<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 March 31, 1999
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 April
30, 1999 was 261,847,085.
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Table of Contents
Part I. Financial Information
Page
Numbers
-------
Item 1. Financial Statements
Consolidated Statements of Operations
Three Months Ended March 31, 1999 and
March 31, 1998..................................... 3
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998................. 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and
March 31, 1998..................................... 5
Notes to Consolidated Financial Statements............. 6-11
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition.......... 12-22
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.... 23
Item 6. Exhibits and Reports on Form 8-K....................... 24
Signatures...................................................... 25
2
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PART I. FINANCIAL INFORMATION
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Three months ended
March 31
------------------
1999 1998
---- ----
(unaudited)
Net sales........................................... $1,213.8 $1,183.4
Costs, expenses and other:
Cost of sales**................................... 508.2 503.1
Marketing, distribution and administrative expenses 639.8 626.1
Special charge..................................... 105.2 70.5
-------- --------
Operating loss ..................................... (39.4) (16.3)
Interest expense.................................. 11.3 9.5
Interest income................................... (3.2) (2.3)
Other (income) expense, net....................... (8.2) 3.1
-------- --------
Total other (income)expense ........................ (0.1) 10.3
-------- --------
Loss before taxes and minority interest............. (39.3) (26.6)
Income taxes........................................ 11.4 6.1
-------- --------
Loss before minority interest....................... (50.7) (32.7)
Minority interest................................... 1.8 1.7
-------- --------
Net loss .......................................... $ (48.9) $ (31.0)
========= =========
Loss per share:
Basic ........................................... $ (.19) $ (.12)*
========= =========
Diluted........................................... $ (.19) $ (.12)*
========= =========
*Restated to reflect a two-for-one stock split distributed in September 1998.
**1999 and 1998 include a one-time charge of $46.0 and $37.9, respectively, for
inventory write-downs.
The accompanying notes are an integral part of these statements.
3
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AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
March 31 December 31
1999 1998
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................ $ 138.9 $ 105.6
Accounts receivable.............................. 479.2 492.6
Inventories...................................... 523.6 538.4
Prepaid expenses and other....................... 196.2 204.8
-------- --------
Total current assets............................. 1,337.9 1,341.4
-------- --------
Property, plant and equipment, at cost........... 1,355.4 1,392.8
Less accumulated depreciation.................... 706.9 722.9
-------- --------
648.5 669.9
-------- --------
Other assets..................................... 413.4 422.2
-------- --------
Total assets..................................... $2,399.8 $2,433.5
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year.................... $ 291.8 $ 55.3
Accounts payable................................. 333.8 416.9
Accrued compensation............................. 122.0 161.3
Other accrued liabilities........................ 368.9 308.2
Sales and taxes other than income................ 94.5 106.2
Income taxes..................................... 266.4 281.6
-------- --------
Total current liabilities........................ 1,477.4 1,329.5
-------- --------
Long-term debt................................... 204.1 201.0
Employee benefit plans........................... 385.6 390.0
Deferred income taxes............................ 36.5 36.3
Other liabilities................................ 187.6 191.6
Shareholders' equity:
Common stock..................................... 88.0 87.8
Additional paid-in capital....................... 790.9 780.0
Retained earnings................................ 623.1 719.1
Accumulated other comprehensive income........... (342.9) (301.3)
Treasury stock, at cost.......................... (1,050.5) (1,000.5)
-------- --------
Total shareholders' equity....................... 108.6 285.1
-------- --------
Total liabilities and shareholders' equity....... $2,399.8 $2,433.5
======== ========
The accompanying notes are an integral part of these statements.
