Avon 2003 Annual Report Download

Download and view the complete annual report

Please find the complete 2003 Avon annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 85

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85

The Financial Section
2
4
6
8
10
8
10
99 00 01 02 03
250
500
750
1000
1250
1500
99 00 01 02 03
Number of Active
Representatives
Worldwide
In millions
* Revised methodology for calculating
active Representatives
1
2
3
4
5
99 00* 01* 02* 03*

Table of contents

  • Page 1
    The Financial Section 2003 Results by Geographic Region â- â- North America Latin America â- â- Europe Pacific Number of Active Representatives Worldwide In millions Net Sales 10 1500 13% 1250 8 1000 6 750 4 500 2 12% 33% 24% 250 31% 99 00 01 02 03 99 00 01 02 03 99 00* 01* ...

  • Page 2
    ... of Financial Condition and Results of Operations 24 Cautionary Statement 24 Introduction 25 Critical Accounting Estimates 27 Business 28 Results of Operations - Consolidated 33 Segment Review 43 Liquidity and Capital Resources 45 Foreign Operations 46 Risk Management Strategies and Market Rate...

  • Page 3
    .... Also, all group presentations are webcast in real time from our Web site in order to provide access to the general public. Management Representations. The accompanying consolidated financial statements of Avon Products, Inc. report the results of our operations for the year 2003. They have been...

  • Page 4
    ... in corporate governance and financial reporting. To the Board of Directors and Shareholders of Avon Products, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and changes in shareholders' equity (deficit) present fairly...

  • Page 5
    ... identify new business opportunities; the Company's access to financing; and the Company's ability to attract and retain key executives. Additional information identifying such factors is contained in Item 1 of the Company's Form 10-K report for the year ended December 31, 2003, filed with...

  • Page 6
    ...as well as exploration of geographic opportunities, particularly in China and Central and Eastern Europe. In addition, the Company expects that its Business Transformation programs will continue to produce margin expansion, primarily as a result of savings from supply chain and marketing initiatives...

  • Page 7
    ...results of the Company will depend on economic conditions, employee demographics, mortality rates, the number of associates electing to take lump-sum payments, investment performance and funding decisions. However, given current assumptions (including those noted above), 2004 pension expense related...

  • Page 8
    ...APB") Opinion 25, "Accounting for Stock Issued to Employees," in accounting for its long-term stock-based incentive plans. No compensation cost related to grants of stock options was reflected in Net income, as all options granted under the plans had an exercise price equal to the market price. Net...

  • Page 9
    ... 2001 Net sales Total revenue Cost of sales Marketing, distribution and administrative expenses Special charges, net Contract settlement gain, net Operating profit Interest expense Interest income Other expense (income), net Net income Diluted earnings per share Gross margin Marketing, distribution...

  • Page 10
    ...13, Special Charges). See the "Segment Review" sections of Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information related to changes in gross margin by segment. Other Revenue Other revenue primarily includes shipping and handling fees billed...

  • Page 11
    ... higher expense ratios (which increased the consolidated ratio by .3 point). See the "Segment Review" sections of Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information related to changes in expense ratios by segment. Other Expense (Income...

  • Page 12
    ...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...

  • Page 13
    ... supply chain initiatives, workforce reduction programs and sales transformation initiatives. Approximately 90% of the charges related to future cash expenditures. Approximately 20% of these expenditures were made in the fourth quarter of 2002, with approximately 70% of the total cash payments...

  • Page 14
    ...Sales 2002 Operating Profit (Loss) Net Sales 2001 Operating Profit (Loss) North America U.S. U.S. Retail* Other** Total International Latin America Mexico Brazil Europe Pacific Total Total from operations Global expenses Contact settlement gain, net of related expenses Special charges, net*** Total...

  • Page 15
    ... costs were partially offset by lower bonus accruals and a higher customer order charge. The unfavorable expense ratio was partially offset by an improvement in gross margin mainly due to a favorable mix of products sold and savings resulting from supply chain initiatives associated with Business...

  • Page 16
    ... improvement (which increased segment margin by 1.0 point) was primarily attributable to the sales increase discussed above, and gross margin expansion, mainly due to supply chain savings associated with Business Transformation projects (including favorable freight costs from sourcing of non-Beauty...

  • Page 17
    ... mix towards higher priced products. • In Mexico, Net sales increased in U.S. dollars and local currency, benefiting from growth in active Representatives, and new product launches, as well as sales promotion offers which drove unit growth in this market. • In Venezuela, Net sales increased in...

