<PAGE>
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, 1995
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, 1995 was 68,094,268.
<PAGE>2
Table of Contents
Part I. Financial Information
Page
Numbers
Item 1. Financial Statements
Consolidated Statement of Income
Three Months Ended June 30, 1995 and
June 30, 1994 3
Six Months Ended June 30, 1995 and
June 30, 1994 4
Consolidated Balance Sheet
June 30, 1995 and December 31, 1994 5
Consolidated Statement of Cash Flows
Six Months Ended June 30, 1995 and
June 30, 1994 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition 11-19
Part II. Other Information
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 INCOME
(In millions, except per share data)
Three months ended
June 30
------------------
1995 1994
---- ----
(unaudited)
Net sales............................................ $1,064.0 $1,007.2
-------- --------
Costs, expenses and other:
Cost of sales........................................ 404.9 389.1
Marketing, distribution and
administrative expenses............................ 523.1 490.4
Interest expense..................................... 10.3 15.2
Interest income...................................... (5.6) (9.8)
Other (income)/expense, net.......................... (2.4) 2.3
-------- --------
Total costs, expenses and other.................... 930.3 887.2
-------- --------
Income from continuing operations before taxes and
minority interest.................................. 133.7 120.0
Income taxes......................................... 53.4 46.8
-------- --------
Income from continuing operations before
minority interest.................................. 80.3 73.2
Minority interest.................................... .1 (.9)
-------- --------
Income from continuing operations.................... 80.4 72.3
Discontinued operations
Income, net of taxes............................... -- 2.8
Loss on sale....................................... -- (25.0)
-------- --------
Net income........................................... $ 80.4 $ 50.1
======== ========
Income (loss) per share:
Continuing operations.............................. $ 1.17 $ 1.02
Discontinued operations............................ -- (.31)
-------- --------
Net income......................................... $ 1.17 $ .71
======== ========
Average shares outstanding........................... 68.46 70.86
======== ========
The accompanying notes are an integral part of these statements.
3
<PAGE>4
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share data)
Six months ended
June 30
----------------
1995 1994
---- ----
(unaudited)
Net sales.............................................. $2,040.2 $1,893.2
-------- --------
Costs, expenses and other:
Cost of sales.......................................... 792.2 741.5
Marketing, distribution and
administrative expenses.............................. 1,040.1 958.7
Interest expense....................................... 19.3 29.7
Interest income........................................ (9.7) (15.0)
Other expense, net..................................... 8.1 7.2
-------- --------
Total costs, expenses and other...................... 1,850.0 1,722.1
-------- --------
Income from continuing operations before
taxes, minority interest and cumulative
effect of accounting changes......................... 190.2 171.1
Income taxes........................................... 75.9 66.7
-------- --------
Income from continuing operations before
minority interest and cumulative effect
of accounting changes................................ 114.3 104.4
Minority interest...................................... .5 (1.0)
-------- --------
Income from continuing operations before
cumulative effect of accounting changes.............. 114.8 103.4
Discontinued operations
Income, net of taxes................................. -- 1.2
Loss on sale......................................... -- (25.0)
Cumulative effect of accounting changes................ -- (45.2)
-------- --------
Net income............................................. $ 114.8 $ 34.4
======== ========
Income (loss) per share:
Continuing operations................................ $ 1.67 $ 1.45
Discontinued operations.............................. -- (.34)
Cumulative effect of accounting changes.............. -- (.63)
-------- --------
Net income........................................... $ 1.67 $ .48
======== ========
Average shares outstanding............................. 68.57 71.39
======== ========
The accompanying notes are an integral part of these statements.
4
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AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(In millions)
June 30 December 31
1995 1994
------- -----------
(unaudited)
ASSETS
Current assets:
Cash and equivalents............................ $ 111.7 $ 214.8
Accounts receivable............................. 387.1 373.7
Inventories..................................... 510.3 412.8
Prepaid expenses and other...................... 178.6 149.0
-------- --------
Total current assets........................ 1,187.7 1,150.3
-------- --------
Property, plant and equipment, at cost.......... 1,206.3 1,146.7
Less accumulated depreciation................... 660.7 618.3
-------- --------
545.6 528.4
-------- --------
Other assets.................................... 303.9 299.6
-------- --------
Total assets................................ $2,037.2 $1,978.3
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year................... $ 201.1 $ 61.2
Accounts payable................................ 296.6 408.0
Accrued compensation............................ 97.7 100.0
Other accrued liabilities....................... 230.4 222.3
Sales and other taxes........................... 91.1 95.7
Income taxes.................................... 255.1 253.8
-------- --------
Total current liabilities................... 1,172.0 1,141.0
-------- --------
Long-term debt.................................. 114.2 116.5
Employee benefit plans.......................... 385.1 366.6
Deferred income taxes........................... 32.7 32.2
Other liabilities............................... 140.5 136.4
Shareholders' equity:
Common stock.................................... 43.4 43.3
Additional paid-in capital...................... 665.7 660.5
Retained earnings............................... 258.8 212.4
Translation adjustments......................... (176.5) (187.1)
Treasury stock, at cost......................... (598.7) (543.5)
-------- --------
Total shareholders' equity.................. 192.7 185.6
-------- --------
Total liabilities and shareholders' equity.. $2,037.2 $1,978.3
======== ========
The accompanying notes are an integral part of these statements.
