ITEM 1. FINANCIAL STATEMENTS
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
(In millions, except per share data)
|
September 30, 2019
|
|
September 30, 2018
|
|
Product sales
|
$
|
1,117.2
|
|
|
$
|
1,346.3
|
|
|
Other revenue
|
70.8
|
|
|
77.9
|
|
|
Total revenue
|
1,188.0
|
|
|
1,424.2
|
|
|
Costs, expenses and other:
|
|
|
|
|
Cost of sales
|
(468.2)
|
|
|
(538.4)
|
|
|
Selling, general and administrative expenses
|
(622.1)
|
|
|
(698.9)
|
|
|
|
|
|
|
|
Operating profit
|
97.7
|
|
|
186.9
|
|
|
|
|
|
|
|
Interest expense
|
(32.0)
|
|
|
(31.3)
|
|
|
Loss on extinguishment of debt and credit facilities
|
(8.1)
|
|
|
—
|
|
|
Interest income
|
2.1
|
|
|
4.3
|
|
|
Other income (expense), net
|
57.9
|
|
|
22.2
|
|
|
Gain on sale of business/assets
|
26.8
|
|
|
—
|
|
|
Total other income (expenses)
|
46.7
|
|
|
(4.8)
|
|
|
|
|
|
|
|
Income from continuing operations, before income taxes
|
144.4
|
|
|
182.1
|
|
|
Income taxes
|
(31.5)
|
|
|
(68.3)
|
|
|
Income from continuing operations, net of tax
|
112.9
|
|
|
113.8
|
|
|
Loss from discontinued operations, net of tax
|
(6.3)
|
|
|
—
|
|
|
Net income
|
106.6
|
|
|
113.8
|
|
|
Net loss attributable to noncontrolling interests
|
.3
|
|
|
.7
|
|
|
Net income attributable to Avon
|
$
|
106.9
|
|
|
$
|
114.5
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
|
|
Basic
|
|
|
|
|
Basic from continuing operations
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
Basic from discontinued operations
|
(0.01)
|
|
|
—
|
|
|
Basic attributable to Avon
|
$
|
0.20
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
Diluted from continuing operations
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
Diluted from discontinued operations
|
(0.01)
|
|
|
—
|
|
|
Diluted attributable to Avon
|
$
|
0.20
|
|
|
$
|
0.21
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
(In millions, except per share data)
|
September 30, 2019
|
|
September 30, 2018
|
|
Product sales
|
$
|
3,342.2
|
|
|
$
|
3,924.7
|
|
|
Other revenue
|
207.5
|
|
|
244.9
|
|
|
Total revenue
|
3,549.7
|
|
|
4,169.6
|
|
|
Costs, expenses and other:
|
|
|
|
|
Cost of sales
|
(1,482.7)
|
|
|
(1,657.8)
|
|
|
Selling, general and administrative expenses
|
(1,942.7)
|
|
|
(2,227.0)
|
|
|
|
|
|
|
|
Operating profit
|
124.3
|
|
|
284.8
|
|
|
|
|
|
|
|
Interest expense
|
(95.9)
|
|
|
(102.0)
|
|
|
Loss on extinguishment of debt
|
(10.1)
|
|
|
(2.9)
|
|
|
Interest income
|
5.3
|
|
|
12.0
|
|
|
Other income (expense), net
|
87.3
|
|
|
.3
|
|
|
Gain on sale of business/assets
|
50.3
|
|
|
—
|
|
|
Total other income (expenses)
|
36.9
|
|
|
(92.6)
|
|
|
|
|
|
|
|
Income before income taxes
|
161.2
|
|
|
192.2
|
|
|
Income taxes
|
(78.2)
|
|
|
(136.5)
|
|
|
Income from continuing operations, net of tax
|
83.0
|
|
|
55.7
|
|
|
Loss from discontinued operations, net of tax
|
(29.0)
|
|
|
—
|
|
|
Net income
|
54.0
|
|
|
55.7
|
|
|
Net loss attributable to noncontrolling interests
|
.7
|
|
|
2.4
|
|
|
Net income attributable to Avon
|
$
|
54.7
|
|
|
$
|
58.1
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
|
|
Basic
|
|
|
|
|
Basic from continuing operations
|
$
|
0.14
|
|
|
$
|
0.09
|
|
|
Basic from discontinued operations
|
(0.06)
|
|
|
—
|
|
|
Basic attributable to Avon
|
$
|
0.08
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
Diluted from continuing operations
|
$
|
0.14
|
|
|
$
|
0.09
|
|
|
Diluted from discontinued operations
|
(0.06)
|
|
|
—
|
|
|
Diluted attributable to Avon
|
$
|
0.08
|
|
|
$
|
0.09
|
|
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
(In millions)
|
September 30, 2019
|
|
September 30, 2018
|
|
Net income
|
$
|
106.6
|
|
|
$
|
113.8
|
|
|
Other comprehensive loss:
|
|
|
|
|
Foreign currency translation adjustments
|
—
|
|
|
0.8
|
|
|
Unrealized losses on revaluation of long-term intercompany balances, net of taxes of $0.0
|
(19.1)
|
|
|
(4.6)
|
|
|
Change in unrealized gains/losses on cash flow hedges, net of taxes of $0.0
|
.1
|
|
|
—
|
|
|
Adjustments and amortization of net actuarial loss and prior service cost, net of taxes of $0.2 and $0.1
|
1.6
|
|
|
2.1
|
|
|
Sale of business
|
(3.4)
|
|
|
—
|
|
|
Total other comprehensive loss, net of income taxes
|
(20.8)
|
|
|
(1.7)
|
|
|
Comprehensive income
|
85.8
|
|
|
112.1
|
|
|
Less: comprehensive loss attributable to noncontrolling interests
|
(.3)
|
|
|
(0.9)
|
|
|
Comprehensive income attributable to Avon
|
$
|
86.1
|
|
|
$
|
113.0
|
|
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
(In millions)
|
September 30, 2019
|
|
September 30, 2018
|
|
Net income
|
$
|
54.0
|
|
|
$
|
55.7
|
|
|
Other comprehensive income:
|
|
|
|
|
Foreign currency translation adjustments
|
1.3
|
|
|
(49.1)
|
|
|
Unrealized losses on revaluation of long-term intercompany balances, net of taxes of $0.0
|
(19.4)
|
|
|
(48.7)
|
|
|
Change in unrealized gains/losses on cash flow hedges, net of taxes of $0.0
|
(2.5)
|
|
|
—
|
|
|
Adjustments of and amortization of net actuarial loss and prior service cost, net of taxes of $0.5 and $0.4
|
4.7
|
|
|
7.8
|
|
|
Sale of business
|
(3.4)
|
|
|
—
|
|
|
Total other comprehensive loss, net of income taxes
|
(19.3)
|
|
|
(90.0)
|
|
|
Comprehensive income (loss)
|
34.7
|
|
|
(34.3)
|
|
|
Less: comprehensive loss attributable to noncontrolling interests
|
(.8)
|
|
|
(2.8)
|
|
|
Comprehensive income (loss) attributable to Avon
|
$
|
35.5
|
|
|
$
|
(31.5)
|
|
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2018 (Audited) and September 30, 2019 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30,
2019
|
|
December 31,
2018
|
|
Assets
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
564.2
|
|
|
$
|
532.7
|
|
|
Accounts receivable, net
|
303.0
|
|
|
349.7
|
|
|
Inventories
|
499.4
|
|
|
542.0
|
|
|
Prepaid expenses and other
|
265.4
|
|
|
272.0
|
|
|
Assets held for sale
|
18.3
|
|
|
65.6
|
|
|
|
|
|
|
|
Total current assets
|
1,650.3
|
|
|
1,762.0
|
|
|
Property, plant and equipment, at cost
|
1,101.4
|
|
|
1,207.8
|
|
|
Less accumulated depreciation
|
(624.4)
|
|
|
(650.2)
|
|
|
Property, plant and equipment, net
|
477.0
|
|
|
557.6
|
|
|
Right-of-use assets
|
172.3
|
|
|
—
|
|
|
Goodwill
|
82.5
|
|
|
87.4
|
|
|
Deferred tax asset
|
174.2
|
|
|
212.6
|
|
|
Other assets
|
513.9
|
|
|
390.4
|
|
|
|
|
|
|
|
Total assets
|
$
|
3,070.2
|
|
|
$
|
3,010.0
|
|
|
Liabilities, Series C Convertible Preferred Stock and Shareholders’ Deficit
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Debt maturing within one year
|
$
|
116.2
|
|
|
$
|
12.0
|
|
|
Accounts payable
|
642.0
|
|
|
816.5
|
|
|
Accrued compensation
|
104.4
|
|
|
85.5
|
|
|
Other accrued liabilities
|
387.9
|
|
|
451.3
|
|
|
Sales taxes and taxes other than income
|
98.2
|
|
|
103.9
|
|
|
Income taxes
|
10.4
|
|
|
15.9
|
|
|
Held for sale liabilities
|
—
|
|
|
11.4
|
|
|
Current liabilities of discontinued operations
|
14.2
|
|
|
—
|
|
|
Total current liabilities
|
1,373.3
|
|
|
1,496.5
|
|
|
Long-term debt
|
1,589.1
|
|
|
1,581.6
|
|
|
Long-term operating lease liability
|
141.7
|
|
|
—
|
|
|
Employee benefit plans
|
128.2
|
|
|
128.3
|
|
|
Long-term income taxes
|
127.4
|
|
|
136.2
|
|
|
Other liabilities
|
74.6
|
|
|
72.1
|
|
|
|
|
|
|
|
Total liabilities
|
3,434.3
|
|
|
3,414.7
|
|
|
|
|
|
|
|
Series C convertible preferred stock
|
511.1
|
|
|
492.1
|
|
|
|
|
|
|
|
Shareholders’ Deficit
|
|
|
|
|
Common stock
|
190.4
|
|
|
190.3
|
|
|
Additional paid-in capital
|
2,310.5
|
|
|
2,303.6
|
|
|
Retained earnings
|
2,270.0
|
|
|
2,234.3
|
|
|
Accumulated other comprehensive loss
|
(1,049.7)
|
|
|
(1,030.4)
|
|
|
Treasury stock, at cost
|
(4,603.3)
|
|
|
(4,602.3)
|
|
|
Total Avon shareholders’ deficit
|
(882.1)
|
|
|
(904.5)
|
|
|
Noncontrolling interests
|
6.9
|
|
|
7.7
|
|
|
Total shareholders’ deficit
|
(875.2)
|
|
|
(896.8)
|
|
|
Total liabilities, series C convertible preferred stock and shareholders’ deficit
|
$
|
3,070.2
|
|
|
$
|
3,010.0
|
|
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
(In millions)
|
September 30, 2019
|
|
September 30, 2018
|
|
September 30, 2019
|
|
September 30, 2018
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
$
|
106.6
|
|
|
$
|
113.8
|
|
|
$
|
54.0
|
|
|
$
|
55.7
|
|
|
Loss from discontinued operations, net of tax
|
(6.3)
|
|
|
—
|
|
|
(29.0)
|
|
|
—
|
|
|
Income from continuing operations, net of tax
|
112.9
|
|
|
113.8
|
|
|
83.0
|
|
|
55.7
|
|
|
Adjustments to reconcile net income from continuing operations to net cash provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
18.1
|
|
|
19.5
|
|
|
54.6
|
|
|
61.1
|
|
|
Amortization
|
5.9
|
|
|
6.5
|
|
|
18.7
|
|
|
20.3
|
|
|
Provision for doubtful accounts
|
28.2
|
|
|
40.7
|
|
|
86.9
|
|
|
126.9
|
|
|
Provision for obsolescence
|
6.0
|
|
|
9.2
|
|
|
22.2
|
|
|
22.5
|
|
|
Share-based compensation
|
3.7
|
|
|
2.0
|
|
|
8.9
|
|
|
9.5
|
|
|
Foreign exchange losses (gains)
|
.6
|
|
|
(9.5)
|
|
|
(6.7)
|
|
|
4.0
|
|
|
Deferred income taxes
|
14.4
|
|
|
(28.3)
|
|
|
21.7
|
|
|
(28.5)
|
|
|
|
|
|
|
|
|
|
|
|
Impairment loss on assets
|
2.1
|
|
|
—
|
|
|
15.4
|
|
|
—
|
|
|
Gain on sale of business / assets
|
(26.8)
|
|
|
—
|
|
|
(50.3)
|
|
|
—
|
|
|
Certain Brazil indirect taxes
|
(118.3)
|
|
|
|
(194.7)
|
|
|
|
(118.3)
|
|
|
|
(194.7)
|
|
|
Other
|
11.5
|
|
|
11.0
|
|
|
16.7
|
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
(15.2)
|
|
|
(43.4)
|
|
|
(56.1)
|
|
|
(93.4)
|
|
|
Inventories
|
(7.9)
|
|
|
(32.1)
|
|
|
10.1
|
|
|
(131.8)
|
|
|
Prepaid expenses and other
|
18.9
|
|
|
(39.9)
|
|
|
34.1
|
|
|
(38.2)
|
|
|
Accounts payable and accrued liabilities
|
(21.5)
|
|
|
45.9
|
|
|
(232.8)
|
|
|
(30.7)
|
|
|
Income and other taxes
|
(1.7)
|
|
|
74.4
|
|
|
5.5
|
|
|
74.1
|
|
|
Noncurrent assets and liabilities
|
(.6)
|
|
|
63.3
|
|
|
(18.9)
|
|
|
60.7
|
|
|
Net cash provided (used) by operating activities of continuing operations
|
30.3
|
|
|
38.4
|
|
|
(105.3)
|
|
|
(68.3)
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Capital expenditures
|
(10.3)
|
|
|
(23.0)
|
|
|
(42.8)
|
|
|
(71.0)
|
|
|
Disposal of assets
|
1.0
|
|
|
.9
|
|
|
1.8
|
|
|
2.3
|
|
|
Net proceeds from sale of business / assets
|
23.4
|
|
|
—
|
|
|
99.9
|
|
|
—
|
|
|
Other investing activities
|
1.0
|
|
|
—
|
|
|
1.0
|
|
|
(3.3)
|
|
|
Net cash provided (used) by investing activities of continuing operations
|
15.1
|
|
|
(22.1)
|
|
|
59.9
|
|
|
(72.0)
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt, net (maturities of three months or less)
|
(7.4)
|
|
|
3.6
|
|
|
(6.9)
|
|
|
(6.8)
|
|
|
Proceeds from debt
|
400.0
|
|
|
|
—
|
|
|
|
400.0
|
|
|
|
—
|
|
|
Repayment of debt
|
(275.5)
|
|
|
(.3)
|
|
|
(275.8)
|
|
|
(238.9)
|
|
|
Repurchase of common stock
|
.1
|
|
|
.1
|
|
|
(1.0)
|
|
|
(3.1)
|
|
|
Costs associated with debt issue / repayment
|
(16.4)
|
|
|
|
—
|
|
|
|
(25.4)
|
|
|
|
—
|
|
|
Proceeds from monetization of COFINS tax credits
|
19.4
|
|
|
|
—
|
|
|
|
19.4
|
|
|
|
—
|
|
|
Other financing activities
|
.7
|
|
|
(6.2)
|
|
|
.5
|
|
|
(6.3)
|
|
|
Net cash provided (used) by financing activities of continuing operations
|
120.9
|
|
|
(2.8)
|
|
|
110.8
|
|
|
(255.1)
|
|
|
Cash Flows from Discontinued Operations
|
|
|
|
|
|
|
|
|
Net cash used by operating activities of discontinued operations
|
(10.2)
|
|
|
—
|
|
|
(14.8)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by discontinued operations
|
(10.2)
|
|
|
—
|
|
|
(14.8)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
(In millions)
|
September 30, 2019
|
|
September 30, 2018
|
|
September 30, 2019
|
|
September 30, 2018
|
|
Effect of exchange rate changes on cash and cash equivalents, and restricted cash
|
(12.9)
|
|
|
(4.8)
|
|
|
(15.2)
|
|
|
(33.5)
|
|
|
Net increase in cash and cash equivalents, and restricted cash
|
143.2
|
|
|
8.7
|
|
|
35.4
|
|
|
(428.9)
|
|
|
Cash and cash equivalents, and restricted cash at beginning of period(1)
|
428.6
|
|
|
443.9
|
|
|
536.4
|
|
|
881.5
|
|
|
Cash and cash equivalents, and restricted cash at end of period (2)
|
$
|
571.8
|
|
|
$
|
452.6
|
|
|
$
|
571.8
|
|
|
$
|
452.6
|
|
The accompanying notes are an integral part of these statements.
(1)The balance at the beginning of the nine month period ended September 30, 2019 includes cash and cash equivalents of $3.7 classified as Held for sale assets in our Consolidated Balance Sheets.
(2)The balance at the end of the three and nine month period ended September 30, 2019 includes restricted cash of $7.6 related to the sale of Avon Manufacturing (Guangzhou), Ltd classified as Cash and cash equivalents in our Consolidated Balance Sheets.
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per
|
|
Common Stock
|
|
|
|
Additional
|
|
Retained
|
|
Accumulated Other
|
|
Treasury Stock
|
|
|
|
Noncontrolling
|
|
|
|
share data)
|
|
Shares
|
|
Amount
|
|
Paid-In Capital
|
|
Earnings
|
|
Comprehensive Loss
|
|
Shares
|
|
Amount
|
|
Interests
|
|
Total
|
|
Balances at December 31, 2018
|
|
761.8
|
|
|
$
|
190.3
|
|
|
$
|
2,303.6
|
|
|
$
|
2,234.3
|
|
|
$
|
(1,030.4)
|
|
|
319.4
|
|
|
$
|
(4,602.3)
|
|
|
$
|
7.7
|
|
|
$
|
(896.8)
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(32.7)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.8)
|
|
|
(33.5)
|
|
|
Other comprehensive (loss) income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
(4.0)
|
|
|
—
|
|
|
—
|
|
|
.1
|
|
|
(3.9)
|
|
|
Dividends accrued - Series C convertible preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.2)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.2)
|
|
|
Exercise/ vesting/ expense of share-based compensation
|
|
1.3
|
|
|
.3
|
|
|
(1.5)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and sales of noncontrolling interests, net of dividends paid of $0.0
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.1
|
|
|
0.1
|
|
|
Balances at March 31, 2019
|
|
763.1
|
|
|
$
|
190.6
|
|
|
$
|
2,302.1
|
|
|
$
|
2,195.4
|
|
|
$
|
(1,034.4)
|
|
|
319.4
|
|
|
$
|
(4,602.3)
|
|
|
$
|
7.1
|
|
|
$
|
(941.5)
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19.5)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.4
|
|
|
(19.1)
|
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.5
|
|
|
Dividends accrued - Series C convertible preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.4)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.4)
|
|
|
Exercise/ vesting/ expense of share-based compensation
|
|
—
|
|
|
—
|
|
|
5.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.4
|
|
|
Repurchase of common stock
|
|
.1
|
|
|
.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.5
|
|
|
(1.0)
|
|
|
—
|
|
|
(1.0)
|
|
|
Purchases and sales of noncontrolling interests, net of dividends paid of $0.1
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.3)
|
|
|
(.3)
|
|
|
Balances at June 30, 2019
|
|
763.2
|
|
|
$
|
190.7
|
|
|
$
|
2,307.5
|
|
|
$
|
2,169.5
|
|
|
$
|
(1,028.9)
|
|
|
319.9
|
|
|
$
|
(4,603.3)
|
|
|
$
|
7.2
|
|
|
$
|
(957.3)
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
106.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.3)
|
|
|
106.6
|
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20.8)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20.8)
|
|
|
Dividends accrued - Series C convertible preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.4)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.4)
|
|
|
Exercise/ vesting/ expense of share-based compensation
|
|
.3
|
|
|
.3
|
|
|
3.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.3
|
|
|
Repurchase of common stock
|
|
(.1)
|
|
|
(.6)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2019
|
|
763.4
|
|
|
$
|
190.4
|
|
|
$
|
2,310.5
|
|
|
$
|
2,270.0
|
|
|
$
|
(1,049.7)
|
|
|
319.9
|
|
|
$
|
(4,603.3)
|
|
|
$
|
6.9
|
|
|
$
|
(875.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per
|
|
Common Stock
|
|
|
|
Additional
|
|
Retained
|
|
Accumulated Other
|
|
Treasury Stock
|
|
|
|
Noncontrolling
|
|
|
|
share data)
|
|
Shares
|
|
Amount
|
|
Paid-In Capital
|
|
Earnings
|
|
Comprehensive Loss
|
|
Shares
|
|
Amount
|
|
Interests
|
|
Total
|
|
Balances at December 31, 2017
|
|
758.7
|
|
|
$
|
189.7
|
|
|
$
|
2,291.2
|
|
|
$
|
2,320.3
|
|
|
$
|
(926.2)
|
|
|
318.4
|
|
|
$
|
(4,600.0)
|
|
|
$
|
10.3
|
|
|
$
|
(714.7)
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20.3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.8)
|
|
|
(21.1)
|
|
|
Revenue Recognition Cumulative catch up
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(41.1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(41.1)
|
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
35.2
|
|
|
|
|
|
|
.4
|
|
|
35.6
|
|
|
Dividends accrued - Series C convertible preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.0)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.0)
|
|
|
Exercise/ vesting/ expense of share-based compensation
|
|
2.2
|
|
|
.6
|
|
|
2.5
|
|
|
(.4)
|
|
|
—
|
|
|
(.1)
|
|
|
.9
|
|
|
—
|
|
|
3.6
|
|
|
Repurchase of common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.9
|
|
|
(2.7)
|
|
|
—
|
|
|
(2.7)
|
|
|
Purchases and sales of noncontrolling interests, net of dividends paid of $0.0
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.2)
|
|
|
(.2)
|
|
|
Balances at March 31, 2018
|
|
760.9
|
|
|
$
|
190.3
|
|
|
$
|
2,293.7
|
|
|
$
|
2,252.5
|
|
|
$
|
(891.0)
|
|
|
319.2
|
|
|
$
|
(4,601.8)
|
|
|
$
|
9.7
|
|
|
$
|
(746.6)
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(36.1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.9)
|
|
|
(37.0)
|
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(123.4)
|
|
|
—
|
|
|
—
|
|
|
(.4)
|
|
|
(123.8)
|
|
|
Dividends accrued - Series C convertible preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.0)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.0)
|
|
|
Exercise/ vesting/ expense of share-based compensation
|
|
.8
|
|
|
—
|
|
|
3.8
|
|
|
(.4)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.4
|
|
|
Repurchase of common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.2
|
|
|
(.5)
|
|
|
—
|
|
|
(.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2018
|
|
761.7
|
|
|
$
|
190.3
|
|
|
$
|
2,297.5
|
|
|
$
|
2,210.0
|
|
|
$
|
(1,014.4)
|
|
|
319.4
|
|
|
$
|
(4,602.3)
|
|
|
$
|
8.4
|
|
|
$
|
(910.5)
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
114.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.7)
|
|
|
113.8
|
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.5)
|
|
|
—
|
|
|
—
|
|
|
(.2)
|
|
|
(1.7)
|
|
|
Dividends accrued - Series C convertible preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.2)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.2)
|
|
|
Exercise/ vesting/ expense of share-based compensation
|
|
—
|
|
|
—
|
|
|
1.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2018
|
|
761.7
|
|
|
|
190.3
|
|
|
|
2,299.1
|
|
|
|
2,318.3
|
|
|
|
(1,015.9)
|
|
|
|
319.4
|
|
|
|
(4,602.3)
|
|
|
|
7.5
|
|
|
|
(803.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
1. ACCOUNTING POLICIES
Basis of Presentation
We prepare our unaudited interim Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States ("GAAP"). We consistently applied the accounting policies described in our 2018 Annual Report on Form 10-K ("2018 Form 10-K") in preparing these unaudited interim Consolidated Financial Statements, other than those impacted by new accounting standards as described below. In our opinion, the unaudited interim Consolidated Financial Statements reflect all adjustments of a normal recurring nature that are necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results for a full year. You should read these unaudited interim Consolidated Financial Statements in conjunction with our Consolidated Financial Statements contained in our 2018 Form 10-K. When used in this report, the terms "Avon," "Company," "we" or "us" mean Avon Products, Inc.