4
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AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Three months ended
March 31
------------------
1999 1998
---- ----
(unaudited)
Cash flows from operating activities:
Net loss................................................ $ (48.9) $(31.0)
Adjustments to reconcile net loss to net cash
used by operating activities:
Special and non-recurring charges....................... 132.3 100.3
Depreciation and amortization........................... 20.0 16.5
Provision for doubtful accounts......................... 23.2 24.8
Translation gains....................................... (.9) (.5)
Deferred income taxes................................... (2.6) (5.3)
Other................................................... .1 1.4
Changes in assets and liabilities:
Accounts receivable................................... (46.2) (62.2)
Inventories........................................... (55.7) (73.9)
Prepaid expenses and other............................ (1.6) (14.7)
Accounts payable and accrued liabilities.............. (72.5) (66.3)
Income and other taxes................................ (18.6) (19.5)
Noncurrent assets and liabilities..................... 4.8 (4.5)
------ ------
Net cash used by operating activities................... (66.6) (134.9)
------ ------
Cash flows from investing activities:
Capital expenditures.................................... (23.9) (26.5)
Disposal of assets...................................... 3.3 1.1
Other investing activities.............................. (12.1) (.2)
------ ------
Net cash used by investing activities................... (32.7) (25.6)
------ ------
Cash flows from financing activities:
Cash dividends.......................................... (48.6) (46.3)
Debt, net (maturities of three months or less).......... 236.5 132.7
Proceeds from short-term debt........................... 10.9 39.8
Retirement of short-term debt........................... (11.2) (3.8)
Retirement of long-term debt............................ - (.1)
Repurchase of common stock.............................. (50.0) (24.8)
Proceeds from exercise of stock options, net of taxes... 11.1 8.2
------ ------
Net cash provided by financing activities............... 148.7 105.7
------ ------
Effect of exchange rate changes on cash and equivalents. (16.1) (2.3)
------ ------
Net increase (decrease) in cash and equivalents......... 33.3 (57.1)
Cash and equivalents at beginning of period............. 105.6 141.9
------ ------
Cash and equivalents at end of period................... $ 138.9 $ 84.8
======= ======
The accompanying notes are an integral part of these statements.
5
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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 1998 Annual Report to Shareholders. The interim statements
are unaudited but include all adjustments, consisting of normal recurring
adjustments, 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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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 cash flows of 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.
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:
Three months ended
March 31
------------------
1999 1998
---- ----
Interest............................................ $ 12.8 $ 9.6
Income taxes, net of refunds received............... 24.9 28.9
6
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AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
3. LOSS PER SHARE
Basic earnings (loss) per share ("EPS") are computed by dividing net income
(loss) by the weighted-average number of shares outstanding during the year.
Diluted earnings (loss) per share are calculated to give effect to all
potentially dilutive common shares that were outstanding during the year.
For the three months ended March 31, 1999 and 1998, the number of shares
used in the computation of basic and diluted earnings (loss) per share are as
follows:
1999 1998*
---- ----
Basic EPS
Weighted-average shares 262.00 263.56
Incremental shares from
conversion of:
Stock options (1) - -
---- -----
Diluted EPS
Adjusted weighted-
average shares 262.00 263.56
----- ------
(1) The calculation of EPS assuming dilution is antidilutive and accordingly,
EPS have not been adjusted for the conversion of stock options into additional
common shares.
*Restated to reflect a two-for-one stock split distributed in September 1998.
The Company purchased approximately 1,267,000 shares of common stock for
$50.0 during the first three months of 1999, as compared to approximately
793,000 shares of common stock for $24.8 during the first three months of 1998,
under a previously announced share repurchase program.
4. INVENTORIES
March 31 December 31
1999 1998
----- ----
Raw materials................ $159.8 $140.6
Finished goods............... 363.8 397.8
------ ------
$523.6 $538.4
====== ======
7
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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 $.18 for the three months
ended March 31, 1999 and $.17 for the corresponding 1998 period. On February
4, 1999, the Company increased the annual dividend rate to $.72 from $.68.
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. A trial has been
preliminarily scheduled to commence as early as December 1999.
In the opinion of Avon's management, based on its review of the information
available at this time, the difference, if any, between the total cost of
resolving such contingencies and reserves recorded by Avon at March 31, 1999
should not have a material adverse impact on Avon's consolidated financial
position, results of operations, or cash flows.
7. COMPREHENSIVE LOSS
For the three months ended March 31, 1999 and 1998, the components of
comprehensive loss are as follows:
1999 1998
------- -------
Net loss $(48.9) $(31.0)
Other comprehensive loss:
Change in equity due to
foreign currency
translation and
transaction adjustments (41.6) (3.9)
----- -----
Comprehensive loss $(90.5) $(34.9)
===== =====
8. SPECIAL AND NON-RECURRING CHARGES
In October 1997, the Company announced a worldwide business process
redesign program to streamline operations and improve profitability through
margin improvement and expense reductions. The special and non-recurring
charges associated with this program totaled $154.4 pretax ($122.8 net of tax,
or $.46 per share on a basic and diluted basis) for the year ended December 31,
1998.
