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
2012
Annual Report on Form 10-K, as amended ("
2012
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
2012
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, our tax provision is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. We also provide for accruals under our various employee benefit plans for each quarter based on one quarter of the estimated annual expense.
Venezuela Currency
Effective February 13, 2013, the Venezuelan government devalued its currency by approximately
32%
and as such we recorded a one-time, after-tax loss of
$51
(
$34
in other expense, net and
$17
in income taxes) in the first quarter of 2013, primarily reflecting the write-down of monetary assets and liabilities and deferred tax benefits. In addition, as a result of using the U.S. historic dollar cost basis of non-monetary assets, such as inventory, acquired prior to the devaluation, operating profit and net income during the nine months ending September 30, 2013 were negatively impacted.
New Accounting Standard Implemented
In February 2013, the Financial Accounting Standards Board ("FASB") issued ASU 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
. ASU 2013-02 requires entities to report, either on the face of the income statement or in the notes, the effect of significant reclassifications out of accumulated other comprehensive income ("AOCI") on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety from AOCI to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. See Note 7, Accumulated Other Comprehensive Income, for the required disclosures. ASU 2013-02 is effective as of January 1, 2013 for Avon and did not have a significant impact on our financial statements, other than presentation.
2. EARNINGS PER SHARE AND SHARE REPURCHASES
We compute earnings (loss) per share ("EPS") using the two-class method, which is an earnings allocation formula that determines earnings 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. We compute basic EPS by dividing net income allocated to common shareholders by the weighted-average number of shares outstanding during the year. Diluted EPS is calculated to give effect to all potentially dilutive common shares that were outstanding during the period.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
(Shares in millions)
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Numerator from continuing operations:
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, less amounts attributable to noncontrolling interests
|
|
$
|
(6.1
|
)
|
|
$
|
35.2
|
|
|
$
|
63.6
|
|
|
$
|
126.3
|
|
Less: Loss (earnings) allocated to participating securities
|
|
.1
|
|
|
(.9
|
)
|
|
(.6
|
)
|
|
(2.8
|
)
|
(Loss) income from continuing operations allocated to common shareholders
|
|
(6.0
|
)
|
|
34.3
|
|
|
63.0
|
|
|
123.5
|
|
Numerator from discontinued operations:
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations
|
|
$
|
.6
|
|
|
$
|
(3.6
|
)
|
|
$
|
(50.9
|
)
|
|
$
|
(6.6
|
)
|
Less: (Earnings) loss allocated to participating securities
|
|
—
|
|
|
(.6
|
)
|
|
.5
|
|
|
(1.7
|
)
|
Earnings (loss) allocated to common shareholders
|
|
.6
|
|
|
(4.2
|
)
|
|
(50.4
|
)
|
|
(8.3
|
)
|
Numerator attributable to Avon:
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Avon
|
|
$
|
(5.5
|
)
|
|
$
|
31.6
|
|
|
$
|
12.7
|
|
|
$
|
119.7
|
|
Less: Loss (earnings) allocated to participating securities
|
|
.1
|
|
|
(.8
|
)
|
|
(.1
|
)
|
|
(2.7
|
)
|
(Loss) income allocated to common shareholders
|
|
(5.4
|
)
|
|
30.8
|
|
|
12.6
|
|
|
117.0
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic EPS weighted-average shares outstanding
|
|
433.5
|
|
|
432.1
|
|
|
433.3
|
|
|
431.8
|
|
Diluted effect of assumed conversion of stock options
|
|
—
|
|
|
.4
|
|
|
.9
|
|
|
.7
|
|
Diluted EPS adjusted weighted-average shares outstanding
|
|
433.5
|
|
|
432.5
|
|
|
434.2
|
|
|
432.5
|
|
(Loss) Earnings per Common Share from continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(.01
|
)
|
|
$
|
.08
|
|
|
$
|
.15
|
|
|
$
|
.29
|
|
Diluted
|
|
$
|
(.01
|
)
|
|
$
|
.08
|
|
|
$
|
.15
|
|
|
$
|
.29
|
|
Loss per Common Share from discontinued operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
—
|
|
|
$
|
(.01
|
)
|
|
$
|
(.12
|
)
|
|
$
|
(.02
|
)
|
Diluted
|
|
$
|
—
|
|
|
$
|
(.01
|
)
|
|
$
|
(.12
|
)
|
|
$
|
(.02
|
)
|
(Loss) Earnings per Common Share attributable to Avon:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(.01
|
)
|
|
$
|
.07
|
|
|
$
|
.03
|
|
|
$
|
.27
|
|
Diluted
|
|
$
|
(.01
|
)
|
|
$
|
.07
|
|
|
$
|
.03
|
|
|
$
|
.27
|
|
Amounts in the table above may not necessarily sum due to rounding.
At
September 30, 2013
and 2012, we did not include stock options to purchase
17.8 million
shares and
22.1 million
shares of Avon common stock, respectively, in the calculations of diluted EPS because the exercise prices of those options were greater than the average market price, and therefore, their inclusion would have been anti-dilutive. We also did not include stock options to purchase
.9 million
shares for the three months ended September 30, 2013, as we had a loss from continuing operations, net of tax and the inclusion of these shares would decrease the net loss per share. Since the inclusion of such shares would be anti-dilutive, these are excluded from the calculation.
We purchased approximately
.4 million
shares of Avon common stock for
$8.4
during the first
nine
months of 2013, as compared to approximately
.4 million
shares of Avon common stock for
$8.5
during the first
nine
months of 2012, through acquisition of stock from employees in connection with tax payments upon vesting of restricted stock units and private transactions with a broker in connection with stock based obligations under our Deferred Compensation Plan.
3. DISCONTINUED OPERATIONS
On June 30, 2013, the Company entered into an agreement to sell its Silpada jewelry business (“Silpada”) for
$85
, plus an earn-out of up to
$15
if Silpada achieves specific earnings targets over two years
. Silpada was previously reported within our North America segment and has been classified within discontinued operations for all periods presented. The transaction closed on July 3, 2013. Proceeds from the sale were used for general corporate purposes, including the repayment of outstanding debt. The benefit associated with the earn-out will be recorded in discontinued operations only when it becomes realizable by Avon.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
In the second quarter of 2013, the Company recorded a pre-tax charge of
$79
(
$50
net of tax), reflecting the expected loss on sale, which represents the difference between the carrying value of the Silpada business and the expected proceeds.
Earlier this year, the Company disclosed that it was reviewing strategic alternatives for Silpada. In connection with this review, Avon ran a broad auction process that included potential financial and strategic buyers. The initial offers that were received through April of 2013 were lower than the carrying value of Silpada. At that time, we did not believe that these offers were representative of the underlying fair value of the Silpada business. In June 2013, the Company received final offers for the Silpada business that also were at a level below what previously had been expected as the fair value of the business. The Company decided to agree to the offer that emerged at the time as the highest bid, based in part on consideration of a) the timeline and investment required to return the business to historical levels of profitability and b) the deterioration of Silpada's business performance in the second quarter of 2013. The Company also considered that this divestiture would allow greater focus of time and resources on the core Avon business. This transaction was approved by the Board of Directors on June 26, 2013, subject to certain conditions which were satisfied on June 30, 2013.
Summarized financial information for discontinued operations is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Total revenue
|
|
$
|
2.2
|
|
|
$
|
40.3
|
|
|
$
|
54.5
|
|
|
$
|
108.8
|
|
Operating income (loss)
(1)
|
|
.9
|
|
|
(4.6
|
)
|
|
(81.0
|
)
|
|
(8.1
|
)
|
(1)
Operating loss for the nine months ended September 30, 2013 includes a pre-tax charge of
$79.0
recorded in the second quarter of 2013, reflecting the expected loss on sale, as well as an additional loss on sale of
$.4
before tax recorded in the third quarter of 2013.
2012 Silpada Impairment Assessment
Silpada was acquired in July 2010. Silpada had historically generated positive cash flows and was expected to continue to generate positive cash flows; however, the expected cash flows of the business as of the date of our impairment analysis were not at a level sufficient to support the carrying value of the business. Since the acquisition in 2010, the Silpada business did not achieve our revenue, earnings and cash flows expectations primarily due to lower consumer spending, higher silver prices and increased competition. When compared to our initial projections for the business at the time of the acquisition, the future expectations for Silpada utilized in the 2011 and 2012 impairment analyses represented a significant decrease in the future cash flows that were expected to be generated by Silpada. This reduction in future expectations led to material impairments of
$263
and
$209
being recorded during the fourth quarters of 2011 and 2012, respectively.
Throughout the first nine months of 2012, Silpada continued to perform generally in line with our revenue and earnings forecast and there were no significant changes to our long-term outlook for the business, which was utilized in determining the estimated fair value in our 2011 impairment analysis. Our revenue and earnings forecast for 2012 had projected improvements to the trends (i.e., a reduction of the year-over-year revenue declines) in the latter portion of 2012. In 2012, in an effort to promote sales and grow the business, we made changes to certain members of the Silpada management team, including bringing in personnel who had previously managed other Avon businesses. Among the initiatives implemented by the new Silpada management team was a recruiting incentive program which we had believed would benefit our Representative counts and Representative productivity primarily in the latter portion of 2012, and in turn improve the performance of the business. While we saw improvement in our Representative additions, the recruiting incentive program did not result in the expected Representative productivity.
