Avon 2003 Annual Report Download - page 13

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Management’s Discussion and Analysis of Financial Condition and Results of Operations
management’s discussion
The actions associated with the 2001 Special charges resulted in incremental
cash outlays of $32.0 in 2002 and produced incremental cash flow of $27.0 in
2003 and are expected to produce incremental cash flow of $40.0 in 2004.
Capital expenditures associated with the 2001 Special charges were approx-
imately $30.0 in 2002 and $5.0 in 2003. The cash outlays in 2002, and capital
expenditures in 2002 and 2003 were 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 supply chain initiatives, workforce reduc-
tion 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 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). In the fourth quarter
of 2003, Avon recorded a benefit of $1.8 pretax ($1.3 after tax, or $.005 per
diluted share) from an adjustment to the third quarter 2002 charge (see
Note 13, Special Charges).
In 2003, Avon actions associated with the 2002 Special charges yielded net
savings of $16.0 (gross savings of $29.0 partially offset by transitional costs of
$13.0). Cost savings from these initiatives should continue, with net savings in
2004 expected to be approximately $50.0 (net of additional transitional costs
of approximately $4.0).
The actions associated with the 2002 Special charges resulted in incremental
cash outlays of $20.0 in 2002 and produced incremental cash flow of $3.0 in
2003 and are expected to produce incremental cash flow of $30.0 in 2004.
Capital expenditures associated with Business Transformation initiatives
included in the 2002 Special charges were $10.0 through 2003 and were
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 can-
cellation of a retail agreement between Avon and Sears Roebuck & Company
(see Note 15, Contract Settlement).
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