5
<PAGE>6
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Six months ended
June 30
----------------
1995 1994
---- ----
(unaudited)
Cash flows from operating activities:
Net income............................................. $114.8 $ 34.4
Adjustments to reconcile net income to net cash
(used) by operating activities:
Cumulative effect of accounting changes, net....... -- 45.2
Discontinued operations, net....................... -- 23.8
Payments for restructuring costs................... -- (3.5)
Depreciation and amortization...................... 28.9 27.5
Provision for doubtful accounts.................... 35.7 27.8
Translation losses (gains)......................... 2.1 (11.8)
Deferred income taxes.............................. (4.3) (1.6)
Other.............................................. 15.6 12.3
Changes in assets and liabilities:
Accounts receivable.............................. (52.1) (89.1)
Inventories...................................... (91.9) (85.6)
Prepaid expenses and other....................... (30.5) (22.2)
Accounts payable and accrued liabilities......... (107.7) (27.1)
Income and other taxes........................... (2.2) (7.8)
Noncurrent assets and liabilities................ (.6) (32.1)
------ ------
Net cash (used) by continuing operations............... (92.2) (109.8)
Net cash (used) provided by discontinued operations.... (2.1) 1.1
------ ------
Net cash (used) by operating activities................ (94.3) (108.7)
------ ------
Cash flows from investing activities:
Capital expenditures................................... (26.3) (31.1)
Disposal of assets..................................... .5 3.0
------ ------
Net cash (used) by investing activities................ (25.8) (28.1)
------ ------
Cash flows from financing activities:
Cash dividends......................................... (73.0) (69.9)
Debt, net (maturities of three months or less)......... 150.9 159.8
Proceeds from short-term debt.......................... 17.9 20.0
Retirement of short-term debt.......................... (19.6) (6.2)
Retirement of long-term debt........................... (16.8) (12.0)
Proceeds from exercise of stock options, net of taxes.. .9 .4
Repurchase of common stock............................. (57.8) (96.1)
------ ------
Net cash provided (used) by financing activities....... 2.5 (4.0)
------ ------
Effect of exchange rate changes on cash and
equivalents.......................................... 14.5 (7.8)
------ ------
Net decrease in cash and equivalents................... (103.1) (148.6)
Cash and equivalents beginning of period............... 214.8 223.9
------ ------
Cash and equivalents end of period..................... $111.7 $ 75.3
====== ======
The accompanying notes are an integral part of these statements.
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 1994 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.
2. DISCONTINUED OPERATIONS
As previously reported, during 1994 the Company completed the sale of
Giorgio Beverly Hills, Inc. ("Giorgio"), its remaining retail business.
Giorgio's operating results are segregated and reported as discontinued
operations for the three and six months ended June 30, 1994.
3. ACCOUNTING CHANGES
Effective January 1, 1994, Avon adopted Statement of Financial Accounting
Standards Board ("FAS") No. 112, "Employers' Accounting for Postemployment
Benefits", for all applicable operations and FAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", for its foreign
benefit plans. In addition, effective January 1, 1994, Avon changed its
method of accounting for internal systems development costs. These develop-
ment costs are being expensed as incurred, rather than deferred and amortized
over future periods.
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
----------------
1995 1994
---- ----
Interest.............................................. $16.2 $27.3
Income taxes, net of refunds received................. 84.1 72.6
7
<PAGE>8
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)
5. INCOME PER SHARE
Income per share of common stock is based on the weighted average number
of shares outstanding. The decrease in average shares outstanding for the
three and six months ended June 30, 1995 compared to the respective periods of
1994 is primarily due to the shares acquired under the 10 percent or
approximately 7 million share repurchase program which began in the first
quarter of 1994. During the first half of 1995, the Company purchased
approximately 954,000 shares of common stock compared to approximately
1,674,000 shares purchased during the first half of 1994. As of June 30,
1995, the cumulative number of shares repurchased was approximately 4.2
million shares.