In the fourth quarter of 2012, which is generally the quarter with the largest dollar value of revenue for the Silpada business, it became apparent that we would not achieve our forecasted revenue and earnings for 2012, partially due to the recruiting incentive program not driving the expected Representative productivity, and as a result, Silpada experienced weaker than expected performance in the fourth quarter of 2012. The revenue performance in the fourth quarter of 2012 was approximately
19%
less than the estimates utilized in our 2011 impairment analysis. Based on these continued trends, in the latter part of the fourth quarter of 2012, in conjunction with the 2013 planning process and the early stages of our evaluation of strategic alternatives for the business, we lowered our long-term revenue and earnings projections for Silpada in our discounted cash flow (“DCF”) model to reflect a more moderate recovery of the business. The more moderate recovery of the business was believed to be appropriate due to the lack of sales momentum in the business and the continued inability of Silpada to achieve our financial performance expectations.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
The decline in the fair values of the Silpada reporting unit, the trademark, and the customer relationships was primarily driven by the reduction in the forecasted long-term growth rates and cash flows used to estimate fair value. The lower than expected results for fiscal year 2012 served as the baseline for the long-term projections of the business. Fiscal year 2012 revenue for Silpada was approximately
10%
less than the estimates utilized in our 2011 impairment analysis and
19%
less than fiscal year 2011 results. We forecasted revenue and the resulting cash flows over ten years using a DCF model which included a terminal value at the end of the projection period.
4. INVENTORIES
|
|
|
|
|
|
|
|
|
|
Components of Inventories
|
|
September 30, 2013
|
|
December 31, 2012
|
Raw materials
|
|
$
|
365.4
|
|
|
$
|
393.4
|
|
Finished goods
|
|
834.6
|
|
|
707.7
|
|
Total
|
|
$
|
1,200.0
|
|
|
$
|
1,101.1
|
|
5. EMPLOYEE BENEFIT PLANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Pension Benefits
|
|
|
|
|
Net Periodic Benefit Costs
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Postretirement Benefits
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Service cost
|
|
$
|
3.4
|
|
|
$
|
3.8
|
|
|
$
|
2.3
|
|
|
$
|
4.5
|
|
|
$
|
.5
|
|
|
$
|
.5
|
|
Interest cost
|
|
7.0
|
|
|
7.4
|
|
|
9.2
|
|
|
10.0
|
|
|
1.2
|
|
|
1.4
|
|
Expected return on plan assets
|
|
(9.4
|
)
|
|
(9.0
|
)
|
|
(10.2
|
)
|
|
(9.6
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
|
(.1
|
)
|
|
(.1
|
)
|
|
—
|
|
|
(.3
|
)
|
|
(1.2
|
)
|
|
(3.3
|
)
|
Amortization of net actuarial losses
|
|
12.0
|
|
|
10.9
|
|
|
2.7
|
|
|
4.4
|
|
|
.6
|
|
|
1.0
|
|
Curtailments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.7
|
)
|
|
(1.8
|
)
|
|
—
|
|
Net periodic benefit costs
|
|
$
|
12.9
|
|
|
$
|
13.0
|
|
|
$
|
4.0
|
|
|
$
|
8.3
|
|
|
$
|
(.7
|
)
|
|
$
|
(.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Pension Benefits
|
|
|
|
|
Net Periodic Benefit Costs
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Postretirement Benefits
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Service cost
|
|
$
|
11.8
|
|
|
$
|
11.3
|
|
|
$
|
9.9
|
|
|
$
|
13.5
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
Interest cost
|
|
20.6
|
|
|
22.2
|
|
|
27.3
|
|
|
29.5
|
|
|
3.7
|
|
|
4.3
|
|
Expected return on plan assets
|
|
(28.2
|
)
|
|
(27.0
|
)
|
|
(30.1
|
)
|
|
(29.2
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
|
(.3
|
)
|
|
(.2
|
)
|
|
(.3
|
)
|
|
(1.1
|
)
|
|
(3.6
|
)
|
|
(9.9
|
)
|
Amortization of net actuarial losses
|
|
35.3
|
|
|
32.8
|
|
|
10.0
|
|
|
13.2
|
|
|
2.0
|
|
|
3.0
|
|
Curtailments
|
|
—
|
|
|
—
|
|
|
(7.5
|
)
|
|
(.7
|
)
|
|
(1.8
|
)
|
|
(1.0
|
)
|
Net periodic benefit costs
|
|
$
|
39.2
|
|
|
$
|
39.1
|
|
|
$
|
9.3
|
|
|
$
|
25.2
|
|
|
$
|
1.8
|
|
|
$
|
(2.1
|
)
|
The non-U.S. pension curtailment gain recognized in 2013 is due to the decision to freeze our defined benefit pension plan in the United Kingdom. The postretirement benefits curtailment gain recognized in 2013 is due to the closure of the Atlanta distribution center in the U.S.
As of
September 30, 2013
, we made approximately
$40
and
$65
of contributions to the U.S. and non-U.S. pension and postretirement plans, respectively. During the remainder of 2013, we anticipate contributing approximately
$15
to
$20
and
$0
to
$5
to fund our U.S. and non-U.S. pension and postretirement plans, respectively. The contributions made as of September 30, 2013 to the non-U.S. pension and postretirement plans include
$25
as a result of our decision to freeze our defined benefit pension plan in the United Kingdom. All future pension benefits in the United Kingdom will now accrue on a defined
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
contribution basis rather than on a defined benefit basis. Our funding requirements may be impacted by regulations or interpretations thereof.
6. CONTINGENCIES
FCPA Investigations
As previously reported, we have 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 has been conducted under the oversight of our Audit Committee, began in June 2008. As previously reported in July 2009, in connection with the internal investigation, we commenced compliance reviews regarding the FCPA and related U.S. and foreign laws in additional countries in order to evaluate our compliance efforts. We have conducted these compliance reviews in a number of countries selected to represent each of the Company's international geographic segments. The internal investigation and compliance reviews have focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, use of third-party vendors and consultants and related due diligence, joint ventures and acquisitions, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees. The internal investigation and compliance reviews of these matters are substantially complete. In connection with the internal investigation and compliance reviews, certain personnel actions, including termination of employment of certain senior members of management, have been taken, and additional personnel actions may be taken in the future. In connection with the internal investigation and compliance reviews, we continue to enhance our ethics and compliance program, including our policies and procedures, FCPA compliance-related training, FCPA third-party due diligence program and other compliance-related resources.
As previously reported in October 2008, we voluntarily contacted the United States Securities and Exchange Commission ("SEC") and the United States Department of Justice ("DOJ") to advise both agencies of our internal investigation. We have cooperated and continue to cooperate with investigations of these matters by the SEC and the DOJ. We have, among other things, signed tolling agreements, responded to inquiries, translated and produced documents, assisted with interviews, and provided information on our internal investigation and compliance reviews, personnel actions taken and steps taken to enhance our ethics and compliance program. As previously reported in August 2012, we are in discussions with the SEC and the DOJ regarding resolving the government investigations. Our factual presentations as part of these discussions are substantially complete. As previously reported in our Quarterly Report on Form 10-Q for the period ending June 30, 2013, we made an offer of settlement to the DOJ and the SEC in June 2013 that, among other terms, would have included payment of monetary penalties of approximately
$12
. Although our offer was rejected by the DOJ and the staff of the SEC, we accrued the amount of our offer in the second quarter of 2013.
In September 2013, the staff of the SEC proposed terms of potential settlement that included monetary penalties of a magnitude significantly greater than our earlier offer. We disagree with the SEC staff's assumptions and the methodology used in its calculations and believe that monetary penalties at the level proposed by the SEC staff are not warranted. We anticipate that the DOJ also will propose terms of potential settlement, although they have not yet done so and we are unable to predict the timing or terms of any such proposal. If the DOJ’s offer is comparable to the SEC’s offer and if the Company were to enter into settlements with the SEC and the DOJ at such levels, we believe that the Company’s earnings, cash flows, liquidity, financial condition and ongoing business would be materially adversely impacted.
Although we are working to resolve the government investigations through settlement, our discussions are at early stages and at this point we do not know if those efforts will be successful and, if they are, what the timing or terms of any such settlements would be. We expect any such settlements will include civil and/or criminal fines and penalties, and may also include non-monetary remedies, such as oversight requirements and additional remediation and compliance requirements. We may be required to incur significant future costs to comply with the non-monetary terms of any settlements with the SEC and the DOJ. If we are able to reach settlements with the SEC and the DOJ, the Company believes that such settlements are likely to include monetary penalties that would be material to its earnings and cash flows in the relevant fiscal period and could, depending on the amounts of the settlements, materially adversely impact the Company’s liquidity, financial condition and ongoing business.
