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
2016
Annual Report on Form 10-K ("
2016
Form 10-K") in preparing these unaudited interim Consolidated 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
2016
Form 10-K. When used in this report, the terms "Avon," "Company," "we" or "us" mean Avon Products, Inc.
For interim Consolidated Financial Statements purposes, we generally provide for accruals under our various employee benefit plans for each quarter based on one quarter of the estimated annual expense, and adjust these accruals as estimates are refined. 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:
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•
|
the effects of significant, unusual or extraordinary pretax and income tax items, if any;
|
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|
•
|
withholding taxes recognized 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
As of March 31, 2016, we deconsolidated our Venezuelan operations, and since then, we account for this business using the cost method of accounting. The decision to deconsolidate our Venezuelan operations was due to the lack of exchangeability between the Venezuelan bolivar and the U.S. dollar. This was caused by Venezuela's restrictive foreign exchange control regulations and our Venezuelan operations' increasingly limited access to U.S. dollars, which restricted our Venezuelan operations' ability to pay dividends and settle intercompany obligations.
As a result of the change to the cost method of accounting, in the first quarter of 2016, we recorded a loss of
$120.5
in other expense, net. The loss was comprised of
$39.2
in net assets of the Venezuelan business and
$81.3
in accumulated foreign currency translation adjustments within accumulated other comprehensive loss ("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
$23.7
, property, plant and equipment, net of
$15.0
, other assets of
$11.4
, accounts receivable of
$4.6
, cash of
$4.5
, and accounts payable and accrued liabilities of
$20.0
. Our Consolidated Balance Sheets no longer include the assets and liabilities of our Venezuelan operations. We no longer include the results of our Venezuelan operations in our Consolidated Financial Statements, and will include income relating to our Venezuelan operations only to the extent that we receive cash for dividends or royalties remitted by Avon Venezuela.
Revisions
In our 2016 Form 10-K, our Consolidated Statements of Cash Flows presented supplemental information of the cash paid for interest of
$87.1
for the year ended December 31, 2016; however, this amount should have been disclosed as
$142.8
. We determined that the effect of this revision was not material to our 2016 Form 10-K.
New Accounting Standards Implemented
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation
, which is intended to simplify the accounting for share-based payment transactions. This new guidance changes several aspects of the accounting for share-based payment transactions, including accounting for income taxes, forfeitures and employer-tax withholding requirements. ASU 2016-09 also clarifies the Statements of Cash Flows presentation for certain components of share-based payment awards. We adopted this new accounting guidance in the first quarter of 2017, which did not have a material impact on our Consolidated Financial Statements.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
Accounting Standards to be Implemented
ASU 2014-09, Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, as a new Topic, Accounting Standards Codification Topic ("ASC") 606. The core principle of the guidance is that an entity 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. This new accounting guidance may be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We intend to adopt this new accounting guidance as a cumulative-effect adjustment as of January 1, 2018. Based on the evaluation completed to-date, we believe that we will need to:
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•
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consider some of our sales incentive programs as a separate deliverable and allocate a portion of the sales transaction price to this deliverable, and thus defer a portion of the sales transaction price until the incentive prize is redeemed;
|
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•
|
consider some of our prospective discounts achieved based on sales targets as a separate deliverable and allocate a portion of the sales transaction prices to this deliverable, thus deferring a portion of the sales transaction price until future discounts are realized;
|
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•
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adjust the manner in which we present our allowance for sales returns in our Consolidated Balance Sheets, to reflect a refund liability and a returns asset;
|
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•
|
reflect fees paid by the Representative to the Company for items such as brochures, sales aids and late payments as revenue, rather than as a reduction to selling, general and administrative expenses ("SG&A"), as these represent separate performance obligations;
|
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•
|
reflect certain of the costs associated with the fees paid by the Representative in cost of sales, rather than SG&A; and
|
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•
|
recharacterize certain costs related to sales incentives, brochures and sales aids in our Consolidated Balance Sheets from prepaid expenses and other to inventories.
|
As a result of adopting this new accounting guidance, we estimate that had we adopted the new standard as of January 1, 2016, the impact on our full-year 2016 Consolidated Statement of Operations would have been:
•
an increase in total revenue by approximately
5%
;
•
a decrease in gross margin by approximately
350
to
500
basis points; and
•
a decrease in operating margin by approximately
10
to
30
basis points.
These impacts are associated with reclassifications of items in the Consolidated Statements of Operations only, which will have no impact on operating profit. These impacts do not reflect the impact due to the change in timing of recognition of revenue and associated costs that would be deferred until sales incentive programs and prospective discounts are fulfilled, which we do not believe is material to the estimated impacts discussed above. In addition, upon adoption, we do not expect the change in timing of recognition of revenue and associated costs to have a significant impact on our full-year Consolidated Statements of Operations; however, the impact may vary depending on the types of incentive programs, the volume of incentives offered, and the timing of the programs. The cumulative-effect adjustment upon adoption of the new revenue recognition standard as of January 1, 2018 will depend on open sales incentive programs and prospective discounts existing at December 31, 2017, which cannot be reliably estimated at this time.
ASU 2017-07, Compensation - Retirement Benefits
In March 2017, the FASB issued ASU 2017-07,
Compensation - Retirement Benefits
. This new guidance requires entities to (1) disaggregate the service cost component from the other components of net periodic benefit costs and present it with other current employee compensation costs in the Consolidated Statements of Operations and (2) present the other components of net periodic benefit costs below operating profit in other expense (income), net. We intend to adopt this new accounting guidance effective January 1, 2018. The new accounting guidance is applied retrospectively and will increase our operating profit for the three and nine months ended September 30, 2017 and the full year 2016 by
$3.9
,
$5.8
and
$2.1
, respectively, but will have no impact on net income (loss).
