Avon 2006 Annual Report Download - page 37

favorable working capital levels in accounts payable and lower
payments associated with incentive compensation as compared
to 2005.
Inventory levels have continued to increase during 2006 from
$801.7 at December 31, 2005 to $900.3 at December 31, 2006,
reflecting an increase in inventory coverage, partially driven by
decisions to protect service levels in the first quarter of 2007,
higher sales volume and the impacts of foreign exchange. As
previously mentioned, our turnaround plan includes initiatives
such as PLS and Sales and Operations Planning process that are
expected to improve inventory levels.
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 dis-
tributions, investment performance and funding decisions. Based
on current assumptions, we expect to contribute approximately
$23.0 and $70.0 to our U.S. and international pension plans,
respectively, in 2007.
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 approx-
imately $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 performance-based compensation.
Net Cash Used by Investing Activities
Net cash used by investing activities in 2006 was $135.2 lower
than in 2005 resulting from lower capital expenditures due to
fewer major construction projects during 2006, and the 2005
purchase of the Avon direct selling business from our licensee in
Colombia for $154.0, partially offset by the 2006 acquisition of
the remaining minority interest in our two joint venture sub-
sidiaries in China for approximately $39.1.
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, capacity expansion and an enterprise
resource planning (“ERP”) system. Plant construction, expansion
and modernization projects were in progress at December 31,
2006, with an estimated cost to complete of approximately
$76.4. Capital expenditures in 2007 are currently expected to be
in the range of $275.0 to $325.0 and will be funded by cash
from operations. These expenditures will include investments for
capacity expansion, the construction of a new distribution facility
in North America and information systems (including the con-
tinued development of the ERP system).
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, partially offset by the 2004 purchase of a portion of the
ownership interest in our subsidiary in China for $45.6 and lower
capital expenditures.
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 global research and develop-
ment facility, partially offset by spending in 2005 for an ERP
system.
Net Cash Used by Financing Activities
Net cash used by financing activities in 2006 was $263.7 higher
than in 2005, mainly driven by higher borrowings during 2005
and lower proceeds from stock option exercises during 2006,
partially offset by lower repurchases of common stock during
2006.
Net cash used by financing activities in 2005 was $340.3 lower
than in 2004, mainly driven by higher commercial paper borrow-
ings, partially offset by higher repurchases of common stock,
lower proceeds from stock option exercises, and higher dividend
payments.
We purchased approximately 11.6 million shares of Avon
common stock for $355.1 during 2006, as compared to approx-
imately 22.9 million shares of Avon common stock for $728.0
during 2005 and 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. During 2006, we increased sequen-
tially the purchases under our program as we have been accel-
erating the pace of our repurchase program.
Dividends of $.70 per share were declared and paid in 2006, as
compared to $.66 per share in 2005 and $.56 per share in 2004.
In February 2007, our Board approved an increase in the quar-
terly dividend to $.185 per share.
A V O N 2006 31