NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share and share data)
NOTE 1. Description of the Business and Summary of Significant Accounting Policies
Business
When used in these notes, the terms "Avon," "Company," "we," "our" or "us" mean Avon Products, Inc.
We are a global manufacturer and marketer of beauty and related products. Our business is conducted primarily in
one
channel, direct selling. Our reportable segments are based on geographic operations in
four
regions: Europe, Middle East & Africa; South Latin America; North Latin America; and Asia Pacific. Our product categories are Beauty and Fashion & Home. Beauty consists of skincare, fragrance and color (cosmetics). Fashion & Home consists of fashion jewelry, watches, apparel, footwear, accessories, gift and decorative products, housewares, entertainment and leisure products, children’s products and nutritional products. Sales are made to the ultimate consumer principally by independent Representatives.
In December 2015, we entered into definitive agreements with affiliates of Cerberus Capital Management L.P. ("Cerberus"), which included a
$435
investment in Avon by an affiliate of Cerberus through the purchase of our convertible preferred stock and the separation of the North America business (including approximately
$100
of cash, subject to certain adjustments) from Avon into New Avon LLC ("New Avon"), a privately-held company that is majority-owned and managed by an affiliate of Cerberus. These transactions closed in March 2016 and Avon retained approximately
20%
ownership in New Avon. The North American business, which represented the Company's operations in the United States ("U.S."), Canada and Puerto Rico, was previously its own reportable segment and has been presented as discontinued operations for all periods. Refer to Note 3, Discontinued Operations and Assets and Liabilities Held for Sale for additional information regarding the investment by an affiliate of Cerberus and the separation of the North America business. As a result of this transaction, all of our consolidated revenue is derived from operations of subsidiaries outside of the U.S.
Principles of Consolidation
The consolidated financial statements include the accounts of Avon and our majority and wholly-owned subsidiaries. Intercompany balances and transactions are eliminated.
Use of Estimates
We prepare our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America, or GAAP. In preparing these statements, we are required to use estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. On an ongoing basis, we review our estimates, including those related to stand-alone selling prices ("SSP") of promised goods or services delivered under sales incentives, allowances for sales returns, allowances for doubtful accounts receivable, provisions for inventory obsolescence, the determination of discount rates and other actuarial assumptions for pension and postretirement benefit expenses, restructuring expense, income taxes and tax valuation allowances, share-based compensation, loss contingencies and the evaluation of goodwill, property, plant and equipment and capitalized software for potential impairment.
Foreign Currency
Financial statements of foreign subsidiaries operating in other than highly inflationary economies are translated at year-end exchange rates for assets and liabilities and average exchange rates during the year for income and expense accounts. The resulting translation adjustments are recorded within accumulated other comprehensive income (loss) ("AOCI"). Gains or losses resulting from the impact of changes in foreign currency rates on assets and liabilities denominated in a currency other than the functional currency are recorded in other expense, net.
For financial statements of Avon subsidiaries operating in highly inflationary economies, the U.S. dollar is required to be used as the functional currency. At
December 31, 2018
, only our Argentinian subsidiary is considered to be operating in a highly inflationary economy. Highly inflationary accounting requires monetary assets and liabilities, such as cash, receivables and payables, to be remeasured into U.S. dollars at the current exchange rate at the end of each period with the impact of any changes in exchange rates being recorded in income. We record the impact of changes in exchange rates on monetary assets and liabilities in other expense, net. Similarly, deferred tax assets and liabilities are remeasured into U.S. dollars at the current exchange rates; however, the impact of changes in exchange rates is recorded in income taxes in our Consolidated Statements of Operations. Non-monetary assets and liabilities, such as inventory, property, plant and equipment and prepaid expenses are recorded in U.S. dollars at the historical rates at the time of acquisition of such assets or liabilities.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Argentina Currency
During the quarter ended June 30, 2018, based on published official exchange rates which indicate that Argentina's three-year cumulative inflation rate has exceeded 100%, we concluded that Argentina had become a highly inflationary economy. From July 1, 2018, we have applied highly inflationary accounting for our Argentinian subsidiary. As such, the functional currency for Argentina has changed to the U.S. dollar, which is the consolidated group's reporting currency. When an entity operates in a highly inflationary economy, exchange gains and losses associated with monetary assets and liabilities resulting from changes in the exchange rate are recorded in income. Nonmonetary assets and liabilities, which include inventories, property, plant and equipment and contract liabilities, are carried forward at their historical dollar cost, which was calculated using the exchange rate at June 30, 2018.
As a result of the devaluation of the Argentinian peso of approximately
25%
from June 30, 2018 to December 31, 2018, operating profit was negatively impacted by approximately
$8
, largely in cost of sales in our Consolidated Income Statements, primarily due to inventory being accounted for at its historical dollar cost. During the six months ended December 31, 2018, we also recorded a benefit during the period of approximately
$6
in other expense, net primarily associated with the net monetary liability position of Argentina, and an approximate
$2
positive impact on income taxes, both in our Consolidated Income Statements. As of December 31, 2018, the net Argentine peso-denominated monetary liability position of Argentina was
$33
and the net Argentine peso-denominated non-monetary asset position was
$50
, primarily consisting of inventory balances of
$32
.
Venezuela Currency
Currency restrictions enacted by the Venezuelan government since 2003 have impacted the ability of Avon Venezuela to obtain foreign currency to pay for imported products. In 2010, we began accounting for our operations in Venezuela under accounting guidance associated with highly inflationary economies.
Venezuela's restrictive foreign exchange control regulations and our Venezuelan operations' increasingly limited access to U.S. dollars resulted in 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 lack of exchangeability would continue for the foreseeable future, and as a result, we concluded that, effective March 31, 2016, this condition was other-than-temporary and we no longer met the accounting criteria of control in order to continue consolidating our Venezuelan operations. As a result, since March 31, 2016, we have accounted for our Venezuelan operations using the cost method of accounting.
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 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.
Revenue Recognition
Nature of goods and services
We are a global manufacturer and marketer of beauty and related products. Our product categories are Beauty and Fashion & Home. Beauty consists of skincare, fragrance and color (cosmetics). Fashion & Home consists of fashion jewelry, watches, apparel, footwear, accessories, gift and decorative products, housewares, entertainment and leisure products, children’s products and nutritional products.
Our business is conducted primarily in one channel - direct selling. Our reportable segments are based on geographic operations in four regions: Europe, Middle East & Africa; South Latin America; North Latin America; and Asia Pacific. We primarily sell our products to the ultimate consumer through the direct selling channel principally through Representatives, who are independent contractors and not our employees.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue recognition
Revenue is recognized when control of a product or service is transferred to a customer, which is generally the Representative. Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties, such as Value Added Taxes (“VAT”) collected for taxing authorities.
Principal revenue streams and significant judgments
Our principal revenue streams can be distinguished into: i) the sale of Beauty and Fashion & Home products to Representatives (recorded in net sales); ii) Representative fees, primarily for the sale of brochures to Representatives and fulfillment activities related to the contract, which include fees for shipping and handling (recorded in other revenue); and iii) other, which includes the sale of products to New Avon and royalties from the licensing of our name and products (recorded in other revenue).
i) Sale of Beauty and Fashion & Home products to Representatives
We generate the majority of our revenue through the sale of Beauty and Fashion & Home products. A Representative contacts her customers directly, selling primarily through our brochure (whether paper or online), which highlights new products and special promotions (or incentives) for each sales campaign. In this sense, the Representative, together with the brochure, are the "store" through which our products are sold. A brochure introducing a new sales campaign is typically generated every three to four weeks. A purchase order is processed and the products are picked at a distribution center and delivered to the Representative usually through a combination of local and national delivery companies. Generally, the Representative then delivers the merchandise and collects payment from the customer for her or his own account. A Representative generally receives a refund of the price the Representative paid for a product if the Representative chooses to return it.
A Representative Agreement, which outlines the basic terms of the agreement between Avon and the Representative, combined with a purchase order, constitutes a contract for the purposes of Accounting Standards Codification Topic (“ASC”),
Revenue from Contracts with Customers
("ASC 606").
Revenue from Contracts with Customers
We account for individual products and services separately in the contract if they are distinct (i.e., if a product or service is separately identifiable from the other items in the contract and if a Representative can benefit from the product or service on its own or with other resources that are readily available), which is recognized at a point in time, when control of a product is transferred to a Representative. In addition, we offer incentives to Representatives to support sales growth. Certain of these sales incentives are distinct promises to a Representative, and therefore are a separate performance obligation. As a result, revenue is allocated to the performance obligation for sales incentives and is deferred on the balance sheet until the associated performance obligations are satisfied.
Typically included within a contract is variable consideration, such as sales returns and late payment fees. Revenue is only recorded to the extent it is probable that it will not be reversed, and therefore revenue is adjusted for variable consideration. Variable consideration is generally estimated using the expected value method, which considers possible outcomes weighted by their probability. Specifically for sales returns, a refund liability will be recorded for the estimated cash to be refunded for the products expected to be returned, and a returns asset will be recorded for the products which we expect to be returned and re-sold, each of these based on historical experience. The estimate of sales returns as well as the measurement of the returns asset and the refund liability is updated at the end of each month for changes in expectations regarding the amount of salvageable returns, reconditioning costs and any additional decreases in the value of the returned products. Late payment fees are recorded when the uncertainty associated with collecting such fees are resolved (i.e., when collected).
The Representative generally receives a credit period of one sales campaign if they meet certain criteria; however, the specific credit terms are outlined in the Representative Agreement. Generally, the Representative remits payment during each sales campaign, which relates to the prior campaign cycle. The Representative is generally precluded from submitting an order for the current sales campaign until the accounts receivable balance past due for prior campaigns is paid; however, there are circumstances where the Representative fails to make the required payment.
Our contracts with Representatives often include multiple promises to transfer products and/or services to the Representative, and determining which of these products and/or services are considered distinct performance obligations that should be accounted for separately. In addition, in assessing the recognition of revenue for the following performance obligations, management has exercised significant judgment in the following areas: estimation of variable consideration and the SSP of promised goods or services in order to determine and allocate the transaction price.
Performance obligation - Avon products and appointment kits
The Representative purchases Avon products and appointment kits through a purchase order. Avon offers appointment kits for purchase to Representatives, which may contain various Avon products. We recognize revenue for Avon products and appointment kits in net sales in our Consolidated Statements of Operations when the Representative obtains control of the
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
products, which occurs upon delivery of the product to the Representative. Transaction price is the amount we expect to receive in exchange for those products adjusted for variable consideration as discussed above and the estimated SSP of other performance obligations as discussed below. The cost of these products and appointment kits is recognized in cost of sales in our Consolidated Statements of Operations.
Performance obligation - Sales incentives
Types of sales incentives include status programs, loyalty points, prospective discounts, and gift with purchase, among others. A Representative is eligible for certain status programs if specified sales levels are met. Status programs offer additional benefits such as free or discounted products and services. Loyalty points offer the option to redeem for additional Avon or other products or services. Prospective discounts are offered in some countries when certain sales levels are reached in a given time period. The revenue attributable to the prospective discount performance obligation is for the option to purchase additional product at a discounted amount.
Certain benefits within status programs, loyalty points, prospective discounts and certain other sales incentives constitute a material right and, therefore, a distinct performance obligation in the contract with the Representative. Transaction price is allocated to the material right (performance obligation) based on estimated SSP and is deferred on the balance sheet until the associated performance obligations are satisfied. The cost of incentives is presented in inventories in our Consolidated Balance Sheets. We recognize revenue allocated to the material right in net sales in our Consolidated Statements of Operations at the point in time that the Representative receives the benefits of the material right or obtains control of the products, which occurs upon delivery to the Representative or upon expiration of the material right. For sales incentives that are delivered with the associated products order (such as gift with purchase), no deferral is required.
SSP represents the estimated market value, or the estimated amount that could be charged for that material right when the entity sells it separately in similar circumstances to similar customers. Judgment is required to determine the SSP for each distinct performance obligation. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, including for certain sales incentives, we determine the SSP using information that may include market prices and other observable inputs.
ii) Representative fees, primarily for the sale of brochures to Representatives and fulfillment activities related to the contract ("Representative fees")
The purchase order in the contract with the Representative explicitly identifies activities that we will perform. This includes fees that we charge Representatives, primarily for the sale of brochures to Representatives and fulfillment activities, and also includes late payment fees (discussed above). Brochures represent promotional materials that are given directly by the Representatives to their customers as a marketing activity. Under ASC 606, brochures that are sold by Avon to Representatives through purchase orders represent separate performance obligations in the contract as these are promises made between Avon and the Representative. Although the brochures are used similar to marketing materials, the Representative generally orders and pays for the brochures, and we allocate consideration for purposes of revenue recognition. The revenue associated with brochures that are sold to Representatives is recognized in other revenue and the related cost is recognized in cost of sales in our Consolidated Statements of Operations. We recognize revenue when the Representative obtains control of the brochures, which occurs upon delivery to the Representative. When brochures are given away for free to Representatives as promotional items, the cost is recognized in selling, general and administrative expenses in our Consolidated Statements of Operations.
We often charge the Representative for shipping and handling (including order processing) and payment processing activities on the invoice, and such activities are considered to be fulfillment costs. The consideration received represents part of the transaction price in the contract that is allocated to the performance obligations in the contract. We recognize revenue for fulfillment activities in other revenue in our Consolidated Statements of Operations when such services are provided to the Representative. The cost of these activities is recognized in SG&A expenses in our Consolidated Statements of Operations.
iii) Other revenue
We also recognize revenue from the sale of products to New Avon LLC ("New Avon"), as part of a manufacturing and supply agreement, since the separation of the Company's North America business into New Avon on March 1, 2016, and royalties from the licensing of our name and products, in other revenue in our Consolidated Statements of Operations
Cash and Cash Equivalents
Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are generally high-quality, short-term money market instruments with an original maturity of three months or less and consist of time deposits with a number of U.S. and non-U.S. commercial banks and money market fund investments.
Inventories
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. We classify inventory into various categories based upon its stage in the product life cycle, future marketing sales plans and the disposition process. We assign a degree of obsolescence risk to products based on this classification to estimate the level of obsolescence provision.
Brochure Costs
Brochures represent promotional materials that are given directly by the Representatives to their customers as a marketing activity. Brochures that are sold by Avon to Representatives through purchase orders represent separate performance obligations in the contract as these are promises made between Avon and the Representative. Although the brochures are used similar to marketing materials, the Representative generally orders and pays for the brochures, and Avon allocates consideration for purposes of revenue recognition. The revenue associated with brochures that are sold to Representatives is recognized in other revenue and the related cost is recognized in cost of sales in our Consolidated Statements of Operations. We recognize revenue when the Representative obtains control of the brochures, which occurs upon delivery to the Representative. When brochures are given away for free to Representatives as promotional items, the cost is recognized in SG&A expenses in our Consolidated Statements of Operations.
Brochure costs and associated fees that are presented as inventory were
$13.2
at
December 31, 2018
and
zero
at
December 31, 2017
, an increase driven by the implementation of ASU 606. Brochure costs and associated fees that are presented as prepaid expenses and other were
$5.9
at
December 31, 2018
and
$26.6
at
December 31, 2017
, a decrease driven by the implementation of ASU 606.
Brochure costs were expensed to COGS and SG&A in 2018 amounted to
$113.5
and
$106.2
, respectively. In 2017 and 2016 brochures costs of
$244.0
and
$244.7
, respectively, were expensed to SG&A under the previous ASU 605.
The fees charged to Representatives for brochures sold recorded in Other revenue in 2018 amounted to
$117.0
. In 2017 and 2016, the fees charged to Representatives were recorded as a reduction to SG&A expenses and amounted to
106.2
in
2018
$139.4
and
$138.6
, respectively.
Property, Plant and Equipment and Capitalized Software
Property, plant and equipment are stated at cost and are depreciated using a straight-line method over the estimated useful lives of the assets. The estimated useful lives generally are as follows: buildings,
45
years; land improvements,
20
years; machinery and equipment,
15
years; and office equipment,
five
to
ten
years. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the asset. Upon disposal of property, plant and equipment, the cost of the assets and the related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in earnings. Costs associated with repair and maintenance activities are expensed as incurred.