ASU 2016-02, Leases
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires all assets and liabilities arising from leases to be recognized in the Consolidated Balance Sheets. We intend to adopt this new accounting guidance effective January 1, 2019. We are currently evaluating the effect that adopting this new accounting guidance will have on our Consolidated Financial Statements.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
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.
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Three Months Ended September 30,
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|
Nine Months Ended September 30,
|
(Shares in millions)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator from continuing operations:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, less amounts attributable to noncontrolling interests
|
|
$
|
12.5
|
|
|
$
|
36.7
|
|
|
$
|
(69.5
|
)
|
|
$
|
(84.0
|
)
|
Less: Earnings (loss) allocated to participating securities
|
|
.2
|
|
|
.5
|
|
|
(.9
|
)
|
|
(1.1
|
)
|
Less: Earnings allocated to convertible preferred stock
|
|
5.8
|
|
|
6.1
|
|
|
17.2
|
|
|
12.8
|
|
Income (loss) from continuing operations allocated to common shareholders
|
|
6.5
|
|
|
30.1
|
|
|
(85.8
|
)
|
|
(95.7
|
)
|
Numerator from discontinued operations:
|
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|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
—
|
|
|
$
|
(.7
|
)
|
|
$
|
—
|
|
|
$
|
(12.9
|
)
|
Less: Loss allocated to participating securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.2
|
)
|
Loss allocated to common shareholders
|
|
—
|
|
|
(.7
|
)
|
|
—
|
|
|
(12.7
|
)
|
Numerator attributable to Avon:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Avon
|
|
$
|
12.5
|
|
|
$
|
36.0
|
|
|
$
|
(69.5
|
)
|
|
$
|
(96.9
|
)
|
Less: Earnings (loss) allocated to participating securities
|
|
.2
|
|
|
.5
|
|
|
(.9
|
)
|
|
(1.3
|
)
|
Less: Earnings allocated to convertible preferred stock
|
|
5.8
|
|
|
6.1
|
|
|
17.2
|
|
|
12.8
|
|
Income (loss) allocated to common shareholders
|
|
6.5
|
|
|
29.4
|
|
|
(85.8
|
)
|
|
(108.4
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic EPS weighted-average shares outstanding
|
|
440.0
|
|
|
437.4
|
|
|
439.5
|
|
|
436.7
|
|
Diluted effect of assumed conversion of stock options
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted effect of assumed conversion of preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted EPS adjusted weighted-average shares outstanding
|
|
440.0
|
|
|
437.4
|
|
|
439.5
|
|
|
436.7
|
|
Earnings (Loss) per Common Share from continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.01
|
|
|
$
|
.07
|
|
|
$
|
(.20
|
)
|
|
$
|
(.22
|
)
|
Diluted
|
|
.01
|
|
|
.07
|
|
|
(.20
|
)
|
|
(.22
|
)
|
Loss per Common Share from discontinued operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(.03
|
)
|
Diluted
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.03
|
)
|
Earnings (Loss) per Common Share attributable to Avon:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.01
|
|
|
$
|
.07
|
|
|
$
|
(.20
|
)
|
|
$
|
(.25
|
)
|
Diluted
|
|
.01
|
|
|
.07
|
|
|
(.20
|
)
|
|
(.25
|
)
|
Amounts in the table above may not necessarily sum due to rounding.
During the three months ended
September 30, 2017
and 2016, we did not include stock options to purchase
18.4 million
shares and
15.0 million
shares, respectively, 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, 2017 and 2016, we did not include stock options to purchase
16.9 million
shares and
14.2
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
million
shares, respectively, of Avon common stock in the calculation of diluted EPS as 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.
During the three and nine months ended
September 30, 2017
and
2016
, it is more dilutive to assume the series C convertible preferred stock is not converted into common stock; therefore, the weighted-average shares outstanding were not adjusted by the as-if converted series C convertible preferred stock because the effect would be anti-dilutive. The inclusion of the series C convertible preferred stock would increase the net earnings per share for the three months ended September 30, 2017 and 2016 and decrease the net loss per share for the nine months ended September 30, 2017 and 2016. 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, 2017
and
2016
. See Note 5, Related Party Transactions.
We purchased approximately
1.5 million
shares of Avon common stock for
$6.6
during the first
nine
months of
2017
, as compared to approximately
1.3 million
shares of Avon common stock for
$5.3
during the first
nine
months of
2016
, through acquisition of stock from employees in connection with tax payments upon the vesting of restricted stock units and performance restricted stock units.
3. DISCONTINUED OPERATIONS
On December 17, 2015, the Company entered into definitive agreements with affiliates controlled by Cerberus Capital Management, L.P. ("Cerberus"). The agreements include an investment agreement providing for a
$435.0
investment by Cleveland Apple Investor L.P. (“Cerberus Investor”) (an affiliate of Cerberus) in the Company through the purchase of perpetual convertible preferred stock (see Note 5, Related Party Transactions) 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 Cerberus NA Investor LLC (“Cerberus NA”) (an affiliate of Cerberus). These transactions closed on March 1, 2016.
The major classes of financial statement components comprising the loss on discontinued operations, net of tax for North America are shown below:
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2016
|
Total revenue
|
|
$
|
—
|
|
|
$
|
135.2
|
|
Cost of sales
|
|
—
|
|
|
53.2
|
|
Selling, general and administrative expenses
|
|
1.0
|
|
|
90.0
|
|
Operating loss
|
|
(1.0
|
)
|
|
(8.0
|
)
|
Other income items
|
|
—
|
|
|
.6
|
|
Loss from discontinued operations, before tax
|
|
(1.0
|
)
|
|
(7.4
|
)
|
Gain (loss) on sale of discontinued operations, before tax
|
|
.3
|
|
|
(16.0
|
)
|
Income taxes
|
|
—
|
|
|
10.5
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(.7
|
)
|
|
$
|
(12.9
|
)
|
There were no amounts recorded in discontinued operations for the three or nine months ended September 30, 2017.