For interim Consolidated Financial Statements purposes, we generally provide for accruals under our various employee benefit plans for each quarter based on one quarter of the estimated annual expense, and adjust these accruals as estimates are refined. In addition, our income tax provision is determined using an estimate of our consolidated annual effective tax rate, adjusted in the current period for discrete income tax items including:
•the effects of significant, unusual or extraordinary pretax and income tax items, if any;
•withholding taxes recognized associated with cash repatriations; and
•the impact of loss-making subsidiaries for which we cannot recognize an income tax benefit and subsidiaries for which an effective tax rate cannot be reliably estimated.
Accounting Standards Implemented
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 adopted this new accounting guidance effective January 1, 2019.
In July 2018, the FASB added an optional transition method which we elected upon adoption of the new standard. This allowed us to recognize and measure leases existing at January 1, 2019 without restating comparative information. In addition, we elected 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.
We determine if an arrangement is a lease at the lease commencement date. In addition to our lease agreements, we review all material new vendor arrangements for potential embedded lease obligations. The asset balance related to operating and finance leases is presented within right-of-use (ROU) asset and property, plant and equipment, respectively, on our Consolidated Balance Sheet. The short-term liability balance related to operating and finance leases is presented within other accrued liabilities on our Consolidated Balance Sheets. The long-term liability balance is presented within long-term operating lease liability and long-term debt on our Consolidated Balance Sheets for operating and finance leases, respectively.
The lease liability is recognized based on the present value of the remaining fixed or in-substance fixed lease payments discounted using our incremental borrowing rates. We use a specific incremental borrowing rate for our material leases, which is determined based on the geography, nature of the asset and term of the lease. These rates are determined based on inputs provided by external banks and updated periodically. The lease liability includes the exercise of a purchase option only if we are reasonably certain to exercise as of the commencement date of the lease. The residual value guarantee amount is only included in the lease liability calculation to the extent payment is probable to the lessor as of the commencement of the lease. The ROU asset is calculated based on the lease liability adjusted for any lease payments paid to the lessor at or before the commencement date (i.e. prepaid rent) and initial direct costs incurred by Avon and excluding any lease incentives received from the Lessor.
Variable lease payments are payments to the lessor not included in the lease liability calculation. We define variable lease payments as payments made by Avon to the lessor for the right to use a leased asset that vary because of changes in facts or circumstances (such as changes in an index rate, volume, usage, etc.) occurring after the lease commencement date, other than predetermined contractual changes due to the passage of time (for example, predetermined rent increase amounts that are set out in the contract). Variable lease payments or charges are accounted for as incurred.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
The lease term for purposes of lease accounting may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option as of the commencement date of the lease. For operating leases, the lease expense is recognized on a straight-line basis over the lease term. For finance leases, the Company amortizes the ROU asset on a straight-line basis and records interest expense on the lease liability created at lease commencement over the lease term.
We account for our lease and non-lease components as a single component for most of our asset classes, and therefore both are included in the calculation of lease liability recognized on the Consolidated Balance Sheets. However, for certain lease asset classes related to identified embedded leases we account for the lease and non-lease components separately, and therefore, the non-lease component is not included in the lease liability.
Leases with an initial term of twelve months or less are not recorded on the Consolidated Balance Sheet; we recognize lease expense for these leases over their lease term. See Note 9, Leases, to the Consolidated Financial Statements contained herein for further details.
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 accumulated other comprehensive income (loss) to retained earnings. We adopted this new accounting guidance effective January 1, 2019 and elected not to reclassify the disproportionate income tax effects of the Act from accumulated other comprehensive income (loss) to retained earnings.
Accounting Standards to be Implemented
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 of adopting this standard but do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
2. EARNINGS PER SHARE AND SHARE REPURCHASES
We compute earnings per share ("EPS") using the two-class method, which is a earnings allocation formula that determines loss per share for common stock and loss allocated to convertible preferred stock and participating securities, as appropriate. The earnings allocated to convertible preferred stock are the larger of 1) the preferred dividends accrued in the period or 2) the percentage of earnings from continuing operations allocable to the preferred stock as if they had been converted to common stock. Our participating securities are our grants of restricted stock and restricted stock units, which contain non-forfeitable rights to dividend equivalents to the extent any dividends are declared and paid on our common stock. We compute basic EPS by dividing net income (loss) allocated to common shareholders by the weighted-average number of shares outstanding during the period. Diluted EPS is calculated to give effect to all potentially dilutive common shares that were outstanding during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
(Shares in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Numerator from continuing operations:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, less amounts attributable to noncontrolling interests
|
|
$
|
113.2
|
|
|
$
|
114.5
|
|
|
$
|
83.7
|
|
|
$
|
58.1
|
|
|
Less: Earnings allocated to participating securities
|
|
1.6
|
|
|
1.4
|
|
|
1.2
|
|
|
.7
|
|
|
Less: Earnings allocated to convertible preferred stock
|
|
18.6
|
|
|
18.8
|
|
|
19.0
|
|
|
18.1
|
|
|
Income from continuing operations allocated to common shareholders
|
|
93.0
|
|
|
94.3
|
|
|
63.5
|
|
|
39.3
|
|
|
Numerator from discontinued operations:
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(6.3)
|
|
|
$
|
—
|
|
|
$
|
(29.0)
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss allocated to common shareholders
|
|
(6.3)
|
|
|
—
|
|
|
(29.0)
|
|
|
—
|
|
|
Numerator attributable to Avon:
|
|
|
|
|
|
|
|
|
|
Net income attributable to Avon
|
|
$
|
106.9
|
|
|
$
|
114.5
|
|
|
$
|
54.7
|
|
|
$
|
58.1
|
|
|
Less: Earnings allocated to participating securities
|
|
1.6
|
|
|
1.4
|
|
|
1.2
|
|
|
.7
|
|
|
Less: Earnings allocated to convertible preferred stock
|
|
18.6
|
|
|
18.8
|
|
|
19.0
|
|
|
18.1
|
|
|
Income allocated to common shareholders
|
|
86.7
|
|
|
94.3
|
|
|
34.5
|
|
|
39.3
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Basic EPS weighted-average shares outstanding
|
|
442.4
|
|
|
442.3
|
|
|
442.7
|
|
|
441.8
|
|
|
Diluted effect of assumed conversion of stock-based compensation
|
|
.2
|
|
|
—
|
|
|
.2
|
|
|
—
|
|
|
Diluted effect of assumed conversion of preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Diluted EPS adjusted weighted-average shares outstanding
|
|
442.6
|
|
|
442.3
|
|
|
442.9
|
|
|
441.8
|
|
|
Earnings per Common Share from continuing operations:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
$
|
0.14
|
|
|
$
|
0.09
|
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
$
|
0.14
|
|
|
$
|
0.09
|
|
|
Loss per Common Share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01)
|
|
|
$
|
—
|
|
|
$
|
(0.06)
|
|
|
$
|
—
|
|
|
Diluted
|
|
$
|
(0.01)
|
|
|
$
|
—
|
|
|
$
|
(0.06)
|
|
|
$
|
—
|
|
|
Earnings per Common Share attributable to Avon:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
|
$
|
0.21
|
|
|
$
|
0.08
|
|
|
$
|
0.09
|
|
|
Diluted
|
|
$
|
0.20
|
|
|
$
|
0.21
|
|
|
$
|
0.08
|
|
|
$
|
0.09
|
|
Amounts in the table above may not necessarily sum due to rounding.
During the three and nine months ended September 30, 2019, we did not include stock options to purchase 8.6 million and 16.6 million shares, respectively, of Avon common stock in the calculation of diluted EPS as the exercise prices of those options were greater than the average market price. Since the inclusion of such shares would be anti-dilutive, these are excluded from the calculation. During the three and nine months ended September 30, 2018, we did not include stock options to purchase 18.1 million shares and 17.6 million shares, respectively, of Avon common stock in the calculation of diluted EPS for the same reason.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
For the three and nine months ended September 30, 2019 and 2018, respectively, it is more dilutive to assume the series C convertible preferred stock is not converted into common stock; therefore, the weighted-average shares outstanding were not adjusted by the as-if converted series C convertible preferred stock because the effect would be anti-dilutive. The inclusion of the series C convertible preferred stock would increase the earnings per share for the three and nine months ended September 30, 2019 and 2018. If the as-if converted series C convertible preferred stock had been dilutive, approximately 87.1 million additional shares would have been included in the diluted weighted average number of shares outstanding for the three and nine months ended September 30, 2019 and 2018. See Note 6, Related Party Transactions, to the Consolidated Financial Statements contained herein.
We purchased approximately 0.5 million shares of Avon common stock for $1.5 during the first nine months of 2019, as compared to approximately 1.1 million shares of Avon common stock for $3.2 during the first nine months of 2018, through acquisition of stock from employees in connection with tax payments upon the vesting of restricted stock units and performance restricted stock units.
3. DISCONTINUED OPERATIONS, ASSETS AND LIABILITIES HELD FOR SALE AND DIVESTITURES
Discontinued Operations
On December 17, 2015, the Company entered into definitive agreements with affiliates controlled by Cerberus Capital Management, L.P. ("Cerberus"). The agreements resulted in the separation of the Company's North America business, which represented the Company's operations in the United States, Canada and Puerto Rico, from the Company into New Avon Company, formerly New Avon LLC ("New Avon"), a privately-held company majority-owned and managed by Cerberus NA Investor LLC (an affiliate of Cerberus). The Company retained an investment of 19.9% ownership interest in New Avon. These transactions closed on March 1, 2016, from that date, resolution of contingent liabilities relating to Avon's ownership and operation of the North America business prior to its separation from the Company into New Avon have been treated as discontinued operations. Refer to Divestitures section below for information relating to the sale of New Avon.
The Company incurred costs during the three and nine months ended September 30, 2019 following the resolution of certain contingent liabilities related to its ownership and operation of the North America business prior to its separation into New Avon.
The major classes of financial statement components comprising the loss on discontinued operations, net of tax for New Avon are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2019
|
|
Selling, general and administrative expenses
|
|
$
|
6.3
|
|
|
$
|
29.0
|
|
|
Operating loss
|
|
$
|
(6.3)
|
|
|
$
|
(29.0)
|
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(6.3)
|
|
|
$
|
(29.0)
|
|
There were no amounts recorded in discontinued operations for the three and nine months ended September 30, 2018.
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 Sheets as of September 30, 2019 and December 31, 2018 are shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Current Held for sale assets
|
|
|
|
Property, Plant & Equipment (net)
|
|
$
|
18.3
|
|
|
|
|
$
|
18.3
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
|
—
|
|
|
.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
|
|
|
—
|
|
|
.2
|
|
|
2.8
|
|
|
|
|
$
|
11.2
|
|
|
|
$
|
—
|
|
|
|
$
|
.2
|
|
|
|
$
|
11.4
|
|
The Company, in line with the Open Up Avon strategy, identified two additional properties to be sold which met the held for sale criteria under Accounting Standard Codification ("ASC") 360, Property, Plant and Equipment as of September 30, 2019. The Company expects to close these transactions within a year.
Refer to Divestitures section below for information on the sale of Avon Manufacturing (Guangzhou), Rye Office, Malaysia Maximin and New Avon.
Divestitures
Rye Office
On June 26, 2019, we completed the sale of the Rye office for a selling price of $23.2, less expenses of approximately $0.8, resulting in proceeds of $22.4. These proceeds are presented as investing activities in the Consolidated Statement of Cash Flows.
In the second quarter of 2019, we recorded a gain on sale of $9.9 before and after tax, which is reported separately in the Consolidated Statements of Operations. The gain recorded represents the difference between the proceeds and the carrying value of the Rye office on the date of sale. During the first quarter of 2019, we refined the calculation for the Held for sale assets which gave rise to an additional $.2 in assets.
Malaysia Maximin
On May 9, 2019, we completed the sale of all of the equity interests in Maximin Corporation Sdn Bhd ("Malaysia Maximin") for a total selling price of $7.8. The cash proceeds of $7.6, net of expenses, are presented within investing activities in the Consolidated Statement of Cash Flows.
In the second quarter of 2019, we recorded a gain on sale of $3.3 before tax, which is reported separately in the Consolidated Statements of Operations, and $3.0 after tax. The gain recorded represents the difference between the proceeds and the carrying value of Malaysia Maximin on the date of sale. During the second quarter of 2019, we refined the calculation for the Held for sale assets which gave rise to an additional $1.4 in assets.
China manufacturing
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 selling price of $71.0, less expenses of approximately $1.1. The selling price included $23.5 relating to outstanding intercompany loans payable to Avon Manufacturing (Guangzhou), Ltd. from other Avon subsidiaries that was presented as financing activities in the Consolidated Statement of Cash Flows when settled in April 2019. The cash proceeds of $46.4, net of loan amounts, are presented as investing activities in the Consolidated Statement of Cash Flows, which includes $7.6 of restricted cash as of September 30, 2019, refer to Note 4, Restricted Cash to the Consolidated Financial Statements contained herein.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
In the first quarter of 2019, we recorded a gain on sale of $10.3 before tax, which is reported separately in the Consolidated Statements of Operations, and $8.2 after tax, representing the difference between the proceeds, including the settlement of the intercompany loans, and the carrying value of Avon Manufacturing (Guangzhou), Ltd. on the date of sale.
New Avon
In April 2019, we signed an agreement with LG Household & Health Care Ltd. to sell our 19.9% ownership interest in New Avon. During August, 2019, we completed the sale of New Avon for a selling price of $24.5. Expenses were approximately $1.1, resulting in cash proceeds of $23.4. These proceeds are presented as investing activities in the Consolidated Statement of Cash Flows.
In the third quarter of 2019, we recorded a gain on sale of $26.8 before and after tax, which is reported in the Consolidated Statements of Operations as Gain on sale of business/asset. The gain recorded represents the total proceeds and the release of accumulated other comprehensive income of $3.4.
Our recorded investment balance in New Avon at September 30, 2019 and December 31, 2018 was zero.
4. RESTRICTED CASH
Restricted cash is related to the sale of Avon Manufacturing (Guangzhou), Ltd. as described in Note 3, Discontinued Operations, Assets and Liabilities Held for Sale and Divestitures to the Consolidated Financial Statements contained herein.
Restricted cash is subject to legal restrictions imposed by the Equity Purchase Agreement between TheFaceShop Co., Ltd., an affiliate of LG Household & Health Care Ltd., Avon Asia Holdings Company and Avon Products (China) Co., Ltd. related to the sale of Avon Manufacturing (Guangzhou), Ltd. These deposits are not available for general use by the Company.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheet that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows for the nine month period ended September 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Cash and cash equivalents
|
|
$
|
564.2
|
|
|
$
|
532.7
|
|
|
Long-term restricted cash(1)
|
|
7.6
|
|
|
—
|
|
|
Held for sale cash and cash equivalents
|
|
—
|
|
|
3.7
|
|
|
Cash and cash equivalents, and restricted cash at end of period per the statement of cash flows
|
|
$
|
571.8
|
|
|
$
|
536.4
|
|
(1) Long-term restricted cash is presented in other assets in our Consolidated Balance Sheets.
5. INVESTMENT IN NEW AVON
In connection with the separation of the Company's North America business, 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. In April 2019, Avon and Cerberus signed an agreement with LG Household & Health Care Ltd. for the sale of New Avon, including our 19.9% ownership interest. This transaction closed on August 14, 2019. See Note 3, Discontinued Operations, Assets and Liabilities Held for Sale and Divestitures, for additional information.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
6. 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. On August 14, 2019, we sold our investment in New Avon to LG Household & Health Care Ltd. Upon completion of the sale, New Avon is no longer a related party. See Note 3, Discontinued Operation, Assets and Liabilities Held for Sale and Divestitures, to the Consolidated Financial Statements contained herein, for further details.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
Revenue from sale of product to New Avon(1)
|
|
$
|
3.5
|
|
|
$
|
7.3
|
|
|
$
|
12.0
|
|
|
$
|
20.3
|
|
|
Gross profit from sale of product to New Avon(1)
|
|
$
|
.1
|
|
|
$
|
.6
|
|
|
$
|
.2
|
|
|
$
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales for purchases from New Avon(2)
|
|
$
|
.7
|
|
|
$
|
.9
|
|
|
$
|
2.1
|
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses related to New Avon:
|
|
|
|
|
|
|
|
|
|
Transition services, intellectual property, technical support and innovation and subleases(3)
|
|
$
|
—
|
|
|
$
|
(.6)
|
|
|
$
|
(.2)
|
|
|
$
|
(4.3)
|
|
|
Project management team(4)
|
|
.6
|
|
|
$
|
.2
|
|
|
$
|
4.0
|
|
|
$
|
1.0
|
|
|
Net reduction of selling, general and administrative expenses
|
|
$
|
.6
|
|
|
$
|
(.4)
|
|
|
$
|
3.8
|
|
|
$
|
(3.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from Instituto Avon(5)
|
|
$
|
—
|
|
|
$
|
.1
|
|
|
$
|
.1
|
|
|
$
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Balance Sheet Data
|
|
|
|
|
|
Inventories(6)
|
|
N/A
|
|
|
$
|
.3
|
|
|
Receivables due from New Avon(6)
|
|
N/A
|
|
|
$
|
7.0
|
|
|
Receivables due from Instituto Avon(5)
|
|
$
|
2.0
|
|
|
$
|
3.2
|
|
|
Payables due to New Avon(6)
|
|
N/A
|
|
|
$
|
.2
|
|
|
Payables due to an affiliate of Cerberus(7)
|
|
$
|
2.1
|
|
|
$
|
.6
|
|
(1) The Company supplies product to New Avon as part of a manufacturing and supply agreement. On August 14, 2019, the Company sold it's investment in New Avon to LG Household & Health Care Ltd, from this point New Avon is no longer a related party. Transactions entered into with New Avon for the three month and nine month periods ended September 30, 2019 have been disclosed above.
(2) New Avon supplies product to the Company as part of the same manufacturing and supply agreement discussed in footnote (1) above. The Company purchased $.5 and $.7 from New Avon associated with this agreement during the three months ended September 30, 2019 and 2018, respectively, and recorded $.7 and $.9 associated with these purchases within cost of sales in our Consolidated Statement of Operations during the three months ended September 30, 2019 and 2018, respectively. The Company purchased $1.6 and $1.9 from New Avon associated with this agreement during the nine months ended September 30, 2019 and 2018, respectively, and recorded $2.1 and $2.1 associated with these purchases within cost of sales in our Consolidated Statement of Operations during the nine months ended September 30, 2019 and 2018, respectively. On August 14, 2019, the Company sold its investment in New Avon to LG Household & Health Care Ltd; from this point New Avon is no longer a related party. Transactions entered into with New Avon for the three month and nine month periods ended September 30, 2019 have been disclosed above.
(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 license agreement, an agreement for technical support and innovation and sublease for office space. The net amounts recorded within selling, general and administrative expenses generally represent a recovery of the related costs.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
(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 implementation of the Company’s strategic initiatives. The Company recorded net cost of $.6 and $.2 in selling, general and administrative expenses associated with these agreements during the three months ended September 30, 2019 and 2018, respectively, and recorded $4.0 and $1.0 in selling, general and administrative expenses associated with these agreements during the nine months ended September 30, 2019 and 2018, respectively. See Note 15, Restructuring Initiatives to the Consolidated Financial Statements contained herein, for additional information related to the Company's strategic initiatives.
(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, R$12 million (Brazilian real) for an unsecured 5-year term at a fixed interest rate of 7% per annum, to be paid back in five equal annual installments. The Instituto Avon was created by an Avon subsidiary in Brazil, with the board and executive team comprised of Avon Brazil management. The purpose of the loan was 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 Hospital do Câncer de Barretos), in order to invest in equipment with the objective of expanding breast cancer prevention and treatment. During the third quarter of 2019 Institutio Avon repaid $1 million of the loan.
(6) On August 14, 2019, the Company sold its investment in New Avon to LG Household & Health Care Ltd, from this point New Avon is no longer a related party. Therefore at September 30, 2019, we do not have any related party balances with New Avon.
(7) 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. As of September 30, 2019, the Company has a liability of $.8 for the estimated value of such standby letters of credit.
