Avon 2003 Annual Report Download - page 12

Tax audit settlements and an interest refund from the IRS
reduced 2003’s effective tax rate by approximately 2.5 points.
The effective tax rate was higher in 2002 because the net Special charges of
$36.3 (see Note 13, Special Charges) gave rise to a lower tax benefit due to
the loss positions of certain international subsidiaries incurring a portion of the
charges. In addition, the tax rate increased due to changes in the earnings
mix. The increase in the rate was partially offset by the favorable impact of
repatriation planning and changes in the tax rates of international subsidiaries.
Cumulative Effect of Accounting Change
Effective January 1, 2001, Avon adopted FAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” as amended by FAS No. 138,
“Accounting for Certain Derivative Instruments and Hedging Activities,” which
establishes accounting and reporting standards for derivative instruments and
hedging activities. In accordance with the provisions of FAS No. 133 and FAS
No. 138, Avon recorded a charge to earnings of $.3, net of a tax benefit of $.2,
in the first quarter of 2001 and a charge to Shareholders’ equity (deficit) of $3.9,
net of a tax benefit of $2.1, which is included in Accumulated other comprehen-
sive loss in the Consolidated Balance Sheets. These charges are reflected as a
Cumulative effect of an accounting change in the accompanying Consolidated
Financial Statements (see Note 2, Accounting Changes).
Special Charges
Business Transformation
In May 2001, Avon announced its 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 orga-
nizational structure and integrating certain similar activities across markets to
achieve efficiencies. Avon anticipates significant benefits from these Business
Transformation initiatives, but the scope and complexity 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 consumer growth strategies. Management believes that initiatives associ-
ated with the 2001 and 2002 Special charges discussed below will help the
Company achieve its operating margin targets.
In the first quarter of 2003, Avon announced additional Business Transformation
initiatives, which are expected to promote continued sales and earnings growth
as well as provide for further margin expansion through 2007. No special charges
are anticipated with these additional Business Transformation initiatives.
Special Charges – Fourth Quarter 2001
In the fourth quarter of 2001, Avon recorded special charges of $97.4 pretax
($68.3 after tax, or $.28 per diluted share) primarily associated with facility rational-
izations and workforce reduction 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 related to future cash expenditures. Approximately 60% of
these cash expenditures were made by December 2002, with approximately 85%
of total cash payments made by December 2003. All payments are funded by
cash flow from operations (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. Additionally, in the fourth quarter of
2003, Avon recorded a benefit of $2.1 pretax ($1.3 after tax, or $.006 per diluted
share) from an adjustment to the fourth quarter 2001 charge (see Note 13,
Special Charges).
In 2002 and 2003, 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) and $60.0 (gross savings of $70.0 partially offset
by transitional costs of $10.0), respectively. Cost savings from these initiatives
should continue, with net savings in 2004 expected to be approximately
$85.0 (net of additional transitional costs of approximately $5.0).
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