<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 September 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 October
31, 1995 was 67,867,647.
<PAGE>2
Table of Contents
Part I. Financial Information
Page
Numbers
Item 1. Financial Statements
Consolidated Statement of Income
Three Months Ended September 30, 1995 and
September 30, 1994 3
Nine Months Ended September 30, 1995 and
September 30, 1994 4
Consolidated Balance Sheet
September 30, 1995 and December 31, 1994 5
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1995 and
September 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 11-20
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
<PAGE>3
PART I. FINANCIAL INFORMATION
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share data)
Three months ended
September 30
-------------------
1995 1994
---- ----
(unaudited)
Net sales....................................... $1,067.8 $1,009.8
Costs, expenses and other:
Cost of sales................................... 419.4 392.9
Marketing, distribution and
administrative expenses....................... 551.3 515.2
Interest expense................................ 11.4 11.2
Interest income................................. (4.5) (2.0)
Other expense, net.............................. 3.0 11.9
-------- --------
Total costs, expenses and other............... 980.6 929.2
-------- --------
Income before taxes and minority interest....... 87.2 80.6
Income taxes.................................... 31.4 28.7
-------- --------
Income before minority interest................. 55.8 51.9
Minority interest............................... (.6) (.6)
-------- --------
Net income...................................... $ 55.2 $ 51.3
======== ========
Net income per share............................ $ .81 $ .73
======== ========
Average shares outstanding 68.02 70.17
======== ========
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)
Nine months ended
September 30
-------------------
1995 1994
---- ----
(unaudited)
Net sales....................................... $3,108.0 $2,903.0
Costs, expenses and other:
Cost of sales................................... 1,211.6 1,134.4
Marketing, distribution and
administrative expenses....................... 1,591.4 1,473.9
Interest expense................................ 30.7 40.9
Interest income................................. (14.2) (17.0)
Other expense, net.............................. 11.1 19.1
-------- --------
Total costs, expenses and other............... 2,830.6 2,651.3
-------- --------
Income from continuing operations before
taxes, minority interest and cumulative
effect of accounting changes.................. 277.4 251.7
Income taxes.................................... 107.3 95.4
-------- --------
Income from continuing operations before
minority interest and cumulative effect
of accounting changes......................... 170.1 156.3
Minority interest............................... (.1) (1.6)
-------- --------
Income from continuing operations before
cumulative effect of accounting changes....... 170.0 154.7
Discontinued operations
Income, net of taxes.......................... -- 1.2
Loss on sale.................................. -- (25.0)
Cumulative effect of accounting changes......... -- (45.2)
-------- --------
Net income...................................... $ 170.0 $ 85.7
======== ========
Income (loss) per share:
Continuing operations......................... $ 2.49 $ 2.18
Discontinued operations....................... -- (.34)
Cumulative effect of accounting changes....... -- (.63)
-------- --------
Net income...................................... $ 2.49 $ 1.21
======== ========
Average shares outstanding 68.38 70.98
======== ========
The accompanying notes are an integral part of these statements.