6. INVENTORIES
June 30 December 3l
1995 1994
------- -----------
Raw materials............................. $138.9 $118.4
Finished goods............................ 371.4 294.4
------ ------
$510.3 $412.8
====== ======
7. DIVIDENDS
Cash dividends paid per share of common stock were $.50 and $1.00 for the
three and six months ended June 30, 1995, respectively, and $.45 and $.90 for
the corresponding 1994 periods. On August 2, 1995, Avon increased the regular
quarterly dividend on common shares from $.50 to $.55, increasing the annual
rate to $2.20 per share from $2.00 per share. The first quarterly dividend at
the new rate of $.55 will be paid on September 1, 1995.
8. NEW ACCOUNTING STANDARD
FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", was issued in March 1995 and is
effective for fiscal years beginning after December 15, 1995 but may be
adopted earlier. This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. The Company does not
anticipate any significant impact to its results of operations or financial
position upon adoption.
8
<PAGE>9
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)
9. 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. The most significant of these are
described below.
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"), alleging 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.
In 1988, Mallinckrodt, Inc. ("Mallinckrodt") and International Minerals &
Chemical Corporation, now known as Mallinckrodt Group Inc. ("Mallinckrodt
Group"), filed a lawsuit against Avon in the St. Louis Missouri City Circuit
Court arising from Avon's sale of Mallinckrodt to Mallinckrodt Group in 1986.
The suit alleged that a certain patent dispute and 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 July 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. In November
1992, the St. Louis Missouri City Circuit Court granted Mallinckrodt Group's
motion for a judgment notwithstanding the verdict and directed a verdict for
plaintiffs in the amount of $27.1 plus interest. As of that date, the
interest amounted to approximately $11.7. Avon and Mallinckrodt Group
appealed this decision and in November 1994, the Missouri Court of Appeals
overturned the judgment notwithstanding the verdict and ordered a new trial.
All possible further judicial review has now been exhausted and a retrial to
determine the amount of damages, if any, is scheduled to begin in October
1995.
The total cost to Avon under the indemnity cannot be determined with
certainty as a result of such factors, among other things, as the status of
environmental information relating to the sites owned by the purchaser, the
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. There have recently been discussions
between Avon and Mallinckrodt Group about resolving all or a portion of the
indemnification dispute. These factors have been assessed and will continue
to be assessed by Avon in estimating reserves to be recorded in its
consolidated financial statements.
The ultimate outcome and aggregate cost of resolving all of the above
contingencies will be based on a number of factors and are expected to be
determined over a number of years. Accordingly, the total cost to Avon cannot
9
<PAGE>10
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)
currently be determined with certainty. The reserves for such contingencies
at June 30, 1995, 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, 1995. 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 June 30, 1995 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.
10
<PAGE>11
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, 1995 and 1994.
Consolidated
Avon's net income for the three months ended June 30, 1995 of $80.4
million, or $1.17 per share, increased 60 percent and 65 percent, respective-
ly, from net income of $50.1 million, or $.71 per share, in the comparable
period of 1994. The 1995 results for the second quarter include the following
one-time pretax items: a gain of $25.0 million, net of related costs, from a
cash settlement of a lease dispute and charges of $12.0 million related to an
early retirement program implemented in Japan and $11.0 million for severance
costs, primarily in Europe, as part of Avon's program to reduce fixed expenses
in certain markets. These programs are anticipated to be substantially
completed during 1995. The lease dispute related to the overpayment of
previous years' rent for the Company's headquarters building. The $25.0
million gain represents a $14.0 million recovery of disputed rent, which is
included in Marketing, Distribution and Administrative Expenses, and $11.0
million of interest, net of related costs, which is included in Other
(Income)/Expense, Net. The net effect of these one-time items in the quarter
was to increase income from continuing operations and net income by $3.0
million, or $.04 per share. The Japan and Europe expense reduction programs
are anticipated to generate $5.0 million and $4.0 million, respectively, of
savings in 1995, with higher levels of savings to be realized in 1996 and
beyond. 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").
Continuing Operations
Income from continuing operations for the three months ended June 30, 1995
was $80.4 million, an 11 percent increase over the comparable period of 1994.
