Document/Exhibit Description Pages Size
1: 10-K Avon Products, Inc. 10K 35 132K
7: EX-4.3 Avon Products, Inc. Exhibit 4.3 84 306K
2: EX-10.13 Avon Products, Inc. Exhibit 10.13 2± 9K
3: EX-10.19 Avon Products, Inc. Exhibit 10.19 1 6K
4: EX-10.21 Avon Products, Inc. Exhibit 10.21 1 8K
5: EX-10.7 Avon Products, Inc. Exhibit 10.7 1 7K
9: EX-13 Avon Products, Inc. Exhibit 13 67 338K
6: EX-21 Avon Products, Inc. Exhibit 21 3 14K
8: EX-24 Avon Products, Inc. Exhibit 24 2 12K
Management's Discussion and Analysis
Avon Products, Inc.
Dollars in millions, except share data
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. Such forward-looking statements are based on
management's reasonable current assumptions and expectations.
Such forward-looking statements involve risks, uncertainties
and other factors which may cause the actual results, levels
of activity, performance or achievement of Avon Products,
Inc. ("Avon" or the "Company") to be materially different
from any future results, levels of activity, performance or
achievement expressed or implied by such forward-looking
statements, and there can be no assurance that actual results
will not differ materially from management's expectations.
Such factors include, among others, the following: general
economic and business conditions in the Company's markets;
Avon's ability to implement its business strategy; Avon's
ability to successfully identify new business opportunities;
Avon's access to financing; the impact of substantial
currency fluctuations in Avon's principal foreign markets;
Avon's ability to attract and retain key executives; Avon's
ability to achieve anticipated cost savings and profitability
targets; changes in the industry; competition; the effect of
regulatory, tax and legal proceedings and restrictions
imposed by domestic and foreign governments; and other
factors discussed in Item 1 of Avon's Form 10-K. As a result
of the foregoing and other factors, no assurance can be given
as to the future results and achievements of Avon. Neither
Avon nor any other person assumes responsibility for the
accuracy and completeness of such forward-looking statements,
nor undertakes an obligation to update them.
The following discussion of the results of operations
and financial condition of Avon should be read in conjunction
with the information contained in the Consolidated Financial
Statements and Notes thereto. These statements have been
prepared in conformity with generally accepted accounting
principles in the U.S. and require management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially
from those estimates. On an ongoing basis, management
reviews its estimates, including those related to revenue
recognition, allowances for doubtful accounts receivable,
allowances for sales returns, provisions for inventory
obsolescence, income taxes and tax valuation reserves, loss
contingencies and the determination of discount and other
rate assumptions for pension, post-retirement and post-
employment benefit expenses. Changes in facts and
circumstances may result in revised estimates, which are
recorded in the period they become known.
Critical Accounting Policies and Estimates
Avon believes the accounting policies below represent
its critical accounting policies due to the estimation
processes involved in each. See Note 1 of the Notes to
Consolidated Financial Statements for a detailed discussion
on the application of these and other accounting policies.
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Revenue recognition - Avon recognizes revenue upon
delivery, when both title and risks and rewards of ownership
pass to the independent Representatives. Avon uses estimates
in determining revenue and operating profit for orders that
have been shipped but not delivered as of the end of the
period. These estimates are based on daily sales levels,
delivery lead times, gross margin and variable expense
ratios. It is possible that future results of operations for
any particular quarterly or annual period could be materially
affected by changes in Avon's assumptions.
Allowances for doubtful accounts receivable - Avon
maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its Representatives to
make required payments. If the financial condition of Avon's
Representatives were to deteriorate, resulting in an
impairment of their ability to make payments, additional
allowances may be required.
Allowances for sales returns - Avon records a provision
for estimated sales returns based on historical experience
with product returns. If the historical data Avon uses to
calculate these estimates does not properly reflect future
returns, additional allowances may be required.
Provisions for inventory obsolescence - Avon writes
down its inventory for estimated obsolescence equal to the
difference between the cost of inventory and the estimated
market value based on assumptions about future sales and
disposition plans. If actual sales are less favorable than
those projected by management, additional inventory write-
downs may be required.
Income taxes and valuation reserves - Avon records a
valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be
realized. While Avon has considered projected future taxable
income and ongoing tax planning strategies in assessing the
need for the valuation allowance, in the event Avon were to
determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase earnings
in the period such determination was made. Likewise, should
Avon determine that it would not be able to realize all or
part of its net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to
earnings in the period such determination was made.
Contingencies - Avon determines whether to disclose and
accrue for loss contingencies based on an assessment of
whether the risk of loss is remote, reasonably possible or
probable and, where reasonable estimates can be made of the
amount of potential loss, of the materiality of the loss
contingency, in accordance with Statement of Financial
Accounting Standards ("FAS") No. 5, "Accounting for
Contingencies". Management's assessment is developed in
consultations with the Company's outside advisors and is
based on an analysis of possible outcomes under various
strategies. Loss contingency assumptions involve judgements
that are inherently subjective and frequently involve matters
that are in litigation, which by its nature is unpredictable.
Management believes that its loss contingency assumptions are
sound, but because of the subjectivity involved and the
unpredictable nature of the subject matter at issue,
management's assumptions may prove to be incorrect, which
could materially impact the Consolidated Financial Statements
in future periods.
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Business
The Company is a global manufacturer and marketer of
beauty and related products. The product categories include
Beauty which consists of cosmetics, fragrance and toiletries
("CFT"); Beauty Plus which consists of jewelry, watches and
apparel and accessories; and Beyond Beauty which consists of
home products, gift and decorative and candles. Health and
Wellness products are divided among all three product
categories based on product segmentation. 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.
Additionally, Avon launched a Retail business in the U.S. in
the third quarter of 2001.
Results of Operations
Consolidated - Net income for 2001 was $430.0 compared with
$478.4 in 2000. Basic and diluted earnings per share in 2001
were $1.82 and $1.79, respectively, compared with $2.01 and
$1.99, respectively, for 2000. Net income for 1999 was
$302.4 and basic and diluted earnings per share were $1.18
and $1.17, respectively.
The 2001 results included the following items: special
and non-recurring charges of $97.4 pretax ($68.3 after-tax,
or $.28 per diluted share), primarily related to workforce
reduction programs and facility rationalizations (see Note 13
of the Notes to Consolidated Financial Statements); an Asset
impairment charge of $23.9 pretax ($14.5 after-tax, or $.06
per diluted share) related to the write off of the remaining
carrying value of an order management software system that
had been under development (see Notes 14 and 16 of the Notes
to Consolidated Financial Statements); a charge of $6.4
pretax ($3.4 after-tax, or $.01 per diluted share) related to
the settlement of a contested tax assessment in Argentina
(see Note 14 of the Notes to Consolidated Financial
Statements); and a Contract settlement gain, net of related
expenses, of $25.9 pretax ($15.7 after-tax, or $.06 per
diluted share) related to the cancellation of a retail
agreement between Avon and Sears Roebuck & Company
("Sears")(see Note 15 of the Notes to Consolidated Financial
Statements).
The 2000 results included 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, Avon recognized $40.1 ($.16
per diluted share) 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.
The 1999 results included special and non-recurring
charges of $151.2 pretax ($121.9 after-tax, or $.47 per
diluted share) related to Avon's Business Process Redesign
("BPR") program.
Effective January 1, 2001, Avon adopted FAS No. 133,
"Accounting for Derivative Instruments and Hedging
Activities," as amended by FAS No. 138, "Accounting for
Certain Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative
instruments and hedging activities. In accordance with the
provisions of FAS No. 133 and FAS No. 138, Avon recorded a
charge to earnings of $0.3, net of a tax benefit of $0.2, in
the first quarter of 2001 and a charge to Shareholders'
(deficit) equity of $3.9,
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net of a tax benefit of $2.1, which is included in
Accumulated other comprehensive loss in the Consolidated
Balance Sheets. These charges are reflected as a Cumulative
effect of an accounting change in the accompanying
Consolidated Financial Statements. See Note 2 of the Notes
to Consolidated Financial Statements.
Effective January 1, 2000, Avon changed its method of
accounting for revenue recognition in accordance with Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements" (see Note 2 of the Notes to
Consolidated Financial Statements). The cumulative effect of
the change on prior years resulted in a charge of $6.7, net
of a tax benefit of $3.5, or $.03 per diluted share, which is
included in Net income for the year ended December 31, 2000.
Consolidated net sales increased 5% in 2001 to $5.95
billion from $5.67 billion in 2000. Sales in North America
increased 6% to $2.27 billion in 2001. International sales
increased 4% to $3.68 billion in 2001 due to increases in
Europe and Latin America, partially offset by a decline in
the Pacific region. In 2000, consolidated net sales of $5.67
billion increased 7% 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 in 2000 due
to strong growth in the Latin American and Pacific regions
and, to a lesser extent, in the European region. Excluding
the unfavorable impact of foreign currency translation,
consolidated net sales increased 10% and 11% in 2001 and
2000, respectively.
Other revenue includes shipping and handling fees billed
to Representatives and totaled $42.5, $40.9 and $38.8 in
2001, 2000 and 1999, respectively.
Cost of sales as a percentage of total revenue was 37.0%
in 2001, compared with 37.1% in 2000 and 38.1% in 1999. The
2001 cost of sales included $2.5 of non-recurring charges
related to inventory write-downs associated with facility
closures. The 1999 cost of sales included $46.0 of non-
recurring charges for inventory write-downs related to the
closure of facilities, discontinuation of certain product
lines, size-of-line reductions and a change in strategy for
product dispositions.
In 2001, gross margin was slightly favorable versus 2000
primarily due to improvements in Russia resulting from
product sourcing benefits and a reduction in customs duties
on certain products; the United Kingdom driven by favorable
comparisons against product supply difficulties in 2000; the
Philippines resulting from a change in product mix to higher
priced products as well as vendor cost negotiations; and in
the U.S. due to supply chain savings. These improvements
were partially offset by a decline in gross margin in Poland
mainly from favorable foreign exchange on inventory purchases
in 2000 and pricing investments in 2001 to gain market share,
as well as declines in gross margin in most Western European
countries, which were negatively impacted by sales pressure
associated with a weak economic environment.
In 2000, gross margin was favorable versus 1999 due to
improvements in all international regions, most significantly
in the Pacific region, including Japan and China, as well as
the Central and Eastern Europe region, 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 1999 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 CFT products and selective price cuts to meet
competition.
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Marketing, distribution and administrative expenses of
$2.93 billion in 2001 increased $128.9, or 5%, over 2000, but
decreased as a percentage of total revenue to 48.9% from
49.1% in 2000. The improvement in the expense ratio was
favorably impacted by improved expense ratios in Russia,
China and the Ukraine from significant sales increases, and
in the U.S. due to BPR savings. These improvements were
partially offset by expenses associated with the U.S. Retail
business and worldwide investments in consumer-related
initiatives, such as incremental spending on advertising,
sampling and brochure enhancements.
Marketing, distribution and administrative expenses of
$2.80 billion in 2000 increased $161.4, or 6%, over 1999, but
decreased as a percentage of total revenue to 49.1% from
49.6% in 1999. The overall improvement in the expense ratio
was due to a favorable expense ratio in Mexico, resulting
from lower marketing and promotional expenses associated with
product introductions, in Russia, due to strict expense
controls, 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.
Interest expense decreased $13.6 in 2001 to $71.1
primarily as a result of a decline in domestic interest rates
in 2001. Interest expense increased $41.5 in 2000 to $84.7
primarily due to increased domestic borrowings related to the
acceleration of Avon's share repurchase program and higher
working capital requirements.
Interest income increased $5.9 in 2001 to $14.4
primarily due to stronger cash flow levels during 2001.
Interest income decreased $2.6 in 2000 to $8.5 primarily
resulting from reduced interest rates in Brazil and Mexico
during 2000.
Other expense, net in 2001 of $27.0 was $5.5 unfavorable
to 2000 mainly due to the settlement of a contested excise
tax assessment in Argentina in 2001 (see Note 14 of the Notes
to Consolidated Financial Statements), additional legal
expenses in 2001, and unfavorable foreign exchange movements
on the Mexican peso, British pound and Philippine peso
contracts, partially offset by transaction gains on a U.S.
dollar intercompany loan receivable in Argentina and
favorable foreign exchange movements in 2001 on Japanese yen
contracts.
Other expense, net in 2000 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.
The effective tax rate was 34.7% in 2001 compared with
29.2% for 2000. The effective tax rate was higher in 2001
versus 2000 due to a federal income tax refund in 2000 (see
Note 6 of the Notes to Consolidated Financial Statements) and
the tax benefit of the 2001 special and non-recurring charges
(see Note 13 of the Notes to Consolidated Financial
Statements), partially offset by the favorable impact of
repatriation planning, the earnings mix and tax rates of
international subsidiaries.
The effective tax rate was 29.2% in 2000 compared with
40.3% in 1999. The effective tax rate was lower in 2000
versus 1999 due to a federal income tax refund in 2000, the
settlement of foreign audits, dividend planning,
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utilization of net operating loss carryforwards, the mix of earnings and tax
rates of international subsidiaries, and the impact of the 1999 special and
non-recurring charges.
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, 2001.
[Enlarge/Download Table]
Years ended December 31 2001 2000 1999
Net Operating Net Operating Net Operating
Sales Profit(Loss) Sales Profit(Loss) Sales Profit(Loss)
North America:
U.S. $2,016.7 $ 373.4 $1,894.9 $ 343.5 $1,809.3 $329.3
U.S. Retail* 13.9 (25.9) 8.5 (4.5) 3.4 (2.7)
Other** 242.6 32.7 244.5 29.2 237.6 34.5
Total 2,273.2 380.2 2,147.9 368.2 2,050.3 361.1
International:
Latin America North*** 966.3 251.6 848.8 215.2 731.7 181.6
Latin America South*** 933.3 175.9 992.0 200.3 909.0 184.9
Latin America 1,899.6 427.5 1,840.8 415.5 1,640.7 366.5
Europe 1,009.6 167.0 885.6 129.5 878.0 126.2
Pacific 771.4 112.6 799.4 117.8 720.1 102.1
Total 3,680.6 707.1 3,525.8 662.8 3,238.8 594.8
Total from operations 5,953.8 1,087.3 5,673.7 1,031.0 5,289.1 955.9
Global expenses (1.8) (242.5) - (242.3) - (255.3)
Contact settlement gain,
net of related
expenses - 25.9 - - - -
Asset impairment charge - (23.9) - - - -
Special and non-recurring
charges**** - (97.4) - - - (151.2)
Total $5,952.0 $ 749.4 $5,673.7 $ 788.7 $5,289.1 $ 549.4
*Includes U.S. Retail and Avon Centre.
**Includes operating information for Canada and Puerto Rico.
***Latin America North primarily includes the markets of Mexico,
Venezuela and Central America. Latin America South primarily includes the
markets of Brazil, Argentina, Chile and Peru. Avon's operations
in Mexico reported net sales for 2001, 2000 and 1999 of $620.7,
$555.6 and $471.6, respectively. Avon's operations in Mexico
reported operating profit for 2001, 2000 and 1999 of $154.8,
$136.0 and $115.1, respectively.
****The $97.4 is included in the Consolidated Statements of Income
as a Special charge ($94.9) and as inventory writedowns in Cost of
sales ($2.5).
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The following table presents consolidated net sales by
classes of principal products, for the years ended December 31:
2001 2000 1999
Beauty* $3,730.5 $3,533.9 $3,220.8
Beauty Plus** 1,233.7 1,174.6 1,061.6
Beyond Beauty*** 987.8 965.2 1,006.7
Total net sales $5,952.0 $5,673.7 $5,289.1
*Beauty includes cosmetics, fragrances, and toiletries.
**Beauty Plus includes fashion jewelry, watches and apparel and
accessories.
***Beyond Beauty includes home products, gift and decorative and candles.
Sales from Health and Wellness products are divided among the three
categories based on product segmentations.
To conform to the 2001 presentation, certain reclassifications were
made to the prior periods' segment information.
2001 Compared to 2000
North America
Net sales in North America grew 6% and operating profit
increased 3% in 2001. The U.S business, which represents almost
90% of the North American segment, reported sales and operating
profit growth of 6% and 9%, respectively.
The sales increase in the U.S. resulted from a 3% increase in
the number of active Representatives due to the successful
implementation of Avon's career strategies, particularly Sales
Leadership, as well as the strength of Avon's marketing plans.
The 2001 sales increase was also driven by a 6% growth in units
due to the success of the Kiss Goodbye to Breast Cancer lipstick
campaign and inventory clearance programs, partially offset by a
temporary pause in recruitment resulting from the events of
September 11th.
U.S. sales improvements resulted from the successful launch
of the new Health and Wellness line of beauty, vitamin and fitness
products. The Beauty category increased 4% with double-digit
percentage increases in color cosmetics and hair care and a mid-
single digit increase in skin care. Color had its second year of
double-digit growth. The eye and lip segments led with strong
performance in both new and existing areas. Primary drivers of
growth were the focus and resources that supported the relaunch of
key sub-brands: Beyond Color, with the introduction of Nutralush
plumping lipstick, as well as Perfect Wear, with the introduction
of EverGlaze Lip Ink. The company-wide Kiss Goodbye to Breast
Cancer event was also critical to the color category's success in
2001. Hair care increased as a result of the strong performance
of the Advance Techniques brand, including the introduction of the
new color protection line. Skin care increased due to exceptional
new products from Anew including Line Eliminator, Force Extra, and
Pure O2 as well as a significant increase in existing Anew product
sales. The personal care category was slightly down as strength
in the specialty bath segment
did not compensate for the inability to match Skin-So-Soft's 2000
record performance. Fragrance sales were flat on the year, with
an increase in the fourth quarter reflecting the largest fragrance
launch in Avon history, Little Black Dress. Sales in the Beauty
Plus category also grew in 2001 due to increases
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in apparel and accessories and watches, partially offset by a
slight decline in jewelry. The growth in watches resulted from a
strategic decision to offer more concepts as well as increased
resourcing. Beyond Beauty sales grew in 2001, driven by an
increase in gifts, partially offset by declines in toys and home
entertainment. The gift line was up due to a successful fourth
quarter holiday line.
