<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, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___ to ___
Commission file number 1-4881
AVON PRODUCTS, INC.
______________________________________________________
(Exact name of registrant as specified in its charter)
New York 13-0544597
_______________________________ ___________________
(State or other jurisdiction of (I.R S. Employer
incorporation or organization) Identification No.)
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 October 31, 1998 was 262,705,916.
<PAGE>2
Table of Contents
Part I. Financial Information
Page
Numbers
-------
Item 1. Financial Statements
Consolidated Statement of Operations
Three Months Ended September 30, 1998 and
September 30, 1997....................................... 3
Nine Months Ended September 30, 1998 and
September 30, 1997....................................... 4
Consolidated Balance Sheet
September 30, 1998 and December 31, 1997 ................ 5
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1998 and
September 30, 1997...................................... 6
Notes to Consolidated Financial Statements.................. 7-12
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition............. 13-27
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.......................... 28
Signatures......................................................... 29
2
<PAGE>3
PART I. FINANCIAL INFORMATION
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share data)
Three months ended
September 30
------------------
1998 1997
---- ----
(unaudited)
Net sales...................................... $1,233.2 $1,249.4
Costs, expenses and other:
Cost of sales......................................478.2 517.2
Marketing, distribution and
administrative expenses..........................626.3 614.7
Special charge......................................46.0 -
Interest expense....................................11.0 11.2
Interest income.....................................(3.3) (2.4)
Other (income) expense, net.........................(1.5) .8
-------- --------
Total costs, expenses and other..................1,156.7 1,141.5
-------- --------
Income before taxes and minority interest...........76.5 107.9
Income taxes........................................36.7 39.9
-------- --------
Income before minority interest.....................39.8 68.0
Minority interest................................... 1.7 .6
-------- --------
Net income......................................$ 41.5 $ 68.6
======== ========
Earnings per share:
Basic .......................................$ .16 $ .26*
Diluted......................................$ .16 $ .26*
*Restated to reflect a two-for-one stock split distributed in September 1998.
The accompanying notes are an integral part of these statements.
3
<PAGE>4
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share data)
Nine months ended
September 30
----------------
1998 1997
---- ----
(unaudited)
Net sales...................................$3,663.8 $3,562.0
Costs, expenses and other:
Cost of sales................................1,446.9 1,434.9
Marketing, distribution and
administrative expenses....................1,855.4 1,779.5
Special charges................................116.5 -
Interest expense................................30.4 31.6
Interest income................................(11.5) (7.8)
Other expense, net...............................2.6 2.4
-------- --------
Total costs, expenses and other..............3,440.3 3,240.6
------- --------
Income before taxes and minority interest......223.5 321.4
Income taxes...................................106.7 118.9
------- --------
Income before minority interest................116.8 202.5
Minority interest................................5.1 2.6
------- --------
Net income..................................$ 121.9 $ 205.1
======== ========
Earnings per share:
Basic ..................................$ .46 $ .77*
Diluted.................................$ .46 $ .77*
*Restated to reflect a two-for-one stock split distributed in September 1998.
The accompanying notes are an integral part of these statements.
4
<PAGE>5
AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(In millions)
September 30 December 31
1998 1997
(unaudited)
ASSETS
Current assets:
Cash and equivalents............................. $ 97.2 $ 141.9
Accounts receivable.............................. 503.8 444.8
Inventories...................................... 641.4 564.8
Prepaid expenses and other....................... 229.0 192.5
-------- --------
Total current assets............................. 1,471.4 1,344.0
-------- --------
Property, plant and equipment, at cost............. 1,347.8 1,281.6
Less accumulated depreciation.................... 723.7 670.6
-------- --------
624.1 611.0
-------- --------
Other assets..................................... 369.0 317.9
-------- --------
Total assets..................................... $2,464.5 $2,272.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year.................... $ 294.5 $ 132.1
Accounts payable................................. 357.7 476.0
Accrued compensation............................. 150.1 111.3
Other accrued liabilities........................ 344.6 268.9
Sales and other taxes............................ 95.0 101.0
Income taxes..................................... 272.1 266.6
------- --------
Total current liabilities........................ 1,514.0 1,355.9
-------- --------
Long-term debt................................... 201.1 102.2
Employee benefit plans........................... 389.3 367.6
Deferred income taxes............................ 28.1 31.2
Other liabilities................................ 128.3 131.0
Shareholders' equity:
Common stock.................................... 87.7 87.4*
Additional paid-in capital....................... 757.3 733.1
Retained earnings............................... 615.6 627.9*
Accumulated comprehensive income................... (289.2) (270.3)
Treasury stock, at cost......................... (967.7) (893.1)*
-------- --------
Total shareholders' equity....................... 203.7 285.0
-------- --------
Total liabilities and shareholders' equity....... $2,464.5 $2,272.9
======== ========
*Restated to reflect a two-for-one stock split distributed in September 1998.
See Note 3 of the Notes to the Consolidated Financial Statements.
The accompanying notes are an integral part of these statements.