Income per share from continuing operations increased 15 percent to $1.17 from
$1.02 in 1994. The 15 percent increase in income per share over the
comparable period of the prior year exceeds the 11 percent increase in income
from continuing operations because of the lower average shares outstanding
for 1995 compared with 1994 as a result of a share repurchase program started
in 1994. Pretax income of $133.7 million increased 11 percent due to higher
sales, the net effect of the one-time items previously discussed, lower
interest expense and monetary correction expense in Brazil and reduced
foreign exchange losses mainly in Venezuela. These favorable results were
partially offset by lower interest income in Brazil and higher corporate non-
operating expenses. Income from continuing operations was further reduced by
a higher effective tax rate (39.9 percent versus 39.0 percent in 1994)
resulting primarily from the mix of earnings and income tax rates of
International subsidiaries.
11
<PAGE>12
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Net sales for the three months ended June 30, 1995 of $1.1 billion
increased $56.8 million, or 6 percent, over the comparable period of the
prior year. The increase was primarily due to higher International sales
as a result of strong unit growth throughout most of the Americas Region,
particularly Brazil, and the Pacific Rim markets and the favorable exchange
rate impact of the European currencies and the Japanese yen against the weaker
U.S. dollar. These improvements were partially offset by lower sales in
Mexico primarily as a result of the substantially weaker peso caused by the
major devaluation in December 1994 and the weak economic conditions, lower
sales in the U.S., primarily due to a lower average order size, and
operational sales declines in Japan.
Cost of sales as a percentage of sales was 38.1 percent in the second
quarter of 1995 compared to 38.6 percent in the second quarter of 1994. The
improved cost ratio was primarily due to significant gross margin improve-
ments in Brazil, as a result of the favorable impact of a government
economic stabilization program implemented in July 1994, in the Pacific Rim,
and, to a lesser extent, in Germany. These improvements were partially offset
by a decline in gross margin in the United Kingdom and Japan.
Marketing, distribution and administrative expenses of $523.1 million
increased $32.7 million, or 7 percent, over the comparable period of 1994 and
increased as a percentage of sales to 49.2 percent from 48.7 percent in 1994.
Excluding the one-time items previously mentioned, operating expenses would
have increased $23.3 million and the operating expense ratio would have
declined slightly. The higher expense level is due to sales-related increases
in Brazil and higher operating expenses throughout most of Europe, and the
Pacific Region. These increases were partially offset by lower expenses in
Mexico due to the impact of the peso devaluation and lower selling expenses in
the U.S.
Interest expense decreased $4.9 million from the comparable period of
last year due to lower interest rates in Brazil. This decrease was
partially offset by higher borrowings in the Eastern European markets.
Interest income decreased $4.2 million from the comparable period of the prior
year mainly as a result of lower interest rates in Brazil due to the
government economic stabilization plan.
Other (income)/expense, net, of $2.4 million was $4.7 million favorable to
last year primarily due to an $11.0 million gain related to the interest
portion of the cash settlement of the lease dispute, net of related costs,
lower monetary correction expense in Brazil and favorable net foreign
exchange, primarily in Venezuela, partially offset by higher corporate
non-operating expenses.
United States
Net sales decreased 4 percent in the second quarter of 1995 reflecting a
7 percent decrease in average order size partially offset by a 3 percent
increase in the number of Representative orders. Units sold increased 1
12
<PAGE>13
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
percent reflecting strength in the cosmetics, fragrances and toiletries
("CFT"), primarily color, and gift and decorative categories which were
partially offset by a decline in the apparel category. U.S. sales declined
versus a very strong 1994 second quarter which included the launches of the
apparel line, vitamins and several innovative beauty products.
Pretax income improved 2 percent over the prior year period as a result of
lower variable selling expenses and lower marketing program expenses, which
more than offset the impact of the sales decline.
International
Net sales increased 11 percent over the comparable period of 1994 and
pretax income decreased 12 percent. Excluding the one-time pretax charges
for Japan's early retirement program and European severance costs,
International pretax income increased 8 percent. The sales increase was
primarily due to strong operational improvements in Brazil, primarily sales of
higher-priced products; the favorable impact of a weaker U.S. dollar against
the Japanese yen and most European currencies; price increases and increased
units sold in Venezuela; and increased units sold in the Philippines, China
and the Americas Region. Although much of the sales increase in Europe was
driven by strong currencies, units sold increased 1 percent. Also, there was
an increase in active Representatives in Germany and an improved trend in
customers served in France and Spain. These increases reflected sooner-than-
expected improvements from last year's regional results. These improvements
were partially offset by the negative impact of the peso devaluation in Mexico
reflecting the current weak economic environment which has caused a shift in
consumer spending to lower-priced products. Although Mexico sales were lower
in U.S. dollars, sales were higher in local currency with growth in orders
and active Representatives. Also, beginning in the second quarter of 1995,
the impact of the peso devaluation was partially offset by price increases,
which, by the end of the second quarter, were in line with inflation. Over
the second half of 1995, price increases are expected to keep pace with
inflation and continue to help offset the unfavorable translation effects. In
addition, an operational sales decline in Japan reflected the continuing
effects from last year's sales force reconfiguration compounded by an
uncertain economy and intense competition from discounters. Recovery programs
are in place in Japan, including Representative incentive programs, a stepped-
up advertising campaign and revamped merchandising plans.