For the quarter ended March 31, 1999, special and non-recurring charges
related to this program totaled $151.2 pretax ($121.9 net of tax, or $.47 per
share on a basic and diluted basis).
8
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AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
For the quarter ended March 31, 1999, special and non-recurring charges by
business segment are as follows:
North America $ 33.6
Latin America 14.7
Europe 69.8
Pacific 11.8
Corporate 21.3
-------
Total $ 151.2
-------
For the quarter ended March 31, 1999, special and non-recurring charges by
category of expenditures are as follows:
Employee Severance Costs $ 57.0
Inventories 46.0
Write-down of Assets to
Net Realizable Value 26.4
Write-off of Foreign Currency
Translation Adjustment 9.8
Other 12.0
-------
Total $ 151.2
-------
Employee severance costs are expenses, both domestic and international,
associated with the realignment of the Company's global operations. Certain
employee severance costs were accounted for in accordance with the Company's
existing FAS 112, ("Employers' Accounting for Postemployment Benefits"),
severance plans. Remaining severance costs were accounted for in accordance
with other existing accounting literature. The workforce will be reduced by
1,374 associates, or 4% of the total. Approximately 65% of the employees to be
terminated relate to facility reorganizations and closures.
Inventory related charges represent losses to write-down the carrying value
of non-strategic inventory prior to disposal. The charges primarily result
a new business strategy for product dispositions which fundamentally changes
the way the Company markets and sells certain inventory. This new strategy,
approved and effective in March 1999, is meant to complement other redesign
initiatives, with the objective of reducing inventory clearance sales, building
core brochure sales and building global brands.
The write-down of assets (primarily fixed and other assets) relates to the
restructuring of operations in Western Europe, including the closure of a
jewelry manufacturing facility in Ireland and the write-down of software,
the use of which is no longer consistent with the strategic direction of the
Company. By centralizing certain key functional areas and exiting unprofitable
situations, the Company plans to increase operating efficiencies and
ultimately, profit growth in the long-term.
9
<PAGE>
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
The write-off of foreign currency translation adjustment relates to the closure
of the jewelry manufacturing facility.
The "Other" category primarily represents contract termination costs, legal and
consulting fees and other costs associated with the facility closures.
The liability balance at March 31, 1999 is as follows:
Special Cost of
Charge Sales Charge Total
------- ------------ -----
Balance at December 31, 1998 $ 28.5 $ - $ 28.5
Provision 105.2 46.0 151.2
Cash expenditures (18.9) (18.9)
Non-cash write-offs (36.2) (46.0) (82.2)
------ ---- -----
Balance at March 31, 1999 $ 78.6 $ - $ 78.6
====== ===== ======
10
<PAGE>
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
9. SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is as follows:
Three Months Ended
March 31
------------------
1999 1998
---- ----
Net Operating Net Operating
Sales Profit Sales Profit
---- --------- ----- ---------
North America:
U.S. $ 428.8 $ 77.5 $ 404.3 $ 68.7
Other* 62.5 10.0 60.1 5.8
---- ----- ----- ------
491.3 87.5 464.4 74.5
Total ---- ----- ----- ------
International:
Latin America 370.1 62.1 374.3 58.7
Pacific 157.3 13.6 152.2 10.0
Europe 195.1 15.9 192.5 16.5
----- ---- ----- ------
Total 722.5 91.6 719.0 85.2
----- ---- ----- ------
Total from operations $1,213.8 179.1 $1,183.4 159.7
------- -------
Global expenses (67.3) (67.6)
Special and non-recurring charges (151.2) (108.4)
------ ------
Operating loss $ (39.4) $(16.3)
====== ======
*Includes operating information for Puerto Rico, Dominican Republic, Canada and
Discovery Toys.
10. Other Financing Activities
At March 31, 1999 the Company has entered into forward contracts to
purchase 2,868,200 shares of Avon Common Stock at an average price of $36.81
per share as of March 31, 1999. The contracts mature over the next 2-1/2 years
and provide for physical or net settlement to the Company. Accordingly, no
adjustment for subsequent changes in fair value has been recognized.
