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 June 30, 1994
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.)
9 WEST 57TH STREET, NEW YORK, NEW YORK 10019-2683
(Address of principal executive offices)
(212) 546-6015
(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 $.50) outstanding at July
31, 1994 was 70,348,457.
<PAGE>2
Table of Contents
Part I. Financial Information
Page
Numbers
Item 1. Financial Statements
Consolidated Statement of Operations
Three Months Ended June 30, 1994 and
June 30, 1993 3
Six Months Ended June 30, 1994 and
June 30, 1993 4
Consolidated Balance Sheet
June 30, 1994 and December 31, 1993 5
Consolidated Statement of Cash Flows
Six Months Ended June 30, 1994 and
June 30, 1993 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition 12-19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE>3
PART I. FINANCIAL INFORMATION
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share data)
Three months ended
June 30
------------------
1994 1993
---- ----
(unaudited)
Net sales........................................... $1,007.2 $920.2
-------- ------
Costs, expenses and other:
Cost of sales....................................... 389.1 350.2
Marketing, distribution and administrative expenses. 490.4 445.2
Interest expense.................................... 15.2 11.5
Interest income..................................... (9.8) (5.9)
Other expense, net.................................. 2.3 6.2
-------- ------
Total costs, expenses and other................... 887.2 807.2
-------- ------
Income from continuing operations before taxes and
minority interest................................. 120.0 113.0
Income taxes........................................ 46.8 45.2
-------- ------
Income from continuing operations before minority
interest.......................................... 73.2 67.8
Minority interest................................... (.9) (1.9)
-------- ------
Income from continuing operations................... 72.3 65.9
Discontinued operations
Income (loss), net of taxes....................... 2.8 (.3)
(Loss) on sale.................................... (25.0) --
-------- ------
Net income.......................................... $ 50.1 $ 65.6
======== ======
Income (loss) per share of common stock:
Continuing operations............................. $ 1.02 $ .91
Discontinued operations, net...................... (.31) --
-------- ------
Net income.......................................... $ .71 $ .91
======== ======
Average shares outstanding.......................... 70.86 72.05
======== ======
The accompanying notes are an integral part of this statement.
3
<PAGE>4
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share data)
Six months ended
June 30
-----------------
1994 1993
---- ----
(unaudited)
Net sales........................................... $1,893.2 $1,728.3
-------- --------
Costs, expenses and other:
Cost of sales....................................... 741.5 663.8
Marketing, distribution and administrative expenses. 958.7 884.6
Interest expense.................................... 29.7 21.6
Interest income..................................... (15.0) (15.1)
Other expense, net.................................. 7.2 19.7
-------- --------
Total costs, expenses and other................... 1,722.1 1,574.6
-------- --------
Income from continuing operations before taxes,
minority interest and cumulative effect of
accounting changes................................ 171.1 153.7
Income taxes........................................ 66.7 61.5
-------- ---------
Income from continuing operations before minority
interest and cumulative effect of accounting
changes........................................... 104.4 92.2
Minority interest................................... (1.0) (1.6)
-------- ---------
Income from continuing operations before cumulative
effect of accounting changes...................... 103.4 90.6
Discontinued operations
Income (loss), net of taxes....................... 1.2 (.4)
(Loss) on sale, net of taxes in 1993.............. (25.0) (10.0)
Cumulative effect of accounting changes............. (45.2) (107.5)
-------- --------
Net income (loss)................................... $ 34.4 $ (27.3)
======== ========
Income (loss) per share of common stock:
Continuing operations............................. $ 1.45 $ 1.26
Discontinued operations, net...................... (.34) (.15)
Cumulative effect of accounting changes........... (.63) (1.49)
-------- --------
Net income (loss)................................... $ .48 $ (.38)
======== ========
Average shares outstanding.......................... 71.39 72.04
======== ========
The accompanying notes are an integral part of this statement.
4
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AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(In millions)
June 30 December 31
1994 1993
------- -----------
(unaudited)
ASSETS
Current assets:
Cash and equivalents........................... $ 75.3 $ 223.9
Accounts receivable............................ 332.9 306.0
Inventories.................................... 443.8 360.5
Prepaid expenses and other..................... 159.3 135.9
Net assets of discontinued operations.......... 150.0 18.8
-------- --------
Total current assets....................... 1,161.3 1,045.1
-------- --------
Property, plant and equipment, at cost......... 1,110.6 1,061.5
Less accumulated depreciation.................. 611.5 585.3
-------- --------
499.1 476.2
-------- --------
Net assets of discontinued operations.......... -- 136.2
Other assets................................... 305.1 261.2
-------- --------
Total assets............................... $1,965.5 $1,918.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year.................. $ 234.0 $ 70.4
Accounts payable............................... 291.2 365.4
Accrued compensation........................... 85.0 62.7
Other accrued liabilities...................... 206.9 203.3
Sales and other taxes.......................... 82.8 94.9
Income taxes................................... 219.5 225.3
-------- --------
Total current liabilities.................. 1,119.4 1,022.0
-------- --------
Long-term debt................................. 124.7 123.7
Employee benefit plans......................... 362.7 295.1
Deferred income taxes.......................... 29.2 30.5
Other liabilities.............................. 136.1 133.4
Shareholders' equity:
Common stock................................... 43.3 43.3
Additional paid-in capital..................... 655.6 652.3
Retained earnings.............................. 121.1 150.6
Translation adjustments........................ (174.2) (175.3)
Treasury stock, at cost........................ (452.4) (356.9)
-------- --------
Total shareholders' equity................. 193.4 314.0
-------- --------
Total liabilities and shareholders' equity. $1,965.5 $1,918.7
======== ========
The accompanying notes are an integral part of this statement.