4
<PAGE>5
AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(In millions)
September 30 December 31
1995 1994
------------ -----------
(unaudited)
ASSETS
Current assets:
Cash and equivalents............................. $ 98.2 $ 214.8
Accounts receivable.............................. 399.4 373.7
Inventories...................................... 545.8 412.8
Prepaid expenses and other....................... 206.8 149.0
--------- --------
Total current assets......................... 1,250.2 1,150.3
--------- --------
Property, plant and equipment, at cost........... 1,183.9 1,146.7
Less accumulated depreciation.................... 652.8 618.3
--------- --------
531.1 528.4
--------- --------
Other assets..................................... 311.2 299.6
--------- --------
Total assets................................. $2,092.5 $1,978.3
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year.................... $ 230.4 $ 61.2
Accounts payable................................. 320.7 408.0
Accrued compensation............................. 122.1 100.0
Other accrued liabilities........................ 233.8 222.3
Sales and other taxes............................ 84.7 95.7
Income taxes..................................... 262.7 253.8
--------- --------
Total current liabilities.................... 1,254.4 1,141.0
--------- --------
Long-term debt................................... 114.3 116.5
Employee benefit plans........................... 384.9 366.6
Deferred income taxes............................ 32.8 32.2
Other liabilities................................ 135.5 136.4
Shareholders' equity:
Common stock..................................... 43.4 43.3
Additional paid-in capital....................... 667.5 660.5
Retained earnings................................ 276.6 212.4
Translation adjustments.......................... (191.3) (187.1)
Treasury stock, at cost.......................... (625.6) (543.5)
--------- --------
Total shareholders' equity................... 170.6 185.6
--------- --------
Total liabilities and shareholders' equity... $2,092.5 $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)
Nine months ended
September 30
-----------------
1995 1994
---- ----
(unaudited)
Cash flows from operating activities:
Net income............................................. $ 170.0 $ 85.7
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...................... 43.4 41.3
Provision for doubtful accounts.................... 56.1 42.3
Translation losses (gains)......................... 2.2 (10.4)
Deferred income taxes.............................. (6.7) (.4)
Other.............................................. 25.6 18.8
Changes in assets and liabilities:
Accounts receivable.............................. (93.7) (132.1)
Inventories...................................... (134.3) (140.6)
Prepaid expenses and other....................... (62.3) (27.5)
Accounts payable and accrued liabilities......... (38.3) 18.6
Income and other taxes........................... 1.5 (18.1)
Noncurrent assets and liabilities................ (8.5) (39.4)
------- ------
Net cash (used) by continuing operations............... (45.0) (96.3)
Net cash (used) by discontinued operations............. (6.0) (2.0)
------- ------
Net cash (used) by operating activities................ (51.0) (98.3)
------- ------
Cash flows from investing activities:
Capital expenditures................................... (44.5) (60.8)
Disposal of assets..................................... 2.0 4.4
Proceeds from sale of Giorgio Beverly Hills, Inc....... -- 150.0
------- ------
Net cash (used) provided by investing activities....... (42.5) 93.6
------- ------
Cash flows from financing activities:
Cash dividends......................................... (110.4) (106.3)
Debt, net (maturities of three months or less)......... 187.1 112.8
Proceeds from short-term debt.......................... 22.1 23.3
Retirement of short-term debt.......................... (21.4) (9.7)
Retirement of long-term debt........................... (23.3) (12.0)
Repurchase of common stock............................. (85.0) (137.2)
Proceeds from exercise of stock options, net of taxes.. 1.2 .6
------- ------
Net cash (used) by financing activities................ (29.7) (128.5)
------- ------
Effect of exchange rate changes on cash and
equivalents.......................................... 6.6 (6.0)
------- ------
Net decrease in cash and equivalents................... (116.6) (139.2)
Cash and equivalents beginning of period............... 214.8 223.9
------- ------
Cash and equivalents end of period..................... $ 98.2 $ 84.7
======= ======
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 nine months ended September 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:
Nine months ended
September 30
-----------------
1995 1994
---- ----
Interest............................................ $ 23.8 $ 32.9
Income taxes, net of refunds received............... 105.4 106.4
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 nine months ended September 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 nine months of 1995, the Company purchased
approximately 1,350,000 shares of common stock compared to approximately
2,380,000 shares purchased during the first nine months of 1994. As of
September 30, 1995, the cumulative number of shares repurchased was
approximately 4.6 million shares for a total cost of approximately $273.2.
6. INVENTORIES
September 30 December 3l
1995 1994
------------ -----------
Raw materials....................... $151.5 $118.4
Finished goods...................... 394.3 294.4
------ ------
$545.8 $412.8
====== ======
7. DIVIDENDS
Cash dividends paid per share of common stock were $.55 and $1.55 for the
three and nine months ended September 30, 1995, respectively, and $.50 and
$1.40 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 was paid on September 1, 1995.
8. NEW ACCOUNTING STANDARDS
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)
FAS No. 123, "Accounting for Stock-Based Compensation", was issued in
October 1995 and is effective for transactions entered into in fiscal years
beginning after December 15, 1995, but may be adopted earlier. This statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans, such as stock purchase plans, stock options,
restricted stock and stock appreciation rights as well as non-employee
equity transactions. This statement requires the recording of an expense
using a fair value based method of accounting for employee stock options
or similar equity instruments. It encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans
but permits entities to continue their present method of accounting for
stock-based employee compensation plans. At the present time, the timing
and the effect of the adoption of FAS No. 123 on Avon's results of
operations or financial position have not been determined.