Series C Preferred Stock
On March 1, 2016, the Company issued and sold to Cerberus Investor 435,000 shares of newly issued series C preferred stock for an aggregate purchase price of $435.0. Cumulative preferred dividends accrue daily on the series C preferred stock at a rate of 1.25% per quarter. The series C preferred stock had accrued unpaid dividends of $84.8 as of September 30, 2019. Series C convertible preferred stock and accrued dividends of $511.1 on the Consolidated Balance Sheet at September 30, 2019 is stated net of $8.7 of costs incurred in connection with the issuance of the Series C convertible preferred stock in 2016. There were no dividends declared in the nine months ended September 30, 2019 and 2018.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
7. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
125.2
|
|
|
|
$
|
129.3
|
|
|
|
$
|
44.0
|
|
|
|
$
|
27.7
|
|
|
$
|
326.2
|
|
|
$
|
—
|
|
|
$
|
326.2
|
|
|
Fragrance
|
|
129.2
|
|
|
|
100.2
|
|
|
|
47.1
|
|
|
|
19.1
|
|
|
295.6
|
|
|
—
|
|
|
295.6
|
|
|
Color
|
|
70.7
|
|
|
|
69.3
|
|
|
|
20.3
|
|
|
|
11.3
|
|
|
171.6
|
|
|
—
|
|
|
171.6
|
|
|
Total Beauty
|
|
325.1
|
|
|
298.8
|
|
|
111.4
|
|
|
58.1
|
|
|
793.4
|
|
|
—
|
|
|
793.4
|
|
|
Fashion & Home:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fashion
|
|
46.4
|
|
|
|
37.6
|
|
|
|
19.4
|
|
|
|
40.5
|
|
|
143.9
|
|
|
—
|
|
|
143.9
|
|
|
Home
|
|
6.4
|
|
|
|
56.1
|
|
|
|
43.7
|
|
|
|
6.0
|
|
|
112.2
|
|
|
—
|
|
|
112.2
|
|
|
Total Fashion & Home
|
|
52.8
|
|
|
93.7
|
|
|
63.1
|
|
|
46.5
|
|
|
256.1
|
|
|
—
|
|
|
256.1
|
|
|
Certain Brazil indirect taxes*
|
|
—
|
|
|
67.7
|
|
|
—
|
|
|
—
|
|
|
67.7
|
|
|
—
|
|
|
67.7
|
|
|
Product sales
|
|
377.9
|
|
|
|
460.2
|
|
|
|
174.5
|
|
|
|
104.6
|
|
|
1,117.2
|
|
|
—
|
|
|
1,117.2
|
|
|
Representative fees
|
|
20.0
|
|
|
|
28.7
|
|
|
|
10.2
|
|
|
|
1.7
|
|
|
|
60.6
|
|
|
|
|
|
60.6
|
|
|
Other
|
|
.4
|
|
|
|
5.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5.5
|
|
|
4.7
|
|
|
10.2
|
|
|
Other revenue
|
|
20.4
|
|
|
33.8
|
|
|
10.2
|
|
|
1.7
|
|
|
66.1
|
|
|
4.7
|
|
|
70.8
|
|
|
Total revenue
|
|
$
|
398.3
|
|
|
$
|
494.0
|
|
|
$
|
184.7
|
|
|
$
|
106.3
|
|
|
$
|
1,183.3
|
|
|
$
|
4.7
|
|
|
$
|
1,188.0
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 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
|
|
$
|
133.7
|
|
|
|
$
|
137.8
|
|
|
|
$
|
38.2
|
|
|
|
$
|
29.3
|
|
|
|
$
|
339.0
|
|
|
|
$
|
—
|
|
|
|
$
|
339.0
|
|
|
Fragrance
|
|
139.5
|
|
|
|
113.8
|
|
|
|
54.9
|
|
|
|
23.7
|
|
|
|
331.9
|
|
|
|
—
|
|
|
|
331.9
|
|
|
Color
|
|
80.1
|
|
|
|
76.5
|
|
|
|
21.2
|
|
|
|
14.2
|
|
|
|
192.0
|
|
|
|
—
|
|
|
|
192.0
|
|
|
Total Beauty
|
|
353.3
|
|
|
|
328.1
|
|
|
|
114.3
|
|
|
|
67.2
|
|
|
|
862.9
|
|
|
|
—
|
|
|
|
862.9
|
|
|
Fashion & Home:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fashion
|
|
58.9
|
|
|
|
46.0
|
|
|
|
25.1
|
|
|
|
44.7
|
|
|
|
174.7
|
|
|
|
—
|
|
|
|
174.7
|
|
|
Home
|
|
8.7
|
|
|
|
68.6
|
|
|
|
56.0
|
|
|
|
6.8
|
|
|
|
140.1
|
|
|
|
.2
|
|
|
|
140.3
|
|
|
Total Fashion & Home
|
|
67.6
|
|
|
|
114.6
|
|
|
|
81.1
|
|
|
|
51.5
|
|
|
|
314.8
|
|
|
|
.2
|
|
|
|
315.0
|
|
|
Brazil IPI tax release**
|
|
—
|
|
|
|
168.4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
168.4
|
|
|
|
—
|
|
|
|
168.4
|
|
|
Product sales
|
|
420.9
|
|
|
|
611.1
|
|
|
|
195.4
|
|
|
|
118.7
|
|
|
|
1,346.1
|
|
|
|
.2
|
|
|
|
1,346.3
|
|
|
Representative fees
|
|
21.8
|
|
|
|
33.7
|
|
|
|
11.6
|
|
|
|
1.8
|
|
|
|
68.9
|
|
|
|
.1
|
|
|
|
69.0
|
|
|
Other
|
|
.2
|
|
|
|
.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
.8
|
|
|
|
8.1
|
|
|
|
8.9
|
|
|
Other revenue
|
|
22.0
|
|
|
|
34.3
|
|
|
|
11.6
|
|
|
|
1.8
|
|
|
|
69.7
|
|
|
|
8.2
|
|
|
|
77.9
|
|
|
Total revenue
|
|
$
|
442.9
|
|
|
|
$
|
645.4
|
|
|
|
$
|
207.0
|
|
|
|
$
|
120.5
|
|
|
|
$
|
1,415.8
|
|
|
|
$
|
8.4
|
|
|
|
$
|
1,424.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
400.9
|
|
|
$
|
386.1
|
|
|
$
|
144.2
|
|
|
$
|
90.2
|
|
|
$
|
1,021.4
|
|
|
|
|
|
$
|
1,021.4
|
|
|
Fragrance
|
|
386.9
|
|
|
313.0
|
|
|
140.7
|
|
|
56.1
|
|
|
896.7
|
|
|
|
|
|
896.7
|
|
|
Color
|
|
246.6
|
|
|
196.2
|
|
|
63.4
|
|
|
35.4
|
|
|
541.6
|
|
|
|
|
|
541.6
|
|
|
Total Beauty
|
|
1,034.4
|
|
|
895.3
|
|
|
348.3
|
|
|
181.7
|
|
|
2,459.7
|
|
|
—
|
|
|
2,459.7
|
|
|
Fashion & Home:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fashion
|
|
162.1
|
|
|
117.7
|
|
|
61.4
|
|
|
123.2
|
|
|
464.4
|
|
|
|
|
|
464.4
|
|
|
Home
|
|
21.3
|
|
|
178.3
|
|
|
131.0
|
|
|
19.8
|
|
|
350.4
|
|
|
|
|
|
350.4
|
|
|
Total Fashion & Home
|
|
183.4
|
|
|
296.0
|
|
|
192.4
|
|
|
143.0
|
|
|
814.8
|
|
|
—
|
|
|
814.8
|
|
|
Certain Brazil indirect taxes*
|
|
—
|
|
|
67.7
|
|
|
—
|
|
|
—
|
|
|
67.7
|
|
|
—
|
|
|
67.7
|
|
|
Product sales
|
|
1,217.8
|
|
|
1,259.0
|
|
|
540.7
|
|
|
324.7
|
|
|
3,342.2
|
|
|
—
|
|
|
3,342.2
|
|
|
Representative fees
|
|
63.5
|
|
|
87.0
|
|
|
30.5
|
|
|
5.2
|
|
|
186.2
|
|
|
|
|
|
186.2
|
|
|
Other
|
|
.8
|
|
|
5.7
|
|
|
—
|
|
|
.1
|
|
|
6.6
|
|
|
14.7
|
|
|
21.3
|
|
|
Other revenue
|
|
64.3
|
|
|
92.7
|
|
|
30.5
|
|
|
5.3
|
|
|
192.8
|
|
|
14.7
|
|
|
207.5
|
|
|
Total revenue
|
|
$
|
1,282.1
|
|
|
$
|
1,351.7
|
|
|
$
|
571.2
|
|
|
$
|
330.0
|
|
|
$
|
3,535.0
|
|
|
$
|
14.7
|
|
|
$
|
3,549.7
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 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
|
|
$
|
457.4
|
|
|
|
$
|
423.4
|
|
|
|
$
|
128.8
|
|
|
|
$
|
90.9
|
|
|
|
$
|
1,100.5
|
|
|
|
$
|
6.4
|
|
|
|
$
|
1,106.9
|
|
|
Fragrance
|
|
446.5
|
|
|
|
363.9
|
|
|
|
160.9
|
|
|
|
62.4
|
|
|
|
1,033.7
|
|
|
|
2.9
|
|
|
|
1,036.6
|
|
|
Color
|
|
299.0
|
|
|
|
237.9
|
|
|
|
62.8
|
|
|
|
40.3
|
|
|
|
640.0
|
|
|
|
4.8
|
|
|
|
644.8
|
|
|
Total Beauty
|
|
1,202.9
|
|
|
|
1,025.2
|
|
|
|
352.5
|
|
|
|
193.6
|
|
|
|
2,774.2
|
|
|
|
14.1
|
|
|
|
2,788.3
|
|
|
Fashion & Home:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fashion
|
|
211.5
|
|
|
|
142.4
|
|
|
|
70.1
|
|
|
|
125.2
|
|
|
|
549.2
|
|
|
|
3.0
|
|
|
|
552.2
|
|
|
Home
|
|
25.6
|
|
|
|
213.1
|
|
|
|
153.9
|
|
|
|
21.2
|
|
|
|
413.8
|
|
|
|
2.0
|
|
|
|
415.8
|
|
|
Total Fashion & Home
|
|
237.1
|
|
|
|
355.5
|
|
|
|
224.0
|
|
|
|
146.4
|
|
|
|
963.0
|
|
|
|
5.0
|
|
|
|
968.0
|
|
|
Brazil IPI tax release**
|
|
—
|
|
|
|
168.4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
168.4
|
|
|
|
—
|
|
|
|
168.4
|
|
|
Product sales
|
|
1,440.0
|
|
|
|
1,549.1
|
|
|
|
576.5
|
|
|
|
340.0
|
|
|
|
3,905.6
|
|
|
|
19.1
|
|
|
|
3,924.7
|
|
|
Representative fees
|
|
71.5
|
|
|
|
105.1
|
|
|
|
33.4
|
|
|
|
4.9
|
|
|
|
214.9
|
|
|
|
2.0
|
|
|
|
216.9
|
|
|
Other
|
|
.5
|
|
|
|
4.4
|
|
|
|
—
|
|
|
|
.1
|
|
|
|
5.0
|
|
|
|
23.0
|
|
|
|
28.0
|
|
|
Other revenue
|
|
72.0
|
|
|
|
109.5
|
|
|
|
33.4
|
|
|
|
5.0
|
|
|
|
219.9
|
|
|
|
25.0
|
|
|
|
244.9
|
|
|
Total revenue
|
|
$
|
1,512.0
|
|
|
|
$
|
1,658.6
|
|
|
|
$
|
609.9
|
|
|
|
$
|
345.0
|
|
|
|
$
|
4,125.5
|
|
|
|
$
|
44.1
|
|
|
|
$
|
4,169.6
|
|
* 2019 includes the impact of certain Brazil indirect taxes which was recorded in product sales of approximately $68, in our Consolidated Income Statements. See Note 14 Supplemental Balance Sheet Information, to the Consolidated Financial Statements contained herein for further information.
**2018 includes the impact of the Brazil IPI, which was recorded in product sales of approximately $168, in our Consolidated Income Statements. See Note 11, Contingencies, to the Consolidated Financial Statements contained herein for further information.
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 September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Accounts receivable, net of allowances of $65 and $93
|
|
$
|
303.0
|
|
|
$
|
349.7
|
|
|
Contract liabilities
|
|
$
|
49.1
|
|
|
$
|
84.4
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
The contract liability balances relate to certain material rights (loyalty points, status program and prospective discounts). During the nine months ended September 30, 2019, we recognized $67.2 of revenue related to the contract liability balance at the beginning of the nine month period ended September 30, 2019, as the result of performance obligations satisfied. In addition, we deferred an additional $32.9 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 September 30, 2019 as compared with December 31, 2018.
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.
8. INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Inventories
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Raw materials
|
|
$
|
131.2
|
|
|
$
|
157.8
|
|
|
Finished goods
|
|
368.2
|
|
|
384.2
|
|
|
Total
|
|
$
|
499.4
|
|
|
$
|
542.0
|
|
9. LEASES
We have operating and finance leases for corporate and market offices, warehouses, automotive and other equipment. Some of our leases may include options to extend or terminate the lease. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
September 30, 2019
|
|
January 1, 2019
|
|
Assets
|
|
|
|
|
|
|
|
Operating right-of-use assets
|
|
Right-of-use asset
|
|
$
|
172.3
|
|
|
$
|
187.5
|
|
|
Finance right-of-use assets
|
|
Property, Plant and Equipment
|
|
2.5
|
|
|
3.2
|
|
|
Total right-of-use assets
|
|
|
|
174.8
|
|
|
190.7
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Other accrued liabilities
|
|
$
|
43.9
|
|
|
$
|
45.4
|
|
|
Finance lease liabilities
|
|
Other accrued liabilities
|
|
1.0
|
|
|
1.1
|
|
|
Total current lease liabilities
|
|
|
|
44.9
|
|
|
46.5
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Long-term operating lease liability
|
|
$
|
141.7
|
|
|
$
|
155.9
|
|
|
Finance lease liabilities
|
|
Long-term debt
|
|
1.5
|
|
|
1.9
|
|
|
Total noncurrent lease liabilities
|
|
|
|
$
|
143.2
|
|
|
$
|
157.8
|
|
|
|
|
|
|
|
|
|
|
Total lease liability
|
|
|
|
$
|
188.1
|
|
|
$
|
204.3
|
|
The table below shows the lease income and expenses recorded in the Consolidated Statement of Operations incurred during the three and nine months ended September 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
Lease Costs
|
|
Classification
|
|
2019
|
|
2019
|
|
Operating lease cost (1)
|
|
Selling, general and administrative expenses
|
|
$
|
16.9
|
|
|
$
|
49.9
|
|
|
Finance lease cost
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
Selling, general and administrative expenses
|
|
.4
|
|
|
1.2
|
|
|
Interest on lease liabilities
|
|
Interest Expense
|
|
.1
|
|
|
.2
|
|
|
Short-term leases costs
|
|
Selling, general and administrative expenses
|
|
.9
|
|
|
2.9
|
|
|
Sublease income (2)
|
|
Selling, general and administrative expenses
|
|
(2.5)
|
|
|
(8.3)
|
|
|
Net lease cost
|
|
|
|
$
|
15.8
|
|
|
$
|
45.9
|
|
(1) Includes variable lease costs which are immaterial. These are presented in selling, general and administrative expenses in our Consolidated Statements of Operations.
(2) Sublease portfolio consists of the sublease of our previous principal executive office located at 777 Third Avenue, New York, NY.
The maturity analysis of the finance and operating lease liabilities is reflected below. This table also reflects the reconciliation of the undiscounted cash flows to the discounted finance and operating lease liabilities as recognized in the September 30, 2019 Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities
|
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
|
2019
|
|
$
|
15.4
|
|
|
$
|
.3
|
|
|
$
|
15.7
|
|
|
2020
|
|
55.3
|
|
|
1.1
|
|
|
56.4
|
|
|
2021
|
|
46.1
|
|
|
.8
|
|
|
46.9
|
|
|
2022
|
|
38.3
|
|
|
.5
|
|
|
38.8
|
|
|
2023
|
|
25.7
|
|
|
.1
|
|
|
25.8
|
|
|
2024
|
|
18.4
|
|
|
—
|
|
|
18.4
|
|
|
Thereafter
|
|
29.1
|
|
|
—
|
|
|
29.1
|
|
|
Total lease payments
|
|
$
|
228.3
|
|
|
$
|
2.8
|
|
|
$
|
231.1
|
|
|
Less: Interest
|
|
42.7
|
|
|
.3
|
|
|
43.0
|
|
|
Present value of lease liabilities
|
|
$
|
185.6
|
|
|
$
|
2.5
|
|
|
$
|
188.1
|
|
At December 31, 2018 our operating and finance lease obligations by due dates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities
|
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
|
2019
|
|
$
|
56.4
|
|
|
$
|
1.1
|
|
|
$
|
57.5
|
|
|
2020
|
|
42.0
|
|
|
.6
|
|
|
42.6
|
|
|
2021
|
|
35.3
|
|
|
.4
|
|
|
35.7
|
|
|
2022
|
|
31.1
|
|
|
.2
|
|
|
31.3
|
|
|
2023
|
|
22.4
|
|
|
.1
|
|
|
22.5
|
|
|
Thereafter
|
|
46.9
|
|
|
.1
|
|
|
47.0
|
|
|
Total lease payments(1)
|
|
$
|
234.1
|
|
|
$
|
2.5
|
|
|
$
|
236.6
|
|
(1) Total lease payments of $236.6 represent undiscounted cash flows and therefore do not reconcile to the total discounted lease liability of $204.3 at January 1, 2019 shown above.
The Company has calculated the weighted-average remaining lease term, presented in years below, and the weighted-average discount rate for our operating and finance lease population. As noted in our lease accounting policy (See Note 1, Accounting
Policies to the Consolidated Financial Statements contained herein), the Company uses the incremental borrowing rate as the lease discount rate.
|
|
|
|
|
|
|
|
|
|
|
Lease Term and Discount Rate
|
|
September 30, 2019
|
|
Weighted-average remaining lease term (years)
|
|
|
|
Operating leases
|
|
5.0
|
|
Finance leases
|
|
2.7
|
|
Weighted-average discount rate
|
|
|
|
Operating leases
|
|
8.5
|
%
|
|
Finance leases
|
|
10.7
|
%
|
The table below sets out the classification of lease payments in the Consolidated Statement of Cash Flows. The right-of-use assets obtained in exchange for new finance and operating lease liabilities represent the new operating and finance leases entered into during the three and nine months ended September 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information
|
|
Three months ended September 30, 2019
|
|
Nine months ended September 30, 2019
|
|
Operating Cash Flows From Operating Leases
|
|
$
|
16.2
|
|
|
$
|
47.9
|
|
|
Financing Cash Flows From Finance Leases
|
|
.3
|
|
|
1.0
|
|
|
Cash Paid For Amounts Included In Measurement of Liabilities
|
|
$
|
16.5
|
|
|
$
|
48.9
|
|
|
|
|
|
|
|
|
Right-of-use Assets Obtained In Exchange For New Finance Liabilities
|
|
$
|
—
|
|
|
$
|
.9
|
|
|
Right-of-use Assets Obtained In Exchange For New Operating Liabilities
|
|
$
|
8.5
|
|
|
$
|
33.9
|
|
10. EMPLOYEE BENEFIT PLANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Costs
|
|
U.S. Plans
|
|
|
|
Non-U.S. Plans
|
|
|
|
Postretirement Benefits
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost(1)
|
|
$
|
.3
|
|
|
$
|
.6
|
|
|
$
|
.9
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
|
.6
|
|
|
.6
|
|
|
3.5
|
|
|
3.4
|
|
|
.3
|
|
|
.2
|
|
|
Expected return on plan assets
|
|
(.8)
|
|
|
(1.0)
|
|
|
(7.2)
|
|
|
(7.3)
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service credit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.1)
|
|
|
—
|
|
|
(.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial losses
|
|
.6
|
|
|
.7
|
|
|
1.1
|
|
|
1.5
|
|
|
—
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs(1)
|
|
$
|
.7
|
|
|
$
|
.9
|
|
|
$
|
(1.7)
|
|
|
$
|
(1.4)
|
|
|
$
|
.3
|
|
|
$
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Costs
|
|
U.S. Plans
|
|
|
|
Non-U.S. Plans
|
|
|
|
Postretirement Benefits
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost(1)
|
|
$
|
1.3
|
|
|
$
|
2.4
|
|
|
$
|
2.9
|
|
|
$
|
3.5
|
|
|
$
|
—
|
|
|
$
|
.1
|
|
|
Interest cost
|
|
1.8
|
|
|
1.8
|
|
|
11.2
|
|
|
11.6
|
|
|
.9
|
|
|
.8
|
|
|
Expected return on plan assets
|
|
(2.4)
|
|
|
(2.6)
|
|
|
(22.8)
|
|
|
(23.9)
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service credit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(.1)
|
|
|
—
|
|
|
(.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial losses
|
|
2.0
|
|
|
3.3
|
|
|
3.7
|
|
|
5.1
|
|
|
—
|
|
|
.1
|
|
|
Settlements/curtailments
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net periodic benefit costs(1)
|
|
$
|
2.7
|
|
|
$
|
4.9
|
|
|
$
|
(4.9)
|
|
|
$
|
(3.8)
|
|
|
$
|
.9
|
|
|
$
|
.7
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
(1) Service cost is presented in selling, general and administrative expenses in our Consolidated Statements of Operations. The components of net periodic benefit costs other than service cost are presented in other income (expense), net in our Consolidated Statements of Operations.
During the nine months ended September 30, 2019, we made $1 of contributions to the U.S. and contributions of $3 to the non-U.S. defined benefit pension and postretirement benefit plans, respectively. During the remainder of 2019, we anticipate contributing approximately $0 to $5 and approximately $0 to $5 to fund our U.S. and non-U.S. defined benefit pension and postretirement benefit plans, respectively.
11. CONTINGENCIES
Brazilian Tax Assessments
In December 2012, our Brazilian subsidiary, Avon Industrial LTDA (Avon Brazil Manufacturing) received an excise tax (IPI) assessment for the year 2008. The assessment totals approximately $293, including penalties and accrued interest. As in prior IPI cases that have been resolved in Avon’s favor, this assessment asserts that the establishment in 1995 of separate manufacturing and distribution companies in Brazil was done without a valid business purpose and that Avon Brazil Manufacturing did not observe minimum pricing rules to define the taxable basis of excise tax. The structure adopted in 1995 is comparable to that used by many other companies in Brazil. We believe that our Brazilian corporate structure is appropriate, both operationally and legally, and that the 2012 IPI assessment is unfounded.
These matters are being vigorously contested. In July 2013, the 2012 IPI assessment was upheld at the first administrative level and we appealed this decision to the second administrative level. On April 18, 2018, Avon received official notification that the second administrative level has issued a partially favorable and partially unfavorable decision. In this decision, the original assessment was reduced by approximately $62 (including associated penalty and interest), subject to Federal Revenue appeal. The remaining $231 of the assessment was upheld at the second administrative level. On April 20, 2018, we appealed this decision in the third administrative level where the matter remains pending resolution. We expect to have a decision by the end of 2019.
On October 3, 2017, Avon Brazil Manufacturing received a new tax assessment notice regarding IPI for 2014 on grounds similar to the 2012 assessment. The 2017 IPI assessment totals approximately $228, including penalties and accrued interest. On April 2, 2018, Avon was notified of an unfavorable decision at the first administrative level. On February 25, 2019, this IPI assessment was upheld at the second administrative level and on April 11, 2019 we appealed this decision to the third administrative level. The structure adopted in 1995 is comparable to that used by many other companies in Brazil. We believe that our Brazilian corporate structure is appropriate, both operationally and legally, and that the 2017 IPI assessment is unfounded.
In the event that the 2012 and the 2017 IPI assessments are upheld in the third and final administrative level, it may be necessary for us to provide monetary security in the full amount of the debt to pursue further appeals in the judicial levels, which, depending on the circumstances, may result in a charge to earnings and an adverse effect on the Company's Consolidated Statements of Cash Flows. It is not possible to reasonably estimate the likelihood or potential amount of assessments that may be issued for subsequent periods (tax years up through 2010 are closed by statute). We believe that the 2012 and the 2017 IPI assessments are unfounded, however, based on the likelihood that these will be upheld, we assess the risks as disclosed above as reasonably possible. At September 30, 2019, we have not recognized a liability for the 2012 or 2017 IPI assessments.