5
<PAGE>6
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Nine months ended
September 30
------------------
1998 1997
---- ----
(unaudited)
Cash flows from operating activities:
Net income............................................. $ 121.9 $ 205.1
Adjustments to reconcile net income to net cash
used by operating activities:
Special and non-recurring charges....................... 104.4 -
Depreciation and amortization........................... 51.2 50.8
Provision for doubtful accounts......................... 66.8 58.9
Translation (gains) losses.............................. (8.6) .3
Deferred income taxes................................... (21.1) (9.5)
Other................................................... 3.0 7.9
Changes in assets and liabilities:
Accounts receivable................................... (148.0) (139.8)
Inventories........................................... (125.1) (143.8)
Prepaid expenses and other............................ (27.2) (14.6)
Accounts payable and accrued liabilities.............. (31.5) (54.3)
Income and other taxes................................ 4.9 (18.3)
Noncurrent assets and liabilities..................... (4.3) (33.0)
------ ------
Net cash used by operating activities................... (13.6) (90.3)
------ ------
Cash flows from investing activities:
Capital expenditures.................................... (110.9) (111.0)
Disposal of assets...................................... 7.2 2.8
Other investing activities.............................. (.6) (8.6)
------ ------
Net cash used by investing activities................... (104.3) (116.8)
------ ------
Cash flows from financing activities:
Cash dividends.......................................... (135.7) (126.6)
Debt, net (maturities of three months or less).......... 202.9 162.9
Proceeds from short-term debt........................... 76.6 13.6
Retirement of short-term debt........................... (116.2) (14.0)
Proceeds from long-term debt............................ 100.0 100.0
Retirement of long-term debt............................ (.5) (.6)
Repurchase of common stock.............................. (75.0) (90.0)
Proceeds from exercise of stock options................. 17.5 19.6
Other financing activities.............................. - 58.6
------ ------
Net cash provided by financing activities............... 69.6 123.5
------ ------
Effect of exchange rate changes on cash and equivalents. 3.6 (15.2)
------ ------
Net decrease in cash and equivalents.................... (44.7) (98.8)
Cash and equivalents beginning of period................ 141.9 184.5
------ ------
Cash and equivalents end of period...................... $ 97.2 $ 85.7
The accompanying notes are an integral part of these statements.
6
<PAGE>7
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 1997 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.
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards ("FAS") No. 130 "Reporting
Comprehensive Income". FAS No. 130 requires disclosure of
comprehensive income in interim periods and additional disclosures of
the components of comprehensive income on an annual basis.
Comprehensive income includes all changes in equity during a period
except those resulting from investments by and distributions to the
Company's stockholders. The components of comprehensive income are
included in Note 7.
Effective January 1, 1998, the Company adopted AICPA Statement of
Position ("SOP") No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP No. 98-1
requires certain costs in connection with developing or obtaining
internal-use software to be capitalized that previously would have
been expensed as incurred. The adoption of SOP No. 98-1 did not have
a material impact on the Company's results of operations, financial
position, or cash flows.
In June 1998, the Financial Accounting Standards Board issued FAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". FAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999 (January 1, 2000 for the
Company). FAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction. For fair-value hedge
transactions in which the Company is hedging changes in the fair value
of an asset, liability, or firm commitment, changes in the fair value
of the derivative instrument will be included in the income statement
along with the offsetting changes in the hedged item's fair value.
For cash-flow hedge transactions in which the Company is hedging the
variability of cash flows related to a variable-rate asset, liability,
or a forecasted transaction, changes in the fair value of the
derivative instrument will be reported in other comprehensive income.
The gains and losses on the derivative instrument that are reported in
other comprehensive income will be reclassified to earnings in the
periods in which earnings are impacted by the variability of the cash
flows of the hedged item. The ineffective portion of all of the
hedges will be recognized in current-period earnings. The Company has
not yet determined the impact that the adoption of FAS No. 133 will
have on its earnings or statement of financial position.
7
<PAGE>8
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
2. INFORMATION RELATING TO THE STATEMENT OF CASH FLOWS
"Net cash used by operating activities" includes the following
cash payments for interest and income taxes:
Nine months ended
September 30
------------------
1998 1997
---- ----
Interest............................................ $ 30.3 $ 21.3
Income taxes, net of refunds received............... 124.8 137.0
3. EARNINGS PER SHARE
On July 22, 1998, the Company declared a two-for-one stock split
in the form of a 100% stock dividend to be issued to shareholders of
record as of the close of business on August 24, 1998. Accordingly,
the stock split has been recognized by reclassifying the par value of
the additional shares resulting from the split, from retaining
earnings to common stock and treasury stock. All share and per share
data included in this report have been restated to reflect the stock
split.
Basic earnings per share ("EPS") are computed by dividing net
income by the weighted-average number of shares outstanding during the
year. Diluted earnings per share are calculated to give effect to all
potentially dilutive common shares that were outstanding during the
year.
For the three and nine months ended September 30, 1998 and 1997,
the number of shares used in the computation of basic and diluted
earnings per share are as follows:
Three Months ended Nine Months ended
September 30 September 30
1998 1997 1998 1997
____ ____ ____ ____
Basic EPS
Weighted-average shares 263.16 264.58 263.42 264.95
Incremental shares from
conversion of:
Stock options 2.62 2.47 1.80 2.40
Diluted EPS ______ ______ ______ ______
Adjusted weighted-
average shares 265.78 267.05 265.22 267.35
====== ====== ====== ======
8
<PAGE>9
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
During the first nine months of 1998, the Company purchased
approximately 2,211,000 shares of common stock for $75.0 compared to
approximately 3,060,000
shares purchased for $90.0 during the first nine months of 1997. The
cumulative number of shares repurchased under the three-year stock
repurchase program which ended in February 1997 was approximately
25,328,000 shares for a total cost of approximately $424.4. Under a
new repurchase program, which began in February 1997, the Company
repurchased approximately 5,888,000 shares
at a total cost of approximately $184.3 as of September 30, 1998.
Under this new program, the Company may buy back up to $1,100.0 of its
currently outstanding common stock through open market purchases over
a period of up to three to five years.
