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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 March 31, 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 April
30, 1995 was 68,492,470.
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Table of Contents
Part I. Financial Information
Page
Numbers
Item 1. Financial Statements
Consolidated Statement of Operations
Three Months Ended March 31, 1995 and
March 31, 1994 3
Consolidated Balance Sheet
March 31, 1995 and December 31, 1994 4
Consolidated Statement of Cash Flows
Three Months Ended March 31, 1995 and
March 31, 1994 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition 9-14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
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PART I. FINANCIAL INFORMATION
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share data)
Three months ended
March 31
------------------
1995 1994
---- ----
(unaudited)
Net sales........................................... $976.2 $886.0
------ ------
Costs, expenses and other:
Cost of sales....................................... 387.3 352.4
Marketing, distribution and
administrative expenses........................... 517.0 468.3
Interest expense.................................... 9.0 14.5
Interest income..................................... (4.1) (5.2)
Other expense, net.................................. 10.5 4.9
------ ------
Total costs, expenses and other................... 919.7 834.9
------ ------
Income from continuing operations before
taxes, minority interest and cumulative
effect of accounting changes...................... 56.5 51.1
Income taxes........................................ 22.5 19.9
------ ------
Income from continuing operations before
minority interest and cumulative effect
of accounting changes............................. 34.0 31.2
Minority interest................................... .4 (.1)
------ ------
Income from continuing operations before
cumulative effect of accounting changes........... 34.4 31.1
Discontinued operations, net of taxes............... -- (1.6)
Cumulative effect of accounting changes,
net of taxes...................................... -- (45.2)
------ ------
Net income (loss)................................... $ 34.4 $(15.7)
====== ======
Income (loss) per share:
Continuing operations............................. $ .50 $ .43
Discontinued operations........................... -- (.02)
Cumulative effect of accounting changes........... -- (.63)
------ ------
Net income (loss)................................. $ .50 $ (.22)
====== ======
Average shares outstanding.......................... 68.68 71.92
====== ======
The accompanying notes are an integral part of these statements.
3
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AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(In millions)
March 31 December 31
1995 1994
-------- -----------
(unaudited)
ASSETS
Current assets:
Cash and equivalents............................. $ 98.5 $ 214.8
Accounts receivable.............................. 370.6 373.7
Inventories...................................... 494.3 412.8
Prepaid expenses and other....................... 158.6 149.0
-------- --------
Total current assets......................... 1,122.0 1,150.3
-------- --------
Property, plant and equipment, at cost........... 1,176.6 1,146.7
Less accumulated depreciation.................... 641.4 618.3
-------- --------
535.2 528.4
-------- --------
Other assets..................................... 299.1 299.6
-------- --------
Total assets................................. $1,956.3 $1,978.3
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year.................... $ 178.0 $ 61.2
Accounts payable................................. 312.7 408.0
Accrued compensation............................. 93.1 100.0
Other accrued liabilities........................ 223.4 222.3
Sales and other taxes............................ 88.6 95.7
Income taxes..................................... 238.7 253.8
-------- --------
Total current liabilities.................... 1,134.5 1,141.0
-------- --------
Long-term debt................................... 115.0 116.5
Employee benefit plans........................... 377.9 366.6
Deferred income taxes............................ 31.8 32.2
Other liabilities................................ 141.6 136.4
Shareholders' equity:
Common stock..................................... 43.4 43.3
Additional paid-in capital....................... 663.3 660.5
Retained earnings................................ 212.6 212.4
Translation adjustments.......................... (185.8) (187.1)
Treasury stock, at cost.......................... (578.0) (543.5)
-------- --------
Total shareholders' equity................... 155.5 185.6
-------- --------
Total liabilities and shareholders' equity... $1,956.3 $1,978.3
======== ========
The accompanying notes are an integral part of these statements.
