<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, 1997
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
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(State or other jurisdiction of (I.R S. Employer
incorporation or organization) Identification No.)
1345 Avenue of the Americas, New York, N.Y. 10105-0196
-------------------------------------------------------
(Address of principal executive offices)
(212) 282-5000
----------------
(Telephone Number)
The number of shares of Common Stock (par value $.25) outstanding at
October 31, 1997 was 132,007,706
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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 ___
Table of Contents
Part I. Financial Information
Page
Numbers
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Item 1. Financial Statements
Consolidated Statement of Income
Three Months Ended September 30, 1997 and
September 30, 1996.................................... 3
Nine Months Ended September 30, 1997 and
September 30, 1996.................................... 4
Consolidated Balance Sheet
September 30, 1997 and December 31, 1996................ 5
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1997 and
September 30, 1996.................................... 6
Notes to Consolidated Financial Statements................ 7-9
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition............. 10-19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.......................... 20
Signatures......................................................... 21
2
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PART I. FINANCIAL INFORMATION
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share data)
Three months ended
September 30
------------------
1997 1996
---- ----
(unaudited)
Net sales........................................... $1,249.4 $1,177.3
Costs, expenses and other:
Cost of sales....................................... 517.2 474.8
Marketing, distribution and
administrative expenses........................... 614.7 597.6
Interest expense.................................... 11.2 10.9
Interest income..................................... (2.4) (3.3)
Other expense (income), net........................ .8 (1.6)
-------- --------
Total costs, expenses and other..................... 1,141.5 1,078.4
-------- --------
Income before taxes and minority interest........... 107.9 98.9
Income taxes........................................ 39.9 36.1
-------- --------
Income before minority interest..................... 68.0 62.8
Minority interest................................... .6 (.3)
-------- --------
Net income.......................................... $ 68.6 $ 62.5
======== ========
Income per share.................................... $ .52 $ .47
======== ========
Average shares outstanding.......................... 132.29 132.93
======== ========
The accompanying notes are an integral part of these statements.
3
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AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share data)
Nine months ended
September 30
-----------------
1997 1996
---- ----
(unaudited)
Net sales........................................... $3,562.0 $3,322.1
Costs, expenses and other:
Cost of sales....................................... 1,434.9 1,313.5
Marketing, distribution and
administrative expenses........................... 1,779.5 1,684.6
Interest expense.................................... 31.6 30.9
Interest income..................................... (7.8) (10.9)
Other expense, net.................................. 2.4 6.6
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Total costs, expenses and other..................... 3,240.6 3,024.7
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Income before taxes and minority interest........... 321.4 297.4
Income taxes........................................ 118.9 111.5
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Income before minority interest..................... 202.5 185.9
Minority interest................................... 2.6 -
-------- -------
Net income.......................................... $ 205.1 $ 185.9
======== ========
Income per share.................................... $ 1.55 $ 1.39
======== ========
Average shares outstanding.......................... 132.47 133.91
======== ========
The accompanying notes are an integral part of these statements.
4
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AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(In millions)
September 30 December 31
1997 1996
---- ----
(unaudited)
ASSETS
Current assets:
Cash and equivalents............................. $ 85.7 $ 184.5
Accounts receivable.............................. 499.0 437.0
Inventories...................................... 656.7 530.0
Prepaid expenses and other....................... 223.7 198.1
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Total current assets............................. 1,465.1 1,349.6
-------- ---------
Property, plant and equipment, at cost........... 1,271.7 1,224.9
Less accumulated depreciation.................... 665.0 658.3
-------- ---------
606.7 566.6
-------- ---------
Other assets..................................... 334.3 306.2
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Total assets..................................... $2,406.1 $2,222.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year.................... $ 357.2 $ 97.1
Accounts payable................................. 390.9 469.3
Accrued compensation............................. 114.9 142.4
Other accrued liabilities........................ 272.4 238.7
Sales and other taxes............................ 120.8 124.6
Income taxes..................................... 299.6 319.2
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Total current liabilities........................ 1,555.8 1,391.3
-------- -------
Long-term debt................................... 103.2 104.5
Employee benefit plans........................... 354.7 384.8
Deferred income taxes............................ 32.1 33.9
Other liabilities................................ 133.3 66.2
Shareholders' equity:
Common stock..................................... 43.7 43.5
Additional paid-in capital....................... 722.1 693.6
Retained earnings................................ 568.7 488.8
Translation adjustments.......................... (245.7) (210.7)
Treasury stock, at cost.......................... (861.8) (773.5)
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Total shareholders' equity....................... 227.0 241.7
-------- -------
Total liabilities and shareholders' equity....... $2,406.1 $2,222.4
======== ========
The accompanying notes are an integral part of these statements.
