had an unfavorable impact on gross
margin, and no restatements were made to the 1999 Financial Statements for these
changes.
In 1999, the favorable gross margin variance versus 1998 was due to improvements
in all regions, most significantly in Europe, including the United Kingdom,
Germany, Italy and Central Europe, due to a continuing focus on pricing
strategies and improved profitability of Beauty Plus categories, including
fashion jewelry and accessories. Japan, Mexico and the U.S. also posted strong
gross margin improvements. These improvements were partially offset by a decline
in Brazil, resulting from higher costs in the second half of 1999 as a result of
major currency devaluation, and in Russia, due to a pricing discount policy
begun in the fourth quarter of 1998.
3
Marketing, distribution and administrative expenses of $2.76 billion increased
$116.6, or 4%, over prior year, but decreased as a percentage of total revenue
to 48.3% from 49.6% in 1999. The overall improvement in the expense ratio was
due to a favorable expense ratio in Mexico, resulting from lower marketing and
promotional expenses associated with product introductions, in Russia, due to
strict expense controls as well as favorable comparisons against prior year, and
in the Philippines and China, reflecting fixed administrative expenses on a
higher sales base. Expense ratio improvements were partially offset by higher
expenses in Argentina, reflecting increased advertising and brochure costs, in
the United Kingdom, due to increased shipping and distribution costs from
decreased capacity of shipping lines during transition to a new system, and in
Puerto Rico, reflecting higher transitional expenses related to the
consolidation of operations.
Marketing, distribution and administrative expenses of $2.64 billion in 1999
increased $39.8, or 2%, over 1998, but remained level as a percentage of total
revenue versus 1998. Expense ratio improvements were reported in Brazil
reflecting strict expense management and BPR initiatives, in Japan reflecting
BPR efforts, and in Central Europe reflecting volume efficiencies and a
significant reduction in expenses. These improvements were offset by higher
expense ratios in Mexico due to increased advertising and incentive programs in
1999, in Germany due to strategic marketing investments, in Venezuela due to
increased incentive programs and in the United Kingdom due to higher shipping
expenses, most significantly in the fourth quarter of 1999.
Interest expense increased $41.5 in 2000 to $84.7 and $8.5 in 1999 to $43.2. The
increases in both 2000 and 1999 are primarily the result of increased domestic
borrowings related to the acceleration of the Company's share repurchase
program, which occurred in the second half of 1999, and working capital
requirements.
Interest income in 2000 of $8.5 versus the prior year decreased $2.6 primarily
resulting from reduced interest rates in Brazil and Mexico during 2000. Interest
income in 1999 of $11.1 decreased $4.8 versus 1998 mainly due to a tax refund
claim recognized in 1998.
In 2000, other expense (income) net was $10.8 unfavorable to 1999 mainly due to
favorable foreign exchange in 1999 resulting from gains on Brazilian forward
contracts and, to a lesser extent, a value added tax refund in China in 1999,
partially offset by favorable comparisons versus 1999, primarily in Europe and
the Pacific. In 1999, other expense (income) net was $12.2 unfavorable to 1998
due primarily to unfavorable net foreign exchange in 1999 resulting from
exchange losses, primarily in Europe and Latin America.
Income taxes were $202.2 in 2000 and the effective tax rate was 29.2% compared
with $193.7 in 1999 and an effective tax rate of 40.3%. Excluding the effect of
a federal income tax refund in 2000 and special and non-recurring charges in
1999, the effective tax rate was 35.0% and 35.5% in 2000 and 1999, respectively.
The effective tax rate was lower in 2000 versus 1999 due to the settlement of
foreign audits, dividend planning, utilization of net operating loss
carryforwards and the mix of earnings and income tax rates of the international
subsidiaries. Income taxes in 1998 were $190.8 and the effective tax rate was
41.9% (36.4% excluding the effect of the special and non-recurring charges).
Inflation in the United States has remained at a relatively low level during the
last three years and has not had a major effect on Avon's results of operations.
Many countries in which Avon has operations have experienced higher rates of
inflation than the United States, including Venezuela and Russia, which
experienced high cumulative rates of inflation over the past three years. Mexico
was converted to non-hyperinflationary status beginning January 1, 1999 due to
reduced cumulative inflation rates during the three-year period 1996 through
1998.
4
Below is an analysis of the key factors affecting net sales and operating
profit by reportable segment for each of the years in the three-year period
ended December 31, 2000.
Years ended December 31 2000 1999 1998
---- ---- ----
Net Operating Net Operating Net Operating
Sales Profit Sales Profit Sales Profit
------- -------- ------- --------- -------- ----------
North America:
U.S. $1,894.9 $ 343.5 $1,809.3 $ 329.3 $1,774.0 $ 302.8
Other* 253.0 24.7 241.0 31.2 259.7 29.3
-------- -------- ------- ------- -------- -------
Total 2,147.9 368.2 2,050.3 360.5 2,033.7 332.1
International:
Latin America North** 848.8 215.2 731.7 181.6 636.0 156.4
Latin America South** 992.0 200.3 909.0 184.9 1,057.0 198.9
-------- -------- -------- ------- ------- -------
Latin America 1,840.8 415.5 1,640.7 366.5 1,693.0 355.3
Europe 885.6 129.5 878.0 126.2 862.7 102.2
Pacific 799.4 117.8 720.1 102.1 623.3 62.5
-------- -------- -------- ------- -------- -------
Total 3,525.8 662.8 3,238.8 594.8 3,179.0 520.0
Total from operations $5,673.7 1,031.0 $5,289.1 955.3 $5,212.7 852.1
Global expenses (241.1) (257.7) (224.5)
Special and
non-recurring
charges - (136.4) (154.4)
Asset impairment charge - (38.1) -
Reclassifications for
Accounting changes
(Note 2) 8.0 - - - - -
-------- -------- -------- -------- -------- -------
Total $5,681.7 $ 789.9 $5,289.1 $ 523.1 $5,212.7 $ 473.2
======== ======== ======== ======== ======== =======
*Includes operating information for Canada and Puerto Rico.
** Latin America North includes the major markets of Mexico, Venezuela and
Central America. Latin America South includes the major markets of Brazil,
Argentina, Chile and Peru.
2000 Compared to 1999
North America - Net sales in North America increased 5% to $2.15 billion in
2000. The U.S. business, which represents almost 90% of the North American
segment, reported sales growth of 5%. The sales increase in the U.S. resulted
primarily from a 6% increase in the number of units sold, a 2% increase in
active Representatives and a higher average CFT order size. Sales improvements
in the U.S. resulted from increases in CFT categories, fashion jewelry and
watches and accessories, partially offset by declines in apparel and home
entertainment products. U.S. sales of CFT increased 7% over 1999 reflecting a
double-digit increase in skincare, primarily due to strong launches of
Botanisource and Anew Retroactive, which was the largest CFT launch ever. Color
cosmetics also reported double-digit increases versus prior year, reflecting our
commitment to the Avon Color brand and powerful new product introductions, such
as Nailwear and Glazewear. Growth in the fragrance category was driven by strong
performance in Men's brands. The personal care category also contributed to the
sales increase, particularly from the strength of the new launch of Chamomile
and sales of existing Skin-So-Soft lines, which reported the largest increases
ever for this brand. Fashion jewelry and watches increased mid-single digits
versus 1999 due to strategic growth in fashion and fine jewelry segments. Higher
sales in accessories were driven by strong performance in fashion accessories,
including handbags, totes and small leather goods. These increases were
partially offset by declines in the apparel category, due to softness in casual
wear items, and lower sales in home entertainment products, resulting from fewer
new product introductions.
5
Operating profit in North America increased 2% to $368.2 in 2000 due to the
region's increased sales, discussed above, while the operating margin declined
0.5 points. The decline in operating margin is primarily due to an increase in
the operating expense ratio in Puerto Rico caused by higher transitional
expenses related to the consolidation of operations. Operating profit in the
U.S. of $343.5 increased 4% versus 1999 reflecting sales growth, partially
offset by a slightly unfavorable expense ratio. The expense ratio in the U.S.
was negatively impacted by asset writedowns associated with the closure of
certain Company-owned Avon Beauty Centers. Excluding the asset writedowns, the
expense ratio was favorable to 1999 resulting from cost containment, BPR savings
and lower benefit expenses partially offset by increased spending on advertising
and e-commerce initiatives.
International
International sales increased 9% to $3.53 billion and operating profit increased
11% to $662.8 in 2000. Excluding the effect of foreign exchange, international
sales increased 14% in 2000 with double-digit increases in all regions.
In Latin America, sales increased 12% to $1.84 billion in 2000 driven by
improvements in all major markets, with Mexico, Brazil and Venezuela being the
main contributors. Excluding the impact of foreign exchange, sales in Latin
America increased 15% in 2000. Units and active Representatives for the region
rose 4% and 10%, respectively, versus the same period in 1999. The sales growth
in Mexico was driven by increases in the number of units sold, active
Representatives and customers served. Mexico had double-digit sales growth in
all product categories, particularly in the CFT category, as well as in apparel,
as a result of greater product selection. In Brazil, higher average orders,
along with increased prices and more Representatives were the main drivers of
sales improvements. Venezuela's sales improvement resulted from increases in the
number of units sold, orders, active Representatives and customers served.
Venezuela was able to post these increases despite severe flooding in late 1999,
which negatively affected operations at the beginning of 2000, along with
persistent economic and political uncertainty.
Operating profit in Latin America grew 13% to $415.5 in 2000 due to the sales
increases, discussed above, and operating margin improvements in Venezuela and
Brazil, partially offset by a decline in Argentina. The operating margin in 2000
in Latin America improved 30 basis points versus 1999. Venezuela's operating
margin reflected a higher gross margin, driven by price increases and cost
improvement, partially offset by increased marketing spending and incentive
programs. Brazil's operating margin increased primarily due to lower bad debt
and recognition expenses. Mexico's operating margin improved 10 basis points due
to savings in marketing and cost savings on purchase orders, partially offset by
a decrease in gross margin due to increased sales of lower margin items and
selective pricing cuts. In Argentina, operating margin declined as incentives
and advertising expenses were increased to solidify our leading market position
in a weak economic environment.
In Europe, sales increased 1% to $885.6 versus 1999 but increased 13% in local
currency on 12% growth in units and 15% higher active Representatives. The euro,
pound and zloty devalued significantly in 2000 and, as a result, negatively
affected U.S. dollar results. Sales growth in Central and Eastern Europe,
primarily Poland, and in Russia was partially offset by declines in most Western
European markets, most significantly in Germany. The sales improvement in
Central Europe resulted from double-digit increases in units, active
Representatives and customers served. New Representative leadership programs and
a new campaign cycle also favorably impacted sales in Poland. The sales increase
in Russia was due to double-digit increases in units and active Representatives
and an improved economic environment resulting from the stability of the Russian
ruble. In Germany, the sales decline reflected a continuing weak economic
climate. In the United Kingdom, sales increased in local currency but U.S.
dollar results were negatively impacted by foreign currency exchange.
6
Operating profit in Europe grew 3% to $129.5 in 2000 due to the sales increases,
discussed above, coupled with operating margin improvements in Central and
Eastern Europe, particularly Poland, and Russia, partially offset by increased
spending on incentives and advertising throughout the region and the impact of
weaker currencies. In the Europe region, operating margin in 2000 improved 30
basis points over 1999. In Poland, gross margin improved due to a shift in mix
to higher margin items, partially offset by the cost of shipping increased
orders. The operating margin improvement in Russia was primarily due to a
favorable comparison against the prior year's discount pricing policy and
product sourcing, as well as tight expense controls on a higher sales base. A
decline in the United Kingdom's operating margin was primarily due to increased
advertising, consumer motivation and sampling activities to support sales
growth, as well as increased shipping, distribution and volume related costs due
to reduced capacity of shipping lines during transition to a new shipping
system.
In the Pacific region, sales increased 11% to $799.4 in 2000 due to increases in
all major markets resulting from an 18% increase in the number of units sold and
31% increase in active Representatives. In 2000, dollar sales for most markets
were negatively impacted by foreign currency exchange, excluding Japan and
Taiwan, where foreign currency exchange had a positive impact on dollar sales.
In Japan, sales increased double-digits due to an increase in units sold and
active Representatives despite a reduction in consumer spending due to economic
pressures, as well as a favorable exchange rate impact versus 1999. In China,
sales growth of 44% was driven by channel expansion, led by beauty boutiques. In
the Philippines, dollar sales and local currency sales increased solid
double-digits. In the Philippines, increased advertising and consumer promotions
resulted in strong increases in units sold, customers served and active
Representatives. Excluding the impact of foreign exchange, sales in the Pacific
region rose 13%.
Operating profit in the Pacific region increased 15% to $117.8 in 2000 due to
the sales increases, discussed above, and operating margin improvements,
primarily in Japan and China, partially offset by operating margin declines in
Taiwan and the Philippines. In the Pacific region, 2000 operating margin
improved 60 basis points over 1999. In Japan, operating margin was favorably
impacted by an improvement in gross margin due to product cost savings
initiatives and a favorable change of product mix from non-CFT to higher margin
CFT products. China's operating margin improvement was driven primarily by
increased sales growth and new higher margin products. Operating margin declined
in Taiwan primarily due to increased costs resulting from moving to a new
distribution facility and increased spending to support sales growth. Operating
margin in the Philippines was negatively impacted by a lower gross margin
resulting from higher sales of lower margin items, and higher advertising
expenses.
1999 Compared to 1998
North America - Sales in North America increased 1% to $2.05 billion, and
operating profit increased 9% to $360.5 in 1999. The U.S. business reported
sales and operating profit growth of 2% and 9%, respectively. The sales increase
in the U.S. resulted primarily from an increase in the average order size.
Growth in fashion jewelry and accessories and beyond beauty categories was
partially offset by sales decreases in CFT and apparel. Sales of fashion jewelry
and accessories rose significantly over 1998 reflecting the success of sterling
silver and bolder jewelry designs, the introduction of licensed luggage and a
strong performance in watches and handbags. Additionally, sales of accessories
increased significantly due to the success of the Pokemon watch in the fourth
quarter. The Beyond Beauty category, consisting primarily of home entertainment
and gift and decorative items, posted strong growth due to increased sales of
inspirational and religious products. Fourth quarter sales of Millennium
products also contributed to the overall increase of Beyond Beauty items. These
improvements were partially offset by declines in the CFT and apparel
categories. The decrease in CFT sales resulted primarily from lower fragrance
sales in 1999 due to the underperformance of women's new products as well as
fewer offers on existing products. Apparel sales decreased due to
underperformance of new product introductions and demonstration products as well
as a shift in focus from sales growth to
7
increased profitability. A 1.0 point operating margin improvement in the U.S.
included favorable gross margin and operating expense ratios. The gross margin
improvement resulted from supply chain cost improvements and product category
management, partially offset by price reductions in CFT during the fourth
quarter to drive sales. The favorable expense ratio reflects lower spending in
1999 on advertising, lower variable compensation and the elimination of the
Sponsorship program, partially offset by increased spending on strategic
initiatives such as the Internet and express and Beauty Centers.
International - International sales increased 2% to $3.24 billion and operating
profit increased 14% to $594.8 from $520.0 in 1998. Excluding the impact of
foreign currency exchange, international sales rose 14% and operating profit
increased 27% over 1998. The sales growth resulted from strong double-digit
growth in the Pacific region, most significantly in Japan, the Philippines,
Taiwan and Australia, as well as growth in Europe reflecting improvements in
Poland and the United Kingdom, and in Mexico, Venezuela and Central America.
These results were significantly offset by sales declines in Brazil, and, to a
lesser extent, in Russia, Argentina and Germany.
In Latin America, sales declined 3% to $1.64 billion while operating profit
increased 3% to $366.5 in 1999. Excluding the impact of foreign currency
exchange, sales increased 17%, a 20 point differential due primarily to the
Brazilian real devaluation that began in early 1999, discussed below. Brazil,
however, had double-digit increases in local currency sales, units and number of
customers served. Sales decreased in Argentina and Chile as a result of weak
economic conditions. The Argentine economy has been in a prolonged recession
with high unemployment and low consumer spending. Despite the sales decline,
Avon continued to gain market share in Argentina in 1999. These sales declines
were partially offset by strong growth in Mexico, and, to a lesser extent, in
Venezuela and Central America. Mexico's sales increase resulted from both
operational factors including new product launches in the cosmetics, home and
fashion lines as well as economic growth reflecting consumer price increases in
1999. Sales grew in Venezuela due mainly to price increases as well as
double-digit increases in number of orders and active Representatives, and in
Central America due to strong increases in units, customers served and active
Representatives. The improvement in the region's operating profit was primarily
due to favorable results in Mexico attributable to the sales increase and an
improved gross margin, partially offset by increased advertising expense and
incentive programs in 1999. The gross margin improvement in Mexico resulted from
a shift in the sales mix from fewer sales of toiletries to more sales of
higher-margin cosmetics and fragrances. However, in the third quarter of 1999,
Avon's retail competitors in the toiletries and non-CFT categories significantly
discounted their prices which led to unit declines. Management in Mexico
adjusted prices in the fourth quarter of 1999 and planned incentive programs to
aggressively recruit Representatives to mitigate the impact of competitors' deep
discounting. Active Representatives in Mexico grew 11% in 1999. Venezuela
contributed to the region's growth in operating profit through a gross margin
improvement driven by price increases as well as BPR initiatives, particularly
in the home segment. As discussed, these improvements were partially offset by
reduced sales and a gross margin decline in Brazil and weak economic conditions
in Argentina and Chile. Brazil's gross margin decline, particularly during the
fourth quarter of 1999, resulted from increased costs due to the impact of the
devaluation. However, Brazil made tremendous improvements in the operating
expense ratio attributable to reduced bad debt expense, sales returns and
transportation costs. Excluding the impact of foreign currency exchange,
operating profit in Latin America increased 22% over 1998.