11. Subsequent Event
On May 6, 1999, the Company declared a quarterly dividend on its common
stock of $.18 per share which will be paid on June 1, 1999 to shareholders of
record on May 17, 1999.
11
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AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
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 March 31, 1999 and 1998.
Consolidated
Avon's net loss for the three months ended March 31, 1999 was $48.9, or
$.19 per share on a basic and diluted basis, compared with a net loss of $31.0,
or $.12 per share on a basic and diluted basis in 1998. Operating loss was
$39.4 in 1999 compared to a loss of $16.3 in 1998. Additional special and non-
recurring charges were recorded in the first quarter of 1999 for the Company's
business process redesign (BPR) program. These charges totaled $151.2 pretax,
which reduced net income by $121.9 after tax, or $.47 per share on a basic and
diluted basis. These charges are expected to be the last of such BPR-related
charges that will help the Company deliver the higher sales and profit targets
previously communicated in late 1997. See Note 8 for further discussion of 1999
special and non-recurring charges. The 1998 first quarter results include
special and non-recurring charges of $108.4 pretax, which reduced net income by
$84.2 after tax, or $.32 per share on a basic and diluted basis.
Excluding the special and non-recurring charges in 1999 and 1998,
operating profit increased $19.7, or 21% over 1998 due to higher sales, an
improved gross margin and a favorable operating expense ratio in 1999. The
improvement in operating profit combined with the impact of favorable foreign
exchange resulted in a 37%, or $30.1, increase in pretax income, before the
charges. For the three months ended March 31, 1999, net income, before the
charges, of $73.0 increased 37% while basic and diluted earnings per share of
$.28 per share increased 40% over the comparable period in 1998.
Consolidated net sales for the three months ended March 31, 1999 of
$1,213.8 increased $30.4, or 3%, over the comparable period of the prior year.
The increase in sales was due to a 6% increase in North America, primarily in
the U.S. International U.S. dollar sales remained level with the prior year.
Sales growth in the Pacific and Europe regions was offset by declines in Latin
America, primarily Brazil. Excluding the impact of foreign currency exchange,
consolidated net sales rose 11% over the comparable period of the prior year.
Cost of sales as a percentage of net sales was 41.9% in the first quarter
of 1999 compared to 42.5% in the first quarter of 1998. The 1999 and 1998 cost
of sales include $46.0 and $37.9, respectively, of one-time charges for
inventory write-downs related to the Company's BPR program. See Note 8 for
further detail. Excluding these one-time charges, cost of sales as a
percentage of sales decreased from 39.3% to 38.1% reflecting the Company-wide
focus on margin expansion. The increase in the gross margin of 1.2 points
resulted from higher margins in all reportable segments, primarily in the U.S.,
Brazil, the United Kingdom, Germany and Japan.
Marketing, distribution and administrative expenses of $639.8 increased
$13.7, or 2%, over the comparable period of 1998 primarily due to increases in
12
<PAGE>
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
the U.S. and Mexico. However, operating expenses decreased as a percentage of
sales to 52.7% from 52.9% primarily due to improved expense ratios in Brazil
and the United Kingdom, partially offset by higher ratios in the U.S., Mexico,
Argentina and China.
A Special Charge of $105.2 was recorded in the first quarter 1999 for the
Company's BPR program. This charge is primarily related to employee severance
benefits worldwide, as well as facility reorganizations. See Note 8 for
further detail.
Interest expense of $11.3 increased $1.8 versus the comparable period of
1998, primarily due to increased borrowings in China.
Interest income of $3.2 increased $.9 over the comparable period of 1998,
primarily due to higher interest rates and increased average short-term
investments in Mexico and Brazil in 1999.
Other (income) expense, net of $8.2 was $11.3 favorable to the comparable
period of last year primarily due to favorable net foreign exchange resulting
from gains on Brazilian currency forward contracts.
Excluding the charges, the effective tax rate was 36.4% in the first
quarter of 1999 compared to 37.0% in the first quarter 1998. The tax benefit
on the one-time charge in 1999 was 19.4% due to the mix of countries and tax
jurisdictions incurring the charges.