5
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AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Nine months ended
September 30
-----------------
1997 1996
---- ----
(unaudited)
Cash flows from operating activities:
Net income.............................................. $ 205.1 $ 185.9
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization........................... 50.8 48.0
Provision for doubtful accounts......................... 58.9 55.0
Translation losses (gains).............................. .3 (1.0)
Deferred income taxes................................... (9.5) (2.5)
Other................................................... 7.9 6.2
Changes in assets and liabilities:
Accounts receivable................................... (139.8) (111.7)
Inventories........................................... (143.8) (148.5)
Prepaid expenses and other............................ (14.6) (23.8)
Accounts payable and accrued liabilities.............. (54.3) (30.6)
Income and other taxes................................ (18.3) (1.1)
Noncurrent assets and liabilities..................... (33.0) (2.6)
------ ------
Net cash used by continuing operations.................. (90.3) (26.7)
Net cash used by discontinued operations................ - (37.2)
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Net cash used by operating activities................... (90.3) (63.9)
----- ------
Cash flows from investing activities:
Capital expenditures.................................... (111.0) (62.6)
Disposal of assets...................................... 2.8 3.2
Other investing activities.............................. (8.6) (6.3)
------ ------
Net cash used by investing activities................... (116.8) (65.7)
------ ------
Cash flows from financing activities:
Cash dividends.......................................... (126.6) (119.2)
Debt, net (maturities of three months or less).......... 162.9 292.0
Proceeds from short-term debt........................... 13.6 10.9
Retirement of short-term debt........................... (14.0) (10.0)
Proceeds from long-term debt............................ 100.0 -
Retirement of long-term debt............................ (.6) (.9)
Repurchase of common stock.............................. (90.0) (124.4)
Proceeds from exercise of stock options................. 19.6 6.1
Other financing activities.............................. 58.6 -
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Net cash provided by financing activities............... 123.5 54.5
------ ------
Effect of exchange rate changes on cash and equivalents. (15.2) (8.9)
------ ------
Net decrease in cash and equivalents.................... (98.8) (84.0)
Cash and equivalents, beginning of period................ 184.5 151.4
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Cash and equivalents, end of period......................$ 85.7 $ 67.4
======= =======
The accompanying notes are an integral part of these statements.
6
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AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
1. ACCOUNTING POLICIES
The accompanying Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
contained in Avon's 1996 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. 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
-----------------
1997 1996
---- ----
Interest............................................ $ 21.3 $ 18.7
Income taxes, net of refunds received............... 137.0 116.9
During the second quarter of 1997, the Company reached final agreement
with the Internal Revenue Service with respect to its examination of the
Company's income tax returns for the years 1982 through 1989. As anticipated,
payments, including related interest, made under this settlement will
approximate $42.4 of which $12.0 has been paid as of September 30, 1997.
Reserves previously had been provided by the Company related to the agreement.
During the second quarter of 1997, the 170 million 6-1/8% deutsche mark
notes ("Notes") due May 1998 and the related currency exchange contract were
reclassified to short term. The Notes have been effectively converted into
U.S. dollar debt of $100.0 through the use of a currency exchange swap
contract which includes both principal and interest. During the third quarter
of 1997, the Company issued $100.0 of long-term debt and the net proceeds were
used to pay down commercial paper borrowings.
In late September, the Company entered into a securities lending
transaction resulting in the borrowing of securities which were subsequently
sold for net proceeds approximating $58.6 used to repay commercial paper
borrowings. The borrowed securities are due to the lender no later than
December 29, 2000, but at the Company's option can be returned at any time.
The obligation is included in other non-current liabilities on the balance
sheet. The effective interest rate on this transaction is expected to be 6.5%.
7
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AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
3. 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, 1997 compared to the respective
periods of 1996 is primarily due to the shares acquired under the stock
repurchase programs.
During the first nine months of 1997, the Company purchased approximately
1.5 million shares of common stock for $90.0 compared to approximately 2.9
million shares purchased for $124.4 during the first nine months of 1996. As
of September 30, 1997, the cumulative number of shares repurchased under the
three-year stock repurchase program which ended in February 1997 was
approximately 12.7 million shares for a total cost of approximately $424.4.
Under a new repurchase program, which began in February 1997, the Company
repurchased approximately 1.5 million shares at a total cost of approximately
$88.5 as of September 30, 1997. Under this new program, the Company may buy
back up to $500.0 of its currently outstanding common stock through open
market purchases over a period of up to three to five years.
Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings Per
Share", was issued in February 1997 and is effective for the Company's
financial statements for the year ending December 31, 1997. Early adoption is
not permitted. After the effective date, all prior period earnings per share
("EPS") data shall be restated. SFAS No. 128 establishes standards for
computing and presenting EPS and replaces the presentation of previously
disclosed EPS with both basic and diluted EPS. Based upon the Company's
current capitalization structure, the EPS amounts calculated in accordance
with FAS No. 128 are expected to approximate the Company's EPS amounts
computed in accordance with Accounting Principles Board Opinion No. 15,
"Earnings Per Share."