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 interest was entered. In November 1992, the Court
granted Mallinckrodt Group's motion for a judgment notwithstanding the
verdict ("JNOV") and directed a verdict for plaintiffs in the amount of $27.1
plus interest; as of September 30, 1995, the interest accruable on such verdict
would amount to approximately $19.0. Avon and Mallinckrodt Group appealed the
JNOV decision and in November 1994, the Missouri Court of Appeals overturned
the JNOV and ordered a new trial. Such re-trial began on October 30, 1995.
See Note 10 regarding a Subsequent Event.
9
<PAGE>10
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)
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
currently be determined with certainty. The reserves for such contingencies
at September 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 September 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 September 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. Subsequent Event
In early November 1995, re-trial of the DuPont patent case was discontinued
on the basis that the Company and Mallinckrodt Group were making substantial
progress toward resolving the contingencies in the indemnification dispute as
discussed in Note 9 of the Notes to Consolidated Financial Statements.
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 September 30, 1995 and 1994.
Consolidated
Avon's net income for the three months ended September 30, 1995 of $55.2
million, or $.81 per share, increased 8 percent and 11 percent, respectively,
from net income of $51.3 million, or $.73 per share, in the comparable period
of 1994. The 11 percent increase in income per share over the comparable
period of the prior year exceeds the 8 percent increase in net income 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 $87.2
million increased 8 percent due to higher sales, favorable foreign exchange
and in Brazil, lower monetary correction expense and higher interest
income. These favorable results were partially offset by higher operating
expenses and cost of sales. Net income was further reduced by a slightly
higher effective income tax rate (36.0 percent versus 35.6 percent in 1994)
resulting primarily from the mix of earnings and tax rates of International
subsidiaries. In addition, the 1994 effective tax rate was favorably impacted
by the utilization of foreign net operating loss carryforwards.
Consolidated net sales for the three months ended September 30, 1995 of
$1.1 billion increased $58.0 million, or 6 percent, over the comparable period
of the prior year. The increase was primarily due to higher International
sales resulting from strong unit growth in Brazil, Venezuela, Chile, the
United Kingdom, and most Pacific markets and the favorable exchange rate
impact of a weaker U.S. dollar against the currencies in the Pacific and
Europe regions, primarily Japan and Germany. These improvements were
partially offset by lower sales in Mexico as a result of the major peso
devaluation which has occurred since December 1994, and reduced consumer
spending caused by a weak economy.
Cost of sales as a percentage of sales was 39.3 percent in the third
quarter of 1995 compared to 38.9 percent in the third quarter of 1994. The
decline in gross margin was primarily due to the margin investments in the
U.S. and the United Kingdom and a shift in sales mix to lower margin products
in Japan. These declines were partially offset by improved gross margins
throughout most Pacific Rim markets and Venezuela.
Marketing, distribution and administrative expenses of $551.3 million
increased $36.1 million, or 7 percent, over the comparable period of 1994 and
increased as a percentage of sales to 51.6 percent from 51.0 percent in 1994.
The higher expenses are associated with sales increases in Brazil, higher
operating expenses throughout most of the Pacific Rim markets and the
Europe region, except Germany, and higher paper cost in the U.S. These
increases were partially offset by lower expenses in Mexico due to the impact
11
<PAGE>12
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
of the peso devaluation and, to a lesser extent, in Argentina and Germany.
The increase in the operating expense ratio was primarily due to higher
operating expenses in Brazil and the Pacific Rim, with proportionately
lower increases in sales and operational sales declines in Mexico. The
increase was partially offset by favorable expense ratios throughout the
Europe region, most significantly Germany and the United Kingdom, and Japan.
Other expense, net, of $3.0 million was $8.9 million favorable to the
same period last year reflecting favorable net foreign exchange in Japan and
Brazil partially offset by unfavorable foreign exchange in Venezuela; and
lower monetary correction expense in Brazil.
United States
Net sales for the third quarter of 1995 were level compared with the
third quarter of 1994. Average order size and number of Representative
orders were even with last year. Sales increases for color cosmetics,
fragrances, and apparel were offset by declines in the gift and jewelry
categories.