5
<PAGE>6
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Six months ended
June 30
----------------
1994 1993
---- ----
(unaudited)
Cash flows from operating activities:
Net income (loss)..................................... $ 34.4 $ (27.3)
Adjustments to reconcile net income (loss) to net cash
(used) by operating activities:
Cumulative effect of accounting changes........... 45.2 107.5
Discontinued operations, net...................... 23.8 10.4
Payments for restructuring costs.................. (3.5) (14.3)
Depreciation and amortization..................... 27.5 28.0
Provision for doubtful accounts................... 27.8 21.6
Translation (gains) losses........................ (11.8) 10.0
Deferred income taxes............................. (1.6) 3.8
Other............................................. 12.3 8.1
Changes in assets and liabilities:
Accounts receivable............................. (89.1) (67.6)
Inventories..................................... (85.6) (50.3)
Prepaid expenses and other...................... (22.2) (24.1)
Accounts payable and accrued liabilities........ (27.1) (85.1)
Income and other taxes.......................... (7.8) (18.5)
Noncurrent assets and liabilities............... (32.1) (1.4)
------- -------
Net cash (used) by continuing operations.............. (109.8) (99.2)
Net cash provided (used) by discontinued operations... 1.1 (25.2)
------- -------
Net cash (used) by operating activities............... (108.7) (124.4)
------- -------
Cash flows from investing activities:
Capital expenditures.................................. (31.1) (27.5)
Disposal of assets.................................... 3.0 1.5
------- --------
Net cash (used) by investing activities............... (28.1) (26.0)
------- -------
Cash flows from financing activities:
Cash dividends........................................ (69.9) (59.9)
Debt, net (maturities of three months or less)........ 159.8 164.2
Proceeds from short-term debt......................... 20.0 8.2
Retirement of short-term debt......................... (6.2) (7.4)
Retirement of long-term debt.......................... (12.0) (37.4)
Repurchases of common stock........................... (96.1) (.2)
Proceeds from exercise of stock options, net of taxes. .4 .5
------- -------
Net cash (used) provided by financing activities...... (4.0) 68.0
------- -------
Effect of exchange rate changes on cash............... (7.8) (8.1)
------- -------
Net decrease in cash and equivalents.................. (148.6) (90.5)
Cash and equivalents beginning of period.............. 223.9 141.6
------- -------
Cash and equivalents end of period.................... $ 75.3 $ 51.1
======= =======
The accompanying notes are an integral part of this statement.
6
<PAGE>7
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per 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 1993 Annual Report to Shareholders. The interim
statements are unaudited but include all adjustments, which consisted of
only normal recurring accruals, 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.
To conform to the 1994 presentation, certain reclassifications to the
1993 balance sheet and cash flow statement were made. See Note 2 below
regarding discontinued operations.
2. DISCONTINUED OPERATIONS
The Company has signed a definitive agreement to sell Giorgio Beverly
Hills, Inc. ("Giorgio"), its remaining retail business, for $150.0 in cash
and recorded a loss on the sale of $25.0 as of June 30, 1994. Since the
Company has excess capital loss carryforwards, no tax benefits have been
recognized on the loss. The sale, which is subject to customary regulatory
clearances and closing conditions, is anticipated to close during the
third quarter of 1994.
Accordingly, Giorgio's operating results are segregated and reported
as discontinued operations in the accompanying consolidated financial
statements. Prior period financial statements have been reclassified to
conform to the current year presentation.
