Avon 2007 Annual Report Download - page 33

Selling, General and Administrative
Expenses
Selling, general and administrative expenses during 2007
increased $538.8, primarily due to higher investments in
advertising and RVP of approximately $240, higher variable
expenses such as freight and commissions from increased sales
volume, and increased distribution costs as a percentage of
revenue. Partially offsetting the higher expenses were $71.8 of
lower costs incurred to implement our restructuring initiatives
and savings associated with position eliminations resulting from
restructuring initiatives. Additionally, 2007 benefited from a
favorable comparison to 2006 which included a one-time charge
of $21.0 related to the resolution of a long-standing dispute
regarding value-added taxes in the U.K., the recognition of
unclaimed sales-related tax credits and a reduction of a reserve
for statutory liabilities.
Selling, general and administrative expenses increased $698.6
during 2006, primarily due to $181.0 of incremental costs
incurred to implement our restructuring initiatives and invest-
ments in advertising of $113.0. Other contributing items include
higher performance-based compensation expense; expenses
associated with our business in Colombia, which was acquired
during the fourth quarter of 2005; a one-time charge of $21.0
related to the resolution of the VAT dispute, discussed above;
and additional expense of $49.2 due to the adoption of SFAS
123R, including restricted 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.
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 operating margin by
segment.
Other Expenses
Interest expense increased in 2007 and 2006, mainly due to
higher borrowings to support our share repurchase programs, as
well as increases in domestic interest rates. At December 31,
2007 and 2006, we held interest rate swap agreements that
effectively converted approximately 30% of our outstanding
long-term, fixed-rate borrowings to a variable interest rate based
on LIBOR. Our total exposure to floating interest rates at
December 31, 2007 and December 31, 2006 was approximately
60% and 50%, respectively.
Interest income decreased in 2007, primarily due to lower cash
and cash equivalent balances. Interest income increased in 2006,
primarily due to higher cash and cash equivalent balances
invested offshore at higher interest rates.
Other expense, net decreased in 2007 primarily due to higher
net foreign exchange gains in 2007. Other expense, net
increased in 2006, primarily because 2005 included a net gain of
$4.7 million on the sale of investments in equity securities and a
gain of $2.5 on a treasury lock agreement that was no longer
designated as a hedge.
Effective Tax Rate
The effective tax rate for 2007 was 33.0%, compared to 31.8%
for 2006. During 2007, the tax rate was favorably impacted by
approximately 2.0 points due to the net release of valuation
allowances, partially offset by the unfavorable impact of
restructuring initiatives and PLS program and earnings mix.
During 2006, the effective tax rate was favorably impacted by
approximately 4.0 points due to the closure of tax years by
expiration of the statute of limitations and audit settlements as
well as 1.7 points due to tax refunds. These benefits were parti-
ally offset by the repatriation of international earnings, which
increased the rate by approximately 3.1 points, and the tax
impact associated with our restructuring charges due to the
lower weighted-average effective tax rate of subsidiaries incur-
ring the charges.
The effective tax rate for 2006 was 31.8%, compared to 24.0%
for 2005. The effective tax rate for 2005 was favorably impacted
by 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.
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