FORM 10-Q/A
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, 1999
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
October 31, 1999 was 242,304,430.
Table of Contents
Part I. Financial Information
Page
Numbers
-------
Introductory Notes - Restatements.............................. 3
Item 1. Financial Statements
Consolidated Statements of Operations
Three Months Ended September 30, 1999 (Restated)
and September 30, 1998............................ 4
Nine Months Ended September 30, 1999 (Restated)
and September 30, 1998............................ 5
Consolidated Balance Sheets
September 30, 1999(Restated) and December 31,1998... 6
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 (Restated)
and September 30, 1998 ........................... 7
Notes to Consolidated Financial Statements (Restated) 8-16
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition (Restated) 17-26
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................... 27
Signatures.................................................. 28
2
Introductory Note--Restatements
In connection with the settlement of the previously disclosed
investigation by the Securities and Exchange Commission ("SEC") relating to the
write off of an order management software system known as the "FIRST" project,
Avon has restated its Consolidated Financial Statements as of December 31,
2001, 2000 and 1999 and for the years then ended and for each of the fiscal
quarters ended March 31, 1999 through March 31, 2002. Avon had written off
$14.8 pretax, or $10.0 after tax, of FIRST assets in the first quarter of 1999
and $23.9 pretax, or $14.5 after tax, of FIRST assets in the third quarter of
2001. Avon has restated its financial statements to reflect the additional
write off as of March 31, 1999 of all capitalized costs ($23.3 pretax, or $14.0
after tax), associated with the FIRST project as of that date and a reversal of
the charge recorded in the third quarter of 2001. Other FIRST-related activity
(capitalized costs and amortization) recorded during 1999-2002 has also been
restated. A description of the adjustments that comprise the restatements is
set forth in Notes 2 and 10 of the Notes to Consolidated Financial Statements
filed with this Form 10-Q/A.
The accompanying financial statements have been restated to reflect the
restatements discussed above as well as the accounting changes outlined in Note
2. No attempt has been made in this Form 10-Q/A to modify or update any
disclosures except as required to reflect the results of the restatements
discussed above and any changes made to prior period financial information for
which a Form 10-Q/A was not filed.
3
PART I. FINANCIAL INFORMATION
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Three months ended
September 30
------------------
1999 1998
(Restated Note 2) ------
---------------
(unaudited)
Net sales.................................. $1,250.6 $1,233.2
Other revenue.............................. 9.1 8.7
-------- --------
Total revenue.............................. 1,259.7 1,241.9
Costs, expenses and other:
Cost of sales .......................... 465.0 478.2
Marketing, distribution and
administrative expenses................ 648.6 636.6
Special charge........................... - 46.0
-------- --------
Operating profit .......................... 146.1 81.1
Interest expense......................... 9.8 9.4
Interest income.......................... (2.4) (3.3)
Other expense (income), net.............. 2.6 (1.5)
-------- --------
Total other expenses....................... 10.0 4.6
-------- -------
Income before taxes and minority interest.. 136.1 76.5
Income taxes............................... 47.7 36.7
-------- --------
Income before minority interest............ 88.4 39.8
Minority interest.......................... (.3) 1.7
-------- --------
Net income................................. $ 88.1 $ 41.5
======== ========
Earnings per share:
Basic ................................. $ .34 $ .16
======== ========
Diluted................................ $ .34 $ .16
======== ========
The accompanying notes are an integral part of these statements.
4
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Nine months ended
September 30
-----------------
1999 1998
(Restated Note 2) ------
---------------
(unaudited)
Net sales.................................. $3,722.5 $3,663.8
Other revenue.............................. 27.4 26.3
-------- --------
Total revenue.............................. 3,749.9 3,690.1
Costs, expenses and other:
Cost of sales* .......................... 1,424.9 1,446.9
Marketing, distribution and
administrative expenses................ 1,922.3 1,886.5
Special charge........................... 90.4 116.5
Asset impairment charge.................. 38.1 -
-------- --------
Operating profit........................... 274.2 240.2
Interest expense......................... 27.7 25.6
Interest income.......................... (7.8) (11.5)
Other (income)expense, net............... (4.6) 2.6
-------- --------
Total other expenses....................... 15.3 16.7
-------- --------
Income before taxes and minority interest.. 258.9 223.5
Income taxes............................... 116.4 106.7
-------- --------
Income before minority interest............ 142.5 116.8
Minority interest.......................... 2.3 5.1
-------- --------
Net income................................. $ 144.8 $ 121.9
======== ========
Earnings per share:
Basic ................................. $ .55 $ .46
======== ========
Diluted................................ $ .55 $ .46
======== ========
*1999 and 1998 include one-time charges of $46.0 and $37.9, respectively, for
inventory write-downs.
The accompanying notes are an integral part of these statements.
5
AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
September 30 December 31
1999 1998
(Restated Note 2) ----------
---------------
(unaudited)
ASSETS
Current assets:
Cash and equivalents.................... $ 101.3 $ 105.6
Accounts receivable..................... 500.5 492.6
Inventories............................. 577.5 538.4
Prepaid expenses and other.............. 219.0 204.8
-------- --------
Total current assets.................... 1,398.3 1,341.4
-------- --------
Property, plant and equipment, at cost.. 1,432.7 1,392.8
Less accumulated depreciation........... 736.4 722.9
-------- --------
696.3 669.9
-------- --------
Other assets........................... 416.0 422.2
-------- -------
Total assets........................... $2,510.6 $2,433.5
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year.......... $ 395.7 $ 55.3
Accounts payable....................... 342.3 416.9
Accrued compensation................... 165.2 161.3
Other accrued liabilities.............. 365.4 308.2
Sales and other taxes.................. 95.2 106.2
Income taxes........................... 286.9 281.6
-------- --------
Total current liabilities.............. 1,650.7 1,329.5
-------- --------
Long-term debt......................... 204.7 201.0
Employee benefit plans................. 395.8 390.0
Deferred income taxes.................. 28.6 36.3
Other liabilities...................... 185.6 191.6
Shareholders' equity:
Common stock........................... 88.1 87.8
Additional paid-in capital............. 809.3 780.0
Retained earnings...................... 722.8 719.1
Accumulated other comprehensive income. (346.3) (301.3)
Treasury stock, at cost................ (1,228.7) (1,000.5)
-------- --------
Total shareholders' equity............. 45.2 285.1
-------- --------
Total liabilities and shareholders' equity $2,510.6 $2,433.5
======== ========
The accompanying notes are an integral part of these statements.