Net sales and income (loss) from operations of Giorgio are summarized
below:
Three months ended Six months ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
---- ---- ---- ----
Net sales.................... $30.5 $29.1 $58.1 $62.9
Income (loss) before taxes... 4.3 (.5) 2.0 (.7)
Net income (loss)............ 2.8 (.3) 1.2 (.4)
7
<PAGE>8
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)
Assets and liabilities of Giorgio, reported as net assets of discontinued
operations, are summarized below:
June 30 December 31
1994 1993
------- -----------
Current assets.................................. $ 53.7 $ 55.5
Goodwill........................................ 132.4 134.4
Other noncurrent assets......................... 3.5 4.4
------ ------
Total assets 189.6 194.3
------ ------
Current liabilities............................. 37.4 36.7
Long-term liabilities........................... 2.2 2.6
------ ------
Total liabilities........................... 39.6 39.3
------ ------
Net assets of discontinued operations........... $150.0 $155.0
====== ======
In March 1993, Avon recorded a provision for discontinued operations of
$10.0 after tax, or $.14 per share, for the final settlement and related
expenses in an arbitration proceeding related to a business previously sold.
3. ACCOUNTING CHANGES
Effective January 1, 1994, Avon adopted Statement of Financial Accounting
Standards Board ("FAS") No. 112, "Employers' Accounting for Postemployment
Benefits" and FAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" for its foreign benefit plans. In addition, effective
January 1, 1994, Avon changed its method of accounting for internal systems
development costs. These development costs are being expensed as incurred,
rather than deferred and amortized over future periods. For further
discussion of these accounting changes, see Note 2 of the Notes to the
Consolidated Financial Statements in the Form 10-Q for the three months
ended March 31, 1994.
The proforma effect for the change in accounting for the deferred
internal systems development costs for the three and six months ended
June 30, 1993, had the accounting change been adopted effective January 1,
1993, would not have been significant.
Effective January 1, 1993, Avon adopted FAS No. 106 for its U.S. benefit
plans and FAS No. 109, "Accounting for Income Taxes". For further
discussion of these accounting changes, see Note 2 of the Notes to the
Consolidated Financial Statements in the 1993 Annual Report.
8
<PAGE>9
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)
4. INFORMATION RELATING TO THE STATEMENT OF CASH FLOWS
"Net cash (used) by continuing operations" includes the following cash
payments for interest and income taxes:
Six months ended
June 30
----------------
1994 1993
---- ----
Interest............................................ $27.3 $16.5
Income taxes, net of refunds received............... 72.5 72.8
5. INCOME (LOSS) PER SHARE
Primary income (loss) per share of common stock is based on the weighted
average number of shares outstanding. Dilution that could result from the
exercise of stock options is not material for the three and six months ended
June 30, 1994 and 1993, and accordingly, income (loss) per share assuming
full dilution has not been presented.
6. INVENTORIES
June 30 December 3l
1994 1993
------- -----------
Raw materials.............................. $128.0 $117.8
Finished goods............................. 315.8 242.7
------- ------
$443.8 $360.5
====== ======
7. DIVIDENDS
Cash dividends paid per share of common stock were $.45 and $.90 for the
three and six months ended June 30, 1994, respectively, and $.40 and $.80
for the corresponding 1993 periods. On August 2, 1994, Avon increased the
regular quarterly dividend on common shares from $.45 to $.50, increasing
the annual rate to $2.00 per share from $1.80 per share. The first
quarterly dividend at the new rate of $.50 will be paid on September 1,
1994.
8. CONTINGENCIES
Various lawsuits and claims (asserted and unasserted) arising in the
ordinary course of business are pending or threatened against Avon. The
9
<PAGE>10
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)
most significant of these are described below.
In April 1991, Wertheim Schroder & Co. Incorporated, a holder of Avon's
Preferred Equity-Redemption Cumulative Stock (the "PERCS"), filed, on behalf
of certain classes of PERCS holders, a suit against Avon in the United
States District Court for the Southern District of New York alleging various
contract and securities law claims relating to the PERCS. Avon's motion for
summary judgment was denied, except as to one claim, on April 1, 1993. Avon
rejects the assertions in this case, believes it has meritorious defenses to
the claims and is vigorously contesting this lawsuit.
In June 1988, Mallinckrodt, Inc. ("Mallinckrodt") and International
Minerals & Chemical Corporation ("IMC"), now known as Mallinckrodt Group
Inc., filed a lawsuit against Avon in the St. Louis Missouri City Circuit
Court arising from Avon's sale of Mallinckrodt to IMC in 1986. The suit
alleged that a certain patent dispute and a settlement, referred to as the
DuPont patent case, various environmental claims and numerous other lawsuits
and claims are contingent liabilities covered by an indemnification given by
Avon in connection with the sale of Mallinckrodt. In October 1991, the
Missouri Supreme Court affirmed the Circuit Court's decision that Avon has
the obligation to indemnify IMC and Mallinckrodt in connection with the
DuPont patent case, but remanded the matter for a trial on the damages, if
any, suffered by the parties. On July 27, 1992, a jury returned a verdict
in the DuPont patent case for $16.0, and a judgment for that amount plus
approximately $6.5 interest was entered. On August 11, 1992, IMC and
Mallinckrodt filed post-trial motions, including a motion for a judgment
notwithstanding the verdict or, in the alternative, a motion for a new
trial. On November 5, 1992, the St. Louis Missouri City Circuit Court
granted IMC's and Mallinckrodt's motion for a judgment notwithstanding the
verdict and directed a verdict for plaintiffs in the amount of $27.1 plus
interest. As of November 5, 1992, the interest amounted to approximately
$11.7. Avon, IMC and Mallinckrodt have appealed this decision. This issue
was argued before the Missouri Court of Appeals, Eastern District on May 11,
1994. A decision is expected during this year. Pre-trial proceedings and
discovery activities are ongoing with respect to the environmental and
general litigation portions of the case.