4
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AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Three months ended
March 31
------------------
1995 1994
---- ----
(unaudited)
Cash flows from operating activities:
Net income (loss)...................................... $ 34.4 $(15.7)
Adjustments to reconcile net income (loss) to net cash
(used) by operating activities:
Cumulative effect of accounting changes, net....... -- 45.2
Discontinued operations, net....................... -- 1.6
Payments for restructuring costs................... -- (3.5)
Depreciation and amortization...................... 14.0 13.5
Provision for doubtful accounts.................... 17.2 13.7
Translation (gains) losses......................... 1.9 (6.2)
Deferred income taxes.............................. .7 (1.3)
Other.............................................. 9.2 4.4
Changes in assets and liabilities:
Accounts receivable.............................. (22.2) (47.8)
Inventories...................................... (81.4) (64.7)
Prepaid expenses and other....................... (15.2) (9.3)
Accounts payable and accrued liabilities......... (95.4) (20.9)
Income and other taxes........................... (19.8) (22.0)
Noncurrent assets and liabilities................ .4 (32.6)
------ ------
Net cash (used) by continuing operations............... (156.2) (145.6)
Net cash (used) by discontinued operations............. (1.7) (2.5)
------ ------
Net cash (used) by operating activities................ (157.9) (148.1)
------ ------
Cash flows from investing activities:
Capital expenditures................................... (9.9) (11.4)
Disposal of assets..................................... .4 .8
------ ------
Net cash (used) by investing activities................ (9.5) (10.6)
------ ------
Cash flows from financing activities:
Cash dividends......................................... (36.4) (36.3)
Debt, net (maturities of three months or less)......... 123.7 130.5
Proceeds from short-term debt.......................... 11.2 5.8
Retirement of short-term debt.......................... (13.6) (2.9)
Retirement of long-term debt........................... (8.8) (12.0)
Proceeds from exercise of stock options, net of taxes.. .1 .5
Repurchase of common stock............................. (36.6) (46.7)
------ ------
Net cash provided by financing activities.............. 39.6 38.9
------ ------
Effect of exchange rate changes on cash and
equivalents.......................................... 11.5 (3.4)
------ ------
Net decrease in cash and equivalents................... (116.3) (123.2)
Cash and equivalents beginning of period............... 214.8 223.9
------ ------
Cash and equivalents end of period..................... $ 98.5 $100.7
====== ======
The accompanying notes are an integral part of these statements.
5
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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 first quarter of 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:
Three months ended
March 31
------------------
1995 1994
---- ----
Interest.............................................. $ 4.5 $ 8.7
Income taxes, net of refunds received................. 38.7 36.7
6
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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
first quarter of 1995 compared to the same period of 1994 is primarily due to
the shares acquired under the stock repurchase program which began in the
first quarter of 1994. As of March 31, 1995, the cumulative number of shares
repurchased was approximately 3.9 million shares.
6. INVENTORIES
March 31 December 3l
1995 1994
-------- -----------
Raw materials............................. $133.2 $118.4
Finished goods............................ 361.1 294.4
------ ------
$494.3 $412.8
====== ======
7. DIVIDENDS
Regular quarterly dividends of $.50 and $.45 per share of common stock
were paid on March 1, 1995 and 1994, respectively.
8. 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 ("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
7
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AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)
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. On November 8, 1994, the 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 is scheduled for
October 23, 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, IMC and Mallinckrodt 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 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
March 31, 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 March 31, 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 March 31, 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.
8
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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 March 31, 1995 and 1994.
Consolidated
Avon's net income for the three months ended March 31, 1995 was $34.4
million, or $.50 per share, as compared to a net loss of $15.7 million, or
$.22 per share, in the comparable period of 1994. The average shares out-
standing for the three months ended March 31, 1995 and 1994 were 68.7 million
and 71.9 million, respectively. The 1994 results include a loss of $1.6
million, or $.02 per share, for discontinued operations relating to Giorgio
Beverly Hills, Inc. ("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 account-
ing changes for the three months ended March 31, 1995 was $34.4 million, an 11
percent increase over the comparable period of 1994. Income per share from
continuing operations increased 16 percent to $.50 from $.43 in 1994. The 16
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.
