Avon 2001 Annual Report Download - page 6

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Effective January 1, 2000, Avon changed its method
of accounting for revenue recognition in accordance with
Staff Accounting Bulletin (“SAB”) No. 101, “Revenue
Recognition in Financial Statements” (see Note 2,
Accounting Changes). The cumulative effect of the change
on prior years resulted in a charge of $6.7, net of a tax ben-
efit of $3.5, or $.03 per diluted share, which is included in
Net income for the year ended December 31, 2000.
Special Charges >
Business Transformation > In May 2001, Avon announced
its new Business Transformation plans, which are designed
to significantly reduce costs and expand profit margins,
while continuing to focus on consumer growth strategies.
Business Transformation initiatives include an end-to-end
evaluation of business processes in key operating areas,
with target completion dates through 2004. Specifically,
the initiatives focus on simplifying Avon’s marketing
processes, taking advantage of supply chain opportunities,
strengthening Avon’s sales model through the Sales
Leadership program and the Internet, streamlining the
Company’s organizational structure and integrating cer-
tain similar activities across markets to achieve efficien-
cies. Avon anticipates significant benefits from these
Business Transformation initiatives, but the scope and com-
plexity of these initiatives necessarily involve planning
and execution risk.
It is expected that the savings from these initiatives
will provide additional financial flexibility to achieve
profit targets, while enabling further investment in con-
sumer growth strategies. Management believes that initia-
tives associated with the 2001 and 2002 Special charges
discussed below will help the Company achieve its target
of a 250 basis-point expansion of its operating margin, as
compared to the 2001 level, by the end of 2004. In 2002,
Avon established a three-year Transformation Long-Term
Incentive Plan based on achieving Business Transformation
goals (see Note 8, Long-Term Incentive Plans).
Special Charges–Fourth Quarter 2001 >In the fourth quar-
ter of 2001, Avon recorded Special charges of $97.4 pretax
($68.3 after tax, or $.28 per diluted share) primarily asso-
ciated with facility rationalizations and workforce reduc-
tion programs related to implementation of certain
Business Transformation initiatives. The charges of $97.4
were included in the Consolidated Statements of Income
for 2001 as Special charges ($94.9) and as inventory write-
downs, which were included in Cost of sales ($2.5).
Approximately 80% of the charges relate to future cash
expenditures. Approximately 60% of these cash expendi-
tures were made by December 2002, with approximately
90% of total cash payments to be made by December
2003. All payments are funded by cash flow from opera-
tions. (See Note 13, Special Charges).
In the third quarter of 2002, Avon recorded an
adjustment related to the fourth quarter–2001 charge. See
Special Charges–Third Quarter 2002 below.
In 2002, actions associated with the 2001 Special
charges yielded net savings of approximately $30.0 (gross
savings of $50.0 partially offset by transitional costs of
$20.0). Cost savings from these initiatives should con-
tinue, with net savings in 2003 expected to be approxi-
mately $65.0 (net of additional transitional costs of
approximately $10.0) and net savings in 2004 are
expected to be approximately $85.0 (net of additional
transitional costs of approximately $2.0).
The actions associated with the 2001 Special
charges resulted in incremental cash outlays of $10.0 in
2002 and are expected to produce incremental cash flow
of $40.0 in 2003. Capital expenditures associated with
the 2001 Special charges were $20.0 in 2002 and are
expected to be $15.0 in 2003. These cash outlays in 2002,
and capital expenditures in 2002 and 2003 are funded
through cash flow from operations.
Special Charges–Third Quarter 2002 >Special charges
of $43.6 pretax ($30.4 after tax or $.12 per diluted share),
recorded in the third quarter of 2002 primarily related
to Avon’s Business Transformation initiatives, including sup-
ply chain initiatives, workforce reduction programs and
sales transformation initiatives. Approximately 90% of the
charges relate to future cash expenditures. Approximately
20% of these expenditures were made in the fourth quar-
ter of 2002, with over 90% of the total cash payments to
be made by December 2003. Avon also recorded a benefit
of $7.3 pretax ($5.2 after tax, or $.02 per diluted share)
from an adjustment to the Special charges recorded in the
fourth quarter of 2001. The net effect of the special items
was a charge of $36.3 pretax ($25.2 after tax, or $.10 per
diluted share). The $36.3 was included in the Consolidated
Statements of Income for 2002 as a Special charge ($34.3)
and as inventory write-downs, which were included in
Cost of sales ($2.0). (See Note 13, Special Charges).
In 2003, Avon expects actions associated with the
2002 Special charges to yield net savings of $15.0 (gross
savings of $30.0 partially offset by transitional costs of
$15.0). Cost savings from these initiatives should increase
thereafter, with net savings in 2004 expected to be
approximately $40.0 to $50.0, net of additional transi-
tional costs of approximately $8.0.
The actions associated with the 2002 Special
charges are also expected to produce incremental cash
flow from operations of $5.0 in 2003 and $20.0 to $30.0
in 2004. Capital expenditures associated with Business
Transformation initiatives included in the 2002 Special
charges are expected to be approximately $5.0 through
2003 and are funded through cash flow from operations.
Contract settlement gain, net of related expenses >
The 2001 results included a Contract settlement gain, net
of related expenses, of $25.9 pretax ($15.7 after tax, or
$.06 per diluted share) related to the cancellation of a
retail agreement between Avon and Sears Roebuck &
Company (see Note 15, Contract Settlement).