4. INVESTMENT IN NEW AVON
In connection with the separation of the Company's North America business (as discussed in Note 3, Discontinued Operations), which closed on March 1, 2016, the Company retained a
19.9%
ownership interest in New Avon. The Company has accounted for its ownership interest in New Avon using the equity method of accounting, which resulted in the Company recognizing its proportionate share of New Avon's income or loss and other comprehensive income or loss. Our recorded investment balance in New Avon at September 30, 2017 was
zero
.
During the three and nine months ended September 30, 2017, the Company's proportionate share of the losses of New Avon was $
6.2
and $
16.0
respectively, of which $
1.7
and $
11.5
, respectively, of these amounts was recorded within other expense, net. In addition, during the third quarter of 2017, the Company received a cash distribution of $
22.0
from New Avon, which reduced our recorded investment balance in New Avon. During the third quarter of 2017, we recorded only
$1.7
of the
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
Company's proportionate share of the losses in New Avon, as this reduced our recorded investment balance in New Avon to zero. If New Avon experiences future losses while our recorded investment balance is zero, we would not record our proportionate share of such loss. The Company's proportionate share of the losses of New Avon was
$4.5
and
$9.0
during the three and seven months ended
September 30, 2016
, respectively, which was recorded within other expense, net. In addition, the Company's proportionate share of the post-separation other comprehensive income of New Avon was a benefit of an immaterial amount and
$.1
during the three and nine months ended September 30, 2017, respectively, and was recorded within other comprehensive income (loss).
The Company also recorded an additional loss of
$.5
within other expense, net and a benefit of
$1.1
within other comprehensive income (loss), during the nine months ended
September 30, 2017
, primarily associated with purchase accounting adjustments reported by New Avon.
Summarized financial information related to New Avon is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2017
|
|
Seven Months Ended September 30, 2016
|
Total revenue
|
|
$
|
527.7
|
|
|
$
|
523.0
|
|
Gross profit
|
|
$
|
322.9
|
|
|
$
|
317.4
|
|
Net loss
|
|
$
|
(80.5
|
)
|
|
$
|
(45.2
|
)
|
5. RELATED PARTY TRANSACTIONS
The following tables present the related party transactions with New Avon and affiliates of Cerberus. There are no other related party transactions. New Avon is majority owned and managed by Cerberus NA. See Note 3, Discontinued Operations and Note 4, Investment in New Avon for further details.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
Revenue from sale of product to New Avon
(1)
|
|
$
|
8.3
|
|
|
$
|
6.9
|
|
|
$
|
25.9
|
|
|
$
|
20.4
|
|
Gross profit from sale of product to New Avon
(1)
|
|
$
|
.2
|
|
|
$
|
.5
|
|
|
$
|
1.5
|
|
|
$
|
1.4
|
|
|
|
|
|
|
|
|
|
|
Cost of sales for purchases from New Avon
(2)
|
|
$
|
.9
|
|
|
$
|
1.2
|
|
|
$
|
3.0
|
|
|
$
|
4.1
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
Transition services, intellectual property, research and development and subleases
(3)
|
|
$
|
(7.4
|
)
|
|
$
|
(10.2
|
)
|
|
$
|
(22.5
|
)
|
|
$
|
(25.1
|
)
|
Project management team
(4)
|
|
$
|
.6
|
|
|
.8
|
|
|
$
|
2.2
|
|
|
1.8
|
|
Net reduction of selling, general and administrative expenses
|
|
$
|
(6.8
|
)
|
|
$
|
(9.4
|
)
|
|
$
|
(20.3
|
)
|
|
$
|
(23.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Balance Sheet Data
|
|
|
|
|
Inventories
(5)
|
|
$
|
.4
|
|
|
$
|
1.0
|
|
Receivables due from New Avon
(6)
|
|
$
|
9.1
|
|
|
$
|
11.6
|
|
Payables due to New Avon
(7)
|
|
$
|
.3
|
|
|
$
|
.7
|
|
Payables due to an affiliate of Cerberus
(8)
|
|
$
|
.5
|
|
|
$
|
.6
|
|
(1)
The Company supplies product to New Avon as part of a manufacturing and supply agreement. The Company recorded revenue of
$8.3
and
$6.9
, within other revenue, and gross profit of
$.2
and
$.5
associated with this agreement during the three months ended
September 30, 2017
and
2016
, respectively. The Company recorded revenue of
$25.9
and
$20.4
, within other revenue, and gross profit of
$1.5
and
$1.4
associated with this agreement during the
nine
months ended
September 30, 2017
and
2016
, respectively.
(2)
New Avon supplies product to the Company as part of the same manufacturing and supply agreement noted above. The Company purchased
$.8
and
$1.0
from New Avon associated with this agreement during the three months ended
September 30, 2017
and
2016
, respectively, and recorded
$.9
and
$1.2
associated with these purchases within cost of sales during the three
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
months ended
September 30, 2017
and
2016
, respectively. The Company purchased
$2.7
and
$4.6
from New Avon associated with this agreement during the
nine
months ended
September 30, 2017
and
2016
, respectively and recorded
$3.0
and
$4.1
associated with these purchases within cost of sales during the
nine
months ended
September 30, 2017
and
2016
, respectively.
(3)
The Company also entered into a transition services agreement to provide certain services to New Avon, as well as an intellectual property ("IP") license agreement, 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
$7.4
and
$10.2
reduction of selling, general and administrative expenses associated with these agreements during the three months ended
September 30, 2017
and
2016
, respectively, and a net
$22.5
and
$25.1
reduction of selling, general and administrative expenses associated with these agreements during the
nine
months ended
September 30, 2017
and
2016
, respectively. The net reduction of selling, general and administrative expenses associated with these agreements generally represents a recovery of the related costs.