With respect to the environmental contingencies which constitute a part
of the indemnification litigation, the total cost to Avon cannot be
determined with certainty as a result of such factors as the preliminary
status of information relating to the sites owned by the purchaser, the
preliminary regulatory involvement, the unknown magnitude and timing of
cleanup efforts, if any, to be undertaken by the purchaser or Mallinckrodt,
the possibility of recoveries against other parties, the uncertainty of the
success of Avon's defenses, and unasserted claims, if any. However, these
factors have been assessed and will continue to be assessed by Avon in
estimating reserves to be recorded in its financial statements.
10
<PAGE>11
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)
The ultimate outcome and aggregate cost of resolving all of the above
contingencies will be based on a number of factors and will be determined
over a number of years. Accordingly, the total cost to Avon cannot currently
be determined with certainty. The reserves for such contingencies, at June
30, 1994, which are recorded gross without anticipation of insurance
recoveries or other third party recoveries, if any, have been estimated by
Avon's management based on its review of currently known facts and
circumstances at June 30, 1994. In the opinion of Avon's management, based
on its review of the preliminary information available at this time, the
difference, if any, between the total cost of resolving such contingencies
and reserves recorded by Avon at June 30, 1994 should not have a material
adverse impact on Avon's consolidated financial position or results of
operations, based on the current levels of such amounts. However, this
difference, if any, could have a material effect on results of operations
in a future period when resolved.
11
<PAGE>12
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ITEM 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition
Results of Operations--Three Months Ended June 30, 1994 and 1993.
Consolidated
Avon's net income for the three months ended June 30, 1994 of $50.1
million, or $.71 per share, decreased 24 percent and 22 percent, respect-
ively, from net income of $65.6 million, or $.91 per share, in the comparable
period of 1993. The 1994 results for the second quarter include a net loss
of $22.2 million, or $.31 per share, for discontinued operations relating to
the sale of Giorgio Beverly Hills, Inc. ("Giorgio"). The sale, which is
subject to customary regulatory clearances and closing conditions, is
anticipated to close during the third quarter of 1994. As a result, Giorgio's
results have been accounted for as discontinued operations for the three and
six months ended June 30, 1994 and 1993.
Continuing Operations
Income from continuing operations for the three months ended June 30,
1994 was $72.3 million, a 10 percent increase over the comparable period of
1993. Income per share from continuing operations increased 12 percent to
$1.02 from $.91 in 1993. Pretax income of $120.0 million increased 6 percent
due to higher overall sales and higher interest income and favorable foreign
exchange primarily in Brazil. These favorable results were partially offset
by a lower gross margin, a higher operating expense ratio and higher interest
expense primarily in Brazil. Income from continuing operations was further
improved by a lower effective tax rate in 1994 (39.0 percent versus 40.0
percent in 1993) resulting primarily from the mix of international and
domestic income.
Net sales for the three months ended June 30, 1994 of $1.0 billion
increased $87.0 million, or 9 percent, over the comparable period of the
prior year. The increase was primarily due to higher sales in the U.S.
reflecting a significant increase in average order size, unit volume growth
in Argentina, Mexico and the Pacific Rim markets and inflation-related
price increases in Brazil. These improvements were partially offset by lower
sales in Germany and Venezuela due to declines in units sold.
Cost of sales as a percentage of sales was 38.6 percent in the second
quarter of 1994 compared to 38.1 percent in the second quarter of 1993. The
decline in gross margin was primarily due to increased sales in the lower
margin intimate apparel line in the U.S. and lower margins throughout the
European markets, excluding the United Kingdom and Spain.
12
<PAGE>13
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Marketing, distribution and administrative expenses of $490.4 million
increased $45.2 million, or 10 percent, over the comparable period of 1993
and increased as a percentage of sales to 48.7 percent from 48.4 percent in
1993. The higher expenses are associated with sales increases in the U.S.,
Argentina and Mexico, expansion in the Pacific Rim markets, most signifi-
cantly China, and increased advertising, field incentives, and government-
mandated salary increases in Brazil. The higher operating expense ratio
resulted primarily from the increased expenses in Brazil and China and the
sales declines in Germany and Venezuela. An improved operating expense
ratio in the U.S. partially offset this decline. This improved ratio
reflects the significant sales increase with only a moderate increase in
expenses.
