Avon 2007 Annual Report Download

Download and view the complete annual report

Please find the complete 2007 Avon annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 92

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92

Annual Report 2007

Table of contents

  • Page 1
    Annual Report 2007

  • Page 2
    Hello Tomorrow It's our favorite day

  • Page 3
    ..., we have begun to aggressively recapture market share in beauty and direct selling. These gains have been driven by a significant investment in growth to strengthen our brand and channel, fueled by transforming our cost base and leveraging our global scale to operate more efficiently and...

  • Page 4
    ... direct-selling channel. Avon is by far the world's largest direct seller with 5.4 million Avon Representatives in over 100 countries. Avon Representatives are icons in their communities. They are friends and neighbors, providing a unique level of personal service and customer connection that...

  • Page 5
    ... as Avon's new Global Ambassador, representing our brand, our direct-selling channel and our corporate philanthropy programs. Reese will be featured in Avon advertising starting in 2008. of investment also helped drive a recovery in developed markets, which reversed declines over the past two years...

  • Page 6
    ...'s share of these funds has gone to support the world-famous Avon Breast Cancer Crusade which was launched in 1992. Three years ago, we added a second cause to our mission with the launch of our Speak Out Against Domestic Violence program. Just recently, Avon formed an important new public/private...

  • Page 7
    ...or organization) (I.R.S. Employer Identification No.) 1345 Avenue of the Americas, New York, N.Y. 10105-0196 (Address of principal executive offices) (212) 282-5000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange...

  • Page 8
    ...Quantitative and Qualitative Disclosures About Market Risk 40 Item 11 Executive Compensation 41 15 (a) 2 Financial Statement Schedule 14 Item 2 Properties 15 Item 3 Legal Proceedings 40 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 41 15...

  • Page 9
    ... and time schedules we expect) from our global business strategy, including our multiyear restructuring initiatives, product mix and pricing strategies, enterprise resource planning, customer service initiatives, product line simplification program, sales and operation planning process, strategic...

  • Page 10
    ...: North America; Latin America; Western Europe, Middle East & Africa; Central & Eastern Europe; Asia Pacific; and China. We also centrally manage Brand Marketing and Supply Chain organizations. Financial information relating to our reportable segments is included in the "Segment Review" section...

  • Page 11
    ... information technology, human resource and customer service processes, and the move of certain services from markets to lower cost shared service centers; • the restructure of certain international direct-selling operations; • the realignment of certain distribution and manufacturing operations...

  • Page 12
    ... including order submission, order tracking, payment and two-way communications with Avon. In addition, in the U.S., Representatives can further build their own Avon business through personalized web pages developed in association with us, enabling them to sell a complete line of our products online...

  • Page 13
    .... Promotion and Marketing Sales promotion and sales development activities are directed at assisting Representatives, through sales aids such as brochures, product samples and demonstration products. In order to support the efforts of Representatives to reach new customers, specially designed sales...

  • Page 14
    ... quarter of 2006 includes cost to implement our restructuring initiatives of $43.7 and $41.6 of costs related to our PLS program. Research and Product Development Activities New products are essential to growth in the highly competitive cosmetics industry. Our research and development department...

  • Page 15
    ... cash management, tax, foreign currency hedging and risk management strategies; • implement our Sales Leadership program globally, recruit Representatives, enhance the Representative experience and increase their productivity through investments in the direct selling channel; • reach new...

  • Page 16
    ...products from Representatives or buying beauty and related products in channels other than in direct selling, this could reduce our sales and have a material adverse effect on our business, financial condition and results of operations. If our competitors establish greater market share in the direct...

  • Page 17
    ...markets. The introduction of new channels in our business, such as the direct selling channel in China, may also negatively impact existing sales. We may encounter similar political, legal and regulatory risks in Central and Eastern Europe, Latin America, Asia Pacific, and the Middle East and Africa...

