CONFORMED COPY
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___ to ___
Commission file number 1-4881
AVON PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
New York 13-0544597
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1345 Avenue of the Americas, New York, N.Y. 10105-0196
(Address of principal executive offices)
(212) 282-5000
(Telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer
(as defined by Rule 12b-2 of the Securities Exchange Act of 1934).
Yes X No ___
The number of shares of Common Stock (par value $.25) outstanding at
April 30, 2003 was 234,822,672.
Table of Contents
Page
Numbers
-------
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income
Three Months Ended March 31, 2003 and
March 31, 2002..................................... 3
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002................. 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and
March 31, 2002..................................... 5
Notes to Consolidated Financial Statements............. 6-19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 20-31
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ..................................... 31
Item 4. Controls and Procedures ............................... 32
Part II. Other Information
Item 1. Legal Proceedings ..................................... 33
Item 6. Exhibits and Reports on Form 8-K....................... 33
Signature ...................................................... 34
Certifications ................................................ 35-36
PART I. FINANCIAL INFORMATION
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share data)
Three months ended
March 31
----------------------
2003 2002
-------- --------
Net sales........................................... $1,465.7 $1,372.1
Other revenue....................................... 15.7 11.5
-------- -------
Total revenue....................................... 1,481.4 1,383.6
Costs, expenses and other:
Cost of sales..................................... 574.2 540.9
Marketing, distribution and administrative expenses 743.6 690.1
-------- --------
Operating profit.................................... 163.6 152.6
Interest expense.................................. 9.9 13.4
Interest income................................... (2.5) (4.3)
Other expense(income), net....................... 1.8 (6.0)
-------- --------
Total other expense, net............................ 9.2 3.1
-------- --------
Income from continuing operations before taxes
and minority interest............................. 154.4 149.5
Income taxes........................................ 54.0 52.1
-------- --------
Income before minority interest ..................... 100.4 97.4
Minority interest................................... (1.5) (1.1)
-------- --------
Net income ......................................... $ 98.9 $ 96.3
======== ========
Earnings per share:
Basic ............................................ $ .42 $ .41
Diluted........................................... $ .42 $ .40
Weighted-average shares outstanding:
Basic ............................................ 235.09 236.70
Diluted........................................... 243.82 246.30
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
March 31 December 31
2003 2002
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 452.7 $ 606.8
Accounts receivable.............................. 530.4 555.4
Inventories...................................... 690.0 614.7
Prepaid expenses and other....................... 282.5 271.3
-------- --------
Total current assets............................. 1,955.6 2,048.2
-------- --------
Property, plant and equipment, at cost........... 1,559.5 1,548.4
Less accumulated depreciation.................... 796.7 779.3
-------- --------
762.8 769.1
Other assets..................................... 504.6 510.2
-------- --------
Total assets..................................... $3,223.0 $3,327.5
======== ========
LIABILITIES AND SHAREHOLDERS'(DEFICIT)EQUITY
Current liabilities:
Debt maturing within one year.................... $ 606.8 $ 605.2
Accounts payable................................. 385.6 379.9
Accrued compensation............................. 88.5 175.7
Other accrued liabilities........................ 336.2 336.6
Sales and taxes other than income................ 114.9 125.1
Income taxes..................................... 355.4 353.0
-------- --------
Total current liabilities........................ $1,887.4 1,975.5
-------- --------
Long-term debt................................... 764.9 767.0
Employee benefit plans........................... 532.8 560.4
Deferred income taxes............................ 33.9 35.4
Other liabilities................................ 117.2 116.9
Contingencies (Note 6)
Shareholders'(deficit)equity:
Common stock..................................... 89.8 89.6
Additional paid-in capital....................... 1,042.5 1,019.5
Retained earnings................................ 1,785.1 1,735.3
Accumulated other comprehensive loss ........... (798.2) (791.4)
Treasury stock, at cost.......................... (2,232.4) (2,180.7)
-------- --------
Total shareholders'(deficit)equity............... (113.2) (127.7)
-------- --------
Total liabilities and shareholders'(deficit)equity $3,223.0 $3,327.5
======== ========
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Three months ended
March 31
------------------
2003 2002
------ ------
Cash flows from operating activities:
Net income.............................................. $ 98.9 $ 96.3
Adjustments to reconcile net income to net cash used in
operating activities:
Special payments........................................ (10.6) (7.3)
Asset write-downs ...................................... 12.1 -
Depreciation and amortization........................... 30.2 29.6
Provision for doubtful accounts......................... 30.1 29.3
Amortization of debt discount........................... 4.1 3.8
Foreign exchange losses (gains)......................... 1.4 (10.7)
Deferred income taxes................................... .9 (1.5)
Other................................................... 5.0 3.2
Changes in assets and liabilities:
Accounts receivable................................... (.7) (27.1)
Inventories........................................... (82.5) (71.8)
Prepaid expenses and other............................ (13.9) (10.4)
Accounts payable and accrued liabilities.............. (74.6) (96.5)
Income and other taxes................................ (7.2) (2.0)
Noncurrent assets and liabilities..................... (33.1) 2.8
------ ------
Net cash used in operating activities...... ............ (39.9) (62.3)
------ ------
Cash flows from investing activities:
Capital expenditures.................................... (25.2) (14.6)
Disposal of assets...................................... 2.1 .2
Purchases of investments................................ (5.5) (8.5)
Proceeds from sales of investments...................... 5.3 13.3
Other investing activities.............................. (.3) (.8)
------ ------
Net cash used in investing activities................... (23.6) (10.4)
------ ------
Cash flows from financing activities:
Cash dividends.......................................... (51.6) (49.5)
Book overdraft.......................................... .5 (.5)
Debt, net (maturities of three months or less).......... 4.4 5.8
Proceeds from short-term debt........................... 12.5 17.9
Retirement of short-term debt........................... (20.6) (27.6)
Repurchase of common stock.............................. (52.1) (54.5)
Proceeds from exercise of stock options, net of taxes... 17.2 30.8
------ ------
Net cash used in financing activities................... (89.7) (77.6)
------ ------
Effect of exchange rate changes on cash and equivalents. (.9) (5.4)
------ ------
Net decrease in cash and equivalents.................... (154.1) (155.8)
Cash and equivalents at beginning of period............. 606.8 508.5
------ ------
Cash and equivalents at end of period................... $ 452.7 $ 352.7
======= =======
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share data)
1. ACCOUNTING POLICIES
Basis of Presentation
The accompanying Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
contained in Avon's 2002 Annual Report to Shareholders. The interim
statements are unaudited but include all adjustments, consisting of normal
recurring adjustments, that management considers necessary to fairly present
the results for the interim periods. Results for interim periods are not
necessarily indicative of results for a full year. The year-end balance
sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting
principles.
To conform to the 2003 presentation, certain reclassifications were
made to the prior periods' consolidated financial statements and the
accompanying footnotes.
Consolidation of Variable Interest Entities
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46"), which changes the criteria by which one company
includes another entity in its consolidated financial statements. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN 46
are effective immediately for variable interest entities created after
January 31, 2003, and July 1, 2003, for variable interest entities created
prior to February 1, 2003. The provisions of the interpretation are
currently being evaluated, but management believes its adoption will not
have a material impact on the Consolidated Financial Statements.
2. EARNINGS PER SHARE
Basic earnings per share ("EPS") were computed by dividing Net income by
the weighted-average number of shares outstanding during the period.
Diluted EPS were calculated to give effect to all potentially dilutive
common shares that were outstanding during the period.
For the three months ended March 31, 2003 and 2002, the components of
basic and diluted earnings per share were as follows:
2003 2002
Numerator:
Net income for purposes of computing
basic EPS $ 98.9 $ 96.3
Interest expense on convertible notes,
net of taxes 2.7 2.6
Net income for purposes of computing
diluted EPS $ 101.6 $ 98.9
Denominator:
Basic EPS weighted-average shares
Outstanding 235.09 236.70
Dilutive effect of:
Assumed conversion of
stock options and settlement of
forward contracts (1) 1.77 2.64
Assumed conversion of convertible notes 6.96 6.96
Diluted EPS weighted-average
shares outstanding 243.82 246.30
Basic EPS $ .42 $ .41
Diluted EPS $ .42 $ .40
(1) At March 31, 2003 and 2002, stock options and forward contracts to
purchase Avon common stock totaling 3.2 million shares and 0.3 million
shares, respectively, were not included in the earnings per share
calculation since their impact is anti-dilutive.
Avon purchased approximately 996,000 shares of Avon common stock for
$52.1 during the first three months of 2003, as compared to approximately
1,100,000 shares of Avon common stock for $57.4 during the first three
months of 2002, under a previously announced share repurchase program.