Pretax income of $56.5 million increased 11 percent due to increased sales, an
improved gross margin and lower interest expense and monetary correction
expense in Brazil. These favorable results were partially offset by a higher
overall operating expense ratio and unfavorable foreign exchange and lower
interest income in Brazil. Net income was further reduced by a higher
effective income 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.
Consolidated net sales for the three months ended March 31, 1995 of $976.2
million, increased $90.2 million, or 10 percent, over the comparable period
of the prior year. The increase was primarily due to higher sales in the
U.S., reflecting increases in average order size and number of Representative
orders; operational sales growth in the Americas Region, most significantly
9
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AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Brazil, and the Pacific Rim markets; and the favorable exchange rate impact of
the weaker U.S. Dollar in relation to the currencies in the Europe and Pacific
Regions. These improvements were partially offset by lower sales in Mexico as
a result of the major Peso devaluation and operational sales declines in Japan
and Germany.
Cost of sales as a percentage of sales was 39.7 percent in the first
quarter of 1995 compared to 39.8 percent in the first quarter of 1994. The
improved cost ratio was primarily due to significant gross margin improvements
in Brazil, as a result of the favorable impact of the government economic
stabilization program implemented in July 1994 and, to a lesser extent, in
Argentina and most Pacific Rim markets. These improvements were partially
offset by lower gross margins primarily in Germany and the United Kingdom and,
to a smaller degree, in Japan, Mexico and the U.S.
Marketing, distribution and administrative expenses of $517.0 million
increased $48.7 million, or 10 percent, over the comparable period of 1994
and increased as a percentage of sales to 53.0 percent from 52.9 percent in
1994. The higher expenses are associated with sales increases in the U.S.
and Brazil, and higher operating expenses in all European markets, primarily
Germany and the United Kingdom, and the Pacific Rim markets. These increases
were partially offset by lower expenses in Mexico due to the impact of the
Peso devaluation. The increase in the operating expense ratio was primarily
due to operational sales shortfalls in Germany and Japan, partially offset by
significant sales increases in Brazil and the U.S. with proportionately lower
increases in expenses.
Interest expense decreased $5.5 million from the comparable period of last
year as a result of lower interest rates and debt levels in Brazil and in the
U.S. These decreases were partially offset by higher borrowings in the
Eastern European markets as part of Avon's growth strategy. Interest income
decreased $1.1 million compared to the comparable period of the prior year
primarily due to lower interest rates in Brazil.
Other expense, net, of $10.5 million increased $5.6 million from the
comparable period in 1994. This increase was primarily due to net foreign
exchange losses in 1995 compared to net foreign exchange gains in 1994 in
Brazil, partially offset by lower monetary correction expense in Brazil in
1995. Brazil's net asset position and slight devaluation generated trans-
lation losses in 1995 as compared to a net liability position and significant
devaluation which generated translation gains in 1994.
United States
Net sales increased 10 percent in the first quarter of 1995 compared to
the same period of 1994 reflecting a 5 percent increase in both average order
size and number of Representative orders and a 6 percent increase in units
sold. The sales improvement was driven by increases in most product
categories, most significantly apparel, which was launched late in the first
quarter of 1994, and color cosmetics and skin care products.
10
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AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Pretax income increased 20 percent over the prior year period due to the sales
increase and an improved operating expense ratio as expenses increased at a
lower rate than sales, partially offset by a decline in gross margin due to
higher sales of the lower margin apparel line.
International
Net sales increased 10 percent during the first quarter of 1995 compared
to the first quarter of 1994 and pretax income decreased 18 percent. The
sales growth was primarily due to strong unit growth in Brazil and Argentina
and sales of higher-priced products in Brazil and the Pacific Rim markets. In
addition, the sales increase was due to the favorable impact of a weaker U.S.