The operating profit increase in North America was primarily
attributable to sales increases in the U.S., partially offset by
costs associated with the Retail business, which launched in
September 2001. Operating profit margin in North America declined
0.4 points for 2001 primarily due to investments associated with
the U.S. Retail business, partially offset by an improvement in
the U.S. The U.S. operating margin improved due to an increase in
gross margin, the realization of certain process redesign savings
and a favorable comparison to 2000 operating results which were
negatively impacted by the costs associated with exiting certain
Avon-owned Beauty Centers. Such improvements more than offset the
higher 2001 investments associated with the launch of the Health
and Wellness business and the U.S. Internet initiative.
Avon launched the beComing brand in select J.C. Penney stores
in the U.S. in the third quarter of 2001. The termination of a
retail venture with Sears resulted in a gain in the third quarter
of 2001 but will unfavorably impact subsequent periods due to the
loss of anticipated contribution from the Sears business. The
aggregate impact of the termination is expected to be neutral
through 2002 after taking into account results and the contract
settlement with Sears.
International
International net sales in U.S. dollars increased 4% and
operating profit increased 7% in 2001. The sales improvement was
a result of increases in Europe and Latin America, partially
offset by a decline in the Pacific region. Excluding the effect
of foreign currency exchange, international sales increased 12% in
2001.
In Latin America, sales increased 3% in 2001 mainly due to
double-digit sales growth in Mexico and Venezuela, partially
offset by declines in Chile, Brazil and Argentina. The sales
increases in Mexico and Venezuela were primarily driven by strong
increases in active Representatives, customers and units. The
increase in Mexico was also driven by strong performance in
fragrance and skin care due to new product introductions.
Venezuela had double-digit percentage sales growth in the Beauty
category resulting from competitive pricing in fragrance and
personal care. In Brazil, local currency sales grew double-digits
in 2001, driven by an increase in units, active Representatives
and customers, but U.S. dollar sales were negatively impacted by
foreign exchange. Sales in Argentina decreased in 2001 primarily
due to a weak economic and political environment. From 1991 until
early 2002, Argentina maintained the peso at a one-to-one ratio
with the U.S. dollar. During the second half of 2001, the
Argentine peso came under increased pressure due to three
consecutive years of recession and concerns about the government's
financial policies. In January 2002, the Argentine peso devalued
against the U.S. dollar and Avon expects inflation to increase in
Argentina as a result of the devaluation of the peso. While the
Argentine peso did not devalue until January 2002, the pressure on
the peso had a negative impact during 2001 on other currencies in
the region,
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including the Brazilian real and the Chilean peso. As a result,
Avon Brazil's and Avon Chile's U.S. dollar results were adversely
impacted. In Brazil, an effective deployment of resources
supported by productivity gains, as well foreign exchange
contracts previously in place, partially compensated for the
weaker currency and related economic impact. Excluding the impact
of exchange, sales in Latin America increased 12% in 2001.
Operating profit in Latin America increased 3% in 2001. The
operating profit improvement resulted from the sales increases
discussed above, as well as operating profit margin improvements
in Venezuela and Mexico, partially offset by operating profit
margin declines in Argentina and Brazil. Venezuela's operating
margin improvement reflects expense control and savings from BPR
initiatives. The operating margin improvement in Mexico resulted
from successful vendor negotiations to lower product costs, a
decrease in damaged merchandise returns as a result of moving to a
new distribution center and a reduction in local housing taxes.
Argentina's operating margin declined mainly due to sales-related
declines, as well as a new banking tax imposed in April 2001.
Brazil's operating margin declined in 2001 due to a negative
foreign exchange impact in costs and expenses, as well as a
migration of customers to lower priced items driven by an erosion
in consumers' purchasing power. Brazil's margin was also impacted
by higher expenses associated with incremental investments to
support new product launches and improve order quality, which in
turn contributed to top-line local currency sales growth.
In Europe, sales increased 14% in 2001 driven by growth in
Central and Eastern Europe, primarily Poland, Russia and the
Ukraine, and, to a lesser extent, in the United Kingdom, partially
offset by sales declines in most Western European markets. Higher
sales in Central and Eastern Europe resulted from double-digit
percentage increases in customers, active Representatives and
units. Poland's continued strong sales growth was aided by the
successful implementation of the Sales Leadership Strategy
(launched in 2000). This strategy has resulted in increased
market penetration and, along with continued focus on
Representative retention, contributed to a significant increase in
Representatives. In Russia, higher sales resulted from an
improved local economy, coupled with an increase in the average
order resulting from a 2001 change in the commission structure. In
the United Kingdom, the sales increase was accomplished by growth
in both customers and customer spending despite strong
competition, as well as significant gains in color cosmetics.
Sales declines in most Western European markets were primarily the
result of a weak economic climate, which negatively impacted
business in 2001. Excluding the impact of exchange, Europe sales
grew 18%.
Europe's operating profit increased 29% in 2001 primarily due
to the higher sales discussed above, as well as operating profit
margin improvements in Russia, the United Kingdom and the Ukraine,
partially offset by margin declines in Poland, South Africa and
most Western European markets. Russia's operating margin
improvement was due to significant sales growth (which led to an
improvement in the expense ratio), as well as product sourcing
benefits and a reduction in custom duties on certain products. The
operating margin improvement in the United Kingdom resulted from
tighter expense management and a reduction in shipping and
distribution costs as the shipping systems installed in 2000 were
completed and began to improve productivity. The operating margin
improvement in the Ukraine was driven by an improvement in the
expense ratio resulting from sales growth of 80% in 2001, and an
improvement in gross margin, which
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benefited from a reduction in import duties. The operating margin
decline in Poland was driven by favorable foreign exchange on
inventory purchases in 2000 and pricing investments in 2001 to
gain market share. The operating profit margin decline in South
Africa was due to a higher expense ratio, resulting from lower
sales volume. Operating margins in most Western European markets
continued to be negatively impacted by sales pressures associated
with a weak economic environment. Overall, the operating margin
in Europe in 2001 increased 1.9 points, as compared to 2000.
In 2001, U.S. dollar sales for most major markets in the
Pacific region were negatively impacted by foreign exchange, most
significantly the Philippines, Japan and Taiwan. U.S. dollar
sales in the Pacific region declined 4% in 2001, but sales
increased 6% in local currency. Despite U.S. dollar declines in
the region, U.S. dollar and local currency sales in China grew 36%
in 2001, driven by the success of consumer initiatives and the
opening of additional beauty boutiques. Despite the weakness of
the local economy, Japan's local currency sales increased 2% in
2001. The Philippines posted strong increases in average
Representatives, customers and units, resulting in double-digit
percentage local currency sales growth in 2001. U.S. dollar and
local currency sales in Taiwan declined in 2001 due to an economic
slowdown, which has negatively impacted employment rates and
consumer spending this year.
Operating profit in the Pacific region declined 4% in 2001
resulting from the negative impact of foreign currency
translation. Excluding the impact of foreign exchange, operating
profit increased 6% in 2001 with increases in most major markets.
China's operating margin improved significantly in 2001 due to a
favorable expense ratio resulting from higher sales. Japan's
operating margin improved, largely driven by BPR efforts, which
continue to generate significant savings across all expense areas.
Operating margin in Taiwan declined in 2001 due to a higher
expense ratio resulting from lower sales. Operating margin in the
Philippines declined resulting from costs associated with an
increase in brochure pages, partially offset by favorable product
mix and pricing.
2000 Compared to 1999
North America - Net sales in North America increased 5% to $2.15
billion in 2000. The U.S. business, representing 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 Avon's largest CFT
launch ever. Color cosmetics also reported a double-digit increase
versus 1999, 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, with particular strength coming
from the 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 a strong performance in
fashion accessories, including handbags, totes and small leather
goods. These increases were partially offset by declines in the
apparel category, due to softness in casual wear items, and lower
sales in home entertainment products, resulting from fewer new
product introductions.
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Operating profit in North America increased 2% to $368.2 in
2000 due to the region's increased sales, discussed above, while
the operating margin declined 0.5 points. The decline in
operating margin was primarily due to an increase in the operating
expense ratio in Puerto Rico caused by higher transitional
expenses related to the consolidation of operations. Gross margin
in North America remained level in 2000 as compared to 1999.
Operating profit in the U.S. of $343.5 increased 4% versus 1999
reflecting sales growth, partially offset by a slightly
unfavorable expense ratio. The expense ratio in the U.S. was
negatively impacted by asset writedowns associated with the
closure of certain Company-owned Avon Beauty Centers. Excluding
the asset writedowns, the expense ratio was favorable to 1999
resulting from cost containment, BPR savings and lower benefit
expenses partially offset by increased spending on advertising and
e-commerce initiatives.
International
International sales increased 9% to $3.53 billion and operating
profit increased 11% to $662.8 in 2000. Excluding the effect of
foreign exchange, international sales increased 14% in 2000 with
double-digit increases in all regions.
In Latin America, sales increased 12% to $1.84 billion in
2000 driven by improvements in all major markets, with Mexico,
Brazil and Venezuela being the main contributors. Excluding the
impact of foreign exchange, sales in Latin America increased 15%
in 2000. Units and active Representatives for the region rose 4%
and 10%, respectively, versus the same period in 1999. The sales
growth in Mexico was driven by increases in the number of units
sold, active Representatives and customers served. Mexico had
double-digit sales growth in all product categories, with
particular strength in CFT, and apparel categories. 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. Latin America's 2000 operating margin
improved 0.2 points versus 1999. Venezuela's operating margin
reflected a higher gross margin, driven by price increases and
cost improvements, partially offset by increased marketing
spending and incentive programs. Brazil's operating margin
increased primarily due to lower bad debt and recognition
expenses. Mexico's operating margin remained level with 1999 due
to savings in marketing and cost savings on purchase orders,
offset by a decrease in gross margin resulting from 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 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
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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 weak
economic climate. In the United Kingdom, sales increased in local
currency but U.S. dollar results were negatively impacted by
foreign currency exchange.
Operating profit in Europe grew 3% to $129.5 in 2000 due to
the sales increases discussed above coupled with operating margin
improvements in Central and Eastern Europe, particularly Poland
and Russia, partially offset by increased spending on incentives
and advertising throughout the region and the impact of weaker
currencies. In the Europe region, operating margin in 2000
improved 0.3 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 1999'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, despite
a reduction in consumer spending due to economic pressures, due to
an increase in units sold and active Representatives as well as a
favorable exchange rate impact versus 1999. In China, sales
growth of 44% was driven by channel expansion, led by beauty
boutiques. In the Philippines, dollar sales grew in the mid-
single digits, but local currency sales increased solid double-
digits, as 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
0.6 points over 1999. In Japan, operating margin was favorably
impacted by 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 higher sales of lower
margin items, and higher advertising expenses.
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Global Expenses - Global expenses were $242.5 in 2001 compared
with $242.3 in 2000. Global expenses remained level in 2001,
primarily due to savings in global departmental expenses
(including such areas as marketing and information technology
systems), offset by higher benefit expenses in 2001 and insurance
proceeds received in 2000 related to 1998 hurricane losses in
Central America, 1999 flood losses in Venezuela and 1999
earthquake losses in Taiwan. Global expenses were $242.3 in 2000
compared with $255.3 in 1999. The $13.0 decrease was primarily
due to lower expenses related to the Company's long-term incentive
plan, lower benefit expenses, insurance proceeds received in 2000
discussed above, and savings in global marketing departments,
partially offset by increased investments in information
technology and retail initiatives.
In 2001, the assets associated with the Company's benefit
plans experienced weaker investment returns, which was mostly due
to unfavorable returns on equity securities. These unfavorable
investment returns are expected to increase pension costs in the
near future. In addition, net periodic pension cost may
significantly increase in the future if settlement losses are
required due to an increase in the aggregate benefits paid to
retirees as lump sum distributions. Settlement losses may result
in the future if the number of eligible participants deciding to
receive lump sum distributions and the amount of their benefits
increases. (See Note 10 of the Notes to Consolidated Financial
Statements).
Accounting Changes - See Note 2 of the Notes to Consolidated
Financial Statements for a discussion regarding recent accounting
standards, including FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," FAS No. 141, "Business
Combinations," FAS No. 142, "Goodwill and Other Intangible
Assets," FAS No. 143, "Accounting for Asset Retirement
Obligations" and FAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," SAB No. 101, "Revenue Recognition
in Financial Statements," Emerging Issues Task Force ("EITF") 00-
10, "Accounting for Shipping and Handling Fees and Costs," EITF
00-14, "Accounting for Certain Sales Incentives," EITF 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 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'".
Contingencies - Avon is a defendant in a class action suit
commenced in 1991 on behalf of certain classes of holders of
Avon's Preferred Equity-Redemption Cumulative Stock ("PERCS").
Plaintiffs allege various contract and securities law claims
related to the PERCS (which were fully redeemed in 1991) and seek
aggregate damages of approximately $145.0, plus interest. A trial
of this action took place in the United States District Court for
the Southern District of New York and concluded in November 2001.
At the conclusion of the trial, the judge reserved decision in the
matter. Avon believes it presented meritorious defenses to the
claims asserted. However, it is not possible to predict the
outcome of litigation and it is reasonably possible that the
trial, and any possible appeal, could be decided unfavorably.
Management is unable to make a meaningful estimate of the amount
or range of loss that could result from an unfavorable outcome
but, under some of the damage theories presented, an adverse award
could be material to the Consolidated Financial Statements.
Avon is a defendant in an action commenced in the Supreme
Court of the State of New York by Sheldon Solow d/b/a Solow
Building Company, the landlord of the Company's former
headquarters in New York City. Plaintiff seeks aggregate damages
of approximately $80.0, plus interest, for the Company's alleged
failure to restore the
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leasehold premises at the conclusion of the lease term in 1997. A
trial of this matter had been scheduled for February 2002, but has
been stayed pending the determination of (i) an interlocutory
appeal by plaintiff of an order that denied the plaintiff's motion
for summary judgment and granted partial summary judgment in favor
of the Company on one of plaintiff's claims; and (ii) an appeal by
plaintiff of a decision in an action against another former tenant
that dismissed plaintiff's claims after trial. While it is not
possible to predict the outcome of litigation, management believes
that there are meritorious defenses to the claims asserted and
that this action should not have a material adverse effect on the
Consolidated Financial Statements. This action is being
vigorously contested.
Various other 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 the opinion of Avon's management, based on its review of
the information available at this time, the total cost of
resolving such other contingencies at December 31, 2001 should not
have a material adverse impact on the Consolidated Financial
Statements.
In 1998, the Argentine tax authorities denied certain past
excise tax credits taken by Avon's subsidiary in Argentina and
assessed this subsidiary for the corresponding taxes. Avon
vigorously contested this assessment through local administrative
and judicial proceedings since 1998. In the third quarter of
2001, the Argentine government issued a decree permitting
taxpayers to satisfy certain tax liabilities on favorable terms
using Argentine government bonds as payment. Avon decided to
settle this contested tax assessment by applying for relief under
this new government program and purchased bonds to tender in
settlement of the aforementioned assessment. As a result, a pre-
tax
charge of $6.4 ($3.4 after-tax, or $.01 per diluted share) was
included in Other expense, net in the Consolidated Statements of
Income in the third quarter of 2001.
Avon has been responding to a formal investigation by the
Securities and Exchange Commission ("SEC") which commenced in
August 2000, and has furnished to the SEC information that
principally concerns a special charge reported by Avon in the
first quarter of 1999, which included the writeoff of
approximately $15.0 in pre-tax costs associated with an 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, or $.06 per diluted
share) to write off the carrying value of costs related to that
project. As part of a resolution of the investigation or at the
conclusion of a contested proceeding, there may be a finding that
Avon knew or should have known in the first quarter of 1999 that
it was not probable that FIRST would be implemented and therefore,
the entire FIRST asset should have been written off as abandoned
at that time. In that connection, it may also be necessary for
Avon to restate its financial statements to write off the entire
FIRST asset in the first quarter of 1999. If Avon were to restate
its financial statements to write off the FIRST asset in the first
quarter of 1999, then the charge recorded in the third quarter of
2001 and other FIRST-related items recorded in prior periods would
also be restated. (See Note 16 of the Notes to Consolidated
Financial Statements).
Liquidity and Capital Resources
Cash Flows - Net cash provided by operating activities was $754.9
in 2001 compared to $323.9 in 2000. The 2001 increase principally
reflects the receipt of an income tax refund in 2001 and higher
net income (adjusted for non-cash items and including the
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cash settlement from Sears), as well as higher working capital
needs in 2000, including the payout of a long-term incentive plan,
timing of cash payments and a larger increase in inventories.
Excluding changes in debt and other financing activities, net
cash flow of $321.8 in 2001 was $418.9 favorable compared with net
cash usage of $97.1 in 2000. The $418.9 variance primarily
resulted from higher net cash provided by operations in 2001 and a
reduction in capital expenditures, as 2000 results included
significant spending for the U.S. Internet project. Partially
offsetting this increase were higher repurchases of Avon common
stock in 2001. During 1998 and 1997, Avon received net proceeds
under securities lending transactions that were settled in the
fourth quarter of 2000 for $101.4 and were included in the cash
flows as Other financing activities.
For the period 1994 through 2001, approximately 62.9 million
shares of common stock were purchased for approximately $1.6
billion under share repurchase programs. See Note 9 of the Notes
to Consolidated Financial Statements for further details of the
share repurchase programs.
Working Capital - As of December 31, 2001 and December 31, 2000,
current assets exceeded current liabilities by $428.1 and $186.4,
respectively. The increase of current assets over current
liabilities of $241.7 was primarily due to higher cash balances
and the repayment of short-term borrowings. The increase was
partially offset by a lower receivable balance reflecting the
receipt of an income tax refund in 2001 and a higher accrued
liability balance due to the 2001 Special charge.