The Brazilian real devalued significantly in January 1999 and, as a result,
negatively affected Brazil's U.S. dollar results in 1999. The effect of exchange
rates was reduced by foreign exchange contracts previously in place and several
actions taken by local management to offset the devaluation, including a focused
effort directed at vendor negotiations and additional local sourcing to reduce
imports. Brazil's 1999 sales, although up over 20% in local currency, were down
approximately 20% in U.S. dollars due to the devaluation.
In the Europe region, sales increased 2% to $878.0 and operating profit
increased 23% to $126.2 in 1999. Sales growth in Central Europe, primarily
Poland, and the United Kingdom was partially offset by declines in Russia,
8
Germany and France. Continued double-digit increases in units, customers served
and active Representatives contributed to Central Europe's sales increase.
Poland's success reflects strong growth in the CFT category, increased
Representative retention and a change in the campaign cycle, including a new
brochure every four weeks versus six weeks in 1998. Growth in the United Kingdom
resulted from a higher average order size, increased distributorship sales and
the successful launch of a new brochure in 1999 to enhance Avon's image. Sales
were lower in Russia due to the economic crisis and ruble devaluation, which
occurred in August 1998, and in Germany due to a weak economy. Local currency
sales in Russia increased almost 30% over 1998, with a strong increase in active
Representatives. Excluding the impact of foreign currency exchange, sales in
Europe increased 13% over 1998. The increase in Europe's operating profit
resulted from operating margin improvements in Central Europe, mainly Poland,
the United Kingdom and Italy due to higher gross margins that resulted from a
continuing focus on pricing strategies and improved profitability of non-CFT
categories. These operating profit increases were partially offset by continued
declines in Russia due to the ruble devaluation. Management in Russia will
continue to focus on market share growth and improved margins through pricing
flexibility and tight expense management. Excluding the impact of foreign
currency exchange, operating profit increased 31% over 1998.
In the Pacific region, sales increased 16% to $720.1 and operating profit
increased 63% to $102.1 in 1999. Excluding the impact of foreign currency
exchange, sales increased 8% over 1998. The sales improvement resulted from
growth in every market, most significantly in Japan due to a favorable currency
impact in 1999, and in the Philippines, Taiwan and Australia due to strong
increases in units and customers served. Despite the earthquake in Taiwan in
September 1999, sales were up double-digits over 1998 due to aggressive
marketing and sales programs, incentive offers and increased spending on
advertising. The increase in the region's operating profit resulted primarily
from the above sales increases and operating margin improvements in Japan and
China. Japan's gross margin improved due to product cost savings initiatives in
CFT and improved sourcing decisions for non-CFT as well as a profitability
screening process that led to the elimination of many low-margin products in the
apparel and jewelry segments. Additionally, BPR efforts continue to generate
significant savings across all expense areas in Japan. China's operating margin
also improved significantly in 1999 reflecting the suspension of operations for
most of the second quarter of 1998. Excluding the impact of foreign currency
exchange, operating profit increased 53% over 1998.
See Foreign Operations section under Liquidity and Capital Resources for
additional discussion.
Global Expenses - Global expenses were $241.1 in 2000 compared with $257.7 in
1999. The decrease was primarily due to lower expenses related to the Company's
long-term incentive plan, lower benefit expenses, insurance proceeds received in
2000 related to the 1998 hurricane losses in Central America, the 1999 flood
losses in Venezuela and 1999 earthquake losses in Taiwan, and savings in global
marketing departments, partially offset by increased investments in information
technology and retail initiatives. In 1999, global expenses were higher than
1998 due to higher spending related to global marketing and information
technology system initiatives.
Accounting Changes - See Note 3 of the Notes to Consolidated Financial
Statements for a discussion regarding recently issued accounting standards,
including Financial Accounting Standard No. 137, Staff Accounting Bulletin No.
101, Emerging Issues Task Force ("EITF") 00-10, EITF 00-14 and EITF 00-19.
Contingencies - Although Avon has completed its divestiture of all discontinued
operations, various lawsuits and claims (asserted and unasserted) are pending or
threatened against Avon. The Company is also involved in a number of proceedings
arising out of the federal Superfund law and similar state laws. In some
instances, Avon, along with other companies, has been designated as a
potentially responsible party which may be liable for costs associated with
these various hazardous waste sites. In the opinion of Avon's management, based
on its review of the information available at this time, the total cost of
resolving such contingencies at December 31, 2000 should not
9
have a material adverse impact on Avon's consolidated financial position,
results of operations or cash flows.
Liquidity and Capital Resources
Cash Flows - Net cash provided by operating activities was $323.9 in 2000
compared to $445.5 in 1999. The 2000 decrease principally reflects higher
working capital levels, which primarily included increased inventory levels and
a use of cash related to accounts payable and accrued expenses, partially offset
by higher net income. The increase in inventory was mainly due to higher sales
volume and additional stock on hand to protect service levels. Accounts payable
and accrued expenses reflected the payout of the Company's long-term incentive
plan in 2000, as well as a decline in days in payables, to a level that is
consistent with valuable supply chain partnerships developed in recent years.
Excluding changes in debt and other financing activities, net cash usage of
$97.1 in 2000 was $639.5 favorable compared to net cash usage of $736.6 in 1999.
The variance primarily reflects a decrease in repurchases of common stock
resulting from the acceleration of the buyback program in the second half of
1999. See Note 10 of the Notes to Consolidated Financial Statements for further
discussion of the Company's share repurchase program. In addition, the variance
was also a result of a favorable exchange rate impact on cash and decreased cash
used for investing activities in 2000, due to the acquisition of a manufacturing
facility in Poland in 1999 and lower capital expenditures in 2000. These sources
of cash were partially offset by lower cash provided by operating activities,
discussed above, and a reduction in book overdrafts in 2000. During 1998 and
1997, the Company received net proceeds of approximately $58.1 and $58.6,
respectively, under securities lending transactions that were settled in the
fourth quarter of 2000 and are included in the cash flows as other financing
activities. See Note 5 of the Notes to Consolidated Financial Statements for
further discussion of these transactions.
For the period 1994 through 2000, 59.6 million shares of common stock have
been purchased for approximately $1.51 billion under the stock repurchase
programs. See Note 10 of the Notes to Consolidated Financial Statements for
further details of the share repurchase programs.
Working Capital - At December 31, 2000, current assets exceeded current
liabilities by $186.4 while at December 31, 1999, current liabilities exceeded
current assets by $375.0. This increase of $561.4 is primarily due to decreased
net debt (short-term debt less cash and equivalents), the repayment of $101.4
related to securities lending transactions that were included in other accrued
liabilities in 1999, the payout of the long-term incentive plan in 2000 as well
as the net effect of the 2000 tax refund. In addition, higher inventory levels,
as discussed in the Inventories Section, also contributed to the variance.
Although current liabilities exceeded current assets at December 31, 1999,
management believes this is due to the Company's direct selling business format
which results in lower receivable and working capital levels. Avon's liquidity
results from its ability to generate significant cash flows from operations and
its ample unused borrowing capacity. At December 31, 1999, the large excess of
current liabilities over current assets as well as the issuance of long-term
debt in 1999, discussed in Note 5 of the Notes to Consolidated Financial
Statements, reflects the acceleration of the Company's share repurchase program.
These share repurchases resulted in a shareholders' deficit balance at December
31, 2000 and 1999, of $230.9 and $421.9, respectively. Avon's credit agreements
do not contain any provisions or requirements with respect to working capital or
equity balances.
Capital Resources - Total debt of $1,213.6 at December 31, 2000 increased $206.2
from $1,007.4 at December 31, 1999, compared with an increase of $751.1 from
December 31, 1998. At December 31, 1999, other accrued liabilities included
approximately $106.4, related to securities lending activities. These
liabilities were repaid in 2000. See Note 5 of the Notes to Consolidated
Financial Statements for further discussion of these transactions. During 2000
and 1999, cash flows from operating activities combined with cash on hand and
higher debt levels were used for repurchase of common stock, dividends, capital
expenditures and the acquisition of a manufacturing facility in Poland in 1999.
10
At December 31, 2000, debt maturing within one year consisted of borrowings
from banks of $104.6 and the current maturities of long-term debt of $.8.
Management believes that cash from operations and available sources of financing
are adequate to meet anticipated requirements for working capital, dividends,
capital expenditures, the remainder of the stock repurchase program and other
cash needs.
In July 2000, the Company issued in a private placement $735.8 principal
amount at maturity of zero coupon convertible senior notes ("Convertible Notes")
due July 12, 2020, with proceeds of approximately $350.0. The issue price per
note was $475.66, being 47.566% of the principal amount of $1,000 per note at
maturity. The Convertible Notes have a 3.75% yield to maturity and are
convertible at any time into the Company's common stock at a conversion rate of
8.2723 shares of common stock per $1,000 principal amount at maturity of the
Convertible Notes (equivalent to a conversion price of $57.50 per share based on
the initial offering price of the Convertible Notes). The Convertible Notes may
be redeemed at the option of the Company on or after July 12, 2003, at a
redemption price equal to the issue price plus accrued original issue discount
to the redemption date. The holders can require the Company to purchase all or a
portion of the Convertible Notes on July 12, 2003, July 12, 2008 and July 12,
2013, at the redemption price per Note of $531.74, $640.29 and $771.00,
respectively. The holders may also require the Company to repurchase the
Convertible Notes if a fundamental change, as defined, involving Avon occurs
prior to July 12, 2003. The Company has the option to pay the purchase price or,
if a fundamental change has occurred, the repurchase price in cash or common
stock or a combination of cash and common stock. The indenture under which the
Convertible Notes were issued restricts the Company's ability to merge with or
consolidate into another company or to sell substantially all of the Company's
assets.
The Company also granted to the initial purchasers of the Convertible Notes
an over-allotment option to purchase an additional $105.0 of Convertible Notes.
As of August 8, 2000, the over-allotment option had been exercised and
additional Convertible Notes with an aggregate principal amount at maturity of
approximately $105.0 were purchased by the initial purchasers from the Company
for proceeds of approximately $50.0.
The net proceeds from the offering (including the proceeds of the
over-allotment option) were used for general corporate purposes, including the
repayment of short-term debt.
In November 1999, the Company issued $500.0 of unsubordinated, unsecured
notes payable (the "Notes") in a private offering to institutional investors.
The proceeds from this issuance were used for general corporate purposes,
including the repayment of outstanding short-term borrowings incurred to finance
the acceleration of the Company's share repurchase program.
In connection with the November 1999 offering, Avon entered into five-year
and ten-year interest rate swap contracts with notional amounts of $200.0 and
$300.0, respectively, to effectively convert fixed interest on the Notes to a
variable interest rate, based on commercial paper rates. In November 2000, these
interest rate swap contracts were terminated. The cost to settle these contracts
is being amortized over the remaining term of the underlying debt. At the same
time, the Company entered into new four-year and nine-year interest rate swap
contracts with notional amounts of $200.0 and $300.0, respectively, to
effectively convert fixed interest on the Notes to a variable interest rate,
based on LIBOR.
In May 2000, the Company entered into an interest rate cap agreement with a
notional amount of $150.0 expiring on May 31, 2001, to convert a variable
interest rate, resulting from the interest rate swaps above, to a fixed interest
rate. The cap rate under this contract is 7%.
In May 1998, Avon issued $100.0 of bonds embedded with option features (the
"Bonds") to pay down commercial paper borrowings. The Bonds have a twenty-year
maturity; however, after five years, the Bonds, at the holder's option, can be
sold back to the Company at par or can be called at par by the underwriter and
resold to investors as fifteen-year debt. The coupon rate on
11
the Bonds is 6.25% for the first five years, but will be refinanced at 5.69%
plus the then corporate spread if the Bonds are reissued.
In connection with the May 1998 Bond issuance, Avon entered into a
five-year interest rate swap contract with a notional amount of $50.0 to
effectively convert fixed interest on a portion of the Bonds to a variable
interest rate, based on LIBOR.
During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007,
to pay down commercial paper borrowings.
During 1996, the Company entered into an agreement (the "credit facility"),
which expires in 2001, with various banks to amend and restate the five-year,
$600.0 revolving credit and competitive advance facility agreement. The Company
is currently negotiating with various banks to renew this credit facility and
expects to have a final agreement by the end of the second quarter of 2001.
Within this facility, the Company is able to borrow, on an uncommitted basis,
various foreign currencies.
The credit facility is primarily to be used to finance working capital,
provide support for the issuance of commercial paper and support the stock
repurchase program. At the Company's option, the interest rate on borrowings
under the credit facility is based on LIBOR or the higher of prime or federal
fund rates. The credit facility has an annual facility fee of $.4. The credit
facility contains a covenant for interest coverage, as defined. The Company is
in compliance with this covenant. At December 31, 2000 and 1999, the Company has
$29.9 and $226.4, respectively, outstanding under a $600.0 commercial paper
program supported by the credit facility.
The Company has uncommitted lines of credit available of $49.0 in 2000 and
1999 with various banks that have no compensating balances or fees. As of
December 31, 2000 and 1999, $11.1 of these lines are being used for letters of
credit. In addition, as of December 31, 2000 and 1999, there were international
lines of credit totaling $449.5 and $399.5, respectively, of which $74.8 and
$81.6, respectively, were outstanding.
Inventories - Avon's products are marketed during 12 to 26 individual sales
campaigns each year. Each campaign is conducted using a brochure offering a wide
assortment of products, many of which change from campaign to campaign. It is
necessary for Avon to maintain relatively high inventory levels as a result of
the nature of its business, including the number of campaigns conducted annually
and the large number of products marketed. Avon's operations have a seasonal
pattern characteristic of many companies selling CFT, fashion jewelry and
accessories, gift and decorative items, and apparel. Holiday sales cause a peak
in the fourth quarter, which results in the build up of inventory at the end of
the third quarter. Inventory levels are then reduced by the end of the fourth
quarter. Inventories of $610.6 at December 31, 2000 were $87.1 higher than 1999
as a result of worldwide inventory investments due to sales increases; an
increase in beauty inventories to protect service levels, primarily in the U.S.
and Europe; transitional start-up related to new distribution/manufacturing
facilities in Taiwan, Mexico and Poland; and European new market entries. It is
Avon's objective to continue to manage purchases and inventory levels
maintaining the focus of operating the business at efficient inventory levels.
However, the addition or expansion of product lines, which are subject to
changing fashion trends and consumer tastes, as well as planned expansion in
high growth markets, may cause the inventory levels to grow periodically.
Capital Expenditures - Capital expenditures during 2000 were $193.5 (1999 -
$200.2). These expenditures were made for capacity expansion in high growth
markets, maintenance of worldwide facilities, contemporization and replacement
of information systems, the new Internet strategy and a new manufacturing
facility in Poland. Numerous construction and information systems projects were
in progress at December 31, 2000 with an estimated cost to complete of
approximately $130.0. Capital expenditures in 2001 are currently expected to be
in the range of $200.0 - $220.0. These expenditures will include improvements on
existing facilities, continued investments for capacity expansion in high growth
markets, facility modernization, information systems, including spending on the
new Internet strategy, and equipment replacement projects.
12
Foreign Operations - For the three years ended 2000, 1999 and 1998, the Company
derived approximately 60% of its consolidated net sales and consolidated
operating profit from operations from its subsidiaries outside of North America.
In addition, as of December 31, 2000 and 1999, these subsidiaries comprised
approximately 51% of the Company's consolidated total assets.
Avon's operations in many countries utilize numerous currencies. Avon has
significant net assets in Brazil, Mexico, the United Kingdom, Japan, Argentina,
Canada, the Philippines and Poland. Changes in the value of
non-hyperinflationary countries' currencies relative to the U.S. dollar result
in direct charges or credits to equity. Effective January 1, 1997, Mexico was
designated as a country with a highly inflationary economy due to the cumulative
inflation rates over the three-year period 1994 - 1996. However, Mexico was
converted to non-hyperinflationary status effective January 1, 1999 due to
reduced cumulative inflation rates during the three-year period 1996 through
1998.
