11/02/01 PM
CONFORMED COPY
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2001
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___ to ___
Commission file number 1-4881
AVON PRODUCTS, INC.
(Exact name of registrant as specified in its
charter)
New York 13-0544597
(State or other jurisdiction of (I.R S. Employer
Incorporation or organization) Identification No.)
1345 Avenue of the Americas, New York, N.Y. 10105-0196
(Address of principal executive offices)
(212) 282-5000
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
The number of shares of Common Stock (par value $.25) outstanding at
September 30, 2001 was 236,234,721
Table of Contents
Part I. Financial Information
Page
Numbers
-------
Item 1. Financial Statements
Consolidated Statements of Income
Three Months Ended September 30, 2001 and
September 30, 2000................................ 3
Nine Months Ended September 30, 2001 and
September 30, 2000.............................. 4
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000............ 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2001 and
September 30, 2000................................ 6
Notes to Consolidated Financial Statements............. 7 - 19
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition.......... 20 - 30
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K....................... 31
Signatures...................................................... 32
2
PART I. FINANCIAL INFORMATION
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Three months ended
September 30
------------------
2001 2000
------- -------
(unaudited)
Net sales........................................... $1,412.8 $1,336.0
Other revenue....................................... 9.7 9.7
-------- --------
Total revenue....................................... 1,422.5 1,345.7
Costs, expenses and other:
Cost of sales ................................... 525.0 490.2
Marketing, distribution and administrative
expenses........................................ 722.3 686.9
Contract settlement gain, net of related
expenses (Note 13).............................. (25.9) -
Asset impairment charge (Note 14)................. 23.9 -
-------- --------
Operating profit.................................... 177.2 168.6
Interest expense.................................. 16.1 22.4
Interest income................................... (3.5) (2.1)
Other expense, net................................ 12.4 4.0
-------- --------
Total other expense, net ........................... 25.0 24.3
-------- --------
Income before taxes and minority interest........... 152.2 144.3
Income taxes........................................ 51.3 51.1
-------- --------
Income before minority interest..................... 100.9 93.2
Minority interest................................... (0.6) (0.9)
-------- --------
Net income ......................................... $ 100.3 $ 92.3
======== ========
Earnings per share:
Basic............................................. $ .42 $ .39
======== ========
Diluted........................................... $ .42 $ .38
======== ========
The accompanying notes are an integral part of these statements.
3
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Nine months ended
September 30
------------------
2001 2000
------ -------
(unaudited)
Net sales........................................... $4,212.5 $4,025.3
Other revenue....................................... 30.5 30.1
-------- --------
Total revenue....................................... 4,243.0 4,055.4
Costs, expenses and other:
Cost of sales ................................... 1,548.6 1,479.6
Marketing, distribution and administrative
expenses........................................ 2,137.6 2,049.0
Contract settlement gain, net of related
expenses (Note 13).............................. (25.9) -
Asset impairment charge (Note 14)................. 23.9 -
-------- --------
Operating profit.................................... 558.8 526.8
Interest expense.................................. 54.7 65.1
Interest income................................... (9.7) (6.0)
Other expense, net................................ 21.3 18.8
-------- --------
Total other expense, net ........................... 66.3 77.9
-------- --------
Income from continuing operations before taxes,
minority interest and cumulative effect
of accounting changes............................. 492.5 448.9
Income taxes........................................ 170.4 159.4
-------- --------
Income before minority interest and cumulative
effect of accounting changes...................... 322.1 289.5
Minority interest................................... (2.1) (1.9)
-------- --------
Income from continuing operations before
cumulative effect of accounting changes........... 320.0 287.6
Cumulative effect of accounting changes, net of taxes (0.3) (6.7)
-------- --------
Net income ......................................... $ 319.7 $ 280.9
======== ========
Basic earnings per share:
Continuing operations............................. $ 1.35 $ 1.21
Cumulative effect of accounting changes........... - (0.03)
-------- --------
$ 1.35 $ 1.18
======== ========
Diluted earnings per share:
Continuing operations ............................ $ 1.33 $ 1.20
Cumulative effect of accounting changes........... - (0.03)
-------- --------
$ 1.33 $ 1.17
======== ========
The accompanying notes are an integral part of these statements.
4
AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
September 30 December 31
2001 2000
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................ $ 185.1 $ 122.7
Accounts receivable.............................. 514.1 499.0
Income tax receivable ........................... - 95.2
Inventories...................................... 728.2 610.6
Prepaid expenses and other....................... 237.7 218.2
-------- --------
Total current assets............................. 1,665.1 1,545.7
-------- --------
Property, plant and equipment, at cost........... 1,539.1 1,523.1
Less accumulated depreciation.................... 775.7 754.7
-------- --------
763.4 768.4
Other assets..................................... 529.8 512.3
-------- --------
Total assets..................................... $2,958.3 $2,826.4
======== ========
LIABILITIES AND SHAREHOLDERS'(DEFICIT) EQUITY
Current liabilities:
Debt maturing within one year.................... $ 79.6 $ 105.4
Accounts payable................................. 350.5 391.3
Accrued compensation............................. 130.3 138.2
Other accrued liabilities........................ 269.7 251.7
Sales and taxes other than income................ 95.9 101.1
Income taxes..................................... 378.8 371.6
-------- --------
Total current liabilities........................ 1,304.8 1,359.3
-------- --------
Long-term debt................................... 1,251.1 1,108.2
Employee benefit plans........................... 388.7 397.2
Deferred income taxes............................ 29.9 31.3
Other liabilities................................ 100.3 95.2
Contingencies (Note 6)
Share repurchase commitments - 51.0
Shareholders'(deficit) equity:
Common stock..................................... 89.0 88.6
Additional paid-in capital....................... 914.2 824.1
Retained earnings................................ 1,324.6 1,139.8
Accumulated other comprehensive loss ........... (444.4) (399.1)
Treasury stock, at cost.......................... (1,999.9) (1,869.2)
-------- --------
Total shareholders'(deficit) equity.............. (116.5) (215.8)
-------- --------
Total liabilities and shareholders'(deficit) equity $2,958.3 $2,826.4
======== ========
The accompanying notes are an integral part of these statements.