6
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Nine months ended
September 30
-----------------
1999 1998
(Restated Note 2) ------
---------------
(unaudited)
Cash flows from operating activities:
Net income...................................... $ 144.8 $ 121.9
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Special and non-recurring charges............... 85.6 104.4
Asset impairment charge...................... .. 38.1 -
Depreciation and amortization................... 60.8 51.2
Provision for doubtful accounts................. 65.0 66.8
Translation gains............................... (.8) (8.6)
Deferred income taxes........................... (30.9) (21.1)
Amortization of debt discount................... (5.0) -
Other........................................... 5.3 3.0
Changes in assets and liabilities:
Accounts receivable........................... (115.6) (148.0)
Inventories................................... (111.4) (125.1)
Prepaid expenses and other.................... (16.8) (27.2)
Accounts payable and accrued liabilities...... (59.0) (31.5)
Income and other taxes........................ 3.9 4.9
Noncurrent assets and liabilities............. 19.2 (4.3)
------ ------
Net cash provided(used)by operating activities.. 83.2 (13.6)
------ ------
Cash flows from investing activities:
Capital expenditures........................... (120.1) (110.9)
Disposal of assets............................. 6.2 7.2
Other investing activities..................... (16.4) (.6)
------ ------
Net cash used by investing activities.......... (130.3) (104.3)
------ ------
Cash flows from financing activities:
Cash dividends................................. (142.7) (135.7)
Book overdraft................................. 23.3 -
Debt, net (maturities of three months or less). 339.8 202.9
Proceeds from short-term debt.................. 38.6 76.6
Retirement of short-term debt.................. (37.0) (116.2)
Proceeds from long-term debt................... - 100.0
Retirement of long-term debt................... (.2) (.5)
Repurchase of common stock..................... (182.7) (75.0)
Proceeds from exercise of stock options........ 23.9 17.5
------ ------
Net cash provided by financing activities...... 63.0 69.6
------ ------
Effect of exchange rate changes on cash
and equivalents............................ (20.2) 3.6
------ ------
Net decrease in cash and equivalents........... (4.3) (44.7)
Cash and equivalents beginning of period....... 105.6 141.9
------ ------
Cash and equivalents end of period............. $101.3 $ 97.2
====== ======
The accompanying notes are an integral part of these statements.
7
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars 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 1998 Annual Report to Shareholders. The interim financial
statements are unaudited but include all adjustments, consisting of normal
recurring accruals, that management considers necessary to fairly present the
results for the interim periods. Results for interim financial 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.
In May 1999, the Financial Accounting Standards Board issued an Exposure
Draft delaying the effective date of Financial Accounting Standard ("FAS") No.
133, Accounting for Derivative Instruments and Hedging Activities, by one year.
FAS No. 133 is now effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (January 1, 2001 for the Company). FAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction. For fair-value hedge
transactions in which the Company is hedging changes in the fair value of an
asset, liability, or firm commitment, changes in the fair value of the
derivative instrument are included in the income statement along with the
offsetting changes in the hedged item's fair value. For cash-flow hedge
transactions, in which the Company is hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in
other comprehensive income. The gains and losses on the derivative instrument
that are reported in other comprehensive income will be reclassified to
earnings in the periods in which earnings are impacted by the variability of
the cash flows of the hedged item. The ineffective portion of all of the hedges
will be recognized in current-period earnings. The Company has not yet
determined the impact that the adoption of FAS No. 133 will have on its
earnings or statement of financial position.
To conform to the 1999 presentation, certain reclassifications were made
to prior years financial information.
2. RESTATEMENTS AND ACCOUNTING CHANGES
Restatements
In connection with the settlement of a previously disclosed investigation
by the Securities and Exchange Commission relating to the write off of an order
management software system known as the "FIRST" project, Avon has restated its
Consolidated Financial Statements as of December 31, 2001, 2000 and 1999 and
for the years then ended and for each of the fiscal quarters ended March 31,
1999 through March 31, 2002. See Introductory Note-Restatements and Note 10 of
the Notes to Consolidated Financial Statements, "Asset Impairment Charge".
The accompanying financial statements have been restated to reflect the
restatements discussed above as well as the accounting changes outlined in this
Note. No attempt has been made in this Form 10-Q/A to modify or update any
disclosures except as required to reflect the results of the restatements
discussed above and any changes made to prior period financial information for
which a Form 10-Q/A was not filed.
The principal adjustments comprising the restatements are as follows:
o Reclassification of $14.8 of pre-tax charges recorded in the first
quarter of 1999 related to the write off of a portion of the FIRST
project, out of the "Special charges" line and into the "Asset
impairment charge" line;
o An additional Asset impairment charge of $23.3 pretax in the first
quarter of 1999 to reflect the write off of all capitalized costs
associated with the FIRST project as of March 31, 1999;
o Reversal of the third quarter 2001 Asset impairment charge of $23.9
pretax related to the abandonment of the FIRST project; and
o Restatement of all other activity related to the FIRST project,
consisting of costs incurred and capitalized subsequent to March 31,
1999 and amortization, recorded from the second quarter of 1999
through the first quarter of 2002.
8
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
These adjustments resulting from the restatements are reflected in
Management's Discussion & Analysis and the following notes: Special and
Non-Recurring Charges, Earnings per Share, Comprehensive Income, Segment
Information and Asset Impairment Charge.
The effects of these restatements on the Consolidated Financial Statements
are set forth below:
Consolidated Statements of Operations
---------------------------------------------------------------------------------
Three Months ended Nine Months ended
September 30, 1999 September 30, 1999
------------------ ------------------
As As As As
Reported(1) Restated(2) Reported(1) Restated(2)
----------- ----------- ----------- -----------
Marketing, distribution and
administrative expenses $ 648.4 $ 648.6 $1,919.0 $1,922.3
Special charges - - 105.2 90.4
Asset impairment charge - - - 38.1
Operating profit 146.3 146.1 300.8 274.2
Income before taxes and minority
interest 136.3 136.1 285.4 258.9
Income taxes 47.8 47.7 127.0 116.4
Income before minority interest 88.5 88.4 158.4 142.5
Net income 88.2 88.1 160.7 144.8
Earnings per share:
Basic $ .34 $ .34 $ .62 $ .55
Diluted $ .34 $ .34 $ .61 $ .55
Consolidated Balance Sheet
As of September 30, 1999
--------------------------------------------------
As As
Reported(3) Restated(2)
----------- -----------
Property, plant and equipment, at cost $1,435.4 $1,432.7
Other assets 429.3 416.0
Total assets 2,526.6 2,510.6
Retained earnings 738.8 722.8
Total liabilities and shareholder's
equity 2,526.6 2,510.6
(1) As reported (as prior period comparative data) in the Company's Form 10-K
for the year ended December 31, 2000, which includes the effect of the
accounting changes outlined below.