3. INVENTORIES
March 31 December 31
2003 2002
------ ------
Raw materials................ $172.1 $165.6
Finished goods............... 517.9 449.1
------ ------
$690.0 $614.7
====== ======
4. DIVIDENDS
Cash dividends paid per share of common stock were $.21 for the three
months ended March 31, 2003, and $.20 for the corresponding 2002 period. On
January 31, 2003, Avon increased the annualized dividend rate to $.84 from
$.80.
5. STOCK-BASED COMPENSATION
Avon applies the recognition and measurement principles of Accounting
Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to
Employees," and released interpretations in accounting for its long-term
stock-based incentive plans. No compensation cost related to grants of
stock options was reflected in Net income, as all options granted under the
plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. Compensation cost related to grants of
restricted stock is equal to the quoted market price of Avon's stock at the
measurement date and is amortized to expense over the vesting period.
Compensation expense under grants of restricted stock for the three months
ended March 31, 2003 and 2002, was $1.8 and $2.2, respectively. The effects
on Net income and Earnings per share if Avon had applied the fair value
recognition provisions of FAS No. 123, "Accounting for Stock-Based
Compensation," to stock-based compensation for three months ended March 31,
2003 and 2002 were as follows:
2003 2002
---- ----
Net income, as reported $98.9 $96.3
Less: Stock-based compensation
expense determined under
FAS No. 123, net of tax (7.6) (5.8)
Pro forma Net income 91.3 90.5
Earnings per share:
Basic - as reported $.42 $ .41
Basic - pro forma $.38 $ .38
Diluted - as reported $.42 $ .40
Diluted - pro forma $.39 $ .38
6. CONTINGENCIES
Avon is a defendant in a class action suit commenced in 1991 on behalf
of certain classes of holders of Avon's Preferred Equity-Redemption
Cumulative Stock ("PERCS"). Plaintiffs allege various contract and
securities law claims related to the PERCS (which were fully redeemed in
1991) and seek aggregate damages of approximately $145.0, plus interest. A
trial of this action took place in the United States District Court for the
Southern District of New York and concluded in November 2001. At the
conclusion of the trial, the judge reserved decision in the matter. Avon
believes it presented meritorious defenses to the claims asserted. However,
it is not possible to predict the outcome of litigation and it is reasonably
possible that the trial, and any possible appeal, could be decided
unfavorably. Management is unable to make a meaningful estimate of the
amount or range of loss that could result from an unfavorable outcome but,
under some of the damage theories presented, an adverse award could be
material to the Consolidated Financial Statements.
Avon is a defendant in an action commenced in the Supreme Court of the
State of New York by Sheldon Solow d/b/a Solow Building Company, the
landlord of the Company's former headquarters in New York City. Plaintiff
seeks aggregate damages of approximately $80.0, plus interest, for the
Company's alleged failure to restore the leasehold premises at the
conclusion of the lease term in 1997. A trial of this matter was scheduled
for February 2002, but was stayed pending the determination of (i) an
interlocutory appeal by plaintiff of an order that denied the plaintiff's
motion for summary judgment and granted partial summary judgment in favor of
the Company on one of the plaintiff's claims; and (ii) an appeal by
plaintiff of a decision in an action against another former tenant that
dismissed plaintiff's claims after trial. In January 2003, both appeals
were decided against the plaintiff. Plaintiff has filed motions to appeal
both decisions and a trial has not yet been scheduled. While it is not
possible to predict the outcome of litigation, management believes that
there are meritorious defenses to the claims asserted and that this action
should not have a material adverse effect on the Consolidated Financial
Statements. This action is being vigorously contested.
Avon Products Foundation, Inc. (the "Avon Foundation") is a defendant
in an arbitration proceeding brought by Pallotta TeamWorks ("Pallotta") on
September 3, 2002, before Judicial Arbitration and Mediation Services, Inc.
("JAMS"). Pallotta asserts claims of breach of contract, misappropriation
of opportunity, tortious interference with prospective contractual
arrangement and unfair competition arising out of the Avon Foundation's
decision to use another party to conduct breast cancer fundraising events,
and seeks unspecified damages and attorneys' fees. In January 2003,
Pallotta's misappropriation claim was dismissed by the arbitrator. In
February 2003, Pallotta's unfair competition claim was also dismissed by the
arbitrator. A hearing on the remaining claims has been scheduled for July
2003. The Avon Foundation believes that it has meritorious defenses to the
claims asserted by Pallotta and has filed a number of counterclaims, and
initiated a separate arbitration proceeding before JAMS. The Avon
Foundation is a registered 501(c)(3) charity and is a distinct entity from
Avon Products, Inc., which is not a party to these proceedings. While it
is not possible to predict the outcome of litigation, management believes
that these proceedings should not have a material adverse effect on the
Consolidated Financial Statements of the Company.
On December 20, 2002, a Brazilian subsidiary of the Company received a
series of tax assessments from the Brazilian tax authorities asserting that
the establishment in 1995 of separate manufacturing and distribution
companies in that country was done without a valid business purpose. The
assessments assert tax deficiencies during portions of the years 1997 and
1998 of approximately $61.0 at the exchange rate on the date of this filing,
plus penalties and accruing interest totaling approximately $115.0 at the
exchange rate on the date of this filing. In the event that the assessments
are upheld in the earlier stages of review, it may be necessary for the
Company to provide security to pursue further appeals, which, depending on
the circumstances, may result in a charge to income. It is not possible to
make a reasonable estimate of the amount or range of expense that could
result from an unfavorable outcome in respect of these or any additional
assessments that may be issued for subsequent periods. The structure
adopted in 1995 is comparable to that used by many companies in Brazil, and
the Company believes it is appropriate, both operationally and legally, and
that the assessments are unfounded. This matter is being vigorously
contested and in the opinion of the Company's outside counsel the likelihood
that the assessments ultimately will be upheld is remote. Management
believes that the likelihood that the assessments will have a material
impact on the Consolidated Financial Statements is also remote.
Polish subsidiaries of the Company have been responding to Protocols of
Inspection served by the Polish tax authorities in respect of 1999 and 2000
tax audits. The Protocols asserted tax deficiencies, penalties and accruing
interest totaling approximately $30.0 at the exchange rate on the date of
this filing: $17.0 primarily relating to the documentation of certain sales,
and $13.0 relating to excise taxes. The procedural rules for conducting
audits in Poland changed effective January 1, 2003, and the Company was
informed on January 14, 2003 and January 17, 2003, respectively, that the
tax authorities had rejected the Company's factual assertions regarding the
alleged tax deficiencies. Under the new procedures, each matter has now
either commenced or is awaiting the commencement of a second stage of
proceeding at which the applicable legal conclusions will be determined.
Notice has been received in respect of one element of the excise tax matter,
indicating that a second-stage final assessment may be issued without
further notice from the tax authorities. In the event that assessments are
finally established at the second stage of the proceedings, it may be
necessary to pay the assessments in order to pursue further appeals, which
may result in a charge to income. Management believes that there are
meritorious defenses to these proceedings and they are being vigorously
contested. It is not possible to make a reasonable estimate of the amount
or range of expense that could result from an unfavorable outcome in these
proceedings but management does not believe that the proceedings ultimately
will have a material impact on the Consolidated Financial Statements.
Various other lawsuits and claims (asserted and unasserted), arising
in the ordinary course of business or related to businesses previously sold,
are pending or threatened against Avon. In the opinion of Avon's
management, based on its review of the information available at this time,
the total cost of resolving such other contingencies at March 31, 2003,
should not have a material adverse effect on the Consolidated Financial
Statements.
7. COMPREHENSIVE INCOME
For the three months ended March 31, 2003 and 2002, the components of
comprehensive income were as follows:
2003 2002
------ ------
Net income $ 98.9 $ 96.3
Other comprehensive loss:
Foreign currency translation and
transaction adjustments (5.3) (29.2)
Unrealized loss from available-for-sale
securities (.5) (.2)
Net derivative (losses)gains on cash
flow hedges (1.0) .5
------ ------
Comprehensive income $ 92.1 $ 67.4
====== ======
Cash flow hedges impacted other comprehensive loss as follows for the
three months ended March 31:
2003 2002
------ ------
Net losses on derivative instruments $ (.7) $ (1.5)
Reclassification of (gains)losses to earnings (.3) 2.0
------ -----
Net (decrease)increase to other
comprehensive loss $ (1.0) $ .5
====== =====
8. SPECIAL CHARGES
In May 2001, Avon announced its new Business Transformation plans,
which are designed to significantly reduce costs and expand profit margins,
while continuing to focus on consumer growth strategies. Business
Transformation initiatives include an end-to-end evaluation of business
processes in key operating areas, with target completion dates through 2004.