Dollar throughout Europe and the Pacific Region. These favorable results were
partially offset by lower sales in Mexico due to the negative impact of the
Peso devaluation and lower unit volume in Germany and Japan reflecting a
decline in the number of active Representatives as compared with the prior
year period. The decrease in pretax income reflects the negative impact of
the Peso devaluation in Mexico, operational sales shortfalls in Japan, which
is recovering from the impact of the reorganization of the sales force in the
second quarter of 1994 and unfavorable operating results in Germany and the
United Kingdom. The pretax income in Mexico decreased by approximately $10.0
million due to the devaluation. It is currently anticipated the currency
impact should lessen in succeeding quarters because of revised marketing and
sales plans being implemented. The decrease in pretax income in Germany and
the United Kingdom was primarily due to gross margin investments to reduce
inventory levels and increase sales, higher operating expenses related to
increasing the number of Representatives in Germany and higher distribution
costs in the United Kingdom. These decreases in pretax income were partially
offset by the overall sales increase and strong operating results in Brazil
resulting from the government economic stabilization program. This program
resulted in lowered inflation and improved consumer purchasing confidence. In
addition, a higher number of Representatives in the first quarter of 1995
compared to the first quarter of 1994 enabled the Company to take advantage of
the improved economic environment.
In April 1995, Avon's Japanese subsidiary implemented an early retirement
program as part of an expense reduction effort. The program will result
in approximately $12.0 million of one-time costs, before the effect of
minority interest, in the second quarter but should produce substantial
savings in the second half of 1995 and thereafter. As a result of the
anticipated savings and the effect of minority interest, the after-tax
impact on 1995 earnings should be negligible.
Discontinued Operations
During the third quarter of 1994, Avon completed the sale of Giorgio.
As a result, Giorgio's net loss of $1.6 million, or $.02 per share, for the
three months ended March 1994, have been reported as discontinued operations.
11
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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 $228.8 million in the first
quarter of 1995 compared with $244.6 million in the comparable period of 1994.
The decrease in the cash usage primarily reflects a favorable exchange rate
impact due to the weaker U.S. Dollar against most currencies and lower cash
used for the repurchase of common stock, partially offset by an increase in
cash used by operations. During the first quarter of 1995, the Company
purchased, under the stock repurchase program begun last year, approximately
634,000 shares of common stock for $36.6 million compared with $46.7 million
spent for the repurchase of approximately 824,000 shares of common stock
during the comparable period in 1994. As of March 31, 1995, the cumulative
number of shares repurchased was approximately 3.9 million shares.
For the first quarter of 1995, cash used by operations was $157.9 million,
compared with $148.1 million in 1994. This higher cash usage resulted from
higher working capital levels in the U.S. and the Americas Region, mainly
Brazil and Argentina, and lower net income in Mexico and Germany. This
increase was partially offset by the funding of benefit plans in 1994, higher
net income in Brazil and the U.S., and lower working capital levels in the
Europe Region and Japan.
Capital Resources
Total debt increased $115.3 million to $293.0 million at March 31, 1995
from $177.7 million at December 31, 1994, principally due to normal seasonal
working capital requirements during the first three months of 1995. Total
debt at March 31, 1995 of $293.0 million was $28.1 million lower than total
debt of $321.1 million at March 31, 1994. The higher debt at March 31, 1994
is primarily due to the funding of benefit plans in 1994.
At March 31, 1995, borrowings under the $600 million revolving credit
and competitive advance facility agreement ("Credit Agreement") were $26.0
million. This agreement also supported the Company's commercial paper
borrowings of $87.5 million at March 31, 1995.
At March 31, 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.
12
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AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Working Capital
As of March 31, 1995, current liabilities exceeded current assets by $12.5
million compared with current assets exceeding current liabilities by $9.3
million at the end of 1994. The decline from December 1994 reflects a
decrease in cash and equivalents and an increase in debt maturing within one
year resulting from higher inventory levels and a decrease in accounts
payable which reflects the seasonal pattern of Avon's operations. Addition-
ally, the inventory increase is due to higher apparel inventory in the U.S.;
higher sales in Brazil and Argentina and sales shortfalls in the United
Kingdom and Japan. These inventory increases were partially offset by a
decrease in the U.S. Dollar value of inventory in Mexico as a result of the
Peso devaluation.
Although current liabilities exceeded current assets at March 31, 1995,
management believes this 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
ample unused borrowing capacity. Actions that would eliminate the working
capital deficit are not anticipated at this time. Avon's Credit Agreement
contains a covenant for interest coverage, as defined, and does not contain
any provisions or requirements with respect to working capital. As of March
31, 1995, the Company is in compliance with the interest coverage covenant in
the Credit Agreement.