Pretax income decreased 5 percent from the comparable period last year
primarily as a result of seasonal sales of "Avon Style" apparel merchandise
to reduce inventory levels and substantially higher paper costs.
International
Net sales increased 9 percent over the comparable period of 1994 and
pretax income increased 18 percent. The sales increase was primarily due to
strong unit growth in Brazil, and to a lesser extent, Venezuela and Chile; the
favorable impact of a weaker U.S. dollar throughout the Pacific region,
primarily Japan, and Europe, mainly Germany; and improvements due to strong
unit growth, partially offset by a change in sales mix to lower-priced
products in the United Kingdom and Japan. These favorable results were
partially offset by lower sales in Mexico reflecting the continued negative
impact of the peso devaluation as well as unit declines due to reduced
consumer spending caused by a weak economy.
The increase in pretax income reflects the international sales growth
and continued strong results in Brazil, due to the continued benefits of
the government's economic stabilization program implemented last year
which produced lower levels of inflation and improved consumer confidence.
In addition, the increase in pretax income was due to operating expense
ratio improvements throughout the Europe region, most notably in Germany
as a result of lower operating expenses and the United Kingdom reflecting
operational sales growth. Also, favorable foreign exchange in Japan
contributed to the pretax income increase. Due to the continued operating
12
<PAGE>13
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
improvements in the region, Europe results reflected a pretax income in the
third quarter versus a pretax loss in the same quarter last year. The
increase in pretax income was partially offset by an operational sales
decline and the unfavorable impact of the peso devaluation in Mexico; gross
margin investments in the United Kingdom to support sales with low margin
special offers; a decline in Japan's gross margin reflecting the shift in
sales mix to lower margin products; and higher operating expenses for
expansion throughout most of the Pacific Rim markets.
Results of Operations--Nine Months Ended September 30, 1995 and 1994.
Consolidated
Avon's net income for the nine months ended September 30, 1995 was $170.0
million, or $2.49 per share, compared to net income of $85.7 million, or $1.21
per share in the comparable period of 1994. The 1995 results include the
following one-time pretax items recorded in the second quarter: 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.
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 Expense, net. The net effect of
these one-time items 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 still 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 include a loss of $23.8
million, or $.34 per share, for discontinued operations relating to the sale
of 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.
13
<PAGE>14
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Continuing Operations
Income from continuing operations before the cumulative effect of
accounting changes for the nine months ended September 30, 1995 was $170.0
million, a 10 percent increase over the comparable period of 1994. Income per
share from continuing operations increased 14 percent to $2.49 from $2.18 in
1994 reflecting lower average shares outstanding for 1995 compared with
1994 due to the stock repurchase program. Pretax income of $277.4 million
increased 10 percent due to higher sales and lower net interest expense and
monetary correction expense in Brazil, as well as higher pretax income in
the U.S. In addition, the increase in pretax income reflects the
one-time items previously discussed. These favorable results were
partially offset by unfavorable net foreign exchange and higher corporate
non-operating expenses. Net income was further reduced by a higher effective
income tax rate (38.7 percent versus 37.9 percent in 1994) resulting
primarily from the mix of earnings and income tax rates of International
subsidiaries. In addition, the 1994 effective tax rate was favorably impacted
by the utilization of foreign net operating loss carryforwards.
Consolidated net sales for the nine months ended September 30, 1995 of
$3.1 billion, increased $205.0 million, or 7 percent, over the comparable
period of the prior year. The increase was primarily due to strong sales
growth in Brazil; higher sales in the U.S., reflecting an increase in the
number of Representative orders; operational improvements reflecting unit
increases in Venezuela, Chile and the Pacific Rim; and the favorable exchange
rate impact of the weaker U.S. dollar in relation to the currencies in the
Pacific and Europe regions. These improvements were partially offset by lower
sales in Mexico as a result of the major peso devaluation and a shift to sales
of lower-priced products in Mexico and Japan and unit declines in Germany.
Cost of sales as a percentage of sales was 39.0 percent in 1995 compared
to 39.1 percent in 1994. The improved cost ratio was primarily due to gross
margin improvements in Brazil, reflecting the continued favorable impact of
the government's economic stabilization program implemented in July 1994 and in
most Pacific Rim markets. These improvements were partially offset by lower
gross margins in the United Kingdom, Japan and the U.S.