The euro devalued significantly during 2000 and, as a result, negatively
affected the 2000 U.S. dollar results of the European countries using this
common currency. Net sales from these countries represent 5% of Avon's
consolidated net sales. The impact on earnings of this devaluation was reduced
by foreign exchange contracts previously in place.
The Brazilian real devalued significantly in January 1999 and, as a result,
negatively affected Brazil's U.S. dollar results in 1999. The effect of exchange
rates was reduced by foreign exchange contracts previously in place and several
actions taken by local management to offset the devaluation, including a focused
effort directed at vendor negotiations and local sourcing to reduce imports.
Brazil's 1999 net sales represented approximately 9% of Avon's consolidated net
sales.
On April 21, 1998, the Chinese government issued a directive banning all
direct selling in China resulting in the shutdown of the Company's sales
operations for most of the second quarter. As of the beginning of June 1998, the
Company received Chinese governmental approval to resume operations as a
wholesale and retail business and became operational again on June 15, 1998. The
Company converted its 75 branches into retail outlets to serve customers. During
the end of the second quarter of 1998, Avon received government approval to
utilize sales promoters, much like Representatives, to promote product sales in
China.
In early April 1999, the United States and China agreed to remove all market
access restrictions on direct selling in China by January 1, 2003, including the
current ban on direct selling imposed by the Chinese government in April 1998.
The agreement is contingent upon successful completion of the World Trade
Organization accession negotiations between the United States and China and also
includes development of regulations for direct selling based on the World
Federation of Direct Selling Association's World Code of Conduct. Avon supports
resolution of this direct selling issue in China and remains committed to the
opportunities this promising region offers.
Avon's well diversified global portfolio of businesses has demonstrated that
the effects of weak economies and currency fluctuations in certain countries may
be offset by strong results in others. Fluctuations in the value of foreign
currencies cause U.S. dollar-translated amounts to change in comparison with
previous periods. Accordingly, Avon cannot project in any meaningful way the
possible effect of such fluctuations upon translated amounts or future earnings.
This is due to the large number of currencies, the complexity of intercompany
relationships, the hedging activity entered into in an attempt to minimize
certain effects of exchange rate changes where economically feasible, and the
fact that all foreign currencies do not react in the same manner against the
U.S. dollar.
Certain of the Company's financial instruments, which are discussed below
under Risk Management Strategies and Market Rate Sensitive Instruments and in
Note 8 of the Notes to Consolidated Financial Statements, are used to hedge
various amounts relating to certain international subsidiaries. However, the
13
Company's foreign currency hedging activities are not material when compared to
the Company's international financial position or results of operations.
Some foreign subsidiaries rely primarily on borrowings from local commercial
banks to fund working capital needs created by their highly seasonal sales
pattern. From time to time, when tax and other considerations dictate, Avon will
finance subsidiary working capital needs or borrow foreign currencies. At
December 31, 2000, the total indebtedness of foreign subsidiaries was $76.5.
It is Avon's policy to remit all the available cash (cash in excess of
working capital requirements, having no legal restrictions and not considered
permanently reinvested) of foreign subsidiaries as rapidly as is practical.
During 2000, these subsidiaries remitted, net of taxes, $393.3 in dividends and
royalties. This sum is a substantial portion of the 2000 consolidated net
earnings of Avon's foreign subsidiaries.
Risk Management Strategies and Market Rate Sensitive Instruments - The
Company operates globally, with manufacturing and distribution facilities in
various locations around the world. The Company may reduce its primary market
exposures to fluctuations in interest rates and foreign exchange rates by
creating offsetting positions through the use of derivative financial
instruments. The Company does not use derivative financial instruments for
trading or speculative purposes, nor is the Company a party to leveraged
derivatives.
The Company periodically uses interest rate swaps to hedge portions of
interest payable on its debt. In addition, the Company may periodically employ
interest rate caps to reduce exposure, if any, to increases in variable interest
rates.
The Company may periodically hedge foreign currency royalties, net
investments in foreign subsidiaries, firm purchase commitments and contractual
foreign currency cash flows or obligations, including third party and
intercompany foreign currency transactions. The Company regularly monitors its
foreign currency exposures and ensures that hedge contract amounts do not exceed
the amounts of the underlying exposures.
At December 31, 2000, the Company held foreign currency forward contracts
with notional amounts totaling $393.7 and option contracts with notional amounts
totaling $19.1 to hedge foreign currency items. All of these contracts mature
within the next 13 months. Also outstanding in 2000 were foreign currency
forward contracts totaling $34.2, which do not qualify as hedging transactions
under the current accounting definitions and, accordingly, have been marked to
market. The mark-to-market adjustment at December 31, 2000 was not material.
The Company has entered into forward contracts to purchase approximately
1,374,400 shares of Avon common stock at an average price of $37.09 per share at
December 31, 2000. The contracts mature over the next ten months and provide for
physical or net share settlement to the Company. Accordingly, no adjustment for
subsequent changes in fair value has been recognized. In accordance with the
provisions of EITF 00-19, $51.0 of these contracts have been included in the
accompanying Consolidated Balance Sheets in Share repurchase commitments with a
corresponding decrease in Additional paid-in capital. See Note 3 of the Notes to
Consolidated Financial Statements. On March 1, 2001, the Company purchased
260,000 shares of Avon common stock at a purchase price of $11.5 under these
contracts.
The Company attempts to minimize its credit exposure to counterparties by
entering into interest rate swap and cap contracts only with major international
financial institutions with "A" or higher credit ratings as issued by Standard &
Poor's Corporation. The Company's foreign currency and interest rate derivatives
are comprised of over-the-counter forward contracts or options with major
international financial institutions. Although the Company's theoretical credit
risk is the replacement cost at the then estimated fair value of these
instruments, management believes that the risk of incurring losses is remote and
that such losses, if any, would not be material.
14
Non-performance of the counterparties to the balance of all the currency
and interest rate swap agreements would not result in a significant write off at
December 31, 2000. In addition, Avon may be exposed to market risk on its
foreign exchange and interest rate swap agreements as a result of changes in
foreign exchange and interest rates. The market risk related to the foreign
exchange agreements should be substantially offset by changes in the valuation
of the underlying items being hedged.
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 5 and 8 of the Notes to Consolidated
Financial Statements. Interest rate changes would result in gains or losses in
the fair value of debt and other financing instruments held by the Company.
Based on the outstanding balance of all instruments at December 31, 2000, a
hypothetical 50 basis point increase or decrease in interest rates prevailing at
this date, sustained for one year, would not represent a material potential loss
in fair value, earnings or cash flows. This potential loss was calculated based
on discounted cash flow analyses using interest rates comparable to the
Company's current cost of debt. In 2000, the Company did not experience a
material loss in fair value, earnings or cash flows associated with changes in
interest rates.
The Company is exposed to equity price fluctuations for investments
included in the grantors trust. A 10% change in equity prices would not be
material based on the fair value of equity investments as of December 31, 2000.
The Company also engages in various hedging activities in order to reduce
potential losses due to foreign currency risks. Consistent with the nature of
the economic hedge of such foreign exchange contracts, any unrealized gain or
loss would be offset by corresponding decreases or increases, respectively, of
the underlying instrument or transaction being hedged. These financial
instruments are discussed above and in Note 8 of the Notes to Consolidated
Financial Statements. Based on the Company's foreign exchange contracts at
December 31, 2000, the impact of a 10% appreciation or 10% depreciation of the
U.S. dollar against the Company's foreign exchange contracts would not represent
a material potential loss in fair value, earnings or cash flows. This potential
loss does not consider the underlying foreign currency transaction or
translation exposures of the Company. The hypothetical impact was calculated on
the combined option and forward positions using forward rates at December 31,
2000 adjusted for an assumed 10% appreciation or 10% depreciation of the U.S.
dollar against the foreign contracts. The impact of payoffs on option contracts
is not significant to this calculation. In 2000, net foreign exchange losses
associated with the Company's foreign exchange contracts did not represent a
material loss in fair value, earnings or cash flows.
As of December 31, 2000, the primary currencies for which the Company has
net underlying foreign currency exchange rate exposure are the U.S. dollar
versus the Mexican peso, Brazilian real, Argentine peso, British pound,
Philippine peso, Polish zloty, Japanese yen and the euro. The Company is also
exposed to other South American and Asian currencies.
The Company does not hedge its foreign currency exposure in a manner that
would entirely eliminate the effect of changes in foreign exchange rates on the
Company's consolidated financial position, results of operations and cash flows.
The impact of a 10% appreciation or 10% depreciation of the U.S. dollar against
the Company's net underlying foreign currency transaction and translation
exposures could be material.
15
Other Information
In October 1997, the Company announced its BPR program to streamline operations
and improve profitability through margin improvement and expense reductions. The
special and non-recurring charges associated with this program totaled $136.4
pretax ($111.9 net of tax, or $.43 per share on a basic and diluted basis) for
the year ended December 31, 1999 and $154.4 pretax ($122.8 net of tax, or $.46
per share on a basic and diluted basis) for the year ended December 31, 1998.
In connection with these programs, BPR initiatives reduced costs by
approximately $400.0 in 2000 versus 1997 levels, with a portion of the savings
being reinvested primarily in consumer-focused initiatives.
Euro
A single currency called the euro was introduced in Europe on January 1, 1999.
Eleven of the fifteen member countries of the European Union adopted the euro as
their common legal currency on that date. Fixed conversion rates between these
participating countries' existing currencies (the "legacy currencies") and the
euro were established as of that date. The legacy currencies are scheduled to
remain legal tender as denominations of the euro until June 30, 2002 after which
they will be withdrawn from circulation. During this transition period, parties
may settle transactions using either the euro or a participating country's legal
currency. Beginning in January 2002, new euro-denominated bills and coins will
be issued.
Avon operating subsidiaries affected by the euro conversion have established
plans to address issues raised by the euro currency conversion. These issues
include, among others, the need to adapt information technology systems,
business processes and equipment to accommodate euro-denominated transactions,
the impact of one common currency on pricing and recalculating currency risk.
Avon does not expect system and equipment conversion costs to be material. Due
to the numerous uncertainties associated with the market impact of the euro
conversion, the Company cannot reasonably estimate the effects one common
currency will have on pricing and the resulting impact, if any, on results of
operations, financial position or cash flows.
16
Results of Operations by Quarter (Unaudited)
(Restated - Note 2)
Avon Products, Inc.
In millions, except per share data
First Second Third Fourth Year
------------------ ------------------ ------------------- ------------------- -------------------
As As As As As As As As As As
Reported Restated Reported Restated Reported Restated Reported Restated Reported Restated
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
2000
Net Sales $1,306.7 $1,306.3 $1,382.6 $1,386.4 $1,336.0 $1,335.8 $1,648.4 $1,653.2 $5,673.7 $5,681.7
Other revenue 10.4 10.4 10.0 10.0 9.7 9.7 10.8 10.8 40.9 40.9
Gross profit 826.3 815.3 894.0 884.5 855.5 843.2 1,016.1 1,008.3 3,591.9 3,551.3
Operating profit 137.8 137.9 220.4 221.2 168.6 168.8 261.9 262.0 788.7 789.9
Income before taxes,
minority interest and
cumulative effect of
accounting change 109.5 109.6 195.1 195.9 144.3 144.5 242.1 242.2 691.0 692.2
Income minority interest
and cumulative effect
of accounting change 70.4 70.5 125.9 126.4 93.2 93.3 199.8 199.8 489.3 490.0
Income before cumulative
of accounting change 70.4 70.5 124.9 125.4 92.3 92.4 197.5 197.5 485.1 485.8
Net income 63.7 63.8 124.9 125.4 92.3 92.4 197.5 197.5 478.4 479.1
Basic earnings per share:
Continuing operations $ 0.30 $ 0.30 $ 0.53 $ 0.53 $ 0.39 $ 0.39 $ 0.83 $ 0.83 $ 2.04 $ 2.04
Cumulative effect of
accounting change (0.03) (0.03) (0.03) (0.03)
-------- ------- ------- ------- ------- ------- ------- ------- ------ ------
$ .27 $ .27 $ 0.53 $ 0.53 $ 0.39 $ 0.39 $ 0.83 $ 0.83 $ 2.01 $ 2.01(1)
======== ======= ======= ======= ======= ======= ======= ======= ====== ======
Diluted earnings per share:
Continuing operations $ .30 $ .30 $ .52 $ 0.52 $ 0.38 $ 0.38 $ 0.81 $ 0.81 $ 2.02 $ 2.02
Cumulative effect of
accounting change (.03) (.03) - - - - - - (.03) (.03)
-------- ------ ------- ------ ------- ------ ------- ------ ------ -----
$ .27 $ .27 $ .52 $ 0.52 $ 0.38 $ 0.38 $ 0.81 $ 0.81 $ 1.99 $ 1.99(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.
17
1999 First Second Third Fourth Year
----- ------ ----- ------ ----
Net sales $1,213.8 $1,258.1 $1,250.6 $1,566.6 $5,289.1
Other revenue 9.2 9.1 9.1 11.4 38.8
Gross profit** 714.8 815.5 794.7 971.4 3,296.4
Special charges 90.4 - - - 90.4
Asset impairment charge 38.1 - - - 38.1
Operating (loss)profit (64.6) 192.7 146.1 248.9 523.1
(Loss)income before taxes
and minority interest (62.6) 185.3 136.1 221.5 480.3
(Loss)income before
minority interest (64.7) 118.7 88.4 144.2 286.6
Net(loss)income $ (62.9) $ 119.5 $ 88.1 $ 141.9 $ 286.6
======== ======== ======== ======== ========
(Loss)earnings per share:
Basic $ (.24) $ .46 $ .34 $ .58 $ 1.12(1)
======== ======== ======== ======== =======
Diluted $ (.24) $ .45 $ .34 $ .58 $ 1.10(1)
======== ======== ======== ======== =======
**First quarter 1999 includes a special and non-recurring charge of $46.0 for
inventory write-downs.
(1) The sum of per share amounts for the quarters does not necessarily equal
that for the year because the computations are made independently.
Market Prices Per Share of Common Stock by Quarter
2000 1999
---- ----
High Low High Low
---- --- ---- ---
Quarter
First $ 34.50 $ 25.25 $ 49.00 $ 35.50
Second 44.50 28.38 59.13 46.38
Third 44.00 35.00 56.75 24.63
Fourth 49.75 38.19 37.38 23.31
Avon common stock is listed on the New York Stock Exchange. At December 31,
2000, there were 21,978 shareholders of record. The Company believes that there
are over 70,000 additional shareholders who are not "shareholders of record" but
who beneficially own and vote shares through nominee holders such as brokers and
benefit plan trustees. Dividends of $.74 per share, or $.185 per share each
quarter, were declared and paid in 2000. Dividends of $.72 per share, or $.18
per share each quarter, were declared and paid in 1999.
18
Consolidated Statements of Income
Avon Products, Inc.
In millions, except per share data
Years ended December 31 2000 1999 1998
---- ---- ----
(Restated Note 2)
Net sales $5,681.7 $5,289.1 $5,212.7
Other revenue 40.9 38.8 35.0
-------- -------- --------
Total revenue $5,722.6 $5,327.9 $5,247.7
Costs, expenses and other:
Cost of sales* 2,171.3 2,031.5 2,053.0
Marketing, distribution and
administrative expenses 2,761.4 2,644.8 2,605.0
Special charges - 90.4 116.5
Asset impairment charge - 38.1 -
--------- -------- --------
Operating profit 789.9 523.1 473.2
--------- -------- --------
Interest expense 84.7 43.2 34.7
Interest income (8.5) (11.1) (15.9)
Other expense (income), net 21.5 10.7 (1.5)
--------- -------- --------
Total other expenses 97.7 42.8 17.3
--------- -------- --------
Income from continuing operations before
taxes, minority interest and cumulative
effect of accounting change 692.2 480.3 455.9
Income taxes 202.2 193.7 190.8
--------- -------- --------
Income before minority interest
and cumulative effect of
accounting change 490.0 286.6 265.1
Minority interest (4.2) 0.0 4.9
--------- -------- --------
Income from continuing operations before
cumulative effect of accounting change 485.8 286.6 270.0
Cumulative effect of accounting change,
net of tax (6.7) - -
--------- -------- --------
Net income $ 479.1 $ 286.6 $ 270.0
========= ======== ========
Basic earnings per share:
Continuing operations $ 2.04 $ 1.12 $ 1.03
Cumulative effect of accounting change (.03) - -
--------- -------- --------
$ 2.01 $ 1.12 $ 1.03
========= ======== ========
Diluted earnings per share:
Continuing operations $ 2.02 $ 1.10 $ 1.02
Cumulative effect of accounting change (.03) - -
---------- -------- --------
$ 1.99 $ 1.10 $ 1.02
========= ======== ========
*1999 and 1998 include special and non-recurring charges of $46.0 and $37.9,
respectively, for inventory write-downs.
The accompanying notes are an integral part of these statements.
19
Consolidated Balance Sheets
Avon Products, Inc.