5
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Nine months ended
September 30
------------------
2001 2000
---- ----
(unaudited)
Cash flows from operating activities:
Net income.............................................. $ 319.7 $ 280.9
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Special and non-recurring payments...................... (4.4) (14.6)
Cumulative effect of accounting changes................. 0.3 6.7
Depreciation and amortization........................... 81.2 69.4
Provision for doubtful accounts......................... 79.1 70.2
Foreign exchange losses................................. 1.4 2.3
Amortization of debt discounts (premiums)............... 11.1 (1.8)
Deferred income taxes................................... (1.0) 5.4
Asset impairment charge................................. 23.9 -
Other................................................... 11.4 8.2
Changes in assets and liabilities:
Accounts receivable................................... (116.0) (103.7)
Income tax receivable................................. 95.2 -
Inventories........................................... (137.6) (204.6)
Prepaid expenses and other............................ (31.5) (33.7)
Accounts payable and other accrued liabilities........ (0.4) (85.8)
Income and other taxes................................ 13.0 (3.7)
Noncurrent assets and liabilities..................... 3.0 3.9
------ ------
Net cash provided by (used in) operating activities..... 348.4 (0.9)
------ ------
Cash flows from investing activities:
Capital expenditures.................................... (101.1) (126.3)
Disposal of assets...................................... 7.1 5.7
Other investing activities.............................. (5.8) (1.2)
------ ------
Net cash used in investing activities................... (99.8) (121.8)
------ ------
Cash flows from financing activities:
Cash dividends.......................................... (136.9) (133.6)
Book overdraft.......................................... (1.3) (12.5)
Debt, net (maturities of three months or less).......... (7.1) 26.1
Proceeds from short-term debt........................... 58.1 48.6
Retirement of short-term debt........................... (75.0) (184.4)
Proceeds from long-term debt............................ 76.3 400.1
Retirement of long-term debt............................ (.1) (.2)
Repurchase of common stock.............................. (130.7) (47.1)
Proceeds from exercise of stock options, net of taxes... 35.1 18.3
------ -------
Net cash (used in) provided by financing activities..... (181.6) 115.3
------ ------
Effect of exchange rate changes on cash and
cash equivalents...................................... (4.6) (16.0)
------ ------
Net increase (decrease) in cash and cash equivalents.... 62.4 (23.4)
Cash and cash equivalents at beginning of period........ 122.7 117.4
------ ------
Cash and cash equivalents at end of period.............. $ 185.1 $ 94.0
======= ======
The accompanying notes are an integral part of these statements.
6
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
1. ACCOUNTING POLICIES
The accompanying Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
contained in Avon's 2000 Annual Report to Shareholders. The interim statements
are unaudited but include all adjustments, consisting of normal recurring
adjustments, that management considers necessary to fairly present the results
for the interim periods. Results for interim periods are not necessarily
indicative of results for a full year. The year-end balance sheet data was
derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
Effective January 1, 2001, Avon adopted Statement of Financial Accounting
Standards ("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, 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' inception 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 expects to
reclassify into earnings within the next twelve months. These charges are
reflected as a cumulative effect of an accounting change in the accompanying
Consolidated Financial Statements. See Notes 7 and 11 of the Notes to
Consolidated Financial Statements.
Effective January 1, 2000, Avon adopted Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
provides the Securities and Exchange Commission's views in applying generally
accepted accounting principles to revenue recognition in the financial
statements. As a result of adopting SAB 101, Avon changed its revenue
recognition policy to recognize revenue upon delivery, when both title and
risks and rewards of ownership pass to the independent Representative. In
accordance with the provisions of SAB 101, Avon recorded a charge to earnings
of $6.7, net of a tax benefit of $3.5, in the first quarter of 2000 to reflect
the accounting change. This charge is reflected as a cumulative effect of an
accounting change in the accompanying Consolidated Financial Statements.
Restatements were made to previously reported 2000 quarterly information to
reflect the adoption of SAB 101.
For the year ended December 31, 2000, Avon 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. EITF 00-10 also
requires the disclosure of the income statement classification of any shipping
and handling costs. 2000 quarterly information was restated to reflect
shipping and handling fees, previously reported in Marketing, distribution and
administration expenses, in Other revenue in the Consolidated Statements of
Income. For the three months ended September 30, 2001 and 2000, shipping and
handling costs aggregated $129.6 and $121.4, respectively. For the nine
months ended September 30, 2001 and 2000, shipping and handling costs
aggregated $385.6 and $361.9, respectively. These costs are included in
Marketing, distribution and administrative expenses in the Consolidated
Statements of Income.
7
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
In May 2000, the EITF reached a consensus on EITF 00-14, "Accounting for
Certain Sales Incentives", which provides guidance on accounting for
discounts, coupons, rebates and free products, as well as the income statement
classification of these discounts, coupons, rebates and free products. EITF
00-14 is effective January 1, 2002 for Avon. Avon is currently evaluating the
impact of this new guidance.
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. EITF 00-25 is effective January 1, 2002 for
Avon. Avon is currently evaluating the impact of this new guidance.
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. Avon is currently
evaluating the impact of this new guidance.
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 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 144
is effective January 1, 2002 for Avon. Avon is currently evaluating the
impact of this new guidance.
To conform to the 2001 presentation, certain reclassifications were made
to the prior periods' consolidated financial statements and the accompanying
footnotes.
2. INFORMATION RELATING TO THE STATEMENTS OF CASH FLOWS
"Net cash provided by (used in) operating activities" includes the
following cash payments for interest and income taxes:
Nine months ended
September 30
------------------
2001 2000
---- ----
Interest............................................ $ 38.7 $ 65.6
Income taxes, net of refunds received............... 62.4 151.0
3. EARNINGS PER SHARE
Basic earnings per share ("EPS") are computed by dividing net income by
the weighted-average number of shares outstanding during the period. Diluted
earnings per share are calculated to give effect to all potentially dilutive
common shares that were outstanding during the period.
8
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
For the three and nine months ended September 30, 2001 and 2000, the
components of basic and diluted earnings per share are as follows:
Three Months Nine Months
Ended September 30 Ended September 30
2001 2000 2001 2000
Numerator:
Basic:
Income from continuing operations
before cumulative effect of
accounting changes $ 100.3 $ 92.3 $ 320.0 $ 287.6
Cumulative effect of accounting changes - - (0.3) (6.7)
-------- ------- ------- ------
Net Income $ 100.3 $ 92.3 $ 319.7 $ 280.9
======== ======= ======= ======
Diluted:
Income from continuing operations
before cumulative effect of accounting
changes $ 100.3 $ 92.3 $ 320.0 $ 287.6
Interest expense on convertible notes,
net of taxes 2.5 2.0 7.5 2.0
-------- ------- ------- ------
Income for purposes of computing
diluted EPS before cumulative effect
of accounting changes 102.8 94.3 327.5 289.6
Cumulative effect of accounting changes - - (0.3) (6.7)
-------- ------- ------- -----
Net income for purposes of computing
diluted EPS $ 102.8 $ 94.3 $ 327.2 $ 282.9
======== ======= ======= ======
Denominator:
Basic EPS weighted-average shares
outstanding 236.28 237.54 236.97 237.56
Dilutive effect of:
Assumed conversion of
stock options and settlement of
forward contracts (1) 2.49 2.10 2.16 1.89
Assumed conversion of convertible
notes 6.96 5.87 6.96 1.97
-------- ------- ------- ------
Diluted EPS adjusted weighted-average
shares outstanding 245.73 245.51 246.09 241.42
======== ======= ======= ======
Basic EPS:
Continuing operations $ .42 $ .39 $ 1.35 $ 1.21
Cumulative effect of accounting
changes - - - (.03)
-------- ------- ------- -------
$ .42 $ .39 $ 1.35 $ 1.18
======== ======= ======= =======
Diluted EPS:
Continuing operations $ .42 $ .38 $ 1.33 $ 1.20
Cumulative effect of accounting
changes - - - (.03)
-------- ------- ------- ------
$ .42 $ .38 $ 1.33 $ 1.17
======== ======= ======= ======
(1) At September 30, 2000, stock options and forward contracts to purchase
Avon common stock totaling 1.0 million shares, are excluded from the
calculation of diluted earnings per share calculation because
their impact is anti-dilutive.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
Avon purchased approximately 3,200,000 shares of Avon common stock for
$130.7 during the first nine months of 2001, as compared to approximately
1,200,000 shares of Avon common stock for $47.1 during the first nine months
of 2000.