4. INVENTORIES
September 30 December 31
1998 1997
---- ----
Raw materials................ $156.6 $147.4
Finished goods............... 484.8 417.4
------ ------
$641.4 $564.8
====== ======
5. DIVIDENDS
Cash dividends paid per share of common stock were $.34 for the
three months ended September 30, 1998 and $.315 for the corresponding
1997 period on a pre-split basis. Future dividends will be paid on a
post-split basis. The dividend of $.34 is the equivalent of $.17 on a
post-split basis. The annual dividend rate for 1998, adjusted for the
two-for-one stock split, is $.68 compared to an adjusted post-split
dividend rate for 1997 of $.63.
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
9
<PAGE>10
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
of resolving such contingencies and reserves recorded by Avon at
September 30, 1998 should not have a material adverse impact on Avon's
consolidated financial position, results of operations, or cash flows.
7. COMPREHENSIVE INCOME
For the three and nine months ended September 30, 1998 and 1997,
the components of comprehensive income are as follows:
Three Months ended Nine Months ended
September 30 September 30
1998 1997 1998 1997
Net income $ 41.5 $ 68.6 $121.9 $205.1
Other comprehensive loss
Change in equity due to
foreign currency
translation and
transaction adjustments (1.2) (25.5) (18.9) (35.0)
_____ _____ _____ _____
Comprehensive income $ 40.3 $ 43.1 $103.0 $170.1
8. SPECIAL AND NON-RECURRING CHARGES
In October 1997, the Company announced a worldwide re-engineering
program in order to streamline operations and improve profitability,
through gross margin improvement and expense reductions. The one-time
charges associated with this program totaled $154.4 pretax ($122.8 net
of tax, or $.47 and $.46 per share on a basic and diluted basis,
respectively) for the nine months ended September 30, 1998.
For the three and nine months ended September 30, 1998, special and
non-recurring charges by category of expenditures are as follows:
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
Special Cost of Sales Special Cost of
Charge Charge Total Charge Sales Charge Total
Employee severance
costs $ 5.4 - $ 5.4 $56.4 - $56.4
Inventories - - - - $37.9 37.9
Write down of assets
to net realizable
value 20.9 - 20.9 31.8 - 31.8
Field program buy-out 14.4 - 14.4 14.4 - 14.4
Other 5.3 - 5.3 13.9 - 13.9
----- ----- ----- ----- ----- -----
$ 46.0 - $ 46.0 $116.5 $37.9 $154.4
===== ===== ===== ===== ===== =====
10
<PAGE>11
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
The write down of assets relates to the closure of a Far East
buying office and manufacturing facilities in Puerto Rico and the
Dominican Republic. As a result of on-going government restrictions,
the Company has also decided to close certain branches and a regional
office in China. Also, write downs include assets associated with
under-performing product lines.
Inventory-related charges represent losses to write down the
carrying value of non-strategic inventory prior to disposal. These
charges result from the closure of facilities, discontinuation of
certain product lines, size-of-line reductions and a change in
strategy for product dispositions.
Employee severance costs are expenses, both domestic and
international, associated with the realignment of the Company's global
operations. The workforce will be reduced by approximately 2,300
employees, or 7% of the total. Approximately one-half of the
employees to be terminated relate to the facility closures.
The field program buy-out represents costs to revamp the Company's
Representative recruitment program in the U.S.
The liability balance at September 30, 1998 is as follows:
Special Cost of
Charge Sales Charge Total
Provision $116.5 $37.9 $154.4
Cash expenditures (50.0) (50.0)
Non-cash write-offs (22.2) (37.9) (60.1)
----- ----- -----
Balance at Sept. 30, 1998 $ 44.3 - $ 44.3
===== ===== =====
The balance at September 30, 1998 relates primarily to employee
severance costs that will be paid during 1998 and 1999.
The Company expects to record additional charges in 1999 as plans
are finalized.
9. DEBT AND OTHER FINANCING ACTIVITIES
In May 1998, Avon issued $100.0 of bonds imbedded with option
features (the "bonds") for which the net proceeds were used to pay
down commercial paper borrowings. The bonds have a twenty-year
maturity; however, after five years, the bonds can be sold back to the
Company at par or can be called at par by the underwriter and resold
to investors as fifteen-year debt. The coupon rate on the bonds is
6.25% for the first five years, but will be refinanced at market rates
if the bonds are called in year five.
11
<PAGE>12
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
In connection with the bond issuance, Avon entered into a five-
year interest rate swap contract with a notional amount of $50.0 to
effectively convert fixed interest on a portion of the bonds to a
variable interest rate, based on LIBOR.
At September 30, 1998, the Company has entered into forward
contracts to purchase approximately 3,700,000 shares of Avon common
stock at an average rate of $35.95 as of September 30, 1998. The
contracts mature over the next three years and provide for share
settlement to the Company. Accordingly, no adjustment for subsequent
changes in fair value has been recognized.
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)
ITEM 2. Management's Discussion and Analysis of the Results of
Operations and Financial Condition
All share and per share data included in this report have been
restated to reflect a two-for-one stock split distributed in September
1998.
Results of Operations--Three Months Ended September 30, 1998 and 1997.
Consolidated
Avon's net income for the three months ended September 30, 1998
was $41.5, or $.16 per share on a basic and diluted basis, compared
with net income of $68.6, or $.26 per share on a basic and diluted
basis, in 1997. Pretax income of $76.5 decreased 29% from the prior
year. Special charges were recorded in the third quarter of 1998 for
the Company's previously announced business process redesign program.
These charges totaled $46.0 pretax, which reduced net income by $38.6
after tax, or $.14 per share on a basic and diluted basis. The
special charge of $46.0 is primarily related to the restructuring of a
U.S. Representative recruitment program, employee severance benefits
and facility reorganizations in Puerto Rico, Hong Kong and China, as
well as asset writedowns associated with under-performing product
lines. These charges represent the second part of an estimated $200.0
total charge that will help the Company deliver the higher sales and
profit targets previously communicated. Before the charges, net
income for the three months ended September 30, 1998 of $80.1, or $.30
per share on a basic and diluted basis, increased 17% and 15%,
respectively, from the comparable period in 1997. Pretax income,
before the charge, of $122.5 increased 14% over 1997, despite lower
sales, due to an improved gross margin, favorable foreign exchange
and higher interest income in 1998. These results were partially
offset by an unfavorable operating expense ratio.