Interest expense increased $3.7 million from the comparable period of
1993 primarily due to higher short-term debt levels in Brazil to fund working
capital needs. Interest income increased $3.9 million primarily due to a
new collection policy in Brazil designed to reduce late payments from
Representatives.
Other expense, net, decreased $3.9 million from the prior year period
primarily due to favorable foreign exchange in Brazil, partially offset by
the 1993 gain on sale of a non-operating investment.
United States
Net sales increased 15 percent reflecting a 12 percent increase in
average order size and a 3 percent increase in the number of Representative
orders. The sales improvement reflects the success of the new intimate
apparel line, the introduction of nutritional supplements and an increase
in the Cosmetics, Fragrances and Toiletries ("CFT") product line primarily
due to the introduction of new products. Pretax income increased 38
percent over the prior year period due to the significant sales increase
and an improved operating expense ratio. The improved operating expense
ratio resulted from lower marketing-related expenses, primarily advertising,
as well as expense savings resulting from the restructuring program. These
improvements were partially offset by a lower gross margin due to increased
sales of the lower margin intimate apparel line.
International
Net sales increased 6 percent over the comparable period of 1993 and
pretax income decreased 4 percent. The sales increase was primarily due to
strong unit growth and sales of higher-priced products in Argentina and
Mexico, inflation-related price increases in Brazil and increased units sold
in the Pacific Rim markets. These improvements were partially offset by
lower sales in Germany, reflecting unit declines due to the continuing weak
economy, and in Venezuela, where economic instability and uncertainty
resulted in unit declines. In Japan, sales were slightly below the
comparable period of last year as unit declines were partially offset by a
13
<PAGE>14
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
stronger Yen. The decrease in pretax income reflects a sales decline in
Germany; higher operating expenses relating to market expansion in the
Pacific Rim markets, most significantly in China; and the impact of a
significant currency devaluation in Venezuela. The decreases were partially
offset by the sales increase in Argentina; favorable foreign exchange in
Brazil and Japan; and improved operating expense ratios in the United Kingdom
and Spain primarily due to higher sales, lower marketing expenses and
continued expense savings from the restructuring programs.
Discontinued Operations
In July 1994, Avon signed a definitive agreement for the sale of Giorgio.
As a result, Avon has recorded a net loss from discontinued operations of
$22.2 million, or $.31 per share, in the second quarter of 1994. This
reflects a loss of $25.0 million on the sale, partially offset by Giorgio's
net earnings of $2.8 million for the second quarter.
Results of Operations--Six Months Ended June 30, 1994 and 1993.
Consolidated
Avon's net income for the six months ended June 30, 1994 of $34.4
million, or $.48 per share, includes a loss for discontinued operations of
$23.8 million, or $.34 per share, and a charge for accounting changes of
$45.2 million, or $.63 per share. The loss from discontinued operations
relates to the anticipated sale of Giorgio. The charge for accounting
changes is for the cumulative effect of changes in accounting principles for
the following: postemployment benefits (FAS No. 112) of $28.9 million;
postretirement benefits (FAS No. 106) for foreign benefit plans of $8.0
million; and costs related to the development of information systems of $8.3
million. Effective in the first quarter of 1994, internal information
systems development costs are being expensed as incurred, rather than deferred
and amortized over future periods.
Net loss for the first six months of 1993 was $27.3 million, or $.38 per
share, which included a net charge for the cumulative effect of changes in
accounting principles of $107.5 million, or $1.49 per share, for post-
retirement benefits (FAS No. 106) for U.S. plans and income taxes (FAS No.
109) and a charge for discontinued operations, primarily related to a
business previously sold, of $10.4 million, or $.15 per share.
Continuing Operations
Income from continuing operations before cumulative effect of accounting
changes for the six months ended June 30, 1994 was $103.4 million, a 14
percent increase over the comparable period of 1993. Income per share from
14
<PAGE>15
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
continuing operations increased 15 percent to $1.45 from $1.26 in the
comparable period last year. Pretax income of $171.1 million increased 11
percent due to higher overall sales, an improved operating expense ratio and
favorable foreign exchange primarily in Brazil. These favorable results
were partially offset by higher interest expense, mainly in Brazil, and a
lower gross margin. Net income was further improved by a lower effective
tax rate in 1994 (39.0 percent versus 40.0 percent in 1993) resulting
primarily from the mix of international and domestic income.