In millions, except share data
December 31 2000 1999
---- ----
(Restated Noted 2)
Assets
Current assets
Cash, including cash equivalents of $23.9 and $49.6 $ 122.7 $ 117.4
Accounts receivable (less allowance for doubtful
accounts of $39.2 and $40.0) 499.0 495.6
Income tax receivable 95.2 -
Inventories 610.6 523.5
Prepaid expenses and other 218.2 201.3
-------- --------
Total current assets 1,545.7 1,337.8
-------- --------
Property, plant and equipment, at cost
Land 53.0 55.1
Buildings and improvements 659.5 653.4
Equipment 807.9 760.8
-------- --------
1,520.4 1,469.3
Less accumulated depreciation 754.7 737.2
-------- --------
765.7 732.1
Other assets 499.9 442.9
-------- --------
Total assets $2,811.3 $2,512.8
======== ========
Liabilities and Shareholders' (Deficit) Equity
Current liabilities
Debt maturing within one year $ 105.4 $ 306.0
Accounts payable 391.3 435.9
Accrued compensation 138.2 165.8
Other accrued liabilities 251.7 411.6
Sales and taxes other than income 101.1 107.5
Income taxes 371.6 286.0
-------- --------
Total current liabilities 1,359.3 1,712.8
-------- --------
Long-term debt 1,108.2 701.4
Employee benefit plans 397.2 398.1
Deferred income taxes 31.3 36.7
Other liabilities (including minority interest
of $30.7 and $32.7) 95.2 85.7
Commitments and contingencies (Notes 5, 13 and 16)
Share repurchase commitments (Note 3) 51.0 -
Shareholders' (deficit) equity
Common stock, par value $.25 - authorized:
800,000,000 shares; issued
354,535,840 and 352,575,924 shares 88.6 88.1
Additional paid-in capital 824.1 819.4
Retained earnings 1,124.7 821.4
Accumulated other comprehensive loss (399.1) (349.7)
Treasury stock, at cost - 116,373,394 and
114,680,525 shares (1,869.2) (1,801.1)
-------- --------
Total shareholders' (deficit) equity (230.9) (421.9)
-------- --------
Total liabilities and
shareholders' (deficit) equity $2,811.3 $2,512.8
======== ========
The accompanying notes are an integral part of these statements.
20
Consolidated Statements of Cash Flows
Avon Products, Inc.
In millions
Years ended December 31 2000 1999 1998
---- ---- ----
(Restated Note 2)
Cash flows from operating activities
Net income $ 479.1 $ 286.6 $ 270.0
Adjustments to reconcile income to net cash
provided by operating activities:
Cumulative effect of accounting change 6.7 - -
Depreciation and amortization 95.9 82.7 72.0
Provision for doubtful accounts 94.3 87.5 91.3
Translation losses(gains) 2.7 (.9) (7.2)
Deferred income taxes 14.0 (30.5) (13.0)
Special charges (18.3) 69.3 88.5
Asset impairment charge - 38.1 -
Amortization of debt discount 1.4 - -
Other 13.8 9.8 3.9
Changes in assets and liabilities:
Accounts receivable (145.6) (132.7) (157.6)
Income tax receivable (95.2) - -
Inventories (103.3) (57.8) (17.2)
Prepaid expenses and other (30.7) 1.1 (4.0)
Accounts payable and accrued liabilities (57.3) 40.4 13.0
Income and other taxes 81.5 27.6 19.5
Noncurrent assets and liabilities (15.1) 24.3 (34.8)
------- ------- -------
Net cash provided by operating activities 323.9 445.5 324.4
------- ------- --------
Cash flows from investing activities
Capital expenditures (193.5) (200.2) (189.5)
Disposal of assets 7.2 11.7 5.8
Acquisitions of subsidiary stock and other
investing activities (1.4) (16.5) 1.4
------- ------- -------
Net cash used by investing activities (187.7) (205.0) (182.3)
------- ------- -------
Cash flows from financing activities
Cash dividends (178.2) (186.3) (180.6)
Book overdrafts (13.5) 15.9 -
Debt, net (maturities of three months or less) (194.3) 227.2 (96.1)
Proceeds from short-term debt 90.5 90.8 54.7
Retirement of short-term debt (92.2) (69.4) (34.9)
Proceeds from long-term debt 400.1 500.0 100.1
Retirement of long-term debt (.3) (.2) (.6)
Proceeds from exercise of stock options 38.4 23.9 24.0
Repurchase of common stock (68.1) (800.6) (107.8)
Other financing activities (101.4) - 58.1
------- ------- -------
Net cash used by financing activities (119.0) (198.7) (183.1)
------- ------- -------
Effect of exchange rate changes on cash and
equivalents (11.9) (30.0) 4.7
------- ------- -------
Net increase(decrease) in cash and equivalents 5.3 11.8 (36.3)
Cash and equivalents at beginning of year 117.4 105.6 141.9
------- ------- -------
Cash and equivalents at end of year $ 122.7 $ 117.4 $ 105.6
======= ======= =======
Cash paid for:
Interest, net of amounts capitalized $ 96.9 $ 47.1 $ 39.2
Income taxes, net of refunds received 207.6 176.0 188.5
The accompanying notes are an integral part of these statements.
21
Consolidated Statements of Changes in Shareholders' (Deficit) Equity
Avon Products, Inc.
Accumulated
(Restated-Note 2) Additional Compre- Other
Common Stock Paid-In Retained hensive Treasury
In millions, except share data Shares Amount Capital Earnings Loss Stock Total
----------- ------- -------- -------- ------- --------- --------
Balance at December 31, 1997 174,711,173 $ 43.7 $ 733.1 $ 660.9 $(270.3) $(882.4) $ 285.0
Comprehensive income:
Net income 270.0 270.0
Foreign currency translation adjustments (15.6) (15.6)
Minimum pension liability adjustment (15.4) (15.4)
-------
Total comprehensive income 239.0
Dividends - $.68 per share (178.9) (178.9)
Two-for-one stock split effected in the form of
a stock dividend from retained earnings (Note 9) 175,419,475 43.9 (32.9) (11.0) -
Exercise of stock options, including tax benefits 916,102 .2 38.2 38.4
Grant, cancellation and
amortization of restricted stock 267,616 7.1 7.1
Repurchase of common stock (107.8) (107.8)
Benefit plan contributions 1.6 .7 2.3
----------- ------ ------- -------- ------- --------- --------
Balance at December 31, 1998 351,314,366 87.8 780.0 719.1 (301.3) (1,000.5) 285.1
Comprehensive income:
Net income 286.6 286.6
Foreign currency translation adjustments (49.7) (49.7)
Minimum pension liability adjustment 1.3 1.3
-------
Total comprehensive income 238.2
Dividends - $.72 per share (184.3) (184.3)
Exercise of stock options,
including tax benefits of $7.9 1,152,549 .3 30.7 31.0
Grant, cancellation and
amortization of restricted stock 109,009 8.7 8.7
Repurchase of common stock (800.6) (800.6)
----------- ------ ------- -------- ------- --------- --------
Balance at December 31, 1999 352,575,924 88.1 819.4 821.4 (349.7) (1,801.1) (421.9)
Comprehensive income:
Net income (Restated - Note 2) 479.1 479.1
Foreign currency translation adjustments (42.9) (42.9)
Unrealized loss from available-
for-sale securities, net of tax (6.0) (6.0)
Minimum pension liability adjustment, net of tax (.5) (.5)
---
Total comprehensive income (Restated - Note 2) 429.7
Dividends - $.74 per share (175.8) (175.8)
Exercise of stock options,
including tax benefits of $8.8 1,701,935 .4 49.1 49.5
Grant, cancellation and
amortization of restricted stock 257,981 .1 6.6 6.7
Repurchase of common stock (68.1) (68.1)
(68.1)
Share repurchase commitments (51.0) (51.0)
----------- ------ ------- -------- ------- --------- --------
Balance at December 31, 2000 (Restated-Note2) 354,535,840 $ 88.6 $ 824.1 $1,124.7 $(399.1) $(1,869.2) $ (230.9)
----------- ------ ------- -------- ------- --------- --------
The accompanying notes are an integral part of these statements.
22
Notes to Consolidated Financial Statements
Avon Products, Inc.
In millions, except per share data
1. Description of the Business and Summary of Significant Accounting Policies
Business
Avon Products, Inc. ("Avon" or the "Company") is a global manufacturer and
marketer of beauty and related products. The product categories include
cosmetics, fragrance and toiletries ("CFT"); Beauty Plus which consists of
jewelry, watches and accessories and apparel; and Beyond Beauty which consists
of gift and decorative, home entertainment and health and nutrition products.
Avon's business is primarily comprised of one industry segment, direct selling,
which is conducted in North America, Latin America, the Pacific and Europe.
Sales are made to the ultimate customers principally by independent Avon
Representatives.
Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include the
accounts of Avon and its majority and wholly-owned subsidiaries. Intercompany
balances and transactions are eliminated. These statements have been prepared in
conformity with generally accepted accounting principles and require management
to make estimates and assumptions that affect amounts reported and disclosed in
the financial statements and related notes. Actual results could differ from
these estimates.
Foreign Currency - Financial statements of foreign subsidiaries operating in
other than highly inflationary economies are translated at year-end exchange
rates for assets and liabilities and average exchange rates during the year for
income and expense accounts. The resulting translation adjustments are recorded
within accumulated other comprehensive income. Financial statements of
subsidiaries operating in highly inflationary economies are translated using a
combination of current and historical exchange rates and any translation
adjustments are included in income.
Revenue Recognition - Avon recognizes revenue upon delivery, when both title and
risks and rewards of ownership pass to the independent Representatives, who are
Avon's customers. Prior to 2000, Avon recognized revenue as shipments were made.
See Note 3 of the Notes to Consolidated Financial Statements.
Other revenues include shipping and handling fees charged to Representatives.
Cash and Equivalents - Cash equivalents are stated at cost plus accrued
interest, which approximates fair value. Cash equivalents are highly liquid debt
instruments with an original maturity of three months or less and consist of
time deposits with a number of U.S. and non-U.S. commercial banks with high
credit ratings.
Inventories - Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out ("FIFO") method for all inventories.
Prior to October 1999, substantially all U.S. inventories, except apparel, used
the last-in, first-out ("LIFO") method to determine cost. The LIFO value of such
inventory at December 31, 1999 was approximately $3.6 lower than it would have
been under the FIFO method at December 31, 1998. Effective October 1, 1999, the
U.S. inventories using the LIFO method were changed to the FIFO method. The
change was made because the Company had begun to realize and expects to continue
to experience cost reductions as a result of technological advancements and
process improvements in its manufacturing operations. As a result, the FIFO
method will better measure the current value of such inventories, provide a more
appropriate matching of revenues and expenses, and conform all inventories of
the Company to the same accounting method. This
23
accounting change was not material to the financial statements on an annual or
quarterly basis, and accordingly, no restatement of prior periods' financial
statements was made.
Depreciation - Substantially all buildings, improvements and equipment are
depreciated using the straight-line method over estimated useful lives.
Estimated useful lives for buildings and improvements range from approximately
20 to 45 years and equipment range from 3 to 15 years.
Deferred Software - Systems development costs related to the development of
major information and accounting systems are capitalized and amortized over the
estimated useful life of the related project, not to exceed five years.
Unamortized deferred software costs totaled $98.9 and $72.5 at December 31, 2000
and 1999, respectively, and are included in Other assets on the Consolidated
Balance Sheets.
Stock Options - Avon applies APB Opinion 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its long-term
incentive plans. Compensation cost for fixed price options is measured as the
excess, if any, of the quoted market price of Avon's stock at the grant date or
other measurement date over the amount an employee must pay to acquire the
stock.
Financial Instruments - The Company uses derivative financial instruments,
including swaps, forward contracts and options, to manage interest rate and
foreign currency exposures. Gains and losses on existing assets, liabilities and
firm commitments designated as hedged items are deferred and included in other
assets or liabilities and recognized when the offsetting gains and losses are
recognized on the related financial instrument. Gains and losses and cash flows
from derivative instruments designated as hedges are classified consistent with
the items being hedged. Items which do not qualify for hedge accounting are
marked to market with the resulting gain or loss recognized in other expense
(income), net. Gains and losses on terminations of foreign exchange and interest
rate swap contracts are deferred and amortized over the remaining terms of the
original agreements.
The Company also uses financial instruments, including forward contracts to
purchase Avon common stock, to hedge certain employee benefit costs and the cost
of the Company's share repurchase program. Contracts that require physical or
net share settlement are initially measured at fair value with subsequent
changes in fair value not recognized. Contracts that require net cash settlement
are initially measured at fair value with subsequent changes in fair value
recognized as gains or losses in the income statement.
Research and Development - Research and development costs are expensed as
incurred and aggregated in 2000 - $43.1 (1999 - $38.2; 1998 - $31.4).
Advertising - Advertising costs are expensed as incurred and aggregated in 2000
- - $92.4 (1999 - $63.4; 1998 - $65.0).
Income Taxes - Deferred income taxes have been provided on items recognized for
financial reporting purposes in different periods than for income tax purposes
at future enacted rates.
U.S. income taxes have not been provided on approximately $204.0 of
undistributed income of subsidiaries that has been or is intended to be
permanently reinvested outside the United States.
Shipping and Handling - Shipping and handling costs are expensed as incurred and
aggregated in 2000 - $533.2 (1999 - $495.4; 1998 - $440.9). Shipping and
handling costs are included in Marketing, distribution and administrative
expenses on the Consolidated Statements of Income.
24
Earnings per Share - Basic earnings per share ("EPS") are computed by dividing
net income by the weighted-average number of shares outstanding during the year.
Diluted earnings per share are calculated to give effect to all potentially
dilutive common shares that were outstanding during the year.
For each of the three years ended December 31, the components of basic and
diluted earnings per share are as follows:
2000 1999 1998
---- ---- ----
Numerator:
Basic:
Income from continuing operations
before cumulative effect of
accounting change $ 485.8 $ 286.6 $ 270.0
Cumulative effect of accounting change (6.7) - -
------- ------- -------
Net Income $ 479.1 $ 286.6 $ 270.0
======= ======= =======
Diluted:
Income from continuing operations
before cumulative effect of accounting
change $ 485.8 $ 286.6 $ 270.0
Interest expense on Convertible Notes,
net of taxes 4.5 - -
------- ------- -------
Income for purposes of computing diluted
EPS before cumulative effect of
accounting change 490.3 286.6 270.0
Cumulative effect of accounting change (6.7) - -
------ ------- -------
Net income for purposes of computing
diluted EPS $ 483.6 $ 286.6 $ 270.0
======= ======= =======
Denominator:
Basic EPS weighted-average shares
outstanding 237.67 256.78 263.27
Dilutive effect of:
Assumed conversion of
stock options and settlement of
forward contracts 2.06* 2.59* 2.68
Assumed conversion of Convertible Notes 3.22 - -
------ ------- ------
Diluted EPS adjusted weighted-average
shares outstanding 242.95 259.37 265.95
====== ======= ======
Basic EPS:
Continuing operations $ 2.04 $ 1.12 $ 1.03
Cumulative effect of accounting change (.03) - -
------- ------- -------
$ 2.01 $ 1.12 $ 1.03
======= ======= =======
Diluted EPS:
Continuing operations $ 2.02 $ 1.10 $ 1.02
Cumulative effect of accounting change (.03) - -
------- ------- -------
$ 1.99 $ 1.10 $ 1.02
======= ======= =======
*At December 31, 2000 and 1999, stock options and forward contracts to
purchase Avon common stock totaling 1.1 million and 3.8 million shares,
respectively, are not included in the diluted EPS calculation since their
impact is anti-dilutive.
25
Reclassifications - To conform to the 2000 presentation, certain
reclassifications were made to the prior years' consolidated financial
statements and the accompanying footnotes.
2. Restatements and Accounting Changes
Restatements
In connection with the settlement of a previously disclosed investigation
by the Securities and Exchange Commission relating to the write off of an order
management software system known as the "FIRST" project, Avon has restated its
Consolidated Financial Statements as of December 31, 2001, 2000 and 1999 and for
the years then ended and for each of the fiscal quarters ended March 31, 1999
through March 31, 2002. See Introductory Note-Restatements and Note 15 of the
Notes to Consolidated Financial Statements, "Asset Impairment Charge".
The accompanying financial statements have been restated to reflect the
restatements discussed above as well as the accounting changes outlined in this
Note. No attempt has been made in this Form 10-K/A to modify or update any
disclosures except as required to reflect the results of the restatements
discussed above and any changes made to prior period financial information for
which a Form 10-K/A was not filed.