4. INVENTORIES
September 30 December 31
1997 1996
---- ----
Raw materials................ $161.5 $136.7
Finished goods............... 495.2 393.3
------ -----
$656.7 $530.0
====== ======
8
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AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
5. DIVIDENDS
Cash dividends paid per share of common stock were $.315 and $.945 for the
three and nine months ended September 30, 1997, respectively, and $.29 and
$.87 for the corresponding 1996 periods. The annual dividend rate for 1997 is
$1.26 compared to $1.16 for 1996.
6. CONTINGENCIES
Various lawsuits and claims (asserted and unasserted), arising in the
ordinary course of business or related to businesses previously sold, are
pending or threatened against Avon.
In 1991, a class action suit was initiated against Avon on behalf of
certain classes of holders of Avon's Preferred Equity-Redemption Cumulative
Stock ("PERCS"). This lawsuit alleges various contract and securities law
claims relating to the PERCS (which were fully redeemed that year). Avon has
rejected the assertions in this case, believes it has meritorious defenses to
the claims and is vigorously contesting this lawsuit.
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, 1997 should not have a material adverse impact on Avon's
consolidated financial position, results of operations, or cash flows.
9
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AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
ITEM 2. Management's Discussion and Analysis of the Results of Operations
and Financial Condition
Results of Operations--Three Months Ended September 30, 1997 and 1996.
Consolidated
Avon's net income for the three months ended September 30, 1997 of $68.6,
or $.52 per share, increased 10% and 11%, respectively, from net income of
$62.5, or $.47 per share, in the comparable period of 1996. Pretax income of
$107.9 increased 9% due to higher sales and an improved expense ratio. These
favorable results were partially offset by a decline in the gross margin,
unfavorable net interest and unfavorable net foreign exchange in 1997. Net
income was also affected by favorable minority interest due mainly to the
results in China and a higher effective tax rate. The higher effective tax
rate (37.0% versus 36.5% in 1996) resulted primarily from the mix of earnings
and tax rates of international subsidiaries.
Consolidated net sales for the three months ended September 30, 1997 of
$1,249.4 increased $72.1, or 6%, over the comparable period of the prior year.
The increase in sales was due to an 8% increase in international and a 3%
increase in U.S. sales which includes the results of Discovery Toys, Inc. The
international sales improvement resulted from strong growth in the Americas,
most significantly in Mexico and Argentina. Sales continued to grow
significantly in the United Kingdom, Russia and Taiwan. These improvements
were partially offset by sales declines in Germany and Brazil. Excluding the
effect of foreign currency exchange, consolidated net sales rose 10% over the
comparable period of the prior year.
Cost of sales as a percentage of sales was 41.4% in the third quarter of
1997 compared to 40.3% in the third quarter of 1996. The decline in the gross
margin resulted from lower margins in Japan due to an aggressive pricing
strategy and in Brazil reflecting a continued consumer shift towards lower-
priced products as well as actions taken to reduce inventory levels. In
addition, the gross margin in the U.S. declined due to investments in
strategic pricing initiatives to drive customer sales. These declines were
partially offset by a margin improvement in the United Kingdom due to a shift
in sales mix to higher-margin items.
10
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AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Marketing, distribution and administrative expenses of $614.7 increased
$17.1, or 3%, over the comparable period of 1996, but decreased as a
percentage of sales to 49.2% from 50.8% in 1996. The increase in operating
expenses was primarily in markets which have experienced strong sales growth,
including Mexico, Taiwan, Russia, Argentina and the United Kingdom. These
increases were partially offset by lower expenses in Brazil reflecting reduced
advertising expenses and in Germany and Japan due to the impact of a stronger
U.S. dollar in 1997. The decrease in the expense ratio was due to improvements
throughout Europe due to continued fixed expense reduction efforts, in Mexico
resulting from dramatic sales growth and in Japan due to reduced distribution
expenses and more efficient order entry processes. These improvements were
partially offset by higher expense ratios in Germany reflecting the sales
decline and in Venezuela due to increased marketing and distribution expenses.
Interest expense of $11.2 increased $.3 over the comparable period of
last year primarily due to increased average working capital borrowings in
1997.
Interest income decreased $.9 versus the comparable period of last year
primarily due to lower interest rates in Brazil.
Other (income) expense, net, was $2.4 unfavorable, representing an
expense of $.8 in 1997 compared to income of $1.6 in 1996, primarily due to
unfavorable net foreign exchange.
U.S.
