NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
1. ACCOUNTING POLICIES
Basis of Presentation
We prepare our unaudited interim consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP"). We consistently applied the accounting policies described in our
2015
Annual Report on Form 10-K ("
2015
Form 10-K") in preparing these unaudited financial statements. In our opinion, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results for a full year. You should read these unaudited interim consolidated financial statements in conjunction with our consolidated financial statements contained in our
2015
Form 10-K. When used in this report, the terms "Avon," "Company," "we" or "us" mean Avon Products, Inc.
For interim consolidated financial statement purposes we provide for accruals under our various employee benefit plans for each quarter based on one quarter of the estimated annual expense. In addition, our tax provision is determined using an estimate of our consolidated annual effective tax rate, adjusted in the current period for discrete tax items including:
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•
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the effects of significant, unusual or extraordinary pretax and tax items, if any;
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|
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•
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withholding taxes associated with current period cash repatriations; and
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|
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•
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the impact of loss-making subsidiaries for which we cannot recognize a tax benefit and subsidiaries that reduce the reliability of the estimated annual consolidated effective tax rate.
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Venezuela
Venezuela's restrictive foreign exchange control regulations and our Venezuelan operations' increasingly limited access to U.S. dollars have resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and the U.S. dollar, and have restricted our Venezuelan operations' ability to pay dividends and settle intercompany obligations. The severe currency controls imposed by the Venezuelan government have significantly limited our ability to realize the benefits from earnings of our Venezuelan operations and access the resulting liquidity provided by those earnings. We expect that this other-than-temporary lack of exchangeability will continue for the foreseeable future, and as a result, we concluded that, effective March 31, 2016, we did not meet the accounting criteria of control in order to continue consolidating our Venezuelan operations and, as a result, will account for our Venezuelan operations using the cost method of accounting. As a result, our Consolidated Balance Sheet no longer includes the assets and liabilities of our Venezuelan operations and, in the first quarter of 2016, we recorded a loss of approximately
$120
in other expense, net. The loss was comprised of
$39
in net assets of the Venezuelan business and
$81
in accumulated foreign currency translation adjustments within accumulated other comprehensive income (loss) (shareholders' deficit) ("AOCI") associated with foreign currency changes before Venezuela was accounted for as a highly inflationary economy. The nets assets of the Venezuelan business were comprised of inventories of
$24
, property, plant & equipment of
$15
, non-current assets of
$11
, cash of
$5
, accounts receivable of
$4
, and accounts payable and accruals of
$20
.
In February 2015, the Venezuelan government announced the creation of a new foreign exchange system referred to as the SIMADI exchange ("SIMADI"). SIMADI began operating on February 12, 2015. There were multiple legal mechanisms in Venezuela to exchange currency. As SIMADI represented the rate which better reflected the economics of Avon Venezuela's business activity, in comparison to the other available exchange rates, we concluded that we should utilize the SIMADI exchange rate to remeasure our Venezuelan operations effective February 12, 2015. As a result of the change to the SIMADI rate, which caused the recognition of a devaluation of approximately
70%
as compared to the exchange rate we had used previously, we recorded an after-tax benefit of approximately $
3
(a benefit of approximately $
4
in other expense, net, and a loss of approximately $
1
in income taxes) in the first quarter of 2015, primarily reflecting the write-down of net monetary assets. In addition, as a result of using the historical U.S. dollar cost basis of non-monetary assets, such as inventories, these assets continued to be remeasured, following the change to the SIMADI rate, at the applicable rate at the time of their acquisition. The remeasurement of non-monetary assets at the historical U.S. dollar cost basis caused a disproportionate expense as these assets were consumed in operations, negatively impacting operating profit and net income by approximately
$5
during the three months ended March 31, 2015. Also as a result of the change to the SIMADI rate, we determined that an adjustment of approximately $
11
to cost of sales was needed to reflect certain non-monetary assets, primarily inventories, at their net realizable value, which was recorded in the first quarter of 2015.
In addition, at February 12, 2015, we reviewed Avon Venezuela's long-lived assets to determine whether the carrying amount of the assets was recoverable. Based on our expected cash flows associated with the asset group, we determined that the carrying amount of the assets, carried at their historical U.S. dollar cost basis, was not recoverable. As such, an impairment charge of approximately $
90
to selling, general and administrative expenses was needed to reflect the write-down of the long-lived assets to their estimated fair value of $
15.7
, which was recorded in the first quarter of 2015. The fair value of Avon Venezuela's long-lived assets was determined using both market and cost valuation approaches. The valuation analysis performed required several estimates, including market conditions and inflation rates.
Accounting Standards Implemented
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03,
Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs
, which requires that debt issuance costs to be presented in the balance sheet as a direct reduction from the associated debt liability rather than as an asset. We adopted this standard for the first fiscal quarter of 2016 and applied it retrospectively to all periods presented. Accordingly,
$9.1 million
of debt issuance costs are reflected within long-term debt as of December 31, 2015. These costs were previously recorded within other assets.
Accounting Standards to be Implemented
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires all assets and liabilities arising from leases to be recognized in the statement of financial position. This standard is effective as of January 1, 2019. We are currently evaluating the effect that adopting this new accounting guidance will have on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, issued as a new Topic, Accounting Standards Codification Topic 606. The core principle of the guidance is that a Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14,
Deferral of the Effective Date
, which resulted in the standard being effective beginning in 2018, with early adoption permitted in the beginning of 2017. This standard can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the effect that adopting this new accounting guidance will have on our consolidated financial statements.
2. LOSS PER SHARE AND SHARE REPURCHASES
We compute loss per share ("EPS") using the two-class method, which is a loss allocation formula that determines loss per share for common stock and participating securities. Our participating securities are our grants of restricted stock and restricted stock units, which contain non-forfeitable rights to dividend equivalents to the extent any dividends are declared and paid on our common stock. We compute basic EPS by dividing net income (loss) allocated to common shareholders by the weighted-average number of shares outstanding during the period. Diluted EPS is calculated to give effect to all potentially dilutive common shares that were outstanding during the period.
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Three Months Ended
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March 31
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(Shares in millions)
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2016
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2015
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Numerator from continuing operations:
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Loss from continuing operations, less amounts attributable to noncontrolling interests
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$
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(156.3
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)
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$
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(143.5
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)
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Less: Loss allocated to participating securities
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1.9
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1.9
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Less: Earnings allocated to convertible preferred stock
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(1.8
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)
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—
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Loss from continuing operations allocated to common shareholders
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(156.2
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)
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(141.6
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)
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Numerator from discontinued operations:
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Loss from discontinued operations
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$
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(9.6
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)
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$
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(3.8
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)
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Less: Loss allocated to participating securities
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.1
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.3
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Loss allocated to common shareholders
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(9.5
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)
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(3.5
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)
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Numerator:
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Net loss attributable to Avon
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$
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(165.9
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)
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$
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(147.3
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)
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Less: Loss allocated to participating securities
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2.0
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2.0
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Less: Earnings allocated to convertible preferred stock
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(1.8
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)
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—
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Loss allocated to common shareholders
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(165.7
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)
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(145.3
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)
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Denominator:
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Basic EPS weighted-average shares outstanding
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435.9
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434.9
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Diluted effect of assumed conversion of stock options
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—
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—
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Diluted EPS adjusted weighted-average shares outstanding
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435.9
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434.9
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Loss per Common Share from continuing operations:
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Basic
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$
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(.36
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)
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$
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(.33
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)
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Diluted
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(.36
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)
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(.33
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)
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Loss per Common Share from discontinued operations:
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Basic
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$
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(.02
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)
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$
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(.01
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)
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Diluted
|
|
(.02
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)
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|
(.01
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)
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Loss per Common Share:
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Basic
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$
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(.38
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)
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$
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(.33
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)
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Diluted
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(.38
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)
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(.33
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)
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Amounts in the table above may not necessarily sum due to rounding.
