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, portions of which (including Part I, Item 1. Business, and the following items from Part II of the Annual Report: Item 6. Selected Financial Data, Item 7. Management’s Discussion and Analysis and Item 8. Financial Statements and Supplementary Data) were recast in the Company's Current Report on Form 8-K filed with the SEC on October 11, 2016. 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 income tax provision is determined using an estimate of our consolidated annual effective tax rate, adjusted in the current period for discrete income tax items including:
|
|
•
|
the effects of significant, unusual or extraordinary pretax and income tax items, if any;
|
|
|
•
|
withholding taxes associated with cash repatriations; and
|
|
|
•
|
the impact of loss-making subsidiaries for which we cannot recognize an income tax benefit and subsidiaries that reduce the reliability of the estimated annual consolidated effective tax rate.
|
Venezuela
Venezuela's restrictive foreign exchange control regulations and our Venezuelan operations' increasingly limited access to U.S. dollars resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and the U.S. dollar, and restricted our Venezuelan operations' ability to pay dividends and settle intercompany obligations. The severe currency controls imposed by the Venezuelan government significantly limited our ability to realize the benefits from earnings of our Venezuelan operations and access the resulting liquidity provided by those earnings. We expected that this other-than-temporary lack of exchangeability would 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, account for our Venezuelan operations using the cost method of accounting. Our Consolidated Balance Sheets no longer includes the assets and liabilities of our Venezuelan operations, and we no longer include the results of our Venezuelan operations in our Consolidated Financial Statements.
As a result of the change to the cost method of accounting, in the first quarter of 2016, we recorded a loss of approximately
$120
in other expense, net. The loss was comprised of approximately
$39
in net assets of the Venezuelan business and approximately
$81
in accumulated foreign currency translation adjustments within AOCI (shareholders' deficit) associated with foreign currency changes before Venezuela was accounted for as a highly inflationary economy. The net assets of the Venezuelan business were comprised of inventories of approximately
$24
, property, plant and equipment, net of approximately
$15
, other assets of approximately
$11
, cash of approximately
$5
, accounts receivable of approximately
$4
, and accounts payable and accrued liabilities of approximately
$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
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
were consumed in operations, negatively impacting operating profit and net income by approximately
$6
and approximately
$17
during the three and nine months ended September 30, 2015, respectively. 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 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 has been amended, and as amended, 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. EARNINGS (LOSS) PER SHARE AND SHARE REPURCHASES
We compute earnings (loss) per share ("EPS") using the two-class method, which is an earnings (loss) allocation formula that determines earnings (loss) per share for common stock, and earnings (loss) allocated to convertible preferred stock and participating securities, as appropriate. The earnings allocated to convertible preferred stock are the larger of 1) the preferred dividends accrued in the period or 2) the percentage of earnings from continuing operations allocable to the preferred stock as if they had been converted to common stock. 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.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(Shares in millions)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator from continuing operations:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, less amounts attributable to noncontrolling interests
|
|
$
|
36.7
|
|
|
$
|
(668.0
|
)
|
|
$
|
(84.0
|
)
|
|
$
|
(783.5
|
)
|
Less: (Earnings) loss allocated to participating securities
|
|
(.5
|
)
|
|
10.7
|
|
|
1.1
|
|
|
12.3
|
|
Less: Earnings allocated to convertible preferred stock
|
|
(6.1
|
)
|
|
—
|
|
|
(12.8
|
)
|
|
—
|
|
Earnings (loss) from continuing operations allocated to common shareholders
|
|
30.1
|
|
|
(657.3
|
)
|
|
(95.7
|
)
|
|
(771.2
|
)
|
Numerator from discontinued operations:
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(.7
|
)
|
|
$
|
(29.0
|
)
|
|
$
|
(12.9
|
)
|
|
$
|
(32.0
|
)
|
Less: Loss allocated to participating securities
|
|
—
|
|
|
.8
|
|
|
.2
|
|
|
1.5
|
|
Loss allocated to common shareholders
|
|
(.7
|
)
|
|
(28.2
|
)
|
|
(12.7
|
)
|
|
(30.5
|
)
|
Numerator attributable to Avon:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Avon
|
|
$
|
36.0
|
|
|
$
|
(697.0
|
)
|
|
$
|
(96.9
|
)
|
|
$
|
(815.5
|
)
|
Less: (Earnings) loss allocated to participating securities
|
|
(.5
|
)
|
|
11.1
|
|
|
1.3
|
|
|
12.8
|
|
Less: Earnings allocated to convertible preferred stock
|
|
(6.1
|
)
|
|
—
|
|
|
(12.8
|
)
|
|
—
|
|
Earnings (loss) allocated to common shareholders
|
|
29.4
|
|
|
(685.9
|
)
|
|
(108.4
|
)
|
|
(802.7
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic EPS weighted-average shares outstanding
|
|
437.4
|
|
|
435.4
|
|
|
436.7
|
|
|
435.1
|
|
Diluted effect of assumed conversion of stock options
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted effect of assumed conversion of preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted EPS adjusted weighted-average shares outstanding
|
|
437.4
|
|
|
435.4
|
|
|
436.7
|
|
|
435.1
|
|
Earnings (Loss) per Common Share from continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.07
|
|
|
$
|
(1.51
|
)
|
|
$
|
(.22
|
)
|
|
$
|
(1.77
|
)
|
Diluted
|
|
.07
|
|
|
(1.51
|
)
|
|
(.22
|
)
|
|
(1.77
|
)
|
Loss per Common Share from discontinued operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
—
|
|
|
$
|
(.06
|
)
|
|
$
|
(.03
|
)
|
|
$
|
(.07
|
)
|
Diluted
|
|
—
|
|
|
(.06
|
)
|
|
(.03
|
)
|
|
(.07
|
)
|
Earnings (Loss) per Common Share attributable to Avon:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.07
|
|
|
$
|
(1.58
|
)
|
|
$
|
(.25
|
)
|
|
$
|
(1.84
|
)
|
Diluted
|
|
.07
|
|
|
(1.58
|
)
|
|
(.25
|
)
|
|
(1.84
|
)
|
Amounts in the table above may not necessarily sum due to rounding.