(4)
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
$.6
and
$.8
in selling, general and administrative expenses associated with these agreements during the three months ended
September 30, 2017
and
2016
, respectively, and recorded
$2.2
and
$1.8
in selling, general and administrative expenses associated with these agreements during the
nine
months ended
September 30, 2017
and
2016
, respectively. See Note 12, Restructuring Initiatives for additional information related to the Transformation Plan.
(5)
Inventories relate to purchases from New Avon, associated with the manufacturing and supply agreement, which have not yet been sold, and were classified within inventories in the Consolidated Balance Sheets.
(6)
The receivables due from New Avon relate to the agreements for transition services, the IP license, research and development and subleases for office space, as well as the manufacturing and supply agreement, and were classified within prepaid expenses and other in the Consolidated Balance Sheets.
(7)
The payables due to New Avon relate to the manufacturing and supply agreement, and were classified within other accrued liabilities in the Consolidated Balance Sheets.
(8)
The payables due to an affiliate of Cerberus relate to the agreement for the project management team, and were classified within other accrued liabilities in the Consolidated Balance Sheets.
In addition, 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, 2017
, the Company has a liability of
$1.6
for the estimated value of such standby letters of credit. The recognition of the initial liability of
$2.1
was included in the estimated loss on sale of the North America business in loss from discontinued operations, net of tax during the year ended
December 31, 2016
.
Series C Preferred Stock
On March 1, 2016, the Company issued and sold to Cerberus Investor
435,000
shares of newly issued series C preferred stock for an aggregate purchase price of
$435.0
. Cumulative preferred dividends accrue daily on the series C preferred stock at a rate of
1.25%
per quarter. The series C preferred stock had accrued unpaid dividends of
$35.6
as of
September 30, 2017
. There were
no
dividends declared in the
nine
months ended
September 30, 2017
and
2016
.
6. INVENTORIES
|
|
|
|
|
|
|
|
|
|
Components of Inventories
|
|
September 30, 2017
|
|
December 31, 2016
|
Raw materials
|
|
$
|
228.6
|
|
|
$
|
179.3
|
|
Finished goods
|
|
433.9
|
|
|
407.1
|
|
Total
|
|
$
|
662.5
|
|
|
$
|
586.4
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
7. EMPLOYEE BENEFIT PLANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Pension Benefits
|
|
|
|
|
Net Periodic Benefit Costs
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Postretirement Benefits
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
|
$
|
.8
|
|
|
$
|
1.3
|
|
|
$
|
1.1
|
|
|
$
|
1.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
.7
|
|
|
.8
|
|
|
4.7
|
|
|
4.9
|
|
|
.1
|
|
|
.3
|
|
Expected return on plan assets
|
|
(.8
|
)
|
|
(1.0
|
)
|
|
(7.4
|
)
|
|
(7.5
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.1
|
)
|
|
(.2
|
)
|
Amortization of net actuarial losses
|
|
1.3
|
|
|
1.5
|
|
|
2.1
|
|
|
1.5
|
|
|
—
|
|
|
.1
|
|
Settlements/curtailments
|
|
—
|
|
|
—
|
|
|
3.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit costs
(1)
|
|
$
|
2.0
|
|
|
$
|
2.6
|
|
|
$
|
3.8
|
|
|
$
|
.1
|
|
|
$
|
—
|
|
|
$
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Pension Benefits
|
|
|
|
|
Net Periodic Benefit Costs
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Postretirement Benefits
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
|
$
|
3.5
|
|
|
$
|
4.9
|
|
|
$
|
3.5
|
|
|
$
|
3.8
|
|
|
$
|
—
|
|
|
$
|
.1
|
|
Interest cost
|
|
2.2
|
|
|
5.9
|
|
|
13.5
|
|
|
16.6
|
|
|
.8
|
|
|
1.2
|
|
Expected return on plan assets
|
|
(2.4
|
)
|
|
(7.2
|
)
|
|
(21.0
|
)
|
|
(25.0
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
|
—
|
|
|
(.1
|
)
|
|
(.1
|
)
|
|
—
|
|
|
(.3
|
)
|
|
(1.1
|
)
|
Amortization of net actuarial losses
|
|
3.8
|
|
|
9.2
|
|
|
5.9
|
|
|
4.9
|
|
|
.1
|
|
|
.2
|
|
Settlements/curtailments
|
|
—
|
|
|
.1
|
|
|
3.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit costs
(1)
|
|
$
|
7.1
|
|
|
$
|
12.8
|
|
|
$
|
5.1
|
|
|
$
|
.3
|
|
|
$
|
.6
|
|
|
$
|
.4
|
|
(1)
Includes
$4.4
of U.S. pension and immaterial amounts of the postretirement benefit plans (related to the U.S.) for the
nine
months ended September 30,
2016
, which are included in discontinued operations. Amounts associated with the pension and postretirement benefit plans in Canada and the postretirement benefit plan in Puerto Rico, which are included in discontinued operations, have been excluded from all amounts in the table above. See Note 3, Discontinued Operations for discussion of the separation of the Company's North America business.
During the
nine
months ended
September 30, 2017
, we made approximately
$12
and approximately
$18
of contributions to the U.S. and non-U.S. defined benefit pension and postretirement benefit plans, respectively. During the remainder of
2017
, we anticipate contributing approximately
$0
to
$3
and approximately
$2
to
$7
to fund our U.S. and non-U.S. defined benefit pension and postretirement benefit plans, respectively.
In addition to the amounts in the table above, during the second quarter of 2017, we recorded an
$18.2
charge for a loss contingency related to a non-U.S. pension plan, for which an amendment to the plan that occurred in a prior year may not have been appropriately implemented.
8. CONTINGENCIES
Settlements of FCPA Investigations
As previously reported, we engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the Foreign Corrupt Practices Act ("FCPA") and related U.S. and foreign laws in China and additional countries. The internal investigation, which was conducted under the oversight of our Audit Committee, began in June 2008 and along with the compliance reviews, was completed in 2014.
