<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 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.
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(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.)
1345 Avenue of the Americas, New York, N.Y. 10105-0196
-------------------------------------------------------
(Address of principal executive offices)
(212) 282-5000
--------------
(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 $.25) outstanding
at July 31, 1997 was 132,383,313.
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Table of Contents
Part I. Financial Information
Page
Numbers
-------
Item 1. Financial Statements
Consolidated Statement of Income
Three Months Ended June 30, 1997 and
June 30, 1996......................................... 3
Six Months Ended June 30, 1997 and
June 30, 1996......................................... 4
Consolidated Balance Sheet
June 30, 1997 and December 31, 1996..................... 5
Consolidated Statement of Cash Flows
Six Months Ended June 30, 1997 and
June 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 5. Other Information......................................... 20
Item 6. Exhibits and Reports on Form 8-K.......................... 21
Signatures......................................................... 22
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
June 30
------------------
1997 1996
---- ----
(unaudited)
Net sales........................................... $1,225.0 $1,128.7
Costs, expenses and other:
Cost of sales....................................... 476.1 437.1
Marketing, distribution and
administrative expenses........................... 591.9 546.0
Interest expense.................................... 10.8 10.4
Interest income..................................... (3.1) (3.7)
Other (income) expense, net......................... (1.2) .2
-------- --------
Total costs, expenses and other..................... 1,074.5 990.0
-------- --------
Income before taxes and minority interest........... 150.5 138.7
Income taxes........................................ 55.7 52.7
-------- --------
Income before minority interest..................... 94.8 86.0
Minority interest................................... .4 (.3)
-------- --------
Net income.......................................... $ 95.2 $ 85.7
======== ========
Income per share.................................... $ .72 $ .64
======== ========
Average shares outstanding.......................... 132.26 133.91
======== ========
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)
Six months ended
June 30
----------------
1997 1996
---- ----
(unaudited)
Net sales........................................... $2,312.6 $2,144.8
Costs, expenses and other:
Cost of sales....................................... 917.7 838.7
Marketing, distribution and
administrative expenses........................... 1,164.8 1,087.0
Interest expense.................................... 20.4 20.0
Interest income..................................... (5.4) (7.6)
Other expense, net.................................. 1.6 8.2
-------- --------
Total costs, expenses and other..................... 2,099.1 1,946.3
-------- --------
Income before taxes and minority interest........... 213.5 198.5
Income taxes........................................ 79.0 75.4
-------- --------
Income before minority interest..................... 134.5 123.1
Minority interest................................... 2.0 .3
-------- --------
Net income.......................................... $ 136.5 $ 123.4
======== ========
Income per share.................................... $ 1.03 $ .92
======== ========
Average shares outstanding.......................... 132.57 134.26
======== ========
The accompanying notes are an integral part of these statements.
4
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AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(In millions)
June 30 December 31
1997 1996
---- ----
(unaudited)
ASSETS
Current assets:
Cash and equivalents............................. $ 116.4 $ 184.5
Accounts receivable.............................. 445.1 437.0
Inventories...................................... 617.4 530.0
Prepaid expenses and other....................... 225.5 198.1
-------- --------
Total current assets............................. 1,404.4 1,349.6
-------- --------
Property, plant and equipment, at cost........... 1,283.3 1,224.9
Less accumulated depreciation.................... 683.1 658.3
-------- --------
600.2 566.6
-------- --------
Other assets..................................... 337.2 306.2
-------- --------
Total assets..................................... $2,341.8 $2,222.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year.................... $ 374.8 $ 97.1
Accounts payable................................. 356.1 469.3
Accrued compensation............................. 93.9 142.4
Other accrued liabilities........................ 252.7 238.7
Sales and other taxes............................ 120.7 124.6
Income taxes..................................... 306.8 319.2
-------- --------
Total current liabilities........................ 1,505.0 1,391.3
-------- --------
Long-term debt................................... 103.8 104.5
Employee benefit plans........................... 373.6 384.8
Deferred income taxes............................ 32.6 33.9
Other liabilities................................ 77.1 66.2
Shareholders' equity:
Common stock..................................... 43.7 43.5
Additional paid-in capital....................... 718.9 693.6
Retained earnings................................ 541.9 488.8