During the three months ended
September 30, 2016
, we did not include stock options to purchase
15.0 million
shares of Avon common stock in the calculation of diluted EPS because the exercise prices of those options were greater than the average market price, and therefore, their inclusion would be anti-dilutive. During the nine months ended
September 30, 2016
, we did not include stock options to purchase
14.2 million
shares of Avon common stock in the calculation of diluted EPS as we had a loss from continuing operations, net of tax. During the three and nine months ended September 30, 2015, we did not include stock options to purchase
11.9 million
shares and
13.2 million
shares, respectively, of Avon common stock in the calculation of diluted EPS as we had a loss from continuing operations, net of tax. For the nine months ended September 30, 2016 and the three and nine months ended September 30, 2015, when we had a loss from continuing operations, net of tax, the inclusion of these shares would decrease the net loss per share, and therefore, their inclusion would be anti-dilutive.
For the three and nine months ended September 30, 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 and nine months ended September 30, 2016. See Note 7, Series C Convertible Preferred Stock.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
We purchased approximately
1.3 million
shares of Avon common stock for
$5.3
during the first
nine
months of 2016, as compared to approximately
.4 million
shares of Avon common stock for
$3.0
during the first
nine
months of 2015, through acquisition of stock from employees in connection with tax payments upon vesting of restricted stock units in 2016 and 2015 and performance restricted stock units in 2016.
3. DISCONTINUED OPERATIONS AND DIVESTITURES
Discontinued Operations
North America
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 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
$6
of cash from New Avon at closing as part of a customary working capital adjustment.
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 three and nine months ended September 30, 2016, the Company recognized a reduction to the loss on sale of less than
$1
before tax (less than
$1
after tax) and an additional loss on sale of approximately
$16
before tax (approximately
$6
after tax), respectively. The cumulative loss on sale of approximately
$356
before tax (approximately
$346
after tax) represents 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, at closing, which was approximately
$43
.
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
$4.5
and
$9.0
during the three and nine months ended September 30, 2016, respectively, and was recorded within other expense, net.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
The major classes of financial statement components comprising the loss on discontinued operations, net of tax for North America are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Total revenue
|
|
$
|
—
|
|
|
$
|
230.7
|
|
|
$
|
135.2
|
|
|
$
|
731.3
|
|
Cost of sales
|
|
—
|
|
|
93.7
|
|
|
53.2
|
|
|
291.6
|
|
Selling, general and administrative expenses
|
|
1.0
|
|
|
155.9
|
|
|
90.0
|
|
|
461.2
|
|
Operating loss
|
|
(1.0
|
)
|
|
(18.9
|
)
|
|
(8.0
|
)
|
|
(21.5
|
)
|
Other (expense) income items
|
|
—
|
|
|
(4.3
|
)
|
|
.6
|
|
|
(5.7
|
)
|
Gain (loss) on sale of discontinued operations, before tax
|
|
.3
|
|
|
—
|
|
|
(16.0
|
)
|
|
—
|
|
Loss from discontinued operations, before tax
|
|
(.7
|
)
|
|
(23.2
|
)
|
|
(23.4
|
)
|
|
(27.2
|
)
|
Income taxes
|
|
—
|
|
|
(5.8
|
)
|
|
10.5
|
|
|
(4.8
|
)
|
Loss from discontinued operations, net of tax
|
|
$
|
(.7
|
)
|
|
$
|
(29.0
|
)
|
|
$
|
(12.9
|
)
|
|
$
|
(32.0
|
)
|
Divestitures
Liz Earle
On July 9, 2015, the Company sold Liz Earle Beauty Co. Limited (“Liz Earle”) for approximately
$215
, less expenses of approximately
$5
. Liz Earle was previously reported within our Europe, Middle East & Africa segment. In 2015, we recorded a gain on sale of
$44.9
before tax, which was reported separately in the Consolidated Statements of Operations, and
$51.6
after tax, representing the difference between the proceeds, including the expected working capital settlement, and the carrying value of the Liz Earle business on the date of sale. Proceeds from the sale of Liz Earle were used to fund a portion of the Company’s redemption of the
$250
principal amount of its
2.375%
Notes due March 15, 2016, which occurred on August 10, 2015. See Note 16, Debt for additional information.
4. RELATED PARTY TRANSACTIONS
As discussed in Note 3, Discontinued Operations and Divestitures, the Company has entered into a transition services agreement to provide certain services to New Avon, as well as an agreement for research and development and subleases for office space. In addition, New Avon is performing certain services for the Company under a similar transition services agreement. The Company recorded a net
$10.2
and
$25.1
reduction of selling, general and administrative expenses associated with these agreements during the three and nine months ended September 30, 2016, respectively.
The Company also supplies product to New Avon as part of these transition services. The Company recorded revenues of
$6.9
and
$20.4
and gross profit of
$.5
and
$1.4
associated with this supply arrangement during the three and nine months ended September 30, 2016, respectively. In addition, New Avon also supplies product to the Company as part of these transition services. The Company purchased
$1.0
and
$4.6
from New Avon associated with this supply arrangement during the three and nine months ended September 30, 2016, respectively.
The Company also entered into agreements with an affiliate of Cerberus, which provide for the secondment of Cerberus affiliate personnel to the Company's project management team responsible for assisting with the execution of the transformation plan (the "Transformation Plan") announced in January 2016. The Company recorded
$.8
and
$1.8
in selling, general and administrative expenses associated with these agreements during the three and nine months ended September 30, 2016, respectively. See Note 12, Restructuring Initiatives for additional information related to the Transformation Plan.