  • Page 18
    Avon Mexico's gain from a sale of property in Mexico City, as part of its move to a new distribution facility, contributed to the region's 1.4 points of operating margin expansion in 2003. In February 2003, the Venezuelan government implemented exchange controls and fixed the exchange rate for the ...

  • Page 19
    ... Analysis of Financial Condition and Results of Operations Segment Review - 2002 Compared to 2001 • In Mexico, Net sales increased in U.S. dollars and local currency, benefiting from new product launches with higher price points in non-CFT product lines. The decrease in operating margin in Latin...

  • Page 20
    ...In Western Europe, operating margin improved (which increased segment margin by 1.0 point) primarily due to a higher gross margin. This increase resulted from lower product costs, due to supply chain benefits including the closure of a manufacturing facility in the United Kingdom, price increases in...

  • Page 21
    ... discussion Management's Discussion and Analysis of Financial Condition and Results of Operations Segment Review - 2002 Compared to 2001 The increase in operating margin in Europe was most significantly impacted by the following markets: • In Central and Eastern Europe, operating margin improved...

  • Page 22
    ... resulting from savings associated with supply chain initiatives. • In the Philippines, operating margin improved (which increased segment margin by .6 point) due to a higher gross margin resulting from supply chain savings associated with Business Transformation initiatives, and increased sales...

  • Page 23
    ... in gross margin resulting from aggressive pricing and merchandising to increase market share. Global expenses increased $14.2 in 2003 primarily due to expenses of $6.5 related to Avon's supply chain initiatives; incremental investments of $5.8 for global marketing and research and development...

  • Page 24
    ...the stock repurchase program and other cash needs. Avon offers extended payment terms to select Representatives during certain campaigns. The number of Representatives electing this extended payment option can impact the timing of cash flows related to the collection of Accounts receivable balances...

  • Page 25
    management's discussion Management's Discussion and Analysis of Financial Condition and Results of Operations During 2003 the Company began preliminary development of a global supply chain system with globally integrated processes supported by contemporary information technology. Part of this ...

  • Page 26
    ...trade activities and commercial commitments executed in the ordinary course of business, such as purchase orders for normal replenishment of inventory levels. Foreign Operations For the three years ended 2003, 2002 and 2001, the Company derived approximately 60% to 70% of its consolidated Net sales...

  • Page 27
    ... Management's Discussion and Analysis of Financial Condition and Results of Operations The functional currency for most of Avon's foreign operations is the local currency. The cumulative effects of translating balance sheet accounts from the functional currency into the U.S. dollar at current...

  • Page 28
    ... interest rates prevailing at that date, sustained for one year, would not represent a material potential change in fair value, earnings or cash flows. This potential change was calculated based on discounted cash flow analyses using interest rates comparable to Avon's current cost of debt. In 2003...

  • Page 29
    ...the-counter forward contracts, swaps or options with major international financial institutions. Although Avon's theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, management believes that the risk of incurring credit risk losses is remote and that...

  • Page 30
    ... State of California on behalf of "all persons in the United States who were or are Independent Sales Representatives ('ISRs') for Avon from 1999 to the date of judgment who were shipped product by Avon that the ISR did not order, who were charged for such product and who were not credited for such...

  • Page 31
    ... served an amended class action complaint on behalf of Avon Sales Representatives who "received products from Avon they did not order, thereafter returned the unordered products to Avon, and did not receive credit for those returned products." The amended complaint seeks unspecified compensatory and...

  • Page 32
    ...disclosed by the Company in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods. Other Information On February 3, 2004, Avon announced a two-for-one stock split in the form of a dividend of one share of common stock in respect...

  • Page 33
    management's discussion Results of Operations by Quarter (Unaudited) In millions, except per share data 2003 Net sales Other revenue Gross profit Special charges, net Operating profit Income before taxes and minority interest Income before minority interest Net income Earnings per share: Basic ...

  • Page 34
    ...the New York Stock Exchange. At December 31, 2003, there were 20,263 shareholders of record. The Company believes that there are over 100,000 additional shareholders who are not "shareholders of record" but who beneficially own and vote shares through nominee holders such as brokers and benefit plan...

  • Page 35
    ... share data Years ended December 31 2003 2002 2001 Net sales Other revenue Total revenue Costs, expenses and other: Cost of sales* Marketing, distribution and administrative expenses Contract settlement gain, net of related expenses (Note 15) Special charges, net (Note 13) Operating profit Interest...