Specifically, the initiatives focus on simplifying Avon's marketing
processes, taking advantage of supply chain opportunities, strengthening
Avon's sales model through the Sales Leadership program and the Internet,
streamlining the Company's organizational structure and integrating certain
similar activities across markets to achieve efficiencies. Avon anticipates
significant benefits from these Business Transformation initiatives, but the
scope and complexity of these initiatives necessarily involve planning and
execution risk.
Special Charges - Fourth Quarter 2001
In the fourth quarter of 2001, Avon recorded Special charges of $97.4
pretax ($68.3 after tax, or $.28 per share on a diluted basis) primarily
associated with facility rationalizations and workforce reduction programs
related to implementation of certain Business Transformation initiatives.
The charges of $97.4 were included in the Consolidated Statement of Income
for 2001 as Special charges ($94.9) and as inventory write-downs, which were
included in Cost of sales ($2.5). Approximately 80% of the charges relate
to future cash expenditures. Approximately 60% of these cash expenditures
were made by March 2003, with approximately 90% of total cash payments to be
made by December 2003. All payments are funded by cash flow from
operations.
Special charges by business segment were as follows:
Corporate
North Latin and
America* U.S. America Europe Other Total
Facility
rationalizations** $ 16.8 $ 14.3 $ 17.7 $ 13.2 $ - $ 62.0
Workforce reduction
programs .9 9.7 6.4 2.1 14.0 33.1
Other - 2.1 - - .2 2.3
Total accrued charges $ 17.7(1) $ 26.1(2) $ 24.1(3) $ 15.3(4) $ 14.2(5) $ 97.4
Number of employee
terminations 362 460 2,007 533 125 3,487
*Excludes amounts related to the U.S.
**Includes accrued severance and related costs associated with facility
rationalizations.
(1) The majority of the special charge within the North America segment
related to a plan to outsource jewelry manufacturing through third party
vendors, resulting in the closure of a jewelry manufacturing facility in
Puerto Rico.
(2) The special charge within the U.S. segment primarily related to the
closure of a manufacturing facility in Suffern, New York. Production is
being moved to an existing facility in Springdale, Ohio and to one or more
third party manufacturers. To a lesser extent, the special charge also
included workforce reduction programs within the marketing and supply chain
functions as well as the closure of four express centers (distribution
centers where customers pick up products).
(3) The majority of the special charge within the Latin America segment
related to the closure of a manufacturing and distribution facility in
Mexico City, Mexico. The project also included a construction plan to
expand an existing facility in Celaya, Mexico and the movement of the
manufacturing and distribution functions on a staged basis to the newly
constructed site. To a lesser extent, the special charge also included
workforce reduction programs in Brazil (primarily in the supply chain
function) and in Argentina and Mexico (across numerous functional areas).
(4) The special charge within Europe primarily related to the closure of a
manufacturing facility in the United Kingdom, with most of the production
moving to an existing facility in Poland.
(5) The Corporate and other special charge was the result of workforce
reduction programs which spanned much of the organization, including the
legal, human resources, information technology, communications, finance,
marketing and research & development departments.
Special charges by category of expenditures were as follows:
Accrued
Accrued Facility
Severance Asset Rational-
and Cost of Impair- Special Contract ization
Related Sales ment Termination Termination and Other
Costs Charge Charge Benefits Costs Costs Total
Facility
rationalizations $ 42.9 $ 2.5 $ 5.1 $ 5.0 $ 2.2 $ 4.3 $ 62.0
Workforce reduction
programs 26.9 - - 6.2 - - 33.1
Other - - .3 - 1.3 .7 2.3
Total accrued charges $ 69.8 $ 2.5 $ 5.4 $ 11.2 $ 3.5 $ 5.0 $ 97.4
Accrued severance and related costs are expenses associated with
domestic and international facility rationalizations and workforce reduction
programs. Employee severance costs were accounted for in accordance with
the Company's existing FAS No. 112, "Employers' Accounting for Post-
employment Benefits," severance plans or in accordance with other accounting
literature. Approximately 3,500 employees, or 8.0% of the total workforce,
will receive severance benefits. Approximately 85% of the number of
employees to be terminated relate to facility rationalizations, which
represents employees within the manufacturing and distribution functions.
The remainder of the employee severance costs are associated with workforce
reduction programs, which span much of the organization including the
functional areas of marketing, sales, information technology, human
resources, finance, research & development, legal, communications and
strategic planning. The facility rationalizations will primarily result in
expanding production in existing facilities (Europe and U.S.), building a
new facility (Latin America) and sourcing product through third party
vendors (North America including the U.S.). In certain circumstances,
employees terminated due to facility rationalizations will need to be
replaced. The majority of the employee severance costs will be paid by the
end of 2003 in accordance with the original plan.
The Cost of sales charge represented losses for inventory write-downs
associated with a facility closure in Puerto Rico.
Primarily as a result of facility rationalizations, management
identified indicators of possible impairment of certain long-lived assets,
consisting of buildings and improvements, equipment and other assets. In
assessing and measuring impairment of long-lived assets, the Company applied
the provisions of FAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". Recoverability of
assets to be held and used was measured by the comparison of the carrying
amount of the assets with expected future cash flows of the assets (assets
were grouped at the lowest level for which there were identifiable cash
flows that were largely independent of the cash flows of other groups of
assets). As a result of the impairment review, an asset impairment charge
was recorded. Approximately $4.0 of the asset impairment charge related to
the closure of a facility in Puerto Rico and reflected the reduction in the
carrying value of equipment to its estimated fair market value based on
selling prices for comparable equipment. The equipment was sold in the
first half of 2002. The remaining charge related to assets (leasehold
improvements and other assets) that have been abandoned.
Special termination benefits represent the impact of employee
terminations on the Company's benefit plans in the U.S. and certain
international locations. In accordance with FAS No. 88, "Employers'
Accounting for Settlements and Curtailment of Defined Benefit Pension Plans
and for Termination Benefits," the plans experienced a net loss from
curtailment and special termination benefits of $1.3 and $9.9, respectively.
The curtailment charge reflected the difference between the liabilities
assuming all of the participants terminate as of their severance date versus
the ongoing liability for these participants under FAS No. 87, "Employers
Accounting for Pensions", at the curtailment date assuming continued active
employment. The special termination benefits included a loss resulting from
an increase in a liability due to additional service and pay earned during
the severance period, coupled with an additional liability attributable to
paying benefits at an actual rate versus an assumed rate.
Contract termination costs primarily represented lease buyout costs
related to facility closures in North America (including the U.S.) and
cancellation of a contract with a third-party supplier of warehousing and
logistical services in the U.S.
Accrued facility rationalization and other costs primarily represented
incremental costs associated with the facility rationalizations, including
administrative expenses during the shutdown period, employee and union
communication costs and legal fees.
While project plans associated with these initiatives have not changed,
the Company has experienced favorable adjustments to its original cost
estimates. As a result, in the third quarter 2002, the Company reversed $7.3
pretax ($5.2 after tax, or $.02 per diluted share) against the Special
charge line in the Consolidated Statements of Income, where the estimates
were originally recorded. The favorable adjustments primarily related to
certain employees pursuing reassignments in other Avon locations, as well as
lower severance costs resulting from higher than anticipated lump-sum
distributions (associates who elect lump-sum distributions do not receive
benefits during the severance period).
Special Charges - Third Quarter 2002
On September 30, 2002, the Company authorized a plan related to the
implementation of its Business Transformation initiatives. In connection
with these initiatives, in the third quarter of 2002, Avon recorded Special
charges of $43.6 pretax ($30.4 after tax, or $.12 per diluted share). These
charges were primarily associated with the following initiatives:
* Supply chain initiatives, including actions to improve efficiencies
and productivity in manufacturing, logistics, transportation and
distribution activities;
* Workforce reduction programs focused on realigning the organization
and leveraging regional structures; and
* Sales transformation initiatives, including a shift to a more variable
expense base and changes in the selling structure due to a variety of
initiatives to contemporize the sales model.
Approximately 90% of the charge will result in future cash
expenditures. Approximately 30% of these cash expenditures were made by
March 2003, with over 90% of total cash payments to be made by December
2003. All payments will be funded by cash flow from operations.
The third quarter charges (net of the $7.3 adjustment to the 2001
Special charges as previously disclosed) were included in the Consolidated
Statements of Income as Special charges ($34.3) and as inventory write-
downs, which were included in Cost of sales ($2.0).