(2) Includes the effects of restatements and accounting changes.
(3) As reported in the Company's Form 10-Q for the quarter ended September 30,
1999.
Accounting Changes
In addition, the Form 10-Q/A reflects the following changes to prior
period financial information for which a Form 10-Q/A was not previously filed.
These changes are primarily the result of the previously disclosed adoption of
new accounting pronouncements and are unrelated to the restatements described
above and the FIRST project:
o Accounting changes made to reported 1999 financial information as a
result of the adoption of Emerging Issues Task Force ("EITF") 00-10,
"Accounting for Shipping and Handling Fees and Costs". The adoption of
EITF 00-10 resulted in increases in Marketing, distribution and
administrative expenses and Other Revenue of $9.1 and $27.4 for the
three and nine months ended September 30, 1999, respectively, and
$8.7 and $26.3 for the three and nine months ended September 30,
1998, respectively. The adoption of this EITF had no impact on Net
income or Earnings per share.
o Reclassifications made to reported financial information
to conform with the 1999 full year presentation.
9
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
3. INFORMATION RELATING TO THE STATEMENT OF CASH FLOWS
"Net cash provided (used) by operating activities" includes the following
cash payments for interest and income taxes:
Nine months ended
September 30
-----------------
1999 1998
---- ----
Interest................................. $ 34.0 $ 30.3
Income taxes, net of refunds received.... 117.9 124.8
Non-cash financing activities include $45.5 of common stock repurchased in
September 1999 not settled until October 1999.
4. EARNINGS PER SHARE
Basic earnings per share ("EPS") are computed by dividing net income by
the weighted-average number of shares outstanding during the year. Diluted
earnings per share are calculated to give effect to all potentially dilutive
common shares that were outstanding during the year.
For the three and nine months ended September 30, 1999 and 1998, the
number of shares used in the computation of basic and diluted earnings per
share are as follows:
Three Months ended Nine Months ended
September 30 September 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Basic EPS:
Weighted-average shares 260.40 263.16 261.31 263.42
Incremental shares from
assumed conversion of
stock options 2.53 2.62 2.90 1.80
------ ------ ------ ------
Diluted EPS:
Adjusted weighted-
average shares 262.93 265.78 264.21 265.22
====== ====== ====== ======
The Company purchased approximately 5,895,800 shares of common stock for
$228.2 during the first nine months of 1999, as compared to approximately
2,211,000 shares of common stock for $75.0 during the first nine months of
1998. Of the 5,895,800 shares repurchased, 1,779,800 shares repurchased for
$45.5 in September 1999 were not settled until October 1999. Accordingly, $45.5
has been included in Other accrued liabilities on the Consolidated Balance
Sheet.
10
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
5. INVENTORIES
September 30 December 31
1999 1998
---- ----
Raw materials................ $166.5 $140.6
Finished goods............... 411.0 397.8
------ ------
$577.5 $538.4
====== ======
6. DIVIDENDS
Cash dividends paid per share of common stock were $.18 and $.54 for the
three and nine months ended September 30, 1999, respectively, and $.17 and $.51
for the corresponding 1998 period. On February 4, 1999, the Company increased
the annual dividend rate to $.72 from $.68.
7. CONTINGENCIES
Various lawsuits and claims (asserted and unasserted), arising in the
ordinary course of business or related to businesses previously sold, are
pending or threatened against Avon.
In 1991, a class action 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). Avon has
rejected the assertions in this case, believes it has meritorious defenses to
the claims and is vigorously contesting this lawsuit. It is anticipated that a
trial may take place as early as Spring 2000.
In the opinion of Avon's management, based on its review of the information
available at this time, the difference, if any, between the total cost of
resolving such contingencies and reserves recorded by Avon at September 30,
1999 should not have a material adverse impact on Avon's consolidated financial
position, results of operations, or cash flows.
8. COMPREHENSIVE INCOME
For the three and nine months ended September 30, 1999 and 1998, the
components of comprehensive income are as follows:
Three Months ended Nine Months ended
September 30 September 30
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Net Income $ 88.1 $ 41.5 $ 144.8 $ 121.9
Other comprehensive income
(loss): Change in equity
due to foreign currency
translation and
transaction adjustments (4.8) (1.2) (45.0) (18.9)
----- ------ ------ ------
Comprehensive income $ 83.3 $ 40.3 $ 99.8 $ 103.0
====== ====== ======= ======
11
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
9. SPECIAL AND NON-RECURRING CHARGES
In October 1997, the Company announced a worldwide business process
redesign program in order to streamline operations and improve profitability,
through margin improvement and expense reductions. The special and
non-recurring charges associated with this program totaled $46.0 pretax ($38.6
net of tax, or $.14 per diluted share) and $154.4 pretax ($122.8 net of tax, or
$.46 per diluted share) for the three months and nine months ended September
30, 1998, respectively.
For the nine months ended September 30, 1999, special and non-recurring
charges related to this program totaled $136.4 pretax ($111.9 net of tax, or
$.43 per share on a basic and diluted basis).
For the nine months ended September 30, 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 6.5
-------
Total $ 136.4
=======
For the nine months ended September 30, 1999, special and non-recurring
charges by category of expenditures are as follows:
Special Cost of
Charge Sales Charge Total
------- ------------ -----
Employee Severance Costs $ 57.0 $ 57.0
Inventories $ 46.0 46.0
Write-down of Assets to
Net Realizable Value 11.6 11.6
Recognition of Foreign Currency
Translation Adjustment 9.8 9.8
Other 12.0 12.0
------- ------ ------
Total $ 90.4 $ 46.0 $ 136.4
======= ======= =======
Employee severance costs are expenses, both domestic and international,
associated with the realignment of the Company's global operations. Certain
employee severance costs were accounted for in accordance with the Company's
existing FAS 112, ("Employers' Accounting for Post employment Benefits"),
severance plans. Remaining severance costs were accounted for in accordance
with other existing accounting literature. The workforce will be reduced by
1,374 associates, or 4% of the total. Approximately 65% of the employees to be
terminated relate to facility reorganizations and closures.