The principal adjustments comprising the restatements are as follows:
o Reclassification of $14.8 of pre-tax charges recorded in the first
quarter of 1999 related to the write off of a portion of the FIRST
project, out of the "Special charges" line and into the "Asset
impairment charge" line;
o An additional Asset impairment charge of $23.3 pretax in the first
quarter of 1999 to reflect the write off of all capitalized costs
associated with the FIRST project as of March 31, 1999;
o Reversal of the third quarter 2001 Asset impairment charge of $23.9
pretax related to the abandonment of the FIRST project; and
o Restatement of all other activity related to the FIRST project,
consisting of costs incurred and capitalized subsequent to March 31,
1999 and amortization, recorded from the second quarter of 1999
through the first quarter of 2002.
These adjustments resulting from the restatements are reflected in Results
of Operations by Quarter, Management's Discussion & Analysis, Eleven-Year
Review and the following notes: Special and Non-Recurring Charges, Earnings per
Share, Comprehensive Income, Income Taxes, Segment Information and Asset
Impairment Charge.
Accounting Changes
In addition, the Form 10-K/A reflects the following changes to prior
period financial information for which a Form 10-K/A was not previously filed.
These changes are primarily the result of the previously disclosed adoption of
new accounting pronouncements and are unrelated to the restatements described
above and the FIRST project:
o Reclassifications made to reported 2000 financial information as a
result of the adoption of EITF No. 00-14, "Accounting for Certain
Sales Incentives", EITF No. 00-25, "Accounting for Consideration from
a Vendor to a Retailer in Connection with the Purchase or Promotion
of the Vendor's Products" and EITF 01-09 "Accounting for
Consideration Given by a Vendor to a Customer or Reseller of the
Vendor's Products". The adoption of these EITFs had no impact on
Operating profit, Net income or Earnings per share; and
o Reclassifications made to reported financial information to conform
with the 2002 presentation primarily relating to the sale of
fundraising products in the U.S. Previously the net sales and
fundraising expenses associated with certain U.S. fundraising
products had been included within Marketing, distribution and
administrative expenses. This reclassification resulted in an
increase to Net sales, Cost of sales and Marketing, distribution and
administrative expenses of $13.1, $6.3 and $6.8, respectively for the
year ended December 31, 2000 and had no impact on reported Operating
profit, Net income or Earnings per share.
26
The effects of these restatements and accounting changes on the Consolidated
Financial Statements are set forth below:
Consolidated Statement of Operations
Year ended December 31, 2000
---------------------------------------------------------
As As
Reported(1) (2) Restated(3)
----------- --- -----------
Net sales $5,673.7 $5,681.7 $5,681.7
Total revenue 5,714.6 5,722.6 5,722.6
Cost of sales 2,122.7 2,171.3 2,171.3
Marketing, distribution and
administrative expenses 2,803.2 2,762.6 2,761.4
Operating profit 788.7 788.7 789.9
Income from continuing operations
before taxes, minority interest
and cumulative effect of
accounting change 691.0 691.0 692.2
Income taxes 201.7 201.7 202.2
Income from continuing operations
before minority interest and
cumulative effect of accounting
change 489.3 489.3 490.0
Income from continuing operations
before cumulative effect of
accounting change 485.1 485.1 485.8
Net income 478.4 478.4 479.1
Basic earning per share:
Continuing operations $ 2.04 $ 2.04 $ 2.04
Cumulative effect of accounting
change (.03) (.03) (.03)
-------- ------- -------
$ 2.01 $ 2.01 $ 2.01
======== ======= =======
Diluted earnings per share:
Continuing operations $ 2.02 $ 2.02 $ 2.02
Cumulative effect of accounting
change (.03) (.03) (.03)
-------- ------- -------
$ 1.99 $ 1.99 $ 1.99
======== ======= =======
Consolidated Balance Sheet
As of December 31, 2000
--------------------------------------
As Previously As
Reported(1) Restated(3)
----------- -----------
Property, plant and equipment, at cost $1,523.1 $1,520.4
Other assets 512.3 499.9
Total assets 2,826.4 2,811.3
Retained earnings 1,139.8 1,124.7
Total liabilities and shareholder's
(deficit) equity 2,826.4 2,811.3
(1) As reported in Avon's Form 10-K for the year ended December 31, 2000.
(2) Includes the effects of accounting changes outlined above.
(3) Includes the effects of restatements and accounting changes outlined
above.
Note: Refer to the Company's Form 10-K/A for the year ended December 31, 1999
for restatements to 1999 information.
27
3. Accounting Changes
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FAS No.
133", which delayed the effective date of FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", by one year. FAS No. 133 is now
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 (January 1, 2001 for the Company). In June 2000, the FASB issued FAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133". FAS No. 138 amends FAS No.
133 and will be adopted concurrently with FAS No. 133. FAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives will be recorded each period in current
earnings or accumulated other comprehensive income, depending on whether the
derivative is designated as part of a hedge transaction. For fair-value hedge
transactions in which the Company is hedging changes in the fair value of an
asset, liability, or firm commitment, changes in the fair value of the
derivative instrument will be included in the income statement along with the
offsetting changes in the hedged item's fair value. For cash-flow hedge
transactions in which the Company is hedging the variability of cash flows
related to a variable rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in
accumulated other comprehensive income. The gains and losses on the derivative
instruments that are reported in accumulated other comprehensive income will be
reclassified to earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion of all
of the hedges will be recognized in current period earnings. The impact of FAS
No. 133 as amended by FAS No. 138 on the Company's financial statements will
depend on a variety of factors, including the future level of forecasted and
actual foreign currency transactions, the extent of the Company's hedging
activities, the types of hedging instruments used and the effectiveness of such
instruments. Based on Avon's financial instruments outstanding at December 31,
2000, the Company has determined that the cumulative effect of adoption will not
be material to the Consolidated Financial Statements.
Effective January 1, 2000, the Company adopted Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 provides the Securities and Exchange Commission's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. As a result of adopting SAB 101, Avon changed its revenue
recognition policy to recognize revenue upon delivery, when both title and risks
and rewards of ownership pass to the independent Representative. In accordance
with the provisions of SAB 101, the Company recorded a charge to earnings of
$6.7, net of a tax benefit of $3.5, to reflect the accounting change. This
charge is reflected as a cumulative effect of an accounting change in the
accompanying Consolidated Statements of Income. The effect of the change on the
year ended December 31, 2000, was to decrease net income before the cumulative
effect of the accounting change by $1.1. The change in accounting method would
not have a material effect on the Statements of Income in 1999 or 1998 if
adopted in these periods.
In September 2000, the Emerging Issues Task Force ("EITF") issued EITF
00-10, "Accounting for Shipping and Handling Fees and Costs". Under the
provisions of EITF 00-10, amounts billed to a customer in a sales transaction
related to shipping and handling should be classified as revenue. EITF 00-10
also requires the disclosure of the income statement classification of any
shipping and handling costs. Prior to October 1, 2000, the Company included
shipping and handling fees in Marketing, distribution and administrative
expenses in the Consolidated Statements of Income. Effective October 1, 2000,
the Company adopted EITF 00-10, with restatement of all comparative prior period
financial statements. The adoption has no impact on the determination of net
income.
28
In March 2000, the EITF reached a consensus on the application of EITF
Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock", with Issue No. 00-7, "Equity
Derivative Transactions that Require Net Cash Settlement if Certain Events
Outside the Control of the Issuer Occur" ("EITF 00-7"). Equity derivative
contracts that contain any provision that could require net cash settlement
(except upon the complete liquidation of the Company) must be marked to fair
value through earnings under EITF 00-7. In September 2000, the EITF reached a
consensus on Issue No.00-19, "Determination of Whether Share Settlement Is
Within the Control of the Issuer for Purposes of Applying Issue No. 96-13,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock" ("EITF 00-19"). EITF 00-19 addresses
questions regarding the application of EITF 00-7 and sets forth a model to be
used to determine whether equity derivative contracts should be recorded as
equity. Under the transition provisions of EITF 00-19, all contracts existing
prior to the date of the consensus are grandfathered until June 30, 2001, with a
cumulative catch-up adjustment to be recorded at that time. Additionally, any
contracts entered into prior to September 20, 2000, which are not revised to
comply with the requirements of EITF 00-19 by December 31, 2000, will require
reclassification out of permanent equity and into temporary equity pursuant to
Accounting Series Release No. 268. This reclassification will remain until the
contracts are revised to comply with EITF 00-19 through June 30, 2001. At
December 31, 2000, contracts aggregating $51.0 do not comply with the provisions
of EITF 00-19 and have been included in the accompanying Consolidated Balance
Sheets in Share repurchase commitments with a corresponding decrease in
Additional paid-in capital. The Company believes that the equity derivative
contracts that may remain outstanding at June 30, 2001, if any, will be in
accordance with the requirements of EITF 00-19 and does not anticipate that such
adoption will have a material impact on the consolidated financial statements.
On March 1, 2001, the Company purchased 260,000 shares of Avon common stock for
a purchase price of $11.5 under these contracts.
In May 2000, the EITF reached a consensus on EITF 00-14, "Accounting for
Certain Sales Incentives", which provides guidance on accounting for discounts,
coupons, rebates and free products, as well as the income statement
classification of these discounts, coupons, rebates and free products. EITF
00-14 is effective April 1, 2001, for the Company. The Company is currently
evaluating the impact of this new guidance.
4. Inventories
Inventories at December 31 consisted of the following:
2000 1999
Raw materials $168.0 $156.9
Finished goods 442.6 366.6
------ ------
Total $610.6 $523.5
====== ======
29
5. Debt and Other Financing
Debt at December 31 consisted of the following (see also Note 8 of the Notes to
Consolidated Financial Statements regarding financial instruments):
2000 1999
Maturing within one year:
Notes payable $ 104.6 $305.2
Current portion of long-term debt .8 .8
------ ------
Total $ 105.4 $306.0
====== ======
Long-term debt:
6.90% Notes, due 2004 $ 200.0 $200.0
6.55% Notes, due 2007 100.0 100.0
7.15% Notes, due 2009 300.0 300.0
6.25% Bonds, due 2018 100.0 100.0
Convertible Notes, due 2020 407.0 -
Other, payable through 2005 with interest from 3% to 15% 2.0 2.2
Less current portion (.8) (.8)
-------- ------
Total $1,108.2 $701.4
======== ======
Annual maturities of long-term debt for each of the next five years are:
2001 - $.8; 2002 - $.6; 2003 - $.4; 2004 - $200.1; and 2005 and beyond - $907.1.
In July 2000, the Company issued in a private placement $735.8 principal
amount at maturity of zero-coupon convertible senior notes (the "Convertible
Notes"), due July 12, 2020 with proceeds of approximately $350.0. The issue
price per Convertible Note was $475.66, being 47.566% of the principal amount of
$1,000 per note at maturity. The Convertible Notes have a 3.75% yield to
maturity and are convertible at any time into the Company's common stock at a
conversion rate of 8.2723 shares of common stock per $1,000 principal amount at
maturity of the Convertible Notes (equivalent to a conversion price of $57.50
per share based on the initial offering price of the Convertible Notes). The
Convertible Notes may be redeemed at the option of the Company on or after July
12, 2003 at a redemption price equal to the issue price plus accrued original
issue discount to the redemption date. The holders can require the Company to
purchase all or a portion of the Convertible Notes on July 12, 2003, July 12,
2008 and July 12, 2013, at the redemption price per note of $531.74, $640.29 and
$771.00, respectively. The holders may also require the Company to repurchase
the Convertible Notes if a fundamental change, as defined, involving Avon occurs
prior to July 12, 2003. The Company has the option to pay the purchase price or,
if a fundamental change has occurred, the repurchase price in cash or common
stock or a combination of cash and common stock. The indenture under which the
Convertible Notes were issued restricts the Company's ability to merge with or
consolidate into another company or to sell substantially all of the Company's
assets.
The Company also granted to the initial purchasers of the Convertible Notes
an over-allotment option to purchase an additional $105.0 of Convertible Notes.
As of August 8, 2000, the over-allotment option had been exercised and
additional Convertible Notes with an aggregate principal amount at maturity of
approximately $105.0 were purchased by the initial purchasers from the Company
for proceeds of approximately $50.0.
The net proceeds from the offering (including the proceeds of the
over-allotment option) were used for general corporate purposes, including the
repayment of short-term debt.
30
In November 1999, Avon issued $500.0 of notes payable (the "Notes") in a
private offering to institutional investors. The Notes are unsubordinated,
unsecured obligations of the Company. $200.0 of the Notes bear interest at a per
annum rate equal to 6.90% and mature on November 15, 2004. $300.0 of the Notes
bear interest at a per annum rate equal to 7.15% and mature on November 15,
2009. Interest on the Notes is payable semi-annually. The indenture under which
the Notes were issued limits the incurrence of liens and restricts the
incurrence of sales and leaseback transactions and transactions involving the
mergers, consolidation or a sales of substantially all of the Company's assets.
In connection with the November 1999 offering, Avon entered into five-year
and ten-year interest rate swap contracts with notional amounts of $200.0 and
$300.0, respectively, to effectively convert fixed interest rates on the Notes
to a variable interest rate, based on commercial paper rates. In November 2000,
these interest rate swap contracts were terminated. The cost to settle these
contracts is being amortized over the remaining term of the underlying debt. At
the same time, the Company entered into new four year and nine-year interest
rate swap contracts with notional amounts of $200.0 and $300.0, respectively, to
effectively convert fixed interest on the Notes to a variable interest rate,
based on LIBOR.
In May 2000, Avon entered into an interest rate cap agreement with a
notional amount of $150.0 expiring on May 31, 2001, to convert a variable
interest rate, resulting from the interest rate swaps above, to a fixed interest
rate. The cap rate under this contract is 7%.
In May 1998, Avon issued $100.0 of bonds embedded with option features (the
"Bonds") to pay down commercial paper borrowings. The Bonds have a twenty-year
maturity; however, after five years, the Bonds, at the holder's option, can be
sold back to the Company at par or can be called at par by the underwriter and
resold to investors as fifteen-year debt. The coupon rate on the Bonds is 6.25%
for the first five years, but will be refinanced at 5.69% plus the then
corporate spread if the Bonds are reissued.
In connection with the May 1998 Bond issuance, Avon entered into a five-year
interest rate swap contract with a notional amount of $50.0 to effectively
convert fixed interest on a portion of the Bonds to a variable interest rate,
based on LIBOR.
During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007,
to pay down commercial paper borrowings.
Under the terms of a revolving credit and competitive advance facility
agreement amended in 1996 and expiring in 2001 (the "credit facility"), the
Company may borrow up to $600.0. The Company is currently negotiating with
various banks to renew this credit facility and expects to have a final
agreement by the end of the second quarter of 2001. Within this facility, the
Company is able to borrow, on an uncommitted basis, various foreign currencies.
The credit facility is primarily to be used to finance working capital,
provide support for the issuance of commercial paper and support the stock
repurchase program. At the Company's option, the interest rate on borrowings
under the credit facility is based on LIBOR or the higher of prime or federal
fund rates. The credit facility has an annual facility fee of $.4. The credit
facility contains a covenant for interest coverage, as defined. The Company is
in compliance with this covenant. At December 31, 2000 and 1999, the Company has
$29.9 and $226.4, respectively, outstanding under a $600.0 commercial paper
program supported by the credit facility.
The Company has uncommitted lines of credit available of $49.0 in 2000 and
1999 with various banks which have no compensating balances or fees. As of
December 31, 2000 and 1999, $11.1 of these lines are being used for letters of
credit.
31
The maximum borrowings under these combined facilities during 2000 and 1999
were $515.4 and $840.7, respectively, and the annual average borrowings during
each year were approximately $313.7 and $304.0, respectively, at average annual
interest rates of approximately 6.5% and 5.3%, respectively.
At December 31, 2000 and 1999, international lines of credit totaled $449.5
and $399.5, respectively, of which $74.8 and $81.6 were outstanding,
respectively. The maximum borrowings under these facilities during 2000 and 1999
were $86.4 and $121.0, respectively, and the annual average borrowings during
each year were $77.8 and $73.0, respectively, at average annual interest rates
of approximately 6.4% and 6.2%, respectively. Such lines have no compensating
balances or fees.
At December 31, 2000 and 1999, Avon also had letters of credit outstanding
totaling $15.5, which guarantee various insurance activities. In addition, Avon
had outstanding letters of credit for various trade activities.
During 1998 and 1997, the Company entered into securities lending
transactions resulting in the borrowing of securities which were subsequently
sold for net proceeds approximating $58.1 and $58.6, respectively, used to repay
commercial paper borrowings. The borrowed securities were paid during 2000. The
obligations are included in other accrued liabilities on the balance sheet at
December 31, 1999. The effective rates on the transactions were 5.5% and 6.5%,
respectively.