There can be no assurance that our efforts to reach settlements with the government will be successful. If we do not reach settlements with the SEC and/or the DOJ, we cannot predict the outcome of any subsequent litigation with the government but such litigation could have a material adverse effect on our earnings, cash flow, liquidity, financial condition and ongoing business.
We have not recorded an additional accrual beyond the amount recorded in the second quarter of 2013 because at this time, in light of the early stages of our discussions of possible settlement terms with the government, the magnitude of the difference between our offer and the amount proposed by the SEC and the absence of a proposal from the DOJ, and our inability to predict
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
whether we will be able to reach settlements with the government, we cannot reasonably estimate the amount of additional loss above the amount accrued to date.
Until these matters are resolved, either through settlement or litigation, we expect to continue to incur costs, primarily professional fees and expenses, which may be significant, in connection with the government investigations. Furthermore, under certain circumstances, we may also be required to advance and/or reimburse significant professional fees and expenses to certain current and former Company employees in connection with these matters.
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)). These actions allege breach of fiduciary duty, abuse of control, waste of corporate assets, and, in one complaint, 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 both of these derivative complaints includes 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. In the
Parker
case, plaintiff has agreed that defendants' time to file an answer, motion to dismiss or other response is adjourned until plaintiff files an amended pleading. In
Schwartz
, the parties have agreed to defer the filing of an amended complaint and the defendants' response thereto until the parties submit a further stipulation addressing the scheduling of proceedings. On May 14, 2012, County of York Retirement Plan ("County of York")
-
which had been a plaintiff in a previously-filed but now discontinued derivative action
-
filed a complaint against the Company seeking enforcement of its demands for the inspection of certain of the Company's books and records (
County of York Retirement Plan v. Avon Products, Inc.,
New York Supreme Court, New York County, Index No. 651673/2012). On July 10, 2012, the Company moved to dismiss County of York's complaint. 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 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 have filed an 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 amended complaint names the Company and two individual defendants 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 as well as injunctive relief. Defendants moved to dismiss the amended complaint on June 14, 2012. We are unable to predict the outcome of this matter. However, it is reasonably possible that we may incur a loss in connection with this matter. We are unable to reasonably estimate the amount or range of such reasonably possible loss.
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), totaling approximately
$371
,
$56
and
$257
each, including penalties and accrued interest, at the exchange rate on
September 30, 2013
. The 2002 and the 2012 assessments assert that the establishment in 1995 of separate manufacturing and distribution companies in that country 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 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 assessments. 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. In October 2013, the 2012 PIS and COFINS assessments were canceled in our favor by the first administrative level. This decision will be subject to a mandatory appeal to the second administrative level by the Brazilian tax authorities. In October 2010, the 2002 assessment was upheld at the first administrative
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
level at an amount reduced to approximately $
29
from approximately $
70
, including penalties and accrued interest, at the exchange rate on
September 30, 2013
. We have appealed this decision to the second administrative level.
In the event that the 2002 or 2012 assessments are upheld at the second as well as the third and 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 amount or range of potential loss that we could incur related to the 2002 and 2012 assessments or any additional assessments that may be issued for subsequent periods (tax years up through 2007 are closed by statute). However, other similar excise tax (IPI) assessments involving different periods (1998-2001) have been canceled and officially closed in our favor by the second administrative level, and management believes that the likelihood that the 2002 and 2012 assessments will be upheld is remote.
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
September 30, 2013
, is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
7. ACCUMULATED OTHER COMPREHENSIVE INCOME
The tables below present the changes in AOCI by component and the reclassifications out of AOCI for the three and nine months ended September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2013:
|
|
Foreign Currency Translation Adjustments
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Pension and Postretirement Benefits
|
|
Total
|
Balance at June 30, 2013
|
|
$
|
(448.7
|
)
|
|
$
|
(5.7
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(518.3
|
)
|
|
$
|
(977.0
|
)
|
Other comprehensive income other than reclassifications
|
|
23.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23.4
|
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
Derivative losses on cash flow hedges, net of tax of $.2
(1)
|
|
—
|
|
|
.3
|
|
|
—
|
|
|
—
|
|
|
.3
|
|
Adjustments of and amortization of net actuarial loss, prior service cost, and transition obligation, net of tax of $(1.5)
(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.0
|
)
|
|
(6.0
|
)
|
Total reclassifications into earnings
|
|
—
|
|
|
.3
|
|
|
—
|
|
|
(6.0
|
)
|
|
(5.7
|
)
|
Balance at September 30, 2013
|
|
$
|
(425.3
|
)
|
|
$
|
(5.4
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(524.3
|
)
|
|
$
|
(959.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2013:
|
|
Foreign Currency Translation Adjustments
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Pension and Postretirement Benefits
|
|
Total
|
Balance at December 31, 2012
|
|
$
|
(317.6
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(548.0
|
)
|
|
$
|
(876.7
|
)
|
Other comprehensive loss other than reclassifications
|
|
(107.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(107.7
|
)
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
Derivative losses on cash flow hedges, net of tax of $.8
(1)
|
|
—
|
|
|
1.4
|
|
|
—
|
|
|
—
|
|
|
1.4
|
|
Adjustments of and amortization of net actuarial loss, prior service cost, and transition obligation, net of tax of $10.6
(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23.7
|
|
|
23.7
|
|
Total reclassifications into earnings
|
|
—
|
|
|
1.4
|
|
|
—
|
|
|
23.7
|
|
|
25.1
|
|
Balance at September 30, 2013
|
|
$
|
(425.3
|
)
|
|
$
|
(5.4
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(524.3
|
)
|
|
$
|
(959.3
|
)
|
(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.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
8. SEGMENT INFORMATION
In the second quarter of 2013, Silpada was classified within discontinued operations. See Note 3, Discontinued Operations for further details. Accordingly, all amounts exclude the results of Silpada for all periods presented.
Summarized financial information concerning our reportable segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2013
|
|
2012
|
|
Revenue
|
|
Operating
Profit (Loss)
|
|
Revenue
|
|
Operating
Profit (Loss)
|
Latin America
|
$
|
1,207.7
|
|
|
$
|
121.7
|
|
|
$
|
1,270.9
|
|
|
$
|
142.2
|
|
Europe, Middle East & Africa
|
619.2
|
|
|
61.4
|
|
|
620.7
|
|
|
53.6
|
|
North America
|
328.6
|
|
|
(32.7
|
)
|
|
403.3
|
|
|
(8.8
|
)
|
Asia Pacific
|
167.4
|
|
|
(39.7
|
)
|
|
215.7
|
|
|
(30.2
|
)
|
Total from operations
|
$
|
2,322.9
|
|
|
$
|
110.7
|
|
|
$
|
2,510.6
|
|
|
$
|
156.8
|
|
Global and other
|
—
|
|
|
(42.5
|
)
|
|
—
|
|
|
(46.2
|
)
|
Total
|
$
|
2,322.9
|
|
|
$
|
68.2
|
|
|
$
|
2,510.6
|
|
|
$
|
110.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2013
|
|
2012
|
|
Revenue
|
|
Operating
Profit (Loss)
|
|
Revenue
|
|
Operating
Profit (Loss)
|
Latin America
|
$
|
3,604.2
|
|
|
$
|
370.9
|
|
|
$
|
3,663.2
|
|
|
$
|
307.9
|
|
Europe, Middle East & Africa
|
2,030.7
|
|
|
276.9
|
|
|
2,008.4
|
|
|
181.4
|
|
North America
|
1,087.4
|
|
|
(53.5
|
)
|
|
1,281.8
|
|
|
(5.4
|
)
|
Asia Pacific
|
565.5
|
|
|
(12.2
|
)
|
|
655.8
|
|
|
(3.7
|
)
|
Total from operations
|
$
|
7,287.8
|
|
|
$
|
582.1
|
|
|
$
|
7,609.2
|
|
|
$
|
480.2
|
|
Global and other
|
—
|
|
|
(137.7
|
)
|
|
—
|
|
|
(168.0
|
)
|
Total
|
$
|
7,287.8
|
|
|
$
|
444.4
|
|
|
$
|
7,609.2
|
|
|
$
|
312.2
|
|
Our consolidated net sales by classes of principal products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Beauty
(1)
|
$
|
1,660.0
|
|
|
$
|
1,820.4
|
|
|
$
|
5,215.7
|
|
|
$
|
5,533.5
|
|
Fashion
(2)
|
362.7
|
|
|
407.0
|
|
|
1,182.3
|
|
|
1,255.1
|
|
Home
(3)
|
242.6
|
|
|
245.3
|
|
|
741.2
|
|
|
703.5
|
|
Net sales
|
$
|
2,265.3
|
|
|
$
|
2,472.7
|
|
|
$
|
7,139.2
|
|
|
$
|
7,492.1
|
|
Other revenue
(4)
|
57.6
|
|
|
37.9
|
|
|
148.6
|
|
|
117.1
|
|
Total revenue
|
$
|
2,322.9
|
|
|
$
|
2,510.6
|
|
|
$
|
7,287.8
|
|
|
$
|
7,609.2
|
|
|
|
(1)
|
Beauty includes color cosmetics, fragrances, skincare and personal care.
|
|
|
(2)
|
Fashion includes jewelry, watches, apparel, footwear, accessories and children’s products.
|
|
|
(3)
|
Home includes gift and decorative products, housewares, entertainment and leisure products, children's products and nutritional products.
|
|
|
(4)
|
Other revenue primarily includes shipping and handling and order processing fees billed to Representatives.