Net sales for the six months ended June 30, 1994 were $1.9 billion, a
$164.9 million, or 10 percent, increase over the comparable period last
year. The sales increase was primarily due to higher sales in the U.S.,
reflecting an increase in average order size; higher sales throughout most
markets in the Americas; increased units sold in the Pacific Rim markets;
and the favorable impact of exchange rate fluctuations and sales of higher-
priced products in Japan. These improvements were partially offset by
shortfalls in many European markets, most significantly Germany and France,
due to lower units sold, sales of lower-priced products and the impact of
exchange rate fluctuations.
Cost of sales as a percentage of sales was 39.2 percent in 1994 compared
to 38.4 percent in 1993. The decline in gross margin was primarily due to
increased sales of the lower margin intimate apparel category in the U.S. and
increased sales of the lower margin home product category in Mexico. The
decline was partially offset by an improved gross margin in Japan resulting
from a shift in the sales mix to higher margin items.
Marketing, distribution and administrative expenses of $958.7 million
increased 8 percent over the comparable period of 1993, but decreased as a
percentage of sales to 50.6 percent from 51.2 percent in the comparable
period of 1993. The higher expense level reflects increased advertising,
field incentives and government-mandated salary increases in Brazil; higher
selling and marketing expenses to strengthen competitive position in Mexico;
increased sales in Argentina and the U.S.; and market expansion in the
Pacific Rim, most significantly China. The improvement in the operating
expense ratio was primarily due to the sales increases in the U.S., Argentina
and Japan, partially offset by the increased expenses in Brazil, Mexico and
the Pacific Rim markets and lower sales in Venezuela and Germany.
Interest expense increased $8.1 million from the comparable period of
last year primarily due to higher short-term debt levels in Brazil to fund
working capital needs. Interest income was level with the comparable period
of 1993.
Other expense, net, of $7.2 million decreased $12.5 million from the
comparable period of 1993, primarily due to net foreign exchange gains
15
<PAGE>16
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
in 1994 compared to net foreign exchange losses in 1993 in Brazil, partially
offset by the 1993 gain on sale of a non-operating investment.
United States
Net sales increased 12 percent reflecting a 10 percent increase in
Representative average order size and a 2 percent increase in the number of
Representative orders. The sales improvement reflects the introduction of a
new intimate apparel line in 1994, as well as increases in all major product
categories with the exception of fragrance. Pretax income increased 36
percent, primarily due to the sales increase and a favorable operating
expense ratio due to lower marketing-related expenses, primarily advertising,
and expense savings resulting from the restructuring program. These
favorable results were partially offset by a lower gross margin due to
the introduction of the intimate apparel category.
International
Net sales and pretax income increased 8 percent and 3 percent, respect-
ively, over the comparable period of 1993. The increase in sales reflects
increased units sold in Mexico, Argentina and the Pacific Rim markets; the
favorable impact of exchange rate fluctuations in Japan; and the sale of
higher-priced products in Argentina, Brazil and Japan. These favorable
results were partially offset by lower sales in Venezuela and throughout most
Western European markets, mainly as a result of the strengthening of the
dollar against most Western European currencies, and lower unit volume and
increased sales of lower-priced products in Germany and France. The increase
in pretax income reflects the overall sales growth; higher gross margin in
Japan due to a shift in product mix to higher margin products, as well as the
favorable impact of a stronger Yen; and improved operating expense ratios
in the United Kingdom and Spain primarily due to higher sales, lower marketing
expenses and continued expense savings from the restructuring programs.
These improvements were partially offset by sales-related shortfalls in
Germany and France; lower unit sales and currency fluctuations in Venezuela;
and higher expenses in the Pacific Rim markets primarily for expansion in
China as part of a long-term growth strategy.
Discontinued Operations
As a result of the sale of Giorgio, as previously discussed, the six
months ended June 30, 1994 included a net loss from discontinued operations
of $23.8 million, or $.34 per share. This reflects a loss of $25.0 million
on the sale, partially offset by Giorgio's net earnings of $1.2 million for
the six months.
In March 1993, Avon recorded a discontinued operations provision of $10.0
million after tax, or $.14 per share, for the final settlement and related
expenses in an arbitration proceeding related to a business previously sold.
16
<PAGE>17
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Liquidity and Capital Resources
Cash Flows
Excluding changes in debt, net cash usage was $310.2 million in the first
half of 1994 compared with $218.1 million in the comparable period of 1993.
The higher cash usage reflects $96.1 million for the repurchase of common
stock and $10.0 million in higher dividend payments which were partially
offset by lower cash used by operations. During the first half of 1994, the
Company purchased approximately 1,586,000 shares of common stock for $91.0
million under the stock repurchase program and acquired approximately 88,000
shares issued under the 1991 Long-Term Incentive Plan.