Primarily as a result of the Company's share repurchase
program, at December 31, 2001 and 2000, the Company reported a
shareholders' deficit balance of $74.6 and $215.8, respectively.
Capital Resources - Total debt of $1,325.1 at December 31, 2001,
increased $111.5 from $1,213.6 at December 31, 2000, principally
due to the issuance in September 2001 of Japanese yen denominated
notes payable and an adjustment to debt to reflect the fair value
of outstanding interest rate swaps (see Note 4 of the Notes to
Consolidated Financial Statements). Total debt of $1,213.6 at
December 31, 2000, increased $206.2 from December 31, 1999,
primarily due to the issuance of convertible notes in 2000.
During 2001 and 2000, cash flows from operating activities
combined with cash on hand and higher debt levels were used for
repurchases of common stock, payment of dividends, and capital
expenditures. Management believes that cash from operations and
available sources of financing are adequate to meet anticipated
requirements for working capital, dividends, capital expenditures,
the stock repurchase program and other cash needs.
-15-
Debt and Contractual Financial Obligations and Commitments - At December 31,
2001, Avon's debt and contractual financial obligations and commitments by due
date were as follows:
[Download Table]
2002 2003 2004 2005 2006
and Beyond Total
Notes payable $ 87.6 $ - $ - $ - $ - $ 87.6
Long-term debt 0.1 0.1 200.0 - 991.3 (1) 1,191.5
Capital lease obligations 1.1 2.0 2.1 0.1 - 5.3
Operating leases 70.0 53.1 40.8 32.4 211.9 408.2
Other long-term
Obligations 2.0 2.0 2.0 2.0 0.5 8.5
Total debt and
Ccontractual financial
Oobligations and
Ccommitments(2) $ 160.8$ 57.2 $ 244.9 $34.5$ 1,203.7 $ 1,701.1
(1) $100.0 of bonds embedded with option features maturing in May
2018 can be sold back to Avon at par or can be called at par
by the underwriter and resold to investors as 15-year debt in
May 2003. Convertible Notes of $422.4 maturing in 2020 may be
redeemed at the option of Avon on or after July 12, 2003. In
addition, at the holder's option, the Convertible Notes may be
sold to Avon, for cash or shares at Avon's discretion, at the
redemption price on July 12, 2003, July 12, 2008 and July 12,
2013.
(2) The amount of debt and contractual financial obligations and
commitments excludes amounts due pursuant to derivative
transactions.
See Notes 4 and 12 of the Notes to Consolidated Financial
Statements for further information on Avon's debt and contractual
financial obligations and commitments.
Avon has a five-year $600.0 revolving credit and competitive
advance facility (the "credit facility"), which expires in 2006.
The credit facility may be used for general corporate purposes,
including financing working capital and capital expenditures and
supporting the stock repurchase program. The interest rate on
borrowings under the credit facility is based on LIBOR or on the
higher of prime or 1/2% plus the federal funds rate. The credit
facility has an annual facility fee, payable quarterly, of $0.5,
based on Avon's current credit ratings. The credit facility
contains customary covenants, including one which requires Avon's
interest coverage ratio (determined in relation to Avon's
consolidated pre-tax income and interest expense) to equal or
exceed 4:1. At December 31, 2001, Avon was in compliance with all
covenants in the credit facility. At December 31, 2001 and
December 31, 2000, there were no borrowings under the credit
facility. Avon maintains a $600.0 commercial paper program, which
is supported by the credit facility. Outstanding commercial paper
effectively reduces the amount available for borrowing under the
credit facility. At December 31, 2001, Avon had no commercial
paper outstanding, and at December 31, 2000, Avon had $29.9 in
commercial paper outstanding under this program.
The cost of borrowings under the credit facility, as well as
the amount of the facility fee and utilization fee (applicable
only if more than 50% of the facility is borrowed), depend on
Avon's credit ratings. A downgrade in Avon's credit ratings might
increase the cost to Avon of maintaining and borrowing under the
credit facility, or preclude Avon from issuing commercial paper or
increase the cost to Avon of issuing commercial paper in the
future, but the credit facility does not contain a rating
downgrade trigger that would prevent Avon from borrowing under the
credit facility. The credit facility would become unavailable for
borrowing only if Avon were to fail to satisfy one of the
conditions to borrowing in the facility. These conditions to
borrowing are generally based on the accuracy of certain
representations and warranties, compliance by Avon with the
covenants in the credit facility (discussed above) and the absence
of defaults, including but not limited to
-16-
bankruptcy and insolvency, change of control, failure to pay other
material debts, and failure to stay or pay material judgments, as
those events are described more fully in the credit facility
agreement.
At December 31, 2001, Avon was in compliance with all
covenants in its indentures (see Note 4 of the Notes to
Consolidated Financial Statements), which do not contain any
rating downgrade triggers that would accelerate the maturity of
its debt. Neither the credit facility nor any of the indentures
contains any covenant or other requirement relating to maintenance
of a positive shareholders' equity balance.
Avon had uncommitted domestic lines of credit available of
$49.0 in 2001 and 2000 with various banks. As of December 31,
2001 and 2000, $11.1 of these lines are being used for letters of
credit. In addition, as of December 31, 2001 and 2000, there were
international lines of credit totaling $457.4 and $449.5,
respectively, of which $87.9 and $74.8, respectively, were
outstanding and included in Notes payable and Long-term debt. At
December 31, 2001 and 2000, Avon also had letters of credit
outstanding totaling $13.9 and $9.5, respectively, which guarantee
various insurance activities. In addition, Avon had outstanding
letters of credit for various trade activities and commercial
commitments executed in the ordinary course of business, such as
purchase orders for normal replenishment of inventory levels.
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 $612.5 at December
31, 2001, were slightly higher than at December 31, 2000. At the
same time, inventory days outstanding declined from prior year,
reflecting Avon's efforts to manage purchases and inventory levels
while maintaining a focus on operating the business at efficient
inventory levels. It is Avon's objective to continue to focus on
inventory management. 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 inventory levels to grow periodically.
Capital Expenditures - Capital expenditures during 2001 were
$155.3 compared with $193.5 in 2000. Those expenditures were made
for improvements on existing facilities, continued investments for
capacity expansion, facility modernization, information systems,
including spending on the Internet strategy, and equipment
replacement projects. Numerous construction and information
systems projects were in progress at December 31, 2001, with an
estimated cost to complete of approximately $119.2. Capital
expenditures in 2002 are currently expected to be in the range of
$220.0 - $230.0. These expenditures will include improvements on
existing facilities, continued investments for capacity expansion,
facility modernization, information systems and equipment
replacement projects.
Foreign Operations - For the three years ended 2001, 2000 and
1999, the Company derived approximately 60% of its consolidated
net sales and total operating profit from operations from
subsidiaries outside of the U.S. In addition, as of December 31,
2001 and 2000, these subsidiaries comprised approximately 50% of
the Company's consolidated total assets. Avon has significant net
assets in Brazil, Mexico, the United Kingdom, Japan, Argentina,
Venezuela, Canada, the Philippines and Poland.
-17-
The functional currency for most of Avon's foreign operations
is the local currency. The cumulative effects of translating
balance sheet accounts from the functional currency into the U.S.
dollar at current exchange rates are included in Accumulated other
comprehensive loss in Shareholders equity. The U.S. dollar is
used as the functional currency for operations in highly
inflationary foreign economies, including Russia and Venezuela,
where cumulative inflation rates in those countries exceeded 100%
over a three-year period. Effective January 1, 1995, Venezuela
was designated as a country with a highly inflationary economy due
to cumulative inflation rates over the three-year period 1992 -
1994. Effective January 1, 1997, Russia was designated as a
country with a highly inflationary economy due to cumulative
inflation rates over the three-year period 1994 - 1996. Venezuela
has converted to non-hyperinflationary status effective January 1,
2002 due to reduced cumulative inflation rates.
During 2001, the Argentine economy remained in a deep
recession, making 2001 the third consecutive year of negative
growth. In addition to the economic crisis, the Argentine peso,
which had been maintained at a one-to-one ratio for 11 years with
the U.S. dollar, came under pressure. In December 2001, foreign
exchange transactions were prohibited by the government. On
January 6, 2002, the government announced it was devaluing the
peso by abandoning the one-to-one ratio. The foreign exchange
markets reopened on January 11, 2002. Pursuant to FAS No. 52,
"Foreign Currency Translation", the exchange rate from January 11,
2002, was used as a reference rate for the translation of Avon
Argentina's December 31, 2001 balance sheet. Because Avon
Argentina had a U.S. dollar intercompany loan receivable on its
balance sheet, Avon Argentina recognized a net foreign exchange
gain of approximately $8.0 pretax.
With the Argentine peso devaluation on January 6, 2002, and a
forecast for continued negative economic conditions, Avon
anticipates the 2002 U.S. dollar results of Avon Argentina to be
negatively impacted. Net sales from Avon Argentina represent 5%
of Avon's consolidated net sales. The impact of any further
devaluation is expected to be partially offset by inflation,
hedging strategies and certain actions taken by management.
Management expects to leverage the direct selling channel through
Representative recruiting and price adjustments, as well as Avon's
local production capability, to respond to changing market
conditions, thereby achieving market share gain.
Avon's 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 the possible
effect of such fluctuations upon translated amounts or future
earnings. This is due to the large number of currencies,
intercompany transactions, 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.
-18-
Certain of Avon's financial instruments, which are discussed
below under Risk Management Strategies and Market Rate Sensitive
Instruments and in Note 7 of the Notes to Consolidated Financial
Statements, are used to hedge various amounts relating to certain
international subsidiaries.
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. At December 31, 2001, the total
indebtedness of foreign subsidiaries to third parties was $93.1.
It is Avon's practice 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 2001, Avon's
foreign subsidiaries remitted, net of taxes, $343.5 in dividends
and royalties. This sum is a substantial portion of the 2001
consolidated net earnings of those subsidiaries.
Risk Management Strategies and Market Rate Sensitive Instruments -
As discussed above, Avon operates globally, with manufacturing and
distribution facilities in various locations around the world.
Avon may reduce its exposure to fluctuations in earnings and cash
flows associated with changes in interest rates and foreign
exchange rates by creating offsetting positions through the use of
derivative financial instruments. Since Avon uses foreign
currency rate-sensitive and interest rate-sensitive instruments to
hedge a certain portion of its existing and forecasted
transactions, Avon expects that any loss in value for the hedge
instruments generally would be offset by increases in the value of
the underlying
transactions.
Derivatives are recognized on the balance sheet at their fair
values. The accounting for changes in fair value (gains or losses)
of a derivative instrument depends on whether it has been
designated by Avon and qualifies as part of a hedging relationship
and further, on the type of hedging relationship. Changes in the
fair value of a derivative that is designated as a fair value
hedge, along with the loss or gain on the hedged asset or
liability that is attributable to the hedged risk, are recorded in
earnings. Changes in the fair value of a derivative that is
designated as a cash flow hedge are recorded in other
comprehensive income ("OCI") to the extent effective and
reclassified into earnings in the same period or periods during
which the hedged transaction affects earnings. Changes in the
fair value of a derivative that is designated as a hedge of a net
investment in a foreign operation are recorded in foreign currency
translation adjustments within OCI to the extent effective as a
hedge. "Effectiveness" is the extent to which changes in fair
value of a derivative offsets changes in fair value of the hedged
item. Changes in the fair value of a derivative not designated as
a hedging instrument are recognized in earnings in Other expense,
net on the Consolidated Statements of Income.
Avon assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair
values or cash flows of hedged items. Highly effective means that
cumulative changes in the fair value of the derivative are between
80% - 125% of the cumulative changes in the fair value of the
hedged item. The ineffective portion of the derivative's gain or
loss, if any, is recorded in earnings in Other expense, net on the
Consolidated Statements of Income. Prior to June 1, 2001, Avon
excluded the change in the time value of option contracts from its
assessment of hedge effectiveness. Effective June 1, 2001, Avon
includes the change in the time value of options in its assessment
of hedge effectiveness. When Avon determines that
-19-
a derivative is not highly effective as a hedge, hedge accounting
is discontinued prospectively. When hedge accounting is
discontinued because it is probable that a forecasted transaction
will not occur, Avon discontinues hedge accounting for the
affected portion of the forecasted transaction, and reclassifies
gains and losses that were accumulated in OCI to earnings in Other
expense, net on the Consolidated Statements of Income.
Avon has not entered into derivative financial instruments
for trading purposes, nor is Avon a party to leveraged
derivatives. The master agreements governing Avon's derivative
contracts generally contain standard provisions that could trigger
early termination of the contracts in certain circumstances,
including if Avon were to merge with another entity and the
creditworthiness of the surviving entity were to be "materially
weaker" than that of Avon prior to the merger. In certain of
these master agreements, "materially weaker" has been defined by
reference to specific credit ratings.
Interest Rate Risk - Avon uses interest rate swaps to hedge
interest rate risk on its fixed-rate debt. In addition, Avon may
periodically employ interest rate caps and forward interest rate
agreements to reduce exposure, if any, to increases in variable
interest rates.
At December 31, 2001, Avon has outstanding interest rate swap
agreements that effectively convert fixed interest on a portion of
Avon's outstanding debt to a variable interest rate based on
LIBOR, as follows:
Notional Maturity
Amount Date Related Outstanding Debt
$ 50.0 May 2003 $100.0, 6.25% Bonds, due 2018
100.0 November 2004 200.0, 6.90% Notes, due 2004
100.0 November 2004 200.0, 6.90% Notes, due 2004
150.0 November 2009 300.0, 7.15% Notes, due 2009
150.0 November 2009* 300.0, 7.15% Notes, due 2009
*This interest rate swap agreement requires Avon to post
collateral in certain circumstances if Avon's credit rating drops
below BBB.
Avon has designated the interest rate swaps as fair value
hedges pursuant to FAS No. 133 (see Note 4 of the Notes to
Consolidated Financial Statements). During 2001, Long-term debt
increased by $33.2 with a corresponding increase to Other assets
to reflect the fair values of outstanding interest rate swaps.
Long-term debt also includes the remaining unamortized gain of
$7.5 resulting from a terminated swap agreement, which is being
amortized over the remaining term of the underlying debt. There
were no amounts of hedge ineffectiveness for the year ended
December 31, 2001, related to these interest rate swaps (see Note
7 of the Notes to Consolidated Financial Statements).
At December 31, 2001, Avon has forward interest rate
agreements to protect against increases in interest rates on a
portion of Avon's fixed to variable interest rate swap agreements
as follows:
Notional Maturity
Amount Date
$ 150.0 May 15, 2002
150.0 November 15, 2002
250.0 May 15, 2002
The forward interest rate agreements have not been designated
as hedges and have been recorded at fair value in earnings in the
Consolidated Statements of Income.
-20-
See Note 4 of the Notes to Consolidated Financial
Statements for further discussion regarding the interest
rate swap and forward rate agreements.
Foreign Currency Risk - Avon uses foreign currency forward
contracts and options to hedge portions of its forecasted
foreign currency cash flows resulting from intercompany
royalties, intercompany loans, and other third-party and
intercompany foreign currency transactions where there is a
high probability that anticipated exposures will
materialize. These contracts have been designated as cash
flow hedges. At December 31, 2001, the primary currencies
for which Avon has net underlying foreign currency exchange
rate exposure are the U.S. dollar versus the Argentine
peso, Brazilian real, British pound, the euro, Japanese
yen, Mexican peso, Philippine peso, Polish zloty, the
Russian ruble and Venezuelan bolivar.
Avon also enters into foreign currency forward
contracts and options to protect against the adverse
effects that exchange rate fluctuations may have on the
earnings of its foreign subsidiaries. These derivatives do
not qualify for hedge accounting and therefore, the gains
and losses on these derivatives have been recognized in
earnings each reporting period. Avon's hedges of its
foreign currency exposure cannot entirely eliminate the
effect of changes in foreign exchange rates on Avon's
consolidated financial position, results of operations and
cash flows.
Avon uses foreign currency forward contracts and
foreign currency denominated debt to hedge the foreign
currency exposure related to the net assets of certain of
its foreign subsidiaries. During 2001, Avon entered into
loan agreements and notes payable to borrow Japanese yen to
hedge Avon's net investment in its Japanese subsidiary (see
Note 4 of the Notes to Consolidated Financial Statements).
Avon also entered into foreign currency forward contracts
to hedge its net investment in its Mexican subsidiary. For
the year ended December 31, 2001, net gains of $5.1 related
to the effective portion of these hedges were included in
foreign currency translation adjustments within Accumulated
other comprehensive loss on the Consolidated Balance
Sheets.
At December 31, 2001, Avon held foreign currency
forward and option contracts to buy and sell foreign
currencies, including cross-currency contracts to sell one
foreign currency for another, with notional amounts in U.S.
dollars as follows:
Buy Sell
Argentine peso $ 4.6 $ 5.0
Brazilian real - 15.0
British pound 46.6 16.4
Canadian dollar - 17.2
Czech koruna - 11.0
Euro 83.4 45.4
Hungarian forint - 18.8
Japanese yen 12.6 23.2
Mexican peso - 88.0
Polish zloty - 6.5
Taiwanese dollar - 11.0
Other currencies - 11.3
Total $147.2 $ 268.8
-21-
Other Financing Activities - As of December 31, 2001, Avon
has forward contracts to purchase approximately 271,000
shares of Avon common stock at an average price of $46.01
per share. The contracts mature in October 2002 and were
recorded as equity instruments. As equity instruments, no
adjustment for subsequent changes in fair value has been
recognized. The maturities of forward contracts are
accelerated in the event that either Avon's credit rating
declines to Baa2 or its stock price closes at the trigger
price of approximately $16.00 per share for a two-day
period. In accordance with the provisions of EITF 00-19,
$51.0 of contracts outstanding at December 31, 2000, were
included in the accompanying Consolidated Balance Sheets in
Share repurchase commitments with a corresponding decrease
in Additional paid-in capital (see Note 2 of the Notes to
Consolidated Financial Statements).