Following our voluntary reporting of the internal investigation to both the U.S. Department of Justice (the "DOJ") and the U.S. Securities and Exchange Commission (the "SEC") and our subsequent cooperation with those agencies, the United States District Court for the Southern District of New York (the "USDC") approved in December 2014 a deferred prosecution agreement (“DPA”) entered into between the Company and the DOJ related to charges of violations of the books and records and internal controls provisions of the FCPA. In addition, Avon Products (China) Co. Ltd., a subsidiary of the Company operating in China, pleaded guilty to conspiring to violate the books and records provision of the FCPA and was sentenced by the USDC to pay a $
68
fine. The SEC also filed a complaint against the Company charging violations of the books and records
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
and internal controls provisions of the FCPA and a consent to settlement (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, 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 has assessed and monitored 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 as they relate to the Company's current and ongoing compliance with the FCPA and other applicable anti-corruption laws. The monitor has recommended some changes to our policies and procedures that we have substantially adopted and are in the process of completing. The monitor 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.
The third-party 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.
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, which was officially closed in favor of Avon Brazil in July 2017. 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. As in the 2002 IPI case, the 2012 IPI assessment asserts that the establishment in 1995 of separate manufacturing and distribution companies in Brazil was done without a valid business purpose and that Avon Brazil did not observe minimum pricing rules to define the taxable basis of excise tax. The structure adopted in 1995 is comparable to that used by many other companies in Brazil. We believe that our Brazilian corporate structure is appropriate, both operationally and legally, and that the 2012 IPI assessment is 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 appealed this decision to the second administrative level. The 2012 IPI assessment totals approximately
$356
, including penalties and accrued interest.
On October 3, 2017, Avon Brazil received a new tax assessment notice regarding IPI for 2014, in the total amount of approximately $
270
, including penalties and accrued interest. In line with the other assessments received in the past, the Brazilian tax authorities assert that the structure adopted in 2005 has no valid business purpose. Avon will vigorously contest this assessment, and presented the first defense on November 1, 2017.
In the event that the 2012 and the 2017 IPI assessments are upheld, 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 and an adverse effect on the Company's Consolidated Statements of Cash Flows. 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 and in July 2017 we received the official cancellation of the 2002 assessment pursuant to the
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
favorable decision discussed above. We believe that the likelihood that the 2012 and the 2017 IPI assessments will be upheld is reasonably possible. As stated above, we believe that the 2012 and 2017 IPI assessments are unfounded. At September 30, 2017, we have not recognized a liability for the 2012 or 2017 IPI assessments.
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. In December 2016, Avon Brazil received a favorable decision from the Federal District Court regarding this objection. This decision has been appealed by the tax authorities.
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, 2017
, the liability to the taxing authorities for this IPI tax increase was approximately $
185
and was classified within long-term sales taxes and taxes other than income
in our Consolidated Balance Sheets, and the judicial deposit was approximately
$76
and was classified within other assets in our Consolidated Balance Sheets. The net liability that does not have a corresponding judicial deposit was approximately
$109
at
September 30, 2017
, and the interest associated with this net liability has been and will continue to be recognized in other expense, net. Our cash flow from operations has benefited as compared to our earnings as we have recognized the expense and associated interest related to this IPI tax in our Consolidated Statements of Operations; however, since May 2016, we have not made a corresponding cash payment into a judicial deposit.
An unfavorable ruling to our objection of this IPI tax increase would have an adverse effect on the Company's Consolidated Statements of 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, 2017
, is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The tables below present the changes in AOCI by component and the reclassifications out of AOCI for the three and
nine
months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017:
|
|
Foreign Currency Translation Adjustments
|
|
Net Investment Hedges
|
|
Pension and Postretirement Benefits
|
|
Investment in New Avon
|
|
Total
|
Balance at June 30, 2017
|
|
$
|
(839.7
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(114.0
|
)
|
|
$
|
3.4
|
|
|
$
|
(954.6
|
)
|
Other comprehensive income other than reclassifications
|
|
13.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13.5
|
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $0.0
(1)
|
|
—
|
|
|
—
|
|
|
6.5
|
|
|
—
|
|
|
6.5
|
|
Total reclassifications into earnings
|
|
—
|
|
|
—
|
|
|
6.5
|
|
|
—
|
|
|
6.5
|
|
Balance at September 30, 2017
|
|
$
|
(826.2
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(107.5
|
)
|
|
$
|
3.4
|
|
|
$
|
(934.6
|
)
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
(2)
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $.2
(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017:
|
|
Foreign Currency Translation Adjustments
|
|
Net Investment Hedges
|
|
Pension and Postretirement Benefits
|
|
Investment in New Avon
|
|
Total
|
Balance at December 31, 2016
|
|
$
|
(910.9
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(120.2
|
)
|
|
$
|
2.2
|
|
|
$
|
(1,033.2
|
)
|
Other comprehensive income other than reclassifications
|
|
84.7
|
|
|
—
|
|
|
—
|
|
|
1.2
|
|
|
85.9
|
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $0.0
(1)
|
|
—
|
|
|
—
|
|
|
12.7
|
|
|
—
|
|
|
12.7
|
|
Total reclassifications into earnings
|
|
—
|
|
|
—
|
|
|
12.7
|
|
|
—
|
|
|
12.7
|
|
Balance at September 30, 2017
|
|
$
|
(826.2
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(107.5
|
)
|
|
$
|
3.4
|
|
|
$
|
(934.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
(2)
|
|
—
|
|
|
2.7
|
|
|
—
|
|
|
—
|
|
|
2.7
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $.6
(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
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
|
)
|
(1)
Gross amount reclassified to pension and postretirement expense, within selling, general & administrative expenses, and related taxes reclassified to income taxes.
(2)
Gross amount reclassified to interest expense, and related taxes reclassified to income taxes.