Consolidated net sales for the three months ended September 30,
1998 of $1,233.2 decreased $16.2, or 1%, from the comparable period of
the prior year. The decrease in sales was due to a 3% decrease in
International sales partially offset by a 2% increase in U.S sales.
Sales improvements in Brazil, Venezuela, the United Kingdom and
Central Europe were more than offset by declines in the Pacific
region, primarily in Japan. Excluding the impact of foreign currency
exchange, consolidated net sales rose 6% over the comparable period of
the prior year.
Cost of sales as a percentage of net sales was 38.8% in the third
quarter of 1998 compared to 41.4% in the third quarter of 1997. The
increase in the gross margin of 2.6 points resulted from higher
margins in the U.S., several major markets in the Americas, most
significantly Brazil, the United Kingdom, Japan and the Philippines.
The gross margin improvement in the U.S. was attributable to a change
in the product mix towards higher-margin products and categories
combined with improved costs and price increases in non-CFT
categories. Brazil's gross margin improved due to better vendor
negotiations and cost reduction programs. A shift in sales mix to
higher-margin items resulted in improved margins in the United Kingdom
while Venezuela's margin improvement resulted primarily from improved
pricing in
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)
their fashion business as well as process redesign efforts. In Japan,
the higher gross margin resulted from product cost savings initiatives
in cosmetics, fragrance and toiletries ("CFT"), improved sourcing
decisions for non-CFT as well as strategic price increases. These
improvements were partially offset by a margin decline in Mexico
reflecting investments made to sustain market penetration and customer
appeal in an increasingly competitive environment.
Marketing, distribution and administrative expenses of $626.3
increased $11.6, or 2%, over the comparable period of 1997 and
increased as a percentage of net sales to 50.8% from 49.2%. The
increase in operating expenses was primarily in the U.S. due to the
sales growth and one-time items, discussed below. These increases
were partially offset by lower expenses in the Pacific primarily due
to lower sales and the impact of currency devaluations. Additionally,
business restructuring efforts initiated last year in Japan have
resulted in lower operating expenses. Expense ratio improvements in
Japan were due to ongoing expense reduction efforts and, in Brazil,
strong sales growth contributed to a favorable expense ratio. These
improvements were more than offset by declines in the U.S. due to a
one-time adjustment recorded in the prior year related to the
Company's benefit plans and in Mexico due to higher marketing
expenses.
Interest expense of $11.0 decreased $.2 versus the comparable
period of 1997 due to lower cost of domestic working capital
borrowings.
Interest income of $3.3 increased $.9 over the comparable period
of 1997 primarily due to higher short-term investments and higher
interest rates in Brazil in 1998.
Other (income) expense, net of $1.5 was $2.3 favorable to the
comparable period of last year primarily due to favorable foreign
exchange partially offset by higher corporate non-operating expenses.
Excluding the special charge, the effective income tax rate was
36.0% in the third quarter of 1998 compared to 37.0% in 1997. The tax
benefit on the special charge was 16.1% due to the mix of countries
and tax jurisdictions incurring the charge.
U.S.
Net sales increased 2% compared with the third quarter of 1997
primarily driven by an increase in the average order size. Including
the charge, pretax income decreased 75%. The sales increase resulted
from increases in CFT, and fashion jewelry and accessories partially
offset by declines in the apparel and gift and decorative categories.
The CFT increase was driven by growth in skincare and fragrance due to
the successful launches of Anew Retinol Hand Complex and Rare Rubies,
respectively. Additionally, total Anew sales were significantly above
1997 due to several Anew promotions and a new product introduction
versus no major Anew launches in the third quarter of 1997. Accessory
sales were up significantly driven by the success of organizer
handbags and licensed back-to-school favorites such as
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)
knapsacks and watches. These improvements were partially offset by
declines in apparel resulting from weaker sales in designer and
children's casual wear and declines in the gift and decorative
category reflecting softer sales of the Winter Splendor Barbie
compared to last year's doll.
Excluding the special charge, pretax income increased 17% due to
the improved sales and a favorable gross margin driven by CFT as well
as non-CFT margin improvements. The CFT margin improvement was due to
pricing, less discounting and higher margin products. Non-CFT margin
improvement resulted from improved costs, fewer toy introductions in
the gift category and price increases in apparel. These margin
improvements were partially offset by an unfavorable expense ratio
resulting from a one-time adjustment recorded in the prior year
related to the Company's benefit plans and higher variable
compensation.
International
Net sales decreased 3% from the comparable period of 1997 and
including the charge, pretax income increased 6%. The sales decline
resulted from decreases throughout the Pacific region, most
significantly in Japan, and in Russia partially offset by growth in
most major markets in the Americas as well as in the United Kingdom
and Central Europe. Declines in the Pacific Region are a result of
the continuing Asian currency and economic crisis. The Pacific region
did post a double-digit increase in customers served and a strong increase in
active Representatives. While Russia's sales declined due to the currency
devaluation, the number of active Representatives continues to grow
dramatically.
Sales growth in the Americas was highlighted by strong increases
in Brazil and Venezuela which reported double-digit growth in active
Representatives and higher units, orders and customers served. Brazil
capitalized on key global product events such as Perfect Wear Age
Block and Women of Earth supported by customer sampling and television
advertising. In Europe, sales grew in the United Kingdom due to a
higher average order size in 1998, and Central European markets
reported strong sales increases highlighted by continued double-digit
growth in the number of orders and active Representatives. Excluding
the effect of foreign currency exchange, international net sales were
up 8%.
