NTCO Natura and Co Holding SA

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: September 30, 2020

Item 1

Discussion of Avon Products, Inc.’s Business and Operations as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019.

TABLE OF CONTENTS

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CERTAIN DEFINED TERMS AND CONVENTIONS USED IN THIS FORM 6-K

All references in this Form 6-K to the “Company,” “we,” “us” and “our” refer to Natura &Co, as defined below, unless the context otherwise requires. All references herein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “U.S.$” are to United States dollars, the official currency of the United States. All references to “pounds,” “pound sterling” or “£” are to the British pound sterling, the official currency of the United Kingdom.

In addition, as used in this Form 6-K, the following defined terms have the following respective meanings:

“Aesop” means Emeis Holding Pty Ltd and its consolidated subsidiaries.

“Avon” means Avon Products, Inc., a New York corporation, and its consolidated subsidiaries.

“Brazil” means the Federative Republic of Brazil and the phrase “Brazilian government” refers to the federal government of Brazil.

“Brazilian Central Bank” means the Central Bank of Brazil (Banco Central do Brasil).

“Natura” means Natura Cosméticos S.A., a corporation (sociedade anônima) incorporated under the laws of Brazil, and its consolidated subsidiaries (excluding Aesop, The Body Shop and their respective subsidiaries).

“Natura &Co” means (1) prior to the completion of the Transaction, Natura Cosméticos S.A. and its consolidated subsidiaries, and (2) after the completion of the Transaction, Natura &Co Holding S.A. and its consolidated subsidiaries, including Natura and Avon.

“Natura &Co Holding” means Natura &Co Holding S.A., a corporation (sociedade anônima) incorporated under the laws of Brazil, excluding its subsidiaries.

“Natura Cosméticos” means Natura Cosméticos S.A., a corporation (sociedade anônima) incorporated under the laws of Brazil.

“Merger Sub I” means Nectarine Merger Sub I, Inc., a Delaware corporation and a direct wholly owned subsidiary of Natura &Co Holding.

“Merger Sub II” means Nectarine Merger Sub II, Inc., a Delaware corporation and a direct wholly owned subsidiary of Merger Sub I.

“Merger Subs” means Merger Sub I and Merger Sub II, collectively.

“Sales representatives” or “representatives” means independent contractors who are not employees of Avon or any of its subsidiaries, but directly or indirectly purchase products or services from Avon or any of its subsidiaries.

“The Body Shop” means The Body Shop International Limited, a private limited company registered in England and Wales and its subsidiaries.

“Transaction” means the transaction effected by the Agreement and Plan of Mergers, dated May 22, 2019, as amended on October 3, 2019 and as may be further amended from time to time in accordance with its terms (the “Merger Agreement”) entered into by Avon Products, Natura Cosméticos, Natura &Co Holding and the Merger Subs pursuant to which (i) Natura &Co Holding, after the completion of certain restructuring steps, held all issued and outstanding shares of Natura Cosméticos, (ii) Merger Sub II merged with and into Avon, with Avon surviving the merger, and (iii) Merger Sub I merged with and into Natura &Co Holding, with Natura &Co Holding surviving the merger, and as a result of which each of Avon and Natura Cosméticos became a wholly owned direct subsidiary of Natura &Co Holding.

“United Kingdom” or “UK” means the United Kingdom of Great Britain and Northern Ireland.

“United States” or “U.S.” means the United States of America.

“U.S. GAAP” or “GAAP” means generally accepted accounting principles in the U.S.

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PRESENTATION OF FINANCIAL AND CERTAIN OTHER INFORMATION

Financial Statements

Avon’s annual consolidated financial information as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019 presented herein have been derived from the audited consolidated financial statements of Avon and the related notes thereto included elsewhere in this Form 6-K.

The consolidated financial statements of Avon are prepared in accordance with U.S. GAAP and are presented in U.S. dollars.

In 2020, Avon changed its reportable segments to align them with how the business is operated and managed since the merger with Natura &Co, which are reportable segments based on geographic operations: Avon International and Avon Latin America. Prior to this change, Avon reported four segments: Europe, Middle East & Africa, Asia Pacific, South Latin America and North Latin America. We have not recast the segments in this Form 6-K because we do not believe the change in reporting segments is material to the assessment of Avon’s performance.

The Transaction

Avon Products, Natura Cosméticos, Natura &Co Holding and the Merger Subs entered into an Agreement and Plan of Mergers, dated May 22, 2019, as amended on October 3, 2019 and November 5, 2019, or the Merger Agreement, pursuant to which (i) Natura &Co Holding, after the completion of certain restructuring steps, held all issued and outstanding shares of Natura Cosméticos, (ii) Merger Sub II merged with and into Avon, with Avon surviving the merger, and (iii) Merger Sub I merged with and into Natura &Co Holding, with Natura &Co Holding surviving the merger, and as a result of which each of Avon and Natura Cosméticos became a wholly owned direct subsidiary of Natura &Co Holding.

The Transaction was consummated on January 3, 2020. Accordingly, our results of operations and financial condition for the historical periods discussed in this section prior to the Transaction do not reflect or include the results of operations or any assets or liabilities of Avon as well as certain critical accounting policies and estimates related to goodwill, intangible assets and purchase accounting related to the Transaction. We began consolidating Avon and its subsidiaries as from January 3, 2020, and, accordingly, our results of operations and financial condition of and for the six-months ended June 30, 2020 and future periods may not necessarily be comparable to our results of operations and financial condition for historical periods prior to the Transaction, including those discussed below.

Rounding

We have made rounding adjustments to reach some of the figures included in this Form 6-K. As a result, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that precede them.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS OF AVON

You should read the following discussion of the results of operations and financial condition of Avon and its majority and wholly owned subsidiaries in conjunction with the information contained in Avon’s annual consolidated financial statements as of December 31, 2019 and 2018 and for each of the years in the three-year period ended December 31, 2019 and related notes, prepared in accordance with U.S. GAAP and included elsewhere in this Form 6-K. This discussion is based on the historical information of Avon presented without the effect of purchase accounting adjustments and changes in segmentation since the combination with Natura &Co.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Avon—Non-GAAP Financial Measures” for a description of how constant dollar, Constant U.S.$, growth rates (a Non-GAAP financial measure) are determined and see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Avon—Performance Metrics” for definitions of our performance metrics (Change in Active representatives, Change in units sold, Change in Ending representatives and Change in Average Order).

For the purposes of this section, when used in this discussion, the terms “Avon,” “Company,” “we,” “our” or “us” mean, unless the context otherwise indicates, Avon Products, Inc. and its majority and wholly owned subsidiaries.

Overview

Avon is a global manufacturer and marketer of beauty and related products. Avon’s business is conducted primarily in the direct-selling channel. During 2019, Avon had sales operations in 54 countries and territories, and distributed products in 24 more. All of Avon’s consolidated revenue is derived from operations of subsidiaries outside the U.S.

In 2020, Avon changed its reportable segments to align them with how the business is operated and managed since the merger with Natura &Co, which are reportable segments based on geographic operations: Avon International and Avon Latin America. Prior to this change, Avon reported four segments: Europe, Middle East & Africa, Asia Pacific, South Latin America and North Latin America.