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 Company's North America business. As of September 30, 2016 the Company has a liability
$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
|
|
|
|
|
|
|
|
|
|
Components of Inventories
|
|
September 30, 2016
|
|
December 31, 2015
|
Raw materials
|
|
$
|
208.1
|
|
|
$
|
180.5
|
|
Finished goods
|
|
498.3
|
|
|
443.5
|
|
Total
|
|
$
|
706.4
|
|
|
$
|
624.0
|
|
6. EMPLOYEE BENEFIT PLANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Pension Benefits
|
|
|
|
|
Net Periodic Benefit Costs
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Postretirement Benefits
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
|
$
|
1.3
|
|
|
$
|
3.3
|
|
|
$
|
1.2
|
|
|
$
|
1.2
|
|
|
$
|
—
|
|
|
$
|
.2
|
|
Interest cost
|
|
.8
|
|
|
6.2
|
|
|
4.9
|
|
|
5.9
|
|
|
.3
|
|
|
.9
|
|
Expected return on plan assets
|
|
(1.0
|
)
|
|
(8.3
|
)
|
|
(7.5
|
)
|
|
(9.2
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
|
—
|
|
|
(.2
|
)
|
|
—
|
|
|
—
|
|
|
(.2
|
)
|
|
(1.0
|
)
|
Amortization of net actuarial losses
|
|
1.5
|
|
|
11.6
|
|
|
1.5
|
|
|
2.1
|
|
|
.1
|
|
|
.4
|
|
Settlements/curtailments
|
|
—
|
|
|
23.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit costs
(1)
|
|
$
|
2.6
|
|
|
$
|
36.4
|
|
|
$
|
.1
|
|
|
$
|
—
|
|
|
$
|
.2
|
|
|
$
|
.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Pension Benefits
|
|
|
|
|
Net Periodic Benefit Costs
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Postretirement Benefits
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
|
$
|
4.9
|
|
|
$
|
9.8
|
|
|
$
|
3.8
|
|
|
$
|
4.1
|
|
|
$
|
.1
|
|
|
$
|
.5
|
|
Interest cost
|
|
5.9
|
|
|
18.7
|
|
|
16.6
|
|
|
17.5
|
|
|
1.2
|
|
|
2.7
|
|
Expected return on plan assets
|
|
(7.2
|
)
|
|
(24.9
|
)
|
|
(25.0
|
)
|
|
(27.4
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
|
(.1
|
)
|
|
(.6
|
)
|
|
—
|
|
|
—
|
|
|
(1.1
|
)
|
|
(3.0
|
)
|
Amortization of net actuarial losses
|
|
9.2
|
|
|
34.7
|
|
|
4.9
|
|
|
6.3
|
|
|
.2
|
|
|
1.4
|
|
Settlements/curtailments
|
|
.1
|
|
|
23.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit costs
(1)
|
|
$
|
12.8
|
|
|
$
|
61.5
|
|
|
$
|
.3
|
|
|
$
|
.5
|
|
|
$
|
.4
|
|
|
$
|
1.6
|
|
(1)
Includes
$26.3
of U.S. pension for the three months ended September 30, 2015 and
$4.4
and
$43.5
of U.S. pension for the nine months ended September 30, 2016 and 2015, respectively. Immaterial amounts of the postretirement benefit plans (related to the U.S.) are included in discontinued operations for the three months ended September 30, 2015 and for the nine months ended September 30, 2016 and 2015. 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 tables above.
As part of the separation of the North America business, we transferred
$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
$355.9
of assets held by the U.S. defined benefit pension plan, to a defined benefit pension plan sponsored by New Avon. We also transferred
$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 and Divestitures. 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 a result of lump-sum payments made to former employees that were vested and participated in the U.S. defined benefit pension plan, in the third quarter of 2015, we recorded a settlement charge of
$23.8
. These lump sum payments were made from our plan assets and were not the result of a specific offer to participants of the U.S. defined benefit pension plan. Such payments fully settled our pension plan obligation to those participants who elected to receive such payment. This settlement charge was allocated between Global and Discontinued Operations.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
During the nine months ended
September 30, 2016
, we made approximately
$26
and approximately
$14
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 approximately
$6
to
$11
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 September 30, 2016, had accrued unpaid dividends of
$12.8
. There were
no
cash dividends declared in the nine months ended September 30, 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 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 of September 30, 2016, Series C Preferred Stock was convertible into
87,051,524
shares of common stock. 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 are also 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.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
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 DOJ and the SEC, the monitor can be replaced by the Company no earlier than 18 months after their engagement, 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.
The costs incurred in connection with ongoing compliance with the DPA and the Consent, including the monitorship, have not been material to date and we do not anticipate material costs going forward. We currently cannot estimate the costs that we are likely to incur in connection with self-reporting, if applicable, and any additional costs of implementing the changes, if any, to our policies and procedures required by the monitor.
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 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 and payment of plaintiffs' attorneys' fees in the
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
amount of
$4
. On March 30, 2016, the court granted preliminary approval of the settlement, and on August 1, 2016, the court entered an order and judgment granting final approval of the settlement. The
$4
was paid by the Company's insurers. The order and judgment approving the settlement has become final and Avon has until November 1, 2016 to implement the agreed corporate governance measures. In light of the settlement, stipulations voluntarily dismissing or discontinuing the actions with prejudice have been filed in the
Pritika
and
Parker
actions.
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 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
$62
. 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). On August 21, 2015, the court granted preliminary approval of the settlement, and on August 24, 2016, the court entered an order and judgment granting final approval of the settlement. There has been an appeal of the court's separate order relating to plaintiffs' attorneys' fees, dated August 25, 2016. However, no appeal was filed from the court's August 24, 2016 order and judgment approving the settlement and thus that judgment has now become final.
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 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
. Approximately
$5
of the settlement was paid by the Company’s insurer and approximately
$1
was paid by the Company (which represented the remaining deductible under the Company’s applicable insurance policy). On June 7, 2016, the court granted preliminary approval of the settlement, and on October 11, 2016, the court held a hearing to consider final approval of the settlement and ordered the parties to submit additional documentation in support of the settlement by November 4, 2016. 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 Assessments
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
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
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
$331
, 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 $
29
from approximately $
68
, 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 Brazilian tax authorities' appeal to this favorable decision regarding the 2002 IPI assessment is still pending.