A foreign exchange net gain of $
5.0
and net loss of $
1.9
for the three months ended
September 30, 2017
and
2016
, respectively, and a foreign exchange net gain of
$14.8
and net loss of
$12.8
for the
nine
months ended
September 30, 2017
and
2016
, respectively, resulting from the translation of actuarial losses and prior service cost recorded in AOCI, are included in foreign currency translation adjustments in our Consolidated Statements of Comprehensive Income (Loss).
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
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), a loss contingency related to a non-U.S. pension plan (see Note 7, Employee Benefit Plans), 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
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Europe, Middle East & Africa
|
|
$
|
482.8
|
|
|
$
|
476.4
|
|
|
$
|
1,484.9
|
|
|
$
|
1,517.7
|
|
South Latin America
|
|
589.7
|
|
|
594.8
|
|
|
1,647.0
|
|
|
1,556.9
|
|
North Latin America
|
|
206.0
|
|
|
196.8
|
|
|
607.0
|
|
|
625.9
|
|
Asia Pacific
|
|
130.1
|
|
|
131.4
|
|
|
379.0
|
|
|
406.4
|
|
Total revenue from reportable segments
|
|
1,408.6
|
|
|
1,399.4
|
|
|
4,117.9
|
|
|
4,106.9
|
|
Other operating segments and business activities
|
|
9.2
|
|
|
9.4
|
|
|
28.9
|
|
|
42.7
|
|
Total revenue
|
|
$
|
1,417.8
|
|
|
$
|
1,408.8
|
|
|
$
|
4,146.8
|
|
|
$
|
4,149.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Operating Profit
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Segment Profit
|
|
|
|
|
|
|
|
|
Europe, Middle East & Africa
|
|
$
|
65.9
|
|
|
$
|
66.2
|
|
|
$
|
222.5
|
|
|
$
|
218.3
|
|
South Latin America
|
|
66.3
|
|
|
73.8
|
|
|
124.8
|
|
|
157.9
|
|
North Latin America
|
|
17.2
|
|
|
24.4
|
|
|
56.0
|
|
|
85.0
|
|
Asia Pacific
|
|
13.0
|
|
|
12.9
|
|
|
34.1
|
|
|
43.1
|
|
Total profit from reportable segments
|
|
$
|
162.4
|
|
|
$
|
177.3
|
|
|
$
|
437.4
|
|
|
$
|
504.3
|
|
Other operating segments and business activities
|
|
1.1
|
|
|
(1.0
|
)
|
|
3.9
|
|
|
3.2
|
|
Unallocated global expenses
|
|
(74.3
|
)
|
|
(77.5
|
)
|
|
(243.3
|
)
|
|
(249.6
|
)
|
CTI restructuring initiatives
|
|
(6.2
|
)
|
|
(14.0
|
)
|
|
(36.5
|
)
|
|
(70.2
|
)
|
Loss contingency
|
|
—
|
|
|
—
|
|
|
(18.2
|
)
|
|
—
|
|
Legal settlement
|
|
—
|
|
|
27.2
|
|
|
—
|
|
|
27.2
|
|
Operating profit
|
|
$
|
83.0
|
|
|
$
|
112.0
|
|
|
$
|
143.3
|
|
|
$
|
214.9
|
|
Other operating segments and business activities include the first quarter of 2016 results of Venezuela, as it was deconsolidated effective March 31, 2016, as well as markets that have been exited. Effective in the first quarter of 2017, given that we exited Thailand during 2016, the results of Thailand are now reported in Other operating segments and business activities for all periods presented, while previously the results had been reported in Asia Pacific. 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.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
11. SUPPLEMENTAL BALANCE SHEET INFORMATION
At
September 30, 2017
and
December 31, 2016
, prepaid expenses and other included the following:
|
|
|
|
|
|
|
|
|
|
Components of Prepaid Expenses and Other
|
|
September 30, 2017
|
|
December 31, 2016
|
Prepaid taxes and tax refunds receivable
|
|
$
|
107.4
|
|
|
$
|
99.3
|
|
Prepaid brochure costs, paper and other literature
|
|
72.6
|
|
|
73.2
|
|
Receivables other than trade
|
|
55.8
|
|
|
68.3
|
|
Other
|
|
56.4
|
|
|
50.5
|
|
Prepaid expenses and other
|
|
$
|
292.2
|
|
|
$
|
291.3
|
|
At
September 30, 2017
and
December 31, 2016
, other assets included the following:
|
|
|
|
|
|
|
|
|
|
Components of Other Assets
|
|
September 30, 2017
|
|
December 31, 2016
|
Deferred tax assets
|
|
$
|
162.9
|
|
|
$
|
162.1
|
|
Judicial deposits other than Brazil IPI tax (see below)
|
|
84.3
|
|
|
78.0
|
|
Capitalized software
|
|
81.4
|
|
|
83.9
|
|
Long-term receivables
|
|
81.4
|
|
|
78.9
|
|
Judicial deposit for Brazil IPI tax on cosmetics (Note 8)
|
|
75.6
|
|
|
69.0
|
|
Net overfunded pension plans
|
|
73.0
|
|
|
54.8
|
|
Trust assets associated with supplemental benefit plans
|
|
36.7
|
|
|
35.2
|
|
Tooling (plates and molds associated with our beauty products)
|
|
13.2
|
|
|
14.7
|
|
Investment in New Avon (Note 4)
|
|
—
|
|
|
32.8
|
|
Other
|
|
12.3
|
|
|
12.3
|
|
Other assets
|
|
$
|
620.8
|
|
|
$
|
621.7
|
|
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-dollar revenue growth. As part of the Transformation Plan, we identified certain actions, that we believe will reduce ongoing costs, primarily consisting of global headcount reductions relating to operating model changes, 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
$143.6
before taxes, of which
$37.5
was recorded during the
nine
months ended
September 30, 2017
, in our Consolidated Statements of Operations. The additional charges not yet incurred associated with the restructuring actions approved to-date of approximately
$5
to
$10
before taxes are expected to be recorded primarily in 2018. At this time we are unable to quantify the total costs to implement the restructuring initiatives that will be incurred through the time the Transformation Plan is fully implemented as we have not yet identified all actions to be taken.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
Restructuring Charges - Three and
Nine Months Ended
September 30, 2017
During the three and
nine
months ended
September 30, 2017
, we recorded costs to implement of
$6.5
and
$37.5
, respectively, related to the Transformation Plan, in our Consolidated Statements of Operations. The costs consisted of the following:
|
|
•
|
net charges of
$2.3
and
$19.4
, respectively, for employee-related costs, including severance benefits;
|
|
|
•
|
contract termination and other net charges of
$2.0
and
$14.2
, respectively, associated with vacating our previous corporate headquarters, including the impairment of fixed assets;
|
|
|
•
|
implementation costs of
$1.8
and
$2.5
, respectively, primarily related to professional service fees; and
|
|
|
•
|
accelerated depreciation of
$.4
and
$1.4
, respectively.