Certain systems development costs related to the purchase, development and installation of computer software, and implementation costs incurred in a hosting arrangement that is a service contract, are capitalized and amortized over the estimated useful life of the related project. Costs incurred prior to the development stage, as well as maintenance, training costs, and general and administrative expenses are expensed as incurred. The other assets balance included unamortized capitalized software costs of
$89.3
at
December 31, 2018
and
$85.2
at
December 31, 2017
. The amortization expense associated with capitalized software was $
26.5
, $
29.5
and $
30.5
for the years ended December 31,
2018
,
2017
and
2016
, respectively.
We evaluate our property, plant and equipment and capitalized software for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated pre-tax undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value of the asset is determined using revenue and cash flow projections, and royalty and discount rates, as appropriate.
Assets and Liabilities Held for Sale
A long-lived asset (or disposal group) is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable within a year. A long-lived asset (or disposal group) classified as held for sale is initially measured at the lower of its carrying amount or fair value less cost to sell. An impairment loss is recognized for any initial or subsequent write-down of the long-lived asset (or disposal group) to fair value less costs to sell. A gain or loss not previously recognized by the date of the sale of the long-lived asset (or disposal group) is recognized at the date of derecognition.
Long-lived assets (including those that are part of a disposal group) are not depreciated or amortized while they are classified as held for sale. Long-lived assets classified as held for sale and the assets of a disposal group classified as held for sale are
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
presented separately from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the balance sheet.
Goodwill
Goodwill is not amortized and is assessed for impairment annually during the fourth quarter or on the occurrence of an event that indicates impairment may have occurred, at the reporting unit level. A reporting unit is the operating segment, or a component, which is one level below that operating segment. Components are aggregated as a single reporting unit if they have similar economic characteristics. When testing goodwill for impairment, we perform either a qualitative or quantitative assessment for each of our reporting units. Factors considered in the qualitative analysis include macroeconomic conditions, industry and market considerations, cost factors and overall financial performance specific to the reporting unit. If the qualitative analysis results in a more likely than not probability of impairment, the first quantitative step, as described below, is required.
The quantitative test to evaluate goodwill for impairment is a two-step process. In the first step, we compare the fair value of a reporting unit to its carrying value. If the fair value of a reporting unit is less than its carrying value, we perform a second step to determine the implied fair value of the reporting unit’s goodwill. The second step of the impairment analysis requires a valuation of a reporting unit’s tangible and intangible assets and liabilities in a manner similar to the allocation of the purchase price in a business combination. If the resulting implied fair value of the reporting unit’s goodwill is less than its carrying value, that difference represents an impairment.
The impairment analysis performed for goodwill requires several estimates in computing the estimated fair value of a reporting unit. We typically use a DCF approach to estimate the fair value of a reporting unit, which we believe is the most reliable indicator of fair value of this business, and is most consistent with the approach that we would generally expect a marketplace participant would use. In estimating the fair value of our reporting units utilizing a DCF approach, we typically forecast revenue and the resulting cash flows for periods of
five
to
ten
years and include an estimated terminal value at the end of the forecasted period. When determining the appropriate forecast period for the DCF approach, we consider the amount of time required before the reporting unit achieves what we consider a normalized, sustainable level of cash flows. The estimation of fair value utilizing a DCF approach includes numerous uncertainties which require significant judgment when making assumptions of expected growth rates and the selection of discount rates, as well as assumptions regarding general economic and business conditions, and the structure that would yield the highest economic value, among other factors.
Financial Instruments
We use derivative financial instruments, including forward foreign currency contracts, to manage foreign currency exposures.
If applicable, derivatives are recognized in our Consolidated Balance Sheets at their fair values. When we become a party to a derivative instrument and intend to apply hedge accounting, we designate the instrument, for financial reporting purposes, as a fair value hedge, a cash flow hedge, or a net investment hedge. The accounting for changes in fair value (gains or losses) of a derivative instrument depends on whether we had designated it and it qualified as part of a hedging relationship and further, on the type of hedging relationship. We apply the following:
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Changes in the fair value of a derivative that is designated as a fair value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk are recorded in earnings.
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•
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Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded in AOCI and reclassified into earnings in the same period or periods during which the transaction hedged by that derivative also affects earnings.
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Changes in the fair value of a derivative that is designated as a hedge of a net investment in a foreign operation are recorded in foreign currency translation adjustments within AOCI.
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Changes in the fair value of a derivative that is not designated as a hedging instrument are recognized in earnings in other expense, net in our Consolidated Statements of Operations.
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We present the earnings effect of the hedging instrument in our Consolidated Statements of Operations in the same income statement line item in which the earnings effect of the hedged item is reported.
For derivatives designated as cash flow hedges, if we conclude that the hedging relationship is perfectly effective at inception, a detailed effectiveness assessment in each period is not required as long as (i) the critical terms of the hedging instrument completely match the related terms of the hedged item (ii) it is considered probable that the counterparties to the hedging instrument and the hedged item will not default, and (iii) the hedged cash flows remain probable.
If the conditions above are not met, we will assess prospective and retrospective effectiveness using the cumulative dollar-offset method, which compares the change in fair value or present value of cash flows of the hedging instrument to the changes
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in the fair value or present value of the cash flows of the hedged item. If the result of the quantification demonstrates that the hedge is still highly effective (meaning that cumulative changes in the fair value of the derivative are between 80% and 125% of the cumulative changes in the fair value of the hedged item), we will revert to qualitative assessments of hedge effectiveness in subsequent periods if an expectation of high effectiveness on a qualitative basis for subsequent periods can be reasonably supported. If effectiveness is not within the 80% to 125% range, hedge accounting will be discontinued, and changes in the fair value of the hedging instrument will be recorded in earnings from the date the hedge is no longer considered highly effective.
Deferred Income Taxes
Deferred income taxes have been provided on items recognized for financial reporting purposes in different periods than for income tax purposes using tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided to reduce our deferred tax assets to an amount that is "more likely than not" to be realized. The ultimate realization of our deferred tax assets depends upon generating sufficient future taxable income during the periods in which our temporary differences become deductible or before our net operating loss and tax credit carryforwards expire. See Note 10, Income Taxes for more information.
In accordance with guidance issued by the Financial Accounting Standards Board ("FASB"), we are choosing to treat the U.S. income tax consequences of Global Intangible Low-Taxed Income ("GILTI") as a period cost. As a result, as of
December 31, 2018
, no deferred income taxes have been provided.
Uncertain Tax Positions
We recognize the benefit of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. We record interest expense and penalties payable to relevant tax authorities in income taxes in our Consolidated Statements of Operations.
SG&A Expenses
SG&A expenses include costs associated with selling; marketing; distribution, including shipping and handling costs; advertising; net brochure costs; research and development; information technology; and other administrative costs, including finance, legal and human resource functions.
Shipping and Handling
Shipping and handling costs are expensed as incurred and amounted to
$503.5
in
2018
,
$530.8
in
2017
and
$489.3
in
2016
.
Advertising
Advertising costs, excluding brochure preparation costs, are expensed as incurred and amounted to
$127.6
in
2018
,
$118.4
in
2017
and
$108.9
in
2016
.
Research and Development
Research and development costs are expensed as incurred and amounted to
$48.0
in
2018
,
$52.9
in
2017
and
$52.1
in
2016
. Research and development costs include all costs related to the design and development of new products such as salaries and benefits, supplies and materials and facilities costs.
Share-based Compensation
All share-based payments to employees are recognized in the financial statements based on their fair value at the date of grant. If applicable, we use a Monte-Carlo simulation to calculate the fair value of performance restricted stock units with market conditions and the fair value of premium-priced stock options. We account for forfeitures on share-based payments as they occur.
Restructuring Expense
We record the estimated expense for our restructuring initiatives, such as our Transformation Plan and Open Up Avon, when such costs are deemed probable and estimable, when approved by the appropriate corporate authority and by accumulating detailed estimates of costs for such plans. These expenses include the estimated costs of employee severance and related benefits, inventory write-offs, impairment or accelerated depreciation of property, plant and equipment and capitalized software, and any other qualifying exit costs. Such costs represent our best estimate, but require assumptions about the programs that may change over time, including attrition rates. Estimates are evaluated periodically to determine whether an adjustment is required.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pension and Postretirement Expense
Pension and postretirement expense is determined based on a number of actuarial assumptions, which are generally reviewed and determined on an annual basis. These assumptions include the discount rate applied to plan obligations, the expected rate of return on plan assets, the rate of compensation increase of plan participants, price inflation, cost-of-living adjustments, mortality rates and certain other demographic assumptions, and other factors. Actual results that differ from assumptions are accumulated and amortized to expense over future periods and, therefore, generally affect recognized expense in future periods. We recognize the funded status of pension and other postretirement benefit plans in our Consolidated Balance Sheets. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. The recognition of prior service costs or credits and net actuarial gains or losses, as well as subsequent changes in the funded status, are recognized as components of AOCI, net of tax, in shareholders’ equity, until they are amortized as a component of net periodic benefit cost. We recognize prior service costs or credits and actuarial gains and losses beyond a 10% corridor to earnings based on the estimated future service period of the participants. The determination of the 10% corridor utilizes a calculated value of plan assets for our more significant plans, whereby gains and losses are smoothed over
three
- and
five
-year periods. We use a December 31 measurement date for all of our employee benefit plans. Service cost is presented in SG&A in our Consolidated Statements of Operations. The components of net periodic benefit costs other than service cost are presented in other expense, net in our Consolidated Statements of Operations.
Contingencies
We determine whether to disclose and/or accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable. We record loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable.
Earnings (Loss) per Share
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 year 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 year. Diluted EPS is calculated to give effect to all potentially dilutive common shares that were outstanding during the year.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For each of the three years ended December 31 the components of basic and diluted EPS were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in millions)
|
|
2018
|
|
2017
|
|
2016
|
Numerator from continuing operations:
|
|
|
|
|
|
|
Income (loss) from continuing operations less amounts attributable to noncontrolling interests
|
|
$
|
(19.5
|
)
|
|
$
|
22.0
|
|
|
$
|
(93.6
|
)
|
Less: Earnings (loss) allocated to participating securities
|
|
(.2
|
)
|
|
.3
|
|
|
(1.2
|
)
|
Less: Earnings allocated to convertible preferred stock
|
|
24.3
|
|
|
23.1
|
|
|
18.4
|
|
Loss from continuing operations allocated to common shareholders
|
|
(43.6
|
)
|
|
(1.4
|
)
|
|
(110.8
|
)
|
Numerator from discontinued operations:
|
|
|
|
|
|
|
Loss from discontinued operations less amounts attributable to noncontrolling interests
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(14.0
|
)
|
Less: Loss allocated to participating securities
|
|
—
|
|
|
—
|
|
|
(.2
|
)
|
Loss from discontinued operations allocated to common shareholders
|
|
—
|
|
|
—
|
|
|
(13.8
|
)
|
Numerator attributable to Avon:
|
|
|
|
|
|
|
Net income (loss) attributable to Avon less amounts attributable to noncontrolling interests
|
|
$
|
(19.5
|
)
|
|
$
|
22.0
|
|
|
$
|
(107.6
|
)
|
Less: Earnings (loss) allocated to participating securities
|
|
(.2
|
)
|
|
.3
|
|
|
(1.4
|
)
|
Less: Earnings allocated to convertible preferred stock
|
|
24.3
|
|
|
23.1
|
|
|
18.4
|
|
Loss attributable to Avon allocated to common shareholders
|
|
(43.6
|
)
|
|
(1.4
|
)
|
|
(124.6
|
)
|
Denominator:
|
|
|
|
|
|
|
Basic EPS weighted-average shares outstanding
|
|
441.9
|
|
|
439.7
|
|
|
437.0
|
|
Diluted effect of assumed conversion of stock options
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted effect of assumed conversion of preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted EPS adjusted weighted-average shares outstanding
|
|
441.9
|
|
|
439.7
|
|
|
437.0
|
|
Loss per Common Share from continuing operations:
|
|
|
|
|
|
|
Basic
|
|
$
|
(.10
|
)
|
|
$
|
(.00
|
)
|
|
$
|
(.25
|
)
|
Diluted
|
|
(.10
|
)
|
|
(.00
|
)
|
|
(.25
|
)
|
Loss per Common Share from discontinued operations:
|
|
|
|
|
|
|
Basic
|
|
$
|
.00
|
|
|
$
|
.00
|
|
|
$
|
(.03
|
)
|
Diluted
|
|
.00
|
|
|
.00
|
|
|
(.03
|
)
|
Loss per Common Share attributable to Avon:
|
|
|
|
|
|
|
Basic
|
|
$
|
(.10
|
)
|
|
$
|
(.00
|
)
|
|
$
|
(.29
|
)
|
Diluted
|
|
(.10
|
)
|
|
(.00
|
)
|
|
(.29
|
)
|
Amounts in the table above may not necessarily sum due to rounding.
During the years ended
December 31, 2018
, 2017 and 2016, we did not include stock options to purchase
17.8 million
shares,
16.9 million
shares and
14.2 million
shares of Avon common stock, respectively, in the calculation of diluted EPS as we had a loss from continuing operations, net of tax and the inclusion of these shares would decrease the net loss per share. Since the inclusion of such shares would be anti-dilutive, these are excluded from the calculation.
For the years ended
December 31, 2018
and
2017
, 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 decrease the net loss per share for the years ended
December 31, 2018
and 2017. 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 years ended
December 31, 2018
and
2017
. There were no shares of series C convertible preferred stock outstanding for the year ended December 31,
2016
. See Note 18, Series C Convertible Preferred Stock.
NOTE 2. New Accounting Standards
New Accounting Standards Implemented
ASU 2014-09, Revenue from Contracts with Customers
Except for the changes below, we have consistently applied the accounting policies to all periods presented in these consolidated financial statements.
We adopted ASC 606 with a date of the initial application of January 1, 2018, as a cumulative-effect adjustment to retained earnings. Therefore, the comparative information for prior periods has not been adjusted and continues to be reported under ASC 605,
Revenue Recognition
. We applied ASC 606 to all outstanding contracts at January 1, 2018.
We recorded a cumulative-effect adjustment upon adoption of the new revenue recognition standard as of January 1, 2018 comprised of the following:
|
|
•
|
a reduction to retained earnings of
$52.7
before taxes (
$41.1
after tax), with a corresponding impact to deferred income taxes of
$11.6
;
|
|
|
•
|
a reduction to prepaid expenses and other of
$54.9
;
|
|
|
•
|
an increase to inventories of
$39.3
; and
|
|
|
•
|
an increase to other accrued liabilities of
$37.1
due to the net impact of the establishment of a contract liability of
$91.8
for deferred revenue where our performance obligations are not yet satisfied, which is partially offset by a reduction in the sales incentive accrual of
$54.7
.
|
This cumulative-effect adjustment impacting our Consolidated Balance Sheets is primarily driven by sales incentives and brochures. The other changes resulting from the new revenue recognition standard were not material.
The details of the significant changes to our accounting policy for revenue recognition and the quantitative impact of the changes on our Consolidated Financial Statements are set out below.
Performance obligations - Avon products and appointment kits
We recognize revenue for Avon products and appointment kits in net sales in our Consolidated Statements of Operations when the Representative obtains control of the products, which occurs upon delivery of the product to the Representative. Transaction price is the amount we expect to receive in exchange for those products adjusted for variable consideration, such as sales returns and past due fees, and the estimated SSP of other performance obligations, such as sales incentives. Revenue allocated to the material right (performance obligation) for sales incentives is deferred on the balance sheet until the associated performance obligations are satisfied. The cost of these products and appointment kits is recognized in cost of sales in our Consolidated Statements of Operations.
Under our historical accounting, we recognized revenue for Avon products in net sales in our Consolidated Statements of Operations upon delivery of the product to the Representative. We recognized revenue for appointment kits sold to Representatives as a reduction of SG&A expenses in our Consolidated Statements of Operations, and the associated cost was recognized in SG&A expenses in our Consolidated Statements of Operations. Revenue was adjusted for expected sales returns.