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
9. SUPPLEMENTAL BALANCE SHEET INFORMATION
At
September 30, 2013
and
December 31, 2012
, prepaid expenses and other included the following:
|
|
|
|
|
|
|
|
|
|
Components of Prepaid Expenses and Other
|
|
September 30, 2013
|
|
December 31, 2012
|
Deferred tax assets
|
|
$
|
237.0
|
|
|
$
|
273.5
|
|
Prepaid taxes and tax refunds receivable
|
|
150.0
|
|
|
141.1
|
|
Prepaid brochure costs, paper, and other literature
|
|
107.0
|
|
|
111.8
|
|
Receivables other than trade
|
|
90.2
|
|
|
131.6
|
|
Short-term investments
|
|
34.2
|
|
|
16.5
|
|
Healthcare trust assets
|
|
7.6
|
|
|
26.9
|
|
Interest-rate swap agreements, including interest (Notes 12 and 13)
|
|
—
|
|
|
19.5
|
|
Other
|
|
107.5
|
|
|
106.1
|
|
Prepaid expenses and other
|
|
$
|
733.5
|
|
|
$
|
827.0
|
|
At
September 30, 2013
and
December 31, 2012
, other assets included the following:
|
|
|
|
|
|
|
|
|
|
Components of Other Assets
|
|
September 30, 2013
|
|
December 31, 2012
|
Deferred tax assets
|
|
$
|
922.0
|
|
|
$
|
826.9
|
|
Capitalized software
|
|
244.0
|
|
|
235.4
|
|
Long-term receivables
|
|
159.2
|
|
|
174.9
|
|
Investments
|
|
33.4
|
|
|
44.5
|
|
Interest-rate swap agreements (Notes 12 and 13)
|
|
—
|
|
|
94.8
|
|
Other
|
|
35.8
|
|
|
31.4
|
|
Other assets
|
|
$
|
1,394.4
|
|
|
$
|
1,407.9
|
|
10. RESTRUCTURING INITIATIVES
$400M Cost Savings Initiative
In 2012, we announced a cost savings initiative (the "$400M Cost Savings Initiative") in an effort to stabilize the business and return Avon to sustainable growth, which is expected to be achieved through restructuring actions as well as other cost-savings strategies that will not result in restructuring charges. The $400M Cost Savings Initiative is designed to reduce our operating expenses as a percentage of total revenue to help us achieve a targeted low double-digit operating margin by 2016. The restructuring actions under the $400M Cost Savings Initiative primarily consist of global headcount reductions and related actions, as well as the restructuring or closure of certain smaller, under-performing markets, including our exit from the South Korea, Vietnam and Republic of Ireland markets.
As a result of the actions approved to-date, we have recorded total costs to implement these restructuring initiatives of
$80.1
before taxes, of which
$29.4
before taxes was recorded in the first nine months of 2013. For the actions approved to-date, we expect our total costs to implement restructuring to be in the range of
$100
to
$110
before taxes. The additional charges not yet incurred associated with the actions approved to-date of approximately
$20
to
$30
before taxes are expected to be recorded primarily in 2013. At this time we are unable to quantify the total costs to implement these restructuring initiatives that will be incurred through the time the initiative is fully implemented. In connection with the restructuring actions approved to-date associated with the $400M Cost Savings Initiative, we expect to realize annualized savings of approximately
$125
before taxes. For market closures, the annualized savings represent the foregone selling, general and administrative expenses as a result of no longer operating in the respective markets. For actions that did not result in the closure of a market, the annualized savings represent the net reduction of expenses that will no longer be incurred by Avon. The annualized savings do not incorporate the impact of the decline in revenue associated with these actions (including market closures), which is not expected to be material.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
During the three and nine months ended September 30, 2013, we recorded costs to implement of
$.6
and $
29.4
, respectively, related to the $400M Cost Savings Initiative, and the costs consisted of the following:
|
|
•
|
net benefit of
$1.9
and net charge of
$14.6
, respectively, primarily for employee-related costs, including severance and pension and postretirement benefits;
|
|
|
•
|
contract termination and other charges of
$.2
and
$4.1
, respectively, primarily related to the costs associated with our exit from the Republic of Ireland market;
|
|
|
•
|
accelerated depreciation of
$1.7
and
$13.5
, respectively, associated with the closure and rationalization of certain facilities;
|
|
|
•
|
net benefit of
$3.5
due to accumulated foreign currency translation adjustments in the second quarter of 2013 primarily associated with our exit from the Vietnam market;
|
|
|
•
|
implementation costs of
$.6
and
$1.4
, respectively, for professional service fees; and
|
|
|
•
|
net benefit of
$.7
due to inventory adjustments in the first and second quarters of 2013.
|
For the three months ended September 30, 2013 total costs to implement were recorded in selling, general and administrative expenses. For the nine months ended September 30, 2013,
$30.1
of the total costs to implement was recorded in selling, general and administrative expenses and a net benefit of
$.7
was recorded in cost of sales. The majority of cash payments associated with these charges are expected to be made during 2013.
The liability balance for the $400M Cost Savings Initiative as of September 30, 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-
Related
Costs
|
|
Inventory/ Asset Write-offs
|
|
Currency Translation Adjustment Write-offs
|
|
Contract Terminations/Other
|
|
Total
|
Balance at December 31, 2012
|
|
$
|
41.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.7
|
|
|
$
|
43.0
|
|
2013 charges
|
|
16.4
|
|
|
.1
|
|
|
(3.5
|
)
|
|
4.6
|
|
|
17.6
|
|
Adjustments
|
|
(1.8
|
)
|
|
(.8
|
)
|
|
—
|
|
|
(.5
|
)
|
|
(3.1
|
)
|
Cash payments
|
|
(39.1
|
)
|
|
—
|
|
|
—
|
|
|
(4.6
|
)
|
|
(43.7
|
)
|
Non-cash write-offs
|
|
1.8
|
|
|
.7
|
|
|
3.5
|
|
|
—
|
|
|
6.0
|
|
Foreign exchange
|
|
.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.1
|
|
Balance at September 30, 2013
|
|
$
|
18.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.2
|
|
|
$
|
19.9
|
|
Non-cash write-offs associated with employee-related costs are the result of settlements and curtailment for pension and postretirement benefits plans due to the initiatives implemented.
The following table presents the restructuring charges incurred to-date, net of adjustments, under our $400M Cost Savings Initiative, along with the estimated charges expected to be incurred on approved initiatives under the plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-
Related
Costs
|
|
Inventory/Asset
Write-offs
|
|
Currency
Translation
Adjustment
Write-offs
|
|
Contract
Terminations/Other
|
|
Total
|
Charges incurred to date
|
|
$
|
59.8
|
|
|
$
|
.7
|
|
|
$
|
(3.5
|
)
|
|
$
|
6.0
|
|
|
$
|
63.0
|
|
Estimated charges to be incurred on approved initiatives
|
|
3.5
|
|
|
—
|
|
|
6.0
|
|
|
8.3
|
|
|
17.8
|
|
Total expected charges on approved initiatives
|
|
$
|
63.3
|
|
|
$
|
.7
|
|
|
$
|
2.5
|
|
|
$
|
14.3
|
|
|
$
|
80.8
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
The charges, net of adjustments, of initiatives under the $400M Cost Savings Initiative by reportable business segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin
America
|
|
Europe, Middle East & Africa
|
|
North
America
|
|
Asia
Pacific
|
|
Corporate
|
|
Total
|
2012
|
|
$
|
12.9
|
|
|
$
|
1.1
|
|
|
$
|
18.0
|
|
|
$
|
12.9
|
|
|
$
|
3.6
|
|
|
$
|
48.5
|
|
First quarter 2013
|
|
(1.1
|
)
|
|
9.0
|
|
|
1.5
|
|
|
1.5
|
|
|
2.1
|
|
|
13.0
|
|
Second quarter 2013
|
|
3.8
|
|
|
3.4
|
|
|
(.1
|
)
|
|
(3.9
|
)
|
|
—
|
|
|
3.2
|
|
Third quarter 2013
|
|
1.7
|
|
|
(.3
|
)
|
|
(3.1
|
)
|
|
.1
|
|
|
(.1
|
)
|
|
(1.7
|
)
|
Charges incurred to date
|
|
17.3
|
|
|
13.2
|
|
|
16.3
|
|
|
10.6
|
|
|
5.6
|
|
|
63.0
|
|
Estimated charges to be incurred on approved initiatives
|
|
3.3
|
|
|
14.3
|
|
|
.2
|
|
|
—
|
|
|
—
|
|
|
17.8
|
|
Total expected charges on approved initiatives
|
|
$
|
20.6
|
|
|
$
|
27.5
|
|
|
$
|
16.5
|
|
|
$
|
10.6
|
|
|
$
|
5.6
|
|
|
$
|
80.8
|
|
As noted previously, for the initiatives approved to date, we expect to record total costs to implement restructuring in the range of
$100
to
$110
before taxes under the $400M Cost Savings Initiative. 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 incur other costs to implement restructuring initiatives such as other professional services and accelerated depreciation.