6. Comprehensive Income
The following table reflects comprehensive income as of December 31:
2000 1999 1998
---- ---- ----
Net income $479.1 $286.6 $270.0
Other comprehensive loss:
Foreign currency
translation adjustments (42.9) (49.7) (15.6)
Available-for-sale securities
Unrealized loss (9.3) - -
Income taxes 3.3 - -
Minimum pension liability
Aadjustment (.8) 2.0 (24.6)
Income taxes .3 (.7) 9.2
------ ------ ------
Comprehensive income $429.7 $238.2 $239.0
====== ====== ======
Accumulated other comprehensive loss at December 31 consisted of the following:
2000 1999
---- ----
Foreign currency translation
Aadjustments $(378.5) $(335.6)
Unrealized loss from
available-for-
sale securities, net of tax (6.0) -
Minimum pension liability
Aadjustment, net of tax (14.6) (14.1)
------- -------
Total $(399.1) $(349.7)
======= =======
32
7. Income Taxes
Deferred tax assets (liabilities) resulting from temporary differences in the
recognition of income and expense for tax and financial reporting purposes at
December 31 consisted of the following:
2000 1999
---- ----
Deferred tax assets:
Postretirement benefits $ 80.7 $ 82.8
Accrued expenses and reserves 48.9 48.6
Special and non-recurring charges 2.4 7.2
Employee benefit plans 69.8 70.9
Foreign operating loss carryforwards 25.9 37.3
Capital loss carryforwards .2 10.0
Postemployment benefits 7.4 9.3
Revenue recognition 4.2 -
All other 30.6 27.0
Valuation allowance (25.4) (46.7)
------- -------
Total deferred tax assets 244.7 246.4
------- -------
Deferred tax liabilities:
Depreciation (43.1) (43.6)
Prepaid retirement plan costs (50.0) (54.9)
Capitalized interest (8.7) (9.7)
Unremitted foreign earnings (13.7) (17.7)
All other (17.2) (9.3)
------- -------
Total deferred tax liabilities (132.7) (135.2)
------- -------
Net deferred tax assets $ 112.0 $ 111.2
======= =======
Deferred tax assets (liabilities) at December 31 were classified as follows:
2000 1999
---- ----
Deferred tax assets:
Prepaid expenses and other $ 86.0 $ 90.0
Other assets 76.1 62.6
------ ------
Total deferred tax assets 162.1 152.6
----- -----
Deferred tax liabilities:
Income taxes (18.8) (4.7)
Deferred income taxes (31.3) (36.7)
------ ------
Total deferred tax liabilities (50.1) (41.4)
------ ------
Net deferred tax assets $112.0 $111.2
====== ======
The valuation allowance primarily represents reserves for foreign operating
loss and capital loss carry forwards. The basis used for recognition of deferred
tax assets included the profitability of the operations and related deferred tax
liabilities.
Income from continuing operations before taxes, minority interest and
cumulative effect of an accounting change for the years ended December 31 was
as follows:
2000 1999 1998
---- ---- ----
United States $ 173.1 $ 78.6 $ 74.2
Foreign 519.1 401.7 381.7
------- ------- -------
Total $ 692.2 $ 480.3 $ 455.9
======= ======= =======
33
The provision for income taxes for the years ended December 31 was as
follows:
2000 1999 1998
---- ---- ----
Federal:
Current $ (3.2) $ 48.4 $ 39.2
Deferred 11.5 (21.0) (10.4)
------- ------- -------
8.3 27.4 28.8
------- ------- -------
Foreign:
Current 183.8 167.5 153.7
Deferred - (5.6) .9
------- ------- -------
183.8 161.9 154.6
------- ------- -------
State and other:
Current 7.6 8.3 10.9
Deferred 2.5 (3.9) (3.5)
------- ------- -------
10.1 4.4 7.4
------- ------- -------
Total $ 202.2 $ 193.7 $ 190.8
======= ======= =======
The effective tax rate for the years ended December 31 was as follows:
2000 1999 1998
---- ---- ----
Statutory federal rate 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit .5 .6 1.0
Tax-exempt operations (.2) (.3) .8
Taxes on foreign income, including translation .3 4.4 4.6
Tax refund, net of taxes (5.8) - -
Other (.6) .6 .5
---- ---- ----
Effective tax rate 29.2% 40.3% 41.9%
==== ==== ====
At December 31, 2000, Avon had foreign operating loss carryforwards of
approximately $78.7. The loss carryforwards expiring between 2001 and 2008 were
$35.5 and the loss carryforwards which do not expire were $43.2. Capital loss
carryforwards, which expire in 2001 and may be used to offset capital gains, if
any, were approximately $.7 at December 31, 2000.
In January 2001, the Company received a federal income tax refund consisting
of $32.5 of tax and $62.7 of interest related to the carryback of foreign tax
credits and general business credits to the years ended December 31, 1982, 1983,
1985 and 1986. The Company recognized $40.1 million as an income tax benefit in
2000 resulting from the impact of the tax refund offset by taxes due on interest
received and other related tax obligations.
8. 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
34
periodically employ interest rate caps to reduce exposure, if any, to increases
in variable interest rates.
As discussed in Note 5 of the Notes to Consolidated Financial Statements,
the Company entered into a five-year interest rate swap contract with a notional
amount of $50.0 to effectively convert fixed interest on a portion of the Bonds
to a variable interest rate based on LIBOR. The Company has also entered into
four-year and nine-year interest rate swap contracts with notional amounts of
$200.0 and $300.0, respectively, to convert fixed interest on the Notes to a
variable interest rate, based on LIBOR.
In May 2000, Avon entered into an interest rate cap agreement with a
notional amount of $150.0 expiring on May 31, 2001, to convert a variable
interest rate, resulting from the interest rate swaps above, to a fixed interest
rate. The cap rate under this contract is 7%.
Foreign Currencies - The Company may periodically hedge foreign currency
royalties, net investments in foreign subsidiaries, firm purchase commitments
and contractual foreign currency cash flows or obligations, including
third-party and intercompany foreign currency transactions. The Company
regularly monitors its foreign currency exposures and ensures that hedge
contract amounts do not exceed the amounts of the underlying exposures.
At December 31, 2000, the Company held foreign currency forward contracts
with notional amounts totaling $393.7 (1999 - $290.2) and option contracts with
notional amounts totaling $19.1 (1999 - $20.0) to hedge foreign currency items.
All of these contracts mature within the next 13 months. Additionally, the
Company also held forward contracts with notional amounts totaling $34.2 (1999 -
$66.7) which do not qualify as hedging transactions under the current accounting
definitions and, accordingly, have been marked to market. The mark-to-market
adjustments on these forward contracts at December 31, 2000 and 1999, were not
material.
These forward and option contracts to purchase and sell foreign currencies,
including cross-currency contracts to sell one foreign currency for another
currency at December 31, are summarized below:
2000 1999
---- ----
Buy Sell Buy Sell
Argentine peso $ - $ 15.0 $ - $ -
Brazilian real - 8.0 15.0 65.0
British pound 5.5 41.7 7.3 30.1
Canadian dollar - 10.8 - 23.8
Euro 151.3 104.1 82.9 10.0
French franc .9 - 10.9 -
Indonesian rupiah .9 - 1.7 -
Irish punt 2.8 - 1.7 -
Italian lira 1.6 - 4.7 -
Japanese yen 13.7 20.0 4.8 60.5
Mexican peso - 43.8 - 45.0
Polish zloty - 8.4 - -
Taiwanese dollar - 7.0 - 3.0
Other currencies 2.3 9.2 6.2 4.3
------ ------- ------- ------
Total $179.0 $ 268.0 $ 135.2 $241.7
====== ======= ======= ======
At December 31, 2000, the Company has entered into forward contracts to
purchase approximately 1,374,400 shares of Avon common stock at an average price
of $37.09 per share at December 31, 2000. The contracts mature over the next 10
months and provide for physical or net share settlement to the Company.
Accordingly, no adjustment for subsequent changes in fair value has been
recognized. In accordance with the provisions of EITF 00-19, $51.0 of these
contracts have been included in the accompanying Consolidated Balance Sheets in
Share repurchase commitments with a corresponding decrease in Additional paid-in
capital.
35
See Note 3 of the Notes to Consolidated Financial Statements. On March 1, 2001,
the Company purchased 260,000 shares of Avon common stock at a purchase price
of $11.5 under these contracts.
Credit and Market Risk - The Company attempts to minimize its credit exposure to
counterparties by entering into interest rate swap and cap contracts only with
major international financial institutions with "A" or higher credit ratings as
issued by Standard & Poor's Corporation. The Company's foreign currency and
interest rate derivatives are comprised of over-the-counter forward contracts or
options with major international financial institutions. Although the Company's
theoretical credit risk is the replacement cost at the then estimated fair value
of these instruments, management believes that the risk of incurring losses is
remote and that such losses, if any, would not be material.
Non-performance of the counterparties to the balance of all the currency
and interest rate swap agreements would not result in a significant write-off at
December 31, 2000. In addition, Avon may be exposed to market risk on its
foreign exchange and interest rate swap agreements as a result of changes in
foreign exchange and interest rates. The market risk related to the foreign
exchange agreements should be substantially offset by changes in the valuation
of the underlying items being hedged.
Fair Value of Financial Instruments - For purposes of the following disclosure,
the fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation. The aggregate fair value amounts presented are
not intended to, and do not, represent the underlying fair value of Avon.
The methods and assumptions used to estimate fair value are as follows:
Grantor trust - The fair value of these investments, principally fixed income
funds and equity securities, is based on the quoted market prices for issues
listed on exchanges.
Debt maturing within one year and long-term debt and other financing - The fair
value of all debt and other financing is estimated based on quoted market
prices.
Forward stock purchases and foreign exchange forward and option contracts - The
fair value of forward and option contracts is estimated based on quoted market
prices from banks.
Interest rate swap agreements - The fair value of interest rate swap agreements
is estimated based on quotes from the market makers of these instruments and
represents the estimated amounts that Avon would expect to receive or pay to
terminate the agreements.
36
The asset and (liability) amounts recorded in the balance sheet (carrying
amount) and the estimated fair values of financial instruments at December 31
consisted of the following:
2000 1999
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Cash and equivalents $ 122.7 $ 122.7 $ 117.4 $ 117.4
Grantor trust 70.1 70.1 75.4 75.4
Debt maturing within one year* (105.4) (105.4) (412.4) (412.4)
Long-term debt, net of related
discount or premium (1,108.8) (1,139.3) (701.1) (675.6)
Share repurchase commitments (51.0) (14.8) - (12.3)
Foreign exchange forward and
option contracts .6 (4.2) 9.8 4.3
Interest rate swap and cap
receivable (payable) .3 20.0 .5 (13.4)
*Other financing activities are included in Debt maturing within one year in
1999.
9. Stock Option Plans
A summary of the Company's stock option activity, weighted-average exercise
price and related information for the years ended December 31 is as follows:
1998 1999 2000
---- ---- ----
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(in 000's) Price (in 000's) Price (in 000's) Price
---------- ----- ---------- ----- ---------- -----
Outstanding -
beginning
of year 7,070 $22.29 7,127 $25.46 8,106 $29.38
Granted 1,664 32.40 2,225 37.33 3,424 38.28
Exercised (1,412) 17.59 (1,152) 20.35 (1,702) 23.94
Forfeited (195) 26.87 (94) 31.14 (249) 31.68
----- ----- ----- ----- ------ -----
Outstanding -
end of year 7,127 $25.46 8,106 $29.38 9,579 $33.47
===== ====== ===== ====== ====== ======
Options
exercisable -
end of year 2,943 $18.74 3,627 $23.32 4,241 $28.61
===== ====== ===== ====== ====== ======
37
The following table summarizes information about stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
------------------- -------------------
Exercise Shares Average Average Shares Average
Price (in 000's) Price Term (in 000's) Price
----- ---------- ----- ---- ---------- -----
$13.13 - $23.00 1,142 $ 17.23 5 years 1,142 $ 17.23
$29.63 - $35.25 3,611 $ 31.54 7 years 2,532 $ 31.10
$38.25 - $54.81 4,826 $ 38.75 9 years 567 $ 40.43
The 1993 Stock Incentive Plan (the "1993 Plan"), and the Avon Products, Inc.
2000 Stock Incentive Plan (the "2000 Plan"), which replaced the 1993 Plan
effective May 4, 2000, provide for several types of equity-based incentive
compensation awards. Under the 2000 Plan, the maximum number of shares that may
be awarded is 18,250,000 shares, of which no more than 6,000,000 shares may be
used for restricted share and stock bonus grants. Under the 1993 Plan, the
maximum number of shares that could be awarded was 14,100,000 shares, of which
no more than 8,000,000 shares could be used for restricted share and stock bonus
grants. Awards under either plan may be in the form of stock options, stock
appreciation rights, dividend equivalent rights or performance unit awards.
Stock options are granted at a price no less than fair market value on the date
the option is granted. During 2000, 1999 and 1998, restricted shares with
aggregate value and vesting and related amortization periods were granted as
follows: 2000 - 261,700 valued at $10.2 vesting over one to three years; 1999 -
137,000 valued at $5.8 vesting over one to three years and 1998 - 499,000 valued
at $16.0 vesting over one to three years.
Effective January 1, 1997, the 1997 Long-Term Incentive Plan ("1997 LTIP")
was authorized under the 1993 Plan. The 1997 LTIP provided for the grant of two
forms of incentive awards, performance units for potential cash incentives and
ten-year stock options. Performance units were earned over the three-year
performance period (1997-1999), based on the degree of attainment of performance
objectives. As of December 31, 1999, certain performance goals under the 1997
LTIP were achieved and, accordingly, cash incentives totaling approximately
$31.0 were paid in 2000. Effective May 4, 2000, stock options were awarded under
the 2000 Plan. Options are awarded annually over a three-year performance period
and vest in thirds over the three-year period following each option grant date.
As discussed above, these options are granted at the fair market value on the
date the option is granted.
Compensation expense under all plans in 2000 was $6.6 (1999 - $20.4; 1998 -
$17.8). The unamortized cost of restricted shares as of December 31, 2000 was
$10.0 (1999 - $6.8).
The Company has adopted the disclosure provisions of FAS No. 123. Had
compensation cost for the plans been based on the fair value at the grant dates
for awards under those plans consistent with the method prescribed by FAS No.
123, net income and earnings per share (after the cumulative effect of the
accounting change) would have been the pro forma amounts indicated below:
2000 1999 1998
---- ---- ----
Pro forma net income $ 461.6 $ 275.2 $ 263.0
Pro forma earnings per share:
Basic $ 1.94 $ 1.07 $ 1.00
Diluted $ 1.92 $ 1.05 $ .99
38
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
2000 1999 1998
---- ---- ----
Risk-free interest rate 6.7% 5.4% 5.5%
Expected life 5 years 5 years 5 years
Expected volatility 40% 30% 25% - 30%
Expected dividend yield 2.0% 2.0% 2.0%
The weighted-average grant date fair values of options granted during 2000, 1999
and 1998 were $11.73, $10.09, and $7.67, respectively.
10. Shareholders' (Deficit) Equity
Stock Split - On July 22, 1998, the Company declared a two-for-one stock split
in the form of a 100% stock dividend which was distributed in September 1998 to
shareholders of record as of the close of business on August 24, 1998.
Accordingly, the stock split has been recognized by reclassifying the par value
of the additional shares resulting from the split from retained earnings to
common stock and treasury stock. All references to the number of share and per
share amounts elsewhere in the consolidated financial statements and related
footnotes have been restated to reflect the effect of the split for all periods
presented.
Share Rights Plan - Avon has a Share Rights Plan under which one right has been
declared as a dividend for each outstanding share of its common stock. Each
right, which is redeemable at $.005 at any time at Avon's option, entitles the
shareholder, among other things, to purchase one share of Avon common stock at a
price equal to one-half of the then current market price, if certain events have
occurred. The right is exercisable if, among other events, one party obtains a
beneficial ownership of 20% or more of Avon's voting stock.
Stock Repurchase Programs - During 1994, Avon's Board authorized a stock
repurchase program under which Avon could buy back up to 10% of its then
outstanding common stock, or approximately 28.0 million shares. As of February
1997, when the plan ended, the cumulative number of shares repurchased was 25.3
million shares at a total cost of $424.4 which are included in Treasury stock.
In February 1997, Avon's Board authorized a new repurchase program under which
the Company was authorized to buy back up to $1,100.0 of its currently
outstanding common stock through open market purchases over a period of up to
five years. In the third quarter of 2000, when the program was completed, the
cumulative number of shares repurchased was 33.7 million shares at a total cost
of $1,060.0. In September 2000, Avon's Board approved a new share repurchase
program under which the Company may buy up to $1,000.0 of its outstanding stock
over the next five years. As of December 31, 2000, the Company repurchased
approximately 0.6 million shares at a total cost of approximately $25.8 under
this new program.
Savings Plan - The Company offers a qualified defined contribution plan, the
Avon Products, Inc. 401(k) Personal Savings Account, which allows eligible
participants to contribute 1% to 20% of qualified compensation through payroll
deductions. Effective July 1, 1998, the Company matches employee contributions
dollar for dollar up to the first 3% of eligible compensation and $.50 for each
$1.00 contributed from 4% to 6% of eligible compensation. Prior to July 1, 1998,
the Company matched contributions in an amount equal to 25% of an employee's
qualified contribution. In 2000 and 1999, matching contributions approximating
$12.7 and $12.8, respectively, were made in cash, which was then used to
39
purchase Avon shares in the open market. In 1998, Avon contributed 62,520 shares
of treasury stock to the employees' savings plan and recognized expense for its
fair value.