For the first half of 1994, cash used by continuing operations was
$109.8 million compared with $99.2 million in 1993. The higher cash
usage resulted mainly from the funding of benefit plans, which is included
in the change in noncurrent assets and liabilities on the Consolidated
Statement of Cash Flows. This increase was partially offset by lower working
capital levels and higher net income in the U.S. The favorable change in
cash provided by discontinued operations of $26.3 million was primarily due
to the 1993 payment of an arbitration settlement and related expenses.
Capital Resources
Total debt increased $164.6 million to $358.7 million at June 30, 1994
from $194.1 million at December 31, 1993 principally due to normal seasonal
working capital requirements during the first six months of 1994 and
borrowings related to the stock repurchase program. Total debt at June 30,
1994 was $358.7 million compared to $350.3 million at June 30, 1993.
At June 30, 1994, the Company had two revolving credit agreements
totaling $600 million. The credit agreements contain covenants that include
requirements for minimum net worth, as defined, interest coverage and maximum
borrowings. One of the agreements also allows the Company to use borrowings
for the purchase of Avon stock. These agreements supported the Company's
commercial paper borrowings of $95.1 million at June 30, 1994. There were
no borrowings under these agreements during the second quarter of 1994.
At June 30, 1994, the Company had bankers' acceptance facilities
available of $197.0 million with various banks. At June 30, 1994, there
were $7.5 million of borrowings under these facilities. In addition, at
June 30, 1994, the Company had $29.2 million of borrowings from various
banks 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. It is also currently anticipated that existing
debt maturing over the next five years will be paid without refinancing.
17
<PAGE>18
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
In addition, the proceeds from the anticipated sale of Giorgio will be used
to reduce debt and support the ongoing stock repurchase program.
Financial Instruments
The Company may use interest rate swaps solely to hedge portions of its
interest expense thereby allowing the Company to establish fixed or variable
interest rates for its outstanding debt. Currently and over the recent past,
the Company has elected to use interest rate swaps to establish fixed rates
on its long-term debt. The Company closely monitors market conditions and,
if in a variable position, may also use interest rate caps whereby it obtains
protection if interest rates rise above a defined level. As of June 30,
1994, the Company's long-term debt has been hedged to a net fixed interest
rate position through the use of interest rate swap contracts and the Company
has interest rate caps on a portion of its short-term debt. The Company
attempts to minimize its credit exposure to counterparties by entering into
contracts only with major international financial institutions with "A" or
higher credit ratings as issued by Standard & Poor's Corporation.
The Company may hedge foreign currency royalties and dividends from its
international subsidiaries and other foreign currency transactions. The
Company may also hedge equity investments in foreign subsidiaries or
contractual foreign currency cash flows or obligations. The Company's hedges
are comprised of over-the-counter forward contracts or options with major
international financial institutions to buy or sell foreign currencies
primarily against the U.S. Dollar. As foreign currency exchange rates
change, the resulting gains or losses on foreign exchange contracts are
offset by gains or losses on the underlying foreign currency exposures. The
Company regularly monitors its foreign currency exposures and ensures that
hedge contract amounts do not exceed the amounts of the underlying exposures.
Working Capital
As of June 30, 1994, excluding net assets of discontinued operations,
current liabilities exceeded current assets by $108.1 million compared with
current assets, excluding net assets of discontinued operations, exceeding
current liabilities by $4.3 million at the end of 1993. The decline from
December 1993 reflects a decrease in cash and equivalents and an increase in
debt maturing within one year, partially offset by higher investments in
working assets (current assets excluding cash and equivalents and net assets
of discontinued operations), most significantly inventory, which reflects the
seasonal pattern of Avon's operations. The increase in inventory is also due
to the introduction of new and higher-priced product lines and higher sales
volume in the U.S., continued business expansion in the Pacific Rim markets,
higher sales volume in Argentina and sales shortfalls in most European
markets, most notably Germany.
18
<PAGE>19
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Although current liabilities exceeded current assets, excluding net assets
of discontinued operations, at June 30, 1994, management believes it
highlights the effectiveness of its working capital management and does not
adversely affect liquidity. Avon's liquidity results from its ability to
generate significant cash flows from operations and its adequate unused
borrowing capacity. Actions that would eliminate the working capital deficit
are not anticipated at this time. Avon's credit agreements do not contain
any provisions or requirements with respect to working capital. Avon is in
compliance with all financial covenants.
19
<PAGE>20
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As mentioned in the Form 10-Q for the quarter ended March 31, 1994, on
May 11, 1994, the DuPont patent case was argued before the Missouri Court of
Appeals, Eastern District. A decision is expected during this year, see
Note 8 - Contingencies.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
11.1 --Statement re computation of primary income (loss) per
share.
11.2 --Statement re computation of fully diluted income (loss)
per share.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the second quarter
of 1994.
20
<PAGE>21
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, 1994 By /s/ ROBERT J. CONOLOGUE
------------------------------
Robert J. Conologue
Group Vice President and Controller
Principal Accounting Officer
Signed both on behalf of the registrant
and as principal accounting officer.