Translation adjustments.......................... (220.2) (210.7)
Treasury stock, at cost.......................... (834.6) (773.5)
-------- --------
Total shareholders' equity....................... 249.7 241.7
-------- --------
Total liabilities and shareholders' equity....... $2,341.8 $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)
Six months ended
June 30
----------------
1997 1996
---- ----
(unaudited)
Cash flows from operating activities:
Net income.............................................. $136.5 $123.4
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization........................... 33.5 31.2
Provision for doubtful accounts......................... 38.0 34.5
Translation losses (gains).............................. .6 (.7)
Deferred income taxes................................... (13.6) (9.4)
Other................................................... 5.4 3.6
Changes in assets and liabilities:
Accounts receivable................................... (53.6) (50.0)
Inventories........................................... (88.6) (86.6)
Prepaid expenses and other............................ (19.2) (18.4)
Accounts payable and accrued liabilities.............. (142.8) (104.9)
Income and other taxes................................ (13.7) (11.0)
Noncurrent assets and liabilities..................... (9.1) (7.6)
------ ------
Net cash used by continuing operations.................. (126.6) (95.9)
Net cash used by discontinued operations................ -- (36.8)
------ ------
Net cash used by operating activities................... (126.6) (132.7)
------ ------
Cash flows from investing activities:
Capital expenditures.................................... (74.6) (31.6)
Disposal of assets...................................... 2.8 1.9
Other investing activities.............................. (8.0) (6.3)
------ ------
Net cash used by investing activities................... (79.8) (36.0)
------ ------
Cash flows from financing activities:
Cash dividends.......................................... (84.9) (80.7)
Debt, net (maturities of three months or less).......... 290.6 257.1
Proceeds from short-term debt........................... -- 5.1
Retirement of short-term debt........................... (12.5) (5.7)
Retirement of long-term debt............................ (.5) (.6)
Repurchase of common stock.............................. (62.6) (79.9)
Proceeds from exercise of stock options................. 18.0 4.8
------ ------
Net cash provided by financing activities............... 148.1 100.1
------ ------
Effect of exchange rate changes on cash and equivalents. (9.8) (9.9)
------ ------
Net decrease in cash and equivalents.................... (68.1) (78.5)
Cash and equivalents beginning of period................ 184.5 151.4
------ ------
Cash and equivalents end of period...................... $116.4 $ 72.9
====== ======
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:
Six months ended
June 30
----------------
1997 1996
---- ----
Interest............................................ $14.1 $16.8
Income taxes, net of refunds received............... 95.2 87.5
As expected 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 $44.0 of which $12.0 has been paid as of June 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 will
be used to pay down commercial paper borrowings. As a result of the
refinancing of commercial paper borrowings with the new long-term debt, $100.0
of commercial paper borrowings as of June 30, 1997 were reclassified to long-
term debt.
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 six months ended June 30, 1997 compared to the respective periods of
1996 is primarily due to the shares acquired under the stock repurchase
programs.
During the first six months of 1997, the Company purchased approximately
1.1 million shares of common stock compared to approximately 1.9 million
shares purchased during the first six months of 1996. As of June 30, 1997,
the cumulative number of shares repurchased under the three-year stock
repurchase program begun in February 1994 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
1,095,076 shares at a total cost of approximately $61.1 as of June 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 of Opinion No. 15,
"Earnings Per Share."
4. INVENTORIES
June 30 December 31
1997 1996
---- ----
Raw materials................ $158.6 $136.7
Finished goods............... 458.8 393.3
------ ------
$617.4 $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 $.63 for the
three and six months ended June 30, 1997, respectively, and $.29 and $.58 for
the corresponding 1996 periods. On February 6, 1997, the Company increased
the annual dividend rate to $1.26 from $1.16.
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 June 30,
1997 should not have a material adverse impact on Avon's consolidated
financial position, results of operations, or cash flows.
9
<PAGE>10
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 June 30, 1997 and 1996.
Consolidated
Avon's net income for the three months ended June 30, 1997 of $95.2, or
$.72 per share, increased 11% and 13%, respectively, from net income of $85.7,
or $.64 per share, in the comparable period of 1996. Pretax income of $150.5
increased 9% due to higher sales, a slightly improved expense ratio and lower
foreign exchange losses in 1997. These favorable results were partially
offset by a slight decline in the gross margin and unfavorable net interest in
1997. Net income was also favorably impacted by a lower effective tax rate
and a favorable minority interest impact due mainly to the results in Japan.