Excluding the one-time charges, previously discussed, there was an
increase in pretax income which reflected the overall sales increase, with
continued strong operating results in Brazil reflecting the benefits of
the government economic stabilization program. This program has produced
lower levels of inflation and improved consumer confidence. In addition,
Brazil, with a higher number of Representatives at the end of the second
quarter of 1995, has been able to take advantage of this improved economic
environment. The increase in pretax income is also due to strong operational
results in the Pacific Rim driven by higher units sold as well as an improved
13
<PAGE>14
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
operating expense ratio in Europe reflecting the effect of previous expense
reduction efforts in the Region. These increases were partially offset by
operational shortfalls in Japan and the unfavorable impact of the peso
devaluation and weak economy in Mexico.
Results of Operations--Six Months Ended June 30, 1995 and 1994.
Consolidated
Avon's net income for the six months ended June 30, 1995 was $114.8
million, or $1.67 per share, compared to net income of $34.4 million, or
$.48 per share, in the comparable period of 1994. The 1995 results include
the previously discussed one-time items which had the net effect of increasing
income from continuing operations and net income by $3.0 million, or $.04 per
share. The 1994 results include a loss of $23.8 million, or $.34 per share,
for discontinued operations relating to the sale of Giorgio, and a non-cash
charge for accounting changes of $45.2 million after-tax, or $.63 per share.
The charge for accounting changes is for the cumulative effect of changes in
accounting principles for the following: Statement of Financial Accounting
Standards ("FAS") No. 112, "Employers' Accounting for Postemployment
Benefits", for all applicable operations of $28.9 million; FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions", for
foreign benefit plans of $8.0 million; and costs related to the development of
information systems of $8.3 million. Effective January 1, 1994, internal
information systems development costs are being expensed as incurred, rather
than deferred and amortized over future periods.
Continuing Operations
Income from continuing operations before the cumulative effect of
accounting changes for the six months ended June 30, 1995 was $114.8 million
an 11 percent increase over the comparable period of 1994. Income per share
from continuing operations increased 15 percent to $1.67 from $1.45 in 1994.
The 15 percent increase in income per share over the comparable period of
the prior year exceeds the 11 percent increase in income from continuing
operations because of the lower average shares outstanding for 1995 as
compared to 1994.
Pretax income of $190.2 million increased 11 percent due to higher sales,
a slight improvement in gross margin, and lower interest and monetary
correction expenses in Brazil. In addition, the improvement in pretax income
reflects the one-time items previously discussed. These favorable results
were partially offset by unfavorable net foreign exchange and lower interest
income mainly in Brazil and higher corporate non-operating expenses. Net
income was further reduced by a higher effective tax rate (39.9 percent versus
39.0 percent in 1994) resulting primarily from the mix of earnings and income
tax rates of International subsidiaries.
14
<PAGE>15
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Consolidated net sales for the six months ended June 30, 1995 were $2.0
billion, a $147.0 million, or 8 percent, increase over the comparable period
of 1994. The sales increase was primarily due to higher sales in the U.S.,
reflecting an increase in the number of Representative orders; operational
increases in most markets in the Americas Region, primarily Brazil, and in the
Pacific Rim; and the favorable impact of a weaker U.S. dollar in relation to
most of the currencies in Europe and Japan. These improvements were partially
offset by lower sales in Mexico due to the major peso devaluation and weak
economic environment and operational sales declines in Japan, Germany and the
United Kingdom.
Cost of sales as a percentage of sales was 38.8 percent in 1995 compared
to 39.2 percent in 1994. The improved cost ratio was primarily due to
significant gross margin improvements in Brazil reflecting the favorable
impact of lower inflation due to a government economic stabilization program
implemented last year and improved gross margins throughout most of the
Pacific Rim. These improvements were partially offset by lower gross margins
in the United Kingdom and Japan, and to a lesser extent, in the U.S.
Marketing, distribution and administrative expenses of $1.0 billion
increased $81.4 million, or 8 percent, over the comparable period of 1994
and increased as a percentage of sales to 51.0 percent from 50.6 percent
in 1994. Excluding the one-time charges in Europe and Japan and the one-time
lease settlement gain, previously mentioned, the operating expenses increased
$72.0 million and the operating expense ratio declined slightly. The higher
expenses are associated with sales increases in Brazil, higher operating
expenses throughout Europe and continued expansion of the Pacific Rim markets.
