Avon 2005 Annual Report Download - page 9

As a percentage of total revenue, marketing, distribution and administrative expenses increased 1.1 points in 2005 and were level with prior
year in 2004, as follows:
2005 2004
Increase/(Decrease) Weighted Impact Increase/(Decrease) Weighted Impact
Expense Ratio on Avon Expense Ratio on Avon
North America .6 .2 .1 –
Europe 1.2 .3 (2.3) (.6)
Latin America 2.1 .6 – –
Asia Pacific 4.1 .6 (.2) –
Global expenses N/A (.4) N/A .5
Impact of country mix N/A (.2) N/A .1
Consolidated increase 1.1 –
See the “Segment Review” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional
information related to changes in expense ratios by segment.
Other Expenses
Interest expense increased in 2005, mainly due to increases in
domestic interest rates, as well as higher commercial paper borrow-
ings to support our share repurchase programs. Interest expense
increased slightly in 2004 as compared to 2003 as a result of inter-
est on a tax-related liability in Latin America, partially offset by a
decrease in debt-related interest. The 2004 decrease in debt-related
interest was primarily due to the retirement of $447.2 of convert-
ible notes in July 2003, partially offset by the issuance of $250.0
of fixed-rate debt that was later swapped to a floating interest
rate. At December 31, 2005 and 2004, we held interest rate
swap agreements that effectively converted approximately 60%
and 75%, respectively, of our outstanding long-term, fixed-rate
borrowings to a variable interest rate based on LIBOR. Avon’s total
exposure to floating interest rates at December 31, 2005 was
approximately 80%.
Interest income increased in both 2005 and 2004, primarily due
to higher cash and cash equivalent balances invested offshore at
higher interest rates.
Other expense, net decreased in 2005 primarily due to lower
write-downs of $11.5 resulting from declines in the fair values
of investments in equity securities below their cost bases. These
declines were determined 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 were available to fund select benefit plan obligations.
Additionally, other expense, net was lower in 2005 due to a net
gain of $4.7 on the sale of investments in equity securities and
favorable foreign exchange of $3.7.
Other expense, net was lower in 2004 than in 2003, primarily due
to favorable foreign exchange of $6.4 and the 2003 write-off of
deferred debt issue costs of $6.4 related to our convertible notes
(see Note 4, Debt and Other Financing). This favorability was sub-
stantially 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.
Effective Tax Rate
The effective tax rate for 2005 was 24.0%, compared to 27.8% for
2004, primarily due to the favorable effects of the completion of
tax examinations as well as the closure of a tax year by expiration
of the statute of limitations, which reduced the effective tax rate
by approximately 10.5 points. Current levels of profitability of our
U.S. business combined with anticipated higher interest expense
from domestic borrowings may affect our ability to utilize foreign
tax credits and adversely impact our future effective tax rate.
The effective tax rate for 2004 was favorably impacted by 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 previously recorded deferred
taxes in connection with the decision to permanently reinvest a
significant portion of foreign earnings offshore. Additionally, the
effective tax rate was favorably impacted by cash management
and tax strategies, which we began to implement in the second
quarter of 2004. These strategies reflect the permanent reinvest-
ment of a greater portion of foreign earnings offshore and further
reduced the effective tax rate by approximately .5 point. The 2004
rate was also impacted favorably by changes in the earnings mix
and tax rates of international subsidiaries. The effective tax rate for
2003 was favorably impacted by 2.5 points, primarily due to tax
audit settlements and an interest refund from the IRS.
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