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 the Company markets and sells certain inventory. This new strategy,
approved and effective in March 1999, is meant to complement other redesign
initiatives, with the objective of reducing inventory clearance sales, building
core brochure sales and building global brands.
12
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
The write-down of assets (primarily fixed and other assets) mainly relates
to the restructuring of operations in Western Europe, including the closure of
a jewelry manufacturing facility in Ireland. By centralizing certain key
functional areas and exiting unprofitable situations, the Company plans to
increase operating efficiencies and ultimately, profit growth in the long-term.
The recognition of foreign currency translation adjustment relates to the
closure of the jewelry manufacturing facility.
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, 1999 is as follows:
Special Cost of
Charge Sales Charge Total
------- ------------ -----
Balance at December 31, 1998 $ 28.5 $ - $ 28.5
Provision 90.4 46.0 136.4
Cash expenditures (51.0) (51.0)
Non-cash write offs (26.5) (46.0) (72.5)
------ ----- ------
Balance at September 30, 1999 $ 41.4 $ - $ 41.4
====== ===== ======
The balance at September 30, 1999 relates primarily to employee severance
costs that will be paid during 1999 and 2000.
10. ASSET IMPAIRMENT CHARGE
In the first quarter of 1999, Avon originally recorded a Special charge of
$151.2 pretax, which included the write off of $14.8 in pre-tax costs ($10.0
after tax) associated with a portion of the order management software system
known as the FIRST project. The balance of the FIRST project's development
costs had been carried as an asset until the third quarter of 2001, when Avon
recorded a pre-tax charge of $23.9 ($14.5 after tax) to write off the carrying
value of costs related to that project. The non-cash charge recorded in the
third quarter of 2001 included software development costs, certain hardware,
software interfaces and other related costs. Prior to the write off, the
capitalized software was included in Property, plant and equipment, at cost and
Other assets on the Consolidated Balance Sheet.
The decision to abandon the FIRST project was based on various factors,
including project management and implementation issues and costs, costs for
ongoing support, and changes in Avon business strategies.
The FIRST project, and the Special charge reported by Avon in the first
quarter of 1999 that included the write off of $14.8 in pre-tax costs
associated with FIRST, were the subject of a formal investigation by the SEC
commenced in August 2000. Avon has settled that matter with the SEC and, as
part of that settlement, has restated its financial statements to reflect the
additional write off as of March 31, 1999 of all capitalized costs ($23.3
pretax, and $14.0 after tax) associated with the FIRST project as of that date
for a total first quarter write off of $38.1 pretax ($24.0 after tax). Avon has
also reversed the charge recorded in the third quarter of 2001, and has
restated all other FIRST-related activity recorded during 1999-2002.
See the Introductory Note - Restatements and Note 2 of the Notes to
Consolidated Financial Statements, "Restatements and Accounting Changes".
13
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
11. SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is as follows:
Three Months Ended September 30
-------------------------------
1999 1998
---- ----
Net Operating Net Operating
Sales Profit Sales Profit
-------- --------- -------- ---------
North America:
U.S. $ 405.7 $ 57.0 $ 413.0 $ 56.5
Other* 66.0 8.0 65.7 6.1
-------- -------- -------- --------
Total 471.7 65.0 478.7 62.6
-------- -------- -------- --------
International:
Latin America 398.6 91.3 416.2 91.6
Pacific 178.9 24.5 148.3 15.0
Europe 201.4 23.5 190.0 14.9
-------- -------- -------- --------
Total 778.9 139.3 754.5 121.5
-------- -------- -------- --------
Total from operations $1,250.6 $ 204.3 $1,233.2 $ 184.1
======== -------- ======== --------
Global expenses (58.2) (57.0)
Special and non-recurring charges - (46.0)
-------- --------
Operating profit $ 146.1 $ 81.1
======== ========
*Includes operating information for Puerto Rico, Dominican Republic, Canada and
for Discovery Toys.
14
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
Nine Months Ended September 30
------------------------------
1999 1998
---- ----
Net Operating Net Operating
Sales Profit Sales Profit
-------- --------- -------- --------
North America:
U.S. $1,264.5 $ 225.5 $1,232.0 $ 207.0
Other* 190.0 27.6 192.7 21.6
-------- -------- -------- --------
Total 1,454.5 253.1 1,424.7 228.6
-------- -------- -------- --------
International:
Latin America 1,169.4 245.9 1,204.5 236.8
Pacific 505.4 60.9 446.0 36.1
Europe 593.2 69.3 588.6 58.7
-------- -------- -------- --------
Total 2,268.0 376.1 2,239.1 331.6
-------- -------- -------- --------
Total from operations $3,722.5 $ 629.2 $3,663.8 $ 560.2
-------- -------- -------- --------
Global expenses (180.5) (165.6)
Special and
non-recurring charges (136.4) (154.4)
Asset impairment charge (38.1) -
-------- --------
Operating profit $ 274.2 $ 240.2
======== ========
*Includes operating information for Puerto Rico, Dominican Republic, Canada and
for Discovery Toys.
12. OTHER FINANCING ACTIVITIES
At September 30, 1999, the Company had entered into forward contracts to
purchase approximately 2,913,200 shares of Avon common stock at an average rate
of $40.65 per share as of September 30, 1999. The contracts mature over the
next 2 years and provide for physical or net settlement to the Company.
Accordingly, no adjustment for subsequent changes in fair value has been
recognized. Subsequent to September 30, 1999, 480,000 shares were purchased
under these contracts.
13. SUBSEQUENT EVENTS
In October 1999, the Company's Board of Directors approved a significant
acceleration of the Company's share repurchase program. This will substantially
complete the Company's current $1.1 billion buyback program, which had been
scheduled to run through 2001.
Subsequent to September 30, 1999, the Company purchased approximately 17
million shares of its common stock for approximately $488.0 under this program,
funded by short-term borrowings.
15
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
In November of 1999, the Company issued $500.0 of notes payable (the
"Notes") in a private offering to institutional investors. The Notes are
unsubordinated, unsecured obligations of the Company. $200.0 of the Notes bear
interest at a per annum rate equal to 6.90% and mature on November 15, 2004 and
will be repaid at par. $300.0 of the Notes bear interest at a per annum rate
equal to 7.15% and mature on November 15, 2009 and will be repaid at par.
Interest on the Notes is payable semi-annually. The indenture under which the
Notes were issued limits the incurrence of indebtedness, and the restricting of
sales and leaseback transactions, sales of assets and transactions involving
mergers, sales or consolidation. The proceeds from this issuance will be used
for general corporate purposes, including repayment of outstanding short-term
borrowings incurred to finance the acceleration of the Company's share
repurchase program discussed above.