Additional Restructuring Charges
In an effort to improve operating performance, we identified certain actions in 2012 that we believe will enhance our operating model, reduce costs, and improve efficiencies. In addition, we have relocated our corporate headquarters in New York City.
Restructuring Charges – Three and Nine Months Ended September 30, 2013
As a result of the analysis and the actions taken, during the three and nine months ended September 30, 2013, we recorded total costs to implement of
$1.2
and
$1.0
, respectively, in selling, general and administrative expenses.
Restructuring Charges – Three and Nine Months Ended September 30, 2012
During the three and nine months ended September 30, 2012, we recorded total costs to implement of
$2.2
and
$63.2
, respectively, associated with previously approved initiatives, and the costs consisted of the following:
|
|
•
|
net charges of
$.2
and
$56.2
, respectively, primarily for employee-related costs;
|
|
|
•
|
implementation costs of
$.4
and
$4.3
, respectively, for professional service fees; and
|
|
|
•
|
accelerated depreciation of
$1.6
and
$2.7
, respectively, associated with the relocation our corporate headquarters.
|
Total costs to implement were recorded in selling, general and administrative expenses for the three and nine months ended September 30, 2012.
The liability balance for these various restructuring initiatives as of
September 30, 2013
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-
Related
Costs
|
|
Contract Terminations/Other
|
|
Total
|
Balance at December 31, 2012
|
|
$
|
17.6
|
|
|
$
|
11.8
|
|
|
$
|
29.4
|
|
2013 charges
|
|
.8
|
|
|
1.3
|
|
|
2.1
|
|
Adjustments
|
|
(1.2
|
)
|
|
—
|
|
|
(1.2
|
)
|
Cash payments
|
|
(13.3
|
)
|
|
(4.2
|
)
|
|
(17.5
|
)
|
Foreign exchange
|
|
(.1
|
)
|
|
—
|
|
|
(.1
|
)
|
Balance at September 30, 2013
|
|
$
|
3.8
|
|
|
$
|
8.9
|
|
|
$
|
12.7
|
|
The actions associated with these various restructuring initiatives are substantially complete.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
2005 and 2009 Restructuring Programs
We launched restructuring programs in 2005 and 2009 (collectively, the "2005 and 2009 Restructuring Programs") with initiatives designed to enhance our organizational effectiveness, implement a global manufacturing strategy and additional supply chain efficiencies in distribution, restructure our global supply chain operations, realign certain local business support functions to a more regional base, and streamline transactional and other services.
Restructuring Charges – Three and Nine Months Ended September 30, 2013
During the three and nine months ended
September 30, 2013
, we have recorded net benefits as a result of adjustments to the reserve of
$2.1
and
$1.9
, respectively, primarily in selling, general and administrative expenses, associated with previously approved initiatives that are part of our 2005 and 2009 Restructuring Programs.
Restructuring Charges – Three and Nine Months Ended September 30, 2012
During the three and nine months ended
September 30, 2012
, we recorded a net benefit of
$.6
and total costs to implement of
$3.9
, respectively, associated with previously approved initiatives that are part of our 2005 and 2009 Restructuring Programs, and the costs consisted of the following:
|
|
•
|
net benefits of
$1.7
and
$7.5
, respectively, as a result of adjustments to the reserve, partially offset by employee-related costs;
|
|
|
•
|
implementation costs of
$1.0
and
$8.2
, respectively, for professional service fees, primarily associated with our initiatives to outsource certain finance processes and realign certain distribution operations;
|
|
|
•
|
accelerated depreciation of
$.8
and
$3.9
, respectively, associated with our initiatives to realign certain distribution operations; and
|
|
|
•
|
a gain of
$.7
due to the sale of machinery and equipment in Germany in the third quarter of 2012.
|
For the three months ended September 30, 2012, net benefits of
$.4
was recorded in selling, general and administrative expenses and
$.2
were recorded in cost of sales. For the nine months ended
September 30, 2012
, total costs to implement of
$.7
were recorded in selling, general and administrative expenses and
$3.2
were recorded in cost of sales.
The liability balances, which primarily consist of employee-related costs, for the initiatives under the 2005 and 2009 Restructuring Programs are shown below:
|
|
|
|
|
|
|
|
Total
|
Balance December 31, 2012
|
|
$
|
21.0
|
|
2013 charges
|
|
.7
|
|
Adjustments
|
|
(3.4
|
)
|
Cash payments
|
|
(15.8
|
)
|
Foreign exchange
|
|
—
|
|
Balance at September 30, 2013
|
|
$
|
2.5
|
|
The 2005 and 2009 Restructuring Programs are substantially complete.
11. GOODWILL AND INTANGIBLE ASSETS
In the second quarter of 2013, Silpada was classified within discontinued operations. See Note 3, Discontinued Operations for further details. Accordingly, all amounts exclude the results of Silpada for all periods presented.
Q3 2013 China Impairment Assessment
As compared to our projections used in our fourth quarter 2012 impairment analysis ("Q4 2012 projections"), China performed generally in line with our revenue and earnings projections during the first half of 2013. As assumed in our Q4 2012 projections, China's revenue in the first half of 2013 continued to deteriorate versus the prior-year period; however, beginning in the third quarter of 2013, this revenue decline was significantly in excess of our assumptions. Revenue in the third quarter of 2013 declined
67%
versus the third quarter of 2012, compared to a revenue decline of
28%
in the first half of 2013 versus the first half of 2012. As a result, in the third quarter of 2013, it became apparent that we would not achieve our 2013 and long-
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
term forecasted revenue and earnings, and we completed an interim impairment assessment of the fair value of goodwill related to our operations in China.
China's revenue performance in the third quarter of 2013 was approximately
67%
less (when excluding the impact of foreign currency) than the revenue in our Q4 2012 projections. The revenue decline in China during the third quarter of 2013 resulted in the recognition of an operating loss while we had expected operating profit in our Q4 2012 projections. In the third quarter of 2013, we significantly lowered our long-term revenue and earnings projections for China that was included in our DCF model utilized in our interim impairment assessment. Based upon this interim analysis, we determined that the goodwill related to our operations in China was impaired. Specifically, the results of our interim impairment analysis indicated the estimated fair value of our China reporting unit was less than its respective carrying amount. As a result of our impairment testing, we recorded a non-cash before tax impairment charge of
$38.4
(
$38.4
after tax) to reduce the carrying amount of goodwill. There is
no
goodwill remaining for our China reporting unit as a result of this impairment. The decline in the fair value of the China reporting unit was primarily driven by the significant reduction in the forecasted long-term growth rates and cash flows used to estimate fair value. Fiscal year 2013 revenue for China is expected to be approximately
38%
less than the revenue in our Q4 2012 projections and
47%
less than fiscal year 2012 results.
We also performed an interim impairment analysis for our China finite-lived intangible assets, which indicated the carrying value of these intangible assets exceeded the estimated future undiscounted cash flows of the business. This resulted in a non-cash before tax impairment charge of
$3.7
(
$2.8
after tax) to reduce the carrying amount of these assets. There are
no
finite-lived intangible assets remaining for China as a result of this impairment
China had historically generated positive cash flows, but is not expected to generate positive cash flows in 2013 or for a number of years thereafter as there is a need for further investment than previously anticipated. As a result, the expected cash flows of the business as of the date of our impairment analysis were not at a level sufficient to support the carrying value of the business. As compared to prior years' projections for China, the future expectations declined significantly in the 2012 and 2013 impairment analyses. This reduction in future expectations led to impairments of
$44.0
and
$42.1
being recorded during the third quarters of 2012 and 2013, respectively. As previously disclosed in the third quarter of 2012, we made changes to our long-term growth estimates as the China business did not achieve our revenue, earnings and cash flows expectations primarily due to challenges in our business model.
The impairment analyses performed for goodwill and intangible assets require several estimates in computing the estimated fair value of a reporting unit and finite-lived intangible assets. We use a DCF approach to estimate the fair value of a reporting unit, which we believe is the most reliable indicator of fair value of a business, and is most consistent with the approach that we would generally expect a market participant would use. In estimating the fair value of our reporting units utilizing a DCF approach, we typically forecast revenue and the resulting cash flows for periods of five to ten years and include an estimated terminal value at the end of the forecasted period. When determining the appropriate forecast period for the DCF approach, we consider the amount of time required before the reporting unit achieves what we consider a normalized, sustainable level of cash flows. The estimation of fair value utilizing a DCF approach includes numerous uncertainties which require our significant judgment when making assumptions of expected growth rates and the selection of discount rates, as well as assumptions regarding general economic and business conditions, and the structure that would yield the highest economic value, among other factors.