In connection with Avon's share repurchase program, Avon entered into
forward contracts to purchase approximately 271,000 shares of Avon common
stock at an average price of $45.83 per share at September 30, 2001. The
contracts mature in October 2002 and provide for physical or net share
settlement to Avon. Accordingly, no adjustment for subsequent changes in fair
value has been recognized.
4. INVENTORIES
September 30 December 31
2001 2000
------- ------
Raw materials................ $188.5 $168.0
Finished goods............... 539.7 442.6
------- ------
$728.2 $610.6
======= ======
5. DIVIDENDS
Cash dividends paid per share of common stock were $.19 and $.57 for the
three and nine months ended September 30, 2001, respectively, and $.185 and
$.555 for the comparable periods of 2000. On February 1, 2001, Avon increased
the indicated annual dividend rate to $.76 from $.74.
6. CONTINGENCIES
In 1991, a class action suit was initiated against Avon on behalf of
certain classes of holders of Avon's Preferred Equity-Redemption Cumulative
Stock ("PERCS"). This lawsuit alleges various contract and securities law
claims relating to the PERCS (which were fully redeemed that year). A trial
of this action commenced in October 2001 in the United States District Court
for the Southern District of New York. Avon believes it has 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.
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 September 30, 2001 should not have a
material adverse impact on Avon's consolidated financial position, results of
operations or cash flows.
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
10
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
charge of $6.4 million ($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") 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 current period, 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. (See Note 14, Asset
Impairment Charge).
7. COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended September 30, 2001 and 2000, the
components of comprehensive income are as follows:
Three Months Nine Months
Ended September 30 Ended September 30
2001 2000 2001 2000
Net income $ 100.3 $ 92.3 $ 319.7 $ 280.9
Other comprehensive loss:
Foreign currency translation and
transaction adjustments (20.0) (17.8) (39.5) (41.4)
Unrealized loss on available-
for-sale securities,
net of taxes of $0.6 and $0.8 (2.8) (4.5) (4.3) (4.5)
Net gains (losses) on derivative
instruments, net of
taxes of ($0.2) and $0.9 0.6 - (1.5) -
------- ------ ------- -------
Comprehensive income $ 78.1 $ 70.0 $ 274.4 $ 235.0
======= ====== ======= =======
As of September 30, 2001, Avon expects to reclassify $1.7 of net losses on
derivative instruments designated as cash flow hedges from accumulated other
comprehensive loss on the Consolidated Balance Sheet to earnings during the
next twelve months.
For the three and nine months ended September 30, 2001, the components of the
net gains (losses) on derivative instruments are as follows:
Three Months Nine Months
Ended September 30 Ended September 30
2001 2001____
Net gains (losses) on derivative instruments:
Cumulative effect of accounting change, $ - $ (3.9)
net of taxes of $2.1
Net gains on derivative instruments,
net of taxes of ($1.6) and ($0.2) 3.0 0.4
Reclassification of (gains)losses
to earnings, net of taxes of
$1.4 and ($1.0) (2.4) 2.0
------- --------
Net gains (losses) on derivative instruments $ 0.6 $ (1.5)
======= ========
11
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
8. SPECIAL AND NON-RECURRING CHARGES
In October 1997, Avon 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 taxes, or
$.47 per share on a basic and diluted basis) for the year ended December 31,
1999 and $154.4 pretax ($122.8 net of tax, or $.46 per share on a basic and
diluted basis) for the year ended December 31, 1998.
The 1999 special and non-recurring charges by business segment are as
follows:
North America $ 33.6
Latin America 14.7
Europe 69.8
Pacific 11.8
Corporate 21.3
-------
Total $ 151.2
=======
The 1999 special and non-recurring charges by category of expenditures are
as follows:
Special Cost of
Charges Sales Charge Total
------- ------------ -----
Employee severance costs $ 57.0 $ - $ 57.0
Inventories - 46.0 46.0
Write-down of assets to
net realizable value 26.4 - 26.4
Recognition of foreign currency
translation adjustment 9.8 - 9.8
Other 12.0 - 12.0
------- ------ ------
Total $ 105.2 $ 46.0 $ 151.2
======= ======= =======
Employee severance costs are expenses, both domestic and international,
associated with the realignment of Avon's global operations. Certain employee
severance costs were accounted for in accordance with Avon's existing FAS No.
112 ("Employers' Accounting for Postemployment Benefits") severance plans.
Remaining severance costs were accounted for in accordance with other existing
accounting literature. The workforce was reduced by 3,700 associates, or 9%
of the total. Approximately one-half of the terminated employees related to
facility closures. As of September 30, 2001, all employees under the program
have been terminated.
Inventory-related charges represent losses to write-down the carrying
value of non-strategic inventory prior to disposal. The charges primarily
result from a new business strategy for product dispositions which
fundamentally changes the way Avon markets and sells certain inventory. This
new strategy, approved and effective in March 1999, is meant to complement
other redesign initiatives, with the objective of reducing inventory clearance
sales, building core brochure sales and building global brands.
The write down of assets (primarily fixed and other assets) relates to the
restructuring of operations in Western Europe, including the closure of a
jewelry manufacturing facility in Ireland, and the write-down of software, the
use of which is no longer consistent with the strategic direction of Avon. By
centralizing certain key functional areas and exiting unprofitable situations,
Avon plans to increase operating efficiencies and ultimately, profit growth in
the long-term.
12
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
The recognition of a foreign currency translation adjustment relates to
the closure of the jewelry manufacturing facility in Ireland.
The "Other" category primarily represents contract termination costs,
legal and consulting fees and other costs associated with the facility
closures.
The liability balance at September 30, 2001 is as follows:
Special Cost of
Charge Sales Charge Total
------- ------------ -----
Balance at December 31, 2000 $ 7.9 $ - $ 7.9
Cash expenditures (4.4) - (4.4)
------ ---- -----
Balance at September 30, 2001 $ 3.5 $ - $ 3.5
====== ===== ======
The balance at September 30, 2001, relates primarily to employee severance
costs that will be paid in accordance with the original plan during 2001.