  • Page 36
    In millions, except per share data Years ended December 31 2003 2002 2001 Basic earnings per share: Continuing operations Cumulative effect of accounting change Diluted earnings per share: Continuing operations Cumulative effect of accounting change Weighted-average shares outstanding: Basic ...

  • Page 37
    ...Assets Current assets Cash, including cash equivalents of $373.8 and $413.8 Accounts receivable (less allowance for doubtful accounts of $63.1 and $49.5) Inventories Prepaid expenses and other Total current assets Property, plant and equipment, at cost Land Buildings and improvements Equipment Less...

  • Page 38
    ... liabilities Debt maturing within one year Accounts payable Accrued compensation Other accrued liabilities Sales and taxes other than income Income taxes Total current liabilities Long-term debt Employee benefit plans Deferred income taxes Other liabilities (including minority interest of $46.0 and...

  • Page 39
    ...(gains) losses on investments Special charges, net of payments Other Changes in assets and liabilities: Accounts receivable Income tax receivable Inventories Prepaid expenses and other Accounts payable and accrued liabilities Income and other taxes Noncurrent assets and liabilities Net cash provided...

  • Page 40
    ... at end of year Cash paid for: Interest, net of amounts capitalized Income taxes, net of refunds received *Non-cash financing activities included the partial conversion of Convertible Notes of $48.3 in 2003 (Note 4), the exchange of debt of $125.0 in 2003 (Note 4), and the change in fair market...

  • Page 41
    ... of taxes of $1.4 Minimum pension liability adjustment, net of taxes of $17.7 Net derivative losses on cash flow hedges, net of taxes of $1.2 Total comprehensive income Dividends - $.76 per share Exercise of stock options, including tax benefits of $8.3 Repurchase of common stock Grant, cancellation...

  • Page 42
    ... of taxes of $2.4 Minimum pension liability adjustment, net of taxes of $1.0 Net derivative gains on cash flow hedges, net of taxes of $.6 Total comprehensive income Dividends - $.84 per share Exercise of stock options, including tax benefits of $29.5 Repurchase of common stock Grant, cancellation...

  • Page 43
    ... Description of the Business and Summary of Significant Accounting Policies Business Avon Products, Inc. ("Avon" or the "Company") is a global manufacturer and marketer of beauty and related products. Avon's business is primarily comprised of one industry segment, direct selling, which is conducted...

  • Page 44
    ... product returns. In addition, Avon estimates an allowance for doubtful accounts receivable based on an analysis of historical data and current circumstances. Other Revenue - Other revenue includes shipping and handling fees charged to Representatives. Cash and Cash Equivalents - Cash equivalents...

  • Page 45
    ... of stock options was reflected in Net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation cost related to grants of restricted stock is measured as the quoted market price of Avon's stock at...

  • Page 46
    ...("EITF") No. 00-14, "Accounting for Certain Sales Incentives," which requires the cost of certain products and cash incentives used in Avon's promotional activities, previously reported in Marketing, distribution and administrative expenses, to be classified as Cost of sales or as a reduction of Net...

  • Page 47
    ...No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement supersedes EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." FAS No. 146 requires that...

  • Page 48
    ... a revised FAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," to improve financial statement disclosures for defined benefit plans. FAS No. 132 requires new disclosure requirements, which have been included in Note 10, Employee Benefit Plans. In January 2004, the...

  • Page 49
    ... the federal funds rate. The credit facility has an annual facility fee, payable quarterly, of $.5, based on Avon's current credit ratings. The credit facility contains various covenants, including one financial covenant which requires Avon's interest coverage ratio (determined in relation to Avon...

  • Page 50
    ...totaling $25.3 and $27.7, respectively, which guarantee various insurance activities. In addition, Avon had outstanding letters of credit for various trade activities and commercial commitments executed in the ordinary course of business, such as purchase orders for normal replenishment of inventory...

  • Page 51
    ... Financial Statements Deferred tax assets (liabilities) at December 31 were classified as follows: 2003 2002 The provision for income taxes for the years ended December 31 was as follows: 2003 2002 2001 Deferred tax assets: Prepaid expenses and other Other assets Total deferred tax assets...

  • Page 52
    ... credits and general business credits to the years ended December 31, 1982, 1983, 1985 and 1986. The Company recognized $40.1 as an income tax benefit in 2000 resulting from the impact of the tax refund offset by taxes due on interest received and other related tax obligations. Accounting Policies...

