Avon 2004 Annual Report Download - page 12

Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
Other expense (income), net was lower in 2004 than in
2003, primarily due to favorable foreign exchange of $6.4
and a favorable comparison to 2003, which included the
write-off of deferred debt issue costs of $6.4 related to
Avon’s convertible notes (see Note 4, Debt and Other
Financing). This favorability was substantially offset by a
write-down of $13.7 in 2004 resulting from declines in
the fair values of investments in equity securities below
their cost bases. These declines were judged to be other-
than-temporary based on various factors, including an
analysis of the duration and the extent to which market
values were below cost. These equity securities are avail-
able to fund select benefit plan obligations.
Other expense (income) net was higher in 2003 than in
2002, primarily due to unfavorable foreign exchange of
$31.9 and the write-off of deferred debt issue costs of
$6.4 in the third quarter of 2003 related to Avon’s con-
vertible notes which were retired in July 2003 (see Note
4, Debt and Other Financing). The foreign exchange
variance was mainly due to gains of $27.8 in 2002 on
net U.S. dollar denominated assets, primarily in
Argentina, Venezuela, Brazil and Mexico.
Effective Tax Rate
The effective tax rate for 2004 was favorably impacted by
ongoing audit settlements, amended filings, tax refunds,
and foreign tax credits, which reduced the rate by 2.8
points. The tax rate was also reduced by approximately
1.7 points as a result of one-time reversals in the second
and fourth quarters of 2004 of previously recorded
deferred taxes in connection with the decision to perma-
nently reinvest a significant portion of foreign earnings
offshore. Additionally, the effective tax rate was favorably
impacted by cash management and tax strategies, which
the Company began to implement in the second quarter
of 2004. These strategies are a further extension of the
Company’s Business Transformation efforts and reflect
the permanent reinvestment of a greater portion of for-
eign earnings offshore. These strategies further reduced
the effective tax rate by approximately .5 point. The 2004
rate was also impacted favorably by changes in the earn-
ings mix and tax rates of international subsidiaries.
The cash management and tax strategies, which the
Company began implementing during the second quar-
ter of 2004, are expected to result in cash management
efficiencies and ongoing tax savings. The Company esti-
mates the potential effective tax rate for 2005 to be in
the range of 31%.
The effective tax rate was lower in 2003 than in 2002
primarily due to tax audit settlements and an interest
refund from the IRS, which, collectively, reduced the
effective rate by approximately 2.5 points. Additionally,
the 2003 rate was impacted favorably by changes in the
earnings mix and tax rates of international subsidiaries.
Special Charges
Business Transformation
In May 2001, Avon announced its Business Transformation
plans, which were designed to significantly reduce costs
and expand profit margins, while continuing to focus on
consumer growth strategies. Those original Business
Transformation initiatives included an end-to-end evalu-
ation of business processes in key operating areas, with
targeted completion dates through 2004. Specifically,
the initiatives focused on: simplifying Avon’s marketing
processes; taking advantage of supply chain opportuni-
ties; 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 realized significant benefits from these Business
Transformation initiatives from 2002 through 2004. The
savings from these initiatives provided additional financial
flexibility to achieve profit targets, while enabling further
investment in consumer growth strategies. Management
believes that initiatives associated with the 2001 and 2002
special charges discussed below have helped the Com-
pany achieve its operating margin targets.
In the first quarter of 2003 and in late 2004, Avon
announced additional Business Transformation initia-
tives that are expected to promote continued sales and
earnings growth, as well as provide for further margin
expansion through 2007; however, the scope and
complexity of these initiatives necessarily continue to
involve planning and execution risk. No special charges
are anticipated with these additional Business Transfor-
mation initiatives.
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