9. SEGMENT INFORMATION
Summarized financial information concerning Avon's reportable segments is
as follows:
Three Months Ended
September 30
------------------
2001 2000
---- ----
Net Operating Net Operating
Sales Profit Sales Profit
--------- --------- --------- ---------
North America:
U.S. $ 453.0 $ 67.2 $ 421.2 $ 61.1
Other* 60.0 23.4 57.1 4.4
--------- ------- --------- --------
Total 513.0 90.6 478.3 65.5
--------- ------- --------- --------
International:
Latin America North** 247.1 64.5 212.5 52.1
Latin America South** 239.5 48.0 254.8 53.9
--------- ------- -------- --------
Latin America 486.6 112.5 467.3 106.0
Pacific 191.3 26.5 195.7 26.8
Europe 221.9 28.9 194.7 22.1
--------- ------- -------- --------
Total International 899.8 167.9 857.7 154.9
--------- ------- -------- --------
Total from operations 1,412.8 258.5 1,336.0 220.4
Global expenses - (81.3) - (51.8)
--------- ------- --------- --------
Total $ 1,412.8 $ 177.2 $ 1,336.0 $ 168.6
========= ======= ========= ========
*Includes operating information for Canada, Puerto Rico and the U.S. retail
business.
**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.
13
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
Nine Months Ended
September 30
------------------
2001 2000
---- ----
Net Operating Net Operating
Sales Profit Sales Profit
---------- --------- -------- ---------
North America:
U.S. $ 1,395.5 $ 251.3 $ 1,328.5 $ 238.4
Other* 176.1 31.3 174.5 15.8
--------- -------- --------- -------
Total 1,571.6 282.6 1,503.0 254.2
--------- -------- --------- -------
International:
Latin America North** 715.7 182.4 614.7 149.3
Latin America South** 694.8 123.3 718.0 134.7
--------- -------- --------- -------
Latin America 1,410.5 305.7 1,332.7 284.0
Pacific 557.4 75.8 584.7 78.8
Europe 674.8 98.2 604.9 78.5
--------- -------- --------- -------
Total International 2,642.7 479.7 2,522.3 441.3
--------- -------- --------- -------
Total from operations 4,214.3 762.3 4,025.3 695.5
Global expenses (1.8) (203.5) - (168.7)
--------- -------- --------- -------
Total $ 4,212.5 $ 558.8 $ 4,025.3 $ 526.8
========= ======== ========= =======
*Includes operating information for Canada, Puerto Rico and the U.S. retail
business.
**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.
14
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
The following table presents consolidated net sales by classes of
principal products as follows:
Three Months Nine Months
Ended September 30 Ended September 30
2001 2000 2001 2000
Beauty* $ 885.8 $ 840.6 $2,690.8 $2,548.0
Beauty Plus** 294.6 278.7 870.8 832.1
Beyond Beauty*** 232.4 216.7 650.9 645.2
------- -------- ------- -------
Total net sales $1,412.8 $1,336.0 $4,212.5 $4,025.3
*Beauty includes cosmetics, fragrances, toiletries and health and well being.
**Beauty Plus includes fashion jewelry, accessories, apparel, watches and
health and well being.
***Beyond Beauty primarily includes home products, gift and decorative, health
and well being, and candles.
Sales from health and well being 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.
10. Other Financing Activities
In connection with Avon's share repurchase program, Avon entered into
forward contracts to purchase approximately 271,000 shares of Avon common
stock at an average price of $45.83 per share at September 30, 2001. The
contracts mature in October 2002 and provide for physical or net share
settlement to Avon. Accordingly, no adjustment for subsequent changes in fair
value has been recognized.
11. 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 interest rates and foreign exchange rates by creating
offsetting positions through the use of derivative financial instruments.
Avon currently does not enter into derivative financial instruments for
trading purposes, nor is Avon a party to leveraged derivatives.
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 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 current 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. Changes in the fair value of a derivative
not designated as a hedging instrument are recognized in current earnings.
15
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
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.
The ineffective portion of the derivative's gain or loss, if any, is recorded
in current earnings. 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 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.
Interest Rates
Avon uses interest rate swaps to hedge interest rate risk on its 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 a portion of its fixed-rate debt to a variable-rate based on LIBOR.
Avon has designated the interest rate swaps as fair value hedges. At September
30, 2001, $550.0 of Avon's outstanding long-term debt is designated as the
hedged items to the interest rate swap contracts. Accordingly, long-term debt
increased by $53.3 during the nine months ended September 30, 2001, with a
corresponding increase to Other assets to reflect the fair values of
outstanding interest rate swaps. There were no amounts of hedge
ineffectiveness for the three and nine months ended September 30, 2001 related
to these interest rate swaps.
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 bonds
and accordingly both the interest rate swap and underlying debt were adjusted
to reflect their fair values at September 30, 2001. Effective with the
termination of the swap, the fair value adjustment to the underlying debt will
be amortized over the remaining term of that debt.
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. The forward interest
rate agreements have not been designated as hedges and have been recorded in
the Consolidated Financial Statements at fair value. Subsequent to September
30, 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.
16
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
Foreign Currency
Avon uses foreign currency forward contracts and options to hedge
portions of its forecasted foreign currency cash flows resulting from
forecasted royalties, intercompany loans, and other anticipated foreign
currency transactions where there is a high probability that anticipated
exposures will materialize, including third-party and intercompany foreign
currency transactions. These contracts have been designated as cash flow
hedges.
For the three and nine months ended September 30, 2001, the net gain
related to the ineffective portion of Avon's cash flow hedging instruments and
the net loss related to the portion of the hedging instrument excluded from
the assessment of hedge effectiveness (time value of options prior to June 1,
2001) was not material. For the three and nine months ended September 30,
2001, the net gain reclassified from OCI to earnings for cash flow hedges that
have been discontinued, because the forecasted transactions are not probable
of occurring, was not material.
As of September 30, 2001, Avon expects to reclassify $1.7 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 royalties (b) intercompany loan settlements and (c) actual
foreign currency denominated purchases or receipts. The maximum remaining
term over which Avon is hedging exposures to the variability of cash flows for
all forecasted transactions is 15 months.
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 the gains and losses on these derivatives have been
recognized in current earnings.
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 12 of the Notes to Consolidated Financial Statements). For the nine
months ended September 30, 2001, a $0.1 loss related to the revaluation of
this foreign currency denominated debt was included in foreign currency
translation adjustments within accumulated other comprehensive loss on the
Consolidated Balance Sheets.
Credit and Market Risk
Avon attempts to minimize its credit exposure to counterparties by
entering into interest rate swap and cap contracts only with major
international financial institutions with "A" or higher credit ratings as
issued by Standard & Poor's Corporation. Avon's foreign currency and interest
rate derivatives are comprised of over-the-counter forward contracts 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
losses is remote and that such losses, if any, would not be material.
17
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
12. Debt
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. 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.
In February 2001, Avon entered into a loan agreement to borrow 5,500.0
Japanese yen. The loan bore interest at a per annum rate equal to 0.875% and
matured on April 9, 2001. Interest on the loan was paid at maturity. In
April 2001, Avon amended this loan agreement to increase the amount borrowed
to 8,000.0 Japanese yen and to extend the maturity to May 15, 2001. The loan
bore interest at a per annum rate equal to 0.485%. Interest on the loan was
paid at maturity. In May 2001, Avon further amended this loan agreement to
extend the maturity to July 12, 2001. The loan bore interest at a per annum
rate equal to 0.455%. Interest on the loan was paid at maturity. In July
2001, Avon further amended this loan agreement twice to extend the maturity to
August 9, 2001. The loan bore interest at a per annum rate equal to 0.435%.