These increases were partially offset by lower expenses in Mexico due to the
impact of the peso devaluation.
Interest expense decreased $10.4 million from the comparable period of
last year as a result of lower interest rates in Brazil, lower debt levels
and interest rates in the U.S., and lower borrowings in Japan. These
decreases were partially offset by higher borrowings in the Eastern European
markets as part of Avon's growth strategy. Interest income decreased $5.3
million compared to the comparable period of the prior year mainly due to
lower interest rates in Brazil.
Other expense, net, of $8.1 million increased $.9 million from the
comparable period of 1994. This increase was primarily due to net foreign
exchange losses in 1995 compared to net foreign exchange gains in 1994 in
Brazil and higher corporate non-operating expenses. The increase was
partially offset by the $11.0 million gain from the lease dispute settlement
and lower monetary correction expense in Brazil.
United States
Net sales increased 3 percent reflecting a 4 percent increase in the
number of Representative orders, partially offset by a 1 percent decrease
in average order size. The sales improvement reflects a 4 percent increase
15
<PAGE>16
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
in units sold due to increases in the apparel, CFT, primarily color, and gift
and decorative categories. In addition, sales increased as a result of
sales of "Avon Style" apparel and vitamins, which were both launched during
the second quarter of 1994.
Pretax income increased 9 percent over the prior year period primarily due
to the sales increase and a favorable operating expense ratio, partially
offset by a slight decline in gross margin due to higher sales of the lower
margin apparel line.
International
Net sales increased 11 percent over the comparable period of 1994 while
pretax income decreased 14 percent due to the early retirement and severance
programs in Japan and Europe, previously discussed. Excluding these one-time
charges, International pretax income increased 1 percent. The sales
improvement was primarily due to operational increases throughout most markets
in the Americas Region reflecting strong unit growth and sales of higher-
priced products in Brazil, Venezuela and Argentina and operational
improvements in the Pacific Rim reflecting increased units sold in the
Philippines, China and Malaysia. In addition, the sales increase was due to
the favorable impact of a weaker U.S. dollar throughout most of Europe and
Japan. These favorable results were partially offset by lower sales in Mexico
due to the negative impact of the peso devaluation and a customer shift to the
purchase of lower-priced items; operational declines reflecting a decrease in
units sold in Germany and the United Kingdom; and unit declines in Japan as
well as sales of lower-priced products and a lower number of active
Representatives.
The decrease in pretax income reflects costs associated with
the early retirement program in Japan and severance programs in Europe, the
negative impact of the peso devaluation in Mexico and operational sales
shortfalls in Japan, Germany and the United Kingdom. The decrease in pretax
income also reflects higher operating expenses in Germany and gross margin
investments in the United Kingdom to reduce inventory levels and increase
sales as well as higher distribution costs. These decreases in pretax
income were partially offset by the overall sales growth, primarily in Brazil,
where there was a large increase in consumer spending following the economic
stabilization program implemented last year and operational improvements in
the Pacific Rim, primarily China and the Philippines, as a result of an
increase in units sold and number of active Representatives.
Liquidity and Capital Resources
Cash Flows
Excluding changes in debt, net cash usage was $235.5 million in the first
half of 1995 compared with $310.2 million in the comparable period of 1994.
16
<PAGE>17
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
The decrease in the cash usage reflects lower cash used for the repurchase of
common stock, a favorable exchange rate impact due to the weaker U.S. dollar
against most European currencies, as well as the Japanese yen and a decrease
in cash used by operations, discussed below. During the first half of 1995,
the Company purchased, under the stock repurchase program begun last year,
approximately 954,000 shares of common stock for $57.8 million compared with
$96.1 million spent for the repurchase of approximately 1,674,000, shares
of common stock during the comparable period in 1994. As of June 30, 1995,
the cumulative number of shares repurchased was approximately 4.2 million
shares.
For the first half of 1995, cash used by operations was $94.3 million,
compared with $108.7 million in 1994. This lower cash usage resulted from
an increase in net income, mainly Brazil; the cash settlement related to
the lease dispute, previously discussed; higher funding of benefit plans
in 1994; lower working capital levels in most European markets; and a
favorable impact from non-cash items, primarily translation in Brazil. These
improvements were partially offset by higher working capital levels in the
U.S., Brazil and Argentina.