Brazil IPI Tax on Cosmetics
Separate from the tax assessments received by Avon Brazil Manufacturing, Avon Cosmeticos LTDA (Avon Brazil) is involved in litigation related to an executive decree issued in May 2015. This decree increased the amount of IPI taxes that are to be remitted by Avon Brazil to the taxing authority on the sales of cosmetic products. Avon Brazil filed an objection to this IPI tax increase on the basis that it is not constitutional. In December 2016, Avon Brazil received a favorable decision from the Federal District Court regarding this objection. This decision has been appealed by the tax authorities.
From May 2015 through April 2016, Avon Brazil remitted the taxes associated with this IPI tax increase into a judicial deposit which would be remitted to the taxing authorities in the event that we are not successful in our objection to the tax increase. In May 2016, Avon Brazil received a favorable preliminary decision on its objection to the tax and was granted a preliminary injunction. As a result, beginning in May 2016, Avon Brazil was no longer required to remit the taxes associated with IPI into a judicial deposit. On June 12, 2018, we received a decision authorizing Avon to withdraw the amount held as a judicial deposit, substituting it by letter of guarantee, which was presented. On June 29, 2018, the tax authorities presented an appeal against that decision. On July 30, 2018, the funds were received in our bank account. As of September 30, 2018, due in part to recent
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
judicial decisions across the industry and other developments, we concluded, supported by the opinion of legal counsel, that the Executive Decree is unconstitutional. We therefore assessed the IPI tax under ASC 450, Contingencies and determined that the risk of loss is reasonably possible but not probable. Accordingly, we released the associated liability as of September 30, 2018 of approximately $195 and ceased accruing the IPI taxes from October 1, 2018. The liability had been classified within long-term sales taxes and taxes other than income in our Consolidated Balance Sheet, and the release was recorded in product sales and other income (expense), net in the amounts of approximately $168 and approximately $27, respectively, in our Consolidated Income Statements for the quarter ended September 30, 2018.
An unfavorable ruling to our objection of this IPI tax increase would have an adverse effect on the Company's Consolidated Income Statements and Consolidated Statements of Cash Flows as Avon Brazil would have to remit the reasonably possible amount of $249 to the taxing authorities (including the judicial deposit that was returned to us on July 30, 2018). We are not able to reliably predict the timing of the outcome of our objection to this tax increase.
A favorable judicial ruling to our objection of this IPI tax would also have an adverse effect on the Company's Consolidated Statements of Cash Flows as Avon Brazil would have to remit all or a portion of the associated income tax liability to the taxing authorities. The Company is accruing a tax reserve, which amounts to approximately $77 at September 30, 2019. This reserve would be settled on final adjudication of the law through a combination of cash and use of deferred tax assets.
Talc-Related Litigation
The Company has been named a defendant in numerous personal injury lawsuits filed in U.S. courts, alleging that certain talc products the Company sold in the past were contaminated with asbestos. Many of these actions involve a number of co-defendants from a variety of different industries, including manufacturers of cosmetics and manufacturers of other products that, unlike the Company’s products, were designed to contain asbestos. As of September 30, 2019, there were 106 individual cases pending against the Company. During the three months ended September 30, 2019, 16 new cases were filed and 28 cases were dismissed, settled, or otherwise resolved. The value of our settlements in this area thus far has not been material, either individually or in the aggregate. Additional similar cases arising out of the use of the Company's talc products are reasonably anticipated.
We believe that the claims asserted against us in these cases are without merit. We are defending vigorously against these claims and will continue to do so. To date, the Company has not proceeded to trial in any case filed against it and there have been no findings of liability enforceable against the Company. However, nationwide trial results in similar cases filed against other manufacturers of cosmetic talc products have ranged from outright dismissals to very large jury awards of both compensatory and punitive damages. Given the inherent uncertainties of litigation, we cannot predict the outcome of all individual cases pending against the Company, and we are only able to make a reasonable estimate for a small number of individual cases that have advanced to the later stages of legal proceedings. For the remaining cases, we provide an estimate of exposure on an aggregated and ongoing basis, which takes into account the historical outcomes of all cases we have resolved to date. Any accruals currently recorded on the Company’s balance sheet with respect to these cases are not material. Other than these accruals, we are at this time unable to estimate our reasonably possible or probable losses. However, any adverse outcomes, either in an individual case or in the aggregate, could be material. Future costs to litigate these cases, which we expense as incurred, are not known but may be significant, though some costs will be covered by insurance.
Brazilian Labor-Related Litigation
On an ongoing basis, the Company is subject to numerous and diverse labor-related lawsuits filed by employees in Brazil. These cases are assessed on an aggregated and ongoing basis based on historical outcomes of similar cases. The claims made are often for significantly larger sums than have historically been paid out by the Company. Our practice continues to be to recognize a liability based on our assessment of historical payments in similar cases. Our best estimate of the probable loss for such current cases at September 30, 2019 is approximately $12 and, accordingly, we have recognized a liability for this amount.
Shareholder Litigation
On February 14, 2019, a purported shareholder’s class action complaint (Bevinal v. Avon Products, Inc., et al., No. 19-cv-1420) was filed in the United States District Court for the Southern District of New York against the Company and certain former officers of the Company. On June 3, 2019, the court appointed a lead plaintiff and class counsel. The complaint was subsequently amended on June 28, 2019 and recaptioned “In re Avon Products, Inc. Securities Litigation” on July 8, 2019. The amended complaint is brought on behalf of a purported class consisting of all purchasers or acquirers of Avon common stock between January 21, 2016 and November 1, 2017, inclusive. The complaint asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") based on allegedly false or misleading statements and alleged market manipulation with respect to, among other things, changes made to Avon’s credit terms for Representatives in Brazil.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
On July 26, 2019 we filed a motion to dismiss. In light of the early stage of the litigation, we are unable to predict the outcome of this matter and are unable to assess the likelihood of loss or to make a reasonable estimate of the amount or range of loss that could result from an unfavorable outcome.
Other Matters
Various other lawsuits and claims, arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. In management's opinion, based on its review of the information available at this time, the total cost of resolving such other contingencies at September 30, 2019, is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The tables below present the changes in AOCI by component and the reclassifications out of AOCI for the three months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Foreign Currency Translation Adjustments
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Pension and Postretirement Benefits
|
|
Investment in New Avon
|
|
Total
|
|
Balance at June 30, 2019
|
|
$
|
(935.2)
|
|
|
$
|
(2.1)
|
|
|
$
|
(4.3)
|
|
|
$
|
(90.7)
|
|
|
$
|
3.4
|
|
|
$
|
(1,028.9)
|
|
|
Other comprehensive loss other than reclassifications
|
|
(19.1)
|
|
|
(.1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19.2)
|
|
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative losses on cash flow hedges, net of tax of $0.0
|
|
—
|
|
|
.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.2
|
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $0.2(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.6
|
|
|
—
|
|
|
1.6
|
|
|
Sale of New Avon
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.4)
|
|
|
(3.4)
|
|
|
Total reclassifications into earnings
|
|
—
|
|
|
.2
|
|
|
—
|
|
|
1.6
|
|
|
(3.4)
|
|
|
(1.6)
|
|
|
Balance at September 30, 2019
|
|
$
|
(954.3)
|
|
|
$
|
(2.0)
|
|
|
$
|
(4.3)
|
|
|
$
|
(89.1)
|
|
|
$
|
—
|
|
|
$
|
(1,049.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Foreign Currency Translation Adjustments
|
|
Net Investment Hedges
|
|
Pension and Postretirement Benefits
|
|
Investment in New Avon
|
|
Total
|
|
Balance at June 30, 2018
|
|
$
|
(923.5)
|
|
|
$
|
(4.3)
|
|
|
$
|
(90.0)
|
|
|
$
|
3.4
|
|
|
$
|
(1,014.4)
|
|
|
Other comprehensive loss other than reclassifications
|
|
(3.6)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.6)
|
|
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $0.1(1)
|
|
—
|
|
|
—
|
|
|
2.1
|
|
|
—
|
|
|
2.1
|
|
|
Total reclassifications into earnings
|
|
—
|
|
|
—
|
|
|
2.1
|
|
|
—
|
|
|
2.1
|
|
|
Balance at September 30, 2018
|
|
$
|
(927.1)
|
|
|
$
|
(4.3)
|
|
|
$
|
(87.9)
|
|
|
$
|
3.4
|
|
|
$
|
(1,015.9)
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Foreign Currency Translation Adjustments
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Pension and Postretirement Benefits
|
|
Investment in New Avon
|
|
Total
|
|
Balance at December 31, 2018
|
|
$
|
(936.2)
|
|
|
$
|
.5
|
|
|
$
|
(4.3)
|
|
|
$
|
(93.8)
|
|
|
$
|
3.4
|
|
|
$
|
(1,030.4)
|
|
|
Other comprehensive loss other than reclassifications
|
|
(18.1)
|
|
|
(3.6)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(21.7)
|
|
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative losses on cash flow hedges, net of tax of $0.0
|
|
—
|
|
|
1.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.1
|
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $0.5(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4.7
|
|
|
—
|
|
|
4.7
|
|
|
Sale of New Avon
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.4)
|
|
|
(3.4)
|
|
|
Total reclassifications into earnings
|
|
—
|
|
|
1.1
|
|
|
—
|
|
|
4.7
|
|
|
(3.4)
|
|
|
2.4
|
|
|
Balance at September 30, 2019
|
|
$
|
(954.3)
|
|
|
$
|
(2.0)
|
|
|
$
|
(4.3)
|
|
|
$
|
(89.1)
|
|
|
$
|
—
|
|
|
$
|
(1,049.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018:
|
|
Foreign Currency Translation Adjustments
|
|
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 other than reclassifications
|
|
(97.5)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(97.5)
|
|
|
Reclassifications into earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss and prior service cost, net of tax of $0.4(1)
|
|
—
|
|
|
—
|
|
|
7.8
|
|
|
—
|
|
|
7.8
|
|
|
Total reclassifications into earnings
|
|
—
|
|
|
—
|
|
|
7.8
|
|
|
—
|
|
|
7.8
|
|
|
Balance at September 30, 2018
|
|
$
|
(927.1)
|
|
|
$
|
(4.3)
|
|
|
$
|
(87.9)
|
|
|
$
|
3.4
|
|
|
$
|
(1,015.9)
|
|
(1) Gross amount reclassified to other income (expense), net in our Consolidated Statements of Operations, and related taxes reclassified to income taxes in our Consolidated Statements of Operations.
Foreign exchange net loss of $5.1 and net gain of $1.2 for the three months ended September 30, 2019 and 2018, respectively, and foreign exchange net losses of $5.8 and $2.5 for the nine months ended September 30, 2019 and 2018, respectively, resulting from the translation of actuarial losses and prior service cost recorded in AOCI, are included in foreign currency translation adjustments in our Consolidated Statements of Comprehensive Income (Loss).
13. SEGMENT INFORMATION
We determine segment profit by deducting the related costs and expenses from segment revenue. Segment profit includes an allocation of global marketing and digital expenses based on actual revenues. Segment profit excludes global expenses other than the allocation of marketing and digital, costs to implement ("CTI") restructuring initiatives (see Note 15, Restructuring Initiatives to the Consolidated Financial Statements contained herein), certain significant asset impairment charges, and other expenses, which are not allocated to a particular segment, if applicable. This is consistent with the manner in which we assess our performance and allocate resources.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
Summarized financial information concerning our reportable segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
Total Revenue
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Europe, Middle East & Africa
|
|
$
|
398.3
|
|
|
$
|
442.9
|
|
|
$
|
1,282.1
|
|
|
$
|
1,512.0
|
|
|
South Latin America*
|
|
494.0
|
|
|
645.4
|
|
|
1,351.7
|
|
|
1,658.6
|
|
|
North Latin America
|
|
184.7
|
|
|
207.0
|
|
|
571.2
|
|
|
609.9
|
|
|
Asia Pacific
|
|
106.3
|
|
|
120.5
|
|
|
330.0
|
|
|
345.0
|
|
|
Total revenue from reportable segments*
|
|
1,183.3
|
|
|
1,415.8
|
|
|
3,535.0
|
|
|
4,125.5
|
|
|
Other operating segments and business activities(1)
|
|
4.7
|
|
|
8.4
|
|
|
14.7
|
|
|
44.1
|
|
|
Total revenue*
|
|
$
|
1,188.0
|
|
|
$
|
1,424.2
|
|
|
$
|
3,549.7
|
|
|
$
|
4,169.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
Operating Profit
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Segment Profit
|
|
|
|
|
|
|
|
|
|
Europe, Middle East & Africa
|
|
$
|
47.6
|
|
|
$
|
46.1
|
|
|
$
|
165.8
|
|
|
$
|
194.9
|
|
|
South Latin America*
|
|
118.4
|
|
|
194.1
|
|
|
207.4
|
|
|
276.5
|
|
|
North Latin America
|
|
17.0
|
|
|
14.3
|
|
|
52.6
|
|
|
54.1
|
|
|
Asia Pacific
|
|
9.4
|
|
|
9.6
|
|
|
36.9
|
|
|
27.3
|
|
|
Total profit from reportable segments*
|
|
$
|
192.4
|
|
|
$
|
264.1
|
|
|
$
|
462.7
|
|
|
$
|
552.8
|
|
|
Other operating segments and business activities(1)
|
|
.9
|
|
|
1.1
|
|
|
2.0
|
|
|
2.7
|
|
|
Unallocated global expenses
|
|
(58.9)
|
|
|
(58.5)
|
|
|
(187.3)
|
|
|
(216.3)
|
|
|
CTI restructuring initiatives
|
|
(17.5)
|
|
|
(19.8)
|
|
|
(116.7)
|
|
|
(54.4)
|
|
|
Other expenses(2)
|
|
(19.2)
|
|
|
—
|
|
|
(36.4)
|
|
|
—
|
|
|
Operating profit*
|
|
$
|
97.7
|
|
|
$
|
186.9
|
|
|
$
|
124.3
|
|
|
$
|
284.8
|
|
* 2019 includes the impact of certain Brazil indirect taxes which was recorded in product sales of approximately $68, in our Consolidated Income Statements. See Note 14 Supplemental Balance Sheet Information, to the Consolidated Financial Statements contained herein for further information. 2018 includes the impact of the Brazil IPI, which was recorded in product sales of approximately $168, in our Consolidated Income Statements. See Note 11, Contingencies, to the Consolidated Financial Statements contained herein for further information.
(1) Other operating segments and business activities include markets that have been exited. Effective in the first quarter of 2018, given that we exited Australia and New Zealand during 2018, the results of Australia and New Zealand are now reported in Other operating segments and business activities for all periods presented, while previously the results had been reported in the Asia Pacific segment. Other operating segments and business activities also include revenue from the sale of products to New Avon since the separation of the Company's North America business into New Avon on March 1, 2016 and ongoing royalties from the licensing of our name and products.
(2) Other expenses includes primarily professional fees incurred in relation to the Natura transaction, and other impairment losses on assets. Refer to Note 21, Agreement and Plan of Mergers with Natura Cosmeticos S.A., to the Consolidated Financial Statements contained herein for more information relating to the Natura transaction.
14. SUPPLEMENTAL BALANCE SHEET INFORMATION
At September 30, 2019 and December 31, 2018, prepaid expenses and other included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Prepaid Expenses and Other
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Prepaid taxes and tax refunds receivable
|
|
$
|
155.1
|
|
|
$
|
145.0
|
|
|
Receivables other than trade
|
|
47.7
|
|
|
69.2
|
|
|
Prepaid brochure costs, paper and other literature
|
|
12.0
|
|
|
14.9
|
|
|
|
|
|
|
|
|
Other
|
|
50.6
|
|
|
42.9
|
|
|
Prepaid expenses and other
|
|
$
|
265.4
|
|
|
$
|
272.0
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
At September 30, 2019 and December 31, 2018, other assets included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Other Assets(1)
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Net overfunded pension plans
|
|
$
|
95.2
|
|
|
$
|
88.1
|
|
|
Capitalized software
|
|
81.0
|
|
|
89.3
|
|
|
Judicial deposits
|
|
67.9
|
|
|
74.1
|
|
|
Long-term receivables
|
|
186.4
|
|
|
73.2
|
|
|
|
|
|
|
|
|
Trust assets associated with supplemental benefit plans
|
|
39.4
|
|
|
37.0
|
|
|
Tooling (plates and molds associated with our beauty products)
|
|
12.6
|
|
|
12.6
|
|
|
|
|
|
|
|
|
Other
|
|
31.4
|
|
|
16.1
|
|
|
Other assets
|
|
$
|
513.9
|
|
|
$
|
390.4
|
|
(1) Deferred tax asset balance as of September 30, 2019 and December 31, 2018 is presented separately in the Consolidated Balance Sheet
Long-term receivables includes approximately $118 of certain Brazil indirect taxes (COFINS), recognized in the three months ended September 30, 2019. Approximately $68 and $50 was recorded in product sales and other income (expense), net, in our Consolidated Income Statements following favorable judicial decisions in the three months ending September 30, 2019. The corresponding tax charge on this transaction is approximately $23 and is included in the deferred tax asset balance as of September 30, 2019 which is presented separately in the Consolidated Balance Sheet.
During the three months ended September 30, 2019, we entered into an arrangement to sell the rights to a portion of these credits, in the amount of approximately $80. The Company has the option to repurchase these credits for a period of three years. This transaction resulted in a cash inflow of approximately $19, which is presented as a financing activity in the Consolidated Statements of Cash Flows. The sale of credits is accounted for as a financing arrangement, therefore the receivables have not been derecognized and a financing liability of approximately $19 has been recognized.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
15. RESTRUCTURING INITIATIVES
Transformation Plan and Open Up Avon
Open Up Avon
In September 2018, we initiated a new strategy in order to return Avon to growth ("Open Up Avon"). The Open Up Avon strategy is integral to our ability to return Avon to growth, built around the necessity of incorporating new approaches to various elements of our business, including increased utilization of third-party providers in manufacturing and technology, a more fit for purpose asset base, and a focus on enabling our Representatives to more easily interact with the company and achieve relevant earnings. The commercial elements of the strategy were developed to help increase Representative earnings and thereby retention. Elements of the Representative strategy include improvements in service functions, increased training on utilization of digital tools to expand her consumer reach, product bundling and regimens designed to help improve her earnings opportunity and sharper more targeted product innovation to drive brand relevancy. Cost savings under this plan are targeted as annualized cost savings of approximately $400 by 2021, and expected to be generated from efficiencies in manufacturing and sourcing, distribution, general and administrative activities, and back office functions, as well as through revenue management, interest and tax. These savings are expected to be achieved through restructuring actions (that may result in charges related to severance, contract terminations and inventory and other asset write-offs), as well as other cost-savings strategies that would not result in restructuring charges. In January 2019, we announced significant advancements in this strategy, including a structural reset of inventory processes and a reduction in global workforce. The structural reset of inventory will result in lower operational and ongoing obsolescence costs. Over the longer term, it will result in a more concentrated focus on high-turn, higher margin products, driving greater earnings for Representatives due to lessened discount pressure and enhanced service levels. The structural reset resulted in an incremental one-off inventory obsolescence expense of $88 recognized at December 31, 2018. At September 30, 2019, we are trending ahead of the expected 10% global workforce reduction as announced in January 2019, to align with ongoing operating model changes and to create a leaner organization that is better aligned with Avon’s current and future business focus. This reduction is incremental to an 8% reduction of the global workforce that was completed in 2018. The restructuring charge relating to the global workforce reduction, which was approved by the Board of Directors in January 2019, forms an integral part of the Open Up Avon initiative, the impacts of this are disclosed below. We initiated the Open Up Avon strategy to enable us to achieve our goals of low-single-digit Constant $ revenue growth and low double-digit operating margin by 2021. We plan to reinvest a portion of these cost savings in commercial initiatives, including training for Representatives, and digital and information technology infrastructure initiatives. As a result of Open Up Avon restructuring actions approved to-date, we have recorded total costs to implement these restructuring initiatives of $227.4 before taxes, of which $10.8 and $84.1 was recorded during the three and nine months ended September 30, 2019, respectively, in our Consolidated Statements of Operations.
Transformation Plan
In January 2016, we initiated a transformation plan (the "Transformation Plan"), in order to enable us to achieve our long-term goals of mid-single-digit constant-dollar ("Constant $") revenue growth and low double-digit operating margin. Under this plan, we had targeted pre-tax annualized cost savings of approximately $350 after three years, which we exceeded through restructuring actions, as well as other cost-savings strategies that did not result in restructuring charges.
As a result of these restructuring actions approved to-date, we have recorded total costs to implement these restructuring initiatives of $214.4 before taxes, of which $6.7 and $9.0 was recorded during the three and nine months ended September 30, 2019, respectively, in our Consolidated Statements of Operations. There are no further restructuring actions to be taken associated with our Transformation Plan, as beginning in the third quarter of 2018, all new restructuring actions approved operate under our new Open Up Avon plan described above.
Costs to Implement Restructuring Initiatives - Three and Nine Months Ended September 30, 2019 and 2018
During the three months ended September 30, 2019, we recorded net costs to implement of $17.5, of which $10.8 related to Open Up Avon and $6.7 related to the Transformation Plan in our Consolidated Statements of Operations. During the three months ended September 30, 2018, we recorded costs to implement of $19.8, of which $19.1 related to Open Up Avon and .7 related to the Transformation Plan in our Consolidated Statements of Operations.
During the nine months ended September 30, 2019, we recorded net costs to implement of $93.2, of which $84.1 related to Open Up Avon, $9.0 related to the Transformation Plan, and $.1 related to other restructuring initiatives, in our Consolidated Statements of Operations. During the nine months ended September 30, 2018, we recorded costs to implement of $54.4 of which $19.1 related to Open Up Avon, $36.0 related to the Transformation Plan and $.7 benefit related to other restructuring initiatives in our Consolidated Statements of Operations.