Key assumptions used in measuring the fair value of China included projections of revenue and the resulting cash flows. To estimate the fair value of China, we forecasted revenue and the resulting cash flows over ten years using a DCF model which included a terminal value at the end of the projection period. We believed that a ten-year period was a reasonable amount of time in order to return China's cash flows to normalized, sustainable levels.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin
America
|
|
Europe, Middle East & Africa
|
|
Asia
Pacific
|
|
Total
|
Gross balance at December 31, 2012
|
$
|
122.8
|
|
|
$
|
167.3
|
|
|
$
|
84.2
|
|
|
$
|
374.3
|
|
Accumulated impairments
|
—
|
|
|
—
|
|
|
(44.0
|
)
|
|
(44.0
|
)
|
Net balance at December 31, 2012
|
$
|
122.8
|
|
|
$
|
167.3
|
|
|
$
|
40.2
|
|
|
$
|
330.3
|
|
|
|
|
|
|
|
|
|
Changes during the period ended September 30, 2013:
|
|
|
|
|
|
|
|
Impairment
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(38.4
|
)
|
|
$
|
(38.4
|
)
|
Other
(1)
|
(9.5
|
)
|
|
(3.6
|
)
|
|
.8
|
|
|
(12.3
|
)
|
|
|
|
|
|
|
|
|
Gross balance at September 30, 2013
|
$
|
113.3
|
|
|
$
|
163.7
|
|
|
$
|
85.0
|
|
|
$
|
362.0
|
|
Accumulated impairments
|
—
|
|
|
—
|
|
|
(82.4
|
)
|
|
(82.4
|
)
|
Net balance at September 30, 2013
|
$
|
113.3
|
|
|
$
|
163.7
|
|
|
$
|
2.6
|
|
|
$
|
279.6
|
|
(1)
Other is primarily comprised of foreign currency translation.
Other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
December 31, 2012
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
Finite-Lived Intangible Assets
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
40.0
|
|
|
$
|
(36.2
|
)
|
|
$
|
52.7
|
|
|
$
|
(46.0
|
)
|
Licensing agreements
|
52.3
|
|
|
(47.2
|
)
|
|
62.8
|
|
|
(53.6
|
)
|
Noncompete agreements
|
8.1
|
|
|
(8.1
|
)
|
|
8.6
|
|
|
(8.6
|
)
|
Trademarks
|
6.6
|
|
|
(6.6
|
)
|
|
6.6
|
|
|
(6.3
|
)
|
Indefinite-Lived Trademarks
|
24.2
|
|
|
—
|
|
|
24.4
|
|
|
—
|
|
Total
|
$
|
131.2
|
|
|
$
|
(98.1
|
)
|
|
$
|
155.1
|
|
|
$
|
(114.5
|
)
|
Aggregate amortization expense was
$1.3
and
$3.6
for the three months ended
September 30,
2013 and 2012, respectively, and
$3.5
and
$5.3
for the nine months ended
September 30,
2013 and 2012, respectively. Amortization expense in the remainder of 2013 and future periods is not expected to be material.
12. FAIR VALUE
Assets and Liabilities Recorded at Fair Value
The fair value measurement provisions required by the Fair Value Measurements and Disclosures Topic of the Codification 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
(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
September 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
Money market funds
|
$
|
7.6
|
|
|
$
|
—
|
|
|
$
|
7.6
|
|
Available-for-sale securities
|
2.2
|
|
|
—
|
|
|
2.2
|
|
Foreign exchange forward contracts
|
—
|
|
|
2.6
|
|
|
2.6
|
|
Total
|
$
|
9.8
|
|
|
$
|
2.6
|
|
|
$
|
12.4
|
|
Liabilities:
|
|
|
|
|
|
Foreign exchange forward contracts
|
$
|
—
|
|
|
$
|
4.1
|
|
|
$
|
4.1
|
|
Total
|
$
|
—
|
|
|
$
|
4.1
|
|
|
$
|
4.1
|
|
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, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
Money market funds
|
$
|
26.9
|
|
|
$
|
—
|
|
|
$
|
26.9
|
|
Available-for-sale securities
|
1.9
|
|
|
—
|
|
|
1.9
|
|
Interest-rate swap agreements
|
—
|
|
|
94.8
|
|
|
94.8
|
|
Foreign exchange forward contracts
|
—
|
|
|
4.9
|
|
|
4.9
|
|
Total
|
$
|
28.8
|
|
|
$
|
99.7
|
|
|
$
|
128.5
|
|
Liabilities:
|
|
|
|
|
|
Interest-rate swap agreements
|
$
|
—
|
|
|
$
|
1.7
|
|
|
$
|
1.7
|
|
Foreign exchange forward contracts
|
—
|
|
|
1.5
|
|
|
1.5
|
|
Total
|
$
|
—
|
|
|
$
|
3.2
|
|
|
$
|
3.2
|
|
The money market funds are held in a Healthcare trust in order to fund future benefit payments for both active and retiree benefit plans.
Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis
September 30, 2013 - China
In the third quarter of 2013, we completed an interim impairment assessment of the fair value of goodwill related to China and subsequently determined that the goodwill associated with China was impaired. As a result, the carrying amount of China's goodwill was reduced from
$38.4
to
$0
, resulting in a non-cash impairment charge of $
38.4
. In addition, the carrying amount of China's finite-lived intangible assets was reduced from
$3.7
to
$0
, resulting in a non-cash impairment charge of
$3.7
. See Note 11, Goodwill and Intangible Assets for further details.
Fair Value Measurement - China
The impairment analyses performed for goodwill and intangible assets require several estimates in computing the estimated fair value of a reporting unit and finite-lived intangible assets. We use a DCF approach to estimate the fair value of a reporting unit, which we believe is the most reliable indicator of fair value of a business, and is most consistent with the approach that we would generally expect a market participant would use. In estimating the fair value of our reporting units utilizing a DCF approach, we typically forecast revenue and the resulting cash flows for periods of five to ten years and include an estimated terminal value at the end of the forecasted period. When determining the appropriate forecast period for the DCF approach, we consider the amount of time required before the reporting unit achieves what we consider a normalized, sustainable level of cash flows. The estimation of fair value utilizing a DCF approach includes numerous uncertainties which require our significant judgment when making assumptions of expected growth rates and the selection of discount rates, as well as assumptions regarding general economic and business conditions, and the structure that would yield the highest economic value, among other factors.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Key assumptions used in measuring the fair value of China included projections of revenue and the resulting cash flows. To estimate the fair value of China, we forecasted revenue and the resulting cash flows over ten years using a DCF model which included a terminal value at the end of the projection period. We believed that a ten-year period was a reasonable amount of time in order to return China's cash flows to normalized, sustainable levels.
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, available-for-sale securities, short-term investments, money market funds, accounts receivable, loans receivable, debt maturing within one year, accounts payable, long-term debt, foreign exchange forwards contracts, and interest-rate swap agreements. 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
September 30, 2013
and December 31, 2012, respectively, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
December 31, 2012
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Available-for-sale securities
|
$
|
2.2
|
|
|
$
|
2.2
|
|
|
$
|
1.9
|
|
|
$
|
1.9
|
|
Money market funds
|
7.6
|
|
|
7.6
|
|
|
26.9
|
|
|
26.9
|
|
Debt maturing within one year
(1)
|
(243.1
|
)
|
|
(243.1
|
)
|
|
(572.0
|
)
|
|
(572.2
|
)
|
Long-term debt
(1)
|
(2,541.2
|
)
|
|
(2,560.2
|
)
|
|
(2,623.8
|
)
|
|
(2,547.7
|
)
|
Foreign exchange forward contracts
|
(1.5
|
)
|
|
(1.5
|
)
|
|
3.4
|
|
|
3.4
|
|
Interest-rate swap agreements
|
—
|
|
|
—
|
|
|
93.1
|
|
|
93.1
|
|
(1)
The carrying value of debt maturing within one year and long-term debt includes any related discount or premium, unamortized deferred gains on terminated interest-rate swap agreements, and unrealized losses from interest-rate swap agreements.
The methods and assumptions used to estimate fair value are as follows:
Available-for-sale securities and money market funds - 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 all 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.
Interest-rate swap agreements - The fair values of interest-rate swap agreements were estimated based on LIBOR yield curves at the reporting date.
13. 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 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
September 30, 2013
, all interest-rate swap agreements have been terminated.