Performance obligations/ material rights - sales incentives
Certain benefits within status programs, loyalty points, prospective discounts and certain other sales incentives constitute a material right and, therefore, a distinct performance obligation in the contract with the Representative. Transaction price is allocated to the material right based on estimated SSP and is deferred on the balance sheet until the associated performance obligations are satisfied. The cost of sales incentives is presented in inventories in our Consolidated Balance Sheets. We recognize revenue allocated to the material right in net sales and the associated cost of sales incentives is recognized in cost of sales in our Consolidated Statements of Operations, at the point in time that the Representative receives the benefits of the material right or obtains control of the products, which occurs upon delivery to the Representative or upon expiration of the material right. For sales incentives that are delivered with the associated products order (such as gift with purchase), no deferral is required.
Under our historical accounting, the cost of sales incentives was generally presented in other accrued liabilities and prepaid expenses and other in our Consolidated Balance Sheets and recognized in SG&A expenses in our Consolidated Statements of Operations over the period that the sales incentive was earned.
Representative fees, primarily for the sale of brochures to Representatives and fulfillment activities related to the contract
This includes fees that we charge Representatives, primarily for the sale of brochures to Representatives and fulfillment activities, and also includes late payment fees.
Brochures -
Brochures represent promotional materials that are given directly by the Representatives to their customers as a marketing activity. Under ASC 606, brochures that are sold by Avon to Representatives through purchase orders represent separate performance obligations in the contract as these are promises made between Avon and the
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Representative. Although the brochures are used similar to marketing materials, the Representative generally orders and pays for the brochures, and Avon allocates consideration for purposes of revenue recognition. The revenue associated with brochures that are sold to Representatives is recognized in other revenue and the related cost is recognized in cost of sales in our Consolidated Statements of Operations. We recognize revenue when the Representative obtains control of the brochures, which occurs upon delivery to the Representative. When brochures are given away for free to Representatives as promotional items, the cost is recognized in SG&A expenses in our Consolidated Statements of Operations.
Under our historical accounting, all brochure costs were initially deferred to prepaid expenses and other in our Consolidated Balance Sheets and were charged to SG&A expenses in our Consolidated Statements of Operations over the campaign length. In addition, fees charged to Representatives for brochures were initially deferred and presented as a reduction of prepaid expenses and other in our Consolidated Balance Sheets, and were recorded as a reduction of SG&A expenses in our Consolidated Statements of Operations over the campaign length.
Fulfillment activities and late payment fees -
We often charge the Representative for shipping and handling (including order processing) and payment processing activities on the invoice, and such activities are considered to be fulfillment costs. The consideration received represents part of the transaction price in the contract that is allocated to the performance obligations in the contract. We recognize revenue for fulfillment activities in other revenue in our Consolidated Statements of Operations when such services are provided to the Representative. The cost of these activities is recognized in SG&A expenses in our Consolidated Statements of Operations. Late payment fees are recorded in other revenue in our Consolidated Statements of Operations when collected.
Under our historical accounting, revenue for shipping and handling (including order processing) activities was recorded in other revenue in our Consolidated Statements of Operations. However, the revenue for payment processing activities and late payment fees were recognized as a reduction of SG&A expenses in our Consolidated Statements of Operations. The cost of these activities was recognized in SG&A expenses in our Consolidated Statements of Operations.
Impacts on consolidated financial statements
The following tables summarize the impacts of adopting ASC 606 on the Company's consolidated financial statements for the twelve months ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of change in revenue recognition standard
|
Line items impacted within the Consolidated Statements of Operations
|
Per consolidated financial statements
|
|
Adjustments
|
|
Balances excluding the impact of adopting ASC 606
|
Revenue
|
|
|
|
|
|
Net sales
|
$
|
5,247.7
|
|
|
$
|
(28.5
|
)
|
(1)
|
$
|
5,219.2
|
|
Other revenue
|
323.6
|
|
|
(200.7
|
)
|
(2)
|
122.9
|
|
Total revenue
|
5,571.3
|
|
|
(229.2
|
)
|
|
5,342.1
|
|
Costs and expenses
|
|
|
|
|
|
Cost of sales
|
2,364.0
|
|
|
(277.4
|
)
|
(3)
|
2,086.6
|
|
SG&A expenses
|
2,972.1
|
|
|
60.4
|
|
(4)
|
3,032.5
|
|
Operating profit
|
235.2
|
|
|
(12.2
|
)
|
|
223.0
|
|
Income before income taxes
|
108.1
|
|
|
(12.2
|
)
|
|
95.9
|
|
Income taxes
|
(129.9
|
)
|
|
3.6
|
|
|
(126.3
|
)
|
Net loss
|
(21.8
|
)
|
|
(8.6
|
)
|
|
(30.4
|
)
|
Net loss attributable to Avon
|
(19.5
|
)
|
|
(8.6
|
)
|
|
(28.1
|
)
|
(1)
Primarily relates to appointment kits, which were reclassified from SG&A, partially offset by the timing of recognition of sales incentives.
(2)
Relates to Representative fees (primarily brochure fees, late payment fees and certain other fees), which were reclassified from SG&A. Brochure fees were also impacted by the timing of recognition.
(3)
Primarily relates to the cost of sales incentives, the cost of brochures paid for by Representatives and the cost of appointment kits, which were reclassified from SG&A. The cost of sales incentives and the cost of brochures were also impacted by the timing of recognition.
(4)
Relates to the cost of sales incentives, which were reclassified to cost of sales and were also impacted by the timing of recognition. This was partially offset by Representative fees, which were reclassified to other revenue, and appointment kits, which were reclassified to net sales and cost of sales.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of change in revenue recognition standard
|
Line items impacted within the Consolidated Statements of Other Comprehensive Income
|
Per consolidated financial statements
|
|
Adjustments
|
|
Balances excluding the impact of adopting ASC 606
|
Net loss
|
$
|
(21.8
|
)
|
|
$
|
(8.6
|
)
|
|
$
|
(30.4
|
)
|
Foreign currency translation adjustments
|
(48.7
|
)
|
|
(3.5
|
)
|
|
(52.2
|
)
|
Total other comprehensive loss, net of income taxes
|
(104.4
|
)
|
|
(3.5
|
)
|
|
(107.9
|
)
|
Comprehensive loss
|
(126.2
|
)
|
|
(12.1
|
)
|
|
(138.3
|
)
|
Comprehensive loss attributable to Avon
|
(123.6
|
)
|
|
(12.1
|
)
|
|
(135.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of change in revenue recognition standard
|
Line items impacted within the Consolidated Balance Sheets
|
Per consolidated financial statements
|
|
Adjustments
|
|
Balances excluding the impact of adopting ASC 606
|
Accounts receivable, net
|
$
|
349.7
|
|
|
$
|
(8.2
|
)
|
(1)
|
$
|
341.5
|
|
Inventories
|
542.0
|
|
|
(42.8
|
)
|
(2)
|
499.2
|
|
Prepaid expenses and other
|
272.0
|
|
|
47.8
|
|
(2)
|
319.8
|
|
Total current assets
|
1,762.0
|
|
|
(3.2
|
)
|
|
1,758.8
|
|
Other assets
|
603.0
|
|
|
(10.1
|
)
|
(3)
|
592.9
|
|
Total assets
|
3,010.0
|
|
|
(13.3
|
)
|
|
2,996.7
|
|
Liabilities, Series C Convertible Preferred Stock and Shareholders’ Deficit
|
|
|
|
|
|
Other accrued liabilities
|
451.3
|
|
|
(38.0
|
)
|
(4)
|
413.3
|
|
Income taxes
|
15.9
|
|
|
(3.6
|
)
|
|
12.3
|
|
Total current liabilities
|
1,496.5
|
|
|
(41.6
|
)
|
|
1,454.9
|
|
Other liabilities
|
72.1
|
|
|
(0.7
|
)
|
|
71.4
|
|
Total liabilities
|
3,414.7
|
|
|
(42.3
|
)
|
|
3,372.4
|
|
|
|
|
|
|
|
Retained earnings
|
2,234.3
|
|
|
32.5
|
|
(5)
|
2,266.8
|
|
Accumulated other comprehensive loss
|
(1,030.4
|
)
|
|
(3.5
|
)
|
|
(1,033.9
|
)
|
Total Avon shareholders’ deficit
|
(904.5
|
)
|
|
29.0
|
|
|
(875.5
|
)
|
Total shareholders’ deficit
|
(896.8
|
)
|
|
29.0
|
|
|
(867.8
|
)
|
Total liabilities, series C convertible preferred stock and shareholders’ deficit
|
3,010.0
|
|
|
(13.3
|
)
|
|
2,996.7
|
|
(1)
Relates to sales returns, which were reclassified from a reduction of accounts receivable to a refund liability (within other accrued liabilities) and a returns asset (within prepaid expenses and other).
(2)
Primarily relates to sales incentives and brochures, both of which were reclassified from prepaid expenses and other to inventories, and were also impacted by the timing of recognition. In addition, prepaid expenses and other was impacted by the timing of recognition of brochures, as well as the reclassification of sales returns (described above).
(3)
Relates to deferred tax assets associated with the cumulative-effect adjustment.
(4)
Primarily relates to the contract liability for sales incentives, which is partially offset by the lower accrual for sales incentives. In addition, other accrued liabilities was impacted by the reclassification of sales returns (described above).
(5)
Relates to the
$41.1
cumulative-effect adjustment upon adoption of ASC 606, partially offset by the year-to-date
$8.6
net loss adjustment.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of change in revenue recognition standard
|
Line items impacted within the Consolidated Statements of Cash Flows
|
Per consolidated financial statements
|
|
Adjustments
|
|
Balances excluding the impact of adopting ASC 606
|
Cash Flows from Operating Activities
|
|
|
|
|
|
Net loss
|
$
|
(21.8
|
)
|
|
$
|
(8.6
|
)
|
|
$
|
(30.4
|
)
|
Other
|
18.5
|
|
|
(3.5
|
)
|
|
15.0
|
|
Accounts receivable
|
(102.8
|
)
|
|
(.4
|
)
|
|
(103.2
|
)
|
Inventories
|
(99.6
|
)
|
|
3.5
|
|
|
(96.1
|
)
|
Prepaid expenses and other
|
(49.3
|
)
|
|
3.9
|
|
|
(45.4
|
)
|
Accounts payable and accrued liabilities
|
73.1
|
|
|
10.5
|
|
|
83.6
|
|
Income and other taxes
|
63.2
|
|
|
(3.6
|
)
|
|
59.6
|
|
Noncurrent assets and liabilities
|
42.8
|
|
|
(1.8
|
)
|
|
41.0
|
|
ASU 2016-09, Compensation - Stock Compensation
In March 2016, the FASB issued Accounting Standards Update ("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.
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, net. We adopted this new accounting guidance effective January 1, 2018. The new accounting guidance was applied retrospectively and increased our operating profit for 2017 and 2016 by
$8.0
and
$1.9
respectively, but had no impact on net loss.
The following tables summarize the impacts of adopting ASC 2017-07 on the Company's consolidated financial statements for the twelve months ended December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of ASU 2017-07 adoption
|
Line items impacted within the Consolidated Statements of Operations
|
Per consolidated financial statements
|
|
Impact of adoption
|
|
As originally reported
|
|
2017
|
2016
|
|
2017
|
2016
|
|
2017
|
2016
|
SG&A expenses
|
$
|
3,231.0
|
|
$
|
3,136.9
|
|
|
$
|
(8.0
|
)
|
$
|
(1.9
|
)
|
(4)
|
$
|
3,239.0
|
|
$
|
3,138.8
|
|
Operating profit
|
281.3
|
|
323.8
|
|
|
8.0
|
|
1.9
|
|
|
273.3
|
|
321.9
|
|
Other expense, net
|
34.6
|
|
172.9
|
|
|
8.0
|
|
1.9
|
|
|
26.6
|
|
171.0
|
|
Income before income taxes
|
120.7
|
|
31.2
|
|
|
—
|
|
—
|
|
|
120.7
|
|
31.2
|
|
ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities
to align the hedge accounting model more closely with risk management practices, and to simplify its application. Among other things, the new guidance eliminates the requirement to separately measure and report hedge ineffectiveness. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The new guidance must be adopted using a modified retrospective transition with a cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date. We early adopted ASU 2017-12 effective July 1, 2018 and initiated a new hedging program during the third quarter 2018 to hedge foreign exchange risk relating to forecasted transactions. The adoption did not have a material impact on our Consolidated Financial Statements.
ASU 2018-15, Intangibles - Goodwill and Other-Internal - Use Software - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In August 2018, the FASB issued ASU 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.
The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendment. We early adopted ASU 2018-15 effective October 1, 2018, which did not have a material impact on our Consolidated Financial Statements.
Accounting Standards to be Implemented
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 our Consolidated Balance Sheets. We intend to adopt this new accounting guidance effective January 1, 2019.
In July 2018, the FASB added an optional transition method which we will elect upon adoption of the new standard. This allows us to recognize and measure leases existing at January 1, 2019 without restating comparative information. In addition, we will elect to apply the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical lease classification.
The standard will have a material impact on our consolidated balance sheets but will not have a material impact on our Consolidated Income Statements. The most significant impact will be the recognition of right-of-use (ROU) assets and lease liabilities for operating leases, while our accounting for finance leases remains substantially unchanged.
Adoption of the standard will result in the recognition of additional ROU assets and lease liabilities for operating leases of approximately
$200
and approximately
$195
as of January 1, 2019. The difference between these amounts will be recorded as an adjustment to retained earnings.
ASU 2018-02, Income Statement - Reporting Comprehensive Income
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income
, which permits entities to reclassify the disproportionate income tax effects of the 2017 enactment of U.S. tax reform legislation (the "Act") on items within AOCI (loss) to retained earnings. We intend to adopt this new accounting guidance effective January 1, 2019 and have elected not to reclassify the disproportionate income tax effects of the Act from AOCI (loss) to retained earnings.
ASU 2016-13, Financial Instruments - Credit Losses
In January 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses,
which requires measurement and recognition of expected credit losses for financial assets held. We intend to adopt this new accounting guidance effective January 1, 2020. We are currently assessing the impact on our consolidated financial statements.
NOTE 3. Discontinued Operations and Assets and Liabilities Held for Sale
Discontinued Operations
North America
On December 17, 2015, the Company entered into definitive agreements with affiliates controlled by 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 18, 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 U.S., Canada and Puerto Rico, from the Company into 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.
Proceeds from the sale of the perpetual convertible preferred stock were used to fund the
$100
cash contribution into New Avon, approximately
$250
was used to reduce debt, and the remainder was used for restructuring and reinvestment in the business. The Company considered that the transactions with affiliates of Cerberus should help to drive enhanced focus on Avon's international markets, revitalize the North America business and deliver long-term value to shareholders.
During 2016, Cerberus NA contributed approximately
$170
of cash into New Avon in exchange for
80.1%
of its ownership interests. The Company contributed (i) assets primarily related to our North America business (including approximately
$100
of cash, subject to certain adjustments), (ii) certain assumed liabilities (primarily pension and postretirement liabilities) of our North America business and (iii) the employees of our North America business into New Avon in exchange for a
19.9%
ownership interest of New Avon. The Company received approximately
$6
of cash from New Avon as part of a customary working capital adjustment.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The North America business was previously its own reportable segment and has been presented as discontinued operations for all periods presented as the separation represented a significant strategic shift and was determined to have a major effect on our operations and financial results.
During the fourth quarter of 2015, the Company recorded an estimated loss on sale of discontinued operations of
$340.0
before tax (
$340.0
after tax) as the carrying value exceeded the estimated fair value less costs to sell. During 2016, the Company recognized an additional loss on sale of
$15.6
before tax (
$5.4
after tax), respectively. The cumulative loss on sale of
$355.6
before tax (
$345.4
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
$42.5
.
In 2016, 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. Also in 2016, Avon and New Avon also entered into a transition services agreement, which expired on October 31, 2018, and covered, among other things, information technology, financial services and human resources, as well as other commercial agreements, including research and development, product supply and a sublease of office space from Avon to New Avon. See Note 5, Related Party Transactions.