The third quarter 2002 Special charges (net of adjustment to the 2001
charges) affected all business segments as follows:
Corporate
North Latin and
America* U.S. America Europe Pacific Other Total
Supply chain $ 3.1 $ 3.2 $ .8 $ 5.9 $ 4.5 $ - $ 17.5
Workforce reduction
programs 1.6 1.2 3.3 1.6 - 3.9 11.6
Sales transformation
initiatives - 1.8 - 10.0 2.7 - 14.5
Total accrued charge 4.7(1) 6.2(2) 4.1(3) 17.5(4) 7.2(5) 3.9(6) 43.6
Adjustment to 2001
special charge (2.0) (4.4) - - - (.9) (7.3)
Net accrued charge $ 2.7 $ 1.8 $ 4.1 $ 17.5 $ 7.2 $ 3.0 $ 36.3
Number of
employee terminations 152 179 241 302 119 41 1,034
*Excludes amounts related to the U.S.
(1) The majority of the special charge within the North America segment
related to the closure of a manufacturing facility in Canada and the
transition of production to existing facilities in the U.S.
(2) The special charge within the U.S. segment primarily related to workforce
reduction programs within the sales and supply chain functions.
(3) The majority of the special charge within the Latin America segment
included workforce reduction programs in Argentina, Central America and in
Venezuela (across numerous functional areas).
(4) The special charge within Europe primarily related to the restructuring
of the sales force in certain Western European markets as well as the
reconfiguration of distribution operations in the region.
(5) The special charge within the Pacific segment primarily related to supply
chain initiatives in Japan, Australia and the Philippines. In addition, the
special charge included costs associated with the closure of stores and a
procurement center in Hong Kong and the closure of a store and office in
Singapore, as well as contract cancellation fees and other costs resulting
from the shutdown of certain sales branches in Malaysia.
(6) The Corporate and other special charge was the result of a workforce
reduction program primarily within the information technology department.
2002 Special charges (net of adjustment to the 2001 charges) by category
of expenditures were as follows:
Accrued
Severance Cost of Contract
and Related Sales Termination Other
Costs Charge Costs Costs Total
Supply chain $ 14.2 $ 1.4 $ .1 $ 1.8 $ 17.5
Workforce reduction programs 11.0 - - .6 11.6
Sales transformation initiatives 9.7 .6 2.3 1.9 14.5
Total accrued charges 34.9 2.0 2.4 4.3 43.6
Adjustment to 2001
Special charges (5.7) - - (1.6) (7.3)
Net accrued charges $ 29.2 $ 2.0 $ 2.4 $ 2.7 $ 36.3
Accrued severance and related costs are expenses, both domestic and
international, associated with supply chain initiatives (primarily North
America, Europe and the Pacific), workforce reduction programs (all segments
except the Pacific) and sales transformation initiatives (primarily Europe,
the Pacific and U.S). Employee severance costs were accounted for in
accordance with the Company's existing FAS No. 112 severance plans, or with
other accounting literature. Approximately 1,000 employees, or 2.0% of the
total workforce, will receive severance benefits. Over 90% of the employee
severance costs will be paid by December 2003.
Approximately 45% of the number of employees to be terminated related
to facility rationalizations and the supply chain function, which primarily
represents employees within the manufacturing and distribution functions.
Approximately 20% of the number of employees to be terminated related to the
sales transformation initiatives, which represent employees within the sales
function. The remainder of the employee severance costs is associated with
workforce reduction programs, which span much of the organization including
the functional areas of marketing, information technology, human resources,
research and development and strategic planning.
The Cost of sales charge for inventory write-downs primarily represents
losses associated with store and branch closures (primarily Pacific) as well
as the discontinuation of selected product lines (Europe).
Contract termination costs primarily represent lease buyout costs
related to store and branch closures (primarily Pacific) and contract
cancellation fees with store owners (Pacific).
Other costs primarily represent administrative expenses associated with
a facility rationalization, employee and union communication costs, pension
termination benefits and legal and professional fees (primarily Europe).
Liability Balances for Special Charges
The liability balances for Special charges at March 31, 2003, were as
follows:
Accrued
Severance Asset
and Cost of Impair Special Contract
Related Sales ment Termination Termination Other
Costs Charge Charge Benefits Costs Costs Total
2001 Charges:
Balance at
December 31, 2002 $ 27.1 $ - $ - $ - $ - $ 2.7 $ 29.8
Cash expenditure (3.7) - - - (.2) (3.9)
-------- ------- ------ ------ -------- ------ -----
Balance at
March 31, 2003 $ 23.4 $ - $ - $ - $ - $ 2.5 $ 25.9
2002 Charges:
Balance at
December 31, 2002 $ 30.8 $ - $ - $ - $ 1.0 $ 2.2 $ 34.0
Cash expenditures (6.7) - - - - $ - (6.7)
-------- ------ ------ ------- ------- ------- -------Balance at
March 31, 2003 $ 24.1 $ - $ - $ - $ 1.0 $ 2.2 $ 27.3
The liability balances and employee terminations by business segment
were as follows:
2001 Charges:
Corporate
North Latin and
America* U.S. America Europe Pacific Other Total
Total Accrued charges $ 17.7 $ 26.1 $ 24.1 $ 15.3 $ - $ 14.2 $ 97.4
Less: Expenses charged (14.1) (16.4) (10.9) (11.2) - (11.6) (64.2)
Less: Adjustment (2.0) (4.4) - - - (.9) (7.3)
Balance at
March 31, 2003 1.6(a)$ 5.3(b)$ 13.2(c)$ 4.1(d)$ - $ 1.7(e)$ 25.9
Number of planned employee
terminations 362 460 2,007 533 - 125 3,487
Remaining employee
terminations at
March 31, 2003 - 107 1,146 196 - - 1,449
*Excludes amounts related to the U.S.
(a) The majority of the remaining liability relates to remaining amounts
payable to employees already receiving severance as a result of the
closure of Avon's jewelry manufacturing facility in Puerto Rico. The
facility was closed in September 2002, with substantially all remaining
severance payments to be made in 2003.
(b) The majority of the remaining liability relates to employee severance
costs resulting from the closure of a manufacturing facility in
Suffern, NY. Employee terminations began in September 2002 and will
continue through June 2003, with a majority of the remaining severance
payments completed in 2003.
(c) The majority of the remaining liability relates to employee severance
costs
relating to a facility rationalization in Mexico. The facility
project includes the closure of a manufacturing and distribution
facility, a construction plan to expand an existing facility and the
moving of the manufacturing and distribution functions on a staged
basis to a newly constructed site. The workforce will be terminated
over a transition period (700 in 2002, 600 in 2003 and 500 in 2004).
The distribution facility was closed in October 2002. All key
milestones of the project plan are currently in accordance with the
original plan.
(d)The majority of the remaining liability relates to a facility
rationalization in the United Kingdom. The facility closure was
announced in 2002; however, severance benefits were not paid
immediately since employees are being retained during the migration of
production. Employee terminations are expected to be completed in the
second quarter of 2003, in accordance with the plan.
(e)The remaining liability relates to remaining amounts payable to
employees already receiving severance.
2002 Charges:
Corporate
North Latin and
America* U.S. America Europe Pacific Other Total
Total Accrued Charges $ 4.7 $ 6.2 $ 4.1 $ 17.5 $ 7.2 $ 3.9 $ 43.6
Less: Expenses Charged (1.3) (1.2) (2.4) (4.0) (5.4) (2.0) (16.3)
------- ------ ------- ------- ------ ------- ------
Balance at
March 31, 2003 $ 3.4(a) $ 5.0(b)$ 1.7(c)$ 13.5(d)$ 1.8(e) $ 1.9(f)$ 27.3
Number of planned employee
terminations 152 179 241 302 119 41 1,034
Remaining employee
terminations at
March 31, 2003 128 163 162 232 34 5 724
*Excludes amounts related to the U.S.
(a)The majority of the remaining liability relates to employee severance
costs resulting from the closure of a manufacturing facility in Canada
and the transition of production to existing facilities in the U.S.
Employee terminations began in March 2003 and will continue through
September 2003, with the majority of payments made by December 2003.
(b)The majority of the remaining liability relates to employee severance
costs associated with workforce reduction programs within the sales
and supply chain functions. Employee terminations began in December
2002 and will continue through September 2003, with a majority of
payments made by December 2003.
(c)The majority of the remaining liability relates to employee severance
costs associated with workforce reduction programs in Argentina,
Central America and Venezuela. Employee terminations began in October
2002 and will continue through September 2003, with substantially all
payments made by December 2003.
(d)The majority of the remaining liability relates to employee severance
costs. Employee terminations began in November 2002, with a majority
of payments made by December 2003.
(e)The majority of the remaining liability relates to employee severance
costs related to supply chain initiatives. Employee terminations
began in December 2002, with a majority of payments made by March
2003. The procurement center in Hong Kong, the store and office in
Singapore and 15 sales branches in Malaysia were closed in 2002.
(f)The remaining liability relates to remaining amounts payable to
employees already receiving severance.
9. SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments was as follows:
Three Months Ended March 31,
-------------------------------------------
2003 2002
-------------------- -------------------
Net Operating Net Operating
Sales Profit Sales Profit
-------- -------- -------- --------
North America:
U.S. $ 501.2 $ 97.5 $ 496.6 $ 92.2
U.S. Retail* 1.9 (21.7) 1.8 (7.0)
Other** 65.4 6.6 62.8 9.9
-------- -------- -------- --------
Total 568.5 82.4 561.2 95.1
-------- -------- -------- --------
International:
Latin America*** 358.9 64.3 389.8 61.9
Europe 326.4 47.3 240.1 31.3
Pacific 211.9 33.9 181.0 22.5
-------- -------- -------- --------
Total International 897.2 145.5 810.9 115.7
-------- -------- -------- --------
Total from operations $1,465.7 $ 227.9 $1,372.1 $ 210.8
Global expenses - (64.3) - (58.2)
-------- -------- -------- --------
Total $1,465.7 $ 163.6 $1,372.1 $ 152.6
======== ======== ======== ========
*Includes U.S. Retail and Avon Centre. 2003 operating profit for U.S.
Retail includes costs of $18.2 related to severance and asset write-downs
(see Note 12, Other Information).
**Includes Canada, Dominican Republic and Puerto Rico. Beginning January 1,
2003, the Dominican Republic was included in North America whereas in prior
periods it had been included in Latin America. Prior periods have been
restated to reflect this change.
***Avon's operations in Mexico reported Net sales for 2003 and 2002 of
$159.1 and $154.7, respectively, and Operating profit for 2003 and 2002 of
$38.6 and $30.5, respectively.
The following table presents consolidated Net sales by classes of
principal products, for the three months ended March 31:
2003 2002
-------- --------
Beauty* $ 977.2 $ 881.1
Beauty Plus** 254.4 261.2
Beyond Beauty*** 178.9 190.3
Health and Wellness**** 55.2 39.5
-------- --------
Total net sales $1,465.7 $1,372.1
======== ========
*Beauty includes cosmetics, fragrance and toiletries.
**Beauty Plus includes fashion jewelry, watches, apparel and accessories.
***Beyond Beauty includes home products, gift and decorative products, and
candles.
****Health and Wellness includes vitamins, aromatherapy products, exercise
equipment, stress relief and weight management products.
10. Financial Instruments
In February 2003, Avon entered into a treasury lock agreement with
a notional amount of $75.0 that expired in May 2003. On May 9, 2003,
this treasury lock agreement was settled and Avon recorded a gain of
$0.1. This agreement was used to hedge the exposure to a possible rise
in interest rates prior to the anticipated issuance of debt in 2003.
Accordingly, the gain was recorded in Accumulated Other Comprehensive
Income ("OCI") and is expected to be amortized to interest expense over
the life of the anticipated debt. If Avon does not issue the
anticipated debt within a certain time period, the gain recorded in
Accumulated OCI will be reclassified to interest expense.
11. Supplemental Income Statement Information
For the three months ended March 31, 2003 and 2002, the components of
Other expense (income), net were as follows:
2003 2002
------- -------
Foreign exchange losses (gains), net $ 1.1 $ (7.5)
Amortization of debt issue costs
and other financing 1.7 1.4
Other (1.0) .1
------- -------
Other expense (income), net $ 1.8 $ (6.0)
======= =======
12. Other Information
In January 2003, Avon announced that it had agreed with J.C. Penney to
end the business relationship pursuant to which Avon's beComing line of
products has been carried in approximately 90 J.C. Penney stores. The
beComing brand will be sold through Avon's direct selling channel in the
U.S., exclusively by Avon Beauty Advisors, who are independent Avon sales
Representatives with specialized beauty product training and consultative
selling skills. For the three months ended March 31, 2003, costs associated
with ending this business relationship were $18.2, including severance costs
($3.5), asset and inventory write-downs ($12.1) and other related expenses
($2.6). These costs were included in the Consolidated Statements of Income
in Marketing, distribution and administrative expenses ($10.4) and in Cost
of sales ($7.8).
13. Debt
On February 25, 2003, the Company filed a Registration Statement on
Form S-3 with the U.S. Securities and Exchange Commission ("SEC") to
register the issuance by the Company from time to time of $1,000.0 of
debt securities. The registration statement was declared effective by
the SEC on March 21, 2003. (See Note 14, Subsequent Events).
14. Subsequent Events
On May 1, 2003, Avon declared a quarterly dividend on its common stock
of $.21 per share, payable June 2, 2003, to shareholders of record on May
16, 2003.
In April 2003, the callholder exercised the call option associated with
the $100.0 of 6.25% putable/callable notes previously scheduled to mature in
2018. Pursuant to an agreement with the callholder, Avon modified the
putable/callable notes into $125.0 aggregate principal amount of 4.625%
notes due May 15, 2013, such modified principal amount representing the
value of the putable/callable notes and their related call option, plus
approximately $4.0 principal amount of additional notes issued for cash.
On May 13, 2003, $125.0 of 4.625% registered notes were issued in exchange
for the modified notes held by the callholder. The $125.0 of notes were issued
under the Company's $1,000.0 shelf registration (See Note 13, Debt).
On May 1, 2003, the Company entered into a 10-year interest rate swap
agreement (subject to an option to terminate the swap at the end of 7 years)
with a notional amount totaling $125.0 to effectively convert fixed interest
on the $125.0 of bonds to variable interest rates, based on LIBOR.
On May 9, 2003, a treasury lock agreement, which Avon had entered into
in December 2002, with a notional amount of $100.0 was settled and Avon
recorded a loss of $2.8. This agreement was used to hedge the exposure to a
possible rise in interest rates prior to the anticipated issuance of debt in
2003. Accordingly, the loss was recorded in Accumulated OCI and is expected
to be amortized to interest expense over the life of the anticipated debt.
If Avon does not issue the anticipated debt within a certain time period,
the loss recorded in Accumulated OCI will be reclassified to interest
expense.
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 2003 AND 2002.
Consolidated
Favorable
(Unfavorable)
%/Point
2003 2002 Change
-------- -------- --------
Net sales $1,465.7 $1,372.1 7%
Total revenue 1,481.4 1,383.6 7
Cost of sales 574.2 540.9 (6)
Marketing, distribution and
administrative expenses 743.6 690.1 (8)
Operating profit 163.6 152.6 7
Interest expense 9.9 13.4 26
Interest income (2.5) (4.3) (42)
Other (income) expense, net 1.8 (6.0) -
Net income 98.9 96.3 3
Diluted earnings per share .42 .40 5
Gross margin 61.2% 60.9% .3
Operating expense ratio 50.2% 49.9% (.3)
Operating margin 11.0% 11.0% -
Effective tax rate 35.0% 34.8% (.2)
Units 10%
Active Representatives 13%
Net Sales
Net sales growth in 2003 was driven by an increase in units and the
number of active Representatives, with dollar increases in all regions
except Latin America, which was negatively impacted by weaker foreign
exchange rates. Excluding the impact of foreign currency exchange,
consolidated Net sales increased 12%, with increases in all regions.
The 2003 Net sales increase was also driven by an 11% increase in
Beauty sales (driven by strong increases in fragrance, skin care, personal
care and color categories) and, to a lesser extent, a 40% increase in Health
and Wellness sales, partially offset by declines in Beyond Beauty of 6% and
Beauty Plus of 3% (driven by declines in accessories and watches).
Gross Margin
Gross margin improved in 2003 due to increases in the Pacific (1.7
points, which increased consolidated gross margin by .2 point) and Latin
America (.5 point, which increased consolidated gross margin by .1 point),
partially offset by decreases in Europe (.6 point, which reduced
consolidated gross margin by .1 point) and North America (.1 point, which
reduced consolidated gross margin by .1 point). Additionally, gross margin
benefited from greater contributions from countries with higher gross
margins (which increased consolidated gross margin by .2 point).
The gross margin improvements discussed above include incremental net
savings across all geographic segments associated with supply chain Business
Transformation initiatives, which favorably impacted consolidated gross
margin by .7 point. Gross margin in 2003 also included $7.8 of inventory
write-downs related to the repositioning of the beComing line of products,
which decreased consolidated gross margin by .5 point (see Note 12, Other
Information).
See the "Segment Review" sections of Management's Discussion and
Analysis of Financial Condition and Results of Operations for additional
information related to changes in gross margin by segment.