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.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Derivatives are recognized on the balance sheet at their fair values. The following table presents the fair value of derivative instruments outstanding at
September 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
2.6
|
|
|
Accounts payable
|
|
$
|
4.1
|
|
Total derivatives not designated as hedges
|
|
|
$
|
2.6
|
|
|
|
|
$
|
4.1
|
|
Total derivatives
|
|
|
$
|
2.6
|
|
|
|
|
$
|
4.1
|
|
The following table presents the fair value of derivative instruments outstanding at
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
|
Liability
|
|
Balance Sheet
Classification
|
|
Fair
Value
|
|
Balance Sheet
Classification
|
|
Fair
Value
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
Interest-rate swap agreements
|
Other assets/ Prepaid expenses and other
|
|
$
|
93.1
|
|
|
Other liabilities
|
|
$
|
—
|
|
Total derivatives designated as hedges
|
|
|
$
|
93.1
|
|
|
|
|
$
|
—
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
Interest-rate swap agreements
|
Prepaid expenses and other
|
|
$
|
1.7
|
|
|
Accounts payable
|
|
$
|
1.7
|
|
Foreign exchange forward contracts
|
Prepaid expenses and other
|
|
4.9
|
|
|
Accounts payable
|
|
1.5
|
|
Total derivatives not designated as hedges
|
|
|
$
|
6.6
|
|
|
|
|
$
|
3.2
|
|
Total derivatives
|
|
|
$
|
99.7
|
|
|
|
|
$
|
3.2
|
|
Accounting Policies
If applicable, derivatives are recognized on the balance sheet at their fair values. When we become a party to a derivative instrument and intend to apply hedge accounting, we designate the instrument, for financial reporting purposes, as a fair value hedge, a cash flow hedge, or a net investment hedge. The accounting for changes in fair value (gains or losses) of a derivative instrument depends on whether we had designated it and it qualified as part of a hedging relationship and further, on the type of hedging relationship. We apply the following accounting policies:
|
|
•
|
Changes in the fair value of a derivative that is designated as a fair value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk are recorded in earnings.
|
|
|
•
|
Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded in AOCI to the extent effective and reclassified into earnings in the same period or periods during which the transaction hedged by that derivative also affects earnings.
|
|
|
•
|
Changes in the fair value of a derivative that is designated as a hedge of a net investment in a foreign operation are recorded in foreign currency translation adjustments within AOCI to the extent effective as a hedge.
|
|
|
•
|
Changes in the fair value of a derivative not designated as a hedging instrument are recognized in earnings in other expense, net in the Consolidated Statements of Income.
|
Realized gains and losses on a derivative are reported in the Consolidated Statements of Cash Flows consistent with the underlying hedged item.
For derivatives designated as hedges, we assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Highly effective means that cumulative changes in the fair value of the derivative are between
85%
-
125%
of the cumulative changes in the fair value of the hedged item. The ineffective portion of a derivative’s gain or loss, if any, is recorded in earnings in other expense, net in the Consolidated Statements of Income. In addition, when we determine that a derivative is not highly effective as a hedge, hedge accounting is discontinued. When it is probable that a hedged forecasted transaction will not occur, we discontinue hedge accounting for the affected portion of the forecasted transaction, and reclassify gains or losses that were accumulated in AOCI to earnings in other expense, net in the Consolidated Statements of Income.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Interest Rate Risk
A portion of our borrowings is subject to interest rate risk. We previously 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 December 31, 2012, we held interest-rate swap agreements that effectively converted approximately
62%
of our outstanding long-term, fixed-rate borrowings to a variable interest rate based on LIBOR. As of
September 30, 2013
, all designated interest-rate swap agreements have been terminated either in conjunction with repayment of the associated debt or in the January 2013 and March 2012 transactions described below. Our total exposure to floating interest rates was approximately
9%
at
September 30, 2013
, and
69%
at December 31, 2012.
In January 2013, we terminated eight of our interest-rate swap agreements 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. We incurred termination fees of $
2.3
which were recorded in other expense, net. For the three and nine months ended
September 30, 2013
, the net impact of the gain amortization was $
3.6
and
$22.6
, respectively. The interest-rate swap agreements were terminated in order to improve our capital structure, including increasing our ratio of fixed-rate debt. At
September 30, 2013
, the unamortized deferred gain associated with the January 2013 interest-rate swap termination was
$67.8
, and was included within long-term debt.
In March 2012, we terminated two of our interest-rate swap agreements 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. We incurred termination fees of $
2.5
which were recorded in other expense, net. For the three and nine months ended
September 30, 2013
, the net impact of the gain amortization was
$1.5
and
$4.5
, respectively. For the three and nine months ended
September 30, 2012
, the net impact of the gain amortization was
$1.5
and
$2.9
, respectively. The interest-rate swap agreements were terminated in order to increase our ratio of fixed-rate debt. At
September 30, 2013
, the unamortized deferred gain associated with the March 2012 interest-rate swap termination was
$37.2
, and was included within long-term debt.
At September 30, 2013, we do not have interest-rate swap agreements designated as fair value hedges. In addition to the terminations discussed above, the remaining interest-rate swap agreements designated as fair value hedges were terminated in conjunction with the repayment of the associated debt. During the nine months ended
September 30, 2013
, we recorded a net loss of
$.7
in interest expense for the interest-rate swap agreements designated as fair value hedges; however,
no
net gain or loss was recorded during the three months ended September 30, 2013 as the interest-rate swaps were terminated prior to the third quarter of 2013. During the three and nine months ended
September 30, 2012
, we recorded a net gain of
$.4
and a net loss of
$.7
, respectively, in interest expense for these interest-rate swap agreements designated as fair value hedges. The impact on interest expense of these interest-rate swap agreements was offset by an equal and offsetting impact in interest expense on our fixed-rate debt.
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. At September 30, 2013, we do not have interest-rate swap agreements that are not designated as hedges as the remaining undesignated interest-rate swap agreements were terminated in conjunction with the repayment of the associated debt, and therefore no net gain or loss was recorded during the three months ended September 30, 2013. During the nine months ended September 30, 2013, we recorded an immaterial net loss in other expense, net associated with the undesignated interest-rate swap agreements. During the three and nine months ended September 30, 2012, we recorded immaterial net gains in other expense, net associated with these undesignated interest-rate swap agreements.
There was
no
hedge ineffectiveness for the three and nine months ended
September 30, 2013
and 2012, related to these interest-rate swaps.
Foreign Currency Risk
At
September 30, 2013
, the primary currencies for which we had net underlying foreign currency exchange rate exposures were the Argentine peso, Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese renminbi, Colombian peso, the Czech Republic koruna, the euro, Mexican peso, New Zealand dollar, Peruvian new sol, Philippine peso, Polish zloty, Russian ruble, South Africa rand, Turkish lira, Ukrainian hryvnia, and Venezuelan bolívar. We use foreign exchange forward contracts to manage a portion of our foreign currency exchange rate exposures. At
September 30, 2013
, we had outstanding foreign
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
exchange forward contracts with notional amounts totaling approximately
$186
for the Mexican peso, euro, Peruvian new sol, Polish zloty, Canadian dollar, Romanian leu, and New Zealand dollar.
We use foreign exchange forward contracts to manage foreign currency exposure of 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 intercompany loans. During the three and nine months ended
September 30, 2013
, we recorded a gain of
$2.6
and a loss of
$5.5
, respectively, in other expense, net related to these undesignated foreign exchange forward contracts. During the three and nine months ended
September 30, 2013
, we recorded a loss of
$1.9
and a gain of
$6.7
,
respectively, related to the intercompany loans, caused by changes in foreign currency exchange rates.
During the three and nine months ended
September 30, 2012
, we recorded gains of
$9.8
and
$4.2
, respectively, in other expense, net related to these undesignated foreign exchange forward contracts. During the three and nine months ended
September 30, 2012
, we recorded losses of
$8.8
and
$1.4
, respectively, related to the intercompany loans, caused by changes in foreign currency exchange rates.
We also used a foreign exchange forward contract to hedge the foreign currency exposure related to the net assets of a foreign subsidiary, which was effective as a hedge. A loss of
$.3
on the foreign exchange forward contract was recorded in foreign currency translation adjustments within AOCI for the nine months ended
September 30, 2012
. The foreign exchange forward contract was terminated in January 2012, and therefore
no
gain or loss was recorded during the three months ended
September 30, 2012
or during the three and nine months ended
September 30, 2013
.
14. DEBT
Revolving Credit Facility
In March 2013, we entered into a four-year
$1 billion
revolving credit facility (the “revolving credit facility”), which expires in March 2017. The revolving credit facility replaced the previous
$1 billion
revolving credit facility (the "2010 revolving credit facility"), which was terminated in March 2013 prior to its scheduled expiration in November 2013. There were no amounts drawn under the 2010 revolving credit facility on the date of termination and no early termination penalties were incurred. In the first quarter of 2013,
$1.2
was recorded for the write-off of issuance costs related to the 2010 revolving credit facility. As discussed below under "Commercial Paper Program," the
$1 billion
available under the revolving credit facility is effectively reduced by the principal amount of any commercial paper outstanding. Borrowings under the revolving credit facility bear interest, at our option, at a rate per annum equal to LIBOR plus an applicable margin or a floating base rate plus an applicable margin, in each case subject to adjustment based on our credit ratings. As of
September 30, 2013
, there were
no
amounts outstanding under the revolving credit facility.