The major classes of financial statement components comprising the loss on discontinued operations, net of tax for North America are shown below:
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
Total revenue
|
|
$
|
135.2
|
|
|
Cost of sales
|
|
53.2
|
|
|
SG&A expenses
|
|
91.5
|
|
|
Operating (loss) income
|
|
(9.5
|
)
|
|
Other income (expense) items
|
|
.6
|
|
|
Loss from discontinued operations, before tax
|
|
(8.9
|
)
|
|
Loss on sale of discontinued operations, before tax
|
|
(15.6
|
)
|
|
Income taxes
|
|
10.5
|
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(14.0
|
)
|
|
There were no amounts recorded in discontinued operations for the year ended
December 31, 2018
or
2017
.
Assets and Liabilities Held for Sale
The major classes of assets and liabilities comprising Held for sale assets and Held for sale liabilities on the Consolidated Balance Sheet as of December 31, 2018 are shown in the following table. There were no assets or liabilities held for sale at December 31, 2017 or 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
Avon Manufacturing (Guangzhou)
|
|
Rye Office
|
|
Malaysia Maximin
|
|
Total
|
Current held for sale assets
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
8.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8.7
|
|
Property, Plant & Equipment (net)
|
|
36.7
|
|
|
12.3
|
|
|
3.0
|
|
|
52.0
|
|
Cash and cash equivalents
|
|
3.7
|
|
|
—
|
|
|
—
|
|
|
3.7
|
|
Other assets
|
|
1.1
|
|
|
—
|
|
|
0.1
|
|
|
1.2
|
|
|
|
$
|
50.2
|
|
|
$
|
12.3
|
|
|
$
|
3.1
|
|
|
$
|
65.6
|
|
|
|
|
|
|
|
|
|
|
Current held for sale liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
8.6
|
|
|
—
|
|
|
—
|
|
|
8.6
|
|
Other liabilities
|
|
2.6
|
|
|
—
|
|
|
0.2
|
|
|
2.8
|
|
|
|
$
|
11.2
|
|
|
$
|
—
|
|
|
$
|
.2
|
|
|
$
|
11.4
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
China Manufacturing
On January 8, 2019, Avon Asia Holdings Company and Avon Products (China) Co., Ltd. executed an Equity Purchase Agreement for the sale of all the equity interests in Avon Manufacturing (Guangzhou), Ltd. to TheFaceShop Co., Ltd., an affiliate of LG Household & Health Care Ltd, for a total purchase price of
$71
.
Avon Manufacturing (Guangzhou), Ltd. met the held for sale criteria under ASC 360,
Plant, Property and Equipment
("ASC 360") as of December 31, 2018, and the entity's assets and liabilities were classified as held for sale.
On February 15, 2019, we completed the sale to TheFaceShop Co., Ltd., an affiliate of LG Household & Health Care Ltd., of all of the equity interests in Avon Manufacturing (Guangzhou), Ltd. for a total purchase price of
$71.0 million
. Net cash proceeds (pre-tax) will be
$47.0
after the required repayment by the Company of certain outstanding intercompany loans of
$23.3
and after deducting cash on hand in Avon Manufacturing (Guangzhou), Ltd. of
$.7
.
Rye Office
On September 19, 2018, Avon issued a press release entitled “Avon Products Inc. to create leaner New York Operations. In this press release, Avon announced its intention to complete the sale of the Rye office in 2019 as a further step in its ongoing plan to streamline the business to fuel growth by consolidating its U.S. operations into its existing facilities in Suffern, New York.
Prior to December 31, 2018, we entered into a Letter of Intent with a third party to sell the Rye office. The due diligence period is currently ongoing.
The Rye office met the held for sale criteria under ASC 360 as of December 31, 2018, and was classified as an asset held for sale.
In February 2019, we signed an agreement to sell the Rye office. This transaction is expected to close by the end of the second quarter of 2019.
Malaysia Maximin
On November 12, 2018, the Company approved the sale in principal of Maximin Corporation Sdn Bhd (“Maximin”), which owns the Malaysia office and warehouse, in line with our current strategy. In early December, the Company entered into letter of intent with a third party. Refer to Note 23, Subsequent Events, for additional information on developments relating to the sale of Maximin.
Maximin met the held for sale criteria under ASC 360 as of December 31, 2018, and the entity's assets and liabilities were classified as held for sale.
In February 2019, we signed an agreement to sell Maximin. This transaction is expected to close by the end of the first quarter of 2019.
NOTE 4. Investment in New Avon
In connection with the separation of the Company's North America business (as discussed in Note 3, Discontinued Operations and Assets and Liabilities Held for Sale), which closed on March 1, 2016, the Company retained a
19.9%
ownership interest in New Avon, a privately-held company that is majority-owned and managed by an affiliate of Cerberus Capital Management L.P. ("Cerberus"). 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
December 31, 2018
and
December 31, 2017
was
zero
.
During the years ended December 31, 2017 and 2016, the Company's proportionate share of the losses of New Avon was
$20.2
and
$11.9
, of which
$11.5
and
$11.9
, 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 Company's proportionate share of the losses in New Avon, as this reduced our recorded investment balance in New Avon to
zero
. As a result, we have not recorded our proportionate share of New Avon's losses since the fourth quarter of 2017. If New Avon experiences future losses while our recorded investment balance is zero, we would not record our proportionate share of such loss. In addition, the Company's proportionate share of the post-separation other comprehensive income of New Avon was benefits of
$.1
and
$2.2
during the years ended December 31, 2017 and 2016, 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 year ended December 31, 2017, primarily associated with purchase accounting adjustments reported by New Avon.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. Related Party Transactions
The following tables present the related party transactions with New Avon, affiliates of Cerberus and the Instituto Avon in Brazil. There are no other related party transactions. New Avon is majority owned and managed by Cerberus NA. See Note 3, Discontinued Operations and Assets and Liabilities Held for Sale and Note 4, Investment in New Avon for further details.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
Statement of Operations Data
|
|
|
|
|
Revenue from sale of product to New Avon
(1)
|
|
$
|
25.7
|
|
|
$
|
32.5
|
|
Gross profit from sale of product to New Avon
(1)
|
|
$
|
1.6
|
|
|
$
|
1.9
|
|
|
|
|
|
|
Cost of sales for purchases from New Avon
(2)
|
|
$
|
2.9
|
|
|
$
|
3.8
|
|
|
|
|
|
|
SG&A expenses:
|
|
|
|
|
Transition services, intellectual property, research and development and subleases
(3)
|
|
$
|
(5.9
|
)
|
|
$
|
(32.2
|
)
|
Project management team
(4)
|
|
1.2
|
|
|
2.6
|
|
Net reduction of SG&A expenses
|
|
$
|
(4.7
|
)
|
|
$
|
(29.6
|
)
|
|
|
|
|
|
Interest income from Instituto Avon
(5)
|
|
$
|
.1
|
|
|
—
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
Balance Sheet Data
|
|
|
|
|
Inventories
(6)
|
|
$
|
.3
|
|
|
$
|
.4
|
|
Receivables due from New Avon
(7)
|
|
$
|
7.0
|
|
|
$
|
9.8
|
|
Receivables due from Instituto Avon
(5)
|
|
$
|
3.2
|
|
|
$
|
—
|
|
Payables due to New Avon
(8)
|
|
$
|
.2
|
|
|
$
|
.2
|
|
Payables due to an affiliate of Cerberus
(9)
|
|
$
|
.6
|
|
|
$
|
.4
|
|
(1)
The Company supplies product to New Avon as part of a manufacturing and supply agreement. The Company recorded revenue of
$25.7
and
$32.5
, within other revenue, and gross profit of
$1.6
and
$1.9
associated with this agreement during the years ended
December 31, 2018
and
2017
, respectively.
(2)
New Avon also supplies product to the Company as part of the same manufacturing and supply agreement noted above. The Company purchased
$2.8
and
$3.2
from New Avon associated with this agreement during the years ended
December 31, 2018
and
2017
, respectively, and recorded
$2.9
and
$3.8
associated with these purchases within cost of sales during the years ended
December 31, 2018
and
2017
, respectively.
(3)
The Company also entered into a transition services agreement to provide certain services to New Avon, which expired on October 31, 2018, as well as an intellectual property ("IP") license agreement, an agreement for technical support and innovation and subleases for office space. In addition, New Avon performed certain services for the Company under a similar transition services agreement which expired during the third quarter of 2017. The Company recorded a net
$5.9
and
$32.2
reduction of SG&A expenses associated with these agreements during the years ended
December 31, 2018
and
2017
, respectively, which 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 and Open Up Avon strategy (“Open Up Avon”) announced in September 2018. The Company recorded
$1.2
and
$2.6
in SG&A expenses associated with these agreements during the years ended
December 31, 2018
and
2017
, respectively. See Note 17, Restructuring Initiatives for additional information related to the Transformation Plan and Open Up Avon.
(5) During the second quarter of 2018, the Company entered into an agreement to loan the Instituto Avon, an independent non-government charitable organization in Brazil,
$3.6
for an unsecured
5
-year term at a fixed interest rate of
7%
per annum, to be paid back in
5
equal annual installments. The Instituto Avon was created by an Avon subsidiary in Brazil, with the board and executive team comprise of Avon Brazil management. The purpose of the loan is to provide the Instituto Avon with the means to donate funds to Fundação Pio XII (a leading cancer prevention and treatment organization in Brazil and owner of the
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Hospital do Câncer de Barretos), in order to invest in equipment with the objective of expanding breast cancer prevention and treatment.
(6)
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 our Consolidated Balance Sheets.
(7)
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 our Consolidated Balance Sheets.
(8)
The payables due to New Avon relate to the manufacturing and supply agreement, and were classified within other accrued liabilities in our Consolidated Balance Sheets.
(9)
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 our 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. The initial liability for the estimated value of such standby letters of credit was
$2.1
, which was included in the additional loss on sale of the North America business recognized in loss from discontinued operations, net of tax in our Consolidated Statements of Operations during the year ended December 31, 2016. At both
December 31, 2018
and
2017
, the Company had a liability of
$1.4
for the estimated value of such standby letters of credit. The reduction of this estimated liability of
$.2
during the years ended December 31,
2017
was recognized in other expense, net in our Consolidated Statements of Operations.
See Note 18, Series C Convertible Preferred Stock, for discussion of preferred shares issued to Cerberus Investor.
NOTE 6. Revenue
Disaggregation of revenue
In the following table, revenue is disaggregated by product or service type. All revenue is recognized at a point in time, when control of a product is transferred to a customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2018
|
|
|
Reportable segments
|
|
|
|
|
|
|
Europe, Middle East & Africa
|
|
South Latin America
|
|
North Latin America
|
|
Asia Pacific
|
|
Total reportable segments
|
|
Other operating segments and business activities
|
|
Total
|
Beauty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skincare
|
|
$
|
619.2
|
|
|
$
|
564.3
|
|
|
$
|
166.9
|
|
|
$
|
124.3
|
|
|
$
|
1,474.7
|
|
|
$
|
6.4
|
|
|
$
|
1,481.1
|
|
Fragrance
|
|
636.6
|
|
|
483.9
|
|
|
218.1
|
|
|
89.5
|
|
|
1,428.1
|
|
|
2.9
|
|
|
1,431.0
|
|
Color
|
|
398.7
|
|
|
310.7
|
|
|
81.8
|
|
|
54.1
|
|
|
845.3
|
|
|
4.8
|
|
|
850.1
|
|
Total Beauty
|
|
1,654.5
|
|
|
1,358.9
|
|
|
466.8
|
|
|
267.9
|
|
|
3,748.1
|
|
|
14.1
|
|
|
3,762.2
|
|
Fashion & Home:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fashion
|
|
298.0
|
|
|
190.6
|
|
|
94.4
|
|
|
167.8
|
|
|
750.8
|
|
|
3.0
|
|
|
753.8
|
|
Home
|
|
45.3
|
|
|
283.4
|
|
|
204.2
|
|
|
28.4
|
|
|
561.3
|
|
|
2.0
|
|
|
563.3
|
|
Total Fashion & Home
|
|
343.3
|
|
|
474.0
|
|
|
298.6
|
|
|
196.2
|
|
|
1,312.1
|
|
|
5.0
|
|
|
1,317.1
|
|
Brazil IPI tax release *
|
|
—
|
|
|
168.4
|
|
|
—
|
|
|
—
|
|
|
168.4
|
|
|
—
|
|
|
168.4
|
|
Net sales
|
|
1,997.8
|
|
|
2,001.3
|
|
|
765.4
|
|
|
464.1
|
|
|
5,228.6
|
|
|
19.1
|
|
|
5,247.7
|
|
Representative fees
|
|
95.3
|
|
|
135.7
|
|
|
43.9
|
|
|
6.5
|
|
|
281.4
|
|
|
2.0
|
|
|
283.4
|
|
Other
|
|
0.7
|
|
|
9.9
|
|
|
—
|
|
|
0.2
|
|
|
10.8
|
|
|
29.4
|
|
|
40.2
|
|
Other revenue
|
|
96.0
|
|
|
145.6
|
|
|
43.9
|
|
|
6.7
|
|
|
292.2
|
|
|
31.4
|
|
|
323.6
|
|
Total revenue
|
|
$
|
2,093.8
|
|
|
$
|
2,146.9
|
|
|
$
|
809.3
|
|
|
$
|
470.8
|
|
|
$
|
5,520.8
|
|
|
$
|
50.5
|
|
|
$
|
5,571.3
|
|
* Includes the impact of the Brazil IPI tax release, which was recorded in net sales and other (income) expense, net in the amounts of approximately
$168
and approximately
$27
, respectively, in our Consolidated Income Statements (See Note 19, Contingencies for further information).
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contract balances
The timing of revenue recognition generally is different from the timing of a promise made to a Representative. As a result, we have contract liabilities, which primarily relate to the advance consideration received from Representatives prior to transfer of the related good or service for material rights, such as loyalty points and status programs, and are primarily classified within other accrued liabilities (with the long-term portion in other liabilities) in our Consolidated Balance Sheets.
Generally, we record accounts receivable when we invoice a Representative. In addition, we record an estimate of an allowance for doubtful accounts on receivable balances based on an analysis of historical data and current circumstances, including seasonality and changing trends. The allowance for doubtful accounts is reviewed for adequacy, at a minimum, on a quarterly basis. We generally have no detailed information concerning, or any communication with, any ultimate consumer of our products beyond the Representative. We have no legal recourse against the ultimate consumer for the collection of any accounts receivable balances due from the Representative to us. If the financial condition of the Representatives were to deteriorate, resulting in their inability to make payments, additional allowances may be required.
The following table provides information about receivables and contract liabilities from contracts with customers at
December 31, 2018
:
|
|
|
|
|
|
|
|
December 31, 2018
|
Accounts receivable, net of allowances of $93.0
|
|
$
|
349.7
|
|
Contract liabilities
|
|
$
|
84.4
|
|
At January 1, 2018 and
December 31, 2018
we had a contract liability of
$91.8
and
$84.4
, respectively, relating to certain material rights (loyalty points, status program and prospective discounts). During the twelve months ended
December 31, 2018
, we recognized
$89.5
of revenue related to the contract liability balance at January 1, 2018, as the result of performance obligations satisfied. In addition, we deferred an additional
$82.3
related to certain material rights granted during the period, for which the performance obligations are not yet satisfied. Of the amount deferred during the period, substantially all will be recognized within a year, with the significant majority to be captured within a quarter. The remaining movement in the contract liability balance is attributable to foreign exchange differences arising on the translation of the balance as at
December 31, 2018
as compared with December 31, 2017.
Contract costs
Incremental costs to obtain contracts, such as bonuses or commissions, are recognized as an asset if the entity expects to recover them. However, ASC 340-40,
Other Assets and Deferred Costs
, offers a practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. We elected the practical expedient and expense costs to obtain contracts when incurred because our amortization period is one year or less.
Costs to fulfill contracts with Representatives are comprised of shipping and handling (including order processing) and payment processing services, which are expensed as incurred. The fees for these services are included in the transaction price.
NOTE 7. Inventories
Inventories at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Raw materials
|
|
$
|
157.8
|
|
|
$
|
190.6
|
|
Finished goods
|
|
384.2
|
|
|
407.6
|
|
Total
|
|
$
|
542.0
|
|
|
$
|
598.2
|
|
These amounts are net of the allowance for inventory obsolescence, and include the impact of an incremental one-off inventory obsolescence expense recognized at December 31, 2018, resulting from the structural reset of inventory announced in January 2019 (refer to Note 17, Restructuring Initiatives, for additional information regarding Open Up Avon and the structural reset of inventory).