  • Page 18
    ... consumer purchases of discretionary items, including beauty and related products, which could adversely affect our business. Consumer spending is generally affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and consumer...

  • Page 19
    ... business, including systems to support financial reporting, an enterprise resource planning system which we are implementing on a worldwide basis, and an internal communication and data transfer network. We also employ information technology systems to support Representatives in many of our markets...

  • Page 20
    ... run, will approximate the present value of projected benefit obligations. Our pension cost is materially affected by the discount rate used to measure pension obligations, the level of plan assets available to fund those obligations at the measurement date and the expected long-term rate of return...

  • Page 21
    ... certain Latin America distribution and manufacturing operations. We plan to build a new distribution center in Brazil that is expected to open in 2010. We will phase-out our current distribution center in Sao Paulo, Brazil during 2011. We also plan to close our manufacturing facility in Guatemala...

  • Page 22
    ... who are not "shareholders of record" but who beneficially own and vote shares through nominee holders such as brokers and benefit plan trustees. High and low market prices and dividends per share of Avon's Common Stock, in dollars, for 2007 and 2006 were as follows: 2007 Quarter First Second Third...

  • Page 23
    ...that were repurchased by us in connection with employee elections to use shares to pay withholding taxes upon the vesting of their restricted stock units. (2) (3) (4) Securities Authorized for Issuance Under Equity Compensation Plans Information regarding securities authorized for issuance under...

  • Page 24
    ... our Consolidated Financial Statements and related Notes. 2007 (1) Income Data Total revenue Operating profit (4) Net income Diluted earnings per share (5) Cash dividends per share Balance Sheet Data Total assets Debt maturing within one year Long-term debt Total debt Shareholders' equity (1) 2006...

  • Page 25
    ... Avon Color cosmetics, including Uplifting Mascara, and Ultra Color Rich Lipstick, as well as support for "Hello OVERVIEW We are a global manufacturer and marketer of beauty and related products. Our business is conducted worldwide, primarily in the direct-selling channel. We presently have sales...

  • Page 26
    ... efficient manufacturing utilization and lower purchasing costs. We also expect operating expenses to benefit from a reduction in distribution costs and benefits to inventory productivity. We expect to realize annualized benefits in excess of $200 by the end of 2009, with a full year of benefit in...

  • Page 27
    ... information technology, human resource and customer service processes, and the move of certain services from markets to lower cost shared service centers; • the restructure of certain international direct-selling operations; • the realignment of certain distribution and manufacturing operations...

  • Page 28
    ... and 2005. (See Note 10, Employee Benefit Plans). Effective January 1, 2006, we adopted SFAS No. 123 (revised 2004), which requires all share-based payments to employees to be recognized in the financial statements based on their fair values using an option-pricing model at the date of grant. The...

  • Page 29
    ... Receivable Representatives contact their customers, selling primarily through the use of brochures for each sales campaign. Sales campaigns are generally for a two-week duration in the U.S. and a two- to fourweek duration outside the U.S. The Representative purchases products directly from Avon and...

  • Page 30
    ...pension benefit plans for certain current and retired executives (see Note 10, Employee Benefit Plans). Our calculations of pension, postretirement and postemployment costs are dependent upon the use of assumptions, including discount rates, expected return on plan assets, interest cost, health care...

  • Page 31
    ...Increase/(Decrease) in Pension Expense 50 basis point Increase Rate of return on assets Discount rate Rate of compensation increase 50 basis point Decrease nations may be completed. If Avon's filing positions are ultimately upheld, it is possible that the 2008 provision for income taxes may reflect...

  • Page 32
    ...as that market contributed 3 percentage points to revenue growth. Foreign exchange also contributed 2 percentage points to the revenue growth. Revenue grew in Latin America, Western Europe, Middle East & Africa, Central & Eastern Europe, North America and China. Revenue declined in Asia Pacific. On...