Interest on the loan was paid at maturity. In August 2001, Avon further
amended this loan agreement to extend the maturity first to August 31, 2001
and then to September 14, 2001. During these periods, the loan bore interest
at per annum rates equal to 0.435% and 0.425%, respectively. Interest on the
loan was paid at maturity. In September 2001, Avon further amended this loan
agreement to extend the maturity to September 20, 2001 on which date it,
together with the interest thereon, was repaid with the proceeds from the Yen
Notes. The loan bore interest at a per annum rate equal to 0.425%. The loan
was designated as a hedge of Avon's net investment in its Japanese subsidiary.
See Note 11 of the Notes to Consolidated Financial Statements.
In May 2001, Avon entered into an agreement with various banks to replace
Avon's existing revolving credit and competitive advance facility agreement,
which was due to expire in August 2001, with a new five-year $600.0 revolving
credit and competitive advance facility agreement, which expires in 2006. The
new agreement and the prior agreement are referred to, collectively, as the
"credit facility".
The credit facility may be used for general corporate purposes, including
financing working capital and capital expenditures, providing support for the
issuance of commercial paper and supporting the stock repurchase program. The
interest rate on borrowings under the credit facility is based on LIBOR,
prime, or federal fund rates. The credit facility has an annual facility fee
of $0.5. The credit facility contains a covenant for interest coverage, as
defined. Avon is in compliance with this covenant at September 30, 2001. At
September 30, 2001, there were no borrowings under the credit facility.
13. Contract Settlement
In July 2001, Avon announced that, due to a change in Sears Roebuck and
Company's ("Sears") business strategy, which will include de-emphasizing
cosmetics, Avon would not proceed with the launch of its retail brand,
beComing, in Sears stores this fall. 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.
18
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
Avon launched the beComing brand in select J.C. Penney stores in the
third quarter of 2001.
The termination of the retail venture with Sears resulted in a gain in
the third quarter of 2001 but will 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 for the remainder of 2001 and 2002.
14. 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 pre-tax ($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, "Accounting
for the Impairment of Long Lived Assets and for Long Lived Assets to be
Disposed of", 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 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 current period. 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 6, Contingencies).
15. Subsequent Event
On November 1, 2001, Avon declared a quarterly dividend on its common
stock of $.19 per share, payable December 3, 2001, to shareholders of record
on November 15, 2001.
19
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
ITEM 2. Management's Discussion and Analysis of the Results of Operations
and Financial Condition
Results of Operations
Consolidated
Avon's net income for the third quarter and nine-month period of 2001
was $100.3 and $319.7, respectively, or $.42 and $1.33 per share on a
diluted basis, respectively, compared with net income of $92.3 and $280.9,
respectively, or $.38 and $1.17 per share on a diluted basis, respectively,
for the same periods of 2000. Operating profit was $177.2 and $558.8 for
the third quarter and nine-month period in 2001, respectively, compared
with $168.6 and $526.8, respectively, for the comparable periods of 2000.
The third quarter and nine-month period of 2001 included the
following unusual items: an Asset impairment charge of $23.9 ($14.5
after-tax, or $.06 per diluted share) related to the write off of the
remaining carrying value of an order management system that had been
under development (see Notes 6 and 14 of the Notes to Consolidated
Financial Statements); a charge of $6.4 ($3.4 after-tax, or $.01 per
diluted share) related to the settlement of a tax liability in Argentina
(see Note 6 of the Notes to Consolidated Financial Statements); and a
Contract settlement gain, net of related expenses, of $25.9 ($15.7 after-
tax, or $.06 per diluted share) related to the cancellation of a retail
agreement between Avon and Sears (see Note 13 of the Notes to
Consolidated Financial Statements).
Effective January 1, 2001, Avon adopted Statement of Financial Accounting
Standards ("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, 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' inception 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 expects to
reclassify into earnings within the next 12 months. These charges are
reflected as a cumulative effect of an accounting change in the accompanying
Consolidated Financial Statements. See Notes 7 and 11 of the Notes to
Consolidated Financial Statements.
Effective January 1, 2000, Avon changed its revenue recognition
policy in accordance with the provisions of Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements". The
cumulative effect of the change on prior years resulted in a charge of
$6.7, net of a tax benefit of $3.5, or $.03 per share on a basic and
diluted basis, in the first quarter of 2000, which was included in net
20
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
income for the nine-months ended September 30, 2000. For the three months
and nine months ended September 30, 2000, the impact of the accounting
change was to decrease net income before the cumulative effect of the
accounting change by $0.7 and $4.7, respectively.
Consolidated net sales for the third quarter and nine-month period
of 2001 increased 6% and 5%, respectively, over the same periods of 2000.
The sales improvement for both the third quarter and nine-month period
was a result of increases in Europe, Latin America and North America,
partially offset by a decline in the Pacific region. Excluding the
impact of foreign currency exchange, consolidated net sales rose 12% and
10% for the third quarter and nine-month period of 2001, respectively,
over the comparable periods of 2000, with increases in all regions.
Gross margin decreased 0.5 percentage point in the third quarter of
2001 resulting from declines in Europe and North America, partially
offset by an improvement in the Pacific region. Gross margin in the
nine-month period of 2001 remained level with the same period of 2000
primarily due to improvements in the Pacific region and Latin America,
offset by declines in North America and Europe.
Marketing, distribution and administrative expenses increased $35.4 and
$88.6, or 5% and 4%, for the third quarter and nine-month period of 2001,
respectively, over the comparable periods of 2000. Avon has continued to
invest in consumer-related initiatives such as additional spending on
advertising and enhanced brochures. Operating expenses decreased as a
percentage of sales to 50.6% and 50.3% for the third quarter and nine-month
period of 2001, respectively, from 51.0% and 50.5% for the comparable periods
of 2000. The third quarter and nine-month period improvements were primarily
due to improved expense ratios in all regions except the Pacific region which
remained level for the third quarter and declined for the nine month period.
Interest expense of $16.1 and $54.7 for the third quarter and nine-
month period of 2001, respectively, decreased $6.3 and $10.4,
respectively, versus the comparable periods of 2000, primarily as a
result of a decline in domestic interest rates in 2001. Interest income
of $3.5 and $9.7 for the third quarter and nine-month period of 2001,
respectively, increased $1.4 and $3.7, respectively, over the comparable
periods of 2000 primarily due to stronger cash flow levels during 2001.
Other expense, net of $12.4 for the third quarter of 2001 was $8.4
unfavorable to the comparable period of 2000 mainly due to the settlement
of a tax assessment in Argentina of $6.4 in 2001. Other expense, net of
$21.3 for the nine-month period of 2001 was $2.5 unfavorable to the
comparable period of 2000 mainly due to the settlement of the tax
assessment in Argentina in 2001, partially offset by foreign exchange
losses during 2000 on Brazil real contracts as well as favorable foreign
exchange movements in 2001 on Japanese yen contracts.
The effective tax rate was 33.7% and 34.6% for the third quarter and
nine-month period of 2001, respectively, versus 35.4% and 35.5%,
respectively, for the comparable periods of 2000, due to repatriation
planning, as well as the earnings mix and tax rates of international
subsidiaries.