Avon’s product categories are Beauty and Fashion & Home. Beauty consists of skin care, fragrance and color (cosmetics). Fashion & Home consists of fashion jewelry, watches, apparel, footwear, accessories, gift and decorative products, housewares, entertainment and leisure products, children’s products and nutritional products. Sales are made to the end consumer principally through direct selling by representatives, who are independent contractors and not Avon’s employees.

As of December 31, 2019, Avon had approximately five million average active representatives, which represents the number of representatives submitting an order in a sales campaign, totaled for all campaigns during the year and then divided by the number of campaigns. The success of Avon’s business is highly dependent on recruiting, retaining and servicing its representatives.

Total revenue decreased 15% compared to the prior-year period, impacted by certain indirect taxes recognized in Brazil as well as the Brazil tax on industrial products (Imposto sobre Produtos Industrializados), or IPI, in the prior year. These indirect taxes and IPI positively impacted revenue in both 2018 and 2019, but to a larger extent in 2018. Excluding the impact of these indirect taxes in Brazil, Adjusted revenue decreased by 13%, impacted by the unfavorable impact of foreign exchange. Adjusted Constant U.S.$ revenue decreased 7%.

The decline in Adjusted revenue and Adjusted Constant U.S.$ revenue was primarily driven by the Europe Middle East & Africa markets, in particular Russia. Russia was negatively impacted by a decrease in Active representatives and a decrease in Average Representative Sales. Revenue and Constant U.S.$ revenue in Russia continued to be impacted by lower consumer confidence, as well as weaker sales leader engagement in the first half of the year.

Revenue and Constant U.S.$ revenue were impacted by a decrease in Active representatives of 10% across multiple markets. Average Representative Sales decreased 5% on a reported basis, unfavorably impacted by foreign exchange and Adjusted Constant U.S.$ Average Representative Sales increased 2%. While Revenue, Adjusted revenue and Constant U.S.$ Adjusted revenue have declined, this is a consequence of Avon’s intent to improve

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productivity by increasing Average Representative Sales. Adjusted Constant U.S.$ and Average Representative Sales were 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 19 to Avon’s audited consolidated financial statements included herein.

Units sold decreased 14% driven by declines in Brazil and Russia.

See “—Segment Review” for additional information related to changes in revenue by segment.

Agreement and Merger with Natura Cosméticos S.A.

On May 22, 2019, Avon entered into an Agreement and Plan of Mergers with Natura Cosméticos and Natura &Co Holding, among others, pursuant to which, in a series of transactions, Avon and Natura Cosméticos became direct wholly owned subsidiaries of Natura &Co Holding. For additional information, see note 23 to Avon’s audited consolidated financial statements included herein. On January 3, 2020, Avon consummated the transaction and became a wholly owned subsidiary of Natura &Co Holding. In connection with the consummation of the transaction, Avon notified the NYSE that trading of its stock should be suspended, and its common stock was subsequently delisted and deregistered.

Transformation Plan and Open Up Avon

In January 2016, Avon initiated a transformation plan, or the Transformation Plan, in order to enable us to achieve Avon’s long-term goals of mid-single-digit Constant U.S.$ revenue growth and low double-digit operating margin. There are no further restructuring actions to be taken associated with Avon’s Transformation Plan as, beginning in the third quarter of 2018, all new restructuring actions approved operate under its new Open Up Avon plan described below.

In September 2018, Avon initiated a new strategy in order to return Avon to growth, or Open Up Avon. The Open Up Avon strategy is integral to Avon’s ability to return to growth, built around the necessity of incorporating new approaches to various elements of Avon’s business, including increased utilization of third-party providers in manufacturing and technology, a more fit-for-purpose asset base, and a focus on enabling Avon’s representatives to interact with us more easily and achieve relevant earnings. The commercial elements of the strategy were developed to help increase Representative earnings and thereby retention. Elements of the Representative facing strategy include improvements in service functions, increased training on utilization of digital tools to expand our consumer reach, product bundling and regimens designed to help improve our earnings opportunity and sharper more targeted product innovation to drive brand relevancy. Cost savings under this plan are 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, Avon 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 U.S.$88 million recognized at December 31, 2018. In 2019, the global workforce was reduced by 16%, ahead of the expected 10% reduction 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. Avon initiated the Open Up Avon strategy to enable us to achieve its goals of low-single-digit Constant U.S.$ revenue growth and low-double-digit operating margin by 2021. Avon plans to reinvest a portion of these cost savings in commercial initiatives, including training for representatives, and digital and IT infrastructure initiatives.

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In connection with the actions and associated savings discussed above, Avon has incurred costs to implement, or CTI, restructuring initiatives of approximately U.S.$250 million before taxes to date associated with Open Up Avon and approximately U.S.$215 million before taxes to-date associated with the Transformation Plan. Of these costs, approximately U.S.$107 million and approximately U.S.$9 million was recorded during 2019 associated with Open Up Avon and the Transformation Plan, respectively. The additional charges not yet incurred associated with the restructuring actions approved as at December 31, 2019 relate to Open Up Avon and are negligible. As of December 31, 2019, Avon had liabilities of approximately U.S.$24 million associated with Avon’s restructuring actions, primarily associated with Open Up Avon. The majority of future cash payments associated with these restructuring liabilities are expected to be made during 2020.

In 2018, Avon estimated that it achieved total cost savings of approximately U.S.$110 million before taxes, of which approximately U.S.$40 million was attributable to Open Up Avon and approximately U.S.$70 million was attributable to the Transformation Plan. The estimated U.S.$40 million of savings attributable to Open Up Avon primarily related to tax and interest, when compared to Avon’s costs in 2017. As it relates to the Transformation Plan, Avon exceeded its cost savings target of U.S.$65 million before taxes for full-year 2018. These savings include both run-rate savings from the Transformation Plan from 2017, along with in-year savings from current year initiatives already identified, and are associated with restructuring actions and from other cost-savings strategies that did not result in restructuring charges. As a result of restructuring actions and other cost-savings strategies taken related to the Transformation Plan, Avon exited 2018 with run-rate savings in excess of its total cumulative cost savings target of U.S.$350 million.

For additional details on restructuring initiatives, see note 17 to Avon’s audited consolidated financial statements included herein.

Avon’s New Accounting Standards

Information relating to new accounting standards is included in note 2 to Avon’s audited consolidated financial statements included herein.

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Avon’s Non-GAAP Financial Measures

To supplement its financial results presented in accordance with U.S. GAAP, Avon discloses operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, including changes in revenue, Adjusted revenue, operating profit, Adjusted operating profit, operating margin and Adjusted operating margin. Avon refers to these adjusted financial measures as Constant U.S.$ items, which are Non-GAAP financial measures. Avon believes these measures provide users of the financial statements an additional perspective on trends and underlying business results. To exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, Avon calculates current-year results and prior-year results at constant exchange rates, which are updated on an annual basis, usually in October, as part of its budgeting process. Foreign currency impact is determined as the difference between actual growth rates and Constant U.S.$ growth rates.