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)
Excluding the special charge, pretax income increased 13%
reflecting increases in Brazil, the United Kingdom and Japan as well
as the countries in Central Europe. The increase in Brazil resulted
from the significant sales increase, a strong gross margin
improvement, and a favorable expense ratio resulting from ongoing
expense management. A shift in the category mix towards higher-margin
products contributed to the pretax income growth in the United
Kingdom. The success of the Central European markets is a direct
result of the increasing size of the sales force and operating margin
improvements. Despite a weakening economy, Japan posted margin and
profit improvements as compared to 1997 resulting from cost reduction
strategies and business process redesign efforts. These results were
partially offset by declines in Argentina reflecting lower sales and
in the Philippines due to a negative currency impact. Excluding the
impact of foreign currency exchange and the one-time charge, pretax
income rose 19%.
The Russian ruble devalued significantly in August 1998. In
response to this situation, several actions have been taken by local
management including pricing flexibility to maintain and build market
share and reduce credit sales as well as a tightening of expense
controls. Geographic expansion into new cities has also been
deferred. The devaluation will negatively affect Russia's U.S. dollar
results in 1998. In terms of size, Russia's 1997 net sales
represented approximately 1% of Avon's consolidated net sales.
Results of Operations - Nine Months Ended September 30, 1998 and 1997
Consolidated
Avon's net income for the nine months ended September 30, 1998 of
$121.9, or $.46 per share on a basic and diluted basis, decreased 41%
from net income of $205.1, or $.77 per share on a basic and diluted
basis, in 1997. Pretax income of $223.5 decreased 30% from the prior
year. Special and non-recurring charges were recorded in the first
and third quarters of 1998 for the Company's previously announced
business process redesign program. These charges totaled $154.4
pretax, which reduced net income by $122.8 after tax, or $.47 and $.46
pretax per share on a basic and diluted basis, respectively. The
special charge of $116.5 pretax is primarily related to employee
severance benefits as well as facility rationalizations in Puerto
Rico, Dominican Republic, Hong Kong and China as well as asset write-
downs associated with under-performing product lines. In addition,
$37.9 was charged to cost of sales for inventory write-downs. The
one-time charges represent the current year's portion of an estimated
$200.0 total charge that is necessary for the Company to deliver the
higher sales and profit targets previously communicated. Before the
charges, net income for the nine months ended September 30, 1998 of
$244.7 increased 19%. Earnings per share of $.93 and $.92 on a basic
and diluted basis, respectively, increased 21% and 19%, respectively,
from the comparable period in 1997. Pretax income, before the
charges, of $377.9 increased 18% over 1997 due to higher sales, an
improved gross margin and favorable net interest partially offset by a
higher operating expense ratio.
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)
Consolidated net sales for the nine months ended September 30,
1998 of $3,663.8 increased $101.8, or 3%, over the comparable period
of the prior year. The increase in sales was due to a 2% increase in
international and a 4% increase in U.S. sales. The international
sales improvement resulted from strong growth in all major markets in
the Americas, most significantly in Brazil, Argentina and Mexico, as
well as Russia, the United Kingdom and the Central European Markets,
primarily Poland. These improvements were partially offset by sales
declines throughout the Pacific Region, most significantly in Japan
and the Philippines. Excluding the impact of foreign currency
exchange, consolidated net sales rose 10% over the comparable period
of the prior year.
Cost of sales as a percentage of net sales was 39.5% in the first
nine months of 1998 compared to 40.3% in the first nine months of
1997. Excluding the one-time charge of $37.9, cost of sales as a
percentage of sales was 38.5%. The increase in the gross margin of
1.8 points resulted from higher margins in nearly all major markets in
the Americas, most significantly in Brazil, due to actions taken to
reduce inventory levels which had an unfavorable impact on margins in
1997, and, to a lesser extent, in Venezuela as a result of pricing
strategies and business redesign efforts. The United Kingdom and
Germany reported strong margin improvements primarily as a result of a
shift in mix to selling higher margin products. Japan's gross margin
improved as a result of cost reduction initiatives. The U.S. also
reported a favorable gross margin as compared to 1997 attributable to
pricing strategies, cost improvements and reduced clearance activity
in the non-CFT categories.
Marketing, distribution and administrative expenses of $1,855.4
increased $75.9, or 4%, over the comparable period of 1997 and
increased as a percentage of net sales to 50.6% from 50.0%. The
increase in operating expenses was primarily in markets which have
experienced strong sales growth, including all major markets in the
Americas, U.S. and Russia. These increases were partially offset by
lower expenses in the Pacific primarily due to lower sales and the
impact of currency devaluations. The overall increase in the expense
ratio was primarily due to higher expenses ratios in Mexico due to
increased marketing and promotional expenses associated with new
product launches, in Venezuela due to increased administrative
expenses as a result of the implementation of a new labor law and in
China reflecting the shutdown of sales operations for most of the
second quarter of 1998. These increases were partially offset by
improvements throughout Europe and in Japan due to a continued active
focus on reducing operating expenses. Additionally, higher sales
combined with strict expense management contributed to a favorable
expense ratio in Brazil.
Interest expense of $30.4 decreased $1.2 from the comparable
period of 1997 due to lower cost of borrowings.
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)
Interest income of $11.5 increased $3.7 versus the comparable
period of 1997 primarily due to a Mexico tax refund claim.
Other expense, net of $2.6 was $.2 unfavorable to the comparable
period of last year primarily due to higher corporate non-operating
expenses partially offset by favorable foreign exchange.