The following discussion addresses net sales and operating profit by
reportable segment as presented in Note 9:
21
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
North America
Net sales grew 7% and 5% for the third quarter and nine-month period
of 2001, respectively, over the comparable periods of 2000. The U.S
business, which represents almost 90% of the North American segment,
reported a sales increase of 8% and 5% for the third quarter and nine-
month period of 2001, respectively. The increase in both periods resulted
from a 3% increase in the number of average 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 third
quarter sales increase was also driven by a 13% growth in units due to the
success of a 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. beauty sales grew 5% for the third quarter of 2001 reflecting a
strong increase in color cosmetics due in part to the success of a
Holographix Shade Event, an increase in promotional items, and the Breast
Cancer lipstick campaign, coupled with an increase in the fragrance
category resulting from a preferred preview program for the launch of the
Little Black Dress fragrance. Hair care and skin care reported declines
for the quarter due to unfavorable comparisons against last year's
launches of Botanisource and Advance Techniques. Sales in the Beauty Plus
category also increased in the third quarter of 2001 due to growth in
jewelry and watches driven by increased exposure in the brochure, and
growth in footwear, eyewear and totes, partially offset by a decline in
apparel due to sales softness in casual wear and innerwear. The increases
in jewelry, watches and accessories were also due to inventory clearance
events. The Beyond Beauty category increased for the third quarter of
2001 primarily due to greater gift sales as a result of more successful
new products and increased exposure in the brochure, partially offset by a
decline in toy sales due to the underperformance of seasonal new products.
The U.S. sales increase for the nine-month period of 2001 reflects a
5% increase in the Beauty category with double-digit percentage increases
in color cosmetics, skin care and hair care. Color cosmetics increased
due to new product introductions, including the Breast Cancer lipstick
campaign, the launch of Beyond Color and other promotional events. Skin
care increased due to the successful relaunch of Anew Retroactive as well
as new product introductions. The increase in hair care was driven by new
product launches and increased exposure in the brochures. Sales in the
Beauty Plus category also grew in the nine-month period of 2001 due to
increases in apparel and accessories and watches, partially offset by a
decline in jewelry. Beyond Beauty sales grew in the nine-month period of
2001, driven by an increase in gifts, partially offset by declines in toys
and home entertainment.
The successful launch of the new Health and Wellness line of vitamins
and fitness products also contributed to the U.S. sales growth in both
periods of 2001, particularly in the Beyond Beauty category.
Operating profit in North America increased 38% and 11%, (U.S. increased
10% and 5%) for the third quarter and nine-month period of 2001, respectively,
over the comparable periods of 2000. Excluding the benefit of the contract
settlement with Sears, operating profit in North America increased mid-single
digit percentage points for both the third quarter and nine-month period of
2001, respectively. These increases were primarily attributable to sales
increases in the U.S. and Puerto Rico, partially offset by costs associated
with the U.S. retail business which launched in September 2001. Operating
profit margin in North America improved 3.9 points for the third quarter and
1.1 points for the nine-month period of 2001 primarily due to the benefit of
the contract settlement with Sears. Excluding the benefit of the contract
22
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
settlement with Sears, operating profit margin in North America declined
slightly for both the third quarter and nine-month period of 2001 primarily due
to investments associated with the U.S. retail business, partially offset by
margin improvements in the U.S direct selling business. Operating profit
margin in the U.S. improved for both the third quarter and nine-month period of
2001 due to a lower operating expense ratio driven by Business Process Redesign
("BPR") savings, partially offset by higher investments in the internet and
health and well-being business and a lower gross margin resulting from
inventory clearance.
International
International net sales in U.S. dollars increased 5% for both the
third quarter and nine-month period of 2001 compared to the same periods
of 2000. The improvement in both periods 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 14% and 13% for the third quarter and nine-month period
of 2001, respectively, with double-digit percentage increases in the
Europe and Latin America regions and a mid-single digit percentage
increase in the Pacific region in both periods.
In Europe, sales increased 14% and 12% for the third quarter and
nine-month period of 2001, respectively, driven by growth in Central and
Eastern Europe, primarily Poland and Russia, partially offset by a sales
decline in Germany. The sales improvement for both periods in Central
and Eastern Europe resulted from double-digit percentage increases in
average Representatives and units. Poland's continued strong sales
growth has been 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 dramatic increase in staff
count levels. In Russia, the sales increases resulted from an
improvement in the economy, coupled with an increase in the average order
resulting from a change in the commission structure in 2001. U.S. dollar
sales in the U.K increased for the third quarter of 2001 but were level
with 2000 for the nine-month period of 2001. However, local currency
sales in the U.K. increased 7% for both the third quarter and nine-month
period of 2001, driven by an increase in customers and units. The sales
decline in Germany was primarily the result of a weak economic climate,
which negatively impacted business in the third quarter and nine-month
period of 2001. Excluding the impact of exchange, Europe sales grew 17%
for both periods as exchange unfavorably impacted most major markets
within the region.
In Latin America, sales increased 4% and 6% in the third quarter and
nine-month period of 2001, respectively, mainly due to double-digit
percentage growth in Venezuela and Mexico partially offset by declines in
Brazil and Chile. The sales increases in Venezuela and Mexico for both
periods were primarily driven by strong increases in average
Representatives, units and customers. Venezuela had double-digit
percentage sales growth in the Beauty category resulting from competitive
pricing in fragrance and personal care. The increases in Mexico were
driven by strong performance in fragrance and skin care due to new
product introductions. In Brazil, local currency sales increased double-
digits for both the third quarter and nine-month period of 2001, driven
by an increase in units, average representatives and customers, but U.S.
dollar sales were negatively impacted by foreign exchange. Despite a
weak economic and political environment, sales in Argentina increased for
both periods primarily due to the successful launch of Avon's anti-aging
product Retroactive. Since 1991, Argentina has maintained the peso at a
one-to-one ratio with the U.S. dollar. During the second quarter of
2001, the Argentine ratio came under increased pressure due to three
23
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
consecutive years of recession and repeated government financing issues.
While the peso did not devalue during this time, the problems in
Argentina had a negative impact on other currencies in the region,
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.
The negative effect of exchange rates was reduced by foreign exchange
contracts previously in place and several actions taken by local
management to offset these weaker currencies. Excluding the impact of
exchange, sales in Latin America increased 15% and 14% for the third
quarter and nine-month period of 2001, respectively.
In 2001, U.S. dollar sales for most major markets in the Pacific region
were negatively impacted by foreign exchange, most significantly Japan, Taiwan
and the Philippines. U.S. dollar sales in the Pacific region declined 2% and
5% for the third quarter and nine-month period of 2001, respectively, but
increased 8% and 7%, respectively, in local currency. Despite U.S. dollar
declines in the region, sales in China grew 52% and 41% for the third quarter
and nine-month period of 2001, respectively, which was driven by sales
initiatives, the opening of Beauty Boutiques and the success of consumer
initiatives. Despite the weakness of the local economy, Japan's local currency
sales increased 2% for the nine-month period of 2001 but remained flat for the
third quarter. The Philippines posted strong increases in average
Representatives, customers and units, which resulted in double-digit percentage
local currency sales growth for both periods of 2001 versus 2000. U.S. dollar
and local currency sales in Taiwan declined for both the third quarter and
nine-month period of 2001 due to that country's economic slowdown, which has
negatively impacted employment rates and consumer spending this year.