The following discussion addresses net sales and operating profit by reportable
segment as presented in Note 9:
North America
Net sales increased 6% and operating profit increased 17% compared with
the first quarter of 1998. The sales improvement was attributable to a 6%
increase in the average order size. The U.S. business, which represents almost
90% of the North American segment, reported sales and operating profit growth
of 6% and 13%, respectively. The U.S. sales increase was driven by growth in
the gift and decorative, jewelry and accessories, and cosmetics, fragrance and
toiletries ("CFT") categories, partially offset by lower sales of apparel.
Successful holiday promotions, including a strong Easter program and entry into
the Blues Clues children's market drove higher gift and decorative sales, while
the growth in jewelry and accessories was driven by excellent performance in
watches and handbags, coupled with strong sales of sterling silver items.
Increases in the CFT category resulted from a double-digit increase in skincare
products due to strong sales of Anew merchandise and the launch of a new
product, Eye Force. Apparel sales decreased due to under-performance of some
specialty holiday items, partially offset by strength in non-designer
casualwear and a Looney Tunes denim shirt.
The 13% increase in U.S. operating profit resulted from a higher gross
margin due to supply chain cost improvements and pricing and product category
management. This increase was partially offset by a higher operating expense
ratio resulting from higher strategic information technology and internet
expenditures, the opening of new and relocated Express and Beauty Centers, and
higher administrative costs, including pension expenses.
13
<PAGE>
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
International
International U.S. dollar net sales were level with first quarter 1998.
However, excluding the effect of foreign currency exchange, sales increased
14%. International operating profit increased 7% over the comparable period
of 1998.
Sales growth in the Pacific and Europe regions was offset by a decline in
Latin America. Excluding the effect of foreign currency, sales in Latin
America and Europe grew 22% and 9%, respectively. Local currency sales in the
Pacific were level with prior year. The performance in the Pacific was
highlighted by strong unit growth in the Philippines, Taiwan and Thailand.
These three markets also reported double-digit increases in orders, customers
served and active Representatives. In Europe, sales growth was most
significant in Central Europe, primarily Poland, due to continued dramatic
growth in active Representatives and all business fundamentals. Franchise and
distributorship sales grew in the United Kingdom in 1999. In Latin America,
sales grew in Mexico due to increases in CFT, reflecting a new fragrance
launch, Butterfly, and increased market coverage of home and fashion lines
since September 1998. Mexico reported double-digit increases in units,
customers served and active Representatives.
These higher sales were offset by sales declines in Brazil, Russia, China
and Argentina. While local currency sales in Brazil increased nearly 25%, U.S.
dollar sales decreased significantly as a result of the real devaluation,
discussed below. Brazil also reported double-digit increases in units and
customers served. The sales decline in Russia was attributable to the ruble
devaluation in August 1998 and the continued economic crisis reflecting low
consumer purchasing power. The sales decline in China was caused by the
legally mandated restrictions on the Company's selling system in effect since
April 1998. Lower sales in Argentina resulted primarily from weak economic
conditions.
The 7% increase in operating profit reflects improved operating margins in
Brazil and the United Kingdom, and, to a lesser extent, in Central Europe and
the Philippines. Additionally, sales increases in Mexico contributed to
operating profit improvements. Brazil's gross margin and operating expense
ratio improved significantly as a result of aggressive cost reduction efforts
combined with strict expense management and an ongoing recruiting program. The
improvement in the United Kingdom's operating profit resulted from a continued
focus on developing the business through optimization of the most profitable
sales mix through brand awareness, image enhancement and expense control.
14
<PAGE>
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Despite modest sales increases, Japan reported a strong gross margin and
favorable expense ratio due to BPR and continued product cost saving
initiatives, as well as a product profitability screening process which led to
the elimination of many lower margin products. Central Europe and the
Philippines both reported improved gross margins and operating expense ratios
in 1999. These improvements were partially offset by declines in Russia and in
Argentina due to weak economic conditions, and in China due to operational
challenges the Company has faced since mid-1998.
The Brazilian real devalued significantly in January 1999 and as a result,
negatively affected Brazil's U.S. dollar results in 1999. Brazil's first
quarter 1999 sales, although up nearly 25% in local currency, were down 20% in
U.S. dollars due to the devaluation. In response to this situation, several
actions have been taken by local management to offset the devaluation,
including a focused effort directed at vendor negotiations and local sourcing
to reduce imports.
