Avon 2004 Annual Report Download - page 42

Global Beauty 63
Notes to Consolidated
Financial Statements
To conform to the 2004 presentation, for the year 2003,
reclassifications were made from income taxes to
deferred tax assets for benefits related to certain tax
credit carryforwards for 2003.
The valuation allowance primarily represents amounts
for foreign operating loss and foreign tax credit carry-
forwards. The basis used for recognition of deferred
tax assets included the profitability of the operations,
related deferred tax liabilities and the likelihood of
utilizing tax credit carryforwards during the carryover
periods. The net decrease in the valuation allowance
of $14.6 during 2004 was mainly due to a decrease in
foreign tax credit carryforwards for which a valuation
allowance had been provided. This was partially offset
by several of the Company’s foreign entities continuing
to incur losses during 2004, thereby increasing the net
operating loss carryforwards for which a valuation
allowance was provided.
Income before taxes and minority interest for the years
ended December 31 was as follows:
2004 2003 2002
United States $ 249.5 $302.3 $271.1
Foreign 938.0 691.2 564.5
Total $1,187.5 $993.5 $835.6
The provision for income taxes for the years ended
December 31 was as follows:
2004 2003 2002
Federal:
Current $108.4 $ 63.7 $ 60.9
Deferred (14.4) 27.1 36.4
94.0 90.8 97.3
Foreign:
Current 264.5 227.0 203.6
Deferred (36.5) (6.1) (15.2)
228.0 220.9 188.4
State and other:
Current 12.7 5.5 (3.3)
Deferred (4.1) 1.7 9.9
8.6 7.2 6.6
Total $330.6 $318.9 $292.3
The effective tax rate for the years ended December 31
was as follows:
2004 2003 2002
Statutory federal rate 35.0% 35.0% 35.0%
State and local taxes,
net of federal tax benefit .6 .5 .5
Tax-exempt operations — — (.2)
Taxes on foreign income,
including translation (4.4) (1.7) (1.1)
Tax audit settlements,
refunds, amended returns
and foreign tax credits (2.8) (2.5) —
Permanent investment
of foreign earnings (1.7) — —
Other 1.1 .8 .8
Effective tax rate 27.8% 32.1% 35.0%
At December 31, 2004, Avon had foreign operating
loss carryforwards of approximately $231.1. The loss
carryforwards expiring between 2005 and 2014 were
$57.2 and the loss carryforwards which do not expire
were $173.9. Avon also had minimum tax credit carry-
forwards of $29.5 which do not expire and foreign tax
credit carryforwards of $8.8 expiring in 2010.
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 off-
shore. Additionally, the effective tax rate was favorably
impacted by cash management and tax strategies,
which the Company began to implement in the second
quarter of 2004. These strategies are a further extension
of the Company’s Business Transformation efforts and
reflect the permanent reinvestment of a greater portion
of foreign earnings offshore. These strategies further
reduced the effective tax rate by approximately .5 point,
which is included in taxes on foreign income. The 2004
rate was also impacted favorably by changes in the
earnings mix and tax rates of international subsidiaries.