Capital Resources
Total debt increased $137.6 million to $315.3 million at June 30, 1995
from $177.7 million at December 31, 1994, principally due to normal seasonal
working capital requirements during the first six months of 1995. Total
debt at June 30, 1995 of $315.3 million was $43.4 million lower than total
debt of $358.7 million at June 30, 1994. The higher debt at June 30, 1994
was primarily due to the higher number of common shares repurchased and the
higher funding of benefit plans in 1994.
At June 30, 1995, there were no borrowings under the $600 million
revolving credit and competitive advance facility agreement ("Credit
Agreement"). This credit agreement is also used to support the Company's
commercial paper borrowings which at June 30, 1995 had $124.5 million
outstanding.
At June 30, 1995, there were no borrowings under the Company's bankers'
acceptance facilities.
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.
Working Capital
As of June 30, 1995, working capital was $15.7 million compared with $9.3
million at the end of 1994. The increase from December 1994 was primarily due
17
<PAGE>18
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
to higher investments in working assets (current assets excluding cash and
equivalents), most significantly inventory, which reflects the seasonal
pattern of Avon's operations and a decrease in accounts payable. These
changes were partially offset by an increase in debt maturing within one year
and a decrease in cash and equivalents. The inventory increase is due to
higher apparel inventory in the U.S.; meeting higher sales levels in Brazil,
Argentina, Venezuela, and most of the Pacific Rim markets; and the effects of
sales shortfalls in the United Kingdom and Japan.
Avon's liquidity results from its ability to generate significant cash
flows from operations and its ample unused borrowing capacity. 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 internationally, with manufacturing and distribution
facilities in various locations around the world. The Company reduces 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 may use interest rate swaps to hedge portions of its interest
expense thereby allowing the Company to establish fixed or variable interest
rates on its outstanding debt. The Company closely monitors market conditions
and, if in a variable position, may also use interest rate caps whereby its
net interest expense is limited if interest rates rise above a defined level.
At June 30, 1995, the Company had two interest rate swap agreements on
its 170 million 6-1/8 percent Deutsche Mark Notes ("Notes"). Each agreement
has a notional principal amount of $100.0 million. These agreements have
converted the interest rate on the Notes to a variable rate established at 1.4
percentage points above one-month LIBOR from December 31, 1994 to May 6, 1998,
when the Notes mature. The Company also had two interest rate cap contracts
at June 30, 1995. One contract is for the calendar year 1995 and places a
ceiling on one-month LIBOR at 6 percent. The other contract is for the period
January 1996 to the maturity of the Notes and places a ceiling on one-month
LIBOR at 9 percent. The notional principal amount of each cap is $100.0
million. The one-month LIBOR at June 30, 1995 was 6.125 percent and the
average rate for the three and six months then ended was approximately
6.1 percent respectively. In early July 1995, the Company entered
into an interest rate swap agreement, primarily because of the historically
low interest rates, which effectively converted the Notes from a floating to a
fixed interest rate through the maturity date of the Notes. The fixed
interest rate on this new swap agreement is slightly below 5.8 percent. As a
18
<PAGE>19
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
result of the existing swap, the new interest rate is established at 1.4
percentage points above this new 5.8 percent interest rate swap. In addition,
the interest rate cap contracts discussed above no longer hedge the Notes and,
therefore, will be marked-to-market with any resulting adjustments included
in income.
The Company may periodically hedge foreign currency royalties, net invest-
ments in foreign subsidiaries, firm purchase commitments, contractual foreign
currency cash flows or obligations, including debt, and other 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 June 30, 1995, the Company held foreign currency forward contracts
with notional amounts totalling $174.5 million and option contracts with
notional amounts totalling $45.2 million to hedge foreign currency items.
During the second quarter of 1995, the Company entered into certain yen option
contracts with notional amounts of $50.6 million to economically hedge certain
foreign currency exposures. These option contracts do not qualify as hedging
transactions under the current accounting definitions and, accordingly, have
been marked-to-market. The marked-to-market adjustment on these option
contracts at June 30, 1995 was insignificant. The Company's risk of loss
on these options in the future is limited to premiums paid, which are
insignificant.
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.
New Accounting Standard
FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", was issued in March 1995 and is
effective for fiscal years beginning after December 15, 1995 but may be
adopted earlier. This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. The Company does not
anticipate any significant impact to its results of operations or financial
position upon adoption.
19
<PAGE>20
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
11.1 --Statement re computation of primary income per share.
11.2 --Statement re computation of fully diluted income
per share.
27 --Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the second quarter
of 1995.
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 11, 1995 By /s/ MICHAEL R. MATHIESON
-------------------------------
Michael R. Mathieson
Vice President & 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, 1995 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 per share.