Net sales increased 3% while pretax income declined 8% in the third
quarter of 1997 compared with the third quarter of 1996. Excluding the
results of Discovery Toys, which was acquired in early 1997, sales were up 1%
and pretax income decreased 3%. The 1% sales increase reflected a 4% increase
in the average order size partially offset by a 3% decline in the number of
Representative orders. The sales improvement resulted primarily from growth
in the cosmetics, fragrance and toiletries category ("CFT"), with a
significant increase in personal care products resulting from the introduction
of Avon Techniques, a hair care line, and continued success of the specialty
bath segment. In the non-CFT categories, apparel sales grew due to the success
of children's back to school, novelty apparel and casual clothing lines.
These improvements were almost completely offset by a decline in the gift and
decorative category attributable to the phenomenal success of the 1996 Winter
Velvet Barbie. Pretax income decreased 3%, excluding the results of Discovery
Toys, due primarily to a decline in the gross margin. The gross margin
decline resulted from strategic price investments in CFT products aimed at
energizing customer sales.
11
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AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
International
Net sales increased 8%, or 14% excluding the effect of foreign currency
exchange, over the comparable period of 1996 and pretax income increased 21%.
The sales increase reflects improvements in all regions, primarily in the
Americas. Sales growth in the Americas was driven by significant improvements
in Mexico, strong unit growth in Argentina, and to a lesser extent, in Chile
and Central America and an increased average order size in Venezuela.
Mexico's continued sales growth reflected double-digit increases in the number
of orders, average order size and active Representatives primarily due to
customer growth initiatives. These initiatives included incentive programs
focused on retention, sampling concentrated on breakthrough products,
advertising and an emphasis on market penetration in metropolitan areas.
Sales in the Pacific region were up due to strong unit growth in Taiwan,
Australia, and the Philippines. Taiwan's sales performance was the strongest
in the region driven by a higher number of active Representatives and the
successful launch of Lighten Up Undereye Treatment. The sales improvement in
Europe reflected strong growth in the United Kingdom driven by increases in
the average order size and number of orders as well as a favorable exchange
rate impact. In addition, the sales growth in the United Kingdom is
attributable to an ongoing focus on improving market share through brand and
image enhancement. Sales grew in Russia due to exceptional growth in the
number of units and Representatives.
These higher sales were partially offset by declines in Germany and
Brazil and, to a lesser extent in Thailand. The sales decline in Germany
resulted from an unfavorable exchange impact of a stronger U.S. dollar in 1997
and a continued weak economic environment which resulted in lower consumer
spending and higher unemployment. Consumers in Brazil continued to experience
a tightening of credit which has limited their purchasing ability. The sales
decrease in Thailand resulted from unit declines primarily due to a weakening
economic condition. To grow sales, new achievement programs in Brazil and the
party plan concept in Germany were implemented.
The 21% increase in pretax income reflected improvements in Argentina,
Mexico, the United Kingdom, and to a lesser extent, the Philippines. The
increase in Argentina was primarily due to the sales growth and an improvement
in the operating expense ratio resulting from lower distribution costs per
order as well as reduced incentive programs in 1997. Higher pretax results in
Mexico, the United Kingdom and Philippines were primarily driven by increased
sales. These favorable results were partially offset by lower pretax income in
Japan due to a significant gross margin decline resulting from strategic
pricing programs as well a shift in sales mix to lower margin non-CFT items.
The competitive environment remains intense in Japan with the continued
relaxation of import restrictions and the resulting accelerated growth in
discount outlets. As a result, prices were adjusted earlier this year to make
products more competitive in the marketplace. Several new programs were
introduced in 1997 including the multiple order system which allows
Representatives to place orders more frequently. Efforts have also been
focused on improving access, and innovative recruiting programs have been
12
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AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
launched to increase market penetration. Consequently, customers served in
Japan grew 58% and active Representatives grew 46% over the comparable period
of the prior year. Pretax results were also lower in Germany primarily due to
lower sales and in China due to a current government licensing revalidation
process of all direct selling companies, which has delayed our branch
expansion in China.
Several currencies in the Pacific Rim devalued significantly since the
end of the second quarter of 1997. The Thailand baht devalued by 28%, the
Philippine peso by 22% and the Malaysian ringgit and Indonesian rupiah each
devalued by 19%. These devaluations lowered pretax income by approximately
$4.0 in the third quarter of 1997. In response to this situation, several
actions have been taken by local management including cost negotiations with
vendors, identification of expense reductions and a focus on growing the
Representative base. In terms of size, these markets represented approximately
5% of Avon's consolidated net sales in 1996.
Brazil, previously designated as a country with a highly inflationary
economy, was converted to non-hyperinflationary status, effective July 1,
1997, due to the reduced cumulative inflation rate over the past three years.
The effect of the change is not considered significant to the Company's
consolidated financial statements.