In connection with the offering, Avon entered into a five-year and
ten-year interest rate swap contract with notional amounts of $200.0 and
$300.0, respectively to effectively convert fixed interest to a variable
interest rate, based on commercial paper rates.
16
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
ITEM 2. Management's Discussion and Analysis of the Results of Operations and
Financial Condition (Restated)
Results of Operations
Consolidated
Consolidated net sales for the three-month and nine-month periods of 1999
increased 1% and 2%, respectively, over the same periods of 1998. Third quarter
sales improvements in the Pacific and Europe regions were partially offset by
declines in Latin America, primarily Brazil, and in North America. The
year-to-date sales growth reflected increases in North America, primarily in
the U.S., and in International. Excluding the impact of foreign currency
exchange, consolidated net sales rose 8% and 9% in the three-month and
nine-month periods of 1999, respectively, over the comparable periods of the
prior year.
Cost of sales as a percentage of Net sales increased 1.6 percentage points
in the third quarter and 1.2 percentage points in the nine-month period of 1999
compared to the same periods of 1998. The cost of sales for the nine months
ended September 30, 1999 and 1998 include one-time charges of $46.0 and $37.9,
respectively, for inventory write-downs related to the Company's business
process redesign ("BPR") program. See Note 9 for further detail. Excluding
these charges, the gross margin increased 1.5 percentage points on a September
year-to-date basis. The higher gross margin in both the third quarter and
year-to-date period resulted from improvements in all regions, most
significantly in the U.S, Japan, the United Kingdom, Germany, Mexico, Argentina
and Central Europe. Third quarter improvements were partially offset by a gross
margin decline in Brazil.
Marketing, distribution and administrative expenses increased $12.0 (2%)
and $35.8 (2%) in the third quarter and nine-month periods of 1999,
respectively, over the same periods of 1998 primarily due to increases in the
U.S., Mexico and Japan as well as higher global expenses, partially offset by
lower expenses in Brazil and Russia. Marketing, distribution, and
administrative expenses increased slightly as a percentage of total revenue to
51.5% in the third quarter of 1999 from 51.3% in 1998 and to 51.3% in the first
nine months of 1999 from 51.1% in 1998. 1999 expense ratio improvements in
Brazil, Central Europe and China were more than offset by unfavorable expense
ratios in Mexico, Argentina, Germany, and the U.S.
The nine months ended 1999 and 1998 results include special charges of
$90.4 and $116.5, respectively for the Company's BPR program. The third quarter
1998 results also include special charges of $46.0 related to the BPR program.
These charges are primarily related to employee severance benefits worldwide,
as well as facility reorganizations. See Note 9 for further detail.
An Asset impairment charge of $38.1 pretax was recorded in the nine months
ended September 30, 1999 related to the write off of an order management
software system. See Note 10 for further detail.
Interest expense increased to $9.8 in the third quarter of 1999 as
compared with $9.4 in 1998, and to $27.7 in the first nine months of 1999
compared with $25.6 in 1998 primarily as a result of increased domestic
borrowings.
17
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Interest income decreased $.9 in the third quarter of 1999 due to lower
average short-term investments as well as lower interest rates in Brazil. For
the nine-month period, interest income decreased $3.7 compared to prior year
primarily due to a Mexico tax refund claim recognized in June 1998.
Other expense (income) of $2.6 in the third quarter of 1999 was $4.1
unfavorable to the comparable period of 1998 mainly due to unfavorable net
foreign exchange in 1999. However, other expense (income) of ($4.6) for the
nine-month period of 1999 was $7.2 favorable over the nine-month period of 1998
due primarily to favorable net foreign exchange resulting from gains on
Brazilian currency forward contracts.
Excluding the special charges, the effective tax rate for the third
quarter 1999 was 35.0% versus 36.0% for the third quarter 1998 due to the
earnings mix and tax rates of international subsidiaries. Excluding the special
and non-recurring charges, the effective tax rate was 35.6% for the first nine
months of 1999 compared to 36.6% in the comparable period of 1998.
Minority interest decreased $2.0 and $2.8 in the third quarter and
nine-month period of 1999, respectively, compared to 1998, primarily due to
lower losses in Japan and China in 1999.
The following discussion addresses net sales and operating profit by
reportable segment as presented in Note 11:
North America
Net sales decreased 1% in the third quarter while net sales for the
nine-month period of 1999 grew 2% over prior year. The U.S. business, which
represents almost 90% of the North American segment, reported a sales decline
of 2% for the third quarter and a 3% increase for the September year-to-date
period. The third quarter decline resulted from a 6% decrease in the number of
units sold as well as a 1% decrease in active Representatives. U.S. sales of
cosmetics, fragrance and toiletries ("CFT") decreased 10% during the third
quarter primarily due to underperformance of women's new products, particularly
Forever Amber and Skintrition. Additionally, the existing line under performed
primarily due to less exposure in the brochure in 1999. However, within the CFT
category, color cosmetics had a strong increase particularly in the face and
eye segment due to new product launches. The third quarter sales decline also
reflects decreases in the apparel category mainly due to the rebalancing of
resources to support more profitable segments. These decreases were partially
offset by growth in the fashion jewelry and accessories category driven by
higher sales of fine jewelry and strong sales in the novelty jewelry segment
which included such innovative products as Solar Magic, Four Way Locket and
children's giftsets. Sales of gift and decorative items and home entertainment
products also increased during the third quarter primarily due to a focus on
religious and inspirational products.
On a September year-to-date basis, sales in the U.S. increased 3% due to
growth in the fashion jewelry and accessories category reflecting success of
sterling silver and bolder jewelry designs, the introduction of licensed
luggage and strong performance in watches and handbags. Additionally, the home
entertainment and gift and decorative category posted double-digit percentage
increases reflecting increased sales of inspirational and religious products.
These year-to-date improvements were partially offset by continued declines in
CFT and apparel categories.
18
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Operating profit in North America increased 4% and 11% in the third
quarter and first nine months of 1999, respectively, compared with the same
periods in 1998. This improvement is primarily attributable to a higher gross
margin in the U.S. due to supply chain cost improvements and pricing in the
non-CFT categories and product category management, partially offset by an
unfavorable expense ratio due to increased spending on strategic initiatives
such as the internet and the opening of express and beauty centers.