  • Page 53
    ...permits either party to terminate the swap at the end of seven years (May 2010). Avon has designated the interest rate swaps as fair value hedges of the changes in the fair value of fixed-rate debt pursuant to FAS No. 133 (see Note 4, Debt and Other Financing). During 2003, Long-term debt decreased...

  • Page 54
    ... international exposure, Avon uses foreign currency forward contracts and options to hedge portions of its foreign currency cash flows. On June 23, 2003, Avon entered into two 15-year interest rate swap contracts with notional amounts that totaled $250.0 to effectively convert the fixed interest...

  • Page 55
    ... Poor's Corporation. Avon's foreign currency and interest rate derivatives are comprised of over-the-counter forward contracts, swaps 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...

  • Page 56
    ... grant date. Stock options are granted at a price no less than fair market value on the date the option is granted and have a term of 10 years from the date of grant. Cash and cash equivalents $ 694.0 Grantor trust 55.8 Debt maturing within one year (244.1) Long-term debt, net of related discount...

  • Page 57
    ... statements Notes to Consolidated Financial Statements A summary of the Company's stock option activity, weighted-average exercise price and related information for the years ended December 31 was as follows: 2003 Shares (in 000's) WeightedAverage Price Shares (in 000's) 2002 WeightedAverage Price...

  • Page 58
    ...-management director is annually granted options to purchase 4,000 shares of common stock, at an exercise price based on the fair market price of the stock on the date of grant. The aggregate annual grant made to all nonmanagement directors in 2003 and 2002 consisted of 36,000 options in each year...

  • Page 59
    ... 10.9 million shares at a total cost of approximately $551.7 under this program. 10. Employee Benefit Plans Savings Plan The Company offers a qualified defined contribution plan for U.S.-based employees, the Avon Products, Inc. 401(k) Personal Savings Account, which allows eligible participants to...

  • Page 60
    ... Actual return(loss) on plan assets Company contributions Plan participant contributions Benefits paid Foreign currency changes Settlements/special termination benefits Ending balance Funded Status: Funded status at end of year Unrecognized actuarial loss Unrecognized prior service cost Unrecognized...

  • Page 61
    ... lump sum distributions and the amount of their benefits increases. Special termination benefits and settlements or curtailments primarily represent the impact of employee terminations on the Company's benefits plans in the U.S. and certain international locations (see Note 13, Special Charges). 80

  • Page 62
    ... 31, 2002. Weighted-average assumptions used to determine net cost for the years ended December 31 were as follows: Pension Benefits U.S. Plans 2003 2002 2001 2003 Non-U.S. Plans 2002 2001 2003 Postretirement Benefits 2002 2001 Discount rate Rate of compensation increase Rate of return on assets...

  • Page 63
    ... in the number of participants, company contributions, and cash flow. These actual characteristics of the plan place certain demands upon the level, risk, and required growth of trust assets. Avon regularly conducts analyses of the plan's current and likely future financial status by forecasting...

  • Page 64
    ... to higher paid employees in addition to amounts received under Avon's qualified retirement plan which is subject to IRS limitations on covered compensation. At retirement, a participant can elect to defer vested benefits into the Deferred Compensation Plan. The annual cost of this program has been...

  • Page 65
    ... in Note 1, Description of the Business and Summary of Significant Accounting Policies. The Company evaluates the performance of its operating segments based on operating profits or losses. Segment revenues reflect direct sales of products to Representatives based on the Representative's * At...

  • Page 66
    ... not significant. Each segment records direct expenses related to its employees and its operations. The Company does not allocate income taxes, foreign exchange gains or losses, or corporate global expenses to operating segments. Effective July 2002, Avon consolidated the management of its two Latin...

  • Page 67
    notes to statements Notes to Consolidated Financial Statements Total Assets 2003 2002 2001 Depreciation and Amortization 2003 2002 2001 North America U.S. U.S. Retail Other Total International Latin America Mexico Brazil Europe Pacific Total Corporate and other Total assets $ 633.7 $ 627.0 $ 637...

  • Page 68
    ...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...

  • Page 69
    ... reduction programs which spanned much of the organization, including the legal, human resources, information technology, communications, finance, marketing and research and development departments. Special charges by category of expenditures were as follows: Accrued Severance and Related Costs...