Excluding the charges, the effective income tax rate was 36.6% in
the first nine months of 1998 compared to 37.0% in 1997. The tax
benefit on the one-time charges was 20.5% due to the mix of countries
and tax jurisdictions incurring the charges.
U.S.
Net sales increased 4% and pretax income decreased 37% compared
with the first nine months of 1997. A 3% increase in the average
order size along with a 1% increase in the number of active
Representatives contributed to the sales increase. The sales increase
resulted from increases in CFT, fashion jewelry and accessories and
home entertainment categories partially offset by a decline in the
gift and decorative category. The increase in the CFT category was
mainly due to the successful launches of Rare Rubies, Anew Retinol
Hand Complex, the Diane Von Furstenburg fragrance, Forest Lily and the
Far Away and Rare Gold gift with purchase event. In addition, the
successful launch of Avon's transfer resistant technology lipstick and
Avon Color's Spring Shade Collection contributed to the growth in CFT.
The continued growth of the Avon Techniques hair care line and
significant increases in the Skin-So-Soft lines also contributed to
the CFT growth. Accessories showed strong performance with organizer
handbags and the licensed Winnie the Pooh carryalls and licensed Pooh
and sports watches. Higher sales in the home entertainment category
were primarily driven by the launch of a collection of inspirational
and religious products, as well as an increase in the sales of
demonstration products purchased by Representatives. These increases
were partially offset by a decline in the gift and decorative category
primarily attributable to the phasing out of the Avon Home line and
softer Easter and Barbie sales.
Excluding the one-time charges, pretax income increased 14% due
to the improved sales and a favorable gross margin primarily driven by
cost improvements, revised pricing strategies and reduced clearance
activity.
International
Net sales increased 2%, or 12% excluding the effect of foreign
currency exchange, over the comparable period of 1997 and pretax
income decreased 3%.
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 sales increase reflects strong growth in the Americas and
Europe regions almost completely offset by significant declines in the
Pacific region. Sales increases in the Americas were highlighted by
significant growth in Brazil, Argentina, Mexico and Venezuela with
these countries showing growth in units, active Representatives and
orders. Mexico's sales increase resulted from the success of new
product launches such as Anew Night Force, Anew All-in-One, and
Yessamin fragrance as well as apparel and home line extensions with
superior design and promotions. Brazil's growth in sales was driven
by attractive pricing and successful new product launches. In Europe,
sales grew in the United Kingdom due to a higher average order size in
1998. The Central European markets and Russia posted strong year-to-
date sales results reflecting increases in units, customers served and
active Representatives.
These higher sales were partially offset by sales declines in
most major markets in the Pacific caused by the continuing Asian
currency and economic crisis. In addition, selling activities in
China were suspended for most of the second quarter of 1998 due to
governmental restrictions on direct-selling companies. Despite the
above difficulties, most markets in the Pacific showed growth in
active Representatives and strong growth in number of customers
served. This is a result of a strong focus on active recruitment to
expand the Representative base in the Pacific region. Excluding the
effect of foreign currency exchange, sales in the Pacific were level
with the prior year.
Excluding the one-time charges, pretax income increased 19% over
the comparable period of 1997. The 19% increase in pretax income
reflects increases in all major markets in the Americas and Europe,
most significantly in Brazil, the United Kingdom, Japan and Germany.
The overall increase in pretax income over the prior year was due to
the sales increases discussed above and strong margin improvements in
Brazil, the United Kingdom, Germany and Japan. Margins improved most
significantly in Brazil due to declines in 1997 resulting from actions
taken to reduce inventory combined with cost reduction programs in
1998. In addition, ongoing expense reductions in Europe contributed
to the increase in pretax income. Despite the weak economic
conditions in the Pacific, Japan's operating margin improved
significantly as a result of cost reduction strategies and business
redesign efforts.
19
<PAGE>20
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 and other financing activities, there
was a net decrease in cash of $307.5 in the first nine months of 1998
compared with $419.3 in the comparable period of 1997. The variance
primarily reflects lower net cash used by operations and investing
activities, a more positive effect of foreign currency exchange and
lower repurchases of common stock in 1998. The decrease in cash used
by operations primarily reflects the conclusion of the three-year
long-term incentive plan which resulted in a cash payment in the first
quarter of 1997 and the settlement of tax issues in the U.S. in 1997.
Cash used for investing activities was lower in 1998 primarily due to
the acquisition of Discovery Toys, Inc. in the first quarter of 1997.
For the first nine months of 1998, the Company purchased
approximately 2.2 million shares of common stock for $75.0 compared
with $90.0 spent for the repurchase of approximately 3.1 million
shares during the comparable period in 1997.
Capital Resources
Total debt increased $261.3 to $495.6 at September 30, 1998 from
total debt of $234.3 at December 31, 1997, principally due to normal
seasonal working capital requirements and to support the continuing
stock buyback program. Total debt of $495.6 at September 30, 1998 was
$35.2 higher than total debt of $460.4 at September 30, 1997 primarily
due to higher borrowing needs in China. In addition, at September 30,
1998 and December 31, 1997, other non-current liabilities include
approximately $56.0 and $58.6, respectively, related to securities
lending activities. In September 1997, the Company entered into a
securities lending transaction resulting in the borrowing of
securities which were subsequently sold for net proceeds approximating
$58.6 which were 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%.
At September 30, 1998, there were borrowings of $33.6 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 $186.7 was outstanding at
September 30, 1998.
At September 30, 1998, there were $10.0 of borrowings outstanding
under uncommitted lines of credit and there were no borrowings under
the Company's bankers' acceptance facilities.