The lower effective tax rate (37.0% versus 38.0% in 1996) resulted primarily
from the mix of earnings and tax rates of international subsidiaries. Income
per share of $.72 reflects the lower average shares outstanding in 1997 versus
1996 primarily due to the continued stock repurchases.
Consolidated net sales for the three months ended June 30, 1997 of
$1,225.0 increased $96.3, or 9%, over the comparable period of the prior year.
The increase in sales was due to a 10% increase in international and a 5%
increase in U.S. sales which include the results of Discovery Toys, Inc. The
international sales improvement resulted from strong growth in the Americas,
including Mexico, Venezuela, Argentina, Chile and the Central American
markets. In addition, sales continued to grow significantly in the Pacific
Rim, the United Kingdom, Russia and Poland. These improvements were partially
offset by sales declines in Brazil and Germany. Excluding the effect of
foreign currency exchange, consolidated net sales rose 12% over the comparable
period of the prior year.
Cost of sales as a percentage of sales was 38.9% in the second quarter of
1997 compared to 38.7% in the second quarter of 1996. The decline in the
gross margin resulted from lower margins in Brazil reflecting a continued
consumer shift towards lower-priced products, due in part to tightened
consumer credit, as well as actions taken to reduce inventory levels and, to a
lesser extent, in Japan due to an aggressive pricing strategy. These declines
were partially offset by a margin improvement in Venezuela 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 $591.9 increased
$45.9, or 8%, over the comparable period of 1996, but decreased slightly as a
percentage of sales to 48.3% from 48.4% in 1996. The increase in operating
expenses was primarily in markets which have experienced strong sales growth,
including Mexico, the Pacific Rim and the United Kingdom. In addition,
operating expenses were higher in the U.S. due to the sales growth and
increased strategic investment spending in 1997, discussed below. 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.
Interest expense of $10.8 increased $.4 over the comparable period of
last year due to increased average domestic working capital borrowings
partially offset by lower interest rates in Brazil.
Interest income decreased $.6 versus the comparable period of 1996,
primarily due to lower interest rates in Brazil despite higher investments.
Other (income) expense, net, was $1.4 favorable to the comparable period
last year primarily due to lower foreign exchange losses.
U.S.
Net sales increased 5% while pretax income declined 3% in the second
quarter of 1997 compared with the second quarter of 1996. Excluding results
for Discovery Toys, which was acquired in January 1997, sales were up 3% and
pretax income increased 1%. A 4% increase in the average order size,
partially offset by a 1% decline in the number of Representative orders,
contributed to the sales increase. The sales improvement reflects strong
growth in the cosmetics, fragrance and toiletries category ("CFT"), with a
significant increase in the skin care line driven primarily by the launch of
Anew Retinol Recovery Complex. Growth in the CFT category contributed to an
11% increase in number of units sold. In the non-CFT categories, sales of
fashion jewelry and accessories reflected a strong increase due to successful
new products. Gift and decorative sales were up due to the launch of Avon
Home, a new line in 1997. These improvements were partially offset by a
decline in apparel which had a tough comparison with the comparable period of
the prior year which included the launch of the Diane von Furstenberg and
Olympic games collections as well as the cool spring weather in 1997 which
lowered seasonal purchases. Home entertainment products, included in the gift
and decorative category, are still feeling the residual impact of the demo
pricing policy change made. To rebuild sales of demonstration products, a
simplified pricing structure, effective in July 1997, was announced and was
well received by the sales force.
11
<PAGE>12
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Pretax income increased 1%, excluding the results of Discovery Toys, due
to a slightly improved gross margin partially offset by an unfavorable
operating expense ratio. The unfavorable expense ratio resulted from
strategic spending, including advertising and promotional support for the
launch of a new skin care technology product, Anew Retinol, and the national
roll-out of Avon Home, a new line in 1997. In addition, one-time costs
associated with the centralization of certain operational areas contributed to
the higher expense ratio.
International
Net sales increased 10%, or 16% excluding the effect of foreign currency
exchange, over the comparable period of 1996 and pretax income increased 8%.
The sales increase reflects improvements in all regions. Sales growth in the
Americas was highlighted by significant improvements in Mexico, increased
average order size in Venezuela and strong unit growth in Argentina, Chile and
Central America. Mexico's sales growth was driven by double-digit increases
in the number of orders, average order size and active Representatives. These
increases reflect the impact of various incentive programs and successful
product launches including the Essence fragrance and Voluptuous mascara.