Marketing, distribution and administrative expenses of $1.6 billion
increased $117.5 million, or 8 percent, over the comparable period of 1994 and
increased as a percentage of sales to 51.2 percent from 50.8 percent in 1994.
Excluding the one-time charges in Japan and Europe and the one-time lease
settlement gain, previously mentioned, operating expenses increased $108.1
million and the operating expense ratio increased slightly. The higher
expenses are associated with increased sales in Brazil, Venezuela and Chile,
higher operating expenses in most European markets, mainly Germany and the
United Kingdom, and throughout the Pacific region. These increases were
partially offset by lower expenses in Mexico due to the significant peso
devaluation.
14
<PAGE>15
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Interest expense decreased $10.2 million from the comparable period of
last year as a result of lower interest rates in Brazil and lower debt levels
in the U.S. and Japan. These decreases were partially offset by higher
borrowings in the Eastern European markets. Interest income decreased $2.8
million compared to the comparable period of the prior year primarily due to
lower interest rates in Brazil partially offset by higher interest earned on
short-term investments in the U.S.
Other expense, net, of $11.1 million was $8.0 million favorable compared
with the same period of 1994. The decrease was primarily due to the $11.0
million interest portion of the previously discussed lease settlement and
lower monetary correction expense in Brazil. The decrease was partially
offset by unfavorable foreign exchange reflecting net foreign exchange losses
in 1995, primarily Brazil, compared to net foreign exchange gains in 1994,
primarily Brazil, and higher corporate non-operating expenses.
United States
Net sales increased 2 percent reflecting 2 percent increases in the
number of Representative orders and units sold. The sales improvement was
driven by increases in apparel, color cosmetics, and fragrance categories.
"Avon Style" apparel was launched during the second quarter of 1994.
Pretax income increased 5 percent over the prior year period primarily due
to the sales increase and lower operating expenses partially offset by a
decline in gross margin due to higher sales of the lower margin apparel
line and gross margin investments to reduce inventory levels.
International
Net sales increased 10 percent over the comparable period of 1994 and
pretax income decreased 3 percent due to the early retirement and severance
programs in Japan and Europe, previously discussed. Excluding these one-time
charges, International pretax income increased 7 percent. The sales
improvement was due to strong operational improvements reflecting unit growth
throughout most markets in the Americas region; sales of higher-priced
products in Brazil; the favorable impact of a weaker U.S. dollar throughout
the Pacific region, most significantly Japan, and in Europe, mainly Germany
and the United Kingdom; and increased units sold in China, the Philippines
and the Eastern European markets. These favorable results were partially
offset by lower U.S. dollar sales in Mexico due to the negative impact of
the peso devaluation and a customer shift to the purchase of lower-priced
products and shortfalls in Japan and Germany reflecting lower unit volume.
Although U.S. dollar sales in Mexico were lower, sales were higher in local
currency with an increase in units sold and active Representatives.
15
<PAGE>16
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Additionally, the impact of the peso devaluation was partially offset by price
increases which were slightly below the rate of inflation. The operational
sales decline in Japan reflects a decline in consumer spending due to the weak
Japanese economy. Sales of skin care and make-up, two key product categories
in Japan, have declined. As a result, numerous actions, including the
previously mentioned early retirement program, have been taken to respond to
the market conditions in Japan. These actions have included the upgrade of
sales staff, the introduction of innovative products, an increase in
advertising and a reduction of the cost base which has allowed a reallocation
of resources to support customer growth.
Excluding the one-time charges, previously discussed, there was an
increase in pretax income which was due to the overall sales increase with
strong operating improvements and increased orders and units sold in Brazil
reflecting the continued benefits of the government's economic stabilization
program. This program has produced lower levels of inflation and improved
consumer confidence. The increase in pretax income is also attributed to
improved gross margins throughout most Pacific Rim markets and improved
expense ratios throughout most of Europe reflecting the effect of previous
expense reduction efforts in the region. These increases were partially
offset by the negative impact of the peso devaluation in Mexico; operational
sales shortfalls and a decline in gross margin due to a shift in sales mix to
lower-priced products in Japan; and a decline in gross margin in the United
Kingdom due to margin investments to support sales and a shift in sales mix to
lower-priced items.