During the three months ended
March 31, 2016
and 2015, we did not include stock options to purchase
11.0 million
shares and
15.5 million
shares, respectively, of Avon common stock in the calculation of diluted EPS as we had a net loss attributable to Avon. The inclusion of these shares would decrease the net loss per share, and therefore, their inclusion would be anti-dilutive.
For the three months ended March 31, 2016, it is more dilutive to assume the Series C Convertible Preferred Stock is not converted into common stock and therefore the weighted-average outstanding shares outstanding was not adjusted by the as-if converted Series C Convertible Preferred Stock because the effect would decrease the net loss per share, and therefore, their inclusion would be anti-dilutive. If the as-if converted Series C Convertible Preferred Stock had been dilutive, approximately
87.1 million
additional shares would have been included in the diluted weighted average number of shares outstanding for the three months ended March 31, 2016. See Note 7, Series C Convertible Preferred Stock.
We purchased approximately
.9 million
shares of Avon common stock for
$3.5
during the first
three
months of 2016, as compared to approximately
.2 million
shares of Avon common stock for
$1.9
during the first
three
months of 2015, through acquisition of stock from employees in connection with tax payments upon vesting of restricted stock units.
3. DISCONTINUED OPERATIONS
On December 17, 2015, the Company entered into definitive agreements with affiliates controlled by Cerberus Capital Management, L.P. ("Cerberus"). The agreements include an investment agreement providing for a
$435
investment by Cleveland Apple Investor L.P. (f/k/a Cleveland Apple Investor LLC) (“Cerberus Investor”) (an affiliate of Cerberus) in the
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
Company through the purchase of perpetual convertible preferred stock (see Note 7, Series C Convertible Preferred Stock) and a separation and investment agreement providing for the separation of the Company's North America business, which represented the Company's operations in the United States, Canada and Puerto Rico, from the Company into New Avon LLC ("New Avon") a privately-held company that is majority-owned and managed by Cleveland NA Investor LLC (“Cerberus NA”) (an affiliate of Cerberus). These transactions closed on March 1, 2016.
Cerberus NA contributed
$170
of cash into New Avon in exchange for
80.1%
of its ownership interests. The Company contributed the North America business, certain pension and postretirement liabilities and
$100
of cash into New Avon in exchange for a
19.9%
ownership interest of New Avon. The Company received
$4
of cash from New Avon at closing as part of an estimate of a customary working capital adjustment which is expected to be finalized later in 2016.
During the fourth quarter of 2015, the Company recorded an estimated loss on sale of discontinued operations of approximately
$340
before tax (approximately
$340
after tax) as the carrying value exceeded the estimated fair value less costs to sell. During the first quarter of 2016, the Company recognized an additional loss on sale of
$15
before tax (
$5
after tax). The loss on sale represented the net assets contributed into New Avon, including certain pension and postretirement benefit plan liabilities and amounts in AOCI associated with the North America business, which were primarily unrecognized losses associated with our U.S. defined benefit pension plan, and costs to sell, as compared to the implied value of our ownership interests in New Avon which was
$43
. The ultimate loss on sale will be dependent on the finalization of the amount of pension and postretirement benefit plan liabilities contributed to New Avon and the finalization of customary working capital settlement.
New Avon entered into a perpetual, irrevocable royalty-free licensing agreement with the Company for the use of the Avon brand and certain other intellectual property. Avon and New Avon also entered into a transition services agreement which covers, among other things, information technology, financial services and human resources, as well as other commercial agreements, including for research and development and product supply. In addition, the Company subleases office space to New Avon. See Note 4, Related Party Transactions.
The Company accounts for its ownership interests in New Avon using the equity method of accounting, which results in the Company recognizing its proportionate share of New Avon's income or loss. The Company's proportionate share of the post-separation losses of New Avon was
$3.9
during the first quarter of 2016 and was recorded within other expense, net.
The major classes of financial statement components comprising the loss on discontinued operations, net of tax for North America are shown below:
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Three Months Ended March 31,
|
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2016
|
|
2015
|
|
Total Revenue
|
$
|
135.2
|
|
|
$
|
242.1
|
|
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Cost of Sales
|
53.2
|
|
|
95.5
|
|
|
Selling, general and administrative expenses
|
87.8
|
|
|
151.3
|
|
|
Operating loss
|
(5.8
|
)
|
|
(4.7
|
)
|
|
Other income (expense) items
|
.6
|
|
|
(1.2
|
)
|
|
Loss on sale of discontinued operations, before tax
|
(14.9
|
)
|
|
—
|
|
|
Loss from discontinued operations, before tax
|
(20.1
|
)
|
|
(5.9
|
)
|
|
Income taxes
|
10.5
|
|
|
2.1
|
|
|
Loss from discontinued operations, net of tax
|
$
|
(9.6
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)
|
|
$
|
(3.8
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)
|
4. RELATED PARTY TRANSACTIONS
As discussed in Note 3, the Company has entered into a transition services agreement to provide certain services to New Avon, as well as a sublease for office space. In addition, New Avon is performing certain services for the Company under a similar transition service agreement. As a result of these agreements, the Company recorded
$3.9
as a reduction of selling, general and administrative expenses associated with the agreements during the first quarter of 2016.
The Company also supplies product to New Avon as part of these transition services. The Company recorded revenues of
$3.7
and gross profit of
$0.5
associated with this supply arrangement.
The Company also issued standby letters of credit to the lessors of certain equipment, a lease for which was transferred to New Avon in connection with the separation of the business. The Company recorded a liability of
$2.1
for the estimated value of such standby letters of credit. The recognition of the liability was included in the estimated loss on sale of the North America business in loss from discontinued operations, net of tax.
See Note 7, Series C Convertible Preferred Stock, for discussion of preferred shares issued to Cerberus Investor.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
5. INVENTORIES
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|
|
|
|
|
|
|
|
|
|
|
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Components of Inventories
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Raw materials
|
|
$
|
205.4
|
|
|
$
|
180.5
|
|
|
Finished goods
|
|
478.2
|
|
|
443.5
|
|
|
Total
|
|
$
|
683.6
|
|
|
$
|
624.0
|
|
6. EMPLOYEE BENEFIT PLANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
Pension Benefits
|
|
|
|
|
|
Net Periodic Benefit Costs
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Postretirement Benefits
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Service cost
|
|
$
|
2.3
|
|
|
$
|
3.6
|
|
|
$
|
1.3
|
|
|
$
|
1.5
|
|
|
$
|
.1
|
|
|
$
|
.3
|
|
|
Interest cost
|
|
4.3
|
|
|
6.3
|
|
|
6.0
|
|
|
5.9
|
|
|
.6
|
|
|
1.1
|
|
|
Expected return on plan assets
|
|
(5.2
|
)
|
|
(8.3
|
)
|
|
(8.8
|
)
|
|
(9.1
|
)
|
|
—
|
|
|
—
|
|
|
Amortization of prior service credit
|
|
(.1
|
)
|
|
(.2
|
)
|
|
—
|
|
|
—
|
|
|
(.9
|
)
|
|
(1.0
|
)
|
|
Amortization of net actuarial losses
|
|
6.1
|
|
|
11.6
|
|
|
1.7
|
|
|
2.1
|
|
|
.2
|
|
|
.5
|
|
|
Settlements/curtailments
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net periodic benefit costs
(1)
|
|
$
|
7.5
|
|
|
$
|
13.0
|
|
|
$
|
.2
|
|
|
$
|
.4
|
|
|
$
|
—
|
|
|
$
|
.9
|
|
(1)
Includes
$4.4
and
$8.9
of U.S. pension in 2016 and 2015, respectively, and immaterial amounts of the postretirement benefit plans (related to the U.S.) in 2016 and 2015, which are included in discontinued operations. Amounts associated with the pension and postretirement benefit plans in Canada and the postretirement benefit plan in Puerto Rico, which are included in discontinued operations, have been excluded from all amounts in the table above.