Global Expenses
Global expenses of $67.3 in 1999 were level with the prior year.
Liquidity and Capital Resources
Cash Flows
Excluding changes in debt, there was a net decrease in cash of $202.9 in
the first quarter of 1999 compared with a decrease of $225.7 in the comparable
period of 1998. The $22.8 variance primarily reflects lower net cash used by
operations partially offset by increased repurchases of common stock, an
unfavorable effect of foreign currency exchange and increased cash used for
investing activities due to the acquisition of the remaining interest in a
manufacturing facility in Poland. The decrease in cash used by operations
reflects a favorable consolidated working capital level and higher net income
(adjusted for the non-cash portion of the special charges).
During the first quarter of 1999, the Company purchased approximately
1,267,000 shares of common stock for $50.0 compared with $24.8 spent for the
repurchase of approximately 793,000 shares during the comparable period in
1998.
Capital Resources
Total debt increased $239.6 to $495.9 from $256.3 at December 31, 1998,
principally due to normal seasonal working capital requirements during the
first three months of 1999. In addition, at March 31, 1999 and December 31,
1998, other non-current liabilities include approximately $110.9 and $112.4,
respectively, related to securities lending activities.
15
<PAGE>
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
At March 31, 1999, there were no borrowings 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 $221.5
was outstanding at March 31, 1999.
At March 31, 1999, there were $9.5 of borrowings outstanding under
uncommitted lines of credit and there were no borrowings under the Company's
bankers' acceptance facilities.
Management currently believes that cash from operations and available
financing alternatives are adequate to meet anticipated requirements for
working capital, dividends, capital expenditures, the stock repurchase program
and other cash needs.
Working Capital
As of March 31, 1999, current liabilities exceeded current assets by
139.5 while at December 31, 1998 current assets exceeded current liabilities by
$11.9. The increase of current liabilities over current assets of $151.4 was
primarily due to the increase in net debt (debt less cash and equivalents), as
discussed in the Debt Section, and other accrued liabilities, mainly due to the
accrual for special and non-recurring charges, partially offset by a decrease
in accounts payable and accrued compensation due to the payment of 1998
incentive programs.
Although current liabilities exceeded current assets at March 31, 1999,
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.
16
<PAGE>
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
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 March 31, 1999, the Company had a five-year interest rate swap
agreement with a notional amount of $50.0 to convert fixed interest on a
portion of the $100 million bonds to a variable interest rate, based on LIBOR.
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 March 31, 1999, the Company held foreign currency forward contracts with
notional amounts totaling $297.2 and option contracts with notional amounts
totaling $11.8 to hedge foreign currency items. Only $7.3 of these contracts
have maturities after 1999. The Company's risk of loss on the options in the
future is limited to premiums paid, which are insignificant.
The Company has entered into forward contracts to purchase 2,868,200 shares
of Avon Common Stock at an average price of $36.81 per share as of March 31,
1999. The contracts mature over the next 2-1/2 years and provide for physical
or net share settlement to the Company. Accordingly, no adjustment for
subsequent changes in fair value have 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.
Other Information
On April 15, 1999, the Company adopted a new strategic plan to drive
revenue growth and expand the customer base around the world by building on
Avon's strengths as a beauty marketer and the leading home direct seller.
17
<PAGE>
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
The new strategy includes plans to upgrade the Company's beauty image; build a
global portfolio of jewelry and fashion apparel; develop innovative programs to
train, motivate and retain Representatives as well as enhance their earnings
opportunities; develop a global retail strategy to reach new customers; and
pursue complementary new businesses that leverage Avon's direct selling
strengths and commitment to women.
In early April 1999, the United States and China agreed to remove all
market access restrictions on direct selling in China by January 1, 2003,
including the current ban on direct selling imposed by the Chinese government
in April 1998. The agreement is contingent upon successful completion of the
World Trade Organization accession negotiations between the United States and
China and also includes development of regulations for direct selling based on
the World Federation of Direct Selling Association's World Code of Conduct.
Avon supports resolution of this direct selling issue in China and remains
committed to the opportunities this promising region offers.