|
Of the total costs to implement during the three months ended
September 30, 2017
, all
$6.5
was recorded in selling, general and administrative expenses. Of the total costs to implement during the
nine
months ended
September 30, 2017
,
$37.6
was recorded in selling, general and administrative expenses and a benefit of
$.1
was recorded in cost of sales.
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, 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-offs 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 liability balance for the Transformation Plan as of
September 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-Related Costs
|
|
Contract Terminations/Other
|
|
Total
|
Balance at December 31, 2016
|
|
$
|
48.6
|
|
|
$
|
2.8
|
|
|
$
|
51.4
|
|
2017 charges
|
|
21.7
|
|
|
—
|
|
|
21.7
|
|
Adjustments
|
|
(2.3
|
)
|
|
14.2
|
|
|
11.9
|
|
Cash payments
|
|
(28.2
|
)
|
|
(.1
|
)
|
|
(28.3
|
)
|
Non-cash write-offs
|
|
—
|
|
|
(14.0
|
)
|
|
(14.0
|
)
|
Foreign exchange
|
|
.5
|
|
|
—
|
|
|
.5
|
|
Balance at September 30, 2017
|
|
$
|
40.3
|
|
|
$
|
2.9
|
|
|
$
|
43.2
|
|
The majority of cash payments, if applicable, associated with these charges are expected to be made during 2017.
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
|
|
Inventory Write-offs
|
|
Foreign Currency Translation Adjustment Write-offs
|
|
Contract
Terminations/Other
|
|
Total
|
Charges incurred to-date
|
|
$
|
103.4
|
|
|
$
|
.4
|
|
|
$
|
2.7
|
|
|
$
|
22.9
|
|
|
$
|
129.4
|
|
Estimated charges to be incurred on approved initiatives
|
|
6.3
|
|
|
—
|
|
|
—
|
|
|
1.2
|
|
|
7.5
|
|
Total expected charges on approved initiatives
|
|
$
|
109.7
|
|
|
$
|
.4
|
|
|
$
|
2.7
|
|
|
$
|
24.1
|
|
|
$
|
136.9
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
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 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East & Africa
|
|
South Latin America
|
|
North Latin America
|
|
Asia
Pacific
|
|
Global & Other Operating Segments
|
|
Total
|
2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21.4
|
|
|
$
|
21.4
|
|
2016
|
|
30.9
|
|
|
13.2
|
|
|
4.4
|
|
|
11.7
|
|
|
14.2
|
|
|
74.4
|
|
First quarter 2017
|
|
3.0
|
|
|
2.7
|
|
|
(.1
|
)
|
|
(.5
|
)
|
|
3.9
|
|
|
9.0
|
|
Second quarter 2017
|
|
(.1
|
)
|
|
3.0
|
|
|
—
|
|
|
(.1
|
)
|
|
17.5
|
|
|
20.3
|
|
Third quarter 2017
|
|
(.1
|
)
|
|
(.1
|
)
|
|
—
|
|
|
—
|
|
|
4.5
|
|
|
4.3
|
|
Charges incurred to-date
|
|
33.7
|
|
|
18.8
|
|
|
4.3
|
|
|
11.1
|
|
|
61.5
|
|
|
129.4
|
|
Estimated charges to be incurred on approved initiatives
|
|
1.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6.3
|
|
|
7.5
|
|
Total expected charges on approved initiatives
|
|
$
|
34.9
|
|
|
$
|
18.8
|
|
|
$
|
4.3
|
|
|
$
|
11.1
|
|
|
$
|
67.8
|
|
|
$
|
136.9
|
|
The charges above are not included in segment profit, as this excludes costs to implement restructuring initiatives. We expect our total costs to implement restructuring on approved initiatives to be an estimated
$150
to
$155
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.
Other Restructuring Initiatives
During the three and
nine
months ended
September 30, 2017
, we recorded net benefits of
$.3
and
$1.0
, respectively, in selling, general and administrative expenses, in the Consolidated Statements of Operations, associated with the restructuring programs launched in 2005 and 2009, the restructuring initiatives launched in 2012 (including the cost savings initiative known as the "$400M Cost Savings Initiative"), and the restructuring actions identified during 2015 (collectively, the "Other Restructuring Initiatives"), which are substantially complete. During the three and
nine
months ended
September 30, 2016
, we recorded an immaterial amount and a net benefit of
$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, as of
September 30, 2017
is not material.
13. GOODWILL
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East & Africa
|
|
South Latin
America
|
|
Asia
Pacific
|
|
Total
|
Net balance at December 31, 2016
|
|
$
|
18.7
|
|
|
$
|
72.3
|
|
|
$
|
2.6
|
|
|
$
|
93.6
|
|
Changes during the period ended September 30, 2017:
|
|
|
|
|
|
|
|
|
Foreign exchange
|
|
1.6
|
|
|
1.6
|
|
|
—
|
|
|
3.2
|
|
Net balance at September 30, 2017
|
|
$
|
20.3
|
|
|
$
|
73.9
|
|
|
$
|
2.6
|
|
|
$
|
96.8
|
|
14. FAIR VALUE
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The assets and liabilities measured at fair value on a recurring basis were immaterial at
September 30, 2017
and December 31, 2016.