Results of Operations--Nine Months Ended September 30, 1997 and 1996
Consolidated
Avon's net income for the nine months ended September 30, 1997 of $205.1,
or $1.55 per share, increased 10% and 12%, respectively, compared to net
income of $185.9, or $1.39 per share, in the comparable period of 1996.
Pretax income of $321.4 increased 8% due to higher sales, an improved expense
ratio and favorable net foreign exchange in 1997. These increases were
partially offset by a decline in the gross margin and unfavorable net interest
in 1997. Net income of $205.1 was impacted by a lower effective tax rate
(37.0% versus 37.5% in 1996) due primarily to the mix of earnings and tax
rates of international subsidiaries. In addition, the increase in net income
reflects a favorable minority interest impact due mainly to the results in
Japan and China. Income per share of $1.55 was favorably impacted by the
lower average shares outstanding in 1997 compared to 1996 due to continued
stock repurchases.
Consolidated net sales for the nine months ended September 30, 1997 of
$3,562.0 increased $239.9, or 7%, over the comparable period of the prior
year. The higher sales was due to a 10% increase in international and a 2%
increase in U.S. sales which includes the results of Discovery Toys. The
international sales improvement resulted from strong growth in most markets,
most significantly in Mexico, the United Kingdom, Argentina, the Pacific Rim
and Russia. Sales growth in Chile, Venezuela, Central America and Poland also
contributed to the improvement. These improvements were partially offset by
sales declines in Brazil and Germany. Excluding the impact of foreign
13
<PAGE>14
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
currency exchange, consolidated net sales rose 11% over the comparable period
of the prior year.
Cost of sales as a percentage of sales was 40.3% compared to 39.5% in
1996. The higher cost ratio was primarily due to gross margin declines in
Brazil reflecting actions taken to reduce inventory levels and in Japan due to
sales of lower priced items and price reductions taken in the CFT category.
These declines were partially offset by margin improvements in Venezuela and
the United Kingdom due to a shift in sales mix to higher-margin items.
Marketing, distribution and administrative expenses of $1,779.5 increased
$94.9, or 6%, over the comparable period of 1996, but decreased as a
percentage of sales to 50.0% from 50.7% in 1996. The increase in operating
expenses was primarily in markets which have experienced strong sales growth,
including Mexico, the Pacific Rim, the United Kingdom, Venezuela and Russia.
These increases were partially offset by lower expenses in Germany due to the
impact of a stronger U.S. dollar in 1997 as well as a continued focus on fixed
expense reductions. The decrease in the expense ratio was due to improvements
throughout Europe due to ongoing fixed expense reduction efforts and in Mexico
due to dramatic sales growth. These improvements were partially offset by
higher expense ratios in Brazil and Germany due to the sales decline despite
lower expenses discussed above.
Interest expense increased $.7 versus the comparable period of 1996
primarily due to higher overall debt levels partially offset by lower interest
rates in Brazil.
Interest income decreased $3.1 from the comparable period of 1996
primarily due to lower interest rates in Brazil.
Other expense, net, of $2.4 was $4.2 favorable to the comparable period
of last year primarily due to net foreign exchange.
U.S.
Net sales increased 2% while pretax income decreased 4% in the first nine
months of 1997. Excluding the results of Discovery Toys, sales were up 1% and
pretax income was level with the prior year. A 4% increase in the average
order size partially offset by a 3% decrease in the number of Representative
orders resulted in the sales increase. Units sold increased 5%. The sales
improvement resulted from increases in the CFT category partially offset by
declines in apparel and fashion jewelry and accessory categories. The launch
of Anew Retinol Recovery Complex and Avon Techniques hair care line and the
first quarter 1997 product introductions in the specialty bath segment drove
the growth in the CFT category. In addition, the launch of the renovated Anew
line earlier this year contributed to higher CFT sales in 1997. The decrease
in apparel sales was due to the success of the Olympic games collection in
14
<PAGE>15
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
1996 and lower sales of demonstration products in the first two quarters of
1997. Sales of fashion jewelry and accessories decreased primarily due to
lower first quarter sales which were impacted by the demonstration product
pricing policy change made earlier this year.
Pretax income was level with the comparable period of the prior year
excluding the results of Discovery Toys. The increase in sales was completely
offset by higher expenses and a slight decline in the gross margin. The
higher expense level was primarily driven by strategic investments including
advertising and promotional support for new products, costs associated with
the centralization of the returned goods and call center operations and
increased field incentives designed to drive sales. Discovery Toys had a
negative impact on pretax income due to the seasonal nature of the business.
International
Net sales increased 10% over the comparable period of 1996 and pretax
income increased 14%. The sales increase reflects improvements in all
regions. Sales growth in the Americas was highlighted by significant growth
in Mexico and strong unit increases in Argentina, Chile and Central America.