Marketing, Distribution and Administrative Expenses
Marketing, distribution and administrative expenses increased $53.5 in
2003 primarily due to a 7% sales increase (which resulted in an increase in
expenses of approximately $31.0), an increase in consumer and strategic
investments of $10.0 (including brochure enhancements, advertising and Sales
Leadership), costs of $10.4 (severance and asset write-downs) associated
with the repositioning of the beComing line of products (see Note 12, Other
information), an increase in U.S. pension expense of $4.7 and merit salary
increases of $3.7 for certain marketing, distribution and administrative
personnel around the world. These increases in expenses were partially
offset by incremental net savings from workforce reduction programs
associated with Avon's Business Transformation initiatives of $13.0.
As a percentage of Total revenue, Marketing, distribution and
administrative expenses increased .3 point in 2003 due to a higher expense
ratio in North America (2.4 points, which increased the consolidated ratio
by 1.0 point), partially offset by lower expense ratios in Europe (2.0
points, which reduced the consolidated ratio by .4 point), Latin America
(1.5 points, which reduced the consolidated ratio by .4 point) and the
Pacific (1.8 points, which reduced the consolidated ratio by .3 point).
Additionally, the consolidated expense ratio was negatively impacted by
greater contributions from markets with higher expense ratios (which
increased the consolidated ratio by .4 point).
See the "Segment Review" sections 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 Expense (Income)
Interest expense decreased in 2003 primarily as a result of continued
declines in domestic interest rates.
Interest income decreased in 2003 primarily due to lower Cash and cash
equivalent balances.
Other expense (income), net was unfavorable in 2003 as compared to 2002
by $7.8 primarily due to unfavorable foreign exchange of $8.6. The foreign
exchange variance was primarily comprised of net foreign exchange losses of
$.3 as compared to gains of $11.3 in 2002 on net U.S. dollar denominated
assets primarily in Mexico, Argentina, Brazil, and Venezuela, partially
offset by gains of $3.5 in 2003 on Argentine peso and Mexican peso foreign
exchange contracts.
Avon anticipates that the overall foreign exchange variance will
continue to be unfavorable in the second quarter of 2003 versus the same
period in 2002, reflecting significant foreign exchange losses in 2003 as
compared to foreign exchange gains in 2002.
Effective Tax Rate
The effective tax rate was higher in 2003 due to changes in the
earnings mix and tax rates of international subsidiaries.
Segment Review
North America
%/Point
2003 2002 Change
------ ------ ------
Net sales $568.5 $561.2 1 %
Operating profit 82.4 95.1 (13)%
Operating margin 14.3% 16.7% (2.4)
Units 5%
Active Representatives 4%
Net sales increased due to growth in units and the number of active
Representatives. The U.S. business, which represents approximately 90% of
the North American segment, reported a sales increase of 1% resulting from
an increase in units, and the number of active Representatives due to
continued growth of the Sales Leadership program, partially offset by a
temporary disruption to the business caused by severe snow storms and the
impact of the war in Iraq on consumer spending.
On a category basis, the 2003 sales increase in the U.S. was driven by
an 8% increase in Beauty Sales (driven by increases in the color, skin care
and personal care categories) and a 29% increase in Health and Wellness
sales (driven by new product introductions), largely offset by a 16% decline
in Beyond Beauty and a 5% decline in Beauty Plus.
The decrease in operating margin in North America was most
significantly impacted by the following markets:
* Operating margin for the U.S. Retail business declined significantly
(which decreased segment margin by 3.5 points) resulting from costs of
$18.2 associated with the repositioning of the beComing line of products
(see Note 12, Other Information).
* Operating margin in the U.S. improved (which increased segment margin by
..7 point) primarily due to the sales increase discussed above, and gross
margin expansion, mainly due to a favorable mix of products sold, price
increases in the Beauty category, and supply chain savings resulting from
sourcing initiatives associated with Business Transformation. The
improvement in gross margin was partially offset by an unfavorable
expense ratio due to higher transportation expenses, incremental spending
on advertising and sampling, and higher pension-related costs, partially
offset by incremental supply chain savings associated with Business
Transformation initiatives. Pension expense for full year 2003 related
to the U.S. plan is expected to increase in the range of $20.0 to $25.0
primarily due to negative investment returns in 2001 and 2002.
Europe
%/Point Change
------------------
Local
2003 2002 US$ Currency
------ ------ ------ --------
Net sales $326.4 $240.1 36% 22%
Operating profit 47.3 31.3 51% 43%
Operating margin 14.4% 13.0% 1.4 1.4
Units 26%
Active Representatives 21%
Net sales increased in U.S. dollars and local currencies driven by
substantial growth in units and the number of active Representatives with
the following markets having the most significant impact:
* In the markets of Central and Eastern Europe, Net sales in U.S. dollars
and local currencies grew significantly, primarily in Russia and Poland.
In Russia, local currency sales grew more than 60% due to significant
growth in active Representatives resulting from expansion into new
territories and improved access to products through additional sales
centers, as well as an improvement in Russia's economic environment. In
Poland, local currency sales grew primarily due to an increase in active
Representatives.
* In Western Europe, Net sales in U.S. dollars and local currencies
increased mainly due to an increase in the United Kingdom resulting from
growth in active Representatives, successful new product launches and
additional sales incentive offers such as gift-with-purchase programs.
Sales growth was also driven, to a lesser extent, by increases in Italy
and Spain.
The increase in operating margin in Europe was most significantly
impacted by the following markets:
* In Central and Eastern Europe, operating margin improved (which increased
segment margin by .9 point) primarily due to an improvement in Russia's
expense ratio resulting from significant sales growth and general cost
containment initiatives, partially offset by incremental consumer and
strategic investments, such as advertising. In Russia, the lower expense
ratio was partially offset by a lower gross margin due to strategic
pricing investments and other consumer motivation programs.
* In Western Europe, operating margin was flat (which increased segment
margin by less than .1 point) primarily due to a lower expense ratio
offset by a decline in gross margin. The lower expense ratio resulted
from the sales increases discussed above and savings associated with
Business Transformation initiatives. The lower gross margin was driven
by a decline in gross margin in the United Kingdom primarily due to an
increase in sales incentive offers such as gift-with-purchase programs,
partially offset by a favorable mix of products sold.
Operating margin also improved due to greater contributions from
countries with higher operating margins (which increased segment margin by
..8 point).
Latin America
%/Point Change
-----------------
Local
2003 2002 US $ Currency
----- ----- ------ --------
Net sales $358.9 $389.8 (8)% 21%
Operating profit 64.3 61.9 4 % 32%
Operating margin 17.9% 15.9% 2.0 2.0
Units 7%
Active Representatives 13%
Net sales in U.S. dollars were significantly impacted by weaker foreign
exchange rates in all major markets. Excluding the impact of foreign
currency exchange, Net sales increased in 2003 with increases in all major
markets in the region, reflecting growth in units and active
Representatives.
* In Mexico, Net sales increased in U.S. dollars and local currency,
benefiting from new product launches and growth in active
Representatives.
* In Brazil, Net sales in U.S. dollars decreased significantly due to the
negative impact of foreign exchange, but increased in local currency,
primarily from an increase in the number of active Representatives.
* In Venezuela, Net sales in U.S. dollars decreased significantly due to
the negative impact of foreign exchange, but increased in local currency,
primarily due to new product launches and competitive price discounting,
partially offset by external factors such as the national strike that
lasted until February and the gas scarcity that adversely impacted Avon
Venezuela's ability to ship product to its Representatives.
* In Argentina, Net sales in U.S. dollars decreased due to the negative
impact of foreign exchange, but increased significantly in local
currency, primarily driven by growth in active Representatives.
The increase in operating margin in Latin America was most
significantly impacted by the following markets:
* In Mexico, operating margin increased (which increased segment margin by
2.0 points) primarily due to an improvement in the expense ratio mainly
due to a reduction in salaries and benefits resulting from the transition
to a new distribution center in Celaya, partially offset by an increase
in consumer and strategic investments. Additionally, 2002 included
accelerated depreciation expense associated with the closure of a
distribution facility in Mexico City.
* In Argentina, operating margin increased (which increased segment margin
by .5 point) primarily due to improvement in the expense ratio driven by
a significant increase in local currency sales and general cost
containment initiatives, partially offset by higher investments in
promotion and sampling, and an increase in the cost of imported paper due
to the devaluation of the peso. Additionally, gross margin improved due
to price increases.
* In Venezuela, operating margin decreased (which decreased segment margin
by .8 point) primarily due to an increase in the expense ratio resulting
from higher field and distribution expenses due to the impact of the
national strike on Avon's ability to ship orders, incremental consumer
and strategic investments such as spending on the brochure and higher
bonus accruals resulting from a new bonus recognition program. Operating
margin was also impacted by a decline in gross margin resulting from an
increase in the cost of raw materials and finished goods due to weaker
currency, as well as import and supply chain disruptions resulting from
the national strike.