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.
Brazil IPI Tax on Cosmetics
In May 2015, an Executive Decree on certain cosmetics went into effect in Brazil which increased the amount of IPI taxes that are to be remitted by Avon Brazil to the taxing authority on the sales of cosmetic products subject to IPI. Avon Brazil filed an objection to this IPI tax increase on the basis that it is not constitutional. From May 2015 through April 2016 Avon Brazil remitted the taxes associated with this IPI tax increase into a judicial deposit which would be remitted to the taxing authorities in the event that we are not successful in our objection to the tax increase.
In May 2016, Avon Brazil received a favorable preliminary decision on its objection to the tax and was granted a preliminary injunction. As a result, beginning in May 2016 Avon Brazil is no longer required to remit the taxes associated with IPI into a judicial deposit. As the IPI tax increase remains in effect, Avon Brazil is continuing to recognize the IPI taxes associated with the May 2015 Executive Decree as a liability. At September 30, 2016, the liability to the taxing authorities for this IPI tax increase was approximately
$105
and was classified within other liabilities in the Consolidated Balance Sheets, and the judicial deposit was approximately
$68
and was classified within other assets in the Consolidated Balance Sheets. The net liability that does not have a corresponding judicial deposit was
$37
at September 30, 2016, and the accretion expense associated with this net liability will be recognized in other expense, net.
An unfavorable ruling to our objection of this IPI tax increase would have an adverse effect on our consolidated cash flows as Avon Brazil would have to remit the liability owed to the taxing authorities. This amount would be partially offset by the amount of the judicial deposit held by Avon Brazil. We are not able to reliably predict the timing of the outcome of our objection to this tax increase.
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, 2016, is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
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, 2016
and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016:
|
|
Foreign Currency Translation Adjustments
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Pension and Postretirement Benefits
|
|
Total
|
Balance at June 30, 2016
|
|
$
|
(862.7
|
)
|
|
$
|
(.4
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(142.4
|
)
|
|
$
|
(1,009.8
|
)
|
Other comprehensive income other than reclassifications
|
|
15.4
|
|
|
—
|
|
|
—
|
|
|
.7
|
|
|
16.1
|
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
Derivative losses on cash flow hedges, net of tax of $0.0
(1)
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $.2
(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.9
|
|
|
2.9
|
|
Total reclassifications into earnings
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
2.9
|
|
|
4.7
|
|
Balance at September 30, 2016
|
|
$
|
(847.3
|
)
|
|
$
|
1.4
|
|
|
$
|
(4.3
|
)
|
|
$
|
(138.8
|
)
|
|
$
|
(989.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015:
|
|
Foreign Currency Translation Adjustments
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Pension and Postretirement Benefits
|
|
Total
|
Balance at June 30, 2015
|
|
$
|
(781.7
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(510.1
|
)
|
|
$
|
(1,298.4
|
)
|
Other comprehensive loss other than reclassifications
|
|
(149.5
|
)
|
|
—
|
|
|
—
|
|
|
(9.4
|
)
|
|
(158.9
|
)
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
Derivative losses on cash flow hedges, net of tax of $0.0
(1)
|
|
—
|
|
|
.5
|
|
|
—
|
|
|
—
|
|
|
.5
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $.3
(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39.4
|
|
|
39.4
|
|
Total reclassifications into earnings
|
|
—
|
|
|
.5
|
|
|
—
|
|
|
39.4
|
|
|
39.9
|
|
Balance at September 30, 2015
|
|
$
|
(931.2
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(480.1
|
)
|
|
$
|
(1,417.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 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 (loss) other than reclassifications
|
|
31.4
|
|
|
—
|
|
|
—
|
|
|
(10.6
|
)
|
|
20.8
|
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
Derivative losses on cash flow hedges, net of tax of $0.0
(1)
|
|
—
|
|
|
2.7
|
|
|
—
|
|
|
—
|
|
|
2.7
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $.6
(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12.4
|
|
|
12.4
|
|
Deconsolidation of Venezuela, net of tax of $0.0
|
|
81.3
|
|
|
—
|
|
|
—
|
|
|
.8
|
|
|
82.1
|
|
Separation of North America, net of tax of $10.2
|
|
(10.0
|
)
|
|
—
|
|
|
—
|
|
|
269.2
|
|
|
259.2
|
|
Total reclassifications into earnings
|
|
71.3
|
|
|
2.7
|
|
|
—
|
|
|
282.4
|
|
|
356.4
|
|
Balance at September 30, 2016
|
|
$
|
(847.3
|
)
|
|
$
|
1.4
|
|
|
$
|
(4.3
|
)
|
|
$
|
(138.8
|
)
|
|
$
|
(989.0
|
)
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 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
|
|
(254.2
|
)
|
|
—
|
|
|
—
|
|
|
(13.0
|
)
|
|
(267.2
|
)
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
Derivative losses on cash flow hedges, net of tax of $0.0
(1)
|
|
—
|
|
|
1.4
|
|
|
—
|
|
|
—
|
|
|
1.4
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $.9
(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
66.0
|
|
|
66.0
|
|
Total reclassifications into earnings
|
|
—
|
|
|
1.4
|
|
|
—
|
|
|
66.0
|
|
|
67.4
|
|
Balance at September 30, 2015
|
|
$
|
(931.2
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(480.1
|
)
|
|
$
|
(1,417.4
|
)
|
(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 $
1.9
and of $
7.3
for the three months ended
September 30, 2016
and 2015, respectively, and foreign exchange net losses of $
12.8
and of $
15.6
for the nine months ended
September 30, 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 the allocation of marketing, costs to implement ("CTI") restructuring initiatives (see Note 12, Restructuring Initiatives), certain significant asset impairment charges, 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.