  • Page 33
    ... stock units granted in connection with design changes to share-based compensation plans related to the adoption. These expense increases were partially offset by savings associated with our restructuring initiatives, primarily salary and benefit savings associated with our delayering initiative...

  • Page 34
    ... revenue and operating profit by reportable segment for each of the years in the three-year period ended December 31, 2007. Years ended December 31 Total Revenue North America Latin America Western Europe, Middle East & Africa Central & Eastern Europe Asia Pacific China Total from operations Global...

  • Page 35
    ... of higher revenue, lower costs to implement restructuring initiatives, which positively impacted operating margin by .8 point, savings associated with position eliminations resulting from restructuring initiatives, and the recognition of unclaimed sales-related tax credits. Total revenue increased...

  • Page 36
    ... valueadded tax dispute in the U.K. in the third quarter of 2006. The increase in operating margin for 2007 was also driven by lower product costs due to favorable foreign exchange movements and savings associated with position eliminations resulting from restructuring initiatives. These benefits to...

  • Page 37
    ... programs, as well as investments in advertising driving increased order size. Revenue in the U.K. increased 3%, reflecting strong Beauty growth driven by successful new product launches and increased advertising. Incremental costs, during 2006, associated with implementing restructuring initiatives...

  • Page 38
    ... advertising, higher allocation of global expenses and incremental inventory obsolescence expense related to our inventory initiatives. Asia Pacific - 2006 Compared to 2005 %/Point Change 2006 2005 US$ Local Currency Total revenue Operating profit Operating margin Units sold Active Representatives...

  • Page 39
    ... Sales Promoters to help them build their business by developing their customer base and product knowledge. Prior to the reopening of direct selling we had sold our products in China through a network of licensed beauty boutiques, as well as dealer-owned and company-owned store counters. The company...

  • Page 40
    ...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 $9 and $23 to our U.S. and international pension plans, respectively...

  • Page 41
    ... in accounts payable and lower payments associated with incentive compensation as compared to 2005. Capital expenditures during 2006 were $174.8 compared with $206.8 in 2005. The decrease in capital spending was primarily driven by spending in 2005 for our global research and development facility...

  • Page 42
    ... funds rate. The credit facility has an annual fee of $.675, payable quarterly, based on our current credit ratings. The credit facility contains various covenants, including a financial covenant which requires Avon's interest coverage ratio (determined in relation to our consolidated pretax income...

  • Page 43
    ... objective of our financial risk management program is to reduce the potential negative effects from changes in foreign exchange and interest rates arising from our business activities. We may reduce our exposure to fluctuations in cash flows associated with changes in interest rates and foreign...

  • Page 44
    ... term is defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is defined as a process designed by, or under the supervision of, Avon's principal executive and principal financial officers and effected by Avon's board of directors, management and other personnel...

  • Page 45
    ... in certain significant markets and will continue to roll-out the ERP system over the next several years. As with any new information technology application we implement, this application, along with the internal controls over financial reporting included in this process, were appropriately tested...

  • Page 46
    ... AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS This information is incorporated by reference to the "Equity Compensation Plan Information" and "Ownership of Shares" sections of Avon's Proxy Statement for the 2008 Annual Meeting of Shareholders. Code of Business Conduct and Ethics Avon's Board of...

  • Page 47
    ... Report on Form 10-Q for the quarter ended September 30, 1997). Avon Products, Inc. Year 2000 Stock Incentive Plan (incorporated by reference to Appendix A to the Company's Proxy Statement as filed with the Commission on March 27, 2000 in connection with Avon's 2000 Annual Meeting of Shareholders...

  • Page 48
    ... as filed with the Commission on March 27, 2003 in connection with Avon's 2003 Annual Meeting of Shareholders). Benefit Restoration Pension Plan of Avon Products, Inc., as amended and restated July 1, 1998 (incorporated by reference to Exhibit 10.7 to Avon's Annual Report on Form 10-K for the year...