Sales grew in Venezuela due to a higher average order size in 1997. The sales
increase in the Pacific region was due to strong unit growth in almost every
market in the Pacific Rim, primarily in Taiwan, the Philippines, and China.
An increased average order size and unit growth in the United Kingdom and a
dramatic increase in the number of units and active Representatives in Russia
and Poland contributed to the increase in Europe. These improvements were
partially offset by significant declines in Germany due to ongoing economic
weakness and a negative currency impact and in Brazil resulting from a weak
consumer economy. Excluding the impact of foreign currency exchange,
international sales rose 16% over the comparable period of 1996.
The 14% increase in pretax income reflected increases in the Americas and
Europe regions. The most significant contributor in the Americas was Mexico
due to the strong sales improvement. The increase in Europe reflected the
sales increase and improved expense ratios throughout the region due to the
continued effect of fixed expense reduction efforts. Pretax income was higher
in the Philippines due to the sales increase. These favorable results were
partially offset by decreases in Brazil, and, to a lesser extent, in Japan.
Pretax income in Brazil was affected by a continued tightening in consumer
spending and margin investments relating to inventory reduction programs. The
decline in Japan was due to lower sales and a deterioration in the gross
margin resulting from an aggressive pricing strategy.
15
<PAGE>16
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Liquidity and Capital Resources
Cash Flows
Excluding changes in debt, there was a net decrease in cash of $360.7 in
the first nine months of 1997 compared with $376.0 in the comparable period of
1996. As discussed in Note 2, the Company received net proceeds of
approximately $58.6 under a securities lending transaction which was used to
repay commercial paper borrowings and is included in the cash flows as other
financing activities. Excluding debt and the other financing activities,
there was a net increase in cash usage of $43.3. This variance primarily
reflects increased capital expenditures including the relocation of the global
and U.S. office facilities, conclusion of the three-year long-term incentive
plan which resulted in a cash payment during the first quarter of 1997, as
well as a higher working capital usage level principally due to accounts
payable and accrued expenses. These items were partially offset by the impact
of discontinued operations reflected in 1996, lower repurchases of common
stock and higher net income in 1997.
For the first nine months of 1997, the Company purchased approximately
1.5 million shares of common stock for $90.0 compared with $124.4 spent for
the repurchase of approximately 2.9 million shares during the comparable
period in 1996.
Capital Resources
Total debt increased $258.8 to $460.4 at September 30, 1997 from total
debt of $201.6 at December 31, 1996, principally due to the working capital
requirements mentioned above as well as the seasonality of the business.
Total debt at September 30, 1997 of $460.4 remained relatively level with
total debt of $454.3 at September 30, 1996. In addition, at September 30,
1997, other non-current liabilities include approximately $58.6 related to
securities lending activities, as discussed in Note 2.
At September 30, 1997, there were borrowings of $29.2 under the amended
and restated revolving credit and competitive advance facility agreement.
This agreement is also used to support the Company's commercial paper
borrowings of which $181.0 was outstanding at September 30, 1997.
At September 30, 1997, there were $10.0 of borrowings outstanding under
uncommitted lines of credit and there were no borrowings under the Company's
bankers' acceptance facilities.
16
<PAGE>17
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
At September 30, 1997, the 170 million 6-1/8% deutsche mark notes
("Notes") due May 1998 and the related currency exchange contract were
classified as short term. The Notes have been effectively converted into U.S.
dollar debt of $100.0 through the use of a currency exchange swap contract
which includes both principal and interest. During the third quarter of 1997,
the Company issued $100.0 of long-term debt and the net proceeds were used to
pay down commercial paper borrowings.
Management currently believes that cash from operations and available
financing alternatives are adequate to meet anticipated requirements for
working capital, dividends, capital expenditures, the stock repurchase program
and other cash needs.
Working Capital
As of September 30, 1997 and December 31, 1996, current liabilities
exceeded current assets by $90.7 and $41.7, respectively. The increase of
current liabilities over current assets of $49.0 was mainly due to the
increase in short-term debt and decrease in cash and equivalents, partially
offset by the increase in inventories, reflecting the seasonal pattern of
Avon's operations, and a decrease in accounts payable.
Although current liabilities exceeded current assets at September 30,
1997, management believes this is due to the Company's direct selling business
format which results in lower receivable and working capital levels as well as
the Company's practice of repurchasing shares with available cash. Avon's
liquidity results from its ability to generate significant cash flows from
operations and its ample unused borrowing capacity. 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 globally, with manufacturing and distribution
facilities in various locations around the world. The Company may reduce its
exposure to fluctuations in interest rates and foreign exchange rates by
creating offsetting positions through the use of derivative financial
instruments. The Company currently does not use derivative financial
instruments for trading or speculative purposes, nor is the Company a party to
leveraged derivatives. The Company periodically uses interest rate swaps to
hedge portions of interest payable on its debt. In addition, the Company may
periodically employ interest rate caps to reduce exposure, if any, to
increases in variable interest rates.