Operating margin was favorably impacted by greater contributions from
countries with higher operating margins (which increased segment margin by
..8 point).
The Venezuelan anti-government protests, which began during the fourth
quarter of 2002, continued to disrupt the economy in the early months of
2003. These protests virtually shut down the country's oil exports, the
primary source of the country's foreign exchange reserves. In response to
the disruption of oil exports and the resulting drop in foreign exchange
reserves, the government implemented exchange controls in February 2003 and
the bolivar rate was fixed at a rate of 1,598 bolivars per U.S. dollar.
Although the level of protest has diminished and oil production and the
resulting export revenue has increased, economic growth continues to be
hampered by the lack of foreign exchange. Continuation of the political
unrest has impacted Avon's ability to conduct normal business operations as
well as to obtain foreign currency to pay for imported products. Without a
resolution to the political and economic issues, Avon Venezuela's results of
operations in U.S. dollars are expected to be negatively impacted in 2003.
During 2002, the Brazilian real weakened as investor sentiment turned
bearish prior to the November presidential election, which was won by the
Worker's Party candidate. In the new government's early days, it has
instituted monetary and fiscal policies and initiated structural reforms in
social security and tax administration. These actions have created a better
investor climate and restored confidence in Brazil's ability to service its
heavy debt burden. As a result, since early 2003, the Brazilian real has
strengthened significantly. Should this strengthening trend continue,
results from Avon's Brazilian operations are expected to be positively
impacted in 2003.
Pacific
%/Point Change
-----------------
Local
2003 2002 US$ Currency
------ ------ ------ --------
Net sales $211.9 $181.0 17% 12%
Operating profit 33.9 22.5 51% 46%
Operating margin 15.7% 12.2% 3.5 3.5
Units 8%
Active Representatives 12%
Net sales in U.S. dollars and local currency increased as a result of
growth in all major markets in the region, driven primarily by increases in
units and active Representatives.
* In China, Net sales in U.S. dollars and local currency increased
primarily due to a continued increase in the number of company-owned
beauty boutiques.
* In Japan, Net sales in U.S dollars and local currency increased mainly
due to an increase in active Representatives and an increase in the
number of direct mailings to customers.
* In the Philippines, Net sales increased in U.S. dollars and local
currency due to an increase in active Representatives, successful new
product launches and Representative sales incentive programs.
The increase in operating margin in the Pacific was most significantly
impacted by the following markets:
* In Japan, operating margin improved (which increased segment margin by
1.7 points) resulting primarily from a lower expense ratio due to an
increase in sales, and lower delivery costs resulting from the
consolidation of carriers. Gross margin also improved due to the launch
of products with higher margins and supply chain savings associated with
Business Transformation initiatives.
* In the Philippines, operating margin improved (which increased segment
margin by 1.4 points) due to a lower expense ratio resulting from an
increase in sales and a decrease in the bad debt provision.
* In Australia, operating margin improved (which increased segment margin
by .5 point) primarily due to a lower expense ratio resulting from an
increase in sales, and an improvement in gross margin due to lower
obsolescence expense.
* In China, operating margin improved (which increased segment margin by .5
point) primarily due to a lower expense ratio resulting from operating
expense leverage as this market achieves scale, as well as general cost
containment initiatives, partially offset by incremental advertising
spending.
In the first quarter of 2003, the Company experienced no impact from the
outbreak of severe acute respiratory syndrome ("SARS") in China and Hong
Kong. The disruption in normal business patterns resulting from SARS is
likely to impact the Company's Chinese business and may impact its Asian-
based supply chain in the second quarter and perhaps beyond, although it is
not clear what the scale of that impact might be.
Global Expenses
Global expenses increased $6.1 in 2003 primarily due to higher bonus
accruals of $1.7, higher professional service fees of $1.7, incremental
investments of $1.2 for global marketing, research and development and a new
product line called "mark." (which is due to launch in late 2003), merit
salary increases of $1.1, higher pension expense of $1.1 and charitable
contributions of $1.1. These increases were partially offset by incremental
net savings of approximately $1.6 from workforce reductions associated with
Avon's Business Transformation initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Avon's principal sources of funds are cash flows from operations,
commercial paper, borrowings under uncommitted lines of credit and long-term
borrowings.
Cash Flows
Net cash used in operating activities was $22.4 favorable to 2002
principally reflecting higher net income (adjusted for non-cash items), a
tax payment of $20.0 in 2002 deferred from 2001 and favorable working
capital (primarily accounts receivable), partially offset by a contribution
of $40.0 to the U.S. pension plan, inventory investments, and higher cash
outlays in 2003 for severance and bonus payments.
Excluding changes in debt, Cash and cash equivalents decreased $150.4
in the first quarter of 2003, compared to a decrease of $151.9 in first
quarter of 2002. The lower use of cash in 2003 resulted primarily from
lower cash used in operating activities, discussed above, and lower
repurchases of common stock, partially offset by a decrease in cash received
from the exercise of stock options and sales of investments, as well as
higher capital expenditures. Avon purchased approximately 996,000 shares of
Avon common stock for $52.1 during the first quarter of 2003, compared with
$57.4 spent for the repurchase of approximately 1,100,000 shares during the
first quarter of 2002. At March 31, 2002, 51,867 shares repurchased for
$2.9 were not settled until April 2002.
In the second quarter of 2003, the Company will be making a planned tax
payment of $53.0. In April 2003, Avon also made a cash contribution
to its U.S. qualified pension plan of $20.0. Depending on the performance
of Avon's investments, Avon may make additional contributions to its U.S.
qualified pension plan during the remainder of 2003. In addition, in May
2003, Avon purchased the outstanding 50% of shares in its Turkish joint
venture business, Eczacibasi Avon Kozmetik (EAK) from its partner,
Eczacibasi Group, for $18.0.
Capital Resources
Total debt at March 31, 2003, decreased $.5 to $1,371.7 from $1,372.2
at December 31, 2002, principally due to an adjustment to reflect the fair
value of outstanding interest rate swaps and amortization of gains on
terminated swap agreements, partially offset by amortization of the discount
on Avon's outstanding convertible notes. Total debt at March 31, 2003,
increased $58.1 from $1,313.6 at March 31, 2002, primarily due to
adjustments to reflect the fair value of outstanding interest rate swaps,
amortization of the discount on Avon's outstanding convertible notes and
translation of Avon's Japanese yen denominated notes payable.
At March 31, 2003, there were no borrowings under a $600.0 revolving
credit and competitive advance facility (the "credit facility"). This
credit facility is also used to support Avon's commercial paper facility,
under which no amounts were outstanding at March 31, 2003.
At March 31, 2003, there were no amounts outstanding under uncommitted
lines of credit.
Management currently believes that cash from operations and available
financing alternatives are adequate to meet anticipated requirements for
working capital, dividends, capital expenditures, the stock repurchase
program and other cash needs.
In April 2003, the callholder exercised the call option associated with
the $100.0 of 6.25% putable/callable notes previously scheduled to mature in
2018. Pursuant to an agreement with the callholder, Avon modified the
putable/callable notes into $125.0 aggregate principal amount of 4.625%
notes due May 15, 2013, such modified principal amount representing the
value of the putable/callable notes and their related call option, plus
approximately $4.0 principal amount of additional notes issued for cash.
On May 13, 2003, $125.0 of 4.625% registered notes were issued in exchange
for the modified notes held by the callholder. The $125.0 of notes were
issued under the Company's $1,000.0 shelf registration
(See Note 13, Debt).
On May 1, 2003, the Company entered into a 10-year interest rate swap
agreement (subject to an option to terminate the swap at the end of 7 years)
with a notional amount totaling $125.0 to effectively convert fixed interest
on the $125.0 of bonds to variable interest rates, based on LIBOR.
Financial Instruments and Risk Management Strategies
Interest Rate Risk
In February 2003, Avon entered into a treasury lock agreement with
a notional amount of $75.0 that expired in May 2003. On May 9, 2003,
this treasury lock agreement was settled and Avon recorded a gain of
$0.1. This agreement was used to hedge the exposure to a possible rise
in interest rates prior to the anticipated issuance of debt in 2003.
Accordingly, the gain was recorded in Accumulated Other Comprehensive
Income ("OCI") and is expected to be amortized to interest expense over
the life of the anticipated debt. If Avon does not issue the
anticipated debt within a certain time period, the gain recorded in
Accumulated OCI will be reclassified to interest expense.
On May 9, 2003, a treasury lock agreement, which Avon had entered into
in December 2002, with a notional amount of $100.0 was settled and Avon
recorded a loss of $2.8. This agreement was used to hedge the exposure to a
possible rise in interest rates prior to the anticipated issuance of debt in
2003. Accordingly, the loss was recorded in Accumulated OCI and is expected
to be amortized to interest expense over the life of the anticipated debt.
