Avon 2005 Annual Report Download - page 16

MANAGEMENT’S฀DISCUSSION฀AND฀ANALYSIS฀
OF฀FINANCIAL฀CONDITION฀AND฀RESULTS฀OF฀OPERATIONS
Net Cash Provided by Operating Activities
Net cash provided by operating activities in 2005 was $12.9
favorable to 2004 principally reflecting higher net income
(adjusted for non-cash items) and lower income tax audit settle-
ment payments ($71.2 in 2004 versus $12.5 in 2005) offset by
increased inventory levels.
Additionally, operating cash flow was favorably impacted by the
timing of accounts payable payments and unfavorably affected
by higher contributions of approximately $21.0 to the U.S. and
international pension plans in 2005 (approximately $162.0 in
2005 versus $141.0 in 2004) and lower accruals for perfor-
mance-based compensation.
We maintain defined benefit pension plans and unfunded supple-
mental pension benefit plans (see Note 10, Employee Benefit Plans).
Our funding policy for these plans is based on legal requirements
and cash flows. The amounts necessary to fund future obligations
under these plans could vary depending on estimated assumptions
(as detailed in “Critical Accounting Estimates”). The future funding
for these plans will depend on economic conditions, employee
demographics, mortality rates, the number of associates electing to
take lump-sum distributions, investment performance and funding
decisions. Based on current assumptions, we expect to contribute
approximately $89.0 and $42.0 to our U.S. and international pen-
sion plans, respectively, in 2006.
Inventories of $801.7 at December 31, 2005, were higher than
$740.5 at December 31, 2004. Inventory days were 97 days at
December 31, 2005, up from 93 days at December 31, 2004.
Our objective is to increase our focus on inventory management.
However, the addition or expansion of product lines, which are
subject to changing fashion trends and consumer tastes, as well as
planned expansion in high growth markets, may cause inventory
levels to grow periodically.
Net Cash Used by Investing Activities
Net cash used by investing activities in 2005 was $63.7 higher than
in 2004 resulting primarily from the 2005 purchase of the Avon
direct selling business from our licensee in Colombia for $154.0.
2004 included the purchase of a portion of the ownership interest
in our subsidiary in China for $45.6.
Capital expenditures during 2005 were $206.8 compared with
$250.1 in 2004. The decrease in capital spending was primarily
driven by investments in 2004 for a new manufacturing facility in
Russia and the construction of a new research and development
facility in the U.S., partially offset by spending in 2005 for an enter-
prise resource planning (“ERP”) system. Numerous construction
and information systems projects were in progress at December 31,
2005, with an estimated cost to complete of approximately $92.3.
Capital expenditures in 2006 are currently expected to be approxi-
mately $235.0 and will be funded by cash from operations. These
expenditures will include continued investments for cost reductions,
capacity expansion, and information systems (including the contin-
ued development of the ERP system).
In November 2005, we entered into an agreement to purchase
the remaining 6.155% of the outstanding shares in our two joint
venture subsidiaries in China from a minority interest shareholder,
for approximately $39.0. We expect to consummate the transaction
in the first quarter 2006, subject to the approval and registration of
the transaction by appropriate government authorities in China.
Net Cash Used by Financing Activities
Net cash used by financing activities in 2005 was $340.3 lower than
in 2004, mainly driven by higher commercial paper borrowings, par-
tially offset by higher repurchases of common stock, lower proceeds
from stock option exercises, and higher dividend payments.
We purchased approximately 22.9 million shares of Avon com-
mon stock for $728.0 during 2005, as compared to approximately
5.7 million shares of Avon common stock for $224.2 during 2004
under our previously announced share repurchase programs and
through acquisition of stock from employees in connection with
tax payments upon vesting of restricted stock.
In September 2000, our Board approved a share repurchase pro-
gram for $1,000.0 of our outstanding stock over a five-year period.
This program was completed in August 2005. In February 2005,
we announced that we would begin a new five-year, $1,000.0
share repurchase program upon completion of the September 2000
share repurchase program. In August 2005, we announced that
our Board of Directors authorized us to repurchase an additional
$500.0 of our common stock. This $500.0 program was completed
in December 2005.
In January 2005, our Board approved an increase in the quarterly
dividend to $.165 per share from $.14. Dividends of $.66 per
share were declared and paid in 2005 as compared to $.56 per
share in 2004. In January 2006, our Board approved an increase
in the quarterly dividend to $.175 per share.
Net cash provided by operating
activities reached $895.5 in
2005, $12.9 favorable to 2004.