17
<PAGE>18
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
At September 30, 1997, the Company had three interest rate swap
agreements on its Notes. Each agreement has a notional principal amount of
$100.0. During 1995, the Company entered into an interest rate swap
agreement, which effectively converted the interest payable on the Notes from
a floating to a fixed interest rate basis of approximately 7.2% through
maturity.
The Company has one interest rate cap contract with a notional principal
amount of $100.0, used to economically hedge the Company's short-term variable
interest rate working capital debt. This cap contract expires in May 1998 and
has been marked-to-market yielding an insignificant income statement
adjustment.
The Company may periodically hedge foreign currency royalties, net
investments in foreign subsidiaries, firm purchase commitments and contractual
foreign currency cash flows or obligations, including third-party or
intercompany foreign currency transactions. The Company regularly monitors
its foreign currency exposures and ensures that hedge contract amounts do not
exceed the amounts of the underlying exposures.
At September 30, 1997, the Company held foreign currency forward
contracts with notional amounts totaling $181.1 and option contracts with
notional amounts totaling $71.9 to hedge foreign currency items. These
contracts have various maturities through December 1998. The Company also
entered into certain foreign currency forward contracts with notional amounts
totaling $81.9 and option contracts with notional amounts of $63.4 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 mark-to-market adjustment on
these contracts at September 30, 1997 was insignificant. The Company's risk
of loss on the 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.
18
<PAGE>19
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Other Information
On October 23, 1997, the Company announced that it has raised its long-
term growth targets for sales and earnings and that it expects to record
special charges in connection with a major re-engineering program. Commencing
in 1998, the long-term target for sales growth has been raised to 8-10%
compounded annually, and its target for net income-per-share growth has been
raised to 16-18% annually. Previously, the Company targeted long-term sales
growth of 6-8% and long-term net income per share growth of 13-15%. The
higher targets come largely as a result of initiatives currently underway and
others under review intended to reduce costs by up to $400.0 a year by 2000,
with $200.0 of the savings being reinvested concurrently in advertising and
marketing programs to boost sales. Avon expects to record special charges
totaling $150.0-$200.0 pretax to cover one-time costs associated with the re-
engineering program. Approximately half the charges are expected to be
recorded in the first quarter of 1998, with the balance to be recorded in
early 1999. Approximately $50 million of the charges will be cash-related.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report which are not historical facts or
information are forward-looking statements, including, but not limited to, the
information set forth in "Other Information" herein. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, levels of activity, performance or
achievement of the Company, or industry results, to be materially different
from any future results, levels of activity, performance or achievement
expressed or implied by such forward-looking statements. Such factors
include, among others, the following: general economic and business
conditions; the ability of the Company to implement its business strategy; the
Company's access to financing and its management of foreign currency risks,
the Company's ability to successfully identify new business opportunities; the
Company's ability to attract and retain key executives; the Company's ability
to achieve anticipated cost savings and profitability targets; changes in the
industry; competition; the effect of regulatory and legal restrictions imposed
by foreign governments; the effect of regulatory and legal proceedings and
other factors discussed in Item 1 of the Company's Form 10-K. As a result of
the foregoing and other factors, no assurance can be given as to the future
results and achievements of the Company. Neither the Company nor any other
person assumes responsibility for the accuracy and completeness of these
statements.
19
<PAGE>20
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
------ -----------
10.1 --First Amendment of the Avon 1993 Stock Incentive Plan
effective January 1, 1997.
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 1997.
20
<PAGE>21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVON PRODUCTS, INC.
-------------------
(Registrant)
Date: November 13, 1997 By /s/ MICHAEL R. MATHIESON
-------------------------------
Michael R. Mathieson
Vice President and Controller
Principal Accounting Officer
Signed both on behalf of the
registrant and as principal
accounting officer.
21
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended September 30, 1997 Commission file number 1-4881
____________________________
AVON PRODUCTS, INC.
_____________________________________________________
(Exact name of registrant as specified in its charter)
____________________________
EXHIBITS
<PAGE>
AVON PRODUCTS, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
10.1 --First Amendment of the Avon 1993 Stock Incentive Plan effective
January 1, 1997.
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.
<PAGE>
Appendix A
FIRST AMENDMENT OF THE
AVON PRODUCTS, INC.