Credit and Market Risk - Avon attempts to minimize its
credit exposure to counterparties by entering into interest
rate swap, forward rate and interest rate cap contracts
only with major international financial institutions with
"A" or higher credit ratings as issued by Standard & Poor's
Corporation. Avon's foreign currency and interest rate
derivatives are comprised of over-the-counter forward
contracts, swaps or options with major international
financial institutions. Although Avon's theoretical credit
risk is the replacement cost at the then estimated fair
value of these instruments, management believes that the
risk of incurring credit risk losses is remote and that
such losses, if any, would not be material.
Non-performance of the counterparties on the balance
of all the foreign exchange and interest rate swap and
forward rate agreements would not result in a material
write off at December 31, 2001. In addition, Avon may be
exposed to market risk on its foreign exchange and interest
rate swap and forward rate 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.
Avon 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 Avon are sensitive to changes in
interest rates. These financial instruments are either
discussed above or in Notes 4 and 7 of the Notes to
Consolidated Financial Statements. Interest rate changes
would result in gains or losses in the fair value of debt
and other financing instruments held by Avon. Based on the
outstanding balance of all these financial instruments at
December 31, 2001, a hypothetical 50 basis point change
(either an increase or a decrease) in interest rates
prevailing at that 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 Avon's current cost of debt. In 2001, Avon
did not experience a material loss in fair value, earnings
or cash flows associated with changes in interest rates.
Avon is exposed to equity price fluctuations for
investments included in the grantors trust (see Note 10 of
the Notes to Consolidated Financial Statements). A 10%
change (either an increase or decrease)in equity prices
would not be material based on the fair value of equity
investments as of December 31, 2001.
-22
As previously discussed, Avon 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
gain or loss would be offset by corresponding decreases or
increases, respectively, of the underlying instrument or
transaction being hedged. These financial instruments are
discussed above and in Note 7 of the Notes to Consolidated
Financial Statements.
Avon uses a Value at Risk (VaR) model to evaluate the
potential loss due to adverse changes in market risk
factors relating to its outstanding foreign currency
derivative instruments. The VaR computation includes
Avon's outstanding foreign currency forwards and options.
The computation excludes anticipated transactions, foreign
currency payables and receivables and net investments in
foreign subsidiaries, which the foregoing instruments are
intended to hedge. The VaR model uses a Monte Carlo
methodology that values foreign currency derivative
instruments against one thousand randomly generated sets of
price outcomes. The model generates its prices based on
historical volatilities and correlations observed over the
last year (approximately 250 business days). Based on a 95%
confidence level, a one-month holding period at December
31, 2001, and normal market conditions, the potential loss
in fair value from these foreign currency derivative
instruments would not materially affect Avon's earnings or
cashflows. The VaR model is a risk estimation tool and is
not intended to project actual losses in fair value that
will be incurred by Avon nor is it intended to estimate the
risk that non-normal market conditions or other unusual
events will occur that might affect the fair value of
Avon's foreign currency derivative instruments. Prior to
2001, Avon used a sensitivity analysis to evaluate the risk
of adverse changes in market risk factors. The risk of
loss at December 31, 2001, using a sensitivity analysis was
not material.
Euro
A single currency called the euro was introduced in
Europe on January 1, 1999. On that date, 12 of the 15
member countries of the European Union adopted the euro as
their common legal currency. Fixed conversion rates
between these participating countries' existing currencies
(the "legacy currencies") and the euro were established as
of that date. The legacy currencies are scheduled to
remain legal tender as denominations of the euro until June
30, 2002. During this transition period, parties may settle
transactions using either the euro or a participating
country's legal currency. Beginning in January 2002, new
euro-denominated bills and coins were issued. Generally
legacy currencies were withdrawn from circulation on
February 28, 2002.
Avon operating subsidiaries affected by the euro
conversion have addressed 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. The system and equipment
conversion costs were not material. Due to the numerous
uncertainties associated with the market impact of the euro
conversion, Avon 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.
Other Information
In 1997, the Company announced its BPR program to
streamline operations and improve profitability through
margin improvement and expense reductions. In connection
with this program, BPR initiatives reduced costs by
approximately
-23-
$400.0 in 2000 versus 1997 levels, with a portion of the
savings being reinvested primarily in consumer-focused
initiatives.
In May 2001, Avon announced its new Business
Transformation plans, which are designed to significantly
reduce costs and expand profit margins, while continuing to
focus on consumer growth strategies. Business
Transformation initiatives include an end-to-end evaluation
of business processes in key operating areas, with target
completion dates through 2004. Specifically, the
initiatives focus on simplifying Avon's marketing
processes, driving supply chain opportunities,
strengthening Avon's sales model through the Sales
Leadership program and the Internet, and streamlining the
Company's organizational structure.
In the fourth quarter of 2001, Avon recorded special
and non-recurring charges of $97.4 pretax ($68.3 after-tax,
or $.28 per diluted share), primarily associated with
facility rationalizations and workforce reduction programs
related to implementation of certain Business
Transformation initiatives. Approximately 80% of the
charge was cash related. See Note 13 of the Notes to
Consolidated Financial Statements for further details of
the special and non-recurring charges.
Beginning in 2002, Avon expects to see savings, net of
transitional costs, of approximately $30.0, from actions
associated with the special charge. It is expected that
the savings will provide added financial flexibility to
achieve profit targets, while enabling further investment
in consumer growth strategies and driving operating margin
expansion. Cost savings from current initiatives should
accelerate thereafter, with savings in 2004 expected to be
approximately $80.0 - $90.0. Additional special charges
are under consideration for 2002, primarily related to
additional Business Transformation initiatives. Although
the nature and extent of any further charges remain under
consideration, such charges might be in the range of $100.0
- $150.0, pretax. Based on the estimated benefits it
expects to realize from its overall Business Transformation
initiatives, Avon has set as a goal improvements in
operating margin of 50 basis points in 2002 and 100 basis
points in each of 2003 and 2004.
-24-
Results of Operations by Quarter (Unaudited)
Avon Products, Inc.
In millions, except per share data
[Enlarge/Download Table]
2001 First Second Third Fourth Year
Net sales $1,347.2 $1,452.5 $1,412.8 $1,739.5 $5,952.0
Other revenue 10.6 10.2 9.7 12.0 42.5
Gross profit* 856.7 940.2 897.5 1,080.0 3,774.4
Contract settlement gain,
net of related expenses - - (25.9) - (25.9)
Asset impairment charge - - 23.9 - 23.9
Special charges - - - 94.9 94.9
Operating profit 145.8 235.8 177.2 190.6 749.4
Income before taxes,
minority interest
and cumulative
effect of accounting
change 126.5 213.8 152.2 173.2 665.7
Income before minority
interest and cumulative
effect of accounting
change 82.0 139.2 100.9 112.7 434.8
Income before cumulative
effect of accounting
change 82.0 137.7 100.3 110.3 430.3
Net income $ 81.7 $ 137.7 $ 100.3 $ 110.3 $ 430.0
Earnings per share:
Basic $ .34 $ .58 $ .42 $ .47 $ 1.82(1)
Diluted $ .34 $ .57 $ .42 $ .46 $ 1.79(1)
*Fourth quarter and full year 2001 includes a non-recurring charge of $2.5 for
inventory
writedowns.
2000 First Second Third Fourth Year
Net sales $1,306.7 $1,382.6 $1,336.0 $1,648.4 $5,673.7
Other revenue 10.4 10.0 9.7 10.8 40.9
Gross profit 826.3 894.0 855.5 1,016.1 3,591.9
Operating profit 137.8 220.4 168.6 261.9 788.7
Income before taxes,
minority interest and
cumulative effect of
accounting change 109.5 195.1 144.3 242.1 691.0
Income before minority
interest and cumulative
effect of accounting
change 70.4 125.9 93.2 199.8 489.3
Income before cumulative
effect of accounting
change 70.4 124.9 92.3 197.5 485.1
Net income $ 63.7 $ 124.9 $ 92.3 $ 197.5 $ 478.4
Basic earnings per share:
Continuing operations $ .30 $ .53 $ .39 $ .83 $ 2.04(1)
Cumulative effect of
accounting change (.03) - - - (.03)
$ .27 $ .53 $ .39 $ .83 $ 2.01(1)
Diluted earnings per share:
Continuing operations $ .30 $ .52 $ .38 $ .81 $ 2.02(1)
Cumulative effect of
accounting change (.03) - - - (.03)
$ .27 $ .52 $ .38 $ .81 $ 1.99(1)
(1) The sum of per share amounts for the quarters does not necessarily equal
that for the year because the computations were made independently.
-25-
Market Prices Per Share of Common Stock by Quarter
2001 2000
High Low High Low
Quarter
First $ 48.25 $ 38.00 $ 34.50 $ 25.25
Second 48.26 35.55 44.50 28.38
Third 50.12 42.00 44.00 35.00
Fourth 49.88 43.07 49.75 38.19
Avon common stock is listed on the New York Stock Exchange. At
December 31, 2001, there were 21,393 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 $.76 per share, or $.19 per share each
quarter, were declared and paid in 2001. Dividends of $.74 per share,
or $.185 per share each quarter, were declared and paid in 2000.
-26-
Consolidated Statements of Income
Avon Products, Inc.
In millions, except per share data
Years ended December 31 2001 2000 1999
Net sales $5,952.0 $5,673.7 $5,289.1
Other revenue 42.5 40.9 38.8
Total revenue 5,994.5 5,714.6 5,327.9
Costs, expenses and other:
Cost of sales* 2,220.1 2,122.7 2,031.5
Marketing, distribution and
administrative expenses 2,932.1 2,803.2 2,641.8
Contract settlement gain, net of
related expenses (Note 15) (25.9) - -
Asset impairment charge(Note 16) 23.9 - -
Special charge (Note 13) 94.9 - 105.2
Operating profit 749.4 788.7 549.4
Interest expense 71.1 84.7 43.2
Interest income (14.4) (8.5) (11.1)
Other expense, net 27.0 21.5 10.7
Total other expenses 83.7 97.7 42.8
Income from continuing operations before
taxes, minority interest and cumulative
effect of accounting changes 665.7 691.0 506.6
Income taxes 230.9 201.7 204.2
Income before minority interest
and cumulative effect of
accounting changes 434.8 489.3 302.4
Minority interest (4.5) (4.2) -
Income from continuing operations before
cumulative effect of accounting changes 430.3 485.1 302.4
Cumulative effect of accounting changes,
net of tax (0.3) (6.7) -
Net income $ 430.0 $ 478.4 $ 302.4
Basic earnings per share:
Continuing operations $ 1.82 $ 2.04 $ 1.18
Cumulative effect of accounting changes - (.03) -
$ 1.82 $ 2.01 $ 1.18
Diluted earnings per share:
Continuing operations $ 1.79 $ 2.02 $ 1.17
Cumulative effect of accounting changes - (.03) -
$ 1.79 $ 1.99 $ 1.17
*2001 and 1999 include non-recurring charges of $2.5 and $46.0, respectively,
for
inventory write-downs.
The accompanying notes are an integral part of these statements.
-27-
Consolidated Balance Sheets
Avon Products, Inc.
[Download Table]
In millions, except share data
December 31 2001 2000
Assets
Current assets
Cash, including cash equivalents of $381.8 and $23.9 $ 508.5 $122.7
Accounts receivable (less allowance for doubtful
accounts of $45.1 and $39.2) 519.5 499.0
Income tax receivable - 95.2
Inventories 612.5 610.6
Prepaid expenses and other 248.6 218.2
Total current assets 1,889.1 1,545.7
Property, plant and equipment, at cost
Land 49.4 53.0
Buildings and improvements 664.0 659.5
Equipment 841.2 810.6
1,554.6 1,523.1
Less accumulated depreciation 779.7 754.7
774.9 768.4
Other assets 529.1 512.3
Total assets $ 3,193.1 2,826.4
Liabilities and Shareholders' (Deficit) Equity
Current liabilities
Debt maturing within one year $ 88.8 $105.4
Accounts payable 404.1 391.3
Accrued compensation 145.2 138.2
Other accrued liabilities 338.2 251.7
Sales and taxes other than income 108.8 101.1
Income taxes 375.9 371.6
Total current liabilities 1,461.0 1,359.3
Long-term debt 1,236.3 1,108.2
Employee benefit plans 436.6 397.2
Deferred income taxes 30.6 31.3
Other liabilities (including minority interest
of $29.0 and $30.7) 103.2 95.2
Commitments and Contingencies (Notes 12 and 14)
Share repurchase commitments (Note 2) - 51.0
Shareholders' (deficit) equity
Common stock, par value $.25 - authorized:
800,000,000 shares; issued
356,312,680 and 354,535,840 shares 89.1 88.6
Additional paid-in capital 938.0 824.1
Retained earnings 1,389.9 1,139.8
Accumulated other comprehensive loss (489.5) (399.1)
Treasury stock, at cost - 119,631,574 and
116,373,394 shares (2,002.1) (1,869.2)
Total shareholders' (deficit) equity (74.6) (215.8)
Total liabilities and
shareholders' (deficit) equity $ 3,193.1 $2,826.4
The accompanying notes are an integral part of these statements.
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Consolidated Statements of Cash Flows
Avon Products, Inc.
In millions
Years ended December 31 2001 2000 1999
Cash flows from operating activities
Net income $ 430.0 $ 478.4 $ 302.4
Adjustments to reconcile income to net cash
provided by operating activities:
Cumulative effect of accounting change 0.3 6.7 -
Depreciation and amortization 109.1 97.1 83.0
Provision for doubtful accounts 105.6 94.3 87.5
Amortization of debt discounts(premiums) 14.9 1.4 (6.7)
Translation losses(gains) 6.8 2.7 (.9)
Deferred income taxes (31.1) 13.5 (20.0)
Special charges, net of payments 89.1 (18.3) 84.1
Asset impairment charge 23.9 - -
Other 15.9 13.8 9.8
Changes in assets and liabilities:
Accounts receivable (155.5) (145.6) (132.7)
Income tax receivable 95.2 (95.2) -
Inventories (33.2) (103.3) (57.8)
Prepaid expenses and other (17.7) (30.7) 1.1
Accounts payable and accrued liabilities 71.7 (57.3) 46.3
Income and other taxes 38.4 81.5 27.6
Noncurrent assets and liabilities (8.5) (15.1) 25.0
Net cash provided by operating activities 754.9 323.9 448.7
Cash flows from investing activities
Capital expenditures (155.3) (193.5) (203.4)
Disposal of assets 8.2 7.2 11.7
Acquisitions of subsidiary stock and other
investing activities (5.0) (1.4) (16.5)
Net cash used by investing activities (152.1) (187.7) (208.2)
Cash flows from financing activities
Cash dividends (181.9) (178.2) (186.3)
Book overdrafts (0.2) (13.5) 15.9
Debt, net (maturities of three months or less) (23.0) (194.3) 227.2
Proceeds from short-term debt 99.7 90.5 90.8
Retirement of short-term debt (89.1) (92.2) (69.4)
Proceeds from long-term debt 76.5 400.1 500.0
Retirement of long-term debt (.2) (.3) (.2)
Proceeds from exercise of stock options 49.1 38.4 23.9
Repurchase of common stock (132.9) (68.1) (800.6)
Other financing activities - (101.4) -
Net cash used by financing activities (202.0) (119.0) (198.7)
Effect of exchange rate changes on cash and
equivalents (15.0) (11.9) (30.0)
Net increase in cash and equivalents 385.8 5.3 11.8
Cash and equivalents at beginning of year 122.7 117.4 105.6
Cash and equivalents at end of year $ 508.5 $ 122.7 $ 117.4
Cash paid for:
Interest, net of amounts capitalized $ 55.3 $ 98.6 $ 47.1
Income taxes, net of refunds received 123.7 207.6 176.0
The accompanying notes are an integral part of these statements.
-29-
Consolidated Statements of Changes in Shareholders' (Deficit) Equity
Avon Products, Inc.
[Download Table]
Accumulated
Additional Other
Common Stock Paid-In Retained
Comprehensive Treasury
In millions, except share data Shares Amount
Capital Earnings Loss Stock Total
Balance at December 31, 1998 351,314,366 $ 87.8 $
780.0 $ 719.1 $ (301.3) $(1,000.5) $285.1
Comprehensive income:
Net income 302.4 302.4
Foreign currency translation adjustments (49.7)
(49.7)
Minimum pension liability adjustment,
net of taxes of $0.7
1.3 1.3
Total comprehensive income
254.0
Dividends - $.72 per share
(184.3) (184.3)
Exercise of stock options,
including tax benefits of $7.9 1,152,549 .3
30.7 31.0
Grant, cancellation and
amortization of restricted stock 109,009
8.7 8.7
Repurchase of common stock ___________ ______
_______ _______ _______ (800.6) (800.6)
Balance at December 31, 1999 352,575,924 88.1
819.4 837.2 (349.7) (1,801.1) (406.1)
Comprehensive income:
Net income
478.4 478.4
Foreign currency translation adjustments
(42.9) (42.9)
Unrealized loss from available-
for-sale securities, net of taxes of $3.3
(6.0) (6.0)
Minimum pension liability adjustment, net of taxes
of $0.3
(.5) (.5)
Total comprehensive income
429.0
Dividends - $.74 per share
(175.8) (175.8)
Exercise of stock options,
including tax benefits of $8.8 1,701,935 .4
49.1 49.5
Grant, cancellation and
amortization of restricted stock 257,981 .1
6.6 6.7
Repurchase of common stock
(68.1) (68.1)
Share repurchase commitments ___________ ______
(51.0) ________ _______ _______ (51.0)
Balance at December 31, 2000 354,535,840 88.6
824.1 1,139.8 (399.1) (1,869.2) (215.8)
Comprehensive income:
Net income
430.0 430.0
Foreign currency translation adjustments
(50.6) (50.6)
Unrealized loss from available-
for-sale securities, net of taxes of $1.4
(2.6) (2.6)
Minimum pension liability adjustment,
net of taxes of $17.7
(35.0) (35.0)
Net derivative losses on cash flow hedges,
net of taxes of $1.2
(2.2) (2.2)
Total comprehensive income
339.6
Dividends - $.76 per share
(179.9) (179.9)
Exercise of stock options,
including tax benefits of $8.3 1,626,233 .4
55.0 55.4
Grant, cancellation and
amortization of restricted stock 150,607 .1
7.9 8.0
Repurchase of common stock
(132.9) (132.9)
Share repurchase commitments ___________ ______
51.0 ________ _______ _________ 51.0
Balance at December 31, 2001 356,312,680 $ 89.1 $
938.0 $1,389.9 $(489.5) $(2,002.1) $(74.6)
The accompanying notes are an integral part of these statements.