Board of Directors Remuneration - Effective May 1, 1997, the Company
discontinued the Board retirement plan, which was applicable only to
non-management directors. Directors retiring after that date have had the
actuarial value of their accrued retirement benefits converted to a one-time
grant of common stock which is restricted as to transfer until retirement.
52,786 shares were issued to directors as a result of the discontinuance of the
plan. As a replacement for such plan, effective on and after May 1, 1997, each
non-management director is annually granted options to purchase 4,000 shares of
common stock, at an exercise price based on the fair market price of the stock
on the date of grant. The annual grant made in 2000 and 1999 consisted of 34,000
and 36,000 options, respectively, with an exercise price of $38.25 and $51.38,
respectively.
Also effective as of May 1, 1997, the annual retainer paid to
non-management directors was changed to consist of twenty-five thousand dollars
cash plus an annual grant of shares having a value of twenty-five thousand
dollars based on the average closing market price of the stock for the 10 days
preceding the date of grant. These shares are also restricted as to transfer
until the director retires from the Board. The annual grant made in 2000 and
1999 consisted of a total of 5,232 and 4,284 shares, respectively.
11. Employee Benefit Plans
Retirement Plans - Avon and certain subsidiaries have contributory and
noncontributory retirement plans for substantially all employees. Benefits under
these plans are generally based on an employee's years of service and average
compensation near retirement. Plans are funded on a current basis except where
funding is not required. Plan assets consist primarily of equity securities,
corporate and government bonds and bank deposits.
Effective July 1998, the defined benefit retirement plan covering U.S.-based
employees was converted to a cash balance plan with benefits determined by
compensation credits related to age and service and interest credits based on
individual account balances and prevailing interest rates. Additional amendments
include a 10 year transitional benefit arrangement for certain employees covered
under the existing defined benefit retirement plan.
Postretirement Benefits - Avon provides health care and life insurance benefits
for the majority of employees who retire under Avon's retirement plans in the
United States and certain foreign countries. The cost of such health care
benefits is shared by Avon and its retirees. In 2000, Avon adopted certain
amendments to its retiree medical plans which increases retiree contributions,
changes the prescription drug program and implements a future cap on Company
contributions.
40
The following provides a reconciliation of benefit obligations, plan assets and
funded status of these plans:
Pension Postretirement
Benefits Benefits
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Change in benefit obligation:
Beginning balance $(919.2) $(999.8) $(181.6) $(201.8)
Service cost (36.5) (38.1) (1.9) (3.6)
Interest cost (65.6) (67.6) (11.2) (13.4)
Actuarial (loss) gain (6.8) 43.5 2.7 19.5
Benefits paid 84.3 155.1 13.7 12.1
Plan amendments (1.5) (2.9) 42.1 5.5
Settlements/special
termination benefits 1.7 (17.2) - -
Foreign currency changes 31.2 10.6 - -
Other (1.8) (2.8) .2 .1
------- ------- ------- -------
Ending balance $(914.2) $(919.2) $(136.0) $(181.6)
------- ------- ------- -------
Change in plan assets:
Beginning balance $ 860.0 $ 863.1 $ - $ -
Actual return on
plan assets 7.1 113.7 - -
Company contributions 39.9 36.1 13.7 12.1
Plan participant contributions 2.0 2.2 - -
Benefits paid (84.3) (155.1) (13.7) (12.1)
Foreign currency changes (21.3) 2.0 - -
Settlements/special
termination benefits (4.1) (2.0) - -
------- -------- ------- -------
Ending balance $ 799.3 $ 860.0 $ - $ -
------- -------- ------- -------
Funded status of the plan $(114.9) $ (59.2) $(136.0) $(181.6)
Unrecognized actuarial
loss(gain) 107.5 48.1 (27.6) (26.1)
Unrecognized prior
service cost 2.8 3.0 (44.3) (5.0)
Unrecognized net transition
obligation 2.1 1.6 .3 .4
------- ------- ------- -------
Accrued benefit cost $ (2.5) $ (6.5) $(207.6) $(212.3)
======= ======= ======= =======
Amount recognized in the
statements:
Prepaid benefit $ 143.9 $ 138.8 $ - $ -
Accrued liability (146.4) (145.3) (207.6) (212.3)
Additional minimum liability (31.1) (22.0) - -
Intangible asset 7.8 7.9 - -
Accumulated other
comprehensive income 23.3 14.1 - -
------- -------- ------- -------
$ (2.5) $ (6.5) $(207.6) $(212.3)
======= ======== ======= =======
At December 31, 2000 and 1999, the weighted-average discount rate used in
determining the pension benefit obligation was 7.1%. At December 31, 2000 and
1999, the weighted-average discount rates used in determining the postretirement
benefit obligation were 7.8% and 8.0%, respectively.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension and postretirement benefit plans with accumulated
benefit obligations in excess of plan assets were $390.3, $349.0, and $40.1,
respectively, as of December 31, 2000, and $428.8, $381.4, and $39.4,
respectively, as of December 31, 1999.
41
Net periodic benefit cost for the years ended December 31 was determined as
follows:
Pension Postretirement
Benefits Benefits
-------- --------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Service cost $ 36.5 $ 38.1 $ 35.4 $ 1.9 $ 3.6 $ 3.3
Interest cost 65.6 67.6 64.5 11.2 13.4 13.0
Expected return on plan assets (66.6) (69.6) (64.0) - - -
Amortization of transition
liability (.7) (.7) (6.8) - - -
Amortization of prior
service cost 1.0 .8 (.4) - - -
Amortization of actuarial
losses (gains) 5.6 10.2 12.3 (3.8) (.4) -
Settlements or curtailments (1.2) 2.0 - - - -
Special termination benefits 2.5 1.5 - - - -
Other (.9) - .3 - - -
------ ------ ------ ----- --- -----
Net periodic benefit cost $ 41.8 $ 49.9 $ 41.3 $ 9.3 $16.6 $16.3
====== ====== ====== ===== ===== =====
The weighted-average assumptions used to determine the data for the
years ended December 31 are as follows:
Pension Postretirement
Benefits Benefits
---------------- -----------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Discount rate 7.2% 6.8% 7.1% 8.0% 7.0% 7.2%
Rate of compensation increase 4.0 4.0 4.0 4.5 4.5 4.5
Rate of return on assets 8.8 8.8 9.2 N/A N/A N/A
For 2000, the assumed rate of future increases in the per capita cost of
health care benefits (the health care cost trend rate) was 6.8% for pre-65
claims (6.4% for post-65 claims) and will gradually decrease each year
thereafter to 5.0% in 2005 and beyond. The healthcare cost trend rate assumption
has a significant effect on the amounts reported. A one-percentage point change
in the assumed health care cost trend rates would have the following effects:
1 Percentage 1 Percentage
(In millions) Point Increase Point Decrease
-------------- --------------
Effect on total of service
and interest cost components $ 1.8 $ 1.4
Effect on postretirement benefit
obligation 17.6 14.5
Supplemental Retirement Program - Avon maintains a supplemental retirement
program consisting of a Supplemental Executive Retirement Plan ("SERP") and a
Benefits Restoration Pension Plan ("Restoration Plan") under which non-qualified
supplemental pension benefits are paid to higher paid employees in addition to
amounts received under Avon's qualified retirement plan which is subject to IRS
limitations on covered compensation. The annual cost of this program has been
included in the determination of the net periodic benefit cost shown above and
in 2000 amounted to $10.2 (1999 - $10.1, 1998 - $6.1). The benefit obligation
under this program at December 31, 2000 was $32.9 (1999 - $29.3) and is
primarily included in Employee Benefit Plans.
Avon also maintains a Supplemental Life Insurance Plan ("SLIP") under which
additional death benefits ranging from $.35 to $2.0 are provided to certain
active and retired officers. Avon has acquired corporate-owned life insurance
policies to provide partial funding of the benefits.
42
The cash surrender value of these policies at December 31, 2000 was $26.1 (1999
- - $24.2) and is held in a grantor trust.
Avon has established a grantor trust to provide funding for the benefits payable
under the SERP and SLIP and further provides for funding of obligations under
Avon's Deferred Compensation Plan. The trust is irrevocable and assets
contributed to the trust can only be used to pay such benefits with certain
exceptions. The assets held in the trust at December 31, 2000, amounting to
$96.2 (1999 - $99.6), consisted of a fixed income portfolio, a managed portfolio
of equity securities and corporate-owned life insurance policies. These assets
are included in Other assets.
The equity securities and fixed income portfolio included in the grantor trust
are classified as available-for-sale and recorded at current market value. In
2000, net unrealized gains and losses on these securities were recorded in Other
Comprehensive Income (see Note 5). In 1999, the net unrealized gains and losses
on these securities were not recorded as the carrying value approximated market.
The cost, gross unrealized gains and losses and market value of the
available-for-sale securities as of December 31, 2000, are as follows:
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- --------
Equity Securities $ 44.3 $ 2.5 $ (12.2) $ 34.6
U.S. Government Bonds 1.5 - - 1.5
State and Municipal Bonds 30.9 .6 (.2) 31.3
Mortgage Backed 1.9 - - 1.9
Corporate Bonds .8 - - .8
-------- ---------- ---------- ------
Total $ 79.4 $ 3.1 $ (12.4) $ 70.1
======== ========== =========== ======
Payments, proceeds and net realized gains from the purchases and sales of these
securities totaled $98.3, $100.3 and $6.0, respectively, during 2000. For the
purpose of determining realized gains and losses, the cost of securities sold
was based on specific identification.
Postemployment Benefits - Avon provides postemployment benefits which include
salary continuation, severance benefits, disability benefits, continuation of
health care benefits and life insurance coverage to former employees after
employment but before retirement. At December 31, 2000, the accrued cost for
postemployment benefits was $31.9 (1999 - $38.5) and is included in Employee
Benefit Plans.
12. Segment Information
The Company's reportable segments are based on geographic operations and include
a North American business unit and International business units in Latin
America, Europe and Pacific regions. The segments have similar business
characteristics and each offers similar products through common customer access
methods.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements. The
Company evaluates the performance of its operating segments based on operating
profits or losses. Segment revenues reflect direct sales of products to
Representatives based on their geographic location. Intersegment sales and
transfers are not significant. Each segment records direct expenses related to
its employees and its operations. The Company does not allocate income taxes,
foreign exchange gains or losses, or corporate overhead expenses to operating
segments. Identifiable assets are primarily those directly used in the
operations of each segment. Corporate and other identifiable assets include
cash, investments, deferred tax assets and prepaid pension assets.
43
Summarized financial information concerning the Company's reportable segments as
of December 31 is shown in the following table. Net sales and operating profit
by reportable segment are presented on page 5.
Total Assets:
2000 1999 1998
---- ---- ----
North America
U.S. $ 640.0 $ 536.9 $ 497.2
Other* 125.4 111.8 111.1
-------- -------- --------
Total 765.4 648.7 608.3
-------- -------- --------
International
Latin America North 292.9 248.9 205.3
Latin America South 310.7 294.1 338.1
-------- ------- --------
Latin America 603.6 543.0 543.4
Europe 451.3 415.4 386.0
Pacific 399.8 411.2 379.5
-------- -------- --------
Total 1,454.7 1,369.6 1,308.9
-------- -------- --------
Corporate and other 581.2 484.1 516.3
-------- -------- --------
Total assets $2,801.3 $2,502.4 $2,433.5
======== ======== ========
Capital Expenditures:
2000 1999 1998
---- ---- ----
North America
U.S. $ 67.6 $ 39.2 $ 32.1
Other* 8.7 8.6 8.6
-------- -------- --------
Total 76.3 47.8 40.7
-------- -------- --------
International
Latin America North 17.5 37.6 17.5
Latin America South 24.6 15.8 19.1
-------- -------- -------
Latin America 42.1 53.4 36.6
Europe 47.1 39.6 28.8
Pacific 13.4 33.6 28.1
-------- -------- --------
Total 102.6 126.6 93.5
-------- -------- --------
Corporate and other 14.6 25.8 55.3
-------- -------- --------
Total capital expenditures $ 193.5 $ 200.2 $ 189.5
======== ======== ========
Depreciation and Amortization:
2000 1999 1998
---- ---- ----
North America
U.S. $ 28.5 $ 23.7 $ 19.2
Other* 3.5 2.8 2.4
-------- -------- --------
Total 32.0 26.5 21.6
-------- -------- --------
International
Latin America North 9.3 6.4 5.1
Latin America South 7.4 6.6 6.9
-------- -------- --------
Latin America 16.7 13.0 12.0
Europe 16.0 15.4 14.9
Pacific 16.9 16.1 11.2
-------- -------- --------
Total 49.6 44.5 38.1
-------- -------- --------
Corporate and other 14.3 11.7 12.3
-------- -------- --------
Total depreciation
and amortization $ 95.9 $ 82.7 $ 72.0
======== ======== ========
44
Long-Lived Assets: 2000 1999 1998
---- ---- ----
North America
U.S. $ 264.4 $ 251.6 $ 215.9
Other* 41.3 14.5 23.9
------- ------- -------
Total 305.7 266.1 239.8
------- ------- -------
International
Latin America North 81.4 73.7 47.2
Latin America South 73.5 59.7 62.1
------- ------- -------
Latin America 154.9 133.4 109.3
Europe 176.7 152.9 135.0
Pacific 174.5 193.1 167.1
------- ------- -------
Total 506.1 479.4 411.4
------- ------- -------
Corporate and other 122.9 117.2 153.9
------- ------- -------
Total long-lived assets $ 934.7 $ 862.7 $ 805.1
======= ======= =======
*Includes operating information for Puerto Rico, Canada and Discovery Toys.
The following table presents consolidated net sales by classes of principal
products, as of December 31:
2000 1999 1998
---- ---- ----
Cosmetics, fragrance and toiletries $3,501.3 $3,220.8 $3,181.1
Beauty Plus:
Fashion Jewelry 323.4 313.4 294.5
Accessories 275.8 223.9 222.4
Apparel 476.3 474.5 469.1
Watches 68.6 49.8 42.1
-------- ------- --------
1,144.1 1,061.6 1,028.1
Beyond Beauty and Other* 1,036.3 1,006.7 1,003.5
-------- -------- --------
Total net sales $5,681.7 $5,289.1 $5,212.7
======== ======== ========
*Beyond Beauty and Other primarily includes home products, gift and decorative,
health and nutrition, and candles.
Foreign Exchange - Financial statement translation of subsidiaries operating in
highly inflationary economies and foreign currency transactions resulted in
losses (gains) in 2000 netting to $12.6 (1999 - $7.5; 1998 - $(1.1)), which are
included in other expense (income), net and income taxes. In addition, cost of
sales and expenses include the unfavorable impact of the translation of
inventories and prepaid expenses at historical rates in countries with highly
inflationary economies in 2000 of $3.2 (1999 - $7.1; 1998 - $15.8).
45
13. Leases and Commitments
Minimum rental commitments under noncancellable operating leases, primarily for
equipment and office facilities at December 31, 2000, consisted of the
following:
Year
----
2001 $ 69.1
2002 52.8
2003 40.6
2004 33.1
2005 29.1
Later years 225.3
Sublease rental income (4.5)
-------
Total $ 445.5
=======
Rent expense in 2000 was $85.4 (1999 - $84.5; 1998 - $84.7). Various
construction and information systems projects were in progress at December 31,
2000, with an estimated cost to complete of approximately $130.0.
14. 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 $136.4 pretax ($111.9 net of tax, or $.43
per share on a basic and diluted basis) for the year ended December 31, 1999 and
totaled $154.4 pretax ($122.8 net of tax, or $.46 per share on a basic and
diluted basis) for the year ended December 31, 1998.
Special and non-recurring charges by business segment are as follows:
1999 1998
---- ----
North America $33.6 $84.6
Latin America 14.7 6.3
Europe 69.8 18.2
Pacific 11.8 27.3
Corporate 6.5 18.0
---- ------
Total $136.4 $154.4
====== ======
Special and non-recurring charges by category of expenditures are as follows for
the years ended December 31:
1999
----
Special Cost of
Charges Sales Charge Total
------- ------------ -----
Employee severance
costs $ 57.0 $ - $ 57.0
Inventories - 46.0 46.0
Writedown of assets
to net realizable
value 11.6 - 11.6
Recognition of foreign
currency translation
adjustment 9.8 - 9.8
Other 12.0 - 12.0
------ ------ ------
$90.4 $ 46.0 $136.4
===== ====== ======
46
1998
----
Special Cost of
Charges Sales Charge Total
------- ------------ -----
Employee severance
costs $ 56.4 $ - $ 56.4
Inventories - 37.9 37.9
Writedown of assets
to net realizable
value 31.8 - 31.8
Field program buy-out 14.4 - 14.4
Other 13.9 - 13.9
------ ------ ------
$116.5 $ 37.9 $154.4
====== ====== ======
Employee severance costs are expenses, both domestic and international,
associated with the realignment of the Company's global operations. Certain
employee severance costs were accounted for in accordance with the Company's
existing FAS 112 ("Employers' Accounting for Postemployment Benefits") severance
plans. Remaining severance costs were accounted for in accordance with other
accounting literature. The workforce was reduced by approximately 3,700
employees, or 9% of the total. Approximately one-half of the terminated
employees related to the facility closures. As of December 31, 2000, all
employees under the program have been terminated.