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 March 31, 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 March 31, 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
13
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AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
LIBOR at 9 percent. The notional principal amount of each cap is $100.0
million. The one-month LIBOR at March 31, 1995 was 6.125 percent and the
average rate for the three months then ended was approximately 6.1 percent.
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 March 31, 1995, the Company held foreign currency forward contracts
with notional amounts totalling $212.2 million and option contracts with
notional amounts totalling $80.0 million to hedge foreign currency items.
During the first quarter of 1995, the Company entered into certain Yen option
contracts with notional amounts of $49.7 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 mark-to-market adjustment on these option
contracts at March 31, 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.
14
<PAGE>
<PAGE>15
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 first quarter
of 1995.
15
<PAGE>
<PAGE>16
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: May 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.
16
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 March 31, 1995 Commission file number 1-4881
------------
AVON PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
------------
EXHIBITS
<PAGE>
<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>
<PAGE>
EXHIBIT 11.1
AVON PRODUCTS, INC.
COMPUTATION OF PRIMARY INCOME PER SHARE
(In millions, except per share data)
Three months ended
March 31
------------------
1995 1994
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during the period. 68.68 71.92
Common stock equivalents*............................. -- --
------ ------
Weighted average shares for primary income per share
computation......................................... 68.68 71.92
====== ======
Income from continuing operations....................... $34.4 $ 31.1
Discontinued operations, net of taxes................. -- (1.6)
Cumulative effect of accounting changes, net of
taxes............................................... -- (45.2)
----- ------
Net income (loss)..................................... $34.4 $(15.7)
===== ======
Primary income per share:
Continuing operations................................. $ .50 $ .43
Discontinued operations............................... -- (.02)
Cumulative effect of accounting changes............... -- (.63)
----- ------
Net income (loss)..................................... $ .50 $ (.22)
===== ======
- ----------
*Common stock equivalents are not reported because they result in less than
three percent dilution.
EXHIBIT 11.2
<PAGE>
<PAGE>
EXHIBIT 11.2
AVON PRODUCTS, INC.
COMPUTATION OF FULLY DILUTED INCOME PER SHARE
(In millions, except per share data)
Three months ended
March 31
------------------
1995 1994
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during the
period............................................ 68.68 71.92
Common stock equivalents............................ .12 .17
------ ------
Weighted average shares for fully diluted income
per share computation............................. 68.80 72.09
====== ======
Income from continuing operations..................... $34.4 $ 31.1
Discontinued operations, net of taxes............... -- (1.6)
Cumulative effect of accounting changes, net of
taxes............................................. -- (45.2)
----- ------
Net income (loss)................................... $34.4 $(15.7)
===== ======
Fully diluted income per share:
Continuing operations............................... $ .50 $ .43
Discontinued operations............................. -- (.02)
Cumulative effect of accounting changes............. -- (.63)
----- ------
Net income (loss)................................... $ .50 $ (.22)
===== ======
<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 March 31, 1995 and for the
three months then ended included in the Form 10-Q as of March 31, 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> MAR-31-1995
<PERIOD-TYPE> 3-MOS
<S> <C>
<CASH> 99
<SECURITIES> 0
<RECEIVABLES> 397
<ALLOWANCES> (26)
<INVENTORY> 494
<CURRENT-ASSETS> 1,122
<PP&E> 1,177
<DEPRECIATION> (641)
<TOTAL-ASSETS> 1,956
<CURRENT-LIABILITIES> 1,134
<BONDS> 115
0
0
<COMMON> 43
<OTHER-SE> 113
<TOTAL-LIABILITY-AND-EQUITY> 1,956
<SALES> 976
<TOTAL-REVENUES> 976
<CGS> 387
<TOTAL-COSTS> 887
<OTHER-EXPENSES> 11
<LOSS-PROVISION> 17
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 57
<INCOME-TAX> 23
<INCOME-CONTINUING> 34
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