Avon also presents revenue, gross margin, selling, general and administrative expenses, or SG&A, expenses as a percentage of revenue, operating profit, operating margin, income (loss) before taxes, income taxes and effective tax rate on a Non-GAAP basis. Avon refers to these Non-GAAP financial measures as “Adjusted.” Avon has provided a quantitative reconciliation of the Non-GAAP financial measures to the most directly comparable financial measures calculated and reported in accordance with GAAP under “—Results of Operations—Consolidated—Reconciliation of Non-GAAP Financial Measures.”

Avon uses Non-GAAP financial measures to evaluate its operating performance. These Non-GAAP measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Avon believes users of the financial statements find the Non-GAAP information helpful in understanding the ongoing performance of operations separate from items that may have a disproportionate positive or negative impact on Avon’s financial results in any particular period. Avon believes that it is meaningful for investors to be made aware of the impacts of (1) certain Brazil indirect taxes; (2) CTI restructuring initiatives; (3) Expenses related to the Transaction, primarily professional fees, and impairment losses on assets; (4) costs associated with the early termination of debt; and (5) one-time tax items that are not associated with recurring, normal operations, or Special tax items.

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See notes 1, 8, 10, 14, 15, 17 and 19 to Avon’s audited consolidated financial statements included herein. See also “—Effective Tax Rate,” and “—Results of Operations—Consolidated” below, for more information on these items.

Avon’s Critical Accounting Estimates

Avon believes the accounting policies described below represent its critical accounting policies due to the estimation processes involved in each. See note 1 to Avon’s audited consolidated financial statements included herein for a detailed discussion of the application of these and other accounting policies.

Revenue Recognition

Revenue is recognized when control of a product or service is transferred to a customer, which is generally the Representative. Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties, such as Value Added Taxes collected for taxing authorities.

Avon’s contracts with representatives often include multiple promises to transfer products and/or services to the Representative and determining which of these products and/or services are considered distinct performance obligations that should be accounted for separately. When assessing the recognition of revenue for the identified performance obligations, management has exercised significant judgment in the following areas: estimation of variable consideration and the stand-alone selling prices, or SSP, of promised goods or services delivered under sales incentives to determine and allocate the transaction price.

Typically included within a contract with customers is variable consideration, such as sales returns and late payment fees. Revenue is only recorded to the extent it is probable that it will not be reversed, and therefore revenue is adjusted for variable consideration. Judgment is required to estimate the variable consideration. The Company uses the expected value method, which considers possible outcomes weighted by their probability. Specifically, for sales returns, a refund liability will be recorded for the estimated cash to be refunded for the products expected to be returned, and a returns asset will be recorded for the products which Avon expects to be returned and resold, each of these based on historical experience. The estimate of sales returns as well as the measurement of the returns asset and the refund liability is updated at the end of each month for changes in expectations regarding the amount of salvageable returns, reconditioning costs and any additional decreases in the value of the returned products. Late payment fees are recorded when the uncertainty associated with collecting such fees are resolved (i.e., when collected).

Additionally, management has exercised significant judgment in the estimation of the SSP of promised goods or services delivered under sales incentives such as status programs, loyalty points, prospective discounts, and gift with purchase, among others, to determine and allocate the transaction price. SSP represents the estimated market value, or the estimated amount that could be charged for that material right when the entity sells it separately in similar circumstances to similar customers. Judgment is required to determine the SSP for each distinct performance obligation. In instances where SSP is not directly observable, such as when Avon does not sell the product or service separately, including for certain sales incentives, Avon determines the SSP using information that may include market prices and other observable inputs.

Allowances for Doubtful Accounts Receivable

Representatives contact their customers, selling primarily through the use of brochures for each sales campaign, generally on credit if the representatives meet certain criteria. Sales campaigns are generally for a three- to four-week duration. The Representative purchases products directly from us and may or may not sell them to an end user. In general, the Representative, an independent contractor, remits a payment to us during each sales campaign, which relates to the prior campaign cycle. The Representative is generally precluded from submitting an order for the current sales campaign until the accounts receivable balance past due for prior campaigns is paid; however, there are circumstances where the Representative fails to make the required payment. Avon records 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. Over the past three years, annual bad debt expense was U.S.$115 million in 2019, U.S.$162 million in 2018 and U.S.$222 million in 2017, or approximately 2% of total revenue in 2019, approximately 3% of total revenue in 2018, and approximately 4% of total revenue in 2017. The allowance for doubtful accounts is reviewed for adequacy, at a minimum, on a quarterly basis. Avon generally has

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no detailed information concerning, or any communication with, any end user of its products beyond the Representative. Avon has no legal recourse against the end user 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.

Allowances for Sales Returns

Policies and practices for product returns vary by jurisdiction. Avon records a provision for estimated sales returns based on historical experience with product returns. Over the past three years, annual sales returns were U.S.$133 million for 2019, U.S.$172 million for 2018 and U.S.$198 million for 2017, or 2 to 4% of total revenue in each year, which has been generally in line with Avon’s expectations. If the historical data Avon uses to calculate these estimates does not approximate future returns, due to changes in marketing or promotional strategies, or for other reasons, additional allowances may be required.

Provisions for Inventory Obsolescence

Avon records an allowance for estimated obsolescence, when applicable, equal to the difference between the cost of inventory and the net realizable value. In determining the allowance for estimated obsolescence, Avon classifies inventory into various categories based upon its stage in the product life cycle, future marketing sales plans and the disposition process. Avon assigns a degree of obsolescence risk to products based on this classification to estimate the level of obsolescence provision. If actual sales are less favorable than those projected, additional inventory allowances may need to be recorded for such additional obsolescence. Annual obsolescence expense was U.S.$37 million in 2019, U.S.$114 million in 2018 and U.S.$37 million in 2017, or less than 1% of total revenue in 2019, 2% of total revenue in 2018 and less than 1% of total revenue in 2017. As discussed under “—Overview,” 2018 includes inventory obsolescence charges of U.S.$88 million related to Avon’s inventory reset program, most of which was utilized in 2019.

Pension and Postretirement Expense

Avon maintains defined benefit pension plans, the most significant of which are in the UK, Germany and the U.S. However, Avon’s U.S. defined benefit pension plan is closed to employees hired on or after January 1, 2015, and the UK defined benefit pension plan was frozen for future accruals as of April 1, 2013 and closed to employees hired on or after September 30, 2006. Additionally, Avon has unfunded supplemental pension benefit plans for some current and retired executives and provide retiree healthcare benefits subject to certain limitations to certain retired employees in the U.S. and certain foreign countries. See note 14 to Avon’s audited consolidated financial statements included herein for additional information.

Pension and postretirement expense and the requirements for funding Avon’s major pension plans are determined based on a number of actuarial assumptions, which are generally reviewed and determined on an annual basis. These assumptions include the discount rate applied to plan obligations, the expected rate of return on plan assets, the rate of compensation increase of plan participants, price inflation, cost-of-living adjustments, mortality rates and certain other demographic assumptions, and other factors. Avon uses a December 31 measurement date for all of its employee benefit plans.