International operating profit increased 8% and 9% in the third
quarter and nine-month period of 2001, respectively, compared to the same
periods of 2000.
Operating profit in Europe increased 31% and 25% for the third quarter
and nine-month period of 2001, respectively, primarily due to the sales
increases discussed above, as well as operating profit margin improvements in
Russia, the United Kingdom and the Ukraine, partially offset by margin
declines in most Western European markets (primarily Germany), Poland and
South Africa. Operating profit improvements in Russia for both the third
quarter and nine-month period of 2001 were due to significant sales growth,
which led to an improvement in the expense ratio, and an improvement in gross
margin due to a reduction in custom duties on certain products. The operating
margin improvement in the United Kingdom for both the third quarter and nine-
month period resulted from an improvement in the expense ratio due to tighter
expense management and favorable comparisons against product supply
difficulties in 2000. The operating margin improvement in the Ukraine for the
third quarter and nine-month period was due to an improvement in the expense
ratio resulting from sales growth of over 60% for both periods, and an
improvement in gross margin, which benefited from a reduction in import
duties. The operating profit margin decline in Poland was driven by a
decrease in gross margin mainly due to a sourcing benefit in 2000 that did not
repeat in 2001. The operating profit margin decline in South Africa was due
to fixed expenses on lower sales volume. Operating margins in most Western
European markets (primarily Germany) continue to be negatively impacted by a
weak economic environment. Overall, the operating margin in Europe for the
third quarter and nine-month period of 2001 increased 1.7 and 1.6 points,
respectively, as compared to the prior year.
In Latin America, operating profit for the third quarter and nine-
month period of 2001 increased 6% and 8%, respectively, as compared to
the same periods of 2000. The operating profit improvement for both
periods resulted from the sales increases discussed above, as well as
operating profit margin improvements in Mexico and Venezuela, partially
24
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
offset by operating profit margin declines in Argentina and Chile. The
operating margin improvement in Mexico for both periods was due to
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. Venezuela's third quarter
and nine-month period operating margin improvement reflects a favorable
expense ratio resulting from lower Representative program costs and lower
distribution costs as a result of late 1999 flooding that impacted 2000
results. In Argentina, operating margin declined for both periods due to
an increase in advertising and incentive programs. Brazil's operating
margin was flat for the nine-month period while declining in the quarter
due to a decline in gross margin resulting from a change in product mix
driven by customer's migration to lower priced items. Overall, the third
quarter and nine-month operating margin in Latin America was favorable
0.4 point versus the comparable periods of 2000.
Operating profit in the Pacific region declined 1% and 4% for the
third quarter and nine-month period of 2001, respectively, resulting from
the negative impact of foreign currency translation. Excluding the
impact of foreign exchange, operating profit increased 12% and 10% for
the third quarter and nine-month period of 2001, respectively, with
increases in most major markets. China's operating margin improved
significantly for both the third quarter and nine-month period of 2001
due to a favorable expense ratio resulting from higher sales. Japan's
operating margin improved for the third quarter and nine-month period
largely due to BPR efforts, which continue to generate significant
savings across all expense areas. Operating margin in Taiwan declined in
both the third quarter and nine-month period of 2001 due to fixed
expenses on a lower sales base, as well as an increase in consumer
initiatives. Overall, operating margin in the Pacific region for the
third quarter and nine-month period of 2001 was up 0.2 point and 0.1
point, respectively, versus the comparable periods of 2000.
Global Expenses
Global expenses increased 57% and 21% for the third quarter and nine-
month period of 2001, respectively, versus the same periods of 2000 primarily
due to the Asset impairment charge of $23.9 in 2001 previously discussed.
Excluding this charge, Global expenses increased 11% and 7% for the third
quarter and nine-month period of 2001, respectively, primarily due to
insurance proceeds received in 2000 related to flood losses in Latin America.
Cash Flows
Excluding changes in debt, there was a net increase in cash of $10.2 for
the first nine months of 2001 compared with a decrease of $313.6 for the
comparable period of 2000. The $323.8 variance resulted from higher net cash
provided by operations which reflects higher net income (including the cash
settlement from Sears), the receipt of an income tax refund in 2001, as well
as higher working capital needs in 2000, which included the payout of the
long-term incentive plan, the timing of cash payments and a larger increase in
inventories. These sources of cash were partially offset by higher
repurchases of Avon common stock in 2001.
Avon purchased approximately 3,200,000 shares of Avon common stock for
$130.7 during the first nine months of 2001, as compared to approximately
1,200,000 shares of Avon common stock for $47.1 during the first nine months
of 2000.
Capital Resources
Total debt increased $117.1 to $1,330.7 at September 30, 2001 from $1,213.6
25
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
at December 31, 2000, principally due to the issuance of Japanese yen
denominated notes payable in September 2001, which are designated as a hedge of
Avon's net investment in its Japanese subsidiary, and an adjustment of $53.3 to
reflect the fair value of outstanding interest rate swaps as of September 30,
2001. Total debt of $1,330.7 at September 30, 2001 was $33.1 higher than total
debt of $1,297.6 at September 30, 2000, primarily due to the Japanese yen
denominated notes payable, discussed above, and the adjustment of $53.3 in 2001
to reflect the fair value of outstanding interest rate swaps.
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. 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.
In February 2001, Avon entered into a loan agreement to borrow 5,500.0
Japanese yen. The loan bore interest at a per annum rate equal to 0.875% and
matured on April 9, 2001. Interest on the loan was paid at maturity. In
April 2001, Avon amended this loan agreement to increase the amount borrowed
to 8,000.0 Japanese yen and to extend the maturity to May 15, 2001. The loan
bore interest at a per annum rate equal to 0.485%. Interest on the loan was
paid at maturity. In May 2001, Avon further amended this loan agreement to
extend the maturity to July 12, 2001. The loan bore interest at a per annum
rate equal to 0.455%. Interest on the loan was paid at maturity. In July
2001, Avon further amended this loan agreement to extend the maturity to
August 9, 2001. The loan bore interest at a per annum rate equal to 0.435%.
Interest on the loan was paid at maturity. In August 2001, Avon further
amended this loan agreement to extend the maturity first to August 31, 2001
and then to September 14, 2001. During these periods, the loan bore interest
at per annum rates equal to 0.435% and 0.425%, respectively. Interest on the
loan was paid at maturity. In September 2001, Avon further amended this loan
agreement to extend the maturity to September 20, 2001 on which date it,
together with the interest thereon, was repaid with the proceeds from the Yen
Notes. The loan bore interest at a per annum rate equal to 0.425%. The loan
is designated as a hedge of Avon's net investment in its Japanese subsidiary.
See Note 11 of the Notes to Consolidated Financial Statements.