As part of the separation of the North America business, we transferred an initial estimate of
$499.6
of pension liabilities under the U.S. defined benefit pension plan associated with current and former employees of the North America business and certain other former Avon employees, along with
$358.0
of assets held by the U.S. defined benefit pension plan, to a defined benefit pension plan sponsored by New Avon. We also transferred an initial estimate of
$60.4
of other postretirement liabilities (namely, retiree medical and supplemental pension liabilities) in respect of such employees and former employees. See Note 3, Discontinued Operations. We continue to retain certain U.S. pension and other postretirement liabilities primarily associated with employees who are actively employed by Avon outside of the North America business.
As of
March 31, 2016
, we made approximately
$25
and
$5
of contributions to the U.S. and non-U.S. defined benefit pension and postretirement benefit plans, respectively. During the remainder of 2016, we anticipate contributing approximately
$1
and
$15
to
$20
to fund our U.S. and non-U.S. defined benefit pension and postretirement benefit plans, respectively.
7. SERIES C CONVERTIBLE PREFERRED STOCK
On March 1, 2016, we issued and sold to Cerberus Investor
435,000
shares of newly issued Series C Preferred Stock for an aggregate purchase price of
$435.0
pursuant to an Investment Agreement, dated as of December 17, 2015, between the Company and Cerberus Investor. In connection with the issuance of the Series C Preferred Stock, the Company incurred direct and incremental expenses of
$8.7
, comprised of financial advisory fees and legal expenses, which reduced the carrying value of the Series C Preferred Stock. The Series C Preferred Stock has accrued dividends daily since March 1, 2016 at a rate of
1.25%
per quarter, and as of March 31, 2016, had accrued unpaid dividends of
$1.8
. There were no cash dividends declared in the quarter ended March 31, 2016.
Dividend Rights
. The Series C Preferred Stock ranks senior to the shares of our common stock with respect to dividend rights and rights on the distribution of assets on any liquidation, dissolution or winding up of our affairs. The Series C Preferred Stock has a liquidation preference of
$1,000
per share, representing an aggregate liquidation preference of
$435.0
upon issuance. Holders of Series C Preferred Stock are entitled to participate on an as-converted basis in any cash dividends paid to the holders of shares of the Company’s common stock. In addition, cumulative preferred dividends accrue daily on the Series C Preferred Stock and are payable at a rate of
1.25%
per quarter (net of any dividends on the Company’s common stock and subject to
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
increase up to a maximum rate of
5.00%
per quarter if the Company breaches certain obligations). Except to the extent not otherwise previously paid by the Company, preferred dividends are payable on the seventh anniversary of the issuance date of the Series C Preferred Stock as and when declared by the Board of Directors and at the end of each quarter thereafter. Accrued and unpaid preferred dividends may be paid, at the Company’s option, (i) in cash, (ii) subject to certain conditions, in shares of the Company’s common stock or (iii) upon conversion of shares of Series C Preferred Stock, in shares of the Company’s non-voting, non-convertible Series D Preferred Stock. Any such shares of Series D Preferred Stock issued would have similar preferential rights.
Conversion Features
. Series C Preferred Stock is convertible at the option of the holders at any time into shares of the Company’s common stock at an initial conversion price of
$5.00
per share, subject to certain anti-dilution adjustments. Prior to receipt of applicable shareholder approval, shares of Series C Preferred Stock are not convertible into more than
19.99%
of the number of shares of common stock outstanding immediately prior to the issuance of the Series C Preferred Stock, subject to certain anti-dilution adjustments. As a result of the
$1.8
accrued and unpaid dividends as of March 31, 2016, Series C Preferred Stock was convertible into
87,051,524
shares of common stock as of such date. If at any time the volume weighted average price of the common stock exceeds
$10.00
per share (subject to certain anti-dilution adjustments) for a period of 30 consecutive trading days, the Company may cause all of the Series C Preferred Stock to be converted into shares of common stock based on the then applicable conversion price.
Voting Rights
. Holders of Series C Preferred Stock are entitled to vote generally with the holders of common stock on an as-converted basis. Holders of Series C Preferred Stock will also be entitled to a separate class vote with respect to (i) the election of up to
three
directors to the Board of Directors, subject to maintaining certain levels of beneficial ownership of Series C Preferred Stock and/or common stock, (ii) amendments to the Company’s organizational documents that have an adverse effect on the Series C Preferred Stock, (iii) issuances by the Company of securities that are senior to, or equal in priority with, the Series C Preferred Stock or (iv) the delisting of the Company’s common stock, other than in connection with a change of control event.
Change of Control Put
. Upon certain change of control events involving the Company, holders of Series C Preferred Stock can require the Company to repurchase the Series C Preferred Stock for an amount equal to the greater of (i) an amount in cash equal to
100%
of the liquidation preference thereof plus all accrued but unpaid dividends or (ii) the consideration the holders would have received if they had converted their shares of Series C Preferred Stock into common stock immediately prior to the change of control event.
8. CONTINGENCIES
Settlements of FCPA Investigations
As previously reported, we engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the Foreign Corrupt Practices Act ("FCPA") and related U.S. and foreign laws in China and additional countries. The internal investigation, which was conducted under the oversight of our Audit Committee, began in June 2008 and along with the compliance reviews, was completed in 2014.
Following our voluntary reporting of the internal investigation to both the U.S. Department of Justice (the “DOJ”) and the U.S. Securities and Exchange Commission (the “SEC”) and our subsequent cooperation with those agencies, the United States District Court for the Southern District of New York (the "USDC") approved in December 2014 a deferred prosecution agreement (“DPA”) entered into between the Company and the DOJ related to charges of violations of the books and records and internal controls provisions of the FCPA. In addition, Avon Products (China) Co. Ltd., a subsidiary of the Company operating in China, pleaded guilty to conspiring to violate the books and records provision of the FCPA and was sentenced by the USDC to pay a $
68
fine. The SEC also filed a complaint against the Company charging violations of the books and records and internal controls provisions of the FCPA and the Consent which was approved in a judgment entered by the USDC in January 2015, and included $
67
in disgorgement and prejudgment interest. The DPA, the above-mentioned guilty plea and the Consent resolved the SEC’s and the DOJ’s investigations of the Company’s compliance with the FCPA and related U.S. laws in China and additional countries. The fine was paid in December 2014 and the payment to the SEC was made in January 2015.
Under the DPA, the DOJ will defer criminal prosecution of the Company for a term of three years. If the Company remains in compliance with the DPA during its term, the charges against the Company will be dismissed with prejudice. Under the DPA, the Company also represented that it has implemented and agreed that it will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws throughout its operations.
Under the DPA and the Consent, among other things, the Company agreed to have a compliance monitor (the "monitor"). During July 2015, the Company engaged a monitor, who had been approved by the DOJ and SEC. With the approval of the
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
DOJ and the SEC, the monitor can be replaced by the Company after 18 months, if the Company agrees to undertake self-reporting obligations for the remainder of the monitoring period. The monitoring period is scheduled to expire in July 2018. There can be no assurance as to whether or when the DOJ and the SEC will approve replacing the monitor with the Company’s self-reporting. If the DOJ determines that the Company has knowingly violated the DPA, the DOJ may commence prosecution or extend the term of the DPA, including the monitoring provisions described above, for up to one year.
The monitor is assessing and monitoring the Company's compliance with the terms of the DPA and the Consent by evaluating, among other things, the Company's internal accounting controls, recordkeeping and financial reporting policies and procedures. The monitor has recommended some changes to our policies and procedures that we are in the process of adopting, and may make additional recommendations that we must adopt unless they are unduly burdensome or otherwise inadvisable, in which case we may propose alternatives, which the DOJ and the SEC may or may not accept. In addition, operating under the oversight of the monitor may result in additional time and attention on these matters by members of our management, which may divert their time from the operation of our business. Assuming the monitor is replaced by a self-reporting period, the Company’s self-reporting obligations may be costly or time-consuming.