Euro
A single currency called the euro was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union adopted 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 were established as of that date. The legacy
currencies are scheduled to remain legal tender as denominations of the euro
until June 30, 2002 after which they will be withdrawn from circulation.
During this transition period, parties may settle transactions using either
the euro or a participating country's legal currency. Beginning in January
2002, new euro-denominated bills and coins will be issued.
Avon 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
imoact 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
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,
18
<PAGE>
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
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 programs 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 Softwares, 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
utems; 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 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
19
<PAGE>
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
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 June 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 and testing of embedded
systems. From an international standpoint, the Company is assessing and
testing critical equipment. The assessment phase is scheduled to be completed
by July 1999, with all remediation testing scheduled to be completed by
year-end 1999.
Costs
The total estimated cost associated with achieving worldwide Year 2000
compliance will be approximately $31.1, of which $21.2 has been spent to date.
Replacement costs and costs associated with the validation of third party
compliance are included in these figures. The Company does not separately
track the internal costs incurred for the Year 2000 project, those costs
primarily being related to payroll costs for the Company's information systems
group. 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.
20
<PAGE>
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Contingency Plans
Development of contingency plans is in progress and are scheduled to be
completed by September 1999. 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 "Forward-Looking Statement".
21
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report which are not historical facts or
information are forward-looking statements, including, but not limited to, the
information set forth in "Other Information" herein. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, levels of activity, performance or
achievement of the Company, or industry results, to be materially different
from any future results, levels of activity, performance or achievement
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; the
ability of the Company to implement its business strategy; the Company's access
to financing and its management of foreign currency risks, the Company's
ability to successfully identify new business opportunities; the Company's
ability to attract and retain key executives; the Company's ability to achieve
anticipated cost savings and profitability targets; changes in the industry;
competition; the effect of regulatory and legal restrictions imposed by foreign
governments; the effect of regulatory and legal proceedings and other factors
discussed in Item 1 of the Company's Form 10-K. As a result of the foregoing
and other factors, no assurance can be given as to the future results and
achievements of the Company. Neither the Company nor any other person assumes
responsibility for the accuracy and completeness of these statements.
22
<PAGE>
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) At the annual meeting of shareholders of Avon, held on May 6, 1999, the
matters described under (c) below were voted upon.
(c) Annual meeting votes:
Against Abstentions
or and Broker
For Withheld Non-Votes
----------- --------- -----------
(1) To elect four directors to three-
year terms expiring in 2002:
Brenda C. Barnes................. 218,807,801 1,967,465 -0-
Fred Hassan ..................... 218,821,129 1,954,137 -0-
Ann S. Moore .................... 218,817,351 1,957,915 -0-
Lawrence A. Weinbach ............ 218,795,128 1,980,138 -0-
(2) To amend the Certificate
of Incorporation to increase
the authorized shares of Common
Stock 204,871,831 15,232,484 670,951
(3) To ratify the appointment of
PricewaterhouseCoopers LLP, as
Avon's independent accountants
for 1999........................ 220,070,121 145,608 559,537
23
<PAGE>
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 first quarter of 1999.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVON PRODUCTS, INC.
-------------------
(Registrant)
Date: May 14, 1999 By /s/ Janice Marolda
-------------------------------
Janice Marolda
Vice President,
Controller
Principal Accounting Officer
Signed both on behalf of the
registrant and as principal
accounting officer.
25
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended March 31, 1999 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 March 31, 1999 and is
qualified in its entirety by reference to such financial statements.
<MULTIPLIER> 1000000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<S> <C>
<CASH> 139
<SECURITIES> 0
<RECEIVABLES> 534
<ALLOWANCES> (55)
<INVENTORY> 524
<CURRENT-ASSETS> 1,338
<PP&E> 1,355
<DEPRECIATION> 707
<TOTAL-ASSETS> 2,400
<CURRENT-LIABILITIES> 1,477
<BONDS> 204
0
0
<COMMON> 88
<OTHER-SE> 21
<TOTAL-LIABILITY-AND-EQUITY> 2,400
<SALES> 1,214
<TOTAL-REVENUES> 1,214
<CGS> 508
<TOTAL-COSTS> 1,253
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> (39)
<INCOME-TAX> (11)
<INCOME-CONTINUING> (49)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