International
International U.S. dollar net sales for the third quarter and first nine
months of 1999 increased 3% and 1%, respectively, over the comparable periods
in 1998. Sales growth in the Pacific and Europe regions was partially offset by
a decline in Latin America for both the third quarter and nine-month period of
1999. However, excluding the effect of foreign currency exchange, sales
increased 14% and 13% during the third quarter and first nine months of 1999,
respectively.
The sales improvement in the Pacific region for both the third quarter and
first nine months of 1999 was driven by strong increases in units and customers
served in the Philippines, Australia and Taiwan. Local currency sales in Japan
decreased due to a lower average order size. However, Japan's U.S. dollar sales
increased significantly due to favorable currency impact. Excluding the effect
of foreign currency exchange, sales in the Pacific increased 7% and 6% in the
third quarter and first nine months of 1999, respectively.
In Europe, sales increased 6% and 1% in the third quarter and nine-month
period of 1999, respectively, due to growth in the United Kingdom and Central
Europe, partially offset by declines in Russia and Germany. A higher average
order size and increased distributorship sales fueled the increase in the
United Kingdom. Additionally, in the United Kingdom, the launch of a new
brochure to enhance Avon's image contributed to the sales growth. The
improvement in Central Europe, primarily in Poland, resulted from continued
increases in units, customers served and active Representatives. Poland's
success reflects strong growth in the CFT category, increased Representative
retention and a change in the campaign cycle including a new brochure every 4
weeks versus 6 weeks in prior year. Sales were lower in Russia due to the
continued economic crisis and ruble devaluation, and in Germany due to a weak
economic environment. Excluding the impact of exchange, Europe sales grew 17%
and 11% in the third quarter and first nine months of 1999, respectively.
The U.S dollar sales decline in Latin America resulted from significant
decreases in Brazil as a result of the real devaluation and in Argentina as a
result of weak economic conditions. These declines were partially offset by
sales growth in Mexico, Venezuela and Central America. Mexico's sales increase
during the third quarter resulted mainly from inflation-related price increases
in 1999; however, September year-to-date increases resulted from both
operational growth including new product launches in the cosmetics, home and
fashion lines as well as economic growth reflecting consumer price increases.
Central America posted double-digit increases in units, customers served and
active Representatives in both the third quarter and nine-month period in 1999.
Excluding the impact of exchange, sales in Latin America increased 15% and 18%
in the third quarter and first nine months of 1999, respectively. Local
currency sales and units continue to grow over 20% in Brazil in both the third
quarter and first nine months of 1999. Active Representatives in Brazil were
also up double-digits driven by recruiting and retention strategies in place
including strong training and incentive programs.
19
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
International operating profit increased 15% and 13% in the third quarter
and nine-month period of 1999, respectively, compared to the same periods in
1998.
Operating profit growth in the Pacific of 63% and 69% in the third quarter
and first nine months of 1999, respectively, resulted from U.S. dollar sales
growth, discussed above, and operating margin improvements in nearly all
markets, most significantly in Japan and China. Japan's gross margin improved
due to product cost savings initiatives in CFT and improved sourcing decisions
for non-CFT as well as a business-wide product profitability screening process
that led to the elimination of many low-margin products in the apparel and
jewelry segments. Additionally, BPR efforts continue to generate significant
savings across all expense areas in Japan. China's year-to-date improvement in
1999 reflects the suspension of operations for most of the second quarter of
1998 due to governmental restrictions on direct-selling companies. However,
China's operating margin improved significantly during the third quarter of
1999, which was on a comparable basis to prior year, due to a shift in sales
mix to higher margin items. Philippines and Taiwan also reported increases in
operating profit driven primarily by the sales growth, discussed above. As a
result, the operating margin in the Pacific was up 3.5 points and 3.9 points
for the third quarter and first nine months of 1999, respectively, over prior
year.
In Latin America, operating profit was level in the third quarter but
increased 4% in the nine-month period of 1999 compared to the same periods in
1998. For the third quarter period, continued declines in Brazil resulting from
the real devaluation in 1999 were offset by increases in Mexico and Venezuela.
Higher operating profit in Mexico resulted from the sales growth and gross
margin improvement, partially offset by increased advertising expense and
incentive programs in 1999. The year-to-date 4% operating profit increase was
due to improvements in Mexico and Venezuela driven by higher sales and, to a
lesser extent, in Brazil due to aggressive cost reduction efforts and strict
expense management. Brazil reported a 4.0 point operating margin improvement in
the first nine months of 1999. These improvements were partially offset by
declines in Argentina and Chile due to the sales shortfalls and weak economic
conditions.
The Brazilian real devalued significantly in January 1999 and, as a
result, negatively affected Brazil's U.S. dollar results in 1999. Brazil's
third quarter and September year-to-date 1999 sales, although up over 20% in
local currency, were down approximately 20% in U.S. dollars due to the
devaluation. In response to this situation, several actions have been taken by
local management to offset the devaluation, including a focused effort directed
at vendor negotiations and additional local sourcing to reduce imports.
Operating profit in Europe increased 58% and 18% in the third quarter and
nine-month period of 1999, respectively. This improvement was primarily driven
by increases in the United Kingdom, Central Europe and Italy. The United
Kingdom continues to focus on category and customer growth, image enhancement
and expense control. For both the third quarter and nine-month period of 1999,
the United Kingdom, Central Europe and Italy reported significant growth in
operating margins due to higher gross margins which resulted from a continuing
focus on pricing strategies and improved profitability of non-CFT categories.
Additionally, Russia's third quarter operating results were slightly above last
year due to substantial reduction in their operating expenses. However, on a
year-to-date basis, the improvements in the above markets were partially offset
by declines in Russia resulting from the ruble devaluation during the second
half of 1998. Management in Russia will continue to manage expenses tightly and
seek to increase market share and improve margins through pricing flexibility
and tight expense management.
20
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Global Expenses
Global expenses increased 2% and 9% in the third quarter and first nine
months of 1999, respectively, over the same periods in 1998 primarily due to
increased investments in global marketing, research and development and
information technology systems, as well as costs related to the work on the
Company's new strategic initiatives.
Liquidity and Capital Resources
Cash Flows
Excluding changes in debt, there was a net decrease in cash of $345.5 in
the first nine months of 1999 compared with a decrease of $307.5 in the
comparable period of 1998. The $38.0 variance primarily reflects increased
repurchases of common stock, an unfavorable effect of foreign currency
exchange, increased cash used for investing activities due to the acquisition
of the remaining interest in a manufacturing facility in Poland and higher
capital expenditures, including a new manufacturing and distribution facility
in Mexico. These uses of cash were partially offset by lower net cash used by
operations reflecting a higher net income (adjusted for the non-cash portion of
the special charges), a favorable consolidated working capital level and a
higher cash usage in 1998 related to the funding of the Company's benefit
plans.