The costs during the three and nine months ended September 30, 2019 and 2018 consisted of the following:
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
CTI recorded in operating profit - COGS
|
|
|
|
|
|
|
|
|
|
Manufacturing asset write-offs
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
10.9
|
|
|
$
|
—
|
|
|
Inventory write-off
|
|
(2.1)
|
|
|
(.1)
|
|
|
1.0
|
|
|
1.0
|
|
|
|
|
(1.0)
|
|
|
(.1)
|
|
|
11.9
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
CTI recorded in operating profit - SG&A
|
|
|
|
|
|
|
|
|
|
Net charges for employee-related costs, including severance benefits
|
|
3.2
|
|
|
6.4
|
|
|
51.9
|
|
|
31.9
|
|
|
Implementation costs, primarily related to professional service fees
|
|
7.8
|
|
|
11.8
|
|
|
33.7
|
|
|
17.5
|
|
|
Dual running costs
|
|
3.7
|
|
|
—
|
|
|
8.2
|
|
|
—
|
|
|
Contract termination and other net benefits
|
|
(.1)
|
|
|
(1.7)
|
|
|
4.5
|
|
|
(1.0)
|
|
|
Impairment of other assets
|
|
.1
|
|
|
2.5
|
|
|
2.4
|
|
|
2.5
|
|
|
Accelerated depreciation
|
|
2.3
|
|
|
.9
|
|
|
2.6
|
|
|
2.5
|
|
|
Variable lease charges
|
|
1.5
|
|
|
—
|
|
|
|
1.5
|
|
|
—
|
|
|
|
|
18.5
|
|
|
19.9
|
|
|
104.8
|
|
|
53.4
|
|
|
|
|
|
|
|
|
|
|
|
|
CTI recorded in operating profit
|
|
17.5
|
|
|
19.8
|
|
|
116.7
|
|
|
54.4
|
|
|
|
|
|
|
|
|
|
|
|
|
CTI recorded in other (income) expense
|
|
|
|
|
|
|
|
|
|
Gain on sale of Rye Office
|
|
—
|
|
|
—
|
|
|
(9.9)
|
|
|
—
|
|
|
Gain on sale of Malaysia Maximin
|
|
—
|
|
|
—
|
|
|
(3.3)
|
|
|
—
|
|
|
Gain on sale of China business (relating mainly to foreign currency translation adjustment gain)
|
|
—
|
|
|
—
|
|
|
(10.3)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CTI
|
|
$
|
17.5
|
|
|
$
|
19.8
|
|
|
$
|
93.2
|
|
|
$
|
54.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Open Up Avon
|
|
$
|
10.8
|
|
|
$
|
19.1
|
|
|
$
|
84.1
|
|
|
$
|
19.1
|
|
|
Transformation Plan
|
|
$
|
6.7
|
|
|
$
|
0.7
|
|
|
$
|
9.0
|
|
|
$
|
36.0
|
|
|
Other
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
.1
|
|
|
$
|
(.7)
|
|
The tables below include restructuring costs such as employee-related costs, inventory and asset write-offs, foreign currency translation write-offs and contract terminations, and do not include other costs to implement restructuring initiatives such as professional services fees, dual running costs, accelerated depreciation and gain on sale of business.
The liability balance included in other accrued liabilities in our Consolidated Statements of Operations for the restructuring actions associated with Open Up Avon at September 30, 2019 is as follows:
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-Related Costs
|
|
Inventory/Assets Write-offs
|
|
Foreign Currency Translation Adjustment Write-offs
|
|
Contract Terminations/Other
|
|
Total
|
|
Balance at December 31, 2018
|
|
$
|
19.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
20.7
|
|
|
2019 charges
|
|
$
|
56.1
|
|
|
$
|
14.3
|
|
|
$
|
(10.9)
|
|
|
$
|
4.4
|
|
|
63.9
|
|
|
Adjustments
|
|
(3.6)
|
|
|
—
|
|
|
—
|
|
|
(.1)
|
|
|
(3.7)
|
|
|
Cash payments
|
|
(46.2)
|
|
|
—
|
|
|
—
|
|
|
(2.5)
|
|
|
(48.7)
|
|
|
Non-cash write-offs
|
|
—
|
|
|
(14.3)
|
|
|
10.9
|
|
|
—
|
|
|
(3.4)
|
|
|
Foreign exchange
|
|
(3.0)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.0)
|
|
|
Balance at September 30, 2019
|
|
$
|
22.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.9
|
|
|
$
|
25.8
|
|
The liability balance included in other accrued liabilities in our Consolidated Balance Sheet for the restructuring actions associated with our Transformation Plan as of September 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-Related Costs
|
|
|
|
Contract Terminations/Other
|
|
|
|
Total
|
|
Balance at December 31, 2018
|
|
$
|
34.4
|
|
|
|
|
$
|
3.6
|
|
|
|
|
$
|
38.0
|
|
|
2019 charges
|
|
(0.7)
|
|
|
|
|
.2
|
|
|
|
|
(.5)
|
|
|
Cash payments
|
|
(26.3)
|
|
|
|
|
(2.3)
|
|
|
|
|
(28.6)
|
|
|
Foreign exchange
|
|
.1
|
|
|
|
|
—
|
|
|
|
|
.1
|
|
|
Balance at September 30, 2019
|
|
$
|
7.5
|
|
|
|
|
$
|
1.5
|
|
|
|
|
$
|
9.0
|
|
The majority of cash payments, if applicable, associated with the year-end liability are expected to be made during 2019.
The following table presents the restructuring charges incurred to date, under Open Up Avon and the Transformation Plan, along with the estimated charges expected to be incurred on approved initiatives under the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee- Related Costs
|
|
Inventory/ Asset Write-offs
|
|
Contract
Terminations/Other
|
|
Foreign Currency Translation Adjustment Write-offs
|
|
Total
|
|
Open Up Avon
|
|
|
|
|
|
|
|
|
|
|
|
Charges incurred to-date
|
|
$
|
78.9
|
|
|
$
|
104.1
|
|
|
$
|
5.1
|
|
|
$
|
(10.9)
|
|
|
$
|
177.2
|
|
|
Estimated charges to be incurred on approved initiatives
|
|
—
|
|
|
—
|
|
|
1.7
|
|
|
—
|
|
|
1.7
|
|
|
Total expected charges on approved initiatives
|
|
$
|
78.9
|
|
|
$
|
104.1
|
|
|
$
|
6.8
|
|
|
$
|
(10.9)
|
|
|
$
|
178.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transformation Plan
|
|
|
|
|
|
|
|
|
|
|
|
Charges incurred to-date
|
|
$
|
127.3
|
|
|
$
|
2.4
|
|
|
$
|
40.9
|
|
|
$
|
3.4
|
|
|
$
|
174.0
|
|
|
Estimated charges to be incurred on approved initiatives
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total expected charges on approved initiatives
|
|
$
|
127.3
|
|
|
$
|
2.4
|
|
|
$
|
40.9
|
|
|
$
|
3.4
|
|
|
$
|
174.0
|
|
The charges, net of adjustments, of initiatives under the Open Up Avon and the Transformation Plan, along with the estimated charges expected to be incurred on approved initiatives under the plans, by reportable segment are as follows:
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East & Africa
|
|
South Latin America
|
|
North Latin America
|
|
Asia
Pacific
|
|
Global & Other Operating Segments
|
|
Total
|
|
Open Up Avon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
32.2
|
|
|
$
|
36.4
|
|
|
$
|
27.9
|
|
|
$
|
14.4
|
|
|
$
|
6.2
|
|
|
$
|
117.1
|
|
|
First quarter 2019
|
|
13.5
|
|
|
12.7
|
|
|
2.9
|
|
|
(3.2)
|
|
|
7.3
|
|
|
33.2
|
|
|
Second quarter 2019
|
|
4.5
|
|
|
13.7
|
|
|
4.3
|
|
|
(1.2)
|
|
|
3.9
|
|
|
25.2
|
|
|
Third quarter 2019
|
|
(.8)
|
|
|
1.6
|
|
|
.4
|
|
|
.4
|
|
|
.1
|
|
|
1.7
|
|
|
Charges incurred to-date
|
|
49.4
|
|
|
|
64.4
|
|
|
|
35.5
|
|
|
|
10.4
|
|
|
|
17.5
|
|
|
|
177.2
|
|
|
Estimated charges to be incurred on approved initiatives
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.7
|
|
|
Total expected charges on approved initiatives
|
|
$
|
51.1
|
|
|
$
|
64.4
|
|
|
$
|
35.5
|
|
|
$
|
10.4
|
|
|
$
|
17.5
|
|
|
$
|
178.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transformation Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21.4
|
|
|
$
|
21.4
|
|
|
2016
|
|
30.9
|
|
|
13.2
|
|
|
4.4
|
|
|
9.1
|
|
|
16.8
|
|
|
74.4
|
|
|
2017
|
|
.9
|
|
|
5.6
|
|
|
(.6)
|
|
|
(.5)
|
|
|
49.4
|
|
|
54.8
|
|
|
2018
|
|
5.0
|
|
|
4.1
|
|
|
.6
|
|
|
.6
|
|
|
13.4
|
|
|
23.7
|
|
|
First quarter 2019
|
|
(1.1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.3
|
|
|
(.8)
|
|
|
Second quarter 2019
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Third quarter 2019
|
|
(.1)
|
|
|
.5
|
|
|
—
|
|
|
—
|
|
|
.1
|
|
|
.5
|
|
|
Charges incurred to-date
|
|
35.6
|
|
|
|
23.4
|
|
|
|
4.4
|
|
|
|
9.2
|
|
|
|
101.4
|
|
|
|
174.0
|
|
|
Estimated charges to be incurred on approved initiatives
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total expected charges on approved initiatives
|
|
$
|
35.6
|
|
|
$
|
23.4
|
|
|
$
|
4.4
|
|
|
$
|
9.2
|
|
|
$
|
101.4
|
|
|
$
|
174.0
|
|
The charges above are not included in segment profit, as this excludes costs to implement restructuring initiatives. The amounts shown in the tables above as charges recorded to-date relate to initiatives that have been approved and recorded in the consolidated financial statements, as the costs are probable and estimable. The amounts shown in the tables above as total expected charges on approved initiatives represent charges recorded to-date plus charges yet to be recorded for approved initiatives as the relevant accounting criteria for recording an expense have not yet been met.
16. GOODWILL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East & Africa
|
|
South Latin
America
|
|
Asia
Pacific
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at December 31, 2018
|
|
$
|
18.0
|
|
|
$
|
66.8
|
|
|
$
|
2.6
|
|
|
$
|
87.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes during the period ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
|
|
(1.0)
|
|
|
(3.9)
|
|
|
—
|
|
|
(4.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at September 30, 2019
|
|
$
|
17.0
|
|
|
$
|
62.9
|
|
|
$
|
2.6
|
|
|
$
|
82.5
|
|
17. FAIR VALUE
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2019:
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
4.0
|
|
|
$
|
—
|
|
|
$
|
4.0
|
|
|
Foreign exchange forward contracts
|
$
|
—
|
|
|
$
|
17.0
|
|
|
$
|
17.0
|
|
|
Total
|
$
|
4.0
|
|
|
$
|
17.0
|
|
|
$
|
21.0
|
|
|
Liabilities:
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
$
|
—
|
|
|
$
|
2.0
|
|
|
$
|
2.0
|
|
|
Total
|
$
|
—
|
|
|
$
|
2.0
|
|
|
$
|
2.0
|
|
The assets and liabilities measured at fair value on a recurring basis were immaterial at December 31, 2018.
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 carrying value for cash and cash equivalents, accounts receivable, accounts payable and short-term investments approximate fair value because of the short-term nature of these instruments.
The net asset (liability) amounts recorded in the balance sheet (carrying amount) and the estimated fair values of our remaining financial instruments at September 30, 2019 and December 31, 2018, respectively, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
December 31, 2018
|
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Available-for-sale securities
|
$
|
4.0
|
|
|
$
|
4.0
|
|
|
$
|
3.8
|
|
|
$
|
3.8
|
|
|
Debt maturing within one year(1)
|
(116.2)
|
|
|
(117.4)
|
|
|
(12.0)
|
|
|
(12.0)
|
|
|
Long-term debt(1)
|
(1,589.1)
|
|
|
(1,696.7)
|
|
|
(1,581.6)
|
|
|
(1,460.2)
|
|
|
Foreign exchange forward contracts
|
15.0
|
|
|
15.0
|
|
|
(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.
18. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We operate globally, with manufacturing and distribution facilities in various countries around the world. We may reduce our exposure to fluctuations in the fair value and cash flows associated with changes in interest rates and foreign exchange rates by creating offsetting positions, including through the use of derivative financial instruments. If we use foreign currency-rate sensitive and interest-rate sensitive instruments to hedge a certain portion of our existing and forecasted transactions, we would expect that any gain or loss in value of the hedge instruments generally would be offset by decreases or increases in the value of the underlying forecasted transactions.
We do not enter into derivative financial instruments for trading or speculative purposes, nor are we a party to leveraged derivatives. The master agreements governing our derivative contracts generally contain standard provisions that could trigger early termination of the contracts in certain circumstances, including if we were to merge with another entity and the creditworthiness of the surviving entity were to be "materially weaker" than that of Avon prior to the merger.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
Derivatives are recognized in the Consolidated Balance Sheets at their fair values. The following table presents the fair value of derivative instruments at September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
|
Liability
|
|
|
|
|
Balance Sheet
Classification
|
|
Fair
Value
|
|
Balance Sheet
Classification
|
|
Fair
Value
|
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
Prepaid expenses and other
|
|
$
|
—
|
|
|
Accounts payable
|
|
$
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
Prepaid expenses and other
|
|
$
|
17.0
|
|
|
Accounts payable
|
|
$
|
.1
|
|
|
Total derivatives
|
|
|
$
|
17.0
|
|
|
|
|
$
|
2.0
|
|
The fair value of derivative instruments outstanding was immaterial at December 31, 2018.
Interest Rate Risk
A portion of our borrowings is subject to interest rate risk. In the past we have used interest-rate swap agreements, which effectively converted the fixed rate on long-term debt to a floating interest rate, to manage our interest rate exposure. The agreements were designated as fair value hedges. As of September 30, 2019, we do not have any interest-rate swap agreements. Approximately 7% and 1% of our debt portfolio, at September 30, 2019 and December 31, 2018, respectively, was exposed to floating interest rates. For the purpose of this calculation, we consider all short-term debt to be exposed to floating interest rates.
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 was amortized as a reduction of interest expense until repayment of the underlying debt obligations in June 2018, at which point the remaining unamortized balance was fully released to the Consolidated Statement of Operations. The net impact of the gain amortization was zero for both the three and nine months ended September 30, 2019, and zero and $6.0 for the three and nine months ended September 30, 2018, respectively. At September 30, 2019, 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 September 30, 2019, we had outstanding foreign exchange forward contracts with notional amounts totaling approximately $893.3 for various currencies, of which $13.1 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 translation impact recognized in earnings relating to the associated intercompany loans. During the three and nine months ended September 30, 2019, we recorded gains of $35.1 and $57.0, respectively, in other income (expense), net in our Consolidated Statements of Operations related to these undesignated foreign exchange forward contracts. During the three and nine months ended September 30, 2018, we recorded a gain of $2.0 and a loss of $1.1, respectively, in other income (expense), net in our Consolidated Statements of Operations related to other undesignated foreign exchange forward contracts.
During the first quarter of 2019, we discontinued our program to hedge foreign exchange risk relating to forecasted operational transactions. The last of our designated cash flow hedges will expire during the first quarter of 2020. Our designated hedges did not have a material impact on our Consolidated Financial Statements for the nine months ended September 30, 2019.
19. DEBT
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 February 2019, Avon International Capital, p.l.c. ("AIC"), a wholly-owned foreign subsidiary of the Company, entered into a
three-year €200.0 million senior secured revolving credit facility (the "2019 facility"). As of September 30, 2019 this amounted to $218. The 2019 facility replaced the 2015 facility and the 2015 facility was terminated at such time. There were no amounts
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
drawn under the 2015 revolving credit facility on the date of termination and no early termination penalties were incurred. In the first quarter of 2019, $2.0 was recorded for the write-off of unamortized issuance costs related to the 2015 revolving credit facility. As of September 30, 2019, there were no amounts outstanding under the 2019 facility. 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 (as defined below), if on such 91st day, the applicable notes are not redeemed, repaid, discharged, defeased or otherwise refinanced in full. In the first quarter of 2019, the Company capitalized $11.0 of issue costs relating to the new revolving credit facility; this resulted in a cash outflow presented in other financing activities within the Consolidated Statement of Cash Flows.
As of September 30, 2019, we were in compliance with our interest coverage and net leverage ratios under the 2019 facility. The amount of the facility available to be drawn down on is reduced by any standby letters of credit granted by an obligor, which, as of September 30, 2019, was approximately $23. As of September 30, 2019, based on then applicable exchange rates, the entire amount of the remaining 2019 facility, which is approximately €179 million, could have been drawn down without violating any covenant.
Public Notes
In March 2013, we issued, in a public offering, $500.0 principal amount of 4.60% Notes due March 15, 2020 (the "4.60% Notes"), $500.0 principal amount of 5.00% Notes due March 15, 2023 (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"). Interest on the 2013 Notes is payable semi-annually on March 15 and September 15 of each year.
The indenture governing the 2013 Notes contains interest rate adjustment provisions depending on the long-term credit ratings assigned to the 2013 Notes by S&P and Moody's. As described in the indenture, the interest rates on the 2013 Notes increase by .25% for each one-notch downgrade below investment grade on each of our long-term credit ratings assigned to the 2013 Notes by S&P or Moody's. These adjustments are limited to a total increase of 2.00% 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.
As of September 30, the remaining aggregate principal amount of the 4.60% Notes was $112.3 which will mature on March 15, 2020. In July 2019, AIC issued $400.0 Senior Secured Notes (the 2019 Notes), the proceeds of which were partially used to purchase an aggregate principal amount of $274.8 of the 4.60% Notes. In the third quarter of 2019, AIC capitalized $9 of issue costs relating to the 2019 Notes, this resulted in a cash outflow presented in other financing activities within the Consolidated Statement of Cash Flows.
Senior Secured Notes
In August 2016, AIO issued, in a private placement exempt from registration under the Securities Act of 1933, as amended, $500.0 in aggregate principal amount of 7.875% Senior Secured Notes, which will mature on August 15, 2022 (the "2016 Notes"). Interest on the 2016 Notes is payable semi-annually on February 15 and August 15 of each year.
In July 2019, AIC issued, in a private placement exempt from registration under the Securities Act of 1933, as amended, $400.0 in aggregate principal amount of 6.5% Senior Secured Notes, which will mature on August 15, 2022 (the "2019 Notes"). Interest on the 2019 Notes is payable semi-annually on February 15 and August 15 of each year.
20. INCOME TAXES
Our quarterly income tax provision is calculated using an estimated annual effective income tax approach. The quarterly effective tax rate can differ from our estimated annual effective tax rate as the Company cannot apply an effective tax rate approach for all of its operations. For those entities that can apply an effective tax rate approach, as of September 30, 2019, our annual effective tax rate, excluding discrete items, is 25.2% for 2019, as compared to 23.6% as of September 30, 2018.
The remaining entities, which are operations that generate pre-tax losses which cannot be tax benefited and/or have an effective tax rate which cannot be reliably estimated, have to account for their income taxes on a discrete year-to-date basis as of the end of each quarter and are excluded from the effective tax rate approach. The estimated annual effective tax rate for 2019 also excludes the unfavorable impact of withholding taxes associated with certain intercompany payments, including royalties, service charges, interest and dividends, which in the aggregate are relatively consistent each year due to the need to repatriate funds to cover U.S. and U.K. based costs, such as interest on debt and corporate overhead. Withholding taxes associated with the relatively consistent intercompany payments are accounted for discretely and accrued in the provision for income taxes as they become due.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
The provision for income taxes for the three months ended September 30, 2019 and 2018 was $31.5 and $68.3, respectively. Our effective tax rates for the three months ended September 30, 2019 and 2018 were 21.8% and 37.5%, respectively. The effective tax rates for the three months ended September 30, 2019 and 2018 were impacted by CTI restructuring charges which could not all be benefitted, country mix of earnings and withholding taxes. The effective tax rate for the three months ended September 30, 2019 was also favorably impacted by the accrual of miscellaneous income tax benefits of approximately $2.3. The effective tax rate for the three months ended September 30, 2018 was also favorably impacted by the accrual of tax benefits of approximately $14.0 associated with the initial recognition of tax benefits associated with Avon’s interpretation of case law, net releases of tax reserves of approximately $3.1 associated with our uncertain tax positions and other net benefits of approximately $1.9.
The provision for income taxes for the nine months ended September 30, 2019 and 2018 was $78.2 and $136.5, respectively. Our effective tax rates for the nine months ended September 30, 2019 and 2018 were 48.5% and 71.0%. The effective tax rates for the nine months ended September 30, 2019 and 2018 were impacted by CTI restructuring charges which could not all be benefitted, country mix of earnings and withholding taxes. The effective tax rate for the nine months ended September 30, 2019 was also favorably impacted by the accrual of net income tax benefits of approximately $5.2 associated with the release of income tax reserves of approximately $3.0 associated with our uncertain tax positions and other net, miscellaneous income tax benefits of approximately $2.2. The effective tax rate for the nine months ended September 30, 2018 was also favorably impacted by the accrual of tax benefits of approximately $14.0 associated with the initial recognition of tax benefits associated with Avon’s interpretation of recent case law, the recognition of approximately $4.1 of deferred tax assets that had previously been subject to a full valuation allowance and other net benefits of approximately $1.0 offset with a net increase of approximately $10.9 associated with our uncertain tax positions.
In its final analysis of the impacts of the Tax Cuts and Job Act (the "TCJA") during the fourth quarter of 2018, the Company elected to treat income taxes associated with Global Intangible Low-Taxed Income ("GILTI"), as a period cost. As a result, the 2019 provision for income taxes reflects this treatment. The 2018 provision for income taxes was also calculated treating GILTI as a period cost. For both periods, GILTI did not have a material effect. The TCJA has significant complexity. The Company has considered the published guidance provided by the various Federal and state regulatory authorities into the calculation of its income tax provisions available as of September 30, 2019 and September 30, 2018 for the respective periods ended September 30, 2019 and September 30, 2018.
In prior years, we had previously recorded valuation allowances against certain deferred tax assets associated with the U.S. and various foreign jurisdictions. We intend to continue maintaining these valuation allowances on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
21. AGREEMENT AND PLAN OF MERGERS WITH NATURA COSMÉTICOS S.A.
On May 22, 2019, the Company entered into an Agreement and Plan of Mergers (as amended, the "Merger Agreement") with Natura Cosméticos S.A., a Brazilian corporation (sociedade anônima) ("Natura Cosméticos"), Natura &Co Holding S.A., a Brazilian corporation (sociedade anônima) ("Natura &Co Holding"), Nectarine Merger Sub I, Inc., a Delaware corporation and a direct wholly owned subsidiary of Natura &Co Holding ("Merger Sub I"), and Nectarine Merger Sub II, Inc., a Delaware corporation and a direct wholly owned subsidiary of Merger Sub I ("Merger Sub II"), pursuant to which (i) Natura &Co Holding will, after the completion of certain restructuring steps, hold all issued and outstanding shares of Natura Cosméticos, (ii) Merger Sub II will merge with and into Avon, with Avon surviving the merger and (iii) Merger Sub I will merge with and into Natura &Co Holding, with Natura &Co Holding surviving the merger and as a result of which Avon will become a wholly owned direct subsidiary of Natura &Co Holding (collectively, the "Transaction"). If the Transaction is completed, Avon and Natura Cosméticos will each become wholly owned subsidiaries of Natura &Co Holding.