  • Page 49
    ... Report on Form 8-K filed on March 31, 2006). Restricted Stock Unit Award Agreement, dated as of July 26, 2006, by and between Avon Products, Inc. and Elizabeth Smith, Executive Vice President, President North America and Global Marketing, under the Avon Products, Inc. 2005 Stock Incentive Plan...

  • Page 50
    ....1 to Avon's Current Report on Form 8-K filed on September 6, 2005). Revolving Credit and Competitive Advance Facility Agreement, dated as of January 13, 2006, among Avon Products, Inc., Avon Capital Corporation, Citibank, N.A., as Administrative Agent, Citigroup Global Markets Inc., Banc of America...

  • Page 51
    ... of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 21st day of February 2008. Avon Products, Inc. /s/ Richard S. Foggio Richard S. Foggio Group Vice President...

  • Page 52
    ... in the capacities and on the dates indicated. Signature Title Date * Andrea Jung Chairman of the Board and Chief Executive Officer - Principal Executive Officer February 21, 2008 * Charles W. Cramb Vice Chairman, Chief Finance and Strategy Officer - Principal Financial Officer February 21, 2008...

  • Page 53
    ...Statements: Financial Statement Schedule: F-2 Report of Independent Registered Public Accounting Firm F-3 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2007 F-37 Schedule II - Valuation and Qualifying Accounts F-4 Consolidated Balance Sheets...

  • Page 54
    ... it accounts for uncertain tax positions. In 2006, the Company changed the manner in which it accounts for pension and other postretirement benefit plans and the manner in which it accounts for share-based compensation. A company's internal control over financial reporting is a process designed to...

  • Page 55
    CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share data) Years ended December 31 Net sales Other revenue Total revenue Costs, expenses and other: Cost of sales Selling, general and administrative expenses Operating profit Interest expense Interest income Other expense, net Total other...

  • Page 56
    ... and Shareholders' Equity Current liabilities Debt maturing within one year Accounts payable Accrued compensation Other accrued liabilities Sales and taxes other than income Income taxes Total current liabilities Long-term debt Employee benefit plans Long-term income taxes Other liabilities...

  • Page 57
    ... Provision for obsolescence Share-based compensation Foreign exchange (gains) losses Deferred income taxes Net gains on investments Asset write-off restructuring charges Other Changes in assets and liabilities: Accounts receivable Inventories Prepaid expenses and other Accounts payable and accrued...

  • Page 58
    ....3 (Note 10) Dividends - $.70 per share Exercise / vesting and expense of sharebased compensation Repurchase of common stock Income tax benefits - stock transactions Balances at December 31, 2006 Comprehensive income: Net income Foreign currency translation adjustments Changes in available-for-sale...

  • Page 59
    ... Accounting Policies Business When used in these notes, the terms "Avon," "Company," "we" or "us" mean Avon Products, Inc. We are a global manufacturer and marketer of beauty and related products. Our business is conducted worldwide primarily in one channel, direct selling. We manage our...

  • Page 60
    ... restricted stock units granted in connection with design changes to share-based compensation plans related to the adoption, decreased income before taxes and minority interest, net Deferred Software Certain systems development costs related to the purchase, development and installation of computer...

  • Page 61
    ... include costs associated with selling; marketing; and distribution activities, including shipping and handling costs; research and development; Reclassifications We have reclassified some prior year amounts in the Consolidated Financial Statements and accompanying notes for comparative purposes...

  • Page 62
    ... See Note 1, Description of Business and Summary of Significant Accounting Policies, and Note 8, Share-Based Compensation Plans and Other Long-Term Incentive Plan, for additional information. Effective December 31, 2006, we adopted SFAS No. 158, Employers' Accounting for Defined Benefit Pension and...

  • Page 63
    ... semi-annually, at a per annum rate equal to 5.125%. The net proceeds from the offering were used for general corporate purposes, including the repayment of short-term domestic debt. The carrying value of the 5.125% Notes represents the $500.0 principal amount, net of the unamortized discount to...