-30-
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 Beauty which consists of cosmetics,
fragrance and toiletries ("CFT"); Beauty Plus which consists
of jewelry, watches and apparel and accessories; and Beyond
Beauty which consists of home products, gift and decorative
and candles. Health and Wellness products are divided among
all three product categories based on product segmentation.
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. Additionally, Avon launched a Retail
business in the U.S. in the third quarter of 2001.
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.
Use of Estimates - These statements have been prepared in
conformity with generally accepted accounting principles in
the U.S. and require management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ materially from those
estimates. On an ongoing basis, management reviews its
estimates, including those related to revenue recognition,
allowances for doubtful accounts receivable, allowances for
sales returns, provisions for inventory obsolescence, income
taxes and tax valuation reserves, loss contingencies and the
determination of discount and other rate assumptions for
pension, post-retirement and post-employment benefit expenses.
Changes in facts and circumstances may result in revised
estimates, which are recorded in the period in which they
become known.
Foreign Currency - Statement of Financial Accounting Standards
("FAS") No. 52 distinguishes between translation adjustments,
which are usually reported as a separate component of
Shareholders' (deficit) equity, and foreign currency
transactions, which are included in the determination of net
income. 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 loss. 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 earnings.
Gains or losses resulting from foreign currency transactions
are recorded in earnings in Other expense, net.
Revenue Recognition - Net sales primarily includes sales
generated as a result of Representative orders less any
discounts, commissions, taxes and other
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deductions. Avon recognizes revenue upon delivery, when both
title and risks and rewards of ownership pass to the
independent Representatives, who are Avon's customers. Prior
to 2000, Avon recognized revenue as shipments were made. See
Note 2 of the Notes to Consolidated Financial Statements.
Avon uses estimates in determining revenue and operating
profit for orders that have been shipped but not delivered as
of the end of the period. These estimates are based on daily
sales levels, delivery lead times, gross margin and variable
expenses. Avon also estimates an allowance for sales returns
based on historical experience with product returns. In
addition, Avon estimates an allowance for doubtful accounts
receivable based on analysis of historical data.
Other revenues include shipping and handling fees charged to
Representatives.
Cash and Cash Equivalents - Cash equivalents are stated at
cost plus accrued interest, which approximates fair value.
Cash equivalents are high quality, short-term money market
instruments with an original maturity of 3 months or less and
consist of time deposits with a number of U.S. and non-U.S.
commercial banks and money market fund investments.
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 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 cost reductions as a
result of technological advancements and process improvements
in its manufacturing operations. The FIFO method is a better
measure of the current value of such inventories, provides a
more appropriate matching of revenues and expenses, and
conforms all inventories of the Company to the same accounting
method. This 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.
Avon classifies inventory into various categories based
upon their stage in the product life cycle, future sales plans
and disposition process. Avon assigns a degree of
obsolescence risk to products based on this classification to
determine the level of obsolescence provision.
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 $97.4 and $121.2 at December
31, 2001 and 2000, respectively, and are included in Other
assets on the Consolidated Balance Sheets.
Stock Awards - 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 and awards 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 and is amortized over
the vesting period.
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Financial Instruments - The Company uses derivative financial
instruments, including swaps, forward contracts and options,
to manage interest rate and foreign currency exposures.
Effective January 1, 2001, Avon records all derivative
instruments at their fair values on the Consolidated Balance
Sheet as either assets or liabilities (see Notes 2 and 7 of
the Notes to Consolidated Financial Statements).
Avon also uses financial instruments, including forward
contracts to purchase Avon common stock, to hedge certain
employee benefit costs and the cost of Avon's share repurchase
program. Effective September 1, 2000, Avon adopted the
provisions of Emerging Issues Task Force ("EITF") Issue No.
00-19 (see Note 2 of the Notes to Consolidated Financial
Statements). Contracts that require physical or net share
settlement and contracts that give Avon a choice of net-cash
settlement or settlement in its own shares are recorded as
equity instruments and are initially measured at fair value
with subsequent changes in fair value not recognized.
Contracts that require net-cash settlement and contracts that
give the counterparty a choice of net-cash settlement or
settlement in shares are recorded as assets or liabilities and
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 2001 - $45.9 (2000 -
$43.1; 1999 - $38.2).
Advertising - Advertising costs are expensed as incurred and
aggregated in 2001 - $97.2 (2000 - $92.4; 1999 - $63.4).
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.
A valuation allowance is provided for deferred tax assets if
it is more likely than not these items will either expire
before Avon is able to realize their benefit, or that future
deductibility is uncertain.
U.S. income taxes have not been provided on approximately $221.5
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 2001 - $538.0 (2000 - $517.4; 1999 - $495.4).
Shipping and handling costs are included in Marketing,
distribution and administrative expenses on the Consolidated
Statements of Income.
Contingencies - Avon determines whether to disclose and accrue
for loss contingencies based on an assessment of whether the
risk of loss is remote, reasonably possible or probable and,
where reasonable estimates can be made of the amount of
potential loss, of the materiality of the loss contingency, in
accordance with FAS No. 5, "Accounting for Contingencies".
Reclassifications - To conform to the 2001 presentation, certain
reclassifications were made to the prior years' Consolidated
Financial Statements and the accompanying footnotes.
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 EPS are
calculated to give effect to all potentially dilutive common
shares that were outstanding during the year.
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For each of the three years ended December 31, the components of basic
and diluted earnings per share are as follows:
2001 2000 1999
Numerator:
Basic:
Income from continuing operations
before cumulative effect of
accounting changes $ 430.3 $ 485.1 $ 302.4
Cumulative effect of accounting changes (0.3) (6.7) -
______ _
Net income $ 430.0 $ 478.4 $ 302.4
Diluted:
Income from continuing operations
before cumulative effect of accounting
changes $ 430.3 $ 485.1 $ 302.4
Interest expense on Convertible Notes,
net of taxes 10.0 4.5 -
Income for purposes of computing diluted
EPS before cumulative effect of
accounting changes 440.3 489.6 302.4
Cumulative effect of accounting changes (0.3) (6.7) -
Net income for purposes of computing
diluted EPS $ 440.0 $ 482.9 $ 302.4
Denominator:
Basic EPS weighted-average shares
outstanding 236.83 237.67 256.78
Dilutive effect of:
Assumed conversion of
stock options and settlement of
forward contracts 2.26* 2.06* 2.59*
Assumed conversion of Convertible Notes 6.96 3.22 -
Diluted EPS adjusted weighted-average
shares outstanding 246.05 242.95 259.37
Basic EPS:
Continuing operations $ 1.82 $ 2.04 $ 1.18
Cumulative effect of accounting changes - (.03) -
$ 1.82 $ 2.01 $ 1.18
Diluted EPS:
Continuing operations $ 1.79 $ 2.02 $ 1.17
Cumulative effect of accounting changes - (.03) -
$ 1.79 $ 1.99 $ 1.17
*At December 31, 2001, 2000, and 1999 stock options and forward
contracts to purchase Avon common stock totaling 0.3 million shares, 1.1
million shares and 3.8 million shares, respectively, are not included in
the diluted EPS calculation since their impact is anti-dilutive.
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2. Accounting Changes
Effective January 1, 2001, Avon adopted FAS No. 133,
"Accounting for Derivative Instruments and Hedging
Activities," as amended by FAS No. 138, "Accounting for
Certain Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative
instruments and hedging activities. FAS No. 133, as amended,
requires all derivative instruments be recorded at their fair
values on the Consolidated Balance Sheet as either assets or
liabilities. In accordance with the provisions of FAS No.
133, Avon recorded a charge to earnings of $0.3, net of a tax
benefit of $0.2, in the first quarter of 2001 to reflect the
change in the time value of Avon's outstanding options from
the dates of the options' inceptions through the date of
transition (January 1, 2001). Avon also recorded a charge to
Shareholders' (deficit) equity of $3.9, net of a tax benefit
of $2.1, included in Accumulated other comprehensive loss in
the Consolidated Balance Sheets, to recognize the fair value
of all derivatives designated as cash flow hedging
instruments, which Avon reclassified into earnings during
2001. These charges are reflected as a Cumulative effect of
an accounting change in the accompanying Consolidated
Financial Statements.
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 items. As a result of this new guidance, the cost of
certain products used in Avon's promotional activities, which
was previously reported in Marketing, distribution and
administrative expenses, will be reclassified as Cost of
sales. Although operating profit will remain unchanged, gross
margin will decrease by approximately 0.5 points to 0.7
points, offset by a decrease in Marketing, distribution and
administrative expenses. EITF 00-14 is effective January 1,
2002, for Avon and will be applied retroactively for purposes
of comparability.
In April 2001, the EITF reached a consensus on EITF 00-
25, "Accounting for Consideration from a Vendor to a Retailer
in Connection with the Purchase or Promotion of the Vendor's
Products," which provides guidance on the income statement
classification of consideration from a vendor to a retailer in
connection with the retailer's purchase of the vendor's
products or to promote sales of the vendor's products. In
September 2001, the EITF issued EITF 01-09, "Accounting for
Consideration Given by a Vendor to a Customer or Reseller of
the Vendor's Products," which addresses the accounting for
consideration given by a vendor to a customer or a reseller of
the vendor's products. As a result of this new guidance,
certain expenses related to the U.S. retail business included
in Marketing, distribution and administrative expenses will be
reclassified as a reduction of Net sales. EITF 00-25 and EITF
01-09 are both effective January 1, 2002, for Avon and will be
applied retroactively for purposes of comparability. The
adoption of EITF 00-25 and EITF 01-09 was not material to the
Consolidated Financial Statements.
In June 2001, the Financial Accounting Standard Board
("FASB") issued FAS No. 141, "Business Combinations," which
addresses the accounting for the cost of an acquired business,
and FAS No. 142, "Goodwill and Other Intangible
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Assets," which addresses the accounting for goodwill and other
intangible assets subsequent to their acquisition. FAS No.
141 was effective for business combinations completed after
June 30, 2001, and FAS No. 142 was effective January 1, 2002,
for the Company. The adoption of FAS Nos. 141 and 142 was not
material.
In August 2001, the FASB issued FAS No. 143, "Accounting
for Asset Retirement Obligations," which addresses the
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
retirement costs. FAS No. 143 is effective January 1, 2003
for Avon. Avon is currently evaluating the impact of this new
guidance.
In October 2001, the FASB issued FAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," which
addresses the accounting and reporting for the impairment and
disposal of long-lived assets. FAS No. 144 was effective
January 1, 2002 for Avon. The adoption of FAS No. 144 was not
material.
Effective January 1, 2000, the Company adopted Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements". SAB No. 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 No. 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 No. 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 change in accounting
method would not have a material effect on the Consolidated
Statements of Income in 1999 if adopted in this period.
In September 2000, the 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, Avon adopted
EITF 00-10, with restatement of all comparative prior period
financial statements. The adoption had no impact on the
determination of net income.
In September 2000, the EITF reached a consensus on EITF
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 sets forth a model to be used to
determine whether equity derivative contracts should be
recorded as equity, an asset or a liability. Under the
transition provisions of EITF 00-19, all contracts existing
prior to the date of the consensus were grandfathered until
June 30, 2001, with a cumulative catch-up adjustment at that
time. Additionally, any contracts entered into prior to
September 20, 2000, which were not revised to comply with EITF
00-19 by December 31, 2000, were required to be reclassified
from permanent to temporary equity. In accordance with the
transition provisions of EITF 00-19, contracts aggregating
$51.0 did not comply with the provisions of EITF 00-19 at
December 31, 2000, and were included in the accompanying
Consolidated Balance Sheets in
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Share repurchase commitments with a corresponding decrease in
Additional paid-in capital. All of these contracts were
settled prior to June 30, 2001 and therefore, no cumulative
adjustment was recorded. All contracts entered into during
2001 met the requirements for equity classification under EITF
00-19.
3. Inventories
Inventories at December 31 consisted of the following:
2001 2000
Raw materials $167.0 $168.0
Finished goods 445.5 442.6
Total $612.5 $610.6
4. Debt and Other Financing
Debt at December 31 consisted of the following (see also Note 7 of the Notes to
Consolidated Financial Statements regarding financial instruments):
2001 2000
Maturing within one year:
Notes payable $ 87.6 $ 104.6
Current portion of long-term debt 1.2 .8
Total $ 88.8 $ 105.4
Long-term debt:
1.06% Yen Notes, due 2006 $ 68.8 $ -
Convertible Notes, due 2020 422.4 407.0
6.90% Notes, due 2004 200.0 200.0
7.15% Notes, due 2009 300.0 300.0
6.25% Bonds, due 2018 100.0 100.0
6.55% Notes, due 2007 100.0 100.0
Other, payable through 2005 with interest from
3% to 17% 5.6 2.0
Total long-term debt 1,196.8 1,109.0
Interest rate swaps - FAS 133 adjustment* 40.7 -
Less current portion (1.2) (.8)
Total $1,236.3 $1,108.2
*Adjustment to reflect the fair value of outstanding interest rate
swaps and an unamortized gain on a terminated swap agreement (see Note
7 of the Notes to Consolidated Financial Statements).
Annual maturities of long-term debt (excluding the interest rate
swaps) for each of the next five years are: 2002 - $1.2; 2003 - $2.1;
2004 - $202.1; 2005 - $.1; and 2006 and beyond - $991.3.
Convertible Notes, due 2020 and 6.25% Bonds, due 2018 are subject
to certain early maturity provisions described below in this Note 4.
1.06% Yen Notes, due 2006 - In September 2001, Avon issued 9,000.0
Japanese yen of notes payable (the "Yen Notes"). The Yen Notes are
unsecured and unsubordinated obligations of Avon. The Yen Notes bear
interest at a per annum rate of 1.06% and mature on September 20, 2006.
Interest on the Yen Notes is payable semi-annually. The agency
agreement under which the Yen Notes were issued limits the incurrence
of liens under certain circumstances. The net proceeds from the
issuance of the Yen Notes were used for general corporate purposes,
including the repayment of short-term debt. The Yen Notes are
designated as a hedge of Avon's net investment in its Japanese
subsidiary (See Note 7 of the Notes to Consolidated Financial
Statements).
-37-
In 2001, Avon entered into a series of short-term loan
agreements to borrow Japanese yen. The loans bore interest
at per annum rates ranging from 0.425% to 0.875% with
interest payable at maturity. In September 2001, the
remaining loan was repaid, together with the interest
thereon, with the proceeds from the Yen Notes.
Convertible Notes, due 2020 - In July 2000, Avon 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
Convertible Note at maturity. The Convertible Notes have a
3.75% yield to maturity and are convertible at any time into
Avon'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 Avon 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 Avon 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 Convertible Note of
$531.74, $640.29 and $771.00, respectively. The holders may
also require Avon to repurchase the Convertible Notes if a
fundamental change, as defined, involving Avon occurs prior
to July 12, 2003. Avon 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 Avon's assets.
Avon 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 Avon 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.
6.90% Notes, due 2004 and 7.15% Notes, due 2009 - 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 Avon.
$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 a merger, consolidation or a sale of
substantially all of Avon's assets.
In connection with the November 1999 offering, Avon
entered into five-year and 10-year interest rate swap
contracts with notional amounts totaling $200.0 and $300.0,
respectively, to effectively convert fixed interest rates on
the Notes to variable interest rates, based on commercial
paper rates.
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In November 2000, these interest rate swap contracts
were terminated. The cost to settle these contracts is
being amortized to Interest expense over the remaining term
of the underlying debt. At the same time, Avon entered into
new four-year and nine-year interest rate swap contracts
with notional amounts totaling $200.0 and $300.0,
respectively, to effectively convert fixed interest on the
Notes to variable interest rates, based on LIBOR.
In September 2001, Avon terminated an interest rate
swap contract with a notional amount of $100.0, effective
November 15, 2001. At inception, the swap was designated as
a hedge of a portion of Avon's five-year, $200.0 Notes and
accordingly both the interest rate swap and underlying debt
were adjusted to reflect their fair values at termination.
Effective with the termination of the swap, the fair value
adjustment to the underlying debt is being amortized over
the remaining term of that debt. In November 2001, Avon
entered into a new three-year interest rate swap contract
with a notional amount of $100.0 to effectively convert
fixed interest on a portion of the Notes to a variable
interest rate, based on LIBOR.
In September 2001, Avon entered into two forward
interest rate agreements, each with a notional amount of
$150.0, to protect against increases in interest rates on a
portion of Avon's fixed to variable interest rate swap
contracts. The agreements provide six-month LIBOR interest
rate locks at 2.48% and 2.915% for the periods November 15,
2001 to May 15, 2002 and May 15, 2002 to November 15, 2002,
respectively. In October 2001, Avon entered into a forward
interest rate agreement with a notional amount of $250.0 to
protect against increases on a portion of Avon's fixed to
variable interest rate swap contracts. The agreement
provides a six-month LIBOR interest rate lock at 2.28% for
the period November 15, 2001 to May 15, 2002. The forward
interest rate agreements have not been designated as hedges
pursuant to FAS No. 133 and have been recorded in the
Consolidated Financial Statements at fair value.
6.25% Bonds, due 2018 - 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 20-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 15-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.
6.55% Notes, due 2007 - During 1997, the Company issued
$100.0 of 6.55% notes, due August 1, 2007, to pay down
commercial paper borrowings.