If the Transaction is completed, each share of Avon common stock issued and outstanding immediately prior to the consummation of the Transaction will be converted into the right to receive, at the election of the holder thereof, (i) 0.300 validly issued and allotted, fully paid-up American Depositary Shares of Natura &Co Holding, each representing one Natura &Co Holding Share ("Natura &Co Holding ADSs") against the deposit of two shares of common stock of Natura &Co Holding ("Natura &Co Holding Shares"), subject to adjustment in accordance with the terms of the Merger Agreement, and any cash in lieu of fractional Natura &Co Holding ADSs or (ii) 0.600 validly issued and allotted, fully paid-up Natura &Co Holding Shares, subject to adjustment in accordance with the terms of the Merger Agreement, and any cash in lieu of fractional Natura &Co Holding Shares, and each share of Avon series C preferred stock held by Cleveland Apple Investor L.P. issued and outstanding immediately prior to the consummation of the Transaction will be automatically converted into the right to receive an amount in cash without interest equal to the Stated Value (as defined in Avon's certificate of incorporation) of such shares of series C preferred stock. Upon the consummation of the Transaction, Natura &Co Holding Shares are expected to be listed on the B3 S.A. - Brasil, Bolsa, Balcão stock exchange (the "B3") and Natura &Co Holding ADSs are expected to be listed on the New York Stock Exchange (the "NYSE"). Additionally, upon the consummation of the Transaction, Avon common stock will cease to be traded on the NYSE.
The Merger Agreement contains customary representations and warranties of Avon, Natura Cosméticos and Natura &Co Holding relating to their respective businesses and public filings, in each case generally subject to a materiality qualifier. Additionally, the Merger Agreement provides for customary pre-closing covenants of Avon, including (i) covenants relating to conducting its business in the ordinary course consistent with past practice and to refrain from taking certain actions without Natura Cosméticos's consent, (ii) covenants not to solicit proposals relating to alternative transactions or, subject to certain exceptions, enter into discussions concerning, or provide information in connection with, alternative transactions and (iii) covenants to recommend, subject to certain exceptions, that Avon's shareholders adopt the Merger Agreement.
The timing and completion of the Transaction is subject to a number of closing conditions, including (i) Avon and Natura Cosméticos shareholder approvals having been obtained in accordance with applicable law, (ii) clearance from competition authorities in certain jurisdictions where Avon and Natura Cosméticos operate, (iii) the absence of any judgment, injunction or other order issued by a court of competent jurisdiction prohibiting the Transaction, (iv) effectiveness of registration statements for Natura &Co Holding's ADSs, (v) listing approval for Natura &Co Holding's ADSs on the NYSE, (vi) listing approval for Natura &Co Holding's shares on the B3 stock exchange under the Novo Mercado listing segment and (vii) subject to certain materiality exceptions, the accuracy of Avon's, Natura Cosméticos's and Natura &Co Holding's representations and warranties in the Merger Agreement and performance by each party of their obligations under the Merger Agreement.
The Company has incurred costs to date of $27 in relation to the Transaction, primarily professional fees. It is expected that additional costs will be incurred prior to or at the closing of the Transaction, including approximately $31 with respect to professional fees that are contingent on the successful closing of the Transaction.
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
%/Basis Point
Change
|
|
2019
|
|
2018
|
|
%/Basis Point
Change
|
|
Select Consolidated Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,188.0
|
|
|
$
|
1,424.2
|
|
|
(17)
|
%
|
|
$
|
3,549.7
|
|
|
$
|
4,169.6
|
|
|
(15)
|
%
|
|
Cost of sales
|
|
(468.2)
|
|
|
(538.4)
|
|
|
(13)
|
%
|
|
(1,482.7)
|
|
|
(1,657.8)
|
|
|
(11)
|
%
|
|
Selling, general and administrative expenses
|
|
(622.1)
|
|
|
(698.9)
|
|
|
(11)
|
%
|
|
(1,942.7)
|
|
|
(2,227.0)
|
|
|
(13)
|
%
|
|
Operating profit
|
|
97.7
|
|
|
186.9
|
|
|
(48)
|
%
|
|
124.3
|
|
|
284.8
|
|
|
(56)
|
%
|
|
Interest expense
|
|
(32.0)
|
|
|
(31.3)
|
|
|
2
|
%
|
|
(95.9)
|
|
|
(102.0)
|
|
|
(6)
|
%
|
|
Interest income
|
|
2.1
|
|
|
4.3
|
|
|
(51)
|
%
|
|
5.3
|
|
|
12.0
|
|
|
(56)
|
%
|
|
Other income (expense), net
|
|
57.9
|
|
|
22.2
|
|
|
*
|
|
|
87.3
|
|
|
0.3
|
|
|
*
|
|
|
Gain on sale of business / assets
|
|
26.8
|
|
|
—
|
|
|
100
|
%
|
|
50.3
|
|
|
—
|
|
|
100
|
%
|
|
Loss on extinguishment of debt and credit facilities
|
|
(8.1)
|
|
|
—
|
|
|
(100)
|
%
|
|
(10.1)
|
|
|
(2.9)
|
|
|
*
|
|
|
Income from continuing operations, before income taxes
|
|
144.4
|
|
|
182.1
|
|
|
(21)
|
%
|
|
161.2
|
|
|
192.2
|
|
|
(16)
|
%
|
|
Income from continuing operations, net of tax
|
|
112.9
|
|
|
113.8
|
|
|
(1)
|
%
|
|
83.0
|
|
|
55.7
|
|
|
49
|
%
|
|
Net income attributable to Avon
|
|
$
|
106.9
|
|
|
$
|
114.5
|
|
|
(7)
|
%
|
|
$
|
54.7
|
|
|
$
|
58.1
|
|
|
(6)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share attributable to Avon
|
|
$
|
.20
|
|
|
$
|
.21
|
|
|
(5)
|
%
|
|
$
|
.08
|
|
|
$
|
.09
|
|
|
(11)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising expenses(1)
|
|
$
|
(22.7)
|
|
|
$
|
(32.1)
|
|
|
(29)
|
%
|
|
$
|
(50.4)
|
|
|
$
|
(93.2)
|
|
|
(46)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Non-GAAP Financial Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,188.0
|
|
|
$
|
1,424.2
|
|
|
(17)
|
%
|
|
$
|
3,549.7
|
|
|
$
|
4,169.6
|
|
|
(15)
|
%
|
|
Certain Brazil Indirect taxes
|
|
(67.7)
|
|
|
(168.4)
|
|
|
|
|
(67.7)
|
|
|
(168.4)
|
|
|
|
|
Adjusted revenue
|
|
$
|
1,120.3
|
|
|
$
|
1,255.8
|
|
|
(11)
|
|
|
$
|
3,482.0
|
|
|
$
|
4,001.2
|
|
|
(13)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
60.6
|
%
|
|
62.2
|
%
|
|
(160)
|
|
|
58.2
|
%
|
|
60.2
|
%
|
|
(200)
|
|
|
Certain Brazil Indirect taxes
|
|
(2.4)
|
|
|
(5.1)
|
|
|
270
|
|
|
(.7)
|
|
|
(1.6)
|
|
|
90
|
|
|
CTI restructuring
|
|
(.1)
|
|
|
—
|
|
|
|
|
|
.3
|
|
|
—
|
|
|
—
|
|
|
Adjusted gross margin
|
|
58.1
|
%
|
|
57.1
|
%
|
|
100
|
|
|
57.8
|
%
|
|
58.6
|
%
|
|
(80)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses as a % of total revenue
|
|
52.4
|
%
|
|
49.1
|
%
|
|
330
|
|
|
54.7
|
%
|
|
53.4
|
%
|
|
130
|
|
|
Certain Brazil Indirect taxes
|
|
3.0
|
|
|
6.4
|
|
|
(340)
|
|
|
1.0
|
|
|
2.2
|
|
|
(120)
|
|
|
CTI restructuring
|
|
(1.6)
|
|
|
(1.4)
|
|
|
(20)
|
|
|
(3.0)
|
|
|
(1.3)
|
|
|
(170)
|
|
|
Natura transaction fees and impairment losses on assets
|
|
(1.6)
|
|
|
—
|
|
|
(160)
|
|
|
(1.0)
|
|
|
—
|
|
|
(100)
|
|
|
Adjusted selling, general and administrative expenses as a % of total revenue
|
|
52.2
|
%
|
|
54.1
|
%
|
|
(200)
|
|
|
51.7
|
%
|
|
54.3
|
%
|
|
(260)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
97.7
|
|
|
$
|
186.9
|
|
|
(48)
|
%
|
|
$
|
124.3
|
|
|
$
|
284.8
|
|
|
(56)
|
%
|
|
Certain Brazil Indirect taxes
|
|
(67.7)
|
|
|
(168.4)
|
|
|
|
|
(67.7)
|
|
|
(168.4)
|
|
|
|
|
CTI restructuring
|
|
17.5
|
|
|
19.8
|
|
|
|
|
116.7
|
|
|
54.4
|
|
|
|
|
Natura transaction fees and impairment losses on assets
|
|
19.2
|
|
|
—
|
|
|
|
|
36.4
|
|
|
—
|
|
|
|
|
Adjusted operating profit
|
|
$
|
66.7
|
|
|
$
|
38.3
|
|
|
74
|
%
|
|
$
|
209.7
|
|
|
$
|
170.8
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
8.2
|
%
|
|
13.1
|
%
|
|
(490)
|
|
|
3.5
|
%
|
|
6.8
|
%
|
|
(330)
|
|
|
Certain Brazil Indirect taxes
|
|
(5.3)
|
|
|
(11.5)
|
|
|
620
|
|
|
(1.8)
|
|
|
(3.8)
|
|
|
200
|
|
|
CTI restructuring
|
|
1.5
|
|
|
1.4
|
|
|
10
|
|
|
3.3
|
|
|
1.3
|
|
|
200
|
|
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
%/Basis Point
Change
|
|
2019
|
|
2018
|
|
%/Basis Point
Change
|
|
Natura transaction fees and impairment loss on assets
|
|
1.6
|
|
|
—
|
|
|
160
|
|
|
1.0
|
|
|
—
|
|
|
100
|
|
|
Adjusted operating margin
|
|
6.0
|
%
|
|
3.0
|
%
|
|
300
|
|
|
6.0
|
%
|
|
4.3
|
%
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Constant $ Adjusted operating margin(2)
|
|
|
|
|
|
310
|
|
|
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
144.4
|
|
|
$
|
182.1
|
|
|
*
|
|
|
$
|
161.2
|
|
|
$
|
192.2
|
|
|
(16)
|
%
|
|
Certain Brazil Indirect taxes
|
|
(118.3)
|
|
|
(194.7)
|
|
|
|
|
(118.3)
|
|
|
(194.7)
|
|
|
|
|
CTI restructuring
|
|
17.5
|
|
|
19.8
|
|
|
|
|
93.2
|
|
|
54.4
|
|
|
|
|
Natura transaction fees and impairment loss on assets
|
|
26.7
|
|
|
—
|
|
|
|
|
43.9
|
|
|
—
|
|
|
|
|
Adjusted income before taxes
|
|
$
|
70.3
|
|
|
$
|
7.2
|
|
|
*
|
|
|
$
|
180.0
|
|
|
$
|
51.9
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
(31.5)
|
|
|
$
|
(68.3)
|
|
|
(54)
|
%
|
|
$
|
(78.2)
|
|
|
$
|
(136.5)
|
|
|
(43)
|
%
|
|
Certain Brazil Indirect taxes
|
|
23.0
|
|
|
66.2
|
|
|
|
|
23.0
|
|
|
66.2
|
|
|
|
|
CTI restructuring
|
|
(1.5)
|
|
|
(2.3)
|
|
|
|
|
(11.8)
|
|
|
(4.4)
|
|
|
|
|
Special tax items
|
|
—
|
|
|
3.7
|
|
|
|
|
—
|
|
|
18.4
|
|
|
|
|
Adjusted income taxes
|
|
$
|
(10.0)
|
|
|
$
|
(0.7)
|
|
|
1329
|
%
|
|
$
|
(67.0)
|
|
|
$
|
(56.3)
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
21.8
|
%
|
|
37.5
|
%
|
|
|
|
48.5
|
%
|
|
71.0
|
%
|
|
|
|
Adjusted effective tax rate
|
|
14.2
|
%
|
|
9.7
|
%
|
|
|
|
37.2
|
%
|
|
108.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities of continuing operations
|
|
$
|
30.3
|
|
|
$
|
38.4
|
|
|
(21)
|
%
|
|
$
|
(105.3)
|
|
|
$
|
(68.3)
|
|
|
54
|
%
|
|
Net cash provided (used) by investing activities of continuing operations
|
|
15.1
|
|
|
(22.1)
|
|
|
|
|
|
59.9
|
|
|
(72.0)
|
|
|
|
|
Proceeds from monetization of COFINS tax credits
|
|
19.4
|
|
|
—
|
|
|
|
|
|
19.4
|
|
|
—
|
|
|
|
|
Free cash flow provided (used) by continuing operations
|
|
$
|
64.8
|
|
|
$
|
16.3
|
|
|
298
|
%
|
|
$
|
(26.0)
|
|
|
|
$
|
(140.3)
|
|
|
(81)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Active Representatives compared to prior year
|
|
|
|
|
|
(10)
|
%
|
|
|
|
|
|
(10)
|
%
|
|
Change in Active Representatives compared to prior quarter
|
|
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
Change in units sold
|
|
|
|
|
|
(15)
|
%
|
|
|
|
|
|
(14)
|
%
|
* Calculation not meaningful
Amounts in the table above may not necessarily sum due to rounding.
(1)Advertising expenses are recorded in SG&A.
(2)Change in Constant $ Adjusted operating margin for all years presented is calculated using the current-year Constant $ rates.
Three Months Ended September 30, 2019
Revenue
During the three months ended September 30, 2019, revenue decreased 17% compared to the prior-year period, significantly impacted by indirect tax items in Brazil in the current year and the Brazil IPI tax release in the prior year. Excluding these items, Adjusted revenue decreased 11% unfavorably impacted by foreign exchange. Constant $ Adjusted revenue decreased 7%.
Revenue and Constant $ revenue were impacted by a decrease in Active Representatives of 10%, across multiple markets. Average Representative Sales decreased 1% on a reported basis, unfavorably impacted by foreign exchange and Constant $ Average Representative Sales increased 4%. While Revenue, Adjusted revenue and Constant $ Adjusted revenue have declined, this is a consequence of our intent to improve productivity by increasing Average Representative Sales. Average Representative Sales were
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
impacted by improved price/mix as well as a positive impact from the Brazil IPI tax compared to the prior-year period. For additional details on the IPI tax on cosmetics increase in Brazil, see Note 11, Contingencies, to the Consolidated Financial Statements included herein.
Units sold decreased 15%, driven by declines in Brazil.
On a category basis, our product sales from reportable segments and associated growth rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
% Change
|
|
|
|
|
2019
|
|
|
2018
|
|
|
US$
|
|
Constant $
|
|
Beauty:
|
|
|
|
|
|
|
|
|
Skincare
|
$
|
326.2
|
|
|
$
|
338.9
|
|
|
(4)
|
%
|
|
1
|
%
|
|
Fragrance
|
295.6
|
|
|
332.1
|
|
|
(11)
|
|
|
(6)
|
|
|
Color
|
171.6
|
|
|
192.0
|
|
|
(11)
|
|
|
(6)
|
|
|
Total Beauty
|
793.4
|
|
|
863.0
|
|
|
(8)
|
|
|
(4)
|
|
|
Fashion & Home:
|
|
|
|
|
|
|
|
|
|
Fashion
|
143.9
|
|
|
174.7
|
|
|
(18)
|
|
|
(15)
|
|
|
Home
|
112.2
|
|
|
140.2
|
|
|
(20)
|
|
|
(15)
|
|
|
Total Fashion & Home
|
256.1
|
|
|
314.9
|
|
|
(19)
|
|
|
(15)
|
|
|
Certain Brazil indirect taxes
|
67.7
|
|
168.4
|
|
*
|
|
|
*
|
|
|
Product sales from reportable segments
|
$
|
1,117.2
|
|
|
$
|
1,346.3
|
|
|
(17)
|
|
|
(14)
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
1,117.2
|
|
|
$
|
1,346.3
|
|
|
(17)
|
|
|
(14)
|
|
* Calculation not meaningful
See "Segment Review" in this MD&A for additional information related to changes in revenue by segment.
Operating Margin
Operating margin decreased 490 basis points, significantly impacted by certain indirect taxes recognized in Brazil in the three month period ended September 30, 2019 as well as the IPI tax benefit in the prior year. Excluding the impact of these indirect taxes in Brazil, Adjusted operating margin increased 300 basis points, compared to the same period of 2018, driven by improved price/mix and savings across multiple cost lines. This margin improvement was delivered despite the unfavorable impact of foreign currency. The movements in operating margin and Adjusted operating margin are discussed further below in "Gross Margin" and "Selling, General and Administrative Expenses."
Gross Margin
Gross margin decreased 160 basis points, significantly impacted by the effects of indirect tax items in both the current and prior years. Excluding these items, Adjusted gross margin increased 100 basis points, compared to the same period of 2018.
Gross margin and Adjusted gross margin increased as price/mix more than offset the unfavorable impact of foreign currency and higher supply chain costs (benefit of 280 basis points offset by unfavorable impact of 140 basis and unfavorable impact of 120 basis points). Price/mix improvements were driven by effective pricing, optimized discounts and promotions, more effective incentives and more favorable product mix in most markets. The unfavorable impact of foreign currency is largely due to currency devaluations in Brazil and Argentina. Higher supply chain costs were driven by higher material costs.
Selling, General and Administrative Expenses ("SG&A")
SG&A as a percentage of total revenue increased 330 basis points, significantly impacted by CTI restructuring charges. Adjusted SG&A as a percentage of total revenue decreased 200 basis points, compared to the same period of 2018.
Savings in Adjusted SG&A were recorded across all segments, due to better bad debt management from continued focus on credit control and collections processes (benefit of 90 basis points) and lower advertising and brochure expenses that benefited from certain indirect tax items in Brazil (benefit of 70 basis points).
Other Expenses
Interest expense increased by approximately $1 and interest income decreased by approximately $2 compared to the prior-year period.
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
Loss on extinguishment of debt and credit facilities of approximately $8 is primarily comprised of the costs of termination of a portion of the 2020 bonds repaid in the third quarter of 2019.
Other income (expense), net, of $58 increased by approximately $36 compared to the third quarter of 2019. The current period income is primarily attributable to the impact of interest on certain indirect tax items recognized in Brazil of approximately $50 and the favorable impact of foreign exchange net gains in the third quarter of 2019 compared to losses in the third quarter of 2018.
Gain on sale of business/assets of approximately $27 related to the result of the sale of our investment in New Avon in August 2019. Refer to Note 3, Discontinued Operations, Assets and Liabilities Held for Sale and Divestitures, to the Consolidated Financial Statements contained herein for more information relating to these disposals.
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
Effective Tax Rate
The effective tax rates and the Adjusted effective tax rates in 2019 and 2018 continue to be impacted by our inability to recognize additional deferred tax assets in various jurisdictions related to our current-year operating results. In addition, the effective tax rates and the Adjusted effective tax rates in 2019 and 2018 continue to be impacted by withholding taxes associated with certain intercompany payments, including royalties, service charges, interest and dividends, which in the aggregate are relatively consistent each year due to the need to repatriate funds to cover U.S. and U.K.-based costs, such as interest on debt and corporate overhead.
Our effective tax rates for the three months ended September 30, 2019 and 2018 were 21.8% and 37.5%, respectively. The effective tax rates for the three months ended September 30, 2019 and 2018 were impacted by CTI restructuring charges which could not all be benefitted, country mix of earnings and withholding taxes. The effective tax rate for the three months ended September 30, 2019 was also favorably impacted by the accrual of miscellaneous income tax benefits of approximately $2.3. The effective tax rate in the third quarter of 2018 was also favorably impacted by the accrual of tax benefits of approximately $14.0 associated with the initial recognition of tax benefits associated with Avon’s interpretation of case law, net releases of tax reserves of approximately $3.1 associated with our uncertain tax positions and other net benefits of approximately $1.9.
Our Adjusted effective tax rates for the three months ended September 30, 2019 and 2018 were 14.2% and 9.7%, respectively. The Adjusted effective tax rates in 2019 and 2018 were impacted by country mix of earnings and withholding taxes. The Adjusted effective tax rate for the three months ended September 30, 2019 was also favorably impacted by the accrual of miscellaneous income tax benefits of approximately $2.3. The Adjusted effective tax rate for the three months ended September 30, 2018 was also favorably impacted by the accrual of tax benefits of approximately $14 associated with the initial recognition of tax benefits associated with Avon’s interpretation of case law, releases of tax reserves of approximately $7 associated with our uncertain tax positions and other net benefits of approximately $2.
See Note 20, Income Taxes, to the Consolidated Financial Statements included herein for more information on the effective tax rate, and Note 15, Restructuring Initiatives, to the Consolidated Financial Statements included herein for more information on CTI restructuring.
Impact of Foreign Currency
As compared to the prior-year period, foreign currency has impacted our consolidated financial results in the form of:
•foreign currency transaction losses (classified within cost of sales and SG&A in our Consolidated Statements of Operations), which had an unfavorable impact to operating profit and Adjusted operating profit of approximately $20, or approximately 120 basis points and 140 basis points to operating margin and Adjusted operating margin respectively;
•foreign currency translation, which had an impact of approximately nil to operating profit and Adjusted operating profit, or an impact of approximately nil basis points to operating margin and Adjusted operating margin; and
•foreign exchange net gains, on our working capital (classified within other income (expense), net in our Consolidated Statements of Operations) as compared to losses in the prior year, resulting in a favorable impact of approximately $10 before tax on both a reported and Adjusted basis.
Nine Months Ended September 30, 2019
Revenue
During the nine months ended September 30, 2019, revenue decreased 15% compared to the prior-year period, impacted by certain indirect taxes recognized in Brazil in the nine month period ended September 30, 2019 as well as the IPI tax release in the prior year. Excluding these items, Adjusted revenue decreased 13% unfavorably impacted by foreign exchange. Constant $ Adjusted revenue decreased 5%.
Adjusted revenue and Adjusted Constant $ revenue decline was primarily driven by Europe Middle East & Africa markets, in particular Russia. Russia continued to be impacted by a decrease in Average Representative Order driven by lower consumer confidence, partially offset by an increase in Active Representatives. In recent quarters we have focused heavily on
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
representative recruitment which resulted in an increase in Active Representatives in comparison to both the prior year and the prior quarters.
Revenue and Constant $ revenue were impacted by a decrease in Active Representatives of 10%, partially offset by higher Average Representative Sales. Average Representative Sales decreased 3% on a reported basis, unfavorably impacted by foreign exchange, and increased 5% on a Constant $ basis. While Revenue and Constant $ revenue have declined, this is a consequence of our intent to improve productivity by increasing Average Representative Sales, primarily through price/mix expansion. Average Representative Sales were also favorably impacted by the Brazil IPI tax compared to the prior-year period. For additional details on the IPI tax on cosmetics increase in Brazil, see Note 11, Contingencies, to the Consolidated Financial Statements included herein.
Units sold decreased 14%, driven by declines in Brazil and Russia.