For the first nine months of 1999, the Company purchased approximately
5,895,800 shares of common stock for $228.2 compared with $75.0 spent for the
repurchase of approximately 2,211,000 shares during the comparable period in
1998. Of the 5,895,800 shares repurchased, 1,779,800 shares repurchased for
$45.5 in September 1999 were not settled until October 1999. Accordingly, $45.5
has been included in Other accrued liabilities on the Consolidated Balance
Sheet.
In October 1999, the Company's Board of Directors approved a significant
acceleration of the Company's share repurchase program. This will substantially
complete the Company's current $1.1 billion buyback program, which had been
scheduled to run through 2001. See Note 11 for further detail of this program.
Capital Resources
Total debt increased $344.1 to $600.4 from $256.3 at December 31, 1998,
principally due to normal seasonal working capital requirements and borrowings
to support the continuing stock buyback program. Total debt of $600.4 at
September 30, 1999 was $104.8 higher than total debt of $495.6 at September 30,
1998 primarily to fund the accelerated stock buyback program in 1999. In
addition, at September 30, 1999 and December 31, 1998, other non-current
liabilities include approximately $107.9 and $112.4, respectively, related to
securities lending activities.
At September 30, 1999, there were no borrowings under the amended and
restated revolving credit and competitive advance facility agreement. This
agreement is also used to support the Company's commercial paper borrowings of
which $330.0 was outstanding at September 30, 1999. At September 30, 1999,
there were $10.0 of borrowings outstanding under uncommitted lines of credit.
Subsequent to September 30, 1999, the Company purchased approximately 17
million shares of its common stock for approximately $488.0 under this program,
funded by short-term borrowings.
21
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
As discussed in Note 13 to the Consolidated Financial Statements the
Company issued $500.0 of unsubordinated, unsecured notes payable in a private
offering to institutional investors. The proceeds from this issuance will be
used for general corporate purposes, including the repayment of outstanding
short-term borrowings incurred to finance the acceleration of the Company's
share repurchase program discussed above.
In connection with the offering, Avon entered into a five-year and
ten-year interest rate swap contract with notional amounts of $200.0 and
$300.0, respectively to effectively convert fixed interest to a variable
interest rate, based on commercial paper rates.
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.
Working Capital
As of September 30, 1999, current liabilities exceeded current assets by
$252.4, while at December 31, 1998 current assets exceeded current liabilities
by $11.9. The increase of current liabilities over current assets of $264.3 was
primarily due to the increase in net debt (debt less cash and equivalents), as
discussed in the Debt section, and other accrued liabilities, mainly due to the
accrual for special and non-recurring charges, partially offset by a decrease
in accounts payable and increase in inventories, reflecting the seasonal
pattern of Avon's operations.
Although current liabilities exceeded current assets at September 30,
1999, management believes this is due to the Company's direct selling business
format which results in lower receivable and working capital levels as well as
the Company's practice of repurchasing shares with available cash. Avon's
liquidity results from its ability to generate significant cash flows from
operations and its ample unused borrowing capacity.
At September 30, 1999, the large excess of current liabilities over
current assets reflects the aforementioned acceleration of the Company's share
repurchase program and the related short-term borrowings, pending issuance of
long term debt discussed in Note 13. Avon's credit agreements do not contain
any provisions or requirements with respect to working capital.
Financial Instruments and Risk Management Strategies
The Company operates globally, with manufacturing and distribution
facilities in various locations around the world.
The Company may reduce its exposure to fluctuations in interest rates and
foreign exchange rates by creating offsetting positions through the use of
derivative financial instruments. The Company currently does not use derivative
financial instruments for trading or speculative purposes, nor is the Company a
party to leveraged derivatives.
The Company periodically uses interest rate swaps to hedge portions of
interest payable on its debt. In addition, the Company may periodically employ
interest rate caps to reduce exposure, if any, to increases in variable
interest rates.
At September 30, 1999, the Company had a five-year interest rate swap
contract with a notional amount of $50.0 to effectively convert fixed interest
on a portion of the $100.0 bonds to a variable interest rate, based on LIBOR.
22
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
The Company may periodically hedge foreign currency royalties, net
investments in foreign subsidiaries, firm purchase commitments and contractual
foreign currency cash flows or obligations, including third-party or
intercompany foreign currency transactions. The Company regularly monitors its
foreign currency exposures and ensures that hedge contract amounts do not
exceed the amounts of the underlying exposures.
At September 30, 1999, the Company held foreign currency forward contracts
with notional amounts totaling $376.7 and option contracts with notional
amounts totaling $20.0 to hedge foreign currency items. Only $40.7 of these
contracts have maturities after 1999. Also outstanding at September 30, 1999
were foreign contracts totaling $15.0 which do not qualify as hedging
transactions under the current accounting definitions and accordingly, have
been marked to market. The mark-to-market adjustment at September 30, 1999 was
insignificant. The Company's risk of loss on the options in the future is
limited to premiums paid, which are insignificant.
At September 30, 1999, the Company has entered into forward contracts to
purchase approximately 2,913,200 shares of Avon common stock at an average rate
of $40.65 per share as of September 30, 1999. The contracts mature over the
next 2 years and provide for physical or net share settlement to the Company.
Accordingly, no adjustment for subsequent changes in fair value has been
recognized. Subsequent to September 30, 1999, 480,000 shares were purchased
under these contracts.
The Company attempts to minimize its credit exposure to counterparties by
entering into interest rate swap and cap contracts only with major
international financial institutions with "A" or higher credit ratings as
issued by Standard & Poor's Corporation. The Company's foreign currency and
interest rate derivatives are comprised of over-the-counter forward contracts
or options with major international financial institutions. Although the
Company's theoretical credit risk is the replacement cost at the then estimated
fair value of these instruments, management believes that the risk of incurring
losses is remote and that such losses, if any, would not be material.
Other Information
Euro
A single currency called the euro was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union adopted the
euro as their common legal currency on that date. Fixed conversion rates
between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies are scheduled to remain legal tender as denominations of the euro
until June 30, 2002 after which they will be withdrawn from circulation. During
this transition period, parties may settle transactions using either the euro
or a participating country's legal currency. Beginning in January 2002, new
euro-denominated bills and coins will be issued.