In May 1998, Avon issued $100.0 of bonds imbedded with option
features (the "bonds") for which the net proceeds were used to pay
down commercial paper borrowings. The bonds have a twenty-year
maturity; however, after five years, the
20
<PAGE>21
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
bonds can be sold back to the Company at par or can be called at par
by the underwriter and resold to investors as fifteen-year debt. The
coupon rate on the bonds is 6.25% for the first five years, but will
be refinanced at market rates if the bonds are called in year five.
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, 1998 and December 31, 1997, current
liabilities exceeded current assets by $42.6 and $11.9, respectively.
The increase of current liabilities over current assets of $30.7 was
mainly due to the increase in net debt (debt less cash and
equivalents), as discussed in the Debt section, and other accrued
liabilities. These increases were partially offset by a decrease in
accounts payable and increases in inventories, reflecting the seasonal
pattern of Avon's operations, and accounts receivable.
Although current liabilities exceeded current assets at September
30, 1998, 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.
In connection with the bond issuance, as discussed in the Capital
Resources section, Avon entered into a five-year interest rate swap
contract with a notional amount of $50 million to effectively convert
fixed interest on a portion of the bonds to a variable interest rate,
based on LIBOR.
21
<PAGE>22
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
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, 1998, the Company held foreign currency forward
contracts with notional amounts totaling $225.0 and option contracts
with notional amounts totaling $64.3 to hedge foreign currency items.
These contracts have maturities in 1998 and 1999. The Company also
entered into certain foreign currency forward contracts with notional
amounts totaling $95.0 and option contracts with notional amounts of
$4.2 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, 1998 was
insignificant. The Company's risk of loss on the options in the
future is limited to premiums paid, which are insignificant.
At September 30, 1998, the Company has entered into forward
contracts to purchase approximately 3,700,000 shares of Avon common
stock at an average rate of $35.95 as of September 30, 1998. The
contracts mature over the next three years and provide for share
settlement to the Company. Accordingly, no adjustment for subsequent
changes in fair value has been recognized.
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.
22
<PAGE>23
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Additional Information
On October 23, 1997, the Company announced that it had raised its
long-term growth targets for sales and earnings and that it expected 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
earnings-per-share growth has been raised to 16-18% annually.
Previously, the Company targeted long-term sales growth of 6-8% and
long-term earnings-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 per year by the
Year 2000, with $200.0 of the savings being reinvested concurrently in
advertising and marketing programs to boost sales. The Company
expects to record special charges of approximately $200.0 pretax to
cover one-time costs associated with the re-engineering program. In
the first quarter of 1998, the Company recorded $108.4 pretax of such
one-time charges ($84.2 after tax, or $.64 per share on a basic and
diluted basis) in connection with the re-engineering program.
Slightly more than half of the total pretax charges in the first
quarter were cash related and will be paid in 1998 and 1999. In the
third quarter of 1998, the Company recorded additional special charges
for business redesign efforts totaling $46.0 pretax ($38.6 after tax,
or $.14 per share on a basic and diluted basis). Approximately 70% of
the third quarter pretax charges were cash related and will also be
paid in 1998 and 1999. At September 30, 1998, the remaining liability
balance was $44.3 and relates primarily to severance costs that will
be paid during 1998 and 1999. The Company expects to record the
balance of one-time charges in 1999.
On April 21, 1998, the Chinese government issued a directive
banning all direct selling in China resulting in the shut-down of the
Company's sales operations for most of the second quarter. As of the
beginning of June, the Company received Chinese governmental approval
to resume operations as a wholesale and retail business and became
operational again on June 15, 1998. The Company is converting its
approximately 75 branches into retail outlets to serve customers.
Recently, Avon received government approval to utilize sales
promoters, much like Representatives, to promote product sales in
China.
Euro
A single currency called the euro will be introduced in Europe on
January 1, 1999. Eleven of the fifteen member countries of the
European Union have agreed to adopt the euro as their common legal
currency on that date. Fixed conversion rates between these
participating countries' existing currencies (the "legacy
currencies") and the euro will be established as of that date. The
legacy currencies are scheduled to remain legal tender as
denominations of the euro until June 30, 2002. During this transition
period, parties may settle transactions using either the euro or a
participating country's legacy currency. Beginning in January 2002,
new euro-denominated bills and coins will be issued, and legacy
currencies will be withdrawn from circulation.
23
<PAGE>24
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Avon's operating subsidiaries affected by the euro conversion
have established plans to address issues raised by the euro currency
conversion. These issues include, among others, the need to adapt
information technology systems, business processes and equipment to
accommodate euro-denominated transactions, the impact of one common
currency on pricing and recalculating currency risk. Avon does not
expect system and equipment conversion costs to be material. Due to
the numerous uncertainties associated with the market impact of the
euro conversion, the Company cannot reasonably estimate the effects
one common currency will have on pricing and the resulting impact, if
any, on results of operations, financial condition, or cash flows.
Year 2000 Update
General
The "Year 2000 issue" is the result of computer programs being
written using two-digits rather than four to define the applicable
year. If the Company's computer programs with date-sensitive
functions are not Year 2000 compliant, they may fail or make
miscalculations due to interpreting a date including "00" to mean
1900, not 2000. The result may be disruptions in operations,
including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
The Company commenced its worldwide Year 2000 initiative in early
1996. The Company has developed a comprehensive project plan as a
means for ensuring
that all information technology ("IT") systems, including
applications, operating systems, mainframe, mid range and client
server platforms, all non-information technology ("Non-IT") systems,
including embedded applications and equipment and key third parties
are Year 2000 compliant by December 31, 1999. The Company has
identified high risk applications that are critical to its business,
recognizing the fact that timely compliance of these systems is
crucial, and, therefore, has designed its program to address these
systems first. Furthermore, the Company has established a project
team to identify and address the Company's Year 2000 risks and issues
in an attempt to ensure the integrity and reliability of the Company's
information systems and business processes.