Summarized financial information concerning our reportable segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Total Revenue
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Europe, Middle East & Africa
|
|
$
|
476.4
|
|
|
$
|
497.5
|
|
|
$
|
1,517.7
|
|
|
$
|
1,559.8
|
|
South Latin America
|
|
594.8
|
|
|
570.8
|
|
|
1,556.9
|
|
|
1,769.2
|
|
North Latin America
|
|
196.8
|
|
|
209.7
|
|
|
625.9
|
|
|
675.0
|
|
Asia Pacific
|
|
132.8
|
|
|
145.8
|
|
|
411.4
|
|
|
467.9
|
|
Total revenue from reportable segments
|
|
1,400.8
|
|
|
1,423.8
|
|
|
4,111.9
|
|
|
4,471.9
|
|
Other operating segments and business activities
|
|
8.0
|
|
|
12.4
|
|
|
37.7
|
|
|
81.3
|
|
Total revenue
|
|
$
|
1,408.8
|
|
|
$
|
1,436.2
|
|
|
$
|
4,149.6
|
|
|
$
|
4,553.2
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Operating Profit
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Segment Profit
|
|
|
|
|
|
|
|
|
Europe, Middle East & Africa
|
|
$
|
66.2
|
|
|
$
|
69.5
|
|
|
$
|
218.3
|
|
|
$
|
206.6
|
|
South Latin America
|
|
73.8
|
|
|
52.8
|
|
|
157.9
|
|
|
189.7
|
|
North Latin America
|
|
24.4
|
|
|
17.9
|
|
|
85.0
|
|
|
78.1
|
|
Asia Pacific
|
|
12.7
|
|
|
15.5
|
|
|
42.2
|
|
|
54.2
|
|
Total profit from reportable segments
|
|
$
|
177.1
|
|
|
$
|
155.7
|
|
|
$
|
503.4
|
|
|
$
|
528.6
|
|
Other operating segments and business activities
|
|
(.8
|
)
|
|
3.3
|
|
|
4.1
|
|
|
13.3
|
|
Unallocated global expenses
|
|
(77.5
|
)
|
|
(103.7
|
)
|
|
(249.6
|
)
|
|
(287.1
|
)
|
CTI restructuring initiatives
|
|
(14.0
|
)
|
|
1.9
|
|
|
(70.2
|
)
|
|
(28.2
|
)
|
Legal settlement
|
|
27.2
|
|
|
—
|
|
|
27.2
|
|
|
—
|
|
Venezuelan special items
|
|
—
|
|
|
(5.7
|
)
|
|
—
|
|
|
(118.3
|
)
|
Pension settlement charge
|
|
—
|
|
|
(6.2
|
)
|
|
—
|
|
|
(6.2
|
)
|
Operating profit
|
|
$
|
112.0
|
|
|
$
|
45.3
|
|
|
$
|
214.9
|
|
|
$
|
102.1
|
|
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 the separation of the Company's North America business into New Avon on March 1, 2016 and ongoing royalties from the licensing of our name and products.
11. SUPPLEMENTAL BALANCE SHEET INFORMATION
At
September 30, 2016
and
December 31, 2015
, prepaid expenses and other included the following:
|
|
|
|
|
|
|
|
|
|
Components of Prepaid Expenses and Other
|
|
September 30, 2016
|
|
December 31, 2015
|
Prepaid taxes and tax refunds receivable
|
|
$
|
89.7
|
|
|
$
|
96.3
|
|
Prepaid brochure costs, paper, and other literature
|
|
78.5
|
|
|
64.5
|
|
Receivables other than trade
|
|
73.2
|
|
|
69.6
|
|
Legal settlement
(1)
|
|
27.2
|
|
|
—
|
|
Other
|
|
54.9
|
|
|
65.7
|
|
Prepaid expenses and other
|
|
$
|
323.5
|
|
|
$
|
296.1
|
|
(1)
In the third quarter of 2016, we settled claims relating to professional services that had been provided to the Company prior to 2013 in connection with a previously disclosed legal matter. The proceeds, net of legal fees, of
$27.2
before tax (
$27.2
after tax) were recognized as a reduction of selling, general and administrative expenses in the third quarter of 2016 and were received by the Company in the fourth quarter of 2016.
At
September 30, 2016
and
December 31, 2015
, other assets included the following:
|
|
|
|
|
|
|
|
|
|
Components of Other Assets
|
|
September 30, 2016
|
|
December 31, 2015
|
Deferred tax assets
|
|
$
|
191.3
|
|
|
$
|
172.8
|
|
Long-term receivables
|
|
159.1
|
|
|
128.8
|
|
Capitalized software
|
|
83.5
|
|
|
82.4
|
|
Judicial deposit for Brazil IPI tax on cosmetics (Note 8)
|
|
68.3
|
|
|
33.3
|
|
Investments
|
|
37.5
|
|
|
36.3
|
|
Investment in New Avon (Note 3)
|
|
33.5
|
|
|
—
|
|
Tooling (plates and molds associated with our beauty products)
|
|
15.1
|
|
|
15.3
|
|
Other
|
|
30.9
|
|
|
21.1
|
|
Other assets
|
|
$
|
619.2
|
|
|
$
|
490.0
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
12. RESTRUCTURING INITIATIVES
Transformation Plan
In January 2016, we announced 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 $ 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, as well as the closure of Thailand, a smaller, under-performing market. These operating model changes include the 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
$93.9
before taxes, of which
$71.5
was recorded in the first nine 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
$20
to
$30
before taxes are expected to be recorded primarily in 2017. 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
$95
to
$105
before taxes. We expect to realize approximately
$25
before taxes of savings associated with the restructuring actions in 2016 and are expected to achieve the significant majority of the annualized savings beginning in 2017. For the market closure, the expected annualized savings represented the foregone selling, general and administrative expenses as a result of no longer operating in the respective market. 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 market closures, which is not material.