If Avon does not issue the anticipated debt within a certain time period,
the loss recorded in Accumulated OCI will be reclassified to interest
expense.
Foreign Currency Risk
At March 31, 2003, Avon held foreign currency forward and option
contracts to buy and sell foreign currencies, including cross-currency
contracts to sell one foreign currency for another, with notional amounts in
U.S. dollars as follows:
Buy Sell
------ ------
Argentine peso $ 8.0 $ -
Australian dollar 6.4 5.9
Brazilian real 4.5 28.0
British pound 6.9 56.6
Canadian dollar 4.9 38.1
Czech koruna - 21.3
Euro 89.3 10.2
Hungarian forint - 16.4
Japanese yen 16.8 13.9
Mexican peso - 47.8
Polish zloty 49.8 6.3
Other currencies - 13.5
------ ------
Total $186.6 $258.0
====== ======
At March 31, 2003, certain Avon subsidiaries held U.S. dollar
denominated assets, primarily to minimize foreign-currency risk and provide
liquidity. These subsidiaries included Mexico ($23.2), Argentina ($12.5)
and Brazil ($7.6).
Special Charges
Business Transformation
In May 2001, Avon announced its new Business Transformation plans,
which are designed to significantly reduce costs and expand profit margins,
while continuing to focus on consumer growth strategies. Business
Transformation initiatives include an end-to-end evaluation of business
processes in key operating areas, with target completion dates through 2004.
Specifically, the initiatives focus on simplifying Avon's marketing
processes, taking advantage of supply chain opportunities, strengthening
Avon's sales model through the Sales Leadership program and the Internet,
streamlining the Company's organizational structure and integrating certain
similar activities across markets to achieve efficiencies. Avon anticipates
significant benefits from these Business Transformation initiatives, but the
scope and complexity of these initiatives necessarily involve planning and
execution risk.
It is expected that the savings from these initiatives will provide
additional financial flexibility to achieve profit targets, while enabling
further investment in consumer growth strategies. Management believes that
initiatives associated with the 2001 and 2002 Special charges discussed
below will help the Company achieve its target of a significant expansion of
its operating margin by the end of 2004.
Special Charges - Fourth Quarter 2001
In the fourth quarter of 2001, Avon recorded Special charges of $97.4
pretax ($68.3 after tax, or $.28 per diluted share) primarily associated
with facility rationalizations and workforce reduction programs related to
implementation of certain Business Transformation initiatives. The charges
of $97.4 were included in the Consolidated Statements of Income for 2001 as
Special charges ($94.9) and as inventory write-downs, which were included in
Cost of sales ($2.5). Approximately 80% of the charges relate to future
cash expenditures. Approximately 60% of these cash expenditures were made
by March 2003, with approximately 90% of total cash payments to be made by
December 2003. All payments are funded by cash flow from operations. In the
third quarter of 2002, Avon recorded an adjustment related to the fourth
quarter 2001 charge. See Special Charges - Third Quarter 2002 below.
In 2002, actions associated with the 2001 Special charges yielded net
savings of approximately $30.0 (gross savings of $50.0 partially offset by
transitional costs of $20.0). Cost savings from these initiatives should
continue, with net savings in 2003 expected to be approximately $65.0 (net
of additional transitional costs of approximately $10.0) and net savings in
2004 expected to be approximately $85.0 (net of additional transitional
costs of approximately $2.0).
The actions associated with the 2001 Special charges resulted in
incremental cash outlays of $10.0 in 2002 and are expected to produce
incremental cash flow of $40.0 in 2003. Capital expenditures associated
with the 2001 Special charges were $20.0 in 2002 and are expected to be
$15.0 in 2003. These cash outlays in 2002, and capital expenditures in 2002
and 2003 are funded through cash flow from operations.
Special Charges - Third Quarter 2002
Special charges of $43.6 pretax ($30.4 after tax or $.12 per diluted
share), recorded in the third quarter of 2002 primarily related to Avon's
Business Transformation initiatives, including supply chain initiatives,
workforce reduction programs and sales transformation initiatives.
Approximately 90% of the charges relate to future cash expenditures.
Approximately 30% of these expenditures were made by March 2003, with over
90% of the total cash payments to be made by December 2003. Avon also
recorded a benefit of $7.3 pretax ($5.2 after tax, or $.02 per diluted
share) from an adjustment to the Special charges recorded in the fourth
quarter of 2001. The net effect of the special items was a charge of $36.3
pretax ($25.2 after tax, or $.10 per diluted share). The $36.3 was
included in the Consolidated Statements of Income for 2002 as a Special
charge ($34.3) and as inventory write-downs, which were included in Cost of
sales ($2.0).
In 2003, Avon expects actions associated with the 2002 Special charges
to yield net savings of $15.0 (gross savings of $30.0 partially offset by
transitional costs of $15.0). Cost savings from these initiatives should
increase thereafter, with net savings in 2004 expected to be approximately
$40.0 to $50.0, net of additional transitional costs of approximately $8.0.
The actions associated with the 2002 Special charges are also expected
to produce incremental cash flow from operations of $5.0 in 2003 and $20.0
to $30.0 in 2004. Capital expenditures associated with Business
Transformation initiatives included in the 2002 Special charges are expected
to be approximately $5.0 through 2003 and are funded through cash flow from
operations.
Accounting Changes
See Note 1, Accounting Policies, for a discussion regarding the
adoption of Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities".
Website Access to Reports
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports are available, without
charge, on our website, www.avoninvestor.com, as soon as reasonably
practicable after they are filed electronically with the SEC. Copies are
also available, without charge, from Investor Relations, Avon Products,
Inc., 1345 Avenue of the Americas, New York, NY 10105-0196 or by sending an
email to investor.relations@avon.com or by calling (212) 282-5623.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report which are not historical facts or
information are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
are based on management's reasonable current assumptions and expectations.
Such forward-looking statements involve risks, uncertainties and other
factors, which may cause the actual results, levels of activity, performance
or achievement of the Company to be materially different from any future
results expressed or implied by such forward-looking statements, and there
can be no assurance that actual results will not differ materially from
management's expectations. Such factors include, among others, the
following: general economic and business conditions in the Company's
markets, including economic and political uncertainties in Latin America;
the possible impact of SARS-related concerns on the Company's Asia-Pacific
business and its Asia-based supply chain; the Company's ability to implement
its business strategy and its Business Transformation initiatives, including
the integration of similar activities across markets to achieve
efficiencies; the Company's ability to achieve anticipated cost savings and
its profitability and growth targets; the impact of substantial currency
fluctuations in the Company's principal foreign markets and the success of
the Company's foreign currency hedging and risk management strategies; the
impact of possible pension funding obligations and increased pension expense
on the Company's cash flow and results of operations; the effect of legal
and regulatory proceedings, as well as restrictions imposed on the Company,
its operations or its Representatives by foreign governments; the Company's
ability to successfully identify new business opportunities; the Company's
access to financing; and the Company's ability to attract and retain key
executives. Additional information identifying such factors is contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 2002,
filed with the SEC. The Company undertakes no obligation to update any such
forward-looking statements.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk from the information
provided in Item 7A, Quantitative and Qualitative Disclosures About Market
Risk, of the Company's 2002 Form 10-K.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Within the 90-day period prior to the filing date of this report, the
Company's Chief Executive Officer and Chief Financial Officer carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934 (the "Exchange Act"). Based upon their evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were adequate and effective and
designed to ensure that material information relating to the Company
(including its consolidated subsidiaries) required to be disclosed by the
Company in the reports it files under the Exchange Act is recorded,
processed, summarized and reported within the required time periods.
Changes in Internal Controls
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent
to the date of the evaluation referred to above.
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6, Contingencies.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On January 31, 2003, the Company filed a Form 8-K announcing the
following:
* The termination of the business relationship with J.C. Penney pursuant
to which the Company's beComing line of products had been carried in
J.C. Penney stores.
* Tax assessments pertaining to the Company's subsidiaries in Poland and
Brazil.
SIGNATURES
Pursuant to the requirements 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.
AVON PRODUCTS, INC.
-------------------
(Registrant)
Date: May 13, 2003 /s/ JANICE MAROLDA
----------------------------
Janice Marolda
Vice President,
Controller
Principal Accounting Officer
Signed both on behalf of the
registrant and as principal
accounting officer.
CERTIFICATION
I, Andrea Jung, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Avon Products,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
/S/ ANDREA JUNG
-------------------------
Andrea Jung
Chief Executive Officer
CERTIFICATION
I, Robert J. Corti, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Avon Products, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
d) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
/S/ ROBERT J. CORTI
------------------------
Robert J. Corti
Chief Financial Officer