Revolving Credit Facility, Lines of Credit and Letters of
Credit - Avon has a five-year $600.0 revolving credit and
competitive advance facility (the "credit facility"), which
expires in 2006. The credit facility may be used for
general corporate purposes, including financing working
capital and capital expenditures and supporting the stock
repurchase program. The interest rate on borrowings under
the credit facility is based on LIBOR or on the higher of
prime or 1/2% plus the federal funds rate. The credit
facility has an annual facility fee, payable quarterly, of
$0.5, based on Avon's current credit ratings. The credit
facility contains customary covenants, including one which
requires Avon's interest coverage ratio (determined in
relation to Avon's consolidated pre-tax
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income and interest expense) to equal or exceed 4:1. At
December 31, 2001, Avon was in compliance with all covenants
in the credit facility. At December 31, 2001 and December
31, 2000, there were no borrowings under the credit
facility. Avon maintains a $600.0 commercial paper program,
which is supported by the credit facility. Outstanding
commercial paper effectively reduces the amount available
for borrowing under the credit facility. At December 31,
2001, Avon had no commercial paper outstanding, and at
December 31, 2000, Avon had $29.9 in commercial paper
outstanding under this program.
Avon had uncommitted domestic lines of credit available
of $49.0 in 2001 and 2000 with various banks which have no
compensating balances or fees. As of December 31, 2001 and
2000, $11.1 of these lines were being used for letters of
credit.
The maximum borrowings under these combined domestic
facilities during 2001 and 2000 were $409.0 and $515.4,
respectively, and the annual average borrowings during each
year were approximately $202.0 and $313.7, respectively, at
average annual interest rates of approximately 3.4% and
6.5%, respectively.
At December 31, 2001 and 2000, international lines of
credit totaled $457.4 and $449.5, respectively, of which
$87.9 and $74.8, respectively, were outstanding and included
in Notes payable and Long-term debt. The maximum borrowings
under these facilities during 2001 and 2000 were $89.0 and
$86.4, respectively, and the annual average borrowings
during each year were $77.4 and $77.8, respectively, at
average annual interest rates of approximately 7.3% and
6.9%, respectively. Such lines have no compensating balances
or fees.
At December 31, 2001 and 2000, Avon also had letters of
credit outstanding totaling $13.9 and $9.5, respectively,
which guarantee various insurance activities. In addition,
Avon had outstanding letters of credit for various trade
activities and commercial commitments executed in the
ordinary course of business, such as purchase orders for
normal replenishment of inventory levels.
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5. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss at December 31 consisted of the
following:
2001 2000
Foreign currency translation
Aadjustments $(429.1) $(378.5)
Unrealized loss from
available-for-
sale securities, net of taxes (8.6) (6.0)
Minimum pension liability
adjustment, net of taxes (49.6) (14.6)
Net derivative losses
from cash flow hedges, net of taxes (2.2) ______-
Total $(489.5) $(399.1)
6. Income Taxes
Deferred tax assets (liabilities) resulting from temporary
differences in the recognition of income and expense for tax and
financial reporting purposes at December 31 consisted of the
following:
2001 2000
Deferred tax assets:
Postretirement benefits $ 76.5 $ 80.7
Accrued expenses 51.0 48.9
Special and non-recurring charges 30.7 2.4
Employee benefit plans 79.6 69.8
Foreign operating loss carryforwards 29.1 25.9
Capital loss carryforwards - .2
Postemployment benefits 7.4 7.4
Revenue recognition 3.0 4.2
All other 36.1 32.0
Valuation allowance (28.8) (25.4)
Total deferred tax assets 284.6 246.1
Deferred tax liabilities:
Depreciation (40.4) (43.1)
Prepaid retirement plan costs (47.8) (50.0)
Capitalized interest (7.7) (8.7)
Capitalized software (15.4) (1.4)
Unremitted foreign earnings (15.0) (13.7)
All other (34.0) (27.2)
Total deferred tax liabilities (160.3) (144.1)
Net deferred tax assets $ 124.3 $ 102.0
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Deferred tax assets (liabilities) at December 31 were classified as follows:
2001 2000
Deferred tax assets:
Prepaid expenses and other $ 111.7 $ 86.0
Other assets 62.5 66.1
Total deferred tax assets 174.2 152.1
Deferred tax liabilities:
Income taxes (19.3) (18.8)
Deferred income taxes (30.6) (31.3)
Total deferred tax liabilities (49.9) (50.1)
Net deferred tax assets $ 124.3 $102.0
The valuation allowance primarily represents reserves for foreign
operating loss and capital loss carryforwards. The basis used for
recognition of deferred tax assets included the profitability of the
operations and related deferred tax liabilities.
Income from continuing operations before taxes, minority interest
and cumulative effect of accounting changes for the years ended
December 31 was as follows:
2001 2000 1999
United States $ 148.5 $ 172.0 $ 102.2
Foreign 517.2 519.0 404.4
Total $ 665.7 $ 691.0 $ 506.6
The provision for income taxes for the years ended December 31
was as follows:
2001 2000 1999
Federal:
Current $ 61.8 $ (3.2) $ 48.4
Deferred (9.4) 11.1 (13.3)
52.4 7.9 35.1
Foreign:
Current 197.2 183.8 167.5
Deferred (21.4) - (4.5)
175.8 183.8 163.0
State and other:
Current 3.0 7.6 8.3
Deferred (.3) 2.4 (2.2)
2.7 10.0 6.1
Total $ 230.9 $ 201.7 $ 204.2
The effective tax rate for the years ended December 31 was as follows:
2001 2000 1999
Statutory federal rate 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit .3 .5 .8
Tax-exempt operations .7 (.2) (.3)
Taxes on foreign income, including translation (.8) .3 4.2
Tax refund, net of taxes - (5.8) -
Other (.5) (.6) .6
Effective tax rate 34.7% 29.2% 40.3%
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At December 31, 2001, Avon had foreign operating loss
carryforwards of approximately $91.1. The loss
carryforwards expiring between 2002 and 2009 were $71.8
and the loss carryforwards which do not expire were $19.3.
There are no capital loss carryforwards that expire in
2002 which may be used to offset capital gains.
In January 2001, Avon received a federal income tax
refund consisting of $32.5 of tax and $62.7 of interest
related to the carryback of foreign tax credits and
general business credits to the years ended December 31,
1982, 1983, 1985 and 1986. The Company recognized $40.1
million as an income tax benefit in 2000 resulting from
the impact of the tax refund offset by taxes due on
interest received and other related tax obligations.
7. Financial Instruments and Risk Management
Avon operates globally, with manufacturing and
distribution facilities in various locations around the
world. Avon may reduce its exposure to fluctuations in
earnings and cash flows associated with changes in
interest rates and foreign exchange rates by creating
offsetting positions through the use of derivative
financial instruments. Since Avon uses foreign currency
rate sensitive and interest rate sensitive instruments to
hedge a certain portion of its existing and forecasted
transactions, Avon expects that any loss in value for the
hedge instruments generally would be offset by increases
in the value of the underlying transactions. Avon does
not enter into derivative financial instruments for
trading purposes, nor is Avon a party to leveraged
derivatives.
General
Derivatives are recognized on the balance sheet at
their fair values. The accounting for changes in fair
value (gains or losses) of a derivative instrument depends
on whether it has been designated by Avon and qualifies as
part of a hedging relationship and further, on the type of
hedging relationship. Changes in the fair value of a
derivative that is designated as a fair value hedge, along
with the loss or gain on the hedged asset or liability
that is attributable to the hedged risk, are recorded in
earnings. Changes in the fair value of a derivative that
is designated as a cash flow hedge are recorded in other
comprehensive income ("OCI") to the extent effective and
reclassified into earnings in the same period or periods
during which the hedged transaction affects earnings.
Changes in the fair value of a derivative that is
designated as a hedge of a net investment in a foreign
operation are recorded in foreign currency translation
adjustments within OCI to the extent effective as a hedge.
"Effectiveness" is the extent to which changes in fair
value of a derivative offsets changes in fair value of the
hedged item. Changes in the fair value of a derivative
not designated as a hedging instrument are recognized in
earnings in Other expense, net on the Consolidated
Statements of Income.
Avon assesses, both at the hedge's inception and on
an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items.
Highly effective means that cumulative changes in the fair
value of the derivative are between 80% - 125% of the
cumulative changes in the fair value of the hedged item.
The ineffective portion of the derivative's gain or loss,
if any, is recorded in earnings in Other expense, net on
the Consolidated Statements of Income. Prior to June 1,
2001, Avon excluded the change in the time value of option
contracts from its assessment of hedge effectiveness.
Effective June 1, 2001, Avon includes the change in the
time value of options
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in its assessment of hedge effectiveness. When Avon
determines that a derivative is not highly effective as a
hedge, hedge
accounting is discontinued prospectively. When hedge
accounting is discontinued because it is probable that a
forecasted transaction will not occur, Avon discontinues
hedge accounting for the affected portion of the
forecasted transaction, and reclassifies gains and losses
that were accumulated in OCI to earnings in Other expense,
net on the Consolidated Statements of Income.
Interest Rate Risk
Avon uses interest rate swaps to hedge interest rate
risk on its fixed-rate debt. In addition, Avon may
periodically employ interest rate caps and forward
interest rate agreements to reduce exposure, if any, to
increases in variable interest rates.
Avon has entered into interest rate swap contracts
that effectively convert $550.0 of its fixed-rate debt to
a variable rate based on LIBOR. Avon has designated the
interest rate swaps as fair value hedges pursuant to FAS
No. 133 (see Note 4 of the Notes to Consolidated Financial
Statements). During 2001, Long-term debt increased by
$33.2 with a corresponding increase to Other assets to
reflect the fair values of outstanding interest rate swap
contracts. Long-term debt also included the remaining
unamortized gain of $7.5 resulting from a terminated swap
agreement, which is being amortized over the remaining
term of the underlying debt. There were no amounts of
hedge ineffectiveness for the year ended December 31, 2001
related to these interest rate swaps.
Avon has forward interest rate agreements to protect
against increases in interest rates on a portion of Avon's
fixed to variable interest rate swap contracts (see Note 4
of the Notes to Consolidated Financial Statements). The
forward interest rate agreements have not been designated
as hedges and have been recorded at fair value in the
Consolidated Financial Statements.
Foreign Currency Risk
Avon uses foreign currency forward contracts and
options to hedge portions of its forecasted foreign
currency cash flows resulting from intercompany royalties,
intercompany loans, and other third-party and intercompany
foreign currency transactions where there is a high
probability that anticipated exposures will materialize.
These contracts have been designated as cash flow hedges.
At December 31, 2001, the primary currencies for which
Avon has net underlying foreign currency exchange rate
exposure are the U.S. dollar versus the Argentine peso,
Brazilian real, British pound, the euro, Japanese yen,
Mexican peso, Philippine peso, Polish zloty, the Russian
ruble and the Venezuelan bolivar.
For the year ended December 31, 2001, the ineffective
portion of Avon's cash flow hedging instruments was not
material. In addition, the portion of hedging instruments
excluded from the assessment of hedge effectiveness (time
value of options prior to June 1, 2001) was not material.
For the year ended December 31, 2001, the net gain
reclassified from OCI to earnings for cash flow hedges
that had been discontinued because the forecasted
transactions were not probable of occurring, were not
material.
At December 31, 2001, Avon held foreign currency
forward contracts and option contracts, principally for
the Mexican peso, the euro, Japanese yen, Brazilian real,
British pound, Canadian dollar, Czech koruna, Hungarian
forint and Taiwanese dollar, with aggregate notional
amounts totaling $385.6 and $30.4, respectively, for both
the purchase and/or sale of foreign currencies.
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At December 31, 2001, the maximum remaining term over
which Avon was hedging exposures to the variability of
cash flows for all forecasted transactions was 13 months.
As of December 31, 2001, Avon expected to reclassify $3.5
($2.3, net of taxes) of net losses on derivative
instruments designated as cash flow hedges from
Accumulated other comprehensive loss to earnings during
the next 12 months due to (a) foreign currency denominated
intercompany royalties (b) intercompany loan settlements
and (c) foreign currency denominated purchases or
receipts.
For the year ended December 31, 2001, cash flow hedges
impacted Accumulated other comprehensive loss as follows:
Net derivative losses at beginning of year $ -
Cumulative effect of accounting change, net of
taxes of $2.1 (3.9)
Net losses on derivative instruments, net of
taxes of $1.8 (3.3)
Reclassification of net losses to
earnings, net of taxes of $2.7 5.0
Net derivative losses at end of year,
net of taxes of $1.2 $ (2.2)
Avon also enters into foreign currency forward
contracts and options to protect against the adverse effects
that exchange rate fluctuations may have on the earnings of
its foreign subsidiaries. These derivatives do not qualify
for hedge accounting and therefore, the gains and losses on
these derivatives have been recognized in earnings each
reporting period.
Hedges of Net Investments in Foreign Operations
Avon uses foreign currency forward contracts and
foreign currency denominated debt to hedge the foreign
currency exposure related to the net assets of certain of
its foreign subsidiaries.
During 2001, Avon entered into loan agreements and
notes payable to borrow Japanese yen to hedge Avon's net
investment in its Japanese subsidiary (see Note 4 of the
Notes to Consolidated Financial Statements). Avon also
entered into foreign currency forward contracts to hedge its
net investment in its Mexican subsidiary. For the year
ended December 31, 2001, net gains of $5.1 related to the
effective portion of these hedges were included in foreign
currency translation adjustments within Accumulated other
comprehensive loss on the Consolidated Balance Sheets.
Other Financing Activities
As of December 31, 2001, Avon has forward contracts
to purchase approximately 271,000 shares of Avon common
stock at an average price of $46.01 per share. The
contracts mature in October 2002 and were recorded as
equity instruments. As equity instruments, no adjustment
for subsequent changes in fair value has been recognized.
Credit and Market Risk
Avon attempts to minimize its credit exposure to
counterparties by entering into interest rate swap,
forward rate and interest rate cap contracts only with
major international financial institutions with "A" or
higher credit ratings as issued by Standard & Poor's
Corporation. Avon's foreign currency and interest rate
derivatives are comprised of over-the-counter forward
contracts, swaps or options with major international
financial institutions. Although the Company's
theoretical credit risk is the replacement cost at the
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then estimated fair value of these instruments,
management believes that the risk of incurring credit
risk losses is remote and that such losses, if any, would
not be material.
Non-performance of the counterparties on the balance
of all the foreign exchange and interest rate swap and
forward rate agreements would not result in a material
write-off at December 31, 2001. In addition, Avon may be
exposed to market risk on its foreign exchange and interest
rate swap and forward rate 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 - 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 methods and assumptions used to estimate fair value
are as follows:
Grantors trust - The fair value of these investments,
principally fixed income funds and equity securities, was
based on the quoted market prices for issues listed on
exchanges.
Debt maturing within one year and Long-term debt - The
fair value of all debt and other financing was estimated
based on quoted market prices.
Share repurchase commitments and foreign exchange
forward and option contracts - The fair value of forward
and option contracts was estimated based on quoted market
prices from banks.
Interest rate swap, forward rate and cap agreements -
The fair value of interest rate swap, forward rate and
cap agreements was estimated based on quotes from market
makers of these instruments and represent the estimated
amounts that Avon would expect to receive or pay to
terminate the agreements.
The asset (liability) amounts recorded in the balance
sheet (carrying amount) and the estimated fair values of
financial instruments at December 31 consisted of the
following:
2001 2000
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and cash equivalents $ 508.5 $ 508.5 $ 122.7 $ 122.7
Grantors trust 61.5 61.5 70.1 70.1
Debt maturing within one year (88.8) (88.8) (105.4) (105.4)
Long-term debt, net of related
discount or premium (1,236.2) (1,250.3) (1,108.8) (1,139.3)
Share repurchase commitments (.6) (.7) (51.0) (14.8)
Foreign exchange forward and
option contracts (7.3) (7.3) .6 (4.2)
Interest rate swap, forward rate
and cap agreements 35.1 35.1 .3 20.0
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8. Stock Option Plans
A summary of the Company's stock option activity, weighted-average exercise
price and related information for the years ended December 31 was as follows:
1999 2000 2001________
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 7,127 $25.46 8,106 $29.38 9,579 $33.47
Granted 2,225 37.33 3,424 38.28 2,729 41.96
Exercised (1,152) 20.35 (1,702) 23.94 (1,626) 28.94
Forfeited (94) 31.14 (249) 31.68 (131) 36.09
Outstanding -
end of year 8,106 $29.38 9,579 $33.47 10,551 $36.33
Options
exercisable -
end of year 3,627 $23.32 4,241 $28.61 4,869 $32.23
The following table summarizes information about stock options outstanding
at December 31, 2001:
___Options Outstanding__ ___Options Exercisable__
Exercise Shares Average Average Shares Average
Prices (in 000's) Price Term (in 000's) Price
$13.13 - 29.63 893 $20.07 5 years 825 $19.30
30.06 - 39.91 6,646 35.96 7 years 3,849 34.46
40.16 - 54.81 3,012 41.97 9 years 195 42.88
10,551 4,869
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 and have a term
of 10 years from the date of grant. During 2001, 2000 and 1999, restricted
shares with aggregate value and vesting and related amortization periods were
granted as follows: 2001 - 143,500 valued at $6.2 vesting over one to three
years; 2000 - 261,700 valued at $10.2 vesting over one to three years and
1999 - 137,000 valued at $5.8 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 10-year stock options. Performance units were earned over the
three-year performance period (1997-1999), based on the degree of
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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 are awarded
annually over a three-year performance period and vest in thirds
over the three-year period following each option grant date under
the 2000 Plan. As discussed above, these options are granted at
the fair market value on the date the option is granted.
Compensation expense under all stock-based compensation plans in
2001 was $7.5 (2000 - $6.6; 1999 - $20.4). The unamortized cost of
restricted shares as of December 31, 2001, was $8.5 (2000 - $10.0).