Avon operating subsidiaries affected by the euro conversion have
established plans to address issues raised by the euro currency conversion.
These issues include, among others, the need to adapt information technology
systems, business processes and equipment to accommodate euro-denominated
transactions, the impact of one common currency on pricing and recalculating
currency risk. Avon does not expect system and equipment conversion costs to be
material. Due to the numerous uncertainties associated with the market impact
of the euro conversion, the Company cannot reasonably estimate the effects one
common currency will have on pricing and the resulting impact, if any, on
results of operations, financial condition or cash flows.
23
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Year 2000
General
The "Year 2000 issue" is the result of computer programs being written
using two digits rather than four to define the applicable year. If the
Company's computer programs with date-sensitive functions are not Year 2000
compliant, they may fail or make miscalculations due to interpreting a date,
including "00" to mean 1900, not 2000. The result may be disruptions in
operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
The Company commenced its worldwide Year 2000 initiative in early 1996.
The Company has developed a comprehensive project plan as a means for ensuring
that all information technology ("IT") systems, including applications,
operating systems, mainframe, mid range and client server platforms, all non-
information technology ("Non-IT") systems, including embedded applications and
equipment and key third parties are Year 2000 compliant by December 31, 1999.
The Company has identified high risk applications that are critical to its
business, recognizing the fact that timely compliance of these systems is
crucial, and, therefore, has designed its programs to address these systems
first. Furthermore, the Company has established a project team to identify and
address the Company's Year 2000 risks and issues in an attempt to ensure the
integrity and reliability of the Company's information systems and business
processes.
Project Plan
The Company's Year 2000 project plan is divided into four major sections,
including: Infrastructure, Application Software, Validation of Third Party
Compliance and Embedded Systems. The project has five phases, which are common
to all sections: 1) identifying, inventorying and prioritizing Year 2000 items;
2) assessing Year 2000 compliance of identified items and related potential
risks in circumstances of non-compliance of these items; 3) remediating,
replacing or upgrading, as appropriate, material items that are determined not
to be Year 2000 compliant; 4) validation testing of material items to ensure
compliance; and 5) contingency planning and implementation. The Company
utilizes internal resources and outside consultants to renovate and test its IT
and Non-IT systems for Year 2000 compliance. None of the Company's other
information technology projects have been deferred due to the implementation of
the Year 2000 project.
The Infrastructure section consists of hardware, including mainframe and
AS/400 platforms, and software, including operating systems, other than
Applications Software. This section has been completed for all phases.
The Applications Software section includes the conversion of both in-house
developed and vendor-supplied software applications. In-house developed
software that is not Year 2000 compliant has undergone remediation of its
application, whereas non-compliant vendor provided software has been upgraded
or replaced, where available by the supplier. This section's testing phase,
which includes procedures for independent validation and verification of code
has been completed. In addition, end-to-end testing to verify the data
integrity of internal and external system interfaces has also been completed.
Validation of Third Party Compliance includes the process of recognizing,
prioritizing and communicating with key suppliers and service providers with
whom the Company has a direct and significant relationship and are believed to
be critical to its business operations. The validation of third party
compliance and preparation of any necessary
24
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
contingency plans has been completed. Follow-up reviews are scheduled for the
remainder of 1999.
The Embedded Systems section includes all hardware, software and
associated embedded computer chips that are utilized in operating and
maintaining the internal functions of the Company's facilities, i.e. climate
control systems. The Company has elected to employ a regional-based strategy
for addressing Year 2000 compliance of its embedded systems. Both the U.S. and
international operations have completed the remediation and testing of embedded
systems.
Costs
The total estimated cost associated with achieving worldwide Year 2000
compliance will be approximately $32.7, of which $28.3 has been spent to date.
Replacement costs and costs associated with the validation of third party
compliance are included in these figures. The Company does not separately track
the internal costs incurred for the Year 2000 project, those costs primarily
being related to payroll costs for the Company's information systems group. The
Company's policy is to expense as incurred information system maintenance and
modification costs and to capitalize costs related to system replacement. The
costs of the Company's Year 2000 compliance efforts are being funded through
operating cash flows.
Risks
The Company expects to identify and resolve all Year 2000 problems that
may adversely affect its business operations. However, management believes that
it is not possible to determine with complete certainty that all Year 2000
matters affecting the Company have been or will be identified or corrected,
resulting in part from the uncertainty of the Year 2000 readiness of third
party suppliers. Thus, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition. The Company
believes, however, that its risk of being adversely impacted by Year 2000
failures is mitigated due to its product portfolio being so diversified, with
the vast majority of its items not being date-sensitive. The strategy employed
by the Company's Year 2000 project is expected to significantly reduce the
Company's level of uncertainty about the Year 2000 issue and the Year 2000
compliance of key third parties who materially impact its business.
Contingency Plans
Development of contingency plans has been completed.
Disclaimer
Readers are cautioned that forward-looking statements contained in the
Year 2000 Update should be read in conjunction with the Company's disclosure
under the heading "CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995" on page
26.
Recent Developments
On November 4, 1999 the Company announced that its president and chief
operating officer, Andrea Jung, has been named president and chief executive
officer ("CEO"), succeeding chairman and CEO Charles R. Perrin in his capacity
as CEO. Mr. Perrin is retiring from Avon. The Company also announced that
outside director Stanley C. Gault, has been elected non-executive chairman of
the board of directors. All changes are effective immediately.
25
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, including, but not limited to, the
information set forth in "Other Information" herein. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, levels of activity, performance or
achievement of the Company, or industry results, to be materially different
from any future results, levels of activity, performance or achievement
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; the
ability of the Company to implement its business strategy; the Company's access
to financing and its management of foreign currency risks; the Company's
ability to successfully identify new business opportunities; the Company's
ability to attract and retain key executives; the Company's ability to achieve
anticipated cost savings and profitability targets; changes in the industry;
competition; the effect of regulatory and legal restrictions imposed by foreign
governments; the effect of regulatory and legal proceedings and other factors
discussed in Item 1 of the Company's Form 10-K/A. As a result of the foregoing
and other factors, no assurance can be given as to the future results and
achievements of the Company. Neither the Company nor any other person assumes
responsibility for the accuracy and completeness of these statements.
26
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
There are no exhibits.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the third quarter of 1999.
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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: August 12, 2002 By /s/ JANICE MAROLDA
----------------------------
Janice Marolda
Vice President,
Controller
Principal Accounting Officer
Signed both on behalf of the
registrant and as principal
accounting officer.
28