In May 2001, Avon entered into an agreement with various banks to replace
Avon's existing revolving credit and competitive advance facility agreement,
which was due to expire in August 2001, with a new five-year $600.0 revolving
credit and competitive advance facility agreement, which expires in 2006. The
new agreement and the prior agreement are referred to, collectively, as the
"credit facility".
The credit facility may be used for general corporate purposes, including
financing working capital and capital expenditures, providing support for the
issuance of commercial paper and supporting the stock repurchase program. The
interest rate on borrowings under the credit facility is based on LIBOR,
prime, or federal fund rates. The credit facility has an annual facility fee
of $0.5. The credit facility contains a covenant for interest coverage, as
defined. Avon is in compliance with this covenant at September 30, 2001. At
September 30, 2001, there were no borrowings under the credit facility.
At September 30, 2001, there were $9.0 of borrowings outstanding under
uncommitted lines of credit.
Management currently believes that cash from operations and available
financing alternatives are adequate to meet anticipated requirements for
working capital, dividends, capital expenditures, the stock repurchase program
and other cash needs.
26
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
Working Capital
As of September 30, 2001 and December 31, 2000, current assets exceeded
current liabilities by $360.3 and $186.4, respectively. The increase of
current assets over current liabilities of $173.9 was primarily due to higher
inventories and a decrease in accounts payable, reflecting the seasonal
pattern of Avon's operations and the repayment of commercial paper borrowings.
The increase was partially offset by the receipt of an income tax refund in
2001.
Financial Instruments and Risk Management Strategies
Avon operates globally, with manufacturing and distribution facilities in
various locations around the world. Avon may reduce its exposure to
fluctuations in interest rates and foreign exchange rates by creating
offsetting positions through the use of derivative financial instruments.
Avon currently does not enter into derivative financial instruments for
trading purposes, nor is Avon a party to leveraged derivatives.
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 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 current 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. Changes in the fair value of a derivative
not designated as a hedging instrument are recognized in current earnings.
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.
The ineffective portion of the derivative's gain or loss, if any, is recorded
in current earnings. Prior to June 1, 2001, Avon excluded the change in the
time value of options in its assessment of hedge effectiveness. Effective
June 1, 2001, Avon includes the change in the time value of option contracts
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.
Interest Rates
Avon uses interest rate swaps to hedge interest rate risk on its 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 a portion of its fixed-rate debt to a variable-rate based on LIBOR.
Avon has designated the interest rate swaps as fair value hedges. At September
30, 2001, $550.0 of Avon's outstanding long-term debt is designated as the
27
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
hedged items to the interest rate swap contracts. Accordingly, long-term debt
increased by $53.3 during the nine months ended September 30, 2001 with a
corresponding increase to Other assets to reflect the fair values of
outstanding interest rate swaps. There were no amounts of hedge
ineffectiveness for the three and nine months ended September 30, 2001 related
to these interest rate swaps.
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 bonds
and accordingly both the interest rate swap and underlying debt were adjusted
to reflect their fair values at September 30, 2001. Effective with the
termination of the swap, the fair value adjustment to the underlying debt will
be amortized over the remaining term of that debt.
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. The forward interest
rate agreements have not been designated as hedges and have been recorded in
the Consolidated Financial Statements at fair value.
Foreign Currency
Avon uses foreign currency forward contracts and options to hedge
portions of its forecasted foreign currency cash flows resulting from
forecasted royalties, intercompany loans, and other anticipated foreign
currency transactions where there is a high probability that anticipated
exposures will materialize, including third-party and intercompany foreign
currency transactions. These contracts have been designated as cash flow
hedges.
For the three and nine months ended September 30, 2001, the net gain
related to the ineffective portion of Avon's cash flow hedging instruments and
the net loss related to the portion of the hedging instrument excluded from
the assessment of hedge effectiveness (time value of options prior to June 1,
2001) were not material. For the three and nine months ended September 30,
2001, the net gain reclassified from OCI to earnings for cash flow hedges that
have been discontinued, because the forecasted transactions are not probable
of occurring, was not material.
As of September 30, 2001, Avon expects to reclassify $1.7 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 royalties (b) intercompany loan settlements and (c) actual
foreign currency denominated purchases or receipts. The maximum remaining
term over which Avon is hedging exposures to the variability of cash flows for
all forecasted transactions is 15 months.
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 the gains and losses on these derivatives have been
recognized in current earnings.
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.
28
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(In millions, except share data)
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 12 of the Notes to Consolidated Financial Statements). For the nine
months ended September 30, 2001, a $0.1 loss related to the revaluation of
foreign currency denominated debt was included in foreign currency translation
adjustments within accumulated other comprehensive loss on the Consolidated
Balance Sheets.
Other Financing Activities
In connection with Avon's share repurchase program, Avon has entered into
forward contracts to purchase approximately 271,000 shares of Avon common
stock at an average price of $45.83 per share at September 30, 2001. The
contracts mature in October 2002 and provide for physical or net share
settlement to Avon. Accordingly, 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 and 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
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
losses is remote and that such losses, if any, would not be material.
Euro
A single currency called the euro was introduced in Europe on January 1,
1999. Twelve of the fifteen member countries of the European Union adopted
the euro as their common legal currency on that date. Fixed conversion rates
between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies are scheduled to remain legal tender as denominations of the euro
until June 30, 2002 after which they will be withdrawn from circulation.
During this transition period, parties may settle transactions using either
the euro or a participating country's legacy currency. Beginning in January
2002, new euro-denominated bills and coins will be issued.
Avon operating subsidiaries affected by the euro conversion have
established plans to address issues raised by the euro currency
conversion. These issues include, among others, the need to adapt
information technology systems, business processes and equipment to
accommodate euro-denominated transactions, the impact of one common
currency on pricing and recalculating currency risk. Avon does not
expect system and equipment conversion costs to be material. Due to the
numerous uncertainties associated with the market impact of the euro
conversion, Avon cannot reasonably estimate the effects one common
currency will have on pricing and the resulting impact, if any, on
results of operations, financial condition or cash flows.
Other Information
On September 6, 2001 Avon's board of directors elected its Chief
Executive Officer, Andrea Jung, to the additional post of chairman of the
board of directors effective immediately. She succeeds Stanley C. Gault who
has served as non-executive chairman since November 1999. Mr. Gault will
continue as a director of Avon.
29
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 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, including the potential impact on consumer confidence of the September
11 attacks; 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.
30
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
------- ------------------------
4.1 Agency Agreement dated September 20, 2001 between Avon
and HSBC Bank plc, as initial principal paying agent,
relating to the JPY 9,000,000,000 1.06 percent
Notes due 2006.
(b) Reports on Form 8-K.
On September 5, 2001, Avon filed a Form 8-K to announce that it issued a
press release updating its previous earnings guidance for its third
quarter and full-year 2001.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVON PRODUCTS, INC.
-------------------
(Registrant)
Date: November 2, 2001 By /s/ Janice Marolda
-------------------------------
Janice Marolda
Vice President,
Controller
Principal Accounting Officer
Signed both on behalf of the
registrant and as principal
accounting officer.
32