For 2019, the weighted average assumed rate of return on all pension plan assets was 5.29%, as compared with 5.23% for 2018. In determining the long-term rates of return, Avon considers the nature of the plans’ investments, an expectation for the plans’ investment strategies, historical rates of return and current economic forecasts. Avon generally evaluates the expected long-term rates of return annually and adjust as necessary.

In some of its defined benefit pension plans, Avon has adopted investment strategies which are designed to match the movements in the pension liability through an increased allocation towards debt securities. In addition, Avon also utilizes derivative instruments in its UK defined benefit pension plans to hedge certain risks. Derivative instruments may include, but are not limited to, futures, options, swaps or swaptions. Investment types, including the use of derivatives are based on written guidelines established for each investment manager and monitored by the plan’s investment committee.

A significant portion of Avon’s pension plan assets relate to the UK defined benefit pension plan. The assumed rate of return for determining 2019 net periodic benefit cost for the UK defined benefit pension plan was 5.20%. In addition, the 2019 rate of return assumption for the UK defined benefit pension plan was based on an asset

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allocation of approximately 80% in liability driven investments, approximately 5% in corporate and government bonds and mortgage-backed securities and approximately 15% in equity securities, emerging market debt and high yield securities. In addition to the physical assets, the asset portfolio for the UK defined benefit pension plan has derivative instruments which increase Avon’s exposure to fixed income (in order to better match liabilities) and, to a lesser extent, impact Avon’s equity exposure. The rate of return on the plan assets in the UK was approximately 16.4% in 2019 and approximately (4)% in 2018.

Historically, the pension plan with the most significant pension plan assets was the U.S. defined benefit pension plan. As part of the separation of the North America business, in 2016 Avon transferred U.S.$499.6 million of pension liabilities under the U.S. defined benefit pension plan associated with current and former employees of the North America business and certain other former Avon employees, along with U.S.$355.9 million of assets held by the U.S. defined benefit pension plan, to a defined benefit pension plan sponsored by New Avon. Avon also transferred U.S.$60.4 million of other postretirement liabilities (namely, retiree medical and supplemental pension liabilities) in respect of such employees and former employees. See note 3 to Avon’s audited consolidated financial statements included herein. Avon continues to retain certain U.S. pension and other postretirement liabilities primarily associated with employees who are actively employed by Avon in the U.S. providing services other than with respect to the North America business. Prior to this separation, Avon’s net periodic benefit costs for the U.S. pension and postretirement benefit plans were allocated between Discontinued Operations and Global as the plan included both North America and U.S. Corporate Avon associates, and as such, Avon’s ongoing net periodic benefit costs within Global were not materially impacted by the separation of the North America business.

The discount rate used for determining the present value of future pension obligations for each individual plan is based on a review of bonds that receive a high-quality rating from a recognized rating agency. The discount rates for calculating the balance sheet obligations of Avon’s more significant plans, including its UK defined benefit pension plan and its U.S. defined benefit pension plan, were based on the internal rates of return for a portfolio of high-quality bonds with maturities that are consistent with the projected future benefit payment obligations of each plan. The weighted-average discount rate for U.S. and non-U.S. defined benefit pension plans determined on this basis was 2.15% at December 31, 2019, and 3.06% at December 31, 2018. For the determination of the expected rates of return on assets and the discount rates, Avon takes external actuarial and investment advice into consideration.

Effective as of January 1, 2018, Avon changed the method it uses to estimate the service and interest cost components of net periodic benefit cost for the U.S. defined benefit pension plan and the majority of Avon’s significant non-U.S. pension plans, including the UK defined benefit pension plan. Historically, including in 2017, Avon estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2018, Avon elected to use a full yield curve approach in the estimation of these components of net periodic benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. Avon made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates, which Avon believes will result in a more precise measurement of service and interest costs. Avon accounted for this change in estimate on a prospective basis beginning in 2018.

Avon’s funding requirements may be impacted by standards and regulations or interpretations thereof. Avon’s calculations of pension and postretirement costs are dependent on the use of assumptions, including discount rates, hybrid plan maximum interest crediting rates and expected return on plan assets discussed above, rate of compensation increase of plan participants, interest cost, benefits earned, mortality rates, the number of participants and certain demographics and other factors. Actual results that differ from assumptions are accumulated and amortized to expense over future periods and, therefore, generally affect recognized expense in future periods. At December 31, 2019, Avon had pretax actuarial losses and prior service credits totaling approximately U.S.$24 million for the U.S. defined benefit pension and postretirement plans and approximately U.S.$185 million for the non-U.S. defined benefit pension and postretirement plans that have not yet been charged to expense. These actuarial losses have been charged to AOCI within shareholders’ equity. While Avon believes that the assumptions used are reasonable, differences in actual experience or changes in assumptions may materially affect its pension and postretirement obligations and future expense. For 2020, Avon’s assumption for the expected rate of return on assets is 4.9% for its U.S. defined benefit pension plan and 2.6% for its non-U.S. defined benefit pension plans (which includes 2.20% for its UK defined benefit pension plan). Avon’s assumptions are generally reviewed and determined on an annual basis.

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A 50 basis point change (in either direction) in the expected rate of return on plan assets, the discount rate or the rate of compensation increases, would have had approximately the following effect on 2019 pension expense and the pension benefit obligation at December 31, 2019:

Restructuring Reserves

Avon records the estimated expense for its restructuring initiatives when such costs are deemed probable and estimable, when approved by the appropriate corporate authority and by accumulating detailed estimates of costs for such plans. These expenses include the estimated costs of employee severance and related benefits, inventory write-offs, impairment or accelerated depreciation of property, plant and equipment and capitalized software, and any other qualifying exit costs. These estimated costs are grouped by specific projects within the overall plan and are then monitored on a quarterly basis by finance personnel.

Such costs represent Avon’s best estimate, but require assumptions about the programs that may change over time, including attrition rates. Estimates are evaluated periodically to determine whether an adjustment is required.

Taxes

Avon records a valuation allowance to reduce its deferred tax assets to an amount that is “more likely than not” to be realized. Evaluating the need for and quantifying the valuation allowance often requires significant judgment and extensive analysis of all the weighted positive and negative evidence available to us in order to determine whether all or some portion of the deferred tax assets will not be realized. In performing this analysis, Avon forecasted U.S. and foreign taxable income, and the existence of potential prudent and feasible tax planning strategies that would enable us to utilize some or all of its excess foreign tax credits, are taken into consideration. As of December 31, 2019, Avon had net deferred tax assets of approximately U.S.$153 million (net of valuation allowances of approximately U.S.$2,960 million and deferred tax liabilities of U.S.$142 million).