Inventory-related charges represent losses to write down the carrying value
of non-strategic inventory prior to disposal. The 1999 charges primarily result
from a new business strategy for product dispositions which fundamentally
changes the way the Company markets and sells certain inventory. This new
strategy, approved and effective in March 1999, is meant to complement other
redesign initiatives, with the objective of reducing inventory clearance sales,
building core brochure sales and building global brands. The 1998 charges
resulted from the closure of facilities, discontinuation of certain product
lines, size-of-line reductions and a change in strategy for product
dispositions.
The 1999 writedown of assets (primarily fixed and other assets) mainly
relates to the restructuring of operations in Western Europe, including the
closure of a jewelry manufacturing facility in Ireland. By centralizing certain
key functional areas and exiting unprofitable situations, the Company plans to
increase operating efficiencies and, ultimately, profit growth in the long term.
The 1998 writedown of assets relates to the closure of a Far East buying office
and manufacturing facilities in Puerto Rico and the Dominican Republic. As a
result of ongoing government restrictions, the Company has also decided to close
certain branches and a regional office in China. Also, writedowns include assets
(primarily fixed and intangible assets) associated with the divestiture of the
Discovery Toys business unit, which was effective January 15, 1999.
The field program buy-out represents costs to terminate the Company's prior
representative recruitment program in the U.S.
The recognition of a foreign currency translation adjustment relates to the
closure of the jewelry manufacturing facility in Ireland.
"Other" category primarily represents lease and contract termination costs,
litigation costs, and other costs associated with the facility closures.
47
The liability balance included in other accrued liabilities as of December
31, 2000 and 1999, is as follows:
Special Cost of
Charges Sales Charge Total
------- ------------ -----
Balance at
December 31, 1998 $ 28.5 $ - $ 28.5
Provision 90.4 46.0 136.4
Cash expenditures (67.1) - (67.1)
Non-cash write-offs (25.6) (46.0) (71.6)
----- ----- -----
Balance at
December 31, 1999 26.2 - 26.2
Cash expenditures (18.3) - (18.3)
------ ----- -----
Balance at
December 31, 2000 $ 7.9 $ - $ 7.9
====== ===== ======
The balance at December 31, 2000, relates primarily to employee severance
costs that will be paid in accordance with the original plan during 2001.
15. Asset Impairment Charge
In the first quarter of 1999, Avon originally recorded a Special charge of
$151.2 pretax, which included the write off of $14.8 in pre-tax costs ($10.0
after tax) associated with a portion of the order management software system
known as the FIRST project. The balance of the FIRST project's development
costs had been carried as an asset until the third quarter of 2001, when Avon
recorded a pre-tax charge of $23.9 ($14.5 after tax) to write off the carrying
value of costs related to that project. The non-cash charge recorded in the
third quarter of 2001 included software development costs, certain hardware,
software interfaces and other related costs. Prior to the write off, the
capitalized software was included in Property, plant and equipment, at cost,
and Other assets on the Consolidated Balance Sheet.
The decision to abandon the FIRST project was based on various factors,
including project management and implementation issues and costs, costs for
ongoing support, and changes in Avon business strategies.
The FIRST project, and the Special charge reported by Avon in the first
quarter of 1999 that included the write off of $14.8 in pre-tax costs
associated with FIRST, were the subject of a formal investigation by the SEC
commenced in August 2000. Avon has settled that matter with the SEC and, as
part of that settlement, has restated its financial statements to reflect the
additional write off as of March 31, 1999 of all capitalized costs ($23.3
pretax, and $14.0 after tax) associated with the FIRST project as of that date
for a total first quarter write off of $38.1 pretax ($24.0 after tax). Avon has
also reversed the charge recorded in the third quarter of 2001, and has
restated all other FIRST-related activity recorded during 1999-2002.
See the Introductory Note - Restatements and Note 2 of the Notes to
Consolidated Financial Statements, "Restatements and Accounting Changes".
16. Contingencies
Various lawsuits and claims (asserted and unasserted), arising in the
ordinary course of business or related to businesses previously sold, are
pending or threatened against Avon.
In 1991, a class action lawsuit was initiated against Avon on behalf of
certain classes of holders of Avon's Preferred Equity-Redemption Cumulative
Stock ("PERCS"). This lawsuit alleges various contract and securities law
claims relating to the PERCS (which were fully redeemed that year). While it is
not possible to predict the outcome of litigation, Avon has rejected the
assertions in this case,
48
believes it has meritorious defenses to the claims and is vigorously contesting
this lawsuit. It is anticipated that a trial may take place in late 2001.
In the opinion of Avon's management, based on its review of the information
available at this time, the total cost of resolving such contingencies at
December 31, 2000 should not have a material adverse impact on Avon's
consolidated financial position, results of operations or cash flows.
17. Subsequent Event
On February 1, 2001, Avon's Board approved an increase in the quarterly
cash dividend to $.19 per share from $.185. The first dividend at the new rate
will be paid on March 1, 2001, to shareholders of record on February 15, 2001.
On an annualized basis, the new dividend rate will be $.76 per share.
49
Report of Management
The accompanying consolidated financial statements of Avon Products, Inc. have
been prepared by management in conformity with generally accepted accounting
principles and necessarily include amounts that are based on judgments and
estimates. The audit report of PricewaterhouseCoopers LLP, independent
accountants, on these financial statements is the result of their audits of
these consolidated financial statements, which were performed in accordance with
generally accepted auditing standards.
Avon maintains an internal control structure and related systems, policies
and procedures designed to provide reasonable assurance that assets are
safeguarded, transactions are executed in accordance with appropriate
authorization and accounting records may be relied upon for the preparation of
financial information. Avon also maintains an internal audit department that
evaluates and formally reports to management on the adequacy and effectiveness
of controls, policies and procedures.
The audit committee of the board of directors, comprised solely of outside
directors, has an oversight role in the area of financial reporting and internal
controls. This committee meets several times during the year with management,
PricewaterhouseCoopers LLP and the internal auditors to monitor the proper
discharge of each of their respective responsibilities. PricewaterhouseCoopers
LLP and the internal auditors have free access to management and to the audit
committee to discuss the results of their activities and the adequacy of
controls.
It is management's opinion that Avon's policies and procedures, reinforced
by the internal control structure, provide reasonable assurance that operations
are managed in a responsible and professional manner with a commitment to the
highest standard of business conduct.
Andrea Jung Robert J. Corti
Chief Executive Officer Executive Vice President,
Chief Financial Officer
50
Report of Independent Auditors
To the Board of Directors and Shareholders of Avon Products, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and changes in shareholders'
equity, after the restatement described in Note 2, present fairly, in all
material respects, the financial position of Avon Products, Inc. at December 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of Avon's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 2 of the Notes to the Consolidated Financial
Statements, the Company changed its method of accounting for revenue recognition
as a result of the adoption of Staff Accounting Bulletin No.
101, "Revenue Recognition."
The accompanying consolidated financial statements for the years ended
December 31, 2000 and 1999 have been restated as discussed in Note 2.
PricewaterhouseCoopers LLP
New York, New York
January 25, 2001, except for
Notes 2 and 15 as to which
the date is July 31, 2002
51
Eleven-Year Review
Avon Products, Inc.
In millions, except per share and employee data
2000 1999 1998 1997
---- ---- ---- ----
(Restated-Note 2)
Income data
Net sales $5,681.7 $5,289.1 $5,212.7 $5,079.4
Other revenue 40.9 (1) 38.8(1) 35.0(1) -
Total revenue 5,722.6 5,327.9 5,247.7 5,079.4
Operating profit (4) 789.9 523.1 473.2 537.8
Interest expense (4) 84.7 43.2 34.7 35.5
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 692.2 480.3(8) 455.9(8) 534.9
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 490.0 286.6(8) 265.1(8) 337.0
Income from continuing operations
before cumulative effect
of accounting changes 485.8 286.6(8) 270.0(8) 338.8
(Loss)income from
discontinued
operations, net - - - -
Cumulative effect
of accounting
changes, net (6.7)(2) - - -
Net income 479.1 286.6(8) 270.0(8) 338.8
Earnings (loss) per share
- basic (5) (6)
Continuing operations $ 2.04 $ 1.12(8)$ 1.03(8) $ 1.28
Discontinued operations - - - -
Cumulative effect of
accounting changes (.03) - - -
Net income 2.01 1.12(8) 1.03(8) 1.28
Earnings (loss) per share
- diluted (5) (6)
Continuing operations $ 2.02 (3) $ 1.10(8)$ 1.02(8) $ 1.27
Discontinued operations - - - -
Cumulative effect of
accounting changes (.03) - - -
Net income 1.99 (3) 1.10(8) 1.02(8) 1.27
Cash dividends per share
Common $ .74 $ .72 $ .68 $ .63
Preferred - - - -
Balance sheet data
Working capital $ 186.4 $ (375.0) $ 11.9 $ (11.9)
Capital expenditures 193.5 200.2 189.5 169.4
Property, plant and
equipment, net 765.7 732.1 669.9 611.0
Total assets 2,811.3 2,512.8 2,433.5 2,272.9
Debt maturing within one year 105.4 306.0 55.3 132.1
Long-term debt 1,108.2 701.4 201.0 102.2
Total debt 1,213.6 1,007.4 256.3 234.3
Shareholders' (deficit) equity (230.9) (421.9) 285.1 285.0
Number of employees
United States 9,800 9,700 8,000 8,100
International 33,200 30,800 25,900 26,900
-------- ------- -------- --------
Total employees (7) 43,000 40,500 33,900 35,000
========= ======= ======== ========
52
1996 1995 1994 1993
---- ---- ---- ----
Income data
Net sales $4,814.2 $4,492.1 $4,266.5 $3,844.1
Other revenue - - - -
Total revenue 4,814.2 4,492.1 4,266.5 3,844.1
Operating Profit (4) 538.0 500.8 489.5 427.4
Interest expense (4) 33.2 34.6 44.7 39.4
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 510.4 465.0 433.8 394.6
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 319.0 288.6 270.3 243.8
Income from continuing operations
before cumulative effect of
accounting changes 317.9 286.1 264.8 236.9
(Loss)income from
discontinued
operations, net - (29.6) (23.8) 2.7
Cumulative effect
of accounting
changes, net - - (45.2)(9) (107.5)(9)
Net income 317.9 256.5 195.8 132.1
Earnings (loss) per share
- basic (5) (6)
Continuing operations $ 1.19 $ 1.05 $ .94 $ .82
Discontinued operations - (.11) (.09) .01
Cumulative effect of
accounting changes - - (.16) (.37)
Net income 1.19 .94 .69 .46
Earnings(loss) per share
- diluted (5) (6)
Continuing operations $ 1.18 $ 1.05 $ .93 $ .82
Discontinued operations - (.11) (.08) .01
Cumulative effect of
accounting changes - - (.16) (.37)
Net income 1.18 .94 .69 .46
Cash dividends per share
Common $ .58 $ .53 $ .48 $ .43
Preferred - - - -
Balance sheet data
Working capital $ (41.7) $ (30.3) $ 9.3 $ 23.1
Capital expenditures 103.6 72.7 99.9 58.1
Property, plant and
equipment, net 566.6 537.8 528.4 476.2
Total assets 2,222.4 2,052.8 1,978.3 1,918.7
Debt maturing within one year 97.1 47.3 61.2 70.4
Long-term debt 104.5 114.2 116.5 123.7
Total debt 201.6 161.5 177.7 194.1
Shareholders' (deficit) equity 241.7 192.7 185.6 314.0
Number of employees
United States 7,800 8,000 7,900 8,000
International 25,900 23,800 22,500 21,500
--------- -------- -------- --------
Total employees (7) 33,700 31,800 30,400 29,500
========= ======== ======== ========
53
1992 1991 1990
---- ---- ----
Income data
Net sales $3,660.5 $3,441.0 $3,291.6
Other revenue - - -
Total revenue 3,660.5 3,441.0 3,291.6
Operating Profit (4) 339.9 430.9 409.9
Interest expense (4) 38.4 71.6 74.1
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 290.0(10) 352.9 305.6
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 169.4(10) 209.3 180.3
Income from continuing operations
before cummulative effect
of accounting changes 164.2(10) 204.8 174.1
(Loss)income from
discontinued
operations, net 10.8 (69.1) 21.2
Cumulative effect
of accounting
changes, net - - -
Net income 175.0(10) 135.7 195.3
Earnings (loss) per share
- basic (5) (6)
Continuing operations $ .57(10) $ .65(11) $ .61
Discontinued operations .04 (.24) .09
Cumulative effect of
accounting changes - - -
Net income .61(10) .41(11) .70
Earnings (loss) per share
- diluted (5) (6)
Continuing operations $ .57(10) $ .71(11) $ .58
Discontinued operations .04 (.24) .07
Cumulative effect of
accounting changes - - -
Net income .61(10) .47(11) .65
Cash dividends per share
Common $ .38 $ 1.10(12) $ .25
Preferred - .253 .50
Balance sheet data
Working capital $ (99.5) $ (135.3) $ 71.6
Capital expenditures 62.7 61.2 36.3
Property, plant and
equipment, net 476.7 468.5 467.2
Total assets 1,692.6 1,693.3 2,010.1
Debt maturing within one year 37.3 143.8 207.1
Long-term debt 177.7 208.1 334.8
Total debt 215.0 351.9 541.9
Shareholders' (deficit) equity 310.5 251.6 393.4
Number of employees
United States 8,700 9,200 9,500
International 20,700 20,900 20,300
------- -------- --------
Total employees (7) 29,400 30,100 29,800
======= ======== ========
54
(1) For the year ended December 31, 2000, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling
Fees and Costs," which requires that amounts billed to customers for shipping
and handling fees be classified as revenues. 1999 and 1998 have been restated to
reflect shipping and handling fees, previously reported in Marketing,
distribution and administrative expenses, in Other revenue in the Consolidated
Statements of Income.
(2) For the year ended December 31, 2000, the Company recorded a charge of $6.7
million, after tax, to reflect the adoption of Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements." This charge is reflected
as a cumulative effect of an accounting change in the Consolidated Statements of
Income.
(3) For purposes of calculating diluted earnings per share for the year ended
December 31, 2000, after tax interest expense of $4.5, applicable to Convertible
Notes, has been added back to net income.
(4) Certain reclassifications have been made to conform to the current full year
presentation.
(5) Two-for-one stock splits were distributed in September 1998 and June 1996.
All per share data in this report, unless indicated, have been restated to
reflect the splits.
(6) Effective for the year ended December 31, 1997, the Company adopted FAS No.
128, "Earnings per Share." FAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and replaces the presentation of
previously disclosed EPS with both basic and diluted EPS. Based upon the
Company's capitalization structure, the EPS amounts calculated in accordance
with FAS No. 128 approximated the Company's EPS amounts in accordance with
Accounting Principles Board Opinion No. 15, "Earnings per Share." All prior
period EPS data have been restated in accordance with FAS No. 128.
(7) Avon's calculation of full-time equivalents, or number of employees, was
revised in 1999. Restatements of prior year data are not available, and
therefore, year-over-year comparisons are not meaningful. Approximately 25% of
Avon's U.S. employees are men. Men hold approximately 15% of all U.S. officer
and manager positions, and approximately 10% of all U.S. office and clerical
positions.
(8) In 1998, Avon began a worldwide business process redesign program in order
to streamline operations and recorded special and non-recurring charges of
$154.4 ($122.8 net of tax, or $.46 per share on a basic and diluted basis). In
1999, special and non-recurring charges related to this program totaled $136.4
($111.9 net of tax, or $.43 per share on a basic and diluted basis).
(9) Effective January 1, 1994, Avon adopted Statement of Financial Accounting
Standards ("FAS") No. 112, "Employers' Accounting for Postemployment Benefits",
for all applicable operations, and FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", for its foreign benefit plans.
Effective January 1, 1993, Avon adopted FAS No. 106 for its U.S. retiree health
care and life insurance benefit plans and FAS No. 109, "Accounting for Income
Taxes."
(10) In 1992, Avon began the restructuring of its worldwide manufacturing and
distribution facilities and recorded a provision of $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.
55
(11) For 1991, in management's opinion, per share amounts assuming dilution,
even though the result is antidilutive, provide the most meaningful comparison
of per share data because they show the full effect of the conversion of 72
preferred shares into approximately 51.84 common shares on June 3, 1991.
(12) Includes special dividend of $.75 paid in 1991.
56