  • Page 64
    ... funds rate. The credit facility has an annual fee of $.675, payable quarterly, based on our current credit ratings. The credit facility contains various covenants, including a financial covenant which requires Avon's interest coverage ratio (determined in relation to our consolidated pretax income...

  • Page 65
    ... of inventory levels. A fixed-income portfolio included in a grantor trust and mutual funds that are used to make benefit payments under non-qualified benefit plans are classified as available-for-sale and recorded at current market value (see Note 10, Employee Benefit Plans). The cost, gross...

  • Page 66
    ...: 2007 Deferred tax assets: Postretirement benefits Accrued expenses and reserves Special and non-recurring charges Employee benefit plans Foreign operating loss carryforwards Postemployment benefits Capitalized expenses Minimum tax credit carryforwards Foreign tax credit carryforwards All other...

  • Page 67
    ... settlements. NOTE 7. Financial Instruments and Risk Management We operate globally, with manufacturing and distribution facilities in various locations around the world. We may reduce our exposure to fluctuations in cash flows associated with changes in interest rates and foreign exchange rates by...

  • Page 68
    ... the change in strategy in December 2005, we entered into a treasury lock agreement with a notional amount of $250.0 designated as a cash flow hedge of the $500.0 principal amount of five-year notes payable issued in January 2006. The loss on the 2005 lock agreement of $1.9 was recorded in AOCI and...

  • Page 69
    ..., recorded in accounts payable. Credit and Market Risk We attempt to minimize our credit exposure to counterparties by entering into interest rate swap and foreign currency forward rate and option agreements only with major international financial institutions with "A" or higher credit ratings as...

  • Page 70
    ... of related discount or premium 1,167.7 1,178.4 (1,170.4) (1,165.4) Foreign exchange forward and option contracts 2.8 2.8 7.9 7.9 Interest rate swap and treasury lock agreements (29.0) (29.0) (13.4) (13.4) NOTE 8. Share-Based Compensation Plans and Other Long-Term Incentive Plan The Avon Products...

  • Page 71
    ... current cash dividends of $.185, $.175 and $.165 per share each quarter on Avon's common stock for options granted during 2007, 2006 and 2005, respectively. (3) (4) 2007 Risk-free Expected term (2) Expected volatility (3) Expected dividends (4) (1) 2006 2005 rate (1) 4.5% 5.1% 4.2% 4 years...

  • Page 72
    ...those subsidiaries. Benefits under these plans are generally based on an employee's years of service and average compensation near retirement. Plans are funded based on legal requirements and cash flow. We provide health care and life insurance benefits for the majority of employees who retire under...

  • Page 73
    ... Consolidated Statement of Income for the years ended December 31, 2007, 2006, and 2005. SFAS 158's provisions regarding the change in the measurement date of defined benefit and other postretirement plans had no impact as we were already using a measurement date of December 31 for our pension plans...

  • Page 74
    ...Actual return on plan assets Company contributions Federal subsidy Plan participant contributions Benefits paid Foreign currency changes Settlements/ curtailments Ending balance Funded Status: Funded status at end of year Amount Recognized in Balance Sheet: Other assets Accrued compensation Employee...

  • Page 75
    ... of years of future service of current employees or eliminates the accrual of defined benefits for some or all future services of a significant number of employees. Our funding requirements may be impacted by regulations or interpretations thereof relating to the transitioning of our pension plan...

  • Page 76
    ... net cost recorded in the Consolidated Statements of Income for the years ended December 31 were as follows: Pension Benefits U.S. Plans Non-U.S. Plans 2005 5.80% 6.00 8.00 Postretirement Benefits 2005 5.48% 2.80 7.14 2007 Discount rate Rate of compensation increase Rate of return on assets...

  • Page 77
    ... Avon Personal Savings Account Plan (the "PSA") but that are in excess of U.S. Internal Revenue Code limits on contributions to the PSA. Participants may elect to have their deferred compensation invested in one or more of three investment alternatives. Expense associated with the Plan for the years...