With respect to its deferred tax assets, at December 31, 2019, Avon had recognized deferred tax assets of approximately U.S.$2,112 million relating to foreign and state tax loss carryforwards, for which a valuation allowance of approximately U.S.$2,019 million has been provided. At December 31, 2019, Avon had recognized deferred tax assets of approximately U.S.$658 million primarily relating to excess U.S. foreign tax and other U.S. general business credit carryforwards for which a valuation allowance of approximately U.S.$649 million had been provided. Avon has a history of U.S. source losses, and its excess U.S. foreign tax and general business credits have primarily resulted from having a greater U.S. source loss in recent years which reduces Avon’s ability to credit foreign taxes or utilize the general business credits which it generates.

Avon’s ability to realize its U.S. deferred tax assets, such as its foreign tax and general business credit carryforwards, is dependent on future U.S. taxable income within the carryforward period. At December 31, 2019, Avon would need to generate approximately U.S.$3.1 billion of excess net foreign source income in order to realize the U.S. foreign tax and general business credits before they expire.

As of December 31, 2019, as a result of its U.S. liquidity profile, Avon continues to assert that substantially all of its foreign earnings are not indefinitely reinvested. Accordingly, Avon adjusted its deferred tax liability to account for its 2018 undistributed earnings of foreign subsidiaries and for the tax effect of earnings that were actually repatriated to the U.S. during the year. The net impact on the deferred tax liability associated with our undistributed earnings is a decrease of U.S.$12.5 million, resulting in a deferred tax liability balance of U.S.$6.1 million related to the incremental tax cost on approximately U.S.$1.2 billion of undistributed foreign earnings at December 31, 2019.

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With respect to its uncertain tax positions, Avon recognizes the benefit of a tax position, if that position is more likely than not to be sustained on examination by the taxing authorities, based on the technical merits of the position. Avon believes that its assessment of more likely than not is reasonable, but because of the subjectivity involved and the unpredictable nature of the subject matter at issue, its assessment may prove ultimately to be incorrect, which could materially impact Avon’s Consolidated Financial Statements.

Avon files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. In 2020, a number of open tax years are scheduled to close due to the expiration of the statute of limitations and it is possible that a number of tax examinations may be completed. If Avon’s tax positions are ultimately upheld or denied, it is possible that the 2020 provision for income taxes, as well as tax related cash receipts or payments, may be impacted.

Loss Contingencies

Avon determines whether to disclose and/or accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable. Avon records loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. Avon’s assessment is developed in consultation with its outside counsel and other advisers and is based on an analysis of possible outcomes under various strategies. Loss contingency assumptions involve judgments that are inherently subjective and can involve matters that are in litigation, which, by its nature is unpredictable. Avon believes that its assessment of the probability of loss contingencies is reasonable, but because of the subjectivity involved and the unpredictable nature of the subject matter at issue, its assessment may prove ultimately to be incorrect, which could materially impact Avon’s Consolidated Financial Statements.

Impairment of Assets

Plant, Property and Equipment and Capitalized Software

Avon evaluates its plant, property and equipment and capitalized software for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated pre-tax undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value of the asset is determined using revenue and cash flow projections, and royalty and discount rates, as appropriate.

Goodwill

Avon tests goodwill for impairment annually, and more frequently if circumstances warrant, using various fair value methods. Avon completed its annual goodwill impairment assessment for 2019 in November and determined that the estimated fair values were substantially in excess of the carrying values of each of its reporting units.

The impairment analyses performed for goodwill require several estimates in computing the estimated fair value of a reporting unit. As part of its goodwill impairment analysis, Avon typically uses a discounted cash flow, or DCF, approach to estimate the fair value of a reporting unit, which we believe is the most reliable indicator of fair value of a business, and is most consistent with the approach that Avon would generally expect a market participant would use. In estimating the fair value of its reporting units utilizing a DCF approach, Avon typically forecasts revenue and the resulting cash flows for periods of 5 to 10 years and include an estimated terminal value at the end of the forecasted period. When determining the appropriate forecast period for the DCF approach, Avon considers the amount of time required before the reporting unit achieves what Avon considers a normalized, sustainable level of cash flows. The estimation of fair value utilizing a DCF approach includes numerous uncertainties which require significant judgment when making assumptions of expected growth rates and the selection of discount rates, as well as assumptions regarding general economic and business conditions, and the structure that would yield the highest economic value, among other factors.

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12

Avon - 2019 Compared to 2018

Revenue

Total revenue decreased 15% compared to the prior-year period, impacted by certain indirect taxes recognized in Brazil as well as IPI in the prior year. These indirect taxes and IPI positively impacted revenue in both 2018 and 2019, but to a larger extent in 2018. Excluding the impact of these indirect taxes in Brazil, Adjusted revenue was down 13%, impacted by the unfavorable impact of foreign exchange. Adjusted Constant U.S.$ Revenue decreased 7%.

Revenue, Adjusted revenue and Adjusted Constant U.S.$ revenue decline was primarily driven by Europe, Middle East & Africa markets, in particular Russia. Russia was negatively impacted by a decrease in Active representatives and a decrease in Average Representative Sales. Revenue and Constant U.S.$ revenue in Russia continued to be impacted by lower consumer confidence, as well as weaker sales leader engagement in the first half of the year.

Revenue and Constant U.S.$ revenue were impacted by a decrease in Active representatives of 10%, across multiple markets. Average Representative Sales decreased 5% on a reported basis, unfavorably impacted by foreign exchange and Adjusted Constant U.S.$ Average Representative Sales increased 2%. While Revenue, Adjusted revenue and Constant U.S.$ Adjusted revenue have declined, this is a consequence of Avon’s intent to improve productivity by increasing Average Representative Sales. Adjusted Constant U.S.$ Average Representative Sales were 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 19 to Avon’s audited consolidated financial statements included herein.

Units sold decreased 14%, driven by declines in Brazil and Russia.

See “—Segment Review” for additional information related to changes in revenue by segment.

Operating Margin

Operating margin decreased 160 basis points, significantly impacted by certain indirect taxes recognized in Brazil in the current year as well as the IPI tax benefit in the prior year. These indirect taxes and IPI positively impacted operating margin in both 2019 and 2018, but to a larger extent in 2018. Excluding the impact of these indirect taxes in Brazil, Adjusted operating margin increased 100 basis points, 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.”

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Gross Margin

Gross margin increased 20 basis points and Adjusted gross margin decreased 40 basis points as the unfavorable impact of foreign currency and higher supply chain costs more than offset the positive impact of price/mix (unfavorable impact of 160 basis and unfavorable impact of 110 basis points offset by a benefit of 240 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 Argentina and Brazil. Higher supply chain costs were driven by higher material costs.

Selling, General and Administrative Expenses

Selling, General and Administrative Expenses, or SG&A, as a percentage of total revenue, increased 190 basis points, significantly impacted by CTI restructuring charges. Adjusted SG&A, as a percentage of total revenue decreased 150 basis points.

Savings in SG&A and Adjusted SG&A were primarily due to lower advertising expenses (benefit of 80 basis points) and better bad debt management (benefit of 50 basis points). Advertising expense benefited from certain indirect tax items in Brazil as well as optimizing Avon’s portfolio by concentrating investments in selected channels and focusing on digital advertising. Avon has further reduced its bad debt expense, primarily in Brazil, from continued focus on credit control and collections processes.