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, available-for-sale securities, short-term investments, accounts receivable, debt maturing within one year, accounts payable, long-term debt and foreign exchange forward contracts. The
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
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, 2017
and
December 31, 2016
, respectively, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Available-for-sale securities
|
$
|
3.4
|
|
|
$
|
3.4
|
|
|
$
|
2.8
|
|
|
$
|
2.8
|
|
Debt maturing within one year
(1)
|
(16.1
|
)
|
|
(16.1
|
)
|
|
(18.1
|
)
|
|
(18.1
|
)
|
Long-term debt
(1)
|
(1,873.0
|
)
|
|
(1,789.9
|
)
|
|
(1,875.8
|
)
|
|
(1,877.5
|
)
|
Foreign exchange forward contracts
|
(.2
|
)
|
|
(.2
|
)
|
|
(2.4
|
)
|
|
(2.4
|
)
|
(1)
The carrying value of debt maturing within one year and long-term debt is presented net of debt issuance costs and includes any related discount or premium and unamortized deferred gains on terminated interest-rate swap agreements, as applicable.
The methods and assumptions used to estimate fair value are as follows:
|
|
•
|
Available-for-sale securities - The fair values of these investments were the quoted market prices for issues listed on securities exchanges.
|
|
|
•
|
Debt maturing within one year and long-term debt - The fair values of our debt and other financing were determined using Level 2 inputs based on indicative market prices.
|
|
|
•
|
Foreign exchange forward contracts - The fair values of forward contracts were estimated based on quoted forward foreign exchange prices at the reporting date.
|
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.
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 in the Consolidated Balance Sheets at their fair values. The derivative instruments outstanding were immaterial at
September 30, 2017
and December 31, 2016.
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. As of
September 30, 2017
, we do not have any interest-rate swap agreements. Approximately
1%
of our debt portfolio at
September 30, 2017
and December 31, 2016 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 was 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, 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). At
September 30, 2017
, there is
no
unamortized deferred gain associated with the January 2013 interest-rate swap termination, as the underlying debt obligations have been paid.
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
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
remaining term of the underlying debt obligations through March 2019. The net impact of the gain amortization was
$1.2
and
$3.6
for the three and
nine
months ended
September 30, 2017
, respectively, and
$5.1
and
$8.5
for the three and
nine
months ended
September 30, 2016
, respectively, both of which included
$3.6
related to extinguishment of debt (see Note 16, Debt). At
September 30, 2017
, the unamortized deferred gain associated with the March 2012 interest-rate swap termination was
$7.2
, and was classified within long-term debt in our 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, 2017
, we had outstanding foreign exchange forward contracts with notional amounts totaling approximately
$26
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, 2017
, we recorded gains of
$.6
and
$2.8
, respectively, in other expense, net in our Consolidated Statements of Operations related to these undesignated foreign exchange forward contracts. Also during the three and
nine
months ended
September 30, 2017
, we recorded losses of
$1.2
and
$4.7
, 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, 2016
, we recorded losses of
$1.2
and
$8.7
, respectively, in other expense, net in our 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.
16. DEBT
Revolving Credit Facility
In June 2015, the Company and Avon International Operations, Inc. ("AIO"), a wholly-owned domestic subsidiary of the Company, 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, 2017
, there were
no
amounts outstanding under the 2015 facility.
All obligations of AIO under the 2015 facility are (i) unconditionally guaranteed by each material domestic restricted subsidiary of the Company (other than AIO, the borrower), in each case, subject to certain exceptions and (ii) 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 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, 2017
, 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 is reduced by any standby letters of credit granted by AIO, which, as of
September 30, 2017
, was approximately
$39
. As of
September 30, 2017
, based on then applicable interest rates, approximately
$130
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 (the "5.00% Notes") and
$250.0
principal amount of
6.95%
Notes due March 15, 2043 (the "6.95% Notes") (collectively, the "2013 Notes"). In March 2008, we issued
$350.0
principal amount of
6.50%
Notes due March 1, 2019 (the "6.50% Notes"). Interest on the 2013 Notes is payable semi-annually on March 15 and September 15 of each year, and interest on the 6.50% Notes are payable semi-annually on March 1 and September 1 of each year.
In August 2015, we prepaid the entire principal amount of our 2.375% Notes plus accrued interest and a make-whole premium. In 2016, we completed cash tender offers totaling to a
$300.6
reduction for certain of our outstanding public notes, repurchased
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
$180.5
of certain of our outstanding public notes, and prepaid the remaining principal amounts totaling
$238.4
of our
4.20%
Notes due July 15, 2018 and our
5.75%
Notes due March 1, 2018, plus accrued interest and a make-whole premium (the "2016 debt transactions").
The indenture governing the 2013 Notes contains interest rate adjustment provisions depending on the long-term credit ratings assigned to the 2013 Notes by 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 at a price equal to
101%
of their aggregate principal amount plus accrued and unpaid interest in the event of a change in control involving Avon and, 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. The indenture also contains a covenant requiring AIO and its restricted subsidiaries to, at the end of each year, own at least a certain percentage of the total assets of API and its restricted subsidiaries, subject to certain qualifications. 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 of a change in control involving Avon.
Long-Term Credit Ratings
Our long-term credit ratings are: Moody’s ratings of Stable Outlook with B1 for corporate family debt, B3 for senior unsecured debt, and Ba1 for the Senior Secured Notes; S&P ratings of Stable Outlook with B for corporate family debt and senior unsecured 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 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.
AVON PRODUCTS, INC.