Avon 2004 Annual Report Download - page 37

For each of the three years ended December 31, the
components of basic and diluted earnings per share
were as follows:
Shares in millions 2004 2003 2002
Numerator:
Net income $846.1 $664.8 $534.6
Interest expense on
convertible notes,
net of taxes — 5.7 10.4
Net income for purposes
of computing
diluted EPS $846.1 $670.5 $545.0
Denominator:
Basic EPS weighted-
average shares
outstanding 472.35 471.08 472.12
Diluted effect of:
Stock options 5.61 4.73 4.90
Convertible notes — 7.32 13.92
Diluted EPS adjusted
weighted-average
shares outstanding 477.96 483.13 490.94
EPS:
Basic $ 1.79 $ 1.41 $ 1.13
Diluted $ 1.77 $ 1.39 $ 1.11
At December 31, 2004 and 2002, stock options to
purchase .2 million shares and 5.6 million shares,
respectively, were not included in the diluted EPS cal-
culation since their impact was anti-dilutive. There
were no anti-dilutive shares at December 31, 2003.
2Accounting Changes
Postretirement Benefits
In May 2004, the FASB issued FASB Staff Position (“FSP”)
No. 106-2, “Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003“ (the “Act”). FSP No. 106-2
provides guidance on accounting for the effects of the
new Medicare prescription drug legislation by employers
whose prescription drug benefits are actuarially equiv-
alent to the drug benefit under Medicare Part D. Among
other things, the new law will expand Medicare to include
an outpatient prescription drug benefit beginning in
2006, as well as a federal subsidy for sponsors of retiree
health care benefit plans that provide a benefit that is
at least actuarially equivalent to the new Medicare drug
benefits. This new FSP was effective July 1, 2004. Avon
concluded that its U.S. post-retirement medical plan
provides a benefit that is actuarially equivalent to the
drug benefit provided in Medicare Part D coverage and
recognized the Act’s financial effect retrospectively to
the date of enactment beginning in the third quarter
of 2004. The adoption of FSP 106-2 was not material to
the Consolidated Financial Statements.
Stock-Based Compensation
In December 2004, the FASB issued FASB Statement
No. 123(R) (revised December 2004), Share-Based Pay-
ments (“FAS 123(R)”), which requires companies
to expense the value of employee and director stock
options and similar awards. FAS 123(R) is effective July 1,
2005, for Avon. The Company is considering its choice of
implementation methods under this pronouncement.
Net income in each of the years of 2004, 2003 and 2002,
would have been lower by $26.3, $28.7 and $30.1, respec-
tively, if Avon had applied the fair value recognition provi-
sions of FAS No. 123. (See Note 1, Description of Business
and Summary of Significant Accounting Policies).
Inventory
In November 2004, the FASB issued FASB Statement
No. 151, Inventory Costs (“FAS 151”), which requires
certain inventory-related costs to be expensed as
incurred. FAS 151 is effective January 1, 2006. Avon is
currently assessing the effect of FAS 151 on the Consol-
idated Financial Statements.