See note 15 to Avon’s audited consolidated financial statements included herein for more information on the legal settlement, note 14 to Avon’s audited consolidated financial statements included herein for more information on the loss contingency related to a non-U.S. pension plan and note 17 to Avon’s audited consolidated financial statements included herein for more information on CTI restructuring.

Other Expenses

Interest expense decreased by approximately U.S.$7 million and interest income decreased by approximately U.S.$8 million compared to 2018. Loss on extinguishment of debt and credit facilities of approximately U.S.$12 million is primarily composed of the costs of termination of a portion of the notes due 2020 repaid in the third and fourth quarters of 2019.

Other income (expense), net, of U.S.$94 million increased by approximately U.S.$101 million 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 U.S.$50 million and the favorable impact of foreign exchange net gains in 2019 compared to losses in 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 Avon’s investment in New Avon in August 2019. Refer to note 3 to Avon’s audited consolidated financial statements included herein for more information relating to these disposals.

Effective Tax Rate

The Adjusted effective tax rates and the effective tax rates in 2019 and 2018 continue to be impacted by Avon’s inability to recognize additional deferred tax assets in various jurisdictions related to its current-year operating results. In addition, the Adjusted effective tax rates and the effective tax rates in 2019 and 2018 continue to be impacted by withholding taxes associated with certain intercompany payments, including royalties, service charges and dividends, which in the aggregate are relatively consistent each year due to the need to repatriate funds to cover U.S.-based costs, such as interest on debt and corporate overhead. These factors resulted in unusually high effective tax rates in 2019 and 2018.

The Adjusted effective tax rate and the effective tax rate in 2019 was impacted by an approximate net U.S.$13 million benefit recognized primarily due to reduced costs of repatriating subsidiary earnings and approximately U.S.$7 million of other various net tax benefits associated with law changes, uncertain tax positions, and changes in tax estimates partially offset by a net charge of approximately U.S.$5 million primarily associated with an increase in valuation allowances. The effective tax rate in 2019 was also impacted by the accrual of non-taxable income associated with indirect tax refunds and CTI restructuring for which tax benefits cannot currently be claimed in all affected jurisdictions.

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The Adjusted effective tax rate and the effective tax rate in 2018 was impacted by an approximate net U.S.$25 million benefit recognized primarily due to Avon’s interpretation of case law and/or guidance provided during 2018 in the U.S. and Latin America and the release of valuation allowances of approximately U.S.$5 million associated with improved profitability of certain markets partially offset by a net charge of approximately U.S.$11 million primarily associated with an increase in reserves for uncertain tax positions. The effective tax rate in 2018 was also impacted by the accrual of taxes associated with the reversal of the Brazil IPI loss contingency and CTI restructuring for which tax benefits cannot currently be claimed in all affected jurisdictions.

In addition, the Adjusted effective tax rates and the effective tax rates in 2019 and 2018 were negatively impacted by the country mix of earnings.

Impact of Foreign Currency

As compared to the prior-year period, foreign currency in 2019 impacted Avon’s consolidated financial results in the form of:

Avon’s Segment Review

In 2020, Avon changed its reportable segments to align them with how the business is operated and managed since the merger with Natura &Co, which are reportable segments based on geographic operations: Avon International and Avon Latin America. Prior to this change, Avon reported four segments: Europe, Middle East & Africa, Asia Pacific, South Latin America and North Latin America. We have not recast the segments in this Form 6-K because we do not believe the change in reporting segments is material to the assessment of Avon’s performance.

Avon determines segment profit by deducting the related costs and expenses from segment revenue. Segment profit excludes certain global expenses, CTI restructuring initiatives, certain significant asset impairment charges and other items, which are not allocated to a particular segment. This is consistent with the manner in which Avon assesses its performance and allocates resources. See note 15 to Avon’s audited consolidated financial statements included elsewhere in this Form 6-K for a reconciliation of segment profit to operating profit.

Summarized financial information concerning Avon’s reportable segments was as follows:

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Below is an analysis of the key factors affecting revenue and segment profit by reportable segment for the years ended December 31, 2019 and 2018. Foreign currency impact is determined as the difference between actual growth rates and Constant U.S.$ growth rates. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Avon—Non-GAAP Financial Measures” for more information.

Total revenue decreased 14% 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 Turkish lira, Russian ruble and the South African rand. On a Constant U.S.$ basis, revenue decreased 9%. Revenue and Constant U.S.$ revenue were negatively impacted by a decrease in Active representatives. The decline in Active representatives was across multiple markets in Europe, the Middle East and Africa, primarily Russia.

In Russia, revenue decreased 17%. Excluding the impact of foreign exchange Constant U.S.$ revenue decreased 14%. Revenue and Constant U.S.$ revenue in Russia were negatively impacted primarily by a decrease in Active representatives and a decrease in Average Representative Sales. Revenue and Constant U.S.$ revenue in Russia continued to be impacted by lower consumer confidence, as well as weaker sales leader engagement in the first half of the year.

In the UK, revenue decreased 16%. Excluding the impact of foreign exchange, Constant U.S.$ revenue decreased 13%. Revenue and Constant U.S.$ 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 remained relatively unchanged on both a reported and Constant U.S.$ basis.

The gross margin was relatively unchanged, as the favorable impact of price/mix fully offset the unfavorable impact of foreign currency net losses and lower production volumes on supply chain costs.

SG&A expenses were relatively unchanged, as lower advertising costs were re-allocated into representative and sales leader investments and training.

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Total revenue decreased 18% compared to the prior-year period, impacted by certain indirect taxes recognized in Brazil as well as the IPI tax benefit in the prior year. These indirect taxes and IPI positively impacted revenue in both 2018 and 2019, but to a larger extent in 2018. 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 a result of the strengthening of the U.S. dollar relative to the Argentinian peso and the Brazilian real. Adjusted Constant U.S.$ revenue decreased 2%. Adjusted revenue and Adjusted Constant U.S.$ 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 18%, significantly impacted by certain indirect tax items in both the current and prior year. These indirect taxes and IPI positively impacted revenue in both 2018 and 2019, but to a larger extent in 2018. Excluding these indirect tax items, Adjusted revenue in Brazil decreased 12%, unfavorably impacted by foreign exchange, while Brazil’s Constant U.S.$ Adjusted revenue decreased 4%. Revenue and Adjusted Constant U.S.$ revenue in Brazil were negatively impacted by a decrease in Active representatives, which continued to be negatively impacted by competitive pressures and Avon’s 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 19, Contingencies, to the Consolidated Financial Statements included herein.

Revenue in Argentina declined 23%, unfavorably impacted by foreign exchange. On a Constant U.S.$ basis, Argentina’s revenue grew 35%. Revenue and Constant U.S.$ revenue in Argentina benefited from higher Average Representative Sales, which was impacted by improved revenue growth management including inflationary pricing.

Segment margin decreased 110 basis points, significantly impacted by the effects of indirect tax items in both the current and prior years. Adjusted segment margin increased by 280 basis points and Constant U.S.$ Adjusted segment margin increased by 330 basis points, benefited by other certain indirect tax items on revenue and SG&A (favorable impact of 230 basis points) as well as SG&A benefits which more than offset the decline in gross margin.