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. Debt and Other Financing
Debt
Debt at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Debt maturing within one year:
|
|
|
|
|
Notes payable
|
|
$
|
8.8
|
|
|
$
|
22.6
|
|
Current portion of long-term debt
|
|
3.2
|
|
|
3.1
|
|
Total
|
|
$
|
12.0
|
|
|
$
|
25.7
|
|
Long-term debt:
|
|
|
|
|
6.50% Notes, due March 2019
|
|
$
|
—
|
|
|
$
|
237.2
|
|
4.60% Notes, due March 2020
|
|
386.4
|
|
|
408.8
|
|
7.875% Senior Secured Notes, due August 2022
|
|
494.2
|
|
|
492.6
|
|
5.00% Notes, due March 2023
|
|
458.5
|
|
|
484.5
|
|
Other debt, payable through 2025 with interest from .4% to 12.1%
|
|
4.6
|
|
|
5.2
|
|
6.95% Notes, due March 2043
|
|
241.1
|
|
|
241.0
|
|
Total
|
|
1,584.8
|
|
|
1,869.3
|
|
Unamortized deferred gain - swap terminations
|
|
—
|
|
|
6.0
|
|
Less current portion
|
|
(3.2
|
)
|
|
(3.1
|
)
|
Total long-term debt
|
|
$
|
1,581.6
|
|
|
$
|
1,872.2
|
|
Notes payable included short-term borrowings of international subsidiaries at average annual interest rates of approximately
19.0%
at
December 31, 2018
and
23.0%
at
December 31, 2017
.
Other debt included obligations under capital leases of
$2.5
at
December 31, 2018
and
$4.0
at
December 31, 2017
, which primarily relate to leases of automobiles and equipment.
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 is 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.
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 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
before tax 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 11, Financial Instruments and Risk Management), 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 (see Note 11, Financial Instruments and Risk Management),
$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.
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
$6.2
and accrued interest of
$1.1
. In connection with these repurchases of debt, we incurred a loss on extinguishment of debt of
$1.0
before tax in the fourth quarter of 2016 consisting of the
$6.2
premium paid for the repurchases,
$.5
for the write-off of debt issuance costs and discounts related to the initial issuance of the notes that were repurchased and
$.4
for a deferred loss
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
associated with treasury lock agreements designated as cash flow hedges of the anticipated interest payments on the
5.75%
Notes (see Note 11, Financial Instruments and Risk Management), partially offset by a deferred gain of approximately
$6.1
associated with the March 2012 and January 2013 interest-rate swap agreement terminations (see Note 11, Financial Instruments and Risk Management).
On November 30, 2016, we prepaid the remaining principal amount of our
4.20%
Notes and
5.75%
Notes. The prepayment price was 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
$12.1
for both series of notes and accrued interest of
$3.6
for both series of notes. In connection with the prepayment of our
4.20%
Notes and
5.75%
Notes, we incurred a loss on extinguishment of debt of
$2.9
before tax in the fourth quarter of 2016 consisting of the
$12.1
make-whole premium,
$1.0
of a deferred loss associated with treasury lock agreements designated as cash flow hedges of the anticipated interest payments on the
5.75%
Notes (see Note 11, Financial Instruments and Risk Management) and the write-off of
$.3
of debt issuance costs and discounts related to the initial issuances of the notes that were prepaid, partially offset by a deferred gain of
$10.5
associated with the January 2013 interest-rate swap agreement termination (see Note 10, Financial Instruments and Risk Management).
In December 2016, we repurchased
$11.1
of our
5.00%
Notes and
$6.2
of our
6.95%
Notes, and the aggregate repurchase price was equal to the principal amount of the notes, less a discount received of
$1.3
and plus accrued interest of
$.3
. In connection with this repurchase of debt, we incurred a gain on extinguishment of debt of
$1.1
before tax in the fourth quarter of 2016 consisting of the
$1.3
discount received for the repurchases, partially offset by
$.2
for the write-off of debt issuance costs and discounts related to the initial issuance of the notes that were repurchased.
In June 2018, we prepaid the remaining principal amount of our
6.50%
Notes. The prepayment price was equal to the remaining principal amount of
$237.8
, plus a make-whole premium of
$6.2
and accrued interest of
$4.6
. In connection with the prepayment, we incurred a loss on extinguishment of debt of
$2.9
before tax in the second quarter of 2018 consisting of the
$6.2
make-whole premium, and the write-off of
$.3
of debt issuance costs and discounts related to the initial issuances of the notes that were prepaid, partially offset by a write off of a deferred gain of
$3.6
associated with the March 2012 interest-rate swap agreement termination (see Note 11, Financial Instruments and Risk Management).
In the fourth quarter of 2018, we repurchased
$23.0
of our
4.60%
Notes and
$27.0
of our
5.00%
Notes. The aggregate repurchase price was equal to the principal amount of the notes, less a discount received of
$2.4
and accrued interest of
$.7
. In connection with these repurchases of debt, we incurred a gain on extinguishment of debt of
$2.1
before tax in the fourth quarter of 2018 consisting of the
$2.4
discount received for the repurchases, partially offset by
$0.3
for the write-off of debt issuance costs and discounts related to the initial issuance of the notes that were repurchased.
At
December 31, 2018
and
2017
, the carrying values of our public notes were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Remaining Principal
|
|
Unamortized Discounts
|
|
Unamortized Debt Issuance Costs
|
|
Total
|
|
Remaining Principal
|
|
Unamortized Discounts
|
|
Unamortized Debt Issuance Costs
|
|
Total
|
6.50% Notes, due March 2019
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
237.9
|
|
|
$
|
(.4
|
)
|
|
$
|
(.3
|
)
|
|
$
|
237.2
|
|
4.60% Notes, due March 2020
|
387.0
|
|
|
(.1
|
)
|
|
(.5
|
)
|
|
386.4
|
|
|
409.9
|
|
|
(.2
|
)
|
|
(.9
|
)
|
|
408.8
|
|
5.00% Notes, due March 2023
|
461.9
|
|
|
(1.9
|
)
|
|
(1.5
|
)
|
|
458.5
|
|
|
488.9
|
|
|
(2.5
|
)
|
|
(1.9
|
)
|
|
484.5
|
|
6.95% Notes, due March 2043
|
243.9
|
|
|
(.6
|
)
|
|
(2.2
|
)
|
|
241.1
|
|
|
243.8
|
|
|
(.6
|
)
|
|
(2.2
|
)
|
|
241.0
|
|
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, Avon International Operations, Inc. (“AIO”), a wholly-owned domestic subsidiary of the Company, 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 our Senior Secured Notes is payable semi-annually on February 15 and August 15 of each year. The carrying value of our Senior Secured Notes represented the
$500.0
principal amount, net of unamortized debt issuance costs of $
5.8
and
$7.4
at
December 31, 2018
and
2017
, respectively. This represents the total debt for AIO at
December 31, 2018
and
2017
.
All obligations of AIO under our Senior Secured Notes are unconditionally guaranteed by the Company, AIO and each other material United States or English restricted subsidiary of the Company (collectively, the “Obligors”), in each case, subject to certain exceptions. The obligations of the Obligors are secured by first priority liens on and security interests in substantially all of the assets of the Obligors, in each case, subject to certain exceptions.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Maturities of Long-Term Debt
Annual maturities of long-term debt, which includes our notes and capital leases outstanding at
December 31, 2018
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024 and Beyond
|
|
Total
|
Maturities
|
|
$
|
1.1
|
|
|
$
|
387.6
|
|
|
$
|
0.4
|
|
|
$
|
500.2
|
|
|
$
|
462.0
|
|
|
$
|
243.9
|
|
|
$
|
1,595.2
|
|
Other Financing
Revolving Credit Facility
In June 2015, 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”). In December 2017, AIO entered into an amendment to the 2015 facility, which, among other things, modified the financial covenants (interest coverage and total leverage ratios) to provide the Company additional flexibility. As of December 31, 2018, there were
no
amounts outstanding under the 2015 facility.
In February 2019, Avon International Capital, p.l.c. ("AIC"), a wholly-owned foreign subsidiary of the Company, entered into a
three
-year
€200.0
senior secured revolving credit facility (the “2019 facility”). The 2019 facility replaced the 2015 facility and the 2015 facility was terminated at such time. Borrowings under the 2019 facility bear interest at our option, at a rate per annum, equal to either LIBOR or EURIBOR (for any loan in euros) plus 225 basis points, in each case subject to adjustment based upon a leveraged-based pricing grid. The 2019 facility may be used for general corporate and working capital purposes. There are no amounts outstanding under the 2019 facility. The amount available to be drawn on under the 2019 facility is reduced by any standby letters of credit granted by AIC or any Obligor under the 2019 facility, including the standby letters of credit granted by AIO under the 2015 facility that were rolled over into the 2019 facility, which, as of December 31, 2018, were approximately
$29 million
.
All obligations of AIC under the 2019 facility are unconditionally guaranteed by the Company, AIO and each other material United States or English restricted subsidiary of the Company (collectively, the “Obligors”), in each case, subject to certain exceptions. The obligations of the Obligors are secured by first priority liens on and security interests in substantially all of the assets of the Obligors, in each case, subject to certain exceptions.
The 2019 facility will terminate in February 2022; provided, however, that it shall terminate on the 91st day prior to the maturity of the
4.60%
Notes, if on such 91st day, the applicable notes are not redeemed, repaid, discharged, defeased or otherwise refinanced in full.
The 2019 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). Depending on our business results (including the impact of any adverse foreign exchange movements and significant restructuring charges), it is possible that we may become non-compliant with our interest coverage or total leverage ratio absent the Company undertaking other alternatives to avoid noncompliance, such as obtaining additional amendments to the 2019 facility or repurchasing certain debt. If we were to be non-compliant with our interest coverage or total leverage ratio, we would no longer have access to our 2019 facility and our credit ratings may be downgraded.
Letters of Credit
At
December 31, 2018
and
December 31, 2017
, we also had letters of credit outstanding under our revolving credit facility totaling
29.4
and
$37.7
, respectively. The balances at
December 31, 2018
and
2017
primarily relate to letters of credit issued to 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. The balances at
December 31, 2018
and
December 31, 2017
also include letters of credit which guarantee various insurance activities.
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 our Senior Secured Notes; S&P ratings of Stable Outlook with B for corporate family debt and senior
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
unsecured debt and BB- for our Senior Secured Notes; and Fitch rating of Stable 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.
NOTE 9. Accumulated Other Comprehensive Income (Loss)
The tables below present the changes in AOCI by component and the reclassifications out of AOCI during
2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Pension and Postretirement Benefits
|
|
Investment in New Avon
|
|
Total
|
Balance at December 31, 2017
|
|
$
|
(829.6
|
)
|
|
$
|
—
|
|
|
$
|
(4.3
|
)
|
|
$
|
(95.7
|
)
|
|
$
|
3.4
|
|
|
$
|
(926.2
|
)
|
Other comprehensive (loss) income other than reclassifications
|
|
(106.6
|
)
|
|
.5
|
|
|
—
|
|
|
(8.6
|
)
|
|
—
|
|
|
(114.7
|
)
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative gains on cash flow hedges, net of tax of $0.0
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $.6
(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10.5
|
|
|
—
|
|
|
10.5
|
|
Total reclassifications into earnings
|
|
—
|
|
|
|
|
—
|
|
|
10.5
|
|
|
—
|
|
|
10.5
|
|
Balance at December 31, 2018
|
|
$
|
(936.2
|
)
|
|
$
|
0.5
|
|
|
$
|
(4.3
|
)
|
|
$
|
(93.8
|
)
|
|
$
|
3.4
|
|
|
$
|
(1,030.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
81.3
|
|
|
—
|
|
|
8.9
|
|
|
1.2
|
|
|
91.4
|
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $.8
(1)
|
|
—
|
|
|
—
|
|
|
15.6
|
|
|
—
|
|
|
15.6
|
|
Total reclassifications into earnings
|
|
—
|
|
|
—
|
|
|
15.6
|
|
|
—
|
|
|
15.6
|
|
Balance at December 31, 2017
|
|
$
|
(829.6
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(95.7
|
)
|
|
$
|
3.4
|
|
|
$
|
(926.2
|
)
|
(1)
Gross amount reclassified to other expense, net, and related taxes reclassified to income taxes.
A foreign exchange net loss of
$6.9
for 2018, a gain of
$16.3
for 2017, and a net loss of $
23.7
for
2016
resulting from the translation of actuarial losses and prior service cost recorded in AOCI, are included in changes in foreign currency translation adjustments in our Consolidated Statements of Comprehensive Income (Loss).
NOTE 10. Income Taxes
Income from continuing operations, before taxes for the years ended December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
United States
|
|
$
|
39.3
|
|
|
$
|
(147.6
|
)
|
|
$
|
(403.0
|
)
|
Foreign
|
|
68.8
|
|
|
268.3
|
|
|
434.2
|
|
Total
|
|
$
|
108.1
|
|
|
$
|
120.7
|
|
|
$
|
31.2
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes for the years ended December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Federal:
|
|
|
|
|
|
|
Current
|
|
$
|
(6.1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
3.7
|
|
|
(34.0
|
)
|
|
—
|
|
Total Federal
|
|
(2.4
|
)
|
|
(34.0
|
)
|
|
—
|
|
Foreign:
|
|
|
|
|
|
|
Current
|
|
182.3
|
|
|
130.6
|
|
|
128.5
|
|
Deferred
|
|
(53.0
|
)
|
|
3.8
|
|
|
(4.2
|
)
|
Total Foreign
|
|
129.3
|
|
|
134.4
|
|
|
124.3
|
|
State and Local:
|
|
|
|
|
|
|
Current
|
|
3.0
|
|
|
.3
|
|
|
.3
|
|
Deferred
|
|
—
|
|
|
—
|
|
|
—
|
|
Total State and other
|
|
3.0
|
|
|
.3
|
|
|
.3
|
|
Total
|
|
$
|
129.9
|
|
|
$
|
100.7
|
|
|
$
|
124.6
|
|
The effective tax rate for the years ended December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Statutory federal rate
|
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local taxes, net of federal tax benefit
|
|
2.2
|
|
|
.2
|
|
|
.6
|
|
U.S. Tax Reform
|
|
—
|
|
|
(24.7
|
)
|
|
—
|
|
Tax on foreign income
|
|
(16.2
|
)
|
|
6.0
|
|
|
(24.4
|
)
|
Tax on uncertain tax positions - Brazil
|
|
67.4
|
|
|
—
|
|
|
—
|
|
Tax on uncertain tax positions - Rest of World
|
|
8.5
|
|
|
(3.6
|
)
|
|
34.1
|
|
Reorganizations
|
|
(91.3
|
)
|
|
—
|
|
|
(93.6
|
)
|
Net change in valuation allowances
|
|
128.3
|
|
|
62.4
|
|
|
375.1
|
|
Venezuela deconsolidation, devaluation and highly inflationary accounting
|
|
—
|
|
|
—
|
|
|
23.9
|
|
Imputed royalties and associated non-deductible expenses
|
|
.6
|
|
|
9.5
|
|
|
50.3
|
|
Research credits
|
|
(1.3
|
)
|
|
(1.3
|
)
|
|
(5.4
|
)
|
Other
|
|
1.0
|
|
|
(.1
|
)
|
|
3.8
|
|
Effective tax rate
|
|
120.2
|
%
|
|
83.4
|
%
|
|
399.4
|
%
|
In 2018, as a result of continued business model changes related to the move of the Company’s headquarters from the US to the UK, the Company recognized one time tax benefits of
$98.7
reflected in the “Reorganizations” line above associated primarily with the: rationalization and re-alignment of the Company’s legal entity structure, the ownership transfer of certain operational assets within the consolidated group and the tax benefit associated with the Foreign Derived Intangible Income provisions of the Tax Cuts and Jobs Act in the U.S.