The Company has adopted the disclosure provisions of FAS No. 123,
"Accounting for Stock-Based Compensation", in lieu of recording the
value of the compensation costs of those plans, as permitted by 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:
2001 2000 1999
Pro forma net income $ 402.4 $ 460.9 $ 291.0
Pro forma earnings per share:
Basic $ 1.70 $ 1.94 $ 1.13
Diluted $ 1.68 $ 1.92 $ 1.12
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:
2001 2000 1999
Risk-free interest rate 4.7% 6.7% 5.4%
Expected life 5 years 5 years 5 years
Expected volatility 40% 40% 30%
Expected dividend yield 2.0% 2.0% 2.0%
The weighted-average grant date fair values of options granted during
2001, 2000 and 1999 were $12.05, $11.73 and $10.09, respectively.
9. Shareholders' (Deficit) Equity
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.
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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 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, 2001, the Company had repurchased
approximately 3.9 million shares at a total cost of approximately
$158.8 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. Avon 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. In 2001, 2000 and 1999, matching
contributions approximating $13.3, $12.7 and $12.8, respectively,
were made to this plan in cash, which was then used by the plan to
purchase Avon shares in the open market.
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 2001 and
2000 consisted of 32,000 and 34,000 options, respectively, with an
exercise price of $43.12 and $38.25, 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 2001 and 2000
consisted of a total of 5,024 and 5,232 shares, respectively.
Effective January 1, 2002, the annual retainer paid to non-management
directors was increased to thirty thousand dollars cash plus an
annual grant of shares having a value of thirty thousand dollars
based on the average closing market price of the stock for the 10
days preceding the date of grant.
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10. Employee Benefit Plans
Retirement Plans - Avon and certain subsidiaries have contributory
and noncontributory retirement plans for substantially all employees.
Benefits under these plans are generally based on an employee's years
of service and average compensation near retirement. Plans are funded
on a current basis except where funding is not required. Plan assets
consist primarily of equity securities, corporate and government
bonds and bank deposits.
Effective July 1998, the defined benefit retirement plan
covering U.S.-based employees was converted to a cash balance plan
with benefits determined by compensation credits related to age and
service and interest credits based on individual account balances and
prevailing interest rates. This conversion also included a 10-year
transitional benefit arrangement for certain employees covered under
a pre-existing defined benefit retirement plan who retire during that
10-year period, which provides them with the higher of the benefit
they would have received under the previous defined benefit
retirement plan and the current cash balance 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 increased retiree
contributions, changed the prescription drug program and
implemented a future cap on Company contributions.
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The following provides a reconciliation of benefit obligations, plan
assets and funded status of these plans:
Pension Postretirement
Benefits Benefits
2001 2000 2001 2000
Change in benefit obligation:
Beginning balance $(914.2) $(919.2) $(136.0) $(181.6)
Service cost (34.3) (36.5) (1.2) (1.9)
Interest cost (65.2) (65.6) (10.7) (11.2)
Actuarial (loss) gain (76.0) (6.8) (44.2) 2.7
Benefits paid 90.6 84.3 16.9 13.7
Plan amendments (.4) (1.5) - 42.1
Settlements/special
termination benefits (11.5) 1.7 (1.2) -
Foreign currency changes 19.0 31.2 - -
Other (7.4) (1.8) .3 .2
Ending balance $(999.4) $(914.2) $(176.1) $(136.0)
Change in plan assets:
Beginning balance $ 799.3 $ 860.0 $ - $ -
Actual (loss) return on
plan assets (44.9) 7.1 - -
Company contributions 59.2 39.9 16.9 13.7
Plan participant
contributions 2.1 2.0 - -
Benefits paid (90.6) (84.3) (16.9) (13.7)
Foreign currency changes (7.9) (21.3) - -
Settlements/special
termination benefits (.6) (4.1) - -
Ending balance $ 716.6 $ 799.3 $ - $ -
Funded status of the plan: $(282.8) $(114.9) $(176.1) $(136.0)
Unrecognized actuarial
loss(gain) 291.6 107.5 17.0 (27.6)
Unrecognized prior
service cost 2.2 2.8 (37.8) (44.3)
Unrecognized net transition
obligation 1.9 2.1 .2 .3
Accrued benefit cost $ 12.9 $ (2.5) $(196.7) $(207.6)
Amount recognized in the
statements:
Prepaid benefit $ 158.1 $ 143.9 $ - $ -
Accrued liability (145.2) (146.4) (196.7) (207.6)
Additional minimum liability (85.6) (31.1) - -
Intangible asset 9.6 7.8 - -
Accumulated other
comprehensive loss 76.0 23.3 - -
$ 12.9 $ (2.5) $(196.7) $(207.6)
At December 31, 2001 and 2000, the weighted-average discount rate
used in determining the pension benefit obligation was 6.7% and 7.1%,
respectively. At December 31, 2001 and 2000, the weighted-average
discount rates used in determining the postretirement benefit
obligation were 7.3% and 7.8%, 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 $606.5, $564.1, and $178.2, respectively, as of December 31,
2001, and $390.3, $349.0, and $40.1, respectively, as of December 31,
2000.
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Net periodic benefit cost for the years ended December 31 was determined as
follows:
Pension Postretirement
Benefits Benefits s
2001 2000 1999 2001 2000 1999
Service cost $ 34.3 $ 36.5 $ 38.1 $ 1.2 $ 1.9 $ 3.6
Interest cost 65.2 65.6 67.6 10.7 11.2 13.4
Expected return on plan
assets (68.1) (66.6) (69.6) - - -
Amortization of transition
liability .2 (.7) (.7) - - -
Amortization of prior
service cost 1.0 1.0 .8 (3.9) - -
Amortization of actuarial
losses (gains) 4.0 5.6 10.2 (.3) (3.8) (.4)
Settlements or curtailments 2.5 (1.2) 2.0 (2.1) - -
Special termination benefits 9.4 2.5 1.5 .7 - -
Other (1.1) (.9) - - - -
Net periodic benefit cost $ 47.4 $ 41.8 $ 49.9 $ 6.3 $ 9.3 $16.6
In 2001, the plan assets experienced weaker investment
returns, which was mostly due to unfavorable returns on equity
securities. These unfavorable investment returns are expected to
increase pension costs in the near future. In addition, net
periodic pension cost may significantly increase in the future if
settlement losses are required due to an increase in the
aggregate benefits paid as lump sum distributions. Settlement
losses may result in the future if the number of eligible
participants deciding to receive lump sum distributions and the
amount of their benefits increases.
Special termination benefits primarily represent the impact
of employee terminations on the Company's benefits plans in the
U.S. and certain international locations (see Note 13 of the
Notes to Consolidated Financial Statements).
The weighted-average assumptions used to determine the data
for the years ended December 31 were as follows:
Pension Postretirement
Benefits Benefits___
2001 2000 1999 2001 2000 1999
Discount rate 7.1% 7.2% 6.8% 7.8% 8.0% 7.0%
Rate of compensation increase 3.9 4.0 4.0 4.5 4.5 4.5
Rate of return on assets 8.8 8.8 8.8 N/A N/A N/A
For 2001, the assumed rate of future increases in the per capita cost
of health care benefits (the health care cost trend rate) was 10% for pre-
age 65 claims and post-age 65 claims and will gradually decrease each year
thereafter to 5.0% in 2005 and beyond. 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 $ .6 $ (.6)
Effect on postretirement benefit
obligation 7.4 (7.1)
Supplemental Retirement Program - Avon maintains a supplemental
retirement program consisting of a Supplemental Executive
Retirement Plan ("SERP") and a Benefits Restoration
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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 2001 amounted to $10.5 (2000 - $10.2, 1999 -
$10.1). The benefit obligation under this program at December
31, 2001 was $35.5 (2000 - $32.9) and was primarily included in
Employee Benefit Plans.
Avon also maintains a Supplemental Life Insurance Plan
("SLIP") under which additional death benefits ranging from
$.35 to $2.0 are provided to certain active and retired
officers. Avon has acquired corporate-owned life insurance
policies to provide partial funding of the benefits. The cash
surrender value of these policies at December 31, 2001 was
$26.6 (2000 - $26.1) and is held in a grantors trust.
In addition, Avon has established a grantors trust to
provide funding for the benefits payable under the SERP and
SLIP and to provide for funding of obligations under Avon's
Deferred Compensation Plan. The trust is irrevocable and,
although subject to creditors' claims, 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, 2001,
amounting to $88.1 (2000 - $96.2), consisted of a fixed-income
portfolio, a managed portfolio of equity securities, corporate-
owned life insurance policies and cash and cash equivalents.
These assets are included in Other assets.
The equity securities and fixed-income portfolio included
in the grantors trust are classified as available-for-sale and
recorded at current market value. In 2001 and 2000, net
unrealized gains and losses on these securities were recorded
in Accumulated other comprehensive loss (see Note 5 of the
Notes to Consolidated Financial Statements). The cost, gross
unrealized gains and losses and market value of the available-
for-sale securities as of December 31, were as follows:
2001
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
Equity Securities $ 44.4 $ 1.5 $ (15.2) $ 30.7
U.S. Government Bonds 2.1 - - 2.1
State and Municipal Bonds 21.9 .4 (.1) 22.2
Mortgage Backed 2.8 - - 2.8
Corporate Bonds .6 - - .6
Total available-for-sale
securities 71.8 1.9 (15.3) 58.4
Cash and Equivalents 3.1 - - 3.1
Total $ 74.9 $ 1.9 $ (15.3) $ 61.5
Payments, proceeds and net realized losses from the purchases and
sales of these securities totaled $50.9, $58.3 and $0.1, respectively,
during 2001.
2000
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
Equity Securities $ 44.2 $ 2.6 $ (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 $ 79.3 $ 3.2 $ (12.4) $ 70.1
Payments, proceeds and net realized gains from the purchases and
sales of these securities totaled $99.3, $100.3 and $5.8,
respectively, during 2000. For the purpose of determining realized
gains and losses, the cost of securities sold was based on specific
identification.
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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, 2001, the
accrued cost for postemployment benefits was $32.7 (2000 -
$31.9) and was included in Employee Benefit Plans.
11. Segment Information
The Company's reportable segments are based on geographic
operations and include a North American business unit and
International business units in Latin America, Europe and
Pacific regions. With the exception of the U.S. retail
business, 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.
Summarized financial information concerning Avon'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 6.
Total Assets:
2001 2000 1999
North America
U.S. $ 638.9 $ 640.0 $ 536.9
U.S. Retail* 29.2 12.0 13.3
Other** 119.1 116.2 101.2
Total 787.2 768.2 651.4
International
Latin America North*** 334.6 292.9 248.9
Latin America South 277.8 310.7 294.1
Latin America 612.4 603.6 543.0
Europe 512.3 451.3 415.4
Pacific 393.9 399.8 411.2
Total 1,518.6 1,454.7 1,369.6
Corporate and other 887.3 603.5 507.6
Total assets $3,193.1 $2,826.4 $2,528.6
*Includes U.S. Retail and Avon Centre.
**Includes Canada and Puerto Rico.
***Avon's operations in Mexico reported total assets at December 31, 2001,
2000 and 1999 of $211.0, $189.9 and $157.4, respectively.
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Capital Expenditures:
2001 2000 1999
North America
U.S. $ 26.4 $ 67.6 $ 39.2
U.S. Retail* 7.5 .1 .4
Other** 6.4 8.6 8.7
Total 40.3 ____76.3 48.3
International
Latin America North*** 20.5 17.5 37.6
Latin America South 15.4 24.6 15.8
Latin America 35.9 42.1 53.4
Europe 42.0 47.1 39.6
Pacific 11.9 13.4 33.6
Total 89.8 102.6 126.6
Corporate and other 25.2 14.6 28.5
Total capital expenditures $ 155.3 $ 193.5 $ 203.4
*Includes U.S. Retail and Avon Centre.
**Includes Canada and Puerto Rico.
***Avon's operations in Mexico reported capital expenditures for 2001,
2000 and 1999 of $13.9, $11.7 and $32.1, respectively.
Depreciation and Amortization:
2001 2000 1999
North America
U.S. $ 32.4 $ 28.5 $ 23.7
U.S. Retail* 1.5 .9 .4
Other** 3.0 2.6 2.4
Total 36.9 32.0 26.5
International
Latin America North*** 9.9 9.3 6.4
Latin America South 7.8 7.4 6.6
Latin America 17.7 16.7 13.0
Europe 18.7 16.0 15.4
Pacific 15.3 16.9 16.1
Total 51.7 49.6 44.5
Corporate and other 20.5 15.5 12.0
Total depreciation
and amortization $ 109.1 $ 97.1 $ 83.0
*Includes U.S. Retail and Avon Centre.
**Includes Canada and Puerto Rico.
***Avon's operations in Mexico reported depreciation and amortization for
2001, 2000 and 1999 of $7.0, $5.7 and $4.4, respectively.
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Long-Lived Assets: 2001 2000 1999
North America
U.S. $ 253.5 $ 264.4 $ 228.8
U.S. Retail* 16.8 10 5 11.3
Other** 35.4 33.5 __ 28.7
Total 305.7 308.4 268.8
International
Latin America North*** 95.9 81.4 73.6
Latin America South 70.8 73.5 59.8
Latin America 166.7 154.9 133.4
Europe 202.5 176.7 153.8
Pacific 159.9 174.5 193.0
Total 529.1 506.1 480.2
Corporate and other 152.9 145.3 139.9
Total long-lived assets $ 987.7 $ 959.8 $ 888.9
*Includes U.S. Retail and Avon Centre.
**Includes Canada and Puerto Rico.
***Avon's operations in Mexico reported long-lived assets
at December 31, 2001, 2000 and 1999 of $73.8, $62.5 and
$56.6, respectively.
Net sales by classes of principal products are presented on
page 7.
Foreign Exchange - Financial statement translation of
subsidiaries operating in highly inflationary economies and
foreign currency transactions resulted in losses in 2001
netting to $7.7 (2000 - $12.6; 1999 - $7.5), which are
included in Other expense, net and income taxes. Foreign
exchange losses in 2001 include transaction gains of
approximately $8.0 pretax related to the translation of a
U.S. dollar intercompany loan receivable on Avon
Argentina's balance sheet. In addition, Cost of sales and
expenses included the unfavorable impact of the translation
of inventories and prepaid expenses at historical rates in
countries with highly inflationary economies in 2001 of
$2.0 (2000 - $3.2; 1999 - $7.1).
12. Leases and Commitments
Minimum rental commitments under noncancellable operating
leases, primarily for equipment and office facilities at
December 31, 2001, consisted of the following:
Year
2002 $ 70.8
2003 53.4
2004 40.9
2005 32.5
2006 28.0
Later years 184.9
Sublease rental income (2.3)
Total $408.2
Rent expense in 2001 was $92.1 (2000 - $85.4; 1999 -
$84.5). Various construction and information systems projects
were in progress at December 31, 2001, with an estimated cost
to complete of approximately $119.2.
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13. Special and Non-Recurring Charges
In October 1997, the Company announced a worldwide
business process redesign program to streamline operations and
improve profitability through margin improvement and expense
reductions. The special and non-recurring charges associated
with this program totaled $151.2 pretax ($121.9 net of tax, or
$.47 per share on a 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 diluted basis) for the year ended December 31,
1998. The remaining liability balance at December 31, 2001,
which primarily relates to employee severance costs, was not
material.
In May 2001, Avon announced its new Business
Transformation plans, which are designed to significantly
reduce costs and expand profit margins, while continuing to
focus on consumer growth strategies. Business Transformation
initiatives include an end-to-end evaluation of business
processes in key operating areas, with target completion dates
through 2004. Specifically, the initiatives focus on
simplifying Avon's marketing processes, driving supply chain
opportunities, strengthening Avon's sales model through the
Sales Leadership program and the Internet, and streamlining the
Company's organizational structure.
In the fourth quarter of 2001, Avon recorded special and
non-recurring charges of $97.4 pretax ($68.3 after-tax, or $.28
per share on a diluted basis) primarily associated with
facility rationalizations and workforce reduction programs
related to implementation of certain Business Transformation
initiatives. The $97.4 was included in the Consolidated
Statements of Income for 2001 as a Special charge ($94.9) and
as inventory write-downs which were included in Cost of sales
($2.5).
Special and non-recurring charges by business segment were as
follows:
[Download Table]
Corporate
North Latin and
America* U.S. America Europe Other Total
Facility
Rationalizations $ 16.8 $ 14.3 $ 17.7 $ 13.2 $ - $ 62.0
Workforce reduction
Programs .9 9.7 6.4 2.1 14.0 33.1
Other - 2.1 - - .2 2.3
Total accrued charges $ 17.7 $ 26.1 $ 24.1 $ 15.3 $ 14.2 $ 97.4
*Excludes amounts related to the U.S.
**Includes accrued severance and related costs associated with facility
rationalizations.
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Special and non-recurring charges by category of expenditures were as follows
for the year ended December 31, 2001:
[Enlarge/Download Table]
Accrued Cost of Asset Accrued
Severance Sales Impair Special Contract Facility
and Charge ment Termination Termination Ration
Related Charge Costs Costs ization
Costs and
Other
Costs Total
Facility Rationalizations $ 42.9 $ 2.5 $ 5.1 5.0 $ 2.2 $ 4.3 $ 62.0
Workforce reduction
programs 26.9 - - 6.2 - - 33.1
Other - - .3 - 1.3 .7 2.3
Total accrued charges $ 69.8 $ 2.5 $ 5.4 $ 11.2 $ 3.5 $ 5.0 $ 97.4
Cash expenditures (2.7) - - - - - (2.7)
Non-cash write-offs - (2.5) (5.4) (11.2) - (.5) (19.6)
Balance at
December 31, 2001 $ 67.1 $ - $ - $ - $ 3.5 $ 4.5 $ 75.1
Accrued severance and related costs are expenses, both
domestic and international, associated with facility
rationalizations and workforce reduction programs. Employee
severance costs were accounted for in accordance with the
Company's existing FAS No. 112, "Employers' Accounting for
Postemployment Benefits," severance plans, or with other
accounting literature. Approximately 3,500 employees, or 8.0%
of the total workforce will receive severance benefits.