The gross margin declined as a result of increased supply chain costs driven by higher material costs and the unfavorable impact of foreign currency was not fully offset by the positive impact of price/mix.

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, and lower sales leader and field investments, linked to the decrease in Active representatives and lower fixed costs resulting from tight cost management and restructuring initiatives.

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North Latin America consists largely of Avon’s Mexico business. Total revenue decreased 7% compared to the prior-year period including the unfavorable impact of foreign exchange. On a Constant U.S.$ basis, revenue declined 6%. Revenue and Constant U.S.$ 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, on both a reported and Constant U.S.$ basis. The decline in reported and Constant U.S.$ revenue in Mexico was primarily due to decline in Active representatives, partially offset by higher average representatives sales, both driven by strategic initiatives to focus on Representative productivity via Representative segmentation and training.

Segment margin increased 10 basis points on a reported and on a Constant U.S.$ basis was relatively unchanged.

The gross margin was relatively unchanged as the positive impact of price/mix offset the unfavorable impact of higher supply chain costs driven by higher material costs and the unfavorable impact of foreign currency.

SG&A was relatively unchanged. Cost savings in multiple areas, such as, lower advertising costs and lower representative and sales leader investments in incentives linked to the decrease in Active representatives were fully offset by higher bad debt expense and higher transportation cost, primarily in Mexico, to address security issues and improve service quality.

Effective from the first quarter of 2018, given that Avon exited Australia and New Zealand during 2018, the results of Australia and New Zealand are reported in Other operating segments and business activities for all periods presented, while previously the results had been reported in the Asia Pacific segment.

Total revenue decreased 7% compared to the prior period favorably impacted by foreign exchange. On a Constant U.S.$ basis, revenue declined 8%. Revenue and Constant U.S.$ Revenue declined, driven by a decrease in Active representatives across most markets and, partially offset by higher Average Representative Sales.

Revenue in the Philippines decreased by 2%, favorably impacted by foreign exchange. On a Constant U.S.$ basis Revenue in the Philippines decreased by 4%. Revenue and Constant U.S.$ Revenue in the Philippines was driven by a decrease in Active representatives impacted by changes in sales leader recruitment and commercial practices, partially offset by higher Average Representative Sales, primarily due to effective pricing.

Segment margin increased 150 basis points, or 110 basis points on a Constant U.S.$ basis, driven primarily by improved gross margin.

The gross margin increase 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, was more than offset by higher supply chain costs driven by higher material costs.

SG&A was relatively unchanged.

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Avon — Liquidity and Capital Resources

Avon’s principal sources of funding 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 of December 31, 2019, Avon had cash and cash equivalents totaling approximately U.S.$650.6 million.

Avon may seek to retire its outstanding debt in open market purchases, privately negotiated transactions, through derivative instruments, cash tender offers or otherwise. Repurchases of debt may be funded by cash or the incurrence of additional debt and will depend on prevailing market conditions, Avon’s liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material. Avon may also elect to incur additional debt to finance ongoing operations or to meet its other liquidity needs. However, Avon’s credit ratings remain below investment grade which may impact its ability to access such transactions on favorable terms, if at all.

Avon’s 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 19 to Avon’s audited consolidated financial statements included herein.

Net Cash from Continuing Operating Activities

Net cash provided by continuing operating activities during 2019 was approximately U.S.$94 million as compared to net cash provided by continuing operating activities of approximately U.S.$93 million during 2018, an increase of approximately U.S.$1 million. Net cash provided by continuing operations was relatively unchanged, despite an increase in restructuring payments of U.S.$71 million and the impact from one-time items during 2018 that did not recur in 2019 (net of U.S.$34 million), offset by operational improvements in working capital and higher cash generated from earnings.

Avon maintains defined benefit pension plans and unfunded supplemental pension benefit plans (see note 14 to Avon’s audited consolidated financial statements included herein). Avon’s funding policy for pension plans is to meet the minimum required contributions under applicable law and accumulate plan assets that, over the long run, are expected to approximate the present value of projected benefit obligations. The amounts necessary to fund future obligations under these plans could vary depending on estimated assumptions (as detailed in “—Critical Accounting Estimates—Pension and Postretirement Expense”). The future funding for these plans will depend on economic conditions, employee demographics, mortality rates, the number of associates electing to take lump-sum distributions, investment performance and funding decisions. Based on current assumptions, Avon expects to make contributions in the range of U.S.$5 million to U.S.$10 million to its U.S. defined benefit pension and postretirement plans and in the range of U.S.$0 million to U.S.$5 million to its non-U.S. defined benefit pension and postretirement plans during 2020.

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Net Cash from Continuing Investing Activities

Net cash provided by continuing investing activities during 2019 was approximately U.S.$50 million, as compared to net cash used by continuing investing activities of approximately U.S.$93 million during 2018. The approximate U.S.$143 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 notes 3 and 4 to Avon’s audited consolidated financial statements included herein for more information relating to the sale of these businesses and assets.

Capital expenditures during 2019 were approximately U.S.$59 million compared with approximately U.S.$95 million during 2018.

Net Cash from Continuing Financing Activities

Net cash provided by continuing financing activities during 2019 was approximately U.S.$1 million, as compared net cash used by financing activities of U.S.$307 million in 2018. The approximate U.S.$308 million favorable impact to net cash used by continuing financing activities was primarily due to a U.S.$289 million repayment of debt during 2018 with no offsetting proceeds from debt. During 2019, debt repayments of U.S.$388 million were offset by debt proceeds of U.S.$400 million.

Avon purchased approximately 1.2 million shares of its common stock for U.S.$9.6 million during 2019, as compared to 1.1 million shares of its common stock for U.S.$3.2 million during 2018, through acquisition of stock from employees in connection with tax payments upon vesting of restricted stock units and upon vesting of performance restricted stock units in 2018 and 2017.

In December 2019, Avon declared a dividend of U.S.$0.016 per share, and the dividend was paid in January 2020. No dividends were declared or paid for 2018.

Free Cash Flow Provided by Continuing Operations

Avon also presents free cash flow as an additional financial measure for liquidity, which Avon believes can provide an additional perspective on trends and underlying business results. Free cash flow is the sum of net cash provided (used) by continuing operating activities and net cash provided (used) by continuing investing activities, Avon has also included proceeds of U.S.$19 million 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 U.S.$164 million and a net cash outflow of U.S.$1 million, respectively, for the years ended December 31, 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 helped mitigate the impact of non-recurring tax benefits in the third quarter of 2018.

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The table above assumes debt repayments can be made in line with contractual payment terms and without the need for further refinancing.

In addition to the above, in 2016, Avon sold series C preferred stock to Cerberus. This preferred stock contains certain redemption and conversion features as well as dividends. Further details of the series C preferred stock is included in note 18 to Avon’s audited consolidated financial statements included herein.