Restructuring Charges - Three and Nine Months Ended September 30, 2016
During the three and nine months ended September 30, 2016, we recorded costs to implement of
$14.0
and
$71.5
, respectively, related to the Transformation Plan, in the Consolidated Statement of Operations. The costs consisted of the following:
|
|
•
|
net charges of
$11.8
and
$61.7
, respectively, primarily for employee-related costs, including severance benefits;
|
|
|
•
|
contract termination and other net charges of
$1.0
and
$5.6
, respectively;
|
|
|
•
|
implementation costs of
$1.1
and
$2.6
, respectively, primarily related to professional service fees;
|
|
|
•
|
accelerated depreciation of
$.1
and
$1.3
, respectively; and
|
|
|
•
|
inventory write-off of
$.3
for the nine months ended September 30, 2016.
|
Of the total costs to implement during the three months ended September 30, 2016, all
$14.0
was recorded in selling, general and administrative expenses. Of the total costs to implement during the nine months ended September 30, 2016,
$71.2
was recorded in selling, general and administrative expenses and
$.3
was recorded in cost of sales. The majority of cash payments, if applicable, associated with these charges are expected to be made during the remainder of 2016 and 2017.
The liability balance for the Transformation Plan as of September 30, 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-Related Costs
|
|
Contract Terminations/Other
|
|
Total
|
Balance at December 31, 2015
|
|
$
|
21.4
|
|
|
$
|
—
|
|
|
$
|
21.4
|
|
2016 charges
|
|
70.6
|
|
|
5.6
|
|
|
76.2
|
|
Adjustments
|
|
(8.9
|
)
|
|
—
|
|
|
(8.9
|
)
|
Cash payments
|
|
(24.3
|
)
|
|
(1.1
|
)
|
|
(25.4
|
)
|
Foreign exchange
|
|
.2
|
|
|
—
|
|
|
.2
|
|
Balance at September 30, 2016
|
|
$
|
59.0
|
|
|
$
|
4.5
|
|
|
$
|
63.5
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
The following table presents the restructuring charges incurred to date, under the Transformation Plan, along with the estimated charges expected to be incurred on approved initiatives under the plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee- Related Costs
|
|
Contract
Terminations/Other
|
|
Foreign Currency Translation Adjustment Write-offs
|
|
Total
|
Charges incurred to date
|
|
$
|
83.1
|
|
|
$
|
5.6
|
|
|
$
|
—
|
|
|
$
|
88.7
|
|
Estimated charges to be incurred on approved initiatives
|
|
6.3
|
|
|
2.3
|
|
|
2.0
|
|
|
10.6
|
|
Total expected charges on approved initiatives
|
|
$
|
89.4
|
|
|
$
|
7.9
|
|
|
$
|
2.0
|
|
|
$
|
99.3
|
|
The 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 segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East & Africa
|
|
South Latin America
|
|
North Latin America
|
|
Asia
Pacific
|
|
Global & Other Operating Segments
|
|
Total
|
2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21.4
|
|
|
$
|
21.4
|
|
First quarter 2016
|
|
21.9
|
|
|
12.1
|
|
|
3.3
|
|
|
4.7
|
|
|
5.1
|
|
|
47.1
|
|
Second quarter 2016
|
|
(.1
|
)
|
|
1.0
|
|
|
(.4
|
)
|
|
2.9
|
|
|
4.0
|
|
|
7.4
|
|
Third quarter 2016
|
|
9.4
|
|
|
.3
|
|
|
1.6
|
|
|
.9
|
|
|
.6
|
|
|
12.8
|
|
Charges incurred to date
|
|
31.2
|
|
|
13.4
|
|
|
4.5
|
|
|
8.5
|
|
|
31.1
|
|
|
88.7
|
|
Estimated charges to be incurred on approved initiatives
|
|
1.9
|
|
|
.1
|
|
|
—
|
|
|
2.4
|
|
|
6.2
|
|
|
10.6
|
|
Total expected charges on approved initiatives
|
|
$
|
33.1
|
|
|
$
|
13.5
|
|
|
$
|
4.5
|
|
|
$
|
10.9
|
|
|
$
|
37.3
|
|
|
$
|
99.3
|
|
We expect our total costs to implement restructuring on approved initiatives to be approximately
$95
to
$105
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
$.8
before taxes, during the nine months ended September 30, 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 and Nine Months Ended September 30, 2016
The costs to implement recorded during the three and nine months ended September 30, 2016 consisted of net benefits of
$.1
and
$.8
, respectively, primarily for employee-related costs due to severance benefits.
Restructuring Charges – Three and Nine Months Ended September 30, 2015
The costs to implement recorded during the three and nine months ended September 30, 2015 consisted of the following:
|
|
•
|
a benefit of
$2.0
and a charge of
$22.7
, respectively, for employee-related costs due to severance benefits; and
|
|
|
•
|
implementation costs of
$1.4
and
$6.8
, respectively, primarily for professional service fees associated with Corporate and Asia Pacific.
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
The liability balance, which consists of employee-related costs, for these various restructuring initiatives as of
September 30, 2016
is as follows:
|
|
|
|
|
|
|
|
Total
|
Balance at December 31, 2015
|
|
$
|
4.0
|
|
2016 charges
|
|
—
|
|
Adjustments
|
|
(.8
|
)
|
Cash payments
|
|
(1.9
|
)
|
Foreign exchange
|
|
—
|
|
Balance at September 30, 2016
|
|
$
|
1.3
|
|
The majority of cash payments associated with this liability are expected to be made during 2016.