On a category basis, our product sales from reportable segments and associated growth rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
% Change
|
|
|
|
|
2019
|
|
|
2018
|
|
|
US$
|
|
Constant $
|
|
Beauty:
|
|
|
|
|
|
|
|
|
Skincare
|
$
|
1,021.4
|
|
|
$
|
1,100.5
|
|
|
(7)
|
%
|
|
1
|
%
|
|
Fragrance
|
896.7
|
|
|
1,033.7
|
|
|
(13)
|
|
|
(4)
|
|
|
Color
|
541.6
|
|
|
640.0
|
|
|
(15)
|
|
|
(7)
|
|
|
Total Beauty
|
2,459.7
|
|
|
2,774.2
|
|
|
(11)
|
|
|
(3)
|
|
|
Fashion & Home:
|
|
|
|
|
|
|
|
|
|
Fashion
|
464.4
|
|
|
549.2
|
|
|
(15)
|
|
|
(10)
|
|
|
Home
|
350.4
|
|
|
413.8
|
|
|
(15)
|
|
|
(8)
|
|
|
Total Fashion & Home
|
814.8
|
|
|
963.0
|
|
|
(15)
|
|
|
(9)
|
|
|
Certain Brazil indirect taxes
|
67.7
|
|
|
168.4
|
|
|
*
|
|
|
*
|
|
|
Product sales from reportable segments
|
$
|
3,342.2
|
|
|
$
|
3,905.6
|
|
|
(14)
|
|
|
(7)
|
|
|
Product sales from Other operating segments and business activities
|
—
|
|
|
19.1
|
|
|
(100)
|
|
|
(100)
|
|
|
Product sales
|
$
|
3,342.2
|
|
|
$
|
3,924.7
|
|
|
(15)
|
|
|
(7)
|
|
* Calculation not meaningful
See "Segment Review" in this MD&A for additional information related to changes in revenue by segment.
Operating Margin
Operating margin decreased 330 basis points, significantly impacted by certain indirect taxes recognized in Brazil in the nine month period ended September 30, 2019 as well as the IPI tax release in the prior year. Excluding the impact of these indirect taxes in Brazil, Adjusted operating margin increased 170 basis points, compared to the same period of 2018, driven by improved price/mix and savings across multiple cost lines. This margin improvement was delivered despite the unfavorable impact of foreign currency. The movements in operating margin and Adjusted operating margin are discussed further below in "Gross Margin" and "Selling, General and Administrative Expenses."
Gross Margin
Gross margin decreased 200 basis points, significantly impacted by the effects of indirect tax items in both the current and prior years. Excluding these items, Adjusted gross margin decreased 80 basis points, compared to the same period of 2018.
Gross margin and Adjusted gross margin declined as price/mix did not fully offset the unfavorable impact of foreign currency and supply chain costs (benefit of 220 basis points offset by unfavorable impact of 180 basis points and 90 basis points). Price/mix improvements were driven by effective pricing, optimized discounts and promotions, more effective incentives and more favorable product mix in most markets. The unfavorable impact of foreign currency is largely due to currency devaluations in Brazil and Argentina. Higher supply chain costs were driven by higher material costs.
Selling, General and Administrative Expenses ("SG&A")
SG&A as a percentage of total revenue increased 130 basis points, significantly impacted by higher CTI restructuring charges, and Adjusted SG&A as a percentage of total revenue decreased 260 basis points, compared to the same period of 2018.
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
Savings in Adjusted SG&A were recorded across all segments, in multiple areas, mostly from lower fixed expenses (benefit of 110 basis points), lower advertising expenses (benefit of 80 basis points) and better bad debt management (benefit of 70 basis points). Lower fixed expenses were driven by tight cost management and restructuring initiatives including lower headcount. Advertising expenses benefited from certain indirect tax items in Brazil as well as optimizing our portfolio by concentrating investments in selected channels and focusing on digital advertising. We have further reduced our bad debt expense, primarily in Brazil, from continued focus on credit control and collections processes.
Other Expenses
Interest expense decreased by approximately $7 and interest income decreased by approximately $7 compared to the prior-year period.
Loss on extinguishment of debt and credit facilities of approximately $10 is primarily comprised of the costs of termination of a portion of the 2020 bonds repaid in the third quarter of 2019.
Other income (expense), net, of $87 increased by approximately $87 compared to the prior-year period. The current period income is primarily attributable to the impact of interest on certain indirect tax items recognized in Brazil of approximately $55 and the favorable impact of foreign exchange net gains in the third quarter of 2019 compared to losses in the third quarter of 2018.
Gain on sale of business/assets related to the result of the sale of the Rye Office, Maximin Corporation Sdn Bhd and Avon Manufacturing (Guangzhou), Ltd in June, May and February 2019 respectively and the sale of our investment in New Avon in August 2019. Refer to Note 3, Discontinued Operations, Assets and Liabilities Held for Sale and Divestitures, to the Consolidated Financial Statements contained herein, for more information relating to these disposals.
Effective Tax Rate
The effective tax rates and the Adjusted effective tax rates in 2019 and 2018 continue to be impacted by our inability to recognize additional deferred tax assets in various jurisdictions related to our current-year operating results. In addition, the effective tax rates and the Adjusted effective tax rates in 2019 and 2018 continue to be impacted by withholding taxes associated with certain intercompany payments, including royalties, service charges, interest and dividends, which in the aggregate are relatively consistent each year due to the need to repatriate funds to cover U.S. and U.K.-based costs, such as interest on debt and corporate overhead. These factors resulted in unusually high effective tax rates and Adjusted effective tax rates in 2019 and 2018.
Our effective tax rates for the nine months ended September 30, 2019 and 2018 were 48.5% and 71.0%, respectively. The effective tax rates in 2019 and 2018 were impacted by CTI restructuring charges, country mix of earnings and withholding taxes. The effective tax rate for the nine months ended September 30, 2019 was also favorably impacted by the accrual of net income tax benefits of approximately $5.2 associated with the release of income tax reserves of approximately $3.0 associated with our uncertain tax positions and other net, miscellaneous income tax benefits of approximately $2.2. The effective tax rate for the nine months ended September 30, 2018 was also favorably impacted by the accrual of tax benefits of approximately $14.0 associated with the initial recognition of tax benefits associated with Avon’s interpretation of recent case law, the recognition of approximately $4.1 of deferred tax assets that had previously been subject to a full valuation allowance and other net benefits of approximately $1.0 offset with a net increase of approximately $10.9 associated with our uncertain tax positions.
Our Adjusted effective tax rates for the nine months ended September 30, 2019 and 2018 were 37.2% and 108.5%, respectively. The Adjusted effective tax rates in 2019 and 2018 were impacted by country mix of earnings and withholding taxes. The Adjusted effective tax rate for the nine months ended September 30, 2019 was also favorably impacted by the accrual of net income tax benefits of approximately $3.0 associated with our uncertain tax positions and other net, miscellaneous income tax benefits of approximately $2.2 The Adjusted effective tax rate in 2018 was also favorably impacted by the accrual of tax benefits of approximately $14 associated with the initial recognition of tax benefits associated with Avon’s interpretation of case law, releases of tax reserves of approximately $8 associated with our uncertain tax positions and the recognition of $4 of deferred tax assets that had previously been subject to a full valuation allowance offset with other net charges of approximately $1.
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
See Note 20, Income Taxes, to the Consolidated Financial Statements included herein for more information on the effective tax rate, and Note 15, Restructuring Initiatives, to the Consolidated Financial Statements included herein for more information on CTI restructuring.
Impact of Foreign Currency
As compared to the prior-year period, foreign currency has impacted our consolidated financial results in the form of:
•foreign currency transaction losses (classified within cost of sales, and SG&A in our Consolidated Statements of Operations), which had an unfavorable impact to operating profit and Adjusted operating profit of approximately $60, or approximately 150 basis points to operating margin and Adjusted operating margin;
•foreign currency translation, had an unfavorable impact of approximately $15 to operating profit and $25 to Adjusted operating profit and a negligible impact to operating margin and Adjusted operating margin; and
•higher foreign exchange net gains on our working capital (classified within other income (expense), net in our Consolidated Statements of Operations) as compared to loss in the prior year, resulting in a favorable impact of approximately $50 before tax on both a reported and Adjusted basis.
Segment Review
We determine segment profit by deducting the related costs and expenses from segment revenue. Segment profit includes an allocation of global marketing and digital expenses based on actual revenues. Segment profit excludes global expenses other than the allocation of marketing and digital, CTI restructuring initiatives, certain significant asset impairment charges, and other expenses, which are not allocated to a particular segment, if applicable. This is consistent with the manner in which we assess our performance and allocate resources. See Note 13, Segment Information, to the Consolidated Financial Statements included herein for a reconciliation of segment profit to operating profit.
Europe, Middle East & Africa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
%/Basis Point Change
|
|
|
|
|
|
|
|
%/Basis Point Change
|
|
|
|
|
2019
|
|
2018
|
|
US$
|
|
Constant $
|
|
2019
|
|
2018
|
|
US$
|
|
Constant $
|
|
|
Total revenue
|
$
|
398.3
|
|
|
$
|
442.9
|
|
|
(10)
|
%
|
|
(7)
|
%
|
|
$
|
1,282.1
|
|
|
$
|
1,512.0
|
|
|
(15)
|
%
|
|
(8)
|
%
|
|
Segment profit
|
47.6
|
|
|
46.1
|
|
|
3
|
%
|
|
9
|
%
|
|
165.8
|
|
|
194.9
|
|
|
(15)
|
%
|
|
(6)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment margin
|
12.0
|
%
|
|
10.4
|
%
|
|
160
|
|
|
180
|
|
|
12.9
|
%
|
|
12.9
|
%
|
|
—
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Active Representatives compared to prior year
|
|
|
|
|
|
|
(6)%
|
|
|
|
|
|
|
|
|
(9)%
|
|
|
Change in Active Representatives compared to prior quarter
|
|
|
|
|
|
|
(2)%
|
|
|
|
|
|
|
|
|
|
|
Change in units sold
|
|
|
|
|
|
|
(13)%
|
|
|
|
|
|
|
|
|
(14)%
|
|
Amounts in the table above may not necessarily sum due to rounding.
Three Months Ended September 30, 2019
Total revenue decreased 10% compared to the prior-year period owing to the unfavorable impact of foreign exchange which was driven by the strengthening of the U.S. dollar relative to multiple currencies, primarily the South African Rand and the British Pound. On a Constant $ basis, revenue decreased 7%. Revenue and Constant $ revenue were negatively impacted by a decrease in Active Representatives across multiple markets in Europe, Middle East & Africa.
In Russia, revenue decreased 9% on both a fluctuating and constant $ basis. Revenue and Constant $ revenue in Russia were negatively impacted primarily by a decrease in Average Representative Sales driven by lower consumer confidence, partially offset by an increase in Active Representatives. In recent quarters we have focused heavily on representative recruitment which resulted in an increase in Active Representatives in comparison to both the prior year and the prior quarters.
In the UK, revenue decreased 18%, unfavorably impacted by foreign exchange. On a Constant $ basis, the UK's revenue decreased 12%. Revenue and Constant $ revenue in the UK were entirely impacted by lower Active Representatives as a result of changes in commercial practices and lower consumer confidence.
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
Segment margin increased 160 basis points, or 180 basis points on a Constant $ basis, due to tight control over SG&A and improvements in gross margin.
The gross margin increase was primarily caused by the favorable impact of price/mix which more than offset the unfavorable impact of foreign currency net losses and the impact of lower production volumes on supply chain costs.
Savings in SG&A were driven by tight cost management, as well as the re-allocation of resources. Savings are driven by lower bad debt expense due to improved credit control and collections processes primarily in Russia and South Africa and lower fixed costs, while lower advertising costs were re-allocated into representative and sales leader investments and training.
Nine Months Ended September 30, 2019
Total revenue decreased 15% compared to the prior-year period, owing to the unfavorable impact of foreign exchange which was driven by the strengthening of the U.S. dollar relative to multiple currencies, primarily the Russian ruble, South African rand and the Turkish lira. On a Constant $ basis, revenue decreased 8%. Revenue and Constant $ revenue were negatively impacted by a decrease in Active Representatives, partially offset by higher Average Representative Sales. The decline in Active Representatives was across multiple markets in Europe, Middle East & Africa, primarily Russia.
In Russia, revenue decreased 21%, unfavorably impacted by foreign exchange. On a Constant $ basis, Russia's revenue decreased 14%. Revenue and Constant $ revenue in Russia were negatively impacted primarily by a decrease in Active Representatives. Revenue and Constant $ revenue in Russia continued to be impacted by lower consumer confidence, as well as weaker sales leader engagement. The latter has been actively addressed in the second quarter of 2019 through a heavy focus on recruitment which resulted in Active Representatives growth in the third quarter in comparison to a decline in the prior quarters.
In the UK, revenue decreased 17%, unfavorably impacted by foreign exchange. On a Constant $ basis, the UK's revenue decreased 12%. Revenue and Constant $ revenue in the UK were entirely impacted by lower Active Representatives as a result of a changes in commercial practices and lower consumer confidence.
Segment margin was relatively unchanged, or increased 20 basis points on a Constant $ basis, as the improvement from SG&A was only partially offset by the decline in gross margin.
The gross margin decline was primarily caused by the impact of lower production volumes on supply chain costs. The impact of price/mix fully offset the unfavorable impact of foreign currency net losses.
Savings in SG&A were driven by tight cost management, as well as the re-allocation of resources. Savings are driven by lower fixed costs and lower bad debt expense due to improved credit control and collections processes primarily in Russia and South Africa, while lower advertising costs were re-allocated into representative and sales leader investments and training.
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
South Latin America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
%/Basis Point Change
|
|
|
|
|
|
|
|
%/Basis Point Change
|
|
|
|
|
2019
|
|
2018
|
|
US$
|
|
Constant $
|
|
2019
|
|
2018
|
|
US$
|
|
Constant $
|
|
Total revenue
|
$
|
494.0
|
|
|
$
|
645.4
|
|
|
(23)
|
%
|
|
(19)
|
%
|
|
$
|
1,351.7
|
|
|
$
|
1,658.6
|
|
|
(19)
|
%
|
|
(8)
|
%
|
|
Certain Brazil indirect tax benefit
|
|
(67.7)
|
|
|
(168.4)
|
|
|
(60)
|
%
|
|
(61)
|
%
|
|
(67.7)
|
|
|
(168.4)
|
|
|
(60)
|
%
|
|
(61)
|
%
|
|
Adjusted revenue
|
$
|
426.3
|
|
|
$
|
477.0
|
|
|
(11)
|
%
|
|
(3)
|
%
|
|
$
|
1,284.0
|
|
|
$
|
1,490.2
|
|
|
(14)
|
%
|
|
(1)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
118.4
|
|
|
194.1
|
|
|
(39)
|
%
|
|
(38)
|
%
|
|
207.5
|
|
|
276.5
|
|
|
(25)
|
%
|
|
(19)
|
%
|
|
Certain Brazil indirect tax benefit
|
|
(67.7)
|
|
|
(168.4)
|
|
|
(60)
|
%
|
|
(61)
|
%
|
|
(67.7)
|
|
|
(168.4)
|
|
|
(60)
|
%
|
|
(61)
|
%
|
|
Adjusted segment profit
|
$
|
50.7
|
|
|
$
|
25.7
|
|
|
97
|
%
|
|
98
|
%
|
|
$
|
139.8
|
|
|
$
|
108.1
|
|
|
29
|
%
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment margin
|
24.0
|
%
|
|
30.1
|
%
|
|
(610)
|
|
|
(770)
|
|
|
15.4
|
%
|
|
16.7
|
%
|
|
(130)
|
|
|
(220)
|
|
|
Certain Brazil indirect tax benefit
|
|
(12.1)
|
|
|
(24.7)
|
|
|
1,260
|
|
|
1,420
|
|
|
(4.5)
|
|
|
(9.4)
|
|
|
490
|
|
|
640
|
|
|
Adjusted segment margin
|
11.9
|
%
|
|
5.4
|
%
|
|
650
|
|
|
650
|
|
|
10.9
|
%
|
|
7.3
|
%
|
|
360
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Active Representatives compared to prior year
|
|
|
|
|
|
|
(10)%
|
|
|
|
|
|
|
|
|
(9)%
|
|
|
Change in Active Representatives compared to prior quarter
|
|
|
|
|
|
|
5%
|
|
|
|
|
|
|
|
|
|
|
Change in units sold
|
|
|
|
|
|
|
(16)%
|
|
|
|
|
|
|
|
|
(15)%
|
|
Amounts in the table above may not necessarily sum due to rounding.
Three Months Ended September 30, 2019
Total revenue decreased 23% compared to the prior-year period, impacted by certain indirect taxes recognized in Brazil in the three month period ended September 30, 2019 as well as the IPI tax benefit in the prior year. Excluding the impact of these indirect taxes in Brazil, Adjusted revenue for the region was down 11%, impacted by the unfavorable impact of foreign exchange, which was primarily resulting from the strengthening of the U.S. dollar relative to the Brazilian real and the Argentinian peso. On a Constant $ basis, Adjusted revenue declined 3%. Revenue and Constant $ Adjusted revenue benefited from higher Average Representative Sales, driven by Brazil and Argentina, offset by a decrease in Active Representatives. The decline in Active Representatives was primarily driven by Brazil.
Revenue in Brazil decreased 27%, significantly impacted by indirect tax items in both the current and prior year. Excluding these indirect tax items, Adjusted revenue in Brazil decreased 6%, unfavorably impacted by foreign exchange while Brazil's Constant $ Adjusted revenue decreased 5%. Revenue and Adjusted Constant $ revenue in Brazil were negatively impacted by a decrease in Active Representatives, which continued to be impacted by competitive pressures and our strategy to improve productivity. The decrease in Active Representatives was partially offset by higher Average Representative Sales, which was impacted by improved price/mix as well as a positive impact from the Brazil IPI tax compared to the prior-year period. For additional details on the IPI tax on cosmetics in Brazil, see Note 11, Contingencies, to the Consolidated Financial Statements included herein.
Revenue in Argentina declined 15%, unfavorably impacted by foreign exchange. On a Constant $ basis, Argentina's revenue grew 35%. Revenue and Constant $ revenue in Argentina were negatively impacted by a decrease in Active Representatives offset by higher Average Representative Sales, which was impacted by improved revenue growth management including inflationary pricing.
Segment margin decreased, significantly impacted by the effects of indirect tax items in both the current and prior years. Adjusted segment margin and Constant $ Adjusted segment margin increased by 650 basis points, primarily due to benefits in SG&A as well as the impact of other certain indirect tax items on revenue and SG&A recognized in the quarter (benefit of 330 basis points).
Gross margin was relatively unchanged as improved price/mix in most markets offset the unfavorable impact of foreign currency net losses and higher supply chain costs, primarily driven by increased material costs.
Savings in SG&A were recorded across multiple areas, including continuous reduction of bad debt expense due to improved credit control and collections processes, primarily in Brazil, lower fixed costs resulting from tight cost management and
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
restructuring initiatives and lower sales leader and field investments and lower representative and sales leader investments in incentives, linked to the decrease in Active Representatives.
Nine Months Ended September 30, 2019
Total revenue decreased 19% compared to the prior-year period, impacted by certain indirect taxes recognized in Brazil in the nine month period ended September 30, 2019 as well as the IPI tax benefit in the prior year. Excluding the impact of these indirect taxes in Brazil, Adjusted revenue for the region was down 14%, impacted by the unfavorable impact of foreign exchange, which was primarily resulting from the strengthening of the U.S. dollar relative to the Brazilian real and the Argentinian peso which resulted in a decrease in Adjusted Constant $ Revenue of 1%. Adjusted revenue and Adjusted Constant $ revenue were impacted by a decrease in Active Representatives, primarily in Brazil substantially offset by higher Average Representative Sales, driven by Brazil and Argentina.
Revenue in Brazil decreased 19%, significantly impacted by indirect tax items in both the current and prior year. Excluding these indirect tax items, Adjusted revenue in Brazil decreased 11%, unfavorably impacted by foreign exchange, while Brazil's Constant $ Adjusted revenue decreased 2%. Revenue and Adjusted Constant $ revenue in Brazil were negatively impacted by a decrease in Active Representatives, which continued to be negatively impacted by competitive pressures and our strategy to improve productivity. The decrease in Active Representatives was offset by higher Average Representative Sales, which was impacted by improved price/mix. In addition, Average Representative Sales were favorably impacted by certain indirect tax items, as well as a positive impact from the Brazil IPI tax compared to the prior-year period. For additional details on the IPI tax on cosmetics in Brazil, see Note 11, Contingencies, to the Consolidated Financial Statements included herein.
Revenue in Argentina declined 25%, unfavorably impacted by foreign exchange. On a Constant $ basis, Argentina's revenue grew 36%. Revenue and Constant $ revenue in Argentina benefited from higher Average Representative Sales, which was impacted by improved revenue growth management including inflationary pricing.
Segment margin decreased 130 basis points, significantly impacted by the effects of indirect tax items in both the current and prior years. Adjusted segment margin increased by 360 basis points and Constant $ Adjusted segment margin increased by 430 basis points, benefited by other certain indirect tax items on revenue and SG&A (favorable impact of 300 basis points) as well as SG&A benefits which more than offset the decline in gross margin.
The gross margin decline was primarily caused by higher supply chain costs driven by higher material costs. The improved price/mix in most markets offset the unfavorable impact of foreign currency.
Savings in SG&A were driven primarily by Brazil in multiple areas, such as, reduction of bad debt expense due to improved credit control and collections processes, lower fixed costs resulting from tight cost management and restructuring initiatives and lower sales leader and field investments, linked to the decrease in Active Representatives.
North Latin America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
%/Basis Point Change
|
|
|
|
|
|
|
|
%/Basis Point Change
|
|
|
|
|
2019
|
|
2018
|
|
US$
|
|
Constant $
|
|
2019
|
|
2018
|
|
US$
|
|
Constant $
|
|
Total revenue
|
$
|
184.7
|
|
|
$
|
207.0
|
|
|
(11)
|
%
|
|
(9)
|
%
|
|
$
|
571.2
|
|
|
$
|
609.9
|
|
|
(6)
|
%
|
|
(5)
|
%
|
|
Segment profit
|
17.0
|
|
|
14.3
|
|
|
19
|
%
|
|
22
|
%
|
|
52.6
|
|
|
54.1
|
|
|
(3)
|
%
|
|
(1)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment margin
|
9.2
|
%
|
|
6.9
|
%
|
|
230
|
|
|
230
|
|
|
9.2
|
%
|
|
8.9
|
%
|
|
30
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Active Representatives compared to prior year
|
|
|
|
|
|
|
(13)
|
%
|
|
|
|
|
|
|
|
(10)
|
%
|
|
Change in Active Representatives compared to prior quarter
|
|
|
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
Change in units sold
|
|
|
|
|
|
|
(15)
|
%
|
|
|
|
|
|
|
|
(9)
|
%
|
Amounts in the table above may not necessarily sum due to rounding.
Three Months Ended September 30, 2019
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
Total revenue for the segment declined 11% compared to the prior-year period also unfavorably impacted by foreign exchange. On a Constant $ basis, revenue declined 9%. Revenue and Constant $ revenue declined driven by a decrease in Active Representatives, which was partially offset by higher Average Representative Sales.
Revenue in Mexico decreased 9% compared to the prior year period, unfavorably impacted by foreign exchange. On a Constant $ basis, Mexico's revenue decreased 6%. Constant $ revenue decline in Mexico was primarily due to a decrease in Active Representatives, partially offset by higher Average Representative Sales, both driven by strategic initiatives to focus on Representative productivity via Representative segmentation and training.