There has been a strong emphasis on customer growth initiatives and image
building in Mexico through sampling, advertising and Representative training.
Sales in the Pacific region increased due to strong unit growth in the Pacific
Rim, most significantly in Taiwan and China. The sales improvement in Europe
reflected increases in the United Kingdom driven by increases in the average
order size and the number of orders and units and in Russia and Poland due to
continued rapid growth in number of units and Representatives.
These higher sales were partially offset by declines in Brazil and
Germany. Consumers in Brazil are experiencing a tightening of credit which is
limiting their purchasing ability. Lower sales 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 a
significant increase in unemployment. To grow sales, new recommendation and
achievement programs in Brazil and the party plan concept in Germany were
implemented.
The 8% increase in pretax income reflected improvements in Mexico, the
United Kingdom, Argentina, and to a lesser extent, Russia, Taiwan, Venezuela
and Chile. The increase in Mexico was primarily due to the sales growth and a
significant improvement in the operating expense ratio reflecting the impact
of an expense control program implemented during the second half of 1996.
Higher pretax results in the United Kingdom, Argentina, Russia and Chile were
primarily driven by increased sales.
12
<PAGE>13
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
These favorable results were partially offset by lower pretax income in
Brazil due to a significant gross margin decline and an unfavorable operating
expense ratio. The gross margin decline resulted from a shift in consumer
preferences towards lower-priced products and continued actions taken to
reduce inventory levels. The unfavorable operating expense ratio was driven
by the sales decline. Pretax results were also lower in Japan due to an
unfavorable gross margin reflecting an aggressive pricing strategy, previously
mentioned, combined with increased spending to improve sales. Although these
actions have put short-term pressure on profits, they have produced dramatic
increases in the number of units sold, customers served and active
Representatives.
Results of Operations - Six Months Ended June 30, 1997 and 1996.
Consolidated
Avon's net income for the six months ended June 30, 1997 of $136.5, or
$1.03 per share, increased 11% and 12%, respectively, compared to net income
of $123.4, or $.92 per share, in the comparable period of 1996. Pretax income
of $213.5 increased 8% due to higher sales, an improved expense ratio and
favorable net foreign exchange in 1997. These favorable items were partially
offset by a decline in the gross margin and unfavorable net interest in 1997.
Net income of $136.5 was favorably impacted by a lower effective tax rate
(37.0% versus 38.0% 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.
Consolidated net sales for the six months ended June 30, 1997 of $2,312.6
increased $167.8, or 8%, over the comparable period of the prior year. The
increase in sales was due to an 11% 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 all regions,
most significantly in Mexico, the United Kingdom, the Pacific Rim and Russia.
Sales growth in Chile, Venezuela, Argentina, Central America and Poland also
contributed to the international improvement. These improvements were
partially offset by sales declines in Brazil and Germany. Excluding the
impact of foreign currency exchange, consolidated net sales rose 12% over the
comparable period of the prior year.
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)
Cost of sales as a percentage of sales was 39.7% compared to 39.1% 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
reflecting price reductions, which began in late 1996, 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 $1,164.8 increased
$77.8, or 7%, over the comparable period of 1996, but decreased as a
percentage of sales to 50.4% 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 due to the sales decline.
Interest expense increased $.4 versus the comparable period of 1996
primarily due to higher domestic debt levels partially offset by lower
interest rates in Brazil.
Interest income decreased $2.2 from the comparable period of 1996
primarily due to lower interest rates in Brazil.
Other expense, net, of $1.6 was $6.6 favorable to the comparable period
of last year primarily due to favorable net foreign exchange.
U.S.
Net sales increased 2% while pretax income decreased 2% in the first half
of 1997. Excluding results for Discovery Toys, both sales and pretax income
were up 1%. 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 4%. The sales improvement resulted from
increases in the CFT and gift and decorative categories partially offset by a
decline in apparel. The launch of Anew Retinol Recovery Complex and the first
quarter product introductions in the specialty bath segment drove the growth
in the CFT category. The increase in the gift and decorative category was
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)
primarily due to the launch of the new Avon Home line in 1997. The decrease
in apparel sales reflected the cool spring weather in 1997 which lowered
seasonal purchases of fashions while the 1996 sales reflected the success of
the Olympic games collection.