  • Page 78
    ... East & Africa; Central & Eastern Europe; Asia Pacific; and China. Global expenses include, among other things, costs related to our executive and administrative offices, information technology, research and development, and marketing. We allocate certain planned global expenses to our business...

  • Page 79
    Summarized financial information concerning our segments as of December 31 is shown in the following tables. Total Revenue & Operating Profit 2007 Total Revenue North America Latin America Western Europe, Middle East & Africa Central & Eastern Europe Asia Pacific China Total from operations Global ...

  • Page 80
    ... care and toiletries. Beauty Plus includes fashion jewelry, watches, apparel and accessories. Beyond Beauty includes home products and gift and decorative products. Other primarily includes shipping and handling fees billed to Representatives. (4) Sales from Health and Wellness products and mark...

  • Page 81
    ..., pension and other termination benefits, asset impairment charges and cumulative foreign currency translation charges previously recorded directly to shareholders' equity; • charges of $8.4 for inventory write-off; and • other costs to implement of $4.9 for professional service fees related to...

  • Page 82
    ... resource, finance, customer service, and information technology processes and accelerated depreciation associated with our initiatives to realign certain distribution operations and close certain manufacturing operations. Of the total costs to implement, $157.3 was recorded in selling, general and...

  • Page 83
    ... $530 before taxes for all restructuring initiatives, including restructuring charges and other costs to implement. The amounts shown in the tables above as charges recorded to date relate to initiatives that have been approved and recorded in the financial statements as the costs are probable and...

  • Page 84
    ... financial position, results of operations or cash flows is correspondingly remote. Kendall v. Employees' Retirement Plan of Avon Products and the Retirement Board is a purported class action commenced in April 2003 in the United States District Court for the Southern District of New York...

  • Page 85
    ... District of New York (Master File Number 05-CV-06803) under the caption In re Avon Products, Inc. ERISA Litigation naming Avon, certain officers, Avon's Retirement Board and others. The consolidated action purports to be brought on behalf of the Avon Products, Inc. Personal Savings Account Plan...

  • Page 86
    ... and customer relationships of $1.9 with a ten-year weighted-average useful life. On October 18, 2005, we purchased the Avon direct-selling business of our licensee in Colombia for approximately $154.0 in cash, pursuant to a share purchase agreement that Avon International Holdings Company, a wholly...

  • Page 87
    ... NOTE 17. Results of Operations by Quarter (Unaudited) 2007 Net sales Other revenue Gross profit Operating profit Income before taxes and minority interest Income before minority interest Net income Earnings per share Basic Diluted 2006 Net sales Other revenue Gross profit Operating profit Income...

  • Page 88
    ... TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18. Subsequent Events On February 7, 2008, we announced an increase in our quarterly cash dividend to $.200 per share from $.185 per share. The first dividend at the new rate will be paid on March 3, 2008, to shareholders of record on February 21, 2008...

  • Page 89
    ... at Beginning of Period Charged to Costs and Expenses Charged to Revenue Balance at End of Period (In millions) Description Deductions 2007 Allowance for doubtful accounts receivable Allowance for sales returns Allowance for inventory obsolescence Deferred tax asset valuation allowance $ 91...

  • Page 90
    ... at www.avoncompany.com; email [email protected]; or call (212) 282-5623 Form 10-K The company's 2007 Annual Report (Form 10-K) can be viewed on the Internet at www.avoninvestor.com For information about becoming an Avon Representative or purchasing Avon products, please call 1-800-FOR...

  • Page 91
    ...Board of Directors 1. Andrea Jung Chairman and Chief Executive Officer Chairman and Chief Executive Officer, Granite Broadcasting Corporation Former Chairman, President and Chief Executive Officer, Tambrands, Inc. Chairman and Chief Executive Officer, Schering-Plough Corporation Chief Executive...

  • Page 92
    avon.com