While the costs have not been significant to date, we currently cannot estimate the costs that we are likely to incur in connection with ongoing compliance with the DPA and the Consent, including the monitorship, the costs, if applicable, of self-reporting, and the costs of implementing the changes, if any, to our policies and procedures required by the monitor. These costs could be significant.
Litigation Matters
In July and August 2010, derivative actions were filed in state court against certain present or former officers and/or directors of the Company (
Carol J. Parker, derivatively on behalf of Avon Products, Inc. v. W. Don Cornwell, et al. and Avon Products, Inc. as nominal defendant
(filed in the New York Supreme Court, Nassau County, Index No. 600570/2010);
Lynne Schwartz, derivatively on behalf of Avon Products, Inc. v. Andrea Jung, et al. and Avon Products, Inc. as nominal defendant
(filed in the New York Supreme Court, New York County, Index No. 651304/2010)). On November 22, 2013, a derivative action was filed in federal court against certain present or former officers and/or directors of the Company and following the federal court's dismissal, an additional action was subsequently filed in New York state court on May 1, 2015 (
Sylvia Pritika, derivatively on behalf of Avon Products, Inc. v. Andrea Jung, et al. and Avon Products, Inc. as nominal defendant
(filed in the New York Supreme Court, New York County, Index No. 651479/2015)). The claims asserted in one or more of these actions include alleged breach of fiduciary duty, abuse of control, waste of corporate assets, and unjust enrichment, relating to the Company's compliance with the FCPA, including the adequacy of the Company's internal controls. The relief sought against the individual defendants in one or more of these derivative actions include certain declaratory and equitable relief, restitution, damages, exemplary damages and interest. The Company is a nominal defendant, and no relief is sought against the Company itself. On April 28, 2015, an action was filed to seek enforcement of demands for the inspection of certain of the Company’s books and records (
Belle Cohen v. Avon Products, Inc.
(filed in the New York Supreme Court, New York County, Index No. 651418/2015)). The parties have reached agreements to settle the derivative and books and records actions. The terms of settlement include certain corporate governance measures as well as releases of claims. The Company accrued approximately
$4
as of June 30, 2015 with respect to these matters, which the Company expects will be paid by insurance. Settlement is conditioned upon court approval of the proposed resolution of the derivative actions. On March 30, 2016, the court granted preliminary approval of the settlement and scheduled a hearing to consider final approval for June 30, 2016. In the event that the court does not approve the settlement of the derivative actions, or that the agreements are otherwise terminated before becoming final, we are unable to predict the outcome of these matters.
On July 6, 2011, a purported shareholder's class action complaint (
City of Brockton Retirement System v. Avon Products, Inc., et al.
, No. 11-CIV-4665) was filed in the United States District Court for the Southern District of New York against the Company and certain present or former officers and/or directors of the Company. On September 29, 2011, the Court appointed LBBW Asset Management Investmentgesellschaft mbH and SGSS Deutschland Kapitalanlagegesellschaft mbH as lead plaintiffs and Motley Rice LLC as lead counsel. Lead plaintiffs filed an amended complaint, and the defendants moved to dismiss the amended complaint on June 14, 2012. On September 29, 2014, the Court granted the defendants' motion to dismiss and also granted the plaintiffs leave to amend their complaint. On October 24, 2014, plaintiffs filed their second amended complaint on behalf of a purported class consisting of all persons or entities who purchased or otherwise acquired shares of Avon's common stock from July 31, 2006 through and including October 26, 2011. The second amended complaint names as defendants the Company and two individuals and asserts violations of Sections 10(b) and 20(a) of the Exchange Act based on allegedly false or misleading statements and omissions with respect to, among other things, the Company's compliance with the FCPA, including the adequacy of the Company's internal controls. Plaintiffs seek compensatory damages and declaratory, injunctive, and other equitable relief. Defendants moved to dismiss the Second Amended Complaint on November 21, 2014. The parties have reached an agreement on a settlement of this class action. The terms of settlement include releases by members of the
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
class of claims against the Company and the individual defendants and payment of
$62
. Under the terms of the settlement, approximately
$60
of the settlement was paid by the Company's insurers and approximately
$2
was paid by the Company (which represented the remaining deductible under the Company’s applicable insurance policy) into escrow. On August 21, 2015, the court granted preliminary approval of the settlement, and on December 1, 2015 the court held a hearing to consider final approval of the settlement and expressed an intent to grant final approval. However, the court has not yet entered a final judgment approving the settlement. If the settlement is not approved by the court, or is otherwise terminated before it is finalized, the Company will be unable to predict the outcome of this matter. Furthermore, in that event, it is reasonably possible that the Company may incur a loss in connection with this matter, which the Company is unable to reasonably estimate.
Between December 23, 2014 and March 12, 2015, two purported class actions were filed in the United States District Court for the Southern District of New York --
Poovathur v. Avon Products, Inc., et al. (
No. 14-CV-10083) and
McCoy et al. v. Avon Products, Inc., et al. (
No. 15-CV-01828) asserting claims under the Employee Retirement Income Security Act ("ERISA") against the Company, the Plan's administrator, benefits board and investment committee, and certain individuals alleged to have served as Plan fiduciaries. On April 8, 2015, the Court consolidated the two actions and recaptioned the consolidated case as
In re 2014 Avon Products, Inc. ERISA Litigation, (
No. 14-CV-10083). On May 8, 2015, plaintiffs filed a consolidated complaint, asserting claims for alleged breach of fiduciary duty and failure to monitor under ERISA on behalf of a purported class of participants in and beneficiaries of the Plan who invested in and/or held shares of the Avon Common Stock Fund between July 31, 2006 and May 1, 2014 and between December 14, 2011 and the present. Plaintiffs seek,
inter alia
, certain monetary relief, damages, and declaratory, injunctive and other equitable relief. On July 9, 2015, Defendants moved to dismiss the consolidated complaint. The parties have reached an agreement on a settlement of this class action. The terms of settlement include releases by members of the class of claims against the Company and the individual defendants and payment of approximately
$6
. Under the terms of the settlement, approximately
$5
of the settlement will be paid by the Company’s insurer and approximately
$1
will be paid by the Company (which represents the remaining deductible under the Company’s applicable insurance policy). Certain documentation relating to the settlement has not yet been finalized, and the settlement is subject to court approval. If the settlement is not approved by the court, or is otherwise terminated before it is finalized, the Company will be unable to predict the outcome of this matter. Furthermore, in that event, it is reasonably possible that the Company may incur a loss in connection with this matter, which the Company is unable to reasonably estimate.
Under some circumstances, any losses incurred in connection with adverse outcomes in the litigation matters described above could be material.
Brazilian Tax Matters
In 2002, our Brazilian subsidiary received an excise tax (IPI) assessment from the Brazilian tax authorities for alleged tax deficiencies during the years 1997-1998. In December 2012, additional assessments were received for the year 2008 with respect to excise tax (IPI) and taxes charged on gross receipts (PIS and COFINS). In the second quarter of 2014, the PIS and COFINS assessments were officially closed in favor of Avon Brazil. The 2002 and the 2012 IPI assessments assert that the establishment in 1995 of separate manufacturing and distribution companies in Brazil was done without a valid business purpose and that Avon Brazil did not observe minimum pricing rules to define the taxable basis of excise tax. The structure adopted in 1995 is comparable to that used by many other companies in Brazil. We believe that our Brazilian corporate structure is appropriate, both operationally and legally, and that the 2002 and 2012 IPI assessments are unfounded.