Approximately 85% of these costs related to the facility
rationalizations. The facility rationalizations will primarily
result in either expanding an existing facility, building a new
facility or sourcing product through third party vendors. In
certain circumstances, employees terminated due to facility
rationalizations will need to be replaced. The majority of the
employee severance costs will be paid in 2002 and 2003.
The Cost of sales charge represents losses associated with
a facility closure in North America.
Primarily as a result of facility rationalizations,
management identified indicators of possible impairment of
certain long-lived assets, consisting of buildings and
improvements, equipment and other assets. In assessing and
measuring impairment of long-lived assets, the Company applied
the provisions of FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Recoverability of assets to be held and used was measured by the
comparison of the carrying amount of the assets with expected
future cash flows of the assets (assets were grouped at the
lowest level for which there were identifiable cash flows that
were largely independent of the cash flows of other groups of
assets). As a result of the impairment review, an asset
impairment charge was recorded. Approximately $4.0 of the asset
impairment charge relates to the closure of a facility in North
America and reflects the reduction in the carrying value of
equipment to its estimated fair market value based on selling
prices for comparable equipment. The equipment is expected to
be sold in the first half of 2002. The remaining charge relates
to assets (leasehold improvements and other assets) that have
been abandoned.
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Special termination benefits represent the impact of
employee terminations on the Company's benefit plans in the U.S.
and certain international locations. In accordance with FAS No.
88, "Employers' Accounting for Settlements and Curtailment of
Defined Benefit Pension Plans and for Termination Benefits," the
plans experienced a net loss from curtailment and special
termination benefits of $1.3 and $9.9, respectively. The
curtailment charge reflects the difference between the liability
assuming all of the participants terminate as of their severance
date versus the ongoing liability for these participants
assuming continued active employment. The special termination
benefits include a liability loss resulting from additional
service and pay earned during the severance period, coupled with
an additional liability attributable to paying benefits at an
actual rate versus an assumed rate.
Contract termination costs primarily represent lease buyout
costs related to the facility closures in North America
(including the U.S.) and a cancellation of a contract with a
third party (a supplier of warehousing and logistical services)
in the U.S.
Accrued facility rationalization and other costs primarily
represent incremental costs associated with the facility
rationalizations, including administrative expenses during the
shutdown period, employee and union communication costs and
legal fees.
14. Contingencies
Avon is a defendant in a class action suit commenced in
1991 on behalf of certain classes of holders of Avon's Preferred
Equity-Redemption Cumulative Stock ("PERCS"). Plaintiffs allege
various contract and securities law claims related to the PERCS
(which were fully redeemed in 1991) and seek aggregate damages
of approximately $145.0, plus interest. A trial of this action
took place in the United States District Court for the Southern
District of New York and concluded in November 2001. At the
conclusion of the trial, the judge reserved decision in the
matter. Avon believes it presented meritorious defenses to the
claims asserted. However, it is not possible to predict the
outcome of litigation and it is reasonably possible that the
trial, and any possible appeal, could be decided unfavorably.
Management is unable to make a meaningful estimate of the amount
or range of loss that could result from an unfavorable outcome
but, under some of the damage theories presented, an adverse
award could be material to the Consolidated Financial
Statements.
Avon is a defendant in an action commenced in the Supreme
Court of the State of New York by Sheldon Solow d/b/a Solow
Building Company, the landlord of the Company's former
headquarters in New York City. Plaintiff seeks aggregate
damages of approximately $80.0, plus interest, for the Company's
alleged failure to restore the leasehold premises at the
conclusion of the lease term in 1997. A trial of this matter
had been scheduled for February 2002, but has been stayed
pending the determination of (i) an interlocutory appeal by
plaintiff of an order that denied the plaintiff's motion for
summary judgment and granted partial summary judgment in favor
of the Company on one of the plaintiff's claims; and (ii) an
appeal by plaintiff of a decision in an action against another
former tenant that dismissed plaintiff's claims after trial.
While it is not possible to predict the outcome of litigation,
management believes that there are meritorious defenses to the
claims asserted and that this action should not have a material
adverse effect on the Consolidated Financial Statements. This
action is being vigorously contested.
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Various other 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 the opinion of Avon's management, based on its
review of the information available at this time, the total cost
of resolving such other contingencies at December 31, 2001
should not have a material adverse impact on the Consolidated
Financial Statements.
In 1998, the Argentine tax authorities denied certain past
excise tax credits taken by Avon's subsidiary in Argentina and
assessed this subsidiary for the corresponding taxes. Avon
vigorously contested this assessment through local
administrative and judicial proceedings since 1998. In the
third quarter of 2001, the Argentine government issued a decree
permitting taxpayers to satisfy certain tax liabilities on
favorable terms using Argentine government bonds as payment.
Avon decided to settle this contested tax assessment by applying
for relief under this new government program and purchased bonds
to tender in settlement of the aforementioned assessment. As a
result, a pre-tax
charge of $6.4 ($3.4 after-tax, or $.01 per diluted share) was
included in Other expense, net in the Consolidated Statements of
Income in the third quarter of 2001.
Avon has been responding to a formal investigation by the
Securities and Exchange Commission ("SEC") which commenced in
August 2000, and has furnished to the SEC information that
principally concerns a special charge reported by Avon in the
first quarter of 1999, which included the write off of
approximately $15.0 in pre-tax costs associated with an 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, or $.06 per
diluted share) to write off the carrying value of costs related
to that project. As part of a resolution of the investigation or
at the conclusion of a contested proceeding, there may be a
finding that Avon knew or should have known in the first quarter
of 1999 that it was not probable that FIRST would be implemented
and therefore, the entire FIRST asset should have been written
off as abandoned at that time. In that connection, it may also
be necessary for Avon to restate its financial statements to
write off the entire FIRST asset in the first quarter of 1999.
If Avon were to restate its financial statements to write off
the FIRST asset in the first quarter of 1999, then the charge
recorded in the third quarter of 2001 and other FIRST-related
items recorded in prior periods would also be restated. (See
Note 16 of the Notes to Consolidated Financial Statements).
15. Contract Settlement
In July 2001, Avon announced that, due to a change in
Sears' business strategy, which included de-emphasizing
cosmetics, Avon would not proceed with the launch of its retail
brand, beComing, in Sears stores in the fall of 2001. In July
2001, Avon and Sears reached an agreement, under which Avon
received a Contract settlement gain, net of related expenses, of
approximately $25.9 pretax ($15.7 after-tax, or $.06 per diluted
share) to compensate Avon for lost profits and incremental
expenses as a result of the cancellation of the retail
agreement.
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This termination resulted in a gain in the third quarter of
2001 but will unfavorably impact subsequent periods due to the
loss of anticipated contribution from the Sears business. The
aggregate impact of the termination is expected to be neutral
through 2002 after taking into account results and the contract
settlement with Sears.
16. Asset Impairment Charge
In September 2001, Avon determined that an order management
system known as the "FIRST" project would not be implemented and
would be abandoned. As a result, Avon recorded in the third
quarter of 2001 a non-cash Asset impairment charge of $23.9
pretax ($14.5 after-tax, or $.06 per diluted share) to write off
the carrying value of costs related to the abandoned FIRST
project.
The decision not to use FIRST was based on various factors,
including an assessment of the needs of target markets, changes
in Avon's business strategies, project management and
implementation costs, and costs for the ongoing support of FIRST
following implementation.
As the FIRST project has been abandoned, under FAS No. 121,
Avon recorded a charge in the third quarter of 2001 to write off
the carrying value of the abandoned asset.
The non-cash charge included software development costs,
certain hardware, software interfaces and other related costs.
Prior to the write off, the capitalized software was included in
Other assets on the Consolidated Balance Sheet.
Avon has been responding to a formal investigation by the
SEC which commenced in August 2000, and has furnished to the SEC
information regarding the FIRST project and a special charge
reported by Avon in the first quarter of 1999, which included
the write off of approximately $15.0 in pre-tax costs associated
with FIRST. The balance of the project's development costs was
carried as an asset until the third quarter of 2001. As part of
a resolution of the investigation or at the conclusion of a
contested proceeding, there may be a finding that Avon knew or
should have known in the first quarter of 1999 that it was not
probable that FIRST would be implemented and therefore, the
entire FIRST asset should have been written off as abandoned at
that time. In that connection, it may also be necessary for
Avon to restate its financial statements to write off the entire
FIRST asset in the first quarter of 1999. If Avon were to
restate its financial statements to write off the FIRST asset in
the first quarter of 1999, then the charge recorded in the third
quarter of 2001 and other FIRST-related items recorded in prior
periods would also be restated.
17. Subsequent Event
On January 31, 2002, Avon's Board approved an increase in
the quarterly cash dividend to $.20 per share from $.19. The
first dividend at the new rate will be paid on March 1, 2002 to
shareholders of record on February 15, 2002. On an annualized
basis, the new dividend rate is $.80 per share.
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Report of Management
The accompanying consolidated financial statements of Avon
Products, Inc. have been prepared by management in conformity
with generally accepted accounting principles in the U.S. 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
Chairman and Chief Executive Officer Executive
Vice President,
Chief Financial
Officer
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Report of Independent Accountants
To the Board of Directors and Shareholders of Avon Products,
Inc.
In our opinion, the accompanying consolidated balance
sheets and the related consolidated statements of income, cash
flows and changes in shareholders' equity present fairly, in
all material respects, the financial position of Avon
Products, Inc. at December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United
States of America. These financial statements are the
responsibility of Avon's management; our responsibility is to
express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the
audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Note 2 of the Notes to the Consolidated
Financial Statements, the Company changed its method of
accounting for revenue recognition as a result of the adoption
of Staff Accounting Bulletin No. 101, "Revenue Recognition."
PricewaterhouseCoopers LLP
New York, New York
January 31, 2002
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Eleven-Year Review
Avon Products, Inc.
In millions, except per share and employee data
[Download Table]
2001 2000 1999 1998
Income data
Net sales $5,952.0 $5,673.7 $5,289.1 $ 5,212.7
Other revenue 42.5 40.9(1) 38.8(1) 35.0(1)
Total revenue 5,994.5 5,714.6 5,327.9 5,247.7
Operating profit (4) 794.4 788.7 549.4 473.2
Interest expense (4) 71.1 84.7 43.2 34.7
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 665.7 (14) 691.0 506.6(8) 455.9(8)
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 434.8 (14) 489.3 302.4(8) 265.1(8)
Income from continuing operations
before cumulative effect
of accounting changes 430.3 (14) 485.1 302.4(8) 270.0(8)
(Loss)income from
discontinued
operations, net - - - -
Cumulative effect
of accounting
changes, net (0.3)(13) (6.7)(2) - -
Net income 430.0 (14) 478.4 302.4(8) 270.0(8)
Earnings (loss) per share
- basic (5) (6)
Continuing operations $ 1.82 (14) $ 2.04 $ 1.18(8) $ 1.03(8)
Discontinued operations - - - -
Cumulative effect of
accounting changes - (.03) - -
Net income 1.82 (14) 2.01 1.18(8) 1.03(8)
Earnings (loss) per share
- diluted (5) (6)
Continuing operations $ 1.79 (14) $ 2.02(3)$ 1.17(8) $ 1.02(8)
Discontinued operations - - - -
Cumulative effect of
accounting changes - (.03) - -
Net income 1.79 (14) 1.99(3) 1.17(8) 1.02(8)
Cash dividends per share
Common $ .76 $ .74 $ .72 $ .68
Preferred - - - -
Balance sheet data
Working capital $ 428.1 $ 186.4 $ (375.0) $ 11.9
Capital expenditures 155.3 193.5 203.4 189.5
Property, plant and
equipment, net 774.9 768.4 734.8 669.9
Total assets 3,193.1 2,826.4 2,528.6 2,433.5
Debt maturing within one year 88.8 105.4 306.0 55.3
Long-term debt 1,236.3 1,108.2 701.4 201.0
Total debt 1,325.1 1,213.6 1,007.4 256.3
Shareholders' (deficit) equity (74.6) (215.8) (406.1) 285.1
Number of employees
United States 9,600 9,800 9,700 8,000
International 34,200 33,200 30,800 25,900
Total employees (7) 43,800 43,000 40,500 33,900
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1997 1996 1995 1994
Income data
Net sales $5,079.4 $4,814.2 $4,492.1 $4,266.5
Other revenue - - - -
Total revenue 5,079.4 4,814.2 4,492.1 4,266.5
Operating Profit (4) 537.8 538.0 500.8 489.5
Interest expense (4) 35.5 33.2 34.6 44.7
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 534.9 510.4 465.0 433.8
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 337.0 319.0 288.6 270.3
Income from continuing operations
before cumulative effect of
accounting changes 338.8 317.9 286.1 264.8
(Loss)income from
discontinued
operations, net - - (29.6) (23.8)
Cumulative effect
of accounting
changes, net - - - (45.2)(9)
Net income 338.0 317.9 256.5 195.8
Earnings (loss) per share
- basic (5) (6)
Continuing operations $ 1.28 $ 1.19 $ 1.05 $ .94
Discontinued operations - - (.11) (.09)
Cumulative effect of
accounting changes - - - (.16)
Net income 1.28 1.19 .94 .69
Earnings(loss) per share
- diluted (5) (6)
Continuing operations $ 1.27 $ 1.18 $ 1.05 $ .93
Discontinued operations - - (.11) (.08)
Cumulative effect of
accounting changes - - - (.16)
Net income 1.27 1.18 .94 .69
Cash dividends per share
Common $ .63 $ .58 $ .53 $ .48
Preferred - - - -
Balance sheet data
Working capital $ (11.9) $ (41.7) $ (30.3) $ 9.3
Capital expenditures 169.4 103.6 72.7 99.9
Property, plant and
equipment, net 611.0 566.6 537.8 528.4
Total assets 2,272.9 2,222.4 2,052.8 1,978.3
Debt maturing within one year 132.1 97.1 47.3 61.2
Long-term debt 102.2 104.5 114.2 116.5
Total debt 234.3 201.6 161.5 177.7
Shareholders' (deficit) equity 285.0 241.7 192.7 185.6
Number of employees
United States 8,100 7,800 8,000 7,900
International 26,900 25,900 23,800 22,500
Total employees (7) 35,000 33,700 31,800 30,400
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1993 1992 1991
Income data
Net sales $3,844.1 $3,660.5 $3,441.0
Other revenue - - -
Total revenue 3,844.1 3,660.5 3,441.0
Operating Profit (4) 427.4 339.9 430.9
Interest expense (4) 39.4 38.4 71.6
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 394.6 290.0(10) 352.9
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 243.8 169.4(10) 209.3
Income from continuing operations
before cummulative effect
of accounting changes 236.9 164.2(10) 204.8
(Loss)income from
discontinued
operations, net 2.7 10.8 (69.1)
Cumulative effect
of accounting
changes, net (107.5)(9) - -
Net income 132.1 175.0(10) 135.7
Earnings (loss) per share
- basic (5) (6)
Continuing operations $ .82 $ .57(10) $ .65(11)
Discontinued operations .01 .04 (.24)
Cumulative effect of
accounting changes (.37) - -
Net income .46 .61(10) .41(11)
Earnings (loss) per share
- diluted (5) (6)
Continuing operations $ .82 $ .57(10) $ .71(11)
Discontinued operations .01 .04 (.24)
Cumulative effect of
accounting changes (.37) - -
Net income .46 .61(10) .47(11)
Cash dividends per share
Common $ .43 $ .38 $ 1.10(12)
Preferred - - .253
Balance sheet data
Working capital $ 23.1 $ (99.5) $ (135.3)
Capital expenditures 58.1 62.7 61.2
Property, plant and
equipment, net 476.2 476.7 468.5
Total assets 1,918.7 1,692.6 1,693.3
Debt maturing within one year 70.4 37.3 143.8
Long-term debt 123.7 177.7 208.1
Total debt 194.1 215.0 351.9
Shareholders' (deficit) equity 314.0 310.5 251.6
Number of employees
United States 8,000 8,700 9,200
International 21,500 20,700 20,900
Total employees (7) 29,500 29,400 30,100
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(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, 2001 and 2000, after tax interest expense of $10.0
and $4.5, respectively, 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
Statement of Financial Accounting Standards ("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 26% of Avon's U.S. associates are men. Men hold
approximately 16% of all U.S. officer and manager positions, and
approximately 12% 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 diluted
basis). In 1999, special and non-recurring charges related to this
program totaled $151.2 ($121.9 net of tax, or $.47 per share on a
diluted basis).
(9) Effective January 1, 1994, Avon adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits", for all applicable operations,
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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 recorded a provision of $96.0 ($64.4 after tax, or
$.22 per share on a basic and diluted basis) for restructuring of its
worldwide manufacturing and distribution facilities. Income from
continuing operations in 1993 increased 4% from $228.6, or $.79 per
share on a diluted basis, excluding the 1992 restructuring charge.
(11) For 1991, in management's opinion, per share amounts assuming
dilution, even though the result is antidilutive, provide the most
meaningful comparison of per share data because they show the full
effect of the conversion of 72 preferred shares into approximately 51.84
common shares on June 3, 1991.
(12) Includes special dividend of $.75 paid in 1991.
(13) Effective, January 1, 2001, Avon adopted FAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended by FAS No. 138,
"Accounting for Certain Derivatives and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments and hedging
activities. To reflect the adoption of FAS 133, Avon recorded a charge of
$0.3, net of a tax benefit of $0.2. This charge is reflected as a cumulative
effect of an accounting change in the Consolidated Statements of Income.
(14) In 2001, Avon recorded special and non-recurring charges of $97.4 pretax
($68.3 after-tax or $.28 per diluted share), primarily related to workforce
reductions and facility rationalizations. In 2001, results also included a
non-cash charge of $23.9 pretax ($14.5 after-tax; $0.06 per diluted share) to
write off the carrying value of costs related to an order management system
known as the "FIRST" project. In 2001, Avon also received a cash settlement,
net of related expenses, of $25.9 pretax ($15.7 after-tax; $0.06 per diluted
share) to compensate Avon for lost profits and incremental expenses as a
result of the cancellation of a retail agreement with Sears.
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Dates Referenced Herein and Documents Incorporated by Reference
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