Pretax income increased 1%, excluding the results of Discovery Toys, due
to an improved gross margin partially offset by an unfavorable operating
expense ratio. The improved gross margin reflects increased sales of higher
margin items in 1997, such as CFT. The increase in the expense ratio was
driven by increased strategic spending on advertising and promotional support
for the Anew Retinol launch, the national rollout of Avon Home and costs
associated with the centralization of the returned goods and call center
operations. Discovery Toys had a slightly negative impact on pretax income
due to the seasonal nature of the business.
International
Net sales increased 11% over the comparable period of 1996 and pretax
income increased 9%. The sales increase reflects improvements in all regions.
Sales growth in the Americas was highlighted by continued significant growth
in Mexico and strong unit increases in Chile, Argentina 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 every market
in the Pacific Rim, primarily in the Philippines, Taiwan 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 Brazil resulting from a weak
consumer economy and in Germany due to ongoing economic weakness and a
negative currency impact. Excluding the impact of foreign currency exchange,
international sales rose 17% over the comparable period of 1996.
The 9% increase in pretax income reflected increases in every major
market except Brazil and Japan. 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 Pacific Rim due to the sales increase. These
favorable results were partially offset by significant 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 efforts. The decline in Japan was due to the lower sales
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)
and a deterioration in the gross margin resulting from an aggressive pricing
strategy aimed at improving sales. In addition, spending on strategic
programs were higher in Japan in 1997. These programs included an enhanced
advertising campaign and new Representative recruiting programs. As
previously mentioned, these programs have contributed to double-digit
increases in units, customers served and active Representatives.
Liquidity and Capital Resources
Cash Flows
Excluding changes in debt, there was a net decrease in cash of $345.7 in
the first half of 1997 compared with $334.4 in the comparable period of 1996.
The $11.3 variance primarily reflects higher capital expenditures including
the relocation of office facilities in the U.S. as well as higher usage for
working capital items, primarily accounts payable and accrued expenses. These
items were partially offset by the cash used by discontinued operations in
1996 and higher net income and lower repurchases of common stock in 1997.
For the first half of 1997, the Company purchased approximately 1.1
million shares of common stock for $62.6 compared with $79.9 spent for the
repurchase of approximately 1.9 million shares during the comparable period in
1996.
Capital Resources
Total debt increased $277.0 to $478.6 at June 30, 1997 from $201.6 at
December 31, 1996, principally due to normal seasonal working capital
requirements during the first six months of 1997. Total debt at June 30, 1997
of $478.6 was $60.6 higher than total debt of $418.0 at June 30, 1996 mainly
due to the conclusion of a three-year long-term incentive plan which resulted
in a cash payout during the first quarter of 1997 and relocation spending.
At June 30, 1997, there were borrowings of $25.9 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 $306.5 was outstanding at June 30, 1997.
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 June 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.
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 will
be used to pay down commercial paper borrowings. As a result of the
refinancing of the commercial paper borrowings with the new long-term debt,
$100.0 of commercial paper borrowings as of June 30, 1997 were reclassified to
long-term debt.
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 June 30, 1997 and December 31, 1996, current liabilities exceeded
current assets by $100.6 and $41.7, respectively. The increase of current
liabilities over current assets of $58.9 was mainly due to the increase in
debt, a decrease in cash and equivalents, partially offset by an increase in
inventories, reflecting the seasonal pattern of Avon's operations, and a
decrease in accounts payable and accrued compensation.
Although current liabilities exceeded current assets at June 30, 1997,
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.
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)
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.
At June 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 June 30, 1997, the Company held foreign currency forward contracts
with notional amounts totaling $174.4 and option contracts with notional
amounts totaling $69.3 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
$65.0 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
June 30, 1997 was insignificant. The Company's risk of loss on the options in
the future is limited to premiums paid, which are insignificant.
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)
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.
19
<PAGE>20
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 5. Other Information.
On May 27, 1997, the Company issued a press release relating to the
retirement of Edward J. Robinson as president and chief operating
officer effective June 1, 1997. The text of the press release is as
follows:
"Avon Products, Inc. today announced that Edward J. Robinson,
president and chief operating officer, will retire from the
company, effective June 1.
Mr. Robinson, age 57, joined Avon in 1989 as chief financial
officer and was named to his present position in 1993. Avon said
his decision was the result of a disagreement over the issue of
management succession at the company.