The charges, net of adjustments, of these various restructuring initiatives, by reportable segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East & Africa
|
|
South Latin America
|
|
North Latin America
|
|
Asia
Pacific
|
|
Global & Other Operating Segments
|
|
Total
|
2015
|
|
$
|
4.2
|
|
|
$
|
2.7
|
|
|
$
|
.2
|
|
|
$
|
5.8
|
|
|
$
|
9.2
|
|
|
$
|
22.1
|
|
First Quarter 2016
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.1
|
)
|
|
(.4
|
)
|
|
(.5
|
)
|
Second Quarter 2016
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.2
|
)
|
|
(.2
|
)
|
Third Quarter 2016
|
|
(.1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.1
|
)
|
Charges incurred to date
|
|
$
|
4.1
|
|
|
$
|
2.7
|
|
|
$
|
.2
|
|
|
$
|
5.7
|
|
|
$
|
8.6
|
|
|
$
|
21.3
|
|
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 and
nine
months ended
September 30, 2016
, we recorded a net charge of
$.1
and a net benefit of
$.5
, respectively, 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 "$400M Cost Savings Initiative") (collectively, the "Other Restructuring Initiatives"), which are substantially complete. During the three and
nine
months ended
September 30, 2015
, we recorded net benefits of
$1.3
and
$1.3
, respectively, 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
September 30, 2016
is not material.
13. GOODWILL
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East & Africa
|
|
South Latin
America
|
|
Asia
Pacific
|
|
Total
|
Gross balance at December 31, 2015
|
|
$
|
27.7
|
|
|
$
|
68.9
|
|
|
$
|
85.0
|
|
|
$
|
181.6
|
|
Accumulated impairments
|
|
(6.9
|
)
|
|
—
|
|
|
(82.4
|
)
|
|
(89.3
|
)
|
Net balance at December 31, 2015
|
|
$
|
20.8
|
|
|
$
|
68.9
|
|
|
$
|
2.6
|
|
|
$
|
92.3
|
|
|
|
|
|
|
|
|
|
|
Changes during the period ended September 30, 2016:
|
|
|
|
|
|
|
|
|
Foreign exchange
|
|
.2
|
|
|
5.6
|
|
|
—
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
Gross balance at September 30, 2016
|
|
$
|
27.9
|
|
|
$
|
74.5
|
|
|
$
|
85.0
|
|
|
$
|
187.4
|
|
Accumulated impairments
|
|
(6.9
|
)
|
|
—
|
|
|
(82.4
|
)
|
|
(89.3
|
)
|
Net balance at September 30, 2016
|
|
$
|
21.0
|
|
|
$
|
74.5
|
|
|
$
|
2.6
|
|
|
$
|
98.1
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
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.
|
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, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
Available-for-sale securities
|
$
|
2.8
|
|
|
$
|
—
|
|
|
$
|
2.8
|
|
Foreign exchange forward contracts
|
—
|
|
|
.1
|
|
|
.1
|
|
Total
|
$
|
2.8
|
|
|
$
|
.1
|
|
|
$
|
2.9
|
|
Liabilities:
|
|
|
|
|
|
Foreign exchange forward contracts
|
$
|
—
|
|
|
$
|
6.6
|
|
|
$
|
6.6
|
|
Total
|
$
|
—
|
|
|
$
|
6.6
|
|
|
$
|
6.6
|
|
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
September 30, 2016
and December 31, 2015, respectively, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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)
|
(111.3
|
)
|
|
(111.3
|
)
|
|
(55.2
|
)
|
|
(55.2
|
)
|
Long-term debt
(1)
|
(2,226.8
|
)
|
|
(2,167.0
|
)
|
|
(2,150.5
|
)
|
|
(1,622.7
|
)
|
Foreign exchange forward contracts
|
(6.5
|
)
|
|
(6.5
|
)
|
|
.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.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
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.
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
September 30, 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
September 30, 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
|
|
|
Accounts payable
|
|
$
|
6.6
|
|
Total derivatives not designated as hedges
|
|
|
$
|
.1
|
|
|
|
|
$
|
6.6
|
|
Total derivatives
|
|
|
$
|
.1
|
|
|
|
|
$
|
6.6
|
|
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
September 30, 2016
, we do not have any interest-rate swap agreements. Approximately
5%
and
2%
of our debt portfolio at
September 30, 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. The net impact of the gain amortization was
$11.7
and
$19.1
, respectively,
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
for the three and
nine
months ended
September 30, 2016
, both of which included
$9.2
related to the extinguishment of debt (see Note 16, Debt), and
$3.6
and
$10.9
, respectively, for the three and
nine
months ended
September 30, 2015
. 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, 2016
, the unamortized deferred gain associated with the January 2013 interest-rate swap termination was
$15.6
, of which
$2.3
was classified within debt maturing within one year and
$13.3
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. The net impact of the gain amortization was
$5.1
and
$8.5
, respectively, for the three and
nine
months ended September 30, 2016, both of which included
$3.6
related to the extinguishment of debt (see Note 16, Debt), and
$1.6
and
$4.9
, respectively, for the three and
nine
months ended September 30, 2015. The interest-rate swap agreements were terminated in order to increase our ratio of fixed-rate debt. At
September 30, 2016
, the unamortized deferred gain associated with the March 2012 interest-rate swap termination was
$14.3
, 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
September 30, 2016
, we had outstanding foreign exchange forward contracts with notional amounts totaling approximately
$82.1
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 and
nine
months ended
September 30, 2016
, we recorded losses of
$1.2
and
$8.7
, respectively, in other expense, net in the Consolidated Statements of Operations related to these undesignated foreign exchange forward contracts. Also during the three and
nine
months ended
September 30, 2016
, we recorded gains of
$.1
and
$5.5
, resp
ectively, related to the associated intercompany loans, caused by changes in foreign currency exchange rates.
During the three and
nine
months ended
September 30, 2015
, we recorded a gain of
$4.2
and a loss of
$4.7
, respectively, in other expense, net in the Consolidated Statements of Operations related to these undesignated foreign exchange forward contracts. During the three and
nine
months ended
September 30, 2015
, we recorded a loss of
$7.3
and a gain of
$.8
, respectively, 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 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
September 30, 2016
, there were
no
amounts outstanding under the 2015 facility. The 2015 facility replaced the Company's previous
$1 billion
unsecured revolving credit facility (the "2013 facility"). In the second quarter of 2015,
$2.5
was recorded for the write-off of issuance costs related to the 2013 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) fully guaranteed on an unsecured basis by the Company. The obligations of AIO and the subsidiary guarantors are secured by first priority liens on and security interest in substantially all of the assets of AIO and the subsidiary guarantors, 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 5.75% Notes (as defined below), the 4.20% Notes (as defined below), the 6.50% 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
September 30, 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
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
reduced by any standby letters of credit granted by AIO, which, as of September 30, 2016, was approximately
$34
. As of
September 30, 2016
, based on then applicable interest rates, the entire amount of the remaining 2015 facility, which is approximately
$366
, could have been drawn down without violating any covenant.