See notes 8 and 16 to Avon’s audited consolidated financial statements included herein for more information on its debt and contractual financial obligations and commitments. Additionally, as disclosed in note 17 to Avon’s audited consolidated financial statements included herein, at December 31, 2019, Avon has liabilities of approximately U.S.$34.0 million associated with its restructuring actions, primarily associated with Open Up Avon. The majority of future cash payments associated with these restructuring liabilities are expected to be made during 2020.

Avon’s Off-Balance Sheet Arrangements

As of December 31, 2019, Avon had no material off-balance sheet arrangements.

Avon’s Capital Resources

Revolving Credit Facility

In June 2015, Avon International Operations, Inc., or “AIO,” a wholly owned domestic subsidiary of the Company, entered into a five-year U.S.$400.0 million senior secured revolving credit facility, or the 2015 facility. As of December 31, 2019, there were no amounts outstanding under the 2015 facility.

In February 2019, Avon International Capital p.l.c., or “AIC,” a wholly owned foreign subsidiary of the Company, entered into a three-year €200.0 million senior secured revolving credit facility, or the 2019 facility. As of December 31, 2019, this amounted to U.S.$224 million. The 2019 facility replaced the 2015 facility and the 2015 facility was terminated at such time. Borrowings under the 2019 facility bear interest at Avon’s option, at a rate per annum, equal to either LIBOR or EURIBOR (for any loan in euros) plus 225 basis points, in each case subject to adjustment based upon a leverage canceled-based pricing grid. The 2019 facility was available for general corporate and working capital purposes.

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In the first quarter of 2019, U.S.$2.0 million was recorded for the write-off of unamortized issuance costs related to the 2015 revolving credit facility. In the first quarter of 2019, the Company also capitalized U.S.$11.0 million of issue costs relating to the 2019 revolving credit facility; this resulted in a cash outflow presented in other financing activities within the Consolidated Statement of Cash Flows. As of December 31, 2019, there were no amounts outstanding under the 2019 facility, and on January 3, 2020 the facility was automatically canceled upon change of control and, as a result U.S.$7.8 million of unamortized issuance costs were written off.

The amount of the facility available to be drawn down on was reduced by any standby letters of credit granted by an obligor, which, as of December 31, 2019 was approximately U.S.$22 million. As of December 31, 2019, based on then applicable exchange rates, the entire amount of the remaining 2019 facility, which is approximately €180 million, could have been drawn down without violating any covenant.

All obligations of AIC under the 2019 facility were unconditionally guaranteed by the Company, AIO and each other material U.S. or English restricted subsidiary of the Company (collectively referred to as the “Obligors”), in each case, subject to certain exceptions. The obligations of the Obligors were secured by first priority liens on and security interests in substantially all of the assets of the Obligors, in each case, subject to certain exceptions.

The 2019 facility contained affirmative and negative covenants, which are customary for secured financings of this type, as well as financial covenants (interest coverage and total leverage ratios).

Other Indebtedness

For additional information on our indebtedness see Note 8 — Debt and Other Financing to Avon’s audited consolidated financial statements included herein.

Avon’s Quantitative and Qualitative Disclosures about Market Risk

The overall objective of Avon’s financial risk management program is to reduce the potential negative effects from changes in foreign exchange and interest rates arising from its business activities. Avon may reduce its exposure to fluctuations in fair value or cash flows associated with changes in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments and through operational means. Since Avon may use foreign currency rate-sensitive instruments to hedge a portion of its existing and forecasted transactions, we expect that any loss in value for the hedge instruments generally would be offset by changes in the value of the underlying transactions.

Avon does not enter into derivative financial instruments for trading or speculative purposes, nor is it a party to leveraged derivatives. The master agreements governing Avon’s derivative contracts generally contain standard provisions that could trigger early termination of the contracts in some circumstances, including if Avon was 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.

Interest Rate Risk

In the past Avon has used interest-rate swaps to manage its interest rate exposure. The interest-rate swaps were used to either convert its fixed rate borrowing to a variable interest rate or to unwind an existing variable interest-rate swap on a fixed rate borrowing. As of December 31, 2019, Avon does not have any interest-rate swap agreements. Approximately 0% and 1% of its debt portfolio at December 31, 2019 and 2018, respectively, was exposed to floating interest rates.

Avon’s long-term borrowings at year-end were all at fixed rates of interest and are therefore not sensitive to interest rate changes.

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Foreign Currency Risk

Avon conducts business globally, with operations in various locations around the world. Over the past four years, all of its consolidated revenue was derived from operations of subsidiaries outside of the U.S. The functional currency for most of Avon’s foreign operations is their local currency. Avon is exposed to changes in financial market conditions in the normal course of its operations, primarily due to international businesses and transactions denominated in foreign currencies and the use of various financial instruments. Avon is not able to project, in any meaningful way, the possible effect of these foreign currency fluctuations on translated amounts or future earnings. At December 31, 2019, the primary foreign currencies for which Avon had net underlying foreign currency exchange rate exposures were the Argentine peso, Brazilian real, British pound, Chilean peso, Colombian peso, the euro, Mexican peso, Peruvian new sol, Philippine peso, Polish zloty, Romanian leu, Russian ruble, South African rand, Turkish lira and Ukrainian hryvnia.

Avon may reduce its exposure to fluctuations in fair value or cash flows associated with changes in foreign exchange rates by creating offsetting positions, including through the use of derivative financial instruments. Avon’s hedges of foreign currency exposure are not designed to, and, therefore, cannot entirely eliminate the effect of changes in foreign exchange rates on Avon’s consolidated financial position, results of operations and cash flows.

Avon’s foreign-currency financial instruments were analyzed at year-end to determine their sensitivity to foreign exchange rate changes. Based on Avon’s outstanding foreign exchange contracts at December 31, 2019, all of which were taken out to hedge underlying foreign currency exposures, a hypothetical 10% appreciation of the U.S. dollar against its foreign exchange contracts would reduce earnings by U.S.$71 million and a hypothetical 10% depreciation of the U.S. dollar against its foreign exchange contracts would increase earnings by U.S.$86 million. This hypothetical analysis does not consider Avon’s underlying foreign currency exposures. The hypothetical impact was calculated on the open positions using forward rates at December 31, 2019, adjusted for an assumed 10% appreciation or 10% depreciation of the U.S. dollar against these hedging contracts.

Credit Risk of Financial Instruments

Avon’s foreign currency derivatives are typically composed of over-the-counter forward contracts, swaps or options with major international financial institutions. Although its theoretical credit risk is the replacement cost at the then-estimated fair value of these instruments, Avon believes that the risk of incurring credit risk losses is remote and that such losses, if any, would not be material.

Non-performance of the counterparties on the balance of all the foreign exchange agreements would have resulted in a write-off of U.S.$5.6 million at December 31, 2019. In addition, in the event of non-performance by such counterparties, Avon would be exposed to market risk on the underlying items being hedged as a result of changes in foreign exchange rates.

See note 11 to Avon’s audited consolidated financial statements included herein for more information.

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Item 2

Audited consolidated financial statements as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019 and the related notes thereto of Avon Products, Inc .

AVON PRODUCTS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

F-1