These matters are being vigorously contested. In January 2013, we filed a protest seeking a first administrative level review with respect to the 2012 IPI assessment. In July 2013, the 2012 IPI assessment was upheld at the first administrative level and we have appealed this decision to the second administrative level. The 2012 IPI assessment totals approximately
$280
, including penalties and accrued interest. In October 2010, the 2002 IPI assessment was upheld at the first administrative level at an amount reduced to approximately $
25
from approximately $
59
, including penalties and accrued interest. We appealed this decision to the second administrative level, which ruled in favor of Avon in March 2015 and canceled the 2002 IPI assessment. The 2002 IPI assessment remains subject to appeal by the government.
In the event that the 2002 or 2012 IPI assessments are upheld at the last administrative level, it may be necessary for us to provide security to pursue further appeals, which, depending on the circumstances, may result in a charge to earnings. It is not possible to reasonably estimate the likelihood or potential amount of assessments that may be issued for subsequent periods (tax years up through 2010 are closed by statute). However, other similar IPI assessments involving different periods (1998-2001) have been canceled and officially closed in our favor by the second administrative level. We believe that the likelihood that the 2002 IPI assessment will be upheld on any further appeal is remote and the likelihood that the 2012 IPI assessment will be upheld is reasonably possible. As stated above, we believe that the 2002 and 2012 IPI assessments are unfounded.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
Other Matters
Various other lawsuits and claims, arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. In management's opinion, based on its review of the information available at this time, the total cost of resolving such other contingencies at March 31, 2016, is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The tables below present the changes in accumulated other comprehensive loss ("AOCI") by component and the reclassifications out of AOCI for the three months ended
March 31, 2016
and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016:
|
|
Foreign Currency Translation Adjustments
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Pension and Postretirement Benefits
|
|
Total
|
|
Balance at December 31, 2015
|
|
$
|
(950.0
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(410.6
|
)
|
|
$
|
(1,366.2
|
)
|
|
Other comprehensive income other than reclassifications
|
|
23.9
|
|
|
—
|
|
|
—
|
|
|
(12.7
|
)
|
|
11.2
|
|
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
|
Derivative losses on cash flow hedges, net of tax of $0.0
(1)
|
|
—
|
|
|
.4
|
|
|
—
|
|
|
—
|
|
|
.4
|
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $0.2
(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6.7
|
|
|
6.7
|
|
|
Deconsolidation of Venezuela
|
|
81.3
|
|
|
—
|
|
|
—
|
|
|
0.8
|
|
|
82.1
|
|
|
Separation of North America
|
|
(10.0
|
)
|
|
—
|
|
|
—
|
|
|
269.2
|
|
|
259.2
|
|
|
Total reclassifications into earnings
|
|
71.3
|
|
|
.4
|
|
|
—
|
|
|
276.7
|
|
|
348.4
|
|
|
Balance at March 31, 2016
|
|
$
|
(854.8
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(146.6
|
)
|
|
$
|
(1,006.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015:
|
|
Foreign Currency Translation Adjustments
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Pension and Postretirement Benefits
|
|
Total
|
|
Balance at December 31, 2014
|
|
$
|
(677.0
|
)
|
|
$
|
(3.2
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(533.1
|
)
|
|
$
|
(1,217.6
|
)
|
|
Other comprehensive loss other than reclassifications
|
|
(126.1
|
)
|
|
—
|
|
|
—
|
|
|
(3.6
|
)
|
|
(129.7
|
)
|
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
|
Derivative losses on cash flow hedges, net of tax of $0.0
(1)
|
|
—
|
|
|
.4
|
|
|
—
|
|
|
—
|
|
|
.4
|
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $.3
(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13.3
|
|
|
13.3
|
|
|
Total reclassifications into earnings
|
|
—
|
|
|
.4
|
|
|
—
|
|
|
13.3
|
|
|
13.7
|
|
|
Balance at March 31, 2015
|
|
$
|
(803.1
|
)
|
|
$
|
(2.8
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(523.4
|
)
|
|
$
|
(1,333.6
|
)
|
(1)
Gross amount reclassified to interest expense, and related taxes reclassified to income taxes.
(2)
Gross amount reclassified to pension and postretirement expense, within selling, general & administrative expenses, and related taxes reclassified to income taxes.
Foreign exchange net losses of $
1.2
and $
18.7
for the three months ended
March 31, 2016
and 2015, respectively, resulting from the translation of actuarial losses and prior service cost recorded in AOCI are included in changes in foreign currency translation adjustments in the Consolidated Statements of Comprehensive Income (Loss).
10. SEGMENT INFORMATION
We determine segment profit by deducting the related costs and expenses from segment revenue. In order to ensure comparability between periods, segment profit includes an allocation of global marketing expenses based on actual revenues. Segment profit excludes global expenses other than marketing, costs to implement ("CTI") restructuring initiative (see Note 12, Restructuring Initiatives), certain significant asset impairment charges, charges related to the devaluations of Venezuela
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
currency (see Note 1, Accounting Policies), and other items, which are not allocated to a particular segment, if applicable. This is consistent with the manner in which we assess our performance and allocate resources.
Effective January, 1, 2016, we have updated our reportable segments. Prior periods have been restated to conform with the new presentation. Summarized financial information concerning our reportable segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
Europe, Middle East & Africa
|
$
|
520.4
|
|
|
$
|
532.1
|
|
|
South Latin America
|
426.4
|
|
|
590.9
|
|
|
North Latin America
|
204.7
|
|
|
229.3
|
|
|
Asia Pacific
|
136.7
|
|
|
164.1
|
|
|
Total Segment Revenue
|
1,288.2
|
|
|
1,516.4
|
|
|
Other operating segments and business activities
|
18.3
|
|
|
35.7
|
|
|
Total Revenue
|
$
|
1,306.5
|
|
|
$
|
1,552.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
Europe, Middle East & Africa
|
$
|
68.7
|
|
|
$
|
63.9
|
|
|
South Latin America
|
23.1
|
|
|
67.7
|
|
|
North Latin America
|
28.5
|
|
|
28.7
|
|
|
Asia Pacific
|
14.7
|
|
|
22.2
|
|
|
Total Segment Profit
|
$
|
135.0
|
|
|
$
|
182.5
|
|
|
Other operating segments and business activities
|
4.2
|
|
|
5.1
|
|
|
Unallocated global expenses
|
(84.6
|
)
|
|
(86.8
|
)
|
|
CTI restructuring initiatives
|
(46.8
|
)
|
|
$
|
(27.3
|
)
|
|
Venezuelan special items
|
—
|
|
|
$
|
(106.4
|
)
|
|
Operating Profit
|
$
|
7.8
|
|
|
$
|
(32.9
|
)
|
Other operating segments and business activities include the business results for Liz Earle, which was sold in July 2015, and Venezuela, which was deconsolidated effective March 31, 2016. Other operating segments and business activities also include revenue from the sale of products to New Avon since its separation from Avon on March 1, 2016 and ongoing royalties from the licensing of our name and products.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
11. SUPPLEMENTAL BALANCE SHEET INFORMATION
At
March 31, 2016
and
December 31, 2015
, prepaid expenses and other included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Prepaid Expenses and Other
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Prepaid taxes and tax refunds receivable
|
|
$
|
111.2
|
|
|
$
|
96.3
|
|
|
Receivables other than trade
|
|
89.7
|
|
|
69.6
|
|
|
Prepaid brochure costs, paper, and other literature
|
|
68.3
|
|
|
64.5
|
|
|
Short-term investments
|
|
1.9
|
|
|
2.4
|
|
|
Other
|
|
60.1
|
|
|
63.3
|
|
|
Prepaid expenses and other
|
|
$
|
331.2
|
|
|
$
|
296.1
|
|
At
March 31, 2016
and
December 31, 2015
, other assets included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Other Assets
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Long-term receivables
|
|
$
|
189.5
|
|
|
$
|
162.1
|
|
|
Deferred tax assets
|
|
188.8
|
|
|
172.8
|
|
|
Capitalized software
|
|
83.4
|
|
|
82.4
|
|
|
Investment in New Avon
|
|
38.6
|
|
|
—
|
|
|
Investments
|
|
36.7
|
|
|
36.3
|
|
|
Tooling (plates and molds associated with our beauty products)
|
|
14.5
|
|
|
15.3
|
|
|
Other
|
|
24.3
|
|
|
21.1
|
|
|
Other assets
|
|
$
|
575.8
|
|
|
$
|
490.0
|
|
12. RESTRUCTURING INITIATIVES
Transformation Plan
In January 2016, we announced a transformation plan (the "Transformation Plan"), which includes cost reduction efforts to continue to improve our cost structure and to enable us to reinvest in growth. As a result of this plan, we have targeted pre-tax annualized cost savings of approximately
$350
after
three
years, with an estimated
$200
from supply chain reductions and an estimated
$150
from other cost reductions, which are expected to be achieved through restructuring actions, as well as other cost-savings strategies that will not result in restructuring charges. We plan to reinvest a portion of these cost savings in growth initiatives, including media, social selling and information technology systems that will help us modernize our business. We initiated the Transformation Plan in order to enable us to achieve our long-term goals of double-digit operating margin and mid single-digit constant-dollar revenue growth. As part of the Transformation Plan, we identified certain actions, that we believe will reduce ongoing costs, primarily consisting of global headcount reductions relating to operating model changes. These operating model changes include streamlining of our corporate functions to align with the current and future needs of the business and an information technology infrastructure outsourcing initiative.