Liquidity and Capital Resources
Cash Flows
Excluding changes in debt, net cash usage was $281.1 million in the first
nine months of 1995 compared with $253.6 million in the comparable period of
1994. The higher cash usage of $27.5 million reflects the proceeds in 1994
from the sale of Giorgio partially offset by lower cash used in 1995 for the
repurchase of common stock, a decrease in cash used by operations, discussed
below, lower capital expenditures and a favorable exchange rate impact. This
impact was due to the weaker U.S. dollar against most European currencies as
well as the Japanese yen. At the present time, it is expected that capital
expenditures for the full year will be below last year's level.
This is the result of a delay in certain expenditures. During the first
nine months of 1995, the Company purchased approximately 1.4 million shares
of common stock for $85.0 million compared with $137.2 million spent for
the repurchase of approximately 2.4 million shares of common stock during the
comparable period in 1994. As of September 30, 1995, the cumulative number of
shares repurchased, under the stock repurchase program begun in early 1994, was
approximately 4.6 million shares for a total cost of approximately $273.2
million.
16
<PAGE>17
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
For the first nine months of 1995, cash used by operations was $51.0
million, compared with $98.3 million in 1994. This lower cash usage resulted
from an increase in net income including the cash settlement related to the
lease dispute, previously mentioned; higher funding of benefit plans in 1994;
and lower working capital levels in most European markets, primarily Germany
and Italy. These improvements were partially offset by higher working
capital levels in Brazil, Argentina and the U.S.
Capital Resources
Total debt increased $167.0 million to $344.7 million at September 30,
1995 from $177.7 million at December 31, 1994, principally due to normal
seasonal working capital requirements during the first nine months of 1995.
Total debt at September 30, 1995 of $344.7 million was $31.0 million higher
than total debt of $313.7 million at September 30, 1994. The lower debt at
September 30, 1994 was primarily due to the proceeds from the sale of Giorgio
received in the third quarter of 1994 partially offset by the higher number of
common shares repurchased and the higher funding of benefit plans in 1994.
At September 30, 1995, there were $15.0 million of 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 September 30, 1995 had $148.0
million outstanding.
At September 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 September 30, 1995, current liabilities exceeded current assets by
$4.2 million compared with current assets exceeding current liabilities by
$9.3 million at the end of 1994. The decline in working capital from December
1994 reflects a decrease in cash and equivalents and an increase in debt
maturing within one year resulting from higher inventory levels, higher
prepaid expenses, primarily paper costs, and a decrease in accounts payable
which reflects the seasonal pattern of Avon's operations. The inventory
increase is due to higher apparel inventory in the U.S. and higher
sales in Brazil, Argentina, Venezuela and most of the Pacific Rim markets.
17
<PAGE>18
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Although current liabilities exceeded current assets at September 30,
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
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 September 30, 1995, the Company had three interest rate swap agreements
on its 170 million 6-1/8 percent Deutsche Mark Notes ("Notes"). Each agree-
ment has a notional principal amount of $100.0 million. In 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 payable under this new swap agreement is
slightly below 5.8 percent. As a result of this new swap, the interest rate
is established at 1.4 percentage points above the 5.8 percent interest rate
on this swap. The Company has two interest rate cap contracts, each with a
notional principal amount of $100 million, which no longer hedge the Notes and,
therefore, are marked-to-market with any resulting adjustments included
in income. The marked-to-market adjustment on these interest rate cap
contracts was insignificant. One of the interest rate cap contracts expires
in early 1996 and the other expires in 1998, when the Notes mature.
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.
18
<PAGE>19
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
At September 30, 1995, the Company held foreign currency forward contracts
with notional amounts totalling $171.9 million and option contracts with
notional amounts totalling $78.8 million to hedge foreign currency items.
The Company also entered into certain option contracts with notional amounts
of $79.1 million to economically hedge certain foreign currency exposures,
which 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 September 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 Standards
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.
FAS No. 123, "Accounting for Stock-Based Compensation", was issued in
October 1995 and is effective for transactions entered into in fiscal years
beginning after December 15, 1995, but may be adopted earlier. This statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans, such as stock purchase plans, stock options,
restricted stock and stock appreciation rights as well as non-employee
equity transactions. This statement requires the recording of an expense
using a fair value based method of accounting for employee stock options or
similar equity instruments. It encourages all entities to adopt that method
of accounting for all of their employee stock compensation plans but permits
entities to continue their present method of accounting for stock-based
employee compensation plans. At the present time, the timing and the effect
of the adoption of FAS No. 123 on Avon's result of operations or financial
position have not been determined.