  • Page 70
    ... areas of marketing, sales, information technology, human resources, finance, research and development, legal, communications and strategic planning. The facility rationalizations will primarily result in expanding production in existing facilities (Europe and U.S.), building a new facility (Latin...

  • Page 71
    ... all business segments as follows: North America* Latin America Corporate and Other U.S. Europe Pacific Total Supply chain Workforce reduction programs Sales transformation initiatives Total accrued charges Adjustment to 2001 Special charges Net accrued charges Number of employee terminations...

  • Page 72
    ... costs primarily represent administrative expenses associated with a facility rationalization, employee and union communication costs, pension termination benefits and legal and professional fees (primarily Europe). While project plans associated with these initiatives have not changed, the Company...

  • Page 73
    notes to statements Notes to Consolidated Financial Statements Liability Balances for Special Charges The liability balances for Special charges at December 31, 2001, 2002 and 2003, were as follows: Accrued Severance and Related Costs 2001 Charges: Provision Cash payments Non-cash write-offs ...

  • Page 74
    ... severance. (b) The majority of the remaining liability relates to employee severance costs associated with workforce reduction programs within the sales and supply chain functions. Employee terminations began in December 2002, with a majority of payments made by December 2003. (c) The majority of...

  • Page 75
    ... State of California on behalf of "all persons in the United States who were or are Independent Sales Representatives ('ISRs') for Avon from 1999 to the date of judgment who were shipped product by Avon that the ISR did not order, who were charged for such product and who were not credited for such...

  • Page 76
    ... served an amended class action complaint on behalf of Avon Sales Representatives who "received products from Avon they did not order, thereafter returned the unordered products to Avon, and did not receive credit for those returned products." The amended complaint seeks unspecified compensatory and...

  • Page 77
    ... Avon sales Representatives with specialized beauty product training and consultative selling skills. For the year ended December 31, 2003, costs associated with ending this business relationship were $18.3, including severance costs ($4.1), asset and inventory write-downs ($12.1) and other related...

  • Page 78
    ...of an amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares. If the stock split is approved, the new annual dividend rate will be $.56 per share (quarterly rate of $.14 per share). 19. Subsequent Events On January 14, 2004, Avon entered into an...

  • Page 79
    eleven-year review Eleven-Year Review In millions, except per share and employee data 2003 (3) 2002(4) 2001(5) 2000 Income data Net sales $6,804.6 Other revenue (1) 71.4 Total revenue 6,876.0 Operating profit (2) 1,042.8 Interest expense 33.3 Income from continuing operations before taxes, ...

  • Page 80
    1999(6) 1998(6) 1997 1996 1995 1994 1993 $ 5,289.1 38.8 5,327.9 523.1 43.2 480.3 286.6 286.6 - - $ 286.6 $ 1.12 - - 1.12 1.10 - - 1.10 $5,212.7 35.0 5,247.7 473.2 34.7 455.9 265.1 270.0 - - $ 270.0 $ 1.03 - - 1.03 1.02 - - 1.02 $5,079.4 - 5,079.4 537.8 35.5 534.9 337.0 338.8 - - $ 338.8 $ ...

  • Page 81
    ...800 33,200 43,000 Number of employees United States International Total employees(13) (1) For the year ended December 31, 2000, the Company adopted the provisions of Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling Fees and Costs," which requires that amounts billed...

  • Page 82
    ... "Employers' Accounting for Postretirement Benefits Other Than Pensions," for its foreign benefit plans. Effective January 1, 1993, Avon adopted FAS No. 106 for its U.S. retiree health care and life insurance benefit plans and FAS No. 109, "Accounting for Income Taxes." (10) Two-for-one stock splits...

  • Page 83
    ... information about becoming an Avon Representative or purchasing Avon products, please call 1-800-FOR-AVON. Visit Avon's Web site at: www.avon.com Annual Report Design by Avon Corporate Identity Department New York, NY 102 Robert J. Corti Executive Vice President and Chief Financial Officer Audit...

  • Page 84
    Board of Fred Hassan Chairman and Chief Executive Officer, Schering-Plough Corporation Maria Elena Lagomasino Chairman and Chief Executive Officer, JP Morgan Private Bank Edward T. Fogarty Former Chairman, President and Chief Executive Officer, Tambrands, Inc. Directors from left to right Andrea ...

  • Page 85
    Avon Products, Inc., 1345 Avenue of the Americas, New York, NY 212.282.5000 avoncompany.com