In 2018, the Net Change in Valuation Allowances line in the rate reconciliation above includes
$138.6
of increases to the Valuation Allowances primarily associated with Deferred Tax Assets generated in 2018. Reductions to Valuation Allowances of
$93.0
were reflected in other captions of the rate reconciliation net of the associated Deferred Tax Assets which were expensed or written off during 2018 as follows:
$57.2
for excess tax basis in deconsolidated subsidiaries that was re-allocated against investments in consolidated subsidiaries,
$15.3
for reduction of future tax benefits anticipated for state deferred tax assets,
$11.7
of other Deferred Tax Assets and a reduction of
$8.8
of Deferred Tax Assets associated with the repatriation of earnings from consolidated subsidiaries.
In 2017, as a result of the enactment of the Tax Cuts and Jobs Act in the U.S., the Company recognized a net income tax benefit of $
29.9
associated with the following items which are reflected in the “U.S. Tax Reform” line above: $
33.5
for a valuation allowance release associated with minimum tax credits which can be utilized and/or refunded in the future and $
3.6
for an uncertain tax position for potential withholding taxes on the repatriation of unremitted earnings. In addition, there was no impact on our financial position or results associated with each of the following: a write-off of deferred tax assets and their associated valuation allowance of
$161.4
due to the rate change from 35% to 21%; a reversal of deferred tax liabilities and
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recording of a valuation allowance of $
66.7
associated with unremitted earnings; establishment of deferred tax assets for other miscellaneous withholding tax items and their associated valuation allowance of $
5.5
; and a one-time tax on offshore earnings and the associated utilization of foreign tax credits of $
2.9
.
Included in the net change in valuation allowance noted above for 2017, we released valuation allowances of
$25.5
associated with a number of markets in Europe, Middle East & Africa as a result of a business model change related to the move of the Company's headquarters from the U.S. to the UK.
Deferred tax assets (liabilities) at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
Tax loss and deduction carryforwards
|
|
$
|
2,144.3
|
|
|
$
|
2,022.1
|
|
Tax credit carryforwards
|
|
830.5
|
|
|
981.0
|
|
All other future deductions
|
|
560.8
|
|
|
471.0
|
|
Valuation allowance
|
|
(3,257.5
|
)
|
|
(3,217.7
|
)
|
Total deferred tax assets
|
|
278.1
|
|
|
256.4
|
|
Deferred tax liabilities
|
|
$
|
(85.1
|
)
|
|
$
|
(74.9
|
)
|
Net deferred tax assets
|
|
$
|
193.0
|
|
|
$
|
181.5
|
|
Deferred tax assets (liabilities) at December 31 were classified as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
Other assets
|
|
$
|
212.6
|
|
|
$
|
203.8
|
|
Total deferred tax assets
|
|
212.6
|
|
|
203.8
|
|
Deferred tax liabilities:
|
|
|
|
|
Long-term income taxes
|
|
$
|
(19.6
|
)
|
|
$
|
(22.3
|
)
|
Total deferred tax liabilities
|
|
(19.6
|
)
|
|
(22.3
|
)
|
Net deferred tax assets
|
|
$
|
193.0
|
|
|
$
|
181.5
|
|
During 2018, the Company also recorded a net increase to its valuation allowance of
$45.6
in income tax expense primarily for deferred tax assets generated in 2018 that are not currently more likely than not to be realized. In the future, the Company will continue to evaluate whether its financial results will allow for the valuation allowances to be released. Release of the valuation allowance in the future would occur when the deferred tax assets associated with the valuation allowance are determined to be more likely than not of being realized.
At
December 31, 2018
, exclusive of ASU 2013-11 reductions, we had recognized deferred tax assets of
$842.5
relating to tax credit carryforwards (U.S. foreign tax credits, minimum tax credits, research and experimentation credits and other tax credits) for which a valuation allowance of
$812.5
has been provided. The tax credit carryforwards consist of U.S. foreign tax credits of
$793.8
which are subject to expiration between
2020
and
2027
; U.S. minimum tax credits of
$18.0
which are not subject to expiration; U.S. research and experimentation credits of
$21.0
which are subject to expiration between
2027
and
2038
and other tax credits of
$9.7
which are subject to expiration between
2019
and
2033
.
At
December 31, 2018
, exclusive of ASU 2013-11 reductions, we had recognized deferred tax assets of
$2,166.2
relating to foreign and state tax loss carryforwards for which a valuation allowance of
$2,073.3
has been provided. The deferred tax assets relating to tax loss carryforwards consist of
$2,045.5
of foreign tax loss carryforwards, for which a valuation allowance of
$1,974.5
has been provided, and
$98.8
of state tax loss carryforwards, for which a valuation allowance of
$98.8
has been provided.
The foreign tax loss carryforwards at
December 31, 2018
were
$8,616.2
, of which
$6,927.5
are not subject to expiration and
$1,688.7
are subject to expiration between
2019
and
2048
. The state tax loss carryforwards at December 31, 2018, after taking into consideration the estimated effects of pre-apportionment states, were
$1,396.7
which are subject to expiration between
2019
and
2038
.
At
December 31, 2018
, as a result of our U.S. liquidity profile, we continue to assert that our foreign earnings are not indefinitely reinvested. Accordingly, we adjusted our deferred tax liability to account for our 2018 undistributed earnings of foreign subsidiaries and for the tax effect of earnings that were actually repatriated to the U.S. during the year. The net impact on the deferred tax liability associated with the Company’s undistributed earnings is a decrease of
$5.1
, resulting in a deferred
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
tax liability balance of
$17.5
related to the incremental tax cost on approximately
$1.1 billion
of undistributed foreign earnings at December 31, 2018.
At
December 31, 2018
, the valuation allowance primarily represents amounts for substantially all U.S. deferred tax assets, certain foreign tax loss carryforwards and certain other foreign deferred tax assets. The recognition of deferred tax assets was based on the evaluation of current and estimated future profitability of the operations, reversal of deferred tax liabilities and the likelihood of utilizing tax credit and/or loss carryforwards. Tax planning strategies were also considered and evaluated as support for the realization of deferred tax assets. Where these sources of income existed along with sufficient positive evidence that indicated it was more likely than not that such sources of income could be relied upon, then the deferred tax assets were not reduced by a valuation allowance.
Uncertain Tax Positions
At
December 31, 2018
, we had
$137.6
of total gross unrecognized tax benefits of which approximately
$123.2
would favorably impact the provision for income taxes, if recognized.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
Balance at December 31, 2015
|
$
|
53.0
|
|
Additions based on tax positions related to the current year
|
1.8
|
|
Additions for tax positions of prior years
|
9.4
|
|
Reductions for tax positions of prior years
|
(2.8
|
)
|
Reductions due to lapse of statute of limitations
|
(.7
|
)
|
Reductions due to settlements with tax authorities
|
(2.0
|
)
|
Balance at December 31, 2016
|
58.7
|
|
Additions based on tax positions related to the current year
|
1.4
|
|
Additions for tax positions of prior years
|
17.6
|
|
Reductions for tax positions of prior years
|
(7.9
|
)
|
Reductions due to lapse of statute of limitations
|
(3.1
|
)
|
Reductions due to settlements with tax authorities
|
(18.0
|
)
|
Balance at December 31, 2017
|
48.6
|
|
Additions based on tax positions related to the current year
|
43.6
|
|
Additions for tax positions of prior years
|
65.5
|
|
Reductions for tax positions of prior years
|
(3.7
|
)
|
Reductions due to lapse of statute of limitations
|
(.9
|
)
|
Reductions due to settlements with tax authorities
|
(15.4
|
)
|
Balance at December 31, 2018
|
$
|
137.6
|
|
We accrue interest and penalties related to unrecognized tax benefits in the provision for income taxes. We reversed previously recorded expenses for interest and penalties, net of taxes by
$1.3
during the year ended December 31, 2018, and recorded expenses of
$0.0
and $
2.5
for interest and penalties, net of taxes during the years ended December 31, 2017 and 2016, respectively. At December 31, 2018 and December 31, 2017 we had
$7.4
and
$9.9
, respectively, recorded for interest and penalties, net of tax benefit. The unrecognized tax benefits, including interest and penalties, were classified within long-term income taxes in our Consolidated Balance Sheets.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We file income tax returns in the U.S. and foreign jurisdictions. As of December 31, 2018, the tax years that remained subject to examination by major tax jurisdiction for our most significant subsidiaries were as follows:
|
|
|
|
Jurisdiction
|
|
Open Years
|
Brazil
|
|
2013-2018
|
Mexico
|
|
2013-2018
|
Philippines
|
|
2014-2018
|
Poland
|
|
2013-2018
|
Russia
|
|
2017-2018
|
United Kingdom
|
|
2017-2018
|
United States (Federal)
|
|
2017-2018
|
We anticipate that it is reasonably possible that the total amount of unrecognized tax benefits will not change materially within the next twelve months.
Given the timing of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, the SEC issued guidance under SAB 118 directing taxpayers to consider the impact of the new legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effects resulting from the change in law. As of December 22, 2017, except for the impact of remeasuring our deferred tax assets at the 21% rate, we accounted for all other impacts of the new legislation, including but not limited to effects on existing deferred taxes and valuation allowances, a one-time tax on offshore earnings, potential changes to and impact of our indefinite reinvestment assertion, and the measurement of deferred taxes on foreign unremitted earnings, on a provisional basis on our financial statements. The amounts reported at that time represented our best estimate given the data we had available and based on our interpretation of the U.S. legislation. During 2018, the U.S. Treasury issued various guidance on the application of certain provisions that may impact our calculations. As of December 31, 2018, the Company completed its accounting for the impact of the Tax Cuts and Jobs Act including any necessary adjustments to the “provisional” amounts previously recorded. The recording of the additional adjustments had no material impact on our financial position or results.
NOTE 11. Financial Instruments and Risk Management
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 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 our Consolidated Balance Sheets at their fair values. The fair value of derivative instruments outstanding were immaterial at
December 31, 2018
and
2017
.
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
December 31, 2018
and
2017
, we do not have any interest-rate swap agreements. Approximately
1%
of our debt portfolio at
December 31, 2018
and
2017
, 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 was amortized as a reduction to interest expense over the remaining term of the underlying debt obligations. During the year ended December 31, 2016, the net impact of the gain amortization was $
35.4
, including
$23.6
related to the extinguishment of debt (see Note 8, Debt and Other Financing). At
December 31, 2018
, 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 remaining term of the underlying debt obligations through March 2019. During the years ended
December 31, 2018
and
2017
, the net impact of the gain amortization was
$6.0
and
$4.9
, respectively, including
$3.6
related to the extinguishment of debt during the year ended December 31, 2018 (see Note 8, Debt and Other Financing). At
December 31, 2018
, there was no unamortized deferred gain associated with the March 2012 interest-rate swap termination, as the underlying debt obligations have been paid.
Foreign Currency Risk
We may use foreign exchange forward contracts to manage a portion of our foreign currency exchange rate exposures. At
December 31, 2018
, we had outstanding foreign exchange forward contracts with notional amounts totaling approximately
$1,275
for various currencies, of which
$22
were designated as cash flow hedges.
We may use foreign exchange forward contracts to manage foreign currency exposure of certain intercompany loans. 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 years ended December 31,
2018
and
2017
, we recorded a gain of
$1.5
and a gain of
$3.0
, respectively, in other expense, net in our Consolidated Statements of Operations related to these undesignated foreign exchange forward contracts. Also during the years ended December 31,
2018
and
2017
, we recorded a gain of
$2.2
and a loss of
$5.2
, respectively, related to the associated intercompany loans, caused by changes in foreign currency exchange rates.
We initiated a new hedging program to hedge foreign exchange risk relating to forecasted transactions during the third quarter of 2018. This did not have a material impact on our Consolidated Financial Statements.
Credit Risk of Financial Instruments
At times, we attempt to minimize our credit exposure to counterparties by entering into derivative transactions and similar agreements with major international financial institutions with "A-" or higher credit ratings as issued by Standard & Poor’s Corporation. Our foreign currency derivatives are typically comprised of over-the-counter forward contracts, swaps or options with major international financial institutions. Although our theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, we believe that the risk of incurring credit risk losses is remote and that such losses, if any, would not be material.
Non-performance of the counterparties on the balance of all the foreign exchange agreements would have resulted in a write-off of
$1.3
at
December 31, 2018
. In addition, in the event of non-performance by such counterparties, we would be exposed to market risk on the underlying items being hedged as a result of changes in foreign exchange rates.
NOTE 12. 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
Other than our defined benefit pension and postretirement plan assets, the assets and liabilities measured at fair value on a recurring basis are comprised of foreign exchange forward contracts (see Note 11, Financial Instruments and Risk Management) and available-for-sale securities, which were immaterial at
December 31, 2018
and
2017
. See Note 14, Employee Benefit Plans, for the fair value hierarchy for our plan assets. The available-for-sale securities include securities held in a trust in order to fund future benefit payments for non-qualified retirement plans (see Note 14, Employee Benefit Plans).
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 (Continued)
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 December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
Available-for-sale securities
|
|
$
|
3.8
|
|
|
$
|
3.8
|
|
|
$
|
3.7
|
|
|
$
|
3.7
|
|
Debt maturing within one year
(1)
|
|
(12.0
|
)
|
|
(12.0
|
)
|
|
(25.7
|
)
|
|
(25.7
|
)
|
Long-term debt
(1)
|
|
(1,581.6
|
)
|
|
(1,460.2
|
)
|
|
(1,872.2
|
)
|
|
(1,718.6
|
)
|
Foreign exchange forward contracts
|
|
(5.1
|
)
|
|
(5.1
|
)
|
|
—
|
|
|
—
|
|
(1)
The carrying value of debt maturing within one year and long-term debt is presented net of debt issuance costs and includes any related discount or premium and unamortized deferred gains on terminated interest-rate swap agreements, as applicable.
The methods and assumptions used to estimate fair value are as follows:
|
|
•
|
Available-for-sale securities - The fair values of these investments were the quoted market prices for issues listed on securities exchanges.
|
|
|
•
|
Debt maturing within one year and long-term debt - The fair values of our debt and other financing were determined using Level 2 inputs based on indicative market prices.
|
|
|
•
|
Foreign exchange forward contracts - The fair values of forward contracts were estimated based on quoted forward foreign exchange prices at the reporting date.
|
NOTE 13. Share-Based Compensation Plans
The Avon Products, Inc. 2013 Stock Incentive Plan, as amended and restated (the “2013 Plan”) and the Avon Products, Inc. 2016 Omnibus Incentive Plan (the "2016 Plan"), which are shareholder-approved plans, provide for several types of share-based incentive compensation awards including stock options, restricted stock, restricted stock units and performance restricted stock units. Following shareholder approval of the 2016 Plan in May 2016, there were no further awards made under the 2013 Plan. Under the 2013 Plan, the maximum number of shares that may be awarded is
55,000,000
shares, where the maximum number of shares are reduced as follows: (i) in the case of the grant of an award of an option or stock appreciation right ("SAR"), by each share subject to such an award and (ii) in the case of the grant of an award payable in shares other than an option or SAR by
3.13
multiplied by each share subject to such an award. Under the 2016 Plan, the maximum number of shares that may be awarded is
48,000,000
shares, where the maximum number of shares are reduced as follows: (i) in the case of the grant of an award of an option or SAR, by each share subject to such an award and (ii) in the case of the grant of an award payable in shares other than an option or SAR by
2.4
multiplied by each share subject to such an award. Shares issued under share-based awards will be primarily funded with issuance of new shares.
We have issued stock options under the 2016 Plan, and restricted stock units and performance restricted stock units under the 2013 Plan and the 2016 Plan. We also have outstanding stock options under our prior shareholder-approved plans. Stock option awards are granted with an exercise price generally at a premium to the closing market price of our stock at the date of grant. Stock options generally vest in thirds over the
three
-year period following each option grant date and have
ten
-year contractual terms. Restricted stock units granted to Associates generally vest and settle after
three
years. Restricted stock units awarded to non-management directors vest in approximately
one
year and settle upon a director's departure from the Board of Directors. Performance restricted stock units generally vest after
three
years only upon the satisfaction of certain performance conditions.