As a result of these restructuring actions approved-to-date, we have recorded total costs to implement these restructuring initiatives of
$69.9
before taxes, of which
$47.5
was recorded in the first three months of 2016, in the Consolidated Statements of Operations. The additional charges not yet incurred associated with the restructuring actions approved to-date of approximately
$15
to
$25
before taxes are expected to be recorded primarily in 2016. At this time we are unable to quantify the total costs to implement these restructuring initiatives that will be incurred through the time the Transformation Plan is fully implemented. In connection with the restructuring actions approved to-date associated with the Transformation Plan, we expect to realize annualized savings of approximately
$80
to
$90
(before tax). We expect to realize approximately
$25
of savings in 2016 and are expected to achieve the significant majority of the annualized savings beginning in 2017. The annualized savings represent the net reduction of expenses that will no longer be incurred by Avon.
Restructuring Charges - Three Months Ended March 31, 2016
During the three months ended March 31, 2016, we recorded costs to implement of
$47.5
related to the Transformation Plan, in selling, general and administrative expenses, in the Consolidated Statement of Operations. The costs consisted of the following:
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
|
|
|
•
|
net charge of
$47.1
primarily for employee-related costs, including severance benefits; and
|
|
|
|
|
•
|
implementation costs of
$.4
primarily related to professional service fees.
|
The majority of cash payments, if applicable, associated with these charges are expected to be made during 2016.
The liability balance for the Transformation Plan, which primarily consists of employee-related costs, for these various restructuring initiatives as of March 31, 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Balance at 12/31/2015
|
|
$
|
21.4
|
|
|
2016 charges
|
|
53.5
|
|
|
Adjustments
|
|
(6.4
|
)
|
|
Cash payments
|
|
(3.2
|
)
|
|
Foreign exchange
|
|
.4
|
|
|
Balance at March 31, 2016
|
|
$
|
65.7
|
|
Employee-related charges, net of adjustments, of initiatives under the Transformation Plan along with the estimated charges expected to be incurred on approved initiatives under the plan, by reportable business segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Latin America
|
|
North Latin America
|
|
Europe, Middle East & Africa
|
|
Asia
Pacific
|
|
Corporate
|
|
Total
|
|
2015
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21.4
|
|
|
$
|
21.4
|
|
|
First quarter 2016
|
12.1
|
|
|
3.3
|
|
|
21.9
|
|
|
4.7
|
|
|
5.1
|
|
|
47.1
|
|
|
Charges incurred to date
|
12.1
|
|
|
3.3
|
|
|
21.9
|
|
|
4.7
|
|
|
26.5
|
|
|
68.5
|
|
|
Estimated charges to be incurred on approved initiatives
|
.4
|
|
|
—
|
|
|
—
|
|
|
2.6
|
|
|
7.4
|
|
|
10.4
|
|
|
Total expected charges on approved initiatives
|
$
|
12.5
|
|
|
$
|
3.3
|
|
|
$
|
21.9
|
|
|
$
|
7.3
|
|
|
$
|
33.9
|
|
|
$
|
78.9
|
|
As noted previously, we expect our total costs to implement restructuring to be approximately
$85
to
$95
before taxes under the Transformation Plan. The amounts shown in the tables above as charges recorded to-date relate to initiatives that have been approved and recorded in the financial statements as the costs are probable and estimable. The amounts shown in the tables above as total expected charges on approved initiatives represent charges recorded to-date plus charges yet to be recorded for approved initiatives as the relevant accounting criteria for recording an expense have not yet been met. In addition to the charges included in the tables above, we have incurred and will continue to incur other costs to implement restructuring initiatives such as professional services fees and accelerated depreciation.
Additional Restructuring Charges 2015
As a result of the then-current economic environment, including the impact of foreign currency movements and inflation on our expenses, and in an effort to continue to improve our cost structure, we identified certain actions during 2015 that we believe would reduce ongoing costs. These actions primarily consisted of global headcount reductions.
As a result of these restructuring actions, we recorded a net benefit of
$0.5
before taxes, during the first three months of 2016 in selling, general and administrative expenses, in the Consolidated Statements of Operations. There are no material remaining costs for restructuring actions approved-to-date. In connection with these restructuring actions, we realized annualized savings of approximately
$30
before taxes. We began to realize savings in the second quarter of 2015 and achieved the annualized savings beginning in the third quarter of 2015. The annualized savings represent the net reduction of expenses that will no longer be incurred by Avon.
Restructuring Charges – Three Months Ended March 31, 2016
The costs to implement recorded during the three months ended March 31, 2016 consisted of a benefit of
$.5
for employee-related costs due to severance benefits.
Restructuring Charges – Three Months Ended March 31, 2015
The costs to implement recorded during the three months ended March 31, 2015 consisted of the following:
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
|
|
|
•
|
charge of
$25.0
for employee-related costs due to severance benefits; and
|
|
|
|
|
•
|
implementation costs of
$1.9
primarily for professional service fees associated with Corporate and Asia Pacific.
|
The liability balance, which primarily consists of employee-related costs, for these various restructuring initiatives as of
March 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Balance at 12/31/2015
|
|
$
|
4.0
|
|
|
2016 charges
|
|
—
|
|
|
Adjustments
|
|
(.5
|
)
|
|
Cash payments
|
|
(.8
|
)
|
|
Foreign exchange
|
|
—
|
|
|
Balance at March 31, 2016
|
|
$
|
2.7
|
|
The majority of cash payments associated with this liability are expected to be made during 2016.
The charges approved to date under these various restructuring initiatives by reportable business segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Latin America
|
|
North Latin America
|
|
Europe, Middle East & Africa
|
|
Asia
Pacific
|
|
Corporate
|
|
Total
|
|
2015
|
$
|
2.7
|
|
|
$
|
.2
|
|
|
$
|
4.2
|
|
|
$
|
5.8
|
|
|
$
|
9.2
|
|
|
$
|
22.1
|
|
|
First Quarter 2016
|
—
|
|
|
—
|
|
|
—
|
|
|
(.1
|
)
|
|
(.4
|
)
|
|
(.5
|
)
|
|
Charges incurred to date
|
$
|
2.7
|
|
|
$
|
.2
|
|
|
$
|
4.2
|
|
|
$
|
5.7
|
|
|
$
|
8.8
|
|
|
$
|
21.6
|
|
In addition to the charges included in the tables above, we have incurred other costs to implement restructuring initiatives such as professional services fees.