11.2 --Statement re computation of fully diluted income per share.
27 --Financial Data Schedule.
EXHIBIT 11.1
<PAGE>
EXHIBIT 11.1
AVON PRODUCTS, INC.
COMPUTATION OF PRIMARY INCOME PER SHARE
(In millions, except per share data)
Three months ended
June 30
------------------
1995 1994
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during the period. 68.46 70.86
Common stock equivalents*............................. -- --
------ ------
Weighted average shares for primary income per share
computation......................................... 68.46 70.86
====== ======
Income from continuing operations....................... $ 80.4 $ 72.3
Discontinued operations, net of taxes................... -- (22.2)
------ ------
Net income.............................................. $ 80.4 $ 50.1
====== ======
Primary income (loss) per share:
Continuing operations................................. $ 1.17 $ 1.02
Discontinued operations............................... -- (.31)
------ ------
Net income............................................ $ 1.17 $ .71
====== ======
- ----------
*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 PER SHARE
(In millions, except per share data)
Six months ended
June 30
----------------
1995 1994
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during the period. 68.57 71.39
Common stock equivalents*............................. -- --
------- -------
Weighted average shares for primary income per share
computation......................................... 68.57 71.39
======= =======
Income from continuing operations....................... $ 114.8 $ 103.4
Discontinued operations, net of taxes................... -- (23.8)
Cumulative effect of accounting changes................. -- (45.2)
------- -------
Net income.............................................. $ 114.8 $ 34.4
======= =======
Primary income (loss) per share:
Continuing operations................................. $ 1.67 $ 1.45
Discontinued operations............................... -- (.34)
Cumulative effect of accounting changes............... -- (.63)
------- -------
Net income............................................ $ 1.67 $ .48
======= =======
- ----------
*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 PER SHARE
(In millions, except per share data)
Three months ended
June 30
------------------
1995 1994
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during the
period............................................. 68.46 70.86
Common stock equivalents............................. .20 .19
------ ------
Weighted average shares for fully diluted income
per share computation.............................. 68.66 71.05
====== ======
Income from continuing operations...................... $ 80.4 $ 72.3
Discontinued operations, net of taxes.................. -- (22.2)
------ ------
Net income............................................. $ 80.4 $ 50.1
====== ======
Fully diluted income (loss) per share:
Continuing operations................................ $ 1.17 $ 1.02
Discontinued operations.............................. -- (.31)
------ ------
Net income........................................... $ 1.17 $ .71
====== ======
<PAGE>
EXHIBIT 11.2
AVON PRODUCTS, INC.
COMPUTATION OF FULLY DILUTED INCOME PER SHARE
(In millions, except per share data)
Six months ended
June 30
----------------
1995 1994
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during the
period.............................................. 68.57 71.39
Common stock equivalents.............................. .21 .19
------ ------
Weighted average shares for fully diluted income
per share computation............................... 68.78 71.58
====== ======
Income from continuing operations....................... $114.8 $103.4
Discontinued operations, net of taxes................... -- (23.8)
Cumulative effect of accounting changes................. -- (45.2)
------ ------
Net income.............................................. $114.8 $ 34.4
====== ======
Fully diluted income (loss) per share:
Continuing operations................................. $ 1.67 $ 1.45
Discontinued operations............................... -- (.34)
Cumulative effect of accounting changes............... -- (.63)
------ ------
Net income............................................ $ 1.67 $ .48
====== ======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
Avon Products, Inc.
Financial Data Schedule
This schedule contains summary financial information extracted from the
Avon Products, Inc. financial statements as of June 30, 1995 and for the
six months then ended included in the Form 10-Q as of June 30, 1995
and is qualified in its entirety by reference to such financial statements.
<MULTIPLIER> 1,000,000
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<PERIOD-TYPE> 6-MOS
<S> <C>
<CASH> 112
<SECURITIES> 0
<RECEIVABLES> 421
<ALLOWANCES> (34)
<INVENTORY> 510
<CURRENT-ASSETS> 1,188
<PP&E> 1,206
<DEPRECIATION> (661)
<TOTAL-ASSETS> 2,037
<CURRENT-LIABILITIES> 1,172
<BONDS> 114
0
0
<COMMON> 43
<OTHER-SE> 150
<TOTAL-LIABILITY-AND-EQUITY> 2,037
<SALES> 2,040
<TOTAL-REVENUES> 2,040
<CGS> 792
<TOTAL-COSTS> 1,796
<OTHER-EXPENSES> 8
<LOSS-PROVISION> 36
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 190
<INCOME-TAX> 76
<INCOME-CONTINUING> 115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.67
</TABLE>