For the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Compensation cost for stock options, performance restricted stock units and restricted stock units
|
|
$
|
13.8
|
|
|
$
|
24.2
|
|
|
$
|
24.0
|
|
Total income tax benefit recognized for share-based arrangements
|
|
2.0
|
|
|
1.4
|
|
|
1.9
|
|
All of the compensation cost for stock options, performance restricted stock units and restricted stock units, including those that will be funded with treasury shares, for
2018
,
2017
and
2016
was recorded in SG&A expenses in our Consolidated Statements of Operations.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Options
During 2018, 2017 and 2016, we granted premium-priced stock options, in which the exercise price was equal to a
25%
premium and
30%
premium, respectively, from the closing market price of our stock price at the date of grant. The premium-priced stock options vest on a
three
-year graded vesting schedule. The fair value of each premium-priced stock option is estimated on the date of grant using a Monte-Carlo simulation. When estimating the fair value of each option, we used the following weighted-average assumptions for options granted during the years ended December 31, 2018, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Risk-free rate
(1)
|
|
2.7%
|
|
2.1%
|
|
1.6%
|
Expected term
(2)
|
|
7 years
|
|
7 years
|
|
7 years
|
Expected Avon volatility
(3)
|
|
42%
|
|
41%
|
|
39%
|
Expected dividends
|
|
—%
|
|
—%
|
|
—%
|
|
|
(1)
|
The risk-free rate was based upon the rate on a zero coupon U.S. Treasury bill, for periods within the contractual life of the option, in effect at the time of grant.
|
|
|
(2)
|
The expected term of the option was based on the vesting terms of the respective option and a contractual life of
10
years.
|
|
|
(3)
|
Expected Avon volatility was based on the daily historical volatility of our stock price, over a period similar to the expected life of the option.
|
The weighted-average grant-date fair value per share of options granted were
$1.04
,
$1.54
and
$1.37
during 2018, 2017 and 2016, respectively.
A summary of stock options as of
December 31, 2018
, and changes during
2018
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in 000’s)
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding at January 1, 2018
|
|
17,165
|
|
|
$
|
14.95
|
|
|
|
|
|
|
|
Granted
|
|
5,952
|
|
|
3.49
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
|
1,082
|
|
|
5.82
|
|
|
|
|
|
|
Expired
|
|
3,073
|
|
|
34.27
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
18,962
|
|
|
$
|
9.05
|
|
|
6.4
|
|
$
|
—
|
|
Exercisable at December 31, 2018
|
|
8,679
|
|
|
$
|
14.05
|
|
|
4.1
|
|
$
|
—
|
|
We recognize expense on stock options using a graded vesting method, which recognizes the associated expense based on the timing of option vesting dates. At
December 31, 2018
, there was
$6.1
of unrecognized compensation cost related to stock options outstanding. That cost is expected to be recognized over a weighted-average period of
1.8
years.
There were no stock options exercised during
2018
, 2017 or 2016.
Restricted Stock Units and Performance Restricted Stock Units
During 2018, 2017 and 2016, we granted performance restricted stock units that would vest and settle after three years based on the relative total shareholder return of our common stock against companies included in the S&P 400 index as of the date of grant over a three year performance period ("2018 PRSUs", "2017 PRSUs" and "2016 PRSUs", respectively). The grant date fair value per share of these awards already reflects the estimated probability of achieving the market condition, and therefore we record the expense ratably over the performance period.
During 2015, we granted performance restricted stock units that would vest and settle after three years only upon the satisfaction of certain performance conditions over two years ("2015 PRSUs"). In addition, if the performance conditions are achieved above target, these performance restricted stock units are subject to a market condition in which the number of performance restricted stock units that vest will be limited to the target amount if the Company’s absolute total shareholder return during the three-year service period is negative. We have adjusted the compensation cost recognized to-date to reflect our performance, which reflects an estimated payout below target, and as such, the absolute total shareholder return market condition will not impact the number of performance restricted stock units that vest.
The fair value of the 2018 PRSUs, 2017 PRSUs, 2016 PRSUs and 2015 PRSUs was estimated on the date of grant using a Monte-Carlo simulation that estimates the fair value based on the Company's share price activity, expected term of the award, risk-free interest rate, expected dividends and the expected volatility of the stock of the Company. When estimating the fair
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
value of the 2018 PRSUs, 2017 PRSUs, 2016 PRSUs and the 2015 PRSUs, we used the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
2018 PRSUs
|
|
2017 PRSUs
|
|
2016 PRSUs
|
|
2015 PRSUs
|
Risk-free rate
(1)
|
|
2.5%
|
|
1.6%
|
|
1.1%
|
|
1.1%
|
Expected Avon volatility
(2)
|
|
61.4%
|
|
61%
|
|
56%
|
|
38%
|
Expected average volatility
(3)
|
|
29.5%
|
|
29%
|
|
28%
|
|
N/A
|
Expected dividends
|
|
—%
|
|
—%
|
|
—%
|
|
3%
|
|
|
(1)
|
The risk-free rate was based upon the rate on a
zero
coupon U.S. Treasury bill, for periods within the
three
year performance period, in effect at the time of grant.
|
|
|
(2)
|
Expected Avon volatility was based on the weekly historical volatility of our stock price, over a period similar to the
three
year performance period of the 2018 PRSUs, 2017 PRSUs and 2016 PRSUs and the three year service period of the 2016 PRSUs.
|
|
|
(3)
|
Expected average volatility was based on the weekly historical volatility of the stock prices of each member of companies included in the S&P 400 index as of the date of the grant, over a period similar to the
three
year performance period of the 2018 PRSUs. 2017 PRSUs and 2016 PRSUs.
|
The weighted-average grant-date fair value per share of the 2018 PRSUs, 2017 PRSUs, 2016 PRSUs and 2015 PRSUs was
$2.63
,
$4.52
,
$4.42
and
$7.49
respectively.
A summary of restricted stock units at
December 31, 2018
, and changes during
2018
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
(in 000’s)
|
|
Weighted-Average
Grant-Date
Fair Value
|
January 1, 2018
|
|
4,804
|
|
|
$
|
5.26
|
|
Granted
|
|
2,433
|
|
|
2.61
|
|
Vested
|
|
(1,705
|
)
|
|
7.06
|
|
Forfeited
|
|
(534
|
)
|
|
4.45
|
|
December 31, 2018
|
|
4,998
|
|
|
$
|
3.37
|
|
A summary of performance restricted stock units at
December 31, 2018
, and changes during
2018
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Performance Restricted
Stock Units
(in 000’s)
|
|
Weighted-Average
Grant-Date
Fair Value
|
January 1, 2018
(1)
|
|
4,356
|
|
|
$
|
5.50
|
|
Granted
|
|
1,301
|
|
|
2.93
|
|
Vested
|
|
(986
|
)
|
|
7.49
|
|
Forfeited
|
|
(1,494
|
)
|
|
5.93
|
|
December 31, 2018
(1)
|
|
3,177
|
|
|
$
|
3.76
|
|
(1)
Based on initial target payout.
The total fair value of restricted stock units and performance restricted stock units that vested during
2018
was
$7.2
, based upon market prices on the vesting dates. At
December 31, 2018
, there was
$9.5
of unrecognized compensation cost related to these restricted stock units and performance restricted stock units compensation arrangements outstanding. That cost is expected to be recognized over a weighted-average period of
1.7
years.
Later in 2015, we granted
1,123,183
performance restricted stock units that vested and settled in 2016 only upon the satisfaction of certain performance conditions through 2015. The terms of this award did not result in a fair value measurement date until 2016. During 2016 we recognized compensation cost of
$2.0
for these performance restricted stock units. As this award vested and settled in 2016, no additional compensation cost was recognized in 2018 and 2017.
Restricted Stock Units and Performance Restricted Stock Units Funded With Treasury Shares
In March 2018, we granted
200,000
performance restricted stock units that will be funded with treasury shares, outside of the 2016 Plan, in reliance upon The New York Stock Exchange rules. These performance restricted stock units have a weighted-average grant-date fair value of
$2.79
and would vest and settle after
three years
only upon the satisfaction of certain performance conditions over
one year
. During 2018,
none
of these performance restricted stock units vested, and
200,000
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
performance restricted stock units were outstanding at December 31, 2018. During 2018, we recognized compensation cost of
$.1
for these performance restricted stock units. At December 31, 2018, there was
$.4
unrecognized compensation cost related to these performance restricted stock units.
In February 2018 we granted
600,000
restricted stock units that will be funded from treasury shares, outside of our shareholder-approved plans, in reliance upon The New York Stock Exchange rules. The restricted stock units granted in February 2018 have a weighted-average grant-date fair value of
$2.25
and vest and settle in full after
three years
. During 2018,
none
of these restricted stock units vested, and there were
600,000
restricted stock units outstanding at December 31, 2018. During 2018 we recognized compensation cost of
$.4
for these restricted stock units. At December 31, 2018, there was
$.9
unrecognized compensation cost related to these restricted stock units.
In March 2015, we granted
121,951
performance restricted stock units that will be funded with treasury shares, outside of the 2013 Plan, in reliance upon The New York Stock Exchange rules. These performance restricted stock units have a weighted-average grant-date fair value of
$7.49
and the same terms exist for these awards as the 2015 PRSUs discussed above. During 2018,
121951
of these restricted stock units vested, and no performance restricted stock units were outstanding at December 31, 2018. During 2018, 2017 and 2016, we recognized compensation cost of
$.0
,
$.1
and
$.1
, respectively, for these performance restricted stock units. At
December 31, 2018
, there was no unrecognized compensation cost related to these performance restricted stock units.
In March 2015 and April 2012, we granted
489,596
and
200,000
restricted stock units, respectively, that will be funded with treasury shares, outside of our shareholder-approved plans, in reliance upon The New York Stock Exchange rules. The restricted stock units granted in March 2015 have a weighted-average grant-date fair value of
$9.00
and vest and settle ratably over
three
years. The restricted stock units granted in April 2012 had a weighted-average grant-date fair value of
$21.69
and vested and settled ratably over
five
years. During 2018,
163,198
of these restricted stock units vested, and there were
no
restricted stock units were outstanding at December 31, 2018. During 2018, 2017 and 2016, we recognized compensation cost of
$.1
,
$.8
and
$1.7
, respectively, for these restricted stock units. At
December 31, 2018
, there was
no
unrecognized compensation cost related to these restricted stock units as the awards had vested.
NOTE 14. Employee Benefit Plans
Defined Contribution Plans
We offer a defined contribution plan for employees in the United Kingdom ("UK"), which allows eligible participants to contribute eligible compensation through payroll deductions. We double employee contributions up to the first
5%
of eligible compensation and therefore the maximum level provided by Avon is
10%
of eligible compensation. We made matching contributions in cash to the UK defined contribution plan of
$5.9
in 2018, $
6.7
in 2017 and $
6.5
in 2016, which follow the same investment allocation that the participant has selected for his or her own contributions.
We also offer a qualified defined contribution plan for U.S.-based employees, the Avon Personal Savings Account Plan (the "PSA"), which allows eligible participants to contribute up to
25%
of eligible compensation through payroll deductions. We match employee contributions dollar for dollar up to the first
3%
of eligible compensation and fifty cents for each dollar contributed from
4%
to
6%
of eligible compensation. We made matching contributions in cash to the PSA of
$2.2
in
2018
,
$2.6
in
2017
and
$3.8
in
2016
, which follow the same investment allocation that the participant has selected for his or her own contributions. Prior to the separation of the North America business, the costs associated with the contributions to the PSA were allocated between Discontinued Operations and Global as the plan included both North America and U.S. Corporate Avon associates. See Note 3, Discontinued Operations and Assets and Liabilities Held for Sale.
For U.S.-based employees hired on or after January 1, 2015, we made additional contributions to a Retirement Savings Account ("RSA") within the PSA. Such contributions will range from
3%
to
6%
of a participant's eligible compensation depending on the sum of the participant's age and length of service (as of December 31 of the prior year). Investment of such contributions will follow the same investment allocation that the participant has selected for his or her own contributions to the PSA. A participant will be vested in the RSA generally after
three
full years of applicable service.
Defined Benefit Pension and Postretirement Plans
Avon and certain subsidiaries have contributory and noncontributory defined benefit retirement plans for substantially all employees of those subsidiaries. Benefits under these plans are generally based on an employee’s length of service and average compensation near retirement, and certain plans have vesting requirements. Plans are funded based on legal requirements and cash flow.
Our largest non-U.S. defined benefit pension plan is in the UK. The UK defined benefit pension plan was frozen for future accruals as of April 1, 2013. The U.S. defined benefit pension plan, the Avon Products, Inc. Personal Retirement Account Plan (the "PRA"), is closed to employees hired on or after January 1, 2015. Qualified retirement benefits for U.S.-based employees hired on or after January 1, 2015 will be provided solely through the PSA, as described above.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As part of the separation of the North America business, in 2016 we transferred
$499.6
of pension liabilities under the PRA 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 PRA, 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 Assets and Liabilities Held for Sale. We continue to retain certain U.S. pension and other postretirement liabilities primarily associated with employees who are actively employed by Avon in the U.S. providing services other than with respect to the North America business.
Prior to this separation, our net periodic benefit costs for the U.S. pension and postretirement benefit plans were allocated between Discontinued Operations and Global as the plan included both North America and U.S. Corporate Avon associates.
We provide health care benefits, subject to certain limitations, to certain retired associates in the U.S. and certain foreign countries. In the U.S., such health care benefits for Corporate Avon associates hired on or before January 1, 2005 are in the form of a health reimbursement account. U.S. Corporate Avon associates hired after January 1, 2005 are not eligible for retiree health care benefits. Certain retiree health care obligations for current and former employees of the North America business and certain other former Avon employees based in the U.S. were transferred to New Avon.