19
<PAGE>20
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Subsequent Event
In early November 1995, re-trial of the DuPont patent case was discontinued
on the basis that the Company and Mallinckrodt Group were making substantial
progress toward resolving the contingencies in the indemnification dispute as
discussed in Note 9 of the Notes to Consolidated Financial Statements.
20
<PAGE>21
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 third quarter
of 1995.
21
<PAGE>22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVON PRODUCTS, INC.
(Registrant)
Date: November 13, 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.
22
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 September 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
September 30
------------------
1995 1994
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during the period. 68.02 70.17
Common stock equivalents*............................. -- --
------ ------
Weighted average shares for primary income per share
computation......................................... 68.02 70.17
====== ======
Net income.............................................. $ 55.2 $ 51.3
====== ======
Primary net income per share............................ $ .81 $ .73
====== ======
- ----------
*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)
Nine months ended
September 30
-----------------
1995 1994
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during the period. 68.38 70.98
Common stock equivalents*............................. -- --
------ ------
Weighted average shares for primary income per share
computation......................................... 68.38 70.98
====== ======
Income from continuing operations....................... $170.0 $154.7
Discontinued operations, net of taxes................... -- (23.8)
Cumulative effect of accounting changes................. -- (45.2)
------ ------
Net income.............................................. $170.0 $ 85.7
====== ======
Primary income (loss) per share:
Continuing operations................................. $ 2.49 $ 2.18
Discontinued operations............................... -- (.34)
Cumulative effect of accounting changes............... -- (.63)
------ ------
Net income............................................ $ 2.49 $ 1.21
====== ======
- ----------
*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
September 30
------------------
1995 1994
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during the
period............................................. 68.02 70.17
Common stock equivalents............................. .24 .18
------ ------
Weighted average shares for fully diluted income
per share computation.............................. 68.26 70.35
====== ======
Net income............................................. $ 55.2 $ 51.3
====== ======
Fully diluted net income per share..................... $ .81 $ .73
====== ======
<PAGE>
EXHIBIT 11.2
AVON PRODUCTS, INC.
COMPUTATION OF FULLY DILUTED INCOME PER SHARE
(In millions, except per share data)
Nine months ended
September 30
-----------------
1995 1994
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during the
period.............................................. 68.38 70.98
Common stock equivalents.............................. .25 .19
------ ------
Weighted average shares for fully diluted income
per share computation............................... 68.63 71.17
====== ======
Income from continuing operations....................... $170.0 $154.7
Discontinued operations, net of taxes................... -- (23.8)
Cumulative effect of accounting changes................. -- (45.2)
------ ------
Net income.............................................. $170.0 $ 85.7
====== ======
Fully diluted income (loss) per share:
Continuing operations................................. $ 2.48 $ 2.17
Discontinued operations............................... -- (.33)
Cumulative effect of accounting changes............... -- (.64)
------ ------
Net income............................................ $ 2.48 $ 1.20
====== ======
<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 September 30, 1995 and for the
nine months then ended included in the Form 10-Q as of September 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> SEP-30-1995
<PERIOD-TYPE> 9-MOS
<S> <C>
<CASH> 98
<SECURITIES> 0
<RECEIVABLES> 427
<ALLOWANCES> (28)
<INVENTORY> 546
<CURRENT-ASSETS> 1,250
<PP&E> 1,184
<DEPRECIATION> (653)
<TOTAL-ASSETS> 2,093
<CURRENT-LIABILITIES> 1,254
<BONDS> 114
0
0
<COMMON> 43
<OTHER-SE> 128
<TOTAL-LIABILITY-AND-EQUITY> 2,093
<SALES> 3,108
<TOTAL-REVENUES> 3,108
<CGS> 1,212
<TOTAL-COSTS> 2,747
<OTHER-EXPENSES> 11
<LOSS-PROVISION> 56
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> 277
<INCOME-TAX> 107
<INCOME-CONTINUING> 170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 170
<EPS-PRIMARY> 2.49
<EPS-DILUTED> 2.49
</TABLE>