Other Restructuring Initiatives
During the
three
months ended
March 31, 2016
, we recorded a net benefit of
$.2
in selling, general and administrative expenses, in the Consolidated Statements of Operations, associated with the restructuring programs launched in 2005 and 2009 and the restructuring initiatives launched in 2012 (the "Other Restructuring Initiatives" and "$400M Cost Savings Initiative"), which are substantially complete. During the
three
months ended
March 31, 2015
, we recorded a net charge of
$.3
in selling, general and administrative expenses, in the Consolidated Statements of Operations, associated with the Other Restructuring Initiatives. The liability balance associated with the Other Restructuring Initiatives, which primarily consists of employee-related costs and contract termination costs, as of
March 31, 2016
is not material.
13. GOODWILL AND INTANGIBLE ASSETS
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
America
|
|
Europe, Middle East & Africa
|
|
Asia
Pacific
|
|
Total
|
|
Gross balance at December 31, 2015
|
$
|
68.9
|
|
|
$
|
27.7
|
|
|
$
|
85.0
|
|
|
$
|
181.6
|
|
|
Accumulated impairments
|
—
|
|
|
(6.9
|
)
|
|
(82.4
|
)
|
|
(89.3
|
)
|
|
Net balance at December 31, 2015
|
$
|
68.9
|
|
|
$
|
20.8
|
|
|
$
|
2.6
|
|
|
$
|
92.3
|
|
|
|
|
|
|
|
|
|
|
|
Changes during the period ended March 31, 2016:
|
|
|
|
|
|
|
|
|
Foreign exchange
|
2.0
|
|
|
.6
|
|
|
—
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
Gross balance at March 31, 2016
|
$
|
70.9
|
|
|
$
|
28.3
|
|
|
$
|
85.0
|
|
|
$
|
184.2
|
|
|
Accumulated impairments
|
—
|
|
|
(6.9
|
)
|
|
(82.4
|
)
|
|
(89.3
|
)
|
|
Net balance at March 31, 2016
|
$
|
70.9
|
|
|
$
|
21.4
|
|
|
$
|
2.6
|
|
|
$
|
94.9
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
Other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Finite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
22.0
|
|
|
$
|
(22.0
|
)
|
|
$
|
21.5
|
|
|
$
|
(21.5
|
)
|
|
Licensing agreements
|
26.9
|
|
|
(26.9
|
)
|
|
26.2
|
|
|
(26.2
|
)
|
|
Noncompete agreements
|
6.4
|
|
|
(6.4
|
)
|
|
6.3
|
|
|
(6.3
|
)
|
|
Indefinite-Lived Trademarks
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
55.3
|
|
|
$
|
(55.3
|
)
|
|
$
|
54.0
|
|
|
$
|
(54.0
|
)
|
Aggregate amortization expense was not material for the
three
months ended
March 31
, 2016 and 2015.
14. FAIR VALUE
Assets and Liabilities Recorded at Fair Value
The fair value measurement provisions required by GAAP establish a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
|
|
|
|
•
|
Level 1 - Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
•
|
Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
|
|
|
|
|
•
|
Level 3 - Unobservable inputs based on our own assumptions.
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
2.8
|
|
|
$
|
—
|
|
|
$
|
2.8
|
|
|
Foreign exchange forward contracts
|
—
|
|
|
1.4
|
|
|
1.4
|
|
|
Total
|
$
|
2.8
|
|
|
$
|
1.4
|
|
|
$
|
4.2
|
|
|
Liabilities:
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
$
|
—
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
Total
|
$
|
—
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis
as of
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
2.8
|
|
|
$
|
—
|
|
|
$
|
2.8
|
|
|
Foreign exchange forward contracts
|
—
|
|
|
1.2
|
|
|
1.2
|
|
|
Total
|
$
|
2.8
|
|
|
$
|
1.2
|
|
|
$
|
4.0
|
|
|
Liabilities:
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
Total
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, available-for-sale securities, short-term investments, accounts receivable, loans receivable, debt maturing within one year, accounts payable, long-term debt and foreign exchange forwards contracts. The carrying value for cash and cash equivalents, accounts receivable, accounts payable and short-term investments approximate fair value because of the short-term nature of these instruments.
The net asset (liability) amounts recorded in the balance sheet (carrying amount) and the estimated fair values of our remaining financial instruments at
March 31, 2016
and December 31, 2015, respectively, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Available-for-sale securities
|
$
|
2.8
|
|
|
$
|
2.8
|
|
|
$
|
2.8
|
|
|
$
|
2.8
|
|
|
Debt maturing within one year
(1)
|
(69.0
|
)
|
|
(69.0
|
)
|
|
(55.2
|
)
|
|
(55.2
|
)
|
|
Long-term debt
(1)
|
(2,145.0
|
)
|
|
(1,690.9
|
)
|
|
2,150.5
|
|
|
(1,622.7
|
)
|
|
Foreign exchange forward contracts
|
(.1
|
)
|
|
(.1
|
)
|
|
.1
|
|
|
.1
|
|
(1)
The carrying value of debt maturing within one year and long-term debt is presented net of debt issuance costs and includes any related discount or premium and unamortized deferred gains on terminated interest-rate swap agreements, as applicable.
The methods and assumptions used to estimate fair value are as follows:
Available-for-sale securities - The fair values of these investments were the quoted market prices for issues listed on securities exchanges.
Debt maturing within one year and long-term debt - The fair values of our debt and other financing were determined using Level 2 inputs based on indicative market prices.
Foreign exchange forward contracts - The fair values of forward contracts were estimated based on quoted forward foreign exchange prices at the reporting date.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
15. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We operate globally, with manufacturing and distribution facilities in various countries around the world. We may reduce our exposure to fluctuations in the fair value and cash flows associated with changes in interest rates and foreign exchange rates by creating offsetting positions, including through the use of derivative financial instruments. If we use foreign currency-rate sensitive and interest-rate sensitive instruments to hedge a certain portion of our existing and forecasted transactions, we would expect that any gain or loss in value of the hedge instruments generally would be offset by decreases or increases in the value of the underlying forecasted transactions. As of
March 31, 2016
, we do not have any interest-rate swap agreements.
We do not enter into derivative financial instruments for trading or speculative purposes, nor are we a party to leveraged derivatives. The master agreements governing our derivative contracts generally contain standard provisions that could trigger early termination of the contracts in certain circumstances, including if we were to merge with another entity and the creditworthiness of the surviving entity were to be "materially weaker" than that of Avon prior to the merger.
Derivatives are recognized on the Consolidated Balance Sheets at their fair values. The following table presents the fair value of derivative instruments outstanding at
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Liability
|
|
|
Balance Sheet
Classification
|
|
Fair
Value
|
|
Balance Sheet
Classification
|
|
Fair
Value
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
Prepaid expenses and other
|
|
$
|
1.4
|
|
|
Accounts payable
|
|
$
|
1.5
|
|
|
Total derivatives not designated as hedges
|
|
|
$
|
1.4
|
|
|
|
|
$
|
1.5
|
|
|
Total derivatives
|
|
|
$
|
1.4
|
|
|
|
|
$
|
1.5
|
|
The following table presents the fair value of derivative instruments outstanding at
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
|
Liability
|
|
|
Balance Sheet
Classification
|
|
Fair
Value
|
|
Balance Sheet
Classification
|
|
Fair
Value
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
Prepaid expenses and other
|
|
$
|
1.2
|
|
|
Accounts payable
|
|
$
|
1.1
|
|
|
Total derivatives not designated as hedges
|
|
|
$
|
1.2
|
|
|
|
|
$
|
1.1
|
|
|
Total derivatives
|
|
|
$
|
1.2
|
|
|
|
|
$
|
1.1
|
|
Interest Rate Risk
A portion of our borrowings is subject to interest rate risk. In the past we have used interest-rate swap agreements, which effectively converted the fixed rate on long-term debt to a floating interest rate, to manage our interest rate exposure. The agreements were designated as fair value hedges. At times, we may de-designate the hedging relationship of a receive-fixed/pay-variable interest-rate swap agreement. In these cases, we enter into receive-variable/pay-fixed interest-rate swap agreements that are designated to offset the gain or loss on the de-designated contract. As of
March 31, 2016
, we do not have any interest-rate swap agreements. Approximately
3%
and approximately
2%
of our debt portfolio at
March 31, 2016
and December 31, 2015, respectively, was exposed to floating interest rates.