We recognize the funded status of defined benefit pension and other postretirement benefit plans on the balance sheet. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. The recognition of prior service costs or credits and net actuarial gains or losses, as well as subsequent changes in the funded status, are recognized as components of AOCI, net of tax, in shareholders’ equity, until they are amortized as a component of net periodic benefit cost. We recognize prior service costs or credits and actuarial gains and losses beyond a 10% corridor to earnings based on the estimated future service period of the participants. The determination of the 10% corridor utilizes a calculated value of plan assets for our more significant plans, whereby gains and losses are smoothed over
three
- and
five
-year periods.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reconciliation of Benefit Obligations, Plan Assets and Funded Status
The following table summarizes changes in the benefit obligation, plan assets and the funded status of our significant defined benefit pension and postretirement plans. We use a December 31 measurement date for all of our employee benefit plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Postretirement Benefits
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Change in Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(88.9
|
)
|
|
$
|
(87.6
|
)
|
|
$
|
(714.2
|
)
|
|
$
|
(652.9
|
)
|
|
$
|
(28.2
|
)
|
|
$
|
(26.0
|
)
|
Service cost
|
|
(2.9
|
)
|
|
(4.3
|
)
|
|
(4.7
|
)
|
|
(4.6
|
)
|
|
(.1
|
)
|
|
(.1
|
)
|
Interest cost
|
|
(2.3
|
)
|
|
(3.0
|
)
|
|
(15.4
|
)
|
|
(18.0
|
)
|
|
(1.1
|
)
|
|
(1.3
|
)
|
Actuarial (loss) gain
|
|
9.9
|
|
|
.6
|
|
|
47.4
|
|
|
(15.5
|
)
|
|
1.2
|
|
|
.3
|
|
Benefits paid
|
|
7.8
|
|
|
5.4
|
|
|
35.5
|
|
|
42.5
|
|
|
1.4
|
|
|
.4
|
|
Actual expenses and taxes
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Plan amendments
|
|
—
|
|
|
—
|
|
|
(2.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Curtailments
|
|
1.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
—
|
|
|
—
|
|
|
2.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Special termination benefits
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.1
|
)
|
|
—
|
|
Foreign currency changes and other
|
|
—
|
|
|
—
|
|
|
33.5
|
|
|
(65.7
|
)
|
|
.9
|
|
|
(1.5
|
)
|
Ending balance
|
|
$
|
(74.7
|
)
|
|
$
|
(88.9
|
)
|
|
$
|
(617.0
|
)
|
|
$
|
(714.2
|
)
|
|
$
|
(26.0
|
)
|
|
$
|
(28.2
|
)
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
63.1
|
|
|
$
|
51.4
|
|
|
$
|
705.4
|
|
|
$
|
613.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
|
(5.4
|
)
|
|
5.5
|
|
|
(27.7
|
)
|
|
49.9
|
|
|
—
|
|
|
—
|
|
Company contributions
|
|
12.8
|
|
|
11.6
|
|
|
11.6
|
|
|
19.7
|
|
|
1.4
|
|
|
.4
|
|
Benefits paid
|
|
(7.8
|
)
|
|
(5.4
|
)
|
|
(35.5
|
)
|
|
(42.5
|
)
|
|
(1.4
|
)
|
|
(.4
|
)
|
Settlements
|
|
—
|
|
|
—
|
|
|
(2.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency changes and other
|
|
—
|
|
|
—
|
|
|
(35.4
|
)
|
|
64.6
|
|
|
—
|
|
|
—
|
|
Ending balance
|
|
$
|
62.7
|
|
|
$
|
63.1
|
|
|
$
|
615.8
|
|
|
$
|
705.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded Status:
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(12.0
|
)
|
|
$
|
(25.8
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(8.8
|
)
|
|
$
|
(26.0
|
)
|
|
$
|
(28.2
|
)
|
Amount Recognized in Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
88.1
|
|
|
$
|
82.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued compensation
|
|
(1.0
|
)
|
|
(1.0
|
)
|
|
(2.8
|
)
|
|
(2.2
|
)
|
|
(4.5
|
)
|
|
(2.7
|
)
|
Employee benefit plans liability
|
|
(11.0
|
)
|
|
(24.8
|
)
|
|
(86.5
|
)
|
|
(88.6
|
)
|
|
(21.5
|
)
|
|
(25.5
|
)
|
Net amount recognized
|
|
$
|
(12.0
|
)
|
|
$
|
(25.8
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(8.8
|
)
|
|
$
|
(26.0
|
)
|
|
$
|
(28.2
|
)
|
Pretax Amounts Recognized in Accumulated Other Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
33.1
|
|
|
$
|
41.4
|
|
|
$
|
173.6
|
|
|
$
|
176.8
|
|
|
$
|
—
|
|
|
$
|
1.2
|
|
Prior service (credit) cost
|
|
(.1
|
)
|
|
(.2
|
)
|
|
1.3
|
|
|
(.9
|
)
|
|
.6
|
|
|
(1.3
|
)
|
Total pretax amount recognized
|
|
$
|
33.0
|
|
|
$
|
41.2
|
|
|
$
|
174.9
|
|
|
$
|
175.9
|
|
|
$
|
.6
|
|
|
$
|
(.1
|
)
|
Supplemental Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
72.7
|
|
|
$
|
85.9
|
|
|
$
|
179.9
|
|
|
$
|
199.8
|
|
|
N/A
|
|
|
N/A
|
|
Plans with Projected Benefit Obligation in Excess of Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
74.7
|
|
|
$
|
88.9
|
|
|
$
|
195.3
|
|
|
$
|
216.7
|
|
|
N/A
|
|
|
N/A
|
|
Fair value plan assets
|
|
62.7
|
|
|
63.1
|
|
|
106.0
|
|
|
125.9
|
|
|
N/A
|
|
|
N/A
|
|
Plans with Accumulated Benefit Obligation in Excess of Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
74.7
|
|
|
$
|
88.9
|
|
|
$
|
185.7
|
|
|
$
|
202.0
|
|
|
N/A
|
|
|
N/A
|
|
Accumulated benefit obligation
|
|
72.7
|
|
|
85.9
|
|
|
174.6
|
|
|
191.9
|
|
|
N/A
|
|
|
N/A
|
|
Fair value plan assets
|
|
62.7
|
|
|
63.1
|
|
|
98.0
|
|
|
114.0
|
|
|
N/A
|
|
|
N/A
|
|
The U.S. pension plans include a funded qualified plan (the PRA) and unfunded non-qualified plans. At
December 31, 2018
, the PRA had benefit obligations of
$65.4
and plan assets of
$62.7
. At
December 31, 2017
, the PRA had benefit obligations of
$76.7
and plan assets of
$63.0
. We believe we have adequate investments and cash flows to fund the liabilities associated with the unfunded non-qualified plans. The Non-U.S. pension plans include a funded qualified pension plan in the UK. At
December 31, 2018
, the UK qualified pension plan had benefit obligations of
$416.5
and plan assets of
$501.7
. At
December 31, 2017
, the UK qualified pension plan had benefit obligations of
$494.0
and plan assets of
$573.6
.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Postretirement Benefits
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2.9
|
|
|
$
|
4.3
|
|
|
$
|
6.4
|
|
|
$
|
4.7
|
|
|
$
|
4.6
|
|
|
$
|
5.0
|
|
|
$
|
.1
|
|
|
$
|
.1
|
|
|
$
|
.1
|
|
Interest cost
|
|
2.3
|
|
|
3.0
|
|
|
6.5
|
|
|
15.4
|
|
|
18.0
|
|
|
21.8
|
|
|
1.1
|
|
|
1.3
|
|
|
1.7
|
|
Expected return on plan assets
|
|
(3.5
|
)
|
|
(3.2
|
)
|
|
(8.2
|
)
|
|
(31.9
|
)
|
|
(28.2
|
)
|
|
(33.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
|
—
|
|
|
(.1
|
)
|
|
(.2
|
)
|
|
(.1
|
)
|
|
(.1
|
)
|
|
(.1
|
)
|
|
(.4
|
)
|
|
(.3
|
)
|
|
(1.2
|
)
|
Amortization of net actuarial losses
|
|
4.1
|
|
|
5.2
|
|
|
10.8
|
|
|
6.8
|
|
|
7.6
|
|
|
6.5
|
|
|
—
|
|
|
.1
|
|
|
.3
|
|
Settlements/curtailments
|
|
1.4
|
|
|
—
|
|
|
.1
|
|
|
(.4
|
)
|
|
3.7
|
|
|
.3
|
|
|
(.3
|
)
|
|
—
|
|
|
(.1
|
)
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
(.7
|
)
|
|
—
|
|
|
.1
|
|
|
1.6
|
|
|
—
|
|
Net periodic benefit cost
(1)
|
|
$
|
7.2
|
|
|
$
|
9.2
|
|
|
$
|
15.4
|
|
|
$
|
(5.5
|
)
|
|
$
|
4.9
|
|
|
$
|
.5
|
|
|
$
|
.7
|
|
|
$
|
2.8
|
|
|
$
|
.8
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Loss) Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (gains) losses
|
|
$
|
(2.8
|
)
|
|
$
|
(2.9
|
)
|
|
$
|
13.6
|
|
|
$
|
12.2
|
|
|
$
|
(7.4
|
)
|
|
$
|
(24.6
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(.3
|
)
|
|
$
|
(2.6
|
)
|
Prior service cost (credit)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
1.0
|
|
Amortization of prior service credit
|
|
.1
|
|
|
.1
|
|
|
1.3
|
|
|
.1
|
|
|
.1
|
|
|
.1
|
|
|
.6
|
|
|
.3
|
|
|
26.7
|
|
Amortization of net actuarial losses
|
|
(5.6
|
)
|
|
(5.2
|
)
|
|
(274.4
|
)
|
|
(6.4
|
)
|
|
(11.3
|
)
|
|
(7.8
|
)
|
|
—
|
|
|
(.1
|
)
|
|
(11.3
|
)
|
Foreign currency changes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9.1
|
)
|
|
18.9
|
|
|
(29.6
|
)
|
|
—
|
|
|
—
|
|
|
(.1
|
)
|
Total recognized in other comprehensive (loss) income*
|
|
$
|
(8.3
|
)
|
|
$
|
(8.0
|
)
|
|
$
|
(259.5
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
.3
|
|
|
$
|
(61.9
|
)
|
|
$
|
(.6
|
)
|
|
$
|
(.1
|
)
|
|
$
|
13.7
|
|
Total recognized in net periodic benefit cost and other comprehensive income (loss)
|
|
$
|
(1.1
|
)
|
|
$
|
1.2
|
|
|
$
|
(244.1
|
)
|
|
$
|
(6.5
|
)
|
|
$
|
5.2
|
|
|
$
|
(61.4
|
)
|
|
$
|
.1
|
|
|
$
|
2.7
|
|
|
$
|
14.5
|
|
(1)
Includes
$4.4
of the U.S. pension plans in 2016, and immaterial amounts of the postretirement benefit plans (related to the U.S.) in 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.
* Amounts represent the pre-tax effect classified within other comprehensive (loss) income. The net of tax amounts are classified within our Consolidated Statements of Comprehensive Income (Loss).
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.
The amounts in AOCI that are expected to be recognized as components of net periodic benefit cost during
2019
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Postretirement
Benefits
|
Net actuarial loss
|
|
$
|
3.0
|
|
|
$
|
5.0
|
|
|
$
|
—
|
|
Prior service credit
|
|
—
|
|
|
—
|
|
|
(.2
|
)
|
Assumptions
Weighted-average assumptions used to determine benefit obligations recorded in our Consolidated Balance Sheets as of December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Benefits
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Discount rate
|
|
4.24
|
%
|
|
3.48
|
%
|
|
2.91
|
%
|
|
2.56
|
%
|
|
5.17
|
%
|
|
4.75
|
%
|
Rate of compensation increase
|
|
4.00
|
%
|
|
4.00
|
%
|
|
2.69
|
%
|
|
2.71
|
%
|
|
N/A
|
|
|
N/A
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The discount rate used for determining the present value of future pension obligations for each individual defined benefit pension plan is based on a review of bonds that receive a high-quality rating from a recognized rating agency. The discount rates for our more significant plans, including the UK defined benefit pension plan and the PRA, were based on the internal rates of return for a portfolio of high-quality bonds with maturities that are consistent with the projected future benefit payment obligations of each plan. The weighted-average discount rate for U.S. and non-U.S. defined benefit pension plans determined on this basis has increased to
3.06%
at
December 31, 2018
, from
2.66%
at
December 31, 2017
.
Effective as of January 1, 2018, we changed the method we use to estimate the service and interest cost components of net periodic benefit cost for the PRA and the majority of our significant non-U.S. pension plans, including the UK defined benefit pension plan. Historically, including in 2017, we estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2018, we have elected to use a full yield curve approach in the estimation of these components of net periodic benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We have made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates, which we believe results in a more precise measurement of service and interest costs.
Weighted-average assumptions used to determine net benefit cost recorded in our Consolidated Statements of Operations for the years ended December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Postretirement Benefits
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Discount rate
|
|
3.48
|
%
|
|
3.67
|
%
|
|
4.19
|
%
|
|
2.56
|
%
|
|
2.69
|
%
|
|
3.58
|
%
|
|
4.75
|
%
|
|
5.33
|
%
|
|
4.50
|
%
|
Rate of compensation increase
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
2.71
|
%
|
|
2.79
|
%
|
|
2.94
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Rate of return on assets
|
|
5.50
|
%
|
|
5.50
|
%
|
|
7.00
|
%
|
|
5.20
|
%
|
|
5.09
|
%
|
|
6.40
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
In determining the long-term rates of return, we consider the nature of each plan’s investments, an expectation for each plan’s investment strategies, historical rates of return and current economic forecasts, among other factors. We generally evaluate the expected rate of return on plan assets annually and adjust as necessary. In determining the net cost for the year ended
December 31, 2018
, the assumed rate of return on assets globally was
5.23%
, which represents the weighted-average rate of return on all plan assets. Amounts associated with the pension and postretirement benefit plans in Canada and the postretirement benefit plan in Puerto Rico, which are associated with discontinued operations, have been excluded from all amounts above.
A significant portion of our pension plan assets relate to the UK defined benefit pension plan. The assumed rate of return for determining
2018
net periodic benefit cost for the UK defined benefit pension plan was
5.20%
. In addition, the 2018 rate of return assumption for the UK defined benefit pension plan was based on an asset allocation of approximately
80%
in corporate and government bonds and mortgage-backed securities (which are expected to earn approximately
2%
to
4%
in the long-term) and approximately
20%
in equity securities, emerging market debt and high yield securities (which are expected to earn approximately
5%
to
9%
in the long-term). In addition to the physical assets, the asset portfolio for the UK defined benefit pension plan has derivative instruments which increase our exposure to fixed income (in order to better match liabilities) and, to a lesser extent, impact our equity exposure.
Historically, the pension plan with the most significant pension plan assets was the PRA. The assumed rate of return for determining
2018
net periodic benefit cost for the PRA was
5.50%
. In addition, the 2018 rate of return assumption for the PRA was based on an asset allocation of approximately
70%
in corporate and government bonds (which are expected to earn approximately
3%
to
5%
in the long-term) and approximately
30%
in equity securities (which are expected to earn approximately
6%
to
8%
in the long-term).
Similar assessments were performed in determining rates of return on other non-U.S. defined benefit pension plan assets, to arrive at our weighted-average assumed rate of return of
5.20%
for determining
2018
net cost for all non-US defined benefit pension plan assets.
Plan Assets
Our U.S. and non-U.S. funded defined benefit pension plans target and weighted-average asset allocations at
December 31, 2018
and
2017
, by asset category were as follows:
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plan
|
|
Non-U.S. Pension Plans
|
|
|
% of Plan Assets
|
|
% of Plan Assets
|
|
|
Target
|
|
at Year-End
|
|
Target
|
|
at Year-End
|
Asset Category
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Equity securities
|
|
30
|
%
|
|
30
|
%
|
|
30
|
%
|
|
15
|
%
|
|
16
|
%
|
|
18
|
%
|
Debt securities
|
|
70
|
|
|
70
|
|
|
70
|
|
|
80
|
|
|
79
|
|
|
77
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
|
6
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The following tables present the fair value hierarchy for pension assets measured at fair value on a recurring basis as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plan
|
Asset Category
|
|
Level 1
|
|
Level 2
|
|
Total
|
Equity Securities:
|
|
|
|
|
|
|
Domestic equity
|
|
$
|
—
|
|
|
$
|
8.4
|
|
|
$
|
8.4
|
|
International equity
|
|
—
|
|
|
6.3
|
|
|
6.3
|
|
Emerging markets
|
|
—
|
|
|
1.8
|
|
|
1.8
|
|
|
|
—
|
|
|
16.5
|
|
|
16.5
|
|
Fixed Income Securities:
|
|
|
|
|
|
|
Corporate bonds
|
|
—
|
|
|
32.2
|
|
|
32.2
|
|
Government securities
|
|
—
|
|
|
13.3
|
|
|
13.3
|
|
|
|
—
|
|
|
45.5
|
|
|
45.5
|
|
Cash
|
|
.7
|
|
|
|
|
|
.7
|
|
Total
|
|
$
|
.7
|
|
|
$
|
62.0
|
|
|
$
|
62.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Pension Plans
|
Asset Category
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Equity Securities:
|
|
|
|
|
|
|
|
|
Domestic equity
|
|
$
|
—
|
|
|
$
|
25.8
|
|
|
$
|
—
|
|
|
$
|
25.8
|
|
International equity
|
|
—
|
|
|
72.5
|
|
|
—
|
|
|
72.5
|
|
|
|
—
|
|
|
98.3
|
|
|
—
|
|
|
98.3
|
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
—
|
|
|
212.7
|
|
|
—
|
|
|
212.7
|
|
Government securities
|
|
—
|
|
|
201.7
|
|
|
—
|
|
|
201.7
|
|
Other
|
|
—
|
|
|
70.1
|
|
|
—
|
|
|
70.1
|
|
|
|
—
|
|
|
484.5
|
|
|
—
|
|
|
484.5
|
|
Other
|
|
|
|
|
|
|
|
|
Cash
|
|
35.1
|
|
|
—
|
|
|
—
|
|
|
35.1
|
|
Derivatives
|
|
—
|
|
|
(4.1
|
)
|
|
—
|
|
|
(4.1
|
)
|
Real estate
|
|
—
|
|
|
—
|
|
|
2.0
|
|
|
2.0
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
35.1
|
|
|
(4.1
|
)
|
|
2.0
|
|
|
33.0
|
|
Total
|
|
$
|
35.1
|
|
|
$
|
578.7
|
|
|
$
|
2.0
|
|
|
$
|
615.8
|
|