Project Plan
The Company's Year 2000 project plan is divided into four major
sections, including: Infrastructure, Application Software, Validation
of Third Party Compliance and Embedded Systems. The project has five
phases, which are common to all sections: 1) identifying,
inventorying and prioritizing Year 2000 items; 2) assessing Year 2000
compliance of identified items and related potential risks in
circumstances of non-compliance of these items; 3) remediating,
replacing or upgrading, as appropriate, material items that are
determined not to be Year 2000 compliant; 4) validation testing of
material items to ensure compliance; and 5)
contingency planning and implementation. The Company utilizes
internal resources
24
<PAGE>25
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
and outside consultants to renovate and test its IT and Non-IT systems
for Year 2000 compliance. None of the Company's other information
technology projects have been deferred due to the implementation of
the Year 2000 project.
The Infrastructure section consists of hardware, including
mainframe and AS/400 platforms, and software, including operating
systems, other than Applications Software. This section has completed
all phases through remediation and has progressed to the validation
testing phase. All infrastructure activities are expected to be
completed by June 1999.
The Applications Software section includes the conversion of both
in-house developed and vendor-supplied software applications. In-
house developed software that is not Year 2000 compliant has undergone
remediation of its application, whereas non-compliant vendor-provided
software has been upgraded or replaced, where available by the
supplier. This section's testing phase, which includes procedures for
independent validation and verification of code, is ongoing and is
anticipated to be completed by June 1999.
Validation of Third Party Compliance includes the process of
recognizing, prioritizing and communicating with key suppliers and
service providers with whom the Company has a direct and significant
relationship and are believed to be critical to its business
operations. Identification of significant vendors has been completed
and a strategy has been initiated in an attempt to reasonably
ascertain their progress in addressing the Year 2000 issue. The
Company has distributed comprehensive questionnaires to key suppliers,
and, with the guidance of outside consultants, is in the process of
conducting detailed assessments of the responses received. The
validation of third party compliance is expected to be completed by
May 1999. Follow-up reviews will also be scheduled for the remainder
of 1999.
The Embedded Systems section includes all hardware, software and
associated embedded computer chips that are utilized in operating and
maintaining the internal functions of the Company's facilities, i.e.
climate control systems. The Company has elected to employ a
regional-based strategy for addressing Year 2000
compliance of its embedded systems. Avon U.S. operations have
substantially completed the remediation of embedded systems and
anticipate all repair and testing to be completed by March 1999. From
an international standpoint, the Company is in the process of
inventorying material items that are not Year 2000 compliant and
expects the assessment phase to be completed by July 1999, with all
remediation testing scheduled to be completed by year-end 1999.
25
<PAGE>26
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Costs
The total estimated cost associated with achieving worldwide Year
2000 compliance will be approximately $23.5, of which $12.4 has been
spent to date. Replacement costs and costs associated with the
validation of third party compliance are included in these figures.
The Company's policy is to expense as incurred information system
maintenance and modification costs and to capitalize costs related to
system replacement. The costs of the Company's Year 2000 compliance
efforts are being funded through operating cash flows.
Risks
The Company expects to identify and resolve all Year 2000
problems that may adversely affect its business operations. However,
management believes that it is not possible to determine with complete
certainty that all Year 2000 matters affecting the Company have been
or will be identified or corrected, resulting in part from the
uncertainty of the Year 2000 readiness of third party suppliers.
Thus, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition.
The Company believes, however, that its risk of being adversely
impacted by Year 2000 failures is mitigated due to its
product portfolio being so diversified, with the vast majority of its
items not being date-sensitive. The strategy employed by the
Company's Year 2000 project is expected to significantly reduce the
Company's level of uncertainty about the Year 2000 issue and the Year
2000 compliance of key third parties who materially impact its
business.
Contingency Plans
Development of contingency plans is in progress and will be
developed in detail during the remainder of 1998. Once established,
contingency plans and related cost estimates will be continually
modified, if necessary, as additional information becomes available.
Disclaimer
Readers are cautioned that forward-looking statements contained
in the Year 2000 Update should be read in conjunction with the
Company's disclosure under the heading: "CAUTIONARY STATEMENT FOR
PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995" on page 27.
26
<PAGE>27
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; the impact of substantial currency exchange
devaluations in the Company's principal foreign markets; 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 1997 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.
27
<PAGE>28
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
------ -----------
27 --Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the third quarter
of 1998.
28
<PAGE>29
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, 1998 By /s/ JANICE MAROLDA
-------------------------------
Janice Marolda
Vice President,
Controller
Principal Accounting Officer
Signed both on behalf of the
registrant and as principal
accounting officer.
29
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, 1998 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
- ------- -----------
27 --Financial Data Schedule.
<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, 1998 and for the nine
months then ended included in the Form 10-Q as of Sept. 30, 1998 and is
qualified in its entirety by reference to such financial statements.
<MULTIPLIER> 1000000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<S> <C>
<CASH> 97
<SECURITIES> 0
<RECEIVABLES> 564
<ALLOWANCES> (60)
<INVENTORY> 641
<CURRENT-ASSETS> 1,471
<PP&E> 1,348
<DEPRECIATION> (724)
<TOTAL-ASSETS> 2,465
<CURRENT-LIABILITIES> 1,514
<BONDS> 201
0
0
<COMMON> 88
<OTHER-SE> 116
<TOTAL-LIABILITY-AND-EQUITY> 2,465
<SALES> 3,664
<TOTAL-REVENUES> 3,664
<CGS> 1,447
<TOTAL-COSTS> 3,236
<OTHER-EXPENSES> 3
<LOSS-PROVISION> 67
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 224
<INCOME-TAX> 107
<INCOME-CONTINUING> 122
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 122
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