In January 2013, we terminated eight of our interest-rate swap agreements previously designated as fair value hedges, with notional amounts totaling $
1,000
. As of the interest-rate swap agreements’ termination date, the aggregate favorable adjustment to the carrying value (deferred gain) of our debt was $
90.4
, which is being amortized as a reduction to interest expense over the remaining term of the underlying debt obligations. For the
three
months ended
March 31, 2016
, the net impact of the gain amortization was
$3.7
. For the
three
months ended
March 31, 2015
, the net impact of the gain amortization was
$3.7
. The interest-rate swap agreements were terminated in order to improve our capital structure, including increasing our ratio of fixed-rate debt. At
March 31, 2016
, the unamortized deferred gain associated with the January 2013 interest-rate swap termination was
$31.7
, and was classified within long-term debt in the Consolidated Balance Sheets.
In March 2012, we terminated two of our interest-rate swap agreements previously designated as fair value hedges, with notional amounts totaling $
350
. As of the interest-rate swap agreements’ termination date, the aggregate favorable adjustment to the carrying value (deferred gain) of our debt was $
46.1
, which is being amortized as a reduction to interest expense over the remaining term of the underlying debt obligations through March 2019. For the
three
months ended
March 31, 2016
, the net impact of the gain amortization was
$1.7
. For the
three
months ended
March 31, 2015
, the net impact of the gain amortization
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
was
$1.6
. The interest-rate swap agreements were terminated in order to increase our ratio of fixed-rate debt. At
March 31, 2016
, the unamortized deferred gain associated with the March 2012 interest-rate swap termination was
$21.1
, and was classified within long-term debt in the Consolidated Balance Sheets.
Foreign Currency Risk
We may use foreign exchange forward contracts to manage a portion of our foreign currency exchange rate exposures. At
March 31, 2016
, we had outstanding foreign exchange forward contracts with notional amounts totaling approximately
$104.7
for various currencies.
We may use foreign exchange forward contracts to manage foreign currency exposure of certain intercompany loans. These contracts are not designated as hedges. The change in fair value of these contracts is immediately recognized in earnings and substantially offsets the foreign currency impact recognized in earnings relating to the associated intercompany loans. During the
three
months ended
March 31, 2016
, we recorded a loss of
$2.3
in other expense, net in the Consolidated Statements of Operations related to these undesignated foreign exchange forward contracts. Also during the
three
months ended
March 31, 2016
, we recorded a gain of
$.8
related to the associated intercompany loans, caused by changes in foreign currency exchange rates.
During the
three
months ended
March 31, 2015
, we recorded a loss of
$8.0
in other expense, net in the Consolidated Statements of Operations related to these undesignated foreign exchange forward contracts. During the
three
months ended
March 31, 2015
, we recorded a gain of
$8.7
related to the associated intercompany loans, caused by changes in foreign currency exchange rates.
16. DEBT
Revolving Credit Facility
In June 2015, the Company and Avon International Operations, Inc., a wholly-owned domestic subsidiary of the Company (“AIO”), entered into a new five-year
$400.0
senior secured revolving credit facility (the “2015 facility”).
Borrowings under the 2015 facility bear interest, at our option, at a rate per annum equal to LIBOR plus 250 basis points or a floating base rate plus 150 basis points, in each case subject to adjustment based upon a leverage-based pricing grid.
As of
March 31, 2016
, there were
no
amounts outstanding under the 2015 facility.
All obligations of AIO under the 2015 facility are (i) unconditionally guaranteed by each material domestic restricted subsidiary of the Company (other than AIO, the borrower), in each case, subject to certain exceptions and (ii) guaranteed on a limited recourse basis by the Company. The obligations of AIO and the guarantors are secured by first priority liens on and security interest in substantially all of the assets of AIO and the subsidiary guarantors and by certain assets of the Company, in each case, subject to certain exceptions.
The 2015 facility will terminate in June 2020; provided, however, that it shall terminate on the 91
st
day prior to the maturity of the 2018 Notes (as defined below), the 4.20% Notes (as defined below), the 2019 Notes (as defined below) and the 4.60% Notes (as defined below), if on such 91
st
day, the applicable notes are not redeemed, repaid, discharged, defeased or otherwise refinanced in full.
The 2015 facility contains affirmative and negative covenants, which are customary for secured financings of this type, as well as financial covenants (interest coverage and total leverage ratios). As of
March 31, 2016
, we were in compliance with our interest coverage and total leverage ratios under the 2015 facility. The amount of the facility available to be drawn down on is reduced by any standby letters of credit granted by AIO. AIO has issued approximately
$40.0
of standby letters of credit. As of March 31, 2016, based on then applicable interest rates, the entire amount of the remaining 2015 facility, which is approximately
$360.0
, could have been drawn down without violating any covenant.
Public Notes
In March 2013, we issued, in a public offering,
$500.0
principal amount of
4.60%
Notes due March 15, 2020 (the "4.60% Notes");
$500.0
principal amount of
5.00%
Notes due March 15, 2023; and
$250.0
principal amount of
6.95%
Notes due March 15, 2043 (collectively, the "2013 Notes"). Interest on the 2013 Notes is payable semi-annually on March 15 and September 15 of each year.
The indenture governing the 2013 Notes contains interest rate adjustment provisions depending on the long-term credit ratings assigned to the 2013 Notes with S&P and Moody's. As described in the indenture, the interest rates on the 2013 Notes increase by .25% for each one-notch downgrade below investment grade on each of our long-term credit ratings assigned to the 2013 Notes by S&P or Moody's. These adjustments are limited to a total increase of 2% above the respective interest rates in effect on the date of issuance of the 2013 Notes.
As a result of the long-term credit rating downgrades by S&P and Moody's in 2014 and 2015, the interest rates on the 2013 Notes increased by a total of
1.75%
.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
At
March 31, 2016
, we also have outstanding
$250.0
principal amount of our
5.75%
Notes due March 1, 2018 (the "2018 Notes");
$250.0
principal amount of our
4.20%
Notes due July 15, 2018 (the "4.20% Notes"); and
$350.0
principal amount of our
6.50%
Notes due March 1, 2019 (the "2019 Notes"), with interest on each series of these Notes payable semi-annually.
The indentures governing our outstanding notes described above contain certain customary covenants and customary events of default and cross-default provisions. Further, we would be required to make an offer to repurchase all of our outstanding notes described above, with the exception of our 4.20% Notes, at a price equal to 101% of their aggregate principal amount plus accrued and unpaid interest in the event of a change in control involving Avon and a corresponding credit ratings downgrade to below investment grade.
Long-Term Credit Ratings
Our long-term credit ratings are Ba2 (Negative Outlook) for corporate family debt, and Ba3 (Negative Outlook) for senior unsecured debt, with Moody's; B (Stable Outlook) with S&P; and B+ (Negative Outlook) with Fitch, which are below investment grade.
We do not believe these long-term credit ratings will have a material impact on our near-term liquidity. However, any rating agency reviews could result in a change in outlook or downgrade, which could further limit our access to new financing, particularly short-term financing, reduce our flexibility with respect to working capital needs, affect the market price of some or all of our outstanding debt securities, and likely result in an increase in financing costs, including interest expense under certain of our debt instruments, and less favorable covenants and financial terms under our financing arrangements.
AVON PRODUCTS, INC.