Avon also said there were no immediate plans to name a successor to
Mr. Robinson, and that his responsibilities will be assumed by
James E. Preston, chairman and chief executive officer.
Mr. Preston, who recently turned 64, said he will remain with the
company for at least the next two years, and that a top priority
will be to ensure a smooth transition in senior management before
he retires.
'Ed has played a key role in strengthening the worldwide operations
and financial position of Avon and he helped us build a solid
foundation for future growth.' Mr. Preston said, 'We thank him for
his many contributions and wish him every success in his future
endeavors.'"
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 second
quarter of 1997.
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: August 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.
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 June 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
- ------- -----------
11.1 --Statement re computation of primary income per share.
11.2 --Statement re computation of fully diluted income per share.
27 --Financial Data Schedule.
EXHIBIT 11.1
<PAGE>
EXHIBIT 11.1
AVON PRODUCTS, INC.
COMPUTATION OF PRIMARY INCOME PER SHARE
(In millions, except per share data)
Three months ended
June 30
------------------
1997 1996
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during
the period.............................. 132.257 133.914
Common stock equivalents*................. --* --*
------- -------
Weighted average shares for primary income
per share computation................... 132.257 133.914
======= =======
Net income................................ $ 95.2 $ 85.7
======= =======
Primary income per share.................. $ .72 $ .64
======= =======
_________
*Common stock equivalents are not reported because they result in
less than three percent dilution.
<PAGE>
EXHIBIT 11.1
AVON PRODUCTS, INC.
COMPUTATION OF PRIMARY INCOME PER SHARE
(In millions, except per share data)
Six months ended
June 30
----------------
1997 1996
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during
the period.............................. 132.565 134.256
Common stock equivalents*................. --* --*
------- -------
Weighted average shares for primary income
per share computation................... 132.565 134.256
======= =======
Net income................................ $ 136.5 $ 123.4
======= =======
Primary income per share.................. $ 1.03 $ .92
======= =======
_________
*Common stock equivalents are not reported because they result in
less than three percent dilution.
EXHIBIT 11.
<PAGE>
EXHIBIT 11.2
AVON PRODUCTS, INC.
COMPUTATION OF FULLY DILUTED INCOME PER SHARE
(In millions, except per share data)
Three months ended
June 30
------------------
1997 1996
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during
the period................................. 132.257 133.914
Common stock equivalents..................... 1.393 .944
------- -------
Weighted average shares for fully diluted
income per share computation............... 133.650 134.858
======= =======
Net income..................................... $ 95.2 $ 85.7
======= =======
Fully diluted income per share................. $ .71 $ .64
======= ======
<PAGE>
EXHIBIT 11.2
AVON PRODUCTS, INC.
COMPUTATION OF FULLY DILUTED INCOME PER SHARE
(In millions, except per share data)
Six months ended
June 30
----------------
1997 1996
---- ----
Weighted average shares of common stock:
Weighted average shares outstanding during
the period................................. 132.565 134.256
Common stock equivalents..................... 1.432 .956
------- -------
Weighted average shares for fully diluted
income per share computation............... 133.997 135.212
======= =======
Net income..................................... $ 136.5 $ 123.4
======= =======
Fully diluted income per share................. $ 1.02 $ .91
======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
Avon Products, Inc.
Financial Data Schedule
This schedule contains summary financial information extracted from the
Avon Products, Inc. financial statements as of June 30, 1997 and for the six
months then ended included in the Form 10-Q as of June 30, 1997 and is
qualified in its entirety by reference to such financial statements.
<MULTIPLIER> 1000000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<S> <C>
<CASH> 116
<SECURITIES> 0
<RECEIVABLES> 479
<ALLOWANCES> (34)
<INVENTORY> 617
<CURRENT-ASSETS> 1,404
<PP&E> 1,283
<DEPRECIATION> 683
<TOTAL-ASSETS> 2,342
<CURRENT-LIABILITIES> 1,605
<BONDS> 4
0
0
<COMMON> 44
<OTHER-SE> 206
<TOTAL-LIABILITY-AND-EQUITY> 2,342
<SALES> 2,313
<TOTAL-REVENUES> 2,313
<CGS> 918
<TOTAL-COSTS> 2,045
<OTHER-EXPENSES> 2
<LOSS-PROVISION> 38
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 214
<INCOME-TAX> 79
<INCOME-CONTINUING> 137
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
</TABLE>