1993 STOCK INCENTIVE PLAN
The Avon Products, Inc. 1993 Stock Incentive Plan ("1993 Plan") was
approved by the Shareholders of Avon Products, Inc. ("Company") at the
Company's Annual Meeting of Shareholders held May 6, 1993. Subject to
approval by the Company's Shareholders at the Annual Meeting held May 1,
1997, the 1993 Plan is hereby amended, effective January 1, 1997, as follows:
1. The definitions of "Committee" and "Stock" set forth in Section 1.1
of the 1993 Plan are amended to read as follows:
(d) "Committee" means the Compensation Committee of the Board
of Directors, each member of which must be an "outside
director" within the meaning of Section 162(m) of the Code;
(m) "Stock" means the Company's common stock, $0.25 par value.
2. Section 2.4 is amended to read in its entirety as follows:
2.4 Eligibility and Limits Stock Incentives may be granted to
officers and key employees of the Company and, subsequent to
January 1, 1997, to non-management directors of the Company
including non-management directors who serve on the
Committee. Any other provisions of the Plan to the contrary
notwithstanding, non-management directors shall be entitled to
receive Stock Incentives in substantially similar amounts,
subject to terms and conditions set forth in a separate Stock
Incentive Program applicable only to non-management
directors, approved by the Board of Directors. Incentive stock
options, however, may be only granted to an employee of the
Company or any subsidiary. In the case of incentive stock
options, the aggregate Fair Market Value (determined as at the
date an incentive stock option is granted) of stock with respect
to which stock options intended to meet the requirements of
Code Section 422 become exercisable for the first time by an
individual during any calendar year under all plans of the
Company and its Subsidiaries shall not exceed $100,000;
provided further, that if the limitation is exceeded, the
incentive stock option(s) which cause the limitation to be
exceeded shall be treated as non-qualified stock option(s).
<PAGE>
3. Section 3.1(a) is amended to read in its entirety as follows:
3.1 Terms and Conditions of All Stock Incentives
(a) The number of shares of Stock as to which a Stock Incen-
tive shall be granted shall be determined by the Committee in
its sole discretion, subject to the provisions of Section 2.2 as to
the total number of shares available for grants under the plan.
The number of shares as to which Stock Options or Stock
Appreciation Rights may be granted to any one Participant
during the term of the Plan, however, shall not exceed 10% of
the Maximum Plan Shares that may be issued under the Plan.
4. Except as provided above, the 1993 Plan shall continue in effect
without additional amendment.
EXHIBIT 10.1
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
------------------
1997 1996
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during
the period.............................. 132.291 132.934
Common stock equivalents*................. --* --*
------- -------
Weighted average shares for primary income
per share computation................... 132.291 132.934
======= =======
Net income................................ $ 68.6 $ 62.5
======= =======
Primary income per share.................. $ .52 $ .47
======= =======
_________
*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
----------------
1997 1996
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during
the period.............................. 132.474 133.905
Common stock equivalents*................. --* --*
------- -------
Weighted average shares for primary income
per share computation................... 132.474 133.905
======= =======
Net income................................ $ 205.1 $ 185.9
======= =======
Primary income per share.................. $ 1.55 $ 1.39
======= =======
_________
*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
------------------
1997 1996
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during
the period................................. 132.291 132.934
Common stock equivalents..................... 1.235 1.070
------- -------
Weighted average shares for fully diluted
income per share computation............... 133.526 134.004
======= =======
Net income..................................... $ 68.6 $ 62.5
======= =======
Fully diluted income per share................. $ .51 $ .47
======= ======
<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
----------------
1997 1996
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during
the period................................. 132.474 133.905
Common stock equivalents..................... 1.339 1.104
------- -------
Weighted average shares for fully diluted
income per share computation............... 133.813 135.009
======= =======
Net income..................................... $ 205.1 $ 185.9
======= =======
Fully diluted income per share................. $ 1.53 $ 1.38
======= =======
<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 Sept. 30, 1997 and for the nine
months then ended included in the Form 10-Q as of Sept. 30, 1997 and is
qualified in its entirety by reference to such financial statements.
<MULTIPLIER> 1000000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<S> <C>
<CASH> 86
<SECURITIES> 0
<RECEIVABLES> 546
<ALLOWANCES> (47)
<INVENTORY> 657
<CURRENT-ASSETS> 1,465
<PP&E> 1,272
<DEPRECIATION> (665)
<TOTAL-ASSETS> 2,406
<CURRENT-LIABILITIES> 1,556
<BONDS> 103
0
0
<COMMON> 44
<OTHER-SE> 183
<TOTAL-LIABILITY-AND-EQUITY> 2,406
<SALES> 3,562
<TOTAL-REVENUES> 3,562
<CGS> 1,435
<TOTAL-COSTS> 3,156
<OTHER-EXPENSES> 2
<LOSS-PROVISION> 59
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> 321
<INCOME-TAX> 119
<INCOME-CONTINUING> 202
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 205
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.55
</TABLE>