Term Loan Agreement
On June 29, 2012, we entered into a
$500.0
term loan agreement (the “term loan agreement”). Subsequently on August 2, 2012, we borrowed an incremental
$50.0
of principal from subscriptions by new lenders under the term loan agreement. In March 2013, we entered into the first amendment to the term loan agreement. This amendment primarily related to (i) adding a provision whereby the lenders may, at our election, decide to decline receipt of prepayments, and (ii) adding a subsidiary debt covenant and conforming the interest coverage ratio and leverage ratio covenants to those contained in the revolving credit facility (discussed below under "Debt Covenants"). Later in March 2013, we repaid
$380.0
of the outstanding principal amount of the term loan agreement with a portion of the proceeds from the issuance of the Notes (as defined below under "Public Notes"), which repayment resulted in a loss in the first quarter of 2013 of
$1.6
on extinguishment of debt associated with the write-off of debt issuance costs related to the term loan agreement. On July 25, 2013, we prepaid
$117.5
of the outstanding principal balance under the term loan agreement, without prepayment penalties. At
September 30, 2013
, the outstanding principal balance under the term loan agreement was
$52.5
.
Pursuant to the term loan agreement, we are required to repay an amount equal to 25% of the aggregate remaining principal amount of the term loan on June 29, 2014, and the remaining outstanding principal amount of the term loan on June 29, 2015.
Amounts repaid or prepaid under the term loan agreement may not be reborrowed. Borrowings under the term loan agreement bear interest, at our option, at a rate per annum equal to LIBOR plus an applicable margin or a floating base rate plus an applicable margin, in each case subject to adjustment based on our credit ratings. The term loan agreement also provides for mandatory prepayments and voluntary prepayments. Subject to certain exceptions (including the issuance of commercial paper and draw-downs on our revolving credit facility), we are required to prepay the term loan in an amount equal to
50%
of the net cash proceeds received from any incurrence of debt for borrowed money in excess of
$500
.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Debt Covenants
The revolving credit facility and the term loan agreement (collectively, "the debt agreements") contain covenants limiting our ability to incur liens and enter into mergers and consolidations or sales of substantially all our assets. The debt agreements also contain covenants that limit Avon's subsidiary debt to existing subsidiary debt at February 28, 2013 plus
$500.0
, with certain other exceptions. In addition, the debt agreements contain financial covenants which require our interest coverage ratio at the end of each fiscal quarter to equal or exceed
4
:
1
and our leverage ratio to not be greater than
4
:
1
at the end of the fiscal quarter ended September 30, 2013,
3.75
:
1
at the end of each subsequent fiscal quarter on or prior to September 30, 2014, and
3.5
:
1
at the end of each fiscal quarter thereafter. In addition, the debt agreements contain customary events of default and cross-default provisions. The interest coverage ratio is determined by dividing our consolidated EBIT (as defined in the debt agreements) by our consolidated interest expense, in each case for the period of four fiscal quarters ending on the date of determination. The leverage ratio is determined by dividing the amount of our consolidated funded debt on the date of determination by our consolidated EBITDA (as defined in the debt agreements) for the period of four fiscal quarters ending on the date of determination. When calculating the interest coverage and leverage ratios, the debt agreements allow us, subject to certain conditions and limitations, to add back to our consolidated net income, among other items: (i) extraordinary and other non-cash losses and expenses, (ii) one-time fees, cash charges and other cash expenses, premiums or penalties incurred in connection with any asset sale, equity issuance or incurrence or repayment of debt or refinancing or modification or amendment of any debt instrument and (iii) cash charges and other cash expenses, premiums or penalties incurred in connection with any restructuring or relating to any legal or regulatory action, settlement, judgment or ruling, in an aggregate amount not to exceed
$400.0
for the period from October 1, 2012 until the termination of commitments under the debt agreements; provided, that restructuring charges incurred after December 31, 2014 shall not be added back to our consolidated net income. As of
September 30, 2013
, and based on then applicable interest rates, the full
$1 billion
revolving credit facility, less the principal amount of commercial paper outstanding (which was
$4.9
at
September 30, 2013
), could have been drawn down without violating any covenant. We were in compliance with our interest coverage and leverage ratios under the debt agreements for the four fiscal quarters ended
September 30, 2013
.
Private Notes
On November 23, 2010, we issued, in a private placement exempt from registration under the Securities Act of 1933, as amended,
$142.0
principal amount of
2.60%
Senior Notes, Series A, due November 23, 2015,
$290.0
principal amount of
4.03%
Senior Notes, Series B, due November 23, 2020, and
$103.0
principal amount of
4.18%
Senior Notes, Series C, due November 23, 2022 (collectively, the "Private Notes"). The proceeds from the sale of the Private Notes were used to repay existing debt and for general corporate purposes.
On March 29, 2013, we prepaid our Private Notes. The prepayment price was equal to
100%
of the principal amount of
$535.0
, plus accrued interest of
$6.9
and a make-whole premium of
$68.0
. In connection with the prepayment of our Private Notes, we incurred a loss on extinguishment of debt of
$71.4
in the first quarter of 2013, which included the make-whole premium and the write-off of
$3.4
of debt issuance costs related to the Private Notes.
Public Notes
In May and June 2003, respectively, we issued, in public offerings, $
250.0
principal amount of
4.20
% Notes, due July 15, 2018 and $
125.0
principal amount of
4.625
% Notes, due May 15, 2013. In March 2008, we issued, in a public offering, $
250.0
principal amount of
4.80
% Notes, due March 1, 2013 and $
250.0
principal amount of
5.75
% Notes, due March 1, 2018. In March 2009, we issued, in a public offering,
$500.0
principal amount of
5.625%
Notes, due March 1, 2014 (the "2014 Notes") and
$350.0
principal amount of
6.50%
Notes, due March 1, 2019. The net proceeds from these offerings were used to repay indebtedness outstanding under our commercial paper program and for general corporate purposes.
The 4.80% Notes due March 1, 2013 were repaid in full at maturity. On April 15, 2013 we prepaid the 2014 Notes at a prepayment price equal to
100%
of the principal amount of
$500.0
, plus accrued interest of
$3.4
and a make-whole premium of $
21.7
. In connection with the prepayment of our 2014 Notes, we incurred a loss on extinguishment of debt of $
13.0
in the second quarter of 2013 consisting of the $
21.7
make-whole premium for the 2014 Notes and the write-off of $
1.1
of debt issuance costs and discounts related to the initial issuance of the 2014 Notes, partially offset by a deferred gain of $
9.8
associated with the January 2013 interest-rate swap agreement termination. See Note 13, Derivative Instruments and Hedging Activities for further details. In addition, the 4.625% Notes due May 15, 2013 were repaid in full at maturity.
In March 2013, we issued, in a public offering,
$250.0
principal amount of
2.375%
Notes, due March 15, 2016,
$500.0
principal amount of
4.60%
Notes, due March 15, 2020,
$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 "Notes"). The net proceeds from these Notes
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
were used to repay $380.0 of the outstanding principal amount of the term loan agreement, to prepay the Private Notes and 2014 Notes (plus make-whole premium and accrued interest), and to repay the 4.625% Notes, due May 15, 2013 at maturity. Interest on the Notes is payable semi-annually on March 15 and September 15 of each year.
Commercial Paper Program
We also maintain a
$1 billion
commercial paper program, which is supported by the revolving credit facility. Under this program, we may issue from time to time unsecured promissory notes in the commercial paper market in private placements exempt from registration under federal and state securities laws, for a cumulative face amount not to exceed
$1 billion
outstanding at any one time and with maturities not exceeding 270 days from the date of issue. The commercial paper short-term notes issued under the program are not redeemable prior to maturity and are not subject to voluntary prepayment. Outstanding commercial paper effectively reduces the amount available for borrowing under the revolving credit facility. At
September 30, 2013
, there was
$4.9
of outstanding commercial paper under this program. Beginning in 2012 and continuing into 2013, the demand for our commercial paper declined, partially impacted by the rating agency action described below.
Additional Information
Our long-term credit ratings are Baa2 (Stable Outlook) with Moody's and BBB- (Negative Outlook) with S&P, which are on the low end of investment grade, and BB+ (Stable Outlook) with Fitch, which is below investment grade. In February 2013, Fitch lowered their long-term credit rating from BBB- (Negative Outlook) to BB+ (Stable Outlook) and Moody's lowered their long-term credit rating from Baa1 (Negative Outlook) to Baa2 (Stable Outlook).
Additional rating agency reviews could result in a further change in outlook or downgrade, which would most likely result in an increase in financing costs, including interest expense under certain of our debt instruments, and reduced access to lending sources, including the commercial paper market.
AVON PRODUCTS, INC.