Segment margin increased 230 basis points on a both a reported and Constant $ basis, driven by an improvement gross margin and lower SG&A expense.
The gross margin increased, primarily as a result of lower representative incentives, linked to the decrease in Active Representative and the timing of 2019 sales incentives deferred during the period, partially offset by higher brochure cost. The favorable impact of price/mix offset the impact of increased supply chain costs driven by higher materials costs and the impact of foreign currency.
SG&A cost savings were driven by lower advertising expenses which more than offset increased bad debt expense. Lower representative and sales leader investments in incentives, linked to the decrease in Active Representative offset higher transportation costs, primarily in Mexico, to address security issues and improve service quality.
Nine Months Ended September 30, 2019
Total revenue for the segment declined 6% compared to the prior-year period also unfavorably impacted by foreign exchange. On a Constant $ basis, revenue declined 5%. Revenue and Constant $ revenue declined from a decrease in Active Representatives offset by higher Average Representative Sales.
Revenue in Mexico decreased 4% compared to the prior year period, unfavorably impacted by foreign exchange. Constant $ Revenue decreased 3%. The decline in reported and Constant $ revenue in Mexico was primarily due to decline in Active Representatives, partially offset by higher Average Representative Sales, both driven by strategic initiatives to focus on Representative productivity via Representative segmentation and training.
Segment margin increased 30 basis points on both a reported and Constant $ basis, due to an improvement from SG&A partially offset by a decline in gross margin.
The gross margin decline was primarily caused by the unfavorable impact of foreign currency net losses.
SG&A cost savings were driven by tight cost management in multiple areas, such as, lower representative and sales leader investments in incentives linked to the decrease in Active Representative, lower advertising costs, lower distribution costs. Savings were partially offset by higher bad debt expense and higher transportation cost, primarily in Mexico, to address security issues and improve service quality.
Asia Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
%/Basis Point Change
|
|
|
|
|
|
|
|
%/Basis Point Change
|
|
|
|
|
2019
|
|
2018
|
|
US$
|
|
Constant $
|
|
2019
|
|
2018
|
|
US$
|
|
Constant $
|
|
Total revenue
|
$
|
106.3
|
|
|
$
|
120.5
|
|
|
(12)
|
%
|
|
(13)
|
%
|
|
$
|
330.0
|
|
|
$
|
345.0
|
|
|
(4)
|
%
|
|
(4)
|
%
|
|
Segment profit
|
9.4
|
|
|
9.6
|
|
|
(2)
|
%
|
|
(9)
|
%
|
|
36.9
|
|
|
27.3
|
|
|
35
|
%
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment margin
|
8.8
|
%
|
|
8.0
|
%
|
|
80
|
|
|
40
|
|
|
11.2
|
%
|
|
7.9
|
%
|
|
330
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Active Representatives compared to prior year
|
|
|
|
|
|
|
(19)
|
%
|
|
|
|
|
|
|
|
(13)
|
%
|
|
Change in Active Representatives compared to prior quarter
|
|
|
|
|
|
|
(7)
|
%
|
|
|
|
|
|
|
|
|
|
Change in units sold
|
|
|
|
|
|
|
(21)
|
%
|
|
|
|
|
|
|
|
(11)
|
%
|
Amounts in the table above may not necessarily sum due to rounding.
Three Months Ended September 30, 2019
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
Total revenue decreased 12% compared to the prior-year period, including a favorable impact of foreign exchange. On a Constant $ basis, revenue decreased 13%. Revenue and Constant $ revenue declined driven by a decrease in Active Representatives, across most markets, partially offset by higher Average Representative Sales.
Revenue in the Philippines decreased 7%, favorably impacted by foreign exchange. On a Constant $ basis, revenue in the Philippines decreased 10%. Revenue and Constant $ revenue in the Philippines were negatively impacted by a decrease in Active Representatives partially offset by higher Average Representative Sales. The decrease in Active Representatives was impacted by changes in sales leader recruitment and commercial practices.
Segment margin increased 80 basis points, or 40 basis points on a Constant $ basis, driven entirely by lower SG&A expense, partially offset by a decrease in gross margin.
The gross margin decline was primarily impacted by higher supply chain costs, as higher materials costs and obsolescence more than offset the benefits in logistics from one off expense to address service disruption in the Philippines in the prior year which was not repeated.
Savings in SG&A were driven by lower fixed costs resulting from tight cost management and restructuring initiatives partially offset by higher sales leader and field investment costs.
Nine Months Ended September 30, 2019
Total revenue decreased 4% on both a reported and Constant $ basis. Revenue and Constant $ Revenue declined driven by a decrease in Active Representatives, across most markets, partially offset by higher Average Representative Sales.
Revenue in the Philippines increased by 1%, favorably impacted by foreign exchange. On a Constant $ basis Revenue in the Philippines was relatively unchanged. Revenue and Constant $ Revenue in the Philippines benefited from the impact of inventory system implementation issues in the first half of the prior-year period resulting in a lower revenue base. Revenue and Constant $ Revenue in the Philippines was driven by higher Average Representative Sales, primarily due to effective pricing partially offset by a decrease in Active Representatives impacted by changes in sales leader recruitment and commercial practices.
Segment margin increased 330 basis points, or 290 basis points on a Constant $ basis, due to both lower SG&A expense gross margin.
The gross margin benefit of 90 basis was primarily due to improved price/mix in most markets. The benefit from higher logistics costs in the prior year in the Philippines, to address service disruptions caused by the inventory system implementation, offset by higher supply chain costs driven by higher material costs.
Savings in SG&A were primarily driven by lower fixed costs resulting from tight cost management and restructuring initiatives, an impairment of the inventory system in the Philippines recognized in the second quarter of 2018 and a one-off benefit following the closure of a 2014 tax audit, recognized in the first quarter of 2019.
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds historically have been cash flows from operations, public offerings of notes, bank financings, issuance of commercial paper, borrowings under lines of credit and a private placement of notes. As at September 30, 2019, the Company has a $112 debt maturity obligation due March 2020. In July 2019, the Company issued $400 in aggregate principal amount of 6.50% Senior Notes which will mature on 15 August 2022. The proceeds were partially used to purchase an aggregate principal amount of $275 of the Notes due March 2020 under a cash tender offer completed during July 2019.
The Company has cash on hand of $564 as of September 30, 2019 and has access to the unused portion of its 2019 facility (as defined below in the Capital Resources- revolving Credit Facility section) of €179.
We may seek to repurchase our equity or to retire our outstanding debt in open market purchases, privately negotiated transactions, through derivative instruments, cash tender offers or otherwise. Repurchases of equity and debt may be funded by cash, the incurrence of additional debt or the issuance of equity (including shares of preferred stock) or convertible securities and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material. We may also elect to incur additional debt or issue equity (including shares of preferred stock) or convertible securities to finance ongoing operations or to meet our other liquidity needs. Such transactions may be limited in scope by certain restrictions that are binding on the Company in conjunction with the Merger Agreement. Any issuances of equity (including shares of preferred stock) or convertible securities could have a dilutive effect on the ownership interest of our current shareholders and may adversely impact earnings per share in future periods. Our credit ratings were downgraded during the past several years, which may impact our ability to access such transactions on favorable terms, if at all. For more information, see "Risk Factors - Our credit ratings were downgraded during the past several years, which could limit our access to financing, affect the market price of our financing and increase financing costs. A further downgrade in our credit ratings may adversely affect our access to liquidity," "Risk Factors - Our indebtedness and any future inability to meet any of our obligations under our indebtedness, could adversely affect us by reducing our flexibility to respond to changing business and economic conditions," and "Risk Factors - A general economic downturn, a recession globally or in one or more of our geographic regions or markets or sudden disruption in business conditions or other challenges may adversely affect our business, our access to liquidity and capital, and our credit ratings" contained in our 2018 Form 10-K. For more information, please also see "Risk Factors - The Merger Agreement subjects us to restrictions on our business activities prior to completion of the merger” in Part II, Item 1A of this Form 10-Q.
Our liquidity could also be negatively impacted by restructuring initiatives, dividends, capital expenditures, acquisitions, and certain contingencies, including any legal or regulatory settlements, described more fully in Note 11, Contingencies, to the Consolidated Financial Statements included herein. See our Cautionary Statement for purposes of the "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 contained in this report.
Cash Flows
Three months ended September 30, 2019
Net Cash Provided (Used) by Operating Activities of Continuing Operations
Net cash provided by operating activities of continuing operations during the third quarter of 2019 was approximately $30 as compared to net cash provided by operating activities of continuing operations of approximately $38 during the third quarter of 2018, a decrease of approximately $8. The decline in net cash from operating activities was primarily due to favorable one-time items in the third quarter of 2018 that did not recur in 2019 ($68 judicial deposit receipt relating to Brazil IPI taxes and an unfavorable impact of a timing difference of approximately $34 relating to refundable indirect taxes). Operational improvements in working capital and higher cash generated from earnings more than offset the increase in restructuring payments.
Net Cash Provided (Used) by Investing Activities of Continuing Operations
Net cash provided by continuing investing activities during the third quarter of 2019 was approximately $15, as compared to net cash used by continuing investing activities of approximately $22 during the third quarter of 2018. The approximate $37 increase to net cash provided by continuing investing activities was primarily due to net proceeds from the sale of New Avon and reduced capital expenditure. Refer to Note 5, Investment in New Avon, to the Consolidated Financial Statements contained herein for more information relating to the sale of New Avon.
Net Cash Provided (Used) by Financing Activities of Continuing Operations
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
Net cash provided by continuing financing activities during the third quarter of 2019 was approximately $121, as compared to net cash used by financing activities of $3 during the third quarter of 2018. The approximate $124 favorable impact to net cash from financing activities was primarily due to the net impact of proceeds from debt issued in the quarter offset by the repayment of debt and proceeds from the monetization of COFINS tax credits.
Free Cash Flow Provided (Used) by Continuing Operations
We also present free cash flow as an additional financial measure for liquidity, which we believe provides an additional perspective on trends and underlying business results. Free cash flow is the sum of net cash (used) provided by continuing operating activities and net cash provided (used) by continuing investing activities. We have also included the proceeds from the monetization of COFINS tax credits presented within net cash provided (used) by financing activities of continuing operations. Free cash flow provided by continuing operations was a net inflow of $65 compared to $16, during the third quarter of 2019 and 2018, respectively. Improvements in Free Cash Flow compared to prior year were driven by operational improvements in both earnings and working capital. Cash proceeds from asset sales, including the monetization of tax assets, funded Open Up Avon restructuring and mitigated the impact of non-recurring tax benefits in the third quarter of 2018.
Nine months ended September 30, 2019
Net Cash (Used) by Operating Activities of Continuing Operations
Net cash used by operating activities of continuing operations during the first nine months of 2019 was approximately $105 as compared to approximately $68 during the first nine months of 2018, an increase in usage of approximately $37. The decline in net cash from operating activities was primarily due to favorable onetime items in the third quarter of 2018 that did not recur in 2019 ($68 judicial deposit receipt relating to the Brazil IPI taxes and an unfavorable impact of a timing difference of approximately $34 relating to refundable indirect taxes). Operational improvements in working capital and higher cash generated from earnings more than offset the increase in restructuring payments.
Net Cash Provided (Used) by Investing Activities of Continuing Operations
Net cash provided by continuing investing activities during the first nine months of 2019 was approximately $60, as compared to net cash used by continuing investing activities of approximately $72 during the first nine months of 2018. The approximate $132 increase to net cash from investing activities was primarily due to net proceeds from the sale of Avon Manufacturing (Guangzhou), Ltd, which closed during the first quarter of 2019, the sale of the Rye Office and the sale of Maximin Corporation Sdn Bhd, both of which closed during the second quarter of 2019 and the sale of New Avon which closed during the third quarter of 2019. Refer to Note 3, Discontinued Operations, Assets and Liabilities Held for Sale and Divestitures, and Note 4, Investment in New Avon, to the Consolidated Financial Statements contained herein for more information relating to the sale of these businesses and assets.
Net Cash Provided (Used) by Financing Activities of Continuing Operations
Net cash provided by continuing financing activities during the first nine months of 2019 was approximately $111, as compared to net cash used by financing activities of $255 during the first nine months of 2018. The approximate $366 favorable impact to net cash from financing activities was primarily due the proceeds from debt in the third quarter of 2019 and proceeds from the monetization of COFINS tax credits.
Free Cash Flow Used by Continuing Operations
We also present free cash flow as an additional financial measure for liquidity, which we believe provides an additional perspective on trends and underlying business results. Free cash flow is the sum of net cash (used) provided by continuing operating activities and net cash provided (used) by continuing investing activities, we have also included the proceeds from the monetization of COFINS tax credits presented within net cash provided (used) by financing activities of continuing operations. Free cash flow provided by continuing operations was a net outflow of $26 and $140, respectively, during the first nine months of 2019 and 2018. Improvements in Free Cash Flow compared to prior year were driven by operational improvements in both earnings and working capital. Cash proceeds from asset sales, including the monetization of tax assets, funded Open Up Avon restructuring and mitigated the impact of non-recurring tax benefits in the third quarter of 2018.
Capital Resources
Revolving Credit Facility
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
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 February 2019, Avon International Capital, p.l.c. ("AIC"), a wholly-owned foreign subsidiary of the Company, entered into a three-year €200.0 million senior secured revolving credit facility (the "2019 facility"). The 2019 facility replaced the 2015 facility and the 2015 facility was terminated at such time. 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(1), if on such 91st day, the applicable notes are not redeemed, repaid, discharged, defeased or otherwise refinanced in full.
In July 2019, AIC issued $400 in aggregate principal amount of 6.50% Senior Notes which will mature on 15 August 2022. The proceeds were partially used to purchase the aggregate principal amount of $275 of the 4.6% Notes, due March 2020, under a cash tender offer completed during July 2019.
As of September 30, 2019, we were in compliance with our interest coverage and net leverage ratios under the 2019 facility, as amended. The amount of the facility available to be drawn down on is reduced by any standby letters of credit granted by an obligor, which, as of September 30, 2019, was approximately $23. As of September 30, 2019, based on then applicable exchange rates, the entire amount of the remaining 2019 facility, which is approximately €179 million, could have been drawn down without violating any covenant. Depending on our business results (including the impact of any adverse foreign exchange movements and significant restructuring charges), it is possible that we may be non-compliant with our interest coverage or net leverage ratio absent the Company undertaking other alternatives to avoid noncompliance, such as obtaining amendments to the 2019 facility. If we were to be non-compliant with our interest coverage or net leverage ratio, we would no longer have access to our 2019 facility and our credit ratings may be downgraded. As of September 30, 2019, there were no amounts outstanding under the 2019 facility.
(1) In March 2013, we issued, in a public offering $500.0 principal amount of 4.60% Notes due March 15, 2020, referred above as the "4.60% Notes"
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT STRATEGIES
Interest Rate Risk
In the past we have used interest-rate swaps to manage our interest rate exposure. The interest-rate swaps were used to either convert our fixed rate borrowing to a variable interest rate or to unwind an existing variable interest-rate swap on a fixed rate borrowing. As of September 30, 2019, we do not have any interest-rate swap agreements. Approximately 7% and 1% of our debt portfolio at September 30, 2019 and December 31, 2018, respectively, was exposed to floating interest rates. For the purpose of this calculation, we consider all short-term debt to be exposed to floating interest rates.
Foreign Currency Risk
We conduct business globally, with operations in various locations around the world. Over the past three years, all of our consolidated revenue was derived from operations of subsidiaries outside of the U.S. The functional currency for most of our foreign operations is their local currency. We may reduce our exposure to fluctuations in cash flows associated with changes in foreign exchange rates by creating offsetting positions, including through the use of derivative financial instruments.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this report (or in the documents it incorporates by reference) that are not historical facts or information may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "estimate," "project," "forecast," "plan," "believe," "may," "expect," "anticipate," "intend," "planned," "potential," "can," "expectation," "could," "will," "would" and similar expressions, or the negative of those expressions, may identify forward looking statements. They include, among other things, statements regarding our anticipated or expected results, future financial performance, various strategies and initiatives (including our Transformation Plan, Open Up Avon, stabilization strategies, cost savings initiatives, restructuring and other initiatives and related actions), costs and cost savings, competitive advantages, impairments, the impact of foreign currency, including devaluations, and other laws and regulations, government investigations, results of litigation, contingencies, taxes and tax rates, potential alliances or divestitures, liquidity, cash flow, uses of cash and financing, hedging and risk management strategies, pension, postretirement and incentive compensation plans, supply chain and the legal status of the Representatives. Such forward-looking statements are based on management's reasonable current assumptions, expectations, plans and forecasts regarding the Company's current or future results and future business and economic conditions more generally. Such forward-looking statements involve risks, uncertainties and other factors, which may cause the actual results, levels of activity, performance or achievement of Avon to be materially different from any future results expressed or implied by such forward-looking statements, and there can be no assurance that actual results will not differ materially from management's expectations. Therefore, you should not rely on any of these forward-looking statements as predictors of future events. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
•our ability to improve our financial and operational performance and execute fully our global business strategy, including our ability to implement the key initiatives of, and/or realize the projected benefits (in the amounts and time schedules we expect) from, our Transformation Plan, Open Up Avon, stabilization strategies, cost savings initiatives, restructuring and other initiatives, product mix and pricing strategies, enterprise resource planning, customer service initiatives, sales and operation planning process, outsourcing strategies, Internet platform and technology strategies including e-commerce, marketing and advertising strategies, information technology and related system enhancements and cash management, tax, foreign currency hedging and risk management strategies, and any plans to invest these projected benefits ahead of future growth;
•our ability to achieve the anticipated benefits of our strategic partnership with Cerberus Capital Management, L.P.;
•our broad-based geographic portfolio, which is heavily weighted towards emerging markets, a general economic downturn, a recession globally or in one or more of our geographic regions or markets, such as Brazil, Mexico or Russia, or sudden disruption in business conditions, and the ability to withstand an economic downturn, recession, cost inflation, commodity cost pressures, economic or political instability (including fluctuations in foreign exchange rates), competitive or other market pressures or conditions;
•the effect of economic factors, including inflation and fluctuations in interest rates and foreign currency exchange rates; as well as the designation of Argentina as a highly inflationary economy, and the potential effect of such factors on our business, results of operations and financial condition;
•the possibility of business disruption in connection with our Transformation Plan, Open Up Avon, stabilization strategies, cost savings initiatives, or restructuring and other initiatives;
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
•our ability to reverse declining revenue, to improve margins and net income, or to achieve profitable growth, particularly in our largest markets and developing and emerging markets, such as Brazil, Mexico and Russia;
•our ability to improve working capital and effectively manage doubtful accounts and inventory and implement initiatives to reduce inventory levels, including the potential impact on cash flows and obsolescence;
•our ability to reverse declines in Active Representatives, to enhance our sales leadership programs, to generate Representative activity, to increase the number of consumers served per Representative and their engagement online, to enhance branding and the Representative and consumer experience and increase Representative productivity through field activation and segmentation programs and technology tools and enablers, to invest in the direct-selling channel, to offer a more social selling experience, and to compete with other direct-selling organizations to recruit, retain and service Representatives and to continue to innovate the direct-selling model;
•general economic and business conditions in our markets, including social, economic and political uncertainties, such as in Russia and Ukraine or elsewhere, and any potential sanctions, restrictions or responses to such conditions imposed by other markets in which we operate;
•the effect of political, legal, tax, including changes in tax rates, and other regulatory risks imposed on us abroad and in the U.S., our operations or the Representatives, including foreign exchange, pricing, data privacy or other restrictions, the adoption, interpretation and enforcement of foreign laws, including in jurisdictions such as Brazil and Russia, and any changes thereto, as well as reviews and investigations by government regulators that have occurred or may occur from time to time, including, for example, local regulatory scrutiny;
•competitive uncertainties in our markets, including competition from companies in the consumer packaged goods industry, some of which are larger than we are and have greater resources;
•the impact of the adverse effect of volatile energy, commodity and raw material prices, changes in market trends, purchasing habits of our consumers and changes in consumer preferences, particularly given the global nature of our business and the conduct of our business in primarily one channel;
•our ability to attract and retain key personnel;
•other sudden disruption in business operations beyond our control as a result of events such as acts of terrorism or war, natural disasters, pandemic situations, large-scale power outages and similar events;
•key information technology systems, process or site outages and disruptions, and any cyber security breaches, including any security breach of our systems or those of a third-party provider that results in the theft, transfer or unauthorized disclosure of Representative, customer, employee or Company information or compliance with information security and privacy laws and regulations in the event of such an incident which could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations, and related costs to address such malicious intentional acts and to implement adequate preventative measures against cyber security breaches;
•our ability to comply with various data privacy laws affecting the markets in which we do business;
•the risk of product or ingredient shortages resulting from our concentration of sourcing in fewer suppliers;
•any changes to our credit ratings and the impact of such changes on our financing costs, rates, terms, debt service obligations, access to lending sources and working capital needs;
•the impact of our indebtedness, our access to cash and financing, and our ability to secure financing or financing at attractive rates and terms and conditions;
•the impact of our business results (including the impact of any adverse foreign exchange movements and significant restructuring charges), on our ability to comply with certain covenants in our revolving credit facility;
•our ability to successfully identify new business opportunities, strategic alliances and strategic alternatives and identify and analyze alliance candidates, secure financing on favorable terms and negotiate and consummate alliances;
•disruption in our supply chain or manufacturing and distribution operations;
•the quality, safety and efficacy of our products;
•the success of our research and development activities;
•our ability to protect our intellectual property rights, including in connection with the separation of the North America business;
AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)
•our ability to repurchase the series C preferred stock in connection with a change of control;
•the risk of an adverse outcome in any material pending and future litigation or with respect to the legal status of Representatives; and
•other risks and uncertainties include the timing and likelihood of completion of the proposed combination of the Company and Natura, including the timing, receipt and terms and conditions of any required governmental and regulatory approvals for the proposed transactions that could reduce anticipated benefits or cause the parties to abandon the transactions; the possibility that the Company’s shareholders may not approve the proposed transactions; the possibility that Natura’s shareholders may not approve the proposed transactions; the possibility that the expected synergies and value creation from the proposed transactions will not be realized or will not be realized within the expected time period; the risk that the businesses of the Company and Natura will not be integrated successfully; disruption from the proposed transactions making it more difficult to maintain business and operational relationships; the risk that unexpected costs will be incurred; the possibility that the proposed transactions do not close, including due to the failure to satisfy the closing conditions; the possibility that the intended accounting and tax treatments of the proposed transactions are not achieved; the effect of the announcement, pendency or consummation of the proposed transactions on customers, employees, representatives, suppliers and partners and operating results; as well as more specific risks and uncertainties.
Additional information identifying such factors is contained in Item 1A of our 2018 Form 10-K for the year ended December 31, 2018, and in Item 1A of this 10-Q. We undertake no obligation to update any such forward-looking statements.
AVON PRODUCTS, INC.