Public Notes
In March 2013, we issued, in a public offering,
$250.0
principal amount of
2.375%
Notes due March 15, 2016 (the "2.375% Notes"),
$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. On August 10, 2015, we prepaid our 2.375% Notes at a prepayment price equal to
100%
of the principal amount of $250.0, plus accrued interest of
$3.1
and a make-whole premium of
$5.0
. In connection with the prepayment of our 2.375% Notes, we incurred a loss on extinguishment of debt of
$5.5
in the third quarter of 2015 consisting of the
$5.0
make-whole premium for the 2.375% Notes and the write-off of
$.5
of debt issuance costs and discounts related to the initial issuance of the 2.375% Notes.
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 since issuance of the 2013 Notes, the interest rates on these notes have increased by the maximum allowable increase.
In August 2016, we completed cash tender offers which resulted in a reduction of principal of
$108.6
of our
5.75%
Notes due March 1, 2018 (the "5.75% Notes"),
$73.8
of our
4.20%
Notes due July 15, 2018 (the "4.20% Notes"),
$68.1
of our
6.50%
Notes due March 1, 2019 (the "6.50% Notes") and
$50.1
of our 4.60% Notes. In connection with the cash tender offers, we incurred a gain on extinguishment of debt of
$3.9
in the third quarter of 2016, consisting of a deferred gain of
$12.8
associated with the March 2012 and January 2013 interest-rate swap agreement terminations (see Note 15, Derivative Instruments and Hedging Activities), partially offset by the
$5.8
of early tender premium paid for the cash tender offers,
$1.2
of a deferred loss associated with treasury lock agreements designated as cash flow hedges of the anticipated interest payments on the
5.75%
Notes,
$1.0
of deal costs and the write-off of
$.9
of debt issuance costs and discounts related to the initial issuances of the notes that were the subject of the cash tender offers.
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 Avon undergoes a change of control and, at such time, the outstanding notes are rated below investment grade.
Senior Secured Notes
In August 2016, AIO issued, in a private placement exempt from registration under the Securities Act of 1933, as amended,
$500.0
in aggregate principal amount of
7.875%
Senior Secured Notes, which will mature on August 15, 2022 (the "Senior Secured Notes"). Interest on the Senior Secured Notes is payable semi-annually on February 15 and August 15 of each year.
All obligations of AIO under the Senior Secured Notes are unconditionally guaranteed by each current and future wholly-owned domestic restricted subsidiary of the Company that is a guarantor under the 2015 facility and fully guaranteed on an unsecured basis by the Company. The obligations of AIO and the subsidiary guarantors are secured by first priority liens on and security interest in substantially all of the assets of AIO and the subsidiary guarantors, in each case, subject to certain exceptions.
The indenture governing our Senior Secured Notes contains certain customary covenants and restrictions as well as customary events of default and cross-default provisions. Further, we would be required to make an offer to repurchase all of our Senior Secured Notes, at a price equal to 101% of their aggregate principal amount plus accrued and unpaid interest, in the event Avon undergoes a change of control.
Long-Term Credit Ratings
Our long-term credit ratings are: Moody’s ratings of Negative Outlook with Ba3 for corporate family debt, B1 for senior unsecured debt, and Ba1 for the Senior Secured Notes; S&P ratings of Stable Outlook with B for corporate family debt and BB- for the Senior Secured Notes; and Fitch rating of Negative Outlook with B+, each of 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
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
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, and less favorable covenants and financial terms under our financing arrangements.
17. SUBSEQUENT EVENTS
In October 2016, we repurchased
$44.0
of our
6.50%
Notes,
$44.0
of our
4.20%
Notes,
$40.0
of our
4.60%
Notes and
$35.2
of our
5.75%
Notes. The aggregate repurchase price was equal to the principal amount of the notes, plus a premium of approximately
$6
and accrued interest of approximately
$1
. In connection with these repurchases of debt, we expect to incur a loss on extinguishment of debt of approximately
$1
in the fourth quarter of 2016 consisting of the approximate
$6
premium paid for the repurchases, approximately
$1
for a deferred loss associated with treasury lock agreements designated as cash flow hedges of the anticipated interest payments on the 5.75% Notes and the write-off of debt issuance costs and discounts related to the initial issuance of the notes that were repurchased, partially offset by a deferred gain of approximately
$6
associated with the January 2013 interest-rate swap agreement termination (see Note 15, Derivative Instruments and Hedging Activities).
Also in October 2016, we issued notices of prepayment for the remaining principal amount of our
4.20%
Notes and
5.75%
Notes, and we will prepay our 4.20% Notes and 5.75% Notes in November 2016. The prepayment price will be equal to the remaining principal amount of
$132.2
for our 4.20% Notes and
$106.2
for our 5.75% Notes, plus a make-whole premium of approximately
$13
for both series of notes and accrued interest of approximately
$4
for both series of notes. In connection with the prepayment of our 4.20% Notes and 5.75% Notes, we expect to incur a loss on extinguishment of debt of approximately
$3
in the fourth quarter of 2016 consisting of the
$13
make-whole premium, the write-off of less than
$1
of debt issuance costs and discounts related to the initial issuances of the notes that were prepaid and approximately
$1
of a deferred loss associated with treasury lock agreements designated as cash flow hedges of the anticipated interest payments on the 5.75% Notes, partially offset by a deferred gain of approximately
$11
associated with the January 2013 interest-rate swap agreement termination (see Note 15, Derivative Instruments and Hedging Activities).
AVON PRODUCTS, INC.