21
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended June 30, 1994 Commission file number 1-4881
------------
AVON PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
------------
EXHIBITS
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
11.1 --Statement re computation of primary income (loss) per share.
11.2 --Statement re computation of fully diluted income (loss) per
share.
EXHIBIT 11.1
<PAGE>
EXHIBIT 11.1
AVON PRODUCTS, INC.
COMPUTATION OF PRIMARY INCOME (LOSS) PER SHARE
(In millions, except per share data)
Three months ended
June 30
------------------
1994 1993
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during the period. 70.86 72.05
Common stock equivalents*............................. -- --
------ ------
Weighted average shares for primary income per share
computation......................................... 70.86 72.05
====== ======
Income (loss) per share of common stock:
Income from continuing operations..................... $ 72.3 $ 65.9
Discontinued operations
Income (loss), net of taxes......................... 2.8 (.3)
(Loss) on sale...................................... (25.0) --
------ ------
Net income............................................ $ 50.1 $ 65.6
====== ======
Primary income (loss) per share of common stock:
Continuing operations................................. $ 1.02 $ .91
Discontinued operations, net.......................... (.31) --
------ ------
Net income............................................ $ .71 $ .91
====== ======
- ----------
*Common stock equivalents are not reported because they result in less than
three percent dilution.
<PAGE>
EXHIBIT 11.1
AVON PRODUCTS, INC.
COMPUTATION OF PRIMARY INCOME (LOSS) PER SHARE
(In millions, except per share data)
Six months ended
June 30
----------------
1994 1993
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during the period. 71.39 72.04
Common stock equivalents*............................. -- --
------- -------
Weighted average shares for primary income per share
computation......................................... 71.39 72.04
======= =======
Income (loss) per share of common stock:
Income from continuing operations before
cumulative effect of accounting changes............. $ 103.4 $ 90.6
Discontinued operations
Income (loss), net of taxes......................... 1.2 (.4)
(Loss) on sale, net of taxes in 1993................ (25.0) (10.0)
Cumulative effect of accounting changes............... (45.2) (107.5)
------- -------
Net income (loss)..................................... $ 34.4 $ (27.3)
======= =======
Primary income (loss) per share of common stock:
Continuing operations................................. $ 1.45 $ 1.26
Discontinued operations, net.......................... (.34) (.15)
Cumulative effect of accounting changes............... (.63) (1.49)
------- -------
Net income (loss)..................................... $ .48 $ (.38)
======= =======
- ----------
*Common stock equivalents are not reported because they result in less than
three percent dilution.
EXHIBIT 11.2
<PAGE>
EXHIBIT 11.2
AVON PRODUCTS, INC.
COMPUTATION OF FULLY DILUTED INCOME (LOSS) PER SHARE
(In millions, except per share data)
Three months ended
June 30
------------------
1994 1993
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during the
period............................................ 70.86 72.05
Common stock equivalents............................ .19 .09
------ -------
Weighted average shares for fully diluted income
per share computation............................. 71.05 72.14
====== =======
Income (loss) per share of common stock:
Income from continuing operations................... $ 72.3 $ 65.9
Discontinued operations
Income (loss) net of taxes........................ 2.8 (.3)
(Loss) on sale.................................... (25.0) --
------ -------
Net income.......................................... $ 50.1 $ 65.6
====== =======
Fully diluted income (loss) per share of common stock:
Continuing operations............................... $ 1.02 $ .91
Discontinued operations, net........................ (.31) --
------ -------
Net income.......................................... $ .71 $ .91
====== =======
<PAGE>
EXHIBIT 11.2
AVON PRODUCTS, INC.
COMPUTATION OF FULLY DILUTED INCOME (LOSS) PER SHARE
(In millions, except per share data)
Six months ended
June 30
----------------
1994 1993
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during the
period.............................................. 71.39 72.04
Common stock equivalents.............................. .19 .09
------ -------
Weighted average shares for fully diluted income
per share computation............................... 71.58 72.13
====== =======
Income (loss) per share of common stock:
Income from continuing operations before
cumulative effect of accounting changes............. $103.4 $ 90.6
Discontinued operations
Income (loss), net of taxes......................... 1.2 (.4)
(Loss) on sale, net of taxes in 1993................ (25.0) (10.0)
Cumulative effect of accounting changes............... (45.2) (107.5)
------ -------
Net income (loss)..................................... $ 34.4 $ (27.3)
====== =======
Fully diluted income (loss) per share of common stock:
Continuing operations................................. $ 1.45 $ 1.26
Discontinued operations, net.......................... (.34) (.15)
Cumulative effect of accounting changes............... (.63) (1.49)
------ -------
Net income (loss)..................................... $ .48 $ (.38)
====== =======
